UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
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, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27290
_________________
KSW, INC.
(Exact name of the Registrant as specified in its charter)
Delaware 11-3191686
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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, 2004 was $ 2,707,168 (based on a
price of $.70 per share).
As of March 25, 2005, 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.
FORWARD-LOOKING STATEMENTS.............................................................................................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..........................................7
EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................8
PART II................................................................................................................8
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES............................................8
ITEM 6. SELECTED FINANCIAL DATA......................................................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...................................24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................................................24
ITEM 9A. CONTROLS AND PROCEDURES.....................................................................24
ITEM 9B. OTHER INFORMATION..............................................................................24
PART III..............................................................................................................25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................25
ITEM 11. EXECUTIVE COMPENSATION......................................................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS..................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................26
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................26
PART IV...............................................................................................................26
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................................................26
SIGNATURES............................................................................................................30
FORWARD LOOKING STATEMENTS
Certain statements contained under "Item 1. Business", "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Form 10-K 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" in this Form 10-K. 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.
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: Weill
Cornell "S" Building, Weill Cornell Ambulatory Care Facility, as well as the
conversions from office space to residential rental apartments in lower
Manhattan at 10 Hanover Square and 1 Wall Street Court, and new high rise luxury
buildings at 325 Fifth Avenue and at 83rd Street and York Avenue.
The Company's primary strategic objectives are to increase its revenues
and to become more competitive in its present business. The Company has in the
past 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 Weill Cornell Ambulatory Care Facility, Morgan Stanley Children's Hospital
at New York Presbyterian and the Long Island Jewish Hospital Energy Center, it
is often beneficial for a 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, the Company believes
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.
The Company believes 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. The Company believes customers benefit by having a single
source responsible for the cost, coordination and progress of the mechanical
portion of the projects. Although trade management is typically available only
on large jobs, the Company believes there is opportunity for expanding this line
of business.
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 in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
While trade management projects provide a net profit margin similar
to that for contracting projects, the Company believes 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 what it believes is
a 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.
4
The Company has received letters of approval as an authorized bidder by
various government agencies, including the New York City Transit Authority, the
New York City Health and Hospitals Corporation, the New York City School
Construction Authority, the New York City Housing Authority and the New York
State Dormitory Authority.
MARKETS. The Company competes for business primarily in the New York
City metropolitan area. However, the Company has performed work outside of that
area in the past.
BACKLOG. The Company has a backlog (anticipated revenue from the
uncompleted portions of awarded projects) of orders totaling approximately $
36,000,000 as of December 31, 2004, compared to approximately $20,900,000 as of
December 31, 2003, and approximately $26,200,000 (restated) at December 31,
2002. 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." The Company is actively seeking new contracts to add to
its backlog. Management believes that its value engineering services will lead
to a greater number of contracts to bid, since the Company is able to be part of
the initial planning of a project.
A portion of the Company's anticipated revenue in any year is not
reflected in its backlog at the start of the year because some projects are
started and completed the same year. The Company believes that its backlog is
firm, notwithstanding provisions contained in some contracts which allow
customers to modify or cancel the contracts at any time, subject to certain
conditions, including reimbursement of costs incurred in connection with the
contracts and the possible payment of cancellation fees.
COMPETITION. The mechanical contracting market is highly competitive.
There are many larger regional and national companies with resources greater
than those of the Company. However, some of these large competitors are
unfamiliar with the New York City metropolitan area. The Company believes it
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.
5
EMPLOYEES. At December 31, 2004, the Company had approximately 31
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
assignments and can reduce the number of union workers hired at will with no
penalties.
The Company pays benefits to union employees through payments of funds
to trusts established by the unions. The Company's obligation is to pay a
percentage of the wages of union workers to these trust funds. 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 2004, the Company has
matched 25% of the employees' 401(k) contributions.
DEPENDENCE UPON CUSTOMERS. 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, 2004, work under contracts with Bovis
Lend Lease Inc., Newmark Construction Services, LLC and related entities, and
Glenwood Management Corporation, constituted 32%, 23% and 16% of the Company's
total revenues, respectively.
For the year ended December 31, 2003, work under contracts with 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, respectively.
For the year ended December 31, 2002 (as restated), work under
contracts with 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.
Historically, a considerable portion of the Company's revenue has been
generated from contracts with federal, state and local governmental authorities.
The current backlog does not include any contracts directly with these
governmental authorities.
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, 2004, approximately $25,500,000 of the Company's
$36,000,000 backlog required bonds. In addition, during the first quarter of
2005, the Company accumulated approximately $20,000,000 of new work which is not
reflected in the backlog amount at December 31, 2004 of which $6,600,000 will
require bonding. 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 2004, 2003 and 2002, and anticipates no research and
development expenses in 2005.
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 July 2004 through June 2005 and a one year option for the period
July 2005 through June 2006. The Company also has a three-year option which can
be exercised during 2006.
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 and 10,000 square feet of shop space. It also leases 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 a
triple net lease. The Company pays rent of approximately $8,500 per month, plus
taxes (currently approximately $2,000 per month), maintenance, insurance and
utilities. The lease expired on December 31, 2002 and is currently on a
month-to-month basis.
The 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:
KSW Mechanical Services v. NAB Construction Corp.
In February 1999, the Company sued the general contractor on the
Co-Op City Project and its bonding company in New York State Supreme Court,
Queens County to recover its contract balance and unpaid proposals. The
Company's claim includes approximately $1,937,000, consisting of accounts
receivable applicable to the base contract of approximately $437,000, and unpaid
final retainage billings of approximately $1,500,000. The Company also seeks to
be compensated for unanticipated costs incurred through 1998, in the sum, as
presented at trial, of $2,303,727. These costs have 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 asserted counterclaims, as presented at
trial, totaling $1,440,905, and a claim for $3,000,000 based on the argument
that the Company's mechanic's lien was willfully overstated. The Company
believes all of the defendant's claims 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 40 days and adjourned by the court to April
2005 for further trial proceedings.
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 2004.
7
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, 2004 were as follows:
NAME AGE TITLE
- ---- --- -----
Floyd Warkol 57 Chief Executive Officer, President, Secretary and
Chairman of the Board of Directors
Richard W. Lucas 38 Chief Financial Officer
James F. Oliviero 58 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is quoted on the Over-the-Counter Bulletin
Board under the symbol "KSWW.OB."
At March 25, 2005, 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 2004 or 2003.
8
The following information on high and low bid information is provided
for 2004 and 2003 based on intraday quotation information:
2004 2003
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First............................... $ 1.01 $ .62 $ 1.05 $ .70
Second.............................. $ 1.05 $ .69 $ 1.00 $ .70
Third............................... $ .80 $ .62 $ .85 $ .70
Fourth.............................. $ .75 $ .40 $ .83 $ .62
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, 2004,
2003, 2001, and 2000 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.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INCOME STATEMENT: 2004 2003 2002 2001 2000
(Restated)
Revenues.......................... $26,281 $35,002 $46,448 (a) $51,012 $52,247
Costs of revenues................. 24,139 31,148 40,808 (a) 49,153 48,249
Gross profit...................... 2,142 3,854 5,640 1,859 (b) 3,998 (b)
Selling, general and
administrative expenses........ 3,452 3,010 4,196 4,499 4,706
Operating income (loss)........... (1,310) 844 1,444 (2,640) (708)
Other income (expense)............ 52 (59) (107) (55) 279
Income (loss) before income taxes
(1,258) 785 1,337 (2,695) (429)
Provision (benefit) for income
taxes.......................... 22 (30) 1,714 (c) (1,218) (163)
Income (loss) before cumulative
effect of change in accounting
principle...................... (1,280) 815 (377) (1,477) (266)
Cumulative effect of change in
accounting principle net....... - - (1,888)(d) - -
Net income (loss)................. (1,280) 815 (2,265) (1,477) (266)
Net income (loss) per share -
Basic......................... (.24) .15 (.41) (.27) (.05)
Diluted....................... (.24) .15 (.41) (.27) (.05)
Number of shares used in
computation :
Basic......................... 5,470,311 5,470,311 5,470,311 5,470,311 5,468,991
Diluted....................... 5,470,311 5,470,311 5,470,311 5,470,311 5,641,050
BALANCE SHEET DATA:
Total assets...................... 13,913 16,834 17,171 27,620 28,263
Working capital................... 3,181 4,496 3,495 5,213 6,996
Current liabilities............... 7,127 8,785 10,029 18,149 17,255
Long-term liabilities............. - - - 19 51
Stockholders' equity.............. 6,786 8,049 7,142 9,452 10,957
OTHER DATA:
Current ratio..................... 1.45:1 1.51:1 1.35:1 1.29:1 1.41:1
9
(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.
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, 2004, 2003 and 2002, 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, please refer to the
Consolidated Statements of Operations for the years ended 2004, 2003 and 2002
(restated) included in the Company's consolidated financial statements.
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
10
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 affect previously
reported gross profit, operating income, net income (loss) or earnings (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. The Form 10-K for 2003 and the Form 10-K/A for 2002
restated the overstated amounts to correct the accounting error. Management,
with oversight from the Audit Committee, analyzed and corrected the Company's
internal financial reporting system.
Total revenues for 2004 were $26,281,000 as compared to $35,002,000 for
2003 and $46,448,000 (restated) for 2002.
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.
During the year ended December 31, 2004, the Company's experienced
losses which were primarily a result of (1) a decreased number of projects
available to bid due primarily to market conditions, which resulted in
insufficient revenue to absorb operating expenses and increased labor costs, and
(2) the effect of price increases of steel-based piping materials.
As to labor costs, the Company has a policy of charging costs regarding
project supervision and drafting personnel directly to the projects for which
they are responsible. Reduced revenues, however, have prevented these costs from
being charged to multiple projects, which reduced the profit margins on existing
projects. Specifically, the Company needs to retain experienced field labor for
future, as well as current projects. Because the Company has had a relatively
small number of projects during the past fiscal year, the Company has employed
more highly compensated field personnel per project than it would have if there
were more projects underway. This continued employment, along with the number of
projects, has resulted in increased labor costs per project and a reduction in
profits.
11
The majority of the Company's contracts are awarded on a fixed-price
basis. Subcontractor and equipment purchases are awarded on a fixed-price basis,
near the time the Company's contract is awarded. The Company purchases materials
throughout the project on a price-in-effect basis. The Company was negatively
impacted by the severe price increases of steel based piping materials during
the course of projects which reduced gross profits on these projects. Management
estimates based on its review of the Company's purchases of steel based piping
materials, that the Company's earnings have been reduced by approximately
$315,000 as a result of the price increases in these materials during the year
ended December 31, 2004. The Company now includes allowances in its estimates
for future escalations in steel prices. In order to minimize these future
escalations, on March 28, 2005, the Company entered into an agreement, not yet
reduced to writing, with a supplier of steel based piping materials whereby the
Company has committed to purchase a minimum of $ 1,400,000 of steel based
materials over a fifteen month period, at fixed unit prices.
During the year ended December 31, 2004, the Company has taken steps to
further control its home-office cost management. These steps included reduction
in office staff, as well as the Company's Chief Executive Officer reducing his
salary by 20%, with a proportionate reduction in his work week.
Management 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.
12
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.
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 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. Such claims are not carried on the books until they are acknowledged by
the owner or contractor.
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.
13
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. For the year
ended December 31, 2004, the Company had a net loss, which increased the
deferred tax asset and increased the deferred tax valuation allowance by
$581,000.
RESULTS OF OPERATIONS
The following table, dollar amounts in thousands, sets forth, as a
percentage of net sales, certain items of the Company's statement of operations
for the periods indicated:
2004 2003 2002
---- ---- ----
(RESTATED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
REVENUES............................ $ 26,281 100.0 $ 35,002 100.0 $ 46,448 100.0
COSTS OF REVENUES................... 24,139 91.8 31,148 89.0 40,808 87.9
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT........................ 2,142 8.2 3,854 11.0 5,640 12.1
EXPENSES
Selling, general and
administrative expenses........ 3,452 13.1 3,010 8.6 4,196 9.0
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)............. (1,310) (4.9) 844 2.4 1,444 3.1
OTHER INCOME (EXPENSES)............. 52 .1 (59) (.2) (107) (.2)
---------- ---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES.......... (1,258) (4.8) 785 2.2 1,337 2.9
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 22 .1 (30) (.1) 1,714 3.7
---------- ---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE
CHANGE IN ACCOUNTING PRINCIPLE...... (1,280) (4.9) 815 2.3 (377) (.8)
CUMULATIVE CHANGE IN ACCOUNTING FOR
GOODWILL, NET OF TAX
BENEFIT............................. - - - - (1,888) (4.1)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................... $ (1,280) (4.9) $ 815 2.3 $ (2,265) (4.9)
========== ========== ========== ========== ========== ==========
14
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues
- --------
Revenues decreased by $8,721,000 or (24.9)% to $26,281,000 for the year
ended December 31, 2004, as compared to $35,002,000 for the year ended December
31, 2003. These declines were primarily a result of a decreased number of
projects available to bid due to market conditions. Revenue for the fourth
quarter of 2004 was $6,877,000, a reduction of $3,335,000, as compared to
$10,212,000 for the fourth quarter of 2003. 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, 2004, the Company had backlog of
$36,000,000. During the first quarter of 2005, the Company has accumulated
approximately $20,000,000 of new work, which is not reflected in the backlog
amount as of December 31, 2004. The Company is actively seeking new projects to
add to its backlog.
During the year ended December 31, 2004, the Company earned 32%, 23%
and 16% 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.
Costs of revenues
- -----------------
Costs of revenues decreased by $7,009,000 or (22.5%) to $24,139,000
for the year ended December 31, 2004 compared to $31,148,000 for the year ended
December 31, 2003. Costs of revenues as a percentage of revenues increased by
2.8% during the year ended December 31, 2004 as compared to the year ended
December 31, 2003. Costs of revenues for the fourth quarter 2004 was $6,339,000,
a reduction of $2,047,000 as compared to $8,386,000 for the fourth quarter of
2003. As previously mentioned, the change in costs of revenues during 2004 as
compared to 2003, is attributed partially to the increased cost of steel based
products, reduced revenues limiting project supervision and drafting salaries
from being job costed to multiple projects, as well as increased labor costs
incurred by the Company to retain experienced field labor personnel.
Gross profit
- ------------
For the year ended December 31, 2004, the Company had a gross profit of
$2,142,000 or 8.2% as compared to $3,854,000 or 11.0% for the year ended
December 31, 2003. In the fourth quarter of 2004, the gross profit was $538,000
or 7.8% as compared to $1,826,000 or 17.9% for the same period in 2003. The
15
decline in gross profit for the year ended December 31, 2004 as compared to the
year ended December 31, 2003, was primarily a result of the overall decline in
revenues as well as the effect of price increases of steel based piping
materials and increased labor costs to retain experienced labor.
The decline in the fourth quarter ended December 31, 2004, as compared
to the same period in 2003, was attributed to the overall decline in revenues
and the 2003 fourth quarter results included claim revenue of approximately
$714,000.
Selling, general and administrative expenses
- --------------------------------------------
For the year ended December 31, 2004, selling, general and
administrative ("S,G & A") expenses increased $442,000 or 14.7% to $3,452,000
from $3,010,000 for the year ended December 31, 2003. During the fourth quarter
ended December 31, 2004, S,G & A expenses were $566,000 as compared to $998,000
for the same period in 2003, a decrease of $432,000. For the yearly and
quarterly periods above, these changes were primarily a result of the job
costing of overhead costs to trade management contracts and the reduction in
home office overhead. A legal settlement during the first quarter of 2003
affected only the yearly comparisons.
As previously discussed, during the year ended December 31, 2004, the
Company took additional steps to reduce its S,G & A expenses by eliminating
certain home office positions. In addition, the Company's Chief Executive
Officer reduced his salary by 20% with a proportionate reduction in his work
week. These cost savings did not become fully recognized until the fourth
quarter of 2004 due to severance costs incurred during the third quarter of
2004. During the second half of 2004, the Company started the trade management
contract at the Weill Cornell Ambulatory Care Building, a contract of
approximately $17.7 million. On trade management projects, certain
administration costs are job costed instead of being carried in S, G & A costs.
The above factors contributed to the decrease in S, G & A expenses during the
fourth quarter of 2004 as compared to the same period in 2003.
During 2003, legal costs were approximately $570,000, which related to
a lawsuit with Stroock & Stroock & Lavan, LLP ("Stroock"), as well as the
litigation with NAB Construction Corp. regarding the Co-Op City project as
discussed in "Item 3. - Legal Proceedings" of this Form 10-K. 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 S, G & A expenses during the first quarter of 2003. During the fourth
quarter of 2003, S, G & A expenses were also higher due to the Company
substantially completing all of its trade management contracts.
16
Other income (expenses)
- -----------------------
Other income for the year ended December 31, 2004 was $52,000 as
compared to other expenses of $59,000 for the year ended December 31, 2003. For
the year ended December 31, 2004, the Company realized gains on the sale of
marketable securities totaling $48,000 as compared to realized losses on the
sale of marketable securities of $30,000 for the same period in 2003. The
remaining other expense during 2003 was attributed to the Company incurring
interest charges related to the utilization of its line of credit. During 2004,
the Company earned interest income of $4,000.
Provision (benefit) for income tax
- ----------------------------------
The income tax expense for the year ended December 31, 2004 was $22,000
or 1.7 % of the net loss compared to an income tax benefit for the year ended
December 31, 2003 of $30,000 or 3.8 % of the taxable income. During 2004, net
losses during the period resulted in a $581,000 increase in the valuation
allowance against the Company's deferred tax asset. During 2003, the Company
utilized $406,000 of the deferred tax asset valuation allowance. Without these
provisions, the income tax expense as a percentage of taxable income would have
been approximately 50%.
Net income (loss)
- -----------------
As a result of all of the items mentioned above, the Company generated
a net loss of $1,280,000 in 2004 as compared to net income of $815,000 in 2003.
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.
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.
17
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 of 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
ended December 31, 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 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.
18
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. The remaining
other expenses during 2003 and 2002 were attributed to the Company incurring
interest charges related to the utilization of its line of credit.
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 it 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 in 2003 compared to a net loss of $2,265,000 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
General
- -------
The Company's principal capital requirement is to fund 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 retention, which
is received as the project nears completion, are collectible based on their
respective contract terms. The Company has historically relied primarily on
19
internally generated funds and bank borrowings to finance its operations. The
Company has not relied on bank borrowings to finance its operations since July
2003, and in August 2004, the Company's $2,000,000 line of credit expired. On
March 28, 2005, the Company obtained a line of credit which is subject to
certain conditions. See discussion of credit facility below. As of December 31,
2004, cash balances were $2,960,000, a $196,000 decrease from the $3,156,000
reported as of December 31, 2003.
Cash provided by (used in) operations
- -------------------------------------
Net cash used in operations was $168,000 in 2004. Net cash provided by
operating activities was $1,043,000 in 2003 and $1,678,000 in 2002. During 2004,
the effect of losses was partially offset by the difference between amounts
collected on accounts and retainage receivable compared to the amount of
accounts and retainage payable. 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. The Company's backlog at December
31, 2004 was approximately $36,000,000 as compared to $20,900,000 at December
31, 2003. The Company is actively seeking new contracts.
Cash provided by (used in) investing activities
- -----------------------------------------------
Net cash used in investing activities was $28,000 in 2004, $16,000 in
2003 and $55,000 in 2002. The Company invests its excess cash in managed stock
funds. The Company purchased marketable securities of $685,000, $513,000,
$412,000 during 2004, 2003 and 2002, respectively. The Company received proceeds
on the sale of marketable securities of $676,000, $506,000 and $404,000 during
2004, 2003 and 2002, respectively. In addition, the Company purchased property
and equipment totaling $19,000, $9,000 and $61,000, respectively, in the years
ended 2004, 2003 and 2002.
Cash provided by (used in) financing activities
- -----------------------------------------------
During 2004, no net cash was provided by financing activities. Net cash
used in financing activities was $387,000 in 2003. In 2002, net cash provided by
financing activities was $178,000. These changes were primarily due to the
Company utilizing and repaying its line of credit.
Credit Facility
- ---------------
The Company had a $2,000,000 line of credit which expired in August
2004.
On March 28, 2005, the Company obtained a new line of credit facility
from Fleet National Bank, a Bank of America Company, which provides for
borrowings for working capital purposes up to $2,000,000. This facility expires
April 1, 2006, is secured by the Company's assets and is guaranteed by the
Company's subsidiary KSW Mechanical.
20
The amount of advances is determined based on the amount of secured
margined cash and marketable securities held at the bank and certain
profitability and net worth requirements. Based on these requirements, the
Company may currently borrow up to approximately $500,000.
Secured margined cash and marketable securities advances bear interest
at the bank's prime lending rate plus one-quarter of one percent per annum.
Advances determined by certain profitability and net worth requirements bear
interest at the bank's prime lending rate plus three- quarters of one percent
per annum.
Payment may be accelerated by certain events of default such as
unfavorable credit factors, the occurrence of a material adverse change in the
Company's business, properties or financial condition, a default in payment on
the line, impairment of security, bankruptcy, or the Company ceasing operations
or being unable to pay its debts. The line of credit must be paid in full at the
end of the term, April 1, 2006.
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, which is an undeterminable amount
because it is subject to bidding by third parties. Management believes that all
contingent liabilities will be satisfied by the Company's performance on the
specific bonded contracts involved.
The Company believes its current bonding limits are 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, 2004, approximately $25,600,000 of the Company's backlog of
$36,000,000 required bonds.
While the Company has a longstanding 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 the surety is
unwilling to provide bonds in the future, the Company would seek an alternate
surety. If the Company is 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.
21
CONTRACTUAL OBLIGATIONS
As of December 31, 2004, outstanding contractual obligations are as
follows:
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL LESS THAN 1
OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------- ----- ---- --------- --------- -------------
Long term debt $ - $ - $ - $ - $ -
Capital leases - - - - -
Operating leases (a) 281,000 187,000 94,000 - -
Purchase obligations under
construction contracts (b) - - - - -
Other long-term obligations - - - - -
------------ ------------ ----------- ----------- -----------
Total $ 281,000 $ 187,000 $ 94,000 $ - $ -
============ ============ =========== =========== ===========
(a) The Company is obligated to pay monthly rental payments of approximately
$15,000. The Company has exercised its second one-year option to extend the
lease to June 2006, and has an additional option to extend the lease for
the period July 2006 through June 2009.
(b) On March 28, 2005, the Company entered into an agreement, not yet reduced
to writing, with a supplier of steel based piping materials where the
Company has committed to purchase a minimum of $ 1,400,000 of steel based
materials over a fifteen month period, at fixed unit prices.
OFF -BALANCE SHEET ARRANGEMENTS
No disclosures are required pursuant to Item 303 (a) (4) of Regulation S-K.
FORWARD LOOKING STATEMENTS
Certain statements contained under "Item 1. Business", this "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K 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
22
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. Due to losses experienced industry wide, the surety market has
tightened. This may make it 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, 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.
o The Company has a written employment agreement with Floyd Warkol, its
Chairman and CEO, which expires on December 31, 2005. The Company has no
other current employment or non-competition agreements with senior
management. 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.
o There have been significant increases in the cost of steel based piping
materials, which is the primary material supplied by the Company on
projects, and future increases may impact the Company's profit margins
beyond the amount the Company estimates for these future price escalations.
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.
23
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, 2004, the Company has invested $709,000 in
managed stock funds selected by Merrill Lynch.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required.
ITEM 9A. CONTROLS AND PROCEDURES
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, 2004. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2004.
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 the Company's fourth fiscal quarter ended December 31,
2004, that has materially affected or is reasonably likely to materially affect
the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The following is being provided pursuant to Question 1 of the SEC's
Frequently Asked Questions, dated November 23, 2004, to include disclosure under
Items 1.01 and 2.03 of Form 8-K:
The Company had a $2,000,000 line of credit which expired in August
2004.
24
On March 28, 2005, the Company obtained a new line of credit facility
from Fleet National Bank, a Bank of America Company, which provides for
borrowings for working capital purposes up to $2,000,000. This facility expires
April 1, 2006, is secured by the Company's assets and is guaranteed by the
Company's subsidiary KSW Mechanical.
The amount of advances is determined based on the amount of secured
margined cash and marketable securities held at the bank and certain
profitability and net worth requirements. Based on these requirements, the
Company may currently borrow up to approximately $500,000.
Secured margined cash and marketable securities advances bear interest
at the bank's prime lending rate plus one-quarter of one percent per annum.
Advances determined by certain profitability and net worth requirements bear
interest at the bank's prime lending rate plus three- quarters of one percent
per annum.
Payment may be accelerated by certain events of default such as
unfavorable credit factors, the occurrence of a material adverse change in the
Company's business, properties or financial condition, a default in payment on
the line, impairment of security, bankruptcy, or the Company ceasing operations
or being unable to pay its debts. The line of credit must be paid in full at the
end of the term, April 1, 2006.
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.
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. Copies of the Company's 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.
25
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 ACCOUNTANT 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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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).
26
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).
- ------------------
+ 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.
27
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. (incorporated herein by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 (Commission File No. 0-27290), filed with the
Commission on March 30, 2004).
10.11 WCMA Line of Credit Extension letter, dated January 27, 2004 and WCMA
Line of Credit Extension 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. (incorporated herein by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 (Commission File No. 0-27290), filed with the
Commission on March 30, 2004).
10.12 Agreement of Indemnity, dated May 24, 2001, by and among KSW, Inc.,
KSW Mechanical Services, Inc. and XL Specialty Insurance Company
(incorporated herein by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003
(Commission File No. 0-27290), filed with the Commission on March 30,
2004)
28
10.13+ Employment Agreement, dated April 1, 2003, by and between Floyd Warkol
and the Company (incorporated herein by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 (Commission File No. 0-27290), filed with the
Commission on March 30, 2004)
10.14 WCMA Line of Credit Extension Letter, dated June 30, 2004
(incorporated herein by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2004 (Commission File No. 0-27290), filed with the Commission on
August 16, 2004).
10.15+ Employment Agreement by and among KSW Mechanical Services, Inc., the
Company and Floyd Warkol, dated as of April 1, 2004 (incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2004
(Commission File No. 0-27290), filed with the Commission on November
15, 2004).
10.16+ Amendatory Employment Agreement, dated November 10, 2004, by and
between the Company, KSW Mechanical Services, Inc. and Floyd Warkol
(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 November 16, 2004).
10.17 Line of Credit Agreement letter, dated March 28, 2005 between KSW,
Inc. and Fleet National Bank, a Bank of America Company together with
forms of a Line of Credit Note, Rider to Line of Credit Note, a pledge
security agreement and guaranty.
10.18+ Compensation Arrangements with Certain Executive Officers.
10.19+ Compensation of Non-Employee Directors
11 Statement Regarding Computation of Net Earnings (Loss) Per Share.
21.1 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 of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350.
29
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, 2005
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, 2005
/s/ Burton Reyer
---------------------------------------
Burton Reyer
Director
March 29, 2005
/s/ Russell Molina
---------------------------------------
Russell Molina
Director
March 29, 2005
/s/ Stanley Kreitman
---------------------------------------
Stanley Kreitman
Director
March 29, 2005
/s/ Innis O'Rourke
---------------------------------------
Innis O'Rourke
Director
March 29, 2005
30
/s/ John A. Cavanagh
---------------------------------------
John A. Cavanagh
Director
March 29, 2005
/s/ Richard W. Lucas
---------------------------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 29, 2005
31
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Report of Independent Registered Public Accounting Firm 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-11-34
Schedule II- Schedule of Valuation and Qualifying Accounts F-35
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
37-16 23rd Street
Long Island City, New York 11101
We have audited the accompanying consolidated balance sheets of KSW, Inc. and
subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity and
cash flows for each of the two years in the period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2004 in conformity with U.S. generally accepted accounting
principles.
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
February 11, 2005, except for Note 16, as to which the date is March 28, 2005.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
37-16 23rd Street
Long Island City, New York 11101
We have audited the accompanying consolidated balance sheet of KSW, Inc. and
subsidiary as of December 31, 2002, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity and cash flows for the year
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of KSW,
Inc. and subsidiary as of December 31, 2002, and the results of its operations
and its cash flows for the year ended in conformity with accounting principles
generally accepted in the United States of America.
Rosen, Seymour, Shapss, Martin & Company
Certified Public Accountants
New York, New York
February 19, 2003
except for Notes 14 and 15, which is as of March 19, 2004
F-3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
_______________________
2004 2003
---- ----
A S S E T S
-----------
Current assets:
Cash $ 2,960 $ 3,156
Marketable securities 709 621
Accounts receivable, net 4,211 6,303
Retainage receivable 1,988 2,159
Costs and estimated earnings in excess of billings on
uncompleted contracts 236 622
Prepaid expenses and other receivables 204 420
----------- -----------
Total current assets 10,308 13,281
Property and equipment, net 98 146
Accounts receivable 2,037 1,937
Deferred income taxes and other 1,470 1,470
----------- -----------
Total assets $ 13,913 $ 16,834
=========== ===========
(continued)
F-4
2004 2003
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 4,906 $ 4,978
Retainage payable 1,021 1,141
Accrued payroll and benefits 220 477
Accrued expenses 148 182
Billings in excess of costs and estimated earnings on
uncompleted contracts 832 2,007
----------- -----------
Total current liabilities 7,127 8,785
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock: $.01 par value, 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 (3,058) (1,778)
Accumulated other comprehensive gain:
Net unrealized holding gain on available for sale securities 61 44
----------- -----------
Total stockholders' equity 6,786 8,049
----------- -----------
Total liabilities and stockholders' equity $ 13,913 $ 16,834
=========== ===========
See notes to consolidated financial statements.
F-5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
_____________________
2002
2004 2003 (RESTATED)
---- ---- ----------
Revenues $ 26,281 $ 35,002 $ 46,448
Costs of revenues 24,139 31,148 40,808
------------ ------------ -----------
Gross profit 2,142 3,854 5,640
Selling, general and administrative expenses 3,452 3,010 4,196
------------ ------------ -----------
Operating income (loss) (1,310) 844 1,444
------------ ------------ -----------
Other income (expense):
Interest income (expense), net 4 (29) (17)
Gain (loss) on sale of marketable securities 48 (30) (90)
------------ ------------ -----------
Total other income (expenses) 52 (59) (107)
------------ ------------ -----------
Income (loss) before provision (benefit) for income taxes (1,258) 785 1,337
Provision (benefit) for income taxes 22 (30) 1,714
------------ ------------ -----------
Income (loss) before cumulative effect of change in accounting
principle (1,280) 815 (377)
Cumulative effect of change in accounting for goodwill, net of
income tax benefit of $1,626 - - (1,888)
------------ ------------ -----------
Net income (loss) $ (1,280) $ 815 $ (2,265)
============ ============ ===========
Income (loss) per common share basic and diluted before effect
of change in accounting principle $ (.24) $ .15 $ (.06)
Cumulative effect of change in accounting principle - - (.35)
------------ ------------ -----------
Basic and diluted income (loss) per common share $ (.24) $ .15 $ (.41)
============ ============ ===========
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, 2004, 2003 AND 2002
(IN THOUSANDS)
_______________________
2004 2003 2002
---- ---- ----
Net income (loss) $ (1,280) $ 815 $ (2,265)
------------ ----------- ------------
Other comprehensive income (loss) before tax
Net unrealized holding gains (losses) arising during the 79 141 (176)
year
Less: reclassification adjustment for (gains) losses
included in net income (loss) (48) 30 90
------------ ----------- ------------
Other comprehensive income (loss) before tax 31 171 (86)
Income (tax) benefit related to items of other comprehensive
income (loss) (14) (79) 41
------------ ----------- ------------
Other comprehensive income (loss), net of tax 17 92 (45)
------------ ----------- ------------
Total comprehensive income (loss) $ (1,263) $ 907 $ (2,310)
============ =========== ============
See notes to consolidated financial statements.
F-7
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
______________________
ADDITIONAL RETAINED OTHER
COMMON STOCK PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
------ ------ ------- --------- ------------- -----
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
Net loss - - - (1,280) - (1,280)
Net unrealized gains on available
for sale securities - - - - 17 17
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 2004 5,470,311 $ 54 $ 9,729 $ (3,058) $ 61 $ 6,786
========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
F-8
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
________________________
2004 2003 2002
---- ---- ----
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities:
Net income (loss) $ (1,280) $ 815 $ (2,265)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 67 95 131
Deferred income taxes (14) (79) 1,667
Write off of goodwill, net - - 1,888
Realized (gains) loss on sale of
marketable securities (48) 30 90
Loss on sale of fixed assets - - 17
Changes in assets (increase) decrease:
Accounts receivable 1,992 471 8,928
Retainage receivable 171 587 (197)
Costs and estimated earnings in excess of
billings on uncompleted contracts 386 (53) (543)
Prepaid expenses and other receivables 216 26 279
Other - 8 -
Changes in liabilities increase (decrease):
Accounts payable (72) (2,097) (4,300)
Retainage payable (120) (176) (457)
Accrued payroll and benefits (257) 230 (500)
Accrued expenses (34) 11 (203)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,175) 1,175 (2,857)
------- ------- -------
Net cash provided by (used in)
operating activities (168) 1,043 1,678
------- ------- -------
(continued)
F-9
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
________________
2004 2003 2002
---- ---- ----
Cash flows from investing activities:
Proceeds received on sale of marketable
securities $ 676 $ 506 $ 404
Purchase of marketable securities (685) (513) (412)
Proceeds from sale of property - - 14
Purchase of property and equipment (19) (9) (61)
--------- --------- ---------
Net cash used in investing activities (28) (16) (55)
--------- --------- ---------
Cash flows from financing activities:
Long-term liabilities - - (19)
Repayment of loan payable - (387) -
Increase in loan payable - - 197
--------- --------- ---------
Net cash provided by (used in) financing
activities - (387) 178
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (196) 640 1,801
Cash and cash equivalents, beginning of year 3,156 2,516 715
--------- --------- ---------
Cash, end of year $ 2,960 $ 3,156 $ 2,516
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 15 $ 38 $ 31
Income taxes $ 36 $ 49 $ 47
See notes to consolidated financial statements.
F-10
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
_____________________
(1) PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements for the years ended December 31,
2004, 2003 and 2002 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, 2004 and 2003, 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, 2004, 2003 AND 2002
(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, 2004, 2003 AND 2002
(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, 2004, amounts in excess of
federally insured limits totaled approximately $ 3,479.
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 $ 4,022 and $6,285 at December 31, 2004 and 2003,
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, 2004, 2003 AND 2002
(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.
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 decision to write-off the balance of
goodwill was based upon the fact that 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, 2004, 2003 AND 2002
(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 year ended December 31,
2002:
Reported net loss $ (2,265)
Goodwill amortization net of taxes 1,888
----------
Pro forma net loss $ (377)
==========
Basic and Diluted loss per share:
Reported net loss per share $ (.41)
Less goodwill amortization per share, net of
taxes (.35)
----------
Pro forma loss per share $ (.06)
==========
(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
F-15
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
___________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(H) INCOME TAXES - CONT'D
is more likely than not that some or all of the deferred tax assets
will not be realized through future operations.
(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, 2004, 2003 AND 2002
(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 December, 2004, FASB issued Statement No. 123-R, "Share Based
Payment" ("SFAS 123-R") which is a revision of SFAS 123. SFAS 123-R
superseded APB Opinion N. 25, "Accounting for Stock Issued to
Employees" and its related guidance. Generally the approach to
accounting for share based payments in SFAS 123-R is similar to the
approach described in SFAS 123, however SFAS 123-R requires all share
based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their
fair values (pro forma disclosure is no longer an alternative to
financial statement recognition). SFAS 123-R is effective for
financial statements at both interim and annual periods beginning
after June 15, 2005. The adoption of SFAS 123-R is not expected to
have a material effect on our consolidated results of operations or
financial position.
F-17
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
(M) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - CONT'D
SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29 ("SFAS 153"). SFAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception
from having to apply the fair value accounting provisions of APB 29
for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. SFAS 153 is effective for the first
reporting period beginning after June 15, 2005. We believe that the
adoption of SFAS 153 will not have a material impact on our
consolidated results of operations or financial position.
FASB Interpretation No. 46 - Consolidation of Variable Interest
Entities ("FIN 46"). FIN 46 addresses the consolidation by business
enterprises of variable interest entities, as defined in FIN 46, and
is based on the concept that companies that control another entity
through interests, other than voting interests, should consolidate the
controlled entity. The consolidation requirements apply immediately to
FIN 46 interests held in variable interest entities created after
January 31, 2003, and to interests held in variable interest entities
that existed prior to February 1, 2003 and remain in existence as of
July 1, 2003. The FASB subsequently issued FIN 46R in December 2003
which modified certain provisions of FIN 46. FIN 46R applied to the
first reporting period after March 15, 2004. The application of FIN 46
as originally issued and as revised by the issuance of FIN 46R did not
have an impact on, or result in, additional disclosure in our
consolidated results of operations or financial position.
(N) RECLASSIFICATIONS
Certain amounts in the 2002 consolidated financial statements have
been reclassified for comparative purposes to conform with the current
presentation. These reclassifications did not affect net income or
working capital that was previously reported.
F-18
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(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, 2004 and 2003, was as
follows:
Gross Gross
Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
December 31, 2004:
Managed stock funds $ 597 $ 120 $ (8) $ 709
====== ====== ====== ======
December 31, 2003:
Managed stock funds $ 538 $ 97 $ (14) $ 621
====== ====== ====== ======
At December 31, 2004 and 2003, gross unrealized holding losses on available
for sale securities were $8 and $14, respectively. At December 31, 2004 and
2003, gross unrealized holding gains on available for sale securities were
$120 and $97, respectively. The change in net unrealized holding gains is
$17 and $92 for the years ended December 31, 2004 and 2003, respectively.
During the years ended December 31, 2004 and 2003, available for sale
securities were sold for total proceeds of approximately $676 and $506,
respectively. The gross realized gains (losses) on these sales totaled
approximately $48 and $(30) for the years ended December 31, 2004 and 2003,
respectively.
F-19
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(4) CONTRACTS RECEIVABLE
2004 2003
---- ----
Accounts receivable:
Billed
Contracts in progress $ 2,564 $ 4,752
Completed contracts 1,554 1,673
Unbilled 293 78
---------- -----------
4,411 6,503
Less: Allowances for doubtful collections 200 200
---------- -----------
$ 4,211 $ 6,303
========== ===========
Retainage receivable $ 1,988 $ 2,159
========== ===========
Accounts receivable - long term $ 2,037 $ 1,937
========== ===========
At December 31, 2004 and 2003, retained contract receivables are
expected to be realized within one year.
(5) CONSTRUCTION CONTRACTS
Information with respect to contracts in progress at December 31,
2004 and 2003 is as follows:
2004 2003
---- ----
Costs on uncompleted contracts $ 11,080 $ 33,573
Estimated earnings thereon 1,539 5,272
---------- -----------
12,619 38,845
Less billings applicable thereto 13,215 40,230
---------- -----------
$ (596) $ (1,385)
========== ===========
F-20
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(5) CONSTRUCTION CONTRACTS - CONT'D
Included in the accompanying consolidated balance sheets under the
following captions:
2004 2003
---- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 236 $ 622
Billings in excess of costs and estimated earnings on
uncompleted contracts (832) (2,007)
---------- ----------
$ (596) $ (1,385)
========== ==========
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consists of the
following:
2004 2003
---- ----
Machinery and equipment $ 456 $ 437
Furniture and fixtures 718 718
Leasehold improvements 831 831
---------- ----------
2,005 1,986
Less accumulated depreciation and amortization 1,907 1,840
---------- ----------
$ 98 $ 146
========== ==========
Depreciation and amortization expense relating to property and
equipment was approximately $67, $95 and $131 for the years ended
December 31, 2004, 2003 and 2002, respectively.
F-21
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(7) INCOME TAXES
For the years ended December 31, 2004, 2003 and 2002, components of
provision (benefit) to income taxes are as follows:
2004 2003 2002
---- ---- ----
Current
Federal $ - $ - $ -
State and local 36 49 47
--------- --------- ---------
36 49 47
--------- --------- ---------
Deferred
Federal (8) (48) 997
State and local (6) (31) 670
--------- --------- ---------
(14) (79) 1,667
--------- --------- ---------
Total $ 22 $ (30) $ 1,714
========= ========= =========
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. During the year ended December 31, 2004, the deferred tax
valuation allowance increased $581.
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:
2004 2003 2002
---- ---- ----
Computed tax at the federal statutory rate of 34% $ (428) $ 267 $ 455
State taxes, net of Federal benefit (152) 95 162
Valuation allowance 581 (406) 1,045
Other items, net 21 14 52
-------- --------- ---------
Provision (benefit) for income taxes $ 22 $ (30) $ 1,714
======== ========= =========
F-22
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(7) INCOME TAXES - CONT'D
The details of deferred tax assets and liabilities at December 31, 2003
and 2004 are as follows:
2004 2003
---- ----
Deferred income tax assets:
Net operating loss carry forwards $ 1,497 $ 752
Amortization of goodwill 772 924
Property and equipment 244 255
Allowance for doubtful accounts 92 92
Other tax carryforwards 136 123
---------- ----------
Total deferred income tax assets 2,741 2,146
---------- ----------
Deferred income tax liabilities:
Unrealized gains on marketable securities 52 38
---------- ----------
52 38
---------- ----------
Net deferred income tax assets before
valuation allowance 2,689 2,108
Valuation allowance (1,220) (639)
---------- ----------
Deferred income tax assets, net $ 1,469 $ 1,469
========== ==========
At December 31, 2004, the Company has net operating loss carry forwards
remaining of approximately $3,700, expiring through December 31, 2025.
At December 31, 2004 and 2003, the $1,469 balance of the deferred tax
asset is included in long-term assets in the accompanying balance
sheets.
(8) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2004 and 2003, accumulated other comprehensive income
(loss), which consists of net unrealized holding gains (losses) on
available for sale securities, is as follows:
2004 2003
---- ----
Beginning balance $ 44 $(48)
Current period change 17 92
----- -----
Ending balance $ 61 $ 44
===== =====
F-23
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(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 minimum future rental payments at
December 31, 2004 as follows:
YEAR ENDING
DECEMBER 31,
------------
2005 $ 187
2006 94
-------
$ 281
=======
Under the terms of the lease agreement, the Company is
obligated to pay monthly rental amounts of approximately $15.
The Company has exercised the first five-year option which
extended the lease term through June 2004. The Company has
exercised two options, each for a period of one year for the
periods July 2004 through June 2005 and July 2005 through June
2006. There is also a three-year option that can be exercised
during 2006, which would extend the lease through 2009.
Rent expense for the years ended December 31, 2004, 2003 and
2002 amounted to approximately $185, $180 and $176,
respectively.
F-24
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(9) COMMITMENTS AND CONTINGENCIES - CONT'D
(C) OPERATING LEASE- RELATED PARTY
The Company had an operating lease with a related entity
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, 2004, 2003 and
2002, amounted to $103 to a related entity 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.
(E) LEGAL
a. Co-op City. In February 1999, the Company sued the general
contractor on the Co-Op City Project and its bonding company
in New York State Supreme Court, Queens County to recover
its contract balance and unpaid proposals. The Company's
claim includes approximately $1,937, consisting of accounts
receivable applicable to the base contract of approximately
$437, and unpaid final retainage billings of approximately
$1,500. The Company also seeks to be compensated for
unanticipated costs incurred through 1998, in the sum, as
presented at trial of approximately $2,304. These costs have
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, as presented at trial, totaling approximately
$1,441, and a claim for $3,000 based on the argument that
the Company's Mechanic's Lien was willfully overstated.
F-25
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(9) COMMITMENTS AND CONTINGENCIES - CONT'D
(E) LEGAL - CONT'D
a. Co-op City - cont'd. The Company believes all of the
Defendant's claims 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 40 days and
adjourned by the court to April 2005 for further trial
proceedings. The financial statements, at December 31, 2004
and 2003, 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 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-26
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(9) COMMITMENTS AND CONTINGENCIES - CONT'D
(F) EMPLOYMENT AGREEMENT
The Company's Chief Executive Officer has a written employment
agreement, which expires on December 31, 2005. This agreement
provides a base annual compensation of $450,000, based on a
five-day work week, 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. Commencing on October 1, 2004, as
provided by the employment agreement, as amended, he has
worked four days a week and has received as compensation 80%
of his base annual salary.
(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 32%, 23% and 16% of its contract revenue in
2004, 43%, 27% and 13% of its contract revenue in 2003, 41%,
15% and 11% of its contract revenue in 2002 (restated),
respectively.
(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.
F-27
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(11) RETIREMENT PLANS - CONT'D
(A) PROFIT-SHARING/401(K) PLAN - CONT'D
The Company expensed approximately $60, $61 and $62 as a 25%
matching contribution for the years ended December 31, 2004,
2003 and 2002, 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 $972, $1,315 and $1,189 for the
years ended December 31, 2004, 2003 and 2002, respectively,
related to multi-employer pension plans for its union
employees.
(12) STOCKHOLDERS' EQUITY
(A) STOCK OPTION PLAN
The Board of Directors of the Company adopted the 1995 Stock
Option Plan (the Plan). The Plan enabled the Company to make
incentive-based compensation awards to its employees, officers,
directors and consultants. A total of 750,000 shares were
authorized for issuance under the Plan. Options to purchase
620,000 shares of common stock at $1.50 per share were issued
during December 1995 (of which 535,000 shares were issued to
officers and directors of the Company and its subsidiary). The
Plan requires that the exercise price of options be set at not
less than the fair market value of the common stock on the date
of grant pursuant to the requirements of APB Opinion No. 25.
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
F-28
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY - CONT'D
(A) STOCK OPTION PLAN - CONT'D
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 2004 and 2002. During 2001 through 2004,
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, 2004 and
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 2004, 2003 and 2002 are
summarized below:
2004 2003 2002
Fixed Fixed Fixed
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 576,667 $ 1.50 621,667 $ 1.50 621,667 $ 1.50
Granted - - -
Exercised - - -
Expired/ Canceled - (45,000) -
------------ ------------ -------------
Outstanding at end of year 576,667 $ 1.50 576,667 $ 1.50 621,667 $ 1.50
============ ============ =============
Exercisable at end of year 576,667 $ 1.50 576,667 $ 1.50 621,667 $ 1.50
F-29
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(12) STOCKHOLDERS' EQUITY - CONT'D.
(A) STOCK OPTION PLAN - CONT'D
The following table summarizes information about stock options
outstanding at December 31, 2004:
Remaining
Exercise Price Shares Contractual Life
-------------- ------ ----------------
$1.50 576,667 1.4 years
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:
2004 2003 2002
---- ---- ----
Net income (loss) - as reported $(1,280) $ 815 $(2,265)
Stock option compensation, net of tax - - -
-------- ------- --------
Net income (loss) - pro forma $(1,280) $ 815 $(2,265)
======== ======= ========
Basic net income (loss) per share:
As reported $ (.24) $ .15 $ (.41)
Pro forma $ (.24) $ .15 $ (.41)
Diluted net income (loss) per share:
As reported $ (.24) $ .15 $ (.41)
Pro forma $ (.24) $ .15 $ (.41)
F-30
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
__________________________
(12) STOCKHOLDERS' EQUITY - CONT'D.
(A) STOCK OPTION PLAN - CONT'D
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in
1999: dividend yield of 0%; expected volatility of 54.67%;
risk-free interest rate of 7.00%; and expected lives of six
years.
(B) PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of
preferred stock. As of December 31, 2004, no shares of
preferred stock have been issued by the Company.
(13) BACKLOG
At December 31, 2004, the Company had a backlog of approximately
$36,000. 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.
(14) 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:
QUARTERLY DATA AS PREVIOUSLY AS
-------------- 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-31
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(14) 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-32
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(15) SELECTED QUARTERLY DATA (UNAUDITED)
The following is unaudited selected quarterly data for the years ended December
31, 2004 and 2003:
Year ended December 31, 2004
----------------------------
First Second Third Fourth
quarter Quarter quarter quarter Total
------- ------- ------- ------- -----
Revenues $ 6,431 $ 6,407 $ 6,566 $ 6,877 $ 26,281
Gross profit $ 507 $ 905 $ 192 $ 538 $ 2,142
Net income (loss) $ (644) $ (51) $ (596) $ 11 $ (1,280)
Per share of common stock
earnings (losses):
Basic $ (.12) $ (.01) $ (.11) $ - $ (.24)
Diluted $ (.12) $ (.01) $ (.11) $ - $ (.24)
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.01 $ 1.05 $ .80 $ .75
Low $ .62 $ .69 $ .62 $ .40
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
$ 437 $ 582 $ 1,009 $ 1,826 $ 3,854
Gross profit
Net income (loss) $ (58) $ (145) $ 166 $ 852 $ 815
Per share of common stock
earnings (losses):
$ (.01) $ (.03) $ .03 $ .16 $ .15
Basic $ (.01) $ (.03) $ .03 $ .16 $ .15
Diluted
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 1.05 $ 1.00 $ .85 $ .83
Low $ .70 $ .70 $ .70 $ .62
(a) The Company's management identified and determined that reported revenues
and costs of revenues, during the nine months ended September 30, 2003 were
materially overstated as a result of an accounting error attributable to the
failure to eliminate certain intra-company accounts. The Company restated
these previously reported amounts.
F-33
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
____________________________
(16) SUBSEQUENT EVENT
(A) LINE OF CREDIT FACILITY
The Company had a $2,000 line of credit which expired in
August 2004.
On March 28, 2005, the Company obtained a new line of credit
facility from Fleet National Bank, a Bank of America
Company, which provides for borrowings for working capital
purposes up to $2,000. This facility expires April 1, 2006,
is secured by the Company's assets and is guaranteed by the
Company's subsidiary.
The amount of advances is determined based on the amount of
secured margined cash and marketable securities held at the
bank and certain profitability and net worth requirements.
Secured margined cash and marketable securities advances
bear interest at the bank's prime lending rate plus
one-quarter of one percent per annum. Advances determined by
certain profitability and net worth requirements bear
interest at the bank's prime lending rate plus three-
quarters of one percent per annum.
Payment may be accelerated by certain events of default such
as unfavorable credit factors, the occurrence of a material
adverse change in the Company's business, properties or
financial condition, a default in payment on the line,
impairment of security, bankruptcy, or the Company ceasing
operations or being unable to pay its debts. The line of
credit must be paid in full at the end of the term, April 1,
2006.
(B) STEEL BASED PIPING MATERIALS
On March 28, 2005, the Company has entered into an
agreement, not yet reduced to writing, with a supplier of
steel based piping materials, whereby the Company has
committed to purchase minimum amounts of piping products
used in its normal operations for a period of 15 months. The
total minimum purchase obligation under this agreement is
$1,400.
F-34
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
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
Description
Year ended December 31, 2004
allowance for doubtful accounts and returns $ 200 $ - $ - $ - $ 200
======= ======= ======= ======= =======
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, 2004
deferred income tax valuation $ 639 $ 581 $ - $ - $ 1,220
======= ======= ======= ======= =======
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
======= ======= ======= ======= =======
F-35
KSW, INC.
INDEX TO EXHIBITS
Exhibit 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).
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. (incorporated herein by
reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003
(Commission File No. 0-27290), filed with the Commission on
March 30, 2004).
10.11 WCMA Line of Credit Extension letter, dated January 27, 2004
and WCMA Line of Credit Extension 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.
(incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 (Commission File No. 0-27290), filed
with the Commission on March 30, 2004).
10.12 Agreement of Indemnity, dated May 24, 2001, by and among
KSW, Inc., KSW Mechanical Services, Inc. and XL Specialty
Insurance Company (incorporated herein by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 (Commission File
No. 0-27290), filed with the Commission on March 30, 2004)
10.13 Employment Agreement, dated April 1, 2003, by and between
Floyd Warkol and the Company (incorporated herein by
reference to Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003
(Commission File No. 0-27290), filed with the Commission on
March 30, 2004)
10.14 WCMA Line of Credit Extension Letter, dated June 30, 2004
(incorporated herein by reference to Exhibit 10.14 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004 (Commission File No. 0-27290),
filed with the Commission on August 16, 2004).
10.15 Employment Agreement by and among KSW Mechanical Services,
Inc., the Company and Floyd Warkol, dated as of April 1,
2004 (incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004 (Commission File No.
0-27290), filed with the Commission on November 15, 2004).
10.16 Amendatory Employment Agreement, dated November 10, 2004, by
and between the Company, KSW Mechanical Services, Inc. and
Floyd Warkol (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 November 16,
2004).
10.17 Line of Credit Agreement letter, dated March 28, 2005
between KSW, Inc. and Fleet National Bank, a Bank of America
Company together with forms of a Line of Credit Note, Rider
to Line of Credit Note, a pledge security agreement and
guaranty.
10.18+ Compensation Arrangements with Certain Executive Officers.
10.19+ Compensation of Non-Employee Directors
11 Statement Regarding Computation of Net Earnings (Loss) Per
Share.
21.1 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 of Chief Executive Officer required by Rule
13a-14(a).
31.2 Certification of the Chief Financial Officer required by
Rule 13a-14(a).
32.1 Certification of the Chief Executive Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350.
32.2 Certification of the Chief Financial Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350.