LITIGATION
(1) Designer Wear et. al. vs. Smith & Wesson et. al. - DWI received notice from the Smith and Wesson corporation ("Smith & Wesson"), through ROK, of termination of ROK's Trademark License Agreement dated March 1, 1996, as amended August 23, 1996. Management provided return notice to Smith & Wesson disagreeing with the termination notice and indicated the termination was not valid. The Company's litigation counsel and Smith & Wesson management attempted a resolution of the matter, however, a settlement was not reached. Thereafter, a lawsuit was filed against Smith & Wesson and John S. Steele ("Steele"), its Director of Licensing and Merchandising, on June 1, 1998 in the United States District Court for the Southern District Of Florida, claiming: I. Breach Of A Trademark Licensing Agreement And The Implied Covenant Of Good Faith And Fair Dealing; II. Promissory Estoppel; III. Tortious Interference With The Contractual Relationship Between ROK And DWI; and requested a declaratory judgment and permanent injunction. DWI and ROK are also seeking damages of $50,000,000.
Smith & Wesson filed an "Answer and Affirmative Defenses of Defendant Smith & Wesson to Plaintiffs' Complaint, Counterclaim and Jury Demand" ("Smith & Wesson Answer, Defenses and Counterclaims"), on July 13, 1998, in the United States District Court For The Southern District Of Florida, alleging, among other things, unclean hands, reformation of the license, proper termination, defensive estoppel, and defensive waiver. The counterclaims were brought against DWI, ROK, and third-party defendants Laurence Sack, Howard Weiser and the Company (hereinafter collectively referred to as ("Company et. al."). The counterclaims are as follows: I. Federal trademark infringement; II. False description, false advertising, tarnishment and dilution; III. Common law trademark infringement; IV. Common law unfair competition; V. Breach of contract; VI. Breach of implied covenant of good faith and fair dealings; VII. Duty to indemnify is valid and enforceable; VIII. Fraud; and IX. Conspiracy to commit fraud.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES CONTINUED
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The Company et. al. filed a "Motion to Dismiss Counterclaims and Incorporated Memorandum of Law", on or about August 4, 1998, in the United States District Court For The Southern District Of Florida, in response to the Smith & Wesson Answer, Defenses and Counterclaims. The Company et. al. moved pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for the dismissal of the counterclaims (and third-party claims) brought against them in I, II, III, IV, VI, VII, VIII, and IX, on the ground that they are insufficiently pled and should be dismissed because they fail to state any claim upon which relief may be granted.
In addition, Steele filed a motion to dismiss claims against himself and/or to transfer the action, on July 13, 1998, in the United States District Court For The Southern District Of Florida. DWI and ROK filed an opposition to this motion, on or about July 27, 1998, in the United States District Court For The Southern District Of Florida. This litigation is currently undergoing further discovery and motions for request to produce documents and information are now pending between the parties. At this time, the outcome of this litigation cannot be determined.
(2) The Company vs. Millennium Holdings Group, Inc. - On March 2, 1998, a Statement of Claim was filed against Millennium Holdings Group, Inc. ("Millennium") with the American Arbitration Association ("AAA"), headquartered in New York City, New York. The Company settled this matter and entered into a Settlement Agreement and General Release on September 9, 1998. Pursuant to the Settlement Agreement, Millennium returned the 375,000 shares of restricted common stock and paid $20,000 in damages to the Company.
(3) Stanley Farber vs. the Company et. al. - On July 25, 1996, Stanley Farber ("Farber"), Plaintiff, filed a complaint for Breach of an executive employment contract, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. As a result of absence of counsel on behalf of the Company, a final judgment of $142,187 was awarded on July 21, 1997. Subsequently, in 1997, the Company retained Counsel to appeal the final judgment, however, it was affirmed by the Appellate Court.
On November 16, 1998, the Company's litigation counsel effectuated a settlement of the judgment for $157,500 and 50,000 shares of restricted common stock. The Company has agreed to pay $25,000 per month until the judgment and attorney's fees settlement are paid in full.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES CONTINUED
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(4) Raymond Kalley et. al. vs. the Company - On March 22, 1996, Raymond Kalley, as trustee of the EB Trust and PB Trust (Plaintiff), sued the following in the Southern District of Florida (Miami Division), the Company, UC'NWIN Systems Corporation, a consultant to UC'NWIN Systems Corporation and a beneficiary to the EB and PB Trusts. A default judgment in the amount of $1,075,000 was entered on March 13, 1997. Counsel was retained to apply for the vacatur of the default judgment on the grounds that the Company was not served with various motion papers underlying the judgment. On August 10, 1998, the Company's litigation counsel effectuated a settlement of this matter and a "Stipulation For Settlement" was entered into between the parties. The Stipulation's pertinent details are as follows:
The Plaintiff, and the Company, by their undersigned attorneys, stipulate as follows:
1. The Company will immediately issue 350,000 shares of restricted stock (the "Shares") to Kalley, which Shares shall be subject to the normal one-year ownership requirement of Rule 144.
2. Upon receipt of the Shares by Kalley, and the filing with the Court of a notice to that effect by Kalley's counsel, the Final Judgment entered by the Court on March 13, 1998 as to the Company shall be vacated.
3. Kalley shall have the option to re-sell the Shares to the Company for the sum of $150,000, which option may be exercised any time after April 16, 1999. If Kalley exercises such option to sell, the Company must pay the $150,000 as follows: $55,000.00 within 30 calendar days after exercising of the option, $55,000.00 within 60 calendar days after exercising the option and $40,000.00 within 90 calendar days after exercising of the option.
4. In the event that the Company fails to pay Kalley any of the above payments within ten business days after the due date thereof, Kalley shall be entitled to the entry of a Final Judgment against the Company in the amount of $1,166,922.76.
(5) AG Industries vs. the Company, et. al. - On April 17, 1995, AG Industries sued UC'NWIN Systems Corporation and the Company and for a breach of contract and causes of action for unjust enrichment and breach of implied contract. AG Industries seeks damages in excess of $400,000. On August 22, 1995 the Company filed a Motion to Dismiss and Alternative Motion for a Change of Venue. AG Industries responded and opposed the Defendants' motion. There has been no further discovery and the outcome cannot be determined at the present time.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES CONTINUED
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(6) Other Legal Matters - Other judgments against the Company total approximately $77,000. Management is seeking settlements on the payment under these judgments. The outcome of these negotiations cannot be determined at the present time.
(7) Liabilities from discontinued operations of $134,492 have been added to the Reserve for Litigation.
As of December 31, 1998, the Company has established a reserve for litigation of $685,114.
NOTE 13 - STOCKHOLDERS' (DEFICIT)
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PREFERRED STOCK
The Board of Directors reduced the number of authorized shares of Series A, $1.00 par value preferred stock, from 2,000,000 shares by 750,000 shares, leaving 1,250,000 shares to be designated a series of distinction and issued by the Board. Each share of the Series A preferred stock entities its holder to convert it into .36 shares of common stock, as adjusted in the event of future dilution; to receive $1.000 per share in the event of voluntary or involuntary liquidation, to have the same voting rights as the common stock, and to share equally in payments of any dividends declared by the Board of Directors.
NOTE 14 - STOCK OPTIONS
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STOCK OPTION PLAN
On January 26, 1998, the Company adopted the "1998 Employee and Consultant Stock Option Plan" (the "1998 Plan"), authorizing the issuance of 3,000,000 shares of registered, common stock, to afford certain of its key employees, officers and consultants who are responsible for the continued growth of the Company an opportunity to acquire a proprietary interest in the Company, and thus to create in such individuals an increased in and greater concern for the welfare of the Company and its subsidiaries. The Company, by means of this 1998 Plan, seeks to retain the services of persons now holding key positions and to secure the services of persons capable of filling such positions. The stock options offered pursuant to the Plan are a matter of separate inducement and are not in lieu of any salary or other compensation for the services of any key employee or consultant.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 14 - STOCK OPTIONS CONTINUED
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The stock options granted under the Plan are intended to be either incentive stock options within the meaning of Section 422 of the Internal Revenue code of 1986, as amended, or options that do not meet the requirements for incentive stock options. Under the 1998 Plan, the fair market value of a share is the closing "bid" price of the Company's shares on the date of grant, as determined by Board of Directors approval, as quoted on the Electronic Bulletin Board of the National Association of Securities Dealers or its Automated Quotation System ("NASDAQ") or any successor national stock exchange on which the Common Stock is then successor national stock exchange on which the Common Stock is then traded, provided, however, that if on the date in question there is no public market for the Company's Shares and they are neither quoted on "NASDAQ" nor traded on a national securities exchange, then the Administrator of the 1998 Plan, in its sole discretion and best judgment, is to determine the fair market value.
Pursuant to this 1998 Plan, the Board, as Administrator of the 1998 Plan, granted the 3,000,000 Options to various parties during the year, of which 150,000 Options, were still unexercised and outstanding as of the year ended December 31, 1998. A summary of the outstanding Options is as follows:
STOCK OPTIONS
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SHARES OPTION PRICE
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Outstanding @ December 31, 1998 150,000 $.21 to $.22
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NOTE 15 - INCOME TAXES
The Company has net operating tax loss carry-forwards of approximately $16,100,000 in the United States and $1,500,000 in the United Kingdom, of such loss carry-forwards, approximately $3,000,000 represents carry-forwards of a predecessor, the utilization of which will be credited to additional paid-in capital. The Company is not current with its corporate income tax filings.
NOTE 16 - SUPPLEMENTAL CASH FLOW DISCLOSURES
(A) Cash Paid During The Year
Year Ended Year Ended
December 31, 1998 December 31, 1997
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Interest Paid $ -0- $ -0-
Income Taxes Paid $ -0- $ -0-
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URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 16 - SUPPLEMENTAL CASH FLOW DISCLOSURES CONTINUED
(B) Supplemental Schedule of Non-Cash Investing and Financing Activities
Year Ended Year Ended
December 31, December 31
1998 1997
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Increase in Intangibles Included:
Acquisition of Trademark Agreement $ $ 2,499,600
Acquisition of Goodwill 1,557,508
Acquisition of Deferred Charges 48,964
Acquisition of Property & Equipment 7,050 36,278
Acquisition of Proprietary Formula 80,000
Proceeds from Issuance of Shares Included:
Retainment of Consultants 631,330 491,066
Acquisitions of Companies 3,413,100
Legal Services, Settlements and
Other Services 411,575
Cancellation of Indebtedness 829,858
Proceeds from Loans Included:
Assumption of Debt in ROK Acquisition 599,858
NOTE 17 - RESEARCH AND DEVELOPMENT
On February 21, 1997, pursuant to a February 4, 1997 letter of intent, Urecoats completed negotiations, which resulted in a stock purchase agreement ("SPA") with Envio Dynamics Corporation ("EDC"). Urecoats was to acquire a 75% stock interest, amounting to 3,750,000 shares, of the authorized common voting stock of EDC in exchange for $750,000. On March 21, 1997, Urecoats entered into a purchase and sale agreement with the Essex Chemical Corporation ("ESC") to acquire the land, building and equipment, located at 1521 Industrial Drive, Griffin, Georgia, for $375,000.
On June 13, 1997, Urecoats entered into a License and Option Agreement with Ultimate Urethane Roofing, Inc. ("UUR"). As a result of disputes on the validity of a sealant and coating product, all agreements with EDC and ESC were canceled, and the agreement with UUR has been effectively canceled between the parties. In June 1997, all disputes from EDC were settled and Urecoats secured a promissory note from EDC for reimbursement of advances made under the SPA, in the amount of $250,000. This note receivable was deemed uncollectable and written off.
The Company took a charge to earnings of $515,000, which were classified to research and development during the development stage.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 18 - SUBSEQUENT EVENTS
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At a Special Meeting of the Shareholders of the Company, on February 8, 1999, the following matters were considered and approved by the requisite majority voting requirements:
1. Authorized an amendment to the Company's Restated Certificate of Incorporation increasing the authorized common stock of the Company from a total of 60,000,000 shares of common stock having a par value $.01 per share to 100,000,000 shares of Common Stock having a par value of $.01 per share;
2. Authorized an amendment to the Company's Restated Certificate of Incorporation to change the name of the Company to Urecoats Industries Inc.;
3. Ratified the Company's 1999 Consultant and Employee Stock Purchase and Option Plan covering a total of 8,000,000 shares of common stock.
The Company, pursuant to Board of Director approval, is in the process of issuing an aggregate of 6,630,000 shares of its restricted common stock, for certain private transactions, as described below:
(a) The Company is issuing an aggregate of 1,680,000 shares of restricted common stock, for accrued consulting services rendered, 250,000 of which is being issued to Stuart B. Krost, a director of the Company. The accrued consulting services were valued and recorded at $124,770.
(b) The Company is issuing an aggregate of 400,000 shares of restricted common stock, for accrued legal services rendered. The accrued legal services were valued and recorded at $25,400.
(c) The Company is issuing 2,500,000 shares of restricted common stock, in cancellation of a non-interest bearing loan made to the Company in December 1998 by Richard J. Kurtz, Chairman of the Board, in the amount of $187,500.
(d) The Company is issuing 250,000 shares of restricted common stock, for consulting services rendered during the first quarter of 1999, to Charles A. Gargano.
(e) The Company is issuing 800,000 shares of restricted common stock, for bridge loan fees, due in the first quarter of 1999. The accrued fees were valued and recorded at $32,000.
The Company expects to issue 1,000,000 shares of restricted common stock, as other compensation, to Larry T. Clemons, President.
URECOATS INDUSTRIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 18 - YEAR 2000 COMPLIANCE
The Company has updated its computer systems and hardware to be Year 2000 compliant. The Company has received notifications from various vendors, suppliers, and equipment manufacturers, of their Year 2000 compliant systems. However, there still remains a slight risk for the Year 2000 compliance of those with whom the Company does business, primarily third parties. |
