UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 2007
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: 001-32865
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KSW, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3191686
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
37-16 23rd Street, Long Island City, New York 11101
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (718) 361-6500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK NASDAQ GLOBAL MARKET
$.01 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of Exchange Act). 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, 2007 was $40,897,039 (based on a
price of $7.55 per share).
As of March 4, 2008, there were 6,271,924 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
EXPLANATORY NOTE......................................................................2
PART I................................................................................3
ITEM 1. BUSINESS ........................................................3
ITEM 1A. RISK FACTORS ....................................................7
ITEM 1B. UNRESOLVED STAFF COMMENTS .......................................9
ITEM 2. PROPERTIES ......................................................9
ITEM 3. LEGAL PROCEEDINGS ...............................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............9
EXECUTIVE OFFICERS OF THE REGISTRANT ...........................10
PART II..............................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...............11
ITEM 6. SELECTED FINANCIAL DATA.........................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................26
ITEM 9A (T). CONTROLS AND PROCEDURES.........................................26
ITEM 9B. OTHER INFORMATION...............................................28
PART III.............................................................................28
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE..........28
ITEM 11. EXECUTIVE COMPENSATION..........................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE....................................................28
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES..........................29
PART IV..............................................................................29
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES......................29
SIGNATURES...........................................................................31
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", "may",
"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
under "Item 1A - Risk Factors" 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.
There is no assurance that any of the actions, events or results of the
forward-looking statements will occur, or if any of them do, what impact they
will have on our results of operations or financial condition. Because of these
uncertainties, you should not put undue reliance on any forward-looking
statements. Other than as required by applicable law, we disclaim any obligation
to update to announce publicly the result of any revisions to any of the
forward-looking statements to reflect future events or developments.
EXPLANATORY NOTE
During December 2007, the Company determined that it had incorrectly recorded an
expense when stock options that had vested prior to the Company's adoption of
Financial Accounting Standards Board ("FASB") Statement No. 123-R "Share Based
Payment" ("SFAS 123-R") were exercised. The Company incorrectly recorded an
expense for the intrinsic value of these exercised options equal to the
difference between the option exercise price and the quoted market value for the
Company's common stock on each of the exercise dates, resulting in an
understatement of net income. The Company's consolidated statements for the year
ended December 31, 2006 and each quarterly period in that year, and for each of
the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007, as
previously reported will not be amended and should not be relied upon.
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 $3,000,000. 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 Nasdaq Global Market Exchange ("NASDAQ") under the symbol "KSW".
Some of the Company's ongoing projects include: Cardiovascular Center at
New York Presbyterian Hospital, North Shore L.I. Jewish Women's Hospital Make
Ready and new high rise luxury buildings in Manhattan at 206 East 86th Street,
1330 First Avenue, 839 Sixth Avenue, 450 Washington Street, five projects at
Park West Village on Manhattan's upper west side, the hotel/condominium complex
at 123 Washington Street, and the Trump project at 246 Spring Street. The
Company is not currently performing work on projects in the public sector.
The Company's primary strategic objectives are to increase its revenues
and profitability in its present business. The Company may look to expand its
business into new geographic areas in the Northeastern United States or acquire
businesses which would be complementary to its current line of business. The
Company may also pursue acquisitions outside its current lines of business for
greater diversification.
The Company's primary business is providing HVAC and process piping
systems under direct contracts with owners of buildings or subcontracts with
general contractors or construction managers. Historically, some of these
contracts were awarded through competitive bids.
For the past few years, the Company has focused on the favorable New York
City private construction market and has been successful in obtaining projects
from private owners and construction companies by utilizing its value
engineering and trade management skills. Many of these projects are obtained
from repeat customers, who invite the Company to participate in the project
while the project is still in the design phase, or to assist in bringing a
project's budget in line with the customer's requirements.
The Company provides value engineering assistance, whereby the Company uses
its experienced staff to recommend economical changes to streamline HVAC and
process piping systems. These changes reduce costs, but still yield the same
results as the original plans. The Company's ability to provide this service has
become increasingly recognized in the industry and has resulted in the Company's
ability to secure projects without competitive bidding. The Company believes
that this service will provide additional opportunities in the future.
The Company's management pioneered the concept of managing the mechanical
trade portion of large construction projects. On larger complex projects
(generally those having a mechanical portion valued at over $10,000,000), such
as the Mount Sinai Hospital Center for Science and Medicine, where the Company
is currently performing pre-construction services, the
3
Cardiovascular Center at New York Presbyterian Hospital, 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 owners can more
accurately evaluate design alternatives so that the completed construction
documents balance costs and project objectives. As a mechanical trade manager,
the Company 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 that this coordination provides a
significant benefit in keeping a project on schedule and within budget.
As a mechanical trade manager, the Company may subcontract parts of a
large project to different subcontractors, thereby increasing competition on
projects and reducing costs by allowing smaller contractors to compete for the
subcontract work. On some projects, the Company may self-perform a portion of
the work for a fixed price. 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.
On trade management projects, the Company provides a guaranteed maximum
price ("GMP") to its customer for its scope of responsibility. The Company
controls the GMP by obtaining 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 some of the guaranteed work on its own
should bid prices exceed its estimate. These costs are subject to certain risk
factors discussed in "Item 1A - Risk Factors".
While trade management projects provide a net profit margin lower than
that for construction 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. Historically, the Company has obtained 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 governmental agencies. During 2007,
the Company has not bid on public projects, but has obtained projects in the
private sector by working with owners, developers, construction companies and
design professionals on a cooperative basis. The Company's ability to suggest
alternative design concepts has allowed its customers to reduce their cost of
projects. By providing value engineering and trade management services, the
Company has been able to secure contracts without participating in the
competitive bidding process.
4
For all projects, the Company develops 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.
These costs are tracked on a monthly basis. 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.
While the Company is not actively pursuing projects in the public sector at
this time, it 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
$111,300,000 as of December 31, 2007, compared to approximately $110,200,000 as
of December 31, 2006, and approximately $82,200,000 at December 31, 2005. The
Company's backlog at December 31, 2007 includes only the pre-construction
portion of the Mount Sinai Hospital Center for Science and Medicine trade
management contract, where the Company is currently providing value engineering,
estimating, and scheduling services. The Company has not formulated a GMP nor
entered into a contract to construct this project, which is currently valued at
approximately $58,000,000.
The Company believes that approximately $28,000,000 of the existing
backlog at December 31, 2007 is not reasonably expected to be completed during
the next fiscal year. 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 awarded and performed in the same year. As an example, the $20,000,000
project at 839 Sixth Avenue was awarded in January 2008, and has already
started. The schedule for each project is different and subject to change due to
circumstances outside the control of the Company. Accordingly, it is not
reasonable to assume that the performance of backlog will be evenly distributed
throughout a year. The Company believes that its backlog is firm,
notwithstanding provisions contained in the 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.
The Company is actively seeking new contracts to add to its backlog.
Management believes that its value engineering services will continue to assist
the Company in obtaining new contracts.
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 with such companies because of its reputation in the New York
City area and its knowledge of the local labor force and its ability to
5
value engineer projects. There are also many smaller contractors and
subcontractors in the New York City metropolitan area, who may also compete for
work. The Company believes there are barriers to entry for smaller competitors,
including bonding requirements, relationships with subcontractors, suppliers and
union workers.
Regulations. The construction industry is subject to various governmental
regulations from local, state and federal authorities, such as Occupational
Safety and Health Administration ("OSHA") and environmental agencies. The
Company is also governed by state and federal requirements regarding the
handling and disposal of lead paint, but the impact cannot be predicted at this
time because 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.
Employees. At December 31, 2007, the Company had approximately 45 full-
time office and project support employees. The Company also employs field
employees, who are union workers. The number of field 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 to trust
funds 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 office employees, not subject to collective
bargaining agreements, with medical insurance benefits and a discretionary
matching 401(k) plan. In 2007, the Company matched 25% of its employees' yearly
401(k) contributions.
Dependence Upon Customers. At any given time, a material portion of the
Company's contract revenue may be generated from a single customer through one
large contract or various contracts. 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, 2007, work under contracts with Bovis Lend
Lease LMB, Inc., Newmark Construction Services, LLC and related entities, and
Plaza Construction Corporation constituted 46%, 20% and 13% of the Company's
total revenues, respectively.
For the year ended December 31, 2006, work under contracts with Bovis Lend
Lease LMB, Inc., Newmark Construction Services, LLC, Glenwood Management
Corporation and related entities, and Skanska USA Building Inc. constituted 40%,
18%, 10% and 10% of the Company's total revenues, respectively.
For the year ended December 31, 2005, work under contracts with Bovis Lend
Lease LMB, Inc., Newmark Construction Services, LLC and related entities,
Skanska USA Building
6
Inc., M.D. Carlisle Construction Corp., and Plaza Construction Corporation
constituted 31%, 11%, 11%, 11% and 10% of the Company's total revenues,
respectively.
Historically, a portion of the Company's revenue has been generated from
contracts with federal, state and local governmental authorities. The Company's
current revenue and backlog does not include any contracts directly with these
governmental authorities.
As is customary and required in the industry, the Company is often
requested 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 approximately
1% of the amount of the contract to be performed. Since inception, the Company
has neither 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, 2007, approximately $43,400,000 of the Company's
backlog was bonded.
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 2007, 2006 and 2005, and anticipates no research and
development expenses in 2008.
ITEM 1A. RISK FACTORS
The Company is subject to a variety of risks, including the risks
described below as well as adverse business conditions. The risks and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties, not known or described below, which have not
been determined to be material may also impair the Company's business
operations. You should carefully consider the risks described below together
with all other information in this report, including information contained in
the "Forward-Looking Statements," "Business", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosure about Market Risk" sections. If any of the following
risks occur, the Company's financial condition and results of operations could
be adversely affected. Such events may cause actual results to differ materially
from expected and historical results, and the trading price of the Company's
stock could decline.
The Company has a written employment agreement with Floyd Warkol, its
Chairman and CEO, which expires on December 31, 2009. The Company has no other
current employment or non-competition agreements with senior management. Because
the Company relies on senior management's relationships with its customers and
in the construction industry in New York City, the failure to retain senior
management would have a material adverse effect on the Company's business.
The Company's continued ability to obtain bonding is critical to its
ability to bid on most public work and on certain private projects. 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
7
surety is an at-will arrangement subject to termination. If the Company is
unable to obtain surety bonds as needed, this could have a material adverse
effect on the Company.
The Company has in the past experienced erosion in gross profit margins
due to lower than anticipated labor productivity and higher labor costs related
to shortages of skilled labor and unforeseen jobsite conditions. There can be no
assurance that these factors will not affect productivity and profitability in
the future.
The Company has in the past experienced significant increases in the cost
of steel piping materials, which is the primary material used by the Company on
projects. Future increases may impact the Company's profit margins beyond the
Company's estimates.
An economic downturn, specifically in the New York City metropolitan area,
could result in a decrease in construction spending in the private and public
sectors in the market the Company serves, which could reduce the Company's
revenues.
The Company relies on a relatively small number of customers for a
significant share of its revenues. The loss of business from any of these
significant customers could have a material adverse effect on the Company's
business and its operating results.
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.
During the construction period, owners or general contractors may require
the Company to 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. The failure of an owner or general contractor
to issue change orders or make payments could delay receipt of receivables and
require litigation to collect sums due the Company.
Slow receipt of collections may also result from financial difficulties of
a general contractor or an owner. The Company's inability to collect its
contract balance on a project could have a material adverse effect on its
operating results.
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.
Failure of the Company's subcontractors or providers of equipment to
perform as anticipated could have a negative impact on the Company's results.
The Company subcontracts a portion of its contracts to specialty subcontractors,
and the Company is ultimately responsible for the successful completion of their
work. The Company also utilizes equipment manufacturers and suppliers which are
responsible for delivering specified products on a timely basis. Although the
Company utilizes highly respected companies and sometime requires performance
bonds, there is no guarantee that the Company will not incur a material loss due
to performance issues related to these arrangements.
8
Accounting for contract related revenues and costs as well as other cost
items requires management to make a variety of significant estimates and
assumptions. Although the Company believes it has sufficient experience and
processes to enable it to formulate appropriate assumptions and produce reliable
estimates, these assumptions and estimates may change significantly in the
future, and these changes could have a material adverse effect on the Company's
financial position and results of operations.
The Company's success depends on attracting and retaining qualified
personnel in a competitive environment. The single largest factor in the
Company's ability to profitably execute its work is its ability to attract,
develop and retain qualified personnel. The Company's success in attracting
qualified personnel is dependent on the resources available, the impact of
general economic conditions on the labor supply, and the ability to provide
competitive compensation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
Pursuant to a Modification of Lease Agreement, dated as of May 1, 1998,
the Company leases office and warehouse space in Long Island City, New York,
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 in real estate taxes over
base year taxes, maintenance, insurance and utilities. The Company has exercised
a three-year option extending the lease through June 2009.
The Company also occupies 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 occupies 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 tenancy is
on a triple net basis. The Company pays rent of approximately $8,500 per month,
plus taxes (currently approximately $2,000 per month), maintenance, insurance
and utilities. The written lease for this property expired on December 31, 2002,
and the property is currently being occupied on a month-to-month basis.
The properties are well maintained, adequate and suitable for their
purposes.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceedings to which the Company is a
party.
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 2007.
9
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, 2007 were as follows:
Name Age Title
- ---- --- -----
Floyd Warkol 60 Chief Executive Officer, President, Secretary and
Chairman of the Board of Directors
Richard W. Lucas 41 Chief Financial Officer
James F. Oliviero 60 General Counsel
Vincent Terraferma 57 Chief Operating Officer of KSW Mechanical
Mr. Floyd Warkol has been employed as Chairman of the Board since
December 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 employed as the Chief Financial Officer of
the Company and KSW Mechanical since August 2002. Since February 2006, Mr. Lucas
has been a Director of KSW Mechanical.
Mr. James F. Oliviero has been 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.
Mr. Vincent Terraferma has been employed as Chief Operating Officer of KSW
Mechanical since January 2003. From December 1995 to December 2002, he was KSW
Mechanical's Executive Vice President.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Since November 2007, the Company's Common Stock is quoted on the NASDAQ
Stock Market LLC's Global Market under the symbol "KSW". Prior to November 2007,
the Company's Common Stock was quoted on the American Stock Exchange.
At March 4, 2008, the Company had 6,271,924 shares of KSW Common Stock
issued and outstanding held by approximately 3,200 shareholders of record based
on shareholder lists provided by the Company's stock transfer agent and
Broadridge Financial Solutions, Inc.
On May 8, 2007, the Company's Board of Directors declared a 5% stock
dividend pursuant to which 293,265 additional shares were issued on June 11,
2007 to shareholders of record as of May 24, 2007. Cash was paid in lieu of
issuing fractional shares based on the last sales price of the Company's stock
on the record date. All references in the accompanying consolidated financial
statements to the weighted average number of common shares outstanding and per
share amounts are based on the retroactive effect of the stock dividend.
On May 8, 2006, the Company's Board of Directors declared a special cash
dividend of $.06 per share to shareholders of record as of May 24, 2006. The
aggregate amount of the dividend was $341,000, and this dividend was paid on
June 15, 2006. The Company did not pay dividends in 2005.
The following information on high and low bid data is provided for 2007
and 2006 based on intraday quotations:
2007 2006
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First ..................... $ 7.69 $ 6.01 $ 4.06 $ 2.80
Second .................... $ 8.13 $ 6.23 $ 6.12 $ 3.40
Third ..................... $ 8.65 $ 6.25 $ 4.60 $ 3.66
Fourth .................... $ 7.40 $ 5.76 $ 7.40 $ 3.80
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 year ended December 31, 2007 is derived
from and qualified in its entirety to the consolidated financial statements for
the year audited by J.H. Cohn LLP. The following information for the years ended
December 31, 2006, 2005, 2004 and 2003 is derived from and qualified in its
entirety to the consolidated financial statements for those years audited by
Marden, Harrison & Kreuter CPAs P.C. Each of the previously mentioned
11
consolidated financial statements is included herein or in prior years' annual
reports on Form 10- K, and should be read in conjunction with such financial
information.
As Of And For The Year Ended December 31,
-----------------------------------------
(Dollars in thousands, except share and per share amounts)
2007 2006 2005 2004 2003
(RESTATED)
Income Statement:
Revenues ................................. $77,266 $77,128 $53,378 $26,281 $35,002
Costs of revenues ........................ 66,771 67,155 46,897 24,139 31,148
Gross profit ............................. 10,495 9,973 6,481 2,142 3,854
Selling, general and
administrative expenses ................ 4,427 4,511(a) 3,657 3,452 3,010
Operating income (loss) .................. 6,068 5,462 2,824 (1,310) 844
Other income (expense) ................... 682 361 39 52 (59)
Income (loss) before provision
(benefit) for income taxes ............. 6,750 5,823 2,863 (1,258) 785
Provision (benefit) for income
taxes .................................. 3,088 2,715(a) 152(b) 22 (30)
Net income (loss) ........................ 3,662 3,108 2,711 (1,280) 815
Net income (loss) per share -
Basic .................................. .59 .52 .47 (.22) .14
Diluted ................................ .59 .51 .47 (.22) .14
Number of shares used in
earnings per share
computation :
Basic .................................. 6,162,034 5,950,445 5,743,827 5,743,827 5,743,827
Diluted ................................ 6,242,607 6,077,127 5,743,827 5,743,827 5,743,827
Dividends per share ...................... - .06 - - -
Balance Sheet Data:
Total assets ............................. $40,937 $35,545 $22,710 $13,913 $16,834
Working capital .......................... 16,822 12,361 8,056 3,181 4,496
Current liabilities ...................... 23,548 22,422 13,192 7,127 8,785
Long-term liabilities .................... - - - - -
Stockholders' equity ..................... 17,389 13,123 9,518 6,786 8,049
Other Data:
Current ratio ............................ 1.71:1 1.55:1 1.61:1 1.45:1 1.51:1
(a) During December 2007, the Company determined that it had incorrectly
recorded an expense when stock options that had vested prior to the Company's
adoption of SFAS 123-R were exercised. The Company incorrectly recorded an
expense for the intrinsic value of these exercised options equal to the
difference between the option exercise price and the quoted market value for the
Company's common stock on each of the exercise dates, resulting in an
understatement of net income. The year ended December 31, 2006 amounts above
have been restated to reflect a $636 reduction of selling, general and
administrative expenses and a $293 increase in income tax expense.
(b) During the year ended December 31, 2005, the outstanding deferred tax
valuation allowance was reversed, after the Company's management re-evaluated
the likelihood that these assets would be realized in their entirety, and
concluded the valuation allowance was not required.
12
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, 2007, 2006 and 2005 including:
o factors that 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 Company's
consolidated financial statements and the notes thereto for the years ended
2007, 2006 and 2005 included in this report.
During December 2007, the Company determined that it had incorrectly
recorded an expense when stock options that had vested prior to the Company's
adoption of SFAS 123-R were exercised. The Company incorrectly recorded an
expense for the intrinsic value of these exercised options equal to the
difference between the option exercise price and the quoted market value for the
Company's common stock on each of the exercise dates, resulting in an
understatement of net income. The Company's consolidated financial statements
for the year ended December 31, 2006 and each quarterly period in that year, and
for each of the quarters ended March 31, 2007, June 30, 2007 and September 30,
2007, as previously reported will not be amended and should not be relied upon.
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 $3,000,000. Some larger company projects
involve multi-year contracts, which can account for more than 10% of the
Company's revenue in any given year. 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 and negotiated
bidding processes submitted to project owners or construction managers, many
with whom the Company has 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,
subject to the approval of the design professional. This assistance reduces
costs and yields the same results as the original designs. As a result, during
2007, the Company obtained most of its contracts without bidding against its
competitors.
13
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's costs of revenues include field labor, equipment,
material, subcontractor and overhead costs. Overhead costs include project
supervision and drafting salaries, as well as insurance costs. The Company must
control costs of revenues by having the ability to manage material costs,
purchase equipment at or below original estimated amounts and control labor
costs throughout the duration of each project.
For the year ended December 31, 2007, the Company's earnings were affected
by increased gross profit earned from projects, reduced selling, general and
administrative expenses and increased other income.
The gross profit for 2007 was higher than 2006 as a result of the
Company's ability to pick and choose projects and the increased acceptance of
the Company's value engineering services in the market place.
A number of projects experienced general construction delays in the early
stages of construction, which reduced revenues. While the Company is typically
compensated for costs associated with these delays, the effect is to postpone
revenue recognition until a later period.
The Company's selling, general and administrative expenses were reduced as
a result of the allocation of overhead costs to trade management contracts.
The Company's other income was higher as a result of interest income
earned on a higher cash position and realized gains on the sales of marketable
securities.
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
most materials throughout the project on a price in effect basis. The Company
includes allowances in its estimates for future escalations in steel prices. The
Company has an agreement with a supplier of piping materials, whereby the
Company has committed to purchase certain piping products normally used in its
operations at set prices through October 2008. 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.
For the year ended December 31, 2006, the Company's earnings were affected
by increased volume, an increase in corporate income tax expense and the
reversal of the allowance for doubtful accounts.
The Company's revenues for 2006 increased 44.5%, as a result of the
Company's performance on its backlog as of December 31, 2005, as well as
contracts received during 2006.
The corporate income tax expense for the year ended December 31, 2006 was
higher than 2005, due to increased earnings.
14
During the fourth quarter of 2006, the Company reversed the allowance for
doubtful accounts, which increased net income by approximately $107,000.
For the year ended December 31, 2005, the Company's earnings increased as
a result of increased volume with primarily the same overhead structure as in
the prior year, the settlement of the Co-Op City litigation, and the reversal of
the deferred tax asset valuation allowance.
Even though the Company's revenues increased 103.1%, during 2005, the
Company was not required to materially increase office overhead to support this
increase in revenues.
On October 17, 2005, KSW Mechanical Services, Inc., a wholly-owned
subsidiary of the Company, entered into a Stipulation of Settlement settling a
lawsuit commenced in 1999, entitled KSW Mechanical Services, Inc. v. NAB
Construction Corp. et. al. ("the Lawsuit"), which had been pending in the
Supreme Court of the State of New York, County of Queens. KSW Mechanical
Services, Inc. sued the general contractor and its bonding company on the Co-Op
City Project to recover its accounts receivable applicable to the base contract
of approximately $437,000, unpaid final retainage billings of approximately
$1,500,000, plus a claim for unanticipated costs incurred through 1998 in the
sum, as presented at trial, of $2,303,727. The Defendant asserted counterclaims,
as presented at trial, totaling $1,440,905, and a claim for $3,000,000 based on
the argument that KSW Mechanical's mechanic's lien was willfully overstated.
The Lawsuit was tried for 47 days and further trial proceedings were
scheduled. Pursuant to the Stipulation of Settlement, all claims and
counterclaims were discontinued, and the Company received cash payments totaling
$2,900,000, with $1,200,000 paid as of December 15, 2005, $850,000 paid by March
31, 2006, and $850,000 paid by September 30, 2006. During the quarter ended
December 31, 2005, the Company recognized a pretax net gain, after settlement
expenses, of approximately $888,000, related to this matter.
At December 31, 2004, the outstanding deferred tax asset valuation
allowance was $1,220,000. During the year ended December 31, 2005, the Company
generated profits which reduced this deferred tax valuation allowance and the
Company reversed the outstanding deferred tax valuation allowance. This
allowance was reversed after the Company's management re-evaluated the
likelihood that those assets could be used in their entirety and concluded that
the valuation allowance was not required.
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 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 could pursue. The Company must also continue to obtain surety
bonds, when required on projects. The Company's management has experience in
expanding into new geographic areas; however, to date the Company has conducted
its operations primarily in the New York metropolitan area.
15
Results of Operations
The following table sets forth the amounts of and as a percentage of total
revenues, certain items of the Company's consolidated statement of operations
for the periods indicated (dollar amounts in thousands):
2007 2006 2005
---- ---- ----
RESTATED
--------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Revenues ................................... $ 77,266 100.0 $ 77,128 100.0 $ 53,378 100.0
Costs of revenues .......................... 66,771 86.4 67,155 87.1 46,897 87.9
-------- ----- -------- ----- -------- -----
Gross profit ............................... 10,495 13.6 9,973 12.9 6,481 12.1
Selling, general and
administrative expenses .................. 4,427 5.7 4,511 5.9 3,657 6.8
-------- ----- -------- ----- -------- -----
Operating income ........................... 6,068 7.9 5,462 7.0 2,824 5.3
Other income ............................... 682 .8 361 .5 39 .1
-------- ----- -------- ----- -------- -----
Income before provision for
income taxes ............................... 6,750 8.7 5,823 7.5 2,863 5.4
Provision for income taxes ................. 3,088 4.0 2,715 3.5 152 .3
-------- ----- -------- ----- -------- -----
Net income ................................. $ 3,662 4.7 $ 3,108 4.0 $ 2,711 5.1
======== ===== ======== ===== ======== =====
Year Ended December 31, 2007 compared to Year Ended December 31, 2006
Revenues
- --------
Revenues increased $138,000, or .2%, to $77,266,000 for the year ended
December 31, 2007, as compared to $77,128,000 for the year ended December 31,
2006. Revenues for the fourth quarter of 2007 were $18,928,000, a decrease of
$663,000, or 3.4%, as compared to $19,591,000 in the fourth quarter of 2006.
During 2007, a number of projects experienced general construction delays
in the early stages of construction, which reduced revenues for the year.
At December 31, 2007, the Company had backlog of approximately
$111,300,000. Approximately $28,000,000 of the December 31, 2007 backlog is not
reasonably expected to be completed in the next fiscal year. New contracts
secured by the Company during 2008 will also increase 2008 revenues. The amount
of backlog not reasonably expected to be completed in the next fiscal year is
subject to various uncertainties and risks. The Company is actively seeking new
projects to add to its backlog.
During the year ended December 31, 2007, the Company had earned 46%, 20%,
and 13% of revenues, respectively, 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.
16
Costs of Revenues
- -----------------
Costs of revenues decreased by $384,000, or .6%, to $66,771,000 for the
year ended December 31, 2007, as compared to $67,155,000 for the year ended
December 31, 2006. Costs of revenues for the fourth quarter of 2007 were
$16,576,000, a decrease of $90,000 as compared to $16,666,000 for the fourth
quarter of 2006. Costs of revenues include subcontractor costs, field labor,
material, equipment and overhead expenses. Overhead costs include project
supervision and drafting salaries as well as insurance costs. Higher revenues
generally require higher expenditures of costs, but high 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 took steps to reduce pricing volatility of
piping materials by entering into agreements to purchase these products at fixed
prices.
Gross Profit
- ------------
For the year ended December 31, 2007, the Company had a gross profit of
$10,495,000 or 13.6% of revenues, as compared to $9,973,000 or 12.9% of revenues
for the year ended December 31, 2006. In the fourth quarter of 2007, the gross
profit was $2,352,000 or 12.4% of revenues, as compared to $2,925,000 or 14.9%
of revenues for the fourth quarter of 2006. The change in dollar amount in gross
profits was primarily a result of the mix of contracts the Company has performed
on during the periods.
Selling, General and Administrative Expenses
- --------------------------------------------
For the year ended December 31, 2007, selling, general and administrative
("S,G&A") expenses decreased $84,000, or 1.9%, to $4,427,000, as compared to
$4,511,000 for the year ended December 31, 2006. In the fourth quarter of 2007,
S,G&A expenses were $890,000, a decrease of $104,000, as compared to $994,000
for the fourth quarter of 2006.
For the above yearly and quarterly periods, a portion of these changes
were a result of the professional fees and employment costs. Professional fees,
related to the Company's public filings with the Securities and Exchange
Commission, together with American Stock Exchange fees decreased approximately
$175,000 during the year ended December 31, 2007. In addition, during the fourth
quarter of 2006, the Company reversed the allowance for doubtful accounts
totaling $200,000, which reduced S,G&A expenses.
The remaining changes in S,G&A expenses were primarily a result of
decreases in employment costs and office expenses related to the allocation of
overhead costs to trade management contracts.
17
Other Income
- ------------
Other income for the year ended December 31, 2007 increased $321,000 or
88.9%, to $682,000, as compared to other income of $361,000 for the year ended
December 31, 2006. This change in other income was primarily a result of the
Company's ability to earn interest income on its increased cash position and
gains on sales of marketable securities. Net interest income for the year ended
December 31, 2007 was $569,000, as compared to $317,000 for the year ended
December 31, 2006. During the years ended December 31, 2007 and 2006, the
Company realized gains on the sales of marketable securities totaling $113,000
and $44,000, respectively.
Provision for Income Taxes
- --------------------------
The income tax expense for the year ended December 31, 2007 was
$3,088,000, or 45.7% of income before taxes compared to $2,715,000, or 46.6% of
income before taxes for the year ended December 31, 2006.
Net income
- ----------
As a result of all the items above, the Company reported net income of
$3,662,000, or $.59 per share-basic and diluted, for the year ended December 31,
2007.
As a result of all the items above, the Company reported net income of
$3,108,000, or $.52 per share-basic and $.51 per share-diluted, for the year
ended December 31, 2006.
During the fourth quarter of 2006, the Company reversed the allowance for
doubtful accounts, which increased net income by approximately $107,000 or $.02
per share-basic and diluted.
Year Ended December 31, 2006 compared to Year Ended December 31, 2005
Revenues
- --------
Revenues increased $23,750,000, or 44.5%, to $77,128,000 for the year
ended December 31, 2006, as compared to $53,378,000 for the year ended December
31, 2005. Revenues for the fourth quarter of 2006 were $19,591,000, an increase
of $2,490,000, or 14.6%, as compared to $17,101,000 in the fourth quarter of
2005.
These increases in revenues were a result of the Company's performance on
its backlog of work as of December 31, 2005, as well as work obtained during the
period.
During the year ended December 31, 2006, the Company had earned 40%, 18%,
10% and 10% of revenues, respectively, from its four 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.
18
Costs of Revenues
- -----------------
Costs of revenues increased by $20,258,000, or 43.2%, to $67,155,000 for
the year ended December 31, 2006, as compared to $46,897,000 for the year ended
December 31, 2005. Costs of revenues for the fourth quarter of 2006 were
$16,666,000, an increase of $2,259,000 as compared to $14,407,000 for the fourth
quarter of 2005. Costs of revenues include subcontractor costs, field labor,
material, equipment and overhead expenses. Overhead costs include project
supervision and drafting salaries as well as insurance costs. The increase in
costs of revenues corresponded to the increase in revenues for the applicable
periods. Since higher revenues generally require higher expenditures of costs,
the increased revenues 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 took
steps to reduce pricing volatility of piping materials by entering into
agreements to purchase these products at fixed prices.
Gross Profit
- ------------
For the year ended December 31, 2006, the Company had a gross profit of
$9,973,000 or 12.9% of revenues, as compared to $6,481,000 or 12.1% of revenues
for the year ended December 31, 2005. In the fourth quarter of 2006, the gross
profit was $2,925,000 or 14.9% of revenues, as compared to $2,694,000 or 15.8%
of revenues for the fourth quarter of 2005. The increase dollar amount in gross
profit was primarily a result of the overall increase in revenues. During the
fourth quarter of 2005, the gross profit included an $888,000 gain on the
settlement of the Co-Op City project claim.
Selling, General and Administrative Expenses
- --------------------------------------------
For the year ended December 31, 2006, selling, general and administrative
("S,G&A") expenses increased $854,000, or 23.4%, to $4,511,000, as compared to
$3,657,000 for the year ended December 31, 2005. In the fourth quarter of 2006,
S,G&A expenses were $994,000, an increase of $168,000, as compared to $826,000
for the fourth quarter of 2005.
For the above yearly and quarterly periods, a portion of these changes
were a result of professional fees and employment costs. Professional fees,
related to the Company's public filings with the Securities and Exchange
Commission, together with American Stock Exchange fees increased approximately
$130,000 during the year ended December 31, 2006. In addition, during the fourth
quarter of 2006, the Company reversed the allowance for doubtful accounts
totaling $200,000, which reduced S,G&A expenses.
The remaining changes in S,G&A expenses were primarily a result of
increases in employment costs and office expenses. During the latter half of
2005, the Company's Chief Executive Officer returned to a five-day work week,
and additional office staff were hired, contributing to the increases in 2006.
19
Other Income
- ------------
Other income for the year ended December 31, 2006 increased $322,000 or
825.6%, to $361,000, as compared to other income of $39,000 for the year ended
December 31, 2005. This change in other income was primarily a result of the
Company's ability to earn interest income on its increased cash position. Net
interest income for the year ended December 31, 2006 was $317,000, as compared
to $24,000 for the year ended December 31, 2005. During the years ended December
31, 2006 and 2005, the Company realized gains on the sales of marketable
securities totaling $44,000 and $15,000, respectively.
Provision for Income Taxes
- --------------------------
The income tax expense for the year ended December 31, 2006 was
$2,715,000, or 46.6% of income before taxes compared to $152,000, or 5.3% of
income before taxes for the year ended December 31, 2005. For the year ended
December 31, 2005, the provision for income taxes differs from the Company's
effective income tax rate primarily due to the reversal of a deferred income tax
valuation allowance.
Net income
- ----------
As a result of all the items above, the Company reported net income of
$3,108,000, or $.52 per share-basic and $.51 per share-diluted, for the year
ended December 31, 2006. During the fourth quarter of 2006, the Company reversed
the allowance for doubtful accounts, which increased net income by approximately
$107,000 or $.02 per share-basic and diluted.
The Company reported net income of $2,711,000 or $.47 per share-basic and
diluted for the year ended December 31, 2005. Excluding the effect of the one
time adjustments for the Co-Op City litigation and the reversal of the deferred
tax valuation allowance, net income for 2005 would have been $1,473,000 or $.26
per share-basic and diluted.
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 the
respective contract terms. The Company has historically relied primarily on
internally generated funds. The Company has not relied on bank borrowings to
finance its operations since July 2003. The Company has a line of credit, which
is subject to certain conditions. See discussion of Credit Facility below.
As of December 31, 2007, the Company's cash and cash equivalents balances
totaled $16,232,000, an increase of $2,147,000 from the $14,085,000 reported as
of December 31, 2006.
In addition, at December 31, 2007, the Company held marketable equity
securities and mutual funds totaling $1,892,000, an increase from the $663,000
balance at December 31, 2006.
20
Net cash provided by Operating Activities
- -----------------------------------------
Net cash provided by operating activities was $2,804,000, $8,510,000 and
$2,325,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The cash provided by operations was primarily due to operating income provided
by operations, and during 2007, it was reduced by corporate income taxes paid
totaling $3,922,000. Cash provided by operations for the years ended December
31, 2006 and 2005 include receipts on the Co-Op City litigation settlement of
$1,700,000 in 2006 and $1,200,000 in 2005.
Cash used in Investing Activities
- ---------------------------------
Net cash used in investing activities was $1,322,000 in 2007, $51,000 in
2006, and $86,000 in 2005. The Company purchased marketable securities of
$1,737,000, $12,000, $163,000 during 2007, 2006 and 2005, respectively. The
Company received proceeds on the sales of marketable securities of $489,000,
$171,000, and $153,000 during 2007, 2006 and 2005, respectively. In addition,
the Company purchased property and equipment totaling $74,000, $210,000, and
$76,000 during 2007, 2006 and 2005, respectively.
Cash provided by Financing Activities
- -------------------------------------
During 2007, net cash provided by financing activities was $665,000.
During 2006, net cash provided by financing activities was $427,000. During 2005
no cash was provided by or used in financing activities.
During the year ended December 31, 2007, eight individuals exercised
options to purchase an aggregate of 192,916 shares contributing cash proceeds of
$309,000 to the Company.
During the year ended December 31, 2006, six individuals exercised options
to purchase an aggregate of 287,832 shares contributing cash proceeds of
$475,000 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, $356,000 and $293,000 of excess tax benefits for the years
ended December 31, 2007 and 2006, respectively, have been classified as an
operating cash outflow and a financing cash inflow.
On May 8, 2006, the Company's Board of Directors declared a special cash
dividend of $.06 per share to shareholders of record as of May 24, 2006. The
aggregate amount of the dividend was $341,000, and this dividend was paid on
June 15, 2006.
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 is secured by the
21
Company's assets and is guaranteed by the Company's subsidiary, KSW Mechanical
Services, Inc. On January 28, 2008, the Company's bank extended the working
capital credit facility through April 1, 2009. There have been no borrowings
against this facility during 2007 and 2006.
Advances bear interest, based on the Company's option, at either the
bank's prime lending rate plus one percent per annum (8.25% at December 31,
2007), or the London Interbank Offered Rate ("LIBOR") plus two and one-half
percent per annum (7.35% at December 31, 2007).
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.
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 available, 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.
As of December 31, 2007, approximately $43,400,000 of the Company's
backlog of approximately $111,300,000 was bonded. The Company provides its
surety with a detailed schedule of backlog on a quarterly basis. The Company's
bonding limits are sufficient based on the Company's revenue, volume and size of
the Company's bonded contracts.
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 consolidated 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
22
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
The Company continually evaluates the accounting policies and estimates it
uses to prepare the consolidated financial statements. In general, management's
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
The Company believes the following accounting policies represent critical
accounting policies. Critical accounting policies are those that are both most
important to the portrayal of a company's financial condition and results and
require management's most difficult, subjective, or complex judgment, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. We discuss our
significant accounting policies in Note 2 to the Company's consolidated
financial statements, including those that do not require management to make
difficult, subjective, or complex judgments or estimates.
Accounting for revenue recognition for construction contracts
- -------------------------------------------------------------
The Company recognizes revenue for long-term construction contracts not
yet completed using the percentage of completion method, measured by the
percentage of total costs incurred to date as compared to total estimated costs
at the completion of each contract. When the Company bids on 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 help
upgrade the anticipated total costs at completion, based on facts and
circumstances known at the time. Any revisions 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 receives change orders 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.
Accounts and retainage receivable
- ---------------------------------
Judgment is required to estimate the collectibility of accounts and
retainage receivable. The Company has in the past established 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.
23
Delinquent receivables are written-off based on individual credit evaluation and
specific circumstances of the customer.
During the years ended December 31, 2007 and 2006, the Company has not
written off any receivables and therefore has not recorded an allowance for
uncollectible trade accounts and retainage receivable at December 31, 2007 and
2006.
Accounting for income taxes
- ---------------------------
Judgment is required in developing the Company's provision for income
taxes, including the determination of deferred tax assets and valuation
allowances that might be required against the deferred tax assets and
liabilities. The Company's consolidated balance sheets at December 31, 2007 and
2006 include deferred tax assets totaling $311,000 and $505,000, respectively.
Accounting for share based compensation
- ---------------------------------------
Since January 1, 2006, the Company accounts for share 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 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 share-based
compensation and the related amount recognized in the consolidated income
statements.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 provides
guidance for using fair value to measure assets and liabilities. It also
responds to investors' requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. SFAS 157 applies whenever other standards require (or permit) assets
or liabilities to be measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The adoption of SFAS
157 is not expected to have a material impact on the Company's consolidated
results of operations and financial condition.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
159 is effective for financial statements issued beginning with the first
quarter of 2008. The adoption of SFAS 159 is not expected to have a material
impact on the Company's consolidated results of operations and financial
conditions.
24
In December 2007, the FASB issued Statement No. 141 (revised 2007),
"Business Combinations" ("SFAS 141-R"). SFAS 141-R changes the accounting for
acquisitions specifically eliminating the step acquisition model, changing the
recognition of contingent consideration from being recognized when it is
probable to being recognized at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisition can be recognized. The standard is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the accounting for
acquisitions that are made after adoption.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51"
("SFAS 160"). This statement is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited. This statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the Company's equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the consolidated income
statement. It also amends certain of ARB No. 51's consolidation procedures for
consistency with the requirements of SFAS 141-R. This statement also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. The Company has not determined the effect, if any, the
adoption of SFAS 160 will have on the Company's consolidated financial position
and results of operations.
CONTRACTUAL OBLIGATIONS
As of December 31, 2007, outstanding contractual obligations are as
follows:
Payments Due by Period
----------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ----------------------- ----- ---------------- --------- --------- -------------
Long term debt $ - $ - $ - $ - $ -
Capital leases - - - - -
Operating leases (a) 299,000 199,000 100,000 - -
Purchase obligations
under construction
contracts - - - - -
Other long-term
obligations - - - - -
--------- --------- --------- ---------- ---------
Total $ 299,000 $ 199,000 $ 100,000 $ - $ -
========= ========= ========= ========== =========
(a) The Company is obligated to pay monthly rental payments of
approximately $16,000 on its lease for office space in Long Island
City, New York. The Company has exercised its option to extend the
lease for the period July 2006 through June 2009.
OFF -BALANCE SHEET ARRANGEMENTS
25
No disclosures are required pursuant to Item 303 (a) (4) of
Regulation S-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative
instruments. As of December 31, 2007, the Company has invested $1,892,000 in
marketable securities.
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 to pages F-1
through F-34 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 (T). CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a- 15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2007. Based on that evaluation, its Chief Executive Officer
and Chief Financial Officer concluded that, due to the material weakness in
internal control over financial reporting as set forth below, the Company's
disclosure controls and procedures were not effective as of December 31, 2007.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANICAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934). Our
internal control over financial reporting is a process designed with the
participation of our Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements for external reporting purposes
in accordance with accounting principles generally accepted in the United States
of America.
Our internal control over financial reporting includes policies and
procedures that: (a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of
assets; (b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and Board of Directors; and (c) provide
reasonable assurance regarding prevention or timely
26
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, our disclosure controls and
procedures may not prevent or detect misstatements. A control system, no matter
how well conceived and operated, can only provide reasonable, not absolute,
assurance that the control system objectives are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.
During December 2007, the Company determined that it had incorrectly
recorded an expense when stock options that had vested prior to the Company's
adoption of accounting standard SFAS 123-R were exercised. The Company
incorrectly recorded an expense for the intrinsic value of these exercised
options equal to the difference between the option exercise price and the quoted
market value for the Company's common stock on each of the exercise dates,
resulting in an understatement of net income for the year ended December 31,
2006 and each quarterly period in that year, and for each of the quarters ended
March 31, 2007, June 30, 2007 and September 30, 2007. As a result, the Company
has restated all prior period financial statements included in this Form 10-K
for the effects of errors in accounting for share based compensation. We have
concluded prior to this correction that the restatement was a material weakness
in internal control over financial reporting.
As of December 31, 2007, our management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this evaluation, management has determined that as of December 31, 2007,
there was a material weakness in our internal control over financial reporting
in that the Company incorrectly recorded stock based compensation expense. In
light of this, management has concluded that, as of December 31, 2007, the
Company did not maintain effective internal control over financial reporting. As
defined by the Public Company Accounting Oversight Board Auditing Standard No.
5, a material weakness is a deficiency or a combination of deficiencies, such
that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
Other than as discussed above, there have been no changes in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
27
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 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 Business Conduct and Ethics (the
"Code of Ethics") that applies to its principal executive officer, principal
financial and accounting officer, directors, officers and employees. 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 Item 11 is
incorporated in its entirety herein by reference to the Company's definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required to be disclosed pursuant to 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, AND DIRECTOR
INDEPENDENCE
a. The information required to be disclosed pursuant to 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.
28
b. Any transaction required to be disclosed under this item must be
approved by the Board of Directors as being in the Company's interest.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be disclosed pursuant to 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. 333-217350), filed with the Commission on
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 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 10-K for the fiscal year ended December 31, 1998
(Commission File No. 001-32865), filed with the Commission on
March 30, 1999).
10.2 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. 001-32865), filed with the Commission on
November 24, 1995).
29
10.3 Employment Agreement, dated September 12, 2005 by and between the
Company, KSW Mechanical Services, Inc. and Floyd Warkol (incorporated
herein by reference to Exhibit 10.20 to the Company's Current Report on
Form 8-K (Commission File No. 001-32865), filed with the Commission on
September 12, 2005).
10.4 Amendatory Employment Agreement, dated as of March 6, 2007, by and
between the Company, KSW Mechanical Services, Inc., and Floyd Warkol
(incorporated herein by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2006, filed
with the Commission on March 14, 2007).
10.5 Line of Credit Agreement Letter, dated March 14, 2006, between KSW, Inc.
and Bank of America, N.A. together with forms of a Line of Credit Note,
Rider to Line of Credit Note, a pledge security agreement and guaranty
(incorporated herein by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended December 3, 2005, filed
with the Commission on March 16, 2006).
10.6 Line of Credit Agreement Letter, dated March 8, 2007, between KSW, Inc.
and Bank of America, N.A. (incorporated herein by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2006, filed with the Commission on March 14, 2007).
10.7 Line of Credit Agreement Letter, dated January 28, 2008, between KSW,
Inc. and Bank of America, N.A.
11 Statement Regarding Computation of Net Earnings Per Share.
21.1 List of Subsidiaries.
23.1 Consent of J.H. Cohn 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.
30
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 5, 2008
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 5, 2008
/s/ Stanley Kreitman
--------------------
Stanley Kreitman
Director
March 5, 2008
/s/ Innis O'Rourke
------------------
Innis O'Rourke
Director
March 5, 2008
/s/ Warren O. Kogan
-------------------
Warren O. Kogan
Director
March 5, 2008
/s/ John A. Cavanagh
--------------------
John A. Cavanagh
Director
March 5, 2008
/s/ Richard W. Lucas
--------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 5, 2008
31
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Reports of Independent Registered Public Accounting Firm F-2-3
Consolidated Financial Statements:
Consolidated Balance Sheets F-4-5
Consolidated Statements of Income F-6
Consolidated Statements of Comprehensive Income F-7
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-9-10
Notes to Consolidated Financial Statements F-11-33
Schedule II- Schedule of Valuation and Qualifying Accounts F-34
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of KSW, Inc. and
Subsidiary as of December 31, 2007 and the related consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
year then ended. Our audit also included the consolidated financial statement
schedule listed in the Index at Item 15. These consolidated financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audit.
We conducted our audit 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 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, 2007, and their results of operations and
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects the information set forth therein.
We have also audited the adjustments described in Note 16 that were applied to
restate the 2006 consolidated financial statements to correct an error. In our
opinion, such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review or apply any procedures to the 2006
consolidated financial statements of the Company other than with respect to the
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2006 consolidated financial statements taken as a whole.
As discussed in Note 8 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
("FASB Statement") No. 123R -- "Share Based Payment".
J.H. Cohn LLP
White Plains, New York
March 5, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of KSW, Inc. and
Subsidiary as of December 31, 2006 and the related consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for each of
the two years in the period ended December 31, 2006. These consolidated
financial statements and schedule 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, 2006, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2006 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
consolidated 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 audits of the basic consolidated financial statements and in our
opinion, is 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 15, 2007, except for Note 17(A), as to which the date is March 6, 2007,
and for Note 17(B), as to which date is March 8, 2007.
F-3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
(in thousands, except share data)
---------------------------------
2006
2007 (RESTATED)
-------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 16,232 $ 14,085
Marketable securities 1,892 663
Accounts receivable 14,133 13,205
Retainage receivable 6,647 5,566
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,107 1,017
Prepaid expenses and other receivables 359 247
-------- --------
Total current assets 40,370 34,783
Property and equipment, net 254 256
Deferred income taxes and other 313 506
-------- --------
Total assets $ 40,937 $ 35,545
======== ========
(continued)
F-4
2006
2007 (RESTATED)
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 14,182 $ 11,960
Retainage payable 3,636 2,798
Accrued payroll and benefits 1,519 932
Accrued expenses 175 296
Billings in excess of costs and estimated earnings on
uncompleted contracts 4,031 4,987
Income taxes payable 5 1,449
-------- --------
Total current liabilities 23,548 22,422
-------- --------
Commitments and contingencies (Note 11)
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, 6,244,324 and 5,758,143 shares issued
and outstanding at 2007 and 2006, respectively 62 58
Additional paid-in capital 13,139 10,547
Retained earnings 4,161 2,420
Accumulated other comprehensive income:
Net unrealized holding gains on available for sale
securities 27 98
-------- --------
Total stockholders' equity 17,389 13,123
-------- --------
Total liabilities and stockholders' equity $ 40,937 $ 35,545
======== ========
See notes to consolidated financial statements.
F-5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except per share data)
--------------------------------------------
2006
2007 (RESTATED) 2005
------------ ------------ ------------
Revenues $ 77,266 $ 77,128 $ 53,378
Costs of revenues 66,771 67,155 46,897
---------- ---------- ----------
Gross profit 10,495 9,973 6,481
Selling, general and administrative expenses 4,427 4,511 3,657
---------- ---------- ----------
Operating income 6,068 5,462 2,824
---------- ---------- ----------
Other income:
Interest income, net 569 317 24
Gain on sales of marketable securities 113 44 15
---------- ---------- ----------
Total other income 682 361 39
---------- ---------- ----------
Income before provision for taxes 6,750 5,823 2,863
Provision for income taxes 3,088 2,715 152
---------- ---------- ----------
Net income $ 3,662 $ 3,108 $ 2,711
========== ========== ==========
Basic earnings per common share $ .59 $ .52 $ .47
========== ========== ==========
Diluted earnings per common share $ .59 $ .51 $ .47
========== ========== ==========
Weighted average common shares outstanding -
Basic 6,162,034 5,950,445 5,743,827
Diluted 6,242,607 6,077,127 5,743,827
Cash dividend declared and paid per share $ - $ .06 $ -
========== ========== ==========
See notes to consolidated financial statements.
F-6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands)
-----------------------------------------------
2006
2007 (RESTATED) 2005
------------ ------------ ------------
Net income $ 3,662 $ 3,108 $ 2,711
---------- ---------- ----------
Other comprehensive income (loss) before tax:
Net unrealized holding gains (losses) arising during
the year (19) 73 55
Less: reclassification adjustment for gains included
in net income (113) (44) (15)
---------- ---------- ----------
Other comprehensive income (loss) before income
tax (benefit) (132) 29 40
Income tax (benefit) related to items of other
comprehensive income (loss) (61) 13 19
---------- ---------- ----------
Other comprehensive income (loss), net of income
tax (benefit) (71) 16 21
---------- ---------- ----------
Total comprehensive income $ 3,591 $ 3,124 $ 2,732
========== ========== ==========
See notes to consolidated financial statements.
F-7
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
-----------------------------------------------
Accumulated
Additional Retained Other
Common Stock Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income Total
------ ------ ------- --------- ------ -----
Balances, January 1, 2005 5,470,311 $ 54 $ 9,729 $ (3,058) $ 61 $ 6,786
Net income - - - 2,711 - 2,711
Net unrealized gains on available
for sale securities - - - - 21 21
--------- ------ -------- -------- ------- -------
Balances, December 31, 2005 5,470,311 54 9,729 (347) 82 9,518
Net income (restated) - - - 3,108 - 3,108
Share transactions under employee
stock option plan (restated) 287,832 4 471 - - 475
Amortization of share based
compensation (restated) - - 54 - - 54
Cash dividend paid - $.06 per share - - - (341) - (341)
Tax benefits from exercise of employee stock
option plan (restated) - - 293 - - 293
Net unrealized gains on available for
sale securities - - - - 16 16
--------- ------ -------- -------- ------- -------
Balances, December 31, 2006 (restated) 5,758,143 58 10,547 2,420 98 13,123
Net income - - - 3,662 - 3,662
Share transactions under employee
stock option plan 192,916 1 308 - - 309
Amortization of share based compensation - - 10 - - 10
Stock dividend 293,265 3 1,918 (1,921) - -
Tax benefits from exercise of employee stock
option plan - - 356 - - 356
Net unrealized losses on available for
sale securities - - - - (71) (71)
--------- ------ -------- -------- ------- -------
Balances, December 31, 2007 6,244,324 $ 62 $ 13,139 $ 4,161 $ 27 $17,389
========= ====== ======== ======== ======= =======
See notes to consolidated financial statements.
F-8
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands)
--------------------------------------------
2006
2007 (RESTATED) 2005
--------- ---------- ---------
Cash flows from operating activities:
Net income $ 3,662 $ 3,108 $ 2,711
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 76 66 62
Deferred income taxes 254 856 101
Tax benefits from exercise of stock options (356) (293) -
Reduction in allowance for doubtful accounts - (200) -
Realized gains on sales of
marketable securities (113) (44) (15)
Share based compensation expense
related to stock option plan 10 54 -
Changes in assets (increase) decrease:
Accounts receivable (928) (1,118) (5,639)
Retainage receivable (1,081) (2,802) (776)
Costs and estimated earnings in excess of
billings on uncompleted contracts (90) (537) (244)
Prepaid expenses and other receivables (112) (103) 60
Changes in liabilities increase (decrease):
Accounts payable 2,222 2,427 4,627
Retainage payable 838 1,222 555
Accrued payroll and benefits 587 390 322
Accrued expenses (121) 90 58
Billings in excess of costs and estimated
earnings on uncompleted contracts (956) 3,652 503
Income taxes payable (1,088) 1,742 -
------- ------- -------
Net cash provided by operating activities 2,804 8,510 2,325
------- ------- -------
(continued)
F-9
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands)
-------------------------
2006
2007 (RESTATED) 2005
---------- ---------- ---------
Cash flows from investing activities:
Proceeds received on sales of marketable securities $ 489 $ 171 $ 153
Purchases of marketable securities (1,737) (12) (163)
Purchases of property and equipment (74) (210) (76)
-------- -------- -------
Net cash used in investing activities (1,322) (51) (86)
-------- -------- -------
Cash flows from financing activities:
Proceeds from the exercise of
employee stock option plan 309 475 -
Tax benefits from exercise of stock options 356 293 -
Cash dividends paid - (341) -
-------- -------- -------
Net cash provided by financing activities 665 427 -
-------- -------- -------
Net increase in cash and cash equivalents 2,147 8,886 2,239
Cash and cash equivalents, beginning of year 14,085 5,199 2,960
-------- -------- -------
Cash and cash equivalents, end of year $ 16,232 $ 14,085 $ 5,199
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 16 $ 13 $ 13
Income taxes $ 3,922 $ 142 $ 51
See notes to consolidated financial statements.
F-10
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(1) Principles of consolidation and nature of operations
The accompanying consolidated financial statements as of and for the
years ended December 31, 2007, 2006 and 2005 include the accounts of KSW,
Inc. and its wholly-owned subsidiary, KSW Mechanical Services, Inc.,
collectively "the Company", and have been prepared in conformity with
accounting principles generally acceptable in the United States of
America. 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) 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.
The Company has contracts that may extend over more than one year;
therefore, revisions in cost and profit estimates during the course
of the work are reflected in the accounting period in which the
facts, which require the revisions, become known.
Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
F-11
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(2) Summary of significant accounting policies - cont'd
(A) Revenue and cost recognition - cont'd
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.
(B) 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, 2007 and 2006, cash equivalents consist of money
market accounts.
(C) Marketable securities
Marketable securities, consisting of equity securities and mutual
funds, are classified as "available-for-sale" securities and are
stated at fair market value based on quoted market prices. 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.
(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 may
establish 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
F-12
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(2) Summary of significant accounting policies - cont'd
(D) Contracts receivable - cont'd
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, 2007, amounts in excess of
federally insured limits totaled approximately $16,799.
Trade accounts and retainage receivables, at times, 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 $16,097 and $13,177 at
December 31, 2007 and 2006, 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.
(G) Income taxes
The Company uses the asset and liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Deferred taxes are recognized for temporary
differences between the bases of assets and liabilities for
financial statement and income tax purposes. The temporary
differences relate primarily to different accounting methods used
for depreciation and amortization of property and equipment,
goodwill, allowance for doubtful accounts and net operating loss
carryforwards. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that some or all of the
deferred tax assets will not be realized through future operations.
F-13
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(2) Summary of significant accounting policies - cont'd
(G) Income taxes - cont'd
The Company adopted the provisions of Financial Accounting
Standards Board ("FASB") Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), an interpretation of SFAS
No. 109 on January 1, 2007. The Company had no adjustment as a
result of FIN 48.
(H) Earnings per share
Basic earnings per share is computed by dividing net income 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. The weighted average common shares outstanding have been
adjusted to reflect the 2007 stock dividend.
(I) Use of estimates
The preparation of consolidated 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
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(J) Stock options
On January 1, 2006, the Company adopted SFAS No. 123-R, "Share
Based Payment" ("SFAS 123-R"). SFAS 123-R requires all share based
payments to employees and non-employee directors, including grants
of 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 the
modified prospective method.
Under the modified prospective method of transition under SFAS
123-R, compensation costs in 2006 include costs 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.
F-14
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(2) Summary of significant accounting policies - cont'd
(J) Stock options - cont'd
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 grant. SFAS 123,
"Accounting for Share 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 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 share based compensation and consequently, the related amount
recognized on the consolidated statements of income.
(K) Financial instruments
The carrying value of marketable securities approximates 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.
(L) Impact of recently issued accounting standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to
investors' requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured
at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material impact on
the Company's consolidated results of operations and financial
condition.
F-15
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(2) Summary of significant accounting policies - cont'd
(L) Impact of recently issued accounting standards - cont'd
In February 2007, the FASB issued Statement No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115" ("SFAS No. 159").
SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 is
effective for the Company's financial statements beginning with the
first quarter of 2008. The adoption of SFAS No. 159 is not expected
to have a material impact on the Company's consolidated results of
operations and financial condition.
In December 2007, the FASB issued Statement No. 141 (revised 2007),
"Business Combinations" ("SFAS 141-R"). SFAS 141-R changes the
accounting for acquisitions specifically eliminating the step
acquisition model, changing the recognition of contingent
consideration from being recognized when it is probable to being
recognized at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings
related to acquisition can be recognized. The standard is effective
for fiscal years beginning on or after December 15, 2008 and will
only impact the accounting for acquisitions that are made after
adoption.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB
No. 51" ("SFAS 160"). This statement is effective for fiscal years
beginning on or after December 15, 2008, with earlier adoption
prohibited. This statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the Company's
equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of
the consolidated income statement. It also amends certain of ARB No.
51's consolidation procedures for consistency with the requirements
of SFAS 141-R. This statement also includes expanded disclosure
requirements regarding the interests of the parent and its
noncontrolling interest. The Company has not determined the effect,
if any, the adoption of SFAS 160 will have on the Company's
consolidated financial position and results of operations.
F-16
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(3) Marketable securities
The cost and fair values of the marketable securities, classified as
available-for-sale securities at December 31, 2007 and 2006, are as
follows:
Gross
Unrealized Gross
Holding Unrealized Fair
Cost Gains Holding Losses Value
---- ----- -------------- -----
December 31, 2007:
Mutual funds and
marketable equity
securities $1,842 $141 $(91) $1,892
====== ==== ===== ======
December 31, 2006:
Marketable equity securities $481 $195 $(13) $663
====== ==== ===== ======
At December 31, 2007 and 2006, gross unrealized holding losses on
available for sale securities were $91 and $13, respectively. At December
31, 2007 and 2006, gross unrealized holding gains on available for sale
securities were $141 and $195, respectively. The change in net unrealized
holding gains is a decrease of $71 and an increase of $16 for the years
ended December 31, 2007 and 2006, respectively. During the years ended
December 31, 2007 and 2006, available-for-sale securities were sold for
total proceeds of approximately $489 and $171, respectively. The gross
realized gains on these sales totaled approximately $113, $44, and $15
for the years ended December 31, 2007, 2006, and 2005, respectively.
(4) Contracts receivable
2007 2006
==== ====
Accounts receivable:
Billed
Contracts in progress $ 10,458 $ 9,809
Completed contracts 3,253 3,396
Unbilled 422 -
-------- --------
$ 14,133 $ 13,205
-------- --------
Retainage receivable $ 6,647 $ 5,566
======== ========
At December 31, 2007, retained contract receivables totaling $1,573 are
not expected to be realized within one year.
During the year ended December 31, 2006, the Company reversed the
allowance for doubtful accounts totaling $200. At December 31, 2007 and
2006, there was no allowance required for accounts and retainage
receivable.
F-17
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(5) Construction contracts
Information with respect to contracts in progress at December 31, 2007 and
2006 is as follows:
2007 2006
==== ====
Costs incurred on uncompleted contracts $ 42,786 $ 64,838
Estimated earnings 7,055 9,806
-------- --------
49,841 74,644
Less billings to date 52,765 78,614
-------- --------
$ (2,924) $ (3,970)
======== ========
Included in the accompanying consolidated balance sheets under the
following captions:
2007 2006
==== ====
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 1,107 $ 1,017
Billings in excess of costs and estimated earnings on
uncompleted contracts (4,031) (4,987)
-------- --------
$ (2,924) $ (3,970)
======== ========
(6) Property and equipment
Property and equipment at December 31, 2007 and 2006 consists of the
following:
2007 2006
==== ====
Machinery and equipment $ 657 $ 631
Furniture and fixtures 843 815
Leasehold improvements 845 845
-------- --------
2,345 2,291
Less accumulated depreciation and amortization 2,091 2,035
-------- --------
$ 254 $ 256
======== ========
Depreciation and amortization expense relating to property and equipment
was approximately $76, $66 and $62 for the years ended December 31, 2007,
2006 and 2005, respectively.
F-18
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(7) Income taxes
For the years ended December 31, 2007, 2006 and 2005, components of the
provision for income taxes are as follows:
2006
2007 (RESTATED) 2005
---- ---------- ----
Current
Federal $ 1,740 $ 1,049 $ -
State and local 1,094 810 51
--------- -------- --------
2,834 1,859 51
--------- -------- --------
Deferred
Federal 144 540 60
State and local 110 316 41
--------- -------- --------
254 856 101
--------- -------- --------
Total $ 3,088 $ 2,715 $ 152
========= ======== ========
The Company provided a valuation allowance against its net deferred tax
assets based upon an uncertainty regarding the ultimate realization of
these deferred tax assets in their entirety. At December 31, 2004, the
outstanding deferred tax asset valuation allowance was $1,220. During
the year ended December 31, 2005, the Company generated profits, which
reduced this deferred tax valuation allowance and the Company reversed
the outstanding deferred tax valuation allowance. This allowance was
reversed after the Company's management re-evaluated the likelihood that
these assets would be realized in their entirety and concluded that the
valuation allowance was not required.
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to
income before taxes is as follows:
2006
2007 (RESTATED) 2005
---- ---------- ----
Computed tax at the federal statutory rate of 34% $ 2,295 $ 1,980 $ 974
State and local taxes, net of federal benefit 751 705 347
Reduction in valuation allowance - - (1,220)
Other items, net 42 30 51
------- ------- ------
Provision for income taxes $ 3,088 $ 2,715 $ 152
======= ======= ======
F-19
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(7) Income taxes - cont'd
The details of deferred tax assets and liabilities at December 31, 2007
and 2006 are as follows:
2007 2006
==== ====
Deferred income tax assets:
Amortization of goodwill $ 155 $ 313
Property and equipment 163 225
Other tax carryforwards 15 51
-------- --------
Total deferred income tax assets 333 589
-------- --------
Deferred income tax liabilities:
Unrealized gains on marketable securities 22 84
-------- --------
22 84
-------- --------
Deferred income tax assets, net $ 311 $ 505
======== ========
At December 31, 2005, the Company had net operating loss carry
forwards remaining of approximately $1,500, which were utilized
during the year ended December 31, 2006. At December 31, 2007 and
2006, the net deferred tax asset is included in long-term assets in
the accompanying consolidated balance sheets.
(8) Stockholders' equity
(A) 1995 Stock option plan
In 1995, 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. On August 8, 2005, the Board
of Directors extended the expiration date of the 526,667
outstanding options to December 2010 from December 2005, and
increased the exercise price to $1.66 from $1.50. In addition, on
August 8, 2005, the Company issued 80,000 options, at $1.66 per
share, to an officer and three Directors. The plan expired December
2005, therefore no new options can be granted under this plan. At
December 31, 2005, the Company had 50,000 outstanding options at an
exercise price of $1.50 and 606,667 outstanding options at an
exercise price of $1.66.
On January 1, 2006, the Company adopted FASB Statement No. 123-R,
"Share Based Payment" ("SFAS 123-R"). SFAS 123-R requires all share
based payments to employees and non-employee directors, including
grants of stock options, to be
F-20
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(8) Stockholders' equity
(A) 1995 Stock option plan - cont'd
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 the modified prospective method.
Under the modified prospective method of transition under SFAS
123-R, compensation costs in 2006 include costs 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.
On November 6, 2006, the Company corrected the vesting dates for
options issued to three outside directors to comply with the plan
requirement that options be issued when a director is elected to
the Board.
For the year ended December 31, 2006, the Company incurred
compensation expense related to the vesting of stock options due to
the adoption of SFAS 123-R, totaling approximately $54.
At December 31, 2006, the Company had 30,000 outstanding options at
an exercise price of $1.50 and 338,835 outstanding options at an
exercise price of $1.66. During the year ended December 31, 2006,
53,333 stock options that were not vested as of December 31, 2005
vested, and 13,332 of these stock options were exercised. At
December 31, 2006, 26,667 options of the 338,835 outstanding
options exercisable at $1.66 have not vested.
For the year ended December 31, 2007, the Company incurred
compensation expense related to the vesting of stock options
totaling approximately $10.
During 2007, the Company's Board of Directors declared a 5% stock
dividend which increased the total outstanding options to be issued
under the Plan by 13,083. During 2007, 192,916 stock options were
exercised. At December 31, 2007, outstanding options totaled
189,002 of which 182,002 were vested.
At December 31, 2007, there was approximately $4 of unrecognized
compensation costs related to unvested share-based compensation
awards granted. That cost is expected to be recognized in 2008.
F-21
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(8) Stockholders' equity - cont'd
(A) 1995 Stock option plan - cont'd
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 year ended December
31, 2005. For the purposes of this proforma disclosure, the value
of the options is estimated using Black-Scholes option pricing
model and amortized to expense over the vesting periods (in
thousands, except per share data).
2005
----
Net income - as reported $ 2,711
Stock option compensation, net of tax (194)
-------
Net income - pro forma $ 2,517
=======
Basic net income per share:
As reported $ .47
Pro forma $ .44
Diluted net income per share:
As reported $ .47
Pro forma $ .44
F-22
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(8) Stockholders' equity - cont'd
(A) 1995 Stock option plan - cont'd
Changes that occurred in options outstanding during 2007, 2006 and 2005 are
summarized below:
2007 2006 2005
Weighed Weighed Weighed
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------
Outstanding at beginning of year 368,835 $1.65 656,667 $1.65 576,667 $1.50
Expired/ Canceled - - -
Effect of Stock Dividend 13,083 - -
Granted - August 2005 - - 80,000 $1.66
Modified - August 2005 - - (526,667) (1.50)
Modified - August 2005 - - 526,667 $1.66
Exercised (192,916) $1.60 (287,832) $1.65 -
-------- -------- -------
Outstanding at end of year 189,002 $1.58 368,835 $1.65 656,667 $1.65
======== ======== =======
Exercisable at end of year 182,002 $1.58 342,168 $1.65 576,667 $1.65
======== ======== =======
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 80,000 grants in 2005: dividend
yield of 0%; expected volatility of 64.12%; risk-free interest rate of
4.69%; and expected lives of five years. For the 526,667 options that
were modified in 2005, an expected life of 2.5 years was used.
F-23
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(8) Stockholders' equity - cont'd
(A) 1995 Stock option plan - cont'd
Cash proceeds, tax benefits and intrinsic value related to total
stock options exercised during the years end December 31, 2007,
2006 and 2005, respectively, are as follows:
2006
2007 (RESTATED) 2005
---- ---------- ----
Proceeds from stock options exercised $ 309 $ 475 $ -
Tax benefits related to stock options $ -
exercised $ 356 $ 293
Intrinsic value of stock options exercised $ 790 $ 636 $ -
The following table summarizes information about stock options outstanding at
December 31, 2007:
Exercise Price Shares Contractual Life
- -------------- ------ ----------------
$ 1.43 5,250 1.8 years
$ 1.58 152,250 2.9 years
$ 1.58 31,502 7.6 years
Term in Intrinsic
Shares Average Price Years Value
------ ------------- ------- ----------
Outstanding Options 189,002 $1.58 3.71 $1,019
Exercisable Options 182,002 $1.58 3.60 $ 981
(B) 2007 Stock option plan
By resolution dated May 8, 2007, the Company's Board of Directors
adopted, subject to stockholder approval at the May 2008 annual
meeting of stockholders, the KSW, Inc. 2007 Stock Option Plan.
Pursuant to the 2007 Plan, 300,000 shares of common stock of the
Company are reserved for issuance to employees, consultants and
directors of the Company. The primary purpose of the 2007 Plan is
to reward and retain key employees. No options have been issued to
officers or employees under this 2007 Plan.
F-24
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(8) Stockholders' equity - cont'd
(C) Dividend distributions
On May 8, 2007, the Company's Board of Directors declared a 5%
stock dividend pursuant to which 293,265 additional shares were
issued on June 11, 2007 to shareholders of record as of May 24,
2007. Cash was paid in lieu of issuing fractional shares based on
the last sales price of the Company's stock on the record date.
On May 8, 2006, the Company's Board of Directors declared a special
cash dividend of $.06 per share to shareholders of record as of May
24, 2006. The aggregate amount of the dividend was $341 and such
dividend was paid on June 15, 2006.
(D) Preferred stock
The Company is authorized to issue 1,000,000 shares of preferred
stock. As of December 31, 2007, no shares of preferred stock have
been issued by the Company.
(9) Earnings per share
2006
2007 (RESTATED) 2005
---- ---------- ----
Net earnings $ 3,662 $ 3,108 $ 2,711
========= ========== =========
Earnings per share - basic:
Weighted average shares
outstanding during the year 6,162,034 5,950,455 5,743,827
========= ========== =========
Earnings per common share - basic $ .59 $ .52 $ .47
========= ========== =========
Earnings per share - diluted:
Weighted average shares 6,162,034 5,950,445 5,743,827
outstanding during the year
Effect of stock option dilution 80,573 126,682 -
--------- ---------- ---------
Total shares outstanding for
purposes of calculating diluted
earnings per share 6,242,607 6,077,127 5,743,827
========= ========== =========
Earnings per common shares
and common share equivalent -
diluted $ .59 $ .51 $ .47
========= ========== =========
F-25
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(10) Accumulated other comprehensive income
At December 31, 2007 and 2006, accumulated other comprehensive income,
which consists of net unrealized holding gains on available for sale
securities, is as follows:
2007 2006
---- ----
Beginning balance $ 98 $ 82
Current period change (71) 16
---- ----
Ending balance $ 27 $ 98
==== ====
(11) Commitments and contingencies
(A) Performance and payment 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, 2007 as follows:
Year ending
December 31,
- ------------
2008 $ 199
2009 100
--------
$ 299
========
F-26
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(11) Commitments and contingencies - cont'd
(B) Operating lease - cont'd
Under the terms of the lease agreement, the Company is obligated to
pay monthly rental amounts of approximately $16. 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. The
Company also exercised a three-year option that extended the lease
through 2009.
Rent expense for the years ended December 31, 2007, 2006 and 2005
amounted to approximately $195, $191, and $185, respectively.
(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, 2007, 2006 and 2005,
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.
F-27
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(11) Commitments and contingencies - cont'd
(E) Legal
Other Proposals and Claims. 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) Employment agreement
The Company's Chief Executive Officer has a written employment
agreement, which expires on December 31, 2009. This agreement
provides a base annual compensation of $450 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. In addition,
for the period January 1, 2006 through December 31, 2009, he will
receive a bonus equal to 9.5% of the Company's adjusted annual
operating profits before taxes, which are in excess of $250. For the
years ended December 31, 2007 and 2006, accrued bonus expense related
to this agreement was approximately $683 and $570, respectively.
(G) Purchase obligation
The Company has an agreement with a supplier of piping materials,
whereby the Company has committed to purchase certain piping products
normally used in its operations at set prices through October 2008.
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.
F-28
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(12) 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.
There have been no borrowings against this credit facility. This
facility expires on March 31, 2008, is secured by the Company's
assets and is guaranteed by the Company's subsidiary, KSW Mechanical
Services, Inc. (See Note 18).
Advances bear interest, based on the Company's option, at either the
bank's prime lending rate plus one percent per annum, or the London
Interbank Offered Rate ("Libor") plus two and one-half percent per
annum.
(13) 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 2008.
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 largest customers were approximately 46%,
20%, and 13% of its contract revenue in 2007; 40%, 18%, 10%, and 10%
of its contract revenue in 2006; and 31%, 11%, 11% 11% and 10% of its
contract revenue in 2005.
(14) Retirement plans
(A) Profit-sharing/401(k) plan
The Company sponsors a profit-sharing/401(k) plan covering employees
not covered under collective bargaining agreements who meet the age
and length of service requirements of the plan. The Company may make
discretionary contributions to the plan. The total of employee
contributions may not exceed Federal government limits. The Company
expensed approximately $87, $72 and $70 as a 25% matching
contribution for the years ended December 31, 2007, 2006 and 2005,
respectively.
F-29
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(14) Retirement plans - cont'd
(B) Multiemployer pension plans
Employees of the Company who are parties to 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 $2,059,
$2,524 and $1,207 for the years ended December 31, 2007, 2006 and
2005, respectively, related to multi-employer pension plans for its
union employees.
(15) Backlog
At December 31, 2007, the Company had a backlog of approximately
$111,300. 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.
(16) Restatement
During December 2007, the Company's management determined that 2006
compensation cost included in selling, general and administrative
expenses ("SGA") was materially overstated in the amount of $636. The
Company incorrectly recorded an expense for the intrinsic value of
exercised stock options equal to the excess of the quoted market price
for the Company's common stock over the option exercise price on each of
the exercise dates, resulting in an understatement of net income. The
following is a summary of this restatement:
As Previously Reported Change As Restated
---------------------- ------ -----------
Consolidated Balance Sheet at December 31, 2006
Additional paid-in capital $ 10,890 $ (343) $ 10,547
=========== ========= ==========
Retained earnings $ 2,077 $ 343 $ 2,420
=========== ========= ==========
F-30
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(16) Restatement - cont'd
As Previously Reported Change As Restated
---------------------- ------ -----------
Consolidated Statement of Income -
Year ended December 31, 2006
Revenues $ 77,128 $ - $ 77,128
=========== ========= ==========
Gross profit $ 9,973 $ - $ 9,973
=========== ========= ==========
SGA $ 5,147 $ (636) $ 4,511
=========== ========= ==========
Operating income $ 4,826 $ 636 $ 5,462
=========== ========= ==========
Income before taxes $ 5,187 $ 636 $ 5,823
Provision for income taxes 2,422 293 2,715
----------- --------- ----------
Net income $ 2,765 $ 343 $ 3,108
=========== ========= ==========
Earnings per share-basic $ .46 $ .06 $ .52
Earnings per share-diluted $ .45 $ .06 $ .51
Consolidated Statement of Comprehensive
Income - Year ended December 31, 2006
Net income $ 2,765 $ 343 $ 3,108
=========== ========= ==========
Total comprehensive income $ 2,781 $ 343 $ 3,124
=========== ========= ==========
Consolidated Statement of Cash Flows -
Year ended December 31, 2006
Cash flows from operating activities:
Net income $ 2,765 $ 343 $ 3,108
=========== ========= ==========
Tax benefits from exercise of stock options $ (318) $ 25 $ (293)
=========== ========= ==========
Share based compensation expense related to
stock option plan $ 690 $ (636) $ 54
=========== ========= ==========
Income taxes payable $ 1,449 $ 293 $ 1,742
=========== ========= ==========
Net cash provided by operating activities $ 8,485 $ 25 $ 8,510
=========== ========= ==========
Cash flows from financing activities:
Tax benefits from exercise of stock options $ 318 $ (25) $ 293
=========== ========= ==========
Net cash provided by financing activities $ 452 $ (25) $ 427
=========== ========= ==========
F-31
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(17) Selected Quarterly Data (unaudited)
The following is unaudited selected quarterly data for the years ended
December 31, 2007 and 2006:
Year ended December 31, 2007
----------------------------
First Second Third
Quarter Quarter Quarter Fourth
(RESTATED) (RESTATED) (RESTATED) Quarter Total
---------- ---------- ---------- ------- -----
Revenues $ 17,991 $ 19,320 $ 21,027 $ 18,928 $ 77,266
Gross profit $ 2,490 $ 2,808 $ 2,845 $ 2,352 $ 10,495
Net income $ 898 $ 860 $ 964 $ 940 $ 3,662
Per share:
Basic $ .15 $ .14 $ .15 $ .15 $ .59
Diluted $ .15 $ .14 $ .15 $ .15 $ .59
Dividends $ - $ - $ - $ - $ -
Stock prices:
High $ 7.69 $ 8.13 $ 8.65 $ 7.40
Low $ 6.01 $ 6.23 $ 6.25 $ 5.76
Year ended December 31, 2006
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
(RESTATED) (RESTATED) (RESTATED) (RESTATED) (RESTATED)
---------- ---------- ---------- ---------- ----------
Revenues $ 15,761 $ 20,132 $ 21,644 $ 19,591 $ 77,128
Gross profit $ 2,105 $ 2,503 $ 2,440 $ 2,925 $ 9,973
Net income $ 541 $ 675 $ 794 $ 1,098 $ 3,108
Per share:
Basic $ .09 $ .11 $ .13 $ .19 $ .52
Diluted $ .09 $ .11 $ .13 $ .18 $ .51
Dividends $ - $ .06 $ - $ - $ .06
Stock prices:
High $ 4.06 $ 6.12 $ 4.60 $ 7.40
Low $ 2.80 $ 3.40 $ 3.66 $ 3.80
F-32
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(in thousands, except share data)
---------------------------------
(18) Subsequent event
On January 28, 2008, the Company extended the working capital credit
facility with Bank of America, N.A for a term expiring April 1, 2009.
F-33
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, 2007
allowance for doubtful accounts and returns $ ------- $-------- $------- $------- $-------
========= ========= ======== ======== ========
Year ended December 31, 2006
allowance for doubtful accounts and returns $ 200 $-------- $------- $ 200 $-------
========= ========= ======== ======== ========
Year ended December 31, 2005
allowance for doubtful accounts and returns $ 200 $-------- $------- $------- $ 200
========= ========= ======== ======== ========
Year ended December 31, 2007
deferred income tax valuation allowance $-------- $-------- $------- $------- $-------
========= ========= ======== ======== ========
Year ended December 31, 2006
deferred income tax valuation allowance $-------- $-------- $------- $------- $-------
========= ========= ======== ======== ========
Year ended December 31, 2005
deferred income tax valuation allowance $ 1,220 $-------- $------- $ 1,220 $-------
========= ========= ======== ======== ========
F-34
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. 333-217350), filed with the
Commission on 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 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 10-K for the fiscal year ended December 31,
1998 (Commission File No. 001-32865), filed with the Commission on
March 30, 1999).
10.2 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. 001-32865), filed with the
Commission on November 24, 1995).
10.3 Employment Agreement, dated September 12, 2005 by and between the
Company, KSW Mechanical Services, Inc. and Floyd Warkol
(incorporated herein by reference to Exhibit 10.20 to the Company's
Current Report on Form 8-K (Commission File No. 001-32865), filed
with the Commission on September 12, 2005).
10.4 Amendatory Employment Agreement, dated as of March 6, 2007, by and
between the Company, KSW Mechanical Services, Inc., and Floyd
Warkol. (incorporated herein by reference to Exhibit 10.4 to the
Company's annual report on Form 10-K for the year ended December
31, 2006, filed on March 14, 2007).
10.5 Line of Credit Agreement Letter, dated March 14, 2006, between KSW,
Inc. and Bank of America, N.A. together with forms of a Line of
Credit Note, Rider to Line of Credit Note, a pledge security
agreement and guaranty (incorporated herein by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year
ended December 3, 2005, filed with the Commission on March 16,
2006).
10.6 Line of Credit Agreement Letter, dated March 8, 2007, between KSW,
Inc. and Bank of America, N.A. (incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2006, filed with the Commission on March
14, 2007).
10.7 Line of Credit Agreement Letter, dated January 28, 2008, between
KSW, Inc. and Bank of America, N.A.
11 Statement Regarding Computation of Net Earnings Per Share.
21.1 List of Subsidiaries.
23.1 Consent of J.H. Cohn 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.