UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
[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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number: 0-27290
-----------------
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 24, 1999, there were 5,468,644 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. [X]
The estimated aggregate market value of the voting stock held by non-affiliates
of the registrant on March 24, 1998 was $3,958,142 (based on a price of $1.06
per share).
<PAGE>
KSW, INC
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 7A. Quantitative and Qualitative Disclosure About Market Risk .....13
Item 8. Financial Statements and Supplementary Data....................14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................14
PART III
Item 10. Directors and Executive Officers of the Registrant.............15
Item 11. Executive Compensation.........................................16
Item 12. Security Ownership of Certain Beneficial Owners and Management.18
Item 13. Certain Relationships and Related Transactions.................20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.....................................................21
SIGNATURES.................................................................23
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL. KSW, Inc., a Delaware corporation (the "Company" or "KSW"),
furnishes and installs heating, ventilating and air conditioning ("HVAC")
systems and process piping systems for institutional, industrial, commercial,
high-rise residential and public works projects. The Company does not 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").
Total revenues for 1998 were $39,631,000. 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: The Metropolitan
Museum of Art, Harlem USA, World Financial Center River Water Piping and The
Pfizer Training Center at Doral Arrowwood. Based on increases in the number and
size of new projects announced by public authorities and by private parties in
1998, 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 Company's primary strategic objectives are to increase its
revenues and to become more competitive in its present business. The Company may
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 sometimes are awarded by
competitive bids, since many of the owners are public entities. Other 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
subcontractors, 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 the
responsibility for the cost, coordination and construction progress of the
mechanical portion of the 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
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.
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 fund to cover
such expenses.
OPERATIONS. The Company obtains projects primarily through
negotiations with private Owners, Construction Managers and General Contractors,
and by competitive bidding and negotiations in response to advertisements by
federal, state and local government agencies. The Company submits bids after 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
$36,000,000 as of December 31, 1998.
The Company had a project backlog of approximately $36,000,000 at
December 31, 1998. Since then, the Company has been awarded projects totaling
approximately $20,000,000. Of the Company's backlog at year end, the 110/120
Church Street project and the 1567 Broadway project each comprised approximately
16%.
A portion of the Company's anticipated revenue in any year is not
reflected in its backlog at the start of the year because some projects are
started and completed the same year. The Company believes that its backlog is
firm, notwithstanding provisions contained in some contracts which allow
customers to modify or cancel the contracts at any time, subject to certain
conditions, including reimbursement of costs incurred in connection with the
contracts and the possible payment of cancellation fees.
COMPETITION. The mechanical contracting market is highly competitive.
There are many larger regional and national companies with resources greater
than those of the Company. However, 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. 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 a normal part of its operations. The Company does not perform asbestos
abatement but has occasionally subcontracted that part of a contract to duly
licensed asbestos companies with the Company being named as an additional
insured on the asbestos company's liability insurance policy. 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, 1998, the Company had 37 permanent, full
time employees. The Company also employs field employees who are union workers.
The number of union workers employed varies at any given time, depending on the
number and types of ongoing projects and the scope of 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 full time permanent employees with
medical insurance benefits and a discretionary matching 401(k) plan. The Company
has in the past matched 25% of the employees' 401(k) 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 ended December 31, 1998, work under contracts with three
construction managers: Lehrer McGovern Bovis, Inc., Morse Diesel International,
Inc. and GMO International Inc. amounted to 29%, 18% and 15% of the Company's
total revenues, respectively.
Historically, a considerable portion of the Company's revenue has been
generated from contracts with federal, state and local governmental authorities.
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, 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 requirements are
for bonding, net worth and working capital. The Company generally pays a fee to
the bonding company of an amount less than 1% of the amount of the contract to
be performed. Since inception, the Company has 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 are 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 1996, 1997 or 1998, and no
research and development cost are anticipated.
<PAGE>
ITEM 2. PROPERTIES
As a cost saving measure, the Company decided in 1998, to consolidate
its fabrication operations in one location and to close its Long Island City,
New York shop. Pursuant to a Modification of Lease Agreement, dated as of May 1,
1998, the Company surrendered its Long Island City, New York shop space and now
leases an office and warehouse space in Long Island City, consisting of 18,433
square feet. The lease has a term of one year ending on June 30, 1999 at an
annual rent of $ 167,800. The lease has two five year options with yearly rent
increases of approximately 2%. The lease is a triple net lease and thus the
Company will pay any increases on real estate taxes over the base year taxes,
maintenance, insurance and utilities. The Company has exercised the first five
year option under the Modification of Lease Agreement, which extends the lease
term through June 2004.
The Company also leases a building and a storage yard in Bronx, New
York, consisting of a 14,000 square foot building, including 4,000 square feet
of offices, 10,000 square foot of shop space and an adjacent 5,000 square foot
storage yard. This lease is a triple net lease. The Company pays rent of
$103,000 per year, plus taxes (currently $20,500 per year), maintenance,
insurance and utilities. The lease will expire on December 31, 2000. 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. The following are the material lawsuits in which the Company is a
plaintiff:
a. MARCUS GARVEY NURSING HOME. The Company filed a mechanic's lien
in the amount of $294,397 to recover its contract balance on the
above project. The general contractor, and most of the other
subcontractors have also liened the project. All liens have been
bonded. In 1997, the general contractor, Morse Diesel,
International, instituted a mechanic's lien foreclosure action in
the Supreme Court of the State of New York , Kings County,
against the owner, and the case is currently in discovery. KSW
has cross-claimed in that action to foreclose its mechanic's
lien, and has asserted a contract claim against the general
contractor, and a claim against the general contractor's surety,
Seaboard Surety Company, on its Payment Bond. There is no dispute
between the Company and the general contractor as to the amount
of the Company's subcontract balance. KSW is aware of no
information which would reduce the amount of its ultimate
recovery. KSW intends to vigorously pursue this action, which
should proceed to trial within twelve (12) months.
b. CO-OP CITY. The Company has filed a mechanic's lien in the amount
of $5,362,290 to recover its contract balance and unpaid change
order proposals submitted to the general contractor, KSW's lien
has been bonded. KSW has also asserted a claim against the
general contractor's bonding company on its payment bond seeking
to recover KSW's contract balance and unpaid proposals. The
largest unpaid proposal is in the sum of $3,252,122. KSW seeks an
equitable adjustment to subcontract based on unanticipated
impacts to its work which delayed the project, increased costs
and led to inefficiencies. Management believes that its claims
have merit and on February 23, 1999 instituted a lawsuit in the
Supreme Court of the State of New York Bronx County, against the
general contractor, Nab Construction Corp., its Bonding Company,
Federal Insurance Company and the owner, Riverbay Corporation to
recover the Company's contract balance and unpaid proposals,
which action will be vigorously pursued. Although there is no
guaranty that the claim will ultimately be successful, outside
counsel has reviewed the claim and concurs with management's
opinion as to its merits.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the shareholders at
the Company's Annual Meeting held on May 12, 1998:
a. ELECTION OF DIRECTORS. The following persons were elected as Class
III directors to serve for a term of three years:
NUMBERS OF SHARES
Voted against
NAME VOTED FOR OR WITHHELD
Floyd Warkol 4,492,631 11,114
Burton Reyer 4,492,330 11,445
Of the remaining three directors, two will stand for election in 1999 and the
remaining one will stand for election in the year 2000.
b. APPOINTMENT OF INDEPENDENT AUDITORS. The stockholders ratified the
appointment of Marden Harrison & Kreuter certified public accountants, P.C. as
independent auditors for the Company for 1998. There were 4,494,383 shares voted
for approval, 3,707 shares voted against and 5,685 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 24, 1999, the Company had 5,468,644 shares of KSW Common
Stock issued and outstanding held by approximately 5,800 shareholders of record.
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 1998, the Company repurchased and retired 58,000
shares of common stock at a weighted average price of $2.93.
Currently, the Company intends to retain earnings for future growth,
and does not anticipate paying dividends on its Common Stock in the foreseeable
future. The Company did not pay any dividends in 1997 or 1998.
The following information on high and low trading ranges is provided
for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
QUARTER HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First................................. $3.43 $2.87 $2.37 $1.87
Second................................ 2.87 2.25 2.50 1.87
Third................................. 2.31 1.50 3.50 2.19
Fourth................................ 1.50 1.01 4.50 3.37
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the years ended December 31, 1998, 1997, and 1996 is derived from,
and is qualified by reference to, the financial statements for those years,
audited by Marden, Harrison & Kreuter certified public accountants, P.C. each of
which is included herein, and should be read in conjunction with such financial
information. The financial information for 1995 and 1994 is derived from the
financial statements audited by Corbin & Wertz.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands, except share and per share amounts)
1998 1997 1996 1995 1994
Income Statement:
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $39,631 $ 66,184 $ 46,374 $ 44,176 $ 36,131
Direct costs...................................... 36,434 62,005 42,600 38,990 30,046
Gross profit...................................... 3,197 4,179 3,794 5,186 6,085
Operating expenses................................ 4,397 4,030 3,970 4,115 4,523
Selling, general, administration,
depreciation, interest and income tax
expenses........................................ 3,831 4,020 3,898 4,615 5,479
Income (loss) before income taxes................. (1,200) 149 (176) 1,071 1,562
Net (loss) income................................. (634) 159 (104) 571 606
Net (loss) income per share - Basic............... (.12) .03 ( .02) .07 (1) .08
Net (loss) income per share - Diluted............. (.11) .03 ( .02) .07 (1) .08
Number of shares used in computation-
Basic............................................. 5,463,505 5,528,311 5,440,008 7,785,754 (1) 7,800,000
Diluted........................................... 5,655,195 5,796,893 5,568,429 7,785,754 (1) 7,800,000
Balance Sheet Data:
Total assets...................................... 21,273 26,269 28,734 20,431 18,380
Working capital................................... 5,194 5,809 5,582 4,928 4,564
Current liabilities............................... 11,388 15,700 18,195 10,302 7,305
Long-term liabilities............................. 57 70 0 0 0
Stockholders' equity.............................. 9,828 10,499 10,539 10,129 11,075
Other Data:
Current ratio..................................... 1.46:1 1.37:1 1.31:1 1.48:1 1.62:1
</TABLE>
(1) Pro Forma earnings per share (basic and diluted) after giving effect to a
7,800 to 1 stock split and repurchase of 2,600,000 shares of KSW common
stock by the Company from Helionetics would be $0.11 and $0.12 for years
ended December 31, 1995 and 1994, respectfully, based on 5,200,000 shares
of KSW common stock outstanding.
<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 years ended December 31, 1998, 1997 and 1996.
OVERVIEW
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 retentions although at times
legal procedures have been required to collect retentions due 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>
1998 1997 1996
---- ---- ----
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(dollars in thousands)
Net Sales:
<S> <C> <C> <C> <C> <C> <C>
Contracts....................... $39,587 99.9 $65,671 99.2 $45,611 98.3
Fees............................ 44 .1 513 .8 783 1.7
--------- -------- ------- ------ -------- ------
Total........................... 39,631 100.0 66,184 100.0 46,394 100.0
COSTS OF SALES.................... 36,434 91.9 62,005 93.7 42,600 91.8
------ ------ ------ ------ -------- ------
GROSS PROFIT...................... 3,197 8.1 4,179 6.3 3,794 8.2
EXPENSES:
Selling, general, administrative
and interest expenses........ 4,397 11.1 4,030 6.1 3,970 8.6
----- ---- ----- --- -------- ---
INCOME/(LOSS) BEFORE PROVISION
FOR INCOME TAXES.................. (1,200) (3.0) 149 .2 (176) (.4)
PROVISION FOR INCOME TAXES........ (566) (1.4) (10) 0 (72) (.2)
----- ----- ----- ---- -------- ----
NET INCOME/(LOSS) ............... $(634) (1.6) $159 .2 $(104) (.2)
====== ===== ==== ==== ======= ======
</TABLE>
<PAGE>
KSW, INC
COMPUTATION OF NET INCOME PER SHARE
(000'S EXCEPT NET INCOME PER SHARE)
<TABLE>
<CAPTION>
BASIC DILUTED BASIC DILUTED BASIC DILUTED
1998 1998 1997 1997 1996 1996
----- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Weighted average common shares 5,464 5,464 5,528 5,528 5,440 5,440
Common stock & common stock equivalent
using the Treasury stock method 191 269 128
------ ----- ----- ----- ----- ------
Total shares outstanding for purposes of
calculating basic & diluted earnings/
(loss) per share 5,464 5,655 5,528 5,797 5,440 5,568
----- ----- ----- ----- ----- ------
Net income (loss) as reported $(634) $(634) $ 159 $ 159 $(104) $(104)
====== ====== ===== ====== ====== ======
Net income (loss) per share-basic and diluted $ (.12) $ (.11) $ .03 $ .03 $(. 02) $(.02)
======= ======= ===== ====== ======= ======
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenue decreased by $26,553,000 or 40.1% to $39,631,000 for the
year ended December 31, 1998, compared to $66,184,000 for the same period in
1997. The decrease in revenue for 1998 was due to a decrease in backlog of
construction projects from $31,000,000 at December 31, 1997 compared to
$65,000,000 at December 31, 1996. Backlog increased 16% from $31,000,000 at
December 31, 1997 to $36,000,000 at December 31, 1998. Since then the Company
had been awarded projects totaling approximately $20,000,000.
Cost of sales decreased by $25,571,000 or 41.2% to $36,434,000 for the
year ended December 31, 1998, compared to $62,005,000 for the comparable period
in 1997 primarily as a result of the decrease in contract revenues.
Gross profit percentage of net sales increased to 8.1% for the year
ended December 31, 1998 compared to 6.3% for the same period in 1997. 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 of $2,000,000 in 1997 and $800,000 in 1998. The Company has
submitted a proposal in the sum of $3,252,000 seeking an equitable adjustment
for unanticipated additional costs. In addition, the Company has filed a
mechanic's lien to recover its contract balance and unpaid change order
proposals, which the general contractor has bonded. The Company has elected not
to record claims until the amount of the claim has been settled. Had the Company
not incurred the additional costs, or had it recorded the offsetting claims, the
gross profit percentage for 1998 and 1997 would have been 10.1% and 9.3%,
respectively.
Selling, general and administrative expenses increased by $367,000 or
9.1% to $4,397,000 for the year ended December 31, 1998, compared to $4,030,000
for the comparable period in 1997. During the fourth quarter of 1998, the
Company spent $98,000 in costs in order to close down one of its two fabrication
facilities. It is anticipated that this measure in conjunction with other
reductions will result in overhead savings in excess of $500,000 per year.
The income tax benefit for 1998 was $566,000 as opposed to a benefit
of $10,000 for 1997. The credits were a result of the taxable income/(loss) of
the comparable periods.
There was a ($634,000) loss for 1998 compared to a net profit of
$159,000 in 1997 as a result of all the items previously mentioned.
During 1998 the Company earned 29%, 18% and 15% of its revenues from
its three largest customers. In 1997 it earned 42%, 29% and 13% from its 3
largest customers. The Company bids on large multi-year contracts which account
for over 10% of contract revenue in any given year. The Company is currently
bidding on several such contracts and, if successful, each contract will account
for more than 10% of contract revenue in 1999.
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.
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.
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 Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
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 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 believes its current cash resources are adequate to fund a
moderate increase in sales volume in the next 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 currently has a $2,000,000 revolving credit facility with
Fleet Bank, which is at 1% over prime, subject to certain covenants and expires
June 2000. The Company did not utilize the facility during 1998. As of December
31, 1998, there were no outstanding loans against the facility.
The Company currently has no significant capital expenditure
commitments.
During the construction period, owners or general contractors may
request that KSW perform certain work which is a change to or in addition to the
original contract. Such work often requires months to obtain formal change
orders (including dollar amounts). Change orders are often the subject of
dispute and, sometimes litigation. Slow receipt on collections may also result
from general contractor or Owner financial difficulties. KSW tries to limit its
financial exposure by refusing, whenever possible, to do work without a signed
formal change order.
<PAGE>
YEAR 2000 COMPLIANCE
The Company uses computer software programs and operating systems in
its internal operations, including applications used in billing and various
administrative functions. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year
and impacts both information technology ("IT") and non-IT systems. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could cause the
Company to incur expenses and the risk and potential expense of any disruptions
that may be caused by the software's impaired functioning as the Year 2000
approaches and by the modification or replacement of such software, including a
temporary inability to send correct invoices or engage in similar normal
administrative activities.
Management has assessed the Company's Year 2000 readiness and
determined that all its computer hardware and software programs are Year 2000
compliant. The Company, therefore, does not expect to incur significant
expenditures to address Year 2000 compliance. The ability of third parties with
whom the Company transacts business to address adequately their Year 2000
compliance is beyond the Company's control. The Company has contacted its
subcontractors and material suppliers to determine, to the extent that they
utilize computers, their Year 2000 compliance status and their remediation plans
if they are not Year 2000 compliant. The Company is a mechanical contractor that
relies heavily on the skills of its subcontractors for its business. The Company
currently believes the consequences of Year 2000 issues with respect to these
third parties will not have a material adverse effect on the Company's business,
results of operations and financial condition. However, there can be no
assurance that these expectations will be met. Actual results could differ from
the Company's plans.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative
instruments.
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 THE 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 51 Chief Executive Officer, President and Chairman of
the Board of Directors
Burton Reyer 64 Executive Vice President, Secretary and Director
Robert Brussel 56 Chief Financial Officer and Director
Stanley Kreitman 65 Director
Daniel Spiegel 73 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
KSW and as Chairman and Chief Executive Officer of its subsidiary KSW Mechanical
since January 1994.
Mr. Burton Reyer has been principally employed as Executive Vice
President and Secretary of KSW since December 15, 1995, and as Vice President
and Director of KSW and as President and Chief Operating Officer of its
subsidiary KSW Mechanical since January 1994.
Mr. Robert Brussel has been principally employed as Chief Financial
Officer and Director of KSW and Chief Financial Officer of its subsidiary KSW
Mechanical Services, Inc. since January 1994.
Mr. Daniel Spiegel has been a Director of KSW 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.
Mr. Stanley Kreitman was appointed to the Board of Directors on
February 18, 1999 to replace Armand D'Amato who resigned effective December 10,
1998 for personal reasons unrelated to the Company or its operations. Since
1994, Mr. Kreitman has been Chairman of Manhattan Associates, an investment firm
and is a Board member of the N.Y.C. Department of Corrections. He is a published
author and lecturer on business investment matters. He is a member of the Board
of Directors of Medallion Funding Corp. (NASDAQ), Ports Systems Corp. (AMEX) and
CCA Industries, Inc. (NASDAQ).
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 nonemployee Directors, Stanley Kreitman and
Daniel Spiegel. An Audit Committee, also composed of nonemployee 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 SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent of the Company's common stock to file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"SEC"). Executive officers, directors and holders of more than ten percent are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company and written representations from the Company's
executive officers and directors, the Company believes that during the year
ended December 31, 1998, its executive officers, directors and holders of more
than ten percent complied with all applicable Section 16(a) filings
requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth remuneration paid to executive officers
of the Company for the years ended December 31, 1998, 1997 and 1996.
ANNUAL
Name and Principal COMPENSATION
POSITION YEAR SALARY BONUS
Floyd Warkol 1998 $600,000 $0
Chairman of the Board, President 1997 $575,000 $0
and Chief Executive Officer 1996 $550,000 $0
Burton Reyer 1998 $350,000 $0
Executive Vice President 1997 $325,000 $0
1996 $300,000 $0
Robert Brussel 1998 $135,000 $22,780
Chief Financial Officer 1997 $135,000 $0
1996 $135,000 $32,500
James Oliviero 1998 $150,000 $22,780
1997 $150,000 $0
Director of Investor Relations 1996 $150,000 $32,500
The Company and KSW Mechanical entered into a two-year employment
contract and a noncompetition agreement with Mr. Warkol as of January 1, 1999.
The employment contract provides for base annual compensation of $420,000. In
addition, Mr. Warkol shall be entitled to receive, each year, an amount equal to
9.5% of the Company's annual profits, before taxes, which are in excess of
$250,000. For the purposes of computing the amount due Mr. Warkol, annual pretax
profits shall exclude the effect of any income or expense on the Co-op City
project, and shall exclude any bonuses due to Mr. Warkol or Mr. Reyer. Mr.
Warkol is 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) and a car with a
chauffeur. 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 two-year employment
contract and a non competition agreement with Mr. Reyer as of January 1, 1999.
The employment contract provides for base annual compensation of $240,000. In
addition, Mr. Reyer shall be entitled to receive an amount each year, equal to
5.5% of the Company's annual profits, before taxes, which are in excess of
$250,000. For the purposes of computing the amount due Mr. Reyer, annual pretax
profits shall exclude the effect of any income or expense on the Co-op City
project and shall exclude any bonuses due Mr. Reyer and Mr. Warkol. Mr. Reyer is
entitled to medical insurance, disability insurance with payments equal to 60%
of base compensation and a $500,000 policy of life insurance payable as directed
by the employee. 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. Mr. Reyer 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.
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 KSW 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 1998.
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 shareholders 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 KSW 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 KSW 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 KSW 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 KSW 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 KSW 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 KSW 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 1997 or 1998
fiscal years).
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised in-the-Money
Options/SARs at Year Options/SARs at Year
Shares Acquired End (#) Exercisable/ End ($) Exercisable/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXCERCISABLE
<S> <C> <C> <C> <C>
Floyd Warkol 0 0 300,000/0 N/A
Burton Reyer 0 0 150,000/0 N/A
Robert Brussel 0 0 25,000/0 N/A
James Oliviero 0 0 20,000/0 N/A
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership of KSW Common Stock by (i) those persons known to the Company to
beneficially own 5% or more 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.
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, the number of shares 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.
Number of Percentage
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP
Floyd Warkol 997,000 (1) 18.2%
Meadow Lane
Purchase, NY 10577
Burton Reyer 388,086 (2) 7.1%
17 Foxwood Road
Kings Point, NY 11024
Allen & Company 312,500 5.7%
711 Fifth Avenue
New York, NY
Robert Brussel 33,500 *
365 Woodmere Blvd.
Woodmere, NY 11598
Stanley Kreitman 0 *
375 Park Avenue (Suite 1606)
New York, NY 10022
Daniel Spiegel 5,000 *
351 Twin Lakes Road
Teconic, CT 06079
All Executive officers 1,422,046 26.0%
and directors as a group (5 persons)
- --------------------
* Less than one percent.
(1) Includes 78,000 shares owned by Mr. Warkol's daughter, 75,000 shares owned
by Mr. Warkol's son and 50,000 shares owned by the Floyd and Barbara Warkol
Charitable Foundation, of which Mr. Warkol is a Trustee. Mr. Warkol denies
beneficial ownership of the shares owned by his children.
(2) Amount does not include a 1998 gift of 16,920 shares from Mr. Reyer to
seven family members who do not reside in his household and over which stock Mr.
Reyer denies beneficial ownership, and includes 1,540 shares which Mr. Reyer
gave to his wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Floyd Warkol, President of the Company, and a charitable foundation he
controls are the landlord on the Company's lease in Bronx, New York. The lease
payments on such property were $103,000 for 1998. See "Properties."
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 in this Form 10-K.
(c) Financial data schedule is filed herewith as Exhibit 27.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent auditors' report F-1
Consolidated financial statements:
Consolidated balance sheets F-2
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated 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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
MARDEN, HARRISON & KREUTER
Certified Public Accountants, P.C.
Port Chester, New York
February 2, 1999, except Note 4 as to which the
date is February 5, 1999 and Note 7(B) as to
which the date is February 9, 1999
<PAGE>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
(in thousands)
----------------------------
1998 1997
---------- ------------
A S S E T S
Current assets:
Cash and cash equivalents $ 2,404 $ 2,184
Accounts receivable, net 9,212 13,186
Retainage receivable 3,747 4,984
Costs and estimated earnings in excess
of billings on uncompleted contracts 392 209
Deferred income taxes 600 228
Prepaid expenses and other receivables 227 718
-------- ---------
Total current assets 16,582 21,509
Property and equipment, net 410 569
Other assets:
Goodwill, net 3,973 4,126
Deferred income taxes 300 57
Other 8 8
-------- ---------
Total assets $ 21,273 $ 26,269
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,464 $ 8,508
Retainage payable 2,242 4,030
Accrued payroll and benefits 426 806
Accrued expenses 189 733
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,067 1,623
-------- ---------
Total current liabilities 11,388 15,700
Long-term liabilities 57 70
-------- ---------
Total liabilities 11,445 15,770
-------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock 54 54
Additional paid-in capital 9,726 9,763
Retained earnings 48 682
-------- ---------
Total stockholders' equity 9,828 10,499
-------- ---------
Total liabilities and stockholders' equity $ 21,273 $ 26,269
======== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996 (in thousands, except share
and per share data)
-----------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contracts $ 39,491 $ 65,549 $ 45,511
Fees from seller 44 513 783
Interest 96 122 100
------------ ---------- -----------
Total revenues 39,631 66,184 46,394
Direct costs 36,434 62,005 42,600
-------------- ---------- -----------
Gross profit 3,197 4,179 3,794
Selling, general and administrative expenses 4,364 3,987 3,956
Interest expense 33 43 14
------------ ---------- -----------
Income (loss) before income taxes (1,200) 149 (176)
Income tax expense (benefit) (566) (10) (72)
------------ ---------- -----------
Net income (loss) $ (634) $ 159 $ (104)
============= ========== ============
Net income (loss) per common share - basic $ (.12) $ .03 $ (.02)
============= =========== =============
Net income (loss) per common
share - diluted $ (.11) $ .03 $ (.02)
============= ============ =============
Weighted average common shares outstanding -
basic 5,463,505 5,528,311 5,440,008
============ ============ =============
Weighted average common shares outstanding -
diluted 5,655,195 5,796,893 5,568,429
============ ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except share data)
----------------------------
<TABLE>
<CAPTION>
Common Stock, $.01 par, Additional
25,000,000 Shares Authorized Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
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
Repurchase of common stock (58,000) (1) (169) - (170)
Issuance of common stock to executives and
consultant 42,000 1 112 - 113
Exercise of stock options 13,333 - 20 - 20
Net loss - - - (634) (634)
--------- ----- ------- ------ --------
Balances, December 31, 1998 5,468,644 $ 54 $ 9,726 $ 48 $ 9,828
========= ===== ======= ====== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except share data)
----------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ (634) $ 159 $ (104)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Compensation expense paid through issuance
of common stock 113 - 191
Depreciation and amortization 398 476 441
Deferred income taxes (615) (145) (72)
Increase (reduction) in allowance for
doubtful accounts 38 (49) (130)
Changes in assets (increase) decrease:
Accounts receivable 3,936 (1,432) (6,792)
Retainage receivable 1,237 568 (2,197)
Costs and estimated earnings in excess
of billings on uncompleted contracts (183) 1,431 (127)
Prepaid expenses and other receivables 491 (428) 100
Other assets - 6 23
Changes in liabilities increase (decrease):
Accounts payable (3,044) (94) 5,041
Retainage payable (1,788) 558 137
Accrued payroll and benefits (380) (110) (114)
Accrued expenses (544) 388 (138)
Due to contractor - - (1,264)
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,444 (3,237) 4,228
Long-term liabilities (13) 70 -
--------- -------- ---------
Net cash provided by (used in)
operating activities 456 (1,839) (777)
--------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment (86) (242) (206)
---------- ---------- ------------
Net cash used in investing activities (86) (242) (206)
---------- ---------- ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except share data)
----------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Exercise of stock options 20 - -
Issuance of common stock - - 450
Repurchase of common stock (170) (199) (127)
--------- -------- -------
Net cash provided by (used in) financing activities (150) (199) 323
--------- -------- -------
Net increase (decrease) in cash and cash equivalents 220 (2,280) (660)
Cash and cash equivalents, beginning of year 2,184 4,464 5,124
-------- ------- -------
Cash and cash equivalents, end of year $ 2,404 $ 2,184 $ 4,464
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 33 $ 43 $ 14
======== ======= ========
Income taxes $ 8 $ 226 $ 65
======== ======= ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During 1998, the Company issued 42,000 shares of common stock of which 17,000
shares of stock were allocated to Company executives and 25,000 shares of stock
were allocated as payments to a consultant. The fair market value of the
additional 42,000 shares issued was approximately $113 at the date of issuance.
During 1996, the Company issued 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 issued was approximately $191 at the date of issuance.
See Note 11 for other noncash financing activities.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except share data)
----------------------------
(1) Principles of consolidation and nature of operations:
The consolidated financial statements for the years ended December 31,
1998, 1997 and 1996 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, 1998 and 1997, cash equivalents consisted of investments
in Euro-dollars with original maturities of one week 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.
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) Allowance for doubtful accounts:
The Company establishes an allowance for uncollectible trade accounts
received based on historical collection experience and management's
evaluation of collectibility of outstanding accounts receivable. The
allowance for doubtful accounts was $160 and $121 as of December 31,
1998 and 1997, respectively.
(D) 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.
(E) 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.
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, 1998, 1997 and 1996, no impairment of
goodwill was determined by management.
Goodwill at December 31, 1998 and 1997 is as follows:
1998 1997
--------- ---------
Goodwill $ 4,990 $ 4,990
Less: accumulated amortization 1,017 864
------- -------
Net goodwill $ 3,973 $ 4,126
======= =======
Amortization expense for the years ended December 31, 1998, 1997 and
1996 amounted to approximately $153 per year.
(F) 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.
(G) 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.
(H) 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.
(I) 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 (see Note 11(C)).
(3) Retainage receivable:
At December 31, 1998, approximately $2,365 of the retainage receivable is
not collectible within one year.
(4) Construction contracts:
Information with respect to contracts in progress at December 31, 1998
and 1997 is as follows:
1998 1997
----------- ---------
Expenditures on uncompleted contracts $ 25,057 $ 45,293
Estimated earnings thereon 2,844 4,148
-------- ---------
27,901 49,441
Less billings applicable thereto 30,576 50,855
-------- ---------
$ (2,675) $ (1,414)
========= ==========
Included in the accompanying consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 392 $ 209
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,067) (1,623)
-------- ---------
$ (2,675) $ (1,414)
========= ==========
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 of $2,000 in 1997 and $800 in
1998. The effect of the additional costs incurred was to decrease net
income for the year ended December 31, 1998 by $471 ($.09 per share-basic
and $.08 per share-diluted) and December 31, 1997 by $1,051 ($.19 per
share-basic and $.18 per share-diluted). The Company has submitted a
proposal in the sum of $3,252 seeking an equitable adjustment for KSW's
unanticipated additional costs on February 5, 1999. In addition, the
Company has filed a mechanic's lien to recover its contract balance and
unpaid change order proposals, which the General Contractor has bonded. The
Company has elected not to record claims until the amount of the claim has
been settled. At December 31, 1998, approximately $2,246 for billings
applicable to the base contract, is included in accounts and retainage
receivable relating to this contract.
(5) Property and equipment:
Property and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
---------- ------------
Machinery and equipment $ 524 $ 479
Furniture and fixtures 453 428
Leasehold improvements 754 738
------- --------
1,731 1,645
Less accumulated depreciation and
amortization 1,321 1,076
-------- -------
Net property and equipment $ 410 $ 569
======== ========
Depreciation and amortization expense relating to property and equipment
was approximately $245, $324 and $288 for the years ended December 31,
1998, 1997 and 1996, respectively.
(6) Income taxes:
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
Current
<S> <C> <C> <C>
State and local $ 49 $ 135 $ -
-------- ------ ------
49 135 -
-------- ------ ------
Deferred
Federal (373) (94) (40)
State and local (242) (51) (32)
--------- ------ -------
(615) (145) (72)
--------- ------ -------
Total $ (566) $ (10) $ (72)
========= ====== =======
A reconciliation of the statutory Federal income tax rate to the provision
for income taxes is as follows: 1998 1997 1996
Statutory Federal income tax rate (benefit) (34)% 34% (34)%
State and local taxes, net of Federal tax benefit (12) 13 (12)
Adjustment of prior year over accrual (1) (54) -
Other - - 5
-------- ------ -------
(47)% (7)% (41)%
======== ====== =======
</TABLE>
The tax provision for 1997 includes an adjustment of deferred taxes for
prior years over accruals.
The details of deferred tax assets and liabilities are as follows:
Deferred income tax assets:
1998 1997
--------- ----------
Property and equipment $ 301 $ 175
Allowance for doubtful accounts 77 56
Net operating loss carryforward 835 220
------- -----
Total deferred income tax assets 1,213 451
Deferred income tax liabilities:
Amortization of goodwill 313 166
------- -----
Net deferred income tax asset $ 900 $ 285
======= =====
At December 31, 1998, the Company has a net operating loss carryforward of
approximately $1,800 expiring through 2014.
(7) 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, 1998 as follows:
Year Ending
December 31, Nonaffiliated Related Party Total
1999 $178 $103 $ 281
2000 169 103 272
2001 173 - 173
2002 176 - 176
2003 180 - 180
Thereafter 91 - 91
------ ------- -------
$967 $206 $1,173
====== ======= =======
In accordance with the lease agreement, the Company has the option to
extend its non affiliated lease an additional five years from June 2004
through June 2009. The Company has extended its lease with a related
party through December 2000.
Rent expense for the years ended December 31, 1998, 1997 and 1996
amounted to approximately $381, $357 and $351, 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 1999 through December
2000. These agreements provide for aggregate base annual compensation
of $660 each year plus 15% of income before taxes in excess of $250.
The officers are also entitled to medical insurance, disability
insurance and life insurance. Future minimum payments required by the
Company in accordance with these agreements are as follows:
Year ending
DECEMBER 31, Amount
1999 $ 660
2000 660
-------
$ 1,320
=======
(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.
(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 from January 1, 1996 through December 31, 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 11C). Neither agreement was
extended after its expiration date.
During 1998 and 1996, the Company approved the issuance of 42,000 and
85,000 shares of common stock, respectively, of which 25,000 and 35,000
shares, respectively, were issued to these consultants in lieu of cash
payments with a fair market value of approximately $67 and $79,
respectively. These transactions have been reflected in the Company's
consolidated financial statements for the year ended December 31, 1998
and 1996, respectively (see Note 11B).
(8) 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, 1998, amounts in
excess of federally insured limits totaled approximately $2,177.
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 customers:
The Company earned approximately 29%, 18% and 15% of its contract
revenue in 1998; 42%, 29% and 13% of its contract revenue in 1997 and
53%, 16% and 12% of contract revenue in 1996 from its three largest
customers. Accounts receivable and retainage receivable from these
customers totaled approximately $5,945, $13,222 and $13,037,
respectively at December 31, 1998, 1997 and 1996.
(9) Retirement plans:
(A) Profit-sharing/401(k) plan:
The Company sponsors a profit-sharing/401(k) plan covering employees
not covered under collective bargaining agreements who meet the age and
length of service requirements of the plan. The Company may make
discretionary contributions to the plan. The total of employee
contributions may not exceed Federal government limits. The Company
expensed approximately $51, $57 and $51, as a 25% matching contribution
for the years ended December 31, 1998, 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.
(10) Line of credit - bank
On May 29, 1997, the Company established a credit facility in the amount of
$3,000 with Fleet Bank which provided a $2,000 revolving credit agreement
and $1,000 line of credit with interest at the bank's prime lending rate,
plus 1%. The $1,000 line of credit expired in June 1998 and was not
renewed. The $2,000 revolving credit agreement expires in June 2000 and
requires the Company to meet certain financial covenants. At December 31,
1998 and 1997, there were no outstanding borrowings on this credit
facility.
(11) Stockholders' equity:
(A) Repurchase of common stock:
During 1998 and 1997, the Company purchased 58,000 and 71,667 shares,
respectively, of its common stock under a Board of Directors resolution
authorizing the Company to purchase up to 10% of its outstanding
shares.
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.
(B) Issuance of common stock - executives and consultants:
During 1998, the Company issued 25,000 shares of common stock to a
consultant in lieu of cash payments (see Note 7(E)) and 17,000 shares
to executives as bonuses. The consolidated financial statements reflect
the effect of 42,000 shares issued per this resolution. The fair market
value of these shares at December 31, 1998 was approximately $42.
During 1996, the Company issued 35,000 shares of stock to two
consultants in lieu of cash payments and 50,000 shares to executives as
year end bonuses. The fair market value of these shares at December 31,
1996 was approximately $191.
(C) 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 of common stock 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 of common stock.
Holders of shares issued pursuant to the Plan are entitled to
registration of such shares annually, subject to restrictions in any
underwriting agreement. During 1998, 13,333 options under the Plan were
exercised. During 1997 and 1996, no options under the Plan were
exercised. During 1998, 1997 and 1996 no new options were granted. At
December 31, 1998, there were 596,667 exercisable options outstanding,
all of which have an exercise price of $1.50 per share.
(D) Preferred stock:
The Company is authorized to issue 1,000,000 shares of preferred stock.
Through December 31, 1998, no shares of preferred stock have been
issued by the Company.
(12) Backlog:
Backlog represents the amount of revenue the Company expects to realize
from work to be performed on uncompleted contracts in progress at year end.
At December 31, 1998 backlog consists of estimated revenue to be recognized
of $35,582.
(13) Year 2000 Compliance:
Management has assessed the Company's Year 2000 readiness and determined
that all of its computer hardware and software programs are Year 2000
compliant. The Company, therefore, does not expect to incur significant
expenditures to address Year 2000 compliance. The ability of third parties
with whom the Company transacts business to address adequately their Year
2000 compliance is beyond the Company's control. The Company is a
mechanical contractor that relies heavily on the skills of its
subcontractors for its business. The Company currently believes the
consequences of Year 2000 issues with respect to these third parties will
not have a material adverse effect on the Company's business, results of
operations and financial condition. However, there can be no assurance that
these expectations will be met. Actual results could differ from the
Company's plans.
<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
March 30, 1999 its behalf by the undersigned, thereunto duly authorized.
KSW, INC.
By: /S/ FLOYD WARKOL
------------------
Floyd Warkol
Chief Executive Officer
March 30, 1999
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
------------------------
Floyd Warkol
President, Chief Executive Officer,
Chairman of the Board and Director
March 30, 1999
/S/ BURTON REYER
--------------------------
Burton Reyer
Vice President and Director
March 30, 1999
/S/ ROBERT BRUSSEL
--------------------------
Robert Brussel
Chief Financial Officer and Director
March 30, 1999
/S/ STANLEY KREITMAN
----------------------------
Stanley Kreitman
Director
March 30, 1999
/S/ DANIEL SPIEGEL
----------------------------
Daniel Spiegel
Director
March 30, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
2.1* Modification of Lease Agreement dated as of May 1, 1998
3.i.2^ Amended and Restated Articles of Incorporation of the
Registrant
3.ii.2^ Amended and Restated By-Laws of the Registrant
10.1^ Employment Agreement, dated as of January 1, 1994, by
and among KSW Mechanical Services, Inc., Floyd Warkol
and the Registrant
10.2^ Employment Agreement, dated as of January 1, 1994, by
and among KSW Mechanical Services, Inc., Burton Reyer
and the Registrant
10.3^ Amendatory Employment Agreement, dated as of December
15, 1995, by and among KSW Mechanical Services, Inc.,
the Registrant and Floyd Warkol
10.4^ Amendatory Employment Agreement, dated as of December
15, 1995, by and among KSW Mechanical Services, Inc.,
the Registrant and Burton Reyer
10.5* Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc. the Registrant and Floyd Warkol.
10.6* Form of Second Amendatory Employment Agreement dated as of
December 31, 1998 by and among KSW Mechanical Services,
Inc. the Registrant and Burton Reyer.
21.1^ List of Subsidiaries
27* Financial Data Schedule
- --------------------------- *
* Filed herewith.
^ Previously Filed.
MODIFICATION OF LEASE
AGREEMENT made as of the 1st day of May, 1998, by and between Irvjoy
Partners, L.P., and I BLDG Co., Inc. having an office with a mailing address c/o
Wembly Management Company, 52 Vanderbilt Avenue, New York, New York 10017
(hereinafter referred to as "Landlord") and KSW, Inc., having an office at 37-16
23rd Street, Long Island City, New York 11101 (hereinafter referred to as
"Tenant").
STATEMENT OF FACTS
Landlord and Tenant have each succeeded to the named Landlord and
named Tenant, respectively, set forth in the hereinafter described leases and
are presently parties to a lease dated as of the 4th day of April, 1988
(hereinafter referred to as the "Lease"), whereby Landlord leases to Tenant and
Tenant hired from Landlord certain premises in a building known and numbered as
22-14 37th Avenue, Long Island City, New York ("Premises"), upon all of the
terms, covenants, conditions, and provisions more particularly contained in the
Lease. Landlord and Tenant now desire to extend the term of the Lease and to
otherwise modify the Lease, as amended by the terms, covenants, conditions and
other provisions hereinafter provided. Unless the text hereof shall indicate
otherwise, the capitalized terms used herein shall have the meanings ascribed to
them in the Lease.
NOW, THEREFORE, for Ten ($10.00) Dollars and other good and valuable
consideration, the receipt and adequacy of which is hereby mutually
acknowledged, Landlord and Tenant hereby agree to the following:
1. The term of the Lease is extended for fourteen (14) months
commencing 5/l/98 and terminating on, and including, 6/30/99, all upon the same
terms and conditions as set forth in the Lease, except as herein below provided.
2. The annual Base Rental payable by Tenant pursuant to Paragraph 38
of the Lease shall be changed to the following amounts during the following
periods:
PERIOD ANNUAL RENT MONTHLY RENT
5/1/98 - 6/30/99 $297,000.00 $24,750.00
3. (a) Tenant is hereby given two (2) consecutive options to extend
the term of this Lease by two (2) additional five (5) year terms ("option
term(s)"), with the first (1st) commencing July 1, 1999 and expiring June 30,
2004, inclusive, and the second (2nd) commencing July 1, 2004 and expiring June
30, 2009, inclusive, each exerciseable, but only at least one hundred twenty
(120) days prior to the expiration of the initial term or the first option term,
as the case may be, by written notice to Landlord given in the manner for the
giving of notice by the terms of the Lease. Upon the giving of such notice to
extend the term of this Lease, the Lease term will automatically, without the
need for any further documentation, be extended for the option term(s), upon the
terms and conditions as are set forth in the Lease, except as herein provided
and after the exercise of the first (1st) option, Tenant shall have only one
(1) option left and after the exercise of the second (2nd) option, Tenant shall
have no further options to exercise.
(b) During the option terms the base rent shall be as follows:
FIRST 7/1/99-6/30/00 $ 297,000.00 $ 24,750.00
OPTION 7/1/00-6/30/01 $ 302,940.00 $ 25,186.67
TERM 7/1/01-6/30/02 $ 308,999.00 $ 25,749.92
7/1/02-6/30/03 $ 315,179.00 $ 26,264.92
7/1/03-6/30/04 $ 321,482.00 $ 26,790.17
SECOND 7/1/04-6/30/05 $ 327,912.00 $ 27,326.00
OPTION 7/1/05-6/30/06 $ 334,470.00 $ 27,872.50
TERM 7/1/06-6/30/07 $ 341,160.00 $ 28,430.00
7/1/07-6/30/08 $ 347,983.00 $ 28,998.59
7/1/08-6/30/09 $ 354,943.00 $ 29,578.59
4. At all times during the initial one (1) year extension and during
each of the option terms, except for the last year of the second (2nd) option
term, if any, Tenant is hereby given the right on at least ninety (90) days
prior written notice to Landlord to surrender a portion ("Surrendered Portion")
of the Premises, outlined in red on an exhibit, attached hereto, made a part
hereof and marked "Exhibit A." Upon such exercise Tenant shall vacate the
Surrendered Portion, removing all of its property, repairing any damaged caused
to the same during such removal and leave the Surrendered Portion in good
condition and broomcleaned. Landlord shall, on a before the expiration of
ninety (90) days following Tenant's vacating the Surrendered Portion in the
manner above prescribed, perform the following work:
a) separate all utilities and close wall openings between
the Surrendered Portion and the balance of the Premises; and,
b) provide for a separation in the operation of the HVAC
system between the Surrendered Portion and balance of the Premises.
Within ninety (90) days of the exercise of the first (1st) option
term, or as soon as possible thereafter if prevented by temperatures below 32
degrees Fahrenheit, Landlord will perform the following work:
c) supply and install a new roof and fleshing with a ten
(10) year guarantee from the installer;
d) supply and install a new rooftop HVAC unit sufficient to
service the drafting area (outlined on Exhibit A); and,
e) Landlord will repair the existing sidewalk to place the
same in reasonably good condition and, thereafter, during the term of the Lease,
Tenant shall maintain and repair the sidewalk in a reasonably good and clean,
free of snow, ice and debris condition.
If Tenant exercises the aforementioned option to vacate the
Surrendered Portion the base rent and all additional rent shall be lowered and
adjusted on a pro-rata basis based upon the square footage of the entire
Premises and the square footage of the balance of the Premises after the removal
of the square footage attributable to the Surrendered Portion.
If Tenant exercises the aforementioned option to vacate the
Surrendered Portion and does not exercise the first (1st) option term, the
Tenant shall repay to Landlord, as additional rent prior to June 30, 1999, its
actual costs expended to perform the work described in subparagraphs 4.(a) and
(b) above.
5. Article 3 of the Lease is hereby deleted in its entirety and the
following substituted therefore:
a) TAXES: At the times set forth in this Lease Tenant shall
pay Landlord one hundred percent (100%) of all taxes, assessments, water rents,
rates and charges, sewer rents, and other governmental impositions and charges
of every kind and nature whatsoever, extraordinary as well as ordinary, and each
and every installment thereof, which shall or may during the term be charged,
laid, levied, assessed, imposed, become due and payable, or liens upon, or arise
in connection with the use, occupancy or possession of, or grow due or payable
out of, or for, the Premises or any part thereof, or any buildings,
appurtenances or equipment thereon or therein or any part thereof, or the
sidewalks or streets in front of or adjoining the Premises, and all taxes
charged, laid, levied, assessed or imposed in lieu of or in addition to the
foregoing under or by virtue of all present or future laws, ordinances,
requirements, orders, directions, rules or regulations of the federal, state,
county and city governments and of all other governmental authorities
whatsoever, and all fees and charges of public and governmental authorities for
construction, maintenance, occupation or use during the term of any vault,
passageway or space in, over or under any sidewalk or street on or adjacent to
the Premises, or for construction, maintenance or use during the term of any
part of any building covered hereby within the limits of any street,
(collectively referred to as "Taxes") all in excess of the amount for the New
York City fiscal tax year of July 1, 1998 and through June 30, 1999.
b) All such taxes, water rents, rates and charges, sewer
rents and other governmental impositions and charges which shall be charged,
laid, levied assessed or imposed for each fiscal period in which the term of
this Lease commences and terminates shall be apportioned pro rata between
Landlord and Tenant in accordance with the respective portions of each such
fiscal period during which such term shall be in effect.
c) Commencing in the second year of this Lease term
extension if the first option is exercised, on or before the 15th day of each
and every month during the term of this lease, the Tenant shall deposit with the
Landlord a sum equal to one-twelfth (1/12) of the portion of the Taxes for which
Tenant is responsible to pay and assessed or imposed against Premises for the
calendar year. Such payments shall be based upon the payments made by Tenant for
the next previous tax fiscal year. All such deposits shall be received and held
by the Landlord or deposited with the first mortgagee if required at the sole
election of Landlord. As and when such Taxes become due and before they become
delinquent, Landlord shall pay the same and shall promptly forward to Tenant
receipted bills showing such payment. In the even that the amount of such Tax
assessed or imposed against the Premises has not been definitely ascertained at
the time when any of such monthly deposits become due and payable, Tenant shall
make the deposit based upon the amount of such Taxes as assessed or imposed
against the Premises for the preceding year subject to adjustment as and when
the amount of such real estate taxes is ascertained. If at the time when such
Taxes become due and payable, Tenant has deposited an insufficient amount to pay
the same, Tenant shall forthwith upon demand deposit any deficiency with
Landlord so that Taxes may be paid without penalty. If Tenant shall have
deposited more than sufficient funds to pay the same, the excess shall be
credited toward any immediately subsequent deposit. In the event that Landlord
shall fail to pay any such Tax payments as and when the same become due and
before they become delinquent and provided that the Landlord has received from
Tenant sufficient monies for the purpose of paying the same, Tenant may, at its
option, pay the same and deduct the amount so paid.
d) Nothing herein contained shall require or be construed to
require Tenant to pay any inheritance, estate, succession, transfer, gift,
franchise, corporation, income or profit tax, or capital levy that is or may be
imposed upon Landlord, its successors or assigns; provided, however, that in any
case where a Tax may be levied, assessed or imposed upon the income arising from
the rent hereunder for the use and occupancy of the Premises in lieu of or as
substitute, in whole or in part, for a Tax upon the Premises, Tenant shall pay
the same.
e) Landlord shall promptly forward copies of any such bill
it receives( due date, or with Landlord billing if Landlord previously has paid
such charge.
6. Landlord hereby agrees, upon the exercise of the options given
Tenant hereunder, to pay to the broker of record, Diana & Yuras, the brokerage
commission, in the amounts set forth in the letter of April 27, 1998 addressed
to Robert A. Rapuano, Vice President, BLDG Management Co., Inc. Landlord and
Tenant each agree to indemnify and hold harmless the other from any claim for a
brokerage commission, arising out of this transaction, made by any broker
claiming to have dealt with the indemnifying party.
7. Except as otherwise provided herein, all of the terms, covenants,
conditions and provisions of the Lease shall remain and continue unmodified, in
full force and effect and binding upon the parties hereto, their heirs,
administrators, executors and their permitted assigns.
8. This Agreement may not be changed, modified or canceled orally.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this SECOND
MODIFICATION of Lease as of the day and year first above written.
LANDLORD:
IRVJOY PARTNERS, L.P., AND
I BLDG CO., INC.
By:______________________
TENANT:
KSW, INC.
By:______________________
SECOND AMENDATORY EMPLOYMENT AGREEMENT
SECOND AMENDATORY EMPLOYMENT AGREEMENT, dated as of December 18, 1998, by and
among KSW Mechanical Services, Inc., a Delaware corporation (the "Company"),
KSW, Inc., a Delaware corporation ("KSWI") and Floyd Warkol ("Warkol").
W I T N E S S E T H
WHEREAS, Warkol is employed by the Company and KSWI pursuant to an
Employment Agreement, dated as of January 1, 1994, by and among the Company,
KSWI and Warkol (the "Employment Agreement"), as amended by the Amendatory
Employment Agreement, dated as of December 15, 1995; and
WHEREAS, the Company, KSWI and Warkol wish to provide for the amendment of
certain terms of the Employment Agreement;
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto hereby agree as follows:
1. All terms used herein that are defined in the Employment Agreement shall have
the meanings provided therein, unless otherwise defined herein. The following
amendments to the Employment Agreement shall take effect as of January 1, 1999.
2. Paragraph 1.1 of the Employment Agreement is hereby deleted in its entirety
and replaced by the following:
"1.1 Term. The Company agrees to employ Warkol as Chairman and Chief Executive
Officer of the Company and Warkol agrees to accept such employment, subject to
the terms and provisions hereof, for the period beginning the date hereof and
ending on December 31, 2000, unless terminated earlier pursuant to Article 3 or
4 hereof (the "Term"). During the Term, and for so long as Warkol is employed by
the Company hereunder, Warkol shall also serve as the President and Chief
Executive Officer of KSWI and KSWI shall employ Warkol in that capacity. During
the Term, Warkol shall, if he wishes, be elected as a director of the Company
and KSWI. If Warkol is not a director of the Company or KSWI, he shall
nonetheless be entitled to attend Board of Directors meetings of the Company and
KSWI."
3. Paragraph 2.1 of the Employment Agreement is hereby amended to add the
following provisions:
"2.1(a). Subject to the provisions of Article 4 and 5 hereof, as
compensation for services rendered hereunder, Warkol shall receive an annual
base salary of $420,000 in the years 1999 and 2000, to be paid weekly in
accordance with the Company's normal payroll practices, subject to deduction for
withholding and other applicable taxes and similar charges.
2.1(b). In addition to the base salary set forth in paragraph 2.1(a)
hereof, for the years 1999 and 2000,Warkol shall receive each year an amount
equal to 9.5% of the annual profits, before taxes, of the Company which are in
excess of $250,000, to be paid within 90 days after the end of each calendar
year. The computation of any bonus based on the annual pretax profits of the
Company shall exclude the effect of any income or expense with respect to the
CO-OP City Project. For the purpose of this Agreement, pretax profit shall
exclude any bonuses due to Floyd Warkol or Burton Reyer.
2.1 (c). Sub-paragraph 2.3(d) of the Employment Agreement is hereby deleted
in its entirety."
4. Except as specifically amended or modified herein, all of the terms and
provisions of the Employment Agreement shall remain in full force and effect,
except any references to Shea and Gould are deleted, and any references to
Helionetics, Inc. shall be changed to KSW, Inc.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendatory
Employment Agreement as of the date first above written.
KSW MECHANICAL, SERVICES, INC.
By:______________________________
Name:
Title:
KSW, INC.
By:______________________________
Name:
Title:
FLOYD WARKOL
_________________________________
SECOND AMENDATORY EMPLOYMENT AGREEMENT
SECOND AMENDATORY EMPLOYMENT AGREEMENT, dated as of December 18, 1998, by
and among KSW Mechanical Services, Inc., a Delaware corporation (the "Company"),
KSW, Inc., a Delaware corporation ("KSWI") and Burton Reyer ("Reyer").
W I T N E S S E T H
WHEREAS, Reyer is employed by the Company and KSWI pursuant to an
Employment Agreement, dated as of January 1, 1994, by and among the Company,
KSWI and Reyer (the "Employment Agreement"), as amended by the Amendatory
Employment Agreement, dated as of December 15, 1995; and
WHEREAS, the Company, KSWI and Reyer wish to provide for the amendment of
certain terms of the Employment Agreement;
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto hereby agree as follows:
1. All terms used herein that are defined in the Employment Agreement shall have
the meanings provided therein, unless otherwise defined herein. The following
amendments to the Employment Agreement shall take effect as of January 1, 1999.
2. Paragraph 1.1 of the Employment Agreement is hereby deleted in its entirety
and replaced by the following:
"1.1 Term. The Company agrees to employ Reyer as Chief Operating Officer of the
Company and Reyer agrees to accept such employment, subject to the terms and
provisions hereof, for the period beginning the date hereof and ending on
December 31, 2000, unless terminated earlier pursuant to Article 3 or 4 hereof
(the "Term"). During the Term, and for so long as Reyer is employed by the
Company hereunder, Reyer shall also serve as the Vice President of KSWI and KSWI
shall employ Reyer in that capacity. During the Term, Reyer shall, if he wishes,
be elected as a director of the Company and KSWI. If Reyer is not a director of
the Company or KSWI, he shall nonetheless be entitled to attend Board of
Directors meetings of the Company and KSWI."
3. Paragraph 2.1 of the Employment Agreement is hereby amended to add the
following provisions:
"2.1(a). Subject to the provisions of Article 4 and 5 hereof, as
compensation for services rendered hereunder, Reyer shall receive an annual base
salary of $240,000 in the years 1999 and 2000, to be paid weekly in accordance
with the Company's normal payroll practices, subject to deduction for
withholding and other applicable taxes and similar charges.
2.1(b). In addition to the base salary set forth in paragraph 2.1(a)
hereof, for the years 1999 and 2000, Reyer shall receive each year an amount
equal to 5.5% of the annual profits, before taxes, of the Company which are in
excess of $250,000, to be paid within 90 days after the end of each calendar
year. The computation of any bonus on annual pretax profits of the
Company shall exclude the effect of any income or expense with respect to the
CO-OP City Project. For the purpose of this Agreement pretax profit shall
exclude any bonuses due to Floyd Warkol or Burton Reyer."
4. Except as specifically amended or modified herein, all of the terms and
provisions of the Employment Agreement shall remain in full force and effect,
except any reference to Shea and Gould is deleted.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendatory
Employment Agreement as of the date first above written.
KSW MECHANICAL, SERVICES, INC.
By:______________________________
Name:
Title:
KSW, INC.
By:______________________________
Name:
Title:
BURTON REYER
_________________________________
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2404
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0
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