UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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.
- --------------------------------------------------------------------------------
(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)
(718) 699-0100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Common stock, par value $.001 per share: 1,961,037 shares outstanding as of
January 20, 1999.
<PAGE>
USABG CORP.
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1998
(Unaudited) and June 30, 1998 1-2
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended September 30, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity (Unaudited)
for the Three Months Ended September 30, 1998 4
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended September 30, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18-25
PART 2 - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 26
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5 - OTHER INFORMATION 26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1998 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 210,678 $ 184,709
Contracts and retainage receivable, net 3,116,442 2,266,864
Costs and estimated earnings in excess of billings
on uncompleted contracts 51,877 321,854
Due from related parties -- 103,050
Other current assets 107,002 84,721
------------ ------------
Total current assets 3,485,999 2,961,198
------------ ------------
Contracts and retainage receivable, net-non-current portion 8,400,581 8,400,581
Transportation and office equipment, net 266,488 207,084
Other assets 1,350 1,100
------------ ------------
Total assets $ 12,154,418 $ 11,569,963
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including cash overdrafts of $122
and $96,867, respectively $ 1,443,686 $ 1,430,990
Accrued expenses 1,854,096 1,936,240
Payroll taxes payable 2,809,794 2,616,742
Income taxes payable 224,716 166,716
Convertible debentures 450,000 450,000
Current portion of long-term debt 300,000 300,000
Due to related parties 418,102 215,932
Billings in excess of costs and estimated earnings
on uncompleted contracts 59,980 21,922
Liabilities of discontinued operations 150,000 150,000
------------ ------------
Total current liabilities 7,710,374 7,288,542
------------ ------------
Long-term debt, net of current portion 1,200,000 1,275,000
------------ ------------
Total Liabilities 8,910,374 8,563,542
------------ ------------
Minority interest 2,263,302 2,191,802
------------ ------------
Commitments and contingencies (Note 7) -- --
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
(Unaudited)
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <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 1,961
Additional paid-in capital 4,865,447 4,865,447
Accumulated deficit (3,383,036) (3,430,909)
------------ ------------
Subtotal stockholders' equity 1,484,372 1,436,499
------------ ------------
Less: stock subscription receivable and other stockholders' deductions (503,630) (621,880)
------------ ------------
Total stockholders' equity 980,742 814,619
------------ ------------
Total liabilities and stockholders' equity $ 12,154,418 $ 11,569,963
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited)
-2-
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 2,168,383 $ 8,918,385
----------- -----------
Costs and expenses:
Cost of contract revenues 1,347,424 7,536,092
General and administrative expenses 607,616 678,487
----------- -----------
Total costs and expenses 1,955,040 8,214,579
----------- -----------
Income from operations before other income (expense),
minority interest and provision for income taxes 213,343 703,806
----------- -----------
Other income (expense):
Interest expense (36,000) (3,900)
Interest income 30 2,948
----------- -----------
Total other income (expenses) (35,970) (952)
----------- -----------
Income from operations before minority interest
and provision for income taxes 177,373 702,854
Minority interest in net income (71,500) (264,380))
----------- -----------
Income before provision for income tax expense 105,873 438,474
Provision for income tax expense 58,000 127,158
----------- -----------
Net income $ 47,873 $ 311,316
=========== ===========
Net loss per common equivalent share:
Basic:
Net income $ .02 $ .17
=========== ===========
Diluted:
Net income $ .02 $ .17
=========== ===========
Weighted average number of common shares outstanding 1,961,037 1,850,537
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
-3-
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Common
stock
Additional Total
--------------------------- paid-in Accumulated Other Stockholders'
Shares Amount capital deficit deductions equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1998 1,961,037 $ 1,961 $ 4,865,447 $(3,430,909) $ (621,880) $ 814,619
Amortization of prepaid rent -- -- -- -- 60,000 60,000
Amortization of deferred expenses in
connection with issuances of common
stock -- -- -- -- 58,250 58,250
Net income for the three months ended
September 30, 1998 -- -- -- 47,873 -- 47,873
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1998 1,961,037 $ 1,961 $ 4,865,447 $(3,383,036) $ (503,630) $ 980,742
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited)
-4-
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ 47,873 $ 311,316
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Depreciation and amortization -- 24,400
Amortization of deferred compensation & consulting 58,250 --
Bad debt recovery -- (28,000)
Amortization of prepaid rent and interest 60,000 --
Deferred income tax expense -- 700
Minority interest in net income (loss) 71,500 264,380
Decrease (increase) in:
Contracts and retainage receivable (849,578) (2,311,003)
Other current assets (22,280) (6,501)
Costs and estimated earnings in excess of
billing on uncompleted contracts 269,977 176,201
Other assets (250) --
Increase (decrease) in:
Accounts payable 12,695 324,130
Accrued expenses (82,144) 509,478
Payroll taxes payable 193,052 717,009
Billings in excess of costs and estimated earnings
on uncompleted contracts 38,058 (12,471)
Income taxes payable 58,000 126,458
----------- -----------
Net cash (used for) provided by operating activities (144,847) 96,097
----------- -----------
Investing activities:
Transportation and office equipment (59,404) (3,823)
Increase in restricted cash -- (2,948)
----------- -----------
Net cash used for investing activities (59,404) (6,771)
----------- -----------
Financing activities:
Net borrowings from (repayments to) related parties 305,220 (185,983)
Repayments of note payable (75,000) --
----------- -----------
Net cash provided by (used for) financing activities 230,220 (185,983)
----------- -----------
Net increase (decrease) in cash 25,969 (96,657)
Cash, beginning 184,709 555,435
----------- -----------
Cash, ending $ 210,678 $ 458,778
=========== ===========
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
USABG CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
(continued)
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the nine months for:
Interest $ -- $ 3,900
=========== ===========
Taxes $ -- $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
-6-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 1 - GENERAL
The consolidated financial statements of USABG Corp. (the
"Company") at September 30, 1998 include the accounts of its
subsidiary, USA Bridge Construction of N.Y. Inc ("NY") (48.5%)
and its wholly-owned subsidiaries, Royal Steel Services, Inc.
(Royal"), Worldwide Construction Limited ("Worldwide"), One
Carnegie Court Associates, Ltd. ("One Carnegie") and USA
Bridge Construction Corp. (Maryland), ("MD"), after
elimination of all significant intercompany transactions and
accounts. The Company's President and Chairman of the Board
owns 7.5% of NYs common stock . By virtue of his ownership
interest 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.
Royal Steel was formed during November 1997, in order for the
Company to conduct work on its smaller base contracts.
Worldwide was formed by the Company 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 Port Shop S.A. ("PortShop"), both of which
companies were formed in N'djamena, Chad. Falcon was formed in
February 1998 to operate as a full service transportation,
forwarding and warehousing company. PortShop was formed in
February 1998 to stock a duty free store in Chad's sole
international airport. Worldwide operateS as the liaison
between PortShop and Falcon, and the governmental or private
entities with which PortShop and Falcon intend to contract in
Chad. As of September 30,1998, the only activity in Worldwide
was consulting AND travel expenses, and the purchase of trucks
by Falcon.
The accompanying unaudited consolidated financial statements
of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management
the consolidated interim financial statements include all
adjustments necessary in order to make the consolidated
financial statements not misleading. The results of operations
for the three months ended are not necessarily indicative of
the results to be expected for the full year. For further
information, refer to the Company's audited consolidated
financial statements and footnotes thereto at June 30, 1998,
included in the Company's Annual Report Form 10-KSB, filed
with the Securities and Exchange Commission.
-7-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements 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 after recording bad debt expense
amounting to $2,403,815 and $1,287,362 respectively in
connection with the settlement of certain contract receivable
and by increasing its allowance for bad debts as a result of
various mechanic's liens placed on completed contracts during
the years ended June 30, 1998 and 1997.
As of September 30, 1998 and June 30, 1998, the Company has a
working capital deficiency amounting to $4,224,375 and
$4,327,344 respectively as a result of classifying certain
contracts and retainages receivables as non-current since the
timing of their collectibility cannot be determined due to the
pending litigations in conjunction with pending change orders
on completed contracts.
As of September 30, 1998, the Company's backlog amounted to
approximately $900,000. 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 September 30, 1998 the Company owes
approximately $2,809,794 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.
The Company is aggressively trying 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 projects in order to collect
its receivables and liquidate its unpaid payroll taxes,
however, there can be no assurance that it will be able to
obtain additional contracts, settle its disputes, and
liquidate 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.
-8-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 3 - LONG TERM DEBT
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 liquidate originally $1,750,000 owed
relating to unpaid 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. 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 receive credit for any payment received by the
Union related to the assigned portion of the mechanic's lien.
The amount outstanding at September 30, 1998 is $1,500,000 of
which $300,000 has been classified as current. In connection
with such liability, the Company has accrued $113,584 of
interest as of September 30, 1998.
Union dues payable are due as follows:
Year ending
June 30,
--------
1999 $ 225,000
2000 300,000
2001 300,000
2002 300,000
2003 300,000
Thereafter 75,000
-------------
$ 1,500,000
=============
NOTE 4 - CONVERTIBLE DEBENTURE
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 a
$450,000 of convertible debentures (the "Debentures") and
Warrants. The Debentures and Warrants, as well as the Common
Stock underlying same, were issued in a private transaction,
exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Act"). Such Debentures are due
January 30, 2000 with interest accruing at 8% per annum. The
Debentures, plus interest accrued thereon, are convertible
into shares of Common Stock at the lesser of (i) 100% of the 5
day average closing bid price, as reported by Bloomberg, LP,
-9-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
for the 5 trading days immediately preceding the closing date
(February 3, 1998) of the private placement (the "Private
Placement" or "Private Placement Offering") ($.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.
NOTE 5 - MINORITY INTEREST
As of September 30, 1998 and June 30, 1998, the minority
interest balance amounting to $2,263,302 and $2,191,802,
respectively, is a result of the stock transaction of NY and
the proportionate share of income and losses attributable to
the minority stockholders from inception to September 30,1998
and June 30, 1998, respectively.
NOTE 6 - 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
-10-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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 Three months
ended September 30, 1998 and 1997, the Company recorded
consulting expense amounting to $22,500 and $ 33,750
respectively.
(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. For the
three months ended September 30, 1998 and 1997,
compensation expense amounted to $ -0- and $ 4,950
respectively.
(iii) 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. As of
June 30, 1998, the Company's president has exercised
the option to purchase 31,250 common shares at $7.70
each. The Company received a promissory note in the
amount of $240,625 as consideration for such common
shares which has been classified as a reduction of
stockholder's equity.
(iv) 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
-11-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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 500,000) 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 above
shares which do not vest immediately which have been
recorded as deferred compensation are being amortized
over the vesting period.
(v) 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 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 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
-12-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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 three months ended September
30,1998, compensation and consulting expense amounted
to $39,150.
(ii) 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 7 - COMMITMENTS AND CONTINGENCIES
a) Disclosure of significant estimates - revenue recognition
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
estimates 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, which lease requires monthly payments of
$20,000. This lease expires on December 31, 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
6b(iii) 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.
Included in general and administrative expenses is rent
expense which amounted to $60,000 for the three months ended
September 30, 1998 and 1997, respectively.
-13-
<PAGE>
USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
c) Significant customers and vendors
For the three months ended September 30, 1998 and 1997, the
Company had two unrelated customers respectively, which
accounted for approximately 95% and 99% respectively, of total
revenues. As of September 30, 1998, the Company had two
unrelated customers which accounted for approximately 74% of
total net contracts and retainage receivables.
d) Seasonality
The Company 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
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
since the Company elected not to recognize any portion of the
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 September 30, 1998, the Company owes approximately
$2,809,794 of payroll taxes and related estimated penalties
and interest. Federal and state tax liens have been filed
against the Company in connection with unpaid payroll taxes.
Although as of September 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.
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USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
h) Legal proceedings
i) The Company 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. Negotiations for a final
settlement are in their final stages. The Company has
accrued $300,000 as of June 30, 1998 based on the
expected settlement amount .
ii) In connection with various mechanic's liens filed as
discussed in note 7(f), certain actions were commenced
against the Company 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's lien for $13,640,747
relating to work performed at the project. NY is in
the process of pretrial discovery which is
scheduled to be completed by June, 1999. NY intends
to vigorously defend against any claims as well as
vigorously prosecute its claims against the owner
of the project.
b) A general contractor commenced an action to recover
a total of $6,326,000 against NY which includes
costs to complete the job, delay and other damages.
NY has commenced an action for extras and retainage
due and filed a mechanic's lien in the amount of
$1,488,775. In addition, NY is attempting to
recover $759,500 for contract interference.
NY intends to vigorously defend against any claims
as well as vigorously prosecute its claims against
the general contractor.
iii) During August 1998, a majority of the Company's as well
as its President's and 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. As Grand Jury
investigations are secret, legal open counsel is not at
liberty to comment upon the investigation.
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USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Additionally, since the investigation is in its initial
stages, legal counsel cannot comment regarding any
possible liability of the Company. Accordingly, as of
September 30, 1998, no accrual for any potential loss
contingency has been made.
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.
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.
NOTE 8 - RELATED PARTY TRANSACTIONS
a) Due from related parties
As of September 30,1998 and June 30, 1998, the Company has
advanced funds to various affiliates. These advances are
non-interest bearing and are due on demand. As of September
30, 1998 and June 30, 1998 such advances amounted to $-0- and
$103,050, respectively.
b) Due to related parties
As of September 30, 1998 and June 30, 1998, the total due to
officers and affiliates, amounting to $ 418,102 and $215,932,
represents advances made by the President of the Company and
affiliated entities which bear no interest and are due on
demand.
c) Rent expense
Included in general and administrative expenses is rent
expense paid in cash and stock by NY pursuant to a signed
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USABG CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
lease agreement with a company (RSJJ) owned by the Company's
President. The lease expired December 31, 1998. Rent expensed
for both three month periods ended September 30, 1998 and 1997
amounted to $60,000. (See Note 7b for additional information)
d) Purchase of material and labor
For the three months ended September 30, 1997 NY paid to
U.S.Bridge Corp. (Maryland) ("US Bridge MD") approximately
$35,000 for materials and labor necessary to perform steel
erection services. US Bridge MD is a wholly owned subsidiary
of USABG. Crown Crane, Inc. is an entity which is 50% owned by
the Company's President. As of September 30, 1998 and June 30,
1998, $113, 584 and $107,911, respectivley, is owed to Crown
Crane, Inc. which has been included in due to related parties.
Atlas Gem Leasing Inc. ("AGLI") is an entity wholly owned by
the Company's President. As of September 30, 1998 $34,068 was
owed to AGLI which has been included in due to officer and
affiliates.
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 expiring on June 30, 1998. The employment agreement
provided for an annual salary of $300,000 with a 10% annual
escalation. In addition, the President and Director was
granted options to purchase 25,000 shares of NY's common
stock, all of which options are vested and expire in April
2000. The exercise price of the options shall be equal to the
110% of the stock price in the initial public offering. The
foregoing options are intended to qualify as incentive stock
options. 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.
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ITEM 2. 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 USA Bridge Construction of N.Y., Inc.
("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 Construction Corp. (Maryland), ceased operations
in August 1997 and November 1996 respectively. Unless noted, reference to the
Company includes the Company and its subsidiaries.
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. Through September 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 three months
ended September 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 $17,500 and $90,325, respectively,
for the three months ended September 30, 1998 and 1997.
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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.
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 September 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 September 30,
1998, the backlog balance on Company's contracts amounted to approximately
$900,000. The bulk of the Company's backlog amounting to approximately $700,000
are expected to be completed during January and February 1999.
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 three months ended September 30, 1998 , NY did not obtain any new contracts,
however , it did obtain change orders to its two existing contracts of
approximately $1,500,000. Royal obtained various smaller base contracts for the
three months ended September 30, 1998 . NY did not obtain any material new
contracts for the three months ended September 30, 1998 because it did not
provide the lowest bids for the projects for which it submitted same along with
the inability to obtain bonding.. 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 three months ended September 30, 1998. Backlog represents the amount
of revenue the Company expects to realize from work to be performed on
uncompleted contracts in progress at September 30, 1998 and from contractual
agreements on which work has not yet begun.
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<PAGE>
Backlog balance at July 1, 1998 $1,051,119
Change orders to contracts in progress at July 1, 1998 1,560,745
New contracts during the three months ended
September 30, 1998 456,519
----------
3,068,383
Less: contract revenue earned during the three months
ended September 30, 1998 2,168,383
----------
Backlog balance at September 30, 1998 $ 900,000
----------
The change orders for the three months ended September 30, 1998
amounting to approximately $1,560,745 relate to the two remaining contracts,
Grand Central Terminal and the Louis Vitton office tower.. 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.
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<PAGE>
Three months ended September 30, 1998 as compared to the three months ended
September 30, 1997.
Contract revenues for the three months ended September 30, 1998 and
1997 amounted to $2,168,383 and $8,918,385, respectively. This represents a
decrease of $6,750,002 (or approximately 76%). This material decrease in revenue
is a direct result of the Company's inability to obtain any material new
contracts during the year ended June 30, 1998 and subsequent thereto.
Through 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 during the quarter.
For the three months ended September 30, 1998 and 1997, the Company had
two unrelated customers, respectively, which accounted for approximately 98%,
and 99%, respectively, of total revenues. As of September 30, 1998, the Company
had two unrelated customers which accounted for approximately 74% of total net
contract and retainage receivables.
Despite the Company's inability to obtain new contracts during the year
ended June 30, 1998 and the three months ended September 30, 1998, the Company's
gross profit for the three months ended September 30, 1998 amounted to 38% as
compared to 15% for the three months ended September 30, 1997. The increase in
gross profit for the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997 is primarily a result of the effect of the
change orders to the two remaining major contracts of the Company.
Normally change orders tend to yield a much higher gross profit.
General and administrative expenses have decreased by $70,871 (or 11%)
to $607,616 for the three months ended September 30, 1998, from $678,487 for the
three months ended September 30, 1997. The decrease in general administration
expenses is mainly attributable to the Company's attempt to reduce its overhead
as a result of its lack of new contracts.
Company classifies a portion of its contracts receivables as
non-current since it 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.
Liquidity and Capital Resources
The accompanying consolidated financial statement have been prepared
assuming that the Company will continue as a going concern. Despite the fact
that the Company generated net income of $47,873 for the quarter ended September
30, 1998, for the years ended June 30, 1998 and 1997, the Company generated a
net loss amounting to $2,343,482 and $875,238 respectively.
Additionally, as of September 30, 1998, the Company has a working
capital deficiency amounting to approximately $4,224,375. The Company has
classified certain contracts and retainages receivables as non-current as a
result of pending litigations in connection with claims and pending change
orders. As of September 30, 1998, the Company's backlog amounted to
approximately $900,000 which is composed of approximately $700,000 pertaining to
last two large contracts from NY (which are expected to be completed between
January & February 1999) and the remaining balance for approximately $200,000
pertains to Royal Steel smaller base contracts. 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.
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Lastly, as of September 30, 1998, the Company owes approximately $2,809,794 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. Although 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.
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 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 the Company 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 through
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 September 30, 1998.
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.
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 September 30, 1998 is $1,500,000, of which $300,000 has
been classified as current and $1,200,000 as non-current.
The Company used cash for operating activities amounting to $144,847
for the three months ended September 30, 1998, whereas it provided cash
amounting to $96,097 for the three months ended September 30, 1997.
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The Company used $59,404 of cash for investing activities for the three
months ended September 30, 1998 as a result of acquiring additional equipment
for its Chadian operations.
The Company provided net cash from financing activities amounting to
$230,220 as a result of borrowings form affiliates and officers in the amount of
$305,220, and payments of principal on its note payable in the amount of $75,000
for the three months ended September 30, 1998. For the three months ended
September 30, 1997, the Company used cash in the amount of $185,983 primarily
for repayments to related parties.
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 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
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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
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
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<PAGE>
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 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS None.
ITEM 2 - CHANGES IN SECURITIES None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The date of the special meeting of security holders was
July 29, 1998.
(b) The Company held the special meeting of security holders in
order to approve a proposal by the Company to effectuate a reverse-split of the
Company's outstanding shares of common stock on a 1 for 4 basis.
(c) Of the 7,486,539 total proxies received, 7,390,267 voted
for the stock split, 89,472 voted against the stock split and 6,800 abstained
from voting.
ITEM 5 - OTHER INFORMATION None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K; The Company filed a report on Form
8-K on November 24, 1998, disclosing the Company's change in certifying
accountant from Scarano and Tomaro, P.C. to Massella, Tomaro & Co., LLP. On
November 30, 1998, the Company filed an amendment to the November 24, 1998, Form
8-K to include exhibit 16.1, a letter on change in certifying public accountant.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, therunto daily authorized.
Dated: January 29, 1999 USABG Corp.
By: /s/Joseph M. Polito
-------------------
Joseph M. Polito, President
By: /s/Steven Polito
----------------
Steven Polito, Treasurer
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<PERIOD-END> SEP-30-1998
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