UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549


____________




FORM 10-K




(Mark One)




x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the year ended December 31, 2010




OR




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from ______________ to ______________




Commission file number:  001-32865




_________________




KSW, INC.


(Exact Name of Registrant as Specified in its Charter)




Delaware

(State or Other Jurisdictionof Incorporation or Organization)

11-3191686

(I.R.S. EmployerIdentification No.)37-16 23rd Street, Long Island City, New York

11101(Address of Principal Executive Offices)

(Zip Code)




Registrant’s telephone number, including area code:  (718) 361-6500




Securities registered pursuant to Section 12(b) of the Act:




TITLE OF EACH CLASS

NAME OF EACH EXCHANGE ON WHICH REGISTEREDCOMMON STOCK

$.01 par value

NASDAQ GLOBAL MARKET







SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  NONE




Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x




Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o  No x







Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o




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




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o




Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large Accelerated Filer  o

Accelerated Filer  o

Non-Accelerated Filer  o

Smaller Reporting Company x





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).  Yes o  No x




The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant on June 30, 2010 was $17,497,008 (based on a price of $ 3.14 per share).




As of March 18, 2011, there were 6,366,625 shares of Common Stock, $.01 par value per share, outstanding.




DOCUMENTS INCORPORATED BY REFERENCE:




The Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission (the “Commission”) pursuant to Regulation 14A within 120 days after the end of the Registrant’s last fiscal year is incorporated by reference into Part III of this Annual Report on Form 10-K.











FORWARD-LOOKING STATEMENTS
2PART I
3ITEM 1.
BUSINESS
3ITEM 1A.
RISK FACTORS
7ITEM 1B.
UNRESOLVED STAFF COMMENTS
10ITEM 2.
PROPERTIES
10ITEM 3.
LEGAL PROCEEDINGS
10ITEM 4.
(REMOVED AND RESERVED)
11PART II
12ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
12ITEM 6.
SELECTED FINANCIAL DATA
13ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
24ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
24ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
25ITEM 9A.
CONTROLS AND PROCEDURES
25ITEM 9B.
OTHER INFORMATION
26PART III
26ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
26ITEM 11.
EXECUTIVE COMPENSATION
26ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
27ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
27ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
27PART IV
28ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
28SIGNATURES
30
  
  FORWARD LOOKING STATEMENTS
  Certain statements contained under “Item 1 - Business”, “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K regarding matters that are not historical facts, constitute “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements generally can be identified as statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “may”, “will” or other similar words or phrases. Such forward-looking statements concerning management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements to differ materially from any expected results, performance or achievements discussed or implied by such forward-looking statements. Many of the risks, uncertainties and other important factors that could cause actual results to differ materially from expectations of the Company are described under “Item 1A - Risk Factors” in this Form 10-K. All written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are qualified in their entirety by such factors.
 
 There is no assurance that any of the actions, events or results of the forward-looking statements will occur, or if any of them do, what impact they will have on the Company’s results of operations or financial condition.  Because of these uncertainties, you should not put undue reliance on any forward-looking statements.  Other than as required by applicable law, the Company disclaims any obligation to update or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
 
 2
 
 PART I
 
 ITEM 1.
BUSINESS
  General.  KSW, Inc., a Delaware corporation (the “Company” or “KSW”), furnishes and installs heating, ventilating and air conditioning (“HVAC”) systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects.  The Company does not actively pursue projects under $3,000,000.  The Company also serves as a mechanical trade manager, performing project management services relating to the mechanical trades.  The Company conducts operations through its wholly-owned subsidiary, KSW Mechanical Services, Inc. (“KSW Mechanical”). The Company’s common stock is traded on the Nasdaq Global Market Exchange (“NASDAQ”) under the symbol “KSW”.
  Since 2008, banks have been less likely to lend money for private construction projects, and investors appear to be less likely to invest capital in new construction projects.  Private construction in New York City, which is dependent on the financial institutions and markets, has been affected by this crisis.  Therefore, the Company has shifted its focus to opportunities in the public and institutional construction sectors, where the Company has successfully worked in the past.  The Company believes its high cash reserves and strong balance sheet should help it weather the current economic condition.
  Some of the Company’s ongoing institutional projects include:  Mount Sinai Center for Science and Medicine, Blythedale Children’s Hospital and the Morgan Stanley Children’s Hospital of New York Pediatric Emergency Department Renovation. The Company is also working on public projects such as the World Trade Center Chiller Plant, and several projects at Brookhaven National Laboratories.  The Company is completing its installation of the HVAC systems at a hotel/luxury apartment project at 42nd Street and 10th Avenue in Manhattan.
  The Company’s primary strategic objectives are to increase its revenues and profitability in its present business.  While cash reserves are important in this economic climate, the Company may look to expand its business into new geographic areas in the Northeastern United States or acquire businesses which would be complementary to its current line of business.  The Company may also pursue acquisitions outside its current lines of business for greater diversification.
  Prior to the current credit crisis and recent economic recession, the Company focused on the New York City private construction market and had been successful in obtaining projects from private owners and construction companies by utilizing its value engineering and trade management skills.  Many of these projects are obtained from repeat customers, who invite the Company to participate in the project while the project is still in the design phase, or to assist in bringing a project’s budget in line with the customer’s requirements.  While the amount of private construction projects available to the Company has decreased since 2008, recently there appears to be a modest increase in the number of private projects available for bidding.
  On private projects, the Company provides value engineering assistance, whereby the Company uses its experienced staff to recommend economical changes to streamline HVAC and process piping systems.  These changes reduce costs, but still yield the same results as the
 
 3
 original plans.  The Company’s ability to provide this service has become increasingly recognized in the industry and has resulted in the Company’s ability to secure projects without competitive bidding. The Company believes that this service may provide additional opportunities in the future, when lending for private construction becomes more available. Certain governmental agencies have begun to incorporate value engineering provisions in their bid documents.
  The Company’s management pioneered the concept of managing the mechanical trade portion of large construction projects.  On larger complex projects (generally those having a mechanical portion valued at over $10,000,000), it is often beneficial for a construction manager to lock in the costs of the mechanical portion of the contract prior to completion of the contract documents.  By engaging the services of a trade manager, the Company believes owners can more accurately evaluate design alternatives so that the completed construction documents balance costs and project objectives.  As a mechanical trade manager, the Company performs a construction manager function for the mechanical trade portion of a project.  The Company divides the mechanical portion of the contract into bid packages for subcontractors and equipment, negotiates subcontracts and coordinates the work. The Company believes that this coordination provides a significant benefit in keeping a project on schedule and within budget.
  As a mechanical trade manager, the Company may subcontract parts of a large project to different subcontractors, thereby increasing competition on projects and reducing costs by allowing smaller contractors to compete for the subcontract work.  On some projects, the Company may self-perform a portion of the work for a fixed price.  The Company believes customers benefit by having a single source responsible for the cost, coordination and progress of the mechanical portion of the projects. Although trade management is typically available only on large jobs, the Company believes there is opportunity for expanding this line of business.
  On trade management projects, the Company provides a guaranteed maximum price (“GMP”) to its customer for its scope of responsibility.  The Company controls the GMP by obtaining price quotes from potential suppliers and subcontractors, requiring payment or performance bonds from major subcontractors and adding a contingency allowance to these price quotes before the Company submits its GMP.  The Company also works to control costs because it is a mechanical contractor and can perform some of the guaranteed work on its own should bid prices exceed its estimate. These costs are subject to certain risk factors discussed in “Item 1A – Risk Factors”.
  While trade management projects provide a net profit margin lower than that for construction projects, the Company believes there is generally less risk associated with trade management projects because there is a contingency fund, which can be drawn from if necessary.  A contingency fund is a line item which the Company includes in the GMP to account for any contingencies the Company may not have anticipated in estimating the GMP.  In the event the Company’s costs exceed the relevant line items quoted in the GMP, the Company may draw from the contingency fund to cover such expenses.  The Company is at risk for any costs in excess of the GMP.  There is no assurance that potential cost overruns will not exceed this contingency.
  The Company purchases steel products from local, national and international distributors.  The Company includes allowances in its estimates for future escalations in steel prices due to
 
 4
 market conditions. When market conditions indicated a price rise, the Company has in the past entered into agreements locking in prices with its suppliers to purchase steel products at fixed dollar amounts for extended time periods.  When steel product prices do not fluctuate, the Company purchases these products on a price in effect basis.  The current prices for steel are fluctuating, and the Company is attempting to lock in prices for the length of each project, which may or may not be possible.
  Operations.For all projects, the Company develops a comprehensive project budget using what it believes is a proven cost estimating system.  Projects are divided into phases and line items indicating separate labor, equipment, material, subcontractor and overhead cost estimates.  As a project progresses, the Company’s project managers are responsible for planning, scheduling and overseeing operations and reviewing project costs compared to the estimates. These costs are tracked on a monthly basis.   The Company’s costs have been and may in the future be impacted by lower than expected labor productivity and higher than expected material costs.
  The Company continues to bid on public projects.  It has received letters of approval as an authorized bidder by various government agencies, including the Metropolitan Transportation Authority, 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, the Port Authority of New York and New Jersey and the New York State Dormitory Authority.
  Markets.The Company competes for business primarily in the New York City metropolitan area.  However, the Company has performed work outside of that area in the past.
  Backlog.The Company had a backlog (anticipated revenue from the uncompleted portions of awarded contracts) totaling approximately $64,000,000 as of December 31, 2010, compared to approximately $121,500,000 as of December 31, 2009.
  The backlog as of December 31, 2010 does not include the recently awarded United Nations Chiller Plant Project, valued at approximately $14,100,000, with add alternates, at the Owner’s option, which could increase the contract by an additional $1,000,000.
 
 A portion of the Company’s anticipated revenue in any year is not reflected in its backlog at the start of the year because some projects are awarded and performed in the same year.  The Company believes that approximately $21,000,000 of the existing backlog at December 31, 2010, is not reasonably expected to be completed during the 2011 fiscal year.  The schedule for each project is different and subject to change due to circumstances outside the control of the Company. Accordingly, it is not reasonable to assume that the performance of backlog will be evenly distributed throughout a year. The Company believes that its backlog is firm, notwithstanding provisions contained in the contracts which allow customers to modify or cancel the contracts at any time, subject to certain conditions, including reimbursement of costs incurred in connection with the contracts and the possible payment of cancellation fees.
  5
 The Company is actively seeking new contracts to add to its backlog.  Management believes that its value engineering services will continue to assist the Company in obtaining new contracts.
  Competition.  On public works projects, the Company competes by submitting a sealed bid to the public entity.  The project is typically awarded to the lowest responsible bidder.  On private projects, the Company and its competitors negotiate with the developer, or its construction manager, on the costs of the mechanical work required.
  The mechanical contracting market is highly competitive. There are many larger regional and national companies with resources greater than those of the Company.  However, some of these large competitors are unfamiliar with the New York City metropolitan area.  On private and institutional projects, the Company believes it competes favorably with such companies because of its reputation in the New York City area and its knowledge of the local labor force and its ability to value engineer projects.  There are also many smaller contractors and subcontractors in the New York City metropolitan area, who may also compete for work.  The Company believes there are barriers to entry for smaller competitors, including bonding requirements, and relationships with subcontractors, suppliers and unions.
  Regulations.  The construction industry is subject to various governmental regulations from local, state and federal authorities, such as the Occupational Safety and Health Administration (“OSHA”) and environmental agencies.  The Company is also governed by state and federal requirements regarding the handling and disposal of lead paint, but the financial impact of complying with such requirements cannot be predicted at this time because it varies from project to project.  The Company must also comply with regulations as to the use and disposal of solvents and hazardous wastes which compliance is a normal part of its operations.  The Company does not perform asbestos abatement, but has occasionally subcontracted that part of a contract to duly licensed asbestos abatement companies with the Company being named as an additional insured on the asbestos abatement company’s liability insurance policy.  The Company has not incurred any liability for violations of environmental laws.
  Employees.  At December 31, 2010 the Company had approximately 38 full-time office and project support employees.  The Company also employs field employees, who are union workers.  The number of field union workers employed varies at any given time, depending on the number and types of ongoing projects and the scope of projects under contract.  The Company hires union labor for specific work assignments and can reduce the number of union workers hired at will with no penalty.
  The Company pays benefits to union employees through payments to trust funds established by the unions.  The Company’s obligation is to pay a percentage of the wages of union workers to these trust funds.  The Company is not liable for under funding of these union plans.  The Company provides its full-time office employees, not subject to collective bargaining agreements, with medical insurance benefits and a discretionary matching 401(k) plan.  In 2010, the Company matched 25% of its employees’ yearly 401(k) contributions.
  Dependence Upon Customers.   At any given time, a material portion of the Company’s contract revenue may be generated from a single customer through one large contract or various
 
 6
 contracts.  The Company’s customer base can vary each year based on the nature and scope of the projects undertaken in that year.
  For the year ended December 31, 2010, work under contracts with Tishman Construction, Bovis Lend Lease LMB, Inc., Port Authority of New York and New Jersey, through the Company’s Joint Venture at the World Trade Center, and Genesys Engineering, P.C. constituted 27%, 21%, 20%, and 10% of the Company’s total revenues, respectively.
  For the year ended December 31, 2009, work under contracts with M.D. Carlisle Construction Corp., Tishman Construction, Glenwood Management Corporation and related entities, Levine Builders and Bovis Lend Lease LMB, Inc., constituted  23%,  17%,  12%, 12% and  11% of the Company’s total revenues, respectively.
  Historically, a portion of the Company’s revenue has been generated from contracts with federal, state and local governmental authorities.  The Company’s current revenue and backlog does not include any contracts directly with these governmental authorities, although the Company is part of a Joint Venture that is performing a contract with the Port Authority of New York and New Jersey to construct a chiller plant at the World Trade Center site.
  As is customary and required in the industry, the Company is often requested to provide a surety bond.  The Company’s ability to obtain bonding, and the amount of bonding required, is solely at the discretion of the surety and is primarily based upon the Company’s net worth, working capital, the number and size of projects under construction and the surety’s relationship with management.  The larger the project and/or the number of projects under contract, the greater the requirements are for net worth and working capital.  The Company generally pays a fee to the bonding company of an amount approximately 1% of the amount of the contract to be performed.  Since inception, the Company has neither been denied any request for payment or performance bonds, nor has a bonding company been required to make a payment on any bonds issued for the Company.  At December 31, 2010, approximately $16,300,000  of the Company’s backlog was bonded.
  Other Matters. The Company does not own any patents or patent rights.  The Company’s business is not subject to large seasonal variations. The Company did not expend funds for research and development during 2010 and 2009 and anticipates no research and development expenses in 2011.
 ITEM 1A.
RISK FACTORS
 The Company is subject to a variety of risks, including the risks described below as well as adverse business conditions.  The risks and uncertainties described below are not the only ones facing the Company.  Additional risks and uncertainties, not known or described below, which have not been determined to be material may also impair the Company’s business operations.  You should carefully consider the risks described below together with all other information in this report, including information contained in the “Forward-Looking Statements,” “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosure about Market Risk” sections.  If any of the following risks occur, the Company’s financial condition and results of
 
 7
 operations could be adversely affected.  Such events may cause actual results to differ materially from expected and historical results, and the trading price of the Company’s stock could decline.
  The economic downturn, specifically in the New York City metropolitan area, has resulted in a decrease in construction spending in the private and public sectors in the market the Company serves.  In the past, the Company has experienced several projects placed on hold or terminated.  Current or future projects could be delayed or cancelled, which would reduce the Company’s future revenues.
  The Company has a written employment agreement with Floyd Warkol, its Chairman and CEO, which expires on December 31, 2011. The Company maintains a $3,000,000 insurance policy on the life of the CEO, with proceeds payable to the Company.  The Company has no other current employment or non-competition agreements with senior management.  Because the Company relies on senior management’s relationships with its customers and in the construction industry in New York City, the failure to retain senior management would have a material adverse effect on the Company’s business.
  The Company’s continued ability to obtain bonding is critical to its ability to bid on most public work and on certain private projects.  The surety’s provision of bonding pursuant to its arrangement with the Company is solely at the surety’s discretion, and the arrangement with the surety is an at-will arrangement subject to termination.  The Company’s inability to obtain surety bonds as needed could have a material adverse effect on the Company.
  The Company has in the past experienced erosion in gross profit margins due to lower than anticipated labor productivity and higher labor costs related to shortages of skilled labor and unforeseen jobsite conditions.  There can be no assurance that these factors will not affect productivity and profitability in the future.
  The Company has in the past experienced significant increases in the cost of steel piping materials, which is the primary material used by the Company on projects.  Future increases may impact the Company’s profit margins to the extent the Company is not able to pass such increased costs on to its customers or lock-in prices under long-term purchase agreements.
  The Company relies on a relatively small number of customers for a significant share of its revenues.  The loss of business from any of these significant customers could have a material adverse effect on the Company’s business and its operating results.
  The Company faces intense competition due to the highly competitive nature of the mechanical contracting market that could limit its ability to increase its market share and its revenues.
  During the construction period, owners or general contractors may require the Company to perform certain work which is a change to or in addition to the original contract.  Such work often requires months to obtain formal change orders (including dollar amounts).  Change orders are often the subject of dispute and sometimes litigation.  The failure of an owner or general contractor to issue change orders or make payments could delay receipt of receivables and require litigation to collect sums due the Company.
  8
 Slow receipt of collections may also result from financial difficulties of a general contractor or an owner.  The Company’s inability to collect its contract balance on a project could have a material adverse effect on its operating results.
  Although the Company’s operations are not directly affected by inflation, both New York City and New York State have large debt service burdens.  Inflationary pressures historically have tended to result in a reduction in capital spending by both state and local agencies; such capital expenditure reductions in turn could have a negative impact on the Company’s revenues.
  Failure of the Company’s subcontractors or providers of equipment to perform as anticipated could have a negative impact on the Company’s results.  The Company subcontracts a portion of its contracts to specialty subcontractors, and the Company is ultimately responsible for the successful completion of their work.  The Company also utilizes equipment manufacturers and suppliers which are responsible for delivering specified products on a timely basis.  Although the Company utilizes highly respected companies and sometime requires performance bonds, there is no guarantee that the Company will not incur a material loss due to performance issues related to these arrangements.
  During the third quarter of 2009, a Joint Venture in which the Company and Five Star Electric Corporation each have a 50 percent ownership interest was awarded a $46 million contract for the construction of a chiller plant at the World Trade Center site.
 
 The work covered by the Joint Venture is made up of three components, (1) a mechanical segment performed by the Company, (2) an electrical segment performed by the Company’s joint venture partner and (3) a general construction segment.   The Joint Venture has issued three contracts, (1) to the Company to perform the mechanical work, (2) to the Company’s partner to perform the electrical work and (3) to a construction manager to perform the general construction work as an agent for the Joint Venture, on a reimbursable cost plus fee basis.
 
 The Company has provided a guaranteed maximum price for the mechanical segment of the contract, and its joint venture partner has provided a guaranteed maximum price for the electrical segment of the contract. The Company shares joint venture profits/losses derived from the general construction segment equally with its joint venture partner.
 
 If the other partner is unable to complete its contractual obligations, the Company would be fully liable to do so under the Joint Venture’s contract with the Port Authority of New York and New Jersey.  The Company and its partner are also jointly and severally liable to the bonding company that issued the payment and performance bond for the Joint Venture.  Circumstances that could lead to a loss under the joint venture agreement beyond the Company’s stated ownership interest include the other partner’s inability to contribute additional funds to the venture in the event the project incurs a loss, additional costs that the Company could incur should the partner fail to provide the services and resources toward project completion that it committed to provide in the joint venture agreement, and the partner’s failure to pay its subcontractors and suppliers.
 
 Accounting for contract related revenues and costs as well as other cost items requires management to make a variety of significant estimates and assumptions.  Although the Company
 
 9
 believes it has sufficient experience and processes to enable it to formulate appropriate assumptions and produce reliable estimates, these assumptions and estimates may change significantly in the future, and these changes could have a material adverse effect on the Company’s financial position and results of operations.
  The Company’s success depends on attracting and retaining qualified personnel in a competitive environment.  The single largest factor in the Company’s ability to profitably execute its work is its ability to attract, develop and retain qualified personnel.  The Company’s success in attracting qualified personnel is dependent on the resources available, the impact of general economic conditions on the labor supply, and the ability to provide competitive compensation.
 
 ITEM 1B.
UNRESOLVED STAFF COMMENTS
 Not Applicable.
 ITEM 2.
PROPERTIES
 Pursuant to a Modification of Lease Agreement, dated as of May 1, 1998, the Company leases office and warehouse space in Long Island City, New York, consisting of 18,433 square feet.  The lease had an initial annual base rent of $173,000, with yearly rent increases of approximately 2%.  The lease is a triple net lease, and thus the Company will pay any increases in real estate taxes over base year taxes, maintenance, insurance and utilities.  The current lease expires on June 30, 2014.
  The Company also owns and occupies a building and a storage yard in Bronx, New York, consisting of a 14,000 square foot building, including 4,000 square feet of offices and 10,000 square feet of shop space.  It also owns and occupies an adjacent 5,000 square foot storage yard.   At December 31, 2010, the Company had an outstanding mortgage payable secured by this property totaling $1,052,000.
  The properties are well maintained, adequate and suitable for their purposes.
  ITEM 3.
LEGAL PROCEEDINGS
 There are no material pending legal proceedings to which the Company is a party, except:
 
 a.           The case of KSW Mechanical Services, Inc. v. Pavarini McGovern LLC, et. al., (PMG), Supreme Court, N.Y. County, which is an action to recover KSW’s contract balance of $529,000, plus delay and impact costs of $160,032, from PMG, the construction manager on the 45th Street Hotel project.  PMG and the Owner are in litigation and in alternative dispute resolution proceedings over monetary issues unrelated to the Company’s work.  However, the Construction Manager cites these disputes with the Owner as the basis for failing to pay the Company’s contract balance.  There are at least two companion mechanic’s lien foreclosure actions instituted by other subcontractors.  The Company is a party to these actions because it has also filed a lien.  The actions are in the earliest stage and consolidation can be expected before discovery begins.  The Company is working with the Owner in an attempt to resolve the Company’s claim against PMG.
  10
 b.           In order to secure its receivable, the Company has filed two mechanic’s liens, totaling $1,092,155 against two buildings in Brooklyn, N.Y.  The Owner has cited slow sales and financing problems as the reasons for not paying the Company.  The Owner has bonded both liens.
 
 The Company believes that the receivables recorded on its books, with respect to both legal proceedings discussed above, should be collected.
  ITEM 4.
(REMOVED AND RESERVED)
 EXECUTIVE OFFICERS OF THE REGISTRANT
 
 Officers of the Company serve at the pleasure of the Board of Directors. The name, age and offices held by each of the executive officers of the Company as of December 31, 2010 were as follows:
 
 Name

Age

TitleFloyd Warkol

63

Chief Executive Officer, President, Secretary and Chairman of the Board of DirectorsRichard W. Lucas

44

Chief Financial OfficerJames F. Oliviero

64

General CounselVincent Terraferma

60

Chief Operating Officer of KSW Mechanical
 
 Mr. Floyd Warkol has been employed as Chairman of the Board since December 1995 and as President, Secretary and Chief Executive Officer of the Company and as Chairman and Chief Executive Officer of KSW Mechanical since January 1994.
  Mr. Richard W. Lucas has been employed as the Chief Financial Officer of the Company and KSW Mechanical since August 2002.  Since February 2006, Mr. Lucas has been a Director of KSW Mechanical.
  Mr. James F. Oliviero has been employed as General Counsel of the Company and KSW Mechanical since February 1998.
  Mr. Vincent Terraferma has been employed as Chief Operating Officer of KSW Mechanical since January 2003.  From December 1995 to December 2002, he was KSW Mechanical’s Executive Vice President.
  11
 PART II
 ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Since November 2007, the Company’s Common Stock has been quoted on the NASDAQ Stock Market LLC’s Global Market under the symbol “KSW”.  Prior to November 2007, the Company’s Common Stock was quoted on the American Stock Exchange.
  At March 18, 2011, the Company had 6,419,325 shares of common stock issued and 6,366,625 shares of common stock outstanding, which were held by approximately 3,200 shareholders of record based on shareholder lists provided by the Company’s stock transfer agent and Broadridge Financial Solutions, Inc.
  On November 29, 2010, the Company’s Board of Directors declared a cash dividend of $.07 per share.  The aggregate amount on the dividend was $445,000, and was paid on December 20, 2010 to stockholders of record as of December 14, 2010.
  On March 9, 2010, the Company’s Board of Directors declared a cash dividend of $.10 per share.  The aggregate amount of the dividend was $628,000, and was paid on May 24, 2010 to stockholders of record as of April 26, 2010.
  On June 2, 2009, the Company’s Board of Directors declared a cash dividend of $.10 per share.  The aggregate amount of the dividend was $624,000, and was paid on July 17, 2009 to stockholders of record as of June 29, 2009.
  The following information on high and low bid data is provided for 2010 and 2009 based on intraday quotations:
  2010


2009Quarter

High


Low


High


LowFirst

$
4.15


$
3.51


$
3.05


$
2.00Second

$
3.87


$
3.00


$
2.94


$
2.21Third

$
3.21


$
2.65


$
4.42


$
2.59Fourth

$
3.68


$
3.00


$
3.92


$
3.26
 
 These prices represent bid prices, which are prices paid by broker dealers, and do not include retail markups, markdowns or broker dealer commissions.
  On December 19, 2008, the Company announced that its Board of Directors had approved a stock repurchase program that authorized the Company to buy up to $1,000,000 of its Common Stock through open market purchases in compliance with Rule 10b-18 under the Exchange Act through June 30, 2009. Under this stock repurchase program, the Company purchased a total of 52,700 common shares at a cost of $140,000.
 12
 ITEM 6.
SELECTED FINANCIAL DATA
 
 The following information for the years ended December 31, 2010 and 2009 is derived from the consolidated financial statements audited by BDO USA, LLP, which are included elsewhere herein.
  The following information for the years ended December 31, 2008 and 2007 is derived from and qualified in its entirety to, the consolidated financial statements audited by J.H. Cohn LLP.  The following information for the year ended December 31, 2006 is derived from and qualified in its entirety to the consolidated financial statements  audited by  Marden, Harrison & Kreuter CPAs P.C.  Each of the previously mentioned consolidated financial statements is included elsewhere herein, or in prior years’ annual reports on Form 10-K, and should be read in conjunction with such financial information.
  As Of And For The Year Ended December 31,2010


2009


2008


2007


2006(Dollars in thousands, except share and per share amounts)Income Statement:Revenues

$
76,294


$
64,494


$
93,027


$
77,266


$
77,128Costs of revenues


67,927



57,484



80,910



66,771



67,155Gross profit


8,367



7,010



12,117



10,495



9,973Selling, general and administrativeexpenses


4,863



4,964



5,283



4,427



4,511Operating income


3,504



2,046



6,834



6,068



5,462Other income


61



34



370



682



361Income before provision for incometaxes


3,565



2,080



7,204



6,750



5,823Provision for income taxes


1,597



810



2,965



3,088



2,715Net income


1,968



1,270



4,239



3,662



3,108Net income per share –Basic


.31



.20



.68



.59



.52Diluted


.31



.20



.67



.59



.51Number of shares used in earningsper share computation :Basic


6,305,517



6,240,256



6,278,555



6,162,034



5,950,445Diluted


6,318,349



6,283,540



6,334,329



6,242,607



6,077,127Dividends per share


.17



.10



.20



--



.06Balance Sheet Data:Total assets

$
41,561


$
40,537


$
50,499


$
40,937


$
35,545Working capital


20,347



19,087



18,331



16,822



12,361Current liabilities


18,479



18,632



29,251



23,548



22,422Long-term liabilities


994



1,054



1,118



--



--Stockholders' equity


22,088



20,851



20,130



17,389



13,123Other Data:Current ratio

2.10:1


2.02:1


1.63:1


1.71:1


1.55:1
 
 13
 ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis explains the general financial condition and the results of operations of the Company for the years ended December 31, 2010 and 2009 including:
 
 • factors that affect its business;
 • its earnings and costs in the periods presented;
 • changes in earnings and costs between periods;
 • sources of earnings; and
 • impacts of these factors on its overall financial condition.
 
 As you read this discussion and analysis, please refer to the Company’s audited consolidated financial statements and the notes thereto for the years ended 2010 and 2009 included elsewhere in this report.
 
 Overview
 
 The Company, through its wholly-owned subsidiary, furnishes and installs HVAC systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects.  The Company does not actively pursue projects under $3,000,000. Some larger company projects involve multi-year contracts, which can account for more than 10% of the Company’s revenue in any given year.  The Company also serves as a mechanical trade manager, performing project management services relating to the mechanical trades.
 
 The Company obtains projects through both competitive and negotiated bidding processes submitted to public entities, project owners or construction managers, many with whom the Company has long standing commercial relationships.
 
 On publicly funded projects, the Company competes by submitting a sealed bid to the public entity.  The project is typically awarded to the lowest responsible bidder.  On private projects, the Company and its competitors negotiate with the developer, or its construction manager, on the costs of the mechanical work required.
 
 On private projects, the Company is awarded many of its contracts by providing value engineering assistance, whereby the Company recommends changes to project plans, subject to the approval of the design professional.  This assistance reduces costs and yields the same results as the original designs.  As a result, the Company has historically obtained most of its contracts without being required to participate in a competitive bidding process.  Due to the current credit crisis, the Company has bid primarily on public contracts, some of which incorporate value engineering provisions.  The Company continues to pursue trade management contracts with large institutional builders, such as hospitals.
 
 The Company’s profitability is dependent on its ability to competitively bid on projects in the public sector, continue to maintain its commercial relationships and provide quality services necessary to obtain projects.  The Company’s costs of revenues include field labor, equipment,
 
 14
 material, subcontractor and overhead costs.  Overhead costs include project supervision and drafting salaries, as well as insurance costs.  The Company must control costs of revenues by having the ability to manage material costs, purchase equipment at or below original estimated amounts and control labor costs throughout the duration of each project.
 
 The majority of the Company’s contracts are awarded on a fixed-price basis.  Subcontractor and equipment purchases are awarded on a fixed-price basis, near the time the Company’s contract is awarded.The Company purchases steel products from local, national and international distributors.  The Company includes allowances in its estimates for future escalations in steel prices due to market conditions. When market conditions indicated a price rise, the Company has in the past entered into agreements locking in prices with its suppliers to purchase steel products at fixed dollar amounts for extended time periods.  When steel product prices do not fluctuate, the Company purchases these products on a price in effect basis.  The current prices for steel are fluctuating, and the Company is attempting to lock in prices for the length of each project, which may or may not be possible.
 
 Since 2008, the credit crisis has impacted the number of available private sector projects which the Company may pursue.  Therefore, the Company is aggressively pursuing opportunities in the public sector, where the Company has been successful in the past, while still bidding on any available private developments.  During the third quarter of 2009, the Company received awards of contracts for chiller plants at the new World Trade Center (awarded to the Company’s Joint Venture) and at the Brookhaven National Laboratory. During 2010, the Company was awarded a contract to provide controlled temperatures to the plaques at the National September 11 Memorial located at the World Trade Center site.
 
 For the year ended December 31, 2010, the Company’s earnings were a result of increased revenues, increased gross profit earned from projects, decreased selling, general and administrative expenses and an increase in other income, as compared to the year ended December 31, 2009.
 
 The Company’s revenues for 2010 increased 18.3%, as compared to revenue in 2009. The commencement of the World Trade Center project and Mount Sinai Hospital project contributed to this increase.
 
 The gross profit for 2010 was higher than 2009 as a result of the higher revenues.
  The Company’s selling, general and administrative expenses decreased in 2010, as compared to 2009, primarily as a result of reductions primarily in employment costs as well as the Company’s ability to charge a portion of its overhead to trade management contracts.
 
 The Company’s other income was higher in 2010 as compared to 2009, primarily as a result of an increase in earnings from investments.
 
 Management believes that the future success of the Company lies in its ability to obtain new projects, maintain proper cost controls related to this work, pursue new trade management contracts and continue controlling office expenditures. The Company is dependant on outside factors such as the general health of the New York City metropolitan area economy, lending
 
 15
 institutions willingness to make loans, and continued low interest rates, all of which contribute to the strength of the building industry and the type of projects the Company has the ability to obtain. The Company must also continue to obtain surety bonds, when required on projects. The Company’s management has experience in expanding into new geographic areas; however, to date the Company has conducted its operations primarily in the New York metropolitan area.
 
 Results of Operations
 
 The following table sets forth the amounts and the percentage of total revenues of certain items of the Company’s consolidated statements of operations for the periods indicated (dollar amounts in thousands):
  2010


2009Amount


Percent


Amount


PercentRevenues

$
76,294



100.0


$
64,494



100.0Costs of revenues


67,927



89.0



57,484



89.1Gross profit


8,367



11.0



7,010



10.9Selling, general and administrative expenses


4,863



6.4



4,964



7.7Operating income


3,504



4.6



2,046



3.2Other income


61



.1



34



.0Income before provision for income taxes


3,565



4.7



2,080



3.2Provision for income taxes


1,597



2.1



810



1.2Net income

$
1,968



2.6


$
1,270



2.0
 
 Year Ended December 31, 2010 compared to Year Ended December 31, 2009
  Revenues
  Revenues increased by $11,800,000, or 18.3%, to $76,294,000 for the year ended December 31, 2010, from $64,494,000 for the year ended December 31, 2009.  Revenues for the fourth quarter of 2010 were $17,277,000, an increase of $2,291,000, or 15.3%, from $14,986,000 in the fourth quarter of 2009.
  The Company’s revenues for 2010 increased 18.3%, as compared to revenue in 2009.  The commencement of the World Trade Center project and Mount Sinai Hospital project contributed to this increase.
 
 At December 31, 2010, the Company had backlog of approximately $64,000,000.
  The backlog as of December 31, 2010 does not include the recently awarded United Nations Chiller Plant Project, valued at approximately $14,100,000, with add alternates, at the Owner’s option, which could increase the contract by an additional $1,000,000.
 
 Approximately $21,000,000 of the December 31, 2010 backlog is not reasonably expected to be completed in the 2011 fiscal year.  New contracts secured by the Company during 2011 will also increase 2011 revenues.  The amounts of backlog not reasonably expected to be completed in 2011 is subject to various uncertainties and risks.  The Company is actively seeking new projects to add to its backlog.
  16
 During the 2009 third quarter, the Company received awards for chiller plants at the new World Trade Center (awarded to the Company’s Joint Venture) and at the Brookhaven National Laboratory. During 2010, the Company was awarded a contract to provide controlled temperatures to the plaques at the National September 11 Memorial located at the World Trade Center site. These projects have been in the construction phase in 2010.
  During the year ended December 31, 2010, the Company had ­27%, 21%, 20% and 10% of revenues, respectively, from its four largest customers.  The Company bids on large multi-year contracts, which can account for more than 10% of its contract revenue in any given year.
  Costs of Revenues
  Costs of revenues increase by $10,443,000, or 18.2%, to $67,927,000 for the year ended December 31, 2010, from $57,484,000 for the year ended December 31, 2009.  Costs of revenues for the fourth quarter of 2010 were $15,431,000, an increase of $2,336,000, or 17.8%, from $13,095,000 for the fourth quarter of 2009.  Costs of revenues include subcontractor costs, field labor, material, equipment and overhead expenses.  Overhead costs include project supervision and drafting salaries as well as insurance costs.  Higher revenues generally require higher expenditures of costs, but high revenues allow the Company to allocate the cost of project supervision and drafting salaries over multiple projects and more effectively utilize its experienced field labor personnel.  The increase in cost of revenues was primarily associated with the increase in revenues.
 
 One component of the cost of revenues is steel products such as pipe, valves and fittings which the Company typically installs on its projects.  The Company purchases steel products from local, national and international distributors.  The Company includes allowances in its estimates for future escalations in steel prices due to market conditions. When market conditions indicated a price rise, the Company has in the past entered into agreements locking in prices with its suppliers to purchase steel products at fixed dollar amounts for extended time periods.  When steel product prices do not fluctuate, the Company purchases these products on a price in effect basis.  The current prices for steel are fluctuating, and the Company is attempting to lock in prices for the length of each project, which may or may not be possible.
  Gross Profit
 
 For the year ended December 31, 2010, the Company had a gross profit of $8,367,000 or 11.0% of revenues, as compared to $7,010,000 or 10.9% of revenues for the year ended December 31, 2009.  In the fourth quarter of 2010, the gross profit was $1,846,000 or 10.7% of revenues, as compared to $1,891,000 or 12.6% of revenues for the fourth quarter of 2009.
 
 The overall increase in gross profit for 2010, as compared to 2009, was a result of higher revenues.
  17
 Selling, General and Administrative Expenses
 
 For the year ended December 31, 2010, selling, general and administrative (“SG&A”) expenses decreased by $101,000, or (2.0)%, to $4,863,000 from $4,964,000 for the year ended December 31, 2009.  In the fourth quarter of 2010, SG&A expenses were $1,038,000, an increase of $118,000, or 12.8%, from $920,000 for the fourth quarter of 2009.
 
 The decrease in SG&A expenses in 2010 as compared to 2009, was primarily related to the Company’s ability to charge a portion of its overhead to trade management projects as well as to a reduction in employment costs.
 
 SG&A expenses for the fourth quarter of 2010, as compared to 2009, was higher due to an increase in employment costs.
 
 Other Income
 
 Other income for the year ended December 31, 2010 increased $27,000, or 79.4%, to $61,000, as compared to other income of $34,000 for the year ended December 31, 2009.
 
 Interest income for the year ended December 31, 2010 was $121,000, as compared to $102,000 for the year ended December 31, 2009.  Interest expense for the year ended December 31, 2010 was $60,000, as compared to $68,000 for the year ended December 31, 2009.
 
 Provision for Income Taxes
 
 The income tax expense for the year ended December 31, 2010 was $1,597,000, or 44.8% of income before the provision for income, compared to $810,000, or 38.9% of income for the year ended December 31, 2009.
 
 During 2009, the Company received a federal income tax refund which reduced the provision for income taxes.
 
 Net Income
 
 As a result of all the items above, the Company reported net income of $1,968,000, or $.31 per share-basic and diluted, for the year ended December 31, 2010.
 
 As a result of all the items above, the Company reported net income of $1,270,000 or $.20 per share-basic and diluted, for the year ended December 31, 2009.
 
 
 18
 
  Liquidity and Capital Resources
  General
  The Company’s principal capital requirement is to fund its work on construction projects.  Projects are billed on a monthly basis based on the work performed to date.  These project billings, less a withholding of retention which is received as the project nears completion, are collectible based on the respective contract terms.  The Company has historically relied primarily on internally generated funds.  The Company has not relied on bank borrowings to finance its operations since July 2003.  The Company has a line of credit, which is subject to certain conditions.  See the discussion of the Company’s Credit Facility below.
  For presentation purposes, $1,045,000 of short term investments in Canadian time deposits that were included in cash in the Company’s December 31, 2009 consolidated balance sheet have been reclassified to marketable securities.
  As of December 31, 2010, the Company’s cash and cash equivalents balances totaled $14,945,000, an increase of $1,207,000 from the $13,738,000 balance, as adjusted, at December 31, 2009.
  In addition, at December 31, 2010, the Company held marketable securities totaling $1,625,000, a $979,000 decrease from the $2,604,000 balance, as adjusted, at December 31, 2009.
  Net cash (used in) provided by Operating Activities
  Net cash provided by operating activities was $1,092,000 for the year ended December 31, 2010.  Net cash used in operating activities was $905,000 for the year ended December 31, 2009.
  Cash received from customers includes contract revenues plus the changes in accounts receivable, retainage receivable, costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of estimated earnings on uncompleted contracts less unconsolidated joint venture billings.  Cash received from customers for the year ended December 31, 2010 increased 14.0% as compared to the same period in 2009.  This increase is primarily a result of the increase in contract revenue.  These increased receipts, as well as interest income, were offset by amounts paid to fund project and selling, general and administrative costs, which include executive bonuses, interest expense and the payment of corporate income taxes.  These items contributed to the increase in cash provided by operations in 2010 as compared to cash used in operations in 2009.
  In order to ensure that the Company’s unconsolidated Joint Venture is properly capitalized, the Company and its partner are billing the Joint Venture only for the costs incurred on their respective portions of the joint venture contract.  The Company believes that this arrangement has not had a significant impact on the Company’s liquidity.
  When the project reaches substantial completion, which is anticipated to occur in the fourth quarter of 2011, and the Joint Venture determines that it will not incur any unaccounted
 
 19
 for costs, and is not subject to any significant adjustments between the Joint Venture and the Port Authority of New York and New Jersey for additional or deleted work, the Joint Venture shall make a distribution to each partner of a portion of the difference between each partner’s adjusted subcontract and the amount billed by each partner to date.  At final completion, any balance remaining will be distributed.
 
 Cash provided by (used in) Investing Activities
  Net cash provided by investing activities was $943,000 for the year ended December 31, 2010.
  Net cash used in investing activities was $1,156,000, as adjusted, for the year ended December 31,  2009.  The Company purchased marketable securities of $549,000 and $1,057,000, as adjusted, during 2010 and 2009,  respectively.  The Company received proceeds on the sales of marketable securities of $1,564,000 in 2010.  The Company purchased property and equipment totaling $89,000 and $82,000 in 2010 and 2009, respectively.
  In addition, during the year ended December 31, 2009 the Company advanced its Joint Venture, which was awarded the contract for the chiller plant at the new World Trade Center, $17,000.  This money was repaid during 2010.
  Cash used in Financing Activities
  Net cash used in financing activities was $828,000 and $812,000 during 2010 and 2009, respectively.
  During December 2008, the Company’s Board of Directors authorized the purchase, on the open market, of up to $1,000,000 of the Company’s common stock, through June 2009.
  During the year ended December 31, 2009, the Company purchased 46,100 shares of its common stock at a cost of $124,000.
  No individuals exercised stock options during the year ended December 31, 2009.
  During the year ended December 31, 2010, an executive, the estate of a former director and an employee exercised options to purchase an aggregate of 131,500 shares of the Company’s common stock, contributing cash proceeds of $208,000 to the Company.
  The Company presents excess tax benefits resulting from the exercise of stock in the statement of cash flows  as a part of cash flows from financing activities.  Excess tax benefits represent tax benefits related to exercised options in excess of the associated deferred tax assets for such options.  As of December 31, 2010, $97,000 of excess tax benefits have been classified as an operating cash outflow and a financing cash inflow.
  On June 2, 2009, the Company’s Board of Directors declared a cash dividend of $.10 per share.  The aggregate amount of this dividend was $624,000, and it was paid on July 17, 2009 to stockholders of record as of June 29, 2009.
  20
 On March 9, 2010, the Company’s Board of Directors declared a cash dividend of $.10 per share.  The aggregate amount of the dividend was $628,000, and it was paid on May 24, 2010 to stockholders of record as of April 26, 2010.
  On November 29, 2010, the Company’s Board of Directors declared a cash dividend of $.07 per share.  The aggregate amount on the dividend was $445,000, and it was paid on December 20, 2010 to stockholders of record as of December 14, 2010.
  The Company repaid principal payments on its mortgage payable totaling $60,000 and $64,000 during the years ended December 31, 2010 and 2009, respectively.
  Credit Facility
  The Company has a line of credit facility from Bank of America, N.A., which provides for borrowings for working capital purposes up to $2,000,000.  This facility is secured by the Company’s assets and is guaranteed by the Company’s subsidiary, KSW Mechanical Services, Inc.  On January 14, 2011, the Company and Bank of America, N.A. agreed to extend the working capital credit facility through March 31, 2012.  There were no borrowings against this facility during 2010 and 2009.
  Under this facility, advances bear interest, based on the Company’s option, at either the bank’s prime lending rate (3.25% at December 31, 2010) or the London Interbank Offered Rate (“LIBOR”) (. 26% at December 31, 2010)  plus two percent per annum.
  Payment may be accelerated by certain events of default such as unfavorable credit factors, the occurrence of a material adverse change in the Company’s business, properties or financial condition, a default in payment under the credit facility, impairment of security, bankruptcy, or the Company ceasing operations or being unable to pay its debts.  The line of credit must be paid in full at the end of the term.
  The Company currently has no significant capital expenditure commitments.
  Surety
  On some of its projects, the Company is required to provide a surety bond.  The Company’s ability to obtain bonding, and the amount of bonding available, is solely at the discretion of the surety and is primarily based upon the Company’s net worth, working capital, the number and size of projects under construction and the surety’s relationship with management.  The Company is contingently liable to the surety under a general indemnity agreement.  The Company agrees to indemnify the surety for any payments made on contracts of suretyship, guaranty or indemnity as a result of the Company not having the financial capacity to complete projects.  Management believes the likelihood of the surety having to complete projects is remote.  The contingent liability is the cost of completing all bonded projects, which is an undeterminable amount because it is subject to bidding by third parties.  Management believes that all contingent liabilities will be satisfied by the Company’s performance on the specific bonded contracts involved.  The surety provides bonding solely at its discretion, and the arrangement with the surety is an at-will arrangement subject to termination.
  21
 As of December 31, 2010, approximately $16,300,000 of the Company’s backlog of approximately $64,000,000 was bonded.  The Company provides its surety with a detailed schedule of backlog on a quarterly basis.  The Company believes its bonding limits are sufficient based on the Company’s revenue, volume and size of the Company’s bonded contracts.
  Critical Accounting Policies and Estimates
 
 The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
 The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements.  In general, management’s estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances.  Actual results could differ from those estimates made by management.
 
 The Company believes the following accounting policies represent critical accounting policies. Critical accounting policies are those that are most important to the portrayal of a company’s financial condition and results and that require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. For a discussion of the Company’s significant accounting policies, including those that do not require management to make difficult, subjective, or complex judgments or estimates, see Note 2to the Company’s consolidated financial statements included elsewhere herein.
 
 Accounting for revenue recognition for construction contracts
 
 The Company recognizes revenue for long-term construction contracts not yet completed using the percentage-of-completion method, measured by the percentage of total costs incurred to date as compared to total estimated costs at the completion of each contract.  When the Company bids on projects, a comprehensive budget is prepared dividing the project into line items indicating separate labor, equipment, material, subcontractor and overhead cost estimates.  As projects progress, the Company’s project managers plan, schedule and oversee operations and review project costs compared to the estimates.  Management reviews on a bi-weekly basis the progression of the contract with the project manager.  An analysis is prepared and reviewed monthly by management comparing the costs incurred to the budgeted amounts.  The results of these procedures help update the anticipated total costs at completion, based on facts and circumstances known at the time.  Any revisions in cost and profit estimates are reflected in the accounting period in which the facts which require the revisions become known. These estimates
 
 22
 are subject to revisions due to unanticipated increases in labor, material and equipment costs as well as project scope changes.  The Company receives change orders for project scope changes.  For some project cost overruns, the Company can make a claim to the project owner or general contractor to seek reimbursement of these overruns. In the past, the Company has been successful in the pursuit of such claims.  Such claims are not recorded on the books until they are acknowledged by the owner or contractor.
  Accounts and retainage receivable
 
 Judgment is required to estimate the collectibility of accounts and retainage receivable.  The Company has in the past established an allowance for uncollectible trade accounts and retainage receivable based upon historical collection experience and management’s periodic evaluation of the collectibility of outstanding accounts and retainage receivable on an account-by-account basis.  Accounts receivable and contract retentions are due based on contract terms.  Amounts are deemed delinquent when they are not received within their contract terms.  Delinquent receivables are written-off based on individual credit evaluation and specific circumstances of the customer.
 
 During the years ended December 31, 2010 and 2009, the Company did not write off any receivables and therefore did not record an allowance for uncollectible trade accounts and retainage receivable at December 31, 2010 and 2009.
 
 Accounting for income taxes
 
 Judgment is required in developing the Company’s provision for income taxes, including the determination of deferred tax assets and valuation allowances that might be required against the deferred tax assets and liabilities.  The Company’s consolidated balance sheets at December 31, 2010 and 2009 include deferred tax assets totaling $209,000 and $227,000, respectively.
 
 Accounting for share-based compensation
 
 Since January 1, 2006, the Company has accounted for share-based compensation using the Black-Scholes option – pricing model, which requires the input of subjective assumptions.  These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”).  Changes in the subjective assumptions can materially affect the estimate of fair value share–based compensation and the related amount recognized in the consolidated statements of income.
  NEW ACCOUNTING PRONOUNCEMENTS
 
 The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.”  The FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure its consistent reporting of financial
 23
 
 condition, results of operations, and cash flows.  References to GAAP issued by the FASB are the FASB Accounting Standards Codification,sometimes referred to as the Codification or ASC.
  Currently, there are no new accounting pronouncements which would materially affect the Company.
  CONTRACTUAL OBLIGATIONS
 
 As of December 31, 2010, outstanding contractual obligations were as follows:
 
 Payments Due by Period
  Contractual Obligations

Total


Less than 1 year


1-3 years


4-5 years


After 5 yearsLong- term debt  (a)

$
1,052,000


$
58,000


$
116,000


$
116,000


$
762,000Capital leases


-



-



-



-



-Operating leases (b)


798,000



223,000



458,000



117,000



-Totals

$
1,850,000


$
281,000


$
574,000


$
233,000


$
762,000
  (a)
The long-term debt is related to the financing of the purchase of a pipe fabrication shop and adjacent yard located in Bronx, N.Y.
  (b)
The Company is currently obligated to pay monthly rental payments of approximately $18,000 on its lease for office space in Long Island City, New York.  The current lease expires in June 2014.  The Company has an option to cancel on six month notice.
  OFF -BALANCE SHEET ARRANGEMENTS
  No disclosures are required pursuant to Item 303 (a) (4) of Regulation S-K.
 ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 The Company does not utilize futures, options or other derivative instruments other than an interest rate swap on its mortgage payable with Bank of America, N.A.  Because the mortgage is a variable rate mortgage, the Company used an interest rate swap instrument to fix the interest rate that the Company pays at 5% over the term of the mortgage.
  In addition, as of December 31, 2010, the Company had $1,625,000 in marketable securities.
  
 ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Information required by this item, including the consolidated financial statements and related notes, is incorporated herein by reference to pages F-1 through F-32 of this Annual Report on Form 10-K.
  24
 
 ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE
 In connection with the Company’s change in accountants which occurred in August 2009, there were no disagreements of the type described in Item 304(a)(1)(iv) of Regulation S-K or reportable events of the type described in Item 304(a)(1)(v) of Regulation S-K.
  ITEM 9A.
CONTROLS AND PROCEDURES
 The Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. Based on that evaluation, its Chief Executive Officer and Chief Financial Officer concluded that, the Company’s disclosure controls and procedures were effective as of December 31, 2010.
  MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANICAL REPORTING
 
 The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934). The Company’s internal control over financial reporting is a process designed with the participation of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
 
 The Company’s internal control over financial reporting includes policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of its management and Board of Directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
 
 Because of its inherent limitations, the Company’s disclosure controls and procedures may not prevent or detect misstatements.  A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the control system objectives are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  Also, projections of any evaluation of effectiveness to future periods are subject to the
 
 25
 risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
 As of December 31, 2010, the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting.  Based on this assessment, management determined that, as of December 31, 2010, the Company’s internal control over financial reporting was effective.
 
 There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), during the quarter ended December 31, 2010, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
 This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.
  ITEM 9B.
OTHER INFORMATION
 None.
 PART III
 ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Other than information with respect to the Company’s executive officers, which is set forth after Item 4 of Part I of this Form 10-K, and information regarding the Company’s Code of Ethics, as set forth below, the information required to be disclosed pursuant to Item 10 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
  CODE OF ETHICS
  The Company has adopted a written Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial and accounting officer, directors, officers and employees.  Copies of the Company’s Code of Ethics will be provided free of charge upon written request directed to the Company’s Director of Investor Relations, at 37-16 23rd Street, Long Island City, New York 11101.
 ITEM 11.
EXECUTIVE COMPENSATION
 
 The information required to be disclosed pursuant to Item 11 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
  26
 ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 The information required to be disclosed pursuant to Item 12 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
 ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 a.           The information required to be disclosed pursuant to Item 13 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
  b.           Any transaction required to be disclosed under this item must be approved by the Board of Directors as being in the Company’s best interest.
 ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 The information required to be disclosed pursuant to Item 14 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
  
 27
 PART IV
  ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
Documents filed as part of this report:
  1. and 2. Financial statements and financial statement schedules.
  See Index to Consolidated Financial Statements on page F-1 of this Form 10-K.
  3. Exhibits
  No.

Description3.1

Amended and Restated Articles of Incorporation of KSW, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-8 (No. 333-217350), filed with the Commission on February 13, 1997).3.2

Amended and Restated By-Laws of KSW, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-8 (No. 333-217350), filed with the Commission on February 13, 1997).10.1

Form of Modification of Lease Agreement dated as of May 1, 1998 by and between KSW, Inc, Irvjoy Partners, L.P. and I BLDG Co., Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (Commission File No. 001-32865), filed with the Commission on March 30, 1999).10.2

1995 Stock Option Plan of KSW, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Registration Statement on Form 10 (Commission File No. 001-32865), filed with the Commission on November 24, 1995).10.3

Employment Agreement, dated September 12, 2005 by and between the Company, KSW Mechanical Services, Inc. and Floyd Warkol (incorporated herein by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K (Commission File No. 001-32865), filed with the Commission on September 12, 2005).10.4

Amendatory Employment Agreement, dated as of March 6, 2007, by and between the Company, KSW Mechanical Services, Inc., and Floyd Warkol (incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on March 14, 2007).  28
  10.5

Line of Credit Agreement Letter, dated March 14, 2006, between KSW, Inc. and Bank of America, N.A. together with forms of a Line of Credit Note, Rider to Line of Credit Note, a pledge security agreement and guaranty (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 3, 2005, filed with the Commission on March 16, 2006).10.6

Line of Credit Agreement Letter, dated March 8, 2007, between KSW, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on March 14, 2007).10.7

Line of Credit Agreement Letter, dated January 28, 2008, between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 25, 2009).10.8

Line of Credit Agreement Letter, dated January 26, 2009, between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 25, 2009).10.9

KSW, Inc. 2007 Stock Option Plan (incorporated herein by reference to Appendix E to the Company’s definitive proxy statement on Schedule 14A for the 2008 annual meeting of stockholders, filed with the Commission on April 4, 2008).10.10

Line of Credit Agreement Amendment No. 1, dated January 15, 2010 between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Commission on March 19, 2010).10.11

Line of Credit Agreement Amendment No. 2, dated January 14, 2011 between KSW, Inc. and Bank of America, N.A.11.1

Statement Regarding Computation of Net Earnings Per Share.21.1

Subsidiaries of Registrant23.1

Consent of BDO USA, LLP31.1

Certification of Chief Executive Officer required by Rule 13a-14(a).31.2

Certification of Chief Financial Officer required by Rule 13a-14(a).32.1

Certification of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350.32.2

Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
  29
 
 SIGNATURES
 
 Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
   KSW, INC.By:
/s/ Floyd WarkolFloyd Warkol

President, Chief Executive Officer,

Secretary and Chairman of the Board of Directors (Principal Executive Officer)

March 18, 2011
 
 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 WarkolFloyd Warkol

President, Chief Executive Officer,

Secretary and Chairman of the Board of Directors (Principal Executive Officer)

March 18, 2011/s/ Stanley KreitmanStanley Kreitman

Director

March 18, 2011/s/ Edward T. LaGrassaEdward T. LaGrassa

Director

March 18, 2011/s/Warren O. KoganWarren O. Kogan

Director

March 18, 2011/s/ John A. CavanaghJohn A. Cavanagh

Director

March 18, 2011/s/ Richard W. LucasRichard W. Lucas

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

March 18, 2011
 
 
 30
 
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport of Independent Registered Public Accounting Firm

F-2Consolidated Financial Statements:Consolidated Balance Sheets

F-3-4Consolidated Statements of Income

F-5Consolidated Statements of Comprehensive Income

F-6Consolidated Statements of Stockholders’ Equity

F-7Consolidated Statements of Cash Flows

F-8-9Notes to Consolidated Financial Statements

F-10-32
 
  F-1
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   Board of Directors and Stockholders
 KSW, Inc. and Subsidiary
 Long Island City, New York
  We have audited the accompanying consolidated balance sheets ofKSW, Inc. and Subsidiaryas of December 31, 2010 and 2009 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2010 and 2009.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provided a reasonable basis for our opinion.
  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofKSW, Inc. and Subsidiaryat December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010 and 2009,in conformity with accounting principles generally accepted in the United States of America.
 
  
 /s/BDO USA, LLP
 New York, New York
  March 18, 2011
  
 F-2
  
  KSW, INC. AND SUBSIDIARY
  CONSOLIDATED BALANCE SHEETS
  DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 ASSETS

2010


2009Current assets:Cash and cash equivalents

$
14,945


$
13,738Marketable securities


1,625



2,604Accounts receivable


13,700



12,338Retainage receivable


4,081



6,637Costs and estimated earnings in excess of billings on uncompleted contracts


3,714



1,979Prepaid income taxes


165



-Prepaid expenses and other receivables


191



265Advances to and earnings from joint venture


281



17Deferred income taxes


124



141Total current assets


38,826



37,719Property and equipment, net


2,614



2,692Deferred income taxes


85



86Other


36



40Total assets

$
41,561


$
40,537
 
 (continued)
 F-3
 
 KSW, INC. AND SUBSIDIARY
  CONSOLIDATED BALANCE SHEETS
  DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 2010


2009LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Current portion of mortgage payable

$
58


$
58Accounts payable


10,641



12,005Retainage payable


2,349



3,608Accrued payroll and benefits


957



835Accrued expenses


489



220Billings in excess of costs and estimated earnings on uncompleted contracts


3,985



1,767Income taxes payable


-



139Total current liabilities


18,479



18,632Mortgage payable, net of current portion


994



1,054Total liabilities


19,473



19,686Commitments and contingencies (Note 13)Stockholders’ equity:Preferred stock: $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding


-



-Common stock:  $.01 par value, 25,000,000 shares authorized, 6,419,325 and 6,287,825 issued, 6,366,625 and 6,235,125 shares outstanding at 2010 and 2009, respectively


64



63Additional paid-in capital


13,634



13,313Retained earnings


8,683



7,788Accumulated other comprehensive loss


(153
)


(173
)Treasury stock at cost, 52,700 shares


(140
)


(140
)Total stockholders’ equity


22,088



20,851Total liabilities and stockholders’ equity

$
41,561


$
40,537
 
  See notes to consolidated financial statements.
  F-4
 KSW, INC. AND SUBSIDIARY
  CONSOLIDATED STATEMENTS OF INCOME
  YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share and per share data)
 
 2010


2009Revenues

$
76,294


$
64,494Costs of revenues


67,927



57,484Gross profit


8,367



7,010Selling, general and administrative expenses


4,863



4,964Operating income


3,504



2,046Other income :Interest income


121



102Interest expense


(60
)


(68
)Total other income


61



34Income before provision for incometaxes


3,565



2,080Provision for income taxes


1,597



810Net income

$
1,968


$
1,270Basic earnings per common share

$
.31


$
.20Diluted earnings per common share

$
.31


$
.20Weighted average common shares outstanding –Basic


6,305,517



6,240,256Diluted


6,318,349



6,283,540Cash dividend declared and paid per share

$
.17


$
.10
 
  See notes to consolidated financial statements.
 F-5
 KSW, INC. AND SUBSIDIARY
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands)
 
 2010


2009Net income

$
1,968


$
1,270Other comprehensive income:Net unrealized holding gains arising during the year


36



324Income tax expense related to items of other comprehensive income


(16
)


(145
)Other comprehensive income, net of  income tax expense


20



179Total comprehensive income

$
1,988


$
1,449
  
 See notes to consolidated financial statements.
  F-6
 KSW, INC. AND SUBSIDIARY
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 Common Stock


Additional

Paid-In


Retained


Accumulated

Other

Comprehensive


TreasuryShares


Amount


Capital


Earnings


Income(Loss)


Stock


TotalBalances, January 1, 2009


6,287,825


$
63


$
13,293


$
7,142


$
(352
)

$
(16
)

$
20,130Net income


-



-



-



1,270



-



-



1,270Cash dividend paid - $.10 per share


-



-



-



(624
)


-



-



(624
)Amortization of share-based compensation


-



-



20



-



-



-



20Purchase of treasury stock


-



-



-



-



-



(124
)


(124
)Net unrealized gains on available-for-sale securities


-



-



-



-



179



-



179Balances, December 31, 2009


6,287,825



63



13,313



7,788



(173
)


(140
)


20,851Net income


-



-



-



1,968



-



-



1,968Exercise of employee stock options


131,500



1



207



-



-



-



208Cash dividend paid - $.10 per share














(628
)










(628
)Cash dividend paid - $.07 per share


-



-



-



(445
)


-



-



(445
)Tax benefits from exercise of employee stockoptions


-



-



97



-



-



-



97Amortization of share-based compensation


-



-



17



-



-



-



17Net unrealized losses on available-for-sale securities


-



-



-



-



20



-



20Balances, December 31, 2010


6,419,325


$
64


$
13,634


$
8,683


$
(153
)

$
(140
)

$
22,088
 
  See notes to consolidated financial statements.
  F-7
 KSW, INC. AND SUBSIDIARY
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands)
 
 2010


2009Cash flows from operating activities:Net income

$
1,968


$
1,270Adjustments to reconcile net income to netcash provided by operating activities:Depreciation and amortization


171



172Deferred income taxes


2



22Tax benefits from exercise of stockoptions


(97
)


-Share-based compensation expenserelated to stock options


17



20Earnings from unconsolidated Joint Venture


(281
)


-Changes in operating assets (increase) decrease:Accounts receivable


(1,362
)


7,110Retainage receivable


2,556



2,460Costs and estimated earnings in excess ofbillings on uncompleted contracts


(1,735
)


(1,750
)Prepaid expenses and other receivables


74



84Prepaid income taxes


(68
)


-Changes in operating liabilities increase (decrease):Accounts payable


(1,364
)


(2,437
)Retainage payable


(1,259
)


(1,374
)Accrued payroll and benefits


122



(819
)Accrued expenses


269



55Billings in excess of costs and estimatedearnings on uncompleted contracts


2,218



(6,183
)Income taxes payable


(139
)


465Net cash provided by (used in) operating activities

$
1,092


$
(905
)
 
 (continued)
  
 F-8
  KSW, INC. AND SUBSIDIARY
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 (CONCLUDED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands)
 
 2010


2009Cash flows from investing activities:Proceeds received on sale of marketable securities

$
1,564


$
-Purchases of marketable securities


(549
)


(1,057
)Purchases of property and equipment


(89
)


(82
)Advances to joint venture


17



(17
)Net cash provided by (used in) investing  activities


943



(1,156
)Cash flows from financing activities:Proceeds from the exercise of employee stock options


208



-Tax benefits from exercise of stock options


97



-Purchase of treasury stock


-



(124
)Repayment of long-term debt


(60
)


(64
)Other


-



-Cash dividends paid


(1,073
)


(624
)Net cash used in financing activities


(828
)


(812
)Net (decrease) increase in cash and cash equivalents


1,207



(2,873
)Cash and cash equivalents, beginning of year


13,738



16,611Cash and cash equivalents, end of year

$
14,945


$
13,738Supplemental disclosure of cash flow information:Cash paid during the year for:Interest

$
60


$
68Income taxes

$
1,796


$
390
 
 For presentation purposes, $1,045 of short term investments in Canadian time deposits, that were included in cash in the Company’s December 31, 2009 consolidated balance sheet, have been reclassified to marketable securities.
  
 See notes to consolidated financial statements.
  F-9
  KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (1)
Principles of consolidation and nature of operations
  The accompanying consolidated financial statements as of December 31, 2010 and 2009 and for the years then ended, include the accounts of KSW, Inc. and its wholly-owned subsidiary, KSW Mechanical Services, Inc., collectively “the Company”, and have been prepared in conformity with accounting principles generally acceptable in the United States of America.  All material intercompany accounts and transactions have been eliminated in consolidation.
  The Company furnishes and installs heating, ventilating and air conditioning systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects, primarily in the State of New York. On larger, more complicated projects such as hospitals, the Company serves as a mechanical trade manager, performing project management services relating to the mechanical trades.  On public works projects, the Company competes by submitting a sealed bid to the public entity.  The project is typically awarded to the lowest responsible bidder.  On private projects, the Company and its competitors negotiate with the developer, or its construction manager, on the cost of the mechanical work required.
 
 The Company considers itself to operate as one operating segment.
 
  (2)
Summary of significant accounting policies
  (A)
Revenue and cost recognition
 
 Revenue is primarily recognized on the percentage-of-completion method for long-term construction contracts not yet completed, measured by the percentage of total costs incurred to date to estimated total costs at completion for each contract.  This method is utilized because management considers the cost-to-cost method the best method available to measure progress on these contracts.  Revenues and estimated total costs at completion are adjusted monthly as additional information becomes available and based upon the Company’s internal tracking systems.  Because of the inherent uncertainties in estimating revenue and costs, it is reasonably possible that the estimates used will change within the near term.
  Contract costs include all direct material and labor costs and those other indirect costs related to contract performance including, but not limited to, indirect labor, subcontract costs and supplies.  General and administrative costs are charged to expense as incurred.
  The Company has contracts that may extend over more than one year; therefore, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which the facts, which require the revisions, become known.
  F-10
  KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (2)
Summary of significant accounting policies – cont’d
 (A)
Revenue and cost recognition – cont’d
 Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
  The Company does not record any income from claims until the claims have been received or awarded.
  Revenues recognized in excess of amounts billed are recorded as a current asset under the caption “Costs and estimated earnings in excess of billings on uncompleted contracts.”  Billings in excess of revenues recognized are recorded as a current liability under the caption “Billings in excess of costs and estimated earnings on uncompleted contracts.”
  In accordance with construction industry practice, the Company reports in current assets and liabilities those amounts relating to construction contracts realizable and payable over a period in excess of one year.
  Fees for the management of certain contracts are recognized when services are provided.
 (B)
Cash and cash equivalents
 The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.  At December 31, 2010 and 2009, cash equivalents consisted of Canadian time deposits and money market accounts.
 (C)
Marketable securities
 
 Marketable securities, consisting of Canadian time deposits, equity securities and mutual funds, are classified as “available-for-sale” securities and are stated at fair market value based on quoted market prices.  Realized gains and losses, determined using the specific identification method, are included in earnings.  Unrealized holding gains and losses are reported as comprehensive income (loss) in a separate component of stockholders’ equity.
 (D)
Accounts and retainage receivable
 Accounts and retainage receivable from furnishing and installing heating, ventilating and air conditioning systems and process piping systems are based on contracted prices.  The Company may establish an allowance for uncollectible trade accounts and retainage receivable based upon historical collection experience and management’s
  F-11
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (2)
Summary of significant accounting policies – cont’d
 (D)
Accounts and retainage receivable – cont’d
 periodic evaluation of the collectability of outstanding accounts and retainage receivable on an account-by-account basis.  Accounts receivable and contract retentions are due based on contract terms.  Amounts are deemed delinquent when they are not received within their contract terms. Delinquent receivables are written-off based on individual credit evaluation and specific circumstances of the customer.
  (E)
Credit risk
 Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and trade accounts and retainage receivables.
  The Company maintains its cash accounts at balances which exceed Federally insured limits for such accounts.  The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.  At December 31, 2010, amounts in excess of federally insured limits totaled approximately $15,655.
  Trade accounts and retainage receivables, at times, are due from government agencies, municipalities and private owners located in the New York metropolitan area.  The Company does not require collateral in most cases, but may file claims or statutory liens against the construction projects if a default in payment occurs.  Trade accounts and retainage receivables from the Company’s three largest customers totaled approximately $10,981 and $ 7,979 at December 31, 2010 and 2009, respectively.
  (F)
Property and equipment
 Property and equipment is stated at cost.  Depreciation is computed over the estimated useful lives of the assets, generally five years, except for building and improvements which is thirty-nine years, using the straight-line method.  Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets to which they apply or the related lease term.  Repairs and maintenance are charged to operations in the period incurred.
  (G)
Income taxes
 The Company uses the asset and liability method of accounting for income taxes in accordance with Accounting Standards.  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,
 F-12
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 (2)
Summary of significant accounting policies – cont’d
 
  (G)
Income taxes – cont’d
 and unrealized gains and losses on marketable securities.  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.
  (H)
Earnings per share
 Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options.  The difference between reported basic and diluted weighted average common shares results from the assumption that all dilutive stock options outstanding were exercised.
  (I)
Use of estimates
 The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates, and such differences could be material.
  (J)
Stock options
 All share based payments to employees and non-employee directors, including grants of stock options, are recognized in the financial statements based on the awards fair value at the date of grant.
 
 The Company uses the Black-Scholes option – pricing model, which requires the input of subjective assumptions.  These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the
  F-13
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (2)
Summary of significant accounting policies – cont’d
 (J)
Stock options – cont’d
 expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”).  Changes in the subjective assumptions can materially affect the estimate of fair value of share-based compensation and consequently, the related amount recognized on the consolidated statements of income.
  (K)
Financial instruments
 Disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies.  Considerable judgment is necessary to interpret market data and develop estimated fair values.
 
 Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
 Cash equivalents, marketable securities, receivables, payables and other amounts arising out of normal contract activities, including retentions, which may be settled beyond one year, reasonably approximate their fair values.
 
 The fair value of the Company’s mortgage payable, which is not traded in the market, is estimated by considering the Company’s credit rating, current rates available to the Company for debt of the same remaining maturity and the terms of the debt.
 
 Disclosure about fair value of financial instruments is based on pertinent information available to management as of the balance sheet date.
  (L)
Impact of recently issued and adopted accounting standards
 The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.”  The FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure its consistent reporting of financial condition, results of operations, and cash flows.  References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,sometimes referred to as the Codification or ASC.  There were no recently issued accounting standards which materially affect the Company.
 
 F-14
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (3)
Marketable securities
  The cost and fair values of the marketable securities, classified as available-for-sale securities at December 31, 2010 and 2009, were as follows:
  Cost


Gross

Unrealized

Holding Gains


Gross

Unrealized

Holding Losses


Fair

ValueDecember 31, 2010:Mutual funds and marketable equity securities

$
1,902


$
79


$
(356
)

$
1,625December 31, 2009:Investment in Canadian time deposits, mutual funds and marketable equity securities

$
2,917


$
68


$
(381
)

$
2,604
  At December 31, 2010 and 2009, gross unrealized holding losses on available-for-sale securities were $356 and $381, respectively.  At December 31, 2010 and 2009, gross unrealized holding gains on available-for-sale securities were $79 and $68, respectively. The change in net unrealized holding losses, net of tax, was a decrease of $20 and $179 for the years ended December 31, 2010 and 2009, respectively.
  FASB ASC 820-10, “Fair Value Measurements”, establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels which are described below:
 
 Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.  The fair value hierarchy gives the highest priority to Level 1 inputs.
 
 Level 2:
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
 
 Level 3:
Unobservable inputs are used when little or no market data is available.  The fair value hierarchy gives the lowest priority to Level 3 inputs.
 F-15
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
  (3)
Marketable securities – cont’d
  In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
 
 Financial assets carried at fair value at December 31, 2010 are classified in the table below in one of the three categories described above.
 
 Level 1


Level 2


Level 3


TotalMutual funds and marketableequity securities

$
1,625


$
-


$
-


$
1,625
 
 Mutual funds and marketable equity securities are valued using market prices on active markets (Level 1).  Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.
 
 For presentation purposes, $1,045 of short term investments in Canadian time deposits, that were included in cash in the Company’s December 31, 2009 consolidated balance sheet, have been reclassified to marketable securities.
  
 (4)
Accounts and retainage receivable
 
 2010


2009Accounts and retainage receivable:BilledContracts in progress

$
8,365


$
5,681Completed contracts


4,990



6,581Unbilled


345



76$
13,700


$
12,338Retainage receivable

$
4,081


$
6,637
  At December 31, 2010, retained contract receivables totaling $691 were not expected to be realized within one year.
   F-16
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
  (5)
Costs and estimated earnings on uncompleted contracts
  Costs and estimated earnings on uncompleted contracts consists of the following at December 31, 2010 and 2009:
  2010


2009Costs incurred on uncompleted contracts

$
59,819


$
57,059Estimated earnings


7,516



7,24367,335



64,302Less billings to date


67,606



64,090$
(271
)

$
212
 
  The above amounts are included in the accompanying consolidated balance sheets under the following captions:
 
 2010


2009Costs and estimated earnings in excess of billings onuncompleted contracts

$
3,714


$
1,979Billings in excess of costs and estimated earnings onuncompleted contracts


(3,985
)


(1,767
)$
(271
)

$
212
 
 (6)
Joint Venture
  During the third quarter of 2009, a joint venture in which the Company and Five Star Electric Corporation each have a 50 percent ownership interest was awarded a $46 million contract for the construction of a chiller plant at the World Trade Center site.
 
 The work covered by the joint venture is made up of three components, (1) a mechanical segment performed by the Company, (2) an electrical segment performed by the Company’s joint venture partner and (3) a general construction segment.   The Joint Venture has issued three contracts, (1) to the Company to perform the mechanical work, (2) to the Company’s partner to perform the electrical work and (3) to a construction manager to perform the general construction work as an agent for the joint venture, on a reimbursable cost plus fee basis.
 F-17
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (6)
Joint Venture – cont’d
  The Company has provided a guaranteed maximum price for the mechanical segment of the contract, and its joint venture partner has provided a guaranteed maximum price for the electrical segment of the contract. The Company shares joint venture profits/losses derived from the general construction segment equally with its joint venture partner.
 
 If the other partner is unable to complete its contractual obligations, the Company would be fully liable to do so under the joint venture’s contract with the Port Authority of New York and New Jersey.  The Company and its partner are also jointly and severally liable to the bonding company that issued the payment and performance bond for the joint venture.  Circumstances that could lead to a loss under the joint venture agreement beyond the Company’s stated ownership interest include the other partner’s inability to contribute additional funds to the joint venture in the event the project incurs a loss, additional costs that the Company could incur should the partner fail to provide the services and resources toward project completion that it committed to provide in the joint venture agreement, and the partner’s failure to pay its subcontractors and suppliers.
 
 The Company uses a combination of the proportionate consolidation method and the equity method to account for its interest in the joint venture.  TheCompany  records the assets, liabilities, revenues and costs of revenues associated with the mechanical segment of the contract as gross amounts, in the financial statements (i.e. using the proportionate consolidation method), as it would any other contract with a third party. The Company records its 50% share of the revenues and costs of revenues associated with the general construction segment of the contract as gross amounts in the consolidated statement of income and records its portion of the assets and liabilities as a net amount in the consolidated balance sheet (i.e. using the equity method), under the caption  “Advances to and Earnings from Joint Venture”. The joint venture partner is responsible for the electrical portion of the contract, and the Company is not recognizing any portion of that part of the joint venture contract in its financial statements.
 
 In order to ensure that the Company’s unconsolidated joint venture is properly capitalized, the Company and its partner are currently billing the joint venture only for the costs incurred on their respective portions of the joint venture contract. The decision to bill the joint venture only for the costs incurred on the project has not had a significant impact on the Company’s liquidity. When the project reaches substantial completion, which is anticipated to occur in the fourth quarter of 2011, and the Joint Venture determines that it will not incur any unaccounted for costs, and is not subject to any significant adjustments between the Joint Venture and the Port Authority of New York and New Jersey for additional or deleted work, the Joint Venture shall make a distribution to each partner of a portion of the difference between each partner’s adjusted subcontract and the amount billed by each partner to date.  At final completion, any balance remaining will be distributed.
 F-18
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
  (6)
Joint Venture – cont’d
 Since the Company is currently billing the joint venture for its costs related to the performance of the mechanical portion of the joint venture contract, which do not include any profit, this transaction increases amounts the Company records in its consolidated balance sheets under the caption “Costs and estimated earnings in excess of billings on uncompleted contracts”.
 
 As of December 31, 2010, the joint venture had cash totaling approximately $7,084, no portion of which was included in the Company’s cash balance in the consolidated balance sheet as of December 31, 2010.
 
 At December 31, 2010 and 2009, the Company has recorded the following in its consolidated balance sheets under the caption “Advances to and earnings from joint venture”:
 
 2010


2009Advances to joint venture

$
-


$
17Earnings from joint venture


281



-Balance at December 31, 2010

$
281


$
17
 
 For the years ended December 31, 2010 and 2009, the Company has prepared analyses, as determined by Item 1-02(w) of Regulation S-X, to determine if the joint venture was a significant subsidiary investment requiring its separate financial statements to be included in the Company’s Form 10-K.  The results of these analyses showed that it was not necessary to include the financial statements of the joint venture in the Form 10-K filings because the joint venture did not meet any of the criteria set forth in Item 3-09 of Regulation S-X.
 
 (7)
Property and equipment
  Property and equipment at December 31, 2010 and 2009 consisted of the following:
  2010


2009Land

$
694


$
694Building


1,718



1,718Machinery and equipment


814



803Furniture and fixtures


976



967Leasehold improvements


851



8515,053



5,033Less accumulated depreciation and amortization


2,439



2,341$
2,614


$
2,692
 
 Depreciation and amortization expense relating to property and equipment was approximately $167 and $168 for the years ended December 31, 2010 and 2009, respectively.
 F-19
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (8)
Mortgage payable
  During December 2008, the Company purchased a pipe fabrication shop and an adjacent storage yard in Bronx, New York, from the Company’s Chief Executive Officer and a charitable foundation he controls at fair market value.
 
 The Company financed a portion of this purchase using a $1,176 mortgage with Bank of America, N.A.  This mortgage has a ten year term, with interest amortized over twenty years, with any unpaid principal due in a balloon payment December 2018.  The mortgage payable is at a variable interest rate, and the Company used an interest swap instrument to convert the interest rate that the Company pays to a fixed rate.  The Company has determined that the fair value of the interest rate swap was immaterial.  Monthly payments are approximate $5 plus interest at 5%.  This mortgage is collateralized by the real estate.
 
 Future principal maturities of this mortgage payable are as follows as of December 31, 2010:
 
 Year endingDecember 31,

Amount2011

$
582012


582013


582014


582015


58Thereafter


762Total

$
1,052
 
 Costs related to obtaining the mortgage debt are capitalized and amortized over the term of the related debt using the straight-line method.  When the loan is paid in full, any unamortized finance costs are removed from the related accounts and charged to operations.  During December 2008, the Company incurred costs related to the mortgage closing totaling $44.    During the year ended December 31, 2010 and 2009, amortization expense charged to operations related to these deferred mortgage costs totaled $4.   At December 31, 2010 and 2009, net deferred mortgage costs totaled $36 and $40, respectively, and are included in the consolidated balance sheets as a long term asset under the caption “Other”.
 
 F-20
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 
 (9)
Income taxes
  For the years ended December 31, 2010 and 2009 components of the provision for income taxes are as follows:
  2010


2009CurrentFederal

$
948


$
431State and local


647



3571,595



788DeferredFederal


2



14State and local


-



82



22Totals

$
1,597


$
810
 
  A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before taxes is as follows:
  2010


2009Computed tax at the federal statutory rate of 34%

$
1,212


$
707State and local taxes, net of federal benefit


386



225Other items, net


(1
)


(122
)Provision for income taxes

$
1,597


$
810
 
  The details of deferred tax assets and liabilities at December 31, 2010 and 2009 are as follows:
  2010


2009Deferred income tax assets:Property and equipment

$
53


$
60Unrealized losses on marketable securities


124



141Other tax carryforwards


32



26Deferred income tax assets, net

$
209


$
227
 
 F-21
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (9)           Income taxes – cont’d
  At December 31, 2010 and 2009, the Company had net current deferred tax assets totaling $124 and $141, respectively.  At December 31, 2010 and 2009, the net non-current deferred tax assets total $85 and $86, respectively.
  Management has evaluated its tax positions for the year ended December 31, 2010 and has determined that it has no uncertain tax positions requiring financial statement recognition as of December 31, 2010.
  (10)
Stockholders’ equity
  (A)
Stock option plans
  The Company has outstanding stock options under two plans, the KSW, Inc. 1995 Stock Option Plan (“1995 Plan”) and the KSW Inc. 2007 Stock Option Plan (“2007 Plan”).
 
 In 1995, the Board of Directors of the Company adopted the 1995 Plan.  This plan enabled the Company to make incentive-based compensation awards to its employees, officers, directors and consultants.  On August 8, 2005, the Board of Directors extended the expiration date of the 526,667 outstanding options to December 2010 from December 2005, and increased the exercise price to $1.66 from $1.50. In addition, on August 8, 2005, the Company issued 80,000 options, at $1.66 per share, to an officer and three Directors.  The plan expired December 2005; therefore, no new options can be granted under this plan.
  Accounting Standards require all share-based payments to employees and non-employee directors, including grants of stock options, to be recognized in the financial statements based on the awards fair value at the date of grant.
  At January 1, 2009, the Company had 145,501 outstanding options under the 1995 plan at an exercise price of $1.66.
  During 2009 there were no options exercised under the 1995 plan.  During 2010, 131,500 options under the 1995 plan were exercised during the year.  At December 31, 2010 there were 14,001 outstanding and fully vested options under the 1995 plan.
  F-22
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
  (10)
Stockholders’ equity- cont’d
  (A)
Stock option plans- cont’d
  The 2007 Plan was adopted and approved by the Company’s Board of Directors on May 8, 2007 and was approved by the shareholders at the May 2008 Annual Meeting of Stockholders.  Pursuant to the 2007 Plan, 300,000 shares of common stock of the Company are reserved for issuance to employees, consultants and Directors of the Company.  The primary purpose of the 2007 Plan is to reward and retain key employees and to compensate directors.  No options have been issued to officers or employees under the 2007 Plan.  Under this plan the Company has issued to a Company director options to purchase 20,000 shares of the Company’s common stock at an exercise price of $6.95 per share.  At January 1, 2009, there were 20,000 options outstanding of which 6,666 were vested under the 2007 Plan.
 
 On May 7, 2009, the Company issued to a Company director options to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.61 per share.  At December 31, 2010, there were 40,000 options under the 2007 plan outstanding of which 26,666 were vested.
 
 As of December 31, 2010, there was approximately $12 unrecognized compensation expense related to unvested stock-based compensation awards.  That cost is expected to be recognized over the next 1.4 years.
 
 Under both plans, options were granted to certain employees, executives and Directors at prices equal to the market value of the stock on the dates the options were issued.  The options granted generally have a term of 10 years from the grant date and granted options vest ratably over a three year period.  The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date of the option and each vesting date.  The Company estimates the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes pricing valuation model.  The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense which would include the expected stock price volatility, risk-free interest rate, weighted-average expected life of the options and the dividend yield.
 
 Historical information is the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of options.  The risk-free interest rate
 
 F-23
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (10)
Stockholders’ equity- cont’d
   (A)
Stock option plans- cont’d
  was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.
 
 Changes that occurred in options outstanding during 2010 and 2009 for both plans are summarized below:
  Number

of Shares


2010

Weighed

Average

Exercise

Price


Number of

Shares


2009

Weighed

Average

Exercise

PriceOutstanding at beginning ofyear


185,501


$
2.27



165,501


$
2.23Expired/ canceled


-



-



-



-Effect of stock dividend


-



-



-



-Granted


-



-



20,000


$
2.61Exercised


(131,500
)

$
1.58



-



-Outstanding at end of year


54,001


$
3.95



185,501


$
2.27Exercisable at end of year


40,667


$
4.39



158,834


$
2.03
 F-24
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
  (10)
Stockholders’ equity- cont’d
 (A)
Stock option plans- cont’d
  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the 20,000 grants in 2009:  dividend yield of 0%; expected volatility of 56.84%; risk-free interest rate of 2.514%; and expected lives of five years.  The fair value of these options issued in 2009 was $1.32 per share.
 
 Cash proceeds, tax benefits and intrinsic value related to total stock options exercised under both plans during the years end December 31, 2010 and 2009, respectively, are as follows:
 
 2010


2009Proceeds from stock options exercised

$
208


$
-Tax benefits related to stock options exercised

$
97


$
-Intrinsic value of stock options exercised

$
216


$
-
 
 The following table summarizes information about stock options outstanding at December 31, 2010:
  Exercise Price


Shares

Contractual Life$
1.58



14,001

4.6 years$
6.95



20,000

6.6 years$
2.61



20,000

8.4 yearsTotal



54,001  F-25
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (10)
Stockholders’ equity- cont’d
 (A)
Stock option plans- cont’d
  Shares


Average Price


Term in Years


Intrinsic

ValueOutstanding Options


54,001


$
3.95



6.7


$
50Exercisable Options


40,667


$
4.39



6.2


$
36
  (B)
Dividend distributions
  On November 29, 2010, the Company’s Board of Directors declared a cash dividend of $.07 per share.  The aggregate amount on the dividend was $445, and was paid on December 20, 2010 to stockholders of record as of December 14, 2010.
 
 On March 9, 2010, the Company’s Board of Directors declared a cash dividend of $.10 per share.  The aggregate amount on the dividend was $628 and was paid on May 24, 2010 to stockholders of record as of April 26, 2010.
 
 On June 2, 2009, the Company’s Board of Directors declared a cash dividend of $.10 per share to shareholders of record as of June 29, 2009.  The aggregate amount of the dividend was $624 and such dividend was paid on July 17, 2009.
  (C)
Preferred stock
 
 The Company is authorized to issue 1,000,000 shares of preferred stock.  As of December 31, 2010, no shares of preferred stock had been issued by the Company.
  (D)
Treasury stock
 
 During December 2008, the Company’s Board of Directors authorized the purchase, through June 2009, of up to $1,000 of the Company’s common stock on the open market.  As of December 31, 2010 and 2009, the Company purchased 52,700 shares of the Company’s common stock at a total cost of $140.
 
  F-26
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (11)
Earnings per share
  2010


2009Net earnings

$
1,968


$
1,270Earnings per share – basic:Weighted average sharesoutstanding during the year


6,305,517



6,240,256Earnings per common share – basic

$
.31


$
.20Earnings per share – diluted:Weighted average sharesoutstanding during the year


6,305,517



6,240,256Effect of stock option dilution


12,832



43,284Total shares outstanding forpurposes of calculating dilutedearnings per share


6,318,349



6,283,540Earnings per common sharesand common share equivalent –diluted

$
.31


$
.20
  (12)
Accumulated other comprehensive income (loss)
  At December 31, 2010 and 2009, accumulated other comprehensive income and loss, which consists of net unrealized holding gains (losses) on available-for-sale securities, was as follows:
  2010


2009Beginning balance

$
(173
)

$
(352
)Current period change


20



179Ending balance

$
(153
)

$
(173
)
  F-27
 KSW, INC. AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 (13)          Commitments and contingencies
  (A)
Performance and payment bonds
  The Company is contingently liable to a surety under a general indemnity agreement.  The Company agrees to indemnify the surety for any payments made on contracts of suretyship, guaranty or indemnity as a result of the Company not having the financial capacity to complete projects.  Management believes the likelihood of the surety having to complete projects is remote.  The contingent liability is the cost of completing all bonded projects, subject to bidding by third parties, which is an undeterminable amount. Management believes that all contingent liabilities will be satisfied by performance on the specific bonded contracts involved.
  (B)
Operating lease
  The Company is obligated under a non-cancelable operating lease, for office space with minimum future rental payments at December 31, 2010 as follows:
  Year endingDecember 31,2011

$
2232012


2272013


2312014

$
117Total

$
798
  Under the terms of the lease agreement, the Company is obligated to pay monthly rental amounts of approximately $18, which escalates 2% each year.
  The lease is a triple net lease which the Company pays any increases in real estate taxes over base year taxes, maintenance, insurance and utilities.  The current lease expires June 30, 2014.
 
 Rent expense for the years ended December 31, 2010 and 2009 amounted to approximately $218 and $209, respectively.
 F-28
 
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (13)
Commitments and contingencies - cont’d
  (C)
Environmental regulation
  The Company must comply with certain Federal, state and local regulations involving contract compliance as well as the disposal of certain toxins.  In management’s opinion, there are no environmental contingencies or violations of environmental laws or regulations, which would have a material adverse impact on the results of operations or on the Company’s financial condition.
  (D)
Legal
  (1)
Other Proposals and Claims
 
 During the course of its work on construction projects, the Company may incur expenses for work outside the scope of its contractual obligations, for which no acknowledgment of liability exists from the owner or general contractor for such additional work.  These claims may include change proposals for extra work or requests for an equitable adjustment to the Company’s contract price due to unforeseen disruptions to its work. In accordance with accounting principles generally accepted in the United States of America for the construction industry, until written acknowledgment of the validity of the claims are received, claim recoveries are not recognized in the accompanying financial statements.  No accruals have been made in the accompanying consolidated financial statements related to these proposals for which no acknowledgment of liability exists. While the Company has been generally successful in obtaining a favorable resolution of such claims, there is no assurance that the Company will be successful in the future.
 
 (2)
Legal Proceedings
 
 There are no material pending legal proceedings to which the Company is a party, except:
 
 a.
The case of KSW Mechanical Services, Inc. v. Pavarini McGovern LLC, et. al., (PMG), Supreme Court, N.Y. County is an action to recover the Company’s contract balance of $529,000, plus delay and impact costs of $160,032, from PMG, the construction manager on the 45th Street Hotel project.  Trust Fund causes of action are also alleged against PMG’s principals.  PMG and the Owner are in litigation and in alternate dispute resolution proceedings over monetary issues unrelated to the Company’s work.  However, the Construction Manager cites these disputes with the
  F-29
 
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
  (13)
Commitments and contingencies - cont’d
  (D)
Legal – cont’d
  (2)
Legal Proceedings – cont’d
 
 Owner as the basis for failing to pay the Company’s contract balance.  There are at least two companion mechanic’s lien foreclosure actions instituted by other subcontractors.  The Company is a party to these actions because it has also filed a lien.  The actions are in the earliest stage and consolidation can be expected before discovery begins.  The Company is working with the Owner in an attempt to resolve the Company’s claim against PMG.
  b.
In order to secure its receivable, the Company has filed two mechanic’s liens, totaling $1,092,155 against two buildings in Brooklyn, N.Y.  The Owner has cited slow sales and financing problems as the reasons for not paying the Company.  The Owner has bonded both liens.
 
 The Company believes that the receivables recorded on its books, with respect to both legal proceedings discussed above, should be collected.
 
 (F)
Employment agreement
  The Company’s Chief Executive Officer has a written employment agreement, which expires on December 31, 2011.  This agreement provides a base annual compensation of $450, medical insurance, disability insurance with payments equal to 60% of base compensation, a $1 million policy of life insurance payable as directed by him and a car with a chauffeur.  His estate is entitled to two months pay in the event of his death.
 
 In addition, for the period January 1, 2006 through December 31, 2009, he received a bonus equal to 9.5% of the Company’s adjusted annual operating profits before taxes, which are in excess of $250.  For the period January 1, 2010 through December 31, 2011, he will receive a bonus equal to 9.5% of the Company’s adjusted annual profits before taxes which are in excess of $100.  For the years ended December 31, 2010 and 2009, bonus expense related to this agreement was $366 and $194, respectively.  At December 31, 2010 and 2009, accrued bonus payable included in the accompanying consolidated balance sheets related to this agreement was approximately $216, and $144, respectively.
 F-30
 
 KSW, INC. AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 (14)
Credit facility
  The Company has a line of credit facility from Bank of America, N.A. which provides borrowings for working capital purposes up to $2,000.  There have been no borrowings against this credit facility.  This facility expires on March 31, 2011, is secured by the Company’s assets and is guaranteed by the Company’s subsidiary, KSW Mechanical Services, Inc.  (See Note 18(A)).
 
 Advances related to the facility in place at December 31, 2010 bear interest, based on the Company’s option, at either the bank’s prime lending rate, or the London Interbank Offered Rate (“Libor”) plus two percent per annum.
  (15)
Concentration risks
  (A)
Labor concentrations
  The Company’s direct labor is supplied primarily by one union through a collective bargaining agreement, which expires in June 2011.  Although the Company’s past experience was favorable with respect to resolving conflicting demands with unions, it is always possible that a protracted conflict may occur which will impact the renewal of the collective bargaining agreements.
 
 (B)
Contract revenue/significant customers
 Revenues from the Company’s largest customers were approximately 27%, 21%, 20%, and 10%, of its contract revenue in 2010; 23%, 17%, 12%, 12% and 11% of its contract revenue in 2009.
  (16)          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 $85 and  $87 as a 25% matching contribution for the years ended December 31, 2010 and 2009, respectively.
 F-31
 
 KSW, INC. AND SUBSIDIARY
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS ENDED DECEMBER 31, 2010 AND 2009
 (in thousands, except share data)
 
 
 (16)
Retirement plans – cont’d
  (B)
Multiemployer pension plans
  Employees of the Company who are parties to a collective bargaining (union) agreement are covered by union pension plans. The Company makes contributions to multiemployer pension plans that cover its various union employees.  These plans provide benefits based on union members’ earnings and periods of coverage under the respective plans.  The Company has expensed approximately $2,328 and $2,468 for the years ended December 31, 2010 and 2009, respectively, related to multi-employer pension plans for its union employees.
  (17)
Backlog
  At December 31, 2010, the Company had a backlog of approximately $64,000. Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at year end and from contractual agreements on work which has not commenced.
 
 
 (18)
Subsequent events
  (A)
Line of Credit
 
 On January 14, 2011, the Company extended the working capital credit facility with Bank of America, N.A for a term expiring March 31, 2012.
  
 F-32
 EXHIBIT INDEX
 
 Exhibit No.

Description3.1

Amended and Restated Articles of Incorporation of KSW, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-8 (No. 333-217350), filed with the Commission on February 13, 1997).3.2

Amended and Restated By-Laws of KSW, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-8 (No. 333-217350), filed with the Commission on February 13, 1997).10.1

Form of Modification of Lease Agreement dated as of May 1, 1998 by and between KSW, Inc, Irvjoy Partners, L.P. and I BLDG Co., Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (Commission File No. 001-32865), filed with the Commission on March 30, 1999).10.2

1995 Stock Option Plan of KSW, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Registration Statement on Form 10 (Commission File No. 001-32865), filed with the Commission on November 24, 1995).10.3

Employment Agreement, dated September 12, 2005 by and between the Company, KSW Mechanical Services, Inc. and Floyd Warkol (incorporated herein by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K (Commission File No. 001-32865), filed with the Commission on September 12, 2005).10.4

Amendatory Employment Agreement, dated as of March 6, 2007, by and between the Company, KSW Mechanical Services, Inc., and Floyd Warkol.  (incorporated herein by reference to Exhibit 10.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2006, filed on March 14, 2007).10.5

Line of Credit Agreement Letter, dated March 14, 2006, between KSW, Inc. and Bank of America, N.A. together with forms of a Line of Credit Note, Rider to Line of Credit Note, a pledge security agreement and guaranty (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 3, 2005, filed with the Commission on March 16, 2006).
   
 
 10.6

Line of Credit Agreement Letter, dated March 8, 2007, between KSW, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on March 14, 2007).10.7

Line of Credit Agreement Letter, dated January 28, 2008, between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 25, 2009).10.8

Line of Credit Agreement Letter, dated January 26, 2009, between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 25, 2009).10.9

KSW, Inc. 2007 Stock Option Plan (incorporated herein by reference to Appendix E to the Company’s definitive proxy statement on Schedule 14A for the 2008 annual meeting of stockholders, filed with the Commission on April 4, 2008).10.10

Line of Credit Agreement Amendment No. 1, dated January 15, 2010 between KSW, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Commission on March 19, 2010).10.11

Line of Credit Agreement Amendment No. 2, dated January 14, 2011 between KSW, Inc. and Bank of America, N.A.11.1

Statement Regarding Computation of Net Earnings Per Share.21.1

Subsidiaries of Registrant23.1

Consent of BDO USA, LLP31.1

Certification of Chief Executive Officer required by Rule 13a-14(a).31.2

Certification of Chief Financial Officer required by Rule 13a-14(a).32.1

Certification of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350.32.2

Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350.