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
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
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
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
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.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceedings to which the Company is a party.
ITEM 4.
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.
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:
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.
PART II
ITEM 5.
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:
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.
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
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.
(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.
ITEM 7.
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.
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.
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.
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):
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.
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.
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.
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.
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.
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
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
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.
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.
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:
(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
No disclosures are required pursuant to Item 303 (a) (4) of Regulation S-K.
ITEM 7A.
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.
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 through of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure required.
ITEM 9A
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
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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
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.
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.
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.
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.
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.
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.
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 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).
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.
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
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
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
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.
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006 (in thousands, except share data) ---------------------------------
(continued)
See notes to consolidated financial statements.
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands, except per share data) --------------------------------------------
See notes to consolidated financial statements.
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands) -----------------------------------------------
See notes to consolidated financial statements.
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands, except share data) -----------------------------------------------
See notes to consolidated financial statements.
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands) --------------------------------------------
(continued)
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED) YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands) -------------------------
See notes to consolidated financial statements.
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.
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
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.
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.
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.
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.
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:
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
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.
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:
Included in the accompanying consolidated balance sheets under the following captions:
(6) Property and equipment
Property and equipment at December 31, 2007 and 2006 consists of the following:
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.
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:
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:
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:
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
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.
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).
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:
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.
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:
The following table summarizes information about stock options outstanding at December 31, 2007:
(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.
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
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:
(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:
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.
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.
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.
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:
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
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:
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.
SCHEDULE II
KSW, INC. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS 000's
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.