10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2002

Commission File No.  0-20101

URECOATS INDUSTRIES INC.

(Exact name of Registrant as Specified in its Charter)

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

Newport Center Plaza
1239 East Newport Center Drive
Suite 101
Deerfield Beach, Florida
(Address of Principal Executive Offices) 33442
(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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

             Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of October 23, 2002 there were 13,328,304 shares of Common Stock, par value $.01, outstanding.

1 

URECOATS INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

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	13
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.  Controls and Procedures	18
PART II	OTHER INFORMATION
	Item 1.  Legal Proceedings	18
	Item 2.  Changes in Securities and Use of Proceeds	18
	Item 3.  Defaults Upon Senior Securities	19
	Item 4.  Submission of Matters to a Vote of Security Holders	19
	Item 5.  Other Information	19
	Item 6. Exhibits and Reports on Form 8-K	19

SIGNATURES	21
CERTIFICATIONS	22
INDEX OF EXHIBITS	24

2 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

URECOATS INDUSTRIES INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

CONDENSED CONSOLIDATED BALANCE SHEETS
	September 30, 2002 and December 31, 2001	4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	Three Months Ended September 30, 2002 and 2001	6
	Nine Months Ended September 30, 2002 and 2001	8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended September 30, 2002 and 2001	10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		12

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.

3 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

			September 30,		December 31,
			2002		2001
			(unaudited)
	ASSETS
Current Assets:
	Cash	$	322,423	$	519,225
	Accounts Receivable		2,151,399		1,054,592
	Inventory		558,397		343,446
	Prepaid Expenses and Other Current Assets		466,905		225,267
	Total Current Assets		3,499,124		2,142,530
Property, Plant and Equipment, Net			1,385,110		1,215,668
Other Assets:
	Intangibles, Net		1,789,105		1,798,490
	Deposits		22,816		28,475
	Notes Receivable - Long Term		637,692		-
	Total Other Assets		2,449,613		1,826,965
	Total Assets	$	7,333,847	$	5,185,163

See accompanying notes to condensed consolidated financial statements.

4 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)

				September 30,			December 31,
				2002			2001
				(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts Payable and Accrued Expenses		$	2,804,447		$	1,566,874
	Current Maturities of Long-Term Debt			438,599			205,975
	Short-Term Notes and Loans Payable			312,695			232,260
	Deferred Revenue			65,000			-
		Total Current Liabilities		3,620,741			2,005,109
Other Liabilities:
	Long-Term Debt			89,813			219,296
	Capital Leases			-			1,017
	Due to Related Parties			-			-
	Commitments and Contingencies			600,622			600,622
		Total Other Liabilities		690,435			820,935
		Total Liabilities		4,311,176			2,826,044
Stockholders’ Equity:
	Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of which Designations:
	Series A Convertible, 750,000 Shares Authorized; 62,500 Issued and Outstanding (Less Offering Costs of $7,465)			55,035			55,035
	Series B Convertible, 500,000 Shares Authorized; 500,000 Issued and Outstanding			500,000			500,000
	Series C Convertible, 750,000 Shares Authorized; 389,953 Issued and Outstanding			389,953			-
	Common Stock, $.01 Par Value; 25,000,000 Shares Authorized; 13,328,304 and 13,140,283 Issued and Outstanding at September 30, 2002 and December 31, 2001, respectively			133,283			131,403
	Additional Paid-In Capital			43,562,340			35,575,058
	Subscriptions Receivable			(1,050,000	)		(1,200,000	)
	Accumulated (Deficit)			(40,567,940	)		(32,702,377	)
		Total Stockholders’ Equity		3,022,671			2,359,119
		Total Liabilities and Stockholders’ Equity	$	7,333,847		$	5,185,163

See accompanying notes to condensed consolidated financial statements.

5 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended
			September 30,			September 30,
			2002			2001 (1)
Revenue:
	Application Systems	$	262,817		$	70,000
	Coatings, Sealants and Other Products		1,268,523			91,625
	Total Revenue		1,531,340			161,625
Cost of Sales:
	Application Systems		240,648			61,000
	Coatings, Sealants and Other Products		935,720			63,007
	Other Cost of Sales		128,212			14,119
	Total Cost of Sales		1,304,580			138,126
Gross Profit			226,760			23,499
Operating Expenses:
	Selling, General and Administrative		2,609,889			820,070
	Professional Fees		168,998			22,526
	Depreciation and Amortization		120,243			95,934
	Research and Development		208,133			334,455
	Consulting Fees		70,427			57,478
	Interest Expense		28,052			31,183
	Total Operating Expenses		3,205,742			1,361,646
Operating (Loss)			(2,978,982	)		(1,338,147	)
(Loss) From Discontinued Operations			(49,270	)		(374,041	)
Net (Loss)		$	(3,028,252	)	$	(1,712,188	)

See accompanying notes to condensed consolidated financial statements.

6 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - CONTINUED)

		Three Months Ended
			September 30,			September 30,
			2002			2001(1)
Net (Loss) Per Common Share-Basic:
	Continuing Operations	$	(0.23	)	$	(0.12	)
	Discontinued Operations		(0.00	)		(0.03	)
	Total	$	(0.23	)	$	(0.15	)
Weighted Average Shares Outstanding			13,305,304			11,379,350
Net (Loss) Per Common Share-Diluted:
	Continuing Operations	$	(0.19	)	$	(0.12	)
	Discontinued Operations		(0.00	)		(0.03	)
	Total	$	(0.19	)	$	(0.15	)
Weighted Average Shares Outstanding			16,270,964			11,534,001

(1) The condensed consolidated statement of operations for the three months ended September 30, 2001 has been restated to conform to the September 30, 2002 presentation.

See accompanying notes to condensed consolidated financial statements.

7 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Nine Months Ended
			September 30,			September 30,
			2002			2001(1)
Revenue:
	Application Systems	$	1,340,951		$	70,000
	Coatings, Sealants and Other Products		3,204,623			91,625
	Total Revenue		4,545,574			161,625
Cost of Sales:
	Application Systems		1,324,859			61,000
	Coatings, Sealants and Other Products		2,152,669			63,007
	Other Cost of Sales		236,212			14,119
	Total Cost of Sales		3,713,740			138,126
Gross Profit			831,834			23,499
Operating Expenses:
	Selling, General and Administrative		6,855,300			1,818,096
	Professional Fees		329,536			176,533
	Depreciation and Amortization		335,714			281,709
	Research and Development		485,110			1,022,465
	Consulting Fees		433,911			169,218
	Interest Expense		47,405			135,476
	Total Operating Expenses		8,486,976			3,603,497
Operating (Loss)			(7,655,142	)		(3,579,998	)
(Loss) From Discontinued Operations			(120,218	)		(1,006,919	)
Net (Loss)		$	(7,775,360	)	$	(4,586,917	)

See accompanying notes to condensed consolidated financial statements.

8 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - CONTINUED)

		Nine Months Ended
			September 30,			September 30,
			2002			2001 (1)
Net (Loss) Per Common Share-Basic:
	Continuing Operations	$	(0.58	)	$	(0.33	)
	Discontinued Operations		(0.01	)		(0.10	)
	Total	$	(0.59	)	$	(0.43	)
Weighted Average Shares Outstanding			13,234,294			10,758,493
Net (Loss) Per Common Share-Diluted:
	Continuing Operations	$	(0.50	)	$	(0.33	)
	Discontinued Operations		(0.01	)		(0.09	)
	Total	$	(0.51	)	$	(0.42	)
Weighted Average Shares Outstanding			15,131,803			10,887,168

(1) The condensed consolidated statement of operations for the nine months ended September 30, 2001 has been restated to conform to the September 30, 2002 presentation.

See accompanying notes to condensed consolidated financial statements.

 9

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

			Nine Months Ended
				September 30,			September 30,
				2002			2001(1)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net (Loss):
		Continuing Operations	$	(7,655,142	)	$	(3,579,997	)
		Discontinued Operations		(120,218	)		(1,006,920	)
	Adjustments to Reconcile Net (Loss) to Net Cash Provided (Used) by Operating Activities:
		Depreciation and Amortization		354,092			298,344
	Non-Cash Operating Activities:
		Board of Director Fees		23,625			29,475
		Interest		21,060			80,839
		Legal Fees, Settlements and Other Services		-			147,825
		Consultant Fees		190,575			183,060
		Other Compensation		265,855			582,166
	Changes in Assets and Liabilities:
		Prepaid Expenses		(137,028	)		(2,175	)
		Accounts and Loans Receivable		(1,096,807	)		(353,000	)
		Inventory		(214,951	)		(31,110	)
		Other Current Assets		(104,610	)		-
		Deposits		5,659			(1,800	)
		Accounts Payable and Accrued Expenses		1,146,596			281,175
		Other Non-Current Assets and Liabilities		(571,792	)		-
		Commitments and Contingencies		-			28,101
		Net Cash (Used) by Operating Activities		(7,893,086	)		(3,344,017	)
CASH FLOWS FROM INVESTING ACTIVITIES:
		(Acquisition) of Property and Equipment		(686,328	)		(714,836	)
		Disposition of Property and Equipment		217,787			99,211
		(Acquisition) of Intangibles		(45,607	)		(772,966	)
		Net Cash (Required) by Investing Activities		(514,148	)		(1,388,591	)

See accompanying notes to condensed consolidated financial statements.

10 

URECOATS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - CONTINUED)

			Nine Months Ended
				September 30,			September 30,
				2002			2001 (1)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from the Issuance of  Stock		$	5,753,000		$	3,230
	Proceeds of Notes and Credit Line			2,144,742			328,549
	(Payment) of Notes and Credit Line			(1,962,310	)		(173,966	)
	Proceeds of Loans from Related Parties			2,275,000			4,611,000
	Net Cash Provided by Financing Activities			8,210,432			4,768,813
Net Increase(Decrease) In Cash				(196,802	)		36,205
Cash at Beginning or Period				519,225			16,998
Cash at End of Period			$	322,423		$	53,203
Supplemental Disclosure of Cash Flow Information:
	Cash Payments for Income Taxes		$	-		$	-
	Cash Payments for Interest		$	26,345		$	54,637
Non-Cash Investing Activities:
	Acquisitions		$	-		$	(805,000	)
		Total Non-Cash Investing Activities	$	-		$	(805,000	)
Non-Cash Financing Activities:
	Issuance of  Stock:
	Operating Activities		$	501,115		$	1,023,365
	Repayment of Debts			2,275,000			7,117,573
	Acquisitions			-			805,000
		Total Non-Cash Financing Activities	$	2,776,115		$	8,945,938

(1) The condensed consolidated cash flows for the nine months ended September 30, 2001 has been restated to conform to the September 30, 2002 presentation.

See accompanying notes to condensed consolidated financial statements.

11 

URECOATS INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position at September 30, 2002 and the results of operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001.  Certain information and footnote disclosures presented in the Company’s annual consolidated financial statements and required by accounting principles generally accepted in the Unites States of America are not included in these interim financial statements. Accordingly, the accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2001 Annual Report to Shareholders, which is incorporated by reference in the Company’s 2001 ann ual report on Form 10-K.  The results of operations for the three and nine months ended September 30, 2002, respectively, are not necessarily indicative of the results to be expected for the year ending December 31, 2002.

Note 2 - Inventories.

Components of inventories were:

			September 30,		December 31,
			2002		2001
Raw Materials		$	74,326	$	75,266
Finished Goods			484,071		268,180
	Total	$	558,397	$	343,446

Note 3 – Common Stock Share Consolidation.

On May 28, 2002, the common stockholders of the Company approved a proposal to initiate a 1-for-10 share consolidation of our outstanding common stock.  Certain information reported in previous periods has been reclassified to conform to the current period presentation.  All common stock share and per share amounts have been adjusted to reflect the share consolidation.

Note 4 - Revenue Recognition.

The Company recognizes revenue from sales of Application Systems when incidences of ownership have been transferred.  Deferred revenue was recorded for one application system sale that included a right of return.  Accordingly, the revenue from this sale will be deferred and recognized when the right of return expires.

Note 5 - Reserves.

The Company established a warranty reserve, calculated at 3% or revenue, and an allowance for doubtful accounts reserve.  The amount reserved for warranties was $61,384 and allowance for doubtful accounts was $390,000 through September 30, 2002.

Note 6 - Discontinued Operations.

The condensed consolidated financial statement for the three and nine months ended September 30, 2001 have been restated to reflect the discontinued operations of our roof contracting subsidiary. During 2001, the Company acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our 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 for the third quarter of 2001 is reflected in the Loss from Discontinued Operations on the Consolidated Statement of Operations in the amount of $(374,041).

12 

Note 7 – Loss 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 outstanding (the denominator) for the period.  For diluted earnings per share, the denominator is based on the weighted-average number of common shares, including additional common shares that would have been outstanding if the potentially dilutive common shares had been issued:

		Three Months Ended		Nine Months Ended
		September 30		September 30
	Year	Basic	Diluted	Basic	Diluted
	2002(1)	13,305,304	16,270,964	13,234,294	15,131,803
	2001(1)	11,379,350	11,534,001	10,758,493	10,887,168
(1)	The shares have been adjusted for all periods to reflect the reverse split effectuated after the close of business on May 30, 2002.

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.

Business

Urecoats Industries Inc. (“We”, “Us”, “Urecoats” or the “Company”) is a technology-driven sales, marketing and product development company.  The executive management team has transitioned the Company out of a four-year period largely characterized by research and development and is continuing to build an infrastructure to meet our strategic goals, while focusing on organizational effectiveness. We are engaged, through our subsidiaries, in the acquisition, development, manufacturing, sales, marketing, and distribution of unique formulations and product lines for the construction and building products industries.  We are selling and distributing our products through a growing network of national distribution locations and are committed to building shareholder value through diversification of our product lines and brand awareness.

We made a brief entry into the roofing and waterproofing contracting business last year, primarily to control the promotion, testing and application of our UrecoatsRSM-100™ sealant and BlueMAX™ spray application system (“Flagship Products”), and to generate revenues. We divested these contracting operations at the end of 2001. The third quarter of 2001 has been restated to conform to the third quarter 2002 presentation. We began acquiring and developing a national network of distribution centers during 2001 through our acquisition of Infiniti Products, Inc. (f/k/a Infiniti Paint Co., Inc.) (“Infiniti”) to get our Flagship Products and additional coatings, sealants and other products acquired from Infiniti (“Comprehensive Product Line”), to customers. In addition, we have established a distribution channel with a Forbes Private 500 material supplier that operates more than 96 locations throughout the Northeastern United States.

UrecoatsRSM-100™ has excellent characteristics for the roofing and waterproofing industry. Therefore, we are targeting the United States commercial and industrial roofing and waterproofing industries as our initial market segment for our Flagship Products.  Our sales efforts and promotional activities are primarily aimed at roofing, waterproofing, and general contractors for our Comprehensive Product Line. Initially, we require contractors/end-users to go through our Certified Contractor Training Program, for our Flagship Products, primarily to make sure that our customers are technically able to properly apply the UrecoatsRSM-100™ sealant using our proprietary BlueMAX™ spray technology. Pursuant to our marketing program, we participate in regional and national trade shows to introduce our Flagship Products, to roofing, waterproofing and general contractors throughout the United States and abroad as well as implementing a multi-phase comprehensive marketing c ampaign through a wide variety of mediums to facilitate our sales process.

At present, we conduct light manufacturing operations. We also utilize high volume, quality oriented, and reputable outside manufacturers under private label for most of our Comprehensive Product Line’s manufacturing requirements.

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Our research is presently conducted internally and through strategic alliances, on variations of our core RSM™ formula for new products in cross over industries, such as concrete, pipeline, and steel. We are also continuing development of new products based on the sealant and coating technologies acquired from Infiniti.  Our research and new product development efforts focus on specialty sealants and coatings that are effective, convenient, and economically beneficial to customers.

We are pursuing strategic acquisitions that will allow us to further establish our market position in targeted markets.  Management believes that the high degree of fragmentation in the adhesives, sealants and coatings business segments provide suitable acquisition candidates.  Potential acquisition candidates will be evaluated based upon the ability of the Company to: (i) expand its Comprehensive Product Line; (ii) enhance its product development capabilities; (iii) sell and market its products through new or expanded distribution channels; and (iv) increase its international presence.

We believe significant opportunities in international markets are available for us to increase sales, enter developing markets and establish new customer relationships.  Along these lines, we have already developed strategic relationships with reputable companies in Canada and Puerto Rico.

Results of Operations

Three Months Ended September 30, 2002 as Compared to Three Months Ended September 30, 2001

Revenues

The following is a summary of revenues for:

			Three Months Ended
				September 30,		September 30,
				2002		2001
Revenue:
	Application Systems		$	262,817	$	70,000
	Coatings, Sealants and Other Products			1,268,523		91,625
		Total Revenue	$	1,531,340	$	161,625

We reported revenue for the three months ended September 30, 2002 of $1,531,340, which represents an increase of $1,369,715 over the $161,625 for the same period last year. The revenue generated from sales of our proprietary and patent pending spray application system (“Application System”) was $262,817 and represented 17% of our revenue, while sales from sealants, coatings and other products (“Coatings, Sealants and Other Products”) was $1,268,523, which represented 83% of our total revenue.  The increase of $1,369,715 over the $161,625 reported for the three months ended September 30, 2001 is attributed to an increase in sales of $192,817 of our Application Systems, and increased sales of $1,176,898 in our Coatings, Sealants and Other Products.  These increases came as a result of reporting a full quarter of revenue from our acquisition of Infiniti on September 1, 2001, which only reported for one month in the same period last year.  In Septe mber of 2001, we also began selling our Application Systems.

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. Our total costs and expenses increased from $1,499,772 for the three months ended September 30, 2001 to $4,510,322 for the three months ended September 30, 2002 for an increase of $3,010,550. The increase is due to our exiting the development stage and expanding marketing, sales and distribution of our Application Systems and Coatings, Sealants and Other Products.  In addition, the third quarter of 2001 reflects only one month of activity from the acquisition of Infiniti.

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Cost of Sales: Our cost of sales for the three months ended September 30, 2002 was $1,304,580 and is comprised of $1,176,368 of direct product costs and $128,212 of other cost of sales.  Direct cost for the Application Systems was $240,648 or 92% as a percent of related revenue, and $935,720 for Coatings, Sealants and Other Products or 74% as a percent of related revenue. We are reporting comparable revenue and costs from our acquisition of Infiniti, beginning September 1, 2001, in addition to the initial sale of our and Application Systems, which are the primary reasons for the increase in cost of sales of $1,166,454 over the three months ended September 30, 2001.  The direct cost as a percent of related revenue for the Application Systems and Coatings, Sealants and Other Products was 87% and 69% respectively for the three months ended September 30, 2001.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the three months ended September 30, 2002 was $2,609,889 as compared to $820,070 for the three months ended September 30, 2001. The increase of $1,789,819 is attributable to us introducing our Comprehensive Product Line to our target markets. The increase can be attributed to: payroll and payroll related costs for sales, marketing, production, distribution, testing and technical support; expenses toward marketing, advertising, conventions and promotional materials; rent and insurance expenses; and other administrative expenses.

Professional Fees: Our professional fees increased $146,472 from $22,526 for the three months ended September 30, 2001 to $168,998 for the three months ended September 30, 2002.  The increase was attributed to attorneys fees associated with litigation in addition to using outside consultants for various purposes.

Depreciation and Amortization: Our depreciation and amortization expense for the three months ended September 30, 2002 was $120,243 as compared to $95,934 for the three months ended September 30, 2001 for an increase of $24,309.

Research and Development: Our research and development costs decreased $126,322 from $334,455 for the three months ended September 30, 2001 to $208,133 for the three months ended September 30, 2002.  The decrease is due to the completion of our commercial spray application system, BlueMAX™, Model 230.

Consulting Fees: Our consulting fees for the three months ended September 30, 2002 were $70,427 as compared to $57,478 for the three months ended September 30, 2001 for an increase of $­­­­­­­­­­­­­­­­­­­­­­­­­­­12,949. The increase is related to fees paid for business and financial consulting, in addition to services relating to the development and testing of products.

Interest Expense: Our interest expense decreased $3,131 from $31,183 for the three months ended September 30, 2001 to $28,052 for the three months ended September 30, 2002.

Discontinued Operations: The loss from discontinued operations of ($374,041) for the three months ended September 30, 2001 is from our discontinued roofing contracting operations.  The ($­­­­­­­­­­­­­­­­­49,270) of loss from discontinued operations for the three months ended September 30, 2002 reflects losses generated from the loss on disposition of certain assets used in the contracting business.

Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September 30, 2001

Revenues

The following is a summary of revenues for:

		Nine Months Ended
			September 30,		September 30,
			2002		2001
Revenue:
	Application Systems	$	1,340,951	$	70,000
	Coatings, Sealants and Other Products		3,204,623		91,625
	Total Revenue	$	4,545,574	$	161,625

15 

We reported record revenue for the nine months ended September 30, 2002 of $4,545,574. The revenue generated from sales of our Application Systems was $1,340,951 and represented 30% of our revenue, while sales from Coatings, Sealants and Other Products was $3,204,623, which represented 70% of our total revenue. We closed our acquisition of Infiniti in September 2001, so the revenue of $161,625 for the nine months ended September 30, 2001 reflects only one month of Infiniti’s revenue.  Also, we sold our initial application system in September of 2001.

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. Our total costs and expenses increased from $3,741,623 for the nine months ended September 30, 2001 to $12,200,716 for the nine months ended September 30, 2002 for an increase of $8,459,093. The increase is due to the company exiting the development stage and expanding marketing, sales and distribution of our Application Systems and Coatings, Sealants and Other Products.

Cost of Sales:  Our cost of sales for the nine months ended September 30, 2002 was $3,713,740 and is comprised of $3,477,528 of direct product costs and $236,212 of freight and other cost of sales. Direct cost for the Application Systems was $1,324,859 or 99% as a percent of related revenue, and $2,152,669 for Coatings, Sealants and Other Products or 67% as a percent of related revenue. The increase of $3,575,614 over the same period last year is due to the fact that it only reflects one month of revenue and costs related to our acquisition of Infiniti in September 2001. The direct cost as a percent of related revenue for the Application Systems and Coatings, Sealants and Other Products was 87% and 69% respectively for the nine months ended September 30, 2001.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the nine months ended September 30, 2002 was $6,855,300 as compared to $1,818,096 for the nine months ended September 30, 2001. The increase of $5,037,204 is attributable to introducing our Comprehensive Product Line in our target markets. The increase can be attributed to: payroll and payroll related costs for sales, marketing, production, distribution, testing and technical support; expenses toward marketing, advertising, conventions and promotional materials; rent and insurance expenses; and other administrative expenses.

Professional Fees: Our professional fees increased $153,003 from $176,533 for the nine months ended September 30, 2001 to $329,536 for the nine months ended September 30, 2002.  The increase was attributed to attorneys fees associated with litigation in addition to using outside consultants for various purposes.

Depreciation and Amortization: Our depreciation and amortization expense for the nine months ended September 30, 2002 was $335,714 as compared to $281,709 for the nine months ended September 30, 2001 for an increase of $54,005. The major portion of the increase relates to amortization of costs for the acquisition of our proprietary RSM™ formula, including securing its patent.

Research and Development:  Our research and development costs decreased $537,355 from $1,022,465 for the nine months ended September 30, 2001 to $485,110 for the nine months ended September 30, 2002.  The decrease is due to the completion of our commercial spray application system, BlueMAX™, Model 230.

Consulting Fees:  Our consulting fees for the nine months ended September 30, 2002 was $433,911 as compared to $169,218 for the nine months ended September 30, 2001 for an increase of $264,693. The increase is related to fees paid for business and financial consulting, in addition to services relating to the development and testing of products.

Interest Expense: Our interest expense decreased $88,071 from $135,476 for the nine months ended September 30, 2001 to $47,405 for the nine months ended September 30, 2002. The decrease is due to the reduction in loans from a related party that was outstanding during the nine month period ended September 30, 2001.

Discontinued Operations: The loss from discontinued operations for the nine months ended September 30, 2001 reflects a ($1,164,070) loss from our roof contracting operations offset by $157,151 of income from a litigation settlement. The ($120,218) of loss from discontinued operations for the nine months ended September 30, 2002 reflects losses from the completion of certain roofing projects under contract at the end of 2001 and completed in the nine months ended September 30, 2002 and the disposition of assets related to our contracting business.

 16

Liquidity and Capital Resources

We had $322,423 of cash on hand at September 30, 2002 reflecting a decrease of $196,802 as compared to $519,225 of cash on hand at December 31, 2001.

The cash required by operations for the nine months ended September 30, 2002 was $­­­­­­­­­­­­­­­­­7,893,086, which is mainly attributable to our net loss for the period and working capital required for inventory, increased prepaid expenses, increased accounts receivable, and increase of long term notes receivable.  These items were offset by a decrease in deposits, an increase in accounts payable and elimination of non-cash expenses for consulting, and board of director fees. In comparison, the cash required by operations for the nine months ended September 30, 2001 was $3,344,017, and was a result of our net loss for the period and working capital required for inventory and increased accounts receivable.  These items were offset by an increase in the accounts payable, accrued expense and elimination of non-cash expenses primarily for consultants, legal fees, settlements, interest, board of director f ees and employee compensation.

The cash used in investing activities was $514,148 for the nine months ended September 30, 2002, as compared to $1,388,591 for the nine months ended September 30, 2001, reflecting a decrease of $874,443.  The net cash required for capital expenditures in the nine month period ended September 30, 2001 was $714,836, for the purchase of vehicles, machinery and equipment used in the production of our products and the establishment of the contracting services subsidiary, and $772,966 for costs relating to the acquisition of our subsidiary, Infiniti, and intellectual property protection partially offset by $99,211 in disposition of property and equipment. The capital expenditures of $686,328 and $45,607 of costs related to intellectual property protection for the nine month periods ended September 30, 2002, were offset by the disposition of property and equipment of $217,787 for the nine month period ended September 30, 2002.  The cash provided from financing activities was $8,210,432 for the nine month period ended September 30, 2002, as compared to $4,768,813 for the nine month period ended September 30, 2001.  The primary source of cash in the nine month periods ended September 30, 2002 is attributed to the issuance of Series C Preferred Stock and proceeds of loans from the Chairman of the Board, while in the same periods in 2001 it is attributed to proceeds of loans from the Chairman of the Board.

As of September 30, 2002 we had $1,050,000 in subscriptions receivable and up to $2,703,940 pursuant to a Series C Preferred Stock Option available to fund our operations. Notwithstanding these commitments, we anticipate further financing through debt instruments, short-term loans and/or the sale of our common and/or preferred stock to accredited sophisticated investors.

Forward Looking Statements

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

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. These forward-looking statements are typically identified by words or phrases such as "believes," "expects," "anticipates," "plans," "estimates," "approximately," "intend," and other similar words and phrases, or future or conditional verbs such as "will," "should," "would," "could," and "may." These forward-looking statements are based largely on our current expectations, assumptions, estimates, judgments, plans and projectio ns 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 consider include the following:  (a) general economic and market conditions, either nationally or in the markets where we conduct our business, may be less favorable than expected; (b) inability to find suitable equity or debt financing when needed on terms commercially reasonable to us; (c) inability to locate suitab le distribution locations; (d) inability to identify suitable acquisition candidates or, if identified, an inability to consummate any such acquisitions, and, if consummated, an inability to operate them profitably; (e) interruptions or cancellation of sources of supply of products or significant increases in the costs of such products; (f) changes in the cost, terms of purchase, pricing of, or consumer demand for, our products; (g) an inability to collect our accounts or notes receivables when due or within a reasonable period of time after they become due and payable; (h) a significant increase in competitive pressures; and (i) changes in accounting policies and practices, as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board.  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.

 17

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. We are not subject to material foreign currency exchange risks at this time.  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.

Item 4. 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 rules and forms promulgated by the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have concluded that our disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules.

We did not make any significant changes in, nor take any material corrective actions regarding, our internal controls or other factors that could significantly affect these controls subsequent to the date of our most recent evaluation.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs vs. Urecoats International, Inc. et al, Defendants.

This litigation has been previously disclosed.  The parties are currently undergoing discovery.  The outcome of this litigation can not be determined at this time.

Item 2. Changes in Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

During the quarterly period ended September 30, 2002, the Company issued securities, for certain private transactions, in reliance on Section 4(2) of the Act, as described below:

             Common Stock

           (1)           On September 30, 2002, we issued an aggregate of 31,500 shares of restricted common stock to officers, as other compensation pursuant to employment agreements, valued and recorded in the aggregate at $22,838.

           (2)           During September, we issued an aggregate of 34,500 shares of restricted common stock pursuant to conversion of an aggregate of 5,000 shares of Series C Convertible Preferred Stock.

             Preferred Stock

           (3)           On September 23, 2002, Richard J. Kurtz, the Chairman of the Board and principal stockholder of the Company, exchanged $1,791,540 of indebtedness (short-term loans bearing interest at 9% per annum) due him for 89,577 shares of the Company’s Series C Convertible Preferred Stock pursuant to a partial exercise of his Series C Preferred Stock Option Agreement.  As previously reported, the Company entered into a Series C Preferred Stock Option Agreement with Mr. Kurtz on January 8, 2002, which granted to him, the right and option to purchase at $20.00 per share on the terms and conditions stated therein all or any part of an aggregate of 250,000 shares of the Company’s currently authorized and unissued Series C Preferred Stock, par value $1.00 per share, which Series C Preferred Stock purchased thereby is convertible into restricted common stock of the Company at a price of $2.20 per share, as adjusted based on the Company’s recent reverse split and share consolidation.

 18

Item 3. Defaults Upon Senior Securities.

None

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

None

Item 5. Other Information.

Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs, vs. Urecoats International, Inc. et. al., Defendants.

On November 12, 2002, the Plaintiffs filed a civil lawsuit against Urecoats International, Inc. and Urecoats Industries Inc. for breach of contract, injunctive relief, breach of duty, and conversion, in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida.  The underlying factual bases are closely related to the allegations in another case filed by the Plaintiffs, which was previously disclosed.  See above Item 1. Legal Proceedings.  This case, like the prior case, arises from the refusal of the Company to remove the Rule 144 (restrictive)  legends from an aggregate of 215,141 (2,151,412 pre-split) restricted shares of common stock issued to the Plaintiffs in connection with a purchase and sale agreement and various consulting related services allegedly performe d.  As set forth in more detail in disclosures for the previously filed case described above, the Company believes the purchase and sale agreement and consulting relationships between the Company and Plaintiffs were fraudulently induced, that the activities related thereto were allegedly consistently misrepresented by Plaintiffs, and that the Plaintiffs failed to perform their obligations under the consulting agreements.  The Company expects that this case may very well be consolidated with the previously filed case described above because the issues are similar and arise out of the same or similar transactions.  Issue has not been joined in this latter lawsuit.

The outcome of this litigation can not be determined at this time.

Item 6. Exhibits and Reports on Form 8-K.

Exhibits

10.1 Employment Agreement, effective September 1, 2002, between Dale L. Epperson and the Company

Reports on Form 8-K

None

19 

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.
Date: November 14, 2002	By:
		Timothy M. Kardok
		Chief Executive Officer and President

By:
	John G. Barbar
	Chief Financial Officer and Treasurer

By:
	Michael T. Adams
	Executive Vice President and Secretary

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CERTIFICATION

I, Timothy M. Kardok, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Urecoats Industries Inc.;

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

(6) The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002	URECOATS INDUSTRIES INC.
		Timothy M. Kardok
		Chief Executive Officer and President

21 

CERTIFICATION

I, John G. Barbar, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Urecoats Industries Inc.;

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

(6) The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002	URECOATS INDUSTRIES INC.
		John G. Barbar
		Chief Financial Officer and Treasurer

22

INDEX OF EXHIBITS

Exhibit Number	Description
10.1	Employment Agreement, effective September 1, 2002, between Dale L. Epperson and the Company

23 

EX-10.1

EMPLOYMENT AGREEMENT

            THIS EMPLOYMENT AGREEMENT (“Agreement”) is effective as of September 1, 2002, by and between URECOATS INDUSTRIES INC., a Delaware corporation with offices at Newport Center Plaza, 1239 East Newport Center Drive, Suite 101, Deerfield Beach, Florida 33442 (the “Company”), and Dale Epperson an individual residing at 6430 Oak Hill Drive, Granite Bay, California 95746 (the “Executive”).

W I T N E S S E T H :

            WHEREAS, the Company wishes to employ the Executive and the Executive wishes to accept such employment, subject to the terms and conditions hereinafter set forth.

            WHEREAS, the Company wishes to memorialize the employment of the Executive in a formal Agreement and the Executive wishes to enter into such Agreement, subject to the terms and conditions hereinafter set forth.

            NOW THEREFORE, the parties hereto, in consideration of the premises and mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, agree as follows:

            1.         EMPLOYMENT TERM.  The Company hereby agrees to employ the Executive, and the Executive hereby accepts such employment for a period beginning on September 1, 2002 through August 31, 2006, unless sooner terminated in accordance with Section 6 hereof (the “Employment Period”).

            2.         POSITION; DUTIES.  During the Employment Period, the Executive shall hold the title and position of Senior Vice President of Market Development of the Company and shall have the duties and responsibilities usually vested in such capacity, as determined from time to time by the Board of Directors, and such other duties and responsibilities as may be assigned to him from time to time by the Board of Directors, Chief Executive Officer and/or President of the Company.

            3.         MANNER OF PERFORMANCE.  The Executive shall serve the Company and devote all his business time, his best efforts and all his skill and ability in the performance of his duties hereunder.  The Executive shall carry out his duties in a competent and professional manner, to the reasonable satisfaction of the Board of Directors, Chief Executive Officer and/or President of the Company, shall work with other Executives of the Company and of its affiliates and generally promote the best interests of the Company and its customers.  The Executive shall not, in any capacity engage in any activity which is, or may be, contrary to the welfare, interest or benefit of the business now or hereafter conducted by the Company or any of its affiliates.

            4.         COMPENSATION AND RELATED MATTERS.  The Executive’s compensation for his services hereunder shall be as follows:

                        4.1       Base Compensation.  During the Employment Period, Executive shall receive an annual base salary (the "Annual Base Salary") of $130,000, payable in accordance with the Company’s normal payroll practices. Executive’s Annual Base Salary will be reviewed on an annual basis by the Compensation Committee of the Board of Directors and may be increased from time to time, in the discretion of the Compensation Committee. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to Executive under this Agreement. Annual Base Salary shall not be reduced at any time (including after any such increase), other than as part of an across-the-board salary reduction applicable to other executive officers of the Company. The term Annual Base Salary as utilized in this Agree ment shall refer to Annual Base Salary as adjusted from time to time.

                        4.2       Restricted Common Stock.

                                    (a)        Executive is hereby granted 48,000 shares of restricted common stock of the Company, $.01 par value per share (the "Shares") subject to vesting in 3,000 share increments on a pro rata calendar quarter basis commencing on the Effective Date. The Shares shall be other compensation to the Executive for his services hereunder and shall be earned and vest at the end of each quarter during the Employment Period.

1 

                                    (b)        The Shares, when vested, shall be subject to the following conditions:

                                                (i)         The shares may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, alienated or encumbered until the restrictions are removed according to the terms of this Agreement or expire;

                                                (ii)        The Compensation Committee may require that the certificates representing the Shares remain in the physical custody of an escrow holder or the Company until all restrictions are removed or expire;

                                                (iii)       Each certificate representing Shares will bear such legend or legends making reference to the restrictions imposed upon such Shares as the Compensation Committee in its discretion deems necessary or appropriate to enforce such restrictions; and

                                                (iv)       Notwithstanding the foregoing, all unearned and unvested Shares listed above shall immediately vest and be delivered to the Executive upon the Change of Control as defined in Section 7(c) provided that the Executive is employed by the Company on the date of the Change in Control.  The Executive shall have no voting or other stockholder rights with respect to any unearned and unvested Shares.  The Shares shall not be assignable by the Executive or be subject to any claims by creditors until they shall have been earned and vested in accordance with this section. In addition to any other restrictions on the Shares described in this section, which may be incorporated by reference in the stock certificates evidencing the Shares, such certificates shall bear a legend substantially as follows:

"The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended ("Securities Act").  The holder hereof, by acquiring such securities, agrees that such securities may not be resold, pledged or otherwise transferred except pursuant to an effective registration statement duly filed under the Securities Act, or pursuant to an exemption effective under the Securities Act."

/TBODY> /TBODY>

                                                (v)        The Executive hereby agrees with Company that the holding period set forth in Rule 144 of the Securities Act of 1933, as amended, shall only begin to run, with respect to any Shares, on the date that such Shares are earned and vest in accordance herewith.

                        4.3       Stock Options.

                                    (a)        Executive shall be eligible for the grant of equity compensation awards from time to time under such equity compensation plans and arrangements as may be maintained by Company from time to time. Any option grants made to Executive pursuant to such plans and arrangements shall be subject to this Agreement and the provisions of such plans and arrangements.

                                    (b)        On the Effective Date, Executive shall be granted an incentive stock option to purchase 20,000 shares of the Company (the “Stock Options”), as defined in and pursuant to and in accordance with one of the Company’s existing stock option plans, or any successor plans as the Board may designate (the "Stock Option Plan"). The Stock Options shall have an exercise price equal to one hundred percent (100%) of the fair market value of Company's common stock as of the date of grant, and, subject to vesting, shall be exercisable at any time, in whole or in part, within five (5) years of the date of grant.  These Stock Options shall vest up to a maximum of 5,000 per year, and in accordance with this Section 4.3(b). Th e Stock Options vest after the end of each calendar year in a number to be determined by dividing the Company’s common stock price as of the end of any applicable year into a number equal to 5% of any such year’s Excess Revenues, rounded to the nearest integer. As used herein, "Excess Revenues" shall mean the Company’s annual Revenues minus $1 million.

                                    (c)        As an example only, if in any year the Revenues are $5 million, and the price of the Company’s stock at the close of that year is $10.00, then 4,000 Stock Options to purchase 4,000 shares of the Company shall vest, determined as follows:

2 

            $5 million - $1 million = $4 million (the Excess Revenues)

            $4 million X 5% of Excess Revenues = $200,000

            $200,000 / $10.00 = 20,000 (The number vested is greater than the number allocated, so 4,000 is vested)

                                    (d)        Notwithstanding the foregoing, Stock Options that do not vest in any given year shall be carried over and added to a subsequent year’s maximum.  In the example provided in Section 4.3(c), -0- Stock Options will be carried over to the next year, provided that the next year is not the last year in this Agreement. Unless otherwise agreed to between the parties, any unvested Stock Options at the end of the Employment Period shall be canceled and of no force or effect.

                                    (e)        Company shall register the shares issuable under the Stock Option on a Form S-8 registration statement prior to the vesting of the first Stock Option and shall keep such registration statement in effect for the entire period the Stock Options remain outstanding.  Each shares issued upon exercise of a Stock Option granted pursuant to Sections 4.3(a) and 4.3(b), shall be transferable upon Executive’s election, to the extent consistent with applicable restrictions under the Company’s registration of the underlying shares with the Securities and Exchange Commission.

                                    (f)         All of Executive’s Stock Options (including any Stock Options that are outstanding on the Effective Date) shall be subject to, and governed by, the terms and provisions in the applicable Company Stock Option Plan, except to the extent of modifications that are expressly provided for in this Agreement which do not result in any modifications to the Stock Option Plan which would require shareholder approval or which would contravene any law which applies to the Stock Option Plan.

                                    (g)        If there is any change in the common stock of Company by reason of any stock dividend, stock split, spin-off, split up, merger, consolidation, recapitalization, reclassification, combination or exchange of shares, or any other similar corporate event or reorganization, however structured, then the number of shares subject to Executive’s Stock Options and the exercise price of Executive’s Stock Options shall be equitably and appropriately adjusted by the applicable Stock Option Plan administrator to effectuate the intent of this Section 4.3. Notice of any adjustment shall be given by Company to Executive and shall be final and binding on Executive.

                        4.4       Performance Awards.  In addition to the foregoing, during the Employment Period, the Executive shall be eligible to earn performance awards from time to time that the Company may, in its discretion, determine to put into effect. The administrator of these plans or arrangements shall determine the performance criteria (which need not be identical) to be utilized to calculate the value of the Performance Awards, the term of such Performance Awards, the Payment Event, and the form and time of payment of Performance Awards. The specific terms and conditions of each Performance Award shall be set forth in a written statement evidencing the grant of such Performance Award. Upon the occurrence of a Payment Event, payment of a Performance Award will be made to the Executive at fair market value on t he date of the Payment Event, as the administrator in its discretion may determine. The administrator may impose a limitation on the amount payable upon the occurrence of a Payment Event, which limitation shall be set forth in the written statement evidencing the grant of the Performance Award. If Executive’s employment with the Company is terminated for any reason, including but not limited to, death, or disability prior to the occurrence of the Payment Event, all of the Executive’s rights under the Performance Award shall expire and terminate unless otherwise determined by the administrator.  Notwithstanding the foregoing, the Executive shall be afforded the opportunity to earn a minimum aggregate of 30,000 Shares during the Employment Period at a maximum of 7,500 Shares, during each calendar year hereof with respect to these plans or arrangements.

                        4.5       Discretionary Bonus. The Executive may be eligible to receive additional bonus compensation at the sole and unreviewable discretion of the Chief Executive Officer and/or President and the Compensation Committee of the Board of Directors.

                        4.6       Compensation and Benefit Programs. During the term of Executive’s employment hereunder, Executive shall be entitled to participate in the following plans as they may exist from time to time during the term hereof, to wit, any and all medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans, and any and all other plans as offered by the Company from time to time to its Executives, including savings, pension, profit-sharing, stock options, and deferred compensation plans, subject to the general eligibility and participation provisions set forth in such plans.

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                        4.7       Vacation and Other Benefits.  During the term of Executive’s employment hereunder, Executive shall be entitled to such paid vacation, fringe benefits and perquisites as are provided from time to time by the Company to similarly situated executives. Vacation will be taken at such times as the Executive and the Company shall mutually determine and provided that no vacation time shall interfere with the duties required to be rendered by Executive hereunder. Notwithstanding the foregoing, as an officer of Company, Executive is expected to utilize his vacation time judiciously and so as not to jeopardize the business of Company or Urecoats.  Unused vacation may not be carried forth to the next calendar year without prior written consent by the Company, except that no written consent is required for carrying over a maximum of fourteen days to any subsequent year. The Company shall also provide the Executive reasonable reimbursement of out-of-pocket expenses incurred by him in connection with his duties hereunder, upon submission of appropriate documentation, and an automobile or automobile allowance, which expense or allowance shall not exceed $750 per month, net.  Notwithstanding the foregoing and as an exception to general policy, the Company will pay for Executive’s reasonable and documented moving expenses for his relocation to Florida.  In connection therewith, the Company will pay for an agent for packing and movement of Executive’s household goods, up to 150 days temporary living allowance not to exceed $2,000 per month, $50 per diem per day up to the 150 day temporary living arrangements, transfer allowance equal to three times Executive’s monthly Base Salary should Executive purchase a home within 24 months from his employment date (payable at closing).

            4.8       Adjustments.  If the outstanding shares of common stock of the Company are increased, decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed in respect of such shares of common stock (or any stock or securities received with respect to such common stock), through merger, consolidation, sale or exchange of all or substantially all of the properties of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, spin-off or other distribution with respect to such shares of Common Stock (or any stock or securities received with respect to such common stock), or (ii) if the value of the outstanding shares of common stock of the Company is reduced by reason of an extraordinary cash dividend, a fair, appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of Shares provided in Section 4.2, (y) the number and kind of shares or other securities subject to then outstanding Performance Awards described in Section 4.4, and (z) the price for each share or other unit of any other securities subject to then outstanding Performance Awards described in Section 4.4. Adjustments under this Section 4.8 will be made by the applicable authority, whose determination as to what adjustments will be made and the extent thereof will be final, binding and conclusive. No fractional interests will be issued from any such adjustments.

            5.         NON-COMPETITION; NON-DISCLOSURE.

                        5.1       Non-Competition.  During the Employment Period and for a period of twelve (12) months after the termination of the Executive’s employment with the Company for any reason (collectively the “Restriction Period”), the Executive shall not, either directly or indirectly, for himself or any third party, anywhere within or outside the United States (a) engage in or have any interest in any activity that directly or indirectly competes with the business of the Company or of any of its affiliates (which for purposes hereof shall include all subsidiaries or parent companies of the Company, now or in the future during the Employment Period), as conducted at any time during the Employment Period, including without limitation, accepting employment from or providing consulting services to a ny such competitor, owning any interest in or being a partner, shareholder or owner of any such competitor, (b) solicit, induce, recruit, or cause another person in the employ of the Company or its affiliates or who is a consultant or independent contractor for the Company or its affiliates to terminate his employment, engagement or other relationship with the Company or its affiliates, or (c) solicit or accept business from any individual or entity which shall have obtained the goods or services of, or purchased goods or services from, the Company or its affiliates during the two year period immediately prior to the end of the Employment Period or which otherwise competes with or engages in a business which is competitive with or similar to the business of the Company or any of its affiliates, (d) call on, solicit or accept any business from any of the actual or targeted prospective customers of the Company or its affiliates (the identity of and information concerning which constitute trade secrets and Conf idential Information of the Company) on behalf of any person or entity in connection with any business competitive with the business of the Company, nor shall the Executive make known the names and addresses of such customers or any information relating in any manner to the Company’s trade or business relationships with such customers, other than in connection with the performance of Executive’s duties under this Agreement.

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                        5.2       Non-disclosure.  The Executive shall not at any time during the term hereof or thereafter divulge, communicate, or use in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company (which shall include, but not be limited to information concerning the Company’s financial condition, prospects, technology, customers, suppliers, sources of leads and methods of doing business) shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary, and Executive shall remain a fiduciary to the Company with respect to all of such information. For purposes of thi s Agreement, the term “Confidential Information” includes, but is not limited to, information disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) prior to or after the date hereof, and not generally known, about the Company or its business. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information to the extent required by law provided that prior to disclosing any such information required by law, Executive shall give prior written notice thereof to Company and provide Company with the opportunity to contest the disclosure.  The Executive shall not disclose, without limitation as to time, Confidential Information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (i) to authorized representatives of the Company, (ii) duri ng the Employment Period, such information may be disclosed by the Executive as is specifically required by Company in the course of performing his duties for the Company, and (iii) to counsel and other advisers of Company subject to Company’s prior approval and provided that such advisers agree to the confidentiality provisions of this Section 5.2.

                        5.3       Ownership of Developments.  All copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes or works of authorship developed or created by Executive during the course of performing work for the Company or its customers (collectively, the “Work Product”) shall belong exclusively to the Company and shall, to the extent possible, be considered a work made by the Executive for hire for the Company within the meaning of Title 17 of the United States Code.  To the extent the Work Product may not be considered work made by the Executive for hire for the Company, the Executive agrees to assign, and automatically assign at the time of creation of the Work Product, without any requirement of further con sideration, any right, title, or interest the Executive may have in such Work Product.  Upon the request of the Company, the Executive shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment.  All of the foregoing shall also be deemed Confidential Information for the purposes of Section 5.2, above.

                        5.4       Books and Records. All books, records, and accounts relating in any manner to the Company (i.e., financial information, customer, supplier, vendor identity, etc.), whether prepared by the Executive or otherwise coming into the Executive’s possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on termination of the Executive’s employment hereunder or otherwise on the Company’s request at any time.

                        5.5       Definition of Company.  Solely for purposes of this Agreement, the term “Company” also shall include any existing or future subsidiaries of the Company that are operating during the time periods described herein and any other entities that directly or indirectly, through one or more intermediaries, control, are controlled by or are under common control with the Company during the periods described herein.

                        5.6       Acknowledgment by Executive.  The Executive acknowledges and confirms that (i) the restrictive covenants contained in this Section 5 are reasonably necessary to protect the legitimate business interests of the Company, and (ii) the restrictions contained in this Section 5 (including without limitation the geographic area and length of the term of the provisions of this Section 5) are not overbroad, overlong, or unfair and are not the result of overreaching, duress or coercion of any kind. The Executive acknowledges and confirms that his special knowledge of the business of the Company is or will be such as would cause the Company serious injury or loss if he were to use such ability and knowledge to the benefit of a competitor or were to compete with the Company in violation of the terms of this Section 5. The Executive further acknowledges that the restrictions contained in this Section 5 are intended to be, and shall be, for the benefit of and shall be enforceable by, the Company’s successors and assigns and shall be enforced to the fullest extent of the law applicable at the time that Company deems it necessary or advisable to enforce the restrictive covenants and other provisions of this Section 5.

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                        5.7       Injunctive Relief; Damages.  Because of the difficulty of measuring economic losses to the Company as a result of a breach of the foregoing covenants in this Section 5, and because of the immediate and irreparable damage that could be caused to the Company for which it would have no other adequate remedy, the Executive agrees that the foregoing covenants may be enforced by the Company in the event of breach by the Executive, by injunctions and restraining orders.  Nothing herein shall be construed as prohibiting the Company from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages.

                        5.8       Severability; Reformation; Independent Covenants. The covenants in this Section 5 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. Each covenant and agreement of Executive in this Section 5 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action by the Executive against the Company (including the affiliates the reof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants or agreements.  It is specifically agreed that the periods of restriction during which the agreements and covenants of the Executive made in this Section 5 shall be effective, shall be computed by extending such periods by the amount of time during which the Executive is in violation of any provision of Section 5. The covenants contained in this Section 5 shall not be affected by any breach of any other provision hereof by any party hereto.

                        5.9       Survival.  The obligations of the parties under this Section 5 shall survive the termination of this Agreement.

            6.         EARLY TERMINATION OF EXECUTIVE EMPLOYMENT.  This Agreement may be terminated by either Party before the expiration of the Employment Period for any reason, but subject to the terms, conditions and remedies set forth in this Section 6, which shall provide the sole and exclusive remedy for any such termination.

                        6.1       Uncompensated Terminations.  If the Executive resigns from the Executive's employment hereunder without Cause (as defined in Section 7(a), or if the Company terminates the Executive for Cause (as defined in Section 7(b)), then the Executive shall be entitled to receive a cash sum payment of the portion of Annual Base Salary earned up to and including the Date of Termination (as defined in Section 6.4(b)), and any benefits that have accrued under Sections 4.2 through 4.6 up to and including the Date of Termination. The amount of cash payable to the Executive under this Section 6.1 shall be payable in accordance with the Company's normal payroll practices and any other benefits described in Sections 4.2 through 4.6 will be handled in accordance with the established procedures for each applicab le benefit.  More particularly, Executive shall be entitled only to (a) such Shares that have actually vested as of the Date of Termination; (b) such Stock Options that he has exercised or entitled to exercise as of the Date of Termination; and (c) such bonuses, if any, that he has earned as of the Date of Termination. Any payments or benefits to which Executive is otherwise entitled under this Section 6.1 shall be subject to setoff to the extent of any claims, which Company has against Executive.

                        6.2       Compensated Termination. If the Executive resigns for Cause or other than a Change in Control (except for a forced resignation as described in Section 6.3(a)), or is terminated by the Company without Cause, in each case prior to the expiration of the Employment Period, the Executive's employment hereunder shall terminate on the Date of Termination and the Executive shall be entitled to the following:

                                    (a)        the unpaid portion of Salary due the Executive for the period of time through the Date of Termination, payable in accordance with the Company's regular payroll practices;

                                    (b)        a severance cash payment equal to six (6) months of the then current Annual Base Salary of Executive;

                                    (c)        a number of Shares equal to six (6) months of the Shares described in Section 4.2, which Shares shall be deemed earned and vested, and any restrictions on such Shares except as required by applicable law shall immediately lapse and such Shares shall become nonforfeitable.  The Shares shall be delivered to Executive pursuant to the time periods and procedures provided for in Section 4.2, above.

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                                    (d)        a number of Stock Options equal to six (6) months of the Stock Options described in Section 4.3, and any other Company stock options granted to Executive, which Stock Options shall be deemed vested, and any restrictions on such Stock Options except as required by applicable law shall immediately lapse and such Stock Options shall be fully exercisable in accordance with the requirements (except continued employment) of Section 4.3;

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                                    (e)        the product of (I) any Performance Awards described in Section 4.4 which Executive can show that he reasonably would have received had Executive remained in such Executive capacity with the Company through the end of the calendar year in which occurs Executive’s Date of Termination, multiplied by (II) a fraction, the numerator of which is the number of days in the calendar year in which the Date of Termination occurs through the Date of Termination and the denominator of which is 365, but only to the extent not previously paid; provided that any payments pursuant to this Section 6.2(e) shall be made within 30 days following the end of the calendar year in which occurs Executive’s Date of Termination;

                                    (f)         for six (6) months following the Date of Termination, Company shall continue to provide medical and dental benefits only to Executive on the same basis as such benefits are provided during such period to the senior executive officers of Company; provided, however, that if Company’s welfare plans do not permit such coverage, Company will provide Executive the medical benefits (with the same after tax effect) outside of such plans; and

                                    (g)        To the extent not theretofore paid or provided, Company shall timely pay or provide to Executive any other amounts or benefits which Executive is entitled to receive through the Date of Termination under any plan, program, policy or practice or contract or agreement of Company and its affiliates, including accrued vacation to the extent unpaid (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits").

                                    (h)        Notwithstanding the foregoing, in the case of termination by the Company without Cause, the severance cash payment described in section 6.2(b) shall be equal to twelve (12) months of the then current Annual Base Salary of Executive.

                        6.3       Termination Due to Change in Control; Death or Permanent Disability.

                                    (a)        If the Company undergoes a Change in Control (as defined in Section 7(c)), the Executive has 120 days on or following the date of the Change in Control to terminate his employment under this Agreement pursuant to this Section 6.3(a); provided, however, that if the Executive is forced to resign, then Executive shall be entitled to all of the compensation and benefits described in Section 6.2.

                                    (b)        If the Executive becomes Permanently Disabled (as defined in Section 7(e)) or dies prior to the expiration of the Employment Period, the Executive's employment hereunder shall terminate on the Date of Termination.

                                    (c)        If the Executive’s employment is Terminated pursuant to either Sections 6.3(a) (except for a forced resignation) or 6.3(b), the Executive or, in the case of the Executive’s death, the Executive’s beneficiary or other legal representative, shall be entitled to: (i) the unpaid portion of the Annual Base salary described in Section 4.1 due the Executive up to the Date of Termination, which amount shall be payable in accordance with the Company's regular payroll practices, (ii) the Shares described in Section 4.2, to the extent earned and vested, which restrictions, if any, shall immediately lapse and become nonforfeitable except as otherwise required by law, (iii) the stock options described in Section 4.3, to the extent granted and vested, shall become fully exercisable, (iv) any Performance Awards described in Section 4.4, in the Compensation Committee’s discretion, and (v) continuation of medical and dental benefits to Executive’s spouse and/or eligible dependents, if any, for six (6) months, on the same basis as such benefits are provided during such period to the senior executive officers of Company; provided, however, that if Company’s welfare plans do not permit such coverage, Company will provide Executive the medical benefits (with the same after tax effect) outside of such plans, and (vi) to the extent not theretofore paid or provided, any unpaid vacation pay or expense reimbursement or other applicable Other Benefits.

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                        6.4       Notice and Date of Termination.

                                    (a)        Any termination of the Executive's employment hereunder by the Company or the Executive (other than termination due to the Executive's death) shall be communicated by a written "Notice of Termination" to the other Party in accordance with Section 11 hereof. A Notice of Termination shall indicate the specific provision of Section 6 relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated.

                                    (b)        "Date of Termination" shall mean

                                                (i)         If the Executive resigns, the date that the Executive sets forth as his last day, but not later than 30 days after the date Executive sends the Notice and, subject to Company’s right to accelerate the Date of Termination to any earlier date;

                                                (ii)        If the Executive's employment hereunder is terminated by the Company, the date specified in the Notice of Termination, which shall be such date determined by the Company; provided, however, that if such termination by the Company is for Cause, the Date of Termination shall not be earlier than the expiration of any applicable remedy period and no later than 60 days following the Notice of Termination;

                                                (iii)       If the Executive's employment hereunder is terminated due to the Executive becoming Permanently Disabled, the date the Company reasonably determines that he has become Permanently Disabled;

                                                (iv)       If the Executive's employment hereunder is terminated due to death, the date of death; or

                                                (v)        If the Executive's employment hereunder is terminated by reason of the expiration of the Employment Period, the date determined or set forth in Section 1.

                        6.5       Company’s Rights Not Prejudiced.  Notwithstanding anything to the contrary in this Agreement, any payments or distributions of Shares, Stock Options or Other Benefits of any nature which Company makes to Executive shall be without prejudice to Company’s rights to assert any claims that Company has or may have against Executive.

            7.         DEFINITIONS.  As used in this Agreement, the following terms shall have the following meanings:

                                    (a)        "Cause," when used by the Executive as the basis for resigning from his employment hereunder, shall mean: (i) the Company's willful, material breach of any material obligation of the Company under this Agreement, after giving the Company notice of such breach and thirty (30) days to cure such breach; or (ii) the occurrence of a Change in Control (as defined below), subject to Section 6.3(a).

                                    (b)        "Cause," when used by the Company as a basis for terminating the Executive's employment hereunder, shall mean: (i) the Executive's willful, material breach of any material obligation of the Executive under this Agreement, including unreasonable failure or refusal to perform the duties required of him, after giving the Executive notice of such breach and thirty (30) days to cure such breach; (ii) any willful misconduct in connection with his employment that could materially impair the financial condition or reputation of the Company; or (iii) the Executive's conviction for, or plea of guilty or nolo contendre (or similar plea) to any criminal offense that is a felony or includes fraud as an element of the offense.

                                    (c)        "Change in Control" means the following and shall be deemed to occur if any of the following events occur:

                                                (i)         Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person"), is or becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act (a "Beneficial Owner"), directly or indirectly, of securities of the Company representing (i) 20% or more of the combined voting power of the Company's then outstanding voting securities, which acquisition is not approved in advance of the acquisition or within 30 days after the acquisition by a majority of the Incumbent Board (as hereinafter defined) or (ii) 33% or more of the combined voting power of the Company's the n outstanding voting securities, without regard to whether such acquisition is approved by the Incumbent Board;

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                                                (ii)        Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used i n Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall, for the purposes of this Director Plan, be considered as though such person were a member of the Incumbent Board of the Company;

                                                (iii)       The consummation of a merger, consolidation or reorganization involving the Company, other than one which satisfies both of the following conditions:

                                                             (A)       a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) at least 55% of the combined voting power of the voting securities of the Company or such other entity resulting from the merger, consolidation or reorganization (the "Surviving Corporation") outstanding immediately after such merger, consolidation or reorganization and being held in substantially the same proportion as the owners hip in the Company's voting securities immediately before such merger, consolidation or reorganization, and

                                                             (B)       a merger, consolidation or reorganization in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding voting securities; or

                                                (iv)       The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or other disposition by the Company of all or substantially all of the Company's assets.

            Notwithstanding the preceding provisions of this Paragraph (c), a Change in Control shall not be deemed to have occurred if the Person described in the preceding provisions of this Paragraph (c) is (1) an underwriter or underwriting syndicate that has acquired any of the Company's then outstanding voting securities solely in connection with a public offering of the Company's securities, (2) the Company or any subsidiary of the Company or (3) an employee stock ownership plan or other employee benefit plan maintained by the Company that is qualified under the provisions of the Code. In addition, notwithstanding the preceding provisions of this Paragraph (c), a Change in Control shall not be deemed to have occurred if the Person described in the preceding provisions of this Paragraph (c) becomes a Beneficial Owner of more than the permitted amount of outstanding securities as a result of the acquisition of voting se curities by the Company which, by reducing the number of voting securities outstanding, increases the proportional number of shares beneficially owned by such Person, provided, that if a Change in Control would occur but for the operation of this sentence and such Person becomes the Beneficial Owner of any additional voting securities (other than through the exercise of options granted under any stock option plan of the Company or through a stock dividend or stock split), then a Change in Control shall occur.

                                    (d)        "Disability" means Executive’s absence from his duties with Company on a full-time basis for 90 days during any consecutive twelve-month period as a result of incapacity due to mental or physical illness as determined by a physician selected by Company and acceptable to Executive. If Company determines in good faith that Executive’s Disability has occurred during the Employment Period, it may give Executive written notice in accordance with Section 6.4(a) of this Agreement of its intention to terminate Executive’s employment. In such event, Executive’s employment shall terminate effective on the thirtieth (30th) day after Executive’s receipt of such notice (the "Disability Effective Date"), unless, wit hin the thirty (30) days after such receipt, Executive shall have been cleared by the physician to return to work and has returned to full-time performance of his duties.

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                                    (e)        "Permanently Disabled" shall mean when, and only when, the Executive is unable, by reason of illness or accident, to perform, for a continuous 180-day period, the material elements of his duties hereunder, and the Company has reasonably determined, based upon medical documentation, that the Executive for such reason is unlikely to be able to resume such duties in the foreseeable future.

            8.         ASSIGNMENT. Executive shall not have the right to assign or delegate his rights or obligations hereunder, or any portion thereof, to any other person.

            9.         GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without regard to its conflict of laws principles to the extent that such principles would require the application of laws other than the laws of the State of Florida.  Venue for any action brought hereunder shall be exclusively in Broward County, Florida and the parties hereto waive any claim that such forum is inconvenient.

            10.       ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company (or any of its affiliates) with respect to such subject matter.  This Agreement may not be modified in any way unless by written instrument signed by both the Company and the Executive.

            11.       NOTICES. All notices required or permitted to be given hereunder shall be in writing and shall be personally delivered by courier, sent by registered or certified mail, return receipt requested or sent by confirmed facsimile transmission addressed as set forth herein. Notices personally delivered, sent by facsimile or sent by overnight courier shall be deemed given on the date of delivery and notices mailed in accordance with the foregoing shall be deemed given upon the earlier of receipt by the addressee, as evidenced by the return receipt thereof, or three (3) days after deposit in the U.S. mail. Notice shall be sent (i) if to the Company, addressed to its President at Newport Center Plaza, 1239 East Newport Center Drive, Suite 101, Deerfield Beach, Florida 33442 with a copy to Sader & LeMaire, P.A., 1901 West Cypress Creek Road, Suite 415, Fort Lauderdale, Flo rida 33309, Attention: Robert L. Sader, Esquire, and (ii) if to the Executive, to his address as reflected on the payroll records of the Company, or to such other address as either party hereto may from time to time give notice of to the other.

            12.       BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit of and binding upon the parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns, including, without limitation, any successor to the Company, whether by merger, consolidation, sale of stock, sale of assets or otherwise.

            13.       SEVERABILITY. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect        the enforceability of the remaining portions of this Agreement or any part thereof.  If any invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.

            14.       WAIVER. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.

            15.       CONSTRUCTION. This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing the drafting hereof, each party having been given the opportunity to be represented by counsel of their choice in connection with the negotiation of this Agreement.

            16.       SECTION HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

            17.       SINGULAR, PLURAL; GENDER.  Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine gender.

            18.       NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended or shall be construed, to confer upon or give any person other than the Company, the parties hereto and their respective heirs, personal representatives, legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement.

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            19.       EMPLOYEE HANDBOOK; OTHER INSTRUMENTS. The provisions of this Agreement shall, to the extent of any conflict, supercede and take precedence over any provisions of the Company’s employee handbook, as it exists from time to time, or any other existing or future agreements or instruments pertaining to or governing the rights and obligations of the parties to one another insofar as permissible under applicable laws.

            IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

COMPANY		WITNESS
By:	/s/ Timothy M. Kardok, CEO	/s/ Michael T. Adams
Name: Timothy M. Kardok
Title:   Chief Executive Officer and President
		WITNESS
By:	/s/ Dale L. Epperson	Christy L. Epperson
Name: Dale Epperson