- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number 0001-32865
KSW, INC.
---------
(Exact name of registrant as specified in its charter)
Delaware 11-3191686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
37-16 23rd Street, Long Island City, New York 11101
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
718-361-6500
------------
(Registrant's telephone number, including area code)
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 whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and larger accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer / / Accelerated Filer / / Non-Accelerated Filer /X/
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of Exchange Act). Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Outstanding at
Class May 12, 2006
----- ------------
Common stock, $.01 par value 5,685,311
KSW, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
Page No.
- --------------------------------------------------------------------------------
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005 3
Consolidated Statements of Income -
Three months ended March 31, 2006 and 2005 4
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2006 and 2005 5
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2006 6
Consolidated Statements of Cash Flows
Three months ended March 31, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 19
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 1A Risk Factors 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 19
- --------------------------------------------------------------------------------
SIGNATURE 21
INDEX TO EXHIBITS 22
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2006 December 31, 2005
-------------- -----------------
ASSETS (unaudited)
- ------
Current assets:
Cash $ 6,724 $ 5,199
Marketable securities 813 774
Accounts receivable, less allowance
for doubtful accounts of $200 at
3/31/06 and 12/31/05 12,568 11,887
Retainage receivable 3,500 2,764
Costs and estimated earnings in excess of
billings on uncompleted contracts 667 480
Prepaid expenses and other receivables 22 144
-------- --------
Total current assets 24,294 21,248
Property and equipment, net of accumulated
depreciation and amortization of $1,921 and $1,969
at 3/31/06 and 12/31/05, respectively 122 112
Deferred income taxes and other 1,074 1,350
-------- --------
Total assets $ 25,490 $ 22,710
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 9,363 $ 9,533
Retainage payable 1,805 1,576
Accrued payroll and benefits 731 542
Accrued expenses 128 206
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,888 1,335
-------- --------
Total current liabilities 14,915 13,192
-------- --------
Commitments and contingencies
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, 5,665,311 and 5,470,311 shares issued
and outstanding at 3/31/06 and 12/31/05, respectively 56 54
Additional paid-in capital 10,419 9,729
Accumulated deficit (1) (347)
Accumulated other comprehensive income
Net unrealized holding gains on available
for sale securities 101 82
-------- --------
Total stockholders' equity 10,575 9,518
-------- --------
Total liabilities and stockholders' equity $ 25,490 $ 22,710
======== ========
See accompanying notes to consolidated financial statements.
3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
-------------------- --------------------
Revenues $ 15,761 $ 9,876
Cost of revenues 13,656 8,733
---------- ----------
Gross profit 2,105 1,143
Selling, general and administrative
expenses 1,480(1) 977
---------- ----------
Operating income 625 166
---------- ----------
Other income :
Interest income, net 41 7
Gain on sales of marketable
securities -- 11
---------- ----------
Total other income 41 18
---------- ----------
Income before provision for income
taxes 666 184
Provision for income taxes 320 29
---------- ----------
Net income $ 346 $ 155
========== ==========
Income per common share:
Basic $ .06 $ .03
Diluted $ .06 $ .03
Weighted average common
shares outstanding:
Basic 5,556,561 5,470,311
Diluted 5,691,855 5,470,311
(1) During the three months ended March 31, 2006, selling and general
administrative expenses include stock compensation expenses of $368, related to
the exercise of stock options and the adoption of the new accounting standards,
SFAS 123-R.
See accompanying notes to consolidated financial statements.
4
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
-------------------- --------------------
Net income $ 346 $ 155
----- -----
Other comprehensive income
(loss) before tax:
Unrealized holding gains
(losses) arising during the
period 35 (28)
Less: reclassification adjustment
for gains included in net
income - (11)
----- -----
Other comprehensive income
(loss) before tax (expense)
benefit 35 (39)
Income tax (expense) benefit
related to items of other
comprehensive income (loss) (16) 18
----- -----
Other comprehensive income
(loss), net of tax (expense)
benefit 19 (21)
----- -----
Total comprehensive income $ 365 $ 134
===== =====
See accompanying notes to consolidated financial statements.
5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2006
(in thousands, except share data)
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
------ ------ ------- ------- ------ -----
Balances, December 31, 2005 5,470,311 $ 54 $ 9,729 $ (347) $ 82 $ 9,518
Net income -- -- -- 346 -- 346
Exercise of stock options 195,000 2 684 -- -- 686
Stock based compensation -- -- 6 -- -- 6
Net unrealized gains on available
for sale securities -- -- -- -- 19 19
--------- ------- ------ ------- ------- ---------
Balances, March 31, 2006 5,665,311 $ 56 10,419 $ (1) $ 101 $ 10,575
========= ======= ====== ======= ======= =========
See accompanying notes to consolidated financial statements.
6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
-------------------- --------------------
Cash flows from operating activities:
Net income $ 346 $ 155
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation and amortization 12 14
Deferred income taxes 428 18
Realized gain on sales of marketable
securities -- (11)
Stock-based compensation expense
related to stock option plan 368 --
Changes in operating assets and liabilities:
Accounts receivable (681) (3,520)
Retainage receivable (736) (263)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (187) 186
Prepaid expenses and other receivables 122 9
Accounts payable (170) 1,303
Retainage payable 229 215
Accrued payroll and benefits 189 248
Accrued expenses (78) (29)
Billings in excess of costs and
estimated earnings on uncompleted
contracts 1,553 756
------- -------
Net cash provided by (used in) operating
activities 1,395 (919)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (22) (23)
Proceeds from sales of marketable securities -- 104
Purchases of marketable securities (5) (107)
------- -------
Net cash used in investing activities (27) (26)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 324 --
Tax benefits from exercise of stock options (167) --
------- -------
Net cash provided by financing activities 157 --
------- -------
Net increase (decrease) in cash 1,525 (945)
Cash, beginning of period 5,199 2,960
------- -------
Cash, end of period $ 6,724 $ 2,015
======= =======
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest $ 1 $ 1
Income taxes $ 60 $ 11
See accompanying notes to consolidated financial statements.
7
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company furnishes and installs heating, ventilating and air conditioning
systems and process 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. The Company considers
itself to be one operating segment.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and note disclosures required by accounting principles
generally accepted in the United States of America. These consolidated
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
2005.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments, necessary for a fair presentation of the
financial position of the Company as of March 31, 2006 and December 31, 2005,
and the results of its income, comprehensive income and cash flows for the
three-month periods ended March 31, 2006 and 2005. Because of the possible
fluctuations in the marketplace in the construction industry, operating results
of the Company on a quarterly basis may not be indicative of operating results
for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company and its subsidiary
in preparing its consolidated financial statements are set forth in Note (2) to
such consolidated financial statements included in Form 10-K for the year ended
December 31, 2005. The Company has made no significant changes to these policies
during 2006, except for its accounting policy related to stock-based
compensation, described below:
On January 1, 2006, the Company adopted Statement No. 123-R, "Share Based
Payment" ("SFAS 123-R"). 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 the awards fair value at the date of grant (pro
forma disclosure is no longer an alternative to financial statement
recognition). The Company has elected to adopt SFAS 123-R on a modified
prospective method. Under the modified prospective method of transition under
SFAS 123-R, compensation costs in 2006 include cost for options granted prior
to, but not vested as of December 31, 2005, and options vested in 2006.
Therefore, results for prior periods have not been restated.
Prior to January 1, 2006, the Company applied Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations. The Company did not record compensation expense because the
exercise price of the shares was equal to the market price at the date of the
8
grant. SFAS 123, "Accounting for Stock Based Compensation - Transition and
Disclosure", requires proforma net income disclosures as if the fair value based
method defined in SFAS No. 123 has been applied. The Company continued to apply
the provisions of APB 25 and provided the proforma disclosures required by SFAS
123 and amended by SFAS 148.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123-R
during the quarter ended March 31, 2005. For the purposes of this pro forma
disclosure, the value of the options is estimated using a Black-Scholes
option-pricing model and amortized to expense over the options vesting periods.
Three Months
Ended March 31, 2005
--------------------
Net income, as reported $ 155,000
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards,
net of related tax effects -
---------
Pro forma net income $ 155,000
=========
Earnings per share:
Basic - as reported $ .03
Basic - pro forma $ .03
Diluted - as reported $ .03
Diluted - pro forma $ .03
The Company uses the Black-Scholes option - pricing model, which requires the
input of subjective assumptions. These assumptions include estimating the length
of time employees will retain their vested stock options before exercising them
("expected term"), the estimated volatility of the Company's common stock price
over the expected term and the number of options that will ultimately not
complete their vesting requirements ("forfeitures"). Changes in the subjective
assumptions can materially affect the estimate of fair value stock-based
compensation and consequently, the related amount recognized on the consolidated
statements of income.
See Note (3) to these consolidated financial statements, "Stockholder's Equity",
for a more detailed discussion of the effects of SFAS 123-R on the Company's
results of operations and financial condition.
3. STOCKHOLDER'S EQUITY
The adoption of SFAS 123-R lowered net income by approximately $3,000 for the
quarter ended March 31, 2006. In addition, during the quarter, two executives
and a former director exercised 195,000 options, which lowered net income by
$196,000 for the quarter ended March 31, 2006.
9
As of March 31, 2006, there was approximately $60,000 of unrecognized
compensation cost related to unvested share-based compensations awards granted.
That cost is expected to be recognized over the next 2.5 years.
In November 2005, the FASB issued FASB Staff Position No. SFAS 123-R-3,
"Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards" ("FSP 123-R-3"). FSP 123-R-3 provides an elective alternative
transition method for calculating the pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of SFAS 123-R.
Companies may take up to one year from the effective date of FSP 123-R-3 to
evaluate the available transition alternatives and make a one-time election as
to which method to adopt. The Company is currently in the process of evaluating
the alternative methods.
Options are granted to certain employees and directors at prices equal to the
market value of the stock on the dates the options were granted. The options
granted generally have a term of 10 years from the grant date and granted
options vest ratably over a three year period. The fair value of each option is
amortized into compensation expense on a straight-line basis between the grant
date for the option and each vesting date. The Company estimates the fair value
of all stock option awards as of the date of the grant by applying the
Black-Scholes pricing valuation model. The application of this valuation model
involves assumptions that are judgmental and sensitive in the determination of
compensation expense which would include the expected stock price volatility,
risk-free interest rate, weighted average expected life of the options and the
dividend yield.
Historical information is the primary basis for the selection of the expected
volatility, expected dividend yield and the expected lives of options. The risk
free interest rate was selected based upon yields of U.S. Treasury issues with a
term equal to the expected life of the option being valued. Stock option
activity for the quarter ended March 31, 2006 is as follows:
Weighted Average Aggregate
Number of Weighted Average Remaining Contractual Intrinsic
Shares Exercise Price Term in Years Value
------ -------------- ------------- -----
Outstanding at January 1, 2006 656,667 $ 1.65
Expired/canceled - -
Granted - -
Exercised (195,000) $ 1.66
-------
Outstanding at March 31, 2006 461,667 $ 1.65 5.4 $988,000
=======
Exercisable at March 31, 2006 381,667 $ 1.65 4.6 $817,000
There were no options granted during the quarter ended March 31, 2006.
10
Cash proceeds, tax benefits and intrinsic value related to total stock options
exercised during the quarters ended March 31, 2006 and 2005 is as follows:
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
Proceeds from stock options exercised $ 324,000 $ -
Tax Benefits related to stock options exercised $ 167,000 $ -
Intrinsic value of stock options exercised $ 362,000 $ -
4. COMMITMENT AND CONTINGENCIES -
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 acknowledgments of the validity of
the claims are received, they are not recognized in the accompanying
financial statements. No accruals have been made in the accompanying
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.
5. SUBSEQUENT EVENT
(A) Exercise of options
On April 24, 2006, a director of the Company exercised 20,000
nonqualified stock options. The Company recognized an expense for
the difference between the market value of the stock on the
exercise date and the price of the option. This transaction
creates an increase in stockholders' equity from the cash proceeds
from the exercise of the options and an increase in the deferred
taxes asset associated with the expense recorded. This deferred
11
tax asset can be utilized to offset profits the Company may have
in the future. The following is a summary of this transaction:
Number of options exercised 20,000
Market value of options on exercise date $4.09 per share
Market value of options on exercisable date $82,000
Exercise price of options $1.50 per share
Proceeds from the exercise of options $30,000
Per share difference between market value
of stock ($4.09) and the exercise price ($1.50) $2.59 per share
Expense to be recorded related to this transaction $ 52,000
Tax benefit (24,000)
--------
Expense, net of tax $ 28,000
========
Increase in stockholders' equity after transaction $ 54,000
========
(B) Purchase Agreement
On May 4, 2006, the Company entered into an agreement with a
supplier of piping materials, whereby the Company has committed to
purchase certain piping products normally used in its operations,
as well as fabrication services, at set prices through April 30,
2007. This agreement does not cover all types of materials the
Company utilizes on its projects. The Company has not been able to
obtain fixed pricing on certain materials, such as copper tubing,
due to current pricing volatility. The Company does not believe
that pricing increases on items not covered by this purchase
agreement will have a material effect on the Company's results of
operations.
(C) Cash Dividend
On May 8, 2006, the Company's Board of Directors declared a
special cash dividend of $.06 per share. The dividend will be
payable on June 15, 2006 to shareholders of record as of May 24,
2006.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended March 31, 2006 increased by 59.6% or
$5,885,000 to $15,761,000, as compared to $9,876,000 for the quarter ended March
31, 2005. This increase in revenues was a result of the Company's performance on
its backlog of work as of December 31, 2005, as well as projects obtained during
the first quarter of 2006. As of March 31, 2006, the Company had backlog of
approximately $84,000,000 as compared to approximately $46,800,000 as of March
31, 2005. The Company believes that approximately $34,000,000 of the Company's
backlog at March 31, 2006 is not reasonably expected to be completed within the
year ended December 31, 2006.
COST OF REVENUES
Cost of revenues for the quarter ended March 31, 2006 increased by $4,923,000 or
56.4% to $13,656,000, as compared to $8,733,000 for the quarter ended March 31,
2005, which corresponds to the change in revenues noted above. The increased
revenues have allowed the Company to allocate the cost of project supervision
and drafting salaries over multiple projects and more effectively utilize its
experienced field labor personnel. In addition, the Company has taken steps to
reduce pricing volatility of piping materials by entering into agreements to
purchase these products at fixed prices.
GROSS PROFIT
Gross profit for the quarter ended March 31, 2006 was $2,105,000, or 13.4% of
revenues, as compared to a gross profit of $1,143,000, or 11.6% of revenues, for
the quarter ended March 31, 2005. The increase in gross profit for the quarter
ended March 31, 2006, as compared to the quarter ended March 31, 2005, was
primarily a result of the overall increases in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the quarter ended
March 31, 2006, increased by $503,000 or 51.5% to $1,480,000, as compared to
$977,000 for the quarter ended March 31, 2005. A substantial portion of this
change was a result of the exercise of stock options by two executives and a
former director, as well as expenses related to the vesting of stock options,
which increased the SG&A expenses for the quarter ended March 31, 2006 by
approximately $368,000. The majority of the remaining change in SG&A during the
quarter ended March 31, 2006, as compared to the quarter ended March 31, 2005,
was a result of executive bonuses expensed during the first quarter of 2006.
13
OTHER INCOME
Other income for the quarter ended March 31, 2006 was $41,000, as compared to
$18,000 for the quarter ended March 31, 2005. For the quarter ended March 31,
2005, the Company realized gains on sales of marketable securities totaling
$11,000. During the quarters ended March 31, 2006 and 2005, the Company earned
net interest income of $41,000 and $7,000, respectively.
PROVISION FOR TAXES
The tax provision for the quarter ended March 31, 2006 was $320,000, as compared
to a tax provision of $29,000 for the quarter ended March 31, 2005. The tax
rates in both periods were affected by certain state and local taxes which are
based on net worth. In addition, the quarter ended March 31, 2005 income tax
expense was reduced by a reduction of a deferred tax valuation allowance. The
entire deferred tax valuation allowance was reversed during the third quarter of
2005 after management determined it was no longer needed.
NET INCOME
As a result of all the items mentioned above, the Company reported net income of
$346,000, or $.06 per share-basic and diluted, for the quarter ended March 31,
2006, as compared to reported net income of $155,000, or $.03 per share-basic
and diluted, for the quarter ended March 31, 2005. Included in the net income
for the quarter ended March 31, 2006 are net expenses of approximately $199,000,
related to exercising and vesting of stock options during the period, which
resulted in a reduction in the calculation of both basic and diluted earnings
per share of approximately $.04 per share. Excluding the effect of stock
options, net income would have been $545,000, or $.10 per share, for the quarter
ended March 31, 2006.
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 of retention, which is received
as the project nears completion, are collectible based on their respective
contract terms. The Company has historically relied primarily on internally
generated funds and bank borrowings to finance its operations. The Company has
not relied on bank borrowings to finance its operation since July 2003. The
Company has a line of credit which is subject to certain covenants.
As of March 31, 2006, total cash was $6,724,000, a $4,709,000 increase over the
$2,015,000 reported as of March 31, 2005.
14
CASH PROVIDED BY (USED IN) OPERATIONS
Net cash provided by operations was $1,395,000 for the quarter ended March 31,
2006. Net cash used in operations was $919,000 for the quarter ended March 31,
2005.
The net cash provided by operations for the quarter ended March 31, 2006 was a
result of the Company's earnings as well as the collection of the second
installment on the Co-Op City litigation settlement.
The net cash used in operating activities for the quarter ended March 31, 2005,
was a result of the Company's increased revenues causing an increase in accounts
and retainage receivable, while the outstanding payables did not increase at the
same rate.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities was $27,000 and $26,000 during the
quarters ended March 31, 2006 and 2005, respectively.
The Company received proceeds on the sale of marketable securities of $104,000
during the quarter ended March 31, 2005. The Company purchased marketable
securities of $5,000 and $107,000 during the quarters ended March 31, 2006 and
2005, respectively. In addition, the Company purchased property and equipment
totaling $22,000 and $23,000 during the quarters ended March 31, 2006 and 2005,
respectively.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities during the quarter ended March 31,
2006 was $157,000. During the quarter, two company executives and a former
director exercised 195,000 options at an exercise price of $1.66 each,
contributing cash proceeds of $324,000 to the Company.
Prior to adopting SFAS 123-R the Company presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Statement of
Cash Flows. SFAS 123-R requires cash flows resulting from excess tax benefits to
be classified as a part of cash flows from financing activities. Excess tax
benefits represent tax benefits related to exercised options in excess of the
associated deferred tax asset for such options. As a result of adopting SFAS
123-R, $167,000 of excess tax benefits for the quarter ended March 31, 2006 have
been classified as an operating cash outflow and a financing cash inflow.
No net cash was provided by financing activities during the quarter ended March
31, 2005.
15
CREDIT FACILITY
The Company has a line of credit facility from Bank of America, N.A., which
provides borrowings for working capital purposes up to $2,000,000. This facility
expires on April 1, 2007, is secured by the Company's assets and guaranteed by
the Company's subsidiary, KSW Mechanical Services, Inc.
There were no borrowings against this line of credit during 2006.
Advances bear interest, based on the Company's option, at either the bank's
prime lending rate plus one percent per annum (8.75% at March 31, 2006) or the
London Interbank Offered Rate ("LIBOR") plus two and one-half percent per annum
(7.32% at March 31, 2006).
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 on April 1, 2007.
The Company currently has no significant capital expenditure commitments.
SURETY
On some 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 surety provides bonding solely at its discretion, and the
arrangement with the surety is an at-will arrangement subject to termination.
During the fourth quarter of 2005, the Company entered into a new surety
relationship with Chubb Group of Insurance Companies to provide surety bonds on
the Company's projects. The surety has provided the Company with a $90,000,000
work program, subject to adjustments for trade management contracts and
non-bonded contracts.
The Company's bonding limits have been 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 March 31,
2006, approximately $28,000,000 of the Company's backlog of $84,000,000 was
bonded.
16
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is primarily recognized on the "percentage of completion" method for
reporting revenue on long-term construction contracts not yet completed,
measured by the percentage of total costs incurred-to-date to estimated total
costs at completion for each contract. This method is utilized because
management considers the cost-to-cost method the best method available to
measure progress on these contracts. Revenues and estimated total costs at
completion are adjusted monthly as additional information becomes available and
based upon the Company's internal tracking systems. Because of the inherent
uncertainties in estimating revenue and costs, it is reasonably possible that
the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those other
indirect costs related to contract performance including, but not limited to,
indirect labor, subcontract costs and supplies. General and administrative costs
are charged to expense as incurred.
The Company has contracts that may extend over more than one year, therefore,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which the facts, which require the
revisions, become known.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
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.
STOCK - BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the fair
value recognition provisions of SFAS 123-R. The Company uses the Black-Scholes
option - pricing model, which requires the input of subjective assumptions.
These assumptions include estimating the length of time employees will retain
17
their vested stock options before exercising them ("expected term"), the
estimated volatility of the Company's common stock price over the expected term
and the number of options that will ultimately not complete their vesting
requirements ("forfeitures"). Changes in the subjective assumptions can
materially affect the estimate of fair value stock - based compensation and
consequently, the related amount recognized on the consolidated income
statements.
See Note (2) to the consolidated financial statements for more detailed
discussion of the effects of SFAS 123-R on our results of operations and
financial condition.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are not historical facts and
constitute "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). These forward looking statements
generally can be identified as statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee", "likely", "will"
or other similar words or phrases. Such forward-looking statements concerning
management's expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition, and other similar matters involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of results to differ
materially from any future results, performance or achievements discussed or
implied by such forward-looking statements. This document describes factors that
could cause actual results to differ materially from expectation of the Company.
All written and oral forward-looking statements attributable to the Company or
persons acting on behalf of the Company are qualified in their entirety by such
factors. Such risks, uncertainties, and other important factors include, among
others: inability to obtain bonding, inability to retain senior management, low
labor productivity and shortages of skilled labor, a rise in the price of steel
products, economic downturn, reliance on certain customers, competition,
inflation, the adverse effect of terrorist concerns and activities on public
budgets and insurance costs, the unavailability of private funds for
construction, and other various matters, many of which are beyond the Company's
control and other factors as are described at the end of "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Company's Form 10-K for the fiscal year ended December 31, 2005. Forward-looking
statements speak only as of the date of the document in which they are made. The
Company disclaims any obligation or undertaking to provide any updates or
revisions to any forward-looking statement to reflect any change in the
Company's expectations or any change in events, conditions or circumstances on
which the forward-looking statement is based.
ITEM 3. QUANTITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative instruments.
As of March 31, 2006, the Company has invested $813,000 in marketable
securities.
18
ITEM 4. 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 March 31, 2006. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, our disclosure controls and procedures
were effective as of March 31, 2006.
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 fiscal quarter ended March 31, 2006, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes related to risk factors from those items
previously disclosed in the December 31, 2005 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 11 - Statement regarding Computation of Income per Share
Exhibit 31.1 - Certification of Chief Executive Officer required by
Rule 13a-14(a)
19
Exhibit 31.2 - Certification of Chief Financial Officer required by
Rule 13a-14(a)
Exhibit 32.1 - Certification of Chief Executive Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350
20
SIGNATURE
Pursuant to the requirements 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.
Date: May 12, 2006
/s/Richard W. Lucas
-----------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
21
KSW, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11 Statement Regarding Computation of Income per Share
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. ss.1350
32.2 Certification of Chief Financial Officer required by Rule 13a-14 (b)
and 18 U.S.C. ss.1350
22
