UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27290
_________________
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
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 361-6500
--------------
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2). Yes __ No [X]
The estimated aggregate market value of the voting stock held by non-affiliates
of the registrant on March 28, 2003 was $ 4,649,764 (based on a price of $ .85
per share).
As of March 28, 2003, there were 5,470,311 shares of Common Stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
2
TABLE OF CONTENTS
PAGE
PART I....................................................................................................................3
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...................................................................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................9
ITEM 6. SELECTED FINANCIAL DATA....................................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......23
PART III.................................................................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................23
ITEM 11. EXECUTIVE COMPENSATION.....................................................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS....................................................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................33
PART IV..................................................................................................................33
ITEM 14. CONTROLS AND PROCEDURES.........................................................................33
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................34
SIGNATURES...............................................................................................................37
i
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 actively
pursue projects under $500,000. The Company also serves as a mechanical trade
manager, performing project management services relating to the mechanical
trades. The Company conducts operations through its wholly-owned subsidiary, KSW
Mechanical Services, Inc. ("KSW Mechanical").
Total revenues for 2002 were $50,313,000 as compared to $51,012,000
for 2001 and $52,247,000 for 2000. Some of the Company's ongoing projects
include the following: The Children's Hospital at New York Presbyterian, Long
Island Jewish Hospital Energy Center, Apartment Buildings at 1930 Broadway and
10 Liberty Street 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's primary business is providing 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.
The Company provides value engineering assistance, whereby the
Company uses its experienced staff to streamline HVAC systems and process piping
systems by recommending changes which reduce costs but still yield the same
results as the original plans. The Company believes that this service can
provide more bidding opportunities in the future.
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 and the Long Island Jewish
Hospital Energy Center 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.
3
As a mechanical trade manager, the Company's 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
estimating system. Projects are divided into phases and line items indicating
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
compared to the estimates. The Company's costs have been and may in the future
4
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 $
26,500,000 as of December 31, 2002, compared to approximately $ 52,000,000 at
December 31, 2001 and approximately $62,000,000 at December 31, 2000. Backlog
has decreased primarily as a result of market conditions which were impacted by
a slower economy and the attacks on September 11, 2001, causing fewer contracts
to bid. The Company is actively seeking new contracts to add to its backlog.
Management believes that its value engineering services will lead to a greater
number of contracts to bid, since the Company is able to be part of the initial
planning of a project.
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
not incurred any liability for violation of environmental laws. The Company must
5
also comply with rules and regulations promulgated by the Occupational Safety
and Health Administration.
EMPLOYEES. At December 31, 2002, the Company had approximately 45
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, and did so in 2002, 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, 2002, work under contracts with three
customers: Bovis Lend Lease, Inc., J.A. Jones Construction Group, LLC., and
Jeffrey M. Brown Associates, Inc. amounted to 37%, 14%, and 10% of the Company's
total revenues, respectively.
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.
For the year ended December 31, 2000, work under contracts with three
customers: Turner Construction, J.A. Jones - GMO, LLC., and Bovis Lend Lease,
Inc. amounted to 20%, 19%, and 15% of the Company's total revenues,
respectfully.
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, the
surety's relationship with management 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
6
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. At December 31, 2002, approximately $10,250,000 of the
Company's $26,500,000 backlog is bonded.
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. The Company
expended no funds for research and development in both 2001 and 2002, and
anticipates no research and development expenses in 2003.
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 base rent of $173,000.
The lease has two five year options with yearly rent increases of approximately
2%. The lease is also 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 also a triple net lease. The Company pays rent of
$103,000 per year, plus taxes (currently approximately $19,700 per year),
maintenance, insurance and utilities. The lease expired on December 31, 2002 and
is currently on a month to month basis. The landlord has served a notice
terminating this monthly tenancy effective March 31, 2003. The Company is
pursuing an alternate location for its pipe fabrication which was performed at
this location. See Item 13 "Certain Relationships and Related Transactions."
ITEM 3 LEGAL PROCEEDINGS
Except as listed below, 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. The following are the significant proceedings
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 its contract balance and unpaid proposals in the sum of $5,770,919.
Included in that sum is a claim for unanticipated costs incurred through
1998 in the sum of $3,662,734, which amount has not been reflected as a
claim receivable in the Company's financial statements because it is the
policy of the Company not to record income from claims until the claims
have been received or awarded. The defendant has asserted counterclaims
totaling $6,269,000, which the Company believes lack merit. While the
7
Company and its counsel believe its lawsuit has merit, there is no guaranty
of a favorable outcome. This case was tried for 14 days and adjourned by
the Court to May 2003 for further trial proceedings. The financial
statements at December 31, 2002 and 2001, included approximately $1,937,000
consisting of accounts receivable applicable to the base contract of
approximately $437,000 and unpaid final retainage billings of approximately
$1,500,000.
b. 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 matter involving Helionetics Creditors Committee which was settled in
May 2002. That action had claimed that Helionetics' distribution of the
Company's stock to Helionetics' shareholders was a fraudulent conveyance.
The Company's 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. The Company's
action seeks to recoup its legal fees paid for the distribution, the fees
spent in defense of the Helionetics Creditors Committee Action, and the $
450,000 payment made by the Company and its directors to settle that action
(a total of approximately $ 1,800,000.), plus punitive damages. Subsequent
to the filing of this malpractice 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 earned in connection with
Stroock's representation of the Company in the Helionetics Creditors
Committee Action. 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 New York 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. Discovery is complete in this California
action. Trial is scheduled for April 1, 2003.
c. Other Proposals and Claims. During the ordinary and routine course of its
work on construction projects, the Company may incur expenses for work
outside the scope of its contractual obligations, for which the owner or
general contractor agrees that the Company will be entitled to additional
compensation, but where there is not yet an agreement on price. The
Company's financial statements include the amounts the Company believes it
will ultimately receive on these authorized proposals. Also during the
course of its work on construction projects, the Company may incur expenses
for work outside the scope of its contractual obligations, for which no
acknowledgment of liability exists from the owner or general contractor for
such additional work. These claims may include change proposals for extra
work or requests for an equitable adjustment to the Company's contract
price due to unforeseen disruptions to its work. In accordance with
accounting principles generally accepted in the United States of America
for the construction industry, until written acknowledgment of the validity
of the claims are received, they are not recognized in the accompanying
financial statements. No accruals have been made in the accompanying
8
consolidated financial statements related to these proposals for which no
acknowledgment of liability exists. While the Company has been generally
successful in obtaining a favorable resolution of such claims, there is no
assurance that the Company will be successful in the future.
d. World Trade Center (WTC) Business Recovery Grant Program
--------------------------------------------------------
The WTC Business Recovery Grant Program (the "Program") was established by
the New York State Urban Development Corporation (d/b/a the Empire State
Development Corporation) to provide assistance to certain businesses that
have been adversely impacted as a result of the events of September 11,
2001. The Program was amended during August 2002 to include businesses
working in the area designated as the Restricted Zone as of September 11,
2001 under a contractual agreement if they meet certain qualifying criteria
of the Program. In the fourth quarter of 2002, the Company received
$338,000 from the Program for economic losses incurred on two projects.
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 2002.
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 28, 2003, 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 near
future. The Company did not pay dividends in 2002 or 2001.
9
The following information on high and low bid information is provided
for 2002 and 2001 based on intraday trading information:
2002 2001
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First..................................... $ 1.04 $ .70 $ 1.37 $ .62
Second.................................... $ 1.05 $ .70 $ 1.01 $ .56
Third..................................... $ 1.05 $ .80 $ .92 $ .47
Fourth.................................... $ .90 $ .90 $ .92 $ .59
10
ITEM 6. SELECTED FINANCIAL DATA
The following summary of certain financial information relating to
the Company for the year ended December 31, 2002, is derived from, and is
qualified by reference to, the financial statements for the year audited by
Rosen Seymour Shapss Martin & Company, LLP. The information for the years ended
December 31, 2001, 2000, 1999, and 1998 is derived from, and is qualified by
reference to, the financial statements for those years audited by Marden,
Harrison & Kreuter CPAs, P.C. Previous year amounts have been reclassified to
conform to the December 31, 2002 presentation. Each of the previously mentioned
financial statements 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)
INCOME STATEMENT: 2002 2001 2000 1999 1998
Revenues............................... $50,313 $51,012 $52,247 $44,720 $39,535
Costs of revenues...................... 44,673 49,153 48,249 38,029 36,434
Gross profit........................... 5,640 1,859 (1) 3,998 6,691 3,101
Selling, general, administration,
expenses............................ 4,196 4,499 4,706 4,280 4,364
Operating income (loss)........... 1,444 (2,640) (708) 2,411 (1,263)
Other income (expense)........... (107) (55) 279 99 63
Income (loss) before income taxes...... 1,337 (2,695) (429) 2,510 (1,200)
Provision (benefit) for income
taxes.............................. 1,714 (2) (1,218) (163) 1,143 (566)
Income (loss) before cumulative effect of
change in accounting principle...... (377) (1,477) (266) 1,367 (634)
Cumulative effect of change in
accounting principle net........ (1,888) (3) - - - -
Net (loss) income...................... (2,265) (1,477) (266) 1,367 (634)
Net (loss) income per share - Basic.... (.41) (.27) (.05) .25 (.12)
Diluted............................. (.41) (.27) (.05) .25 (.11)
----------------
(1) For the years ended December 31, 2001 and 2000 the Company experience a
gross profit erosion primarily due to lower than anticipated productivity
and higher labor costs on several projects which commenced during the later
half of 2000 and completed during 2001. As a result of these contract
losses, the Company has changed its estimating and bidding practices, as
discussed in the Management Discussions and Analysis section.
(2) During the year ended December 31, 2002, the Company, at the
recommendation of its outside auditors, recorded a valuation allowance
totaling $1,045 against its deferred tax assets.
(3) For the year ended December 31, 2002, the Company recorded a cumulative
effect of a change in accounting principle for the write-off of goodwill as
a result of the adoption of SFAS 142 which increased the net loss by
$1,888.
11
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2002 2001 2000 1999 1998
Number of shares used in computation :
Basic.................................. 5,470,311 5,470,311 5,468,991 5,468,644 5,463,505
Diluted................................ 5,470,311 5,470,311 5,641,050 5,468,644 5,655,195
BALANCE SHEET DATA:
Total assets........................... 17,171 27,620 28,263 26,147 21,273
Working capital........................ 3,495 5,213 6,996 7,023 5,194
Current liabilities.................... 10,029 18,149 17,255 14,912 11,388
Long-term liabilities.................. - 19 51 40 57
Stockholders' equity................... 7,142 9,452 10,957 11,195 9,828
OTHER DATA:
Current ratio.......................... 1.35:1 1.29:1 1.41:1 1.47:1 1.46:1
Selected Quarterly Data
-----------------------
(dollars in thousands, except per share amounts and stock prices)
First Second Third Fourth
quarter quarter quarter quarter Total
2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Revenues $ 13,137 $ 14,757 $ 10,600 $ 11,819 $ 50,313
Gross profit $ 1,520 $ 1,349 $ 1,252 $ 1,519 $ 5,640
Net income (loss) before cumulative effect of
change in accounting principle $ 15 $ 146 $ 120 $ (658) (1) $ (377)
Cumulative effect of change in
accounting principle, net $ (1,855) $ - $ - $ (33) $ (1,888)
Net income (loss) $ (1,840) $ 146 $ 120 $ (691) $ (2,265)
- --------------------
(1) During the fourth quarter of 2002, the Company, at the recommendation of its
outside auditors, recorded a valuation allowance totaling $1,045 against its
deferred tax assets.
12
Selected Quarterly Data
-----------------------
(dollars in thousands, except per share amounts and stock prices)
First Second Third Fourth
quarter quarter quarter quarter Total
2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Per share of common stock earnings (losses)
before cumulative change in
accounting principle:
Basic $ (.34) $ .03 $ .02 $ (.12) $ (.41)
Diluted $ (.34) $ .03 $ .02 $ (.12) $ (.41)
Per share of common stock earnings (losses):
Basic $ (0.34) $ 0.03 $ 0.02 $ 0.03 $ (0.26)
Diluted $ (0.34) $ 0.03 $ 0.02 $ 0.03 $ (0.26)
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.04 $ 1.05 $ 1.05 $ .90
Low $ .70 $ .70 $ .80 $ .90
First Second Third Fourth
quarter quarter quarter quarter Total
2001 2001 2001 2001 2001
---- ---- ---- ---- ----
Revenues $ 10,584 $ 9,747 $ 16,523 $ 14,158 $ 51,012
Gross profit (363) (2) (786) (2)$ 1,757 $ 1,251 $ 1,859
Net income (loss) $ (816) $ (1,091) $ 267 $ 163 $ (1,477)
Per share of common stock earnings (losses):
Basic $ (.15) $ (.20) $ .05 $ .03 $ (.27)
Diluted $ (.15) $ (.20) $ .05 $ .03 $ (.27)
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.37 $ 1.01 $ .92 $ .92
Low $ .62 $ .56 $ .47 $ .59
- -----------------------
(2) During the first half of 2001, the Company completed certain contracts which
experienced gross profit erosion due to lower than anticipated productivity and
higher labor costs. As a result of these contract losses, the Company has
changed its bidding and estimating practices.
13
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, 2002, 2001 and 2000.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements and accompanying
notes have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
The Company continually evaluates the accounting policies and
estimates it uses to prepare the consolidated financial statements. In general,
management's estimates are based on historical experience, on information from
third party professionals and on various other assumptions that are believed to
be reasonable under the facts and circumstances. Actual results could differ
from those estimates made by management.
The Company believes its critical accounting policies and estimates
include the accounting for revenue recognition for construction contracts,
accounting for intangible assets and goodwill, and accounting for income taxes.
Accounting for revenue recognition for construction contracts
-------------------------------------------------------------
The Company recognizes revenue for long-term construction contacts
not yet completed using the "percentage of completion" method, measured by the
percentage of total costs incurred to date to estimated total costs at the
completion of each contract. When the Company bids projects, a comprehensive
budget is prepared dividing the project into phases and line items indicating
separate labor, equipment, material, subcontractor and overhead cost estimates.
14
As projects progress, the Company's project managers plan, schedule and oversee
operations and review project costs compared to the estimates. Management
reviews on a bi-weekly basis the progression of the contract with the project
manager. An analysis is prepared and reviewed monthly by management comparing
the costs incurred to the budgeted amounts. The results of these procedures,
determine the estimated total costs at completion, based on facts and
circumstances known at the time. Any revision in cost and profit estimates are
reflected in the accounting period in which the facts, which require the
revisions, become known.
Accounting for intangible assets and goodwill
---------------------------------------------
During 2001, the Financial Accounting Standards Board issued SFAS
142, Goodwill and Other Intangible Assets, which established new accounting and
reporting requirements for goodwill and other intangible assets. Under SFAS 142,
the amortization of goodwill ceased as of January 1, 2002 and a test for
impairment was established. SFAS 142 requires that goodwill be tested annually
using a two step process. The first step is to identify a potential impairment.
The second step measures the amount of impairment loss, if any. Intangible
assets with indefinite lives will be tested for impairment using a one-step
process that compares the fair value to the carrying amount of the asset.
The Company performed an impairment test on its goodwill during the
first quarter of 2002. Since the goodwill recorded was attributed to the entire
Company (a single reporting unit), and the fair value of the Company as
reflected in the market value of its stock was significantly below its net worth
including goodwill, the entire goodwill was written off during the first quarter
of 2002.
Accounting for income taxes
---------------------------
Judgment is required in developing the Company's provision for income
taxes, including the determination of deferred tax assets and liabilities and
any valuation allowances that might be required against the deferred tax assets.
At December 31, 2002, the Company, at the recommendation of its outside
auditors, recorded a valuation allowance against its net deferred tax assets
totaling $1,045,000. In the event that actual results differ from these
estimates, the Company may be required to record an additional adjustment to the
valuation allowance on its deferred tax assets, which could have a material
effect on the Company's financial condition and results of operations.
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:
15
2002 2001 2000
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REVENUES............................... $ 50,313 100.0 $ 51,012 100.0 $ 52,247 100.0
COSTS OF REVENUES................. 44,673 88.8 49,153 96.4 48,249 92.3
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT........................... 5,640 11.2 1,859 3.6 3,998 7.7
EXPENSES
Selling, general, administrative
expenses......................... 4,196 8.3 4,499 8.8 4,706 9.0
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)......... 1,444 2.9 (2,640) (5.2) (708) (1.3)
OTHER INCOME (EXPENSES)........ (107) (.2) (55) (.1) 279 (.5)
---------- ---------- ---------- ---------- ---------- ----------
INCOME/(LOSS) BEFORE PROVISION FOR INCOME
TAXES.................................. 1,337 2.7 (2,695) (5.3) (429) (.8)
PROVISION FOR INCOME TAXES............. 1,714 3.4 (1,218) (2.4) (163) (.3)
----------- ---------- ---------- ---------- ---------- ---------
INCOME BEFORE CUMULATIVE CHANGE IN
ACCOUNTING PRINCIPLE (377) (.7) (1,477) (2.9) (266) (.5)
CUMULATIVE CHANGE IN ACCOUNTING FOR
GOODWILL, NET OF TAX BENEFIT........ (1,888) (3.8) - - - -
----------- ---------- ----------- ---------- ----------- ----------
NET LOSS............................ $ (2,265) (4.5) $ (1,477) (2.9) $ (266) (.5)
=========== ========== ========== ========== =========== ==========
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues decreased by $ 699,000 or (1.4)% to $ 50,313,000 for the
year ended December 31, 2002, compared to $ 51,012,000 for the year 2001. New
projects started in the latter part of 2001 were completed during 2002 and a
majority of new projects included in the Company's backlog at December 31, 2002
have not commenced. Revenue for the fourth quarter of 2002 was $11,819,000, a
reduction of $2,339,000 as compared to the fourth quarter of 2001 totaling
$14,158,000. This decline was a result of market conditions which were impacted
by a slower economy and the attack on September 11, 2001 causing fewer contracts
to bid. At December 31, 2002 the Company had backlog of $26,500,000. The Company
is actively seeking new contracts to add to its backlog. Revenues during the
first half of 2001 were 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.
Costs of revenues decreased by $4,480,000 or (9.1%) to $44,673,000
for the year ended December 31, 2002, compared to $49,153,000 for the year ended
December 31, 2001, primarily due to the higher labor costs in the first half of
2001. As a result of these higher labor costs, the Company has changed its
bidding and estimating practices. The Company has also been more selective in
projects that it bids which are highly labor intensive.
For the year ended December 31, 2002 the Company had a gross profit
of $5,640,000 or 11.2% ,compared to $1,859,000 or 3.6% for the year 2001. The
increase in gross profit can be attributed to gross profits from newer contracts
started in 2001 and completed during 2002, which did not have the erosion of
gross profit due to labor costs which will be discussed later in this paragraph.
In addition, the Company received $338,000 from the WTC Business Recovery
16
Program of which $176,000 was allocated to costs of revenues in 2002. In the
fourth quarter of 2002, the gross profit was $1,519,000 or 12.9% as compared to
$1,251,000 or 8.8% for the same period in 2001. 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. As a result of losses
on these contracts, the Company has changed its bidding and estimating
practices. The Company is more selective in bidding on projects that are highly
labor intensive. 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.
For the year ended December 31, 2002, selling, general and
administrative expenses decreased by $303,000 or (6.7%) to $4,196,000 from
$4,499,000 for the year ended December 31, 2001. During the fourth quarter ended
December 31, 2002 selling, general and administrative expenses were $ 743,000
compared to $ 950,000 for the same period in 2001, a decrease of $207,000 or
(21.8%). Included in the above expenses were legal fees of $770,000 in 2002 of
which $450,000 applied to a settlement in the Helionetics Creditors Committee
Action, ($58,000 in the fourth quarter), and $ 653,000 in 2001 ($ 280,000 in the
fourth quarter, of which $250,000 represented an accrual for anticipated future
costs). In 2002, the Company received $338,000 from the WTC Business Recovery
Grant Program of which $162,000 was allocated to overhead costs. During 2002,
total general and administration salaries decreased by approximately $338,000 as
compared to 2001, which is largely due to the Company utilizing a portion of its
office staff on its trade management projects. This decrease in salary expense
was offset by medical insurance costs in 2002 which were approximately $200,000
higher than 2001.
Other expenses increased to $107,000 in 2002 as compared to $55,000
in 2001, largely due to a reduction in interest income, which is a result of
lower interest rates and lower cash balances throughout the year.
Income taxes for the year ended December 31, 2002 were $1,714,000 or
128.2 % of the taxable income compared to an income tax benefit for the year
ended December 31, 2001 of $1,218,000 or 45.2% of the taxable loss. The 2002
income tax expense contains a $1,045,000 valuation allowance against the
Company's deferred tax assets. Without this valuation allowance, the income tax
expense as a percentage of taxable income would have been approximately 50%. In
addition, the percentages in both years were affected by certain state and local
taxes paid based on net worth.
The Financial Accounting Standards Board issued SFAS 142 "Goodwill
and Other Intangible Assets" which became effective on January 1, 2002. In
accordance with this pronouncement goodwill would no longer be amortized, but
tested each year for impairment. Since the goodwill applied to the entire
Company as a whole and the fair value of the Company as represented by its
market capitalization was significantly below its net worth including the
goodwill, the goodwill of $3,514,000 ($1,888,000 net of taxes), was written off
during the first quarter of 2002.
As a result of all of the items mentioned above the Company incurred
a loss of $2,265,000 in 2002 compared to a loss of $1,477,000 in 2001.
17
Without the Helionetics settlement, legal fees, write off of goodwill
and the deferred tax valuation allowance, the net income for the year ended
December 31, 2002 would have been $ 1,084,000 or $.20 per share, assuming a 46%
tax provision related to the increase in income.
During the year ended December 31, 2002 the Company earned 37%, 14%
and 10% 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, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues decreased by $1,235,000 or 2.4% to $51,012,000 for the year
ended December 31, 2001, compared to $52,247,000 for the year 2000. Revenues
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.
Costs of revenues 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 $1,859,000 or 3.6% compared to $3,998,000 or 7.7% for the year 2000. In the
fourth quarter of 2001, the gross profit was $1,251,000 or 8.8% compared to a
gross loss of $19,000 or 0.1% for the same period in 2000. 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 $207,000 or
4.4% from $ 4,706,000 for the year ended December 31, 2000 compared to
$4,499,000 for the year ended December 31, 2001. During the fourth quarter ended
December 31, 2001, selling, general and administrative expenses were $950,000
compared to $1,119,000 for the same period in 2000, a reduction of $169,000 or
15.1%. 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.
For the year ended December 31, 2001, the Company had total other
income (expenses),net of $(55,000) as compared to total other income
(expenses),net of $279,000. This difference is largely due to interest income
earned on certificates of deposits in 2000 which matured in 2001. In addition,
18
proceeds from those certificates were used for operations as well as the
purchase of managed stock funds. These stock funds generated a $100,000 realized
loss on the sale of marketable securities in 2001.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund
working capital needs. The Company has historically relied primarily on
internally generated funds and bank borrowings to finance its operations and
expansion. As of December 31, 2002, total cash was $2,516,000, a $1,801,000
increase over the $715,000 reported as of December 31, 2001.
Cash provided by (used in) operations
- -------------------------------------
Net cash provided by operations was $1,678,000 in 2002. Net cash used
in operations was $4,567,000 in 2001 and $497,000 in 2000. The increase in 2002
was primarily due to the increase in operating income and the Company's ability
to collect its accounts receivable in a more timely manner. During 2001 and the
later half of 2000, the Company experienced an erosion of gross profits on
several projects due to lower productivity and higher labor costs. These
projects were completed during 2001. The Company believes it has changed its
bidding and estimating practices to minimize these problems in the future. In
addition, during 2001 and 2000, the Company incurred legal expenses of $653,000
and $401,000, respectively, to defend itself in various legal actions.
Cash provided by (used in) investing activities
- -----------------------------------------------
Net cash used in investing activities was $55,000 in 2002 and
$2,639,000 in 2000. In 2001, net cash provided by investing activities was
$1,625,000. During 2000, the Company started investing its excess cash in
certificates of deposits and managed stock funds, which resulted in net
purchases of marketable securities of $2,516,000. During 2001, the certificate
of deposits matured and the proceeds were used to fund the operating losses. The
Company continued its practice of investing its excess cash in managed stock
funds during 2002 and 2001.
19
Cash provided by (used in) financing activities
- -----------------------------------------------
Net cash provided by financing activities was $178,000 in 2002 and
$158,000 in 2001. These increases were primarily due to the Company utilizing
its line of credit. The Company currently has a $2,000,000 line of credit with
Merrill Lynch, which expires on December 31, 2003. The line of credit calls for
borrowing at 3% over the 30 day dealer commercial paper rate ( 4.29% at December
31, 2002). At December 31, 2002 and 2001, there were $387,000 and $190,000,
respectively, of outstanding borrowing against the facility. During 2000, cash
used in operating activities was $16,000, primarily due to the repayment of long
term liabilities.
The Company's backlog at December 31, 2002 was $26,500,000 as
compared to $52,000,000 at December 31, 2000. The Company is actively seeking
new contracts, but due to the September 11, 2001 attacks and the current
economic conditions there are fewer contracts to bid. The Company believes its
current cash resources are adequate to fund a moderate decrease in sales volume
next year. However, the Company's capital resources may not be sufficient to
sustain a substantial revenue decrease.
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. At
December 31, 2002, approximately $10,250,000 of the Company's backlog of
$26,500,000 is bonded.
The Company believes its current cash resources are adequate to fund
its working capital requirements in the next year. However, the Company's
capital resources may not be sufficient to sustain a substantial increase in
growth or substantial decline in revenue. 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
primarily in the New York City metropolitan area.
The Company currently has no significant capital expenditure
commitments.
20
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company material obligations and commitments
to make future payments under contracts:
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS
----------------------- ----- ---------------- -----------
Operating leases $ 271,000 (1) $ 180,000 $ 91,000
Line of Credit 387,000 (2) 387,000 -
--------- ---------- ---------
Total contractual cash
obligations $ 658,000 $ 567,000 $ 91,000
========= ========== =========
(1 )The Company is obligated to pay monthly rental payments of approximately
$15,000 and has the option to extend this lease an additional five years from
June 2004 to June 2009.
(2) The Company has a $2,000,000 line of credit with Merrill Lynch which expires
December 2003. The line of credit calls for borrowings at 3% over the 30 Day
Dealer Commercial Paper Rate (4.29% at December 31, 2002).
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, constitute "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", "foresee",
"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 to 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:
21
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 and unforeseen jobsite conditions. 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.
o The Company relies on certain customers for a significant share of its
revenues. The loss of any of these customers could have a material adverse
effect on 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.
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.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative
instruments. As of December 31, 2002, the Company has invested $ 473,000 in
managed stock funds selected by Merrill Lynch.
The Company's market risk exposure with respect to financial
instruments depends upon changes in the "30-Day Dealer Commercial Paper Rate"
which at December 31, 2002 was 1.29%. The Company may borrow up to $2,000,000
under its credit facility. Amounts outstanding under the credit facility bear
interest at 3% over the 30-day dealer commercial paper rate (4.29% at December
31, 2002). The Company currently does not use interest rate derivative
instruments to manage exposure to interest rate changes. There was $387,000
outstanding debt under this facility at December 31, 2002.
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
Not Required.
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 55 Chief Executive Officer, President, Secretary
and Chairman of the Board of Directors -
Class III Director through the 2004 annual meeting.
Burton Reyer 68 Vice President and Class III Director through the
2004 annual meeting.
Richard Lucas 36 Chief Financial Officer
Stanley Kreitman 69 Class I Director through 2005 annual meeting
Russell Molina 35 Class II Director through 2003 annual meeting
23
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. Richard Lucas has been principally employed as Chief Financial
Officer of KSW and Chief Financial Officer of its subsidiary KSW Mechanical
Services, Inc. since August 2002. Mr. Lucas was previously employed from July
1988 through July 2002 by Marden Harrison & Kreuter CPAs P.C., the Company's
former independent certified public accountants.
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.
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 2005 Annual Meeting.
Mr. Russell Molina was appointed to the Board of Directors on April
18, 2002. He is currently President of Custom Rubber Products in Houston, Texas.
Prior to October 2002, he was President of T.H. Lehman & Co., Inc. Mr. Molina's
term expires on the date of the 2003 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 Director, Stanley Kreitman. An
Audit Committee, also composed of nonemployee Directors, Stanley Kreitman and
Russell Molina 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
24
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, 2002, its executive officers, directors and stockholders of more
than ten percent of the Company complied with all applicable Section 16(a)
filings requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth remuneration paid to executive
officers of the Company for the years ended December 31, 2002, 2001, and 2000.
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ---- ------ -----
Floyd Warkol 2002 $381,600 $0
Chairman of the Board, President, Secretary and 2001 $420,000 $0
Chief Executive Officer 2000 $420,000 $0
Burton Reyer 2002 $228,400 $0
Vice President 2001 $240,000 $0
2000 $240,000 $0
Robert Brussel (A) 2002 $ 98,077 $30,000
Chief Financial Officer 2001 $145,000 $30,000
(Retired Effective August 2002) 2000 $145,000 $37,500
Richard Lucas (B) 2002 $ 46,846 $ -
Chief Financial Officer 2001 $ N/A $ N/A
2000 $ N/A $ N/A
James Oliviero 2002 $160,000 $30,000
General Counsel and Director of Investor Relations 2001 $160,000 $30,000
2000 $160,000 $30,000
(A) During August 2002, Mr. Brussel retired from his position of Chief Financial
Officer and as a member of the Company's Board of Directors.
(B) Mr. Lucas joined the Company during July 2002 and was appointed Chief
Financial Officer upon Mr. Brussel's departure.
25
EMPLOYMENT AGREEMENTS
The Company and its subsidiary, KSW Mechanical Services, Inc.,
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 entitled to two months pay in the event of his death.
This original employment agreement also stated that Mr. Warkol could 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. This
non-compete provision expired effective December 2002.
The Company and its subsidiary, KSW Mechanical Services, Inc.,
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. This original employment agreement also stated that Mr.
Reyer could 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. This non-compete provision expired effective December 2002.
The Company and its subsidiary, KSW Mechanical Services, Inc. have
not entered into new employment agreements with Mr. Warkol or Mr. Reyer. From
January 2001 to present, Mr. Warkol and Mr. Reyer continue in the same
capacities and continue to receive the same base financial renumeration as under
the prior employment agreements. Mr. Warkol and Mr. Reyer elected to reduce
their salaries for the year ended December 31, 2002 in the total amount of
$50,000 to reimburse the Company for a portion of the Helionetics Creditors
Committee lawsuit settlement. Mr. Warkol and Mr. Reyer are entitled to
reimbursement of this salary reduction from 10% of any proceeds up to $500,000
from the Stroock, Stroock & Lavan, LLP litigation.
26
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 480,000 shares. Prior to 1997, the Company had granted options
with respect to 620,000 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,
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. At December 31,
1999, there were 641,667 granted options outstanding, after deducting options
cancelled of 20,000 and converted options of 13,333. During the year ended
December 31, 2000 there were 1,667 options exercised. During the year ended
December 31, 2001, 18,333 options were cancelled. No options were granted during
2002, 2001 and 2000. At December 31, 2002, there were 621,667 options
outstanding at an exercise price of $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 date 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.
27
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.
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 2002.
28
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 on Unexercised Options/SARs Value of Unexercised in-the-Money
Name 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
Richard Lucas........ 0 0 0 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 20,000 0 N/A N/A
29
PERFORMANCE GRAPH
The following graph compares the cumulative total returns for our
common stock for the five year period ending December 31, 2002 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") for the
same period. 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 December 31, 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.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG,KSW,INC.,
NASDAQ MARKET INDEX AND SIC CODE INDEX
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
KSW, INC. 100.00 31.50 39.82 42.61 22.22 17.48
SIC CODE INDEX 100.00 70.01 45.02 16.37 13.58 5.78
NASDAQ MARKET INDEX 100.00 141.04 248.76 156.35 124.64 86.94
Assumes $100 Invested On Dec. 31, 1997
Assumes Dividend Reinvested
Fiscal Year Ending Dec.31, 2002
Source: Media General Financial Services, Inc.
30
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kreitman serves on the Company's Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE
Under the rules established by the SEC, the Company is required to
provide certain data and information in regard to the compensation and benefits
provided to the Company's Chief Executive Officer and other executive officers
of the Company. The disclosure requirements for the Chief Executive Officer and
other executive officers include the use of tables and a report explaining the
rationale and considerations that led to fundamental executive compensation
decisions affecting those individuals. In fulfillment of this requirement, the
Executive Compensation Committee of the Company, at the direction of the Board
of Directors, has prepared the following report.
The executive compensation program of the Company is designed to
attract and retain experienced, motivated and productive officers who will help
the Company reach its strategic and financial objectives. The compensation
program is made up of base salary, incentive compensation and benefits. The
following is a discussion of each component of the compensation program:
o Base Salary. Salaries paid to executives are designed to be
competitive with other companies of similar size and locations.
Salaries are paid for performance and the successful completion of job
description responsibilities and accompanying standards.
o Incentive Compensation. The Company offers long-term incentives in the
form of stock options awarded under the 1995 Stock Option Plan (the
"Stock Option Plan").
o Benefits. The Company sponsors a profit sharing/401(k) plan, which the
Company may make discretionary contributions to the plan.
The Executive Compensation Committee of the Board of Directors is
responsible for the performance review of the Chief Executive Officer, who in
turn reviews each member of senior management and makes recommendations
regarding compensation levels. Compensation strategy is tied to performance,
productivity, operating results and market competitiveness. Incentive
compensation for executive officers is based upon the profitability. The
31
Executive Compensation Committee periodically reviews compensation levels for
competitiveness and reasonableness as compared to industry peers and competitors
from information gathered by external consultants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information relating to the beneficial
ownership of KSW Common Stock as of the most recent reasonably practicable date
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
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP
- ------------------------ ------ ---------
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 (3) *
365 Woodmere Blvd.
Woodmere, NY 11598
Stanley Kreitman 0 *
375 Park Avenue (Suite 1606)
New York, NY 10022
Daniel Spiegel 5,000 (4) *
351 Twin Lakes Road
Teconic, CT 06079
32
NUMBER OF PERCENTAGE
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP
- ------------------------ ------ ---------
All executive officers 1,262,580 23.1%
and directors as a group (5 persons)
Phillip Lifschitz 274,800 5%
7 Tulane Drive
Livingston, NJ 07039
T.H. Lehman & Co., Inc. 372,348 6.8%
4900 Woodway - Suite 650
Houston, TX 77056
* LESS THAN ONE PERCENT.
(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.
(3) Mr. Brussel retired and resigned as a Director in August 2002.
(4) Mr. Spiegel died in December 2002.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002
regarding shares of the Company's common stock to be issued upon exercise and
the weighted-average exercise price of all outstanding options, warrants and
rights granted under the Company's equity compensation plans as well as the
number of shares available for issuance under such plans.
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES WEIGHTED-AVERAGE UNDER EQUITY
TO BE ISSUED UPON EXERCISE EXCERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURTITIES)
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)
- ------------- ------------------- ------------------- -----------------------
(A) (B) (C)
Equity compensation
plans approved by
security holders...... 621,667 $ 1.50 478,333
Equity compensation
plans not approved by - - -
security holders...... ------- -------
Total............... 621,667 478,333
======= =======
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Floyd Warkol, President of the Company, and a charitable foundation
he controls, jointly own the property that the Company leases in Bronx, New
York. The lease payments on such property were $103,000 for 2002. See
"Properties."
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply judgment in
evaluating disclosure controls and procedures.
Within 90 days prior to the filing date of this annual report on Form 10-K, the
Company has carried out an evaluation, under the supervision and with the
participation of the Company's management including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal controls in
connection with the preparation of this annual report on Form 10-K.
ITEM 15. 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.
34
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.
- -----------------------------
^^ Previously filed as an exhibit to Amendment No. 1 to the Company Registration
Statement on Form 10, filed with the sec on December 28, 1995.
^ Previously filed as an exhibit to the Company's Registration Statement on Form
10, filed with the sec on November 24, 1995.
+ Previously filed as an exhibit to the Company's Annual Report on Form 10-K,
filed with the sec on March 27, 1996.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K,
filed on March 30, 1999.
35
10.7++ Form of Modification of Lease Agreement dated as of May 1, 1998.
10.8+++ Settlement and release, dated June 11, 2002 by and between KSW, Inc. Floyd Warkol, Burton Reyer,
Robert Brussel and the Helionetics Official Committee of Unsecured Creditors.
11 Schedule of Valuation and Qualifying Accounts.
12 Statement Regarding Computation of Net Earnings (Loss) Per Share.
21.1^ List of Subsidiaries.
23.1 Consent of Marden, Harrison & Kreuter.
99.1 Certification by the Chief Executive Officer pursuant to 18 US.C. Sec. 1350, as adopted by Sec. 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer pursuant to 18 US.C. Sec. 1350, as adopted by Sec. 906
of the Sarbanes-Oxley Act of 2002.
- ----------------------
^ 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 the Company's current report on Form 8-K,
filed on July 12, 2002.
36
(B) Reports on Form 8-K.
The Company filed the following Current Report on Form 8-K during the
fourth quarter of 2002:
(i) Current report on Form 8-K, dated September 30, 2002, and
filed on October 7, 2002, reporting the retirement of the
Company's Chief Financial Officer and Board Member, Robert
Brussel, and the appointment of Richard W. Lucas as his
successor as Chief Financial Officer. This form also
reported that to ensure auditor independence, the Company
had replaced the Company's former outside auditor for whom
Mr. Lucas had previously worked, and engaged the firm of
Rosen Seymour Shapss Martin and Company, LLP as the
Company's new independent auditor for 2002.
37
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 31, 2003 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 31, 2003
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 31, 2003
/s/ Burton Reyer
----------------------------------------
Burton Reyer
Vice President and Director
March 31, 2003
/s/ Russel Molina
----------------------------------------
Director
March 31, 2003
/s/ Stanley Kreitman
----------------------------------------
Stanley Kreitman
Director
March 31, 2003
/s/ Richard W. Lucas
----------------------------------------
Richard W. Lucas
Chief Financial Officer
March 31, 2003
CERTIFICATIONS
I, Floyd Warkol, certify that:
1. I have reviewed this annual report on Form 10-K of KSW, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the years presented in this
annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual quarterly report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions to significant deficiencies and material
weaknesses.
Date: March 31, 2003
By: /s/ Floyd Warkol
------------------------------------------
Floyd Warkol, Chief Executive Officer
CERTIFICATIONS
I, Richard W. Lucas, certify that:
1. I have reviewed this annual report on Form 10-K of KSW, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the years presented in this
annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual quarterly report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions to significant deficiencies and material
weaknesses.
Date: March 31, 2003
By: /s/ Richard W. Lucas
---------------------------------------------
Richard W. Lucas, Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent auditors' reports F-2-3
Consolidated financial statements:
Consolidated balance sheets F-4-5
Consolidated statements of operations F-6
Consolidated statements of comprehensive loss F-7
Consolidated statements of stockholders' equity F-8
Consolidated statements of cash flows F-9-10
Notes to consolidated financial statements F-11-33
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 sheet of KSW, Inc. and
subsidiary as of December 31, 2002, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity and cash flows for the year
ended. 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 audit.
We conducted our audit 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 audit provides 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, 2002, and the results of its operations
and its cash flows for the year ended in conformity with accounting principles
generally accepted in the United States of America.
Rosen Seymour Shapss Martin & Co., LLP
Certified Public Accountants
New York, New York
February 19, 2003
F-2
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 sheet of KSW, Inc. and
subsidiary as of December 31, 2001, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity and cash flows for the
years ended December 31, 2001 and 2000. 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 the results of its operations
and its cash flows for the years ended December 31, 2001 and 2000 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-3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
2002 2001
---- ----
A S S E T S
-----------
Current assets:
Cash $ 2,516 $ 715
Marketable securities 473 641
Accounts receivable, net 6,774 17,639
Retainage receivable 2,746 2,549
Costs and estimated earnings in excess of billings on uncompleted contracts
569
Deferred income taxes - 1,067
Prepaid expenses and other receivables 446 725
-------- --------
Total current assets 13,524 23,362
Property and equipment, net 232 333
Accounts receivable 1,937
Goodwill, net - 3,514
Deferred income taxes and other 1,478 411
--------- ---------
Total assets $ 17,171 $ 27,620
========= =========
(continued)
F-4
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loan payable $ 387 $ 190
Accounts payable 7,075 11,375
Retainage payable 1,317 1,774
Accrued payroll and benefits 247 747
Accrued expenses 171 374
Billings in excess of costs and estimated earnings on uncompleted contracts
832 3,689
------- ------
Total current liabilities 10,029 18,149
Long-term liabilities - 19
------- ------
Total liabilities 10,029 18,168
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock: 1,000,000 shares authorized,
no shares issued and outstanding - -
Common stock: $.01 par value, 25,000,000 shares authorized, 5,470,311
shares issued and outstanding
54 54
Additional paid-in capital 9,729 9,729
Accumulated deficit (2,593) (328)
Accumulated other comprehensive loss:
Net unrealized holding loss on available for sale securities
(48) (3)
------- ------
Total stockholders' equity 7,142 9,452
------- ------
Total liabilities and stockholders' equity $ 17,171 $ 27,620
======= =======
See notes to consolidated financial statements.
F-5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
________________________________________________
2002 2001 2000
---- ---- ----
Revenues $ 50,313 $ 51,012 $ 52,247
Costs of revenues 44,673 49,153 48,249
-------- -------- -------
Gross profit 5,640 1,859 3,998
Selling, general and administrative expenses 4,196 4,499 4,706
-------- -------- -------
Operating income (loss) 1,444 (2,640) (708)
-------- -------- -------
Other income (expense):
Interest income (expense),net (17) 45 279
Loss on sale of marketable securities (90) (100) -
--------- --------- --------
Total other income (expense) (107) (55) 279
--------- --------- --------
Income (loss) before provision (benefit) for income taxes
(2,695) (429)
1,337
Provision (benefit) for income taxes 1,714 (1,218) (163)
Loss before cumulative effect of change in
accounting principle
(377) (1,477) (266)
Cumulative effect of change in accounting for goodwill, net of income tax
benefit of $ 1,626
(1,888) - -
--------- --------- --------
Net loss $(2,265) $ (1,477) $ (266)
-------- --------- --------
Loss per common share basic and diluted before effect of change in
accounting principle
$ (.06) $ (.27) $ (.05)
Cumulative effect of change in accounting principle
(.35) - -
-------- --------- ---------
Basic and diluted loss per common share $ (.41) $ (.27) $ (.05)
========= ========= =========
Weighted average common shares outstanding -Basic 5,470,311 5,470,311 5,468,991
Diluted 5,470,311 5,470,311 5,641,050
See notes to consolidated financial statements.
F-6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
________________________________________________
2002 2001 2000
---- ---- ----
Net loss $ (2,265) $ (1,477) $ (266)
----------- ----------- ---------
Other comprehensive income (loss) before tax Net unrealized holding gains
(losses) arising during the year
(176) (128) 25
Less: reclassification adjustment for losses included in net loss
90 100 -
----------- ----------- ---------
Other comprehensive income (loss) before tax (86) (28) 25
Income tax related to items of other comprehensive loss
41 - -
----------- ----------- ---------
Other comprehensive income (loss) net of tax (45) (28) 25
----------- ----------- ---------
Total comprehensive loss $ (2,310) $ (1,505) $ (241)
========== ============ ==========
See notes to consolidated financial statements
F-7
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
ADDITIONAL RETAINED OTHER
COMMON STOCK PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
------ ------ ------- --------- ------------- -----
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)
Net 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)
Net unrealized loss on available for
sale securities
- - - - (28) (28)
Balances, December 31, 2001 5,470,311 54 9,729 (328) (3) 9,452
Net loss - - - (2,265) - (2,265)
Net unrealized loss on available for
sale securities - - - - (45) (45)
Balances, December 31, 2002 5,470,311 $ 54 $ 9,729 $ (2,593) $ (48) $ 7,142
See notes to consolidated financial statements.
F-8
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
___________________________
2002 2001 2000
---- ---- ----
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Net loss $ (2,265) $ (1,477) $ (266)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 131 304 323
Deferred income taxes 1,667 (1,243) (197)
Write off of goodwill, net 1,888 - -
Realized loss on sale of marketable securities
90
Loss on sale of fixed assets 17 - -
Changes in assets (increase) decrease:
Accounts receivable 8,928 (3,935) (3,098)
Retainage receivable (197) 714 859
Costs and estimated earnings in excess of billings on
uncompleted contracts (543) 112 200
Prepaid expenses and other receivables 279 154 (661)
Changes in liabilities increase (decrease):
Accounts payable (4,300) 2,552 2,553
Retainage payable (457) (7) 7
Accrued payroll and benefits (500) (401) (17)
Accrued expenses (203) (306) 311
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,857) (1,134) (511)
Net cash provided by (used in) operating
activities 1,678 (4,567) (497)
Cash flows from investing activities:
Net sale (purchase) of marketable securities (8) 1,772 (2,516)
Proceeds from sale of property 14 - -
Purchase of property and equipment (61) (147) (123)
Net cash provided by (used in) investing
activities (55) 1,625 (2,639)
(continued)
F-9
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
____________________________
2002 2001 2000
---- ---- ----
Cash flows from financing activities:
Exercise of stock options - - 3
Long term liabilities (19) (32) (19)
Increase in loans payable 197 190 -
Net cash provided by (used in) financing activities 158 (16)
178
Net increase (decrease) in cash and cash equivalents 1,801 (2,784) (3,152)
Cash and cash equivalents, beginning of year 715 3,499 6,651
Cash and cash equivalents, end of year $2,516 $ 715 $ 3,499
Supplemental disclosure of cash flow information:
Cash paid during the year for:
$ 31 $ 48 $ 22
Interest
$ 47 $ 12 $ 690
Income taxes
See notes to consolidated financial statement
F-10
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(1) PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements for the years ended December
31, 2002, 2001 and 2000, 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. The Company considers itself to be one operating
segment.
(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, 2002 and 2001, there were no cash
equivalents.
(B) REVENUE AND COST RECOGNITION
Revenue is primarily recognized on the "percentage of
completion" method for 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.
F-11
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(B) REVENUE AND COST RECOGNITION - CONT'D
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.
The Company does not record any income from claims until the
claims have been received or awarded. The gross profit
recognized in 2002, 2001 and 2000 applicable to the
finalization of contract balances of contracts completed in
prior periods were approximately $ 176, $ 65 and $ 264,
respectively.
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.
At December 31, 2002 and 2001, retainage receivable
aggregated $2,746 and $2,549, respectively, of which
approximately $ 0 and $336, respectively, is not collectible
within one year.
(C) MARKETABLE SECURITIES
Marketable securities, consisting of managed security
accounts, are classified as "available-for-sale" securities
and are stated at fair market value. Realized gains and
losses, determined using the specific identification method,
are included in earnings. Unrealized holding gains and
losses are reported as comprehensive income (loss) in a
separate component of stockholders' equity.
F-12
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(D) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for uncollectible trade
accounts receivable and retainage receivable based on
historical collection experience and management's periodic
evaluation of the collectibility of outstanding accounts
receivable and retainage receivable on an account by account
basis. The allowance for doubtful accounts is $200 as of
December 31, 2002 and 2001.
(E) 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, 2002 and 2001, amounts in excess of federally
insured limits totaled approximately $2,575 and $ 495,
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 $6,987 and $9,728 at December 31, 2002 and 2001,
respectively.
(F) 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-13
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(G) GOODWILL:
Prior to January 1, 2002, the Company amortized goodwill which
represents the excess of costs over the fair value of net assets
acquired, over a 30 year period.
At December 31, 2001 the Company's goodwill, net of accumulated
amortization of $1,476, totaled $3,514.
Amortization expense for the years ended December 31, 2001 and 2000
was approximately $153 per year.
During 2001, the Financial Accounting Standards Board issued SFAS
142, Goodwill and Other Intangible Assets. Under SFAS 142, the
amortization of goodwill ceased as of January 1, 2002 and a test for
impairment was established whereby the fair value of goodwill was
compared to its carrying value. If the fair value of goodwill is
determined to be less than its carrying value, the carrying amount
of goodwill is reduced to its fair value as an impairment change in
the period. If the fair value of goodwill is greater than its
carrying value, no adjustment to goodwill is made.
Since the Company's goodwill was attributed to the entire Company (a
single reporting unit) and the fair value of the Company as
reflected in the market value of its stock was significant below its
net worth including goodwill, the entire goodwill was written-off
during the first quarter of 2002. The net worth as well as the
market value of the Company has declined in recent years due to,
among other things, legal and settlement costs of over $1,800
associated with the Helionetics Creditors committee action as well
as the Stroock, Stroock & Lavan, LLP action (see note 8 (E)). In
addition, the Company incurred unanticipated costs on the Co-op City
project totaling $3,663, which the Company has a legal action to
recover, (see note 8 (E)). The Company also experienced erosion of
gross profits on several projects during the later half of 2000 and
2001 due to lower than anticipated productivity and higher labor
costs. The Company believes it has corrected this productivity issue
as well as revising its bidding methods.
F-14
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(G) GOODWILL - CONT'D
The following is a pro forma reconciliation of reported net
income adjusted for adoption of SFAS-142 for the years ended
December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Reported net loss $ (2,265) $ (1,477) $ (266)
Goodwill amortization net of taxes $ 1,888 $ 82 $ 82
----------- ---------- --------
Pro forma net loss $ (377) $ (1,395) $ (184)
=========== =========== ========
2002 2001 2000
---- ---- ----
Basic and Diluted loss per share:
Reported net loss per share $ (.41) $ (27) $ (.05)
Goodwill amortization per share, net of taxes
$ (.35) $ .02 $ .02
----------- ---------- --------
Pro forma loss per share $ (.06) $ (.25) $ (.03)
=========== ========== =========
(H) INCOME TAXES
The Company uses the asset and liability method of accounting
for income taxes recommended in SFAS No. 109, "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, based on outside auditor recommendation, for
deferred tax assets when, based on outside auditor
recommendation in the opinion of its outside auditors, it is
more likely than not that some or all of the deferred tax,
based on outside auditor recommendation, assets will not be
realized through future operations.
F-15
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(I) EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed
by dividing income available to common shareholders by the the
weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options. The difference
between reported basic and diluted weighted average common
shares results from the assumption that all dilutive stock
options outstanding were exercised. For the years presented,
the effect of common stock equivalents has been excluded from
the diluted calculation since the effect would be
antidulitive.
(J) 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.
(K) STOCK OPTIONS
The Company uses the intrinsic value method of accounting for
employee stock options in accordance with APB No. 25 and as
permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly,
compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at
the date of the grant over the amount the employee must pay to
acquire the stock. The compensation cost is recognized over
the vesting period of the options.
F-16
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(L) LONG LIVED ASSETS
The Company reviews certain long-lived assets and identifiable
intangibles (including goodwill) for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. In that regard, the Company
assesses the recoverability of such assets based upon
estimated non-discounted cash flow forecasts.
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Obligations Associated with the
Retirement of Long-lived Assets (SFAS 143) in August 2001.
SFAS 143 establishes accounting standards for the recognition
and measurement of an asset retirement obligation and its
associated asset retirement cost. The Company expects that the
provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon
adoption. The Company plans to adopt SFAS 143 effective
January 1, 2003.
The Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal
of Long Lived Assets (SFAS 144), effective January 1, 2002,
which did not have a material impact on the Company's
consolidated results of operations and financial position.
SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including
discontinued operations.
F-17
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - CONT'D
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 requires
that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is
incurred. SFAS 146 requires that the initial measurement of a
liability be at fair value. The Company plans to adopt SFAS
146 effective January 1, 2003 and does not expect that the
adoption will have a material impact on its consolidated
results of operations and financial position.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, (SFAS 148) Accounting for Stock
Based Compensation - Transition and Disclosure. SFAS 148
amends SFAS 123, Accounting for Stock Based Compensation, to
provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
accounting for stock based employee compensation. The adoption
of his pronouncement did not have a material effect on the
financial statements as the Company continues to apply the
intrinsic value method in accordance with APB No. 25.
(N) RECLASSIFICATIONS
Certain amounts in the 2001 and 2000 consolidated financial
statements have been reclassified for comparative purposes to
conform with the 2002 presentation. These reclassifications
did not affect net income or working capital as previously
reported.
F-18
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(3) MARKETABLE SECURITIES
The cost and fair value of the marketable securities, classified as
available-for-sale securities at December 31, 2002 and 2001, was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
December 31, 2002:
Managed stock funds $ 561 $ 19 $ (107) $ 473
======== ======== ======== ========
December 31, 2001:
Managed stock funds $ 644 $ - $ (3) $ 641
======== ======== ======== ========
At December 31, 2002 and 2001, gross unrealized holding losses on
available for sale securities were $107 and $3, respectively. At
December 31, 2002 and 2001, gross unrealized holding gains on the
sale of available for sale securities were $19 and $0, respectively.
The change in net unrealized holding gains (losses) is $(45) and
$(28) for the years ended December 31, 2002 and 2001, respectively.
During the years ended December 31, 2002 and 2001 available for sale
securities were sold for total proceeds of approximately $ 404, and
$ 2,571, respectively . The gross realized losses on these sales
totaled approximately $ 90 and $ 100, for the years ended December
31, 2002 and 2001, respectively.
(4) CONSTRUCTION CONTRACTS
Information with respect to contracts in progress at December 31,
2002 and 2001 is as follows:
F-19
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(4) CONSTRUCTION CONTRACTS - CONT'D
2002 2001
---- ----
Costs on uncompleted contracts $ 37,617 $ 28,408
Estimated earnings thereon 3,458 4,144
----------- -------------
41,075 32,552
Less billings applicable thereto 41,338 36,215
----------- -------------
$ (263) $ (3,663)
=========== =============
Included in the accompanying consolidated balance sheets under the
following captions:
2002 2001
---- ----
Costs and estimated earnings in excess of billings on uncompleted contracts
$ 569
$ 26
Billings in excess of costs and estimated earnings on uncompleted contracts (832) (3,689)
----------- -------------
$ (263) $ (3,663)
=========== =============
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consists of the
following:
2002 2001
---'- ----
Machinery and equipment $ 497 $ 624
Furniture and fixtures 712 676
Leasehold improvements 828 828
----------- -------------
2,037 2,128
Less accumulated depreciation and amortization 1,805 1,795
----------- -------------
$ 232 $ 333
=========== =============
Depreciation and amortization expense relating to property and
equipment was approximately $131, $151 and $170 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-20
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(6) INCOME TAXES
For the years ended December 31, 2002, 2001 and 2000, components of
provision (benefit) to income taxes are as follows:
2002 2001 2000
---- ---- ----
Current
Federal $ - $ - $ (16)
State and local 47 54 50
47 54 34
Deferred
Federal 997 (760) (122)
State and local 670 (512) (75)
1,667 (1,272) (197)
Total $ 1,714 $ (1,218) $ (163)
At December 31, 2002, at the recommendation of its outside auditors,
the Company provided a valuation allowance against its net deferred
tax assets of $1,045 based upon an uncertainty regarding the
ultimate utilization of these deferred tax assets in their entirety.
The majority of the 2002 increase in the deferred tax asset before
the valuation allowance, is attributable to the write-off of
goodwill as a result of implementation of SFAS-142.
A reconciliation of the provision (benefit) for income taxes with
amounts determined by applying the statuatory U.S. Federal income
tax rate to income before taxes is as follows:
2002 2001 2000
---- ---- ----
Computed tax at the federal statuatory rate of 34% $ 455 $ (916) $ (146)
State taxes, net of Federal benefit 162 (326) (52)
Valuation allowance 1,045 - -
Other items, net 52 24 35
Provision (benefit) for income taxes $1,714 $(1,218) $ (163)
.
F-21
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(6) INCOME TAXES - CONT'D
The details of deferred tax assets and liabilities at December 31,
2002 and 2001 are as follows:
2002 2001
---- ----
Deferred income tax assets:
Net operating loss carryforwards $ 979 $ 1,585
Amortization of goodwill 1,058 -
Property and equipment 267 278
Allowance for doubtful accounts 92 92
Unrealized losses on marketable securities
41 -
Other tax carryforwards 77 -
--------- ---------
Total deferred income tax assets 2,514 1,955
--------- ---------
Deferred income tax liabilities:
Amortization of goodwill - (486)
--------- ---------
- (486)
--------- ---------
Net deferred income tax assets before valuation allowance
2,514 1,469
Valuation allowance (1,045) -
--------- ---------
Deferred income tax assets, net $ 1,469 $ 1,469
========= =========
At December 31, 2002, the Company has net operating loss carry forwards
remaining of approximately $2,128 expiring through December 31, 2021. 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 sheets. At
December 31, 2002, the $1,469 balance is included in long-term assets in the
accompanying balance sheets.
F-22
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME
At December 31, 2002 and 2001, accumulated other comprehensive
income (loss), which consists of net unrealized holding gains
(losses) on available for sale securities, is as follows:
2002 2001
---- ----
Beginning balance $ (3) $ 25
Current period change (45) (28)
----- ----
Ending balance $ (48) $ (3)
===== ====
(8) 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 as a result of the Company not having
the financial capacity to complete projects. Management
believes the likelihood of the surety having to complete
projects is remote. The contingent liability is the cost of
completing all bonded projects, subject to bidding by third
parties which is an undeterminable amount. Management believes
that all contingent liabilities will be satisfied by
performance on the specific bonded contracts involved.
(B) OPERATING LEASES
The Company is obligated under non-cancelable operating
leases, for office space with future rental payments at
December 31, 2002 as follows:
YEAR ENDING
DECEMBER 31
2003 $ 180
2004 91
------
$ 271
======
F-23
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(8) COMMITMENTS AND CONTINGENCIES - CONT'D
(B) OPERATING LEASES -CONT'D
Under the terms of the lease agreement, the Company is
obligated to pay monthly rental amounts of approximately $15
and has the option to extend the lease an additional five
years from June 2004 through June 2009.
The Company had an operating lease with related entities
controlled by its chief executive officer for rental of
office, shop and warehouse space which expired on December
31, 2002. The Company will rent this space on a
month-to-month basis at approximately $8.5 per month through
March 2003. The Company is pursuing alternate warehouse
space.
Rent expense for the years ended December 31, 2002, 2001 and
2000 amounted to approximately $ 279, $ 276 and $272
respectively, including $103 to related entities controlled
by the chief executive officer in each year.
(C) EMPLOYMENT AGREEMENTS
KSW Mechanical Services, Inc., the Company's wholly owned
subsidiary, entered into employment agreements with two of its
officers for the period January 1999 through December 2000.
These agreements provided for aggregate base annual
compensation of $660 each year plus 15% of income before taxes
in excess of $250. The officers were also entitled to medical
insurance, disability insurance and life insurance. The
Company has not entered into new employment agreements with
these individuals. The original agreement provided for a
non-compete provision which expired December 2002. Since
January 1, 2001, they continued in the same capacities and
continued to receive the same base financial remuneration as
under the prior employment agreements. During 2002 and 2001,
officers' combined compensation was a base salary of $660. No
bonuses were paid in 2002, 2001 and 2000 to these two
officers. During 2002, these two officers have elected to
reduce their salaries in the amount of $50 to reimburse the
Company in the settlement of the Helionetics Credits Committee
action (see note 8(e)). These officers are entitled to
reimbursement of this salary reduction from 10% of any
proceeds up to $500 from the Stroock, Stroock & Lavan, LLP
litigation.
F-24
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(8) COMMITMENTS AND CONTINGENCIES -CONT'D
(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 are
no environmental contingencies or violations of environmental
laws or regulations, which would have a material adverse
impact on the results of operations or on the Company's
financial condition.
(E) LEGAL
Except as listed below, 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. 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 its contract balance and unpaid proposals
in the sum of $5,771. Included in that sum is a claim for
unanticipated costs incurred through 1998 in the sum of $3,663,
which amount has not been reflected as a claim receivable in the
Company's financial statements because it is the policy of the
Company not to record any income from claims until the claims have
been received or awarded. The defendant has asserted counterclaims
totaling $6,269, which the Company believes lack merit. While the
Company and its counsel believe its lawsuit has merit, there is no
guaranty of a favorable outcome. This case was tried for 14 days and
adjourned by the Court to May 2003 for further trial proceedings.
The financial statements at December 31, 2002 and 2001, contain
approximately $1,937 which consists of accounts receivable
applicable to the base contract of approximately $437 and unpaid
retainage billings of approximately $1,500.
b. 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 matter
involving Helionetics Creditors Committee, which was settled in May
2002. That action had claimed that Helionetics' distribution of the
Company's stock to Helionetics' shareholders was a fraudulent
conveyance. The Company's complaint also alleges malpractice in
F-25
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(8) COMMITMENTS AND CONTINGENCIES - CONT'D
(E) LEGAL - CONT'D
b. Stroock & Stroock & Lavan, LLP. - cont'd:
connection with Stroock's representation of the Company and three of
its directors and officers in the Helionetics Creditors Committee
Action. The Company's action seeks to recoup its legal fees paid for
the distribution, the fees spent in defense of the Helionetics
Creditors Committee Action, and the $450 payment made by the Company
and its directors to settle that action (a total of approximately $
1,800), plus punitive damages. Subsequent to the filing of this
malpractice 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 earned in connection with
Stroock's representation of the Company in the Helionetics Creditors
Committee Action. 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 New York
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.
Discovery is complete in this California action. Trial is scheduled
for April 1, 2003.
c. Other Proposals and Claims. During the ordinary and routine course
of its work on construction projects, the Company may incur expenses
for work outside the scope of its contractual obligations, for which
the owner or general contractor agrees that the Company will be
entitled to additional compensation, but where there is not yet an
agreement on price. The Company's financial statements include the
amounts the Company believes it will ultimately receive on these
authorized proposals. Also during the course of its work on
construction projects, the Company may incur expenses for work
outside the scope of its contractual obligations, for which no
acknowledgment of liability exists from the owner or general
contractor for such additional work. These claims may include change
proposals for extra work or requests for an equitable adjustment to
the Company's contract price due to unforeseen disruptions to its
work. In accordance with accounting principles generally accepted in
the United States of America for the construction industry, until
written acknowledgment of the validity of the claims are received,
claim recoveries are not recognized in the accompanying financial
statements.
F-26
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(8) COMMITMENTS AND CONTINGENCIES - CONT'D
(E) LEGAL - CONT'D
c. Other Proposals and Claims - cont'd
No accruals have been made in the accompanying consolidated financial
statements related to these proposals for which no acknowledgment of
liability exists. While the Company has been generally successful in
obtaining a favorable resolution of such claims, there is no
assurance that the Company will be successful in the future.
d. World Trade Center (WTC) Business Recovery Grant Program
The WTC Business Recovery Grant Program (the "Program") was
established by the New York State Urban Development Corporation
(d/b/a the Empire State Development Corporation) to provide
assistance to certain businesses that have been adversely impacted as
a result of the events of September 11, 2001. The Program was amended
during August 2002 to include businesses working in the area
designated as the Restricted Zone as of September 11, 2001 under a
contractual agreement if they meet certain qualifying criteria of the
Program. The Company received $338 from the Program for economic
losses on two projects which reduced 2002 costs of revenues by
approximately $176 and selling, general and administrative costs by
approximately $162.
F-27
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(9) CONCENTRATION RISKS
(A) LABOR CONCENTRATIONS
The Company's direct labor is supplied primarily by one union
through a collective bargaining agreement which expires in
June 2005. Although the Company's past experience was
favorable with respect to resolving conflicting demands with
unions, it is always possible that a protracted conflict may
occur which will impact the renewal of the collective
bargaining agreements.
(B) CONTRACT REVENUE/SIGNIFICANT CUSTOMERS
Revenues from the Company's three largest customers were
approximately 37%, 14% and 10% of its contract revenue in
2002, 23%, 16% and 14% in 2001, and 20%, 19% and 15% in 2000.
(10) 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
$62, $63 and $62 as a 25% matching contribution for the years
ended December 31, 2002, 2001 and 2000, respectively.
F-28
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(10) RETIREMENT PLANS - CONT'D
(B) MULTIEMPLOYER PENSION PLANS
Employees of the Company who are members of a collective
bargaining (union) agreement are covered by union pension
plans. The Company makes 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. The Company
has expensed approximately $1,189, $2,226 and $2,014 for the
years ended December 31, 2002, 2001 and 2000, respectively,
related to multi-employer pension plans for its union
employees.
(11) LINE OF CREDIT - BANK
The Company has a $2,000 line of credit with Merrill Lynch,
which expires December 2003. This line is collateralized by
all corporate assets. The line of credit calls for borrowings
at 3% over the 30 day dealer commercial paper rate ( 4.29% at
December 31, 2002). The line of credit agreement also requires
the Company to maintain certain financial statement covenants.
(12) 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 make
incentive-based compensation awards to its employees,
officers, directors and consultants. A total of 750,000 shares
were authorized for issuance under the Plan. Options to
purchase 620,000 shares of common stock at $1.50 per share
were issued during December 1995 (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 grant pursuant to the requirements
of APB Opinion No. 25.
F-29
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
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 total number of
shares of common stock available for future options from
130,000 to 480,000 shares.
Holders of shares issued pursuant to the Plan are entitled to
registration of such shares annually, subject to restrictions
in any underwriting agreement. In 1999, the Company issued a
total of 55,000 stock options to three key employees and to a
Director, Stanley Kreitman. At December 31, 1999, there were
641,667 granted options outstanding. No options were exercised
under the plan in 2002 and 2001. In 2000 1,667 options were
exercised. During 2001, 18,333 options under the plan were
canceled. There were no option cancellations in 2002 and 2000.
During 2002, 2001 and 2000, no new options were granted. At
December 31, 2002, there were 621,667 exercisable options
outstanding, all of which have an exercise price of $1.50 per
share.
F-30
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
Changes that occurred in options outstanding during 2002, 2001 and 2000 are
summarized below:
2002 2001 2000
Fixed Fixed Fixed
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------------
Outstanding at beginning of year 621,667 $ 1.50 640,000 $ 1.50 641,667 $ 1.50
Granted - - -
Exercised - - (1,667) $ 1.50
Expired/ Canceled - (18,333) -
-------------- ---------------- -----------------
Outstanding at end of year 621,667 $ 1.50 621,667 $ 1.50 640,000 $ 1.50
============== ================ =================
Exercisable at end of year 621,667 $ 1.50 621,667 $ 1.50 621,667 $ 1.50
The following table summarizes information about stock options outstanding at
December 31, 2002:
Remaining
Exercise Price Shares Contractual Life
-------------- ------ ----------------
$1.50 621,667 3.2 years
F-31
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
The Company follows APB Opinion No. 25 in accounting for its
employee stock options. Under the standard, no compensation
expense is recognized because the exercise price of the shares
equal the market price at the date of grant. The Company is
required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" to disclose pro
forma information regarding options grants made to employees
based on specified valuation techniques that produce estimated
compensation charges for disclosure purposes only. 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 loss before cumulative effect of changes in
accounting principle would have been as follows:
2002 2001 2000
---- ---- ----
Net loss before the effect of change in accounting
principle - as reported $ (377) $(1,477) $ (266)
Stock option compensation, net of tax - (9) (9)
--------- -------- --------
Net loss before the effects of change in accounting
principle - pro forma $ (377) $(1,486) $ (275)
========= ======== ========
Net loss - as reported $ (2,265) $(1,477) $ (266)
Stock option compensation, net of tax - (9) (9)
--------- -------- --------
Net loss - pro forma $ (2,265) $(1,486) $ (275)
========= ======== ========
Per share (basic):
Before cumulative effect of change in accounting
principle - as reported $ (.06) $ (.27) $ (05)
Stock option compensation, net of tax - - -
--------- -------- --------
Before cumulative effect of change in accounting
principle - pro forma $ (.06) $ (.27) $ (.05)
========= ======== ========
F-32
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
2002 2001 2000
---- ---- ----
Per share (diluted):
Before cumulative effect of change in accounting
principle - as reported $ (.06) $ (.27) $ (05)
Stock option compensation, net of tax - - -
---------- ---------- --------
Before cumulative effect of change in accounting
principle - pro forma $ (.06) $ (.27) $ (.05)
========== ========== ========
Net loss per share - as reported $ (.41) $ (.27) $ (.05)
========== ========== ========
Net loss per share - pro forma $ (.41) $ (.27) $ (.05)
========== ========== ========
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, 2002, no shares of
preferred stock have been issued by the Company.
(13) BACKLOG [UNAUDITED]
At December 31, 2002, the Company had a backlog of
approximately $26,500. 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.
F-33