U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28140
USABG CORP.
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(Exact name of registrant as specified in its charter)
Delaware 11-2974406
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.
53-09 97th Place, Corona, New York 11368
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(Address of principal executive offices) (Zip Code)
(7l8) 699-0100
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(Issuer's telephone number, including area code)
SECURITIES registered pursuant to Section 12(b) of the Act: NONE
SECURITIES registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ ] No [ X ].
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Issuer's revenues for its fiscal year ended June 30, 1998 were
$17,062,873.
<PAGE>
The aggregate market value of the voting stock on November 30, 1998
(consisting of Common Stock, $.001 par value per share) held by non-affiliates
was $36,093 based upon the average closing bid price for such Common Stock on
said date $.0625, as reported by a market maker. On such date, there were
1,961,037 shares of Registrant's Common Stock outstanding.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of outstanding shares of each of the Issuer's classes
of common equity, as of the latest practicable date (January 7, 1999):
1,961,037.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
USABG Corp. ("the Company") was incorporated on September 12, 1988, in
the State of Delaware, as Colonial Capital Corp., and changed its name to USABG
Corp. in January 1998. The Company is the parent of USA Bridge Construction of
N.Y., Inc. ("NY") and owns 100% of the outstanding shares of common stock of
Royal Steel Services, Inc. and 100% of the outstanding shares of common stock of
Worldwide Construction Limited ("Worldwide"). These three subsidiaries are the
only ones through which the Company operates. Two additional wholly-owned
subsidiaries of the Company - One Carnegie Court Associates, Inc. ("One
Carnegie") and USA Bridge Construction Corp. (Maryland) ("MD") - ceased
operations in August 1997 and November 1996, respectively, though neither
company has been formally dissolved. Unless the context requires otherwise, all
references to the Company include its subsidiaries.
Until its acquisitions ("the Acquisitions") of both NY and One
Carnegie, consummated on April 25, 1994, the Company was a development stage
company. Its only operations involved searching for possible business
acquisitions. Pursuant to the Acquisitions, the Company issued an aggregate of
3,540,000 shares of its Common Stock, par value $.001 per share ("the Common
Stock"), to the stockholders of NY and One Carnegie - (2,820,000 to the
stockholders of NY and 720,000 to the stockholders of One Carnegie) - in
exchange for all of said stockholders' issued and outstanding shares. Joseph
Polito, the principal stockholder of NY and the sole stockholder of One
Carnegie, received, in exchange for his shares of NY and One Carnegie common
stock, 2,380,000 and 720,000 shares, respectively, of the Company's Common
Stock. The Acquisitions were accounted for as "recapitalizations." Accordingly,
both NY and One Carnegie became subsidiaries of the Company.
In connection with the Acquisitions, the Company amended its
Certificate of Incorporation to (i) increase its authorized shares of Common
Stock from 10,000,000 to 50,000,000 shares; (ii) increase the par value of the
Common Stock from $.0001 to $.001; and (iii) authorize 10,000,000 shares of
Preferred Stock, which shares may be issued in classes and series, pursuant to
the rights, designations, and preferences as determined by the Board of
Directors. To date, the Company has not issued any Preferred Stock.
On August 3, 1998, after shareholder approval obtained at the Company's
special meeting of July 29, 1998, the Company effected a one-for-four reverse
split (1 for 4) of its outstanding shares of Common Stock.
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Business of USA Bridge Construction of N.Y., Inc.
The Company commenced operations through NY, a 56% owned subsidiary, on
or about June 1993. NY was formed to serve primarily as a general contractor for
construction projects sponsored by federal, state, and local government
authorities in the New York State and Metropolitan areas; however, it operated
initially only as a subcontractor as it needed financing to enable it to obtain
bonding which is required for all municipal projects. To date, NY has provided
steel erection for building, roadway, and bridge repair projects for general
contractors who have been engaged by private and municipal/governmental
customers. As of June 30, 1998, NY completed in excess of twenty-one (21)
projects with an aggregate project value in excess of $40,000,000 and is
currently engaged in two (2) projects which will be completed between January
and February 1999 with an aggregate value of approximately $11,600,000 inclusive
of change orders. While NY plans to maintain its subcontractor presence in the
steel industry, it intends also to focus on obtaining projects as a general
contractor. During the fiscal year ended June 30, 1998, NY acted as a prime
contractor which has the same characteristics as a general contractor for one of
its projects.
Company's Ability to Continue as a Going Concern
As a result of the Company's net loss of $2,343,482 and $875,238 for
the fiscal year ended June 30, 1998 and 1997, respectively, a working capital
deficiency of $4,327,344 and backlog balance of $1,051,119 as of June 30, 1998,
substantial doubt exists about the Company's ability to continue as a going
concern. As of June 30, 1998, the Company owes approximately $2,616,742 of
payroll taxes and related penalty and interest. Certain taxing authorities have
filed liens against the Company as a result of such unpaid taxes. In order to
mitigate these uncertainties, the Company is aggressively pursuing in trying to
obtain additional contracts in order to mitigate its low backlog and vigorously
attempting to settle disputes in connection with mechanics' liens placed on
certain projects in order to collect its receivables. However, there can be no
assurance that it will be able to obtain additional contracts and settle its
disputes and generate substantial revenue.
Construction Projects
In May 1996, NY entered a subcontracting agreement with Lehrer McGovern
Bovis, Inc. (general contractor) for the terminal restoration of the Grand
Central Terminal owned by Metro-North Commuter Railroad. The contract is valued
at $5,365,144 including change orders and as of June 30, 1998 is approximately
92% complete. Such contract is expected to be completed between January and
February 1999.
In July 1996, NY entered into a contract with Tishman Construction
Corporation of New York (construction manager) amounting to $6,235,750 including
change orders, to perform steel erection services on the Louis Vuitton Office
Tower owned by Starre Realty and located on East
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57th Street in New York, New York. As of June 30, 1998, the project was 93%
complete and it is expected to be completed between January and February 1999.
In May 1998, NY's bid on a project to build a medical building in
Queens, New York was accepted by the developer thereof, 47-01 Queens Blvd.
Realty Corp. NY shall act as general contractor for the project as well as a
subcontractor providing structural steel fabrication and erection therefor. The
project is valued at approximately $2.4 million. In addition, NY has been given
the exclusive right to perform the interior tenant work on the medical building
which is valued at approximately $3 million. As of January 7, 1999, such
contract is still postponed and no commencement date has been determined.
African Operations
Worldwide was formed in December 1997 in the British Virgin Islands as
a holding company which owns 80% of each of Falcon TChad S.A. ("Falcon") and
Portshop S.A. ("Portshop"), both of which companies were incorporated in Chad, a
country located in North Central Africa. Chad is a country with abundant natural
resources such as cattle, cotton, limestone and crude oil. The remaining 20% of
each of Falcon and Portshop is owned by Diversified Investments Africa S.A.
("DIA"), a Luxembourg company unaffiliated with the Company. Falcon and Portshop
were jointly formed by Worldwide and DIA, both of which received their shares in
the companies as founders thereof and as facilitators of the relationships
between Falcon and Portshop and the entities with which Falcon and Portshop
intend to do business in Chad; accordingly, no cash consideration was paid to
either of Falcon or Portshop by Worldwide or DIA. DIA facilitated the
commencement of the Chadian operation for both companies by acting as a liaison
with the Chadian government and by developing business contacts and operations
in Chad. Falcon will operate as a full service transportation, forwarding,
customs clearance and warehousing company in the city of N'Djamena. Portshop
shall stock and operate a duty free store in Chad's sole international airport.
Worldwide shall operate as the liaison between Portshop, Falcon and the
governmental or private entities with which these companies intend to contract
in Chad.
In January 1998, Falcon purchased 16 transport vehicles and a
communications system. It is engaged in discussions with the Chadian
governmental authorities regarding the transportation of cotton, the country's
main export, though no agreement with respect to same has been executed. In
addition, Falcon has commenced discussions with several large foreign
corporations in order to provide their trucking needs.
During May 1998, Falcon executed a contract with ELF Oil TChad S.A., a
French oil company for whom Falcon has agreed to transport diesel fuel and
gasoline for a period of three years. Trucks and ancillary equipment were
cleared from the port in Cameroon and arrived at the frontier in Chad in late
September 1998. After customs and duty procedures, the vehicles commenced
hauling contracts with Coca Cola Chad and other commercial and industrial
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enterprises. Due to the extended rainy season, passage into Cameroon and Chad
has been delayed.
In June 1998, Falcon and Total Chad, a French company registered in
Chad, executed a letter of intent for the transportation of fuel from Limbe,
Cameroon to N'Djamena, Chad. The contract is expected to commence in the first
quarter of 1999. Efforts are underway to sign contracts with operators of Chad's
sugar industry and Nestle for the movement of products and with other importers
in Chad and Cameroon. A third oil company has approached Falcon Tchad regarding
transport of oil products to depots in Chad. The Company is reviewing its
equipment requirements in order to expand capabilities for the movement of
petroleum products as well as other freight items.
Other Subsidiaries
Royal Steel Services, Inc. was formed by the Company in November 1997
to undertake steel erection projects which carry a considerably smaller dollar
value than those which NY undertakes.
The following table lists, as of June 30, 1998, (i) all companies in
which Joseph Polito is either an Officer, Director, or principal shareholder;
and (ii) the activities engaged in by such companies with the Company or any of
its subsidiaries:
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<TABLE>
<CAPTION>
Year J. Polito's Activities with the Place of
Name (1) of Inc. Title Ownership (%) Company and NY Business
- -------- ------- ----- ------------- -------------- --------
<S> <C> <C> <C> <C> <C>
USABG Corp. (2) 1988 Pres./Director 66.3% Parent company Queens, NY
R.S.J.J. Realty 1983 Pres./Director 100% Leases the offices and storage Queens, NY
Corp. (3) space to the Company and NY
Crown Crane, Ltd. 1988 -- 50% Supplies cranes to NY for the Brooklyn, NY
(3) use in the erection of steel
Atlas Gem Leasing, 1986 Pres./Director 100% Supplies welding machines Queens, NY
Inc. (3) and compressors to NY
Atlas Gem Erectors 1986 Pres./Director 100% Sold certain construction No office
Co., Inc. (3) contracts to NY; ceased
operations 9/94.
USA Bridge 1990 Pres./Director 56.3% Provides steel erection for Queens, NY
Construction of buildings, roadway, and
N.Y., Inc. (3)(4) bridge repair projects
Royal Steel Services, 1997 -- 100% Formed to provide steel Queens, NY
Inc. (5) erection for projects smaller
than NY's projects
Worldwide 1997 -- 100% Parent company of Falcon Chad, Africa
Construction TChad S.A. and Portshop S.A.
Limited (6)
</TABLE>
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(1) Except as disclosed hereunder, no company listed is beneficially owned
by another entity, nor does any company have any subsidiaries.
(2) Incorporated in the State of Delaware.
(3) Incorporated in the State of New York.
(4) Joseph M. Polito, through his ownership of approximately 66.3% of the
outstanding shares of the Company's Common Stock, may be deemed the
beneficial owner of the shares of NY common stock owned by the Company.
(5) Incorporated in the State of New York. Joseph M. Polito, through his
ownership of approximately 66.3% of the outstanding shares of the
Company's Common Stock, may be
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deemed the beneficial owner of the shares of Royal Steel common stock
owned by the Company.
(6) Incorporated in the British Virgin Islands in December 1997. Worldwide
is a wholly-owned subsidiary of the Company and the parent company of
Falcon and Portshop, two companies registered under the laws of Chad
and authorized to operate therein in November 1997. Joseph M. Polito,
through his ownership of approximately 66.3% of the outstanding shares
of the Company's Common Stock, may be deemed the beneficial owner of
the shares of Worldwide common stock owned by the Company.
Prior to leasing equipment from Crown Crane, Ltd. ("Crown") or Atlas
Gem Leasing, Inc. ("AGLI"), NY compares the costs thereof to those costs it
might otherwise incur from like companies. NY will transact business with Crown
and AGLI only on terms which may be considered similar to the terms it might
achieve elsewhere. In connection with such transactions, the audit committee of
NY's Board of Directors intends to exercise reasonable judgment and take such
steps as it deems necessary to resolve any specific conflict of interest which
may occur and will determine what, if any, specific measures, such as retention
of an independent advisor, independent counsel, or special committee, may be
necessary or appropriate. The fact that Joseph M. Polito is an Officer,
Director, and principal shareholder in other companies, including those that
transact business with NY and the Company, opens the potential that there may be
conflicts of interest in decisions made by Mr. Polito, which decisions may
compromise his fiduciary duty to the Company. Any remedy under state law, in the
event such circumstances arise, most likely would be prohibitively expensive and
time consuming.
The Contract Process; Bidding
NY obtains its projects primarily through the process of competitive
bidding. In order to be fully apprised of bid solicitations, NY (i) subscribes
to bid reporting services; (ii) monitors trade journals including Engineering
Record News, Dodge Report, and Brown's Letter, Inc.; (iii) monitors daily
newspapers and real estate publications; (iv) utilizes membership and networking
in affiliated organizations including Allied Building Trades; (v) maintains
contracts with developers and other general contractors; and (vi) requests
notification from various government agencies as to bid solicitations being
requested.
In response to bid requests, NY submits to the soliciting entity a
proposal detailing its qualifications, the services to be provided, and the cost
of its services. Based on its evaluation of the proposals submitted, the
soliciting entity awards the contract to the bidder it deems appropriate.
Generally, the contract for a project is awarded to the lowest bidder, although
other factors may be taken into consideration.
NY submits its bids after management performs a detailed review of the
project specifications, an internal review of NY's capabilities and equipment
availability, and an assessment of whether the project is likely to attain
targeted profit margins. In bidding on
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contracts, there are two types of bid requests made by the soliciting entity: a
unit cost bid and a lump-sum bid. The unit cost bid is based upon a cost per
unit basis; a lump-sum bid obligates NY to complete the project at a fixed
price. With a lump-sum bid, the risk of estimating the quantity of units
required for a particular project is on NY, while with a unit cost bid, NY must
estimate the per unit cost, not the number of units needed. Any increase in NY's
unit cost over its unit bid price or cost over its lump-sum bid, whether due to
inefficiency, faulty estimates, weather, inflation, or other factors, must be
borne by NY and may adversely affect its results of operations.
Upon receipt by a New York City agency of notification that a bid
submitted for a project has been declared the low bid, the city's procurement
policy requires that the New York Finance Committee then approve all funds to be
allocated to such project. During this time, if NY is the low bidder, it must
provide the New York City agency with such documents as are required - including
a Payment and Performance Bond and a Labor and Material Bond - in order to be
approved to undertake the project. Once the New York City Finance Committee has
cleared the allocation of funds for a project and the agency has cleared all
documentation required to be submitted by the contractor, a starting date and
time table is set up for the project.
Most government contracts provide for termination of the contract at
the election of the customer, although in such event, NY is generally entitled
to receive a small cancellation fee. Many of NY's contracts are also subject to
completion requirements with liquidated damages assessed against it if schedules
are not met.
Unlike the general contractor, the prime contractor is responsible for
performance of that category alone, not the entire project. Like the general
contractor, the prime contractor typically contracts directly with the owner or
via the owner's construction manager acting as agent therefor; thus, unlike the
subcontractor, the prime contractor is responsible exclusively to the owner.
As general contractor, NY will be responsible for the performance of
the entire contract, including work assigned to subcontractors. Accordingly, NY
is subject to liability associated with the failure of subcontractors to perform
as required under the contract; thus, NY may require its subcontractors to
furnish Performance Bonds.
Affirmative action regulations require that NY use its best efforts to
hire minority subcontractors for a portion of the project and some of these
minority subcontractors may not be able to obtain such surety bonds.
Insurance and Bonding
NY maintains general liability and excess liability insurance,
insurance covering its construction equipment, and workers' compensation
insurance in amounts it believes are consistent with industry practices. NY
carries liability insurance of $1,000,000 per occurrence which management
believes is adequate for its current operations.
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Although NY generally has not been required to provide Performance
Bonds to general contractors when acting as a subcontractor, it may be required
to furnish bonds guaranteeing its performance as a subcontractor in the future.
NY will continue attempting to bid on both private and public sector
projects as a general contractor. Most of these projects, both public and
private sector, require Bid Bonds and Payment and Performance Bonds. A Bid Bond
is a bond issued by a bonding company which is usually in an amount equal to 10%
of the bid price and which guarantees that the contractor will be able to
produce such other additional documents and information required in order to
commence the project including the issuance of a Performance Bond. A Performance
Bond is a guarantee by a surety, customarily 100% of the value of the contract
amount, that the contractor will complete the project pursuant to the terms and
conditions of the contract. Most government contracts allow for termination of
the contract at the election of the customer, although in such event, NY is
generally entitled to receive a small cancellation fee. Both of NY's current
contracts are also subject to completion requirements with liquidated damages
assessed against NY if schedules are not met.
NY's ability to obtain bonding and its bonding capacity are primarily
determined by its net worth, liquid working capital (consisting of cash and
accounts receivable), past performance, management expertise, the number and
size of projects under construction, and various other factors. The larger the
project and/or the more projects in which NY is engaged, the greater the
bonding, net worth, and liquid working capital requirements. Surety companies
consider such factors in light of the amount of NY's surety bonds then
outstanding and the surety companies' current underwriting standards, which
standards may change periodically. Therefore, NY may be required to maintain
certain levels of tangible net worth in connection with establishing and
maintaining bonding limits. As a practical matter, such levels may limit
dividends, if any, which might have been declared and which would limit
corporate funds available for other purposes.
In determining whether to issue a bond, surety companies perform credit
checks and other due diligence disclosure requirements and investigate NY's
capitalization, working capital, past performance, management's expertise, and
such other factors as are discussed above. The surety companies require
companies receiving bonding to maintain certain amounts of capital and liquid
assets and base the amount of bonding they will issue on a formula, which is
usually based on certain industry standards which take into account such
factors. As a result of the Company's and NY's current financial condition, the
Company and NY may be unable to obtain bonding. The surety companies also
require that the bonds be personally guaranteed by Joseph Polito.
Bonding requirements vary depending upon the nature of the project to
be performed. NY anticipates paying premiums of between 1 1/4% to 3 1/2% of the
total amount of the contracts to be performed. Since these premiums are
generally payable at the beginning of a project, NY must maintain sufficient
working capital to satisfy the premium prior to receiving revenue from the
project. Bonding premiums are a line item in the submitted bid and are included
as part of NY's billing to its clients.
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In December 1996, NY obtained a commitment for a Surety Bond Line of
Credit ($10,000,000 single project limit) from United American Guarantee
Company, Ltd. ("UAGC") for its general contracting projects. This commitment
allowed NY to pursue those general contracting projects in the public and
private sectors which require performance bonds. The UAGC bonding committment
ceased as a result of UAGC's filing for bankruptcy. Accordingly, the Company
does not currently have any bonding. The Company's current financial condition
may prevent the Company from obtaining future bonding.
New York State and City agencies require bonds from bonding companies
licensed by the State of New York. Therefore, NY may be precluded from working
on certain projects if it cannot obtain bonding from a bonding company licensed
by New York. This is not always an issue, however, as the requirement is
sometimes waived (as in the Grand Central Terminal project) for although general
contractors prefer that a subcontractor be licensed by a New York licensed
bonding company, they will waive the requirement when necessary. In addition, NY
may engage in joint ventures with other companies who are bonded by a New York
licensed bonding company, thereby allowing it access it might otherwise not have
had.
Work in Progress; Backlog and Seasonality
Contracts as a subcontractor and general contractor often involve work
periods in excess of one year. Revenue on uncompleted fixed price contracts is
recorded under the percentage of completion method of accounting. NY begins to
recognize profit on its contracts when it first accrues direct costs. As is
standard construction industry practice, a portion of billings may be retained
by the customer until certain contractual obligations are fulfilled.
The following is a list, as of June 30, 1998, of those projects in
which NY is currently engaged:
<TABLE>
<CAPTION>
(2) Costs
Contract & Est.
Date/ Costs (1) Profit in BAcklog
Contract Party/ Contract Est. Type of incurred to % of Job Excess of Gross Amount at
Project Name Amount Completion Contract date Complete Billings Receivables 06/30/98
- ------------ ------ ---------- -------- ---- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lehrer McGovern, May 1996 Lump Sum 3,759,006
Bovis, Inc./ 5,365,144 Jan/Feb 92% 68,254 1,117,178 434,846
Grand Central 1999
Terminal
Tishman
Construction
Corp./Louis July 1996 Lump Sum 4,449.658
Vuitton N.A.(3) 6,235,750 Jan/Feb 93% 71,186 302,815 442,564
1999
Total Signed $8,208,664
Contracts 11,600,894 139,440 1,419,993 877,410(4)
</TABLE>
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(1) Completion percentage is as of June 30, 1998 and is based on the
percentage of costs incurred through that date to the estimated cost of the
project.
(2) "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed on
respective uncompleted contracts at the end of each period. "Billings in excess
of costs and estimated earnings on uncompleted contracts," represents billings
which exceed revenues recognized on respective uncompleted contracts at the end
of each period.
(3) NY is prime contractor (similar to general contractor) on this
project.
(4) Does not include backlog balance amounting to $174,000 for
miscellaneous smaller base contracts of Royal Steel.
For the year ended June 30, 1998, the Company had three unrelated
customers which accounted for approximately 61%, 14% and 17%, respectively, of
total revenues. At June 30, 1998 the Company had two unrelated customers, which
accounted for approximately 67% and 11% of total net contracts receivables.
Seasonality
Though NY does not believe its business is seasonal, its operations
slow during the winter months due to the decreased productivity of the workers
caused by their inability to work in severe weather conditions. As a result of
the foregoing, NY's costs are increased.
Suppliers; Subcontractors; Unions
NY currently depends upon various vendors to supply spare parts,
cranes, and other heavy equipment, and its ability to hire skilled workers
depends upon its ability to comply with certain union agreements and contracts.
NY rents cranes from Crown, a company of which Joseph M. Polito is a 50%
shareholder, and rents generators and other equipment from AGLI, a company which
is wholly-owned by Mr. Polito. NY believes that there are a sufficient number of
vendors, so that in the event any individual or group of vendors can no longer
service NY's needs, NY will be able to find other vendors at competitive prices.
As is standard practice in the construction industry, NY's employees,
other than its office employees, are not salaried individuals. They are union
employees who are hired on an as-needed, or per project, basis and are paid an
hourly wage which is set by the unions with which they are associated. NY hires
skilled steel workers represented by the International Union of Structural
Ironworkers local 40, 361, & 417 and International Operating Engineers locals
14, 14B, 15, 15A, 15C, 15D, and 825 and Cement Masons local 472. NY must comply
with its agreements with the unions, which agreements regulate all employment
issues including pay, overtime, working conditions, vacations, benefits, etc.
between NY and the union employees. These agreements expire on June 30, 1999.
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NY believes that it has a good relationship with the unions and is in
compliance with all union agreements. No assurance can be given that NY will
continue to be in compliance with the Unions or successfully negotiate
extensions to NY's agreements with such Unions. In the event problems or
conflicts with the unions arise or there is a loss of skilled steel and
operating engineers, this would have a detrimental effect on NY's operations.
NY's success as a general contractor, in part, will be dependent upon
its ability to hire workers and comply with union contracts and agreements and
its ability to oversee and retain qualified subcontractors to perform certain
work. NY will be responsible for performance of the entire contract, including
the work done by subcontractors. Accordingly, NY may be subject to substantial
liability if a subcontractor fails to perform as required.
Competition
NY is one of the many subcontractors which erect and furnish steel for
projects. All aspects of NY's business are, and will continue to be, highly
competitive. NY is a subcontractor and a general contractor specializing, but
not exclusively, in bridge and roadway repair and replacement as well as in
fabricating and erecting steel structures for buildings. NY's competitors are
numerous, and many have substantially greater marketing, financial, bonding, and
human resources. When contractors seek construction contracts, they request bids
from numerous subcontractors based on the various requirements of the project.
These subcontractors compete primarily as to price, name recognition, and prior
performance.
The driving force behind NY's name recognition in the construction
industry is the 30 plus year presence therein of Joseph Polito (and certain
employees), which presence serves also to confirm NY's prior performance. In
addition, regarding prior performance, while NY has operated only since 1993,
AGLI, a former steel erector subcontractor or prime contractor for private and
governmental construction projects owned by Mr. Polito, was incorporated in 1986
and operated as such until NY purchased its assets in 1993.
Government Regulation
NY must comply with the rules and regulations of the Occupational
Safety and Health Administration ("OSHA"), a federal agency which regulates and
enforces the safety rules and standards for the construction industry. In
addition, NY must comply with a wide range of other state and local rules and
regulations applicable to its business, including regulations covering labor
relations, safety standards, affirmative action, and the protection of the
environment including those pertaining to water discharge, air emissions, and
hazardous and toxic substance discharge. Continued compliance with OSHA and the
broad federal, state, and local regulatory network is essential and costly. The
failure to comply with such regulations or amendments to current laws or
regulations imposing more stringent requirements may have an adverse effect on
NY's operations. NY believes that it is in substantial compliance with all
applicable laws and regulations.
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Employees
As of June 30, 1998, the Company had three Executive Officers, two
administrative assistants, one comptroller, one project estimator, and two
employees in the accounting department. The number of union employees the
Company utilizes depends on the number and size of projects in which NY is
engaged and can range from 10-200 employees, some of whom are employed full-time
and others of whom are employed part-time. These union employees are represented
by the International Union of Structural Ironworkers local 40, 361 and 417;
International Operating Engineers locals 14, 14B, 15, 15A, 15C, 15D, 825; and
Cement Masons local 472. NY's contracts with these unions, which contracts
regulate all employment issues between NY and the union employees - including
pay, overtime, working conditions, vacations, benefits, etc. - expire on June
30, 1999. NY considers its relationships with the unions and its employees to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company shares office space with NY (at 53-09 97th Place, Corona,
New York 11368) which leases approximately 25,000 square feet of space
(approximately 24,000 square feet of which is utilized for storage space) from
an affiliate company, R.S.J.J. Realty Corp. ("RSJJ"). RSJJ is owned by the
Company's majority stockholder and President, Joseph Polito. The lease, pursuant
to which NY pays rent of $20,000 per month to RSJJ, expired during March 1998,
however, it was extended through December 31, 1998. Subsequent to December 31,
1998, the Company will rent such facility from RSJJ on a month-to-month basis at
a materially reduced amount. NY also leased a yard for storage material pursuant
to an oral agreement with an unrelated party, which agreement required monthly
payments of $3,500. During July 1998, NY settled unpaid rent amounting to
approximately $87,500 as of June 30, 1998 for accrued rent through December 31,
1997 and was forgiven for any rent from January 1998 through June 1998 for
$10,000. The Company believes that the terms of these leases are comparable and
competitive to those terms which might have been negotiated with an unaffiliated
landlord.
In February 1998, NY agreed to issue 106,667 shares of its common stock
to the Company as consideration for the Company's issuance of 48,000 shares of
Common Stock to RSJJ in consideration for payment in full of the rent due by NY
to RSJJ for the period from January 1, 1998 to December 31, 1998. The value of
the shares issued was recorded at the value of the rent otherwise due under the
lease ($240,000). The stock was issued in March 1998.
As of May 1997, NY was in arrears in the amount of $480,000 in payments
due under its lease with RSJJ. This arrearage was converted into equity as
follows: NY issued 270,000 shares of common stock to the Company, for the
cancellation of the debt owed to RSJJ. The Company, in turn, issued 50,000
shares of its Common Stock to Joseph Polito and 37,500 shares of its Common
Stock to RSJJ. RSJJ then transferred all of such shares to RSJJ's mortgagor,
which agreed to accept said shares as payment of RSJJ's outstanding mortgage.
13
<PAGE>
The Company also, through One Carnegie, formerly owned 13 acres of
property in St. Charles Business Park, Waldorf, Maryland, inclusive of a 4 1/2
acre (170,000 square foot) building. In connection with the acquisition of the
property and equipment, One Carnegie entered into a $3,000,000 installment loan
agreement with Trinity Industries ("Trinity"), which loan was collateralized by
all of the property and equipment owned by One Carnegie and personally
guaranteed by Joseph Polito and Atlas Gem.
By agreement executed March 10, 1997, One Carnegie entered into an
agreement for Deed in Lieu of Foreclosure ("the Agreement") with Trinity. The
transaction, which was not deemed complete and closed until August 1, 1997, was
necessitated by One Carnegie's having defaulted on (i) the $3,000,000 Note (of
which Trinity was the holder); and (ii) the Deed of Trust and Security Agreement
which secured said Note.
Pursuant to the Agreement, in lieu of foreclosing upon the Charles
County, Maryland property owned by One Carnegie, Trinity, through its affiliate,
WPI, accepted the deed to such property. As additional consideration for
Trinity's entering the Agreement, One Carnegie executed a promissory note in the
amount of $150,000 naming Trinity as payee. The promissory note is guaranteed by
Joseph Polito and AGLI. A Bill of Sale and Assignment, providing for the
conveyance of certain One Carnegie personal property in exchange for $25,000
from WPI, comprised an additional component of the Agreement. A final component
of the Agreement is a Mutual Release which releases One Carnegie, Mr. Polito,
AGLI, and Trinity (and all their successors and assigns) from any claims which
arose prior to execution of the Agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware
of any threatened litigation that would have a material adverse effect on its
business, except for the litigation matters discussed below.
Mechanics Liens
39th Street Bridge
This action was filed on February 26, 1997 in New York State Supreme
Court, Queens County. It names NY, Metro Steel Structures, Ltd., and McKay
Enterprises, Inc. as plaintiffs and Perini Corporation, Department of
Transportation of the City of New York, and Fidelity and Deposit Company of
Maryland as defendants. NY's claim for relief in this action was $844,932. This
claim is based upon filed mechanic's liens and general contract law. The claim
is for labor performed and materials supplied including money owed under the
contract regarding the rehabilitation of the 39th Street Bridge over the Long
Island Rail Road and Amtrak in Queens, New York. On October 7, 1998, the Company
entered into an agreement with Perini whereby the Company agreed to release and
discharge in full its claims against Perini for 20% of the net
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<PAGE>
amount to be recovered and collected by Perini in connection with Perini's
action against the City of New York.
Robert Moses Causeway
This action was commenced May 9, 1997, and involves money due to NY for
work it performed at the Robert Moses Causeway Project. NY filed a mechanic's
lien in the amount of $279,346. This claim is based upon filed mechanic's liens
and general contract law. The claim is for labor performed and materials
supplied including money owed under the contract and money due for "extra" work
regarding the rehabilitation of the Robert Moses Causeway Northbound Bridge over
the State Boat Channel, in Suffolk County, New York. The action against Kiska
Construction Corp. seeks foreclosure of the mechanic's lien and a judgment for
the amount of $279,346 against Kiska Construction Corp. and the bonding company,
Seaboard Surety Company. Currently, the Company is in the process of completing
pre-trial discovery. NY intends to prosecute the action until such time as a
judgment or settlement can be obtained.
Claims By Perini Corporation
On February 7, 1997, Perini Corporation filed an action against NY and
Metro Steel Structures, Ltd. in New York State Supreme Court, Kings County.
Perini's claims against NY total $1,140,560 and allege defective work on the
Stillwell Avenue project and upon a loss/profit agreement for both the Stillwell
Avenue project and the 39th Street Bridge project. NY has counterclaimed for the
amounts set forth in the above discussion of the two actions involving Perini
Corporation, and its claims are based upon the same theories as those set forth
above. (See above "Mechanics Liens").
Claims by and against EklecCo
This action involves work performed by NY at the Palisades Mall in
Nyack, New York. This action was commenced ins October, 1997 by EklecCo (f/k/a
Pyramid Company of Rockland) seeking to vacate NY's mechanic's lien in the
amount of $13,640,747, seeking judgment in the amount of $500,000,000 for
violations of contract, interference of contract and punitive damages.
Thereafter, NY served an answer with counterclaims seeking to foreclose on its
$13,640,747 mechanic's lien, seeking a judgment in the amount of $13,640,747
relating to work performed at the project, seeking $1,420,000 in bonus money
promised to NY and seeking punitive damages. NY's mechanic's lien was reinstated
by the court and a bond was purchased by EklecCo and issued for the amount of
the lien, plus interest. The Company is currently in the process of pre-trial
discovery, which is scheduled to be completed by June 1999. NY intends to
vigorously defend against EklecCo's claims as well as vigorously prosecute its
claims against EklecCo.
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<PAGE>
Humphreys & Harding, Inc. Claim against NY
NY performed the steel erection work to construct the Republic of Korea
Permanent Mission to the United Nations at 335 East 45th Street, Manhattan.
Humphreys & Harding commenced an action to recover $6,326,000, which includes
$1,604,000 as cost to complete after NY left the job, $2,790,000 for delay and
other damages, $234,000 as liquidated damages under the "time of the essence"
provision to the contract and $1,698,000 for claims by other subcontractors for
delay. NY has commenced a separate action for $1,878,872 representing extras and
retainage due, $1,488,775 on the mechanic's lien, and $667,000 and $92,500 for
interference with contracts of Wheeling Corrugated and Canam Steel.
Claim Against and By State Insurance Fund
In December 1995, the Commissioners of the State Insurance Fund of New
York for and on behalf of the State Insurance Fund commenced suit against Joseph
Polito, Ronald Polito, Steven Polito, NY, Metro Steel Structures, Ltd. (now
known as NY), One Carnegie, and others in the US District Court for the Southern
District of New York, alleging that certain workers' compensation insurance
policies obtained for various insured defendants were obtained fraudulently and
that the defendant corporations failed to pay the appropriate premiums. The
claims against NY, amounting to approximately $3,000,000, are limited to a
policy covering the period April 29, 1993 through December 1994. NY, Messrs.
Polito, and all other defendants are defending against this action and believe
that State Insurance Fund's legitimate claims should not exceed $300,000.
A settlement conference was requested by plaintiff's counsel and the
parties have met on several occasions to discuss settlement. Plaintiff's counsel
requested that the defendant submit documentary evidence to support its position
and the same has now been furnished to plaintiff's counsel. This submission
supports defendant's contention that its liability for premiums should not
exceed three hundred thousand dollars. Active negotiations are in their final
stages and plaintiff's counsel is in the process of drafting final settlement
documents. NY believes this matter will likely be settled with a modest cash
payment to be made to the plaintiff (less than $60,000.00) on the signing of
settlement documents. Any additional payments would involve assignments of
portions of current accounts receivable, to be due and payable only when
received and any balances then remaining would be payable at the end of five
years. It is expected that based upon current negotiations a final settlement of
all the terms and conditions will be in place by the end of this year but until
all settlement documents are formally and finally executed, no assurances may be
made.
Subpoena by the Securities and Exchange Commission and Grand Jury Subpoena
The company effected an underwritten initial public offering of its
securities in August 1996 (the "IPO"). In January 1998, as part of an inquiry
into the activities of a principal underwriter of the IPO, an Order of Private
Investigation was issued by the Securities and
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<PAGE>
Exchange Commission ("SEC") relating to such underwriter and three companies,
including the Company, in which the underwriter had acted as principal
underwriter and in which NY was subpoenaed by the SEC to produce certain
records. The company and its officers and directors have fully cooperated with
the SEC and there have been no additional inquiries from the SEC. At this
juncture, the inquiry is too preliminary to form any judgments or assessments
regarding any possible liability of the Company or of NY.
In September 1998, the Company received a Grand Jury Subpoena Duces
Tecum from the United States District Court for the Eastern District of New York
and a search warrant for the records of NY and the Company and any affiliated
companies as well as those of Joseph Polito. The Company believes that the Grand
Jury investigation is in connection with an investigation of the underwriter
pending in the United States District Court for the Southern District of New
York. Grand Jury investigations can result in a range of actions from a finding
of no true bill to indictments and prosecutions for any number of federal
offenses. Criminal prosecutions can result in a wide range of penalties,
including probation, imprisonment, fines, restitution and forfeiture of assets
depending upon the specific type and severity of the offense. In view of the
fact that this investigation appears to be in its initial stage, at this
juncture the investigation is too preliminary to assert any judgment or
assessments regarding any possible liability of the Company and NY.
Debenture Litigation
Black Sea Investments, Inc., the holder of a debenture in the principal
amount of $250,000 purchased in February 1998, commenced a single count claim
upon the debenture on September 10, 1998 in the United States District Court,
Northern District of Texas. The Company filed a motion to dismiss on grounds of
improper venue and forum non-conveniens. The Plaintiff has opposed the motion;
however, no hearing date has yet been set. The outcome of the motion is
uncertain. The Company has not yet been required to file an answer to the
primary claim at issue and the Company has not yet conducted sufficient
investigation or discovery to determine whether there are any defenses which are
likely to defeat the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 3, 1998, after shareholder approval obtained at the Company's
special meeting of July 29, 1998, the Company effected a reverse split (1 for 4)
of its outstanding shares of Common Stock.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading on the Nasdaq SmallCap Stock
Market on July 25, 1996. Prior to that, from August 25, 1994 to July 24, 1996,
the Company's Common Stock, $.001 par value per share, traded sporadically and
on a limited basis in the over-the-counter market on the OTC Bulletin Board. The
following table sets forth representative high and low closing bid prices for
the period the stock traded on the OTC Bulletin Board and the high and low sales
prices for the period the stock traded on the Nasdaq SmallCap Stock Market, by
calendar quarters, as reported by a market maker during the periods provided for
herein. The bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions. Sales
quotations represent prices between dealers, do not include resale mark-ups,
mark-downs, or other fees or commissions, and do not necessarily represent
actual transactions. Prior to August 25, 1994, there was no trading market for
the Company's Common Stock.
Calendar Quarter Prices
Ended Low High
----- --- ----
1997
01/01/97 - 03/31/97 1 2 3/8
04/01/97 - 06/30/97 1 2 1/8
07/01/97 - 09/30/97 15/16 1 7/16
10/01/97 - 12/31/97 7/8 1 1/2
1998
01/01/98 - 03/31/98 5/8 1 1/4
04/01/98 - 06/30/98 15/16 1
07/01/98 - 09/30/98 1/16 7/16
10/01/98 - 11/30/98 1/16 1/16
As of December 15, 1998, there were 135 registered holders of record of
the Company's Common Stock, $.001 par value, which number, determined by the
Company's stockholder records, does not include beneficial owners of the Common
Stock whose shares are held in names of various security holders, dealers, and
clearing agencies. The Company believes there are in excess of 500 such
beneficial holders of the Common Stock.
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<PAGE>
Effective November 30, 1998, the Company's Common Stock was delisted
for failure to meet the maintenance criteria and trading ceased in the Company's
Common Stock. The Nasdaq delisting panel was of the opinion that the Company
failed to present a plan which would enable it to comply with the bid price,
market value of public float and filing requirements within a reasonable period
of time and to sustain compliance with all requirements for continued listing on
The Nasdaq Small Cap Market over the long term. The Common Stock is currently
listed on the "pink sheets" and the Company intends to resume trading of its
Common Stock and to reapply to the OTC Bulletin Board for listing after filing
its 10-KSB for the year ended June 30, 1998 ("Fiscal 1998") and 10-QSB for the
period ended September 30, 1998.
The Company has paid no dividends for the last two fiscal years or in
the first quarter of fiscal 1998; nor does it have any present plan to pay such
dividends. Payment of future dividends will be determined from time to time by
the Company's Board of Directors based upon its future earnings, if any,
financial condition, capital requirements, and other factors. The Company is not
presently subject to any contractual or similar restriction on its present or
future ability to pay such dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (UPDATE)
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
Information set forth herein contains "forward-looking statements"
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "should" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The Company cautions readers that
important factors may affect the Company's actual results and could cause such
results to differ materially from forward-looking statements made by or on
behalf of the Company. Such factors include, but are not limited to, changing
market conditions, the impact of competitive products, pricing and acceptance of
the Company's products.
General
The Company was incorporated on September 12, 1988 in the State of
Delaware, as Colonial Capital Corp. The Company changed to its current name in
January 1998. The Company is the parent of NY and owns 100% of the outstanding
shares of common stock of each of Worldwide and Royal Steel Services, Inc.
("Royal Steel"). These three subsidiaries are the only ones through which the
Company currently operates. Two additional subsidiaries of the Company (each
wholly-owned), One Carnegie Court Associates, Inc. and USA Bridge
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<PAGE>
Construction Corp. (Maryland), ceased operations in August 1997 and November
1996 respectively.
Royal Steel was formed in November 1997 in order for the Company to
conduct work on its smaller base contracts. Worldwide was formed in December
1997 and is a British Virgin Islands corporation. It was formed as a holding
company intended to own 80% of each of Falcon TCHAD SA ("Falcon") and Portshop
S.A. ("Portshop"), both of which companies are registered in Chad, a country
located in Central North Africa. The remaining 20% of each of Falcon and
Portshop is owned by Diversified Investments Africa S.A. ("DIA"), a Luxembourg
company unaffiliated with the Company. Falcon will operate as a full service
transportation, forwarding, and warehousing company in the city of N'Djamena.
Portshop shall stock and operate a duty free store in Chad's sole international
airport. Worldwide shall operate as the liaison between Portshop and Falcon and
the governmental or private entities with which Falcon and Portshop intend to
contract in Chad. As of June 30, 1998, the only activity commenced in Worldwide
was the purchase of trucks by Falcon and certain consulting and travel expenses
incurred by Worldwide in order to establish operations in Chad.
The following management's discussion and analysis for the years ended
June 30, 1998 and 1997 is that of the Company's subsidiaries since the Company
itself did not have any operations of its own except for primarily stock related
transactions, interest expense and certain general corporate overhead expenses
which totaled approximately $815,000 and $652,000, respectively, for the years
ended June 30, 1998 and 1997.
NY's operations are substantially controlled by Joseph M. Polito, its
President, since he owns approximately 66.3% of the outstanding shares of the
Company and may be considered the beneficial owner of NY. Mr. Polito is also a
100% shareholder of RSJJ. RSJJ leases the administrative office space to NY at a
cost of $20,000 per month pursuant to a signed lease agreement expiring on
December 31, 1998. Mr. Polito has ownership interests in Waldorf Steel
Fabricators, Inc. ("Waldorf") (which ceased operations on August 1, 1995), Crown
and AGLI which provided services to NY for the years ended June 30, 1998 and
1997.
NY commenced operations in or about June 1993 to serve primarily as a
general contractor for construction projects sponsored by federal, state, and
local government authorities in the New York State and Metropolitan areas.
Though formed to operate as a general contractor, NY has operated primarily as a
subcontractor and as a prime contractor on two projects. As of June 30, 1998, NY
has completed in excess of twenty-one (21) projects with an aggregate project
value of approximately $40,000,000 and is currently engaged in two (2) projects
with an aggregate value of approximately $11,600,000. NY plans to maintain its
subcontractor presence in the steel industry; however, it intends also to focus
on obtaining projects as a general contractor. As of June 30, 1998, the backlog
balance on these two contracts amounted $877,000. Such contracts are expected to
be completed during January and February 1999.
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<PAGE>
In December 1996, NY obtained a commitment for a Surety Bond Line of
Credit ($10,000,000 single project limit) from UAGC for its general contracting
projects. This commitment allowed NY to pursue those general contracting
projects in the public and private sectors which require Performance Bonds.
However, since New York State and City agencies require bonds from bonding
companies licensed by the State of New York and UAGC is not a New York licensed
bonding company, NY has been unable to bid as a general contractor on projects
for New York State and New York City agencies. NY has approached several New
York licensed bonding companies, but as of the date hereof, has not been
approved by any company to receive bonding. The UAGC bonding commitment ceased
as a result of UAGC's filing for bankruptcy. Accordingly, the Company currently
does not have any bonding.
Though NY does not believe its business is seasonal, its operations are
generally slow in the winter months due to the decrease in worker productivity
because of weather conditions. Accordingly, NY may experience a seasonal pattern
in its operating results with lower revenue in the third quarter of each fiscal
year. Interim results may also be affected by the timing of bid solicitation,
the stage of completion of major projects, and revenue recognition policies. For
the years ended June 30, 1998 and 1997, NY and Royal obtained new contracts
valued at approximately $806,914 and $1,113,000, respectively. NY did not obtain
any material new contracts for the year ended June 30, 1998 because it did not
provide the lowest bids for the projects for which it submitted same along with
the loss of its bonding ability. NY continues to bid on available contracts,
However, there can be no assurance that it will be able to obtain any.
The following schedule summarizes changes in backlog on contracts
during the year ended June 30, 1998. 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 which work
has not yet begun.
<TABLE>
<CAPTION>
<S> <C>
Backlog balance at July 1, 1997 $ 6,088,048
Change orders to contracts in progress at July 1, 1997 11,219,030
New contracts during the year ended June 30, 1998 806,914
--------------
18,113,992
Less: contract revenue earned during the year ended June 30, 1998 17,062,873
--------------
Backlog balance at June 30, 1998 $ 1,051,119
--------------
</TABLE>
The change orders for the year ended June 30, 1998 amounted to
approximately $6,400,000 for EklecCo and a total of approximately $4,800,000 for
the remaining projects, primarily Grand Central and Louis Vuitton. In January
1998, due to certain project disputes, NY received a contract termination letter
from the general contractor for the Korean Mission project. The dispute arose
from the delivery, by a subcontractor, of improperly fabricated steel to NY. As
a result of the dispute, the general contractor on the project subcontracted the
steel fabrication and erection to a third party in breach of its contract with
NY. NY intends to seek legal redress from
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<PAGE>
the steel fabricator and from the general contractor. The Company expects to
complete the Grand Central and Louis Vuitton projects by February 1999. After
such completion, the Company's only project will be the smaller based projects
from Royal Steel which may be deemed immaterial.
The Company's failure to obtain new contracts could have a material
impact on net revenues and income from continuing operations in the future if
this trend continues. The Company's current backlog and the expected collection
on liens over the next six to twelve months is not anticipated to be sufficient
to meet the Company's operating needs.
NY recognizes revenue and costs for all contracts under the percentage
of completion method measured by the percentage of costs incurred to date to
estimated total costs for each contract. Cost of contract revenues includes all
direct material and labor costs and those indirect costs related to contract
performance. General and administrative expenses are accounted for as period
costs and are, therefore, not included in the calculation of the estimates to
complete construction contracts in progress. Material project losses are
provided for in their entirety without reference to the percentage of
completion. As contracts can extend over one or more accounting periods,
revisions in costs and earnings estimated during the course of the work are
reflected during the accounting period in which the facts became known.
The current asset, "costs and estimated earnings in excess of billings
on uncompleted contracts," represents revenues recognized in excess of amounts
billed on respective uncompleted contracts at the end of each period. The
current liability, "billings in excess of costs and estimate earnings on
uncompleted contracts," represents billings which exceed revenues recognized on
respective uncompleted contracts at the end of each period.
An amount equal to the costs attributable to unapproved change orders
and claims is included in the total estimated revenue when realization is
probable and the amount can be estimated. NY has elected not to recognize any
portion of the revenue associated with such unapproved change orders and claims
until the amounts have been received or awarded. Claims are amounts in excess of
the agreed contract price which NY seeks to collect for customer-caused delays,
errors in specifications and designs, contract terminations, or change orders
which are either in dispute or unapproved.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Contract revenues for the years ended June 30, 1998 and 1997 amounted
to $17,062,873 and $15,494,447, respectively. This represents an increase of
$1,568,426 (or approximately 10%). During the year ended June 30, 1998, NY
obtained new contracts and change orders to previous contracts aggregated
approximately $12,025,944 which have been substantially completed as of June 30,
1998.
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<PAGE>
Below is a summary of the Company's billings and collection for the
year ended June 30, 1998:
<TABLE>
<CAPTION>
Gross Contract and Allowance for Net Contract
Retainable Receivable Uncollectibles Receivables
--------------------- -------------- -----------
<S> <C> <C> <C>
Balances at
June 30, 1997 $ 11,249,297 $ 2,287,000 $ 8,962,297
Billings for the
year ended 19,830,745 2,397,082 17,433,663
Collections for the
year ended (15,728,515) -- (15,728,515)
------------ ------------ ------------
Balances at
June 30, 1998 15,351,527 4,684,082 10,667,445
Less: Non-current
Current Portion 10,884,755 2,444,174 8,400,581
------------ ------------ ------------
Current Portion $ 4,506,772 $ 2,239,908 $ 2,266,864
============ ============ ============
</TABLE>
As of June 30, 1998, the Company increased its allowance for
uncollectibles up to $4,684,082 to reserve for the potential uncollectibility of
certain receivables for which mechanic's liens were filed and for the settlement
of certain mechanic's liens on a certain job subsequent to year end. Through
December 31,1998, NY collected approximately $1,600,000 which includes $525,000
pertaining to a mechanic's lien previously filed (before legal expenses and
other costs). For the years ended June 30, 1998 and 1997, the Company had three
unrelated customers, respectively, which accounted for approximately 61%, 14%
and 17% and 53%, 19% and 15%, respectively, of total revenues. As of June 30,
1998, the Company had two unrelated customers which accounted for approximately
65% and 11% of total net contract and retainage receivables.
The Company's gross profit for the years ended June 30, 1998 and 1997
amounted to 21% and 29%, respectively. The decrease in gross profit for the year
ended June 30, 1998 as compared to the year ended June 30, 1997 is primarily a
result of the effect of change orders and adjustments to estimated costs, as
well as the interruption and termination of certain jobs.
General and administrative expenses have increased by $481,994 (or 15%)
to $3,718,482 for the year ended June 30, 1998, from $3,236,486 for the year
ended June 30, 1997. The increase in general administration costs is mainly
attributable to the general and administrative expenses of Worldwide which
amounted to approximately $280,000 and is primarily composed of travel and
consulting associated with establishing the Chadian operations. The remainder of
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<PAGE>
the increase amounting to approximately $201,000 is mainly attributable to the
general corporate expenses in connection with stock issued for services by the
Company.
The Company's bad debt expense amounted to $2,403,815 for the year
ended June 30, 1998 as compared to $1,287,362 for the year ended June 30, 1997.
The allowance for doubtful accounts at June 30, 1998 is based on a review of the
Company's aging of its receivable, various mechanic's liens filed, and the
settlement of previously fixed mechanic's liens. Lastly, as of June 30, 1998,
the Company has classified a portion of its contracts receivables as non-current
since the Company cannot reasonably estimate the timing such receivables will be
collected as a result of various litigations, and the time associated with the
legal process in settling such disputes.
The Company's interest expense increased to $514,874 for the year ended
June 30, 1998 as a result of the imputed interest expense associated with its
convertible debentures and additional interest accrued on its newly issued notes
payable in connection with unpaid union dues.
As of June 30, 1998, the Company has recorded a non-recurring charge
amounting to $300,000 associated with an estimated potential settlement with an
ongoing lawsuit with the State Insurance Fund for unpaid insurance premiums for
prior years.
Liquidity and Capital Resources
The accompanying consolidated financial statement have been prepared
assuming that the Company will continue as a going concern. For the years ended
June 30, 1998 and 1997, the Company generated a net loss amounting to $2,343,482
and $875,238 respectively. The loss for the year ended June 30, 1998 includes a
non-recurring charge of $300,000 for a potential settlement of unpaid insurance
resulting from an ongoing lawsuit from the State Insurance Fund.
Additionally, as of June 30, 1998, the Company has a working capital
deficiency amounting to approximately $4,327,344. The Company has recorded
certain contracts and retainages receivables as non-current as a result of
pending litigations in connection with claims and pending change orders. As of
June 30, 1998, the Company's backlog amounted to $1,051,119. Backlog represents
the amount of revenue the Company expects to realize from work to be performed
on uncompleted contracts and from contracts on which work has not yet begun.
Lastly, as of June 30, 1998, the Company owes approximately $2,616,742 of
payroll taxes and related penalties and interest. Certain taxing authorities
have filed certain liens against the Company as a result of the unpaid payroll
taxes.
The Company is aggressively trying to obtain additional contracts in
order to mitigate its low backlog and is vigorously attempting to settle
disputes in connection with mechanic's liens placed on certain projects in order
to collect its receivables and liquidate its payroll taxes; however, there can
be no assurance that it will be able to obtain additional contracts and settle
its
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<PAGE>
disputes in a favorable and timely manner. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include adjustments relating to the recoverability and
realization of assets and classification of liabilities that might be necessary
should the Company be unable to continue in operation.
The timing of the collectibility of $8,400,581, which represents the
noncurrent amount of receivables (net of allowances) associated with mechanic's
liens placed by NY on certain jobs, cannot be determined by NY due to the
surrounding circumstances and the legal process associated in collecting funds
whereby a lien has been placed on a project.
The allowance for doubtful accounts was increased to $4,684,082 during
the year ended June 30, 1998 from $2,287,000 at June 30, 1997 to reflect the
filing of mechanic's liens on certain jobs as well as a review of the aging of
the accounts receivable and the settlement of certain receivables subsequent to
year end. No further adjustments to the allowance have been deemed necessary by
management as of June 30, 1998. As of June 30, 1998, the Company classified a
portion of contracts receivables which are in dispute as non-current.
As a result of the slow collection process associated with the above
circumstances, the Company was unable to pay its payroll tax obligations and
rent on a timely basis. Upon the collection or settlement of a major portion of
its contacts receivable, the Company's first priority is to pay down its payroll
tax obligations as much as possible. The accrued and unpaid rent has been
settled by NY with NY issuing stock to its landlord, RSJJ. As of June 30, 1998,
the Company owes approximately $2,616,742 of payroll taxes and related estimated
penalties and interest. As of June 30, 1998 and subsequent thereto, federal and
state tax liens have been filed against the Company in connection with unpaid
payroll taxes. Although as of June 30, 1998, the Company has not entered into
any formal repayment agreements with the respective tax authorities, it has been
attempting to make monthly payments based on available funds.
In December 1997, NY entered into an agreement with the Iron Workers
Local 40, 361 and 417 Joint Security Funds (the "Union") in order to liquidate
$1,750,000 owed for unpaid union dues and benefits previously recorded as
accounts payable. NY agreed to pay $75,000 by January 1998 and at least $25,000
monthly commencing March 1, 1998 with interest at 9.5% per annum. As collateral,
NY assigned its retainage receivable from the EklecCo project as well as
$1,750,000 of NY's related mechanic's lien (which was discharged on the
lien-debtor's payment of a bond with the court). Upon the distribution of any
funds under such bond, the Union will be repaid any balance it is owed, in full,
and NY shall receive the remainder thereof. NY will receive credit for any
payments received by the Union related to the assigned portion of the bond. The
amount outstanding at June 30, 1998 is $1,575,000, of which $300,000 has been
classified as current and $1,275,000 as non-current.
During the two years ended June 30, 1998 and 1997, the Company issued
shares for services as follows:
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<PAGE>
(i) On June 16, 1995, pursuant to Form S-8 Registration Statement, the
Company registered and issued 125,000 shares to a broker-dealer as consideration
for a two year consulting agreement. During August 1996, the Board of Directors
amended the consulting agreement and issued an additional 62,500 shares to such
broker-dealer. Such shares were valued based on the average closing bid price on
the date of issue with a 10% discount to market in order to reflect their fair
value as a result of their restrictions.
(ii) On August 15, 1995, the Company issued 37,500 shares of common
stock to its President pursuant to the terms of the Company's Incentive Plan.
Such shares were issued as compensation for the President's efforts with the
Company and NY in the consummation of NY's initial public offering on August 14,
1995. Of the total 37,500 shares issued to the President, 12,500 shares
immediately vested without restrictions and the remaining 25,000 shares vested
pursuant to the restricted periods, whereby 12,500 shares vested on each August
15, 1996 and 1997. Such shares were valued based on the average closing bid
price on the date of issue with a 10% discount in order to reflect their fair
value as a result of their restrictions.
(iii) On May 13, 1996, an unrelated party loaned the Company's
President $300,000 pursuant to a memorandum of understanding. The loan bore
interest at 1% above prime, and it was due 90 days from receipt of funds.
Simultaneously therewith, the Company's President loaned the Company the
$300,000. Upon the Company being listed on NASDAQ (July 25, 1996), the Company
liquidated such loan by issuing 100,000 shares to such unrelated party pursuant
to Regulation S under the Securities Act of 1933, as amended (the "Act"). The
shares issued as consideration for the repayment of such loan were valued at the
average closing bid price on the date the transaction was commenced.
Accordingly, the Company recorded a financing expense amounting to $100,000
resulting in an effective interest rate of approximately 100%.
(iv) During December 1996, the Company issued an aggregate of 28,654
shares to its employees pursuant to its Incentive Plan. In connection therewith,
the Company recorded compensation expense amounting to $193,415 which is based
on the average closing bid price of $7.50 per share for the month of December
1996 with a 10% discount in order to reflect their fair value as a result of
their restrictions.
(v) During February 1997, pursuant to a Form S-8 Registration Statement
filed with the Securities and Exchange Commission, the Company registered a
total of 172,404 common shares, of which, 143,750 shares underlie options
pursuant to the Company's Incentive Plan. The options are exercisable at various
prices ranging from $7.00 each to $7.70 each. As of June 30, 1998, the Company's
president has exercised the option to purchase 31,250 shares at $7.70 each. The
Company received a promissory note in the amount of $240,625 as consideration
for such shares which has been properly classified as a reduction of
stockholder's equity.
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<PAGE>
(vi) During June 1997, in conjunction with NY's capitalization of its
accounts payable amounting to $480,000 which represented unpaid rent to R.S.J.J.
Realty Corp. ("RSJJ") an entity wholly owned by the Company's president, the
Company issued 87,500 shares of common stock to RSJJ in exchange for the 270,000
shares of NY common stock issued to RSJJ in forgiveness of NY's accounts payable
to RSJJ. The shares issued to RSJJ in exchange of NY's shares have been valued
at the balance of the accounts payable of $480,000.
(vii) During December 1997, the Company authorized the issuance of
62,500 shares of its common stock during the third quarter of its fiscal year
pursuant to the Incentive Plan. Of the 62,500 shares, all of which were issued
in March 1998, 37,500 were issued to the Company's President, and 6,250 shares
each were issued to each of the Company's Secretary and Treasurer. Half of these
shares vested on June 1, 1998 and half vest on January 1, 1999. The remaining
12,500 shares were issued to consultants of the Company. In connection with such
issuance, the Company recorded compensation and consulting expense amounting to
$207,000 which is based on the average closing bid price of $3.68 per share for
the third quarter of the Company's fiscal year, with a 10% discount in order to
reflect their fair value as a result of their restrictions upon issuance. The
above shares which do not vest immediately have been recorded as deferred
compensation and are being amortized over the vesting period.
(viii) During February 1998, NY agreed to issue 106,667 shares of its
common stock to the Company as consideration to the Company for issuing 48,000
shares of its own common stock to RSJJ in consideration for payment in full of
the rent due by NY to RSJJ for the period from January 1, 1998 through December
31, 1998. The value of the shares issued by the Company is recorded at the value
of the rent otherwise due under the lease which amounted to $240,000.
The Company used cash for operating activities amounting to $462,078
for the year ended June 30, 1998, whereas it provided cash amounting to $578,782
for the year ended June 30, 1997.
The Company used $193,472 of cash for investing activities for the year
ended June 30, 1998 as a result of acquiring trucks for its Chadian operations.
In February 1998, the Company raised a net of $393,000 from two
investors in connection with a private placement to fund the Chadian operation,
from the sale of $450,000 of convertible debentures and warrants. The proceeds
were loaned to Worldwide to fund its operations in Chad. The debentures are due
January 30, 2000 with interest accruing at 8% per annum. Holders of the
debentures are entitled to convert the entire face of the debentures plus
accrued interest, at the lesser of (a) a 100% of the 5-day average closing bid
price, for the 5 trading days immediately preceding the closing date of the
offering (February 3, 1998); or (b) 75% of the 5-day average closing bid price
for the 5 trading days immediately preceding the date of conversion. The
warrants are for 25,000 shares of common stock, 12,500 shares at an exercise
price of $4.50 per share and 12,500 shares at $5.64 per share. The Company
agreed to file a registration statement
27
<PAGE>
covering the shares of common stock to be issued upon conversion of the
debentures, and if not declared effective within 90 days following the closing
of the offering, then there shall be a decrease of the conversion ratios by 2.5%
per 30 day period or portion thereof pro rata, until the registration statement
has been declared effective. The registration statement was not effective as of
January 1, 1999 and the Company intends to file a post-effective amendment to
cause the registration statement to become effective. One investor has commenced
an action to recover his investment and additional damages. Conversion of the
debentures at about the current market price would result in substantial
dilution to existing shareholders and make it more difficult for the Company to
raise additional financing.
Litigation
The Company is not a party to any material litigation and is not aware
of any threatened litigation that would have a material adverse effect on its
business, except for the litigation matters discussed below.
Mechanics Liens
39th St. Bridge
This action was filed on February 26, 1997 in New York State Supreme
Court, Queens County. It names NY, Metro Steel Structures, Ltd., and McKay
Enterprises, Inc. as plaintiffs and Perini Corporation, Department of
Transportation of the City of New York, and Fidelity and Deposit Company of
Maryland as defendants. NY's claim for relief in this action was $844,932. This
claim is based upon filed mechanic's liens and general contract law. The claim
is for labor performed and materials supplied including money owed under the
contract regarding the rehabilitation of the 39th Street Bridge over the Long
Island Rail Road and Amtrak in Queens, New York. On October 7, 1998, the Company
entered into an agreement with Perini whereby the Company agreed to release and
discharge in full its claims against Perini for 20% of the net amount to be
recovered and collected by Perini in connection with Perini's action against the
City of New York.
Robert Moses Causeway
This action was commenced May 9, 1997, and involves money due to NY for
work it performed at the Robert Moses Causeway Project. NY filed a mechanic's
lien in the amount of $279,346. This claim is based upon filed mechanic's liens
and general contract law. The claim is for labor performed and materials
supplied including money owed under the contract and money due for "extra" work
regarding the rehabilitation of the Robert Moses Causeway Northbound Bridge over
the State Boat Channel, in Suffolk County, New York. The action against Kiska
Construction Corp. seeks foreclosure of the mechanic's lien and a judgment for
the amount of $279,346 against Kiska Construction Corp. and the bonding company,
Seaboard Surety
28
<PAGE>
Company. Currently, the Company is in the process of completing pre-trial
discovery. NY intends to prosecute the action until such time as a judgment or
settlement can be obtained.
Claims By Perini Corporation
On February 7, 1997, Perini Corporation filed an action against NY and
Metro Steel Structures, Ltd. in New York State Supreme Court, Kings County.
Perini's claims against NY total $1,140,560 and allege defective work on the
Stillwell Avenue project and upon a loss/profit agreement for both the Stillwell
Avenue project and the 39th Street Bridge project. NY has counterclaimed for the
amounts set forth in the above discussion of the two actions involving Perini
Corporation, and its claims are based upon the same theories as those set forth
above. (See above "Mechanics Liens").
Claims by and against EklecCo
This action involves work performed by NY at the Palisades Mall in
Nyack, New York. This action was commenced ins October, 1997 by EklecCo (f/k/a
Pyramid Company of Rockland) seeking to vacate NY's mechanic's lien in the
amount of $13,640,747, seeking judgment in the amount of $500,000,000 for
violations of contract, interference of contract and punitive damages.
Thereafter, NY served an answer with counterclaims seeking to foreclose on its
$13,640,747 mechanic's lien, seeking a judgment in the amount of $13,640,747
relating to work performed at the project, seeking $1,420,000 in bonus money
promised to NY and seeking punitive damages. NY's mechanic's lien was reinstated
by the court and a bond was purchased by EklecCo and issued for the amount of
the lien, plus interest. The Company is currently in the process of pre-trial
discovery, which is scheduled to be completed by June 1999. NY intends to
vigorously defend against EklecCo's claims as well as vigorously prosecute its
claims against EklecCo.
Humphreys & Harding, Inc. Claim against NY
NY performed the steel erection work to construct the Republic of Korea
Permanent Mission to the United Nations at 335 East 45th Street, Manhattan.
Humphreys & Harding commenced an action to recover $6,326,000, which includes
$1,604,000 as cost to complete after NY left the job, $2,790,000 for delay and
other damages, $234,000 as liquidated damages under the "time of the essence"
provision to the contract and $1,698,000 for claims by other subcontractors for
delay. NY has commenced a separate action for $1,878,872 representing extras and
retainage due, $1,488,775 on the mechanic's lien, and $667,000 and $92,500 for
interference with contracts of Wheeling Corrugated and Canam Steel.
Claim Against and By State Insurance Fund
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<PAGE>
In December 1995, the Commissioners of the State Insurance Fund of New
York for and on behalf of the State Insurance Fund commenced suit against Joseph
Polito, Ronald Polito, Steven Polito, NY, Metro Steel Structures, Ltd. (now
known as NY), One Carnegie, and others in the US District Court for the Southern
District of New York, alleging that certain workers' compensation insurance
policies obtained for various insured defendants were obtained fraudulently and
that the defendant corporations failed to pay the appropriate premiums. The
claims against NY, amounting to approximately $3 million, are limited to a
policy covering the period April 29, 1993 through December 1994. NY, Messrs.
Polito, and all other defendants are defending against this action and believe
that State Insurance Fund's legitimate claims should not exceed $300,000.
A settlement conference was requested by plaintiff's counsel and the
parties have met on several occasions to discuss settlement. Plaintiff's counsel
requested that the defendant submit documentary evidence to support its position
and the same has now been furnished to plaintiff's counsel. This submission
supports defendant's contention that its liability for premiums should not
exceed three hundred thousand dollars. Active negotiations are in their final
stages and plaintiff's counsel is in the process of drafting final settlement
documents. NY believes this matter will likely be settled with a modest cash
payment to be made to the plaintiff (less than $60,000.00) on the signing of
settlement documents. Any additional payments would involve assignments of
portions of current accounts receivable, to be due and payable only when
received and any balances then remaining would be payable at the end of five
years. It is expected that based upon current negotiations a final settlement of
all the terms and conditions will be in place by the end of this year but until
all settlement documents are formally and finally executed, no assurances may be
made.
Subpoena by the Securities and Exchange Commission and Grand Jury
Subpoena
The company effected an underwritten initial public offering of its
securities in August 1996 (the "IPO"). In January 1998, as part of an inquiry
into the activities of a principal underwriter of the IPO, an Order of Private
Investigation was issued by the SEC relating to such underwriter and three
companies, including the company, in which the underwriter had acted as
principal underwriter, in which NY was subpoenaed by the SEC to produce certain
records. The company and its officers and directors have fully cooperated with
the SEC and there has been no additional inquiry from the SEC. At this juncture,
the inquiry is too preliminary to form any judgments or assessments regarding
any possible liability of the Company or of NY.
In September 1998, the Company received a Grand Jury Subpoena Duces
Tecum from the United States District Court for the Eastern District of New York
and a search warrant, for the records of NY and the Company and any affiliated
companies as well as those of Joseph Polito. The Company believes that the Grand
Jury investigation is in connection with an investigation of the underwriter
pending in the United States District Court for the Southern District of New
York. Grand Jury investigations can result in a range of actions from a finding
of no true bill to
30
<PAGE>
indictments and prosecutions for any number of federal offenses. Criminal
prosecutions can result in a wide range of penalties, including probation,
imprisonment, fines, restitution and forfeiture of assets depending upon the
specific type and severity of the offense. In view of the fact that this
investigation appears to be in its initial stage, at this juncture the
investigation is too preliminary to assert any judgment or assessments regarding
any possible liability of the Company and NY.
Debenture Litigation
Black Sea Investments, Inc., the holder of a debenture in the principal
amount of $250,000 purchased in February 1998, commenced a single count claim
upon the debenture on September 10, 1998 in the United States District Court,
Northern District of Texas. The Company filed a motion to dismiss on grounds of
improper venue and forum non-conveniens. The Plaintiff has opposed the motion;
however, no hearing date has yet been set. The outcome of the motion is
uncertain. The Company has not yet been required to file an answer to the
primary claim at issue and has not yet conducted sufficient investigation or
discovery to determine whether there are any defenses which are likely to defeat
the action.
ITEM 7. FINANCIAL STATEMENTS
See ITEM 13 for Financial Statements for the fiscal year ended June 30,
1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors.
The names, ages, and positions of the Company's Executive Officers and
Directors are as follows:
Position with the
Name Age Company
- ---- --- ----------------------
Joseph M. Polito 64 President and Director
Ronald J. Polito 39 Secretary and Director
Steven J. Polito 36 Treasurer and Director
Marvin Weinstein 66 Director
Ronald Murphy 56 Director
All Directors hold office until the next annual meeting of stockholders
or until their successors are elected and qualify. Vacancies on the Board of
Directors may be filled by the remaining Directors. Officers are elected
annually by, and serve at the discretion of, the Board of Directors. There are
no family relationships between or among any Officers or Directors of the
Corporation, except that Joseph Polito is the father of both Steven and Ronald
Polito. The Company has an audit committee and compensation committee, both of
which include the outside Directors and Ronald Polito as the inside Director.
Joseph M. Polito has been the President and Director of the Company
since April 1994. He has been the president and a Director of NY since its
inception in 1990, and prior to the Acquisitions in April 1994, he was the sole
shareholder of NY. Mr. Polito oversees all of the Company's operations. Since
its inception in 1994, Mr. Polito has been the president and a Director of MD, a
wholly-owned subsidiary of the Company. Since December 1990, Mr. Polito has been
the president and sole Director and shareholder of One Carnegie, also a
wholly-owned subsidiary of the Company. Since 1988, Mr. Polito has been a 50%
shareholder of Crown, a company which leases cranes for construction projects.
Since 1986, Mr. Polito has been the president and 100% shareholder of Atlas Gem
Leasing, Inc., a company which leases generators and other construction
equipment. Mr. Polito has also been the president and sole Director and
shareholder of Waldorf since 1990. Before it ceased operating in August 1995,
Waldorf fabricated steel and sold same to NY. Since 1983, Mr. Polito has been
the president and 100% shareholder of Royal Steel, a company which owns and
leases real property.
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<PAGE>
Since 1976, Mr. Polito has been a member of the Allied Building Metal
Industries, Inc. ("ABMII"), a trade association which has the authority to
negotiate with the unions in order to better the construction industry. He was
the president of same from 1992 until 1993. Since approximately 1987, Mr. Polito
has been the Chairman of the Steel Institute of New York, a trade association
similar to ABMII. From the mid-1980's to the mid-1990's, Mr. Polito was a member
of the Building Trades Association Joint Safety Committee. Since the mid-1980's
he has served on the Council of Presidents of New York Building Congress, Inc.
Since the mid-1970's, Mr. Polito has been a member of the International Union of
Structural Ironworkers, locals 40, 361, and 417: he has been co-chairman since
the early 1990's.
Ronald J. Polito has been the Secretary and a Director of the Company
since April 1994. Mr. Polito has been the secretary and a Director of NY since
its inception in 1990. Mr. Polito oversees the daily progress on all projects
and analysis of the final costs and profits of jobs completed and the
preparation and bidding on new projects. Since its inception in 1994, Mr. Polito
has been the secretary and a Director of MD. From its inception in 1990 until
March 1995, he was also the treasurer of NY. Since December 1990, Mr. Polito has
been the secretary of One Carnegie and Waldorf. Since 1983, Mr. Polito has been
the secretary of RSJJ. Mr. Polito received a Bachelor of Science Degree in Civil
Engineering from Brooklyn Polytechnical Institute in 1981. He is the son of Mr.
Joseph Polito.
Steven J. Polito has been Treasurer of the Company since March 1995 and
a Director of the Company since April 1994. Mr. Polito was elected treasurer of
NY in March 1995. Mr. Polito oversees the daily operations for projects in
process and projects completed, including purchasing and leasing of materials
and machinery and the distribution of labor. He had previously been a Project
Manager and has been a Director of NY since its inception in 1990. Since its
inception in 1994, Mr. Polito also has been the treasurer and a Director of MD.
Since 1988, Mr. Polito has been the treasurer of One Carnegie, Waldorf, and
RSJJ. He is the son of Mr. Joseph Polito.
Marvin Weinstein was elected Director of the Company in January 1998.
Mr. Weinstein was the President and sole shareholder of M. Weinstein Associates
from 1988 to 1996. This company provided consulting services to the companies in
the steel industry. Mr. Weinstein retired in 1996. Neither NY nor the Company
engaged M. Weinstein Associates to provide any consulting services.
Ronald Murphy was elected Director of the Company in February 1988. Mr.
Murphy has been a private investigator since 1997. Prior thereto, from 1983 to
1996, Mr. Murphy was involved in the construction industry. From 1993-1996, he
was Field Operations Supervisor for The Steel Institute of New York. From
1983-1993, he was office manager and supervisor for Crown and Atlas Gem,
respectively. Prior to entering the construction industry, from 1966 to 1982,
Mr. Murphy was a New York City police officer.
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<PAGE>
Significant Employees of the Company
Richard Miller has been an employee of the Company since September
1997. When Falcon was formed, he became chief executive officer thereof.
Significant Employees of NY
Thomas J. Hayes has been a chief estimator, project manager, vice
president in the structural steel industry (fabrication and erection) for forty
years. He began working for an affiliate of the Company, Gem Steel Erectors, in
1976 and has been employed by the Company or an affiliate since then.
As permitted under Delaware's General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the Directors
to the Company or any of its shareholders for damages for breaches of their
fiduciary duty as Directors. As a result of the inclusion of such provision,
stockholders may be unable to recover damages against Directors for actions
taken by them which constitute negligence or gross negligence or that are in
violation of their fiduciary duties. The inclusion of this provision in the
Company's Certificate of Incorporation may reduce the likelihood of derivative
litigation against Directors and other types of shareholder litigation.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, Officers, and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the Company of expenses incurred or paid
by a Director, Officer, or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such Director,
Officer, or controlling person in connection with the Securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final jurisdiction of
such issue by such court.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(i) of Regulation S-B) compensation awarded
to, earned by, or paid by NY, the Company's subsidiary, during the years ended
June 30, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
(a) (b) (c) (d) (e) (f) (g)
Name Restricted
and Principal Other Annual Stock Options/
Position Year Salary ($) Bonus ($) Compensation($) Awards($) (1) SARS (#)
- -------- ---- ---------- --------- --------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Joseph Polito 1998 $364,000 - $125,585(2) --- ---
President and 1997 330,000 - 68,642(2) $ 175,000(3) 125,000(3)
Director 1996 300,000 - 111,911(2) --- 93,750(4)
Ronald Polito 1998 $107,800 - $ 21,407(5) --- ---
Secretary and 1997 118,800 - 26,631(5) $ 4,375(6) 25,000
Director 1996 125,000 - 13,071(5) --- ---
Steven Polito 1998 $ 84,915 - $ 4,768(7) --- ---
Treasurer and 1997 86,580 - $ 8,572(7) $ 4,375(6) 18,750
Director 1996 94,000 - 8,275(7) --- ---
</TABLE>
- -------------
(1) At the end of the fiscal year, Joseph M. Polito held 1,026,039 shares
of Restricted Stock valued at $1,005,518. Ronald Polito and Steven
Polito held 19,375 and 19,375, respectively, of Restricted Stock valued
at $18,988 respectively. Valuations are based on the average closing
bid price of Common Stock ($.98) on June 30, 1998.
(2) Includes (i) the payment of premiums on a life insurance policy of
$65,969, $10,722, and $54,362 for the years ended June 30, 1998, 1997,
and 1996, respectively; (ii) the payment of travel expenses of $50,000,
$50,000, and $50,000 for the years ended June 30, 1998, 1997 and 1996,
respectively; (iii) the payment of an automobile lease of $9,616,
$7,920 and $7,549 for the years ended June 30, 1998, 1997 and 1996,
respectively; and (iv) the issuance of 37,500 shares of Common Stock. .
See "-Employment and Consulting Agreements."
(3) Represents (i) 25,000 shares of Common Stock issued as a bonus in
December 1996 under the Company's 1994 Senior Management Incentive
Plan; (ii) an option to purchase 100,000 shares of Company Common Stock
under the Company's Stock Option Plan, exercisable at $7.70 per share
(which is 110% of the market price of same on December 2, 1996); and
(iii) an option to purchase 125,000 shares of common stock of NY at
$1.10 per share, all of which option has been exercised (60,000 shares
exercised have been resold and 10,000 shares were transferred in a
private transaction). See "-1994 Senior Management Incentive Plan."
Valuation on the 25,000 restricted shares is based on the closing bid
price of Common Stock ($7.00) on December 2, 1996, as reported by a
market maker.
<PAGE>
(4) Based on the closing bid price of Common Stock ($2.50) on August 15,
1995, as reported by a market maker. As a bonus upon completion of NY's
initial public offering, Mr. Polito was issued 37,500 shares of Common
Stock subject to a vesting whereby 12,500 shares vested upon issuance;
12,500 vested on August 15, 1996; and 12,500 vested on August 15, 1997.
All of these shares have vested and have been issued.
35
<PAGE>
(Footnotes continued from previous page)
(5) Includes (i) payments on the lease of an automobile of $4,059, $5,416
and $5,416 for the years ended June 30, 1998, 1997, and 1996,
respectively; (ii) the payment of premiums on a term life insurance
policy of $10,148, $8,510, and $4,684 for the years ended June 30,
1998, 1997, and 1996, respectively; and (iii) a travel allowance of
$7,200, $12,705, and $2,971 for the years ended June 30, 1998, 1997 and
1996, respectively.
(6) Reflects the value of the ownership of 625 shares of Common Stock at
$4.50, the market price on June 30, 1997.
(7) Includes (i) the payment of an automobile lease of $1,768, $5,304, and
$5,304 for the years ended June 30, 1998, 1997 and 1996, respectively;
and (ii) a travel allowance of $3,000, $3,268, and $2,971 for the years
ended June 30, 1998, 1997, and 1996, respectively.
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<PAGE>
The following table contains information with respect to employees of
the Company concerning options held as of June 30, 1998:
<TABLE>
<CAPTION>
AGGREGATE OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised The-Money
Options/SAR's at Options/SAR's at
FY-End (#) FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) (1) Unexercisable Unexercisable
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph M. Polito 31,250 $ 0 68,750/0 0/0 (2)
Ronald J. Polito 0 0 25,000/0 0/0 (3)
Steven J. Polito 0 0 18,750/0 0/0 (3)
</TABLE>
- ----------------
(1) Based upon the average bid and asked prices for such Common Stock on
June 30, 1998 ($-0-).
(2) Since the options are exercisable at $7.70, there is no value to such
options as of June 30, 1998.
(3) Since the options registered to Ronald and Steven Polito under the
February 1997 S-8 are exercisable at $7.00, there is no value to such
options as of June 30, 1998.
Employment and Consulting Agreements
Joseph Polito entered into an employment agreement with NY dated April
4, 1995, whereby Mr. Polito agreed to devote 80% of his business time to the
affairs of NY. The agreement is for a term of approximately three years and
terminated on June 30, 1998. Pursuant to the terms of the agreement Mr. Polito
is to receive an annual salary of $300,000 per annum until June 30, 1998 with
10% yearly escalation, subject to adjustment by the Board of Directors. Mr.
Polito is also to receive a yearly non-accountable expense allowance of $50,000.
Mr. Polito received a stock option under NY's 1994 Senior Management Incentive
Plan to purchase 6,250 shares at $22.00 per share, vesting at the rate of 1,875
in each of April 1996 and 1997 and 2,500 in April 1998. Mr. Polito also has the
right to receive a yearly bonus equal to five percent (5%) of the first
$1,000,000, upon reaching $1,000,000 and five percent (5%) of the next $500,000,
upon reaching $1,500,000 and five percent (5%) after $1,500,000, of all the
pre-tax profits of NY. NY shall pay to Mr. Polito a monthly draw of $10,000
against the bonus. NY and the Company's President extended the agreement for an
additional three years until June 30, 2001 under the same terms.
37
<PAGE>
Pursuant to the agreement, NY shall pay the premiums on a $3,500,000
life insurance policy for the benefit of individuals as directed by Mr. Polito,
with an estimated yearly premium of $80,000. The agreement restricts Mr. Polito
from competing with NY for a period of one year after the termination of his
employment. The agreement provides for severance compensation to be paid to Mr.
Polito if his employment with NY is terminated or there is a decrease in
responsibilities or duties following a change in control of NY. The severance
compensation shall be made in one payment equal to three times the aggregate
annual compensation paid to the Employee during the preceding calendar year.
Steven and Ronald Polito receive annual salary compensations of
approximately $94,000 and $125,000, respectively, from NY, which compensation
levels commenced in March 1995 and April 1994, respectively. Both individuals
also receive a car allowance equal to the monthly lease payments on their
automobiles and travel expenses. Ronald Polito receives the payment of premiums
on a life insurance policy of which he chooses the beneficiaries. Neither
individual has entered into an employment agreement with NY.
1994 Senior Management Incentive Plan
In December 1994, the Board of Directors adopted the 1994 Senior
Management Incentive Plan (the "Management Plan") which was thereafter approved
by shareholder consent. The Management Plan provides for the issuance of up to
2,000,000 shares of the Company's Common Stock in connection with the issuance
of stock options and other stock purchase rights to Executive Officers and
consultants.
In December 1996, the Company issued 143,750 stock options to Messrs.
Joseph, Ronald, and Steven Polito as follows: Mr. Polito received an option to
purchase 100,000 shares of Common Stock (he exercised the option and purchased
31,250 shares in March 1997 and shortly thereafter sold 15,000 of said shares);
Steven Polito received an option to purchase 25,000 shares of Common Stock; and
Ronald Polito received an option to purchase 18,750 shares of Common Stock. In
March 1998, pursuant to the Management plan, the Company issued bonuses of
37,500 shares of Common Stock and Joseph M. Polito and 6,250 shares of Common
Stock to each of Ronald Polito and Steven Polito.
The adoption of the Management Plan was prompted by the Company's
desire (i) to attract and retain qualified personnel, whose performance is
expected to have a substantial impact on the Company's long-term profit and
growth potential, by encouraging those persons to acquire equity in the Company;
and (ii) to provide the Board with sufficient flexibility regarding the forms of
incentive compensation which the Company will have at its disposal in rewarding
Executive Officers, key employees, and consultants without unnecessarily
depleting the Company's cash reserves. The Management Plan is designed to
augment the Company's existing compensation programs and is intended to enable
the Company to offer executives, key employees, and consultants a personal
interest in the Company's growth and success through the grant of stock options
and/or other rights pursuant to the Management Plan. It is contemplated
38
<PAGE>
that only those executive management employees (generally the Chairman of the
Board, Vice Chairman, Chief Executive Officer, Chief Operating Officer,
President, and Vice President of the Company), key employees, and consultants
who perform services of special importance to the Company will be eligible to
receive compensation under the Management Plan. A total of 2,000,000 shares of
Common Stock are reserved for issuance under the Management Plan.
Unless otherwise indicated, the Management Plan is to be administered
by the Board of Directors or a committee of the Board, if such a committee is
appointed for this purpose (the Board or such committee, as the case may be,
shall be referred to in the following description as "the Administrator").
Subject to the specific provisions of the Management Plan, the Administrator
will have the discretion to determine (i) the recipients of the awards; (ii) the
nature of the awards to be granted; (iii) the dates such awards will be granted;
(iv) the terms and conditions of the awards; and (v) the interpretation of the
Management Plan, except that any award granted to any employee of the Company
who is also a Director of the Company shall also be subject - in the event the
persons serving as members of the Administrator of the Management Plan at the
time such award is proposed to be granted do not satisfy the requirements
regarding the participation of "disinterested persons" set forth in Rule 16b-3
("Rule 16b-3") promulgated under the Exchange Act - to the approval of an
auxiliary committee consisting of not less than two individuals who are
considered "disinterested persons" as defined under Rule 16b-3. As of the date
hereof, the Company has not yet determined who will serve on such auxiliary
committee, if one is required.
The Management Plan generally provides that, unless the Administrator
determines otherwise, each option or right granted shall become exercisable in
full upon certain "change of control" events as described in the Management
Plan, or subject to any right or option granted under the Management Plan
(through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Administrator will make appropriate adjustments to
such plans and the classes, number of shares, and price per share of stock
subject to outstanding rights or options. Generally, the Management Plan may be
amended by action of the Board of Directors, except that any amendment which (i)
would increase the total number of shares subject to such plan; (ii) extend the
duration of such plan; (iii) materially increase the benefits accruing to
participants under such plan; or (iv) change the category of persons who can be
eligible for awards under such plan, must be approved by the affirmative vote of
a majority of the shareholders entitled to vote. The Management Plan permits
awards to be thereunder until November 2004.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for five types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights), restricted
stock purchase agreements, and restricted stock (as described below).
39
<PAGE>
Stock Options. Options granted under the Management Plan may be either
incentive stock options ("ISOs") or options which do not qualify as ISOs
("non-ISOs"). ISOs may be granted at an option price of not less than 100% of
the fair market value of the Common Stock on the date of grant, except that an
ISO granted to any person who owns capital stock representing more than 10% of
the total combined voting power of all classes of Common Stock of the Company
("10% stockholder") must be granted at an exercise price of at least 110% for
the fair market value of the Common Stock on the date of the grant. The exercise
price of the non-ISOs may not be less than 85% of the fair market value of the
Common Stock on the date of grant. Unless the Administrator determines
otherwise, no ISO or non-ISO may be exercisable earlier than one year from the
date of grant. ISOs may not be granted to persons who are not employees of the
Company. ISOs granted to persons other than 10% stockholders may be exercisable
for a period of up to ten (10) years from the date of grant; ISOs granted to 10%
stockholders may be exercisable for a period of up to five years from the date
of grant. No individual may be granted ISOs that become exercisable in any
calendar year for Common Stock having a fair market value at the time of grant
in excess of $100,000. Non-ISOs may be exercisable for a period of up to
thirteen (13) years from the date of grant.
Payment for shares of Common Stock purchases pursuant to exercise of
stock options shall be paid in full in (i) cash, (ii) by certified check, or,
(iii) at the discretion of the Administrator by shares of Common Stock having a
fair market value equal to the total exercise price or (iv) by a combination of
the above. The provision that permits the delivery of already owned shares of
stocks as payment for the exercise of an option may permit "pyramiding." In
general, pyramiding enables a holder to start with as little as one share of
common stock and, by using the shares of common stock acquired in successive,
simultaneous exercises of the option, to exercise the entire option, regardless
of the number of shares covered thereby, with no additional cash or investment
other than the original share of common stock used to exercise the option.
Upon termination of employment or consulting services, an optionee will
be entitled to exercise the vested portion of an option for a period of up to
three months after the date of termination, except that if the reason for
termination was a discharge for cause, the option shall expire immediately, and
if the reason for termination was for death or permanent disability of the
optionee, the vested portion of the option shall remain exercisable for a period
of twelve (12) months thereafter.
Incentive Stock Rights. Incentive stock rights consist of incentive
stock units equivalent to one share of Common Stock in consideration for
services performed for the Company. Each incentive stock unit shall entitle the
holder thereof to receive, without payment of cash or property to the Company,
one share of Common Stock in consideration for services performed for the
Company or any subsidiary by the employee, subject to the lapse of the incentive
periods, whereby the Company shall issue such number of shares upon the
completion of each specified period. If the employment or consulting services of
the holder with the Company terminate prior to the end of the incentive period
relating to the units awarded, the rights shall thereupon be null and void,
except that if termination is caused by death or permanent disability, the
holder or
40
<PAGE>
his/her heirs, as the case may be, shall be entitled to receive a pro rata
portion of the shares represented by the units, based upon that portion of the
incentive period which shall have elapsed prior to the holder's death or
disability.
Stock Appreciation Rights (SARs). SARs may be granted to recipients of
options under the Management Plan. SARs may be granted simultaneously with, or
subsequent to, the grant of a related option and may be exercised to the extent
that the related option is exercisable, except that no general SAR (as
hereinafter defined) may be exercised within a period of six months of the date
of grant of such SAR, and no SAR granted with respect to an ISO may be exercised
unless the fair market value of the Common Stock on the date of exercise exceeds
the exercise price of the ISO. A holder may be granted general SARs ("General
SARs") or limited SARs ("Limited SARs"), or both. General SARs permit the holder
thereof to receive an amount (in cash, shares of Common Stock, or a combination
of both) equal to the number of SARs exercised multiplied by the excess of the
fair market value of the Common Stock on the exercise date over the exercise
price of the related option. Limited SARs are similar to General SARs, except
that, unless the Administrator determines otherwise, they may be exercised only
during a prescribed period following the occurrence of one or more of the
following "Change of Control" transaction: (i) the approval of the Board of
Directors of consolidation or merger in which the Company is not the surviving
corporation, the sale of all of substantially all the assets of the Company, or
the liquidation or dissolution of the Company; (ii) the commencement of a tender
or exchange offer for the Company's Common Stock (or securities convertible into
Common Stock) without the prior consent of the Board; (iii) the acquisition of
beneficial ownership by any person or other entity (other than the Company or
any employee benefit plan sponsored by the Company) of securities of the Company
representing 25% or more of the voting power of the Company's outstanding
securities; or (iv) if during any period of two years or less, individuals who
at the beginning of such period constitute the entire Board cease to constitute
a majority of the Board, unless the election, or the nomination for election, of
each new Director is approved by at least a majority of the Directors than still
in office.
The exercise of any portion of either the related option or the tandem
SARs will cause a corresponding reduction in the number of shares remaining
subject to the option or the tandem SARs, thus maintaining a balance between
outstanding options and SARs.
Restricted Stock Purchase Agreements. Restricted Stock Purchase
Agreements provide for the sale by the Company of shares of Common Stock at
prices to be determined by the Board, which shares shall be subject to
restrictions on disposition for a stated period during which the purchaser must
continue employment with the Company in order to retain the shares. Payment must
be made in cash. If termination of employment occurs for any reason within six
months after the date of purchase, or for any reason other than death or by
retirement with the consent of the Company after the six-month period but prior
to the time that the restrictions on disposition lapse, the Company shall have
the option to reacquire the shares at the original purchase price.
41
<PAGE>
Restricted Stock. Restricted shares awarded under the Management Plan
will be subject to a period of time designated by the Administrator (the
"restricted period") during which the recipient must continue to render services
to the Company before the restricted shares will become vested. The
Administrator may also impose other restrictions, terms and conditions that must
be fulfilled before the restricted shares may vest.
Upon the grant of restricted shares, stock certificates registered in
the name of the recipient will be issued and such shares will constitute issued
and outstanding shares of Common Stock for all corporate purposes. The holder
will have the right to vote the restricted shares and to receive all regular
cash dividends (and such other distributions as the Administrator may
designate), if any, which are paid or distributed on the restricted shares and,
generally, to exercise all other rights as a holder of Common Stock, except
that, until the end of the restricted period; (i) the holder will not be
entitled to take possession of the stock certificates representing the
restricted shares and (ii) the holder will not be entitled to sell, transfer or
otherwise dispose of the restricted shares. A breach of any restrictions, terms,
or conditions established by the Administrator with respect to any restricted
shares will cause a forfeiture of such restricted shares.
Upon expiration of the applicable restriction period and the
satisfaction of any other applicable conditions, all or part of the restricted
shares and any dividends or other distributions not distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Company. If prior to the expiration of the restricted period a holder is
terminated without cause or because of a total disability (in each case as
defined in the Management Plan), or dies, then, unless otherwise determined by
the Administrator at the time of the grant, the restricted period applicable to
each award of restricted shares will thereupon be deemed to have expired. Unless
the Administrator determines otherwise, if a holder's employment terminates
prior to the expiration of the applicable restricted period for any reason other
than as set forth above, all restricted shares and any retained distributions
thereon will be forfeited.
Accelerating of the vesting of the restricted shares shall occur, under
the provisions of the Management Plan, on the first day following the occurrence
of any of the following: (a) the approval by the stockholders of the Company of
an "Approved Transaction"; (b) a "Control Purchase"; or (c) a "Board Change."
An "Approved Transaction" is defined as (A) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock will be converted into
cash, securities, or other property other than a merger of the Company in which
the holders of the Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger; or (B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company; or (C) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
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<PAGE>
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in ss.ss. 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation, or other entity (other than the Company or any employee benefit
plan sponsored by the Company) (A) shall purchase any Common Stock of the
Company (or securities convertible into the Company's Common Stock) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board of Directors, or (B) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
Directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities).
A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
company's stockholders, of each new Director was approved by a vote of at least
a majority of the Directors then still in office.
1994 Employee Stock Option Plan
In December 1994, the Board of Directors adopted the 1994 Senior
Employee Incentive Plan (the "Employee Plan"). This plan was adopted also by
shareholder consent. The Employee Plan provides for the issuance of up to
2,000,000 shares of the Company's Common Stock in connection with the issuance
of stock options to key employees of the Company.
The adoption of the Employee Plan was prompted by the Company's desire
(i) to attract and retain qualified personnel, whose performance is expected to
have a substantial impact on the Company's long-term profit and growth
potential, by encouraging those persons to acquire equity in the Company; and
(ii) to provide the Board with sufficient flexibility regarding the forms of
incentive compensation which the Company will have at its disposal in rewarding
key employees, advisors, and independent consultants without unnecessarily
depleting the Company's cash reserves. The Employee Plan is designed to augment
the Company's existing compensation programs and is intended to enable the
Company to offer employees a personal interest in the Company's growth and
success through the grant of stock options. A total of 2,000,000 shares of
Common Stock are reserved for issuance under the Employee Plan.
Under the Employee Plan, options to purchase an aggregate of not more
than 2,000,000 shares of Common Stock may be granted from time to time to key
employees, advisors and independent consultants to the Company and its
subsidiaries. It is anticipated that awards made under the Employee Plan will be
subject to vesting periods, although the vesting periods are subject to the
discretion of the Board of Directors or Administrator of the plan. If approved,
43
<PAGE>
awards under the Employee Plan may be made until January 1, 2004 when the
Employee Plan terminates.
The Employee Plan is to be administered by the Board of Directors.
Subject to the specific provisions of the Employee Plan, the Administrator is
generally empowered to (i) interpret the plan; (ii) prescribe rules and
regulations pertaining thereto; (iii) determine the terms of the option
agreements; (iv) amend them with the consent of the optionee; (v) determine the
employees to whom options are to be granted; and (vi) determine the number of
shares subject to each option and the exercise price thereof.
The per share exercise price for incentive stock options ("ISOs") will
not be less than 100% of the fair market value of a share of the Common Stock on
the date the option is granted (110% of fair market value on the date of grant
of an ISO if the optionee owns more than 10% of the Common Stock of the
Company).
Options will be exercisable for a term determined by the Board which
will not be less than one year. Options may be exercised only while the original
grantee has a relationship with the Company or a subsidiary of the Company which
confers eligibility to be granted options or up to ninety (90) days after
termination at the sole discretion of the Board. In the event of termination due
to retirement, the Optionee, with the consent of the Board, shall have the right
to exercise his option at any time during the twelve (12) month period after
such retirement. Options may be exercised up to twelve (12) months after death
or total and permanent disability. In the event of certain basic changes in the
Company, including a change in control of the Company (as defined in the
Employee Plan) in the discretion of the Board, each option may become fully and
immediately exercisable. ISOs are not transferable other than by will or the
laws of descent and distribution. Options may be exercised during the holder's
lifetime only by the holder or his or her guardian or legal representative.
Options granted pursuant to the Employee Plan may be designated as
ISOs, with the attendant tax benefits provided under Section 421 and 422A of the
Internal Revenue Code of 1986. Accordingly, the Employee Plan provides that the
aggregate fair market value (determined at the time an ISO is granted) of the
Common Stock subject to ISOs exercisable for the first time by an employee
during any calendar year (under all plans of the Company and its subsidiaries)
may not exceed $100,000. The Board may modify, suspend, or terminate the
Employee Plan, provided, however, that certain material modifications affecting
the Plan must be approved by the shareholders, and any change in the Employee
Plan that may adversely affect an optionee's rights under an option previously
granted under the Employee Plan requires the consent of the optionee.
44
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of June 30, 1998,
based upon information obtained by the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of 5% or more of the outstanding shares of Common Stock;
(ii) by each Officer and Director; and (iii) by all Officers and Directors as a
group.
<TABLE>
<CAPTION>
Percent of
Common
Number of Stock
Name Shares Owned
---- ------ -----
<S> <C> <C>
Joseph Polito (1) 1,301,039 66.3%
c/o U.S. Bridge Corp.
53-09 97th Place
Corona, New York 11368
Steven Polito (2) 38,125 *
c/o U.S. Bridge Corp.
53-09 97th Place
Corona, New York 11368
Ronald Polito (3) 44, 375 *
c/o U.S. Bridge Corp.
53-09 97th Place
Corona, New York 11368
Ronald Murphy -- --
c/o USABG Corp.
53-09 97th Place
Corona, New York 11368
Marvin Weinstein -- --
c/o USABG Corp.
53-09 97th Place
Corona, New York 11368
All Officers and Directors
as a group (5 persons)(1)-(3) 1,383,539 70.5%
* Less than 2.5%
</TABLE>
45
<PAGE>
(1) Includes 68,750 shares issuable upon the exercise of an option which is
presently vested and exercisable. Does not include (i) 2,500 shares
issuable to Joseph Polito upon the exercise of options not presently
vested; and (ii) an aggregate of 62,750 shares gifted by Joseph Polito,
of which 20,250 shares were gifted to members of Joseph Polito's family
(including 12,500 each to Ronald and Steven Polito) and 17,500 shares
were gifted to employees of the Company, as of January 23, 1995. Joseph
Polito disclaims beneficial ownership of all shares transferred to his
family members.
(2) Includes 18,750 shares issuable to Steven Polito pursuant to options
which have vested.
(3) Includes 25,000 shares issuable to Ronald Polito pursuant to options
which have vested.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended June 30, 1998 and 1997, NY paid $154,856 and
$214,000, respectively, to Crown for leasing cranes necessary to perform steel
erection services. Joseph M.
Polito owns 50% of Crown.
During the years ended June 30, 1998 and 1997, NY paid $44,000 and
$35,000, respectively, to AGLI for certain machinery necessary to perform steel
erection services. AGLI is wholly-owned by Joseph M. Polito.
As of June 30, 1998, the Company has advanced funds to various
affiliates. These advances are non-interest bearing and are due on demand. As of
June 30, 1998, such advances amounted to $103,050.
As of June 30, 1998, the total due to officers and affiliates,
amounting to $215,932, represents advances made by the President of the Company
and affiliated entities which bear no interest and are due on demand.
On February 10, 1998, NY agreed to remit its lease payments to RSJJ for
the period January 1998 through December 31, 1998 by issuing the Company 106,667
shares of its common stock in exchange for which the Company agreed to issue
48,000 shares of Common Stock to RSJJ. Both the Company and NY issued the
aforesaid stock in March 1998. The value of the Company's shares was recorded at
the value of the rent otherwise due under the lease ($240,000).
In March 1998, the Company issued bonuses of 37,500 shares of Common
Stock to Joseph M. Polito and 6,250 shares to each of Ronald Polito and Steven
Polito pursuant to the Management plan: 1/2 of these shares vested on June 1,
1998, and 1/2 vest on January 1, 1999. See "Executive Compensation-Employment
and Consulting Agreements" for information regarding management's compensation.
47
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part II,
Item 8:
Page
----
Independent Auditors Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5 - F-6
Consolidated Notes to Financial Statements F-7 - F-27
(b) During the last quarter, the Company filed no reports on Form 8-K.
(c) All exhibits, except those designated with an asterisk (*) which are filed
herewith, previously have been filed with the Commission in connection with such
documents as are incorporated by reference herein.
2.1 Agreement and Plan of Reorganization dated effective as
of April 25, 1994 (incorporated by reference herein to
exhibit 2.1 of Form 10-K filed with the Commission for
the fiscal year ended June 30, 1994).
3.1 Certificate of Incorporation of the Company filed June
15, 1994.
3.2 By-Laws of the Company (incorporated herein by
reference to Form 5- 18, dated May 4, 1989).
4.1 Form of Special Warrant (incorporated herein by
reference to exhibit 4.1 of Form 10-KSB for the fiscal
year ended June 30, 1995).
4.2 Form of Restricted Stock agreement issued to Joseph
Polito (incorporated herein by reference to exhibit 4.2
of Form 10-KSB for the fiscal year ended June 30,
1995).
4.3 Form of 8% Convertible Debenture issued in 1998 Private
Placement.
4.4 Form of Common Stock Purchase Warrant issued in 1998
Private Placement.
10.1 Lease Agreement between One Carnegie Court Associates
and Waldorf Steel Fabrications, Inc., dated March 27,
1990 (incorporated herein by reference to exhibit 10.1
of Form 10-KSB for the fiscal year ended June 30,
1994).
10.2 Promissory note from the Company to Trinity Industries,
Inc. (incorporated herein by reference to exhibit 10.2
of Form 10-KSB for the fiscal year ended June 30,
1994).
10.3 Forbearance Agreement between the Company and Trinity
Industries,
48
<PAGE>
Inc., dated October 14, 1993 (incorporated herein by
reference to exhibit 10.3 of Form 10-KSB for the fiscal
year ended June 30, 1994).
10.4 Lease Agreement between R.S.J.J. Realty Corp. and NY,
dated June 30, 1993 (incorporated herein by reference
to exhibit 10.4 of Form 10-KSB for the fiscal year
ended June 30, 1994).
10.5 Employment Agreement of Joseph Polito (incorporated
herein by reference to exhibit 10.5 of Form 10-KSB for
the fiscal year ended June 30, 1995).
10.6 The Company's Senior Management Incentive Plan
(incorporated herein by reference to the proxy
statement dated February 1995).
10.7 The Company's Employee Stock Option Plan (incorporated
herein by reference to the proxy statement dated
February 1995).
10.8 Agreement between Iron Workers Local Union 40 and NY
(incorporated herein by reference to exhibit 10.8 of
Form 10-KSB for the fiscal year ended June 30, 1995).
10.9 Agreement between Local Union 14, 14B, 15, 15A, 15C,
15D, International Union of Operating Engineers,
AFL-CIO and NY (incorporated herein by reference to
exhibit 10.9 of Form 10-KSB for the fiscal year ended
June 30, 1995).
10.10 Agreement between Local 780 and NY (incorporated herein
by reference to exhibit 10.10 of Form 10-KSB for the
fiscal year ended June 30, 1995).
10.11 Agreement to capitalize the $400,000 of debt
(incorporated herein by reference to exhibit 10.11 of
Form 10-KSB for the fiscal year ended June 30, 1995).
10.12 Consulting Agreement with Marlowe and Company
(incorporated by reference herein to exhibit 10.12 of
Form 10-KSB for the fiscal year ended June 30, 1995).
10.13 Lease surrender agreement between One Carnegie and
Waldorf dated August 1, 1995 (incorporated herein by
reference to Form 10-KSB/A for the fiscal year ended
June 30, 1995).
10.14 Lease Agreement between One Carnegie and U.S. Bridge
Corp. (Maryland), dated August 1, 1995 (incorporated
herein by reference to Form 10-KSB/A for the fiscal
year ended June 30, 1995).
10.15 Consulting Agreement dated December 9, 1996 with
Bernard Tapie (incorporated herein by reference to Form
10-KSB/A for the fiscal year ended June 30, 1997).
10.16 Memorandum of Understanding, dated May 13, 1996,
between the Company and Lubov Ulianova (incorporated
herein by reference to Form 10-KSB/A for the fiscal
year ended June 30, 1997).
10.17 Form of Subscription Agreement for 1998 Private
Placement.
10.18 Form of Registration Rights Agreement for 1998 Private
Placement.
21.1 List of Subsidiaries.
27.1 Financial Data Schedule.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 10th day of January, 1999.
USABG CORP.
By: /s/ Joseph M. Polito
--------------------
Joseph M. Polito, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Date: January 13, 1999 By: /s/ Ronald J. Polito
--------------------
Ronald J. Polito, Secretary
and Director
Date: January 13, 1999 By: /s/ Steven J. Polito
--------------------
Steven J. Polito, Treasurer
and Director
Date: January 13, 1999 By: /s/Marvin Weinstein
-------------------
Marvin Weinstein, Director
Date: January 13, 1999 By: /s/Ronald Murphy
----------------
Ronald Murphy, Director
50
<PAGE>
U.S. BRIDGE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Page
Number
------
Independent auditors' report F-1
Consolidated balance sheet as of June 30, 1998 F-2
Consolidated statements of operations for the years
ended June 30, 1998 and 1997 F-3
Consolidated statement of stockholders' equity for the years
ended June 30, 1998 and 1997 F-4
Consolidated statements of cash flows for the years
ended June 30, 1998 and 1997 F-5 - F-6
Notes to consolidated financial statements F-7 - F-27
<PAGE>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<PAGE>
USABG CORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Page
Number
------
Independent auditors' report F-1
Consolidated balance sheet at June 30, 1998 F-2
Consolidated statements of operations for the years
ended June 30, 1998 and 1997 F-3
Consolidated statement of stockholders' equity for the years
ended June 30, 1998 and 1997 F-4
Consolidated statements of cash flows for the years
ended June 30, 1998 and 1997 F-5 - F-6
Notes to consolidated financial statements F-7 - F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of USABG Corp.
We have audited the accompanying consolidated balance sheet of USABG Corp. and
its subsidiaries (the "Company") as of June 30, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in note 14H(iii), the Company's books and records were
seized in connection with a Grand Jury subpoena from the United States District
Court. Grand Jury investigations can result in a range of actions from a finding
of a no true bill to indictments and prosecutions for any number of federal
offenses. Criminal prosecutions can result in a wide range of penalties,
including probation, imprisonment, fines, restitution and forfeiture of assets
depending upon the specific type and severity of the offense. The reason for the
inquiry and the outcome thereof cannot be determined as of the date of our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of June 30, 1998, and the consolidated results of its operations and
cash flows for the years ended June 30, 1998 and 1997, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company, as of June 30, 1998 has a working capital
deficiency of $4,327,344, a backlog balance of $1,051,119 and payroll taxes
payable amounting to $2,616,742. Lastly, for the years ended June 30, 1998 and
1997 the Company reported net losses amounting to $2,343,482 and $875,238,
respectively. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/Massella, Tomaro & Co., LLP
- ------------------------------
Massella, Tomaro & Co., LLP
Jericho, New York
December 18, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
USABG CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<S> <C>
Current assets:
Cash $ 184,709
Contracts and retainage receivable, net 2,266,864
Costs and estimated earnings in excess of billings on uncompleted contracts 321,854
Other current assets 84,721
Due from related parties 103,050
------------
Total current assets 2,961,198
Contracts and retainage receivable, net - non-current portion 8,400,581
Transportation and office equipment, net 207,084
Other assets 1,100
------------
Total assets $ 11,569,963
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including cash overdrafts of $96,867 $ 1,430,990
Accrued expenses 1,936,240
Payroll taxes payable 2,616,742
Convertible debentures 450,000
Current portion of long-term debt 300,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 21,922
Due to related parties 215,932
Income taxes payable 166,716
Liabilities of discontinued operations 150,000
------------
Total current liabilities 7,288,542
------------
Long-term debt, net of current portion 1,275,000
------------
Total liabilities 8,563,542
------------
Minority interest 2,191,802
------------
Commitments and contingencies (Note 14) --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity:
Preferred stock, authorized 10,000,000, issued and outstanding -0- shares
Common stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding 1,961,037 1,961
Additional paid-in capital 4,865,447
Accumulated deficit (3,430,909)
------------
Sub-total stockholders' equity 1,436,499
Less: stock subscription receivable and other stockholders' deductions (621,880)
------------
Total stockholders' equity 814,619
------------
Total liabilities and stockholders' equity $ 11,569,963
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
USABG CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Contract revenue $ 17,062,873 $ 15,494,447
------------ ------------
Costs and expenses:
Cost of contract revenues 13,436,430 11,021,609
General and administrative expenses 3,718,482 3,236,488
Bad debt expense 2,403,815 1,287,362
------------ ------------
Total costs and expenses 19,558,727 15,545,459
------------ ------------
Loss from continuing operations before other income (expense),
minority interest and provision for income taxes (2,495,854) (51,012)
Other income (expenses):
Non-recurring charge (Note 14h(i)) (300,000) --
Interest expense and financing costs (514,874) (159,565)
Interest income 8,886 10,425
------------ ------------
Total other (expenses) income (805,988) (149,140)
------------ ------------
Loss before minority interest and provision
for income taxes (3,301,842) (200,152)
Minority interest in net loss (income) 981,497 (167,772)
------------ ------------
Loss before provision for income taxes (2,320,345) (367,924)
Provision for income taxes 23,137 142,875
------------ ------------
Loss before discontinued operations (2,343,482) (510,799)
Loss from discontinued operations -- 280,817
Loss on disposal of assets of discontinued operations -- 83,622
------------ ------------
Net (loss) $ (2,343,482) $ (875,238)
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Earnings per common share:
Basic:
Loss before loss from discontinued operations $ (1.23) $ (.30)
============ ============
Loss from discontinued operations $ -- $ (.21)
============ ============
Net loss $ (1.23) $ (.51)
============ ============
Diluted:
Loss before loss from discontinued operations $ (1.23) $ (.30)
============ ============
Loss from discontinued operations $ -- $ (.21)
============ ============
Net loss $ (1.23) $ (.51)
============ ============
Weighted average number of shares outstanding for basic and diluted 1,906,995 1,726,619
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
USABG CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Stock
Common subscription
stock receivable
----------------------- Additional and other Total
paid-in Accumulated stockholders' stockholders'
Shares Amount capital deficit deductions equity
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1996 1,540,633 $ 1,541 $ 2,684,827 $ (212,189) $ (312,183) $ 2,161,996
Issuance of common stock as consideration
for services provided to the Company 62,500 62 269,938 -- (270,000) --
Issuance of common stock in lieu of
repayment of loan and related interest 100,000 100 399,900 -- -- 400,000
Issuance of common stock pursuant to the 1994
Senior Management Incentive Plan
as consideration for services provided to
the Company 28,654 29 193,386 -- -- 193,415
Issuance of common stock in connection with
the exercise of options 31,250 31 240,594 -- (240,625) --
Issuance of common stock in connection with
settlement of subsidiary's related party debt 87,500 88 479,912 -- -- 480,000
Amortization of deferred expense in connection
with issuances of common stock -- -- -- -- 419,733 419,733
Net loss for the year ended June 30, 1997 -- -- -- (875,238) -- (875,238)
--------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 1,850,537 1,851 4,268,557 (1,087,427) (403,075) 2,779,906
Issuance of common stock pursuant to the 1994
Senior Management Incentive Plan as
consideration for services provided to the
Company 62,500 62 206,938 -- (165,600) 41,400
Amortization of prepaid rent -- -- -- -- 120,000 120,000
Issuance of common stock to related party in
connection with prepayment of subsidiary's rent 48,000 48 239,952 -- (240,000) --
Additional paid-in capital resulting from imputed
interest related to convertible debentures -- -- 150,000 -- -- 150,000
Deferred compensation in connection with issuance
of subsidiary's common stock -- -- -- -- (391,500) (391,500)
Amortization of deferred expenses in connection
with issuances of common stock -- -- -- -- 458,295 458,295
Net loss for the year ended June 30, 1998 -- -- -- (2,343,482) -- (2,343,482)
---------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1998 1,961,037 $ 1,961 $ 4,865,447 $(3,430,909) $ (621,880) $ 814,619
========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
USABG CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net (loss) $(2,343,482) $ (875,238)
Adjustments to reconcile net (loss) to net
cash (used for) provided by operating activities:
Depreciation and amortization 465,028 558,233
Minority interest in net loss 981,497 167,772
Bad debt expense 2,403,815 1,287,362
Deferred income tax benefit (378,800) (273,162)
Issuance of common stock for services 240,000 193,415
Loss on disposal of assets of discontinued operations -- 82,622
Decrease (increase) in:
Contracts and retainage receivable (4,102,230) (6,752,882)
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,903,869 207,801
Other current assets 34,440 (7,382)
Increase (decrease) in:
Accounts payable (2,064,314) 3,519,175
Accrued expenses 1,165,029 778,853
Payroll taxes payable 981,940 1,060,660
Billings in excess of costs and estimated
earnings on uncompleted contracts (104,533) 109,888
Income taxes payable 355,663 521,675
----------- -----------
Net cash (used for) provided by operating activities (462,078) 578,792
----------- -----------
Investing activities:
Transportation and office equipment (193,472) (8,156)
----------- -----------
Net cash (used for) investing activities (193,472) (8,156)
----------- -----------
Financing activities:
Advances to related parties (51,211) (376,714)
Financing costs incurred -- (35,000)
Principal payments of long term debt (175,000) --
Repayment of credit line (145,358) (479)
Advances from officers and related parties 49,392 211,341
Proceeds from convertible debentures 450,000 --
Costs of issuance of convertible debentures (57,000) --
----------- -----------
Net cash provided by (used for) financing activities 70,823 (200,852)
----------- -----------
Net (decrease) increase in cash (584,727) 369,784
Cash, beginning 769,436 399,652
----------- -----------
Cash, ending $ 184,709 $ 769,436
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
USABG CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 7,599 $ 36,848
============ ============
Taxes $ - $ -
============ ============
Supplemental disclosure of non-cash operating activities:
In connection with the issuance of common stock, 28,654 shares
were issued as consideration for employee compensation $ - $ 193,415
============ ============
In connection with issuance of common stock, 31,250 shares
were issued in lieu of a promissory note issued by Company's
President $ - $ 240,625
============ ============
Issuance of long term debt for settlement of accounts payable $ 1,750,000 $ -
============ ============
In connection with the prepayment of subsidiary's rent, 48,000
shares of common stock were issued as consideration for
106,667 shares of subsidiary's common stock $ 240,000 $ -
============ ============
Supplemental disclosure of non-cash investing activities:
Surrender of property, plant, and equipment in lieu of
foreclosure on mortgage $ 2,889,999 $ -
============ ===========
Supplemental disclosure of non-cash financing activities:
In connection with the conversion of a subsidiary's account payable,
87,500 shares of common stock of the Company were issued
as consideration for 270,000 shares of the subsidiary's common stock $ - $ 480,000
============ ============
In connection with issuance of common stock, 62,500 shares were
issued as consideration for deferred compensation $ - $ 270,000
============ ============
In connection with repayment of loan and related interest 100,000
shares of common stock were issued to the Company's President $ - $ 400,000
============ ============
</TABLE>
F-6
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1 - ORGANIZATION
USABG Corp. "the Company" was incorporated in the State of
Delaware on September 12, 1988 under the name of Colonial
Capital Corp.
In January 1998, the Company filed an amendment to its
Certificate of Incorporation and changed its name to USABG
Corp. The Company owns 48.5% of USA Bridge Construction of
N.Y., Inc. ("NY"), 100% of the outstanding shares of common
stock of Worldwide Construction Limited ("Worldwide"), and
100% of the outstanding shares of common stock of Royal Steel
Services, Inc. ("Royal Steel"). The Company's President and
Chairman of the Board owns 7.5% of the common stock of NY. By
virtue of his ownership of 66.3% of the outstanding shares of
common stock of the Company, the Company may be deemed the
beneficial owner of those shares of NY common stock held by
its president, resulting in the Company having a direct and
indirect controlling financial interest of 56 % of NY. NY,
Worldwide, and Royal Steel are the only subsidiaries through
which the Company currently operates. NY provides steel
erection for building, roadway, and bridge repair projects for
general contractors. Royal Steel was formed in November 1997
in order for the Company to perform work on smaller base
contracts. Two additional subsidiaries of the Company (each
wholly-owned), One Carnegie Court Associates, Inc. ("One
Carnegie") a former real estate holding company, and USA
Bridge Construction Corp. (Maryland) ("MD") which provided
steel fabrication services, ceased operations in August 1997
and November 1996, respectively.
Worldwide was formed by the Company during December 1997, and
is a British Virgin Islands corporation. It was formed as a
holding company to own 80% of each of Falcon Tchad S.A.
("Falcon") and Portshop S.A. ("Portshop"), both of which
companies were formed in N'Djamena, Chad, a country located in
Central Northern Africa. Falcon was formed in November 1997 to
operate as a full service transportation, forwarding, and
warehousing company in N'Djamena. Portshop was formed in March
1998 to operate a duty free store in Chad's sole international
airport. Worldwide shall operate as the liaison between
Portshop, Falcon and the governmental or private entities with
which Falcon and Portshop intend to contract in Chad. As of
June 30, 1998, the only activity in Worldwide was consulting
and travel expenses and the purchase of trucks by Falcon.
The financial statements give retroactive effect to a
one-for-four reverse stock split effected during August 1998.
Unless noted, reference to the Company includes the Company
and its subsidiaries.
<PAGE>
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statement have been
prepared assuming that the Company will continue as a going
concern. For the years ended June 30, 1998 and 1997, the
Company generated net losses amounting to $2,343,482 and
$875,238, respectively, after recording bad debt expenses
amounting to $2,403,815 and $1,287,362, respectively, in
connection with the settlement of certain contracts receivable
and by increasing its allowance for bad debts as a result of
various mechanic's liens placed on completed contracts during
the year ended June 30, 1998 and 1997.
As of June 30, 1998, the Company has a working capital
deficiency amounting to
F-7
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
$4,327,344 as a result of classifying certain contracts and
retainages receivable as non-current since the timing of their
collectibility cannot be determined due to the related pending
litigations.
As of June 30, 1998, the Company's backlog amounted to
$1,051,119. Backlog represents the amount of revenue the
Company expects to realize from work to be performed on
uncompleted contracts and from contracts on which work has not
yet begun.
Lastly, as of June 30, 1998 the Company owes approximately
$2,616,742 of payroll taxes and related penalties and
interest. Certain taxing authorities have filed liens against
the Company as a result of the unpaid payroll taxes. Should
the taxing authorities take further actions, the results could
be detrimental to the Company's ability to operate.
The Company is aggressively attempting to obtain additional
contracts in order to mitigate its minimal backlog and
vigorously attempting to settle disputes in connection with
mechanic's lien placed on certain completed projects in order
to collect its non-current receivables and pay its unpaid
payroll taxes, however, there can be no assurance that it will
be able to obtain additional contracts, settle its disputes,
and pay its payroll taxes.
These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial
statements do not include adjustments relating to the
recoverability and realization of assets and classification of
liabilities that might be necessary should the Company be
unable to continue in operation.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Consolidated statements
The consolidated financial statement include the accounts of
the Company, NY (by virtue of its direct and indirect
controlling financial interest as outlined above), and its
wholly-owned subsidiaries, One Carnegie, Maryland, Royal
Steel, and Worldwide after elimination of all significant
inter-company transactions and accounts.
b) Cash and cash equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
<PAGE>
c) Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. The most significant estimates with regard
to these financial statements relate to the estimating of
final construction contract profits in accordance with
accounting for long-term contracts, estimating the potential
liabilities in conjunction with certain commitments and
contingencies and estimating the allowance for
F-8
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
doubtful accounts for contracts and retainage receivables.
Actual results could differ from these estimates.
d) Balance sheet classifications
In accordance with normal practice in the construction
industry, the Company included in current assets and current
liabilities amounts related to construction contract
receivable and payable over a period in excess of one year. In
general, contract related receivables and payables other than
retainage receivables are expected to be collected and paid
within one year unless surrounding circumstances support
otherwise. As of June 30, 1998, the Company classified as
non-current assets, certain contract receivables which
mechanic liens have been placed and for which the Company is
in dispute with the general contractor or customer of the
projects.
e) Contracts and retainage receivables
Contracts and retainage receivables represent amounts billed
but uncollected on completed construction contracts and
construction contracts in progress and unbilled retainage on
construction contracts completed and in progress.
The Company utilizes the allowance method for recognizing the
collectibility of its contracts and retainage receivable. The
allowance method recognizes bad debt expense based on a review
of the individual accounts outstanding based on the
surrounding facts and estimates made by management.
f) Transportation, office equipment and furniture
Transportation, office equipment and furniture are reported at
cost less accumulated depreciation which is provided on the
straight line method over the estimated useful lives of the
assets. Expenditure for maintenance and repairs are expensed
as incurred.
g) Deferred compensation and consulting
Deferred compensation consists of the Company's and NY's
common stock issued to officer's of the Company and NY.
Deferred compensation has been charged to general and
administrative expenses over the vesting period of the stock
issued.
Deferred consulting costs consist of consulting fees in the
form of common stock issued to a broker-dealer. The deferred
consulting costs have been amortized over a two year period.
F-9
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
h) Income taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" which requires the use of the
"liability method" of accounting for income taxes.
Accordingly, deferred tax assets and liabilities are
determined based on the difference between the financial
statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the
differences are expected to reverse. In addition, future tax
benefits, such as net operating loss carryforwards, are
recognized currently to the extent such benefits are more
likely than not to be realized as an economic benefit in the
form of a reduction of income taxes in future years. Current
income taxes are based on the respective periods' taxable
income for Federal, State, and City income tax reporting
purposes. For income tax purposes, the Company and its
subsidiaries report using a December 31st year end.
i) Revenue recognition
The Company recognizes revenue and costs for all contracts
under the percentage of completion method, measured by the
percentage of costs incurred to date to estimated total costs
for each contract. Cost of contract revenues include all
direct material and labor costs and those indirect costs
related to contract performance. General and administrative
expenses are accounted for as period costs and are, therefore,
not included in the calculation of the estimates to complete
construction contracts in progress. Material project losses
are provided for in their entirety without reference to the
percentage of completion. As contracts can extend over one or
more accounting periods, revision in costs and earnings
estimated during the course of the work are reflected during
the accounting period in which the facts become known. An
amount equal to the costs attributable to unapproved change
orders and claims is included in the total estimated revenue
when realization is probable and the amount can be reasonably
estimated. The Company generally determines a contract
complete pursuant to a substantial completion clause
stipulated in each contract.
The current asset, "costs and estimated earnings in excess of
billings on uncompleted contracts", represents revenues
recognized in excess of amounts billed on uncompleted
contracts at the end of each period.
The current liability, "billings in excess of costs and
estimated earnings on uncompleted contracts," represents
billings which exceed revenue recognized on respective
uncompleted contracts at the end of each period.
F-10
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
j) Earnings per share
During 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the
previously required reporting of primary and fully diluted
earnings per share with basic and diluted earnings per share,
respectively. Unlike the previously reported primary earnings
per share, basic earnings per share excludes the dilutive
effects of stock options. Diluted earnings per share is
similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods presented
have been calculated in accordance with the requirements of
SFAS No. 128.
k) Impact of recently issued accounting standards
The Company does not believe that any recently issued
accounting standards, not yet adopted by the Company, will
have a material impact on its financial position and results
of operations when adopted.
l) Stock-based compensation
The Company continues to account for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees"for options issued under the Company's 1994
Senior Management Incentive Plan ("Incentive Plan") and NY's
1994 Senior Management Incentive Plan ("NY's Incentive Plan").
Compensation cost for stock options, if any, is measured as
the excess of the quoted market price of the Company's stock
at the date of grant less the amount an employee must pay to
acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock based employee
compensation plans. The Company has elected to remain on its
current method of accounting as described above, and has
adopted and is in compliance with the disclosure requirements
of SFAS No. 123.
m) Fair value disclosure as of June 30, 1998
The carrying value of cash, contracts and retainage
receivable, accounts payable and accrued expenses and
short-term debt are a reasonable estimate of their fair value.
The carrying value of the long-term debt approximates fair
value based upon the interest factors for the debt being based
upon the prime rate which reflects market value.
<PAGE>
n) Reclassifications
Certain reclassifications have been made to the June 30, 1997
consolidated financial statements in order to conform to the
June 30, 1998 presentation. As a result, cost of contract
revenues and general and administrative expenses for the prior
year have been restated to reflect these new classifications.
F-11
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 4 - CONTRACT AND RETAINAGE RECEIVABLE
At June 30, 1998, contract and retainage receivable consist of
the following:
<TABLE>
<CAPTION>
Total Current Non-Current
----------- ----------- -----------
<S> <C> <C> <C>
Contracts in progress $ 1,619,262 $ 1,619,262 $ --
Completed contracts 13,481,848 2,637,093 10,844,755
Retainage 250,417 250,417 --
----------- ----------- -----------
15,351,527 4,506,772 10,844,755
Less: allowance for doubtful accounts 4,684,082 2,239,908 2,444,174
----------- ----------- -----------
$10,667,445 $ 2,266,864 $ 8,400,581
=========== =========== ===========
</TABLE>
The allowance for doubtful accounts was increased to
$4,684,082 at June 30, 1998 from $2,287,000 as of June 30,
1997 to reflect the filing of mechanic's liens on certain jobs
as well as a review of the aging of the accounts receivable
and the settlement of certain receivables. No further
adjustments to the allowance have been deemed necessary by
management as of June 30, 1998. As of June 30, 1998, the
Company classified a portion of its contracts receivables as
non-current since it cannot reasonably estimate the timing
that such receivables will be collected. Lastly, the Company
has pledged approximately $1,702,584 of its contract and
retainage receivables in connection with unpaid union dues and
professional fees (see Note 11B).
NOTE 5 - CONTRACTS IN PROGRESS
At June 30, 1998, costs and estimated earnings in excess of
billings and billings in excess of costs and estimated
earnings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Costs incurred on uncompleted contracts $ 8,222,784
Profits earned to date 2,519,548
--------------
10,742,332
Less: billings to date 10,442,400
--------------
$ 299,932
==============
</TABLE>
<PAGE>
Included in the accompanying balance sheet under the following
captions at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 321,854
Billings in excess of costs and estimated
earnings on uncompleted contracts (21,922)
--------------
$ 299,932
==============
</TABLE>
F-12
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 6 - BACKLOG
The following schedule summarizes changes in backlog on
contracts during the year ended June 30, 1998. 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 which
work has not yet begun.
<TABLE>
<CAPTION>
<S> <C>
Backlog balance at July 1, 1997 $ 6,088,048
Change orders to contracts in progress at July 1, 1997 11,219,030
New contracts during the year ended June 30, 1998 806,914
--------------
18,113,992
Less: contract revenue earned during the year ended June 30, 1998 17,062,873
--------------
Backlog balance at June 30, 1998 $ 1,051,119
==============
</TABLE>
NOTE 7 - TRANSPORTATION, OFFICE EQUIPMENT AND FURNITURE
Transportation, office equipment and furniture is comprised of
the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Transportation equipment $ 183,317
Office equipment 20,431
Furniture & fixtures 18,311
--------------
222,059
Less: accumulated depreciation 14,975
--------------
$ 207,084
==============
</TABLE>
As of June 30, 1998, trucks amounting to $183,317 which are
located in Chad (see Note 1) have not been depreciated since
operations in Chad did not commence until October, 1998.
Depreciation expense for the years ended June 30, 1998 and
1997 amounted to $6,733 and $4,902 respectively.
<PAGE>
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 1998:
Wages and related union benefits $ 181,363
Professional fees 125,000
Insurance 1,500,254
Interest 109,544
Other 20,079
--------------
$ 1,936,240
==============
<PAGE>
NOTE 9 - INCOME TAXES
The Company has adopted SFAS No. 109. Income taxes are
provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus
F-13
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
deferred taxes related primarily to differences between the
financial and tax basis of assets and liabilities. The
deferred tax assets and liabilities represent the future tax
return consequences of these temporary differences, which will
either be taxable or deductible when the assets and
liabilities are recovered or settled.
For income tax purposes, the Company reports using a year end
of December 31. The Company and its subsidiaries file tax
returns separately for federal and state purposes.
The reconciliation of income tax computed at the federal
statutory tax rate to income tax expense is as follows for the
years ended June 30:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Tax computed at the federal statutory income tax rate $ -- $(11,379)
Increase (reductions) resulting from:
state and local taxes, net of federal benefit -- (4,331)
Tax expense on subsidiary income, deferred income
tax benefit, and other miscellaneous permanent
differences -- 158,585
Change in income tax accrual (355,663) --
Change in deferred tax asset valuation allowance 378,800 --
-------------- -------------
Income tax expense $ 23,137 $ 142,875
============== =============
</TABLE>
The reconciliation of income taxes computed at the federal
statutory tax rate to income taxes at the effective income tax
rate in the statements of operations are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
Federal statutory income tax rate 34% 34%
State and local income taxes, net
of federal benefit 11% 11%
Benefit of graduated tax rates (10%) (10%)
Benefit of change in income tax
accrual and valuation allowance (35%) --
---- ---
Effective income tax rate NIL 35%
==== ===
</TABLE>
<PAGE>
The tax effects of significant items comprising the Company's
net current deferred tax assets as of June 30, 1998 are as
follows:
Allowance for doubtful accounts $ 784,000
Section 144 stock (IRC Section 83) 134,000
------------
918,000
Less: Valuation allowance (918,000)
------------
Deferred current tax asset $ -
=============
The tax effects of significant items comprising the Company's
net non-current deferred tax assets as of June 30, 1998 are as
follows:
Allowance for doubtful accounts $ 855,000
Net operating loss carryforwards 750,000
-------------
1,605,000
Less valuation allowance (1,605,000)
-------------
Deferred non-current tax asset $ -
=============
The Company has recorded a deferred tax asset with an
estimated valuation allowance of 100% as of June 30, 1998
since the Company cannot determine that it is "more likely
than not" that such asset will be realized.
At June 30, 1998, the Company had combined net operating loss
carryforwards of approximately $2,142,000 which expire at
various dates through 2013.
A portion of the combined net operating loss carryforwards are
subject to provisions of the Internal Revenue Code, Section
382, which limits the use of net operating loss carryforwards
when changes in ownership of more than 50% occur during a
three year testing period.
NOTE 10 - CONVERTIBLE DEBENTURES
In January 1998, the Company raised a net of $393,000, after
commission and expenses, in connection with a Private
Placement to fund the Chadian operation, from the sale of
$450,000 of Convertible Debentures (the "Debentures") and
Warrants. The Debentures and Warrants, as well as the Common
Stock underlying same, were issued in a private transaction,
exempt from the registration requirements of the Securities
<PAGE>
Act of 1933, as amended (the "Act"). Such Debentures are due
January 30, 2000 with interest accruing at 8% per annum. The
Debentures, plus interest accrued thereon, are convertible
into shares of Common Stock at the lesser of (i) 100% of the 5
day average closing bid price, as reported by Bloomberg, LP,
for the 5 trading days immediately preceding the closing date
(February 3, 1998) of the private placement (the "Private
Placement" or "Private
F-14
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Placement Offering") ($.80); or (ii) 75% of the 5-day average
closing bid price, as reported by Bloomberg, LP, for the 5
trading days immediately preceding the date(s) of conversion
of all or a portion of the Debentures.
Pursuant to the terms of the Private Placement, the Company
must file a Registration Statement covering the shares of
Common Stock to be issued upon conversion of the Debentures.
Such conversion cannot occur earlier than 60 days from the
closing date. If the Registration Statement is not declared
effective within 90 days following the closing of the Private
Placement, then as liquidated damages, the discount set forth
in the Subscription Agreement and Debentures will increase by
2.5% per 30 day period or portion thereof pro rata until the
Registration Statement is declared effective, or
alternatively, if the Registration Statement has not been
declared effective within said 90-day period, then at the
purchaser's sole option, which option must be exercised by
written notice to the Company, the Debentures shall convert to
having been issued pursuant to Regulation S for qualifying
Investors, with immediate availability to convert the
Debentures.
In addition to Debentures, the investors received Warrants to
purchase an aggregate of 25,000 shares of the Company's Common
Stock: 12,500 shares exercisable at $4.50 per share and 12,500
shares exercisable at $5.64 per share. The funds have being
loaned to Worldwide to fund the Chadian operation.
As a result of the beneficial conversion feature, the Company
recorded interest of approximately $150,000 based on the
difference between the value of the shares to be issued upon
conversion assuming the most beneficial conversion feature and
the value of the convertible debentures amounting to $450,000.
Such amount is amortized over the period between the date of
issuance and the first eligible date of conversion. For the
year ended June 30, 1998, the Company recorded $150,000 of the
beneficial conversion feature as interest expense as a result
of the Company's inability to complete the filing of a
registration statement covering the underlying securities
prior to 90 days after the closing date, the first possible
conversion date. The recording of interest results in an
effective interest rate of 141%. Lastly, the Company
classified the convertible debenture as current since it was
unable to file the registration statement within 90 days and
accordingly such debenture became convertible into common
stock.
<PAGE>
NOTE 11 - LONG TERM DEBT
a) Line of credit
During August 1994, the Company secured a $250,000 credit line
with a bank at an interest rate of one and one half percent
(11/2%) above the prime rate. The security for the line of
credit was a certificate of deposit in the amount of $200,000
provided by NY. During April, 1998, such line of credit was
repaid and accordingly therewith, the certificate of deposit
provided as collateral was released by the bank.
b) Union dues payable
During December 1997, NY entered into an agreement with the
Iron Workers Local 40, 361 and 417 Joint Security Funds (the
"Union") in order to settle $1,750,000 of unpaid
F-15
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
union dues previously recorded as accounts payable. NY agreed
to pay $75,000 by January 1998 and at least $25,000 monthly
commencing March 1, 1998 with interest at 9.5% per annum. As
collateral, NY assigned its retainage receivable from a
project as well as $1,750,000 of its related mechanic's lien
on the project. Upon any funds being released or paid under
such mechanic's lien, the Union will have priority and receive
all funds until the debt is paid in full before NY may receive
any funds. NY will then receive credit for any payment
received by the Union related to the assigned portion of the
mechanic's lien received. The amount outstanding at June 30,
1998 is $1,575,000, In connection with such liability, the
Company has accrued $77,584 of interest as of June 30, 1998.
As of June 30, 1998, union dues payable matures as follows:
Year ending
June 30,
-----------
1999 $ 300,000
2000 300,000
2001 300,000
2002 300,000
2003 300,000
Thereafter 75,000
----------
$1,575,000
==========
NOTE 12 - MINORITY INTEREST
As of June 30, 1998, the minority interest balance amounting
to $2,191,802 is a result of the stock transactions and the
proportionate share of income and losses attributable to the
minority stockholders of NY.
NOTE 13 - STOCKHOLDERS' EQUITY
a) Issuance of common shares
(i) On June 16, 1995 pursuant to Form S-8 Registration
Statement filed with Securities and Exchange Commission
the Company registered and issued 125,000 shares to a
broker-dealer as consideration for a two year
consulting agreement. During August 1996, the Board of
Directors amended the consulting agreement and issued
an additional 62,500 shares to such broker-dealer upon
Nasdaq listing. Such shares were valued based on the
average closing bid price on the date of issue with a
10% discount in order to reflect their fair value as a
result of their restrictions. For the years ended June
30, 1998 and 1997, the Company recorded consulting
expense related to this matter amounting to
$135,000 and $112,500, respectively.
<PAGE>
(ii) On August 15, 1995, the Company issued 37,500 shares of
common stock to its President pursuant to the terms of
the Company's Incentive Plan. Such shares were
F-16
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
issued as compensation for the President's efforts with
the Company and NY in the consummation of NY's initial
public offering on August 14, 1995. Of the total 37,500
shares issued to the President, 12,500 shares
immediately vested without restrictions and the
remaining 25,000 shares vested pursuant to the
restricted periods, whereby 12,500 shares vested on
each August 15, 1996 and 1997. Such shares were valued
based on the average closing bid price on the date of
issue with a 10% discount in order to reflect their
fair value as a result of their restrictions. For the
years ended June 30, 1998 and 1997, compensation
expense related to such issuance amounted to $4,950 and
$67,650, respectively.
(iii) On May 13, 1996, an unrelated party loaned the
Company's President $300,000 pursuant to a memorandum
of understanding. The loan beared interest at 1% above
prime, and it was due 90 days from receipt of funds.
Simultaneously therewith, the Company's President
loaned the Company the $300,000. Upon the Company being
listed on NASDAQ (July 25, 1996), the Company
liquidated such loan by issuing 100,000 shares to such
unrelated party pursuant to regulation "S" under the
Securities Act of 1933, as amended (the "Act"). The
shares issued as consideration for the repayment of
such loan were valued at the average closing bid price
on the date the transaction was commenced. Accordingly,
the Company recorded a financing expense amounting to
$100,000 for the year ended June 30, 1997 resulting in
a effective interest rate of approximately 100%.
(iv) During December 1996, the Company issued an aggregate
of 28,654 common shares to certain employees pursuant
to its Incentive Plan. In connection therewith, the
Company recorded compensation expense amounting to
$193,415 which is based on the average closing bid
price of $7.50 per share for the month of December 1996
with a 10% discount in order to reflect their fair
value as a result of their restrictions.
(v) During February 1997, pursuant to a Form S-8
Registration Statement filed with the Securities and
Exchange Commission, the Company registered a total of
172,404 common shares, of which, 143,750 shares
underlie stock options pursuant to the Company's
Incentive Plan. The options are exercisable at various
prices ranging from $7.00 each to $7.70 each. During
the year ended June 30, 1997, the Company's president
exercised the option to purchase 31,250 common shares
at $7.70 each by issuing to the Company a promissory
note in the amount of $240,625. As of June 30, 1998 and
1997, the note has not been paid and has been
classified as a reduction of stockholder's equity.
<PAGE>
(vi) During June 1997, the Company issued 87,500 shares of
common stock to R.S.J.J. Realty Corp., an entity wholly
owned by the Company's president, in exchange for
270,000 shares of NY common stock as consideration for
forgiveness of NY's rent payable to RSJJ. The shares
issued to RSJJ in exchange of NY's shares have been
valued based upon the balance of the rent payable of
$480,000.
(vii) During December 1997, the Company authorized the
issuance of 62,500 shares of its common stock during
the third quarter of its fiscal year pursuant to the
Incentive Plan. Of the 62,500 shares, all of which were
issued in March 1998, 37,500 were issued to the
Company's President, and 6,250 shares each were issued
to each of the
F-17
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Company's Secretary and Treasurer. Half of these shares
vested on June 1, 1998, and half vest on January 1,
1999. The remaining 12,500 shares were issued to
consultants of the Company. The Company also authorized
and filed a Post-Effective Amendment to the Form S-8
Registration Statement initially filed in February 1997
to register the resale of the aforesaid shares and to
reflect the increase (to 2,000,000) in the number of
shares which may be issued under the plan. In
connection with the issuance of common shares, the
Company recorded deferred compensation and consulting
expense amounting to $207,000 which is based on the
average closing bid price of $3.68 per share for the
third quarter of the Company's fiscal year, with a 10%
discount in order to reflect their fair value as a
result of their restrictions upon issuance. The expense
associated with the shares which do not vest
immediately have been recorded as deferred compensation
and are being amortized over the vesting period.
(viii) During February 1998, NY agreed to issue 106,667 shares
of its common stock to the Company as consideration to
the Company for issuing 48,000 shares of its own common
stock to RSJJ in consideration for payment in full of
the rent due by NY to RSJJ for the period from January
1, 1998 through December 31, 1998. The value of the
shares issued by the Company is recorded at the fair
value of the rent otherwise due under the lease which
amounted to $240,000.
b) Issuance of Subsidiary Common Shares
(i) During February 1997, pursuant to a Form S-8
Registration Statement filed with the Securities and
Exchange Commission, NY registered 125,000 common
shares underlying options of NY's President pursuant
to NY's Senior Management Incentive Plan ("NY's
Incentive Plan"). The options were granted December
2, 1996 and were exercisable at $1.10 per share (110%
of the bid price of $1.00 per share on November 27,
1996) and expire on November 27, 2001. These options
were exercised on March 25, 1997 resulting in NY
issuing 125,000 shares of common stock.
(ii) During June 1997, pursuant to an agreement with RSJJ
to settle $480,000 in accrued rent, NY issued 270,000
shares of its common stock to the Company, for the
cancellation of the debt owed to RSJJ. The Company,
in turn, issued 50,000 shares of its common stock to
its President and 37,500 shares of common stock to
RSJJ. RSJJ then transferred all of such common shares
to its mortgagor, which agreed to accept said shares
as payment of RSJJ's outstanding mortgage. These
shares have been valued at $480,000 which represents
the amount of unpaid rent as of December 31, 1997.
<PAGE>
(iii) During December 1997, NY authorized the issuance, in
its third quarter, of 290,000 shares of Common Stock,
pursuant to NY's Incentive Plan. Of the 290,000
shares issued in March 1998 to management, 150,000
were issued to NY's President, 70,000 were issued to
NY's Secretary, and 70,000 were issued to NY's
Treasurer. Half of these shares vested on June 1,
1998, and half vest on January 1, 1999. NY also
authorized the filing of a Post-Effective Amendment
to the Form S-8 Registration Statement initially
filed in February 1997 to register for resale the
290,000 common shares issued pursuant to NY's
Incentive Plan. In addition to
F-18
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
the foregoing, NY also authorized the issuance of
50,000 common shares to certain of its employees and
consultants. In connection with these issuances, NY
recorded deferred compensation and consulting
expenses amounting to approximately $459,000 which is
based on the average closing bid price of $1.50 per
share for the month of March 1998, with a 10%
discount in order to reflect their fair value as a
result of their restrictions at time of issuance. The
above shares which do not vest immediately and were
recorded as deferred compensation, are being
amortized over the vesting period. For the year ended
June 30, 1998, compensation and consulting expense
amounted to $291,215.
(iv) During February 1998, NY issued 106,667 shares of its
common stock to the Company as consideration to the
Company for issuing 48,000 shares of its own common
stock to RSJJ in consideration for payment in full of
the rent due by NY to RSJJ for the period from
January 1, 1998 through December 31, 1998. The value
of the shares issued by NY is recorded at the value
of the rent otherwise due under the lease which
amounted to $240,000.
NOTE 14 - COMMITMENT AND CONTINGENCIES
a) Disclosure of significant estimates - revenue recognition
As outlined in Note 3 the Company's construction revenue is
recognized on the percentage of completion basis.
Consequently, construction revenue and gross margin for each
reporting period is determined on a contract by contract basis
by reference to estimates by the Company's management and
engineers of expected costs to be incurred to complete each
project. These estimates include provisions for known and
anticipated cost overruns, if any exist or are expected to
occur. These estimated may be subject to revision in the
normal course of business.
b) Leases
NY leases its administrative offices pursuant to a signed
lease agreement with RSJJ, an entity wholly-owned by the
Company's President. Such lease requires monthly payments of
$20,000 and expires on December 31, 1998. As of June 30, 1998,
under such lease agreement, NY is required to make future
minimum lease payments amounting to $120,000 through December
31, 1998, however, as a result of the transaction described in
Note 13A(viii) NY has prepaid its rent in full through
December 31, 1998. Subsequent to December 31, 1998, NY plans
on leasing such facility on a month to month basis from RSJJ
for a reduced monthly amount to be negotiated.
<PAGE>
NY also leased storage space pursuant to a month to month
agreement requiring monthly payments of $3,500. As of June 30,
1998, NY settled unpaid rent for $10,000 and vacated such
premises.
Included in selling, general, and administrative expenses is
rent expense which amounted to $240,000 and $240,000 for the
years ended June 30, 1998 and 1997, respectively. The rent
associated with the storage space which amounted to
approximately $31,000 and $42,000 respectively for the years
ended June 30, 1998 and 1997 has been included in cost of
revenue.
F-19
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
c) Significant customers and vendors
For the years ended June 30, 1998 and 1997, the Company had
three unrelated customers respectively, which accounted for
approximately 61%, 14%, 17%, and 53%, 19%, 15%, respectively,
of total revenues. As of June 30, 1998 the Company had two
unrelated customers which accounted for approximately 65% and
11% of total net contract and retainage receivables.
d) Seasonality
NY operates in an industry which may be seasonal, generally
due to inclement weather occurring during the winter months.
Accordingly, NY, may experience a seasonal pattern in its
operating results with lower revenue in the third quarter of
each fiscal year. Quarterly results may also be affected by
the timing of bid solicitations by governmental authorities or
the stage of completion of major projects.
e) Bonding requirements
NY is required to provide bid and/or performance bonds in
connection with governmental construction projects. There can
be no assurance that NY will be able to obtain future bonding
as a result of its financial condition.
f) Mechanics' liens
As of June 30, 1998, various actions to foreclose upon
mechanics liens filed during the last two fiscal years were
commenced. Such actions amounted to approximately $15,544,324.
The mechanic's liens have been filed in relation to work
completed and billed. The liens filed also include claims,
interest, and other costs not included in revenue or contracts
and retainage receivables. The Company elected not to
recognize any portion of the additional revenue associated
which any contract claims until the amounts recovered can be
accurately estimated. Based upon the assessment of management,
the Company has recorded an allowance for doubtful accounts to
adjust its receivable to their estimated realizable amount.
g) Payroll taxes
As of June 30, 1998, the Company owes approximately $2,616,742
of payroll taxes and related estimated penalties and interest.
As of June 30, 1998 and subsequent thereto, federal and state
tax liens have been filed against the Company in connection
with unpaid payroll taxes. Although as of June 30, 1998, the
Company has not entered into any formal repayment agreements
with the respective tax authorities, it has been attempting to
make monthly payments as funds become available.
F-20
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
h) Legal proceedings
i) NY is a defendant in a proposed settlement regarding the
State Insurance Fund for unpaid worker's compensation
insurance for the period from April 29, 1993 to December
31, 1994. As of December 4, 1998, negotiations for a
final settlement are in their final stages. The Company
as of June 30, 1998, has accrued approximately $300,000
based on the expected settlement amount, which has been
included in accrued expenses.
ii) In connection with various mechanic liens filed as
discussed in note 14(f), certain actions were
commenced against the Company during the fiscal year
ended June 30, 1998 as follows:
a) A customer of NY is seeking judgement in the amount
of $500,000,000 for violation of contract,
interference of contract and punitive damages. The
Company has filed a mechanic lien for $13,640,747
relating to work performed at the project. The
Company is in the process of pretrial discovery
which is scheduled to be completed by June, 1999.
The Company intends to vigorously defend against
any claims as well as vigorously prosecute its
claims against the owner of the project.
b) General contractor commenced an action to recover a
total of $6,326,000 which includes cost to complete
the job, and delay and other damages. The Company
has commenced an action for extras and retainage
due and filed a mechanic lien in the amount of
$1,488,775 in addition for damages amounting to
$759,500 for contract interference. The Company
intends to vigorously defend against any claims as
well as vigorously prosecute its claims against the
general contractor.
c) While the ultimate outcome of these matters cannot
be determined presently with certainty, management
is of the opinion that the outcome will not have a
material adverse effect on the Company's
consolidated financial position.
iii) During August 1998, a majority of the Company's, it
subsidiaries', as well as its President's and
Chairman's affiliated entities books and records were
seized in connection with a Grand Jury Subpoena from
the United States District Court for the Eastern
District of New York. Grand Jury investigations can
result in a range of actions from a finding of no
true bill to indictments and prosecutions for any
number of federal offenses. Criminal prosecutions can
<PAGE>
result in a wide range of penalties, including
probation, imprisonment, fines, restitution and
forfeiture of assets depending upon the specific type
and severity of the offense. As Grand Jury
investigations are secret, legal counsel is not at
liberty to comment upon the investigation.
Additionally, since the investigation is in its
initial stages, legal counsel cannot comment
regarding any possible liability of the Company.
Accordingly, as of June 30, 1998, no accrual for any
potential loss contingency has been made.
F-21
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
iv) The Company is a party to various claims and legal
proceedings incidental to its business. In
management's opinion, the outcome of these claims and
proceedings will not have a material adverse effect
on the financial statements of the Company taken as a
whole.
i) Claims
The Company elected not to recognize any portion of the
revenue associated with any contract claims until the
amounts recoverable can be accurately estimated. Claims
are amounts in excess of the agreed contract price
which the Company seeks to collect for customer caused
delays, errors in specifications and designs, contract
terminations, and change orders in dispute or
unapproved.
j) Year 2000 Compliance
The Company has reviewed its computer software for Year 2000
compliance and does not anticipate any adverse effects on its
financial condition, liquidity or results of operations.
k) Foreign Assets
Worldwide's operations, as well as its transportation
equipment amounting to $183,317, are located in Chad, a
country located in Northern Central Africa, accordingly, the
Company is subject to certain risks associated with foreign
currency and political changes.
l) Environmental
The Company is subject to rules and regulations from federal
and state agencies in connection with safety rules and
environmental safety. The failure to comply with such rules
and regulations may have an adverse effect on the Company's
operations. The Company believes that it is in substantial
compliance with all applicable rules and regulations.
NOTE 15 - RELATED PARTY TRANSACTIONS
a) Due from related parties
As of June 30, 1998, the Company has advanced funds to various
affiliates. These advances are non-interest bearing and are
due on demand. As of June 30, 1998 such advances amounted to
$103,050.
b) Due to related parties
As of June 30, 1998, the total due to officers and affiliates,
amounting to $215,932, represents advances made by the
President of the Company and affiliated entities which bear no
interest and are due on demand.
F-22
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
c) Rent expense
Included in general and administrative expenses is rent
expense paid in cash and stock by NY pursuant to a signed
lease agreement with RSJJ a company owned by the Company's
President. The lease expires December 31, 1998. Rent expensed
for both years ended June 30, 1998 and 1997 amounted to
$240,000.
(See Note 14b for additional information)
d) Purchase of material and labor
For the years ended June 30, 1998 and 1997 NY purchased from
Crown Crane, Inc. approximately $154,856 and $214,000,
respectively, for rental of machinery and equipment in
connection with its steel erection services. Crown Crane, Inc.
is an entity which is 50% owned by the Company's President. As
of June 30, 1998, $107,911 is owed to Crown Crane, Inc. which
has been included in due to related parties.
During the year ended June 30, 1998 and 1997, the Company paid
$44,000 and $35,000 respectively to Atlas Gem Leasing Inc.
("AGLI") for certain machinery and equipment necessary to
perform steel erection services. AGLI is an entity wholly
owned by the Company's President.
e) Employment agreement
On April 4, 1995 NY entered into an employment agreement with
its President and Director for a term of approximately three
(3) years which expired on June 30, 1998. NY and the Company's
President formally elected to extend the agreement for an
additional three years until June 30, 2001 under the same
terms. The employment agreement provides for an annual salary
of $300,000 with a 10% annual escalation subject to adjustment
by the Board of Directors. In addition, the President and
Director was granted options to purchase 6,250 shares of NY's
common stock, all of which options are vested and expire in
April 2000. The exercise price of the options are equal to
110% of the stock price in the initial public offering. The
foregoing options are intended to qualify as incentive stock
options. In addition, the President receives an annual
non-accountable expense allowance of $50,000 and NY shall pay
premiums on a $3,500,000 life insurance policy for the benefit
of individuals designated by the President, with an estimated
annual premium of $80,000.
NOTE 16 - EARNINGS PER SHARE
As of June 30, 1998, the Company adopted FAS Statement No.
128, "Earnings per Share". Accordingly, diluted earnings per
common share for all prior periods have been restated.
F-23
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Basic earnings per common share are based on the weighted
average number of common shares outstanding in each year and
after preferred stock dividend requirements. Diluted earnings
per common share assume that any dilutive convertible
debentures and convertible preferred shares outstanding at the
beginning of each year were converted at those dates, with
related interest, preferred stock dividend requirements and
outstanding common shares adjusted accordingly. It also
assumes that outstanding common shares were increased by
shares issuable upon exercise of those stock options for which
market price exceeds exercise price, less shares which could
have been purchased by the Company with related proceeds.
For the years ended June 30, 1998 and 1997, earnings per share
under SFAS 128 was the same as if it were computed in
accordance with the prior rule. The computation of basic and
diluted earnings per common share for "loss before
discontinued operations" is as follows:
<TABLE>
<CAPTION>
For the year
ended June 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net (loss) $(2,343,482) $ (510,799)
Denominator:
Computation of basic earning per share ("EPS"):
Weighted average common shares outstanding 1,906,995 1,726,619
----------- -----------
Basic EPS $ (1.23) $ (.30)
=========== ===========
Computation of diluted EPS:
Weighted average common share outstanding 1,906,995 1,726,619
Potentially dilutive shares:
Weighted average shares issuable under options (a) (b) (a) (b)
Weighted average shares outstanding & available 1,906,995 1,726,619
----------- -----------
Diluted EPS $ (1.23) $ (.30)
=========== ===========
</TABLE>
<PAGE>
(a) Shares issuable under options, were not included in the
computation of diluted EPS since the options' exercise
prices were greater than the average market price of
the common shares.
(b) In accordance with the provisions of SFAS No. 128, no
potential dilutive shares have been included in the
computation of diluted EPS as the Company has a loss
from continuing operations.
NOTE 17 - STOCK COMPENSATION PLANS
i) During December 1994, the Company adopted its Incentive
Plan. The Incentive Plan was adopted in order to
attract and retain qualified personnel, whose
performance
F-24
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
is expected to have a substantial impact on the
Company's long term profit and growth potential. The
Incentive Plan provides for an issuance of up to
2,000,000 shares of the Company's common stock.
The status of the Company's stock option plan is
summarized for the years ended June 30. 1998 and 1997:
<TABLE>
<CAPTION>
Number of Exercise
options price
-------- ------------
<S> <C> <C>
Outstanding at June 30, 1996 -- $ --
Granted 143,750 7 to 7.70
Exercised (31,250) 7.70
Cancelled -- --
-------- ------------
Outstanding at June 30, 1997 112,500 7 to 7.70
Granted -- --
Exercised -- --
Cancelled -- --
-------- ------------
Outstanding at June 30, 1998 112,500 7 to 7.70
======== ============
</TABLE>
ii) During December 1994, NY adopted the NY's Incentive
Plan. NY's Incentive Plan was adopted in order to
attract and retain qualified personnel, whose
performance is expected to have a substantial impact on
NY's long term profit and growth potential. NY's
Incentive Plan provides for an issuance of up to
1,000,000 shares of its common stock.
The status of NY's stock option plan is summarized
below for the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Number of Exercise
options price
<S> <C> <C>
Outstanding at June 30, 1996 $ 25,000 $ 5.50
Granted 125,000 1.10
Exercised (125,000) 1.10
Cancelled -- --
--------- --------
Outstanding at June 30, 1997 25,000 5.50
Granted -- --
Exercised -- --
Cancelled -- --
--------- --------
Outstanding at June 30, 1998 $ 25,000 $ 5.50
========= ========
</TABLE>
<PAGE>
For companies that choose to continue applying APB No. 25, SFAS
No. 123 requires certain proforma disclosures as if the fair
value method had been utilized. Had compensation cost for the
Company's stock-based compensation plan been determined based on
the fair value on the grant dates for award under the plan
consistent with the method of SFAS No. 123, the Company's net
loss per share would have been reduced to the pro forma amounts
F-25
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
indicated below utilizing the Black-Scholes stock option model,
a discount rate of 8.5%, a volatility of 100%, no expected
dividend yield and an expected remaining life of three years.
<TABLE>
<CAPTION>
For the year
ended June 30,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net loss - as reported $ (2,343,482) $ (875,238)
============= =============
- pro-forma $ (2,343,482) $ (1,660,738)
============= =============
Basic EPS - as reported $ (1.23) $ (.51)
============= =============
- pro-forma $ (1.23) $ (.96)
============= =============
</TABLE>
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that do not
have vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the Company's stock options have
characteristics significantly different from those of traded
options and because changes in the subjective input
assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
stock options.
NOTE 18 - DISCONTINUED OPERATIONS
a) Agreement for Deed in Lieu of Foreclosure
On March 10, 1997, One Carnegie executed an agreement with its
mortgage holder, whereby the property secured by the mortgage
and owned by One Carnegie and rented to MD, would be
transferred to the mortgage holder. As additional
consideration, One Carnegie executed a promissory note in the
amount of $150,000 naming the mortgage holder as payee. The
operations of One Carnegie have not been reported previously
as a separate segment as all of One Carnegie's revenue was
derived from MD; however, its assets, liabilities, and results
of operations are clearly distinguishable from the other
assets, liabilities, and results of operations of the Company,
and as such, the property and related accumulated
depreciation, accrued interest, and mortgage payable have been
<PAGE>
recorded as assets and liabilities of discontinued operations
during its June 30, 1997 year end. The transaction was
completed in August 1997, resulting in a loss on disposal of
$83,622. Expenses of One Carnegie included depreciation,
interest, and real estate taxes. All income is eliminated in
consolidation, resulting in losses from discontinued
operations prior to disposal.
F-26
<PAGE>
USABG CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 19 - SUBSEQUENT EVENTS
One May 12, 1998, the Company executed a letter of intent to
sell all of its stock in NY to Amalgamated Resources
Management S.A. ("ARM") for an aggregate of $10,220,000. This
sale was to occur simultaneously with the closing of NY's
acquisition of 51% of the common stock of First Anglo-Swiss
Holdings, Inc. ("FAS") in exchange for 510,000 shares of NY's
common stock. The intent of such transaction was mutually
terminated during August 1998.
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 184,709
<SECURITIES> 0
<RECEIVABLES> 15,351,527
<ALLOWANCES> 4,684,082
<INVENTORY> 0
<CURRENT-ASSETS> 2,961,198
<PP&E> 222,059
<DEPRECIATION> 14,975
<TOTAL-ASSETS> 11,569,963
<CURRENT-LIABILITIES> 7,288,542
<BONDS> 0
0
0
<COMMON> 1,961
<OTHER-SE> 812,658
<TOTAL-LIABILITY-AND-EQUITY> 11,569,963
<SALES> 17,062,873
<TOTAL-REVENUES> 17,062,873
<CGS> 13,436,430
<TOTAL-COSTS> 13,436,430
<OTHER-EXPENSES> 3,718,482
<LOSS-PROVISION> 2,403,815
<INTEREST-EXPENSE> 505,988
<INCOME-PRETAX> (2,066,619)
<INCOME-TAX> 23,137
<INCOME-CONTINUING> (2,495,854)
<DISCONTINUED> 0
<EXTRAORDINARY> (300,000)
<CHANGES> 0
<NET-INCOME> (2,343,482)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
