- -----------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______ to ______.
Commission File No.: 0-20101
-------
URECOATS INDUSTRIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3545304
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1239 East Newport Center Drive, Suite 101
Deerfield Beach, Florida 33442
----------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(954)428-8686
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of November 5,
2001, the registrant had 116,902,886 shares of common stock, par value $.01
outstanding.
- -----------------------------------------------------------------------------
URECOATS INDUSTRIES INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM 1. FINANCIAL STATEMENTS.......................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 25
PART II. OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS............................................. 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................... 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 28
ITEM 5. OTHER INFORMATION............................................. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 30
SIGNATURES................................................................. 32
EXHIBIT INDEX.............................................................. 33
Page 2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
----
CONSOLIDATED BALANCE SHEETS................................. 4
CONSOLIDATED STATEMENTS OF OPERATIONS....................... 6
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 10
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable, and therefore have been
omitted.
Page 3
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
SEPTEMBER 30 DECEMBER 31
------------- -------------
2001 2000
------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 53,203 $ 16,998
Accounts and Loans Receivable 873,293 22,312
Inventory 187,549 ---
Prepaid Expenses 42,424 82,503
------------- -------------
TOTAL CURRENT ASSETS 1,156,469 121,813
------------- -------------
PROPERTY AND EQUIPMENT, NET 1,277,898 951,452
------------- -------------
OTHER ASSETS:
Intangibles, Net 2,700,797 1,051,564
Deposits 28,551 24,476
------------- -------------
TOTAL OTHER ASSETS 2,729,348 1,076,040
------------- -------------
TOTAL ASSETS $ 5,163,715 $ 2,149,305
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 4
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
SEPTEMBER 30 DECEMBER 31
------------- -------------
2001 2000
------------- -------------
(UNAUDITED)
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 169,234 $ 130,334
Accounts Payable and Accrued Expenses 1,412,926 589,999
Loans Payable 177,651 5,880
------------- -------------
TOTAL CURRENT LIABILITIES 1,759,811 726,213
------------- -------------
LONG-TERM DEBT 283,822 131,920
CAPITALIZED LEASE, LONG TERM 2,129 5,454
DUE TO RELATED PARTIES 19,355 2,507,000
DEFERRED INCOME 50,000 50,000
------------- -------------
TOTAL LIABILITIES 2,115,117 3,420,587
------------- -------------
COMMITMENTS AND CONTINGENCIES 627,040 670,939
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $1.00 Par Value, 2,000,000
Shares Authorized, of which Designations:
Series A Convertible, 750,000 Shares
Authorized; Issued & Outstanding,
62,500 Shares Unconverted
(Less Offering Costs of $7,465) 55,035 55,035
Series B Convertible, 500,000 Shares
Authorized; Issued & Outstanding,
375,245 Shares Unconverted 375,245 ---
Common Stock $.01 Par Value, 140,000,000
shares Authorized; 115,827,886 Shares
Issued and Outstanding 1,158,279 993,420
Additional Paid-In-Capital 30,185,967 21,776,138
Accumulated (Deficit)-Continuing Operations (15,327,861) (10,996,326)
Accumulated (Deficit)-Discontinued Operations (14,025,107) (13,770,488)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,421,558 (1,942,221)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,163,715 $ 2,149,305
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 5
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000
----------------------------
REVENUES $ 577,655 $ -0-
------------- -------------
COSTS AND EXPENSES:
Cost of Sales 641,891 ---
Selling, General and Administrative 1,121,328 381,533
Professional Fees 22,526 27,456
Depreciation and Amortization 103,646 69,048
Research and Development 334,455 378,933
Consulting Fees 57,479 43,040
Loss on Disposal of Assets 13,693 -0-
------------- -------------
TOTAL COSTS AND EXPENSES 2,295,018 900,010
------------- -------------
NET (LOSS) FROM CONTINUING OPERATIONS (1,717,363) (900,010)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 5,175 (9,273)
------------- -------------
NET (LOSS) $ (1,712,188) $ (909,283)
============= =============
NET INCOME (LOSS) PER COMMON SHARE
Basic
Continuing Operations $ (0.015) $ (0.009)
Discontinued Operations 0.000 (0.000)
------------- -------------
TOTAL $ (0.015) $ (0.009)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 113,793,496 97,308,214
------------- -------------
NET INCOME (LOSS) INCOME PER COMMON SHARE
Diluted
Continuing Operations $ (0.015) $ (0.009)
Discontinued Operations 0.000 (0.000)
------------- -------------
TOTAL $ (0.015) $ (0.009)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 115,340,011 99,307,969
------------- -------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 6
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000
----------------------------
REVENUES $ 1,311,485 $ -0-
------------- -------------
COSTS AND EXPENSES:
Cost of Sales 1,738,338 ---
Selling, General and Administrative 2,636,961 1,122,798
Professional Fees 176,533 121,315
Depreciation and Amortization 298,344 190,809
Research and Development 1,022,465 815,739
Consulting Fees 169,218 968,565
Loss on Disposal of Assets 13,693 -0-
------------- -------------
TOTAL COSTS AND EXPENSES 6,055,552 3,219,226
------------- -------------
NET (LOSS) FROM CONTINUING OPERATIONS (4,744,067) (3,219,226)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 157,150 (13,274)
------------- -------------
NET (LOSS) $ (4,586,917) $ (3,232,500)
============= =============
NET INCOME (LOSS) PER COMMON SHARE
Basic
Continuing Operations $ (0.044) (0.034)
Discontinued Operations 0.001 (0.000)
------------- -------------
TOTAL $ (0.043) $ (0.034)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 107,584,928 95,304,589
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE
Diluted
Continuing Operations $ (0.044) (0.033)
Discontinued Operations 0.001 (0.000)
------------- -------------
TOTAL $ (0.043) $ (0.033)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 108,871,678 97,190,844
------------- -------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 7
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000(1)
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)
Continuing Operations $ (4,744,067) $ (3,219,226)
Discontinued Operations 157,150 (13,274)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH (REQUIRED) BY OPERATING ACTIVITIES:
Depreciation and Amortization
Continuing Operations 298,242 190,713
Discontinued Operations 102 96
NON-CASH CONTINUING OPERATIONS 1,023,365 1,026,977
Changes in Assets and Liabilities:
Prepaid Expenses (2,175) (8,934)
Accounts and Loans Receivable (353,000) (15,094)
Inventory (31,110) ---
Deposits (1,800) (46,575)
Accounts Payable and Accrued Expenses 281,175 89,784
Commitments and Contingencies 28,101 36,357
------------- -------------
NET CASH (REQUIRED) BY OPERATING ACTIVITIES (3,344,017) (1,959,176)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Acquisition) of Property and Equipment
Continuing Operations (714,836) (685,428)
Disposition of Property and Equipment
Continuing Operations 99,211 ---
(Acquisition) of Intangibles
Continuing Operations (772,966) (25,874)
------------- -------------
NET CASH (REQUIRED) BY INVESTING ACTIVITIES (1,388,591) (711,302)
------------- -------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 8
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000(1)
----------------------------
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock 3,230 22,444
Proceeds from Issuance of Notes 328,549 264,992
(Payment) of Notes (173,966) (52,212)
Increase(Decrease) from Loans --- (24,500)
Proceeds of Loans from Related Parties 4,611,000 2,500,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,768,813 2,710,724
------------- -------------
Net Increase (Decrease) in Cash
Continuing Operations 36,257 40,242
Discontinued Operations (52) 4
------------- -------------
Net Increase in Cash 36,205 40,246
CASH AT BEGINNING OF PERIOD 16,998 15,026
------------- -------------
CASH AT END OF PERIOD $ 53,203 $ 55,272
============= =============
Supplemental Disclosure of Cash Flow Information:
Non-Cash Operating Activities:
Board of Director Fees $ 29,475 $ 67,852
Interest 80,839 ---
Settlement of Litigation 106,800 ---
Consultant Fees 183,060 817,521
Employee Compensation 582,166 141,604
Legal Fees 41,025 -0-
-------------- -------------
Total Non-Cash Operating Activities $ 1,023,365 $ 1,026,977
Non-Cash Financing Activities:
Repayment of Debts 7,117,573 392,506
Acquisition 805,000 ---
-------------- -------------
Total Non-Cash Financing Activities $ 7,922,573 $ 392,506
============== =============
NOTE
- ----
(1) Items described herein as "Continuing Operations" for the September 30,
2000 period were previously reported as "Development-Stage Operations".
(2) The consolidated cash flows for the nine months ended September 30, 2000
have been restated to conform with the September 30, 2001 presentation.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 9
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE A - BASIS OF PRESENTATION
- ------------------------------
These statements are unaudited, but reflect all adjustments that, in the opinion
of management, are necessary to provide a fair presentation of the financial
position, results of operations and cash flows for the dates and periods
covered. All such adjustments are of a normal recurring nature.
NOTE B - SEGMENT INFORMATION - CONTINUING OPERATIONS
- ----------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000(1)
----------------------------
SEGMENT REVENUES
----------------
ADHESIVES, SEALANTS AND COATINGS $ 256,791 $ ---
ROOFING AND WATERPROOFING(2) 415,864 ---
------------- -------------
TOTAL SEGMENT REVENUES 672,655 ---
ELIMINATION OF INTERSEGMENT TRANSFERS (95,000) ---
------------- -------------
REVENUES $ 577,655 $ ---
============= =============
AFTER-TAX OPERATING (LOSS)
--------------------------
ADHESIVES, SEALANTS AND COATINGS $ (373,464) $ (456,898)
ROOFING AND WATERPROOFING (393,353) ---
------------- -------------
TOTAL SEGMENT ATOI (766,817) $ (456,898)
INTEREST AND EXCHANGE (LOSSES) (33,733) (56,436)
CORPORATE EXPENSES (916,813) (386,676)
------------- -------------
(LOSS) FROM CONTINUING OPERATIONS $ (1,717,363) $ (900,010)
============= =============
Page 10
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(CONTINUED)
NOTE B - SEGMENT INFORMATION - CONTINUING OPERATIONS - CONTINUED
- ----------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000(1)
----------------------------
SEGMENT REVENUES
----------------
ADHESIVES, SEALANTS AND COATINGS $ 340,795 $ ---
ROOFING AND WATERPROOFING(2) 1,149,694 ---
------------- -------------
TOTAL SEGMENT REVENUES 1,490,489 ---
ELIMINATION OF INTERSEGMENT TRANSFERS (179,004) ---
------------- -------------
REVENUES $ 1,311,485 $ ---
============= =============
AFTER-TAX OPERATING (LOSS)
--------------------------
ADHESIVES, SEALANTS AND COATINGS $ (1,260,085) $ (1,532,721)
ROOFING AND WATERPROOFING (1,181,414) ---
------------- -------------
TOTAL SEGMENT ATOI (2,441,499) $ (1,532,721)
INTEREST AND EXCHANGE (LOSSES) (138,968) (109,677)
CORPORATE EXPENSES (2,163,600) (1,576,828)
------------- -------------
(LOSS) FROM CONTINUING OPERATIONS $ (4,744,067) $ (3,219,226)
============= =============
COMMENTS TO NOTE B
------------------
(1) Items described herein as "Continuing Operations" for the three
and nine month periods ended September 30, 2000 for the adhesives,
sealants and coatings segment were previously reported as
"Development-Stage Operations".
(2) The Company began roofing and waterproofing operations in the first
quarter of 2001.
Page 11
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(CONTINUED)
NOTE C - EARNINGS PER SHARE
- ---------------------------
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. For diluted earnings per share, the
denominator is based on the following weighted-average number of common shares
and includes the additional common shares that would have been outstanding of
potentially dilutive common shares had been issued:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
BASIC DILUTED BASIC DILUTED
------------- ------------- ------------- -------------
2001 113,793,496 115,340,511 107,584,928 108,871,678
2000 97,308,214 99,307,969 95,304,589 97,190,844
NOTE D - PREFERRED STOCK
- ------------------------
SERIES B CONVERTIBLE PREFERRED STOCK
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. A
brief description of some of the terms and conditions of the Series B Preferred
Shares are described hereinbelow. The holders of the outstanding Series B
Preferred Shares (collectively, the "HOLDERS" and each a "HOLDER") shall 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
shall have the right, at such Holder's option, to convert the Series B
Preferred Shares into shares of the Company's common stock, $.01 par value per
share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), on the
terms and conditions set forth in the Certificate of Designation. Subject to
the restrictions identified in the Certificate of Designation, any Holder shall
be entitled to convert any or all of the Series B Preferred Shares into fully
paid and nonassessable restricted 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 authority to issue such
restricted shares at the time of conversion.
Page 12
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(CONTINUED)
NOTE D - PREFERRED STOCK - CONTINUED
- ------------------------------------
SERIES B CONVERTIBLE PREFERRED STOCK - CONTINUED
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, the Holders shall be entitled to receive in
cash out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders (the "PREFERRED FUNDS"), before
any amount shall be paid to the holders of any of the capital stock of the
Company of any class junior in rank to the Series B Preferred Shares in respect
of the preferences as to the distributions and payments on the liquidation,
dissolution and winding up of the affairs of the Company, an amount per Series B
Preferred Share equal to the sum of (i) Stated Value and (ii) all accrued and
unpaid dividends (such sum being referred to as the "LIQUIDATION VALUE"). The
purchase or redemption by the Company of stock of any class, in any manner
permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the affairs of the Company. All shares
of Common Stock of the Company shall be of junior rank to all Series B Preferred
Shares in respect to the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the affairs of the Company. All other
shares of preferred stock issued or issuable shall not be of senior rank or pari
passu to all Series B Preferred Shares outstanding in respect to the preferences
as to distributions and payments upon the liquidation, dissolution and winding
up of the affairs of the Company. As long as the Series B Preferred Shares
initially issued remain outstanding, then without the prior express written
consent of the Holders of not less than a majority of the then outstanding
Series B Preferred Shares, the Company shall not hereafter authorize or issue
additional or other capital stock that is of senior rank or that is pari passu
with the Series B Preferred Shares in respect of the preferences as to
distributions and payments upon the liquidation, dissolution and winding up of
the Company. Without the prior express written consent of the Holders of not
less than a majority of the then outstanding Series B Preferred Shares, the
Company shall not hereafter authorize or make any amendment to the Company's
Restated Certificate of Incorporation, as amended, or bylaws, or file any
resolution of the Board of Directors of the Company with the Delaware Secretary
of State containing any provisions, which would adversely affect or otherwise
impair the rights or relative priority of the Holders relative to the holders of
the Common Stock or the holders of any other class of capital stock. Until all
of the outstanding Series B Preferred Shares have been converted or redeemed as
provided in the Certificate of Designation, the Company shall not, directly or
indirectly, redeem or declare or pay any cash dividend or distribution on its
Common Stock or any other capital stock without the prior express written
consent of the Holders of not less than a majority of the then outstanding
Series B Preferred Shares. SEE ALSO ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
for more information.
Page 13
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(CONTINUED)
NOTE E - ACQUISITION
- --------------------
During the third quarter 2001, the Company completed the acquisition of Infiniti
Paint Company, Inc. ("Infiniti"). The purchase accounting method was used to
account for this transaction. Proforma information is included below to reflect
the impact Infiniti would have had if the acquisition occurred on January 1,
2001.
URECOATS INDUSTRIES INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
REVENUE $ 1,238,635 $ 3,100,984
COST OF SALES 999,387 2,884,270
------------------ ------------------
GROSS PROFIT(LOSS) 239,248 216,714
OPERATING EXPENSES 1,833,180 4,914,935
------------------ ------------------
NET (LOSS) FROM CONTINUING OPERATIONS (1,593,932) (4,698,221)
INCOME(LOSS) FROM DISCONTINUED OPERATIONS 5,175 157,150
------------------ ------------------
NET (LOSS) (1,588,758) (4,541,072)
================== ==================
NOTE F - INVENTORIES
- --------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
FINISHED PRODUCTS $ 134,218 $ ---
RAW MATERIALS AND SUPPLIES 53,331 ---
------------------ ------------------
TOTAL $ 187,549 $ ---
================== ==================
Page 14
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(CONTINUED)
NOTE G - SEGMENT INFORMATION
- ----------------------------
The Company's operations are grouped into two industry segments or divisions as
defined under Statement of Financial Accounting Standards (SFAS) No. 131. The
results of operations from the Company's six operating entities that are
reportable under SFAS No. 131 for the three and nine month periods ended
September 30, 2001, as compared to the three and nine month periods ended
September 30, 2000, are more fully described below, with the exception of the
roofing and waterproofing operations, which cannot be compared to any prior
corresponding period due to those operations beginning in the first quarter of
2001. Included in both segments are six entities: (1) Urecoats Technologies,
Inc.; (2) Urecoats International, Inc.; (3) Urecoats Manufacturing, Inc.; (4)
Urecoats Distribution, Inc.; (5) Infiniti Paint Company, Inc.; and (6) Rainguard
Roofing Corporation.
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
The following discussion of our results of operations and liquidity and
capital resources should be read in conjunction with our condensed consolidated
financial statements and related notes thereto appearing elsewhere in this
report. All information in the discussion and references to the year and
quarter are based on our fiscal year and third quarter, which end on December
31 and September 30, respectively.
The Company exited its development-stage and began operations on January 1,
2001, in two business segments: 1) adhesives, sealants and coatings, and 2)
roofing and waterproofing, as described hereinbelow. We reclassified and
attributed prior development-stage operational figures for the year 2000, to
our adhesives, sealants and coatings segment, when and where applicable.
OVERVIEW
We are in a significant time of transition. We are transitioning from a four-
year period largely characterized by research and development into a full
production mode. We are well into the process of building an infrastructure to
meet our strategic plans. We are engaged in the development, manufacturing,
sales, marketing, and distribution of unique formulations and products,
utilizing recycled materials where applicable, for the construction and
building products industries. Our plan is to sell and distribute these
products through our growing network of distribution centers ("National
Distribution Network"). Management maintains its view that as a result of the
global recycling movement and legislation aimed at the extraction of raw
materials from solid waste, the future growth of the adhesive, sealant and
coating industry will depend in part on the development and delivery of quality
and cost-effective products that incorporate recycled material in their
compositions. While we are committed to acquiring and developing products that
utilize recycled materials and to supply the emerging market demands for same,
we are also committed to building shareholder value through diversification of
our product line.
NEW SENIOR MANAGEMENT
In March 2001, we hired a new President and Chief Operating Officer to, among
other things, install new types of senior managers, to lead us out of our prior
development-stage operations and into the rollout and distribution of our
flagship UrecoatsRSM-100(tm)("RSM-100") product. Since that time, we have added
a new Chief Financial Officer (who also is our Vice President of Finance and
Treasurer), Vice President of Special Projects, and Senior Vice President
of Operations.
We amended our By-laws on October 9, 2001 and the President was promoted to the
Chief Executive Officer position retaining the additional position of President.
SEE ALSO ITEM 5. OTHER INFORMATION, AMENDMENTS TO BY-LAWS for more information.
Page 16
RECENT ACQUISITION
We acquired Infiniti Paint Company, Inc. ("Infiniti"), a Florida based
adhesives, sealants, coatings, paints, and foam distributor on September 4,
2001, effective September 1, 2001, pursuant to a Stock Purchase Agreement. We
acquired Infiniti for several strategic reasons, including, to: (a) establish
a distribution channel for Urecoats product and spray system to service
roofing and general contractors (we expect to capitalize on this channel not
only with potential cross-over industry uses of our Urecoats products, but
also to introduce other and new products); (b) diversify our existing product
line; (c) own Infiniti's diversified line of products; (d) obtain management
experience of Infiniti's key principals; (e) capitalize upon financial
strength and reliability of certain key suppliers; (f) benefit from certain
relationships with reputable and long standing product manufacturers; (g)
capitalize on profitability from both the manufacturing and distribution of
our products; (h) duplicate its business model for expansion in new locations;
(i) capitalize on prior research and development efforts and activities of
Infiniti within the sealant and coatings business; and (j) capitalize on
Infiniti's current customer base to utilize as a base for future sales of
our Urecoats products.
COMPREHENSIVE PRODUCT LINE
With our Urecoats products and those acquired from Infiniti, we now offer a
comprehensive line of sealant and coating products for the construction and
building products industries as described below:
URECOATS PRODUCTS
We acquired all right, title and interest in two formulas, including
certain technologies for their manufacture and application in 1997. These
technologies form the foundation of our Urecoats products that incorporate
recycled material in their composition. We refer to our products made from
these formulas as Rubber Sealant Membranes(RSM)(TM)("RSM"). The formula of our
RSM-100 product was the subject of a utility patent application filed with the
United States Patent and Trademark Office ("USPTO") on August 19, 1998 and the
patent was granted on August 7, 2001, patent number 6,271,305. We have filed
patent applications for protection of our RSM-100 in Austria, Belgium, Cypres,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Monaco,
Netherlands, Portugal, Spain, Sweden, United Kingdom, Canada, Brazil, and
Mexico.
RSM-100
RSM-100 is a plural component interpenetrating polymer network
composition that creates a seamless water resistant elastomeric membrane that
fully adheres to a variety of surfaces including steel, concrete and most
roofing substrates. Utilizing crumb rubber from recycled tires in its formula,
RSM-100 exhibits remarkable physical and adhesion properties, and is a durable
high performance weatherproofing sealant and coating with a vast array of
potential cross-over industry applications. RSM-100 is applied using our
patent pending spray system (described below). RSM-100's plural components are
mixed and metered in the spray system, then spray applied hot, curing upon
introduction to the atmosphere. Thus, both the spray application system and
the RSM-100 are interdependent, analogous to the razor and the razor blade.
Page 17
BLUEMAX
We are selling our enhanced, user friendly and simplified BlueMAX(TM)
system for spray application of our RSM-100 ("BlueMAX" or "Spray System"). With
knowledge gained from outside consultants, engineers and experience from
applying our RSM-100 product through our pilot licensee program and contracting
subsidiary, we initiated mass manufacturing of our BlueMAX, Model 230, earlier
this year. We filed a patent application, titled "APPLICATOR ASSEMBLY FOR
APPLICATION OF ADHESIVES, SEALANTS AND COATINGS", on October 3, 2001, with the
USPTO, which was assigned serial number 09/970,126.
TRAINING
We are certifying contractors through our multi-faceted certified
contractor training program ("Certified Training Program"). The certified
applicators are being thoroughly trained on application of our RSM-100 and with
technical knowledge on our BlueMAX system. Each BlueMAX unit sold necessitates
that the buyer/contractor receive training to become a "Certified Urecoats RSM-
100 Contractor" and receive a certification card. We have certified six persons
in the operation of the BlueMAX unit. These persons work for the contractor that
purchased our first BlueMAX unit.
INFINITI PRODUCTS
INFINITI BRANDS
A listing, including a brief description, of some of the intellectual
property and products acquired by us from Infiniti, is as follows:
ACRYLIC CONCRETE MODIFIER - 100% Acrylic Resin Additive for Roof
ALPINE - Premium Quality, 100% Acrylic Satin-Gloss Roof Paint
AQUASEAL 2000 - Waterborne Acrylic, Multi-Surface Sealer
ARCTIC - Flat White, Vinyl Acrylic Roof Paint
ATS-13 CLEAR TOPCOAT - 100% Acrylic, Clear Waterborne Roof Tile Sealant
CHALK-BOND+ - Penetrating Chalky Wall & Surface Sealer
CHALK-BOND+BLACK SPF - 100% Acrylic Primer for Spray Polyurethane Foam
CHALK-BOND+PIGMENTED - Penetrating Chalky Wall & Surface Sealer
GREAT WHITE - 100% Acrylic Elastomeric Roof Coating
GUARDIAN - 100% Acrylic Satin-Gloss House & Trim Paint
MULTI-GRIP CLEAR - 100% Acrylic, Waterborne Adhesion Primer
PC-1 - Smooth Brush-Grade Elastomeric Patching Compound
PC-3 - Fibred Knife-Grade Elastomeric Patching Compound
POLAR - Premium Vinyl Acrylic Flat Roof and Satin-Gloss Roof Paints
RAINCOAT - High-Build Acrylic Waterproofing Coating
STERLING - Silver-Aluminum Roof Paint
STERLING - Silver-Aluminum Fibred Roof Mastic
TUFCOAT 8540 ALUMINUM - 100% Solids, Polyurea-Urethane Hybrid Coating
OTHER BRANDS AND ITEMS
Infiniti also sells other products and equipment supplied from
manufacturers and suppliers, including spray polyurethane foam, paints, clear
sealers, spray equipment, and supplies, to roofing and construction contractors.
Page 18
SALES AND MARKETING
The RSM-100 product has excellent characteristics for the roofing industry. We
are targeting the United States commercial and industrial roofing industry as
our initial market segment for the RSM-100 based upon its potential in the $29
billion industry and our executive management team's extensive experience in the
commercial and industrial roofing market.
We began marketing our RSM-100 product through a pilot licensee program last
year, and through our Rainguard Roofing Corporation ("Rainguard") contracting
subsidiary this year, and achieved much success. We introduced our RSM-100
product and BlueMAX system at the Florida Roofers and Sheet Metal Association's
Convention ("FRSA") in June 2001, to roofing contractors in the Southeastern
United States. We retained an independent sales representative firm, Technical
Support and Sales, Inc. ("TSS"), to develop our sales and marketing program for
the Southeastern United States, generally targeting: (a) Building Owners; (b)
Architects; (c) Engineers; (d) Specifiers; and (e) Contractors. We are also
developing our own sales and marketing force to augment TSS's efforts and
preparing for our national RSM-100 introduction in February 2002 at the National
Roofing Contractors Association's convention in San Antonio, Texas. We received
delivery of our first BlueMAX system from our OEM Manufacturer and sold it to a
local South Florida roofing contractor in the third quarter of this year. We
also have more orders from other local South Florida roofing contractors pending
our receipt of additional BlueMAX systems from our OEM Manufacturer and training
through our Certified Training Program.
We are implementing our comprehensive marketing campaign that includes a wide
variety of video, audio and print mediums (i.e., literature and capabilities
booklet, buyer's guide, video tape, product specifications, test results,
application photographs, and local advertising pieces). Our campaign adopts a
"TAKE A PEEK INTO THE FUTURE" theme, emphasizing a strong commitment to complete
customer satisfaction, use of recycled material, technologically advanced
products, and state-of-the-art application systems. Our initial marketing thrust
is directed at the roofing contractor market, in a two-pronged approach. We are
targeting roofing contractors directly through our Infiniti locations and
developing a National Affiliate Program for total market penetration. SEE ALSO
DISTRIBUTION below.
MANUFACTURING
We commenced short-term manufacturing operations for our RSM-100 and BlueMAX in
our own facilities at the beginning of this year. We made a strategic decision
based on input from manufacturers to have our products manufactured by outside
sources. We utilize high volume, quality oriented, and reputable outside sources
for our product manufacturing needs. We have strategically identified and are
utilizing manufacturers in multiple locations across the United States for
manufacturing the components of our RSM-100 product, BlueMAX system, and
Infiniti Brand products. This strategy facilitates cost-effective, local
manufacturing of products, and optimizes transportation and delivery costs. We
are strategically aligning our new distribution openings with our manufacturers
for financial and logistical benefits. As previously reported, we ordered ten
(10) BlueMAX systems earlier this year. We received our first unit in September
and will take delivery of more units during the fourth quarter of this year.
Page 19
DISTRIBUTION
We are in the process of establishing a national network of distribution centers
("National Distribution Network") to facilitate delivery of our product line to
customers. We believe there is a lack of a cohesive national distribution
network for plural component sealant and coating products and application
equipment or systems. Our National Distribution Network will enable us to market
and sell our own products, those products supplied from other reputable sources,
and new products under development now or acquired hereafter by us, in major
geographic markets in the United States. As part of acquisition plans, we
completed our first distribution acquisition in September of this year. We are
using the Infiniti business model as our footprint for generic growth and
planning to open up at least eleven (11) more Infiniti locations in the next
five years. We are presently completing negotiations on a lease to open our
second Infiniti location in Orlando, Florida, and have hired a Branch Manager,
to operate this branch office beginning in December of this year. In addition,
we are developing a "Cutting Edge" National Affiliate Program, to target
strategically situated plural component distributors across the United States.
The goals of the National Affiliate Program are to: (a) establish a network of
distributors that will have an affiliation with us; (b) sell our Urecoats and/or
Infiniti products; and (c) give us an option to purchase an affiliate's
distribution business. This program's design commenced in September of this year
and our goal is to sign up at least six (6) affiliates during the first quarter
of next year.
CONTRACTING
With the acquisition of Infiniti, we are shifting our primary focus away from
generating revenues through applications of our Urecoats and conventional
roofing products through our own contracting subsidiary, and are focusing more
on the sales, marketing and distribution of our comprehensive product line
directly to roofing and construction contractors through Infiniti. In that
regard, we are divesting our contracting efforts and developing sales and
marketing tools, including referring RSM-100 and Infiniti product sales leads
generated by us to our growing base of certified RSM-100 contractors and
Infiniti customers. We will continue to use our contracting subsidiary to
control the testing, marketing and application of our new products and
application systems under development, to generate revenues. Currently we are
performing test applications of our RSM-100 product on steel and concrete using
the BlueMAX, and URX-300 Series products with a new spray system design.
RESEARCH AND NEW PRODUCT DEVELOPMENT
We have placed a high priority on research and new product and process
development. We have spent millions of dollars and conducted extensive research
and development on our RSM formula and hot spray liquid-applied system
technologies. Our goal is to develop a continuous flow of new products in an
attempt to stay ahead of competition. We are conducting research on variations
of our core RSM formula for new products in cross-over industries, such as steel
and concrete as described elsewhere in this report. We also acquired other
sealant and coating technologies through our acquisition of Infiniti, which is
continuing its development of new products. Further, we utilize our outside
manufacturers as strategic partners for developing new products for us and are
routinely capitalizing on the technical and chemical expertise, where and when
applicable or appropriate, from these sources.
Page 20
CROSS-OVER INDUSTRY APPLICATIONS
The original RSM formula was developed for roofing applications. However,
independent tests, including our own, on our RSM formula continually confirm
that our RSM-100 can be used effectively for applications other than roofing.
We are testing the RSM formula, as applied, on steel, concrete and marine
applications.
URX-300 SERIES
We are developing a line of crack sealer and expansion joint products,
which will include recycled materials (such as recycled glass, recycled fibers,
and crumb rubber from recycled tires). These applications are being tested
through our contracting subsidiary, and formulas through independent testing
labs, initially for application on bridges and roads, which products fall into
our URX-300(TM) Series of products. These products are flexible thermoplastic
elastomer joint sealants, which are hot applied, self leveling, rapid curing,
and easy to install. These products are being designed to seal expansion
joints, fill cracking in poured cement, and restore asphaltic concrete pavement.
OTHER SEALANTS AND COATINGS
We acquired certain sealant and coating intellectual property and formulas
from Infiniti when we acquired Infiniti. Infiniti is continuing to develop
additional sealant and coating products using its own technology, and through
outside materials manufacturers, for Infiniti's product line, and topcoats for
use on our RSM-100 product.
INTERNATIONAL EXPANSION
We are continuing to seek and develop relationships for possible joint ventures
or other business relationships with interested international groups in several
countries, including but not limited to, Russia, Spain and South Africa.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES. We reported record revenues for the three months ended September
30, 2001. Revenues and other income (hereafter called revenues) for the third
quarter of 2001 were $577,655. We cannot compare the current period to the
corresponding prior period due to no revenue being generated in the prior
corresponding period.
TOTAL COSTS AND EXPENSES. Our total costs and expenses increased from
$900,010 for the third quarter of 2000 to $2,295,018 in the third quarter of
2001. The increase of $ 1,395,008 related to expanding our adhesives, sealants
and coatings operations and divesting our roofing and waterproofing operations.
COST OF SALES. Our cost of sales for the third quarter of 2001 was
$641,891. These costs included direct labor, materials, and other job related
costs. We cannot compare the costs of sales for the current period to any
corresponding prior period due to no costs of sales being incurred for non-
development-stage operations in the prior corresponding period.
Page 21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for the third quarter of 2001 were $1,121,328 compared
to $381,533 for the corresponding three months of 2000. The increase in
selling, general and administrative expenses of $739,795 for the three months
ended September 30, 2001, compared to that same period in 2000, is primarily
due to salaries, expenses and costs related to our expanding sales, marketing,
and distribution operations required to bring our comprehensive product line
to market.
CONSULTING FEES. Our consulting fees for the third quarter of 2001 were
$57,479 as compared to $43,040 for the same period in 2000. The increase was
attributable to using outside sources for development of technical, sales,
marketing and distribution programs.
RESEARCH AND DEVELOPMENT. Our research and development decreased from
$378,933 for the third quarter of 2000 to $334,455 for the same period in 2001.
Although we are committed to continuing research and new product development,
the decrease of $44,478 reflects our primary focus moving towards introducing
our developed RSM-100 and BlueMAX products into the South Florida roofing
market.
OTHER INCOME AND EXPENSES, NET. Our interest expense was $33,733 for the
third quarter of 2001 compared to $56,436 for the same period in 2000, a
decrease of $22,703. This decrease was primarily due to lower weighted average
borrowings for capital expenditures and working capital required for business
operations in both of our segments during the third quarter of 2001.
INCOME TAX. Our pre-tax loss for the third quarter of 2001 was $(1,712,188)
as compared to $(909,283) in the same quarter of 2000, an increase of $802,905.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES. We reported record revenues for the nine months ended September
30, 2001. Revenues and other income (hereafter called revenues) for the nine
month period were $1,311,485. We cannot compare the current period to the
corresponding prior period due to no revenue being generated in the prior
corresponding period.
TOTAL COSTS AND EXPENSES. Our total costs and expenses increased from
$3,219,226 for the nine months ended September 30, 2000 to $6,055,552 for the
nine months ended September 30, 2001. The increase of $2,836,326 related to
expanding our adhesives, sealants and coatings operations and start-up and
divestment of our roofing and waterproofing operations.
COST OF SALES. Our cost of sales for the nine months ended September 30,
2001 was $1,738,338. These costs included direct labor, materials, and other
job related costs. We cannot compare the costs of sales for the current period
to any corresponding prior period due to no costs of sales being incurred for
non-development-stage operations in the prior corresponding period.
Page 22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for the nine months ended September 30, 2001 were
$2,636,961 compared to $1,122,798 for the corresponding nine months of 2000.
The increase in selling, general and administrative expenses of $1,514,163 for
the nine months ended September 30, 2001, compared to that same period in 2000,
is primarily due to salaries and non-cash bonuses, expenses and costs required
to bring us out of our development-stage, establishment of our roofing and
waterproofing operations, and for introduction of our Urecoats products to the
roofing market, inclusive of marketing materials, production, development of a
website, and our acquisition of Infiniti for distribution.
CONSULTING FEES. Our consulting fees for the nine months ended September
30, 2001 were $169,218 as compared to $968,565 for the same period in 2000.
The decrease was primarily due to the elimination of certain activities that
we retained consultants to perform related to our development-stage operations.
RESEARCH AND DEVELOPMENT. Our research and development for the nine months
ended September 30, 2001 was $1,022,465 as compared to $815,739 for the same
period in 2000. The increase of $206,726 reflects our continued commitment to
developing and testing new products.
OTHER INCOME AND EXPENSES, NET. Our interest expense was $138,969 for the
nine months ended September 30, 2001 compared to $109,677 for the same period
in 2000, an increase of $29,292. This increase was primarily due to higher
weighted average borrowings for capital expenditures and working capital
required for business operations in both of our segments during the nine months
ended September 30, 2001.
INCOME TAX. Our pre-tax loss for the nine months ended September 30, 2001
was $(4,586,917) compared to $(3,232,500) for the same period of 2000, an
increase of $1,354,417.
ACQUISITION OF WHOLLY-OWNED SUBSIDIARY
We acquired Infiniti, a local adhesives, sealants, coatings, paints, and foam
distributor, on September 4, 2001, effective September 1, 2001 pursuant to a
Stock Purchase Agreement. We purchased 100% of the issued and outstanding common
stock of Infiniti from Infiniti's shareholders ("Sellers"), consisting of an
aggregate of 1,000 shares, par value $.0001, for the purchase price of
$1,550,000. We paid the purchase price in cash and stock, of which $775,000 was
paid in cash, subject to certain terms and conditions set forth in the Stock
Purchase Agreement. The Chairman of the Board, Richard J. Kurtz, provided the
funds for the cash portion of the purchase price and these funds were converted
to preferred stock as described elsewhere in this report.
SEE ALSO ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K for more information on our
acquisition of Infiniti.
Page 23
LIQUIDITY AND CAPITAL RESOURCES
Our capital expenditures during the three month period ended September 30, 2001
totaled $848,501 compared to $239,701 in the corresponding prior period.
Additions to plant and equipment decreased from $223,015 during the three month
period ended September 30, 2000 to $111,446 during the current period.
Our total liabilities decreased from $3,420,587 at December 31, 2000 to
$2,115,117, primarily due to the Chairman of the Board converting short-term
loans payable, including interest, into equity described elsewhere in this
report. The total amount converted for the nine month period ended September
30, 2001 was $7,075,386, of which $2,408,000 in principal and $37,467 in
interest was outstanding at December 31, 2000. Total debt as of September 30,
2001 and December 31, 2000, expressed as a percentage of the sum of total debt
and shareholders' equity, was 53.1% and 190.3%, respectively. Total debt
decreased from $4,091,526 at December 31, 2000 to $2,742,157 at September 30,
2001.
Our net loss for the third quarter of 2001 was $(1,712,188), an increase of
88.3% from the net loss of $(909,283) for the third quarter of 2000. Diluted net
loss per common share rose 66.7% to $(0.015) for the third quarter of 2001
compared to $(0.009) for the same period in 2000. The net loss per share
calculation for the third quarter of 2001 includes an increase in actual and
equivalent shares outstanding.
We currently do not have the liquidity or capital resources to fund our
operations without raising capital either from borrowing or from the sale of
additional shares of stock. We anticipate further financing through short-term
and long-term loans and/or the sale of our restricted common stock and/or
preferred stock to accredited sophisticated investors.
SEGMENT INFORMATION
Our revenues for our adhesives, sealants and coatings operations were $256,791
during the third quarter of 2001 as a result of continuing operations and demand
for our RSM-100 product, through our roofing and waterproofing operations, and
from sales through our newly acquired subsidiary Infiniti. We cannot compare the
revenues in the current period to the corresponding prior period due to no
revenues being generated in the corresponding prior period. We came out of
research and development with our flagship RSM-100 product in the first quarter
of this year. We did not have operating profits during the third quarter of
2001.
Our revenues for our roofing and waterproofing operations were $415,864 during
the third quarter of 2001 as a result of demand for applications of our RSM-100
product and other conventional roofing products, in the South Florida local
market. We cannot compare the revenues in the current period to any
corresponding prior period due to no revenues being generated in any
corresponding prior period for these operations. We began our roofing and
waterproofing operations in the first quarter of this year. We did not have
operating profits during the third quarter of 2001.
Page 24
FORWARD-LOOKING STATEMENTS
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions; demand for our Urecoats and Infiniti goods and services;
competitive factors in the industries in which we compete or intend to compete;
raw materials availability and costs; success of implementing our sales,
marketing and distribution programs; and timing, impact and other uncertainties
of our future acquisition plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
We do not issue or invest in financial instruments or their derivatives for
trading or speculative purposes. Our operations are conducted presently in the
United States, and, as such, we are not subject to material foreign currency
exchange risks. Although we have outstanding debt and related interest expense,
market risk in interest rate exposure in the United States is currently not
material to our operations.
Page 25
PART II. OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
ARBITRATION
PAUL COOPER VS. URECOATS ROOFING OF FLORIDA, INC.
On April 9, 2001, Rainguard Roofing Corporation ("Rainguard Roofing"), a
wholly-owned subsidiary of Urecoats International, Inc., which is a wholly-
owned subsidiary of the Company, terminated its employment relationships with
Paul Cooper, the then President of Rainguard Roofing. On July 13, 2001, Mr.
Cooper instituted an arbitration proceeding with the American Arbitration
Association, which related to an Employment Agreement with Urecoats Roofing of
Florida, Inc. ("Urecoats Roofing"), another subsidiary of the Company, which
was entered into effective January 1, 2001. Mr. Cooper is claiming damages in
excess of $1 million. Urecoats Roofing never did any business in Florida because
it never became a qualified and licensed roofing contracting company in the
State of Florida. Urecoats International acquired Rainguard Roofing, an
existing, licensed and and qualified roofing contracting company, to enter the
roofing business. The acquisition of Rainguard Roofing was necessary because Mr.
Cooper failed to pass the roofing contractors exam in Florida and qualify
Urecoats Roofing. Urecoats Roofing had entered enter an Employment Agreement
with Mr. Cooper based on his representations that he was an experienced
executive with the expertise and qualifications to build and operate a multi-
million dollar per year roofing company. Management soon determined that Mr.
Cooper had misrepresented his abilities and experience.
Urecoats Roofing is defending the action and filed an Answering Statement
on August 1, 2001, and denied in its Answer that Mr. Cooper is due any amount
because of his knowing failure to perform his duties under the Employment
Agreement, and Counterclaimed for an unspecified amount for a return of all
compensation and expenses which were paid to Mr. Cooper as well as for money
damages that he caused because of his nonperformance and negligent performance
in his fiduciary capacity as President of Urecoats Roofing. Urecoats Roofing
filed an Amended Answering Statement on November 9, 2001 and in its Amended
Answer asserted defenses including: (1) Invalidity of the Employment Agreement
due to prior material misrepresentations; (2) Nonperformance; (3) Failure of
Consideration; (4) Anticipatory Breach; and (5) Set off/recoupment: (a) in the
amount of at least $2.5 million; (b) an amount equal to all compensation,
expenses and any other benefits whatsoever which Mr. Cooper received from or on
behalf of Urecoats Roofing; and (c) amounts lost by selling trucks, machinery
and equipment at a discount; and Amended Counterclaim incorporating the defenses
in its Amended Answer, and as a result thereof, seeking: (1) at least $2.5
million; (2) the return of compensation, expenses and any other benefits
whatsoever which Mr. Cooper received from or on behalf of Urecoats Roofing; and
(3) the return of monies lost due to selling trucks, machinery and equipment at
a discount. The parties have attempted to settle this matter on several
occasions with no results. Although Management cannot be certain of the outcome,
management is of the opinion that the allegations have little merit in light of
Urecoats Roofing's responses outlined above. The litigation is in its discovery
phase and no date has been set for the arbitration. The hearing locale is in
Broward County, Florida.
Page 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ---------------------------------------------------
RECENT SALES OF UNREGISTERED SECURITIES
During the quarterly period ended September 30, 2001, we issued restricted
stock, for certain private transactions, in reliance on Section 4(2) of the Act,
as described below:
COMMON STOCK
(1) On September 1, 2001, we issued 1,550,000 shares of restricted common
stock, pursuant to a Stock Purchase Agreement, effective September 1, 2001, in
exchange for all of the issued and outstanding common stock of Infiniti, from
the Infiniti shareholders, valued and recorded at $775,000.
(2) On July 1, 2001, we issued 150,000 shares of restricted common stock,
for consulting services rendered, valued and recorded at $61,875.
(3) On September 30, 2001, we issued an aggregate of 1,620,000 shares of
restricted common stock, as employee bonuses, valued and recorded at $458,526;
1,600,000 of which were issued to officers and former officers of the Company,
valued and recorded at $450,080.
(6) On July 31, 2001, we issued 50,000 shares of restricted common stock,
as other compensation, to an officer of the Company, pursuant to an employment
arrangement, valued and recorded at $14,400.
(7) On September 30, 2001, we issued 150,000 shares of restricted common
stock, pursuant to a legal settlement, valued and recorded at $42,195.
(8) On August 23, 2001, we issued 25,000 shares of restricted common
stock, pursuant to a legal settlement, valued and recorded at $8,100.
(9) On September 30, 2001, we issued 472,031 shares of restricted common
stock, pursuant to the exercise of the remaining unexercised portion of a
restricted stock option, to the Chairman of the Board of the Company, in
exchange for cancellation of $207,694 in short-term loans bearing interest at
9% per annum, which he made to the Company during the third quarter of this
year. We granted the 3-year restricted stock option on January 8, 2001, for the
purchase of 12,000,000 shares of restricted common stock at $.44 per share, as
consideration for his agreement to continue funding the working capital
requirements of the Company up to $3,0000,000 and forbearing repayment of funds
he advanced to the Company during the year 2000, through the 2001 calendar year.
PREFERRED STOCK
(10) On September 30, 2001, we issued 375,245 shares of Series B
Convertible Preferred Stock, pursuant to a Securities Purchase Agreement dated
September 30, 2001, to the Chairman of the Board of the Company, in exchange for
cancellation of $1,876,225 in short-term loans bearing interest at 9% per annum,
which he made to the Company during the third quarter of this year.
Page 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- ---------------------------
AMENDMENTS TO BY-LAWS
The Board of Directors amended the Company's By-laws on October 9, 2001 as
described below:
ANNUAL MEETING
Amended ARTICLE I. MEETING OF SHAREHOLDERS, SECTION 1. ANNUAL MEETING as
follows:
"SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of
Urecoats Industries Inc. (hereinafter, the "Corporation") for the election
of directors and for the transaction of such other proper business shall
be held on such date and at such time as may be fixed by the Board of
Directors or if no date and time are so fixed on the fourth Tuesday in May
of each year, at the office of the Corporation or at such other place, and
at such hour as shall be designated by the Board of Directors, or, if no
such time be fixed, then at 10:00 A.M."
CHAIRMAN OF THE BOARD
Amended ARTICLE II. BOARD OF DIRECTORS as follows (New Section):
"SECTION 16. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside over the Board of Directors and shall have the general supervision
and direction over the President. The Chairman of the Board shall see that
the President's duties are properly performed. He shall, if present,
preside at each meeting of the stockholders and of the Board and shall be
an ex officio member of all committees of the Board. He shall perform all
duties incident to the office of Chairman of the Board and such other
duties as may from time to time be assigned to him by the Board."
Page 28
OFFICERS
Amended ARTICLE IV. OFFICERS, SECTION 1. NUMBER AND QUALIFICATIONS as
follows:
"SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation
shall include the President, one or more Vice Presidents (including
Executive Vice Presidents and Senior Vice Presidents), the Treasurer and
the Secretary. Any number of offices may be held by the same person.
Such officers shall be elected from time to time by the Board. Each
officer shall hold his office until his successor is elected and qualified
or until his earlier resignation or removal. The Board may from time to
time elect, or delegate to the President the Power to appoint, such other
officers (including one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents as may be necessary or desirable
for the business of the Corporation. Such other officers and agents shall
have such duties and shall hold their offices for such terms as may be
prescribed by the Board or by the appointing authority."
CHAIRMAN OF THE BOARD
Amended ARTICLE IV. OFFICERS, SECTION 5. THE CHAIRMAN OF THE BOARD as
follows:
"SECTION 5. ---DELETED---"
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Amended ARTICLE IV. OFFICERS, SECTION 6. THE PRESIDENT as follows:
"SECTION 6. THE PRESIDENT. The President shall be the chief executive
officer of the Corporation and shall have the general and active
supervision and direction over the other officers, agents and employees
and shall see that their duties are properly performed, subject, however,
to the direction of the Chairman of the Board and the direction and
control of the Board of Directors. At the request of the Chairman of the
Board, or in the case of his absence or inability to act, the President,
if a director, shall perform the duties of the Chairman of the Board and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman of the Board. In general, the President
shall have such other powers and shall perform such other duties as
usually pertain to the office of President or as from time to time may be
assigned to him by the Board, the Chairman of the Board or these By-laws."
Page 29
OFFICER RESIGNATIONS AND APPOINTMENTS
After the Board of Directors amended the Company's By-laws on October 9, 2001 as
described above, the Board of Directors accepted the resignation of Richard J.
Kurtz as Chief Executive Officer, effective October 9, 2001, of the Company. Mr.
Kurtz continues to hold his position as a director and Chairman of the Board of
the Company. Thereafter, the Board of Directors elected Timothy M. Kardok, the
Company's President, as Chief Executive Officer and accepted his resignation as
Chief Operating Officer, effective October 9, 2001.
DIRECTOR RESIGNATION
GARY M. ZELLER
The Board of Directors accepted the resignation of Mr. Zeller, effective
August 7, 2001.
CONSULTANT ARRANGEMENTS
JEROLD L. ZARO
On October 1, 2001 and prior to Mr. Zaro being elected as a member of the
Company's Board of Directors, Mr. Zaro and the Company entered into a Financial
Consultant Arrangement. As consideration for the financial consulting services
to be performed under the arrangement, the Board of Directors agreed to pay Mr.
Zaro non-cash compensation in the form of restricted common stock, par value
$.01, in two equal increments of 425,000 shares, of the Company. The first
increment was paid on October 1, 2001 and the second increment is to be paid on
April 1, 2002, subject to satisfactory performance of the financial consulting
services required thereunder. SEE ALSO ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
for more information on Mr. Zaro.
STEVEN MENDELOW
On October 1, 2001 and prior to Mr. Mendelow being elected as a member of
the Company's Board of Directors, Mr. Mendelow and the Company entered into a
Financial Consultant Arrangement. As consideration for the financial consulting
services to be performed under the arrangement, the Board of Directors agreed to
pay Mr. Mendelow non-cash compensation in the form of restricted common stock,
par value $.01, in two equal increments of 425,000 shares, of the Company. The
first increment was paid on October 1, 2001 and the second increment is to be
paid on April 1, 2002, subject to satisfactory performance of the financial
consulting services required thereunder. SEE ALSO ITEM 6. EXHIBITS AND REPORTS
ON FORM 8-K for more information on Mr. Mendelow.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
EXHIBITS
10.1 Executive Compensation Description - Arthur K. Guyton
10.2 Executive Compensation Description - Ronald E. Clark
10.3 Executive Compensation Description - Michael T. Adams
Page 30
REPORTS ON FORM 8-K
1. FORM 8-K DATED SEPTEMBER 4, 2001
(As filed electronically with the SEC on September 20, 2001)
ITEMS REPORTED:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
---------------------------------------------
RE: ACQUISITION OF INFINITI PAINT COMPANY, INC.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
------------------------------------------
FINANCIAL STATEMENTS FILED:
Audited Financial Statements of Infiniti Paint Co., Inc. for the
year ended December 31, 2000
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2000 for Urecoats Industries Inc.
and Subsidiaries and Infiniti Paint Co., Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 2000 for Urecoats Industries Inc. and Subsidiaries and
Infiniti Paint Co., Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the six months ended June 30, 2001 for Urecoats Industries Inc.
and Subsidiaries and Infiniti Paint Co., Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June
30, 2001 for Urecoats Industries Inc. and Subsidiaries and Infiniti
Paint Co., Inc.
2. FORM 8-K DATED SEPTEMBER 30, 2001
(As filed electronically with SEC on October 25, 2001)
ITEMS REPORTED:
ITEM 5. OTHER EVENTS
--------------------
RE: SERIES B CONVERTIBLE PREFERRED STOCK
- CERTIFICATE OF DESIGNATION
- SECURITIES PURCHASE AGREEMENT
RE: NEW DIRECTORS - STEVEN MENDELOW, CPA
JEROLD L. ZARO, ESQUIRE
FINANCIAL STATEMENTS FILED: N/A
Page 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
URECOATS INDUSTRIES INC.
(Registrant)
November 14, 2001 /s/ Timothy M. Kardok
----------------- ---------------------
Date Timothy M. Kardok
CEO and President
November 14, 2001 /s/ John G. Barbar
----------------- ---------------------
Date John G. Barbar
CFO and Treasurer
Page 32
EXHIBIT INDEX
-------------
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------
10.1 Executive Employment Description - Arthur K. Guyton
10.2 Executive Employment Description - Ronald E. Clark
10.3 Executive Employment Description - Michael T. Adams
Page 33