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Delaware	13-3545304
(State of Incorporation)	(I.R.S. Employer Identification No.)

718 South Military Trail	33442
Deerfield Beach, Florida 33442	(Zip Code)
(Address of principal executive offices)

Title of each class		Name of each exchange on which each class registered
Common Stock, $0.01 par value		American Stock Exchange

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Products

We offer three series of products: RSM Series™, Spectrum Series™ and Infiniti Series™.

RSM Series™ products consist of the RSM™ brands made from our RSM Technologies™, Spectrum Series™ products consist of Spectrum™ brands marketed by us, and Infiniti Series™ products consist of the Infiniti™ brands made from our Infiniti Technologies™. We sometimes refer to these series of products collectively as our “Comprehensive Product Line”.

RSM Series™

The RSM Series™ is comprised of two series of products. The RSM Hundred Series™ products consist of coatings made from a patented three component RSM™ formula (i.e. “RSM-100™”) and patented spray equipment required for their application (“BlueMAX™”). The three components of the RSM™ formula are processed through the spray equipment to make and apply the coating at a job site. The RSM Thousand Series™ products consist of coatings made from a patent pending two component RSM™ formula (i.e. “RSM-2000™”) and patent pending spray equipment required for their application (“BlueWARRIOR™” and “BlueCHIEF™”). The two components of the RSM™ formula are processed through the spray equipment to make and apply the coating at a job site. Like its RSM Hundred Series™ predecessor, the R SM Thousand Series™ utilizes crumb rubber from recycled tires in its formula.

Spectrum Series™

The Spectrum Series™ is comprised of high performance Primers, Urethanes, Acrylics, Hybrids, and Polyureas suitable for use for a variety of industrial and commercial applications.

Infiniti Series™

The Infiniti Series™ is comprised of roof coatings, paints, and sealants.

 

Sales and Marketing

Our growing sales force consists of inside and outside sales personnel and independent representatives. We attend select trade shows, advertise in trade publications, market using direct mail, and use other various media to target the high performance coating, waterproofing, roofing, corrosion, construction, and urethane markets. Sales have primarily been in the Eastern United States and limited international markets to date. Our target customers are coating applicators with plural component spray experience.

We introduced our new RSM Thousand Series™ and Spectrum Series™ products to the spray polyurethane, waterproofing, and roofing markets in the first quarter of 2004.

The RSM Series™ is marketed using a numbering system to differentiate between the industries in which our RSM™ formulae has application (e.g. RSM-100™ or RSM-110 HP™ or RSM-1000™ for roofing markets, RSM-2000™ for waterproofing markets, etc.).

We sell Infiniti Series™ products to local coating and paint contractors and spray polyurethane foam applicators, through our distribution location in South Florida. Infiniti also is a registered vendor with and sells its roof paints and coatings to North America’s largest manufacturer and seller of paints.

 

Competition

The United States adhesives, sealants and coatings industry is highly fragmented with over 500 manufacturing companies. Future growth is expected to result from the trend of the industry to create new design and manufacture, lower costs, improve product characteristics, reduce weight and corrosion in new applications. Additional industry growth is expected to occur as a result of the increased use of adhesives, sealants and coatings in international markets. Competition is generally regional and is based on product quality, technical service for specialized customer requirements, breadth of product line, brand name recognition, price, service, and warranty. Due to the uniqueness of certain of our technologies, ease of application, cost savings, and the environmental marketing component, we believe we can achieve significant market share in the industries which we are targeting. Our RSM™ coating membranes can only be created through our patented and patent pending spray equipment. Nonetheless, we face strong indirect competition. Numerous companies are engaged in the development, manufacture and marketing of sealant and coating products that compete with us. These competitors have equivalent or, in most cases, greater availability to resources than we do. In marketing our products, we compete primarily on the basis of product technology, value-added services, product performance, and installed price. Our future success will depend on our ability to successfully market our products and create awareness in industry and the public regarding the value of our products as with any new product. We are facing increased competition as we penetrate our existing target markets and build greater brand identity through our sales and marketing efforts.

 

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Manufacturing

We use toll blenders, vendors, and suppliers, under private label agreements, to manufacture most of our Comprehensive Product Line’s needs. There is no known shortage of raw material availability or supply for our products with these sources. Our RSM Hundred Series™ formula is comprised of three components (A, B and C), which are manufactured by outside toll blenders, and an equipment vendor for the spray equipment, for distribution by us to our customers. The RSM Thousand Series™ formula is comprised of two components (A and B), of which the A component is manufactured by an outside toll blender. We have identified and have available outside toll blenders for manufacturing our new B component, however, to be competitive in the markets in which we are targeting, we may need to set up our own manufacturing plant. As part of our strategic organizational i nitiative, we have entered into a strategic alliance with a newly formed, non-affiliated corporation, for the manufacturing, distribution, technical support, service, and training of the RSM Thousand Series™ spray equipment (“BlueWARRIOR™” and “BlueCHIEF™”).

We are moving towards developing an ability to custom manufacture formulations to serve a wider variety of industries. Most of these efforts will focus on providing the customer with specialized products to meet exact specifications, and despite relatively low volume, we expect to achieve a high cost to profit ratio serving these niche markets.

Distribution

In 2002, we entered into an exclusive distribution agreement with Bradco Supply Corp. (“Bradco”), a roofing materials supplier serving the Eastern United States. During 2002 and after establishing this distribution channel with Bradco, we reduced the RSM-100™ and BlueMAX™ selling prices for competitive reasons, which resulted in a decreased margin not only for us but also Bradco. As part of our recent strategic organizational initiative, we are decreasing our reliance on Bradco’s distribution channel because we need to increase our margins to achieve profitability in 2004. We are now primarily selling our RSM Series™, and Spectrum Series™, products direct to our certified applicators throughout the Eastern United States. The Infiniti Series™ products are distributed throughout the Southeastern United States by Infiniti.

 

International

We are committed to limited international expansion with our RSM Technologies™ under distribution, license, and/or purchase agreements. In the fourth quarter of 2003, we executed a confidential purchase agreement, which becomes effective upon placement of an initial order, with a local non-affiliated Florida based company to purchase our RSM Hundred Series™ products, for export only, exclusively to Turkey and the Middle East, for a term of five (5) years including an option to extend the term for a second five (5) year term. Pursuant to the purchase agreement, the buyer is obligated to purchase a certain amount of RSM Series™ products for each year of the agreement or we have the right to convert the agreement into a non-exclusive agreement. The purchase agreement also includes a supplemental license agreement that can be activated by the buyer after a certain amount of our RSM Hundred Series™ products are purchased by the buyer. The license agreement, if and when activated, forms a joint venture between RSM Technologies (as licensor) and the buyer (as licensee) whereby RSM Technologies contributes its RSM Technologies™ (with the right at all times to maintain secrecy) and the buyer contributes all of the capital necessary to design, set up, and operate, a manufacturing plant in Turkey only.

 

Training

Based on the technical nature of our RSM Series™ products, we are required to place a high priority on training. Sales, operations, and technical personnel undergo specialized training relating to specifications, mechanical, repair, maintenance, and spray application techniques to ensure proper customer support to our certified applicators for our RSM Series™ products. We require contractors/end-users/spray applicators who purchase our RSM Series™ products to become certified in their use and application. On-site technical support and refresher courses on a regular basis are available for customer service purposes for a fee.

 

Research and Product Developments

We place a high priority on research and new product and process development. During 2002, we increased research and development on our RSM Technologies™ and developed a two component RSM™ formula and smaller, less expensive, equipment for its spray application (“BlueWARRIOR™” and “BlueCHIEF™”). Refer to Products, RSM Series™, RSM Thousand Series™ above (we recently introduced these new RSM Technologies™ to the marketplace).

During 2003, we encountered problems in the field with our RSM Hundred Series™ products. The only valid way that we could make accurate assessments of the sensitivities of our products (e.g. RSM-100™ and BlueMAX™ ) to raw material variation, substrate preparation, operator technique, and ambient weather, was through the commercialization process. These factors were difficult, if not impossible, for us to simulate in the laboratory or from limited commercial distribution because they are very much dependent upon scale - multiple lots of raw materials, the amount of material processed and the number of projects completed and projects spanning the seasons. We have applied these field assessments and have reengineered our RSM Hundred Series™ technologies™ to address them. Specifically, we identified the sensitive components of our technology and re placed them with components which perform at least as well as the originals under optimum conditions but with less sensitivity to the factors noted above. Using this methodology, we are assured of more reliable performance. For the years ended December 31, 2003, 2002, and 2001, we spent $509,020, $820,533, and $1,250,213, respectively for research and development.

 

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New Markets

We believe our RSM Technologies™ have applicability in many cross-over industry markets, such as corrosion and pipeline, and continue to explore these and other suitable potential markets. See also Products, Spectrum Series™ above.

 

Patents and Trademarks

We have a limited number of patents issued and patents applied for in the United States and in various foreign countries. Principal reliance is placed upon our RSM Hundred Series™ formula and spray equipment.

RSM Hundred Series™

We have an issued patent for the RSM Hundred Series™ formula, namely, U.S. Patent No. 6,271,305, issued August 7, 2001, entitled: "Bituminous Polyurethane Interpenetrating Elastomeric Network Composition and Method of Manufacturing the Same". A continuation application seeking broader coverage for the composition was filed in the United States Patent and Trademark Office on June 27, 2001 and was issued, U.S. Patent No. 6,538,060. We filed corresponding international applications in Europe, Brazil, Canada, and Mexico, which are pending.

We have an issued patent for the RSM Hundred Series™ spray equipment (“BlueMAX™”), namely, U.S. Patent No. 6,663,016, issued December 16, 2003, entitled: "Applicator Assembly for Application of Adhesives, Sealants and Coatings". We filed corresponding international applications in Canada, China, and an international PCT Application, which are pending.

 

Employees

At December 31, 2003, the Company employed 25 people.

 

Historical Information

The Company was incorporated in the state of Delaware on October 20, 1989 as Natural Child Collection, Inc. and changed its name to Natural Child Care, Inc., on January 14, 1991. In 1993, the Company underwent a recapitalization, reverse merger, discontinued its pre-merger NCC operations, changed its name to Winners All International, Inc., and began post-merger random lottery operations. On February 8, 1999, the Company changed its name to Urecoats Industries Inc. We acquired Rainguard Roofing Corporation, a Florida corporation organized on May 28, 1997, effective January 1, 2001, which had minimal assets and liabilities, so we could enter the roofing and waterproofing business. The Board of Directors divested these operations, effective December 31, 2001.

 

Forward Looking Statements

This report includes statements that may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relate to our financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical fact. Accordingly, statements that are based on management's projections, estimates, assumptions, and judgments are forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continu e,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. These forward-looking statements are based largely on our current expectations, assumptions, estimates, judgments, plans and projections about our business and our industry, and they involve inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, judgments, and estimates, forward-looking statements involve known and unknown risks, uncertainties, contingencies, and other factors that could cause our or our industry's actual results, level of activity, performance or achievement to differ materially from those discussed in or implied by any forward-looking statements made by or on the Company and could cause our financial condition, results of operations, or cash flows to be materially adversely affected. In evaluating these statements, some of the factors that you should co nsider include the following: (a) Financial position and results of operations, including general and administrative expense targets and effects on income from continuing operations; (b) Cash position and cash requirements, including the sufficiency of our cash requirements for the next twelve months; (c) Sales and margins; (d) Sources, amounts, and concentration of revenue; (e) Costs and expenses; (f) Accounting estimates, including treatment of goodwill and intangible assets, doubtful accounts, inventory, restructuring, and warranty, and product returns; (g) Operations, including international, supply chain, quality control, and manufacturing supply, capacity, and facilities, including the anticipated opening of our manufacturing operations; (h) Products and services, price of products, product lines, and product and sales channel mix; (i) Relationship with customers, suppliers and strategic partners, including increased reliance on strategic partners; (j) Raw material variations, substrate preparation, ap plication specifications, operator techniques, and ambient weather fluctuations; (k) Acquisition and disposition activity; (l) Credit facility and ability to raise capital; (m) Real estate lease arrangements; (n) Global economic, social, and geopolitical conditions; (o) Industry trends and our response to these trends; (p) Tax position and audits; (q) Strategic organizational initiatives, cost-reduction efforts, including workforce reductions, and the effect on employees; (r) Sources of competition; (s) Protection of intellectual property; (t) Outcome and effect of current and potential future litigation; (u) Research and development efforts, including our investment in new technologies; (v) Future lease obligations and other commitments and liabilities; (w) Common stock, including trading price; (x) Security of computer systems; and (y) Changes in accounting policies and practices, as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board.

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We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Item 2.Properties.

Our operations are conducted in leased facilities located in Deerfield Beach, Florida. These facilities are adequate and provide sufficient space for our present operational requirements. See Notes to Consolidated Financial Statements.

Item 3.Legal Proceedings.

(a)Ponswamy Rajalingam and Uma Umarani, Plaintiffs v. Urecoats International, Inc., Urecoats Industries Inc., et. al., Defendants.

On May 15, 2002, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, Plaintiffs filed a complaint against Urecoats International, Inc., Urecoats Industries Inc., Urecoats Technologies, Inc., and Richard J. Kurtz, Michael T. Adams, and two former officers of the Company, individually, and on November 12, 2002, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, Plaintiffs filed a second complaint against Urecoats International, Inc. and Urecoats Industries Inc., alleging breach of contract, conversion, and numerous other claims under various common law and statutory theories. These two cases were consolidated in 2003. The Plaintiffs are husband and wife chemists who were retained as consultants to Urecoats International, Inc. pursuant to written consulting agreements. The agreements are dated in March 2 000 and expired by their terms in March 2001. They were not renewed. The contracts required, among other things, for the Plaintiffs to build “a full production delivery system” for a sprayable polyurethane and asphalt-based product. The Plaintiffs were paid all of their monthly payments under the two agreements. Plaintiff Rajalingam claims that he is owed $99,000 plus interest pursuant to his consulting agreement (which was money allegedly owed to him under a prior consulting agreement) and he was entitled to have restrictions lifted on 500,000 (50,000 post-split) shares of common stock in Urecoats Industries Inc. Plaintiff Umarani claims that she was entitled to have restrictions lifted on 311,000 (31,100 post-split) shares of common stock in Urecoats Industries Inc. They are seeking the monetary value of that common stock as of March 20, 2001. Moreover, both Plaintiffs owned approximately 2.15 million (215,000 post split) shares of additional restricted common stock in Urecoats Industries Inc. fo r which they are seeking the monetary value. Plaintiffs claim that they would have sold their common stock in March 2002, although this fact as well as the value they would have received from the sale of these shares is in dispute. The Plaintiffs are also seeking punitive damages, which the Company believes are questionable under Florida law and will be vigorously challenged on appeal if awarded, together with the claims against the individual officers and the tort claims against the corporate entities. All of the motions to dismiss were denied and accordingly trial will be on all of the claims asserted. The trial is scheduled to begin in either April or May 2004. Settlement talks have failed and the Company has instructed its litigation counsel to prepare for trial. The outcome of this case cannot be determined at this time.

(b)Raymond T. Hyer, Jr. and Sun Coatings, Inc., Plaintiffs v. Urecoats Industries Inc., et. al, Defendants

On October 3, 2003, in the Hillsborough County State Court, Division H, Plaintiffs filed a complaint against Urecoats Industries Inc. and Michael T. Adams, John G. Barbar, and a former officer of the Company, individually, alleging common law fraud and rescission in connection with their purchase of common stock in the Company. Plaintiff Hyer purchased $100,000 worth of common stock in June 2003 and Plaintiff Sun Coatings purchased $250,000 worth of common stock in July 2003. Plaintiffs allege that the Company and certain present and former officers failed to disclose the current financial condition of the Company and its subsidiaries (notwithstanding that Plaintiffs signed subscription agreements admitting that they were provided all relevant and requested financial information). The Defendants’ motion to dismiss was denied by Order dated January 20, 2004. The Defendants answe red the complaint on February 13, 2004 and asserted, among others, the affirmative defense that Plaintiffs’ claims are barred by their signed subscription agreements. Discovery has not yet commenced and no trial date is set. The Company will vigorously defend this case and the outcome cannot be determined at this time.

(c)Various Other Litigation

We are involved in various lawsuits and claims arising in the ordinary course of business. See Note 8 in our Consolidated Financial Statements.

Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim, management is currently unable to predict the ultimate outcome of any litigation or claim, determine whether a liability has been incurred or make a reasonable estimate of the liability that could result from an unfavorable outcome. In view of the unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any litigation or claim to which we are a party or the impact on us of an adverse ruling in such matters.

Item 4.   Submission of Matters to a Vote of Security Holders.

We did not submit any matter during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

 

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Item 4(A).    Executive Officers of Our Company.

Set forth below is a brief summary of the executive officers of the Company:

Name and Present Position		Age		Business Experience During the Past 5 Years and Period Served as Officer
Michael T. Adams President		38		President since August 1, 2003. Mr. Adams was Executive Vice President and Corporate Secretary from March 1, 1999 to September 30, 2003. Prior thereto, he held various officer capacities in the Company's subsidiaries and was instrumental in the restructuring and establishment of operations for the Company beginning in January 1997. He earned his Bachelor of Science degree in Business Administration in 1989, Master of Science degree in Business Administration in 1990 and Juris Doctor Degree in 1995, from Nova Southeastern University, located in Fort Lauderdale, Florida.
John G. Barbar Senior Vice President of Finance, Chief Financial Officer, and Corporate Treasurer		42		Vice President of Finance and CFO since March 19, 2001, and Treasurer since April 23, 2001. From February 1999 to September 2000, he was vice president and treasurer of General Roofing Services, Fort Lauderdale, FL; November 1996 to August 1998, he was chief financial officer of R & J Roofing of Florida Inc., Boca Raton, FL; and June 1982 to November 1986, he served in various capacities for the Barbar Group, Boca Raton, FL. Mr. Barbar is a certified public accountant and a member of Florida Institute of Certified Public Accountants and American Institute of Certified Public Accountants.
Matthew R. Simring General Counsel, Corporate Secretary		35		General Counsel and Corporate Secretary since August 1, 2003. Mr. Simring has been practicing in the area of business and corporate law since obtaining his law license in 1999. He graduated from Nova Southeastern University Law School, in Fort Lauderdale, Florida in August 1999. Mr. Simring received a Bachelor of Arts in Liberal Studies from Nova Southeastern University in August 1994. He has been a member in good standing with the Florida Bar since September 1999.

PART II

Item 5.Market for Registrant's Common Equity and Related Stockholder Matters.

Market Information

 

Our common stock is traded on the American Stock Exchange as of June 18, 2002 under the ticker "URT". Prior to that time, our common stock traded on the over-the-counter bulletin board under the symbol "UREC" until May 30, 2002 and "URCO" from June 3, 2002 through June 17, 2002. The following table sets forth, for the calendar quarters during the past two years, the closing prices on the American Stock Exchange and the high and low closing bid information for our common stock. For the shares trading on the over-the-counter bulletin board, the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

			2003						2002(*)
Calendar Quarter			High			Low			High			Low
First		$	.62		$	.61		$	6.70		$	6.30
Second			1.12			1.12			3.25			3.20
Third			.57			.57			1.45			1.40
Fourth			.50			.45			.90			.75

* The amounts have been adjusted to reflect a 1-for-10 share consolidation approved by shareholders on May 28, 2002 and effective after the close of business on May 30, 2002.

 

Holders and Dividends

 

As of March 4, 2004, there were approximately 6,500 holders of record of our common stock. We did not declare any dividends during the past two years.

 

Recent Sales of Unregistered Securities

 

During the quarterly period ended December 31, 2003, the Company issued securities, for certain private transactions, in reliance on Section 4(2) of the Act, as described below:

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Common Stock

(1)On November 19, 2003, we issued an aggregate of 43,125 shares of restricted common stock pursuant to conversion of 6,250 shares of our Series C Convertible Preferred Stock, which Series C Convertible Preferred Stock was previously recorded at $125,000.

(2)On December 31, 2003, we issued an aggregate of 7,000 shares of restricted common stock to officers, as other compensation pursuant to employment agreements, valued and recorded in the aggregate at $1,750.

 

Preferred Stock

On December 31, 2003, we issued 71,752 shares of our Series C Convertible Preferred Stock to Richard J. Kurtz, our Chairman of the Board and principal stockholder, in exchange for his cancellation of $1,435,040 of our indebtedness to him for short-term loans, bearing interest at 9% per annum, advanced to us during the fourth quarter of 2003. This transaction represents a partial and the final exercise by him under his Second Series C Preferred Stock Option Agreement. As previously reported, we entered into a Second Series C Preferred Stock Option Agreement with our Chairman on March 21, 2003, which granted to him, the right and option to purchase all or any part of an aggregate of 250,000 of our Series C Convertible Preferred Stock at $20.00 per share to fund our operations up to $5,000,000 during the 2003 year. The Series C Convertible Preferred Stock purchased thereby is converti ble into restricted shares of common stock according to a conversion formula based on a price of $.50 per share of common stock. See also Notes to Consolidated Financial Statements.

 

Item 6.Selected Financial Data.

		Year Ended December 31,
											Development			Development
											Stage			Stage
											Operations			Operations
		2003			2002			2001			2000			1999
Summary of Operations
Revenue		$	3,976,856		$	5,015,645		$	1,255,292	(a)	$	---		$	---
(Loss)From Continuing Operations		$	(11,273,084	)	$	(11,443,336	)	$	(6,442,348	)	$	(4,207,332	)	$	(2,381,026	)
(Loss)Per Common Share-Basic(b)		$	(0.739	)	$	(0.841	)	$	(0.056	)	$	(0.044	)	$	(0.031	)
(Loss)Per Common Share-Dilutive(b)		$	(0.552	)	$	(0.702	)	$	(0.055	)	$	(0.043	)	$	(0.031	)
Financial Position
Total Assets		$	2,699,196		$	6,148,784		$	5,185,163		$	2,149,305		$	1,589,739
Long-Term Debt		$	112,349		$	45,427		$	219,296		$	131,920		$	34,327
Total Liabilities		$	5,268,864		$	4,147,160		$	2,826,044		$	4,091,526		$	979,969
Total Stockholders' Equity (Deficit)		$	(2,569,668	)	$	2,001,624		$	2,359,119		$	(1,942,221	)	$	(59,651	)

 

(a) This amount does not include revenue from our contracting services of $1,352,463, which was discontinued, effective December 31, 2001. The combined revenue of application systems, coatings, sealants and other products, and contracting services totaled $2,607,755. See Consolidated Financial Statements and related Notes for complete information.
(b) These amounts have been adjusted to reflect a 1-for-10 share consolidation approved by the shareholders in 2002.

 

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three-Year Period Ended December 31, 2003

Overview

This financial review presents our operating results for each of the three years in the period ended December 31, 2003, and our financial condition at December 31, 2003. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption “Forward Looking Statements” in Item 1 of Part I of this report. In addition, the following review should be read in connection with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements. As used in this repo rt, "Urecoats" and the "Company" or "Us" or "We" or “Our” refer to Urecoats Industries Inc. and its subsidiaries, unless the context otherwise requires.

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Results of Operations

Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002

Revenues

The following is a summary of revenues for the years ending December 31,

				2003			2002			2001
Revenue:
Application Systems				$	492,700		$	1,314,515		$	490,000
Coatings, Sealants and Other Products					3,484,156			3,701,130			765,292
Total Revenue				$	3,976,856		$	5,015,645		$	1,255,292

We reported revenue for the year ended December 31, 2003 of $3,976,856 as compared to $5,015,645 for the year ended December 31, 2002. The revenue generated from sales of our Application Systems was $492,700, which represented 12% of our revenue, as compared to $1,314,515 in 2002, which was 26% of our revenue, while sales from Coatings, Sealants and Other Products was $3,484,156, which represented 88% of our revenue, as compared to $3,701,130 in 2002, which was 74% of our revenue.

The decrease of $821,815 from Application Systems was due to: 1) a new pricing strategy which reduced our average price per unit by $10,981; 2) an increase in warranty costs relating to product application specifications, contractor practices, and other product issues, which are discussed in Part I, Item 1, Research and Product Developments section, and as a result, curtailed sales effort in the third and fourth quarter of 2003; and 3) more stringent requirements for potential applicators to qualify for the purchase of an Application System. As a result, we sold nine (9) Application Systems in 2003 as compared to twenty (20) in 2002.

The decrease of $216,974 from Coatings, Sealants and Other Products is a result of a decrease in sales of our RSM Series™ of $179,120 and a decrease of the Infiniti Series™ of $37,854.

 

Cost and Expenses

Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. These total costs and expenses decreased from $16,458,981 for the year ended December 31, 2002 to $15,249,940 for the year ended December 31, 2003 for a decrease of $1,209,041. The decrease is comprised of a reduction in selling, general and administrative expenses, research and development expenses, consulting fees, and cost of sales, which were offset by an increase in impairment of assets, loss on disposal and valuation of assets, depreciation and amortization, and interest.

Cost of Sales: Our cost of sales for the year ended December 31, 2003 was $4,463,054 and is comprised of $2,948,935 of direct product costs and $1,514,119 of warranty costs, freight and other cost of sales. Direct cost for Application Systems was $431,550 or 88% of related revenue, and $2,517,385 for Coatings, Sealants and Other Products or 72% of related revenue. The warranty costs, freight and other cost of sales includes an adjustment to net realizable value of $555,700 to the value of Application Systems, and $571,601 of costs relating to the warranty reserve. This is compared to $4,182,220 for the year ended December 31, 2002 and is comprised of $3,958,828 of direct product costs, which includes introductory offers and customer service, support, and training costs, and $223,392 of warranty costs, freight and other costs of sales. Direct cost for the Application Systems w as $1,324,948, which includes an $117,000 adjustment to inventory relating to the new pricing strategy for 2003, and $2,633,880 for Coatings, Sealants and Other Products. The cost of sales as a percent of revenue for the Application Systems, excluding the inventory adjustment, is 92% and 71% for the Coatings, Sealants and Other Products.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2002 was $9,770,869 as compared to $7,155,729 for the year ended December 31, 2003. The decrease of $2,615,140 is attributable to the strategic organizational initiative undertaken in the second half of 2003. The majority of the reductions are reflected in the following areas: personnel and personnel related costs decreased by $1,032,674; marketing, advertising, travel, and conventions resulted in savings of $1,006,629 and shareholder relations, communications, insurance, bad debt, customer relations and other administrative expenses were reduced by $575,837.

Professional Fees: Our professional fees increased $108,872 from $581,414 for the year ended December 31, 2002 to $690,286 for the year ended December 31, 2003. This increase related to additional legal fees relating to litigation.

Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2002 was $389,809 as compared to $671,567 for the year ended December 31, 2003 for an increase of $281,758. This change is attributable to an increase in the amortization of formula and patent costs, which was determined to be fully amortizable at December 31, 2003, and resulted in an increase in amortization expense of 274,698 and an increase in depreciation of $7,060.

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Research and Development: Our research and development costs decreased $311,513 from $820,533 for the year ended December 31, 2002 to $509,020 for the year ended December 31, 2003. This reflects our transition to full sales and production and reallocation of resources for the entire calendar year. We remain committed to the continual development of new products and technology.

Consulting Fees: Our consulting fees for the year ended December 31, 2002 was $554,025 as compared to $192,206 for the year ended December 31, 2003 for a decrease of $361,819. There was a reduction in fees paid for professional advice and services.

Interest Expense: Our interest expense increased $53,863 from $63,814 for the year ended December 31, 2002 to $117,677 for the year ended December 31, 2003. The increase is due to additional short term loans from the Chairman of the Board which were later converted to equity.

Loss on Disposal of and Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Infiniti Products, Inc., in 2001. Management evaluated the fair market value of this asset as required and determined that there was impairment at December 31, 2003. We consider relevant cash flow and profitability information, including estimated future operating results, trends, and other available information, in assessing whether the carrying value of the intangible assets can be recovered. As a result, a charge of $837,011 for the impairment of the asset was recorded and is reflected on the Consolidated Statement of Operations. We also had a loss on the disposal of obsolete machinery and equipment in the amount of $96,297 in 2002 and $290,749 in 2003. In addition, the net book value of certain fixed assets was reduced by $322,641.

Discontinued Operations: During 2002, the Company evaluated all circumstances and that a period of five years had passed since any material communication relating to commitments and contingencies of our discontinued operations. Accordingly, the Company decided that a commitments and contingency reserve was no longer required for these discontinued operations. Therefore, the Income (Loss) From Discontinued Operations reflected on the Consolidated Statement of Operations are $0 and $599,601 for December 31, 2003 and 2002 respectively.

Liquidity and Capital Resources

We had $42,718 of cash on hand at December 31, 2003 reflecting an increase of $1,198 when compared to the $41,520 of cash on hand at December 31, 2002. The cash on hand at December 31, 2001 was $519,225.

The cash required by operations for 2003 was $6,974,725 which was attributable to our net loss for the year, which was offset by increases in accounts payable and accrued expenses, decreases in accounts receivable, inventory, the offset of non-cash related operating expenses, and the elimination of non-cash expenses for consulting, legal fees, settlements and employee compensation. The cash required by operations for 2002 and 2001 was $9,462,026 and $5,437,184, respectively, and was a result of our net loss and increase in inventory which was partially offset by non-cash expenses for consulting, legal fees, settlements, and employee compensation.

The cash used in investing activities was $75,029 for the year ended December 31, 2003 as compared to $996,430 for the year ended December 31, 2002 reflecting a decrease of $921,401. The net cash required for capital expenditures in the current year was $85,947 for the purchase of machinery and equipment for new product development, demonstrations, support of our customers, and leasehold improvements made in order to consolidate our operations. The net capital expenditures were $794,632 in 2002 and $652,645 in 2001.

We also used $728,903 of cash in the acquisition of our wholly owned subsidiary, Infiniti Products, Inc. in 2001. This acquisition expanded our product line to include a broader base of proprietary products and other products in addition to providing an initial internal distribution source for our RSM Series™ Flagship Products.

The cash provided from financing activities was $7,050,952 for the year ended December 31, 2003 as compared to $9,980,751 for the year ended December 31, 2002 and $7,378,142 for 2001. The primary source of cash for each year is attributable to the issuance of common and preferred stock, and proceeds of loans from the Chairman of the Board.

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. Further financing through short-term loans and/or the private sale of our common and preferred stock to accredited sophisticated investors is anticipated. If adequate funds are not available when needed, our business, operations, financial condition and future prospects will be materially adversely affected. We estimate that approximately $4.25 million will be required for us to continue our operations in 2004.

Although no formal commitment has been received from the Chairman of the Board to fund the Company’s operating requirements for the 2004 year, we have received for the period beginning as of January 1, 2004 through March 4, 2004, loans amounting to $920,000 from the Chairman of the Board, which are bearing interest at 9% per annum. In addition, the Company is seeking to raise cash proceeds of at least $4,000,000 privately, on a best efforts basis, pursuant to a private placement offering, however, there can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company’s ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including an increase in revenue, decrease in operating costs and expenses, and seeking additional forms of debt and/or equi ty financing. See Part II, Item 8 – Financial Statements and Supplementary Data and Notes to Consolidated Financial Statements, Note 2. Going-Concern Issues Arising from Recurring Losses and Cash Flow Problems, for more information.

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Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001

Revenues

The following is a summary of revenues for the years ending December 31,

										Development Stage Operations
				2002			2001			2000
Revenue:
Application Systems				$	1,314,515		$	490,000		$	---
Coatings, Sealants and Other Products					3,701,130			765,292			---
				$	5,015,645		$	1,255,292	*	$	---

* During the year we acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our Flagship Products, and to generate revenue. The revenue generated by this subsidiary was $1,352,463. The revenue earned by this subsidiary was previously reported as part of our total revenue. This amount does not include revenue from our contracting services of $1,352,463, which was discontinued, effective December 31, 2001. The combined revenue of Application Systems, Coatings, Sealants and Other Products, and contracting services totaled $2,607,755. As a result of successfully field testing our products and in response to our future customers, who are roofing contractors, management decided to discontinue operations of Rainguard Roofing effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Dis continued Operations on the Consolidated Statement of Operations.

 

We reported revenue for the year ended December 31, 2002 of $5,015,645 as compared to $1,255,292 for the year ended December 31, 2001. The revenue generated from sales of our Application Systems was $1,314,515, which represented 26% of our revenue, as compared to $490,000 in 2001, which was 39% of our revenue, while sales from Coatings, Sealants and Other Products was $3,701,130, which represented 74% of our revenue, as compared to $765,292 in 2001, which was 61% of our revenue.

The increase of $824,515 from Application Systems was primarily due to having a full year of selling this product as compared to a partial year in 2001. The increase of $2,935,838 from Coatings, Sealants and Other Products is broken out as follows: a) $1,764,869 is related to a full year of revenue being reflected from our acquisition of Infiniti Products, Inc. as compared to four months in 2001 (See Note 4. Acquisition, in the Notes to Consolidated Financial Statements, for pro forma information); and b) $1,170,969 is related to a full year of selling our RSM-100™ as compared to a few months in 2001.

In response to certain market and economic conditions we refined our pricing strategy for our RSM series^TM Flagship Products for 2003. This impacted our revenue per unit and gross profit for these products, but we anticipate that new products to be introduced in 2003 will provide additional revenue and improved margins. During the fourth quarter, 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, this sale had to be deferred, and additional selling adjustments for $33,936.

As a result of successfully field testing our RSM Series™ Flagship Products and in response to our future customers, who are roofing contractors, we decided to discontinue providing roof contracting services through our Rainguard Roofing Corporation subsidiary and divested these operations, effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations.

Cost and Expenses

Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. These total costs and expenses increased from $7,697,640 for the year ended December 31, 2001 to $16,458,981 for the year ended December 31, 2002 for an increase of $8,761,341. The increase is due to the Company having a full year of sales and distribution of its Application Systems and Coatings, Sealants and Other Products.

Cost of Sales: Our cost of sales for the year ended December 31, 2001 was $1,060,890 and is comprised of $1,035,311 of direct product costs and $25,579 of warranty costs, freight and other cost of sales. Direct cost for Application Systems was $426,606 or 87% as a percent of related revenue, and $608,705 for Coatings, Sealants and Other Products or 80% of related revenue. This is compared to $4,182,220 for the year ended December 31, 2002 and is comprised of $3,958,828 of direct product costs, which includes introductory offers and customer service, support, and training costs, and $223,392 of warranty costs, freight and other costs of sales. Direct cost for the Application Systems was $1,324,948, which includes an $117,000 adjustment to inventory relating to the new pricing strategy for 2003, and $2,633,880 for Coatings, Sealants and Other Products. The cost of sales as a pe rcent of revenue for the Application Systems, excluding the inventory adjustment, is 92% and 71% for the Coatings, Sealants and Other Products.

 

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Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2002 were $9,770,869 as compared to $2,899,297 for the year ended December 31, 2001. The increase of $6,871,572 is attributable to us introducing our RSM Series™ Flagship Products to the marketplace. This required an increase of personnel and personnel related costs of $2,849,446 for production, testing, technical support, and sales; $862,823 for insurance, communications, shareholder relations, and listing fees; $883,421 for products provided to complete key projects, reserve against notes issued on internally financed Application Systems, and bad debt reserve and expense; $772,784 for other overhead expenses; and $1,503,098 for marketing, advertising, travel, conventions, show booth and related materials required to build brand awareness, and d istribution. In addition, we updated our comprehensive sales and marketing program, including our web site, product brochures, literature pieces, and corporate video.

Professional Fees: Our professional fees increased $313,385 from $268,029 for the year ended December 31, 2001 to $581,414 for the year ended December 31, 2002. This increase related to services that were outsourced during the year that had previously been handled internally. Additional legal, including litigation, accounting and professional services were also required for major issues we dealt with during the year such as private placement documentation.

Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2002 was $389,809 as compared to $402,240 for the year ended December 31, 2001 for a decrease of $12,431. The decrease is attributable to the disposal of certain property and equipment which was partially offset by amortization of patent development costs.

Research and Development: Our research and development costs decreased $429,680 from $1,250,213 for the year ended December 31, 2001 to $820,533 for the year ended December 31, 2002. This reflects our transition to full sales and production and reallocation of resources for the entire calendar year. We remain committed to the continual development of new products and technology.

Consulting Fees: Our consulting fees for the year ended December 31, 2001 was $734,273 as compared to $554,025 for the year ended December 31, 2002 for a decrease of $180,248. This includes fees paid to related parties for professional advice and services.

Interest Expense: Our interest expense decreased $105,394 from $169,208 for the year ended December 31, 2001 to $63,814 for the year ended December 31, 2002. The decrease is due to the reduction of total liabilities over the year.

Loss on Disposal of and Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Urecoats International, Inc., in 1997. Management evaluated the fair market value of this asset as required and determined that there was no value at December 31, 2001. Therefore, a charge of $913,490 for the impairment of the asset was recorded and is reflected on the Consolidated Statement of Operations. We also had a loss on the disposal of obsolete property and equipment in the amount of $96,297 in 2002.

Discontinued Operations: During 2001, we acquired a roofing contracting company, Rainguard Roofing Corporation, primarily to field-test our RSM Series™ Flagship Products, and to generate revenues. As a result of the successful field testing of these products and in response to our future customers who are roofing contractors, management decided to discontinue these operations, effective for the year ended December 31, 2001. The total net activity is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations in the amount of $(1,662,183).

Contractual Obligations

			Payments Due By Period
Contractual Obligations			Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
Long-Term Debt Obligations			$	52,349		$	---		$	52,349		$	---		$	---
Capital Lease Obligations				---			---			---			---			---
Operating Lease Obligations				362,298			173,427			188,871			---			---
Purchase Obligations				192,835			192,835			---			---			---
Other Long-Term Liabilities Reflected on the Company's Balance Sheet under GAAP				---			---			---			---			---
			$	607,482		$	366,262		$	241,220		$	---		$	---

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

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.

 

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Item 8.Financial Statements and Supplementary Data.

The information required by this Item is incorporated herein by reference to the financial statements set forth in Item 15(a) of Part IV of this report.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits o f controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2003, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken.

Based on the foregoing, our Principal Executive Officer and our Chief Financial Officer concluded that, as of the period covered by this report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level.

 

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

PART III

Item 10.Directors and Executive Officers of the Registrant.

The information required for this item will be included in the section entitled "Election of Directors" in our 2004 Proxy Statement and is incorporated herein by this reference.* The information with respect to our executive officers is included in Item 4(A) on page 8 of this report.

The information required by Item 405 of Regulation S-K will be included under the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2004 Proxy Statement and is incorporated herein by this reference.*

Item 11.Executive Compensation.

The information required for this item will be included in the sections entitled "Executive Compensation" and "Director Compensation" in our 2004 Proxy Statement and is incorporated herein by this reference.*

Item 12.Security Ownership of Certain Beneficial Owners and Management.

 

The information required for this item will be included in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in our 2004 Proxy Statement and is incorporated herein by this reference.*

 

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Item 13.Certain Relationships and Related Transactions.

The information required under this item will be included in the section entitled "Transactions with Related Persons" in our 2004 Proxy Statement and is incorporated herein by this reference.*

Item 14.Principal Accountant Fees and Services.

The information required under this item will be included in the section entitled “Independent Auditor Fees” in our 2004 Proxy Statement and is incorporated herein by reference.*

________________

* The information required for Part III hereof, Items 10, 11, 12, 13, and 14 will be included in our 2004 Proxy Statement, which definitive proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of our fiscal year ended December 31, 2003 or shall otherwise be filed with the Securities and Exchange Commission on or before April 30, 2004.

PART IV

Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)Index to Financial Statements

1.Financial Statements included in Part II of this report:

			Page
Consolidated Balance Sheets at December 31, 2003 and December 31, 2002			F-1
Consolidated Statements of Operations for Each of the Years in the Three Year Period Ended December 31, 2003			F-3
Consolidated Statements of Stockholders' Equity for Each of the Years in the Three Year Period Ended December 31, 2003			F-4
Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 2003			F-7
Notes to Consolidated Financial Statements			F-9
Report of Management			F-26
Independent Auditors' Report			F-27

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)Item 601 Exhibits

Reference is made to the Index of Exhibits beginning at page 17 of this report.

(d)Other Financial Statements

There are no financial statements required to be filed by Regulation S-X which are excluded from this report by Rule 14 a-3(b)(1).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 11, 2004	URECOATS INDUSTRIES INC.
	By:
		Michael T. Adams
		President

Date: March 11, 2004	URECOATS INDUSTRIES INC.
	By:
		John G. Barbar
		Vice President of Finance, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: March 11, 2004	By:	/s/ Richard J. Kurtz
		Richard J. Kurtz
		Chairman of the Board

Date: March 11, 2004	By:	/s/ Arthur J. Gregg
		Arthur J. Gregg
		Director

Date: March 11, 2004	By:	/s/ Steven Mendelow
		Steven Mendelow
		Director

Date: March 11, 2004	By:	/s/ Jerold L. Zaro
		Jerold L. Zaro
		Director

Date: March 11, 2004	By:	/s/ Mark A. Reichenbaum
		Mark A. Reichenbaum
		Director

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INDEX OF EXHIBITS

Exhibit Number		Description
3.1		By-laws, as amended, and currently in effect, of the Company (incorporated by reference to Exhibit 3(ii) to Form 10-Q for the quarter ended June 30, 2003, filed August 14, 2003).
10.1		Series C Preferred Stock Option Agreement dated March 21, 2003 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q dated March 31, 2003, filed May 15, 2003).
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, 2002, filed March 31, 2003).
21		List of Subsidiaries of the Company.
31.1		Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification – Chief Financial Officer.
32		Section 1350 Certifications – Principal Executive Officer and Chief Financial Officer.

 

	17