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
USA BRIDGE CONSTRUCTION OF N.Y., INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-3032277
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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
--------------
(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 [X] No[ ].
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
$16,544,354.
<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 approximately $293,205 based upon the average closing bid price for such
Common Stock on said date $.4375, as reported by a market maker. On such date,
there were 2,749,182 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):
2,749,182.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
U.S.A. Bridge Construction of N.Y., Inc. ("the Company") was
incorporated in the State of New York, on September 4, 1990, as Metro Steel
Structures, Ltd. The Company amended its Certificate of Incorporation to effect
a change in its name to its current name during January 1998. Additionally, the
Company amended its authorized capital (i) to increase the number of authorized
shares of common stock from 200 to 10,000,000 ("the Common Stock"); (ii) to
increase the par value of the Common Stock from no par value to $.001 par value
per share; (iii) to authorize 500,000 shares of preferred stock, par value $.01
per share ("the Preferred Stock"); and (iv) to designate 400,000 shares of the
Company*s Preferred Stock as "Series A Preferred Stock."
The Company, via a direct ownership of 48.5% by USABG Corp. and an
indirect ownership of 7.5% by the Company's President, Joseph Polito, is a 56%
owned subsidiary of USABG Corp. ("USABG"). The Company 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. The Company 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,
the Company 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
the Company 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, the Company 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 $2,093,969 for the fiscal
year ended June 30, 1998, a working capital deficiency of $3,207,294 and backlog
balance of $877,410 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 $2,154,856 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, the Company 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.
<PAGE>
In July 1996, the Company 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 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, the Company'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. The Company 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, the
Company 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 has been postponed and no commencement date has
been determined.
The following table lists, as of June 30, 1998, (i) all companies in
which Joseph Polito, the Company's President, is either an Officer, Director, or
principal shareholder; and (ii) the activities engaged in by such companies with
the Company:
<TABLE>
<CAPTION>
Year J. Polito's Activities with the Place of
Name (1) of Inc. Title Ownership (%) Company and USABG Business
- -------- ------- ----- ------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
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.
R.S.J.J. Realty 1983 Pres./Director 100% Leases the offices and Queens, NY
Corp. (3) storage space to USABG and
the Company
Crown Crane, Ltd. (3) 1988 -- 50% Supplies cranes to the Brooklyn, NY
Company for the use in the
erection of steel
Atlas Gem Leasing, 1986 Pres./Director 100% Supplies welding machines Queens, NY
Inc. (3) and compressors to the
Company
Atlas Gem Erectors 1986 Pres./Director 100% Sold certain construction No office
Co., Inc. (3) contracts to the Company;
ceased operations 9/94.
USABG Corp. (2) 1988 Pres./Director 66.3% Parent company Queens, NY
Royal Steel Services, 1997 -- 100% Formed to provide steel Queens, NY
Inc. (5) erection for projects
smaller than the Company's
projects
</TABLE>
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<PAGE>
(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 USABG's Common Stock, may be deemed the
beneficial owner of the shares of the Company's common stock owned by
USABG.
(5) Incorporated in the State of New York. Joseph M. Polito, through his
ownership of approximately 66.3% of the outstanding shares of USABG's
Common Stock, may be deemed the beneficial owner of the shares of
Royal Steel common stock owned by USABG.
Prior to leasing equipment from Crown Crane, Ltd. ("Crown") or Atlas
Gem Leasing, Inc. ("AGLI"), the Company compares the costs thereof to those
costs it might otherwise incur from like companies. The Company 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 the Company'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 the Company and USABG,
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
The Company obtains its projects primarily through the process of
competitive bidding. In order to be fully apprised of bid solicitations, the
Company (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, the Company 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.
The Company submits its bids after management performs a detailed
review of the project specifications, an internal review of the Company's
capabilities and equipment availability, and an assessment of whether the
project is likely to attain targeted profit margins. In bidding on 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 the Company to complete the project at a fixed price.
<PAGE>
With a lump-sum bid, the risk of estimating the quantity of units required for a
particular project is on the Company, while with a unit cost bid, the Company
must estimate the per unit cost, not the number of units needed. Any increase in
the Company'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 the Company 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 the Company 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, the Company is generally
entitled to receive a small cancellation fee. Many of the Company'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, the Company will be responsible for the
performance of the entire contract, including work assigned to subcontractors.
Accordingly, the Company is subject to liability associated with the failure of
subcontractors to perform as required under the contract; thus, the Company may
require its subcontractors to furnish Performance Bonds.
Affirmative action regulations require that the Company 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
The Company 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. The Company carries liability insurance of $1,000,000 per occurrence
which management believes is adequate for its current operations.
Although the Company 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.
The Company 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
<PAGE>
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, is
generally entitled to receive a small cancellation fee. Both of the Company*s
current contracts are also subject to completion requirements with liquidated
damages assessed against the Company if schedules are not met.
The Company'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 the Company is engaged, the
greater the bonding, net worth, and liquid working capital requirements. Surety
companies consider such factors in light of the amount of the Company*s surety
bonds then outstanding and the surety companies* current underwriting standards,
which standards may change periodically. Therefore, the Company 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
the Company'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 current financial condition, the Company
may be unable to obtain any 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. The Company 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, the Company 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 the Company*s billing to its clients.
In December 1996, the Company 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 the Company 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, the Company 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
<PAGE>
general contractors prefer that a subcontractor be licensed by a New York
licensed bonding company, they will waive the requirement when necessary. In
addition, USABG or the Company 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. The Company
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 the Company is currently engaged:
<TABLE>
<CAPTION>
(2) Costs
Contract & Est.
Date/ Costs (1) Profit in Backlog
Contract Party/ Contract Est. Type of incurred % of Job Excess of Gross Amount at
Project Name Amount Completion Contract to 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
</TABLE>
- -----------
(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) The Company is prime contractor (similar to general contractor) on
this project.
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.]
<PAGE>
Seasonality
Though the Company 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, the Company's costs are increased.
Suppliers; Subcontractors; Unions
The Company 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. The Company 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. The Company believes that there
are a sufficient number of vendors, so that in the event any individual or group
of vendors can no longer service the Company's needs, the Company will be able
to find other vendors at competitive prices.
As is standard practice in the construction industry, the Company'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.
The Company 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. The Company must comply with its agreements with the unions, which
agreements regulate all employment issues including pay, overtime, working
conditions, vacations, benefits, etc. between the Company and the union
employees. These agreements expire on June 30, 1999.
The Company believes that it has a good relationship with the Unions
and is in compliance with all union agreements. No assurance can be given that
the Company will continue to be in compliance with the Unions or successfully
negotiate extensions to the Company'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 the Company's
operations.
The Company'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. The Company will be responsible for performance of the
entire contract, including the work done by subcontractors. Accordingly, the
Company may be subject to substantial liability if a subcontractor fails to
perform as required.
Competition
The Company is one of the many subcontractors which erect and furnish
steel for projects. All aspects of the Company's business are, and will continue
to be, highly competitive. The Company 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. The Company'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.
<PAGE>
The driving force behind the Company'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 the Company's prior
performance. In addition, regarding prior performance, while the Company 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 the Company
purchased its assets in 1993.
Government Regulation
The Company 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, the Company 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 the Company*s operations. The Company believes that it is in
substantial compliance with all applicable laws and regulations.
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 the Company
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. The Company's contracts with these Unions,
which contracts regulate all employment issues between the Company and the union
employees - including pay, overtime, working conditions, vacations, benefits,
etc. - expire on June 30, 1999. The Company considers its relationships with the
unions and its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company shares office space with USABG (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 USABG*s
majority stockholder and the Company's President, Joseph Polito. The lease,
pursuant to which the Company 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. The Company 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, the Company 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.
<PAGE>
In February 1998, the Company agreed to issue 106,667 shares of its
common stock to USABG as consideration for USABG's issuance of 48,000 shares of
Common Stock to RSJJ in consideration for payment in full of the rent due by the
Company 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, the Company 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: the Company issued 270,000 shares of common stock to USABG,
for the cancellation of the debt owed to RSJJ. USABG, 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.
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 the Company, 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. The Company*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 it 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 the
Company for work it performed at the Robert Moses Causeway Project. The Company
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. The Company
intends to prosecute the action until such time as a judgment or settlement can
be obtained.
<PAGE>
Claims By Perini Corporation
On February 7, 1997, Perini Corporation filed an action against the
Company and Metro Steel Structures, Ltd. in New York State Supreme Court, Kings
County. Perini*s claims against the Company 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. The
Company 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 the Company 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 the Company'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, the Company 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 the Company and seeking punitive damages. The Company'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. The Company intends to vigorously defend against Eklecco's claims as
well as vigorously prosecute its claims against Eklecco.
Humphreys & Harding, Inc. Claim against the Company
The Company 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 the Company 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. The Company 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, the Company, Metro Steel Structures, Ltd.
(now known as the Company), 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 the Company, amounting to approximately
$3 million, are limited to a policy covering the period April 29, 1993 through
December 1994. The Company, 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.
<PAGE>
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. The Company 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, 1995 (the "IPO"). On July 15, 1997, as part of an inquiry
into the activities of a principal underwriter of the IPO, the Securities and
Exchange Commission (the "SEC") issued an Order of Private Investigation
relating to such underwriter and three companies, including the Company, in
which the underwriter had acted as principal underwriter. Prior to the SEC
issuing its Order of Private Investigation, the Company and its officers and
directors have fully cooperated with the Commission in connection with its
present inquiry.
In January 1998, pursuant to a formal order by the SEC in the Matter
of Cable & Co. Worldwide Inc. and certain other issues, N.Y.-6385, the Company
was subpoenaed by the SEC to produce certain records. The companies subject to
the subpoena each had their initial public offerings underwritten by the same
underwriter, the subpoena was complied with and there has been no follow up from
the SEC. At this juncture, the inquiry is too preliminary to form any judgments
or assessments regarding any possible liability of the Company.
Grand Jury Subpoena
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 the Company and USABG and any
affiliated companies as well as those of Joseph Polito. The Company believes
that the Grand Jury investigation is related to general subject matter the same
as the SEC investigation. 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 USABG and the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on the Nasdaq National Stock
Market until November 30, 1998. The following table sets forth representative
high and low sales price quotes as reported by a market maker, during the period
from August 9, 1995 through November 30, 1998. Price quotations reflect prices
between dealers and do not include resale mark-ups, mark-downs, or other fees or
commissions.
Common Stock
---------------------------
Calendar Period Low High
--------------- --- ----
1997
01/01/97-03/31/97 1 3/8 2 3/4
04/01/97 - 06/30/97 1 9/16 2 5/8
07/01/97 - 09/30/97 2 3/16 2 23/32
10/01/97 - 12/31/97 15/16 2 3/4
1998
01/01/98 - 03/31/98 1 13/32 3 3/8
04/01/98 - 06/30/98 1 1/2 1 5/16
07/01/98 - 09/30/98 1 3/16 1 3/16
10/01/98 - 11/30/98 1/4 7/16
In October 1997, the Company's Board of Directors adopted a resolution
decreasing the exercise price of the outstanding Warrants from $6.00 to $3.00.
No other terms of the Warrants were amended. In addition, the Board authorized
the Company to prepare and file a Post-Effective Amendment to its registration
statement to update the information therein enabling the Warrants to become
exercisable. Each Warrant entitles the holder thereof to purchase one share of
the Company's Common Stock, at an exercise price of $3.00 per share, until
August 8, 2000. The Warrants and the Common Stock underlying same are in
registered form pursuant to the terms of a Warrant Agreement executed by and
between the Company and North American Transfer Co., as warrant agent, so that
the holders of the Warrants will receive unrestricted shares of Common Stock
upon their exercise thereof and payment therefor. No value was attributed to the
Warrants as of the date of the decrease in exercise price to $3.00 per share as
the market price of the Common Stock for a substantial period of time prior to
the decrease was less than $3.00 per share.
As of November 24, 1998, there were 45 registered holders of record of
the Company's Common Stock, $.001 par value, which number, determined by
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.
Effective November 30, 1998, the Company's Common Stock was delisted
for failure to meet the maintenance criteria. The Nasdaq delisting panel was of
the opinion that the Company failed to present a plan which would enable it to
<PAGE>
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 reapply to the OTC Bulletin Board for listing after filing its 10-K
for the year ended June 30, 1998 ("Fiscal 1998") and 10-Q 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
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, limited cash
flow and acceptance of the Company's products.
The Company's operations are substantially controlled by Joseph M.
Polito, its President, since he owns approximately 66.3% of the outstanding
shares of USABG and may be considered the beneficial owner of the Company. Mr.
Polito is also a 100% shareholder of RSJJ. RSJJ leases the administrative office
space to the Company 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 the Company for the years
ended June 30, 1998 and 1997.
The Company 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, the
Company has operated primarily as a subcontractor and as a prime contractor on
two projects. As of June 30, 1998, the Company 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 (inclusive of change orders). The Company 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 to $877,000. Such contracts are expected to be completed during January
and February 1999.
In December 1996, the Company 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 the Company 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, the Company has been unable to bid as a general
contractor on projects for New York State and New York City agencies. The
Company 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. The
Company's current financial condition may prevent the Company from obtaining
future bonding.
<PAGE>
Though the Company 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, the Company 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, the
Company obtained new contracts valued at only approximately $115,000 and
1,113,000, respectively. The Company 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 and as a result of its inability to
obtain bonding. The Company 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 114,686
--------------
17,421,764
Less: contract revenue earned during the year ended June 30, 1998 16,544,354
--------------
Backlog balance at June 30, 1998 $ 877,410
--------------
</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, the Company 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 the Company. 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 the Company. The Company intends to
seek legal redress from the steel fabricator and from the general contractor.
The Company expects to complete the Grand Central and Louis Vuitton projects by
February 1999.
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 its operating needs and accordingly raises the issue about the Company's
ability to continue as a going concern.
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
includes all direct material and labor costs and those indirect costs related to
contract performance. General and administrative expenses are accounted for as
<PAGE>
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. The Company 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 the Company 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 $16,544,354 and $15,455,699, respectively. This represents an increase of
$1,088,655 (or approximately 7%). During the year ended June 30, 1998, the
Company obtained new contracts and change orders to previous contracts
aggregated approximately $11,333,716 which have been substantially completed as
of June 30, 1998. (See Backlog Schedule)
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 2,377,932 17,452,813
Collections for the
year ended (15,838,909) -- (15,838,909)
------------ ----------- -----------
Balances at
June 30, 1998 15,241,133 4,664,932 10,576,201
Less: Non-current
Current Portion 10,876,108 2,444,169 8,431,939
------------ ----------- -----------
Current Portion $ 4,365,025 $ 2,220,763 $ 2,144,262
============ =========== ===========
</TABLE>
<PAGE>
As of June 30, 1998, the Company increased its allowance for
uncollectibles up to $4,664,932 to reserve for the potential uncollectibility of
certain receivables for which mechanic's liens were filed and for the settlement
of certain mechanics liens on a certain job subsequent to year end. Through
December 31, 1998, the Company collected approximately $1,600,000 which includes
the settlement of a mechanic lien for $525,000 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 22% and 28%, 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 $503,361 (or 16%)
to $2,839,425 for the year ended June 30, 1998, from $2,336,064 for the year
ended June 30, 1997. The increase in general administration costs is mainly
attributable to the amortization of stock based compensation to officers and
employees of the Company in connection with stock issued pursuant to the
Company's Incentive Plan and an increase in legal and professional fees
associated with the settlement of a mechanic's lien filed by the Company during
its year ended June 30, 1997.
The Company's bad debt expense amounted to $2,376,187 for the year
ended June 30, 1998 as compared to $1,287,000 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 liens filed, and the
settlement of previously accounts receivables for which mechanic liens were
placed. 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
mechanic liens filed.
The Company's interest expense increased to $263,661 for the year ended
June 30, 1998 as a result of the interest accrued on its newly issued notes
payable in connection with unpaid union dues and interest expense associated
with unpaid payroll taxes.
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 financial statements have been prepared assuming that
the Company will continue as a going concern. For the year ended June 30, 1998
the Company generated a net loss amounting to $2,093,969 after recording a bad
debt expense amounting to $2,376,187 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 year
ended June 30, 1998 and the recording of a non-recurring charge of $300,000 for
a potential settlement of unpaid insurance resulting from an ongoing lawsuit
from the State Insurance Fund.
<PAGE>
Additionally, as of June 30, 1998, the Company has a working capital
deficiency amounting to approximately $3,207,294. The Company has recorded
certain contracts and retainages receivables as non-current since the timing of
their collectibility cannot yet be determined as a result pending litigations in
connection with claims and pending change orders. As of June 30, 1998, the
Company's backlog amounted to approximately $877,000. 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 June 30, 1998, the Company owes approximately $2,154,856 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 mechanics' 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. 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 $8,431,939, which represents the
noncurrent amount of receivables (net of allowances) associated with mechanic's
liens placed by the Company 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 $4,664,932 at 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 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
contracts 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 the Company with USABG issuing stock to its landlord, RSJJ. As of
June 30, 1998, the Company owes approximately $2,154,856 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 oral
agreements and available funds.
In December 1997, the Company 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. The Company 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, the Company assigned its retainage receivable from the EklecCo
<PAGE>
project as well as $1,750,000 of the Company'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 the Company shall receive the remainder thereof. The
Company 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:
(i) During February 1997, pursuant to a Form S-8 Registration Statement
filed with the Securities and Exchange Commission, the Company registered
125,000 common shares underlying options of its President pursuant to the
Company'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 the Company issuing 125,000 shares of common
stock.
(ii) During June 1997, pursuant to an agreement with RSJJ to settle
$480,000 in accrued rent, the Company issued 270,000 shares of its common stock
to USABG for the cancellation of the debt owed to RSJJ. USABG, 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.
(iii) During December 1997, the Company authorized the issuance, in its
third quarter, of 290,000 shares of Common Stock, pursuant to its Incentive
Plan. Of the 290,000 shares issued in March 1998 to management, 150,000 were
issued to the Company's President, 70,000 were issued to the Company's
Secretary, and 70,000 were issued to the Company's Treasurer. Half of these
shares vested on June 1, 1998, and half vest on January 1, 1999. The Company
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 the Company's Incentive Plan. In
addition to the foregoing, the Company also authorized the issuance of 50,000
common shares to certain of its employees and consultants. In connection with
these issuances, the Company 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, the Company issued 106,667 shares of its
common stock to USABG, as consideration to USABG, for issuing 48,000 shares of
its own common stock to RSJJ in consideration for payment in full of the rent
due by the Company 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.
<PAGE>
Net cash provided by operating activities for the year ended June 30,
1998 and 1997 amount to $8,289 and $58,821 respectively.
The Company used 745,338 in cash for financing activities for the year
ended June 30, 1998. Such cash used primarily for advances made to USABG,
principal payments on long term debt and repayment and advances to officer and
affiliates. For the year ended June 30, 1997, the Company provided $520,416 of
cash from officer and related parties.
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.
Litigations
39th St. Bridge
This action was filed on February 26, 1997 in New York State Supreme
Court, Queens County. It names The Company, 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. The Company*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, USABG entered into an agreement with Perini whereby USABG 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 The
Company for work it performed at the Robert Moses Causeway Project. The Company
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,
USABG is in the process of completing pre-trial discovery. The Company 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 The
Company and Metro Steel Structures, Ltd. in New York State Supreme Court, Kings
County. Perini*s claims against The Company total $1,140,560 and allege
<PAGE>
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. The
Company 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 The Company 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 The Company'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, The Company 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 The Company and seeking punitive damages. The Company'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. USABG is currently in the
process of pre-trial discovery, which is scheduled to be completed by June 1999.
The Company intends to vigorously defend against EklecCo's claims as well as
vigorously prosecute its claims against EklecCo.
Humphreys & Harding, Inc. Claim against The Company
The Company 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 The Company 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. The Company 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, The Company, Metro Steel Structures, Ltd.
(now known as The Company), 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 The Company, amounting to approximately
$3 million, are limited to a policy covering the period April 29, 1993 through
December 1994. The Company, 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
<PAGE>
documents. The Company 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 The Company 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.
In September 1998, the Company and USABG 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 The Company, USABG 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 USABG and the Company.
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.
<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 a Director of the Company
since its inception in 1990, and prior to the Acquisitions in April 1994, he was
the sole shareholder of the Company. He has been the President and Director of
USABG since April 1994. Mr. Polito oversees all of the Company's operations.
Since 1988, Mr. Polito has been a 50% shareholder of Crown, a company which
leases cranes for construction projects to the Company. 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 to the Company.
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 The Company. Since 1983, Mr. Polito has been
the president and 100% shareholder of RSJJ, a company which owns and leases real
property.
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.
<PAGE>
Ronald J. Polito has been the secretary and a Director of the Company
since its inception in 1990. He has been the Secretary and a Director of USABG
since April 1994. 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 The Company. 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 was elected treasurer of the Company in March 1995. He
has been Treasurer of USABG since March 1995 and a Director of USABG since April
1994. 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 the Company 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 and USABG 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 the Company nor USABG 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.
Significant Employees of the Company
Richard Miller has been an employee of the Company since September
1997. When Falcon was formed, he became a chief executive officer thereof.
Thomas J. Hayes has been a chief estimator, project manager, vice
president in the structural steel industry (fabrication and erection) for forty
years with such companies such as Grand Iron Works, Pecker Iron Works, Gem Steel
Erectors, Polito Enterprises, Waldorf Steel Fabricators, and at present the
Company.
<PAGE>
As permitted under New York Business 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 the 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 adjudication of
such issue by such court.
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 the Company during the years ended June 30, 1998,
1997, and 1996.
<PAGE>
<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
Director 1996 300,000 - 111,911(2)
Ronald Polito 1998 $107,800 - $ 21,407(3)
Secretary and 1997 118,800 - 26,631(3) $4,375
Director 1996 125,000 - 13,071(3) - -
Steven Polito 1998 $ 84,915 - $ 4,768(4)
Treasurer and 1997 86,580 - 8,572(4) $4,375(
Director 1996 94,000 - 8,275(4) - -
</TABLE>
- ---------------
(1) At the end of the fiscal year, Joseph M. Polito held 205,000 shares of
Restricted Stock valued at $243,438. Ronald Polito and Steven Polito
held 70,000 and 70,000, respectively, of Restricted Stock valued at
$83,125. Valuations are based on the closing bid price of Common Stock
($1.1875) 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."
<PAGE>
(Footnotes continued from previous page)
(3) 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.
(4) 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 $2,971 for the years
ended June 30, 1998, 1997, and 1996, respectively.
<PAGE>
The following table contains information with respect to
employees of the Company and options held as of June 30, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Unexercised In-The-
Number of Money
Unexercised Options/SAR's at
Options/SAR's at FY- FY-End($)
Shares Acquired on Value End (#) Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable (1)
---- --------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Joseph M. Polito -- -- 25,000/25,000 --
</TABLE>
- ------------
(1) Based on the closing price of Common Stock ($1.1875) on June 30, 1998 as
reported by a market maker. Since the Options are exercisable at $5.50,
there is no value to such options as of such date.
Joseph Polito entered into an employment agreement with the Company
dated April 4, 1995, whereby Mr. Polito agreed to devote 80% of his business
time to the affairs of the Company. The agreement is for a term of approximately
three years and expires 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,
1996 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 stock options under the Company's 1994
Senior Management Incentive Plan to purchase 25,000 shares at $5.50 per share,
vesting at the rate of 7,500 in each of April 1996 and 1997 and 10,000 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 the Company. The Company shall pay to
Mr. Polito a monthly draw of $10,000 against the bonus.
Pursuant to the agreement, the Company 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 the Company 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 the Company is terminated or
there is a decrease in responsibilities or duties following a change in control
of the Company. 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.
<PAGE>
Steven and Ronald Polito receive annual salary compensations of $94,000
and $125,000, respectively, from the Company, 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 the Company.
1994 Senior Management Incentive Plan
In December 1994, the Board of Directors adopted the Management
Incentive Plan (the "Management Plan") which was thereafter approved by
shareholder consent. The Management Plan provides for the issuance of up to
1,000,000 shares of the Company's Common Stock in connection with the issuance
of stock options and other stock purchase rights to Executive Officers and other
key employees.
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 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 Executive Officers 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
that only those executive management employees (generally the Chairman of the
Board, Vice-Chairman, Chief Executive Officer, Chief Operating Officer,
President, and Vice Presidents of the Company) who perform services of special
importance to the Company will be eligible to receive compensation under the
Management Plan. As of the date of this Prospectus, the Company's Officers and
Directors are Joseph Polito, Ronald Polito, Steven Polito, Marvin Weinstein, and
Ronald Murphy, though the Management Plan also includes Messrs. Bauer, Panayi,
and Kubilus. A total of 1,000,000 shares of Common Stock will be 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 a disinterested persons as 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.
<PAGE>
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 made 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 four types of awards: stocks options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights) and Restricted
Stock purchase agreements (as described below).
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 he
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 form the date of grant; ISOs granted to 10%
stockholders may be exercisable for a period of up to five years from he dated
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 $100,00. 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.
<PAGE>
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.
On December 2, 1996, the Company granted to Joseph Polito, the
Company's president, an option to purchase 125,000 shares at an exercise price
of $1.10 per share (110% of the ten market price) in accordance with the
Management Plan. The shares were registered for resale pursuant to a Form S-8
registration statement filed in February 1997. On March 25, 1997, Mr. Polito
exercised the option. On April 11, 1997, Mr.
Polito re-sold 60,000 of these shares.
In December 1997, the Company authorized the issuance, in its third
fiscal quarter, of 340,000 shares of Common Stock to management and certain
employees and consultants of the Company. 290,000 of such shares were issued
pursuant to the Company's Management Plan as follows: 150,000 were issued to the
Company's President, 70,000 were issued to the Company's Secretary, and 70,000
were issued to the Company's Treasurer. The remaining 50,000 shares were issued
to employees and consultants. The Company also authorized the filing of a
Post-Effective Amendment to the Form S-8 Registration Statement filed in
February 1997, wherein the sale of the aforesaid shares is to be registered.
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 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
<PAGE>
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 then 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 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.
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.
<PAGE>
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 would 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.
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 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 at 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.
<PAGE>
PRINCIPAL SECURITYHOLDERS
The following table sets forth information with respect to the
beneficial ownership of shares of Common Stock by (i) each person (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended), known by the Company to be the owner of more than 5% of
the outstanding shares of Common Stock; (ii) each Director; and (iii) all
Officers and Directors as a group. Except to the extent indicated in the
footnotes to the following table, each of the individuals listed below possesses
sole voting power with respect to the shares of Common Stock listed opposite his
name.
Percent of Common
Name and Address Number of Shares Owned Stock Owned (1)
- ---------------- ---------------------- ---------------
USABG Corp. (1)(2)
53-09 97th Place 1,562,332 56.8%
Corona, New York 11368
Joseph M. Polito (2)
c/o USABG Corp.
53-09 97th Place 1,562,332 56.8%
Corona, New York 11368
Steven J. Polito
c/o USABG Corp. 70,000 2.5%
53-09 97th Place
Corona, New York 11368
Ronald J. Polito
c/o USABG Corp. 70,000 2.5%
53-09 97th Place
Corona, New York 11368
Marvin Weinstein
c/o USABG Corp. -- --
53-09 97th Place
Corona, New York 11368
Ronald Murphy
c/o USABG Corp. -- --
53-09 97th Place
Corona, New York 11368
All Officers and Directors
as a group (5 persons) 1,702,332 61.9%
(1) Includes (i) 205,000 shares of Common Stock issued to Joseph M. Polito,
as President of the Company, 55,000 of which shares were issued
pursuant to the exercise of an option granted pursuant to the
Management Plan and 150,000 of which shares were issued pursuant to the
Management Plan; and (ii) 25,000 shares issuable to Mr. Polito upon
exercise of a vested option. See "Certain Relationships and Related
Transactions."
<PAGE>
(footnotes from previous page)
(2) Joseph Polito owns approximately 62.8% of the outstanding shares of
Corp. and may be considered the beneficial owner of the shares of the
Company owned by USABG. Includes 25,000 shares issuable upon exercise
of a vested option granted to Joseph Polito. See "Certain Relationships
and Related Transactions."
Employment and Consulting Agreements
Joseph Polito entered into an employment agreement with the Company
dated April 4, 1995, whereby Mr. Polito agreed to devote 80% of his business
time to the affairs of the Company. 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 the Company'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 the Company. The Company
shall pay to Mr. Polito a monthly draw of $10,000 against the bonus. The Company
and its President extended the agreement for an additional three years until
June 30, 2001 under the same terms.
Pursuant to the agreement, the Company 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 the Company 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 the Company is terminated or
there is a decrease in responsibilities or duties following a change in control
of the Company. 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 the Company, 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 the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended June 30, 1998 and 1997, the Company 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.
<PAGE>
During the years ended June 30, 1998 and 1997, the Company 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 $126,489.
As of June 30, 1998, the total due to officers and affiliates,
amounting to $386,457, represents advances made by the President of the Company
and affiliated entities which bear no interest and are due on demand.
As of June 30, 1998, the Company has advanced $405,458 to its parent,
USABG. Such advances bear no interest and are due on demand.
Included in general and administrative expenses is rent expense paid in
cash and stock by the Company pursuant to a signed lease agreement with RSJJ, a
company owned by the Company's President. The lease expires December 31, 1998.
Rent expense for both years ended June 30, 1998 and 1997 amounted to $240,000.
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
Balance Sheet F-2
Statements of Operations F-3
Statement of Stockholders* Equity F-4
Statements of Cash Flows F-5 - F-6
Notes to Financial Statements F-7 - F-24
(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, have previously been filed with the Commission in connection with the
Company's Registration Statement on Form SB-2 - dated August 9, 1995 under file
No. 33-89230-NY (the "SB-2") - or are incorporated herein, pursuant to 17 C.F.R.
'230.411, by reference to the document wherein same were initially filed. All
exhibits which do not include an * or specific reference are incorporated by
reference to the SB-2.
3.1 Certificate of Incorporation of the Company filed September
4, 1990.
3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company filed January 31,1995.
3.3 By-Laws of the Company.
3.3 Specimen Common Stock Certificate.
4.1 Specimen Redeemable Common Stock Warrant Certificate.
4.3 Form of Redeemable Common Stock Warrant Agreement between
the Company and Continental Stock Transfer & Trust Company.
4.4 Form of Special Warrant.
4.6 USABG Corp. note issued in January 1995.
4.7 Form of Promissory Note sold in Private Placement in March
1995.
4.8 Stock option and Agreement issued to Joseph Polito.
<PAGE>
10.2 Stock Purchase Agreement between Corp. and the Company.
10.3 Employment Agreement of Joseph Polito.
10.4 Lease Agreement between the Company and R.S.J.J. Realty
Corp.
10.5 The Company Incentive Stock Option Plan.
10.6 Agreement between Iron Workers Local Union 40 and the
Company.
10.7 Agreement between Local Union 14, 14B, 15, 15A, 15C, 15D,
International Union of Operating Engineers, AFL-CIO and the
Company.
10.8 Agreement between Local 780 and the Company.
10.9 Subcontractor agreement between the Company and McKay
Enterprises, Inc., with respect to the reconstruction of 4th
Avenue Bridge.
10.10 Subcontractor agreement between the Company and Perini
Corporation, with respect to the rehabilitation of Stillwell
Avenue Station on Coney Island.
10.11 Subcontractor agreement between the Company and Perini
Corporation, with respect to the rehabilitation of 39th
Street Bridge over L.I.R.R.
10.12 Subcontractor agreement between the Company and KISKA
Construction Corporation-USA, with respect to the
rehabilitation of Robert Moses Causeway.
10.13 Agreement between Atlas and the Company pursuant to the sale
of contracts.
10.14 Promissory Note issued to First Bank of the Americas.
10.15 Subcontractor agreement between the Company and McKay
Enterprises, Inc., with respect to the rehabilitation of the
Kosciuszko Bridge.
10.17 Agreement to capitalize the $400,000 debt into 320,000
shares of USABG Corp.
10.18 Subcontractor agreement between the Company and Trataros
Construction Inc. (the Williamsburg Houses project), dated
April 11, 1996. (Incorporated by reference to Exhibit 10.18
to Form 10-KSB for the year ended June 30, 1997).
10.19 Subcontractor agreement between the Company and Hannibal
Construction Co., Inc. (the "Hellgate Viaduct Structures
project), dated October 30, 1996 (Incorporated by reference
to Exhibit 10.19 to Form 10-KSB for the year ended June 30,
1997).
10.20 Subcontractor agreement between the Company and N.Y. Iron
(the Indonesian Mission project), dated November 6, 1996
(Incorporated by reference to Exhibit 10.20 to Form 10-KSB
for the year ended June 30, 1997).
10.21 Prime contractor agreement between the Company and EklecCo.
(the Palisades Power Mall project), dated June 17, 1996
(Incorporated by reference to Exhibit 10.21 to Form 10-KSB
for the year ended June 30, 1997).
10.22 Subcontractor agreement between the Company and Lehrer
McGovern, Bovis, Inc. (the Louis Vuitton project), dated May
15, 1996 (Incorporated by reference to Exhibit 10.22 to Form
10-KSB for the year ended June 30, 1997).
10.23 Prime contractor agreement between the Company and Tishman
Construction Corporation of New York, dated July 24, 1996
(Incorporated by reference to Exhibit 10.23 to Form 10-KSB
for the year ended June 30, 1997).
10.24 Subcontractor agreement between the Company and Humphreys &
Harding, Inc. (the Korean Mission project), dated January 15
1997 (Incorporated by reference to Exhibit 10.24 to Form
10-KSB for the year ended June 30, 1997).
<PAGE>
10.25 Agreements, dated November 1997, by and between the Company
and The Iron Workers Locals 40, 361 & 417 Joint Security
Funds in connection with the EklecCo project (Incorporated
by reference to the Company's Post Effective Amendment No. 2
to Form SB-2 dated April 13, 1998).
<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 22nd day of January, 1999.
USA BRIDGE CONSTRUCTION OF N.Y., INC.
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 22, 1999 By: /s/ Ronald J. Polito
---------------------
Ronald J. Polito,
Secretary and Director
Date: January 22, 1999 By: /s/ Steven J. Polito
--------------------
Steven J. Polito,
Treasurer and Director
Date: January 22, 1999 By: /s/Marvin Weinstein
-------------------
Marvin Weinstein, Director
Date: January 22, 1999 By: /s/Ronald Murphy
----------------
Ronald Murphy, Director
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Page
Number
------
Independent auditors' report F-1
Balance sheet as of June 30, 1998 F-2
Statements of operations for the years ended
June 30, 1998 and 1997 F-3
Statement of stockholders' equity for the years ended
June 30, 1998 and 1997 F-4
Statements of cash flows for the years ended
June 30, 1998 and 1997 F-5 - F-6
Notes to financial statements F-7 - F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of USA Bridge Construction of N.Y.,
Inc.
We have audited the accompanying balance sheet of USA Bridge Construction of
N.Y., Inc., (the "Company") as of June 30, 1998 and the related statements of
operations, stockholders' equity and cash flows for the years ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 12H(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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30,
1998, and the 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 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 $3,207,294, a backlog balance of $877,410, and payroll taxes
payable amounting to $2,154,856. Lastly, for the year ended June 30, 1998, the
Company reported a net loss amounting to $2,093,969. 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
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
<S> <C>
Current assets:
Cash $ 20,822
Contracts and retainage receivable, net 2,144,262
Costs and estimated earnings in excess of billings
on uncompleted contracts 139,440
Due from Parent Company 405,458
Due from affiliates 126,489
Other current assets 18,454
------------
Total current assets 2,854,925
Long term portion of contracts and retainage receivable,
net, 8,431,939
Office equipment and fixtures, net 23,767
Other assets 10,366
------------
Total assets $ 11,320,997
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including cash overdraft of $36,415 $ 1,239,097
Accrued expenses 1,822,670
Payroll taxes payable 2,154,856
Note payable 300,000
Due to officer and affiliates 386,457
Income taxes payable 148,889
Billings in excess of costs and estimated earnings
on uncompleted contracts 10,250
Total current liabilities 6,062,219
Long term portion of note payable 1,275,000
------------
Total Liabilities 7,337,219
Commitments and contingencies (Note 12) --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
BALANCE SHEET
JUNE 30, 1998
(continued)
<S> <C>
Stockholders' equity:
Preferred stock $.01 par value, authorized 500,000 shares,
issued and outstanding -0- --
Common stock $.001 par value, authorized 10,000,000 shares,
issued and outstanding 2,749,182 504,494
Additional paid in capital 5,402,209
Accumulated deficit (1,635,140)
------------
Sub-total stockholders' equity 4,271,563
Less: stockholders' deductions (287,785)
------------
Total stockholders' equity 3,983,778
Total liabilities and stockholders' equity $ 11,320,997
============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
Contract revenue $ 16,544,354 $ 15,455,699
Cost of contract revenue 12,985,578 11,167,130
------------ ------------
Gross profit 3,558,776 4,288,569
Expenses:
General and administrative 2,839,425 2,336,064
Bad debt expense 2,376,187 1,287,000
------------ ------------
Total expenses 5,215,612 3,623,064
------------ ------------
(Loss) income from operations before other income
(expense) and (benefit) provision for income taxes (1,656,836) 665,505
Other income (expenses):
Interest expense (263,661) (43,341)
Non-recurring charge (Note 12H(i)) (300,000) --
Interest income 8,886 10,425
------------ ------------
Total other (expenses) (554,775) (32,916)
------------ ------------
(Loss) Income before (benefit) provision
for income taxes (2,211,611) 632,589
(Benefit) provision for income taxes (117,642) 273,874
------------ ------------
Net (loss) income $ (2,093,969) $ 358,715
============ ============
Earnings per common share:
Basic:
Net (loss) income $ (.83) $ .18
============ ============
Diluted:
Net (loss) income (.83) .18
============ ============
Weighted average number of shares outstanding for basic and diluted 2,508,071 1,982,098
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Common
stock
--------------------------- Additional Retained Other Total
paid-in earnings stockholders' stockholders'
Shares Amount capital (deficit) deductions equity
----------- ----------- ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1996 1,907,515 $ 503,652 $ 4,086,551 $ 100,114 $ -- $ 4,690,317
Issuance of common shares
in connection with the exercise
of options 125,000 125 137,375 -- -- 137,500
Issuance of common stock to related
party in connection with settlement
of accounts payable 270,000 270 479,730 -- -- 480,000
Net income for the year
ended June 30, 1997 -- -- -- 358,715 -- 358,715
----------- ----------- ----------- ----------- ------- -----------
Balances at June 30, 1997 2,302,515 504,047 4,703,656 458,829 -- 5,666,532
Issuance of common stock in
lieu of prepaid rent 106,667 107 239,893 -- (240,000) --
Issuance of common stock in
connection with senior management
incentive plan 340,000 340 458,660 -- (459,000) --
Amortization of prepaid rent and
deferred compensation -- -- -- -- 411,215 411,215
Net loss for the year ended
June 30, 1998 -- -- -- (2,093,969) -- (2,093,969)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1998 2,749,182 $ 504,494 $ 5,402,209 $(1,635,140) $ (287,785) $ 3,983,778
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,093,969) $ 358,715
Adjustments to reconcile net (loss) income to net
cash used for operating activities:
Depreciation 6,733 4,902
Amortization of prepaid rent and deferred
compensation 411,215 --
Bad debt expense 2,376,187 1,287,000
Deferred income tax provision (benefit) 239,750 (239,750)
Non-recurring charge 300,000 --
Decrease (increase) in:
Contracts and retainage receivable (4,010,986) (6,789,756)
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,086,283 207,801
Other current assets 33,161 (25,317)
Increase (decrease) in:
Accounts payable (578,220) 2,946,778
Accrued expenses 1,072,822 629,622
Payroll taxes payable 640,008 1,061,559
Income taxes payable (358,490) 507,379
Billings in excess of costs and estimated
earnings on uncompleted contracts (116,205) 109,888
----------- -----------
Net cash provided by operating activities 8,289 58,821
----------- -----------
Investing Activities:
Acquisition of office equipment (10,155) --
----------- -----------
Cash flows from financing activities:
Financing costs incurred (35,000)
Principal payments of long term debt (175,000) --
(Repayments to) proceeds from related parties
and affiliates (185,180) 520,416
Advances to parent company (386,892) --
Other Assets 1,734 --
----------- -----------
Net cash(used for) provided by financing activities (745,338) 485,416
----------- -----------
Net (decrease) increase in cash (747,204) 544,237
Cash, beginning 768,026 223,789
----------- -----------
Cash, ending $ 20,822 $ 768,026
=========== ===========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
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 $ 21,612
========== ==========
Taxes $ -- $ 678
========== ==========
Supplemental disclosure of non-cash operating activities:
In connection with issuance of common stock, 340,000
shares were issued as consideration for compensation $ 459,000 $ --
========== ==========
In connection with the prepayment of rent, $106,667
Shares of common stock were issued $ 240,000 $ --
========== ==========
In connection with settlement of accounts payable,
270,000 shares of common stock $ -- $ 480,000
========== ==========
Supplemental disclosure of non-cash financing activities:
Issuance of long term debt fair settlement of
amounts payable $1,750,000 $ --
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1 - ORGANIZATION
USA Bridge Construction of N.Y., Inc. ("the Company") is a New
York corporation which provides steel erection for building,
roadway and bridge repair projects for contractors who have
been engaged by private and municipal/governmental clients. In
January 1998, the Company effected a name change from U.S.
Bridge of N.Y., Inc. to USA Bridge Construction of N.Y., Inc.
The Company was incorporated on September 4, 1990 and is a
majority owned subsidiary of USABG Corp. ("Bridge Corp.") via
a 48.5% direct ownership and an indirect ownership of 7.5% by
the Company's President. The Company's President is also the
majority stockholder of Bridge Corp. and may be considered the
beneficial owner of the Company.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
For the year ended June 30, 1998, the Company generated a net
loss amounting to $2,093,969.
As of June 30, 1998, the Company has a working capital
deficiency amounting to $3,207,294 as a result of classifying
certain contracts and retainages receivable as non-current
since the timing of their collectibility cannot be determined
due to related pending litigations.
As of June 30, 1998, the Company's backlog amounted to
$877,410. 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
$2,154,856 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 low 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) 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.
b) 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 doubtful
accounts for contracts and retainage receivables. Actual
results could differ from these estimates.
c) 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
receivables and payables 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.
d) 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 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
e) Office equipment and fixtures
Office equipment and fixtures 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.
f) Deferred compensation
Deferred compensation consists of the Company's common stock
issued to its officers. Deferred compensation has been charged
to general and administrative expenses over the vesting period
of the stock issued.
g) Income taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. ("SFAS") 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.
h) 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
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.
i) 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.
j) 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.
k) 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").
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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
l) Fair value disclosure as of June 30, 1998
The carrying value of cash, accounts 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 because the
interest factors for the debt are based upon the prime rate
which reflects market value.
m) 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.
NOTE 4 - CONTRACT AND RETAINAGE RECEIVABLE
At June 30, 1998, contracts and retainage receivable consists
of the following:
<TABLE>
<CAPTION>
Total Current Non-Current
----------- ----------- -----------
<S> <C> <C> <C>
Contracts in progress $ 1,619,262 $ 1,619,262 $ --
Completed contracts 13,371,454 2,495,346 10,876,108
Retainage 250,417 250,417 --
----------- ----------- -----------
15,241,133 4,365,025 10,876,108
Less: allowance for doubtful accounts 4,664,932 2,220,763 2,444,169
----------- ----------- -----------
$10,576,201 $ 2,144,262 $ 8,431,939
=========== =========== ===========
</TABLE>
The allowance for doubtful accounts was increased to
$4,664,932 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 has 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 contracts and
retainage receivables in connection with unpaid union dues and
professional fees (see Note 10).
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
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:
Costs incurred on uncompleted contracts $ 8,208.574
Profits earned to date 2,504,660
-----------
10,713,234
Less: billings to date 10,584,044
-----------
$ 129,190
===========
Included in the accompanying balance sheet under the following
captions at June 30, 1998:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 139,440
Billings in excess of costs and estimated
earnings on uncompleted contracts (10,250)
------------
$ 129,190
============
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 114,686
-----------
17,421,764
Less: contract revenue earned during the year ended June 30, 1998 16,544,354
-----------
Backlog balance at June 30, 1998 $ 877,410
===========
</TABLE>
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 7 - OFFICE EQUIPMENT AND FURNITURE
Office equipment and furniture are comprised of the following
at June 30, 1998:
Office equipment $ 20,431
Furniture & fixtures 18,311
----------
38,742
Less: accumulated depreciation 14,975
----------
$ 23,767
==========
Depreciation expense for the years ended June 30, 1998 and
1997 amounted to $6,733 and $4,902 respectively.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30, 1998:
Wages and related union benefits $ 109,351
Professional fees 115,000
Insurance 1,452,915
Interest 77,584
Other 67,820
------------
$ 1,822,670
============
NOTE 9 - INCOME TAXES
The Company has adopted SFAS No. 109, "Accounting for Income
Taxes". Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist
of taxes currently due plus deferred taxes related primarily
to differences between the financial statements and tax bases
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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
The reconciliation of income tax computed at the federal
statutory tax rate to income tax(benefit) expense is as
follows for the years ended June 30:
1998 1997
--------- ---------
Tax computed at the federal statutory income
tax rate $ -- $ 199,339
Increase (reductions) resulting from:
State and local taxes, net of federal benefit -- 74,535
Change in income tax accrual (357,392) --
Change in deferred tax asset valuation allowance 239,750 --
--------- ---------
Income tax (benefit) expense $(117,642) $ 273,874
========= =========
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:
Year Ended
June 30,
1998 1997
----- ----
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) provision resulting from change in income tax
accrual and valuation allowance (36%) 8%
--- ---
Effective income tax (benefit) provision rate (1%) 43%
=== ===
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) 72,000
---------
856,000
Less: valuation allowance (856,000)
----------
Deferred current tax asset $ -
==========
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
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
-----------
855,000
Less valuation allowance (855,000)
-----------
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 an immaterial amount of net
operating loss carryforwards.
NOTE 10 - LONG TERM DEBT
a) Union dues payable
During December 1997, the Company 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
union dues previously recorded as accounts payable. The
Company 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, the Company 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 the Company may receive any funds. The Company 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
As of June 30, 1998, union dues payable mature 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 11 - STOCKHOLDERS' EQUITY
a) 1994 Senior Management Incentive Plan
During December 1994, the board of directors adopted the
Incentive Plan as amended during December 1996, which was
adopted by shareholder consent. The Incentive Plan provides
for the issuance of up to 1,000,000 shares (as amended) of the
Company's Common Stock in connection with the issuance of
stock options and other stock purchase rights to executive
offices and other key employees.
b) Issuance of Common Shares
(i) During February 1997, pursuant to a Form S-8
Registration Statement filed with the Securities and
Exchange Commission, the Company registered 125,000
common shares underlying options of its President
pursuant to the Company'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 the Company issuing 125,000 shares
of common stock.
(ii) During June 1997, pursuant to an agreement with
R.S.J.J. Realty Corp. ("RSJJ"), a Company wholly
owned by the Company's President to settle $480,000
in accrued rent, the Company issued 270,000 shares of
its common stock to Bridge Corp for the cancellation
of the debt owed to RSJJ. Bridge Corp., 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 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>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(iii) During December 1997, the Company authorized the
issuance, in its third quarter, of 290,000 shares of
Common Stock, pursuant to its Incentive Plan. Of the
290,000 shares issued in March 1998 to management,
150,000 were issued to the Company's President,
70,000 were issued to the Company's Secretary, and
70,000 were issued to the Company's Treasurer. Half
of these shares vested on June 1, 1998, and half vest
on January 1, 1999. The Company 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 the Company's Incentive Plan. In
addition to the foregoing, the Company also
authorized the issuance of 50,000 common shares to
certain of its employees and consultants. In
connection with these issuances, the Company 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, the Company issued 106,667
shares of its common stock to Bridge Corp., as
consideration to Bridge Corp., for issuing 48,000
shares of its own common stock to RSJJ in
consideration for payment in full of the rent due by
the Company 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 .
NOTE 12 - 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 estimates may be subject to revision in the
normal course of business.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
b) Leases
The Company 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, the Company 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 11b(iv), the Company has prepaid
its rent in full through December 31, 1998. Subsequent to
December 31, 1998, the Company plans on leasing such facility
on a month to month basis from RSJJ for a reduced monthly
amount to be negotiated.
The Company also leased storage space pursuant to a month to
month agreement requiring monthly payments of $3,500.
Subsequent to June 30, 1998, the Company settled unpaid rent
for $10,000 and vacated such premises.
Included in 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
contract revenue.
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%, 17%, 14%, and 53%, 15%, 19%, respectively,
of contract revenue. As of June 30, 1998 the Company had two
unrelated customers which accounted for approximately 65% and
11% of total net contracts and retainage receivable.
d) Seasonality
The Company operates in an industry which may be seasonal,
generally due to inclement weather occurring during the winter
months. Accordingly, the Company 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
The Company is required to provide bid and/or performance
bonds in connection with governmental construction projects.
There can be no assurance that the Company will be able to
obtain future bonding as a result of its financial condition.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
f) Mechanic's liens
As of June 30, 1998, various actions to foreclose upon
mechanic's 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 receivable. 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 $2,154,856
of payroll taxes and related estimated penalties and interest.
As of June 30, 1998 and subsequent thereto, certain 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.
h) Legal proceedings
i) The Company is a defendant in a proposed settlement
regarding the State Insurance Fund for unpaid workers'
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's liens filed as
discussed in note 12(f), certain actions were
commenced against the Company during the fiscal year
ended June 30, 1998 as follows:
a) A customer of the Company 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. 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
b) A general contractor commenced an action to recover
a total of $6,326,000 which includes costs to
complete the job, 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, the Company is
attempting to recover $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.
iii) During August 1998, a majority of the Company's, as
well as its President's, affiliated entities and
Bridge Corp.'s, 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 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.
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.
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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
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) 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 13 - 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
$126,489.
b) Due from parent company
As of June 30, 1998, the Company has advanced $405,458 to its
parent, Bridge Corp. Such advances bear no interest and are
due on demand.
c) Due to officer and affiliates
As of June 30, 1998, the total due to officers and affiliates,
amounting to $386,457, represents advances made by the
President of the Company and affiliated entities which bear no
interest and are due on demand.
d) Rent expense
Included in general and administrative expenses is rent
expense paid in cash and stock by the Company pursuant to a
signed lease agreement with RSJJ, a company owned by the
Company's President. The lease expires December 31, 1998. Rent
expense for both years ended June 30, 1998 and 1997 amounted
to $240,000.
e) Purchase of material and labor
For the years ended June 30, 1998 and 1997 the Company paid to
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 officer and affiliates.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
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 which is
wholly owned by the Company's President.
f) Employment agreement
On April 4, 1995 the Company entered into an employment
agreement with its President for a term of approximately three
(3) years which expired on June 30, 1998. 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 was
granted options to purchase 6,250 shares of the Company's
common stock, all of which options vested immediately and are
due to expire in April 2000. The exercise price of the options
is 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 the
Company 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 14 - EARNINGS PER SHARE
As of June 30, 1998, the Company adopted SFAS No. 128,
"Earnings per Share". Accordingly, diluted earnings per common
share for all prior periods have been restated. 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.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
The computation of basic and diluted earnings per common share
is as follows:
<TABLE>
<CAPTION>
For the year
ended June 30,
1998 1997
----------- -------------
<S> <C> <C>
Net (loss) income $(2,093,969) $ 358,715
Denominator:
Computation of basic earning per share ("EPS"):
Weighted average common shares outstanding 2,508,071 1,982,098
----------- -------------
Basic EPS $ (.83) $ .18
=========== =============
Computation of diluted EPS:
Weighted average common share outstanding 2,508,071 1,982,098
Potentially dilutive shares:
Weighted average shares issuable under warrants a, b 436,124
Weighted average shares issuable under options a, b 18,664
----------- -------------
Weighted average shares outstanding & available 2,508,071 2,436,886
----------- -------------
Diluted EPS $ (.83) $ .15
=========== =============
</TABLE>
(a) Shares issuable under options and warrants, were not
included in the computation of diluted EPS since the
options' and warrants' 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 15 - STOCK COMPENSATION PLANS
The Company's Incentive Plan was adopted in order 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. The Company's Incentive Plan provides for an
issuance of up to 1,000,000 shares of its common stock.
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
The status of the Company's Incentive Plan is summarized below
for the years ended June 30, 1998 and 1997:
Number of Exercise
options price
--------- --------
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
========= ========
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
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.
For the year
ended June 30,
1998 1997
------------- --------------
Net loss - as reported $ (2,093,969) $ 358,715
============= ===============
- pro-forma $ (2,093,969) $ 358,715)
============ ==============
Basic EPS - as reported $ (.83) $ .18
============= ===============
- pro-forma $ (.83) $ .18
============= ===============
<PAGE>
USA BRIDGE CONSTRUCTION OF N.Y., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
The Black-Scholes Stock option 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,822
<SECURITIES> 0
<RECEIVABLES> 15,241,133
<ALLOWANCES> 4,664,932
<INVENTORY> 0
<CURRENT-ASSETS> 2,854,925
<PP&E> 38,742
<DEPRECIATION> 14,975
<TOTAL-ASSETS> 11,320,997
<CURRENT-LIABILITIES> 6,062,219
<BONDS> 0
0
0
<COMMON> 504,494
<OTHER-SE> 3,479,284
<TOTAL-LIABILITY-AND-EQUITY> 11,320,997
<SALES> 16,544,354
<TOTAL-REVENUES> 16,544,354
<CGS> 12,985,578
<TOTAL-COSTS> 12,985,578
<OTHER-EXPENSES> 2,839,425
<LOSS-PROVISION> 2,376,187
<INTEREST-EXPENSE> 254,775
<INCOME-PRETAX> (2,211,611)
<INCOME-TAX> (117,642)
<INCOME-CONTINUING> (2,093,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 300,000
<CHANGES> 0
<NET-INCOME> (2,093,469)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
