UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
Amendment No. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number:
-----------------
KSW, INC.
(Exact name of the Registrant as specified in its charter)
DELAWARE 11-3191686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37-16 23RD STREET, LONG ISLAND CITY, NEW YORK 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 361-6500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO ___
As of March 15, 1998, there were 5,471,311 shares of common stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The estimated aggregate market value of the voting stock held by non-affiliates
of the registrant on March 16, 1998 was $12,123,393 (based on a price of $ 3.00
per share of common stock).
<PAGE>
KSW, INC
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.....................................................3
Item 2. Properties...................................................6
Item 3. Legal Proceedings............................................6
Item 4. Submission of Matters to a Vote of Security Holders..........7
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................8
Item 6. Selected Financial Data......................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................10
Item 8. Financial Statements and Supplementary Data.................13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................13
PART III
Item 10. Directors and Executive Officers of the Registrant..........14
Item 11. Executive Compensation......................................15
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................18
Item 13. Certain Relationships and Related Transactions..............18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...............................................19
SIGNATURES.............................................................21
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL. KSW, Inc., a Delaware corporation (the "Company" or "KSWI"),
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 pursue
projects under $500,000. Directly or indirectly through separate subsidiaries,
the Company also serves as a mechanical trade manager, performing project
management services relating to the mechanical trades. The Company operates its
contracting business through its wholly-owned subsidiary, KSW Mechanical
Services, Inc. ("KSW Mechanical").
The Company believes it is one of the largest mechanical contractors in the
New York City metropolitan area, based on its revenues, as were its predecessors
since 1987. The Company has generated significant revenues since 1991, with
total revenues for 1997 of $66,000,000 The Company had a project backlog of
approximately $31,000,000 at December 31, 1997. Of the Company's backlog at
year-end, The Metropolitan Museum project comprised 26 %. The Company believes
that it is most competitive on large projects, where its skill sets are most
valued. Some of the Company's ongoing projects include the following: Terminal
One at John F. Kennedy Airport, Brooklyn Renaissance Plaza, The New York
Hospital, replacement of the underground distribution system at Co-op City, The
Metropolitan Museum and the Grand Central Terminal Main Concourse and
renovation. Based on increases in the number and size of new projects announced
by public authorities and by private parties in 1997, the Company believes that
the construction industry in the New York City metropolitan area is experiencing
an upturn. The Company believes that it is well positioned to obtain a
substantial number of new contracts. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The deregulation of gas and electric service in New York has opened up a
new market place for energy service companies. KSW's experience and valuable
engineering expertise qualifies the Company for entering this new market. During
1997, KSW and Con Edison Solutions, the deregulated energy services subsidiary
of New York's largest utility, submitted joint proposals to perform energy
related projects for Columbia Presbyterian Hospital, Columbia University, and
Brooklyn College. KSW was also named by Con Edison Solutions as part of their
team which pre-qualified to bid on the conversion of 280 New York City schools
from coal burning to gas fired burners. The Company's primary strategic
objectives are to increase its revenues and to become more competitive in its
present business. The Company intends to use any additional funds to expand its
business into new geographic areas in the Northeastern United States and into
areas which would be complementary to its current lines of business through
possible joint ventures or acquisitions. By acquiring complementary businesses,
the Company would also be able to realize significant economies of scale and
minimize the effect of economic downturns. The Company's common stock is traded
on the NASDAQ Electronic Bulletin Board under the symbol "KSWW."
MECHANICAL CONTRACTING/SUBCONTRACTING. The Company provides heating,
ventilation and air conditioning ("HVAC") systems and process piping systems
under direct contracts with owners of buildings or subcontracts with general
contractors or construction managers. These contracts normally are awarded by
competitive bids, since many of the owners are public entities. Some contracts
are obtained through negotiation with private parties.
Traditionally, the Company's mechanical contracting and subcontracting work
made up as much as 90% of its total revenues. Because mechanical contracting and
subcontracting is a substantial portion of its business, the Company intends to
continue its concentration in this line of business.
MECHANICAL TRADE MANAGEMENT. The Company's management pioneered the concept
of managing the mechanical trade portion of construction. On larger complex
projects (generally those having a mechanical portion valued over $20 million),
it is often beneficial for a general contractor or construction manager to lock
in the costs of the mechanical portion of the contract prior to completion of
the contract documents. By engaging the services of a trade manager, general
contractors can more accurately evaluate design alternatives so that the
completed construction documents balance costs and project objectives. As a
mechanical trade manager, the Company or its subsidiary performs a construction
manager function for the mechanical trade portion of a project. The Company
divides the mechanical portion of the contract into bid packages for
sub-contractors, calculates subcontractor bids, negotiates subcontracts and
coordinates the work. Trade management helps to remove gaps between contractual
responsibilities, reduce disputes and claims between trades, and simplify the
bonding process. This coordination makes a significant difference 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 lowering bids by allowing smaller contractors to compete for the subcontract
work. Customers benefit by having a single source with responsibility for the
cost, coordination and construction progress of the mechanical portion of the
projects.
As for any contract, for trade management projects the Company provides a
guaranteed maximum price ("GMP") to the owners for its scope of responsibility.
The Company controls the GMP by obtaining accurate maximum price quotes from
potential suppliers and subcontractors, requiring payment and performance bonds
from major subcontractors and adding a contingency allowance to these before
quoting the GMP. The Company also controls the costs because it is a mechanical
contractor and can perform the guaranteed work on its own. On non- governmental
projects, the Company may be able to split the benefit of cost reductions it
achieves on a project, but this is prohibited in certain government contracts.
The New York Hospital project was performed by the Company as trade manager and
was completed a year ahead of schedule and substantially under the GMP.
Although trade management is typically available only on large jobs, the
Company believes there is opportunity for expanding this line of business. While
trade management projects provide a net profit margin similar to that for
contracting projects, there is generally less risk associated with trade
management projects because there is a contingency fund which can be drawn from
if necessary. A contingency fund is a line item which the Company includes in
the GMP to account for any contingencies the Company may not have anticipated in
estimating the GMP. In the event the Company's costs exceed the relevant line
items quoted in the GMP, the Company may draw from the contingency to cover such
expenses.
OPERATIONS. The Company obtains projects primarily through competitive
bidding and negotiations in response to advertisements by federal, state and
local government agencies and solicitations by private parties. The Company
submits bids after a detailed review of the project specifications, an internal
review of the Company's capabilities, equipment, personnel availability and an
assessment of whether the project is likely to meet the targeted profit margins.
After computing the estimated costs of the project to be bid, the Company adds
its desired profit margin before submitting a bid.
The Company believes it has been successful in the competitive bidding
process because it is selective in the projects it bids and has highly skilled
personnel familiar with the local market. The Company has been able to avoid
costly bidding errors by becoming thoroughly familiar with all aspects of a
project and developing a comprehensive project budget using its proven cost
estimation system. Projects are divided into phases and line items indicating
separate labor, equipment, material, subcontractor and overhead cost estimates.
As a project progresses, the Company's project managers are responsible for
planning, scheduling and overseeing operations and reviewing project costs
against the estimates.
The Company has received letters of approval as an authorized bidder by
various government agencies, including the New York City Transit Authority, the
New York City Health and Hospitals Corporation, the New York City School
Construction Authority, the New York City Housing Authority and the New York
State Dormitory Authority.
MARKETS. The Company competes for business primarily in the New York City
metropolitan area. However, the Company has in the past performed work outside
of that area.
BACKLOG. The Company has a backlog (anticipated revenue from the
uncompleted portions of awarded projects) of orders totaling approximately
$31,000,000 as of December 31, 1997.
A portion of the Company's anticipated revenue in any year is not reflected
in its backlog at the start of the year because some projects are started and
completed the same year. The Company believes that its backlog is firm, subject
to provisions contained in some contracts which allow customers to modify or
cancel the contracts at any time, subject to certain conditions, including
reimbursement of costs incurred in connection with the contracts and the
possible payment of cancellation fees.
COMPETITION. The mechanical contracting market is highly competitive. There
are many larger regional and national companies with resources greater than
those of the Company. However, many of these large competitors are unfamiliar
with the New York City metropolitan area. The Company competes favorably in New
York City with respect to such companies because of its reputation in the area
and its knowledge of the local labor force. There are many smaller contractors
and subcontractors in the New York City metropolitan area, but the Company
believes it has a competitive advantage over smaller competitors due to the
barriers to entry for smaller competitors, including bonding requirements,
relationships with subcontractors, suppliers and union workers.
REGULATION. The construction industry is subject to various governmental
regulations from local, state and federal authorities. The Company is impacted
by state and federal requirements regarding the handling and disposal of lead
paint, but the impact cannot be predicted at this time since it varies from
project to project. The Company must also comply with regulations as to the use
and disposal of solvents and hazardous wastes, compliance with which are now a
normal part of its operations. The Company does not do asbestos abatement but
has occasionally subcontracted that part of a contract to duly licensed asbestos
companies with the Company being named as an additional insured on the asbestos
company's liability insurance policy. For work on certain existing building
projects, during 1997, the Company purchased a $5,000,000 Contractor's Pollution
Liability Policy insuring against losses resulting from exposure to hazardous
materials. The Company has not incurred any liability for violation of
environmental laws. The Company must also comply with rules and regulations
promulgated by the Occupational Safety and Health Administration.
EMPLOYEES. At December 31, 1997, the Company had 51 permanent employees.
The Company also employs field employees who are union workers. The number of
union workers employed varies at any given time, depending on the number and
types of ongoing projects and the scope of construction work under contract. The
Company hires union labor for specific work assignments and can reduce the
number of union workers hired at will with no penalties.
The Company pays for benefits payable to union employees through the
payment of funds to a trust established by the union. The Company's obligation
is to pay a percentage of the wages of union workers to the trust fund. Thus,
the Company does not accrue liabilities for pension and medical benefits to
union retirees. The Company provides its permanent employees with medical
insurance benefits and a discretionary matching 401(k) plan. The Company has in
the past matched 25% of the employees' 401k contributions.
DEPENDENCE UPON CUSTOMERS. The Company seeks large, multi-year contracts.
At any given time, a material portion of the Company's contracting business may
be for one large contract for one customer.
For the year ending December 31, 1997, work contracts for Morse Diesel
International, Inc. amounted to 38% of the Company's total revenues and work for
Memorial Sloan Kettering Cancer Center accounted for 13% of total revenues.
Historically, a considerable portion of the Company's revenue has been
generated from contracts with federal, state and local governmental authorities.
Consequently, a reduction in public sector contracts for any reason, including
an economic downturn or a reduction in government spending, could have a
material adverse effect on the Company's results of operations. At any one time,
the Company's contracts with federal, state and local governmental authorities
may or may not represent a material portion of its revenues. The Company's
current backlog does not include any material contracts with Federal, State or
Local governmental authorities.
On most of its projects, the Company is required to provide a surety bond.
The Company's ability to obtain bonding, and the amount of bonding required, is
primarily based upon the Company's net worth and working capital and the number
and size of projects under construction. The larger the project and/or the
number of projects under contract, the greater the Company's bonding, net worth
and working capital requirements. The Company generally pays a fee to the
bonding company of an amount less than 1% of the amount of the contract to be
performed. Since inception, the Company has not encountered difficulties in
obtaining Payment and Performance Bonds nor has the bonding company been
required to make a payment on any bonds issued for the Company.
OTHER MATTERS. The Company does not own any patents, patent rights, or
similar intellectual property, and none is material to its business. The
Company's business is not subject to large seasonal variations. The Company
expended no funds for research and development in 1995, 1996 or 1997, and no
research and development cost are anticipated.
ITEM 2. PROPERTIES
The Company leases a building in Long Island City, New York, consisting of
35,000 square feet of office, manufacturing and warehouse space. The Company
acquired its interest in the lease by way of assignment from Kerby Saunders
Warkol, Inc. ("Kerby") pursuant to an Asset Purchase Agreement. The lease has a
term of ten years ending on April 30, 1998. The Company may execute a one-year
renewal at an annual rent of $269,000 during which time the Company will
evaluate the relative benefits of relocation or a long-term renewal. The lease
is a triple net lease and thus the Company pays the taxes ($66,276 per year
accruing currently), maintenance, insurance and utilities.
The Company also leases a building and a storage yard in Bronx, New York,
consisting of a 14,000 square foot building, including 4,000 square foot of
offices, 10,000 square feet of shop space and an adjacent 5,000 square feet
storage yard. This lease is a triple net lease. The Company pays rent of
$103,000 per year, plus taxes (currently $24,335 per year), maintenance,
insurance and utilities. The lease will then expire on December 31, 1998. See
"Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings
which could have a material adverse effect on its financial position or
operations. However, there were ongoing class action lawsuits and other lawsuits
against the Company's former parent, Helionetics, Inc., which has filed a
petition in bankruptcy. Pursuant to a Pledge Agreement, Susan Barnes, the wife
of the Chairman of the Board of Helionetics, had irrevocably pledged 500,000
shares of the Company's common stock she received in the Distribution of the
Company as collateral security for any payment by KSW, Inc. of any claims
against Helionetics in connection with the December 28, 1995 Distribution of
KSW, Inc. stock by Helionetics. The Company received notice of the two claims
arising in connection with the Distribution, totaling approximately $250,000.
Helionetics was also indebted to the Company in the amount of $50,000. In April
1997, 100,000 shares of common stock held under the Pledge Agreement were used
to satisfy two claims, and the debt to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the stockholders at the
Company's Annual Meeting held on May 5, 1997:
1. The election of one Class 1 Director, to serve for a term of three years
until his successor shall have been duly elected and qualified. The Director
elected at the meeting was Robert Brussel. The Directors whose term of office
continued after the meeting were Armand D'Amato and Daniel Spiegel (both terms
expiring in 1999), Floyd Warkol and Burton Reyer (both terms expiring in 1998).
2. To ratify the appointment of Marden Harrison & Kreuter, certified public
accountants, as the Company's independent auditors for the fiscal year ending
December 31, 1997. There were 3,627,345 votes for this proposal, 17,010 against
and 4,973 abstentions.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Beginning on January 26, 1996, the Company's common stock was approved for
listing on the NASDAQ's Electronic Bulletin Board under the symbol "KSWW."
At March 15, 1998, the Company had 5,471,311 shares of KSWI common stock
issued and outstanding held by approximately 5,800 shareholders of record.
On April 28, 1997, Susan Barnes transferred 16,667 of her shares of KSWI
common stock to the Company to repay a debt due to the Company from its former
parent. These shares have been retired.
On August 5, 1997 the Board of Directors approved a resolution authorizing
the Company to repurchase up to 10% of the Company's common stock over the next
two years. In the third quarter, the Company repurchased and retired 55,000
shares of common stock.
During the third quarter of 1997, the Company's common stock traded at over
$4.00 per share for a thirty day period, thereby meeting the share price
criteria for listing on the NASDAQ SmallCap Market. In October of 1997, the
Company applied for listing on the NASDAQ SmallCap Market. The listing procedure
extended through the balance of 1997 and into 1998, during which time the share
price fell below $4.00 a share. In February 1998, the NASDAQ Listing
Qualifications Committee advised the company that it would deny the Company's
request for listing at that time based upon its failure to satisfy the minimum
bid requirements. The Company was advised that it could re-apply for listing at
such time as it meets all criteria necessary for initial inclusion, and has
established a bid price at or above $4 in bona fide market conditions.
Currently, the Company intends to retain earnings for future growth; and it
does not anticipate paying dividends on its common stock in the foreseeable
future.
The following information on high and low trading ranges is provided for
1997 and 1996:
1997 1996
---- ----
QUARTER HIGH LOW HIGH LOW
First................ $2.37 $1.87 $2.75 $2.00
Second............... 2.50 1.87 3.18 1.75
Third................ 3.50 2.19 2.12 1.50
Fourth............... 4.50 3.37 1.87 1.50
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the years ended December 31, 1997, December 31, 1996 and December
31, 1995 is derived from, and is qualified by reference to, the financial
statements for the year ended December 31, 1997 and December 31, 1996, audited
by Marden, Harrison & Kreuter, and the financial statements for the year ended
December 31, 1995, audited by Corbin & Wertz, each of which is included herein,
and should be read in conjunction with such financial information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands, except share and per share amounts)
1997 1996 1995 1994 1993
----- ---- ---- ----- ----
Income Statement:
<S> <C> <C> <C> <C> <C>
Revenues................................... $66,184 $46,394 $44,176 $36,131 $57,232
Cost of sales.............................. 62,005 42,600 38,990 30,046 51,901
Gross profit............................... 4,179 3,794 5,186 6,085 5,331
Operating expenses......................... 4,030 3,970 4,115 4,523 4,734
Selling, general, administration,
depreciation, interest and income tax 4,020 3,898 4,615 5,479 5,171
expenses................................
Income (loss) before income taxes.......... 149 (176) 1,071 1,562 597
Net (loss) income.......................... 159 (104) 571 606 160
Net (loss) income per share - Basic and .03 (.02) .07 (1) .08 (1) n/a
Diluted..................................
Number of shares used in computation-
Basic................................... 5,528,311 5,440,008 7,785,754 (1) 7,800,000 (1) n/a
Number of shares used in computation - 5,796,893 5,568,429 7,785,754 (1) 7,800,000 (1) n/a
Diluted.................................
Balance Sheet Data:
Total assets............................... 26,269 28,734 20,431 18,380 15,827
Working capital............................ 5,809 5,582 4,928 4,564 2,023
Current liabilities........................ 15,700 18,195 10,302 7,305 7,456
Long term liabilities...................... 70 0 0 0 852
Stockholders' equity....................... 10,499 10,539 10,129 11,075 7,519
Other Data:
Current ratio.............................. 1.37:1 1.31:1 1.48:1 1.62:1 1.27:1
- ---------------
(1) Pro forma earnings per share (basic and dilutive) after giving effect
to a 7,800 to 1 stock split and repurchase of 2,600,000 shares of KSWI
common stock by the Company from Helionetics would be $.11 and $.12 for
years ended December 31, 1995 and 1994 respectfully based on 5,200,000
shares of KSWI common stock outstanding.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the fiscal years ended December 31, 1997, 1996 and
1995.
OVERVIEW
The Company's history began on October 31, 1993. As of that date, KSWI
acquired certain assets and rights and assumed certain liabilities associated
with the mechanical contracting business conducted by Kerby. KSWI became a
separate publicly traded corporation as a result of the distribution by
Helionetics of its common stock of KSWI to its shareholders, which became
effective on December 29, 1995.
The Company's contracts most often involve work periods in excess of one
year. Revenue on uncompleted fixed price contracts is recorded under the
"percentage of completion" method of accounting. The Company begins to recognize
profit on its contracts when it first incurs direct costs. Contract costs
include all direct material and labor costs and those other direct costs related
to contract performance, including, but not limited to, subcontractor's costs
and supplies. General and administrative costs are charged to expense as
incurred. Pursuant to construction industry practice, a portion of billings,
generally not exceeding 10%, may be retained by the customer until the project
is completed and all obligations of the contractor are paid. The Company has not
been subject to a material loss in connection with any such retention, but has
in the past required legal procedures to collect sums due to the Company.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain items
of the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(Dollars in thousands)
Net Sales:
<S> <C> <C> <C> <C> <C> <C>
Contracts.................... $65,671 99.2 $45,611 98.3 $41,381 93.7
Fees......................... 513 .8 783 1.7 2,795 6.3
-------- -------- ----------- --------- ------ ------
Total........................ 66,184 100.0 46,394 100.0 44,176 100.0
COSTS OF SALES................. 62,005 93.7 42,600 91.8 38,990 88.3
------ ------ --------- --------- -------- ------
GROSS PROFIT................... 4,179 6.3 3,794 8.2 5,186 11.7
EXPENSES:
Selling, general, administrative
and interest expenses......... 4,030 6.1 3,970 8.6 4,115 9.3
----- --- -------- ------- -------- -----
INCOME/(LOSS) BEFORE PROVISION 149 .2 (176) (.4) 1,071 2.4
FOR INCOME TAXES................
PROVISION FOR INCOME TAXES...... (10) 0 (72) (.2) 500 1.1
------ ------ ---------- ------- --------- ------
NET INCOME/(LOSS)............... $159 .2 $(104) (.2) $571 1.3
------ ------ ----------- ------- --------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSW, INC
COMPUTATION OF NET INCOME PER SHARE
(000'S EXCEPT NET INCOME PER SHARE)
BASIC
AND
BASIC DILUTED BASIC DILUTED DILUTED
1997 1997 1996 1996 1995
---- ------- ----- ------- --------
<S> <C> <C> <C> <C> <C>
Weighted average common post-split shares:... 5,528 5,528 5,440 5,440 7,800
Effect of shares acquired from Helionetics... _____ _____ _____ ____ (14)
-------- -------- ------- -------- -------
Pro forma weighted average common shares..... 5,528 5,528 5,440 5,440 7,786
Common stock & common stock equivalent
using the Treasury stock method........... _____ 269 _____ 128 0
-------- ------- ------- --------- --------
Total shares outstanding for purposes of
calculating basic & diluted earnings/
(loss) per share........................... 5,528 5,797 5,440 5 ,568 7,786
----- ----- ----- ------- -----
Net Income/(loss) as reported................ $ 159 $ 159 $(104) $(104) $ 571
----- ----- ------ ------ -----
Pro forma net income(loss)per
share-basic and diluted.................... $ .03 $ .03 $(.02) $ (.02) $.07
----- ----- ------- ------- ----
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenue increased by $19,790,000 or 43% to $66,184,000 for the year
ended December 31, 1997, compared to $46,394,000 for the same period in 1996,
which was due primarily to the upturn in the New York City construction market.
During 1997 50% of revenues came from three major contracts as compared to 1996
where 23% of revenues came from a single project. The company bids and has been
successful in being awarded large projects each of which might account for more
than 10% of revenue in a given year.
Cost of sales increased by $19,405,000 or 46% to $62,005,000 for the year
ended December 31, 1997 compared to $42,600,000 for 1996 primarily as a result
of the increase in total revenue.
Gross profit as a percent of sales decreased to 6.3% for the year ended
December 31, 1997 compared to 8.2% for 1996. The decrease in the gross profit
percentage was due primarily to one project which experienced a construction
delay and subsequent acceleration of work to meet the contract schedule,
resulting in unexpected additional costs. In addition, working out of sequence
also resulted in additional unanticipated costs. The effect of these additional
costs incurred and booked reserves was to reduce gross profit for the year by
$1,984,000. Had these losses not occurred the gross profit percentage for 1997
would have been 9.3%.
Selling, general and administrative expenses increased by only $60,000 or
1.5% in spite of a 43% increase in revenue for 1997. Selling, general and
administrative expenses were $4,030,000 (6.1% of revenue) in 1997 as compared to
$3,970,000 (8.6% of revenue) for 1996. The majority of the companies selling,
general and administrative expenses are not volume sensitive.
The income tax benefit for 1997 was ($10,000) as compared to a benefit of
($72,000) in 1996. The benefit for 1997 was net of an $88,000 adjustment for
prior years taxes. Had this adjustment not been made, the 1997 provision would
have been $78,000 (52% of income before taxes).
Net income for 1997 was $159,000 as compared to a net loss of ($104,000) in
1996 as a result of all the items previously mentioned.
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenue increased by $2,218,000, or 5.0%, to $46,394,000 for the year
ended December 31, 1996, compared to $44,176,000 for the same period in 1995. If
KSWI had booked the full revenues under the contracts it managed for Kerby, it
would have booked additional revenues of $230,000 for the year ended December
31, 1996 and $1,508,000 for the same period in 1995.
Revenue was lower in the first three quarters of 1996 due to the delays in
starting many of the projects. As a result, the revenue increased in each
quarter and rose substantially (45%) in the fourth quarter.
Cost of sales increased by $3,610,000, or 9.3%, to $42,600,000 for the year
ended December 31, 1996, compared to $38,990,000 for the comparable period in
1995 primarily as a result of the increase in contract revenues.
Gross profit as a percentage of net sales decreased to 8.2% for the year
ended December 31, 1996, compared to 11.7% for the same period in 1995. The
decrease in the gross profit margin for the year ended December 31, 1996 was due
to increased competition.
Selling, general and administrative expenses decreased by $145,000 or 3.5%
to $3,970,000 for the year ended December 31, 1996, compared to $4,115,000 for
the comparable period in 1995. This decrease was a result of reductions in
insurance costs which were partially offset by increased costs during 1996
attributable to being a public company.
The income tax benefit for 1996 was ($72,000) as opposed to a provision of
$500,000 for 1995. The credit/provision were a result of the taxable
income/(loss) of the comparable periods.
There was a $104,000 loss for 1996 compared to a net profit of $571,000 in
1995 as a result of all the items previously mentioned.
During 1995 61% of revenues came from one contract as compared to 23% of
revenues coming from the same contract in 1996. This contract is 91% complete at
December 31, 1996 and should not account for a major portion of revenues in
1997. However, the Company is receiving new contracts of significant values and
currently has three large contracts each of which could account for over 10% of
revenues in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its capital resources will be adequate to
maintain its current level of business. The Company believes that it is well
positioned to obtain new contracts and generate increased revenues over the next
year. Public agencies and private parties have announced many new bids for
multi-million dollar projects in which the Company would have a strong
competitive advantage. The Real Estate tax abatement for construction in lower
Manhattan has led to an increase in the number of new projects announced by
private parties.
The Company's current bonding limits are also sufficient given the volume
and size of the Company's contracts. The Company's surety may require that the
Company maintain certain tangible net worth levels and may require additional
guarantees if the Company should desire increased bonding limits.
The Company utilized $1,839,000 of cash from operations during 1997 to fund
the 43% increase in sales volume.
The Company believes its current cash resources are adequate to fund a
moderate increase in sales volume over the next fiscal year. However, the
Company's capital resources will not be sufficient to sustain the Company's
long-term plans for growth. In addition to seeking new contracts, the Company is
investigating expansion into new geographic areas. The Company's management has
had experience in expanding into new geographic areas with the Company's
predecessors; however, to date the Company has conducted its operations
exclusively in the New York City metropolitan area.
The Company is also considering potential acquisitions of company's engaged
in complementary businesses. Entering into complementary lines of business would
achieve significant economies of scale. `The Company has identified several
acquisition candidates but has not entered into any plans, agreements or
understandings in respect of acquisitions. There can be no assurance that the
Company will reach favorable terms, or successfully consummate any acquisitions.
Any acquisitions will require significant additional capital. The Company may
seek to raise capital through debt or equity financing, or both, which may
result in substantial dilution to stockholders.
The Company currently has a $3,000,000 credit facility with Fleet Bank,
which is at 1% over prime and is subject to certain covenants. The Company
utilized a portion of the line of credit during 1997 to cover short-term working
capital needs. As of December 31, 1997, there were no outstanding loans against
this line of credit.
The Company currently has no significant capital expenditure commitments.
During the construction period, owners or general contractors may request
that KSWI perform certain work which is a change to or an 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, of litigation. Slow receipt on collections may also
result from general contractor or owner financial difficulties. KSWI tries to
limit its financial exposure, by refusing, whenever possible, to do work without
a signed formal change order.
IMPACT OF INFLATION
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
would have a negative impact on the Company's revenues.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other statements contained herein regarding matters that are
not historical facts, are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are submitted in Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors of the Company is divided into three classes, with
each class serving for three years or until their successors have been elected.
The officers serve at the pleasure of the Board of Directors. Information as to
the directors and executive officers of the Company and the proposed directors
is as follows:
NAME AGE TITLE
Floyd Warkol 50 President, Chief Executive Officer,
Chairman of the Board and Director
Burton Reyer 63 Executive Vice President, Secretary and
Director
Robert Brussel 55 Chief Financial Officer and Director
Armand D'Amato 53 Director
Daniel Spiegel 72 Director
Mr. Floyd Warkol has been principally employed as Chairman of the Board
since December 15, 1995 and as President and Chief Executive Officer of KSWI and
as Chairman and Chief Executive Officer of its subsidiary KSW Mechanical since
January 1994. From February 1987 to January 1994, he was principally employed as
Chief Executive Officer of Kerby.
Mr. Burton Reyer has been principally employed as Executive Vice President
and Secretary of KSWI since December 15, 1995 and as Vice President and Director
of KSWI and as President and Chief Operating Officer of its subsidiary KSW
Mechanical since January 1994. From December 1987 to January 1994, he was
principally employed as Chief Operating Officer of Kerby.
Mr. Robert Brussel has been principally employed as Chief Financial Officer
and Director of KSWI and Chief Financial Officer of its subsidiary KSW
Mechanical Inc. since January 1994. From June 1988 to January 1994, he was
principally employed as Chief Financial Officer of Kerby.
Mr. Armand D'Amato has been a Director of KSWI since December 15, 1995. He
is also currently, and has been since 1994, the President of the Lloyd Group,
Inc., a company specializing in land use and environmental consulting for real
estate developers and solid waste operators. From 1976 to 1993, he was a partner
at the law firm of Forchelli, Schwartz, Minco and Carlino, Mineola, New York.
From 1972 to 1987, he was a member of the New York State Assembly.
Mr. Daniel Spiegel has been a Director of KSWI since January, 1996. He had
been principally employed as Senior Vice President of Tishman Realty &
Construction Company, Inc. from 1970 until March 1995. He is presently a
consultant to various construction-related companies, and is a member of the
Board of Directors of L.K. Comstock Co., Inc., a privately held electrical
contractor.
COMMITTEES OF THE BOARD OF DIRECTORS. A Compensation Committee approves the
salary, incentives and benefit plans for directors, officers and other employees
and the granting of options and other compensation matters. The Compensation
Committee consists of non-employee Directors, Armand D'Amato and Daniel Spiegel.
An Audit Committee, also composed of non-employee Directors, oversees actions
taken by the Company's independent auditors and reviews the Company's financial
controls.
CLASSIFIED BOARD OF DIRECTORS. The Company's Board of Directors is divided
into three classes of Directors serving staggered three-year terms.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Susan Barnes, a
beneficial owner of more than 10% of issued and outstanding KSWI Common Stock as
of January 1, 1997, sold the remainder of her shares of stock in a brokered
transaction on April 23, 1997. Ms. Barnes has failed to file a Form 4 or a Form
5 to report these transactions. She has failed to file on a timely basis,
reports required by Section 16(a) of the Securities Exchange Act of 1934, as
amended, for the year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth remuneration paid to executive officers of
the Company for the years ended December 31, 1997, 1996 and 1995.
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
Floyd Warkol 1997 $575,000 $0
President and Chief 1996 $550,000 $0
Executive Officer 1995 $525,000 $250,000
Burton Reyer 1997 $325,500 $0
Vice President 1996 $300,000 $0
1995 $287,000 $125,000
Robert Brussel 1997 $135,000 $0
Chief Financial Officer 1996 $135,000 $32,500
1995 $125,000 $30,000
James Oliviero 1997 $150,000 $0
Director of Investor Relations 1996 $150,000 $32,500
1995 $125,000 $25,000
The Company and KSW Mechanical entered into a three-year employment
contract and a non-competition agreement with Mr. Warkol as of January 1, 1994.
The employment contract provides for base annual compensation of $500,000,
increasing by $25,000 per annum. Mr. Warkol is also entitled to medical
insurance, (disability insurance with payments equal to 60% of base
compensation,) a $1 million policy of life insurance payable as directed by the
employee (at a cost of $1,210 per year), $10,000 per year in club dues, and a
car and chauffeur and bonuses if, and when, declared by a two-thirds vote of the
Company's Board of Directors. Mr. Warkol is entitled to terminate his employment
for "good reason," i.e., a substantial change in the nature or status of his
responsibilities or the person to whom he reports, in which event he is entitled
to receive full pay and benefits for the remainder of the term of the contract.
The Company is not entitled to discharge Mr. Warkol for disability until he has
been disabled for 180 consecutive days. Mr. Warkol's estate is entitled to
two-months pay in the event of his death. Mr. Warkol has agreed that he will not
compete in the mechanical contracting business in the New York City metropolitan
area for the term of his employment contract and for two years thereafter.
The Company and KSW Mechanical entered into a three-year employment
contract and a non-competition agreement with Mr. Reyer as of January 1, 1994.
The employment contract provides for base annual compensation of $275,000,
increasing by $12,500 per annum. Mr. Reyer is entitled to medical insurance,
disability insurance with payments equal to 60% of base compensation, a $500,000
policy of life insurance payable as directed by the employee, $5,000 per year in
club dues and bonuses if, and when, declared by a two-thirds vote of the
Company's Board of Directors. Mr. Reyer is entitled to terminate his employment
for good reason, i.e., a substantial change in the nature or status of his
responsibilities or the person to whom he reports, in which event he is entitled
to receive full pay and benefits for the remainder of the term of the contract.
The Company is not entitled to discharge Mr. Reyer for disability until he has
been disabled for 180 consecutive days. Mr. Reyer's estate is entitled to
two-months pay in the event of his death.
In December 1995, Mr. Warkol and Mr. Reyer agreed to extend their executive
employment agreements for an additional two years, under similar terms and
conditions. Messrs. Warkol and Reyer received salary increases of $25,000 in
each of the two years.
OPTIONS GRANTED. The Company adopted the 1995 Stock Option Plan of KSW,
Inc. (the "Stock Option Plan") on December 15, 1995, and the Stock Option Plan
was approved by the KSWI stockholders by unanimous written consent on December
15, 1995. The Stock Option Plan is administered by the Board of Directors or a
Committee appointed by the Board of Directors (each herein called the
"Compensation Committee"). All key employees of, consultants to, and certain
non-employee Directors of the Company, as may be determined by the Compensation
Committee from time to time, are eligible to receive options under the Stock
Option Plan. No options were granted in 1997.
A total of 750,000 shares were originally authorized for issuance under the
Stock Option Plan. Prior to 1997, the Company had granted options with respect
to 610,000 shares at an exercise price of $1.50 per share to certain eligible
participants under the Stock Option Plan (of which 535,000 were issued to
officers and directors of the Company and its subsidiaries). At the Company's
Annual Meeting held on June 27, 1996 the stockholders approved an amendment to
the Stock Option Plan to increase by 350,000 shares the aggregate number of
shares of Common Stock available for future options to 490,000 shares.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee on the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the KSWI Common Stock on the date of grant.
Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the KSWI Common Stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company and its
subsidiaries) shall not exceed $100,000; to the extent that this limitation is
exceeded, such excess options shall be treated as non-qualified stock options
for purposes of the Stock Option Plan and the Internal Revenue Code of 1986, as
amended (the "Code").
At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option plan. Stock options with no
such designation shall be deemed an incentive stock option to the extent that
the $100,000 limit described above is met.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of KSWI Common Stock already owned
by the option holder, or by such other method as the Compensation Committee may
permit from time to time. However, a holder may not use previously owned shares
of KSWI Common Stock that were acquired pursuant to the Stock Option Plan, or
any other stock plan that may be maintained by the Company or its subsidiaries,
to pay the purchase price under an option, unless the holder has beneficially
owned such shares for at least six months. Stock options become immediately
exercisable in full upon the retirement of the holder after reaching the age of
65, upon the disability or death of the holder while in the employ of or service
with the Company, upon a Change of Control (as defined in the Stock Option
Plan), or upon the occurrence of such special circumstances as in the opinion of
the Compensation Committee merit special consideration. However, no options may
be exercised earlier than six months following the date of grant.
Stock options terminate at the end of the tenth business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder, and in the case of
death, the stock option is exercisable by the holder's estate.
The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange, re-
classification or substitution. In the event of any other change in the
corporate structure or outstanding shares of KSWI Common Stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Company shall obtain such consideration for granting options under the
Stock Option Plan as the Compensation Committee in its discretion may request.
Each option may be subject to provisions to assure that any exercise or
disposition of KSWI Common Stock will not violate the securities laws.
No option may be granted under the Stock Option Plan after December 15,
2005.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding options at any time withdraw or amend the
terms and conditions of outstanding options. Any amendment which would increase
the number of shares issuable pursuant to the Stock Option Plan or change the
class of individuals to whom options may be granted shall be subject to the
approval of the stockholders of the Company within one year of such amendment.
The following table shows the number of shares as to which options were
granted immediately before the Distribution on December 29, 1995 to the
Company's executive officers: (no options were granted during the 1996 or 1997
fiscal years.)
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
at Fiscal at Fiscal
Year-End (#) Year-End ($)
Shares Acquired Exercisable/ Exercisable/
NAME on Exercise (#) Value Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Floyd Warkol 0 0 200,000/100,000 $375,000/187,500
Burton Reyer 0 0 100,000/50,000 187,500/93,750
Robert Brussel 0 0 16,667/8,333 31,250/15,625
James Oliviero 0 0 13,333/6,667 25,000/12,500
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership of KSWI Common Stock by (i) those persons known to the Company to
beneficially own more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, proposed directors and executive officers and (iii) all of
the Company's directors, proposed directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF PERCENTAGE
SHARES OWNERSHIP
<S> <C> <C>
Floyd Warkol 1,000,000 (1) 18.3
Meadow Lane
Purchase, NY 10577
Burton Reyer 405,000 7.4
17 Foxwood Road
Kings Point, NY 11024
Allen & Company 317,500 5.8
711 Fifth Avenue
New York, NY
Robert Brussel 25,000 .5
365 Woodmere Blvd.
Woodmere, NY 11598
Armand D'Amato 0 0
Daniel Spiegal 5,000 .9
All Executive officers 1,430,000 26.1
and directors as a group
- ---------------
(1) Includes 78,000 shares owned by Mr. Warkol's wife in trust for their
minor daughter, 78,000 shares owned by Mr. Warkol's son, which Mr.
Warkol denies beneficial ownership, and 50,000 shares owned by the
Floyd and Barbara Warkol Foundation, of which Mr. Warkol is a Trustee.
</TABLE>
As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose, or
direct the disposition, of a security). Accordingly, they may include shares
owned by or for, among others, the wife, minor children or certain other
relatives of such individual, as well as other shares as to which the individual
has the right to acquire within 60 days after such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Floyd Warkol, President of the Company, and a foundation he controls
jointly are the landlord on the Company's lease in Bronx, New York. See
"Properties."
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements required to be filed by Item 8 herewith are as
follows:
(b) EXHIBITS
Reference is made to the Exhibit Index found on page 24 of this Form
10-K.
(c) A schedule of valuation and qualifying accounts is filed herewith as
Exhibit 27.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS OF KSWI
Independent Auditors' Report.............................................F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996.............F-2
Consolidated Statement of Operations years
ended December 31, 1997, 1996 and 1995.................................F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.................................F-5
Consolidated Statement of Cash Flows years ended
December 31, 1997, 1996 and 1995.......................................F-6
Notes to Financial Statements............................................F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
37-16 23rd Street
Long Island City, New York 11101
We have audited the accompanying consolidated balance sheets of KSW, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements of KSW, Inc. and subsidiary as of December 31, 1995 were
audited by other auditors whose report dated February 19, 1996 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
MARDEN, HARRISON & KREUTER
Certified Public Accountants, P.C.
Port Chester, New York
February 2, 1998
<PAGE>
<TABLE>
<CAPTION>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
1997 1996
------------ --------
A S S E T S
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,184 $ 4,464
Accounts receivable, (net of allowance for
doubtful accounts of 1997 - $121; 1996 - $170) 13,186 11,705
Retainage receivable 4,984 5,552
Costs and estimated earnings in excess
of billings on uncompleted contracts 209 1,640
Deferred income taxes 228 126
Prepaid expenses and other receivables 718 290
-------- ---------
Total current assets 21,509 23,777
Property and equipment, (net of accumulated
depreciation and amortization of 1997 - $1,076; 1996 - $752) 569 651
Other assets:
Goodwill, (net of accumulated amortization
of 1997 - $864; 1996 - $712) 4,126 4,278
Other 65 28
-------- ---------
Total assets $26,269 $28,734
======== =======
1997 1996
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,508 $ 8,602
Retainage payable 4,030 3,472
Accrued payroll and benefits 806 916
Accrued expenses 733 345
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,623 4,860
-------- ---------
Total current liabilities 15,700 18,195
Long-term liabilities 70 -
-------- -------
Total liabilities 15,770 18,195
-------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares
authorized, 5,471,311 and 5,542,978 shares issued
and outstanding, at 1997 and 1996, respectively 54 55
Additional paid-in capital 9,763 9,961
Retained earnings 682 523
-------- ---------
Total stockholders' equity 10,499 10,539
-------- ---------
Total liabilities and stockholders' equity $26,269 $28,734
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------
1997 1996 1995
------------ ---------- -------
Revenues:
<S> <C> <C> <C>
Contracts $ 65,549 $ 45,511 $ 41,189
Fees from seller 513 783 2,795
Interest 122 100 192
------------ ---------- -----------
Total revenues 66,184 46,394 44,176
Direct costs 62,005 42,600 38,990
Gross profit 4,179 3,794 5,186
Selling, general and administrative expenses (3,987) (3,956) (4,115)
Interest expense (43) (14) -
------------ ---------- -----------
Income (loss) before income taxes 149 (176) 1,071
Income tax expense (benefit) (10) (72) 500
------------ ---------- -----------
Net income (loss) $ 159 $ (104) $ 571
============ =========== ===========
Net income (loss) per common share - basic
and diluted $ .03 $ (.02) $ .07
=========== =========== ===========
Weighted average common shares outstanding -
basic 5,528,311 5,440,008 7,785,754
============ ========== =========
Weighted average common shares outstanding -
diluted 5,796,893 5,568,429 7,785,754
============ ========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 7,800,000 $ 78 $ 10,391 $ 606 $ 11,075
Acquisition adjustment - - (302) - (302)
Forgiveness of debt by Helionetics - - 335 - 335
Stock purchased from Helionetics (2,600,000) (26) (974) - (1,000)
Dividends - - - (550) (550)
Net income - - - 571 571
-------------- ----- ------- ------ ---------
Balances, December 31, 1995 5,200,000 52 9,450 627 10,129
Sale of common stock to an investment
banking firm and its managing partner 300,000 3 447 - 450
Repurchase of common stock (42,022) (1) (126) - (127)
Issuance of common stock to executives
and consultants 85,000 1 190 - 191
Net loss - - - (104) (104)
-------------- --------- ---------- ------ ---------
Balances, December 31, 1996 5,542,978 55 9,961 523 10,539
Repurchase of common stock (71,667) (1) (198) - (199)
Net income - - - 159 159
------------- ----------- ---------- -------- ----------
Balances, December 31, 1997 5,471,311 $ 54 $9,763 $ 682 $10,499
============= =========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
1997 1996 1995
------------ ----------- --------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 159 $ (104) $ 571
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Compensation expense paid through issuance
of common stock - 191 -
Depreciation and amortization 476 441 383
Deferred income taxes (145) (72) -
Reduction in allowance for doubtful accounts (49) (130) -
Changes in assets (increase) decrease:
Accounts receivable (1,432) (6,792) (627)
Retainage receivable 568 (2,197) (1,617)
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,431 (127) (1,244)
Receivable from sellers - - 894
Prepaid expenses and other receivables (428) 100 (87)
Other assets 6 23 43
Changes in liabilities increase (decrease):
Accounts payable (94) 5,041 938
Retainage payable 558 137 2,410
Accrued payroll and benefits (110) (114) 164
Accrued expenses 388 (138) 383
Due to contractor - (1,264) (776)
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,237) 4,228 (122)
Long-term liabilities 70 - -
--------- -------- -----------
Net cash provided by (used in)
operating activities (1,839) (777) 1,313
--------- -------- ------------
Cash flows from investing activities:
Receivable from Helionetics - - (167)
Cash paid in business acquisition - - (25)
Purchase of property and equipment (242) (206) (287)
-------------- --------- ------------
Net cash used in investing activities (242) (206) (479)
-------------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
1997 1996 1995
Cash flows from financing activities:
<S> <C> <C> <C>
Payment of dividend - - (550)
Issuance of common stock - 450 -
Repurchase of common stock (199) (127) -
--------- -------- -----
Net cash provided by (used in)
financing activities (199) 323 (550)
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents (2,280) (660) 284
Cash and cash equivalents, beginning of year 4,464 5,124 4,840
Cash and cash equivalents, end of year $ 2,184 $ 4,464 $5,124
=========== ========== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 43 $ 14 $ -
============== ============ ==========
Income taxes $ 226 $ 65 $ 765
========= ======== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
On December 20, 1996, the Board of Directors approved the issuance of up to
85,000 shares of common stock of which 50,000 shares of stock were allocated to
company executives and 35,000 shares of stock were allocated as payments to
consultants. The fair market value of the additional 85,000 shares to be issued
was approximately $191 at December 31, 1996.
See Notes 6B and 13A for other noncash financing activities during 1996 and
1995.
See notes to consolidated financial statements.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(1) PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS:
The consolidated financial statements for the years ended December 31,
1997, 1996 and 1995 include the accounts of KSW, Inc. and its
wholly-owned subsidiary, KSW Mechanical Services, Inc., collectively "the
Company." All material intercompany accounts and transactions have been
eliminated in consolidation.
The Company furnishes and installs heating, ventilating and air
conditioning systems and processes piping systems for institutional,
industrial, commercial, high-rise residential and public works projects,
primarily in the State of New York. The Company also serves as a
mechanical trade manager, performing project management services relating
to the mechanical trades and as a constructability consultant.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) CASH AND CASH EQUIVALENTS:
The Company considers highly liquid instruments with remaining
maturities of 90 days or less when purchased to be cash
equivalents. At December 31, 1997 and 1996, all such investments
had original maturities of two weeks or less.
(B) REVENUE AND COST RECOGNITION:
Revenue is primarily recognized on the "percentage of completion"
method for reporting revenue on long-term construction contracts
not yet completed, measured by the percentage of total costs
incurred-to-date to estimated total costs at completion for each
contract. This method is utilized because management considers the
cost-to-cost method the best method available to measure progress
on these contracts. Revenues and estimated total costs at
completion are adjusted monthly as additional information becomes
available and based upon the Company's internal tracking systems.
Because of the inherent uncertainties in estimating revenue and
costs, it is reasonably possible that the estimates used will
change within the near term.
Contract costs include all direct material and labor costs and
those other indirect costs related to contract performance
including, but not limited to, indirect labor, subcontract costs
and supplies. General and administrative costs are charged to
expense as incurred.
The Company has contracts that may extend over more than one year,
therefore, revisions in cost and profit estimates during the
course of the work are reflected in the accounting period in which
the facts, which require the revisions, become known.
Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D:
(B) REVENUE AND COST RECOGNITION - CONT'D:
Revenues recognized in excess of amounts billed are recorded as a
current asset under the caption "Costs and estimated earnings in
excess of billings on uncompleted contracts." Billings in excess
of revenues recognized are recorded as a current liability under
the caption "Billings in excess of costs and estimated earnings on
uncompleted contracts."
In accordance with construction industry practice, the Company
reports in current assets and liabilities those amounts relating
to construction contracts realizable and payable over a period in
excess of one year.
Fees for the management of certain contracts are recognized when
services are provided.
(C) 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.
(D) GOODWILL:
Goodwill, which represents the excess of cost over the fair value
of net assets acquired, is amortized using the straight-line
method over 30 years.
Effective January 1, 1995, management revised the amortization
period for goodwill from 15 years to 30 years, the effects of
which have been adjusted prospectively beginning January 1, 1995.
The Company assesses the recoverability of goodwill periodically
by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected
undiscounted cash flows. The amount of goodwill impairment, if
any, is charged to operations in the period in which goodwill
impairment is determined by management. At December 31, 1997, 1996
and 1995, no impairment of goodwill was determined by management.
Amortization expense for the years ended December 31, 1997, 1996
and 1995 amounted to approximately $153 per year.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D:
(E) INCOME TAXES:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement No. 109, the asset and liability method is used in
accounting for income taxes. Deferred taxes are recognized for
temporary differences between the bases of assets and liabilities
for financial statement and income tax purposes. The temporary
differences relate primarily to different accounting methods used
for depreciation and amortization of property and equipment,
goodwill, allowance for doubtful accounts and net operating loss
carryforwards. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that some or all of the
deferred tax assets will not be realized through future
operations.
(F) NET INCOME (LOSS) PER SHARE:
During the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per
share" (SFAS 128), which establishes new standards for computing
and presenting earnings per share. As required by the standard,
all prior-period earnings per share data have been restated.
Under SFAS No. 128, net income (loss) per share-basic is computed
based on the weighted average number of shares of common stock
outstanding. Income (loss) per share-dilutive reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or otherwise resulted in the issuance of common stock
and is computed similarly to "fully diluted" net income (loss) per
share that was reported under previous accounting standards.
Dilutive potential common shares do not have a significant
dilutive effect.
(G) USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D:
(H) STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Under SFAS 123,
companies are encouraged, but not required, to adopt a fair value
based method of accounting for stock compensation awards. As
permitted by SFAS 123, the Company has elected to continue to
measure compensation cost using the intrinsic value based method
as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and to provide the
disclosures required by SFAS 123.
(3) RETAINAGE RECEIVABLE:
At December 31, 1997, approximately $685 of the retainage receivable is
not collectible within one year.
(4) CONTRACTS IN PROGRESS:
Information with respect to contracts in progress at December 31, 1997
and 1996 is as follows:
1997 1996
Expenditures on uncompleted contracts $ 45,293 $ 75,790
Estimated earnings thereon 4,148 5,632
-------- ---------
49,441 81,422
Less billings applicable thereto 50,855 84,642
-------- ---------
$(1,414) $(3,220)
Included in the accompanying consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 209 $ 1,640
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,623) (4,860)
-------- ---------
$( 1,414) $ (3,220)
========= ==========
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(4) CONTRACTS IN PROGRESS - CONT'D:
The Company experienced a delay and consequently incurred unexpected
costs on one of its projects which resulted in a subsequent acceleration
of work to meet the contract schedule. In addition, working out of
sequence resulted in additional unanticipated costs. The effect of the
additional costs incurred and reserves booked was to decrease net income
for the year ended December 31, 1997 by $1,051 ($.19 per share - basic
and $.18 per share-dilutive).
(5) PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1996 consist of the
following:
1997 1996
Machinery and equipment $ 479 $ 365
Furniture and fixtures 428 300
Leasehold improvements 738 738
------- --------
1,645 1,403
------- -------
Less accumulated depreciation
and amortization 1,076 752
Net property and equipment $ 569 $ 651
======= ========
- -----------
Depreciation and amortization expense relating to property and equipment
was approximately $324, $288 and $230, respectively, for the years ended
December 31, 1997, 1996 and 1995, respectively.
(6) TRANSACTIONS WITH HELIONETICS (FORMER PARENT):
(A) TAX SHARING AGREEMENT:
The Company had an agreement with Helionetics, the Company's
former parent, whereby the Company agreed to pay a share of
Helionetics' tax liability due on consolidated tax returns, but
such payment was not to exceed the tax liability which the Company
would have had on a stand-alone basis. For the year end December
31, 1995, Helionetics forgave debt of $335 relating to income
taxes. Such forgiveness is reflected in the accompanying
consolidated financial statements as capital contributions. The
tax-sharing agreement terminated upon the conclusion of the
Distribution, except with respect to the tax liability accrued
through the Distribution (see Note 12C).
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(6) TRANSACTIONS WITH HELIONETICS (FORMER PARENT) - CONT'D:
(B) RECEIVABLE FROM HELIONETICS:
During 1995, the Company had paid certain state and local taxes on
behalf of Helionetics, as well as certain other costs which, as of
December 29, 1995, aggregated $1,098. On December 29, 1995,
Helionetics tendered 2,600,000 shares of the Company's common
stock in satisfaction of $1,000 in such advances and paid the
Company the remaining balance of $98 (see Note 12C).
(7) INCOME TAXES:
<TABLE>
<CAPTION>
The components of income tax expense (benefit) are as follows:
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
Current
Federal $ - $ - $ 335
State and local 135 - 233
------- ----- -----
135 - 568
------- ----- ---
Deferred
Federal (94) (40) (40)
State and local (51) (32) (28)
------ ----- -----
(145) (72) (68)
------ ----- -----
Total $(10) $ (72) $ 500
===== ===== =====
</TABLE>
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(7) INCOME TAXES - CONT'D:
A reconciliation of the statutory Federal income tax rate to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
Statutory Federal income tax rate (benefit) 34% (34)% 34%
State and local taxes, net of Federal tax benefit 13 (12) 13
Adjustment of prior year (over) under accrual (54) - -
Other - 5 -
-------- ------ ---
(7)% (41)% 47%
======= ===== ===
</TABLE>
The tax provision for 1997 includes an adjustment of deferred taxes for
prior years under accruals. The provision for income taxes for the year
ended December 31, 1995 represents the Federal, State and local income
tax expense based on the assumption that separate income tax returns
would be filed, and the Company would not be included in Helionetics'
consolidated tax returns.
The details of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Deferred income tax asset:
1997 1996
<S> <C> <C>
Property, plant and equipment $ 175 $ 135
Allowance for doubtful accounts 56 68
Net operating loss carryforward 220 58
----- -----
Total deferred income tax assets 451 261
Deferred income tax liabilities:
Amortization of goodwill 166 121
----- -----
Net deferred income tax asset $285 $ 140
==== =====
</TABLE>
At December 31, 1997 and 1996, the long-term portion of the net deferred
tax assets totalling $57 and $14, respectively, are included with other
assets in the accompanying balance sheet.
At December 31, 1997 and 1996, the Company has a net operating loss
carryforward of approximately $450 and $78 expiring through 2013.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(8) COMMITMENTS AND CONTINGENCIES:
(A) PERFORMANCE BONDS:
The Company is contingently liable to a surety under a general
indemnity agreement. The Company agrees to indemnify the surety
for any payments made on contracts of suretyship, guaranty or
indemnity. Management believes that all contingent liabilities
will be satisfied by performance on the specific bonded contracts
involved.
(B) OPERATING LEASES:
The Company is obligated under noncancelable operating leases,
including a lease with its chief executive officer, for office
space with future rental payments at December 31, 1997 as follows:
YEAR ENDING AMOUNT
DECEMBER 31, NONAFFILIATED RELATED PARTY TOTAL
1998 $95 $103 $198
=== ==== ====
Rent expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $357, $351 and $345, respectively,
including $103 to a related party in each year.
(C) EMPLOYMENT AGREEMENTS:
KSW Mechanical Services, Inc. has entered into employment
agreements with two of its officers for the period January 1994
through December 1998. These agreements provide for aggregate base
annual compensation of $775 increasing by $37 in 1995 and 1996 and
by $50 in 1997 and 1998. The officers are also entitled to medical
insurance, disability insurance, life insurance, club dues and
bonuses, if, and when, declared by a two-thirds vote of the
Company's Board of Directors.
(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 have been no
violations of laws which could have a material adverse impact on
the financial condition of the Company.
Employees of the Company have occasion to work in the vicinity of
hazardous materials, such as lead. The Company purchased a $5,000
Contractor's Pollution insurance policy insuring against losses
resulting from exposure to hazardous materials, which expires
February
1998.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(8) COMMITMENTS AND CONTINGENCIES - CONT'D:
(E) CONSULTING AGREEMENTS:
The Company entered into two agreements for independent advisory
and consulting services. The term of the first agreement was from
June 1994 through December 1997 with annual payments totalling
$95. The second agreement was entered into on January 1, 1996 and
expires in December 1998 with annual payments totalling $75. This
agreement also provided the consultant with 15,000 options to
purchase shares of the Company's common stock at $1.50 per share.
The options were issued pursuant to the 1995 Stock Option Plan
(see Note 12E).
During December 1996, under a Board of Directors resolution, the
Company approved the issuance of 85,000 shares of common stock of
which 35,000 shares were issued to these consultants in lieu of
cash payments with a fair market value of approximately $79. This
transaction has been reflected in the Company's consolidated
financial statements for the year ended December 31, 1996 (see
Note 12D).
(F) HELIONETICS' LITIGATION:
The Company is not aware of any pending or threatened legal
proceedings which could have a material adverse effect on its
financial position or operations. However, there are ongoing class
action lawsuits and other lawsuits against the Company's former
parent, Helionetics, Inc., which has filed a petition in
bankruptcy. Pursuant to a Pledge Agreement, Susan Barnes, the wife
of the Chairman of the Board of Helionetics, had irrevocably
pledged 500,000 shares of the common stock she received in the
Distribution of the Company as collateral for payment of claims by
KSW, Inc. against Helionetics in connection with the December 28,
1995 Distribution of KSW, Inc. stock by Helionetics. The Company
received notice of three claims arising in connection with the
Distribution (see Note 12C), totaling $274. In April 1997, 100,000
shares of stock held under the Pledge Agreement were transferred
by Ms. Barnes and used to satisfy these claims. One of these
claims was a debt owed to the Company from its former parent.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(9) CONCENTRATION RISKS:
(A) CREDIT RISK:
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and trade accounts and retainage receivables.
The Company maintains its cash and cash equivalents 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,
1997, such excess amounted to approximately $1,975.
Trade accounts and retainage receivables are due from government
agencies, municipalities and private owners located in the New
York metropolitan area. The Company does not require collateral in
most cases, but may file statutory liens against the construction
projects if a default in payment occurs.
(B) LABOR CONCENTRATIONS:
The Company's direct labor is supplied primarily by unions through
collective bargaining agreements expiring primarily during June
1999. Although the Company's past experience was favorable with
respect to resolving conflicting demands with these unions, it is
always possible that a protracted conflict may occur which will
impact the renewal of the collective bargaining agreements.
(C) CONTRACT REVENUE/SIGNIFICANT CUSTOMER:
The Company earned approximately 42%, 29% and 13% of its contract
revenue during the year ended December 31, 1997 from three
customers. Accounts receivable and retainage receivable from these
respective customers totaled approximately $13,222 as of December
31, 1997. During 1996, the Company earned 53%, 16% and 12% of its
contract revenue from three customers which had combined accounts
and retainage receivable of $13,037 at December 31, 1996. Revenues
from one contract accounted for 61% of consolidated revenues
during 1995. Accounts receivable and retainage receivable from
that contract were $3,573 as of December 31, 1995.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(10) 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 accrued approximately $57 and $51 as a 25%
matching contribution for the years ended December 31, 1997 and
1996, respectively.
(B) MULTIEMPLOYER PENSION PLANS:
The Company has made 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. It is not cost effective to accumulate
information regarding the pension expense under these plans.
(11) LINE OF CREDIT - BANK
Effective July 1, 1996, the Company obtained an uncommitted line of
credit with Fleet Bank, which provided borrowings of up to $2,500 with
interest at the bank's prime lending rate plus 1% which expired May 31,
1997. The line required the Company to meet certain financial covenants
and ratios. At December 31, 1996, there were no outstanding borrowings on
the line of credit.
On May 29, 1997, the Company established a credit facility in the amount
of $3,000 with Fleet Bank which provides a $2,000 revolving credit
agreement and $1,000 line of credit with interest at the bank's prime
lending rate, plus 1%. The $2,000 revolving credit agreement and $1,000
line of credit expire in June 2000 and June 1998, respectively. These
lines require the Company to meet certain financial covenants and ratios.
At December 31, 1997, there was no outstanding borrowing on this credit
facility.
(12) COMMON STOCK:
(A) ISSUANCE OF COMMON STOCK:
On January 31, 1996, the Company sold 300,000 shares of
its common stock for $1.50 per share to an investment
banking firm and its managing partner. (See Note 12C)
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(12) COMMON STOCK - CONT'D:
(B) REPURCHASE OF COMMON STOCK:
During April 1996, the Company purchased 42,022 shares of its
common stock as a result of a tender offer to shareholders whom
held under 50 shares of stock. These shares were purchased at a
cost of $3 per share.
During 1997, the Company purchased 71,667 shares of its stock
under a Board of Directors Resolution authorizing the Company to
purchase up to 10% of its outstanding shares. In January 1998, the
Company purchased an additional 30,000 shares under this
resolution.
(C) THE DISTRIBUTION:
Effective December 29, 1995, the Company filed a Registration
Statement on Form 10 with the Securities and Exchange Commission,
under the provisions of the Securities and Exchange Act of 1934,
as amended, for the purpose of distributing up to 4,189,900 shares
of common stock (the "Distribution"). The Distribution was to the
shareholders of record as of December 4, 1995 of Helionetics at a
rate of one share of the Company's common stock for every twelve
shares of Helionetics stock held. The purpose of the Distribution
was to separate the Company from Helionetics and to enable the
Company to gain independent access to equity markets to fund
future operations. Subsequent to the Distribution, Helionetics had
no ownership interest in the Company. Susan Barnes, the wife of
the Chairman of the Board of Helionetics, received 1,567,958
shares from the distribution as a result of the ownership of her
stock. During 1997 and 1996, she sold all of her shares under the
Securities and Exchange Commission Rule 144 or private
transactions. There are no material pro forma adjustments
necessary to the accompanying statements of operations as a result
of the Distribution because the Company was operated as an
autonomous entity for all periods presented.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(12) COMMON STOCK - CONT'D:
(C) THE DISTRIBUTION - CONT'D:
In connection with the Distribution, the following occurred:
o The Board of Directors of the Company approved a
7,800-for-1 stock split of issued and outstanding
common shares, increased its authorized shares to
25,000,000 and authorized the issuance of 1,000,000
shares of preferred stock.
o The Company declared and paid a cash dividend of $550 to
shareholders of record on December 4, 1995.
o The Company acquired and retired 2,600,000 shares of its
common stock from Helionetics in exchange for
forgiveness by the Company of $1,000 due from Helionetics.
o The Board of Directors of the Company adopted the 1995
Stock Option Plan (the Plan). The Plan enabled the
Company to offer an incentive-based compensation system
to its employees, officers, directors and consultants.
o Bonuses totaling $375 for two officers of the Company were
accrued at December 31, 1995.
o Immediately following the Distribution, the Company
issued and sold a total of 300,000 shares of
common stock for $1.50 per share to an investment
banking firm and its managing partner during
1996. (See Note 12A)
o Pursuant to the Distribution Agreement, Helionetics agreed
to the following: (i) payment of $98 to the Company in
repayment for sums previously advanced by KSW, Inc. to
a Helionetics consultant; (ii) transfer 128,700 and
101,400 shares of the Company's common stock in
satisfaction of agreements; and (iii) Helionetics
documented the account receivable due and owing from
AIM Energy, Inc. (AIM) with respect to advances from
the Company to AIM in the form of a note receivable for
$50, which was paid during 1997.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------
(12) COMMON STOCK - CONT'D:
(D) ISSUANCE OF COMMON STOCK - EXECUTIVES AND CONSULTANTS:
On December 20, 1996, under a Board of Directors Resolution, the
Company was authorized to issue 35,000 shares of stock to two
consultants in lieu of cash payments (see Note 8(E)) and 50,000
shares to executives as year end bonuses. The consolidated
financial statements reflect the effect of 85,000 shares issued
per this resolution. The fair market value of these shares at
December 31, 1996 was approximately $191.
(E) STOCK OPTION PLAN:
The Board of Directors of the Company adopted the 1995 Stock
Option Plan (the Plan). The Plan enabled the Company to offer an
incentive-based compensation system to its employees, officers,
directors and consultants.
A total of 750,000 shares were authorized for issuance under the
Plan. Options to purchase 610,000 shares at $1.50 per share were
issued (of which, 535,000 shares were issued to officers and
directors of the Company and its subsidiary). The Plan requires
that the exercise price of options be set at not less than the
fair market value of the common stock on the date of grants. In
the case of the initial options, the price of $1.50 was determined
to be in excess of the fair market value in light of the
contingencies facing the Company prior to completion of this
Distribution. Options awarded vest one-third on each anniversary
of the date of grant and are fully vested three years after grant
and expire ten years from the date of the grant. Additional credit
towards vesting is given in the event of death (six months) or
disability (three months). Any shares which are subject to an
award but are not used because the terms and conditions of the
award are not met, or any shares which are used by participants to
pay all or part of the purchase price of any option may again be
used for awards under the Plan. The Plan provides that no shares
may be issued to officers or directors in excess of the 750,000
shares originally planned to be authorized unless the Company's
stockholders approve an increase in the number of shares
which may be used for that purpose. At the Company's annual
meeting held on June 27, 1996, the stockholders approved an
amendment to the plan to increase by 350,000 shares the aggregate
number of shares of common stock available for future options to
490,000 shares.
Holders of shares issued pursuant to the Plan are entitled to
registration of such shares annually, subject to restrictions in
any underwriting agreement.
During 1997 and 1996, no options under the Plan were granted or
exercised.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
----------------------------------------
(12) COMMON STOCK - CONT'D:
(E) STOCK OPTION PLAN - CONT'D:
The Corporation has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation
cost for the Company's stock option plan been determined based on
the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Corporation's net income and net income per
common share would have been decreased to the pro forma amounts
indicated below:
1995
Net income - as reported $ 571
======
Net income - pro forma $ 386
======
Net income per common share - as reported -
basic and diluted $ .07
======
Net income per common share - pro forma -
basic and diluted $ .05
======
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option- pricing model with the
following weighted-average assumptions used for grants in 1996:
dividend yield of 0%; expected volatility of 37.20%; risk-free
interest rate of 7.68%; and expected lives of 6 years.
(13) RECLASSIFICATIONS:
Certain amounts in the 1995 consolidated financial statements have been
reclassified for comparative purposes to conform with the 1997 and 1996
presentation. These reclassifications did not affect net income or working
capital, as previously reported.
<PAGE>
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
April 6, 1998 its behalf by the undersigned, thereunto duly authorized.
KSW, INC.
By:/S/ FLOYD WARKOL
Floyd Warkol
Chief Executive Officer
April 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<PAGE>
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
Chief Executive Officer
April 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ FLOYD WARKOL President, Chief April 6, 1998
- ---------------- Executive Officer,
Floyd Warkol Chairman of the Board
/S/ BURTON REYER Vice President and April 6, 1998
- ---------------- Director
Burton Reyer
/S/ ROBERT BRUSSEL Chief Financial April 6, 1998
- ------------------ Officer and Director
Robert Brussel
/S/ ARMAND D'AMATO Director April 6, 1998
- --------------------
Armand D'Amato
/S/ DANIEL SPIEGEL Director April 6, 1998
- ---------------------
Daniel Spiegel
<PAGE>
EXHIBIT INDEX
Exhibit Incorporated Filed
NO. Description Herein by with
Reference Electronic
to Submission
3.1.2 Amended and Restated Articles of X
Incorporation of the Registrant
3.11.2 Amended and Restated By-Laws of the X
Registrant
10.1A Subcontract Agreement dated as of X
November 21, 1996 between KSWI and Morse
Diesel International, Inc. for Brooklyn
Renaissance Plaza
10.1B Subcontract Agreement dated as of May 1, X
1996 between KSWI and
Morse Diesel International, Inc. for
Terminal One at JFK Airport.
10.5 General Agreement of Indemnity, dated X
February 28, 1994, by and among Seaboard
Surety Company-St. Paul Fire and Marine
Insurance Company and KSWI Mechanical
Services, Inc. or the Registrant
10.6 General Agreement of Indemnity, dated X
February 28, 1994, by and among
Helionetics, Inc. Seaboard Surety
Company-St. Paul Fire and Marine Insurance
Company and KSWI Mechanical Services,
Inc. or the Registrant
10.8 Employment Agreement, dated as of January X
1, 1994, by and among KSW Mechanical
Services, Inc., Burton Reyer and the
Registrant
10.9 Employment Agreement, dated as of January X
1, 1994, by and among KSW Mechanical
Services, Inc., Burton Reyer and the
Registrant
10.11 Pledge Agreement by and between Susan X
Barnes and the Registrant
10.12 Irrevocable Proxy, dated December 5, X
1995, by Susan Barnes to Floyd Warkol,
in his capacity as President of the
Registrant
10.13 Amendatory Employment Agreement, dated as X
of December 15, 1995, by and among KSW
Mechanical Services, Inc., the Registrant
and Floyd Warkol
10.14 Amendatory Employment Agreement, dated as X
of December 15, 1995, by and among KSW
Mechanical Services, Inc., the Registrant
and Burton Reyer
21.1 List of Subsidiaries X
27 Summary Financial Information X
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