SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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Form 10-K/A |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For The Fiscal Year Ended December 31, 2002 |
Commission File No. 0-20101 |
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Urecoats Industries Inc. |
(Exact name of Registrant as Specified in its Charter) |
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Delaware | 13-3545304 |
(State ofIncorporation) | (I.R.S. Employer Identification No.) |
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718 South Military Trail | 33442 |
Deerfield Beach,Florida 33442 | (Zip Code) |
(Address of principal executive offices) |
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(954) 428-8686 |
(Registrant's telephone number) |
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Securities registered pursuant to Section 12(b) of the Act: None |
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
| Name of each exchange on which each class registered |
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Common Stock, $0.01 par value |
| American Stock Exchange |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]. |
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes [X] No [ ]. |
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The aggregate market value of the registrant's common equity held by non-affiliates based on the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter was $26,853,654. |
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Common Stock outstanding as of March 24, 2003 - 14,071,254 shares. |
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DOCUMENTS INCORPORATED BY REFERENCE |
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None. |
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TABLE OF CONTENTS |
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PART I |
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Item 3. | Legal Proceedings | 3 |
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PART II |
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Item 8. | Financial Statements and Supplementary Data | 3 |
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PART III |
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Item 10. | Directors and Executive Officers of our Company | 3 |
Item 11. | Executive Compensation | 5 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 10 |
Item 13. | Certain Relationships and Related Transactions | 12 |
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PART IV |
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Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 15 |
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EXHIBITS | 15 | |
SIGNATURES | 17 | |
CERTIFICATIONS | SEE EXHIBITS | |
REPORT OF MANAGEMENT | F-31 | |
INDEPENDENT AUDITORS' REPORT | F-32 | |
INDEX OF EXHIBITS | ATTACHED |
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2 |
ITEMS AMENDED HEREBY |
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As used in this amended report, "Urecoats" and the "Company" or "Us" or "We" refer to Urecoats Industries Inc. and its subsidiaries, unless the context otherwise requires. We are furnishing Items 10, 11, 12, and 13, of Form 10-K previously omitted pursuant to Rule 12b-23 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also amending Item 3. Legal Proceedings and Item 8. Financial Statements and Supplementary Data, Note 12, to the Consolidated Financial Statements at section entitled “Litigation”. |
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PART I |
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Item 3. Legal Proceedings. |
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Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs vs. Urecoats International, Inc. et al, Defendants. |
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The material features of this litigation have been previously disclosed in our Form 8-K dated May 15, 2002 (Item 5. Other Events) and Form 10-Qs dated June 30, 2002 (Item 3. Legal Proceedings) and September 30, 2002 (Item 5. Other Information), which information is incorporated its entirety herein from all of these reports by this reference. Since the date of our last report, a development has occurred consisting of the filing of our motion to consolidate the two cases (previously disclosed and incorporated herein by this reference) into one based on similar underlying factual bases between the two. This motion is scheduled to be heard by the Court in short order. The outcome of this litigation cannot be determined at this time. See Item 8. Financial Statements and Supplementary Data at Note 12 of the Notes to Consolidated Financial Statements. |
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PART II |
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Item 8. Financial Statements and Supplementary Data. |
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See Item 15(a) of Part IV of this amended report and amended disclosure in Note 12 thereof. |
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PART III |
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Item 10. Directors and Executive Officers of our Company. |
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Directors |
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The following describes the age, position, principal occupation and business experience during the past five years, and other directorships of each director. |
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Richard J. Kurtz (61) - Mr. Kurtz has served as Chairman of the Board of Urecoats since February 8, 1999 and a director since November 23, 2998. He was Chief Executive Officer of Urecoats from February 8, 1999 to October 9, 2001. Mr. Kurtz is the president and chief executive officer of The Kamson Corporation, a privately held company for the past 27 years, which owns and operates 71 investment properties in the Northeastern United States, Englewood Cliffs, NJ. He is a member of the board of directors of Paligent, Inc., a public company trading on the NASD over-the-counter bulletin board, since January 2000. Mr. Kurtz is a vice president and a member of the board of the Jewish Community Center on the Palisades, Tenafly, NJ, since 1996. He is an elected member of the board of trustees and foundation board for the Englewood Hospital and Medical Center of New Jersey since 1995. Mr. Kurtz received his bachelor of arts degree from the U niversity of Miami in 1962. |
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Timothy M. Kardok (45) -Mr. Kardok has served as a director since March 1, 2001. He has been Urecoats' Chief Executive Officer and President since March 19, 2001. From March 19, 2001 to December 31, 2001, Mr. Kardok was Chief Operating Officer. From March 19, 2001 to May 18, 2001, he was Treasurer. From October 1997 to February 2000, Mr. Kardok was senior vice president of Centimark Corporation, Canonsburg, PA. From January 1995 to October 1997, Mr. Kardok was executive vice president of R & J Industries, Boca Raton, FL. Mr. Kardok received his bachelor of arts degree in marketing from Notre Dame University, IN, in 1979 and master of business administration in marketing and finance from the University of Bridgeport, CT, in 1989. He is the Chairperson of the Executive Committee. |
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Lt. Gen. Arthur J. Gregg, US Army (Ret.) (74) - Gen. Gregg has been a director since February 21, 2000. He has more than 45 years of distinguished professional experience, holding senior level management and command positions in the military and executive positions in industry. Gen. Gregg is an active member of several corporate and academic boards and chairs three of them. He attended Harvard University, John F. Kennedy School of Government-Concentrated Executive Program in National Security; Saint Benedict College Atchison, KS, bachelor of science in business administration (summa cum laude); Army War College, Carlisle Barracks, PA - one year graduate level; and Command and General Staff College, Fort Leavenworth, KS - one year graduate level. He is Chairperson of the Compensation and a member of the Audit, Corporate Governance, and Executive Committees. |
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Steven Mendelow (59) - Mr. Mendelow has been a director since October 9, 2001. He is a principal and actively practicing with the certified public accounting firm of Konigsberg Wolf & Co., New York, NY, and its predecessor, since 1972. Mr. Mendelow is a member of the board of directors and chairperson of the audit committee of Candie's, Inc., a public company trading on the NASDAQ National Market, since 1999. He is a graduate of Bucknell University, Lewisburg, PA, 1964. Mr. Mendelow is Chairperson of the Audit and a member of the Executive Committee. |
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Jerold L. Zaro (50) - Mr. Zaro has been a director since October 9, 2001. He is a managing partner/president of Ansell Zaro Grimm & Aaron, P.C., New York, NY, since 1985. Mr. Zaro is a member of the board of directors of Commerce Bank Shore/NA, since 1999; Brookdale Community College Foundation, board of trustees since 1996; American Cancer Society, board of directors since 1989; Monmouth Medical Center, board of trustees since 1993; Jewish Federation of Greater Monmouth County, board of directors since 1996; and Commissioner of the New Jersey Highway Authority since 1991 and chairman of the Authority since February 2002. He received his juris doctor degree from Boston College School of Law, MA, 1976; attended the University of Cincinnati, OH, from 1969 to 1971; and received his bachelor of arts in history from Boston University, MA, 1973. Mr. Zaro is the Chairperson of the Corporate Governance and a member of the C ompensation and Executive Committees. |
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Mark A. Reichenbaum (52) - Mr. Reichenbaum has been a director since May 28, 2002. He is the president of HAJA Capital Corporation, Greenwich, Connecticut, since 1997; co-chairman, Clean Rite Centers, College Point, New York, since 1999; and director, eB2B Commerce, New York, New York, since 2001. Mr. Reichenbaum is also a member of the board of directors of Waxman Industries, Inc., a public company trading on the NASD over-the-counter bulletin board, since December 2001. He is a member of the Audit Committee. |
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Stephen L. Green (64) - Mr. Green has been a director since May 28, 2003. He serves as chairman of the board of directors and chief executive officer of SL Green Realty Corp., a public company trading on the NYSE, since 1977. Mr. Green founded S.L. Green Real Estate in 1980. Since then, he has been involved in the acquisition of over 50 Manhattan office buildings containing in excess of twenty million square feet. Today, the company is the second largest non-institutional owner of office buildings in New York City, with interests in 25 properties comprising over 10 million square feet of space. He is an at-large member of the executive committee of the board of governors of the Real Estate Board of New York ("REBNY") and has previously served as chairman of REBNY's Tax Committee. Mr. Green currently serves as a member on the boards of directors of the Starlight Foundation and Street Squash. He received his b achelor of arts degree from Hartwick College and a juris doctor degree from Boston College Law School. Mr. Green is a member of the Compensation Committee. |
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Executive Officers |
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The information with respect to our executive officers, including certain significant employees who are not executive officers but who are expected to make significant contributions to our business, is included under Item 4(A) on page 9 of our Form 10-K filed with the SEC on March 31, 2003. |
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Audit Committee Financial Expert |
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The Board of Directors has determined that it has at least one audit committee financial expert serving on its Audit Committee. The Audit Committee is composed of a majority of independent outside directors. Of the three members, Mr. Mendelow is not considered an independent outside director at this time based on a financial consulting arrangement entered into between us prior to his becoming a member of our Board of Directors in 2001. This arrangement was completed on April 1, 2002. See Item 13. Certain Relationships and Related Transactions, paragraph (d). We determined it was in ours and our stockholders’ best interests for Mr. Mendelow to not only become a member of the Audit Committee based on his 31 years of experience in the accounting and finance profession but also its Chairperson because no other director possessed at the time and none of the directors currently possess his exceptional qualifications. More importantly, Mr. Mende low is our Audit Committee Financial Expert, because he has: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of such principles in connection with our accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements, and experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions. Refer to Directors above for a brief listing of Mr. Mendelow’s experience. |
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Section 16(a) Beneficial Ownership Reporting Compliance |
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Section 16(a) of the Exchange Act requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms and the written representations from certain of the reporting persons that no other reports were required, we believe that during the fiscal year ended December 31, 2002, all executive officers, directors and greater than 10% beneficial owners complied with the reporting requirements of Section 16(a). |
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Code of Ethics |
We have adopted a Code of Ethics applicable to all officers (including but not limited to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), directors, and employees, which was attached as Exhibit 14.1 in our Form 10-K filed with the SEC on March 31, 2003 and also posted on our Internet website athttp://www.urecoats.com, under the heading “About Us”. |
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Item 11. Executive Compensation. |
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Summary of Cash and Certain Other Compensation |
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The following table shows the compensation for our Chief Executive Officer, our four most highly paid executive officers other than the Chief Executive Officer, and an executive officer of a subsidiary, for services rendered in all capacities to us and our subsidiaries for the years ended December 31, 2002, 2001 and 2000. |
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Summary Compensation Table | |||||||||||||
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| Long Term |
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| Annual Compensation | Compensation Awards |
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(a) |
| (b) | (c) | (d) | (e) | (f) | (g) | (i) | |||||
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| Other | Restricted | Securities |
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| Annual | Stock | Underlying | All Other | |||||
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| Salary | Bonus | Compensation | Award(s) | Options | Compensation | |||||
Name and Principal Position |
| Year | ($) | ($) | ($)(1) | ($)(2) | ($)(3) | ($) | |||||
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Timothy M. Kardok |
| 2002 | 225,000 | — | 183,094 | — | 25,000 | — | |||||
| CEO and President |
| 2001 | 168,750 | 236,768 | 160,834 | — | — | — | ||||
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| 2000 | — | — | — | — | — | — | ||||
Michael T. Adams |
| 2002 | 105,000 | — | 42,457 | — | 6,500 | — | |||||
| Executive Vice President and |
| 2001 | 79,800 | 55,556 | 8,100 | — | — | — | ||||
| Corporate Secretary |
| 2000 | 80,000 | 18,333 | 267,312 | — | — | — | ||||
John G. Barbar |
| 2002 | 135,000 | — | 51,544 | — | 5,000 | — | |||||
| CFO, Senior Vice President of |
| 2001 | 100,080 | 5,382 | 23,500 | — | — | — | ||||
| Finance and Corporate Treasurer |
| 2000 | — | — | — | — | — | — | ||||
Arthur K. Guyton, Ph.D. |
| 2002 | 105,000 | — | 43,772 | — | 5,000 | — | |||||
| Senior Vice President of Marketing |
| 2001 | 39,375 | 1,992 | — | — | — | — | ||||
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| 2000 | — | — | — | — | — | — | ||||
Ronald E. Clark |
| 2002 | 125,000 | — | 81,580 | — | 5,000 | — | |||||
| COO and Senior Vice President |
| 2001 | 38,333 | 1,967 | — | — | — | — | ||||
| of Operations |
| 2000 | — | — | — | — | — | — | ||||
David E. Dana, Ph.D. |
| 2002 | 105,417 | — | 33,766 | — | — | — | |||||
| Vice President of R & D for |
| 2001 | — | — | — | — | — | — | ||||
| Urecoats Manufacturing, Inc. |
| 2000 | — | — | — | — | — | — |
________________ |
(1) | Consists of: (a) an aggregate of 140,521 restricted shares of common stock issued and valued in the aggregate at $262,585 to certain executive officers as other compensation pursuant to their employment agreements, of which Messrs Kardok, Adams, Barbar, Guyton, and Clark, received 83,562, 16,000, 15,616, 12,343, and 13,000 shares, respectively, valued at $161,316, $25,620, $32,343, $20,461, and $22,845, respectively; and (b) an aggregate of $173,628 perquisites, of which Messrs Kardok, Adams, Barbar, Guyton, Clark, and Dana, each received an aggregate of $21,778, $16,837, $19,201, $23,311, $58,735, and $33,766, respectively. Perquisite amounts for certain executive officers exceeded 25% of their total perquisites as follows: Messrs Kardok, Adams, Barbar, and Guyton received car allowances for $13,134, $7,800, $7,800, and $11,779, respectively, and $7,992, $8,255, $10,749, and $10,749 for health/dental insurance, respectively; and Messrs Clark and Dana received reimbursement for mo ving expenses of $33,745 and $26,214, respectively. |
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(2) | We reserved an aggregate of 244,000 restricted shares of common stock for performance awards for Messrs Kardok, Adams, Barbar, Guyton, and Clark under our 2002 Executive Incentive Plan pursuant to their employment agreements covering a four year period, of which an aggregate of 61,000 shares were eligible to be earned at the end of the 2002 year, none of which were earned and thus forfeited. Messrs Kardok, Adams, Barbar, Guyton, and Clark held restricted shares of common stock of 170,000, 114,983, 23,113, 15,212, and 13,360, respectively, valued at $153,000, $103,485, $20,802, $13,691, and $12,024, respectively, as of December 31, 2002. No dividends will be paid on any unearned or unvested restricted shares of common stock. See Employment Contracts and Termination of Employment and Change-in-Control Arrangements below for more complete information related to the performance awards described herein for each of the Named Executive Officers below. |
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(3) | We granted an aggregate of 186,000 incentive stock options to Messrs Kardok, Adams, Barbar, Guyton, and Clark under our 2002 Stock Option Plan pursuant to their employment agreements covering a four year period, of which an aggregate of 46,500 options were eligible to become vested based on certain performance based thresholds at the end of the 2002 year, all of which were met and thus vested. |
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Share Consolidation, Options and Adjustments |
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On May 28, 2002, our common stockholders approved a 1-for-10 reverse split and share consolidation, which we effectuated after the close of business on May 30, 2002. In connection with the reverse split and share consolidation, certain adjustments were made to our stock-based compensation and incentive plans and outstanding awards thereunder. Unless otherwise noted, all information in this amended Form 10-K gives effect to the reverse split and share consolidation and related adjustments. |
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Option Grants in Last Fiscal Year |
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The following tables summarize the stock option activity for the Named Executive Officers during 2002. |
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Name |
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| % of Total Options |
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| ExpirationDate |
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Timothy M. Kardok |
| 100,000 |
| 45% |
| $3.00 |
| 12/31/06 |
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Michael T. Adams |
| 26,000 |
| 12% |
| $3.00 |
| 12/31/06 |
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John G. Barbar |
| 20,000 |
| 9% |
| $3.00 |
| 12/31/06 |
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Arthur K. Guyton, Ph.D. |
| 20,000 |
| 9% |
| $3.00 |
| 12/31/06 |
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Ronald E. Clark |
| 20,000 |
| 9% |
| $3.00 |
| 12/31/06 |
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David E. Dana, Ph.D. |
| 10,000 |
| 5% |
| $3.70 |
| 1/16/05 |
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(1) | The options to Messrs Kardok, Adams, Barbar, Guyton, and Clark were granted under our 2002 Stock Option Plan pursuant to their employment agreements covering a four year period, of which varying aggregate amounts for each are eligible to become vested based on meeting certain performance based thresholds at the end of each applicable year. The 2002 Option Plan and terms of their agreements grant broad discretion to change material terms including automatic acceleration of vesting up to a certain number of options upon a “Change-in-Control.”See Employment Contracts and Termination of Employment and Change-in-Control Arrangements” below for more information. |
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(2) | The exercise price for the incentive stock options granted to Messrs Kardok, Adams, Barbar, Guyton, and Clark, is based on the date when the reverse split and share consolidation was approved (as described above), which is $.10 higher than the original exercise price on the date of grant, which was $2.90. |
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Option Exercises and Holdings |
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Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values |
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| Value of Unexercised |
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| Underlying Unexercised |
| In-the-Money Options |
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| Options at12/31/02 (#) |
| At12/31/02 ($)(1) |
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Name |
| Exercise (#) |
| Realized ($) |
| Exercisable |
| Unexercisable |
| Exercisable |
| Unexercisable |
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Timothy M. Kardok |
| — |
| — |
| 25,000 |
| 75,000 |
| — |
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Michael T. Adams |
| — |
| — |
| 6,000 |
| 19,500 |
| — |
| — |
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John G. Barbar |
| — |
| — |
| 5,000 |
| 15,000 |
| — |
| — |
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Arthur K. Guyton, Ph.D. |
| — |
| — |
| 5,000 |
| 15,000 |
| — |
| — |
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Ronald E. Clark |
| — |
| — |
| 5,000 |
| 15,000 |
| — |
| — |
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David E. Dana, Ph.D. |
| — |
| — |
| 3,750 |
| 6,250 |
| — |
| — |
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Director Compensation |
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Of our Board's current 7 members, one is an officer who did not receive additional compensation for Board or committee service in 2002. |
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Standard Arrangements |
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Each director who is not an employee is reimbursed for actual expenses incurred in attending our Board meetings. |
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Prior to May 28, 2002, our nonemployee members of the Board of Directors (nonemployee directors) were compensated under a nonemployee director restricted stock compensation arrangement, where each new nonemployee director received 7,500 restricted shares of common stock for serving on our Board and its committees for a one year period. See Item 13. Certain Relationships and Related Transactions, paragraph (m). |
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On May 28, 2002, our stockholders approved our 2002 Non-Employee Director Restricted Stock Plan (“2002 Director Plan”). Under the 2002 Director Plan, we may issue up to 1,600,000 restricted shares of common stock through periodic automatic grants to our nonemployee directors only. The 2002 Director Plan provides, each nonemployee director who is then serving as a member of the Board shall automatically be granted an award consisting of a number of our restricted shares of common stock equal to: 48,000 for the Chairman of the Board, who is also a nonemployee director; and 12,000 for other nonemployee directors, upon initial election to the Board for a one year term (or a lesser amount prorated monthly if the initial election is for a shorter period). In addition to the automatic grant of shares to nonemployee directors described above, a one-time grant of 1,168,000 restricted shares of common stock was issued to the Chairman of the Board, in recognition of his personal cost for substantially funding us and acting as Chairman of the Board without adequate compensation over a three-year period. This one-time grant, made as of the effective date of this 2002 Director Plan, vests at the end of each year after the effective date of this 2002 Director Plan at the rate of 25% per year. This award vests in total at the end of four years. The restricted shares of common stock awarded under the 2002 Director Plan are subject to restrictions on transferability as well as a vesting schedule. In the event a recipient of a restricted stock award under the 2002 Director Plan ceases to be a director of the Company for any reason other than death or total disability, any restricted shares of common stock which are then unvested are subject to forfeiture back to the Company. Once vested, the shares are no longer restricted as to transferability and no longer subject to forfeiture to the Company upon termination of director status. The 2002 Director Plan is intended to be a nondiscretion ary plan for purposes of rules and interpretations of the SEC relating to Section 16 of the Exchange Act. See Item 13. Certain Relationships and Related Transactions, paragraph (n). See also Exhibits, Exhibit 10.8, for access to the full text of the 2002 Director Plan. |
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Other Arrangements |
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During 2002, we issued 42,500 restricted shares of common stock to Steven Mendelow, a director, pursuant to and in full satisfaction of a financial consultant arrangement entered into between us prior to his becoming a member of our Board of Directors, which shares were valued and recorded at $154,275. In 2001, we entered into a financial consultant arrangement with Mr. Mendelow. As consideration for the financial consulting services to be performed under our arrangement, we agreed to pay Mr. Mendelow an aggregate of 85,000 restricted shares of common stock, in two equal increments, with the first increment being paid on October 1, 2001 and the second on April 1, 2002. See also Item 13. Certain Relationships and Related Transactions, paragraph (d). |
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Employment Contracts and Termination of Employment and Change-in-Control Arrangements |
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In 2002, we entered into long-term employment contracts with our CEO and four other Named Executive Officers comprising Messrs Kardok, Adams, Barbar, Guyton, and Clark, and a long-term employment arrangement with the Named Executive Officer of a subsidiary, Dr. Dana, the terms and conditions of which, including benefits upon termination of employment, and change-in-control arrangements, are more fully described below. |
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Long Term Employment Contracts |
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We agreed to employ Messrs Kardok, Adams, Barbar, Guyton, and Clark for a period beginning on January 1, 2002 (the “effective date”) and ending December 31, 2005 (the “employment period”). These contracts follow the same basic structure and contain identical terms and conditions, except for our CEO’s agreement, which has additional compensation related benefits. A brief summary of each contract is provided below. See Index of Exhibits for access to the full text of each respective officer’s contract. |
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(a) For Mr. Kardok, we agreed to the following compensation: (i) annualbase salary of $225,000, subject to annual review; (ii) an aggregate of 293,562 shares ofrestricted common stock as other compensation, subject to vesting in 17,500 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 31,062 shares will vest at the end thereof; (iii)incentive stock options to purchase 100,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, exercisable anytime within five (5) years of the date of grant, vesting up to a maximum of 25,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 120,000 shares of res tricted common stock during the term of his agreement at a maximum of 30,000 shares during each calendar year; (v) a yearly minimumbonus of $10,000, due and payable not later than January 30 with respect to the immediately preceding calendar year, which our Board of Directors may, in its sole and absolute discretion, increase the amount to as much as $100,000; (vi) entitled to participate in medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans; and (vii) paid vacation, fringe benefits and perquisites. |
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(b) For Mr. Adams, we agreed to the following compensation: (i) annualbase salary of $105,000, subject to annual review; (ii) an aggregate of 64,000 shares ofrestricted common stock as other compensation, subject to vesting in 4,000 share increments on a quarterly basis commencing on the effective date; (iii)incentive stock options to purchase 26,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, exercisable anytime within five (5) years of the date of grant, vesting up to a maximum of 6,500 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 34,000 shares of restricted common stock during the term of his agreement at a maximum of 8,500 shares during each calendar year; ( v) adiscretionary bonus; (vi) entitled to participate in medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans; and (vii) paid vacation, fringe benefits and perquisites. |
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(c) For Mr. Barbar, we agreed to the following compensation: (i) annualbase salary of $135,000, subject to annual review; (ii) an aggregate of 51,616 shares ofrestricted common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 6,616 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, exercisable anytime within five (5) years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 30,000 shares of restricte d common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; (v) adiscretionary bonus; (vi) entitled to participate in medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans; and (vii) paid vacation, fringe benefits and perquisites. |
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(d) For Mr. Guyton, we agreed to the following compensation: (i) annualbase salary of $105,000, subject to annual review; (ii) an aggregate of 48,343 shares ofrestricted common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 3,343 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, exercisable anytime within five (5) years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 30,000 shares of res tricted common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; (v) adiscretionary bonus; (vi) entitled to participate in medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans; and (vii) paid vacation, fringe benefits and perquisites. |
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(e) For Mr. Clark, we agreed to the following compensation: (i) annualbase salary of $125,000, subject to annual review; (ii) an aggregate of 49,000 shares ofrestricted common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 4,000 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, exercisable anytime within five (5) years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 30,000 shares of rest ricted common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; (v) adiscretionary bonus; (vi) entitled to participate in medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans; and (vii) paid vacation, fringe benefits and perquisites. |
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Termination of Employment Contracts |
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The employment contracts with Messrs Kardok, Adams, Barbar, Guyton, and Clark, may be terminated between us before expiration of the employment period for any reason, but subject to certain terms, conditions and remedies, as described below. |
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Uncompensated Termination |
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(a) If an officer resigns without cause, or if we terminate him for cause, then he shall be entitled to receive a cash sum payment of the portion of annual base salary earned up to and including the date of termination, and any benefits that have accrued under certain sections up to and including the date of termination. More particularly, he shall be entitled only to (i) such restricted shares of common stock that have actually vested as of the date of termination; (ii) such stock options that he has exercised or is entitled to exercise as of the date of termination; and (iii) such bonuses, if any, that he has earned as of the date of termination. |
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Compensated Termination |
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(b) If an officer resigns for cause or other than a change-in-control (except for a forced resignation), or is terminated by us without cause, in each case prior to the expiration of the employment period, the officers employment terminates on the date of termination and he is entitled to: |
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(i) the unpaid portion of salary due for the period of time through the date of termination; (ii) a severance cash payment equal to either six (6) months (Messrs Adams, Barbar, Guyton, and Clark) or twelve (12) months (Mr. Kardok) of the then current annual base salary; (iii) a number of restricted shares of common stock equal to six (6) months (Messrs Adams, Barbar, Guyton, and Clark) or twelve (12) months (Mr. Kardok) which other compensation will be deemed earned and vested, and any restrictions on such restricted shares except as required by applicable law will immediately lapse and such restricted shares will become nonforfeitable; (iv) a number of stock options equal to six (6) months (Messrs Adams, Barbar, Guyton, and Clark) or twelve (12) months (Mr. Kardok) of the stock options described in the agreements, and any other stock options granted to the officers, which stock options will be deemed vested, and any restrictions on such stock options except as required by applicable law will immediately lapse and such stock options will be fully exercisable; (v) the product of (I) any performance awards which the officer can show that he reasonably would have received had he remained in his capacity with us through the end of the calendar year in which occurs his date of termination, multiplied by (II) a fraction, the numerator of which is the number of days in the calendar year in which the date of termination occurs through the date of termination and the denominator of which is 365, but only to the extent not previously paid; (vi) for six (6) months (Messrs Adams, Barbar, Guyton, and Clark) or twelve (12) months (Mr. Kardok) following the date of termination, we will continue to provide medical and dental benefits only to the officer on the same basis as such benefits are provided during such period to our senior executive officers; provided, however, that if our welfare plans do not permit such coverage, we will provide the officer medical benefits (with the same after tax effect) outside of such plans; and (vii) to the extent not theretofore paid or provided, we will timely pay or provide to the officer any other amounts or benefits which he is entitled to receive through the date of termination under any of our plans, programs, policies or practices or contracts or agreements, including accrued vacation to the extent unpaid. |
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Termination Due to Change-in-Control; Death or Permanent Disability |
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(c) (i) If we undergo a change-in-control, the officer has 120 days on or following the date of the change-in-control to terminate his employment under his agreement; provided, however, that if the officer is forced to resign, then he is entitled to all of the compensation and benefits described in paragraph (b) above; (ii) if the officer becomes permanently disabled or dies prior to the expiration of the employment period, the officers employment terminates on the date of termination; or (iii) if the officer’s employment is terminated pursuant to either subsection (i) hereof (except for a forced resignation) or subsection (ii) hereof, the officer or, in the case of his death, the officer’s beneficiary or other legal representative, will be entitled to: (A) the unpaid portion of the annual base salary due the officer up to the date of termination, (B) the restricted shares of common stock, to the extent earned and vested under the agreement, which restrictions, if any, will immediately lapse and become nonforfeitable except as otherwise required by law, (C) the stock options, to the extent granted and vested under the agreement, will become fully exercisable, (D) any performance awards, to the extent earned or deemed earned under the agreement in the Compensation Committee’s discretion, (E) continuation of medical and dental benefits to the officer’s spouse and/or eligible dependents, if any, for six (6) months (Messrs Adams, Barbar, Guyton, and Clark) or twelve (12) months (Mr. Kardok), on the same basis as such benefits are provided during such period to our senior executive officers; provided, however, that if our welfare plans do not permit such coverage, we will provide the medical benefits (with the same after tax effect) outside of such plans; and (F) to the extent not theretofore paid or provided, any unpaid vacation pay or expense reimbursement or other applica ble other benefits. |
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Change-in-Control Arrangements |
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The employment contracts with Messrs Kardok, Adams, Barbar, Guyton, and Clark, contain certain change-in-control provisions, the benefits of which were described above under Termination of Employment Contracts, Compensated Terminations. A change-in-control will be deemed to have occurred if any of the following events occur: (i) Any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act, is or becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of our securities representing (i) 20% or more of the combined voting power of our then outstanding voting securities, which acquisition is not approved in advance of the acquisition or within 30 days after the acquisition by a majority of the Incumbent Board (as hereinafter defined) or (ii) 33% or more of the combined voting power of our then outstanding voting securities, without regard to whether such acquisition is approved by the Incumbent Board; (ii) In dividuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by our stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall, for the purposes of this agreement, be considered as though such person were a member of our Incumbent Board; (iii) the consummation of a merger, consolidation or reorganization involving us, other than one which satisfies both of the following conditions: (A) a merger, consolidation or reorganization which would result in our voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) at least 55% of the combined voting power of our voting securities or such o ther entity resulting from the merger, consolidation or reorganization outstanding immediately after such merger, consolidation or reorganization and being held in substantially the same proportion as the ownership in our voting securities immediately before such merger, consolidation or reorganization, and (B) a merger, consolidation or reorganization in which no person is or becomes the beneficial owner, directly or indirectly, of our securities representing 20% or more of the combined voting power of our then outstanding voting securities; or (iv) our stockholders approve a plan of complete liquidation of us or an agreement for the sale or other disposition by us of all or substantially all of our assets. |
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In addition to the compensation and benefits referred to under Termination of Employment Contracts, Compensated Terminations, in paragraph (c)(i) above, all unearned and unvested restricted shares of common stock in the form of other compensation provided for in each officers respective agreement, will immediately vest and be delivered to the officer upon the change of control provided that the officer is employed by us on the date of the change-in-control. |
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Long Tern Employment Arrangement |
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We entered into a long-term employment arrangement with David E. Dana, Ph.D., who is an executive officer in one of our subsidiaries, beginning on January 17, 2002 and ending January 16, 2005, pursuant to which we agreed to the following compensation: (i) annualbase salary of $110,000, subject to periodic review; (ii)incentive stock options to purchase 10,000 shares, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, vesting in 1,250 increments at the end of each quarter worked, and exercisable anytime within three (3) years of the date of grant; (iii) eligibility to participate in the 2002 Management Incentive Plan; (iv) full health insurance coverage; (v) car allowance; (vi) moving expenses; (vii) paid vacation; and (viii) cash bonuses for intellectual property and inventions made during his employment. If we terminate Dr. Dana’s employment arrangement for other than gross misconduct, he is entitled to a severance payment equal to six (6) months of his then current base compensation. |
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Compensation Committee Interlocks and Insider Participation in Compensation Decisions |
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No member of our Compensation Committee is a current or former officer or employee of the Company or any of its subsidiaries. No executive officer of the Company served as a: (a) member of the compensation committee of another entity, one of whose executive officers served on the compensation committee of the Company; (b) director of another entity, one of whose executive officers served on the compensation committee of the Company; or (c) member of the compensation committee of another entity, one of whose executive officers served as a director of the Company. |
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
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Securities Authorized for Issuance under Equity Compensation Plans |
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The following table sets forth information with respect to our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance on an aggregated basis as of December 31, 2002. |
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Equity Compensation Plan Information | ||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities Reflected in Column (a)) (c) | |||||||
Equity Compensation Plans Approved by Security Holders | 677,450 | $ | 3.37 | 2,394,100 | (2) | |||||
Equity Compensation Plans Not Approved by Security Holders (1) | 62,000 | $ | 4.73 | 410,000 | (3) | |||||
Total | 739,450 | $ | 3.48 | 2,804,100 | ||||||
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(1) The compensation plans comprising the figures in this row include: (i) 1998 Employee and Consultant Stock Option Plan (See Item 15(a), Consolidated Financial Statements and accompanying Note 15. Stock Options, 1998 Employee and Consultant Stock Option Plan, andrefer to Exhibits, Exhibit 10.1 for access to the full text of the plan); (ii) Non-Plan Restricted Options (See Item 15(a), Consolidated Financial Statements and accompanying Note 15. Stock Options, Non-Plan Options, andrefer to Item 13. Certain Relationships and Related Transactions, paragraph (p)); and (iii) Long-Term Employment Agreements (See Item 11. Executive Compensation, Employment Contracts and Termination of Employment and Change-in-Control Arrangements, andrefer to Exhibits, Exhibits 10.12 through 10.7 for access to the full text of the contracts). |
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(2) This amount includes securities for compensation plans: (i) 1,600,000 restricted shares of common stock under our 2002 Non-Employee Director Restricted Stock Plan (See also Item 11. Executive Compensation, Director Compensation, Standard Arrangements; Item 15(a), Consolidated Financial Statements and accompanying Note 19. Long-Term Compensation and Incentive Program, 2002 Non-Employee Director Restricted Stock Plan; andrefer to Exhibits, Exhibit 10.8 for access to the full text of the plan); and (ii) 500,000 securities under our 2002 Executive Incentive Plan (See also Item 15(a), Consolidated Financial Statements and accompanying Note 19. Long-Term Compensation and Incentive Program, 2002 Executive Plan; andrefer to Exhibits, Exhibit 10.8 for access to the full text of the plan). |
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(3) This amount includes 410,000 restricted shares of common stock reserved pursuant to long-term employment agreements (Refer to footnote (1)(iii) for the table above). |
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Security Ownership of Management |
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We encourage stock ownership by our directors, officers and employees to align their interests with our stockholders. Urecoats believes this policy has played a significant role in its progress and will, ultimately, lead to beneficial future returns. The following table sets forth information as of April 12, 2003 regarding the beneficial ownership, including the right to acquire beneficial ownership, of common stock by all directors, each of the executive officers named in the Summary Compensation Table, and all of the directors and executive officers of the Company as a group. |
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Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent Beneficially Owned of Class (a) | Amount and Nature of Rights To Acquire Beneficial Ownership (b) | Total Amount Beneficially Owned Including Rights to Acquire Beneficial Ownership | Percent Beneficially Owned including Rights to Acquire Beneficial Ownership of Class (a) | |||||||||||
Directors: | ||||||||||||||||
Richard J. Kurtz, Chairman | 3,967,017 | 27.85 | % | 2,296,109 | 6,263,126 | (c) | 43.97 | % | ||||||||
Lt. Gen. Arthur J. Gregg, US Army (Ret) | 22,500 | .16 | % | 12,000 | 34,500 | .24 | % | |||||||||
Timothy M. Kardok (d) | 187,500 | 1.32 | % | 30,921 | 218,421 | 1.53 | % | |||||||||
Steven Mendelow | 332,000 | (e) | 2.33 | % | 12,000 | 344,000 | 2.42 | % | ||||||||
Jerold L. Zaro | 55,000 | .39 | % | 12,000 | 67,000 | .47 | % | |||||||||
Mark A. Reichenbaum | 0 | --- | 852,000 | (f) | 852,000 | 5.98 | % | |||||||||
Stephen L. Green | 100,250 | .70 | % | 239,500 | (g) | 339,750 | 2.39 | % | ||||||||
Other Named Executive Officers: | ||||||||||||||||
Michael T. Adams | 118,983 | (h) | .84 | % | 9,263 | 128,246 | .90 | % | ||||||||
John G. Barbar | 26,113 | .18 | % | 8,553 | 34,666 | .24 | % | |||||||||
Arthur K. Guyton, Ph.D. | 18,212 | .13 | % | 7,763 | 25,975 | .18 | % | |||||||||
Ronald E. Clark | 16,360 | .11 | % | 8,289 | 24,649 | .17 | % | |||||||||
David E. Dana, Ph.D. | 0 | --- | 6,250 | 6,250 | .04 | % | ||||||||||
All current directors and executive officers as a group (13 ) | 4,850,935 | 34.06 | % | 3,495,981 | 8,346,916 | (h) | 58.60 | % |
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(a) Based on 14,243,354 shares issued and outstanding as of April 12, 2003. |
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(b) This column represents common stock, which the person has the right to acquire within 60 days after April 12, 2003. The rights to acquire common stock are related to the following: For Urecoats employees (Mr. Kardok, Mr. Adams, Mr. Barbar, Dr. Guyton, Mr. Clark, and Dr. Dana) these shares may be acquired upon the exercise of stock options. For the nonemployee directors: (a) Mr. Kurtz, Lt. Gen. Gregg (Ret.), Mr. Mendelow, Mr. Zaro, Mr. Reichenbaum, and Mr. Green may acquire an aggregate of 400,000 of these shares upon vesting pursuant to the 2002 Non-Employee Director Restricted Stock Plan; (b) Mr. Kurtz, and two entities that Mr. Reichenbaum and Mr. Green own a material interest in, may acquire an aggregate of 2,852,209 of these shares upon conversion of Series B and Series C Preferred Shares; and (c) Mr. Kurtz and Mr. Reichenbaum may acquire an aggregate of 171,400 of these shares upon the exercise of stock options. Seegenerally Item 13. Certain Relationships and Related Transactions. |
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(c) Mr. Kurtz is also an optionee under a Second Series C Preferred Option, which, subject to our stockholders’ approval of an increase in our common stock capitalization limit and the conversion aspects of our Series C Preferred Shares, will give him the right to acquire additional restricted shares of common stock pursuant to conversion rights related thereto. The table does not include any specific number of shares. See Item 13. Certain Relationships and Related Transactions, paragraph (t). See also Item 15 (a), Consolidated Financial Statements and accompanying Note 21. Subsequent Events, (b) Series C Convertible Preferred Stock Option, for more information on the second option. |
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(d) Mr. Kardok is also our CEO and President. |
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(e) These shares are held in various instruments, including a limited partnership, defined benefit plan, money purchase plan, and profit sharing plan, arranged by and for the benefit of the named individual and/or his family. |
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(f) The named individual has the right to acquire these shares in his sole name and through an entity in which he owns a material interest. See Item 13. Certain Relationships and Related Transactions, paragraphs (p) and (l), respectively. |
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(g) The named individual has the right to acquire these shares through an entity in which he owns a material interest. See Item 13. Certain Relationships and Related Transactions, paragraph (k). |
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(h) These shares are held jointly by the named individual and his spouse. |
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Security Ownership of Certain Beneficial Owners |
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Except as set forth below, we know of no person who is the beneficial owner of more than 5% of our common stock. |
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Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent Beneficially Owned of Class (a) | Amount and Nature of Rights To Acquire Beneficial Ownership (b) | Total Amount Beneficially Owned Including Rights to Acquire Beneficial Ownership | Percent Beneficially Owned including Rights to Acquire Beneficial Ownership of Class (a) | |||||||||||
Directors: | ||||||||||||||||
Richard J. Kurtz Duck Pond Road Alpine, New Jersey 07620 | 3,967,017 | 27.85 | % | 2,296,109 | 6,263,126 | 43.97 | % | |||||||||
Mark A. Reichenbaum Six Lauder Way Greenwich, Connecticut 06830 | 0 | --- | 852,000 | 852,000 | 5.98 | % |
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(a) Based on 14,243,354 shares issued and outstanding as of April 12, 2003. |
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(b) Refer to the Security Ownership of Management table above under Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for information on the nature of rights to acquire beneficial ownership by the persons under this column. |
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Item 13. Certain Relationships and Related Transactions. |
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We completed our first full year of operations in 2002. We had a continuing, recurring need for financial and other support during 2002, and were required to accept continued support from our officers and directors to ensure our business progressed as planned. This has occasioned many continuing related transactions between our officers and directors. |
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(a) During 2002, Richard J. Kurtz, Chairman of the Board, personally guaranteed $335,000 of notes and is a co-borrower for added security on a $500,000 line of credit from financial institutions, and $1,600,000 for primary suppliers. |
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(b) During 2002, we entered into a Series C Preferred Stock Option Agreement (“First Series C Preferred Option”) with Richard J. Kurtz, Chairman of the Board, which granted to him, the right and option to purchase at $20.00 per share all or any part of an aggregate of 250,000 of our Series C Convertible Preferred Stock (the “Series C Preferred Shares”), which Series C Preferred Shares purchased thereby are convertible into restricted shares of common stock according to a Conversion Ratio formula based on a price of $2.20 per share. SeeItem 15(a), Consolidated Financial Statements and accompanying Note 16. Stockholders’ Equity, Preferred Stock, and Exhibits, Exhibits 99.3 and 10.18, for information on our Series C Preferred Shares and the First Series C Preferred Option. |
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(c) During 2002, we issued 195,631 Series C Preferred Shares to Richard J. Kurtz, Chairman of the Board, pursuant to periodic partial exercises under his First Series C Preferred Option, which shares were paid for by cancellation of $3,912,620 in short term loans bearing interest at 9% per annum that he provided to us throughout the 2002 year for working capital and other operating requirements. See Item (b) above. |
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(d) During 2002, we issued 42,500 restricted shares of common stock to Steven Mendelow, a director, pursuant to and in full satisfaction of a financial consultant arrangement entered into prior to his becoming a member of our Board of Directors, which shares were valued and recorded at $154,275. |
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(e) During 2002, we entered into a long-term employment agreement with Timothy M. Kardok, a director and our CEO and President, under which we agreed to the following compensation: (i) annualbase salary of $225,000; (ii) an aggregate of 293,562restricted shares of common stock as other compensation, subject to vesting in 17,500 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 31,062 shares will vest at the end thereof; (iii)incentive stock options to purchase 100,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 25,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 120,000 restricted shares of common stock during the term of his agreement at a maximum of 30,000 shares during each calendar year; (v) and a yearly minimumbonus of $10,000, due and payable not later than January 30 with respect to the immediately preceding calendar year, which our Board of Directors may, in its sole and absolute discretion, increase the amount to as much as $100,000. Mr. Kardok did not request nor did we pay him a bonus for the year 2002. See paragraph (u) below. See also Exhibits, Exhibits 10.12, for access to the full text of the agreement. |
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(f) During 2002, we entered into a long-term employment agreement with Michael T. Adams, our Executive Vice President and Corporate Secretary, under which we agreed to the following compensation: (i) annualbase salary of $105,000; (ii) an aggregate of 64,000restricted shares of common stock as other compensation, subject to vesting in 4,000 share increments on a quarterly basis commencing on the effective date; (iii)incentive stock options to purchase 26,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 6,500 per year and after the end of each calendar year according to an Excess Revenue formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 34,000 restricted shares of common stock during the ter m of his agreement at a maximum of 8,500 shares during each calendar year; and (v) adiscretionary bonus.See paragraph (u) below. See also Exhibits, Exhibits 10.13, for access to the full text of the agreement. |
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(g) During 2002, we entered into a long-term employment agreement with John G. Barbar, our CFO, Senior Vice President of Finance, and Corporate Treasurer, under which we agreed to the following compensation: (i) annualbase salary of $135,000; (ii) an aggregate of 51,616restricted shares of common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 6,616 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; eligibility to earnperf ormance awards for a minimum aggregate of 30,000 restricted shares of common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; and adiscretionary bonus.See paragraph (u) below. See also Exhibits, Exhibits 10.14, for access to the full text of the agreement. |
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(h) During 2002, we entered into a long-term employment agreement with Arthur K. Guyton, Senior Vice President of Marketing, under which we agreed to the following compensation: (i) annualbase salary of $105,000; (ii) an aggregate of 48,343restricted shares common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 3,343 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 30,000 restricted shares of common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; and (v) adiscretionary bonus.See paragraph (u) below. See also Exhibits, Exhibits 10.15, for access to the full text of the agreement. |
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(i) During 2002, we entered into a long-term employment agreement with Ronald E. Clark, our Chief Operating Officer and Senior Vice President of Operations, under which we agreed to the following compensation: (i) annualbase salary of $125,000; (ii) an aggregate of 49,000restricted shares of common stock as other compensation, subject to vesting in 3,000 share increments on a quarterly basis commencing on the effective date, except the first quarter commencing as of the effective date 4,000 shares will vest at the end thereof; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to ear nperformance awards for a minimum aggregate of 30,000 restricted shares of common stock during the term of his agreement at a maximum of 7,500 shares during each calendar year; and (v) adiscretionary bonus.See paragraph (u) below. See also Exhibits, Exhibits 10.16, for access to the full text of the agreement. |
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(j) During 2002, we entered into a long-term employment agreement with Dale L. Epperson, our Senior Vice President of Market Development, under which we agreed to the following compensation: (i) annualbase salary of $130,000; (ii) an aggregate of 48,000restricted shares of common stock as other compensation, subject to vesting in 3,000 share increments on a pro-rata quarterly basis commencing on the effective date; (iii)incentive stock options to purchase 20,000 shares, at an exercise price equal to $3.00 for each share, of our common stock, and, subject to vesting, exercisable anytime within 5 years of the date of grant, vesting up to a maximum of 5,000 per year and after the end of each calendar year according to an Excess Revenues formula; (iv) eligibility to earnperformance awards for a minimum aggregate of 30,000 restricted shares of common stock during th e term of his agreement at a maximum of 7,500, during each calendar year; and (v) adiscretionary bonus. Mr. Epperson earned a $30,000 bonus in 2002. |
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(k) During 2002, a corporation in which Stephen L. Green, director, owns a material interest, purchased 25,000 of our Series C Preferred Shares pursuant to a private placement offering for $500,000 in cash, which Series C Preferred Shares are convertible into restricted shares of common stock according to a Conversion Ratio formula based on a price of $2.20 per share. See Exhibits, Exhibit 99.3 for access to full information on the Series C Preferred Shares. |
|
(l) During 2002, a corporation in which Mark A Reichenbaum, director, owns a material interest, purchased 100,000 of our Series C Preferred Shares pursuant to a private placement offering for an aggregate of $2,000,000 in cash, which Series C Preferred Shares are convertible into restricted shares of common stock according to a Conversion Ratio formula based on a price of $2.40 per share. See Exhibits, Exhibit 99.3 for access to full information on the Series C Preferred Shares. |
|
(m) During 2002, we issued 7,500 restricted shares of common stock to Lt. Gen. Gregg (Ret.), a director, for board of director services, under a nonemployee director restricted stock arrangement (prior to the establishment of the 2002 Non-Employment Director Restricted Stock Plan), which transaction was valued and recorded at $23,625. |
|
(n) During 2002, we issued an aggregate of 1,276,000 restricted shares of common stock to Messrs Kurtz, Gregg, Mendelow, Zaro, Reichenbaum, and Green, nonemployee directors, under the 2002 Non-Employee Director Restricted Stock Plan (“2002 Director Plan”). The restricted shares of common stock issued thereby have not vested, were not valued, recorded, or treated as outstanding as of December 31, 2002 nor has their status changed as of the date of this amended report, and such shares will remain in our custody until such time that they are earned and vested. SeeItem 15(a), Consolidated Financial Statements and accompanying Note 19. Long Term Compensation and Incentive Program, 2002 Non-Employee Director Restricted Stock Plan, and Exhibits, Exhibit 10.8 for access to the full text of the plan. |
|
(o) During 2002, we issued 147,021 restricted shares of common stock to Messrs Kardok, Adams, Barbar, Guyton, Clark, and Epperson, officers and an officer-director, as other compensation in connection with their employment agreements, which transactions were valued and recorded at $270,690. See paragraphs (e), (f), (g), (h), (i), and (j) above. |
|
(p) During 2002, we granted Mark A Reichenbaum, director, a non-plan option for 10,000 restricted shares of common stock, good for two years, and exercisable at $3.15 for each option per share in exchange for the acceleration of payments related to the purchase of our Series C Preferred Shares. See paragraph (l) above. |
|
(q) During 2002 to and including March 31, 2003, we accrued $144,521 of dividends related to our Series B Preferred Shares, which are solely owned by Richard J. Kurtz, Chairman of the Board. See Exhibits, Exhibits 99.1 and 99.2 for access to full information on the Series B Preferred Shares. |
|
(r) During 2002 to and including March 31, 2003, we accrued $161,592 of dividends related to our Series C Preferred Shares, for two entities in which Mark A. Reichenbaum and Stephen L. Green, directors, own a material interest, and Richard J. Kurtz, Chairman of the Board. See paragraphs (c), (k) and (l) above. See Exhibits, Exhibit 99.3 for access to full information on the Series C Preferred Shares. |
|
(s) During 2002, we paid for a Key Man Life Insurance Policy covering Richard J. Kurtz, Chairman of the Board, which is an annually renewable $3,000,000 term life policy and Urecoats is the beneficiary. |
|
(t) During 2003, we entered into a second Series C Preferred Stock Option Agreement (“Second Series C Preferred Option”) with Richard J. Kurtz, Chairman of the Board, granting to him, the right and option to purchase at $20.00 per share all or any part of an aggregate of 250,000 of our Series C Preferred Shares, which Series C Preferred Shares purchased thereby are convertible into restricted shares of common stock according to a Conversion Ratio formula based on a price of $.50 per share. SeeItem 15(a), Consolidated Financial Statements and accompanying Note 16. Stockholders’ Equity, Preferred Stock, Series C Convertible Preferred Stock and Note 21. Subsequent Events, (b) Series C Convertible Preferred Stock Option, and Exhibits, Exhibit 99.3, for more information on our Series C Preferred Shares and the Second Series C Preferred Option. |
|
(u) As a result of financial constraints during 2003, we granted to Messrs Kardok, Adams, Barbar, Guyton, and Clark, officers, an aggregate of 73,159 non-plan restricted stock options as consideration for their agreeing to a 10% reduction in their annual salary, which options are exercisable at $.95 per share, good for two years, and vest pro rata at the end of each quarter during which the executive is employed in 2003. These restricted stock options were not intended to be nor granted in lieu of salary. |
|
|
14 |
PART IV |
|
|
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. |
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(a) Consolidated Financial Statements and Supplementary Data |
|
The following Financial Statements are included herein under Item 8: |
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| Page |
| |
Consolidated Balance Sheets at December 31, 2002 and December 31, 2001 | F-1 |
Consolidated Statements of Operations for Each of the Years in the Three Year Period Ended December 31, 2002 | F-3 |
Consolidated Statements of Stockholders' Equity for Each of the Years in the Three Year Period Ended December 31, 2002 | F-5 |
Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 2002 | F-8 |
Notes to Consolidated Financial Statements | F-10 |
Report of Management | F-31 |
Independent Auditors' Report | F-32 |
|
All other schedules have been omitted for the reason that the required information is presented in financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable. |
|
(b) Reports on Form 8-K |
None. |
|
(c) Exhibits |
|
Exhibit |
|
|
| ||
3.1 |
| Restated Certificate of Incorporation of the Company as filed with the State of Delaware on June 16, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
3.2 |
| Certificate of Amendment of Certificate of Incorporation dated February 12, 1999 of the Company as filed with the State of Delaware on February 12, 1999 (incorporated by reference to Exhibit 3.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
3.3 |
| Certificate of Amendment of Certificate of Incorporation dated May 28, 2002 of the Company as filed with the State of Delaware on May 28, 2002 (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
3.4 |
| Proforma Restated Certificate of Incorporation, as amended, and currently in effect, of the Company. |
3.5 |
| By-laws of the Company (incorporated by reference to Exhibit 3(ii) to Form 10-KSB for the year ended December 31, 2000, filed March 30, 2001). |
3.6 |
| Amendments to By-laws of the Company (incorporated by reference to Item 5. Other Information, Amendments to By-laws, to Form 10-Q for the quarter ended September 30, 2001, filed November 14, 2001). |
3.7 |
| By-laws, as amended, and currently in effect, of the Company. |
10.1 |
| 1998 Employee and Consultant Stock Option Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 No. 333-44971, filed January 27, 1998). |
10.2 |
| 1999 Consultant and Employee Stock Purchase and Option Plan (incorporated by reference to Exhibit 99.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
10.3 |
| 1999 Consultant and Employee Stock Purchase and Option Plan, as amended (incorporated by reference to Exhibit 99.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
10.4 |
| 2000 Stock Purchase and Option Plan (incorporated by reference to Exhibit (10) to Registration Statement on Form S-8 No. 333-51026, filed November 30, 2000). |
10.5 |
| 2002 Stock Option Plan (incorporated by reference to Annex D to Definitive Proxy Statement, filed April 30, 2002). |
10.6 |
| 2002 Executive Incentive Plan (incorporated by reference to Annex E to Definitive Proxy Statement, filed April 30, 2002). |
|
15 |
10.7 |
| 2002 Management Incentive Plan (incorporate by reference to Annex F to Definitive Proxy Statement, filed April 30, 2002). |
10.8 |
| 2002 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
10.9 |
| Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
10.10 |
| Amendment to Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz dated January 4, 2002 (incorporated by reference to Exhibit 10.1.1 to Form 8-K date December 31, 2001, filed January 31, 2002). |
10.11 |
| Securities Purchase Agreement dated December 31, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
10.12 |
| Employment Agreement, effective January 1, 2002, between Timothy M. Kardok and the Company (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.13 |
| Employment Agreement, effective January 1, 2002, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.14 |
| Employment Agreement, effective January 1, 2002, between John G. Barbar and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.15 |
| Employment Agreement, effective January 1, 2002, between Arthur K. Guyton and the Company (incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.16 |
| Employment Agreement, effective January 1, 2002, between Ronald E. Clark and the Company (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.17 |
| Employment Agreement, effective September 1, 2002 between Dale L. Epperson and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2002, filed November 14, 2002). |
10.18 |
| Series C Preferred Stock Option Agreement dated January 8, 2002 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
14.1 |
| Code of Ethics adopted by the Company on March 28, 2003 (incorporated by reference to Exhibit 14.1 to Form 10-K for the year ended December 31, 2003, filed March 31, 2003). |
21 |
| List of Subsidiaries of the Company. |
23 |
| Consent of Baum & Company, P.A. to the incorporation of their Independent Auditors’ Report herein. |
99.1 |
| Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated September 30, 2001 as filed with the State of Delaware on November 2, 2001 (incorporated by reference to Exhibit 3.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
99.2 |
| Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated December 31, 2001 (incorporated by reference to Exhibit 3.1.1 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
99.3 |
| Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated January 8, 2002 as filed with the State of Delaware on February 28, 2002 (incorporated by reference to Exhibit 3.2 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
99.4 |
| Certification of Chief Executive Officer for Form 10-K for the year ended December 31, 2002 (incorporated by reference to page 54 to the Form 10-K for the year ended December 31, 2002, filed on March 31, 2003). |
99.5 |
| Certification of Chief Financial Officer for Form 10-K for the year ended December 31, 2002 (incorporated by reference to page 55 to the Form 10-K for the year ended December 31, 2002, filed on March 31, 2003). |
|
(d) Other Financial Statements |
|
There are no financial statements required to be filed by Regulation S-X which are excluded from this amended report by Rule 14 a-3(b)(1). |
|
16 |
SIGNATURES |
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. |
|
URECOATS INDUSTRIES INC. | ||
| | |
Date: April 30, 2003 | By: | |
Timothy M. Kardok | ||
Chief Executive Officer and President |
URECOATS INDUSTRIES INC. | ||
| | |
Date: April 30, 2003 | By: | |
John G. Barbar | ||
Chief Financial Officer and Treasurer |
URECOATS INDUSTRIES INC. | ||
| | |
Date: April 30, 2003 | By: | |
Michael T. Adams | ||
Executive Vice President and Secretary |
|
17 |
URECOATS INDUSTRIES INC. |
As of December 31, | ||||||||||
2002 | 2001 | |||||||||
Assets | ||||||||||
Current Assets: | ||||||||||
Cash | $ | 41,520 | $ | 519,225 | ||||||
Accounts Receivable | 604,945 | 1,054,592 | ||||||||
Inventory (Note 4) | 1,416,674 | 343,446 | ||||||||
Prepaid Expenses and Other Current Assets | 204,526 | 225,267 | ||||||||
Total Current Assets | 2,267,665 | 2,142,530 | ||||||||
Property, Plant & Equipment, Net (Note 5) | $ | 1,514,063 | $ | 1,215,668 | ||||||
Other Assets: | ||||||||||
Intangibles, Net (Note 6) | 1,879,433 | 1,798,490 | ||||||||
Notes Receivable | 348,412 | 28,475 | ||||||||
Deposits and Other Non-Current Assets | 139,211 | --- | ||||||||
Total Other Assets | 2,367,056 | 1,826,965 | ||||||||
Total Assets | $ | 6,148,784 | $ | 5,185,163 | ||||||
See accompanying notes to consolidated financial statements |
|
F-1 |
URECOATS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) | ||||||||||
As of December 31, | ||||||||||
2002 | 2001 | |||||||||
Liabilities and Stockholders' Equity | ||||||||||
Current Liabilities: | ||||||||||
Accounts Payable and Accrued Expenses (Note 7) | $ | 3,187,449 | $ | 1,566,874 | ||||||
Current Maturities of Long-Term Debt (Note 8) | 105,257 | 205,975 | ||||||||
Short-Term Notes and Loans Payable (Note 9) | 739,027 | 232,260 | ||||||||
Deferred Income (Note 11) | 70,000 | --- | ||||||||
Total Current Liabilities | 4,101,733 | 2,005,109 | ||||||||
Long-Term Debt (Note 8) | 45,427 | 219,296 | ||||||||
Capital Leases | --- | 1,017 | ||||||||
Commitments and Contingencies (Notes 2, 12) | --- | 600,622 | ||||||||
Total Liabilities | 4,147,160 | 2,826,044 | ||||||||
Stockholders' Equity: | ||||||||||
Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of | ||||||||||
which Designations: (Notes 10, 14, 18) | ||||||||||
Series A Convertible, 750,000 Shares Authorized; 62,500 Issued | ||||||||||
and Outstanding (Less Offering Costs of $7,465) | 55,035 | 55,035 | ||||||||
Series B Convertible, 500,000 Shares Authorized, Issued and | ||||||||||
Outstanding | 500,000 | 500,000 | ||||||||
Series C Convertible, 750,000 Shares Authorized; 414,781 Issued and | ||||||||||
Outstanding | 414,781 | --- | ||||||||
Common Stock, $.01 Par Value; 25,000,000 Shares Authorized; | ||||||||||
14,071,254 and 131,402,830 (Pre-Split-See Note 14) Issued and | ||||||||||
Outstanding at December 31, 2002 and 2001, respectively | 140,713 | 1,314,028 | ||||||||
Additional Paid-In Capital | 44,696,841 | 34,392,433 | ||||||||
Subscriptions Receivable | --- | (1,200,000 | ) | |||||||
Accumulated (Deficit) | (43,805,746 | ) | (32,702,377 | ) | ||||||
Total Stockholders' Equity | 2,001,624 | 2,359,119 | ||||||||
--- | --- | |||||||||
Total Liabilities and Stockholders' Equity | $ | 6,148,784 | $ | 5,185,163 | ||||||
See accompanying notes to consolidated financial statements |
F-2 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||
Year Ended December 31 | |||||||||||||
2002 | 2001 | Development Stage Operations 2000 | |||||||||||
Revenue: | |||||||||||||
Application Systems | $ | 1,314,515 | $ | 490,000 | $ | --- | |||||||
Coatings, Sealants and Other Products | 3,701,130 | 765,292 | --- | ||||||||||
Total Revenue | 5,015,645 | 1,255,292 | --- | ||||||||||
Cost of Sales: | |||||||||||||
Application Systems | 1,324,948 | 426,606 | --- | ||||||||||
Coatings, Sealants and Other Products | 2,633,880 | 608,705 | --- | ||||||||||
Warranty Costs, Freight and Other Cost of Sales | 223,392 | 25,579 | --- | ||||||||||
Total Cost of Sales | 4,182,220 | 1,060,890 | --- | ||||||||||
Gross Profit | 833,425 | 194,402 | --- | ||||||||||
Operating Expenses: | |||||||||||||
Selling, General and Administrative | 9,733,105 | 2,899,297 | 1,268,441 | ||||||||||
Professional Fees | 581,414 | 268,029 | 154,049 | ||||||||||
Depreciation and Amortization | 389,809 | 402,240 | 261,435 | ||||||||||
Research and Development | 581,665 | 1,250,213 | 1,217,012 | ||||||||||
Consulting Fees | 830,657 | 734,273 | 1,108,888 | ||||||||||
Interest Expense | 63,814 | 169,208 | 197,507 | ||||||||||
Impairment of Assets | --- | 913,490 | --- | ||||||||||
Loss on Disposal of Property and Equipment | 96,297 | --- | --- | ||||||||||
Total Operating Expenses | 12,276,761 | 6,636,750 | 4,207,332 | ||||||||||
Operating (Loss) | (11,443,336 | ) | (6,442,348 | ) | (4,207,332 | ) | |||||||
Income (Loss) From Discontinued Operations (Note 2) | 599,601 | (1,473,637 | ) | (314,022 | ) | ||||||||
Net (Loss) | $ | (10,843,735 | ) | $ | (7,915,985 | ) | $ | (4,521,354 | ) | ||||
See accompanying notes to consolidated financial statements |
F-3 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) | |||||||||||||||||||
Year Ended December 31 | |||||||||||||||||||
2002 | 2001 | Development Stage Operations 2000 | |||||||||||||||||
Net (Loss) Per Common Share-Basic | |||||||||||||||||||
Continuing Operations | $ | (0.841 | ) | $ | (0.056 | ) | $ | (0.044 | ) | ||||||||||
Discontinued Operations | 0.044 | (0.013 | ) | (0.003 | ) | ||||||||||||||
Total | $ | (0.797 | ) | $ | (0.069 | ) | $ | (0.047 | ) | ||||||||||
Weighted Average Shares Outstanding | 13,605,769 | 115,362,354 | * | 96,045,094 | * | ||||||||||||||
Net (Loss) Per Common Share-Diluted | |||||||||||||||||||
Continuing Operations | $ | (0.702 | ) | $ | (0.055 | ) | $ | (0.043 | ) | ||||||||||
Discontinued Operations | 0.037 | (0.012 | ) | (0.003 | ) | ||||||||||||||
Total | $ | (0.665 | ) | $ | (0.067 | ) | $ | (0.046 | ) | ||||||||||
Weighted Average Shares Outstanding | 16,313,776 | 118,216,602 | * | 97,788,594 | * | ||||||||||||||
*Pre 1-for-10 share consolidation. See Note 14. |
See accompanying notes to consolidated financial statements |
|
F-4 |
URECOATS INDUSTRIES INC. | ||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||
Preferred Stock Amounts | ||||||||||||||
Series A | Series B | Series C | Par Value | |||||||||||
As of the Year Ended | Shares (a) | Shares | Shares | $1.00 | ||||||||||
December 31, 2000 | 62,500 | --- | --- | $ | 55,035 | |||||||||
Issuance of Common Stock | --- | --- | --- | $ | --- | |||||||||
Issuance of Common Stock | --- | --- | --- | $ | --- | |||||||||
Issuance of Preferred Stock | --- | 500,000 | --- | $ | 500,000 | |||||||||
Net (Loss) | --- | --- | --- | $ | --- | |||||||||
Accrued Dividend on Preferred Stock | ||||||||||||||
and Other Adjustments | --- | --- | --- | $ | --- | |||||||||
December 31, 2001 | 62,500 | 500,000 | --- | $ | 555,035 | |||||||||
Issuance of Common Stock | --- | --- | --- | $ | --- | |||||||||
Issuance of Common Stock | --- | --- | --- | $ | --- | |||||||||
Share Consolidation (1-for-10) | --- | --- | --- | $ | --- | |||||||||
Issuance of Preferred Stock | --- | --- | 423,281 | $ | 423,281 | |||||||||
Conversion of Preferred Stock to Common Stock | --- | --- | (8,500 | ) | $ | (8,500 | ) | |||||||
Net (Loss) | --- | --- | --- | $ | --- | |||||||||
Accrued Dividend on Preferred Stock | ||||||||||||||
and Other Adjustments | --- | --- | --- | $ | --- | |||||||||
December 31, 2002 | 62,500 | 500,000 | 414,781 | $ | 969,816 | |||||||||
|
(a) Par Value for the Series A Preferred Stock, which was the only preferred stock outstanding at December 31, 2000, excludes Offering Costs of $7,465.00. |
|
See accompanying notes to consolidated financial statements |
|
F-5 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) | ||||||||||||||
Common Stock Amounts | ||||||||||||||
As of the Year Ended | Shares | Par Value$.01 | Additional Paid-In Capital | Subscriptions Receivable | ||||||||||
December 31, 2000 | 99,341,969 | $ | 993,420 | $ | 21,776,138 | $ | --- | |||||||
Issuance of Common Stock | 32,060,861 | $ | 320,608 | $ | 10,616,295 | $ | --- | |||||||
Issuance of Common Stock | --- | $ | --- | $ | --- | $ | (1,200,000 | ) | ||||||
Issuance of Preferred Stock | --- | $ | --- | $ | 2,000,000 | $ | --- | |||||||
Net (Loss) | --- | $ | --- | $ | --- | $ | --- | |||||||
Accrued Dividend on Preferred Stock | ||||||||||||||
and Other Adjustments | --- | $ | --- | $ | --- | $ | --- | |||||||
December 31, 2001 | 131,402,830 | $ | 1,314,028 | $ | 34,392,433 | $ | (1,200,000 | ) | ||||||
Issuance of Common Stock | 869,521 | $ | 8,695 | $ | 1,071,559 | $ | --- | |||||||
Issuance of Common Stock | --- | $ | --- | $ | --- | $ | 1,200,000 | |||||||
Share Consolidation (1-for-10) | (118,262,547 | ) | $ | (1,182,625 | ) | $ | 1,182,625 | $ | --- | |||||
Issuance of Preferred Stock | --- | $ | --- | $ | 8,042,339 | $ | --- | |||||||
Conversion of Preferred Stock to | ||||||||||||||
Common Stock | 61,450 | 615 | 7,885 | $ | --- | |||||||||
Net (Loss) | --- | $ | --- | $ | --- | $ | --- | |||||||
Accrued Dividend on Preferred Stock | ||||||||||||||
and Other Adjustments | --- | $ | --- | $ | --- | $ | --- | |||||||
December 31, 2002 | 14,071,254 | $ | 140,713 | $ | 44,696,841 | $ | --- | |||||||
See accompanying notes to consolidated financial statements |
|
F-6 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) | ||||||||
Accumulated | ||||||||
As of the Year Ended | (Deficit) | Total | ||||||
December 31, 2000 | $ | (24,766,814 | ) | $ | (1,942,221 | ) | ||
Issuance of Common Stock | $ | --- | $ | 10,936,903 | ||||
Issuance of Common Stock | $ | --- | $ | (1,200,000 | ) | |||
Issuance of Preferred Stock | $ | --- | $ | 2,500,000 | ||||
Net (Loss) | $ | (7,915,985 | ) | $ | (7,915,985 | ) | ||
Accrued Dividend on Preferred Stock | ||||||||
and Other Adjustments | $ | (19,578 | ) | $ | (19,578 | ) | ||
December 31, 2001 | $ | (32,702,377 | ) | $ | 2,359,119 | |||
Issuance of Common Stock | $ | --- | $ | 1,080,254 | ||||
Issuance of Common Stock | $ | --- | $ | 1,200,000 | ||||
Share Consolidation (1-for-10) | $ | --- | $ | -0- | ||||
Issuance of Preferred Stock | $ | --- | $ | 8,465,620 | ||||
Conversion of Preferred Stock to | ||||||||
Common Stock | $ | --- | $ | -0- | ||||
Net (Loss) | $ | (10,843,735 | ) | $ | (10,843,735 | ) | ||
Accrued Dividend on Preferred Stock | ||||||||
and Other Adjustments | $ | (259,634 | ) | $ | (259,634 | ) | ||
December 31, 2002 | $ | (43,805,746 | ) | $ | 2,001,624 | |||
See accompanying notes to consolidated financial statements |
|
F-7 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
Year Ended December 31, | ||||||||||||
2002 | 2001 | Development Stage Operations 2000* | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Income (Loss): | ||||||||||||
Continuing Operations | $ | (11,443,336 | ) | $ | (6,442,348 | ) | $ | (4,207,332 | ) | |||
Discontinued Operations | 599,601 | (1,473,637 | ) | (314,022 | ) | |||||||
Adjustments to Reconcile Net (Loss) to Net Cash Provided | ||||||||||||
(Used) by Operating Activities: | ||||||||||||
Depreciation and Amortization | 389,809 | 402,240 | 261,435 | |||||||||
Impairment of Goodwill | --- | 913,490 | --- | |||||||||
Commitments and Contingencies | (600,622 | ) | --- | --- | ||||||||
Disposition of Property and Equipment | 217,787 | --- | --- | |||||||||
Non-Cash Operating Activities: | ||||||||||||
Board of Director Fees | 23,625 | 78,750 | 67,852 | |||||||||
Interest | 37,620 | 80,839 | --- | |||||||||
Legal Fees, Settlements and Other Services | 54,750 | 416,493 | 139,875 | |||||||||
Consultant Fees | 160,575 | 487,136 | 843,303 | |||||||||
Other Compensation | 270,690 | 643,106 | 148,804 | |||||||||
Changes in Assets and Liabilities: | ||||||||||||
Prepaid Expenses | 57,281 | (132,777 | ) | (76,360 | ) | |||||||
Accounts and Loans Receivable | 449,647 | (534,299 | ) | (1,029 | ) | |||||||
Inventory | (1,073,228 | ) | (187,007 | ) | --- | |||||||
Other Current Assets | (36,542 | ) | (52,241 | ) | --- | |||||||
Accounts Payable and Accrued Expenses | 1,360,317 | 483,388 | 187,868 | |||||||||
Deferred Income | 70,000 | (50,000 | ) | 50,000 | ||||||||
Commitments and Contingencies | --- | (70,317 | ) | 1,518 | ||||||||
Net Cash (Required) by Operating Activities | (9,462,026 | ) | (5,437,184 | ) | (2,898,088 | ) | ||||||
Cash Flows From Investing Activities | ||||||||||||
(Acquisition) of Property and Equipment | (794,632 | ) | (980,871 | ) | (686,617 | ) | ||||||
Disposition of Property and Equipment | --- | 328,226 | --- | |||||||||
(Acquisition) of Intangibles | (91,962 | ) | (784,362 | ) | (38,888 | ) | ||||||
(Additions) of Deposits and Other Non-Current Assets | (109,836 | ) | (1,724 | ) | (16,135 | ) | ||||||
Net Cash (Required) by Investing Activities | $ | (996,430 | ) | $ | (1,438,731 | ) | $ | (741,640 | ) | |||
|
See accompanying notes to consolidated financial statements |
|
F-8 |
URECOATS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) | ||||||||||||
Year Ended December 31, | ||||||||||||
2002 | 2001 | Development Stage Operations 2000* | ||||||||||
Cash Flows From Financing Activities | ||||||||||||
Proceeds from the Issuance of Stock | $ | 6,223,000 | $ | 1,853,230 | $ | 87,950 | ||||||
Proceeds of Notes and Credit Lines | 2,846,753 | 1,079,797 | 260,386 | |||||||||
(Payment) of Notes and Credit Lines | (2,615,590 | ) | (899,502 | ) | (64,392 | ) | ||||||
(Payment) of Loans | --- | --- | (41,244 | ) | ||||||||
Proceeds of Loans from Related Parties | 3,875,000 | 5,344,617 | 3,399,000 | |||||||||
(Issuance) of Notes Receivable | (348,412 | ) | --- | --- | ||||||||
Net Cash Provided by Financing Activities | 9,980,751 | 7,378,142 | 3,641,700 | |||||||||
Net Increase (Decrease) In Cash | (477,705 | ) | 502,227 | 1,972 | ||||||||
Cash at Beginning or Period | 519,225 | 16,998 | 15,026 | |||||||||
Cash at End of Period | $ | 41,520 | $ | 519,225 | $ | 16,998 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash Payments for Income Taxes | $ | -0- | $ | -0- | $ | -0- | ||||||
Cash Payments for Interest | $ | 26,193 | $ | 56,364 | $ | 25,507 | ||||||
Non-Cash Investing Activities: | ||||||||||||
Acquisitions | $ | (100,000 | ) | $ | (805,000 | ) | $ | --- | ||||
Total Non-Cash Investing Activities | $ | (100,000 | ) | $ | (805,000 | ) | $ | --- | ||||
Non-Cash Financing Activities: | ||||||||||||
Issuance of Common Stock: | ||||||||||||
Operating Activities | $ | 547,260 | $ | 1,706,324 | $ | 1,199,834 | ||||||
Repayment of Debts | 3,912,620 | 7,872,747 | 1,351,700 | |||||||||
Acquisitions | --- | 805,000 | --- | |||||||||
Capital Expenditures | 100,000 | --- | --- | |||||||||
Total Non-Cash Financing Activities | $ | 4,559,880 | $ | 10,384,071 | $ | 2,551,534 | ||||||
|
* The Consolidated Statement of Cash Flows for the year ended December 31, 2000 has been reclassified to conform to the December 31, 2002 and 2001 presentation. |
|
See accompanying notes to consolidated financial statements |
|
F-9 |
URECOATS INDUSTRIES INC. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
Note 1. Summary of Significant Accounting Policies. |
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This summary of significant accounting policies is presented to assist in understanding these consolidated financial statements. The consolidated financial statements and notes are representations of management who is responsible for their integrity and objectivity. The accounting policies used conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of these consolidated financial statements. |
|
Organization |
|
The Company was incorporated in October 1989 as Natural Child Collection, Inc. and changed its name to Natural Child Care, Inc. in January 1991. On October 27, 1993, the legal name of the Company was changed to Winners All International, Inc. The Company was operationally inactive from August 1, 1995 through January 26, 1997. Pursuant to a January 29, 1997 Board of Directors meeting, resolutions pertaining to discontinuing all former operations, retroactive to the year ended July 31, 1995 were ratified. On February 17, 1997, the Company changed its former fiscal year of July 31, to December 31. On February 8, 1999, the legal name of the Company was changed to Urecoats Industries Inc. |
|
Business |
|
The Company, through its subsidiaries, is a technology-driven sales and marketing company that develops and commercializes specialty sealant and coating products for the building products and construction industries. |
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Principles of Consolidation |
|
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company items and transactions have been eliminated. |
|
Fair Value of Financial Instruments |
|
The Company has adopted Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value of Financial Instruments", which requires the disclosure of the fair value of off-and-on balance sheet financial instruments. Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments (none of which are held for trading purposes), approximate the carrying values of such amounts. |
|
Use of Estimates |
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. |
|
Inventories |
|
Inventories are valued at the lower of cost (Application Systems) or average cost (all other inventory) versus market (net realizable value). Cost is determined by the first-in, first-out method. |
|
Property and Equipment |
|
Property and equipment are recorded at historical cost. Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations. Additions and betterments, which extend the useful lives of the assets, are capitalized. Upon retirement or disposal of the property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and the resulting gain or loss is reflected in operations. |
|
F-10 |
Goodwill and Purchased Intangible Assets |
|
Statement of Financial Accounting Standards no. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires goodwill to be tested for impairment, on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. |
|
Based upon the impairment tests performed, there was no impairment of goodwill for the period ended December 31, 2002. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. Purchased intangible assets, which primarily consist of capitalized patent application costs and acquisition of formulae, are amortized, commencing in the year of significant revenue recognition, by the straight-line method over estimated useful lives of 15 years. |
|
Revenue Recognition |
|
The Company recognizes revenue from sales of Application Systems upon shipment of product and title and risk of loss transfers to the customer. Revenue from the sale of Coatings, Sealants and Other Products is recognized when the goods are shipped to the customer. Allowances for returns of Coatings, Sealants and Other Products are provided for based upon an analysis of the Company's historical patterns of returns matched against the sales from which they originated. |
|
Research and Development |
|
Research and development costs related to both future and present products are charged to operations as incurred. |
|
Income Taxes |
|
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the establishment of a deferred tax asset or liability for the recognition of future deductions or taxable amounts, and operating loss and tax credit carry-forwards. Deferred tax expense or benefit is recognized as a result of the change in the deferred asset or liability during the year. If necessary, the Company will establish a valuation allowance to reduce any deferred tax asset to an amount which will more likely than not be realized. |
|
Options |
|
Pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to apply the intrinsic-value-based method of accounting. Under this method, the Company measures stock based compensation for option grants to employees assuming that options granted at market price at the date of grant have no intrinsic value. |
|
Net (Loss) Per Common Share |
|
The Company accounts for (loss) per share in accordance with Statement of Financial Accounting Standard 128 ("SFAS 128") "Earnings Per Share". Basic (loss) per share is based upon the net (loss) applicable to common shares after preferred dividend requirements and upon the weighted average number of common shares outstanding during the period. Diluted (loss) per share reflects the effect of the assumed conversions of convertible securities and exercise of stock options only in the periods in which such effect would have been dilutive. |
|
Warranty Reserves |
|
The Company established a warranty reserve as a percentage of revenue to adequately provide for potential future warranty claims. |
|
Reclassifications |
|
Certain reclassifications of prior year amounts have been made to conform to the current year presentation. |
|
Development Stage |
|
The Company exited its development-stage and began operations on January 1, 2001. |
|
F-11 |
New Accounting Standards Not Yet Adopted |
|
In June 2001, Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, (SFAS No. 143) was issued and is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We believe that the adoption of SFAS 143 will not have a material effect on our consolidated financial statements. |
|
In July 2002, Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No. 146) was issued and is effective for periods beginning after December 31, 2002. SFAS No. 146 requires, among other things, that costs associated with an exit activity (including restructuring and employee and contract termination costs) or with a disposal of long-lived assets be recognized when the liability has been incurred and can be measured at fair value. Companies must record in earnings from continuing operations costs associated with an exit or disposal activity that does not involve a discontinued operation. Costs associated with an activity that involves a discontinued operation would be included in the results of discontinued operations. We believe that the implementation of the provisions of SFAS No. 146 will not have a material effect on our consolidated financial statements. |
|
In December 2002, Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation, (SFAS No. 148) was issued and is effective for fiscal years beginning after December 15, 2002. SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We will provide quarterly footnote disclosure of the fair value based method of accounting for stock-based employee compensation beginning in the first quarter ending March 28, 2003. We have decided not to voluntarily adopt the SFAS No. 123 fair value method of accounting for stock-b ased employee compensation. Therefore, the new transition alternatives allowed in SFAS No. 148 will not affect our consolidated financial statements. |
|
Note 2. Discontinued Operations. |
|
On April 14, 1999, the Board of Directors passed a unanimous resolution to discontinue the activities of Designer Wear, Inc. ("DWI") and ROK International, Inc. ("ROK"), retroactive for the year ended December 31, 1998. DWI and ROK were engaged in the acquisition of license agreements for the design, contract manufacturing, sale, and worldwide distribution of Branded Merchandise products. Rainguard Roofing Corporation was acquired, effective January 1, 2001, primarily for the Company to field test its flagship products, RSM-100™ and BlueMAX™, and generate revenue. As a result of successful field-testing and in response to roofing and waterproofing contractors, the Company divested the roof contracting business, effective December 31, 2001. The impact of this divestiture has been reflected in (Loss) from Discontinued Operations in the amount of $(1,662,183). |
A summary of the (loss) from discontinued operations for the years ended December 31, |
|
2002 | 2001 | Development Stage Operations 2000 | ||||||||
Revenue | $ | --- | $ | 1,352,463 | $ | --- | ||||
Cost of Sales | --- | 1,949,212 | --- | |||||||
Gross Profit (Loss) | --- | (596,749 | ) | --- | ||||||
Operating Expenses | 1,021 | 1,065,434 | 314,022 | |||||||
Other Income | 600,622 | 188,546 | --- | |||||||
Income (Loss) from Discontinued Operations | 599,601 | (1,473,637 | ) | (314,022 | ) | |||||
|
During 2002, the Company evaluated all circumstances and that a period of five years had passed since any material communication relating to these commitments and contingencies. Accordingly, the Company decided that a commitments and contingency reserve was no longer required. |
|
F-12 |
Note 3. Acquisition. |
|
The Company completed the acquisition of Infiniti Paint Company, Inc. (n/k/a Infiniti Products, Inc.), effective September 1, 2001, for $1,611,010. The purchase price was paid in cash and stock: $775,000 cash and 1,550,000 shares of Common Stock valued at $775,000 and miscellaneous expenses related to the acquisition of $61,010. The purchase accounting method was used to account for the transaction and the results have been included since the date of acquisition. The following proforma summary presents the consolidated results of operations of Urecoats as if the acquisition of Infiniti had occurred January 1, 2000. |
|
Year Ended December 31, (UNAUDITED) Pro Forma | |||||||
2001 | 2000 | ||||||
Revenue | $ | 2,883,166 | $ | 2,350,701 | |||
Cost of Sales | 2,129,696 | 1,618,982 | |||||
Gross Profit | 753,470 | 731,719 | |||||
Operating Expenses | 7,177,433 | 4,900,975 | |||||
Operating (Loss) | (6,423,963 | ) | (4,169,256 | ) | |||
(Loss) From Discontinued Operations | (1,473,637 | ) | (314,022 | ) | |||
Net (Loss) | $ | (7,897,600 | ) | $ | (4,483,278 | ) | |
|
Note 4. Inventories. |
|
The following is a summary of inventories for the years ending December 31, |
|
2002 | 2001 | ||||||
Raw Materials | $ | 177,695 | $ | 75,266 | |||
Finished Goods | 1,238,979 | 268,180 | |||||
Total | $ | 1,416,674 | $ | 343,446 | |||
|
Note 5. Property and Equipment. |
|
The following is a summary of property and equipment for the years ending December 31, |
|
Estimated | ||||||||||||
2002 | 2001 | Useful Life | ||||||||||
Vehicles | $ | 414,011 | $ | 524,034 | 5 Years | |||||||
Leasehold Improvements | 694,827 | 408,097 | 3 Years | |||||||||
Office Equipment | 549,232 | 354,319 | 5 Years | |||||||||
Machinery and Equipment | 628,397 | 504,030 | 5 Years | |||||||||
Total Property and Equipment | 2,286,467 | 1,790,480 | ||||||||||
Less: Accumulated Depreciation | (772,404 | ) | (574,812 | ) | ||||||||
Total Property and Equipment | $ | 1,514,063 | $ | 1,215,668 | ||||||||
|
Depreciation expense for the years ended 2002, 2001 and 2000, was $379,146, $401,929, and $261,275, respectively. |
|
F-13 |
Note 6. Intangibles. |
|
The following is a summary of intangibles for the years ending December 31, |
|
2002 | 2001 | ||||||||
Goodwill | $ | 1,611,010 | $ | 1,611,010 | |||||
Patent Costs | 199,086 | 107,480 | |||||||
Proprietary Formula Acquisition Costs | 80,000 | 80,000 | |||||||
Total Intangibles | 1,890,096 | 1,798,490 | |||||||
Less: Accumulated Amortization | (10,663 | ) | --- | ||||||
Total Intangibles, Net | $ | 1,879,433 | $ | 1,798,490 | |||||
|
Amortization of intangible costs for the years ended 2002, 2001 and 2000, were $10,663, $-0-, and $167, respectively. |
|
Goodwill arising from the cost, in excess of fair market value of tangible assets and liabilities acquired, results from the Company's 2001 acquisition of Infiniti Products, Inc. |
|
Patent and Proprietary Formula costs are amortized, under the straight-line method, over 15 years. |
|
The Company evaluates the amortization period of intangibles on an ongoing basis, in light of any changes in business conditions, events or circumstances, which may indicate the potential impairment of intangible assets. |
|
Note 7. Accounts Payable and Accrued Expenses. |
|
The following is a summary of accounts payable for the years ending December 31, |
|
2002 | 2001 | |||||||
Accounts Payable | $ | 2,615,127 | $ | 1,316,444 | ||||
Accrued Payroll Taxes | 358 | 38,911 | ||||||
Accrued Expenses | --- | --- | ||||||
Accrued Sales Taxes | 39,188 | 25,472 | ||||||
Accrued Other | 124,046 | 93,261 | ||||||
Accrued Warranty Reserve | 129,962 | 73,870 | ||||||
Accrued Dividend Payable | 278,768 | 18,916 | ||||||
Total Accounts Payable and Accrued Expenses | $ | 3,187,449 | $ | 1,566,874 | ||||
F-14 |
Note 8. Long-Term Debt. |
|
The following is a summary of long-term debt for the years ending December 31, |
2002 | 2001 | ||||||||||||||
2.9% - 18% - Various Notes Payable, Due in Monthly Installments of $8,770, $17,900, | |||||||||||||||
respectively, including Interest, Maturing through 2006, Secured by Equipment | $ | 135,184 | $ | 407,271 | |||||||||||
12% Notes Payable, payable on Demand, Unsecured | $ | 15,500 | 18,000 | ||||||||||||
$ | 150,684 | $ | 425,271 | ||||||||||||
Less: Current Maturities | (105,257 | ) | (205,975 | ) | |||||||||||
Total Long-Term Debt | $ | 45,427 | $ | 219,296 | |||||||||||
Debt Maturity Schedule | |||||||||||||||
Years Ending December 31 | |||||||||||||||
2004 | 24,543 | ||||||||||||||
2005 | 17,415 | ||||||||||||||
2006 | 3,469 | ||||||||||||||
2007 | --- | ||||||||||||||
$ | 45,427 | ||||||||||||||
Note 9. Short-Term Notes and Loans Payable. |
|
The Company has two operating line of credits. The first line of credit is for $300,000, bears interest at prime plus 1% per annum, matures July 31, 2003, and is secured by assets of the Company and a personal guarantee from the Chairman of the Board. The second line of credit is for $500,000, bears interest at prime plus 2% per annum, matures September 1, 2003, and is secured by assets of the Company and the Chairman of the Board is a co-borrower for added security for the institution. For the years ended December 31, 2002 and 2001, the first line of credit balances were $239,027 and $232,260, respectively, and the second line of credit balances were $500,000 and -0-, respectively. |
|
Note 10. Related Party Transactions. |
|
The following is a summary of related party transactions for the years ending December 31, 2002 and 2001, |
|
(i) The Company issued restricted common stock to officers and directors as follows: |
|
2002 | 2001 | ||||||||||||
Shares | Value | Shares(b) | Value | ||||||||||
Consulting Fees | 42,500 | $ | 154,275 | 870,000 | $ | 246,371 | |||||||
Cancellation of Indebtedness | --- | --- | 521,244 | 140,736 | |||||||||
Other Compensation | 147,021 | 270,690 | 1,864,384 | 522,216 | |||||||||
Board of Director Fees | 1,283,500 | (a) | 23,625 | (a) | 300,000 | 78,750 | |||||||
Exercise of Plan Options | --- | --- | --- | --- | |||||||||
Exercise of Non-Plan Option | --- | --- | 12,000,000 | 5,280,000 | |||||||||
Private Placement | --- | --- | 1,949,318 | 500,000 | |||||||||
1,473,021 | $ | 448,590 | 17,504,946 | $ | 6,768,073 | ||||||||
|
(a) This amount includes an aggregate of 1,276,000 shares issued under the 2002 Non-Employee Director Restricted Stock Plan in 2002, however, these shares have not vested as of December 31, 2002. Therefore, no value was recorded at December 31, 2002. |
|
(b) These shares amounts are prior to the 1-for-10 share consolidation. |
|
F-15 |
(ii) The Company issued preferred stock to directors, as follows: |
|
2002 | 2001 | ||||||||||||
Shares | Value | Shares | Value | ||||||||||
Cancellation of Indebtedness | 195,631 | $ | 3,912,620 | --- | $ | --- | |||||||
Private Placement | 125,000 | 2,500,000 | |||||||||||
320,631 | $ | 6,412,620 | --- | $ | --- | ||||||||
|
(iii) The following is a summary of additional related party transactions for the year ended December 31, 2002: |
|
(a) The Chairman of the Board has personally guaranteed $335,000 of notes and is a co-borrower for added security on a $500,000 line of credit from financial institutions, and $1,600,000 for primary suppliers. In addition, the Chairman of the Board has confirmed a financial guarantee to provide up to $5,000,000 pursuant to a second Series C Preferred Stock Option Agreement to the Company for operating expenses incurred or to be incurred during the year 2003. See Note 21 - Subsequent Events. |
|
(b) The Company has a Key Man Life Insurance Policy in place covering the Chairman of the Board. The policy is an annually renewable $3,000,000 term life policy and the Company is the beneficiary. |
|
(c) During 2002, the Company entered into a Series C Preferred Stock Option Agreement with the Chairman of the Board, which granted to him, the right and option to purchase at $20.00 per share all or any part of an aggregate of 250,000 shares of the Company's Series C Preferred Stock, which Series C Preferred Stock purchased thereby is convertible into restricted common stock of the Company at a price of $2.20 ($.22 pre-spit) per share. |
|
(d) During 2002, the Company issued the Chairman of the Board 195,631 shares of Series C Convertible Preferred Stock pursuant to partial exercises of his first Series C Preferred Stock Option Agreement, which shares were paid for by cancellation of $3,912,620 in short term loans bearing interest at 9% per annum that he provided to the Company throughout the 2002 year for operating expenses. |
|
(e) During 2002, the Company issued 1,276,000 shares of restricted common stock to directors under the 2002 Non-Employee Director Restricted Stock Plan, which shares vest pursuant to the terms of plan. These shares were not vested, valued, recorded, or treated as outstanding as of December 31, 2002, and remain in the custody of the Company until such time that they are earned. |
|
(f) During 2002, the Company issued 7,500 (75,000 pre-split) shares of restricted common stock to a director for board of director services prior to the establishment of the 2002 Non-Employment Director Restricted Stock Plan, which transaction was valued and recorded at $23,625. |
|
(g) During 2002, the Company issued 147,021 shares of restricted common stock to officers and an officer-director as other compensation in connection with their employment, which transactions were valued and recorded at $270,690. |
|
(h) During 2002, the Company issued an aggregate of 42,500 (425,000 pre-split) shares of restricted common stock to a director under a financial consulting services arrangement, which transactions were valued and recorded at $154,275. |
|
(i) During 2002, two directors purchased 25,000 and 100,000 shares of Series C Convertible Preferred Stock through entities controlled by them, pursuant to a Series C Preferred Stock private placement offered by the Company for $500,000 and $2,000,000, which is convertible into restricted common stock at a price of $2.20 ($.22 pre-spit) and $2.40 ($.24 pre-split), respectively, per share. |
|
(j) During 2002, a director was granted a Non-Plan Option for 10,000 shares of restricted common stock, good for two years, and exercisable at $3.15 for each option per share in exchange for accelerating payments under his Series C Convertible Preferred Stock subscription agreement. See (i) above. |
|
(k) During 2002, the Company accrued $100,000 of dividends related to the Series B Convertible Preferred Stock, which is solely owned by the Chairman of the Board. See Note 16 - Stockholders' Equity, Preferred Stock. |
|
(l) During 2002, the Company accrued $98,344 of dividends related to the Series C Convertible Preferred Stock, for two entities controlled by two directors. See (i) above. See also Note 16 - Stockholders' Equity, Preferred Stock. |
|
F-16 |
Note 11. Deferred Income. |
|
The deferred income of $70,000 relates to the sale of an Application System that contains a right of return provision until June 2003. This revenue will be recognized at the expiration of this provision. |
|
Note 12. Commitments and Contingencies. |
|
Leases |
|
The Company has seven operating leases as follows: |
|
| Location |
| Description of Operations |
| Terms | ||
|
|
|
|
|
| ||
| Deerfield Beach, FL |
| Corporate Headquarters, |
| 08-21-2001 | - | 08-21-2006 |
|
|
| Manufacturing, Distribution, |
|
|
|
|
|
|
| Training, Marketing, Research |
|
|
|
|
| Deerfield Beach, FL |
| and Development, and Sales |
| 02-01-2002 |
| 03-01-2006 |
| Pompano Beach, FL |
| Research and Development |
| 02-05-2001 | - | 02-28-2003 |
| Pompano Beach, FL |
| Manufacturing and Warehousing |
| 01-04-2000 | - | 02-28-2003 |
| Pompano Beach, FL |
| Manufacturing and Warehousing |
| 01-04-2000 | - | 02-28-2003 |
| Orlando, FL |
| Research and Development |
| Month-to-Month | ||
| Orlando, FL |
| Distribution and Warehousing |
| 12-15-2001 | - | 02-28-04 |
|
|
|
|
|
|
|
|
|
The Company leases a forklift under a non-cancelable operating lease expiring in March 2003. The Company is also leasing a facility on a month-to-month basis with a $3,000 per month lease payment. Future minimum lease payments required under the non-cancelable operating leases are as follows: |
Year Ending December 31 | Operating Leases | ||||||||||
2003 | $ | 435,977 | |||||||||
2004 | 364,286 | ||||||||||
2005 | 363,270 | ||||||||||
2006 | 375,323 | ||||||||||
2007 | -0- | ||||||||||
Total Minimum Lease Payments | $ | 1,538,856 | |||||||||
|
Rent expense for the years ended December 31, 2002, 2001, and 2000 was $451,225, $263,908, and $147,658 respectively. |
|
Litigation |
|
(a) The following is a summary of the reserve established for commitments and contingencies for the years ending December 31, |
|
2002 | 2001 | |||||||
Judgments of Discontinued Operations | $ | --- | $ | 67,880 | ||||
Accounts Payable of Discontinued Operations | --- | 100,499 | ||||||
Other Liabilities of Discontinued Operations | --- | 166,869 | ||||||
Reserve for Litigation Settlements of Discontinued Operations | --- | 265,374 | ||||||
$ | --- | $ | 600,622 | |||||
|
F-17 |
(b) Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs, vs. Urecoats International, Inc. et. al., Defendants. |
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On May 15, 2002, the Plaintiffs filed a civil lawsuit against Urecoats International, Inc., Urecoats Industries Inc., Urecoats Technologies, Inc., and Richard J. Kurtz, Michael T. Adams, Timothy M. Kardok, and a former officer of the company, individually, for, among other things, basically Contract Indebtedness, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. Each of the Plaintiffs entered into Consulting Agreements with Urecoats International, Inc. on March 29, 2000, effective January 1, 2000 ("2000 Consulting Agreements"), under which they were to receive certain cash and stock compensation for consulting services; and, Urecoats International acknowledged a $99,000 indebtedness to Ponswamy Rajalingam for prior consulting services rendered for Urecoats International. The 2000 Consulting Agreements expired on March 1, 2001. The stock compensation under the 2000 Consulting Agreements was provided, on behalf of Urecoats Internation al, by Urecoats Industries Inc. Urecoats International paid all of the cash compensation required under the Consulting Agreements, except for the $99,000 indebtedness; and, Urecoats Industries initially issued all of the stock compensation to the Plaintiffs, however, pursuant to the 2000 Consulting Agreements, a second restrictive legend was placed on an aggregate of 81,100 (811,000 pre-split) shares of the restricted common stock issued thereby, which second restriction was subject to removal only after Urecoats International determined that the Plaintiffs satisfactorily performed the consulting services required under their 2000 Consulting Agreements. Urecoats International was in possession of the 81,100 (811,000 pre-split) shares and had not removed the second restriction from the stock certificates, however, Urecoats International, Inc. returned the aggregate of 81,100 (811,000 pre-split) shares of restricted common stock to the Plaintiffs’ based on the fact that the second restrictive legend renders possession meaningless. Urecoats International also continues to maintain its position for not removing these second restrictions as justified by virtue of its counterclaim for money damages (as described below). The Plaintiffs are claiming Breach of Contract and requesting that the Court require Urecoats International to remove the second restriction from the stock certificates and pay Ponswamy Rajalingam the $99,000 plus interest, in addition to some nominal business expenses. |
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On May 24, 2002, Urecoats International, Urecoats Industries, and Urecoats Technologies, filed its Answer, Affirmative Defenses and Counterclaims, to the Complaint, and Motions to Dismiss certain claims in the Complaint. The Company denied that it owes any of the amounts claimed (as described above) to the Plaintiffs. The Company affirmatively alleges that the 2000 Consulting Agreements were the last in a series of contracts that were fraudulently induced by the Plaintiffs, who consistently represented to Urecoats International that they were at all times familiar with a technology and a spray application system that was capable of spraying the sealant that was initially represented in that certain Purchase and Sale Agreement dated October 31, 1997, as being complete by virtue of the sample provided to Urecoats International at the time of entering into said agreement; that the application system only needed a small amount of work which the Plaintiffs could provide and supervise s o that Urecoats International could use the sealant that it purchased under said agreement to fill purchase orders, for example, a large order from Mexico. As set forth in more detail in Urecoats International's Counterclaims, these representations were allegedly false, knowingly false or made with the reckless disregard of their truth or veracity, and were made in order to induce Urecoats International to enter into consulting agreements with the Plaintiffs, which Urecoats International did, and to allow the Plaintiffs to spend an enormous amount of money to complete what they initially represented was essentially already done. The Company alleges that the Plaintiffs engaged in this fraudulent conduct knowing that Richard J. Kurtz, who was contributing substantial amounts of capital, and the shareholders of Urecoats Industries, were relying on their misrepresentations. Urecoats International might have continued to renew or enter into additional agreements with the Plaintiffs had it not di scovered another individual in late 2000, who in the short span of approximately 6 months, and without allegedly utilizing any of the spray application system research and development of Plaintiffs, produced a self contained efficient workable and commercially marketable machine known as the BlueMAX™, which was capable of and is today applying the sealant. The alleged damages which Urecoats International has suffered by reason of the misrepresentations of the Plaintiffs consisting of millions of dollars paid for research and development costs required by Plaintiffs, for example, office space, employees, equipment and the like as well as lost profits from potential sales and lost business opportunities, exceeds the amount due to the Plaintiffs and constitutes a setoff to Plaintiffs claims. Urecoats International also claims recoupment against Plaintiffs on the grounds described above. The foregoing factual allegations also amount to nonperformance by Plaintiffs of the essential terms of Plaintiffs 2000 Consulting Agreements and lack, want or failure of consideration for which Urecoats International also claims setoff and recoupment. |
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The Company counterclaimed for money damages in excess of $20 million dollars against Plaintiffs for alleged fraud, breach of written contract, and per se defamation of the Company. On or about August-September, 1997, Urecoats International was searching for a new roofing product that could be commercially applied in the ordinary course of a commercial roofing business because the existing roofing product (the "original product") that contained crumb rubber from recycled tires was not performing as expected or as Urecoats International had been led to believe. Urecoats International had a pending purchase order for the original product for applications in Mexico for approximately $10 million and the original product had not performed as expected in two demonstrations in Mexico, which demonstrations were a prerequisite to fulfillment of the purchase order. Urecoats International was introduced at the time to the Plaintiffs who represented that they had invented a new roofing product that contained crumb rubber from recycled tires (the "sealant" or "new sealant"). Urecoats International alleges that it made it clear to the Plaintiffs that not only was Urecoats International interested in purchasing the new sealant and the associated patent rights, but also that it was absolutely essential that the new sealant be immediately appliable in a commercially reasonable manner so that Urecoats International could deliver on the impending Mexican purchase order. |
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F-18 |
The Company alleges that Plaintiffs knowing that Urecoats International was relying on these assurances as a condition precedent to Urecoats International entering into an agreement with them under which they would be paid considerable cash, as well as stock of Urecoats Industries, the Plaintiffs, with the intent that Urecoats International rely on their representations, but knowing that their representations were false, nonetheless, in order to induce the written agreements with them under which they were paid substantial money and stock, assured Urecoats International that the new product was ready to be commercially applied and that they would be able to fulfill the Mexican purchase order. Accordingly, Urecoats International entered into the Purchase and Sale Agreement with the Plaintiffs and Creative Chemical Company 3 (C) on October 31, 1997 and paid a down payment pursuant thereto. In addition, and as a further result of the Plaintiffs alleged misrepresentations, Urecoats In ternational abandoned all other efforts previously in place to develop the original product technology and focused solely on the new sealant. The Company alleges that the Plaintiffs, prior to entering into any agreements with Urecoats International, also knew that the new sealant was of no use to Urecoats International absent the ability to apply the new sealant in a commercially reasonable manner onto roofs. The Plaintiffs and Urecoats International entered into a series of agreements (i.e., Consulting Agreements), which Consulting Agreements were basically entered into upon the continuing reasonable belief of Urecoats International based on the repeated assurances of the Plaintiffs that they could deliver to Urecoats International what was originally promised in the Purchase and Sale Agreement. The Company further alleges that, as it turned out, the amounts, which Urecoats International had expended on the Plaintiffs under their Consulting Agreements, were for no benefit. The Compan y also alleges that the Plaintiffs have posted messages and/or made such statements to third parties who have then published the statements on the Internet, which contain false, misleading and manipulative statements about the Company, the stock of Urecoats Industries, the equipment and/or past and present officers, thus causing damages to its business reputation. |
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(c) Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs, vs. Urecoats International, Inc. et. al., Defendants. |
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On November 12, 2002, the Plaintiffs filed a civil lawsuit against Urecoats International, Inc. and Urecoats Industries Inc. for breach of contract, injunctive relief, breach of duty, and conversion, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. The underlying factual bases are closely related to the allegations in another case filed by the Plaintiffs, which was previously disclosed. See (b) above. This case, like the prior case, arises from the refusal of the Company to remove the Rule 144 (restrictive) legends from an aggregate of 215,141 (2,151,412 pre-split) restricted shares of common stock issued to the Plaintiffs in connection with a purchase and sale agreement and various consulting related services allegedly performed. As set forth in more detail in disclosures for the previously filed case described above, the Company believes the purchase and sale agreement and consulting relationships between the Company and Plaintiffs were fraudulently induced, that the activities related thereto were allegedly consistently misrepresented by Plaintiffs, and that the Plaintiffs failed to perform their obligations under the consulting agreements. The Company expects that this case may very well be consolidated with the previously filed case described above because the issues are similar and arise out of the same or similar transactions. Issue has not been joined in this latter lawsuit. |
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Note 13. Income Taxes |
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At December 31, 2001, the Company has taxable net operating loss carry-forwards of approximately $40,132,000 to be utilized to offset taxable income arising from the next 3 to 20 years. The Company files a consolidated income tax return and cumulative timing difference between the recognition of certain income and expense items for income tax purposes and financial reporting purposes are as follows: |
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Cumulative Benefit of Net Operating Loss Carry-Forwards | $ | 41,000,000 | ||||
Issuance of Stock for Officers and Directors Compensation | (768,000 | ) | ||||
Tax Depreciation versus Book Depreciation | (100,000 | ) | ||||
$ | 40,132,000 | |||||
Total Deferred Tax Asset | $ | 13,645,000 | ||||
Less Valuation Allowance | (13,645,000 | ) | ||||
Net Deferred Tax Asset | $ | -0- | ||||
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It is currently undeterminable as to when the Company will benefit from the deferred tax asset. |
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Note 14. Securities Transactions. |
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On May 28, 2002, the stockholders of the Company approved a 1-for-10 reverse stock split and share consolidation applicable to shareholders of record on April 30, 2002. |
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F-19 |
Common Stock |
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(a) The Company issued 7,500 shares of restricted common stock to a director for board of director services prior to the establishment of the 2002 Non-Employment Director Restricted Stock Plan during the year, which was valued and recorded at $23,625. See Note 10 - Related Party Transactions. |
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(b) The Company issued an aggregate of 1,276,000 shares of restricted common stock to directors under the 2002 Non-Employee Director Restricted Stock Plan, which vest pursuant to the terms of plan. These shares were not vested, valued, recorded, or treated as outstanding as of December 31, 2002, and remain in the custody of the Company until such time that they are earned. See Note 10 - Related Party Transactions. |
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(c) The Company issued an aggregate of 52,500 shares of restricted common stock for consulting services, which shares were valued and recorded in the aggregate at $190,575, of which 42,500 shares were issued to a director in a consulting capacity, which was valued and recorded at $154,275. See Note 10 - Related Party Transactions. |
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(d) The Company issued an aggregate of 147,021 shares of restricted common stock as other compensation to officers, including an officer-director, which shares were valued in the aggregate and recorded at $270,690. See Note 10 - Related Party Transactions. |
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(e) The Company canceled 20,000 shares of restricted common stock issued for consulting services, which shares were originally valued and recorded at $30,000. |
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(f) The Company issued 100,000 shares of restricted common stock pursuant to the exercise of a non-plan restricted common stock option in exchange for cancellation of contracting services indebtedness, which shares were valued and recorded at $100,000. |
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(g) The Company issued an aggregate of 61,450 shares of restricted common stock from conversions of Series C Convertible Preferred , which shares were valued and recorded in the aggregate at $170,000. |
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(h) The Company issued an aggregate of 112,500 shares of common stock for legal settlements, which shares were valued and recorded in the aggregate at $54,750. |
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(i) The Company issued 470,000 shares of restricted common stock in a private transaction, which shares were valued and recorded at $470,000. |
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Preferred Stock |
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(a) The Company issued an aggregate of 195,631 shares of Series C Convertible Preferred Stock to the Chairman of the Board pursuant to partial exercises of his Series C Preferred Stock Option in exchange for cancellation of short term loans bearing interest at 9% per annum aggregating to $3,912,620. See Note 10 - Related Party Transactions. |
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(b) The Company issued an aggregate of 227,650 shares of Series C Convertible Preferred Stock pursuant to a private placement offering, which shares were valued and recorded in the aggregate at $4,553,000, of which an aggregate of 125,000 shares valued and recorded in the aggregate at $2,500,000 were issued to entities controlled by two directors. See Note 10 - Related Party Transactions. |
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(c) The Company converted an aggregate of 8,500 shares of Series C Convertible Preferred Stock, which shares were originally valued and recorded in the aggregate at $170,000 to restricted common stock. See Common Stock, Item (g) above. |
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Note 15. Stock Options. |
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The Compensation Committee of the Board of Directors administers the Company's stock option activities relating to Plan and Non-Plan stock options. Each of the plans are briefly described below: |
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1998 Employee and Consultant Stock Option Plan |
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On January 26, 1998, the Company adopted the "1998 Employee and Consultant Stock Option Plan" (the "1998 Plan"). Under the 1998 Plan, either Incentive Stock Options or Non-Qualified Stock Options may be granted; however, the former may be granted only to employees of the Company. Generally, the options may be exercised beginning one year from the date of grant and expire in two to five years. The 1998 Plan provides for the grant of an aggregate of 300,000 (3,000,000 pre-split) options, which are exercisable for common stock. In 2002, the Company did not have any options available for grant under the 1998 Plan. There were 288,000 options exercised and 12,000 options outstanding under the 1998 Plan as of December 31, 2002. |
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F-20 |
1999 Consultant and Employee Stock Purchase and Option Plan |
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The 1999 Consultant and Employee Stock Purchase and Option Plan was approved by shareholders on February 8, 1999 ("1999 Plan"). Under the 1999 Plan, either Incentive Stock Options or Non-Qualified Stock Options may be granted; however, the former may be granted only to employees of the Company. Generally, the options may be exercised beginning one year from the date of grant and expire in two to five years. The 1999 Plan provides for the grant of an aggregate of 800,000 (8,000,000 pre-split) options, which are exercisable for common stock. There were 702,450 options exercised, 97,150 options outstanding, and 400 options available for grant under the 1999 Plan as of December 31, 2002. |
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2000 Stock Purchase and Option Plan |
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The 2000 Stock Purchase and Option Plan was approved by shareholders on June 20, 2000 ("2000 Plan"). Under the 2000 Plan, either Incentive Stock Options or Non-Qualified Stock Options may be granted; however, the former may be granted only to employees of the Company. Generally, the options may be exercised beginning one year from the date of grant and expire in two to five years. The 2000 Plan provides for the grant of an aggregate of 500,000 (5,000,000 pre-split) options, which are exercisable for common stock. There were 51,000 options exercised, 374,300 options outstanding, and 74,700 options available for grant under the 1999 Plan as of December 31, 2002. |
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2002 Stock Purchase and Option Plan |
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The 2002 Stock Option Plan was approved by shareholders on May 28, 2002 ("2002 Plan"). Under the 2002 Plan, either Incentive Stock Options or Non-Qualified Stock Options may be granted; however, the former may be granted only to employees of the Company. Generally, the options may be exercised beginning one year from the date of grant and expire in two to five years. The 2002 Plan provides for the grant of an aggregate of 325,000 (3,250,000 pre-split) options, which are exercisable for common stock. There were -0- options exercised, 206,000 outstanding, and 119,000 options available for grant under the 2002 Plan as of December 31, 2002. |
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Non-Plan Options |
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The Company grants restricted options from time to time for special circumstances ("Non-Plan Options"). The Company granted 150,000 Non-Plan Options. There were 100,000 options exercised and 50,000 options outstanding as of December 31, 2002. |
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Plan and Non-Plan Option Activity Tables |
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The status of the Company's Plan and Non-Plan stock option activities for the years ended December 31 is summarized as follows: |
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2002* | 2001 | Development Stage Operations 2000 | ||||||||||||||||||
Number Of Options | Weighted Average Exercise Price | Number Of Options | Weighted Average Exercise Price | Number Of Options | Weighted Average Exercise Price | |||||||||||||||
Options Outstanding -Beginning of Year | 492,050 | $ | 3.90 | 1,483,000 | $ | 0.371 | 2,150,500 | $ | 0.011 | |||||||||||
Granted | 493,800 | 2.55 | 4,440,000 | 0.395 | 2,159,000 | 0.359 | ||||||||||||||
Exercised | (100,000 | ) | 1.00 | (899,000 | ) | 0.339 | (2,826,500 | ) | 0.210 | |||||||||||
Canceled | (133,500 | ) | 1.78 | (103,500 | ) | 1.070 | --- | |||||||||||||
Expired | (12,900 | ) | 10.01 | --- | --- | --- | --- | |||||||||||||
Options Outstanding-End of Year | 739,450 | 3.21 | 4,920,500 | 0.397 | 1,483,000 | $ | 0.371 | |||||||||||||
Options Exercisable - End of Year | 516,783 | $ | 3.66 | 4,438,000 | $ | 0.389 | 1,148,000 | $ | 0.212 | |||||||||||
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*The figures under this section have been adjusted for the 1-for-10 share consolidation approved by the shareholders in 2002. |
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F-21 |
The following table provides additional information relating to stock option activity for Plan and Non-Plan Stock Options for the year ended December 31, 2002:* |
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| Options Outstanding |
| Options Exercisable |
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Range of |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| |||||
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|
|
|
|
| |||||||||||
$1.25 - $2.99 |
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| 158,150 |
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| 1.9 |
| $ | 1.75 |
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| 112,983 |
| $ | 1.67 |
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$3.00 - $3.69 |
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| 210,800 |
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| 3.4 |
| $ | 3.02 |
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| 60,800 |
| $ | 3.05 |
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$3.70 - $5.89 |
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| 331,000 |
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| 2.3 |
| $ | 3.98 |
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| 307,250 |
| $ | 3.96 |
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$5.90 - $10.00 |
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| 39,500 |
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| 1.5 |
| $ | 8.27 |
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| 35,750 |
| $ | 8.43 |
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|
|
|
|
|
| |||||||||||
$1.25 - $10.00 |
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| 739,450 |
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| 2.44 |
| $ | 3.21 |
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| 516,783 |
| $ | 3.66 |
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* The figures under this section have been adjusted for the 1-for-10 share consolidation approved by the shareholders in 2002. |
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Accounting for Stock Based Compensation |
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As allowed by Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, the Company has elected to continue to apply the intrinsic-value-based method of accounting. Under this method, the Company measures stock based compensation for option grants to employees assuming that options granted at market price at the date of grant have no intrinsic value. Restricted stock awards were valued based on the discounted market price of a share of non-restricted stock on the date earned. No compensation expense has been recognized for stock-based incentive compensation plans other than for restricted stock awards pursuant to executive employment agreements (See Note 19) and board of director fees prior to the establishment of the 2002 Non-Employee Director Restricted Stock Plan (See Note 19). No compensation expense was recorded for any non-plan restricted stock options ("Non-Plan Options"). Had compensation expense for the Company's stock options under th e stock-based incentive compensation plans described above (excluding Non-Plan Options) been recognized based upon the fair value for awards granted, the Company's net (loss) would have been increased to the followingpro forma amounts: |
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2002 | 2001 | Development-Stage Operations 2000 | ||||||||||
Net (Loss), as Reported | $ | (10,843,735 | ) | $ | (7,915,985 | ) | $ | (4,521,354 | ) | |||
Stock-Based Compensation Expense Determined Under Fair Value Based Method, Net of Tax (a) | -0- | -0- | -0- | |||||||||
Pro Forma Net (Loss) | $ | (10,843,735 | ) | $ | (7,915,985 | ) | $ | (4,521,354 | ) | |||
(Loss) Per Share: | ||||||||||||
As Reported Basic | $ | (0.797 | ) | $ | (0.069 | ) | $ | (0.047 | ) | |||
As Reported Diluted | $ | (0.665 | ) | $ | (0.067 | ) | $ | (0.046 | ) | |||
Pro Forma Basic | $ | (0.797 | ) | $ | (0.069 | ) | $ | (0.047 | ) | |||
Pro Forma Diluted | $ | (0.665 | ) | $ | (0.067 | ) | $ | (0.046 | ) | |||
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(a) As a result of the Company's highly volatile common stock trading performance in each of the respective years in this table, the overall strike prices of the outstanding options, and the uncertainty about its future economic performance, management has deemed the fair value of these options to be indeterminable. Accordingly, for the years ended December 31, 2002, 2001, and 2000, the value of the options is deemed to be -0-. |
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F-22 |
Note 16. Stockholders' Equity. |
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Preferred Stock |
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Series A Convertible Preferred Stock |
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The Board of Directors reduced the number of authorized shares of Series A, $1.00 par value preferred stock, from 2,000,000 shares to 750,000 shares, leaving 1,250,000 shares to be designated a series of distinction and issued by the Board. Each share of the Series A preferred stock entities its holder to convert it into .036 (.36 pre-split) shares of common stock, as adjusted in the event of future dilution; to receive $1.00 per share in the event of voluntary or involuntary liquidation, to have the same voting rights as the common stock, and to share equally in payments of any dividends declared by the Board of Directors. |
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Series B Convertible Preferred Stock |
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The Board of Directors designated a new series of preferred stock, Series B Convertible Preferred Stock, effective September 30, 2001, $1.00 par value, and authorized 500,000 shares for issuance. The stated value per each Series B Preferred share is $5.00, which includes the par value of $1.00 per share. The holders of the outstanding Series B Preferred Shares have no voting rights with respect to the Series B Preferred Shares, except as required by law, including but not limited to the General Corporation Law of Delaware, and as expressly provided in the certificate of designation. A holder has the right to convert the Series B Preferred Shares into shares of common stock, $.01 par value per share (as converted, the "conversion shares"), on the terms and conditions set forth in the certificate of designation. Subject to the restrictions in the certificate of designation, any holder is entitled to convert any or all of the Series B Preferred Shares into fully paid and nonassessable rest ricted shares of common stock at the conversion rate of 15 shares of restricted common stock for each share of Series B Preferred Shares converted at any time on or from time to time after 180 days from the initial date of issuance of the first Series B Preferred Shares are issued provided the Company has the statutory power and legal authority to issue such shares at the time of conversion. Although the Company initially lacked the statutory authority to issue common stock pursuant to a holder's conversion notice, it now has statutory authority and 750,000 shares of common stock has been reserved until such time that a conversion notice is received from the holder or the Company notifies the holder of its intention to redeem the shares pursuant to the certificate of designation. The registered holders of the outstanding Series B Preferred Shares are entitled to receive cumulative dividends at the rate of 4% per annum of the stated value per each Series B Preferred Share, which annual per annum r ate increased to 9% in 2002. Such dividend is payable quarterly in arrears on the last day of March, June, September and December of each year, commencing on December 31, 2001. Such dividend shall accrue on each Series B Preferred Share from the date of issuance of such Series B Preferred Shares (with appropriate proration for any partial dividend period) and shall accrue from day-to- day, whether or not earned or declared. Dividend payments made with respect to Series B Preferred Shares may be made in cash when and as declared by the Board of Directors of the Company out of funds legally available therefor. The Chairman of the Board is the holder of all of the Series B Preferred Shares. See Note 10 - Related Party Transactions. |
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Series C Convertible Preferred Stock |
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The Board of Directors designated a new series of preferred stock, Series C Convertible Preferred Stock, effective January 8, 2002, $1.00 par value, and authorized 750,000 shares for issuance. The stated value per each Series C Preferred share is $20.00, which includes the par value of $1.00 per share. The holders of the outstanding Series C Preferred Shares have no voting rights with respect to the Series C Preferred Shares, except as required by law, including but not limited to the General Corporation Law of Delaware, and as expressly provided in the certificate of designation. A holder has the right, at such holder's option, to convert the Series C Preferred Shares according to a conversion ration into shares of restricted common stock, $.01 par value per share (as converted, the "conversion chares"), on the terms and conditions in the certificate of designation. The conversion ratio means the number of shares of restricted common stock issuable upon conversion of each share of Seri es C Preferred Stock which number of shares of common stock varies depending upon the number of Series C Preferred Stock purchased. The price per share of common stock into which each share of Series C Preferred Stock is convertible is determined at the time of purchase pursuant to a discount formula related to the amount of investment by each investor. The discount formula is based upon two variables in order to determine price per share of common stock: (1) the total amount of the subscription on date of purchase which shall determine the applicable discount; and (2) the average of the closing bid prices per share for the common stock during the thirty (30) trading days immediately preceding (and including) the date of subscription for the Series C Preferred Stock, to determine the price per share of common stock and the applicable discount, on the following basis: $100,000 to $249,999 equals a 15% discount; $250,000 to $499,000 equals a 20% discount; and $500,000 and greater equals a 25% discount. O nce determined, the price per share (of common stock into which the Series C Preferred Stock is convertible) is divided into the amount paid per share for the Series C Preferred Stock in order to determine the number of shares of common stock issuable upon conversion of each share of Series C Preferred Stock. Subject to the restrictions in the certificate of designation, any holder shall be entitled to convert any or all of the Series C Preferred Stock into fully paid and nonassessable restricted shares of common stock at the conversion ratio at any time on or from time to time after 180 days (the "conversion waiting period") from the initial date of issuance of the first Series C Preferred Stock provided the Company has the statutory power and legal authority to issue such restricted shares at the time of conversion. |
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Although the Company initially lacked the statutory authority to issue common stock pursuant to a holder's conversion notice, it now has statutory authority and 4,012,350 shares of common has been reserved to satisfy all issued, outstanding, and unconverted Series C Preferred Shares or unexercised options (as described below), upon receipt of any conversion notice from any holders of Series B Preferred Shares or when the Company notifies the holders of its intention to redeem the shares pursuant to the certificate of designation. The registered holders of the outstanding Series C Preferred Shares are entitled to receive cumulative dividends at the rate of 4% per annum of the stated value per each Series B Preferred Share. Such dividend shall be payable quarterly in arrears on the last day of March, June, September and December of each year, commencing on December 31, 2002 (each of such dates being a "dividend payment date"). Such dividend shall accrue on each Series C Preferred St ock from the date of issuance of such Series C Preferred Stock (with appropriate pro-ration for any partial dividend period) and shall accrue from day-to- day, whether or not earned or declared. dividend payments made with respect to Series C Preferred Stock may be made in cash when and as declared by the Board of Directors of the Company out of funds legally available therefor. |
F-23 |
Series C Convertible Preferred Stock Option |
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The Company entered into a Series C Preferred Stock Option Agreement with the Chairman of the Board ("optionee") on January 8, 2002. Pursuant to and subject to the terms and conditions of the agreement, the Company granted to the optionee, the right and option (the "call option") to purchase at $20.00 per share (the "stated value") on the terms and conditions stated therein all or any part of an aggregate of 250,000 shares of Series C Convertible Preferred Stock of the currently authorized and unissued Series C Preferred Stock, par value $1.00 per share of the Company. The call option is exercisable, in whole or in part, during the period commencing with the date on which it was granted and ending on December 31, 2003. The call option may be exercised pursuant to the agreement by written notice to the Company stating the number of Series C Preferred Shares with respect to which the option is being exercised, together with payment in full: (i) in cash or certified check; (ii) securities or oth er liquidable property; (iii) acknowledgement of cancellation of the Company's indebtedness to the optionee; or (iv) any combination of the foregoing. Under the agreement, the optionee granted to the Company the right and option (the "exercise demand right") to require the optionee to exercise a portion of the call option up to a maximum aggregate of 250,000 shares of Series C Preferred Stock. This exercise demand right is exercisable by the Company at any time or from time to time during the term that the call option, or any part thereof is outstanding, solely to require the optionee to purchase as much of the Series C Preferred Stock necessary for continuance of the Company's operations during fiscal 2002. The exercise demand right will remain outstanding for as long as the call option remains outstanding, and to the same extent as the call option. The agreement provides that if there is any change in the capitalization of the Company affecting in any manner the number or kind of outstanding shares o f common stock of the Company, whether by stock dividend, stock split, reclassification or recapitalization of such stock, or because the Company has merged or consolidated with one or more other corporations (and provided the call option does not thereby terminate pursuant to its terms), then the number and kind of shares then subject to the call option and the price to be paid therefore shall be commensurately adjusted by the Board of Directors. Any such adjustment shall be made without change in the aggregate purchase price applicable to the unexercised portion of the call option, but with an appropriate adjustment to the price of each Series C Preferred Share or other unit of security covered by this call option. The price per share (of common stock into which the Series C Preferred Stock is convertible) under this agreement is $2.20 ($.22 pre-split) for each share of restricted common stock. As of December 31, 2002, the optionee exercised 195,631 Series C Preferred Stock Options, and has 54, 369 options remaining. See Note 10 - Related Party Transactions. |
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Note 17. Concentration of Credit Risk. |
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The Company's cash balances in financial institutions at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. |
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The Company currently relies upon one vendor to manufacture Application Systems on a "turn key" basis. |
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Note 18. Securities Capitalization. |
|
The following table provides information relating to the Company's common and preferred stock capitalization as of the year ended December 31, 2002: |
|
F-24 |
Preferred | ||||||||||||||||
Shares | Common | Series A | Series B | Series C | Total of Series A, B and C | |||||||||||
Authorized | 25,000,000 | 750,000 | 500,000 | 750,000 | 2,000,000 | |||||||||||
Issued and Outstanding | 14,071,254 | 62,500 | 500,000 | 414,781 | 977,281 | |||||||||||
Reserved | 8,308,150* | -0- | -0- | 54,369 | 54,369 | |||||||||||
Available | 2,620,596 | -0- | -0- | 272,350 | 272,350 | |||||||||||
|
*Reserves allocated as follows: |
|
| 1998 Stock Option Plan | 12,000 |
| See also Note 15. | ||
| 1999 Stock Option Plan | 97,550 |
| See also Note 15. | ||
| 2000 Stock Option Plan | 449,000 |
| See also Note 15. | ||
| 2002 Stock Option Plan | 325,000 |
| See also Note 15. | ||
| 2002 Non-Employee Director Restricted Stock Option Plan | 1,600,000 |
| See also Note 19. | ||
| 2002 Executive Incentive Plan | 500,000 |
| See also Note 19. | ||
| 2002 Management Incentive Plan | 100,000 |
| See also Note 19. | ||
| Non-Plan Restricted Options | 50,000 |
| See also Note 15. | ||
| Executive Employment Agreements | 410,000 |
| See also Note 19. | ||
| Series A Convertible Preferred Stock | 2,250 |
| See also Note 16. | ||
| Series B Convertible Preferred Stock | 750,000 |
| See also Note 16. | ||
| Series C Convertible Preferred Stock | 4,012,350 |
| See also Note 16. | ||
|
|
|
|
|
| |
|
| Total |
| 8,308,150 |
|
|
|
|
|
|
|
| |
|
Note 19. Long-Term Compensation and Incentive Program. |
|
The Company developed a long-term compensation and incentive program in 2002 to attract and retain qualified directors, officers, managers, and key employees, which consists of many components. A brief summary of each component is provided below. |
|
2002 Non-Employee Director Restricted Stock Plan |
|
The shareholders approved the 2002 Non-Employee Director Restricted Stock Plan on May 28, 2002 and it became effective after the reverse split and consolidation of the Company's common stock. |
|
Automatic Grants |
|
Under the Plan, up to 1,600,000 shares of our post split common stock may be issued through periodic automatic grants of restricted stock to non-employee directors only. The shares issuable under the 2002 Director Plan may be newly-issued or treasury shares (including those acquired by the Company in the open market). The 2002 Director Plan provides, each non-employee director who is then serving as a member of the Board shall automatically be granted an award consisting of a number of shares of restricted common stock of the Company equal to: 48,000 for the Chairman of the Board, who is also a non-employee director; and 12,000 for other non-employee directors, upon initial election to the Board for a one year term (or a lesser amount prorated monthly if the initial election is for a shorter period). |
|
F-25 |
One Time Grant to Chairman of the Board |
|
In addition to the automatic grant of shares to non-employee directors described above, a one-time grant of 1,168,000 post split shares of restricted stock was approved for the Chairman of the Board, which recognizes his personal cost for substantially funding us and acting as Chairman of the Board without adequate compensation over a three-year period. This one-time grant, made as of the effective date of this 2002 Director Plan, vests at the end of each year after the effective date of this 2002 Director Plan at the rate of 25% per year. This award vests in total at the end of four years. |
|
Restrictions |
|
The shares awarded under the plan are subject to restrictions on transferability as well as a vesting schedule. In the event a recipient of a restricted stock award under the 2002 Director Plan ceases to be a director of the Company for any reason other than death or total disability, any shares which are then unvested are subject to forfeiture back to the Company. Once vested, the shares are no longer restricted as to transferability and no longer subject to forfeiture to the Company upon termination of director status. |
|
Non-Discretionary Plan |
|
The 2002 Director Plan is intended to be a nondiscretionary plan for purposes of rules and interpretations of the Securities and Exchange Commission relating to Section 16 of the Securities Exchange Act of 1934, as amended. Subject to the provisions of the 2002 Director Plan, including the automatic nature of awards thereunder, administrative authority with respect to the 2002 Director Plan is vested in our Board of Directors, and may be delegated to a committee of the Board consisting of persons ineligible to receive awards under the 2002 Director Plan. |
|
2002 Executive Incentive Plan |
|
The Board of Directors approved the 2002 Executive Incentive Plan, effective January 1, 2002, which was ratified and approved by the shareholders on May 28, 2002. The aggregate number of shares of common stock issuable under this plan is 500,000 shares. |
|
Purpose and Eligibility |
|
The purpose of the 2002 Executive Plan is to advance the interests of the Company and its stockholders by affording to executive officers of the Company and its subsidiaries an opportunity to acquire or increase a proprietary interest in the Company or to otherwise benefit from the success of the Company through the grant of stock options, restricted stock, stock appreciation rights, stock payments, performance awards or other awards granted or sold under the 2002 Executive Plan. All regular, full-time executive officers of the Company who have executive duties, as determined by the Committee, are eligible to receive an Incentive Award under the 2002 Executive Plan. |
|
Stock Options |
|
Stock options granted under the Executive Plan may be incentive stock options intended to qualify under the provisions of Code Section 422 ("ISO") or nonqualified stock options which do not so qualify. The exercise price of common stock that is subject to an option will be determined by the Committee at the date such option is granted. The exercise price may be less than the fair market value on the date of grant of the common stock subject to an option; however, the exercise price for an ISO shall not be less than the fair market value on the date of grant of the common stock subject to such ISO. Options may be exercised as determined by the Committee provided that an ISO may not be exercised after ten years from the date of grant. |
|
Performance Awards |
|
Awards, payable in cash, common stock or a combination thereof, the terms and conditions of which may be determined by the Committee at the time of grant ("Performance Awards") may be granted under the 2002 Executive Plan. The Committee shall determine the performance criteria to be utilized to calculate the value of the Performance Awards, the term of such Performance Awards, the event or events giving rise to the right to payment of a Performance Award, and the form (cash and/or common stock) and time of payment of Performance Awards. |
|
F-26 |
Restricted Stock |
|
An award of common stock which is the subject of an Incentive Award and which is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met as set forth in the 2002 Executive Plan and in any statement evidencing the grant of such Incentive Award ("Restricted Stock") may be granted by the Committee. The Committee shall determine the purchase price (if any), terms of payment of the purchase price, restrictions upon the Restricted Stock and when such restriction shall lapse. The following restrictions, among others which may be imposed upon Restricted Stock by the Committee, will lapse in accordance with the schedule or other conditions as are determined by the Committee: a restriction on transferability; a requirement that certificates representing Restricted Stock remain in the physical custody of an escrow holder or us; and a requirement that each certificate representing Restricted Stock contain a restrictive legend. |
|
2002 Management Incentive Plan |
|
The Board of Directors approved the 2002 Management Incentive Plan, effective January 1, 2002, which was ratified and approved by the shareholders on May 28, 2002. This plan is through December 31, 2005 and is funded by 100,000 stock options. |
|
Purpose and Eligibility |
|
The 2002 Management Plan is designed to enable the Company to reward eligible managers and individual contributors for their contributions to providing our stockholders increased value for their investment through the successful accomplishment of specific financial objectives and individual performance objectives. |
|
Bonus Awards |
|
Bonus Awards for 2002 Management Plan Participants are based on both corporate performance and individual performance in relation to a variety of objectives, which reinforce the key goals that support our long-term strategic plans. These goals differ across business groups and will differ from year to year. We expect to adjust the performance objectives in this 2002 Management Plan from year to year based on changing business conditions. |
|
Duration and Measurement Periods |
|
The 2002 Management Plan runs from January 1, 2002 through December 31, 2005 for all existing and future locations. The 2002 Management Plan will be measured on a quarter by quarter basis to determine eligible bonuses for each calendar year. Each calendar year shall be referred to as its respective Plan Year (i.e. the calendar year 2002 is referred to as "2002 Year"). |
|
Bonus Funding Pool |
|
The 2002 Management Plan is solely funded by stock options ("Bonus Pool"). The Bonus Pool has been set by the Board at a maximum of 100,000 (1,000,000 pre-split) stock options pursuant to our existing and/or future stock option plans, for the duration of the 2002 Management Plan. A maximum limit of 250,000 stock options is available for bonus awards each year ("Maximum Annual Limit"), which may be increased if we do not award the maximum limit in any given year, to a subsequent year. Bonuses are funded based on the Company achieving minimum revenue threshold levels on a quarter by quarter basis. If these minimum thresholds are not met, no bonuses will be awarded for the applicable Measurement Period. The stock options to be granted pursuant to this 2002 Management Plan are expected to be granted under the 2002 Stock Option Plan. |
|
Threshold Levels |
|
In order for the eligible Participants to receive any bonus awards during the 2002 Year, the minimum revenue targets (cumulative) outlined in the table below must be achieved for each Measurement Period. |
|
1st Quarter |
| 2ndQuarter |
| 3rd Quarter |
| 4th Quarter |
|
|
| ||||
$ 1.5 Million |
| $ 3.5 Million |
| $ 6.5 Million |
| $ 10.5 Million |
|
No bonus awards were earned or granted for the year ended December 31, 2002. |
|
F-27 |
Modifications |
|
At the end of a Measurement Period, the Chief Executive Officer and President of the Company may recommend adjustments to the Bonus Pool and/or Threshold Levels and/or Threshold Measurement Mechanism (i.e. Revenue Targets may be changed to Operating Income Target) to the Compensation Committee after consideration of key operating results. When calculating performance for purposes of this 2002 Management Plan, the Compensation Committee has the discretion to include or exclude any or all of the following items: |
|
| 1. |
| extraordinary, unusual or non-recurring items |
|
| 2. |
| effects of accounting changes |
|
| 3. |
| effects of financing activities |
|
| 4. |
| expenses for restructuring or productivity initiatives |
|
| 5. |
| other non-operating items |
|
| 6. |
| spending for acquisitions |
|
| 7. |
| effects of divestitures |
|
|
Executive Employment Agreements |
|
|
|
We enter into long-term Executive Employment Agreements with all of our executive officers. These agreements are for a period of four years and provide for various types of compensation and incentives, as described below. The compensation and incentive elements in these agreements are as follows: |
|
(a) annualbase salary, in various sums, which will be reviewed and may be increased from time to time, in the discretion of the Compensation Committee; |
|
(b) an aggregate amount of shares ofrestricted common stock as other compensation, subject to vesting in various share increments on a quarterly basis commencing on the effective date; |
|
(c) incentive stock options to purchase varying amounts of our shares of common stock, as defined in and pursuant to and in accordance with one of our existing stock option plans, or any successor plans as the Board may designate, at an exercise price equal to 100% of the fair market value of our common stock as of the date of grant, and, subject to vesting, shall be exercisable at any time, in whole or in part, within five (5) years of the date of grant, provided, further, these stock options will vest up to a varying maximum per year and after the end of each calendar year, in a number to be determined by dividing our common stock price as of the end of any applicable year into a number equal to 5% of any such year's excess revenues, rounded to the nearest integer. As used in the agreements, "Excess Revenues" means our annual revenues minus $1 million. The stock options that do not vest in any given year ar e carried over and added to a subsequent year's maximum; |
|
(d) eligible to earnperformance awards from time to time that we may, in our discretion, determine to put into effect, with each executive being afforded an opportunity to earn a varying minimum aggregate of shares of our restricted common stock during the term of their agreement at a varying maximum number of shares during each calendar year with respect to these plans or arrangements. The administrator of these plans or arrangements will determine the performance criteria (which need not be identical) to be utilized to calculate the value of the Performance Awards, the term of such Performance Awards, the Payment Event, and the form and time of payment of Performance Awards. The specific terms and conditions of each Performance Award shall be set forth in a written statement evidencing the grant of such Performance Award. Upon the occurrence of a Payment Event, payment of a Performance Award will be made t o each executive officer at fair market value on the date of the Payment Event, as the administrator in its discretion may determine; and |
|
(e) a varying minimum and maximum yearlybonus for the CEO anddiscretionary bonus for the other executive officers. |
|
F-28 |
Note 20. Selected Quarterly Financial Data (Unaudited). |
|
2002 Quarters Ended, | |||||||||||||||
March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue | |||||||||||||||
Application Systems (3) | $ | 646,538 | $ | 431,596 | $ | 262,817 | $ | (26,436 | ) | ||||||
Coatings, Sealants and Other Products | 673,961 | 1,262,139 | 1,268,523 | 496,507 | |||||||||||
Total Revenue | $ | 1,320,499 | $ | 1,693,735 | $ | 1,531,340 | $ | 470,071 | |||||||
Gross Profit (4) | 173,800 | 431,273 | 226,760 | 1,592 | |||||||||||
(Loss) from Continuing Operations | (2,372,750 | ) | (2,374,359 | ) | (3,028,252 | ) | (3,667,975 | ) | |||||||
Income (Loss) from Discontinued Operations | --- | --- | --- | 599,601 | |||||||||||
Net (Loss) | (2,372,750 | ) | (2,374,359 | ) | (3,028,252 | ) | (3,068,374 | ) | |||||||
(Loss) Per Common Share - Basic (2) | (0.180 | ) | (0.179 | ) | (0.228 | ) | (0.226 | ) | |||||||
(Loss) Per Common Share - Dilutive (2) | (0.174 | ) | (0.161 | ) | (0.186 | ) | (0.188 | ) |
|
2001 Quarters Ended, (1) | |||||||||||||||
March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue | |||||||||||||||
Application Systems | $ | --- | $ | --- | $ | 70,000 | $ | 420,000 | |||||||
Coatings, Sealants and Other Products | --- | --- | 91,791 | 673,501 | |||||||||||
Total Revenue | --- | --- | 161,791 | 1,093,501 | |||||||||||
Gross Profit | --- | --- | 23,500 | 170,902 | |||||||||||
(Loss) from Continuing Operations | (1,133,402 | ) | (1,104,299 | ) | (1,321,460 | ) | (2,883,187 | ) | |||||||
Income (Loss) from Discontinued Operations | (196,399 | ) | (440,630 | ) | (390,728 | ) | (445,880 | ) | |||||||
Net (Loss) | (1,329,801 | ) | (1,544,929 | ) | (1,712,188 | ) | (3,329,067 | ) | |||||||
(Loss) Per Common Share - Basic | (0.013 | ) | (0.014 | ) | (0.015 | ) | (0.029 | ) | |||||||
(Loss) Per Common Share - Dilutive | (0.012 | ) | (0.014 | ) | (0.015 | ) | (0.028 | ) |
|
Notes: |
|
(1) The amounts for 2001 are different from what was reported in the Company's Form 10-Qs for the quarters ended March 31, 2001, June 30, 2001, and September 31, 2001, because operations from Rainguard Roofing Corporation, the contracting services subsidiary, were reported as continuing operations. At the end of 2001, these operations were discontinued and reflected as such in the Company's Form 10-K for the year ended December 31, 2001. This schedule also reflects the acquisition of Infiniti Products, Inc. (f/k/a Infiniti Paint Co., Inc.) in September 2001 and the launch of the Company's Flagship Products. |
|
(2) On May 28, 2002, the common stockholders of the Company approved a 1-for-10 share consolidation and reverse split. All common stock shares and per share amounts have been adjusted to reflect this event. |
|
(3) During the fourth quarter of 2002, we sold five (5) new Application Systems for a total of $357,500. This amount was offset by $280,000 for Application Systems returned; $70,000 for an Application System that was originally recorded as a sale, but due to additional commitments made to the customer, had to be deferred; and additional selling adjustments for $33,936. |
|
(4) The gross profit for the fourth quarter reflects a reduction in the valuation of the Application Systems in inventory due to a change in the Company's pricing strategy motivated by competitive market and economic conditions. |
|
F-29 |
Note 21. Subsequent Events. |
|
(a) Non-Plan Restricted Stock Options |
|
The Board of Directors granted an aggregate of 73,159 restricted stock options to five members of executive management as consideration for their agreeing to a 10% reduction in annual salary based on the present financial hardship of the Company. These restricted stock options are not intended and were not granted in lieu of salary. Under the terms of the restricted options agreement, the option is good for two years and vests pro rata at the end of each quarter of 2003. The number of restricted stock options granted to each executive was calculated based on the value of the 10% reduction divided by the closing price of the Company's non-restricted common stock as traded on the American Stock Exchange on January 1, 2003 (or the closest trading day after January 1, 2003), which was January 2, 2003. |
|
(b) Series C Convertible Preferred Stock Option |
|
Second Series C Convertible Preferred Stock Option |
|
The Company entered into a second Series C Preferred Stock Option Agreement with the Chairman of the Board ("Optionee"), on March 21, 2003 ("Date of Grant"). Pursuant to and subject to the terms and conditions of the Agreement, the Company granted the Optionee, the right and option (the "Call Option") to purchase at $20.00 per share (the "Stated Value") on the terms and conditions stated therein all or any part of an aggregate of 250,000 shares of our Series C Convertible Preferred Stock of the currently authorized and unissued Series C Preferred Stock, par value $1.00 per share. The Call Option is exercisable, in whole or in part, during the period commencing with the date on which it was granted and ending on December 31, 2003. The Call Option may be exercised pursuant to the Agreement by written notice to the Company stating the number of Shares with respect to which the option is being exercised, together with payment in full: (i) in cash or certified check; (ii) securities or other liqui dable property; (iii) acknowledgement of cancellation of the Company's indebtedness to the Optionee; or (iv) any combination of the foregoing. Under the Agreement, the Optionee granted to the Company the right and option ("Exercise Demand Right") to require the Optionee to exercise a portion of the Call Option up to a maximum aggregate of 250,000 shares of Series C Preferred Stock. This Exercise Demand Right is exercisable by the Company at any time or from time to time during the term that the Call Option, or any part thereof is outstanding, solely to require the Optionee to purchase as much of the Series C Preferred Stock necessary for continuance of the Company's operations during fiscal 2003. The Exercise Demand Right will remain outstanding for as long as the Call Option remains outstanding, and to the same extent as the Call Option. Notwithstanding the foregoing, the Company agreed to forbear and not exercise the Exercise Demand Right under this Agreement for as long as the Company is receiving alterna te financing and/or generating sufficient revenues to meet its operational requirements during 2003. If the Optionee elects to exercise the Call Option or the Company invokes the Exercise Demand Right under the Agreement, then the Optionee will be able to convert the Optionee's Series C Preferred Shares into the Company's restricted common stock at a price of $.50 per share (the price per share was calculated pursuant to the Conversion Ratio formula (described in Note 16 - Stockholders' Equity, Preferred Stock, Series C Convertible Preferred Stock) on the Date of Grant. |
|
F-30 |
REPORT OF MANAGEMENT |
|
Management is responsible for the preparation and integrity of the consolidated financial statements appearing in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and, accordingly, include some amounts based on management's best judgments and estimates. |
|
Management is responsible for maintaining a system of internal control and procedures to provide reasonable assurance, at an appropriate cost/benefit relationship, that assets are safeguarded and that transactions are authorized, recorded and reported properly. The internal control system is augmented by appropriate reviews by management and careful selection and training of qualified personnel, applicable to all employees of the Company and its subsidiaries. Management believes that the Company's system of internal control provides reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements and other data and for maintaining accountability for assets. |
|
The Audit Committee of the Board of Directors, composed solely of Directors who are not officers or employees of the Company, interacts with the independent auditors and management periodically to discuss internal accounting controls, auditing and financial reporting matters and to discharge its responsibilities outlined in its written charter. The Committee reviews with the independent auditors the scope and results of the audit effort. Both the independent auditors and Audit Committee have private and confidential access to each other at all times. |
|
|
|
Baum & Company, P.A. was engaged to audit the 2001, 2000, and 1999 consolidated financial statements of Urecoats Industries Inc. and its subsidiaries and conducted such tests and related procedures as deemed necessary in conformity with auditing standards generally accepted in the United States of America. The opinion of the independent auditors, based upon their audits of the consolidated financial statements, is presented on Page 41 of this Report. |
|
March 28, 2003 |
|
Chief Executive Officer and President |
|
Senior Vice President of Finance, Chief Financial Officer and Treasurer |
|
Executive Vice President and Corporate Secretary |
|
F-31 |
INDEPENDENT AUDITORS' REPORT |
|
To the Stockholders and Board of Directors of Urecoats Industries Inc.: |
|
We have audited the accompanying consolidated balance sheets of Urecoats Industries Inc. and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. |
|
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. |
|
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Urecoats Industries Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years ended December 31, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. |
|
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards N0. 142, Goodwill and Other Intangible Assets, in 2002. |
|
/s/ BAUM & COMPANY, P.A. |
|
|
Coral Springs, Florida |
March 24, 2003 |
|
F-32 |
INDEX OF EXHIBITS |
|
|
Exhibit |
| Description |
| ||
3.1 |
| Restated Certificate of Incorporation of the Company as filed with the State of Delaware on June 16, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
3.2 |
| Certificate of Amendment of Certificate of Incorporation dated February 12, 1999 of the Company as filed with the State of Delaware on February 12, 1999 (incorporated by reference to Exhibit 3.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
3.3 |
| Certificate of Amendment of Certificate of Incorporation dated May 28, 2002 of the Company as filed with the State of Delaware on May 28, 2002 (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
3.4 |
| Proforma Restated Certificate of Incorporation, as amended, and currently in effect, of the Company. |
3.5 |
| By-laws of the Company (incorporated by reference to Exhibit 3(ii) to Form 10-KSB for the year ended December 31, 2000, filed March 30, 2001). |
3.6 |
| Amendments to By-laws of the Company (incorporated by reference to Item 5. Other Information, Amendments to By-laws, to Form 10-Q for the quarter ended September 30, 2001, filed November 14, 2001). |
3.7 |
| By-laws, as amended, and currently in effect, of the Company. |
10.1 |
| 1998 Employee and Consultant Stock Option Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 No. 333-44971, filed January 27, 1998). |
10.2 |
| 1999 Consultant and Employee Stock Purchase and Option Plan (incorporated by reference to Exhibit 99.1 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
10.3 |
| 1999 Consultant and Employee Stock Purchase and Option Plan, as amended (incorporated by reference to Exhibit 99.2 to Form 10-KSB for the year ended December 31, 1998, filed April 16, 1999). |
10.4 |
| 2000 Stock Purchase and Option Plan (incorporated by reference to Exhibit (10) to Registration Statement on Form S-8 No. 333-51026, filed November 30, 2000). |
10.5 |
| 2002 Stock Option Plan (incorporated by reference to Annex D to Definitive Proxy Statement, filed April 30, 2002). |
10.6 |
| 2002 Executive Incentive Plan (incorporated by reference to Annex E to Definitive Proxy Statement, filed April 30, 2002). |
10.7 |
| 2002 Management Incentive Plan (incorporate by reference to Annex F to Definitive Proxy Statement, filed April 30, 2002). |
10.8 |
| 2002 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2002, filed August 19, 2002). |
10.9 |
| Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
10.10 |
| Amendment to Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz dated January 4, 2002 (incorporated by reference to Exhibit 10.1.1 to Form 8-K date December 31, 2001, filed January 31, 2002). |
10.11 |
| Securities Purchase Agreement dated December 31, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
10.12 |
| Employment Agreement, effective January 1, 2002, between Timothy M. Kardok and the Company (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.13 |
| Employment Agreement, effective January 1, 2002, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.14 |
| Employment Agreement, effective January 1, 2002, between John G. Barbar and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.15 |
| Employment Agreement, effective January 1, 2002, between Arthur K. Guyton and the Company (incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.16 |
| Employment Agreement, effective January 1, 2002, between Ronald E. Clark and the Company (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter ended March 31, 2002, filed May 15, 2002). |
10.17 |
| Employment Agreement, effective September 1, 2002 between Dale L. Epperson and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2002, filed November 14, 2002). |
10.18 |
| Series C Preferred Stock Option Agreement dated January 8, 2002 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
14.1 |
| Code of Ethics adopted by the Company on March 28, 2003 (incorporated by reference to Exhibit 14.1 to Form 10-K for the year ended December 31, 2003, filed March 31, 2003). |
21 |
| List of Subsidiaries of the Company. |
23 |
| Consent of Baum & Company, P.A. to the incorporation of their Independent Auditors’ Report herein. |
99.1 |
| Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated September 30, 2001 as filed with the State of Delaware on November 2, 2001 (incorporated by reference to Exhibit 3.1 to Form 8-K dated September 30, 2001, filed October 25, 2001). |
99.2 |
| Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated December 31, 2001 (incorporated by reference to Exhibit 3.1.1 to Form 8-K dated December 31, 2001, filed January 31, 2002). |
99.3 |
| Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated January 8, 2002 as filed with the State of Delaware on February 28, 2002 (incorporated by reference to Exhibit 3.2 to Form 8-K dated January 8, 2002, filed January 31, 2002). |
99.4 |
| Certification of Chief Executive Officer for Form 10-K for the year ended December 31, 2002 (incorporated by reference to page 54 to the Form 10-K for the year ended December 31, 2002, filed on March 31, 2003). |
99.5 |
| Certification of Chief Financial Officer for Form 10-K for the year ended December 31, 2002 (incorporated by reference to page 55 to the Form 10-K for the year ended December 31, 2002, filed on March 31, 2003). |
|