UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27290
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KSW, INC.
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(Exact name of the Registrant as specified in its charter)
Delaware 11-3191686
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
37-16 23rd Street, Long Island City, New York 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 361-6500
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on June 30, 2003 was $ 2,900,537 (based on a
price of $.75 per share).
As of March 25, 2004, there were 5,470,311 shares of Common Stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A within 120
days after the end of the Registrant's last fiscal year is incorporated by
reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS................................................................................................2
EXPLANATORY NOTE..........................................................................................................2
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.........................................8
PART II...................................................................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................9
ITEM 6. SELECTED FINANCIAL DATA.....................................................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......23
ITEM 9A. CONTROLS AND PROCEDURES....................................................................23
PART III.................................................................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................23
ITEM 11. EXECUTIVE COMPENSATION.....................................................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS...................................................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................24
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.....................................................24
PART IV..................................................................................................................25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................25
SIGNATURES...............................................................................................................28
1
FORWARD LOOKING STATEMENTS
Certain statements contained under "Item 1. Business" and "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. Many of
the risks, uncertainties, and other important factors that could cause actual
results to differ materially from expectations of the Company are described at
the end of "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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.
EXPLANATORY NOTE
This Annual Report on Form 10-K of KSW, Inc. a Delaware corporation (the
"Company" or "KSW") for the fiscal year ended December 31, 2003, should be read
in conjunction with Form 10-K/A for the fiscal year ended December 31, 2002.
At the end of January 2004, the Company's management identified and determined
that reported revenues and costs of revenues during the year ended 2002 and the
nine months ended September 30, 2003, including their respective interim
periods, were materially overstated. This overstatement was a result of an
accounting error attributable to the failure to eliminate certain intra-company
accounts as disclosed by the Company on February 2, 2004, in a press release, a
copy of which was attached as an exhibit to the Current Report on Form 8-K of
the same date, this overstatement did not change previously reported gross
profit, operating income, net income (loss) or earning (loss) per share for the
affected periods. The Company's previously issued statements of operations for
the year ended 2002 and nine months ended September 30, 2003, including for
their respective interim periods, should not be relied upon as to the revenues
and costs of revenues reported in such statements as a result of these
accounting errors. This Form 10-K for 2003 and the Form 10-K/A for 2002 restates
the amounts to correct the accounting error.
2
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"). The Company's common stock is
traded on the Over-the-Counter Bulletin Board under the symbol "KSWW.OB."
Some of the Company's ongoing projects include the following: New
Apartment Buildings at 1930 Broadway and 10 Liberty Street, the conversion from
offices to rental apartments at 63 Wall Street, and the New Federal Court House
and U.S. Post Office/Courthouse, both in Brooklyn, NY.
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 has engaged consultants to determine the best methods to maximize
shareholder value, including whether the sale of the Company would be
advantageous.
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, as 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 projects. On larger complex projects
(generally those having a mechanical portion valued over $10 million), such as
the 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. 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 provides a
significant benefit in keeping a project on schedule and within budget.
3
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 responsible for
the cost, coordination and 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 price quotes from potential suppliers and subcontractors, requiring
payment or performance bonds from major subcontractors and adding a contingency
allowance to these price quotes before the Company submits its GMP. The Company
also works to control costs because it is a mechanical contractor and can
perform the guaranteed work on its own should bid prices exceed its estimate.
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. The Company is at risk for any costs in excess of the GMP. There
is no assurance that potential cost overruns will not exceed this contingency.
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
detailed reviews of 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, 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
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.
4
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
$20,900,000 as of December 31, 2003, compared to approximately $26,200,000
(restated) at December 31, 2002 and approximately $51,000,000 (restated) at
December 31, 2001. See the discussion of the restatements in "Item 6 -Selected
Financial Data" and "Item 7- Management's Discussion and Analysis of Financial
Condition and Results of Operations." Backlog has decreased primarily as a
result of the Company concentrating its efforts on obtaining projects with
shorter duration and less risk. 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. The Company is currently providing
preconstruction trade management services on a large ambulatory care facility. A
formal trade management contract has not yet been executed, and accordingly is
not included in the Company's backlog.
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
favorably 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 governed 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 abatement companies with the Company being named as an
additional insured on the asbestos abatement company's liability insurance
policy. The Company has not incurred any liability for violations of
environmental laws. The Company must also comply with federal rules and
regulations promulgated by the Occupational Safety and Health Administration.
EMPLOYEES. At December 31, 2003, 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
projects under contract. The Company hires union labor for specific work
5
assignments and can reduce the number of union workers hired at will with no
penalties.
The Company satisfies benefits payable to union employees through
payments 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. Through
2003, the Company has matched 25% of the employees' 401(k) contributions.
DEPENDENCE UPON CUSTOMERS. The Company seeks contracts with shorter
duration which have less risk. At any given time, a material portion of the
Company's contracting business may be for one large contract for one customer.
The Company's customer base can vary each year based on the nature and scope of
the projects undertaken in that year.
For the year ended December 31, 2003, work under contracts with three
customers: Bovis Lend Lease, Inc., Glenwood Management Corporation and Newmark
Construction Services, LLC and related entities, constituted 43%, 27% and 13% of
the Company's total revenues, respectfully.
For the year ended December 31, 2002 (as restated), work under
contracts with three customers: Bovis Lend Lease, Inc., J.A. Jones Construction
Group, LLC. and Jeffrey M. Brown Associates, Inc., constituted 41%, 15% and 11%
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., constituted 23%, 16% and 14% of the Company's total
revenues, respectively.
Historically, a considerable portion of the Company's revenue has
been generated from contracts with federal, state and local governmental
authorities. Consequently, a reduction in public sector contracts for any
reason, including an economic downturn or a reduction in government spending,
could have a material adverse effect on the Company's results of operations. At
any one time, the Company's contracts with federal, state and local governmental
authorities may or may not represent a material portion of its revenues.
As is customary in the industry, 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 solely at the discretion of the surety
and is primarily based upon the Company's net worth, working capital, the number
and size of projects under construction and the surety's relationship with
management. The larger the project and/or the number of projects under contract,
the greater the requirements are for bonding, net worth and working capital. The
Company generally pays a fee to the bonding company of an amount less than 1% of
the amount of the contract to be performed. Since inception, the Company has
never been denied any request for Payment or Performance Bonds, nor has a
bonding company been required to make a payment on any bonds issued for the
Company. At December 31, 2003, approximately $13,600,000 of the Company's
$20,900,000 backlog require bonds. See the discussion of the surety in "Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
OTHER MATTERS. The Company does not own any patents, patent rights or
similar intellectual property. The Company's business is not subject to large
seasonal variations. The Company did not expend funds for research and
development during 2003, 2002 and 2001, and anticipates no research and
development expenses in 2004.
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 had an initial annual base rent of
$173,000, with yearly rent increases of approximately 2%. The lease is a triple
net lease and thus the Company will pay any increases on real estate taxes over
the base year taxes, maintenance, insurance and utilities. The Company has
exercised the first five year option under the Modification of Lease Agreement,
which extended the lease term through June 2004. The Company has exercised a one
year option for the period June 2004 through June 2005. There is also a four
year option which can be exercised during 2005.
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 feet of shop space and an adjacent 5,000 square foot
storage yard. This property is jointly owned by the Company's Chief Executive
Officer, and a charitable foundation he controls. This lease is also a triple
net lease. The Company pays rent of $103,000 per year, plus taxes (currently
approximately $24,000 per year), maintenance, insurance and utilities. The lease
expired on December 31, 2002 and is currently on a month to month basis.
In general, our properties are well maintained, adequate and suitable
for their purposes.
ITEM 3. LEGAL PROCEEDINGS
The following is a material pending proceeding in which the Company is a party:
Co-op City. In February 1999, the Company sued the general contractor and
the general contractor's bonding company in New York State Supreme Court,
Queens County to recover its contract balance and unpaid proposals in the
amount of $5,770,919. Included in that sum is a claim for unanticipated
costs incurred through 1998 in the amount 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 Company and its counsel believe its lawsuit has
merit, there is no guaranty of a favorable outcome. This case was tried
for 28 days and adjourned by the Court to May 2004 for further trial
proceedings. The financial statements at December 31, 2003 and 2002,
include accounts receivable of approximately $1,937,000 related to this
project.
7
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 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers of the Company serve at the pleasure of the Board of Directors. The
name, age and offices held by each of the executive officers of the Company as
of December 31, 2003 were as follows:
NAME AGE TITLE
- ---- --- -----
Floyd Warkol 56 Chief Executive Officer, President,
Secretary and Chairman of the Board of
Directors
Richard W. Lucas 37 Chief Financial Officer
James F. Oliviero 57 General Counsel
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 the Company and as Chairman and Chief Executive Officer of KSW
Mechanical, since January 1994.
Mr. Richard W. Lucas has been principally employed as the Chief
Financial Officer of the Company and KSW Mechanical, since August 2002. Prior
thereto, he was employed from May 1994 through July 2002 by Marden Harrison &
Kreuter CPAs P.C., the Company's independent certified public accountants.
Mr. James F. Oliviero has been principally employed as General
Counsel of the Company and KSW Mechanical, since February 1998. From January
1994 until February 1998, he was employed as Director of Contract Administration
of KSW Mechanical.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Over-the-Counter Bulletin
Board under the symbol "KSWW.OB."
At March 25, 2004, the Company had 5,470,311 shares of KSW Common
Stock issued and outstanding held by approximately 5,000 shareholders of record,
based on shareholder lists provided by the Company's stock transfer agent and
Depository Trust Company.
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 during 2003 or 2002.
The following information on high and low bid information is provided
for 2003 and 2002 based on intraday quotation information:
2003 2002
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First..................................... $ 1.05 $ .70 $ 1.04 $ .70
Second.................................... $ 1.00 $ .70 $ 1.05 $ .70
Third..................................... $ .85 $ .70 $ 1.05 $ .80
Fourth.................................... $ .83 $ .62 $ .90 $ .90
These prices represent bid prices, which are prices paid by broker dealers, and
do not include retail markups, markdowns or broker dealer commissions.
ITEM 6. SELECTED FINANCIAL DATA
The following information for the years ended December 31, 2003,
2001, 2000, and 1999 is derived from, and is qualified by reference to, the
financial statements for those years audited by Marden, Harrison & Kreuter CPAs,
P.C. The summary of certain financial information relating to the Company for
the year ended December 31, 2002 (as restated), is derived from, and is
qualified by reference to, the financial statements for the year audited by
Rosen Seymour Shapss Martin & Company, LLP. Previous year amounts have been
reclassified to conform to the presentation. Each of the previously mentioned
financial statements is included herein or in prior years annual reports on Form
10-K and Form 10-K/A, and should be read in conjunction with such financial
information.
9
FOR THE YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INCOME STATEMENT: 2003 2002 2001 2000 1999
(Restated)
Revenues............................... $35,002 $46,448 (a) $51,012 $52,247 $44,720
Costs of revenues...................... 31,148 40,808 (a) 49,153 48,249 38,029
Gross profit........................... 3,854 5,640 1,859 (b) 3,998 (b) 6,691
Selling, general and administrative
expenses............................ 3,010 4,196 4,499 4,706 4,280
Operating income (loss)................ 844 1,444 (2,640) (708) 2,411
Other income (expense)................. (59) (107) (55) 279 99
Income (loss) before income taxes...... 785 1,337 (2,695) (429) 2,510
Provision (benefit) for income
taxes............................... (30) 1,714 (c) (1,218) (163) 1,143
Income (loss) before cumulative effect
of change in accounting principle.... 815 (377) (1,477) (266) 1,367
Cumulative effect of change in
accounting principle net............ - (1,888)(d) - - -
Net income (loss)...................... 815 (2,265) (1,477) (266) 1,367
Net income (loss) per share - Basic.... .15 (.41) (.27) (.05) .25
Diluted............................ .15 (.41) (.27) (.05) .25
Number of shares used in computation :
Basic.............................. 5,470,311 5,470,311 5,470,311 5,468,991 5,468,644
Diluted............................ 5,470,311 5,470,311 5,470,311 5,641,050 5,468,644
BALANCE SHEET DATA:
Total assets........................... 16,834 17,171 27,620 28,263 26,147
Working capital........................ 4,496 3,495 5,213 6,996 7,023
Current liabilities.................... 8,785 10,029 18,149 17,255 14,912
Long-term liabilities.................. - - 19 51 40
Stockholders' equity................... 8,049 7,142 9,452 10,957 11,195
OTHER DATA:
Current ratio.......................... 1.51:1 1.35:1 1.29:1 1.41:1 1.47:1
(a) The Company's management identified and determined that reported revenues
and costs of revenues during the year ended December 31, 2002 were materially
overstated as a result of an accounting error attributable to the failure to
eliminate certain intra-company accounts. The Company has restated these
previously reported amounts and, with the oversight of its Audit Committee, has
corrected its financial reporting system. Gross profit for the year did not
change due to the offsetting effects of the misstatements.
(b) For the years ended December 31, 2001 and 2000, the Company experienced 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.
(c) During the year ended December 31, 2002, the Company recorded a valuation
allowance totaling $1,045 against its deferred tax assets, at the recommendation
of the Company's outside auditors engaged in the preparation of the 2002 audit.
(d) 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 accounted for $1,888 of the net loss.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis explains the general financial
condition and the results of operations for the Company, for the years ended
December 31, 2003, 2002 and 2001, including:
o factors which affect our business,
o our earnings and costs in the periods presented,
o changes in earnings and costs between periods,
o sources of earnings, and
o impacts of these factors on our overall financial condition.
As you read this discussion and analysis, refer to the Consolidated
Statements of Operations for the years ended 2003, 2002 (restated), and 2001,
included in the Company's consolidated financial statements.
Amounts included in the quarterly information for the first three
quarters of 2003 and all four quarters of 2002 have been restated. The Company's
management identified a material overstatement of revenues and costs of revenues
during the related periods attributed to the failure to eliminate certain
intra-company accounts. This restatement did not change previously reported
gross profit, operating income (loss), net income (loss) or earnings (loss) per
share for the year ended 2002 and the nine months ended September 30, 2003,
including their respective quarters. Management, with the oversight of its Audit
Committee, has analyzed and corrected the Company's internal financial reporting
system.
Total revenues for 2003 were $ 35,002,000 as compared to $46,448,000
(restated) for 2002 and $51,012,000 for 2001.
OVERVIEW
The Company, through its wholly-owned subsidiary, furnishes and
installs 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 obtains projects through both competitive bidding and
negotiated bidding processes submitted to project owners or construction
managers, with many of whom the Company has had long standing commercial
relationships.
The Company is awarded many of its contracts by providing value
engineering assistance, whereby the Company recommends changes to project plans.
This assistance reduces costs and yields the same results as the original
designs.
The Company's profitability is dependent on its ability to continue
to maintain its commercial relationships and provide quality services necessary
to obtain projects. The Company must also manage material costs, purchase
equipment at or below original estimated amounts and control labor costs
throughout the duration of each project.
11
During the year ended December 31, 2003, the Company's positive
results were related to improved home-office cost management, concentration on
smaller projects which allowed for better control, and a continued focus on
trade management projects which have inherently lower risks.
Management, therefore, believes that the future success of the
Company lies in its ability to obtain new projects, maintain proper cost
controls related to this work, pursue new trade management contracts and
continue controlling home-office expenditures. The Company is dependant on
outside factors such as the general health of the New York City metropolitan
area economy and continued low interest rates, both of which relate to the
strength of the building industry and the type of projects the Company has the
ability to obtain. Increasing governmental deficits could also affect the amount
of new governmental financed projects which the Company would pursue. The
Company must also continue to obtain surety bonds, which are required on many of
its projects. The Company's management has had experience in expanding into new
geographic areas; however, to date the Company has conducted its operations
primarily in the New York City metropolitan area.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements and accompanying
notes have been prepared in accordance with accounting principles generally
accepted in the United States of America. 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, 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 the following accounting policies represent
critical accounting policies. Critical accounting policies are those that are
both most important to the portrayal of a company's financial condition and
results and require management's most difficult, subjective, or complex
judgment, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods. We
discuss our significant accounting policies, including those that do not require
management to make difficult, subjective, or complex judgments or estimates, in
Note 2 to the Company's consolidated financial statements.
12
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.
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. These estimates are subject to revisions due to
unanticipated increases in labor, material and equipment costs as well as
project scope changes. The Company has the ability to receive a change order for
project scope changes. For some project cost overruns, the Company can make a
claim to the project owner or general contractor to seek reimbursement of these
overruns. In the past, the Company has been successful in the pursuit of such
claims.
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 balance of 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 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. These adjustments would be a result of the Company's inability to
generate enough profits to realize these assets. For the year ended December 31,
2003, the Company had net income, which utilized a portion of the deferred tax
asset and reduced the deferred tax valuation allowance by $406,000,
respectively.
13
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:
2003 2002 2001
---- ---- ----
(RESTATED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REVENUES............................... $ 35,002 100.0 $ 46,448 100.0 $ 51,012 100.0
COSTS OF REVENUES...................... 31,148 89.0 40,808 87.9 49,153 96.4
---------- --------- ---------- --------- ---------- ---------
GROSS PROFIT........................... 3,854 11.0 5,640 12.1 1,859 3.6
EXPENSES
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 3,010 8.6 4,196 9.0 4,499 8.8
---------- --------- ---------- --------- ---------- ---------
OPERATING INCOME (LOSS)................ 844 2.4 1,444 3.1 (2,640) (5.2)
OTHER EXPENSES......................... (59) (.2) (107) (.2) (55) (.1)
---------- --------- ---------- --------- ---------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES....................... 785 2.2 1,337 2.9 (2,695) (5.3)
PROVISION (BENEFIT) FOR INCOME TAXES... (30) (.1) 1,714 3.7 (1,218) (2.4)
---------- --------- ---------- --------- ---------- ---------
INCOME (LOSS) BEFORE CUMULATIVE CHANGE
IN ACCOUNTING PRINCIPLE................ 815 2.3 (377) (.8) (1,477) (2.9)
CUMULATIVE CHANGE IN ACCOUNTING FOR
GOODWILL, NET OF TAX BENEFIT........... - - (1,888) (4.1) - -
---------- --------- ---------- --------- ---------- ---------
NET INCOME (LOSS)...................... $ 815 2.3 $ ( 2,265) (4.9) $ (1,477) (2.9)
========== ========= ========== ========= ========== =========
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 (RESTATED)
Revenues
- --------
Revenues decreased $11,446,000 or (24.6)% to $35,002,000 for the year
ended December 31, 2003, as compared to $46,448,000 (restated) for the year
2002. The majority of the Company's new projects in 2003, which were originally
projected to be underway during the early part of January 2003, did not commence
until the latter half of the first quarter 2003, which contributed to the
decrease in revenue. This revenue decline was a result of market conditions, as
well as the Company focusing on smaller contracts with shorter durations, which
the Company is able to monitor more closely. Revenue for the fourth quarter of
2003 was $10,212,000, a reduction of $24,000 as compared to the fourth quarter
of 2002 totaling $10,236,000 (restated). Included in the fourth quarter of 2003
results, was approximately $714,000 of reimbursements of costs incurred due to
delays on two government contracts. Costs associated with these claims were
incurred in previous quarters. At December 31, 2003, the Company had backlog of
$20,900,000. The Company is actively seeking new projects to add to its backlog.
14
Costs of revenues
- -----------------
Costs of revenues decreased by $9,660,000 or (23.7%) to $31,148,000
for the year ended December 31, 2003 compared to $40,808,000 (restated) for the
year ended December 31, 2002. Costs of revenues for the fourth quarter 2003 was
$8,386,000, a reduction of $331,000 as compared to the fourth quarter of 2002
totaling $8,717,000 (restated). Both of these changes can be attributed to the
decline in revenue previously discussed.
Gross profit
- ------------
For the year ended December 31, 2003, the Company had a gross profit
of $3,854,000 or 11.0% as compared to $5,640,000 or 12.1% (restated) for the
year 2002. In the fourth quarter of 2003, the gross profit was $1,826,000 or
17.9% as compared to $1,519,000 or 14.8% (restated) for the same period in 2002.
During the fourth quarter 2002, the Company received $338,000 from the WTC
Business Recovery Program of which $176,000 was allocated to costs of revenues
in 2002. The decline in gross profit for year ended December 31, 2003 was
primarily a result of the overall decline in revenues caused by the delayed
start of projects.
Selling, general and administrative expenses
- --------------------------------------------
For the year ended December 31, 2003, selling, general and
administrative expenses decreased $1,186,000 or (28.3)% to $3,010,000 from
$4,196,000 for the year ended December 31, 2002. During the fourth quarter ended
December 31, 2003 selling, general and administrative expenses were $998,000 as
compared to $743,000 for the same period in 2002, an increase of $255,000.
During the three months and year ended December 31, 2003, legal costs decreased
by approximately $35,000 and $1,048,000, respectively, as compared to the same
period in the prior year. During 2003, legal costs were approximately $570,000,
which related to the Stroock & Stroock & Lavan, LLP ("Stroock") lawsuit as well
as the Co-Op City litigation. During the year ended December 31, 2003, the
Company reached a settlement related to its legal action against Stroock,
whereby Stroock paid the Company approximately $850,000 and dismissed its
counterclaim for payment of legal fees. This settlement reduced selling, general
and administrative costs during the first quarter of 2003. During the year ended
December 31, 2002, legal costs were incurred in connection with the Helionetics
Creditors Committee lawsuit and the Co-Op City lawsuit. During the fourth
quarter of 2003, the Company substantially completed all of its trade management
contracts. On these projects, certain administration costs are job costed
instead of being carried in selling, general and administrative costs. This
resulted in selling, general and administrative cost decreasing for the year
ended December 31, 2003 in comparison to the same period in 2002 and an increase
in the fourth quarter of 2003 compared to the same period in 2002. In addition,
during the fourth quarter of 2002, the Company received $338,000 from the WTC
Business Recovery Grant Program of which $162,000 was allocated to selling,
general and administrative costs.
Other expenses
- --------------
Other expenses decreased to $59,000 in 2003 as compared to $107,000
in 2002, largely due to a reduction in realized losses on the sale of marketable
securities the Company holds invested in managed stock funds.
15
Provision (benefit) for income tax
- ----------------------------------
The income tax benefit for the year ended December 31, 2003 was
$30,000 or 3.8 % of the taxable income compared to income tax expense for the
year ended December 31, 2002 of $1,714,000 or 128.2 % of the taxable income. The
2002 income tax expense contains a provision of $1,045,000 for a valuation
allowance against the Company's deferred tax assets. Without this provision, the
income tax expense as a percentage of taxable income would have been
approximately 50%. During 2003, the Company utilized $406,000 of the deferred
tax asset valuation allowance.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
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.
Net income (loss)
- -----------------
As a result of all of the items mentioned above, the Company
generated net income of $815,000 compared to a net loss of $2,265,000 in 2002.
During the year ended December 31, 2003, the Company earned 43%, 27%
and 13% 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, 2002 (RESTATED) COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues
- --------
Revenues decreased by $ 4,564,000 or (9.0)% to $ 46,448,000
(restated) for the year ended December 31, 2002, as 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 had not commenced. Revenue for the fourth quarter of 2002 was
$10,236,000 (restated), a reduction of $3,922,000 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, reducing contracts available to bid. At December 31, 2002, the Company
had backlog of approximately $26,200,000 (restated). 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
- -----------------
Costs of revenues decreased by $8,345,000 or (17.0%) to $40,808,000
(restated) for the year ended December 31, 2002, as compared to $49,153,000 for
the year ended December 31, 2001, primarily due to higher labor costs in the
16
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.
Gross profit
- ------------
For the year ended December 31, 2002, the Company had a gross profit
of $5,640,000 or 12.1% (restated), as compared to $1,859,000 or 3.6% for the
year 2001. The increase 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, discussed later in this paragraph. In addition,
the Company received $338,000 from the WTC Business Recovery 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 14.8% (restated) 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, such erosion was more
than offset by higher gross margins on newer projects.
Selling, general and administrative expenses
- --------------------------------------------
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 as
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 increased medical insurance costs in 2002 which were approximately
$200,000 higher than 2001.
Other expense
- -------------
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.
Provision (benefit) for income taxes
- ------------------------------------
Income taxes for the year ended December 31, 2002 were $1,714,000 or
128.2 % of the taxable income as 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 provision of $1,045,000 for a valuation allowance
against the Company's deferred tax assets. Without this provision, the income
tax expense as a percentage of taxable income would have been approximately 50%.
17
In addition, the percentages in both years were affected by certain state and
local taxes paid based on net worth.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
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.
Net loss
- --------
As a result of all of the items mentioned above, the Company incurred
a net loss of $2,265,000 in 2002 compared to a net loss of $1,477,000 in
2001.
Without the Helionetics settlement, legal fees, write-off of goodwill
and the deferred tax valuation allowance, the Company would have had net income
for the year ended December 31, 2002 of $ 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 41%, 15%
and 11% of its revenue from its three largest customers, as restated. 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
General
- -------
The Company's principal capital requirements arise primarily as a
result of the Company funding its work on construction projects. Projects are
billed on a monthly basis based on the work performed to date. These project
billings, less a withholding of retention, which is received as the project
nears completion, are collectible based on their respective contract terms. The
Company has historically relied primarily on internally generated funds and bank
borrowings to finance its operations. As of December 31, 2003, cash balances
were $3,156,000, a $640,000 increase over the $2,516,000 reported as of December
31, 2002. At December 31, 2002, the Company had outstanding borrowings totaling
$387,000, against its line of credit facility, described below.
Cash provided by (used in) operations
- -------------------------------------
Net cash provided by operating activities was $1,043,000 in 2003 and
$1,678,000 in 2002. Net cash used in operations was $4,567,000 in 2001. The
increase in both 2003 and 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. This improved ability to collect receivables was a result of the
completion of trade management contracts which have a longer collection cycle.
During 2001, 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,
18
during 2001 the Company incurred legal expenses of $653,000. The Company's
backlog at December 31, 2003 was $20,900,000 as compared to $26,200,000
(restated) at December 31, 2002. The Company is actively seeking new contracts
of shorter duration where labor and material costs can be more easily
controlled. The Company believes its current cash resources are adequate to fund
a moderate decrease in revenue volume next year. However, the Company's capital
resources may not be sufficient to sustain a substantial revenue decrease,
unless overhead costs are proportionally reduced.
Cash provided by (used in) investing activities
- -----------------------------------------------
Net cash used in investing activities was $ 16,000 in 2003 and
$55,000 in 2002. In 2001, net cash provided by investing activities was
$1,625,000. During 2001, 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 2003 and 2002. The
Company purchased marketable securities of $513,000, $412,000 and $799,000
during 2003, 2002 and 2001, respectively. The Company received proceeds on the
sale of marketable securities of $506,000, $404,000 and $2,571,000 during 2003,
2002 and 2001, respectively. In addition, the Company purchased property and
equipment totaling $9,000, $61,000 and $147,000, respectively, in the years
ended 2003, 2002 and 2001.
Cash provided by (used in) financing activities
- -----------------------------------------------
Net cash used in financing activities was $387,000 in 2003. In 2002
and 2001, net cash provided by financing activities was $178,000 and $158,000,
respectively. These changes were primarily due to the Company utilizing and
repaying its line of credit. The Company currently has a $2,000,000 line of
credit with Merrill Lynch, which expires on June 30, 2004. The line of credit
calls for borrowings at 3% over the 30 day dealer commercial paper rate ( 4.01%
at December 31, 2003). At December 31, 2002 and 2001, there were $387,000 and
$190,000, respectively, of outstanding borrowings against the facility.
Short-term funding of project costs could be impaired by a decrease in revenue
or the failure for the lender to renew this line of credit agreement.
The Company believes its current cash resources are adequate to fund
its operating requirements in the next year. However, the Company's capital
resources may not be sufficient to sustain a substantial increase in revenue
growth or substantial decline in revenue unless overhead costs are
proportionally reduced. The Company currently has no significant capital
expenditure commitments.
Surety
- ------
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 solely at the discretion of the surety and is primarily based upon
the Company's net worth, working capital, the number and size of projects under
construction and the surety's relationship with management. The Company is
contingently liable to the 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.
19
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, 2003, approximately $13,600,000 of the Company's backlog of
$20,900,000 require bonds.
While the Company has a long standing relationship with its surety,
the surety provides bonding solely at its discretion, and the arrangement with
the surety is an at-will arrangement subject to termination. If this surety was
unwilling to provide bonds in the future, the Company would seek an alternate
surety. If the Company was unable to secure a replacement surety, it would be
unable to bid on certain public projects and certain privately financed
projects, which require performance bonds. This would have a material adverse
effect on the Company.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
----------------------- ----- ------ ----- ----- -----
Long-term debt $ - (a) $ - $ - $ - $ -
Capital leases - - - - -
Operating leases 275,000 (b) 183,000 92,000 - -
Purchase obligations - - - - -
Other long-term obligations - - - - -
---------- ----------- -------- ----------- ----------
Total $ 275,000 $ 183,000 $ 92,000 $ - $ -
========== =========== ======== =========== ==========
(a) The Company has a $2,000,000 line of credit with Merrill Lynch which
expires June 2004. The line of credit calls for borrowings at 3% over
the 30 Day Dealer Commercial Paper Rate (4.01 % at December 31,
2003).
(b) The Company is obligated to pay monthly rental payments of
approximately $15,000. The Company has exercised its one-year option
to extend the lease to June 2005, and has an additional option to
extend the lease for the period June 2005 through June 2009.
20
OFF -BALANCE SHEET ARRANGEMENTS
No required disclosures pursuant to Item 303 (A) (4) of Regulation S-K.
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:
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. With the economic downturn affecting corporate America, the
surety industry has come under increased pressure and claims, and in
general, the surety market has tightened. Consequently, it may become more
difficult for the Company to secure surety bonds in connection with its
construction business due to the Company's financial position as well as
overall market conditions. There can be no assurance that the Company will
be able to obtain bonding or, if so, at a reasonable cost. The surety's
provision of bonding pursuant to its arrangement with the Company is
solely at the surety's discretion, and the arrangement with the surety is
an at-will arrangement subject to termination. If the Company is unable to
obtain surety bonds as needed, this would have a material adverse effect
on the Company.
o The Company has a written employment agreement with Floyd Warkol which
expires on March 31, 2004. The Company has no other current employment or
non-competition agreements with senior management. Mr. Warkol is currently
in discussions with the Company's compensation committee, concerning his
continued employment and continues to perform his duties as Chief
Executive Officer and Chairman of the Board. The failure to retain senior
management would have a material adverse effect on the Company's business.
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. There
can be no assurance that these factors will not affect productivity in the
future.
21
o Recent federal government tariff increases on foreign steel imports are
likely to raise the cost of piping, which is the primary material supplied
by the Company on projects, and which may impact the Company's profit
margins.
o An economic downturn could result in a decrease in construction spending
in the private and public sectors 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 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 of 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative
instruments. As of December 31, 2003, the Company has invested $ 621,000 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, 2003 was 1.01%. 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 (4.01% at December
31, 2003). The Company currently does not use interest rate derivative
instruments to manage exposure to interest rate changes. There is no outstanding
debt under this facility at December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item, including the consolidated
financial statements and related notes, is incorporated herein by reference from
Part IV of this Annual Report on Form 10-K.
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required.
ITEM 9A. CONTROLS AND PROCEDURES
At the end of January 2004, the Company's management identified
material overstatements of reported revenues and costs of revenues with respect
to the year ended December 31, 2002, as well as in each of the quarterly periods
ended March 31, 2003, June 30, 2003 and September 30, 2003. As disclosed in a
press release and a Form 8-K furnished to the SEC on February 2, 2004, these
overstatements resulted from an accounting error attributable to the Company's
failure to eliminate certain intra-company accounts. Reported gross profit,
operating income (loss), net income (loss), and earning (loss) per share for the
periods, however, were unaffected. Management has analyzed and, with the
oversight of its Audit Committee, has corrected its financial reporting system.
The Company's financial reporting system has been changed to better monitor and
track these eliminations, which were the cause of the overstatement. As a result
of the accounting error, the Company has restated its financial statements in an
amendment to its Annual Report on Form 10-K for the year ended December 31,
2002, and in this Annual Report on Form 10-K for the year ended December 31,
2003.
The Company carried out an evaluation, under the supervision and with
the participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2003. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, except as described above, our
disclosure controls and procedures were effective as of December 31, 2003.
There has been no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during Company's fourth fiscal quarter ended December 31, 2003,
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting. However, as noted above,
the Company has made changes to its financial reporting system in the first
quarter of 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than information with respect to the Company's executive
officers, which is set forth after Item 4 of Part I of this Form 10-K, and
information regarding the Company's Code of Ethics, as set forth below, the
information required to be disclosed pursuant to this Item 10 is incorporated in
its entirety herein by reference to the Company's definitive proxy statement to
be filed with the Commission pursuant to Regulation 14A within 120 days after
the end of the Company's last fiscal year.
23
CODE OF ETHICS
The Company has adopted a written Code of Ethics (the "Code of Ethics")
that applies to our principal executive officer and principal financial and
accounting officer. The Code of Ethics includes standards that are designed to
deter wrongdoing and to promote honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships, full, fair, accurate, timely and understandable
disclosure in reports and documents that the Company files with, or submits to,
the Commission, and in other public communications made by the Company,
compliance with applicable government laws, rules and regulations, prompt
internal reporting of violations of the code to an appropriate person or persons
identified in the code, and accountability for adherence to the code. Copies of
the Code of Ethics will be provided free of charge upon written request directed
to the Company's Director of Investor Relations, at 37-16 23rd Street, Long
Island City, New York 11101.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be disclosed pursuant to this Item 11 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required to be disclosed pursuant to this Item 12 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be disclosed pursuant to this Item 13 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be disclosed pursuant to this Item 14 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
24
PART IV
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.
See Index to consolidated financial statements and financial
statement schedules on page F-1 of this form 10-K
3. Exhibits
No. Description
--- -----------
3.1 Amended and Restated Articles of Incorporation of KSW,
Inc.(incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-8 ( No.
333-21735), February 13, 1997).
3.2 Amended and Restated By-Laws of KSW, Inc.(incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-8 (No. 333-217350), filed
with the Commission on February 13, 1997).
10.1+ Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Floyd Warkol and KSW,
Inc.(incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form 10 ( Commission
File No. 0-27290), filed with the Commission on November 24,
1995).
10.2+ Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Burton Reyer and KSW,
Inc. (incorporated herein by reference to Exhibit 10.9 to
the Company's Registration Statement on Form 10 (Commission
File No. 0-27290), filed with the Commission on November 24,
1995).
10.3+ Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., KSW, Inc.
and Floyd Warkol (incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K (Commission File
No. 0-27290) for the fiscal year ended December 31, 1995
filed with the Commission on March 27, 1996).
- -----------------
+ Management contracts or compensatory plans or arrangements required to be
filed as an exhibit pursuant to Item 15 (c) of the rules governing the
preparation of this report.
25
10.4+ Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., KSW, Inc.
and Burton Reyer (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (Commission File No. 0-27290)
filed with the Commission on March 27, 1996).
10.5+ Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc., KSW, Inc. and Floyd Warkol (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,1998
(Commission File No. 0-27290), filed with the Commission on
March 30, 1999).
10.6+ Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc., KSW, Inc. and Burton Reyer (incorporated herein by
reference as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998
(Commission File No. 0-27290), filed with the Commission on
March 30, 1999)
10.7 Form of Modification of Lease Agreement dated as of May 1,
1998 by and between KSW, Inc, Irvjoy Partners, L.P. and I
BLDG Co., Inc.(incorporated herein by reference to Exhibit
2.1 to the Company's Annual Report on Form-10K for the
fiscal year ended December 31, 1998 (Commission File No.
0-27290), filed with the Commission on March 30, 1999).
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
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K (Commission File No.
0-27290), filed with the Commission on July 12, 2002).
10.9+ 1995 Stock Option Plan of KSW, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10 (Commission File No. 0-27290), filed
with the Commission on November 24, 1995).
10.10 WCMA Loan And Security Agreement, dated as of May 30, 2001,
between KSW Mechanical Services, Inc. and Merrill Lynch
Business Financial Services, Inc.
26
10.11 WCMA Line of Credit Extension Letter, dated January 27,
2004, and WCMA Line of Credit Extension Letter Agreements,
dated November 13, 2002 and December 12, 2001, respectively,
between KSW Mechanical Services, Inc., KSW, Inc., Energy
Alternatives, Inc. and Merrill Lynch Business Financial
Services, Inc.
10.12 Agreement of Indemnity, dated May 24, 2001, by and among
KSW, Inc., KSW Mechanical Services, Inc. and XL Specialty
Insurance Company.
10.13+ Employment Agreement, dated April 1, 2003, by and between
Floyd Warkol and the Company.
11 Statement Regarding Computation of Net Earnings (Loss) Per
Share.
21 List of Subsidiaries
23.1 Consent of Rosen Seymour Shapss Martin & Company, LLP.
23.2 Consent of Marden, Harrison & Kreuter, CPAs P.C.
31.1 Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
(b) Reports on Form 8-K:
NONE
27
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
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 (Principal Executive Officer)
March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person 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 (Principal Executive Officer)
March 29, 2004
/s/ Burton Reyer
-----------------------------------------
Burton Reyer
Director
March 29, 2004
/s/ Russell Molina
-----------------------------------------
Director
March 29, 2004
/s/ Stanley Kreitman
-----------------------------------------
Stanley Kreitman
Director
March 29, 2004
/s/ Richard W. Lucas
-----------------------------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 29, 2004
28
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
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 Income (Loss) F-7
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-9-10
Notes to Consolidated Financial Statements F-11-35
Schedule II- Schedule of Valuation and Qualifying Accounts F-36
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, 2003, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity and cash flows for
the years ended December 31, 2003 and 2001. 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, 2003, and the results of its operations
and its cash flows for the years ended December 31, 2003 and 2001 in conformity
with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying financial
statement Schedule II is presented for additional analysis and is not a required
part of the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
Marden, Harrison & Kreuter
Certified Public Accountants, P.C.
White Plains, New York
March 11, 2004
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, 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.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying financial
statement Schedule II is presented for additional analysis and is not a required
part of the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole
Rosen, Seymour, Shapss, Martin & Company
Certified Public Accountants
New York, New York
February 19, 2003
F-3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
2003 2002
---- ----
ASSETS
------
Current assets:
Cash $ 3,156 $ 2,516
Marketable securities 621 473
Accounts receivable, net 6,303 6,774
Retainage receivable 2,159 2,746
Costs and estimated earnings in excess of billings on uncompleted contracts 622 569
Prepaid expenses and other receivables 420 446
------------- -------------
Total current assets 13,281 13,524
Property and equipment, net 146 232
Accounts receivable 1,937 1,937
Deferred income taxes and other 1,470 1,478
------------- -------------
Total assets $ 16,834 $ 17,171
============= =============
(continued)
F-4
2003 2002
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loan payable $ - $ 387
Accounts payable 4,978 7,075
Retainage payable 1,141 1,317
Accrued payroll and benefits 477 247
Accrued expenses 182 171
Billings in excess of costs and estimated earnings on uncompleted contracts 2,007 832
------------- -------------
Total current liabilities 8,785 10,029
------------- -------------
Commitments and contingencies (Note 9)
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 (1,778) (2,593)
Accumulated other comprehensive gain (loss):
Net unrealized holding gain (loss) on available for sale securities 44 (48)
------------- --------------
Total stockholders' equity 8,049 7,142
------------- -------------
Total liabilities and stockholders' equity $ 16,834 $ 17,171
============= =============
See notes to consolidated financial statements.
F-5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------
2002
2003 (RESTATED) 2001
------------- ------------- -------------
Revenues $ 35,002 $ 46,448 $ 51,012
Costs of revenues 31,148 40,808 49,153
------------- ------------- -------------
Gross profit 3,854 5,640 1,859
Selling, general and administrative expenses 3,010 4,196 4,499
------------- ------------- -------------
Operating income (loss) 844 1,444 (2,640)
------------- ------------- -------------
Other income (expense):
Interest income (expense),net (29) (17) 45
Loss on sale of marketable securities (30) (90) (100)
------------- ------------- -------------
Total other expenses (59) (107) (55)
------------- ------------- -------------
Income (loss) before provision (benefit) for income taxes 785 1,337 (2,695)
Provision (benefit) for income taxes (30) 1,714 (1,218)
------------- ------------- -------------
Income (loss) before cumulative effect of change in
accounting principle 815 (377) (1,477)
Cumulative effect of change in accounting for goodwill, net
of income tax benefit of $1,626 - (1,888) -
------------- ------------- -------------
Net income (loss) $ 815 $ (2,265) $ (1,477)
============= ============= =============
Income (loss) per common share basic and diluted before
effect of change in accounting principle $ .15 $ (.06) $ (.27)
Cumulative effect of change in accounting principle - (.35) -
------------- ------------- -------------
Basic and diluted income (loss) per common share $ .15 $ (.41) $ (.27)
============= ============= =============
Weighted average common shares outstanding -
Basic 5,470,311 5,470,311 5,470,311
Diluted 5,470,311 5,470,311 5,470,311
See notes to consolidated financial statements.
F-6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
------------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Net income (loss) $ 815 $ (2,265) $ (1,477)
-------------- -------------- -------------
Other comprehensive income (loss) before tax
Net unrealized holding gains (losses) arising during the year 141 (176) (128)
Less: reclassification adjustment for losses included in net income
(loss) 30 90 100
-------------- -------------- -------------
Other comprehensive income (loss) before tax 171 (86) (28)
Income (tax) benefit related to items of other comprehensive income (loss) (79) 41 -
-------------- -------------- -------------
Other comprehensive income (loss), net of tax 92 (45) (28)
-------------- -------------- -------------
Total comprehensive income (loss) $ 907 $ (2,310) $ (1,505)
============== ============== =============
See notes to consolidated financial statements
F-7
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
ADDITIONAL RETAINED OTHER
COMMON STOCK PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
------ ------ ------- --------- ------------- -----
Balances, December 31, 2000 5,470,311 $ 54 $ 9,729 $ 1,149 $ 25 $ 10,957
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
Net income - - 815 - 815
Net unrealized gains on available
for sale securities - - - - 92 92
--------- -------- ----------- ----------- ------- ----------
Balances, December 31, 2003 5,470,311 $ 54 $ 9,729 $ (1,778) $ 44 $ 8,049
========= ======== =========== =========== ======= ==========
See notes to consolidated financial statements
F-8
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
------------------------------------------------
2003 2002 2001
---- ---- ----
Reconciliation of net income (loss) to net cash provided by (used in)
operating activities:
Net income (loss) $ 815 $ (2,265) $ (1,477)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 95 131 304
Deferred income taxes (79) 1,667 (1,243)
Write off of goodwill, net - 1,888 -
Realized loss on sale of marketable securities 30 90 100
Loss on sale of fixed assets - 17 -
Changes in assets (increase) decrease:
Accounts receivable 471 8,928 (3,935)
Retainage receivable 587 (197) 714
Costs and estimated earnings in excess of billings on
uncompleted contracts (53) (543) 112
Prepaid expenses, other receivables 26 279 154
Other 8 - -
Changes in liabilities increase (decrease):
Accounts payable (2,097) (4,300) 2,552
Retainage payable (176) (457) (7)
Accrued payroll and benefits 230 (500) (401)
Accrued expenses 11 (203) (306)
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,175 (2,857) (1,134)
---------- ----------- ---------
Net cash provided by (used in) operating
activities 1,043 1,678 (4,567)
---------- ----------- ---------
(continued)
F-9
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
----------------------------
2003 2002 2001
---- ---- ----
Cash flows from investing activities:
Proceeds received on sale of marketable securities $ 506 $ 404 $ 2,571
Purchase of marketable securities (513) (412) (799)
Proceeds from sale of property - 14 -
Purchase of property and equipment (9) (61) (147)
---------- ----------- ----------
Net cash provided by (used in) investing activities (16) (55) 1,625
---------- ----------- ----------
Cash flows from financing activities:
Long-term liabilities - (19) (32)
Repayment of loan payable (387) - -
Increase in loan payable - 197 190
---------- ----------- ----------
Net cash provided by (used in) financing activities (387) 178 158
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 640 1,801 (2,784)
Cash and cash equivalents, beginning of year 2,516 715 3,499
---------- ----------- ----------
Cash, end of year $ 3,156 $ 2,516 $ 715
========== =========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 38 $ 31 $ 48
Income taxes $ 49 $ 47 $ 12
See notes to consolidated financial statements
F-10
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(1) PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements for the years ended December
31, 2003, 2002 and 2001 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, 2003 and 2002, 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, 2003, 2002 AND 2001
(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.
Revenues recognized in excess of amounts billed are
recorded as a current asset under the caption "Costs and
estimated earnings in excess of billings on uncompleted
contracts." Billings in excess of revenues recognized are
recorded as a current liability under the caption "Billings
in excess of costs and estimated earnings on uncompleted
contracts."
In accordance with construction industry practice, the
Company reports in current assets and liabilities those
amounts relating to construction contracts realizable and
payable over a period in excess of one year.
Fees for the management of certain contracts are
recognized when services are provided.
(C) MARKETABLE SECURITIES
Marketable securities, consisting of managed security
accounts, are classified as "available-for-sale" securities
and are stated at fair 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, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(D) CONTRACTS RECEIVABLE
Accounts and retainage receivable from furnishing and
installing heating, ventilating and air conditioning
systems and process piping systems are based on contracted
prices. The Company establishes an allowance for
uncollectible trade accounts and retainage receivable based
upon historical collection experience and management's
periodic evaluation of the collectibility of outstanding
accounts and retainage receivable on an account by account
basis. Accounts receivable and contract retentions are due
based on contract terms. Amounts are deemed delinquent when
they are not received within their contract terms.
Delinquent receivables are written-off based on individual
credit evaluation and specific circumstances of the
customer.
(E) CREDIT RISK
Financial instruments, which potentially expose the Company
to concentrations of credit risk, consist primarily of cash
and trade accounts and retainage receivables.
The Company maintains its cash 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, 2003, amounts in excess of federally insured
limits totaled approximately $ 3,721.
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 $ 6,285 and $6,987 at December 31,
2003 and 2002, 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, 2003, 2002 AND 2001
(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.
Amortization expense for the year ended December 31, 2001
was approximately $153.
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
charge 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
significantly below its net worth including goodwill, the
balance of 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. 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 9 (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, 2003, 2002 AND 2001
(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 and 2001:
2002 2001
---- ----
Reported net loss $ (2,265) $ (1,477)
Goodwill amortization net of taxes 1,888 82
-------- --------
Pro forma net loss $ (377) $ (1,395)
======== ========
2002 2001
---- ----
Basic and Diluted loss per share:
Reported net loss per share $ (.41) $ (.27)
Less goodwill amortization per share, net of taxes (.35) (.02)
-------- --------
Pro forma loss per share $ (.06) $ (.25)
======== ========
(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 for deferred tax assets
when it is more likely than not that some or all of the
deferred tax assets will not be realized through future
operations.
F-15
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(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 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 the
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, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(K) STOCK OPTIONS - CONT'D
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, 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 this 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.
(L) FINANCIAL INSTRUMENTS
The carrying value of marketable securities approximates
their fair value as determined by market quotes. The
carrying value of receivables and payables and other
amounts arising out of normal contract activities,
including retentions, which may be settled beyond one year,
approximates fair value.
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board
("FASB") issued Statement No.150 ("SFAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS 150 establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a
liability. Many of those instruments were previously
classified as equity. The adoption of SFAS 150 did not have
an impact on the Company's results of operations or
financial condition.
In April 2003, the FASB issued Statement No. 149 ("SFAS
149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments
embedded in other contracts and for hedging activities
under Statement No.133 "Accounting for Derivative
Instruments and Hedging Activities.". SFAS 149 is effective
for contracts entered into or modified after June 30, 2003,
and hedging relationships designated after June 30, 2003.
The adoption of SFAS 149 had no impact on the Company's
results of operations or financial condition.
F-17
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - CONT'D
In January 2003, the FASB issued FASB Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities."
This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest
entities that possess certain characteristics. FIN 46
requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the
assets, liabilities, and results of the activities of the
variable interest entity must be included in the
consolidated financial statements with those of the
business enterprise. FIN 46 applies immediately to variable
interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains
an interest after that date. On December 24, 2003, the FASB
issued FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities ("FIN 46R").
FIN 46R requires the Company to apply FIN 46 or FIN 46R to
all entities that are considered Special Purpose Entities
(as defined by FIN 46) by the end of the first reporting
period that ends after December 15, 2003. The Company does
not have any relationships with Special Purpose Entities.
The Company does not have any ownership in any variable
interest entities as of December 31, 2003. The Company will
apply the consolidation requirements of FIN 46 in future
periods should interest in a variable interest entity be
acquired.
In June 2002, the FASB issued Statement No. 146 ("SFAS
146"), "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force
Issue ("EITF")
F-18
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - CONT'D
No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Credit Costs Incurred in a Restructuring)." SFAS
146 requires that the liability for costs associated with
an exit or disposal activity be initially measured at fair
value and recognized when the liability is incurred. The
provisions of SFAS 146 apply prospectively to exit or
disposal activities initiated after December 31, 2002. The
adoption of SFAS 146 has not had any impact on our
financial statements.
In June 2001, the FASB issued Statement No. 143 ("SFAS
143"), "Accounting for Asset Retirement Obligations", which
was effective January 1, 2003. SFAS 143 addresses financial
accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the
associated asset retirement costs. Under the statement, the
asset retirement obligation is recorded at fair value in
the period in which it is incurred by increasing the
carrying amount of the related long- lived asset. The
liability is accreted to its present value in each
subsequent period and the capitalized cost is depreciated
over the useful life of the related asset. The Company
adopted SFAS 143 effective January 1, 2003 and the adoption
did not have an impact on its financial position and
results of operations.
(N) RECLASSIFICATIONS
Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified for comparative purposes
to conform with the presentation. These reclassifications
did not affect net income or working capital that was
previously reported.
F-19
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(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, 2003 and 2002, was as
follows:
Gross Gross
Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
December 31, 2003:
Managed stock funds $ 538 $ 97 $ (14) $ 621
===== ==== ====== =====
December 31, 2002:
Managed stock funds $ 561 $ 19 $ (107) $ 473
===== ==== ====== =====
At December 31, 2003 and 2002, gross unrealized holding losses on
available for sale securities were $ 14 and $107, respectively. At
December 31, 2003 and 2002, gross unrealized holding gains on
available for sale securities were $ 97 and $19, respectively. The
change in net unrealized holding gains (losses) is $ 92 and $(45) for
the years ended December 31, 2003 and 2002, respectively. During the
years ended December 31, 2003 and 2002 available for sale securities
were sold for total proceeds of approximately $ 506 and $ 404,
respectively . The gross realized losses on these sales totaled
approximately $ 30 and $ 90 for the years ended December 31, 2003 and
2002, respectively.
(4) CONTRACTS RECEIVABLE
2003 2002
---- ----
Accounts receivable:
Contracts in progress $ 4,752 $ 4,922
Completed contracts 1,751 2,052
------------- -------------
6,503 6,974
Less: Allowances for doubtful collections 200 200
------------- -------------
$ 6,303 $ 6,774
============= =============
Retainage receivable $ 2,159 $ 2,746
============= =============
Accounts receivable - long term $ 1,937 $ 1,937
============= =============
At December 31, 2003 and 2002, retained contract receivables are
expected to be realized within one year.
F-20
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(5) CONSTRUCTION CONTRACTS
Information with respect to contracts in progress at December 31,
2003 and 2002 is as follows:
2002
2003 (RESTATED)
---- ----------
Costs on uncompleted contracts $ 33,573 $ 36,124
Estimated earnings thereon 5,272 3,458
------------- -------------
38,845 39,582
Less billings applicable thereto 40,230 39,845
------------- -------------
$ (1,385) $ (263)
============= =============
Included in the accompanying consolidated balance sheets under the
following captions:
2003 2002
---- ----
Costs and estimated earnings in excess of billings on uncompleted contracts $ 622 $ 569
Billings in excess of costs and estimated earnings on uncompleted contracts (2,007) (832)
------------- -------------
$ (1,385) $ (263)
============= =============
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 consists of the
following:
2003 2002
---- ----
Machinery and equipment $ 437 $ 497
Furniture and fixtures 718 712
Leasehold improvements 831 828
---------- ---------
1,986 2,037
Less accumulated depreciation and amortization 1,840 1,805
---------- ---------
$ 146 $ 232
========== =========
Depreciation and amortization expense relating to property and
equipment was approximately $ 95, $131 and $151 for the years ended
December 31, 2003, 2002 and 2001, respectively.
F-21
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(7) INCOME TAXES
For the years ended December 31, 2003, 2002 and 2001, components of
provision (benefit) to income taxes are as follows:
2003 2002 2001
---- ---- ----
Current
Federal $ - $ - $ -
State and local 49 47 54
----------- ----------- -----------
49 47 54
----------- ----------- -----------
Deferred
Federal (48) 997 (760)
State and local (31) 670 (512)
------------ ----------- -----------
(79) 1,667 (1,272)
------------ ----------- -----------
Total $ (30) $ 1,714 $ (1,218)
============ =========== ============
At December 31, 2002, the Company provided a valuation allowance
against its net deferred tax assets of $1,045 based upon an
uncertainty regarding the ultimate realization 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.
During the year ended December 31, 2003, the deferred tax valuation
allowance decreased $406.
A reconciliation of the provision (benefit) for income taxes with
amounts determined by applying the statutory U.S. Federal income tax
rate to income before taxes is as follows:
2003 2002 2001
---- ---- ----
Computed tax at the federal statutory rate of 34% $ 267 $ 455 $ (916)
State taxes, net of Federal benefit 95 162 (326)
Valuation allowance (406) 1,045 -
Other items, net 14 52 24
-------- -------- -------
Provision (benefit) for income taxes $ (30) $ 1,714 $(1,218)
======== ======== =======
F-22
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(7) INCOME TAXES - CONT'D
The details of deferred tax assets and liabilities at December 31,
2003 and 2002 are as follows:
2003 2002
---- ----
Deferred income tax assets:
Net operating loss carryforwards $ 752 $ 979
Amortization of goodwill 924 1,058
Property and equipment 255 267
Allowance for doubtful accounts 92 92
Unrealized losses on marketable securities - 41
Other tax carryforwards 123 77
------------ ------------
Total deferred income tax assets 2,146 2,514
------------ ------------
Deferred income tax liabilities:
Unrealized gains on marketable securities 38 -
------------ ------------
38 -
------------ ------------
Net deferred income tax assets before valuation allowance 2,108 2,514
Valuation allowance (639) (1,045)
------------ ------------
Deferred income tax assets, net $ 1,469 $ 1,469
============ ============
At December 31, 2003, the Company has net operating loss carry
forwards remaining of approximately $1,900 expiring through December
31, 2021. At December 31, 2003 and 2002, the $1,469 balance is
included in long-term assets in the accompanying balance sheets.
F-23
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(8) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2003 and 2002, accumulated other comprehensive income
(loss), which consists of net unrealized holding gains (losses) on
available for sale securities, is as follows:
2003 2002
---- ----
Beginning balance $ (48) $ (3)
Current period change 92 (45)
----- -----
Ending balance $ 44 $ (48)
===== =====
(9) COMMITMENTS AND CONTINGENCIES
(A) PERFORMANCE BONDS
The Company is contingently liable to a surety under a
general indemnity agreement. The Company agrees to
indemnify the surety for any payments made on contracts of
suretyship, guaranty or indemnity 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 LEASE
The Company is obligated under a non-cancelable operating
lease, for office space with future rental payments at
December 31, 2003 as follows:
YEAR ENDING
DECEMBER 31
-----------
2004 $ 183
2005 92
----------
$ 275
==========
F-24
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(9) COMMITMENTS AND CONTINGENCIES - CONT'D
(B) OPERATING LEASE -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 one year from
June 2004 through June 2005 as well as an additional four
years from June 2005 through June 2009. The Company has
exercised its one-year option to extend the lease from June
2004 through June 2005.
Rent expense for the years ended December 31, 2003, 2002
and 2001 amounted to approximately $ 180, $ 176 and $173,
respectively.
(C) OPERATING LEASE- RELATED PARTY
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 is renting this space on a
month-to-month basis at approximately $8.5 per month.
Rent expense for the years ended December 31, 2003, 2002
and 2001 amounted to $103 to related entities controlled by
the chief executive officer in each year.
(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.
F-25
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(9) COMMITMENTS AND CONTINGENCIES -CONT'D
(E) LEGAL
a. Co-op City. In February 1999, the Company sued
the general contractor and the general
contractor's bonding company in New York State
Supreme Court, Queens County to recover its
contract balance and unpaid proposals in the
amount of $5,771. Included in that amount 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 28 days and adjourned
by the Court to May 2004 for further trial
proceedings. The financial statements at
December 31, 2003 and 2002 contain accounts
receivable of approximately $1,937 related to
this project.
b. 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
F-26
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(9) COMMITMENTS AND CONTINGENCIES - CONT'D
(E) LEGAL - CONT'D
b. Other Proposals and Claims - cont'd
industry, until written acknowledgment of the validity of
the claims are received, claim recoveries are not
recognized in the accompanying financial statements. 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.
(F) EMPLOYMENT AGREEMENT
The Company's Chief Executive Officer has a written
employment agreement which expires on March 31, 2004. This
agreement provides a base annual compensation of $420,
medical insurance, disability insurance with payments equal
to 60% of base compensation, a $1 million policy of life
insurance payable as directed by him and a car with a
chauffeur. His estate is entitled to two months pay in the
event of his death.
(10) 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 43%, 27% and 13% of its contract revenue in
2003, 41%, 15% and 11% of its contract revenue in 2002
(restated) and 23%, 16% and 14% in 2001, respectively.
F-27
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(11) RETIREMENT PLANS
(A) PROFIT-SHARING/401(K) PLAN
The Company sponsors a profit-sharing/401(k) plan covering
employees not covered under collective bargaining
agreements who meet the age and length of service
requirements of the plan. The Company may make
discretionary contributions to the plan. The total of
employee contributions may not exceed Federal government
limits. The Company expensed approximately $61, $62 and $63
as a 25% matching contribution for the years ended December
31, 2003, 2002 and 2001, respectively.
(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 $1,315, $1,189 and $2,226 for
the years ended December 31, 2003, 2002 and 2001,
respectively, related to multi-employer pension plans for
its union employees.
(12) LINE OF CREDIT - BANK
The Company has a $2,000 line of credit with Merrill Lynch,
which expires June 2004. This line is collateralized by all
corporate assets. Interest on borrowings is at 3% over the
30 day dealer commercial paper rate (4.01 % at December 31,
2003). The line of credit agreement requires the Company to
maintain certain financial statement covenants.
F-28
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(13) STOCKHOLDERS' EQUITY
(A) STOCK OPTION PLAN
The Board of Directors of the Company adopted the 1995
Stock Option Plan (the Plan). The Plan enabled the Company
to 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.
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 2003, 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.
F-29
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(13) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
During 2003, 2002 and 2001, no new options were granted. At
December 31, 2002, there were 621,667 exercisable options
outstanding. During 2003, 45,000 options under the plan
were cancelled. At December 31, 2003, there were 576,667
exercisable options outstanding all of which have an
exercise price of $1.50 per share.
Changes that occurred in options outstanding during 2003, 2002 and 2001 are
summarized below:
2003 2002 2001
Fixed Fixed Fixed
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------------
Outstanding at beginning of year 621,667 $1.50 621,667 $ 1.50 640,000 $ 1.50
Granted - - -
Exercised - - -
Expired/ Canceled (45,000) - (18,333)
----------- ---------- -----------
Outstanding at end of year 576,667 $1.50 621,667 $ 1.50 621,667 $ 1.50
=========== ========== ===========
Exercisable at end of year 576,667 $1.50 621,667 $ 1.50 621,667 $ 1.50
The following table summarizes information about stock options outstanding at
December 31, 2003:
Remaining
Exercise Price Shares Contractual Life
-------------- ------ ----------------
$1.50 576,667 2.3 years
F-30
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(13) STOCKHOLDERS' EQUITY CONT'D.
(A) STOCK OPTION PLAN - CONT'D
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No.25,
"Accounting for Stock Issued to Employees", and related
interpretations. The Company has not recorded compensation expense
because the exercise price of the shares is equal to the market
price at the date of the grant. SFAS 123, "Accounting for Stock
Based Compensation", allows entities to continue to apply the
provisions of APB Opinion No.25; however SFAS No.148, "Accounting
for Stock Based Compensation - Transition and Disclosure", requires
pro forma net income disclosures as if the fair value based method
defined in SFAS No.123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No.25 and to provide
the pro forma disclosures specified by SFAS No. 148. Had the Company
determined compensation expense based on the fair value at the grant
date for its stock options (using the Black-Scholes method) under
SFAS No.123, the Company's net income would have been adjusted to
the pro forma amounts indicated below:
2003 2002 2001
---- ---- ----
Net income (loss) - as reported $ 815 $(2,265) $(1,477)
Stock option compensation, net of tax - - (9)
------ -------- --------
Net income (loss) - pro forma $ 815 $(2,265) $(1,486)
====== ======== ========
Basic net income (loss) per share:
As reported $ .15 $ (.06) $ (.27)
Pro forma $ .15 $ (.06) $ (.27)
Diluted net income (loss) per share:
As reported $ .15 $ (.06) $ (.27)
Pro forma $ .15 $ (.06) $ (.27)
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.
F-31
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(13) STOCKHOLDERS' EQUITY CONT'D
(B) PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of
preferred stock. Through December 31, 2003, no shares of
preferred stock have been issued by the Company.
(14) BACKLOG
At December 31, 2003, the Company had a backlog of approximately
$20,900. Backlog represents the amount of revenue the Company expects
to realize from work to be performed on uncompleted contracts in
progress at year end and from contractual agreements on work which
has not commenced.
(15) RESTATEMENT
The Company's management identified and determined that reported
revenues and costs of revenue, during the year ended December 31,
2002 and the nine months ended September 30, 2003, were materially
overstated as a result of an accounting error attributable to the
failure to eliminate intra-company accounts. Management has analyzed
and corrected the Company's internal financial reporting system. The
following is a summary by quarter of this restatement:
AS PREVIOUSLY AS
QUARTERLY DATA REPORTED RESTATED
-------------- -------- --------
Three months ended March 31, 2002 (unaudited)
Revenue $ 13,138 $ 12,798
Costs of Revenues 11,617 11,277
------------- -------------
Gross Profit $ 1,521 $ 1,521
============= =============
Gross Profit % 11.6% 11.9%
============= =============
Three months ended June 30, 2002 (unaudited)
Revenue $ 14,756 $ 14,066
Costs of Revenues 13,408 12,718
------------- -------------
Gross Profit $ 1,348 $ 1,348
============= =============
Gross Profit % 9.1% 9.6%
============= =============
F-32
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(15) RESTATEMENT - CONT'D
AS PREVIOUSLY AS
QUARTERLY DATA REPORTED RESTATED
-------------- -------- --------
Three months ended September 30, 2002 (unaudited)
Revenue $ 10,600 $ 9,348
Costs of Revenues 9,348 8,096
------------- -------------
Gross Profit $ 1,252 $ 1,252
============= =============
Gross Profit % 11.8% 13.4%
============= =============
Three months ended December 31, 2002 (unaudited)
Revenue $ 11,819 $ 10,236
Costs of Revenues 10,300 8,717
------------- -------------
Gross Profit $ 1,519 $ 1,519
============= =============
Gross Profit % 12.9% 14.8%
============= =============
Three months ended March 31, 2003 (unaudited)
Revenue $ 8,078 $ 6,141
Costs of Revenues 7,641 5,704
------------- -------------
Gross Profit $ 437 $ 437
============= =============
Gross Profit % 5.4% 7.1%
============= =============
Three months ended June 30, 2003 (unaudited)
Revenue $ 10,192 $ 8,478
Costs of Revenues 9,610 7,896
------------- -------------
Gross Profit $ 582 $ 582
============= =============
Gross Profit % 5.7% 6.9%
============= =============
Three months ended September 30, 2003 (unaudited)
Revenue $ 11,000 $ 10,171
Costs of Revenues 9,991 9,162
------------- -------------
Gross Profit $ 1,009 $ 1,009
============= =============
Gross Profit % 9.2% 9.9%
============= =============
F-33
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(16) SELECTED QUARTERLY DATA (UNAUDITED)
The following is unaudited selected quarterly data for the years
ended December 31,2003 and 2002:
Year ended December 31, 2003
----------------------------
First Second Third Fourth
quarter quarter quarter quarter Total
------- ------- ------- ------- -----
Revenues, as reported $ 8,078(a) $ 10,192(a) $ 11,000(a) $ 10,212 $ 39,482
Revenues, restated $ 6,141(a) $ 8,478(a) $ 10,171(a) $ 10,212 $ 35,002
Gross profit $ 437 $ 582 $ 1,009 $ 1,826 $ 3,854
Net income (loss) $ (58) $ (145) $ 166 $ 852 $ 815
Per share of common stock
earnings (losses):
Basic $ (.01) $ (.03) $ .03 $ .16 $ .15
Diluted $ (.01) $ (.03) $ .03 $ .16 $ .15
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.05 $ 1.00 $ .85 $ .83
Low $ .70 $ .70 $ .70 $ .62
(a) The Company's management has identified and determined that reported
revenues and costs of revenues, during the nine months ended September 30,
2003 and the year ended December 31, 2002, were materially overstated as a
result of an accounting error attributable to the failure to eliminate
certain intra-company accounts. The Company has restated these previously
reported amounts.
F-34
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(16) SELECTED QUARTERLY DATA (UNAUDITED) - CONT'D
Year ended December 31, 2002
----------------------------
First Second Third Fourth
quarter quarter quarter quarter Total
------- ------- ------- ------- -----
Revenues, as reported $ 13,138(a) $ 14,756(a) $ 10,600(a) $ 11,819(a) $ 50,313(a)
Revenues, restated $ 12,798(a) $ 14,066(a) $ 9,348(a) $ 10,236(a) $ 46,448(a)
Gross profit $ 1,521 $ 1,348 $ 1,252 $ 1,519 $ 5,640
Net income (loss) before cumulative
effect of change in accounting principle $ 15 $ 146 $ 120 $ (658)(b) $ (377)
Cumulative effect of change in
accounting principle, net $ (1,855) $ - $ - $ (33) $ (1,888)
Net income (loss) $ (1,840) $ 146 $ 120 $ (691) $ (2,265)
Per share of common stock earnings
(losses) before cumulative change in
accounting principle:
Basic $ .01 $ .03 $ .02 $ (.12) $ (.06)
Diluted $ .01 $ .03 $ .02 $ (.12) $ (.06)
Per share of common stock earnings
(losses):
Basic $ (0.34) $ 0.03 $ 0.02 $ (.12) $ (.41)
Diluted $ (0.34) $ 0.03 $ 0.02 $ (.12) $ (.41)
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.04 $ 1.05 $ 1.05 $ .90
Low $ .70 $ .70 $ .80 $ .90
(a) The Company's management has identified and determined that reported
revenues and costs of revenues, during the nine months ended September 30,
2003 and the year ended December 31, 2002, were materially overstated as a
result of an accounting error attributable to the failure to eliminate
certain intra-company accounts. The Company has restated these previously
reported amounts.
(b) During the fourth quarter of 2002, the Company recorded a valuation
allowance totaling $1,045 against its deferred tax assets.
F-35
SCHEDULE II
KSW, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
000'S
Balance at Charged to Charged to Balance
Beginning costs and other at end
Description of period expenses accounts Deductions of period
- ----------- --------- -------- -------- ---------- ---------
Year ended December 31, 2003
allowance for doubtful accounts and returns $ 200 $-------- $------- $--------- $ 200
========= ========= ======== ========== =========
Year ended December 31, 2002
allowance for doubtful accounts and returns $ 200 $-------- $------- $--------- $ 200
========= ========= ======== ========== =========
Year ended December 31, 2001
allowance for doubtful accounts and returns $ 200 $-------- $------- $--------- $ 200
========= ========= ======== ========== =========
Year ended December 31, 2003
deferred income tax valuation $ 1,045 $-------- $------- $ 406 $ 639
========= ========= ======== ========== =========
Year ended December 31, 2002
deferred income tax valuation $-------- $ 1,045 $------- $--------- $ 1,045
========= ========= ======== ========== =========
Year ended December 31, 2001
deferred income tax valuation $-------- $-------- $------- $--------- $--------
========= ========= ======== ========== =========
F-36
KSW, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of KSW,
Inc.(incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-8 ( No.
333-21735), February 13, 1997).
3.2 Amended and Restated By-Laws of KSW, Inc.(incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-8 (No. 333-217350), filed
with the Commission on February 13, 1997).
10.1 Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Floyd Warkol and KSW,
Inc.(incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form 10 (Commission File
No. 0-27290), filed with the Commission on November 24,
1995).
10.2 Employment Agreement, dated as of January 1, 1994, by and
among KSW Mechanical Services, Inc., Burton Reyer and KSW,
Inc. (incorporated herein by reference to Exhibit 10.9 to
the Company's Registration Statement on Form 10 (Commission
File No. 0-27290), filed with the Commission on November 24,
1995).
10.3 Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., KSW, Inc.
and Floyd Warkol (incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K (Commission File
No. 0-27290) for the fiscal year ended December 31, 1995
filed with the Commission on March 27, 1996).
10.4 Amendatory Employment Agreement, dated as of December 15,
1995, by and among KSW Mechanical Services, Inc., KSW, Inc.
and Burton Reyer (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (Commission File No. 0-27290)
filed with the Commission on March 27, 1996).
10.5 Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc., KSW, Inc. and Floyd Warkol (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,1998
(Commission File No. 0-27290), filed with the Commission on
March 30, 1999).
10.6 Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc., KSW, Inc. and Burton Reyer (incorporated herein by
reference as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998
(Commission File No. 0-27290), filed with the Commission on
March 30, 1999).
10.7 Form of Modification of Lease Agreement dated as of May 1,
1998 by and between KSW, Inc, Irvjoy Partners, L.P. and I
BLDG Co., Inc.(incorporated herein by reference to Exhibit
2.1 to the Company's Annual Report on Form-10K for the
fiscal year ended December 31, 1998 (Commission File No.
0-27290), filed with the Commission on March 30, 1999).
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
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K (Commission File No.
0-27290), filed with the Commission on July 12, 2002).
10.9 1995 Stock Option Plan of KSW, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10 (Commission File No. 0-27290), filed
with the Commission on November 24, 1995).
10.10 WCMA Loan And Security Agreement, dated as of May 30, 2001,
between KSW Mechanical Services, Inc. and Merrill Lynch
Business Financial Services, Inc.
10.11 WCMA Line of Credit Extension Letter, dated January 27,
2004, and WCMA Line of Credit Extension Letter Agreements,
dated November 13, 2002 and December 12, 2001, respectively,
between KSW Mechanical Services, Inc., KSW, Inc., Energy
Alternatives, Inc. and Merrill Lynch Business Financial
Services, Inc.
10.12 Agreement of Indemnity, dated May 24, 2001, by and among
KSW, Inc., KSW Mechanical Services, Inc. and XL Specialty
Insurance Company.
10.13 Employment Agreement, dated April 1, 2003, by and between
Floyd Warkol and the Company.
11 Statement Regarding Computation of Net Earnings (Loss) Per
Share.
21 List of Subsidiaries
23.1 Consent of Rosen Seymour Shapss Martin & Company, LLP.
23.2 Consent of Marden, Harrison & Kreuter, CPAs P.C.
31.1 Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).