10SB12G/A 1 inn5.htm UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-SB/A

Amendment No. 5

GENERAL FORM FOR REGISTRATION OF SECURITIES

OF SMALL BUSINESS ISSUER

Under Section 12(b) or (g) of the Securities Exchange Act of 1934

INNOVATIVE COATINGS CORPORATION

(Name of small business issuer in its charter)

Georgia

58-2337027

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)
   

1650 Airport Dr., Suite 110, Kennesaw, Georgia

30144

(Address of principal executive offices)

(Zip Code)

 

Issuer's telephone number: (770) 919-0100

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value

(Title of class)

ITEM 1. DESCRIPTION OF BUSINESS.

Corporate History

The Company was incorporated in August 1997, as a Georgia corporation and is headquartered in Kennesaw, Georgia. The Company was formed to develop, manufacture and market specially formulated coating systems and related applications equipment utilizing polyurea-based polymers. The Company's objective is to become a leading producer and licensor of polyurea-based formulation or coating systems and multi-component spray application equipment.

The Company's administrative offices are located at 1650 Airport Rd., Suite 110, Kennesaw, Georgia 30144, and its telephone number is (770) 919-0100.

Polyurea Polymers

Polyurea polymers create, when cured, either a hard, impermeable substance or a flexible rubbery substance, depending on the formulation used. Because the cure time is so short, typically a few seconds, polyurea polymers avoid many of the problems associated with the application of polyurethane coatings, especially in high moisture and low temperature environments. However, the coatings industry has been slow to adopt the use of polyurea polymers primarily because of application problems created by the short cure time of polyurea polymers. In addition, the lack of in-depth knowledge of the chemistry and formulations for specific applications has prevented many companies from converting to polyurea coatings.

Polyurea is a substitute for polyurethane with the following relative advantages and disadvantages:

    • Polyurea costs between 10% and 35% more than polyurethane.
    • Polyurea has higher tensile strength than polyurethane.
    • Polyurea has higher abrasion resistance than polyurethane.
    • Unlike polyurethanes, polyurea contains no volatile organic compounds (VOC's), thus causing less harm to the environment.
    • Polyurea can be sprayed in any ambient weather, unlike polyurethane which cannot be sprayed in high humidity or low temperature conditions.
    • Polyurea is not colorfast except in dark (i.e black, blue, grey) colors, whereas polyurethane can be made colorfast in many colors, including white.
    • Innovative's Class A-rated polyurea does not require agitation while spraying, whereas all known Class A-rated polyurethanes require agitation.
    • Polyurea requires heat applied to spray hoses or chemicals in order to increase viscosity so that chemicals will flow freely when reaching spray gun. Polyurethane may require substantially less heat since it contains VOC's or solvents to increase viscosity.
    • Polyurea cures (tack free) in 5 to 45 seconds (depending on the formula) as opposed to 2 to 24 hours for polyurethane.
    • Polyurea adheres to most substrates without a primer whereas polyurethane usually requires a primer.

Production of polyurea polymers does not require specialized equipment or handling due to the non-volatility of the chemistry. Precision mixing and repackaging are the primary production functions. Production can be easily expanded through the use of larger tanks, mixers, and materials handling equipment. Products are delivered in 55-gallon drums, one of component A and another of component B and are all premixed before shipment. These materials require no special handling for shipment and can be shipped via truck, rail, sea, or air.

Polyurea polymers require specialized spray equipment because the cure time is so short. Polyurea polymers are applied by forcing two compounds to mix under high pressure (i.e., from 2,000 to 3,000 psi) at the tip of specialized spray nozzle. The forced mixing of the two compounds causes the compounds to react with each other, producing a solid formulation within seconds. Initial formulations were difficult to apply, and resulted in a rough surface, since the cure time was only 2 to 3 seconds. However, the Company has developed proprietary formulations and techniques which have increased the reaction time to as much as 75 seconds, which makes the application easier and the finished surface smoother. In addition, in order to apply the Company's coatings efficiently, the Company has developed a spray system capable of being manufactured at significantly less cost than polyurethane applications equipment currently on the market.

The Company has never had a problem with the availability of raw materials. The Company does not utilize any principal or exclusive distributor for its raw materials, and has more than one source of supply for all of its raw materials. Some of the distributors the Company relies on for raw materials are Baychem Corporation, Ribeline Sales, and McCollough-Benton.

Primary Markets For Polyurea Polymers

Management has identified over 300 possible uses for its polyurea formulations or coatings systems. Of the identified uses to date, the Company has designated and/or developed the following uses for its coating systems:

    • A three-step exterior insulation finish system (EIFS) that prevents moisture intrusion, provides significant impact resistance, and is termite proof;
    • A direct applied-exterior finish system (DEFS) for commercial properties;
    • Coatings for flotation devices;
    • Coatings for metal rail car parts that come in constant contact with each other;
    • A flexible coating on soft foam that provides a sanitary, seamless coating for athletic and handicap training equipment;
    • Packaging material that meets strength and fire resistant criteria, such as flare packaging materials for the U.S. Military;
    • Pipeline coatings for U.S. and international gas companies;
    • Coatings for pallets and topboards;
    • EPA Super Fund site containment; and
    • Asbestos containment.

Since its inception, management has focused its efforts on several flame and smoke resistant formulations of polyurea. The Company has filed three patent applications for an EIFS coating system that provides a seal against moisture intrusion and enhances the strength of the EIFS wall structure. Management believes that the EIFS industry, often referred to as the "synthetic stucco industry," is a potentially large market for its coating systems. In addition to EIFS applications, the Company has designed and/or developed a number of coatings systems that have been tested and are available for fire resistant military products, flotation devices, athletic and handicap equipment, rail car equipment, commercial buildings, pipeline coatings, speaker boxes, food processing pallets and topboards, pharmaceutical industry pallets and topboards, EPA SuperFund site containment and asbestos containment. To date, the Company has applied for patents covering its EIFS system and floatation devices, pallets, and pipeline coatings.

The Company has applied for the trademark InstaCoat, the brand name of the Company's ployurea-based coatings. InstaCoat is a 100% "solids" liquid system sprayed through conventional two-component equipment. No volatile or evaporative chemicals are used in the process; therefore, the Company's believes that its coatings do not impose an environmental threat due to VOC emissions. InstaCoat is insensitive to water and reacts regardless of ambient temperature changes. The InstaCoat system uses amine-terminated resins in one of the two components, which provide a fast and very consistent reaction with isocyanate (the "A component") without the use of catalysts. Management believes that the Company's coating products offer excellent physical process properties such as adhesion, abrasion resistance, durability and rapid handling time.

The Company is attempting to procure the required building code and fire rating approvals for its EIFS system for use in residential and commercial construction at local levels. For the remainder of 2001, and until building code approval is obtained, the Company is pursuing sales of its coating systems to EIFS contractors using the coating for signage, exterior and interior moldings and other ornamental uses that do not require building code approval. In some cases, where permitted by local regulations, EIFS contractors are using the Company's products and accepting the Company's product warranty in lieu of building code approval.

The EIFS Market

The Company has devoted most of its efforts to developing polyurea polymers for use in synthetic stucco applications. In December 1997, the Company developed several flame resistant formulations of polyurea that led to the filing of a patent application covering these formulations as an integral part of a two-step exterior insulation finish system (EIFS). This system seals against any moisture intrusion and enhances the strength of the EIFS wall structure.

Other related uses include the use of polyurea polymers to produce stucco-type decorative moldings. Currently, major customers of the Company's products for decorative moldings include Peachtree Signs, and Georgia Foam. In addition, the Company recently received its first order from Disney, which has identified of applications for polyurea polymers in its amusement park division, and the Company believes that Disney may become a major customer for the Company's products.

The EIFS industry, often referred to as "synthetic stucco," has grown dramatically over the past ten years. Synthetic stucco was developed in Europe after WWII to repair war-damaged buildings. Today, EIFS is a multi-billion dollar industry serving commercial, retail, and residential construction needs. The recent discovery of moisture intrusion from poorly applied EIFS has limited its desirability and use in the residential market. The EIFS industry has responded with a new ten-step application process to manage moisture intrusion by creating a "drainable system" in new construction; however, the industry still lacks a solution for previously applied stucco problems. Management believes that the Company's two-step system eliminates the potential moisture problem, is less expensive, has greater strength, and can be applied to correct problems in existing EIFS-covered structures.

Management believes that the residential EIFS market, including the market for retrofitting existing EIFS-covered structures, is large. Of the 2,160,000 new houses built in the United States in 1995 and 1996, about 300,000 were built with synthetic stucco as a primary finish. In New Hanover, County, North Carolina, several independent testing concerns have inspected over 300 homes that were built with EIFS and found that 90% to 95% of them have sustained water damage.

Stucco, both "real" and synthetic, has become one of the leading exterior finishes for commercial buildings. Since the Company's system can be installed in less time than traditional stucco or EIFS systems, while vastly increasing the surface's strength, the Company believes that overtime its products can become a major siding alternative for the commercial construction industry. Based on U.S. Census Bureau data, the Company believes that the U.S. commercial siding market is considerably larger than the residential market.

Management believes the Company's EIFS system, for which it has filed a patent application, will provide a cost-effective solution for existing synthetic stucco moisture problems as well as for new construction. Based on estimates of new construction and potential repair work, the estimated U.S. residential housing marketplace for the Company's EIFS system exceeds $2.5 billion per year.

Other Significant Uses of Polyurea Polymers

In addition to EIFS applications, uses of the Company's products are continuously being developed. Other uses for which the Company is currently marketing its products include:

Railroad Parts - The Company has recently been supplying its products to a third party that has a contract to coat Thrall Railcar Manufacturing automobile rail car parts. Specifically, parts that rub together while in use are spray coated to increase the useful life of the part.

Military Flares - The Company is in the initial contract stages of submitting a bid with Penske Plastics to become a supplier of flame resistant polyurea polymer coating for military flare boxes. The Company believes that its products provide an ideal coating for flare boxes because they are light, strong and fire resistant. To date, the Company has met or exceeded the test criteria presently set by the military contractor. The project encompasses up to 1 million boxes, and has the potential to generate revenue to the Company of about $6.00 per box. Sales of this product line are dependent on Penske Plastics being awarded a contract to spray flare boxes by the U.S. military. The Company does not expect to know whether such contract will be awarded until the close of the U.S. government's fiscal year on September 30, 2001.

Pallets - The Company is working with Chep, Ltd. to develop a contract to apply the Company's products to pallets and topboards. Chep, Ltd. is one of the world's largest owners and lessors of pallets. Initial testing indicates that spraying pallets with polyurea polymers substantially increases their lives and renders them far easier to clean and sanitize. Chep, Ltd. has indicated a desire to utilize the Company's products for its pallets and topboards, but actual sales of the Company's products for pallets and topboards has been delayed pending resolution of details relating to the procurement of a means to spray pallets and topboards in the quantities requested by Chep, Ltd. The Company expects to receive an initial contract to coat 5,000 to 10,000 topboards in its inhouse application facility in the near future.

Flotation Devices - The Company is working to develop a market for polyurea polymers as coatings for flotation devices used in rough or abrasive environments, such as sewage treatment plants. The Company recently completed its first order, and expects additional orders in the future.

Pipelines - The Company is working to gain acceptance of polyurea polymers as a coating and sealant for joints on gas, oil and water transmission pipes. The Company believes that polyurea polymers have the potential for significant use in the piping industry because they provide an effective seal and can be installed in the field much faster than current applications. However, the Company has recently postponed safety testing of its products for this application, because of the cost and the need to use its capital to fund other product lines.

Speakers - Peavy Speakers has tested polyurea polymers as a sealant and finish coat on speakers. Peavy has converted all four of its plants exclusively to the Company's products. Based on the success of the product with Peavy Speakers, the Company has begun marketed its products to other members of the speaker industry. The Company does not have any written supply agreements with Peavy, but instead supplies its products on a purchase order basis as needed.

Roofing - The Company has tested polyurea polymers as a roof coating and sealant. While the polyurea polymers appear to be an effective roof material, the Company's products must be UL tested before it can be used as a roofing material. The Company does not anticipate obtaining UL testing for its products for this market due to the high cost of the tests (about $200,000) unless and until it raises substantial additional capital. Instead, the Company is pursuing sales in product lines in which UL testing is not required, such as for exterior buildings and sheds. For example, the Company is currently supplying its products on a purchase order basis to a third party that has a contract to coat exterior buildings located around microwave towers for Norfolk Southern.

Airport Wall Terminals - The Company received through a third party a contract to coat terminal walls for Delta Airlines in the Cincinnati, Ohio airport. The Company is pursuing other comparable business with Delta Airlines and other airlines.

Business Strategy and Marketing

The Company's strategy is to develop specific formulations of polyurea polymers for application in specific markets. Some of the markets are currently being serviced by polyurethane coatings, and others, such as rail car parts, are not currently using any coating. In most cases, the Company must invest significant time and money prior to generating significant revenue from a market. The Company has recently constructed an application facility within its existing warehouse facility, and believes that there is a substantial market for the application of its products on a value-added basis for others.

The Company employs two inhouse sales personnel, whose sales efforts are concentrated on developing and servicing accounts for the Company's inhouse application facility, original equipment manufacturers, and high volume fixed location users. The Company also has entered into agreements with two individuals to generate relationships with dealers/applicators, and expects to have an agreement with a third individual in the near future. The agreements with the individuals are nonexclusive arrangements under which the individuals are paid a commission of 10% of equipment sales and 5% of chemical sales generated through their contacts. In each case, the individuals have focused their efforts on developing a market for the company's products within a certain niche, such as insulated concrete forms. The Company is actively seeking to expand its outside sales force since the outside sales personnel to date have proven to be a cost-effective way to generate sales of the Company's products.

Competition

At this time, the primary competition for the Company's products is suppliers of coating systems and applications equipment utilizing polyurethane-based polymers. The use of polyurethane coatings and the current methods of its application are well-established and accepted by both consumers and the industry, many of whom may be indifferent to the benefits offered by the Company's products. There are a number of competitors marketing polyurethane coatings and systems competitive with the Company's polyurea coatings, such as Futura. In addition, the Company is subject to competition from other companies offering polyurea products, such as Specialty Products, Inc., Foamseal and Willamette Valley Company. All of the Company's competitors have greater financial, technical and human resources than the Company. However, none of the competitors are marketing polyurea products for the specific applications currently targeted by the Company.

The Company's polyurea coatings are distinguishable from its competitors in the following manner:

    • The Company has the only Class A and Class B fire-rated polyurea coatings.
    • The Company has the only "tack free" cure time in excess of 30 seconds, which allows its coatings to be applied on uneven surfaces to generate a smooth, coated surface.

Trademarks and Patents

The Company has applied for a federal trademark registration for InstaCoat. Notice of the trademark application was recently published, and no objections were received, but no formal trademark has been granted yet. The Company has a registered patent (#6,026,760) for floatation devices, including those constructed of wood, styrene foam, and other materials coated with the Company's polyurea. These devices include billets for docks, sewage and water treatment pond aeration floatation devices, and other applications.

In addition, the Company has four pending patent applications:

(1) The Company has applied for a patent for a pallet constructed of wood or any composite material coated with the Company's polyurea coating. This coating seals the pallet material allowing the pallet to be easily cleaned and/or sterilized. In addition, tests confirm the coated pallet is stronger and therefore requires less frequent repairs.

(2) The Company has applied for a patent for an exterior siding system that consists of polystyrene foam and/or oriented strand board coated with the Company's polyurea coating or any other polymer coating including polyurethane. In addition, the polyurea or polymer coating may be itself coated with paint, stucco, synthetic stucco, or other materials.

(3) The Company has applied for a patent for the process of waterproofing hardboard siding used in residential and commercial construction by applying the Company's polyurea coating during the manufacturing process.

(4) The Company has applied for a patent for exterior and/or interior ornamental trim constructed of various materials, including polystyrene foam, coated with the Company's polyurea coating.

Environmental Laws

The Company does not require any special environmental permits or licenses to operate it business. Company disposes of any chemical waste in liquid form through licensed hazardous waste haulers. Polyurea polymers in solid form are environmentally safe and may be disposed of at any landfill handling municipal solid waste. At times, the Company treats the liquid, chemical waste with a reactant that causes the chemicals to solidify so that they can be disposed of more economically through its municipal waste stream.

Employees

The Company currently has 12 full-time and 2 part-time employees. Jerry Phillips has been the President, and founder since inception in September 1997. Donald H. Sigler has been the Chairman of the Board since September 1997. C. Wayne Bean has served as Vice President in charge Research and Development and Chemist since September 1997.

Item 2. management's discussion and analysis or Plan of operation

Certain statements in this General Form For Registration Of Securities Of Small Business Issuer on Form 10-SB, particularly under this Item 2, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein. The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statement was made.

Until the Company is subject to the reporting requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, the Company cannot avail itself of the safe harbor protections of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934 with respect to any forward-looking statements contained herein.

Results of Operations for the Years ended December 31, 2000 and 1999

Revenues

For the fiscal year ended December 31, 2000, the Company had net sales of $671,151, as compared to net sales in the fiscal year ended December 31, 1999 of $707,809, a decrease of $36,658, or 5.2%. The Company's decreased sales were the result of the failure of three customers of the Company in late 1999 and early 2000. The Company believes that it replaced the lost business late in 2000.

Cost of Goods Sold

For the fiscal year ended December 31, 2000, cost of goods sold were $352,675, as compared to cost of goods sold in the fiscal year ended December 31, 1999 of $458,982, a decrease of $106,307, or 23%. As a percentage of net sales, cost of goods sold decreased from 64.8% to 52.6% from 1999 to 2000. Cost of goods sold decreased as a percentage of net sales as the result of favorable pricing on contracts and volume purchases of raw materials, which reduced the Company's cost of materials.

Gross Profit

Gross profit for the fiscal year ended December 31, 2000 increased to $318,476 from $248,827 in the fiscal year ended December 31, 1999. As a percentage of sales, gross profit increased to 47.1% in 2000 from 35.1% in 1999. The increase in gross profit in 2000 was primarily attributable to better pricing for the Company's products and the decrease in cost of goods sold as described above.

General and Administrative Expenses

For the fiscal year ended December 31, 2000, general and administrative expenses were $1,387,173, as compared to $1,957,215 in the fiscal year ended December 31, 1999, a decrease of $570,042, or 29.1%. As a percentage of net sales, general and administrative expenses decreased from 276% to 207% from 1999 to 2000. The decrease in general and administrative expenses was primarily the result of a noncash expense of $1,150,000 recorded in 1999 as a result of the issuance of stock in payment of consulting services, offset by additional expenses incurred by the Company in 2000 in testing and developing its products for different applications, and in marketing its products.

Interest Expense

For the fiscal year ended December 31, 2000, interest expense was $188,447 as compared to $223,396 in the fiscal year ended December 31, 1999, a decrease of $34,949. Of that amount, cash interest expense was $9,999 and $91,396 in 2000 and 1999, respectively. Cash interest expense decreased in 2000 as compared to 1999 as the result of the conversion of $895,000 in convertible notes in late 1999, offset by the issuance of $121,000 of new convertible notes in 2000. In 1999, the Company recorded significant noncash interest expense resulting from the issuance of warrants to purchase common stock at $0.02 per share to the purchasers of the convertible notes. In addition, in 2000, the Company recorded noncash interest expense of $181,500 resulting from a beneficial conversion feature in convertible notes issued that year, which was the difference between the aggregate fair value of the common stock into which the convertible notes were convertible over the proceeds received from the issuance of the notes.

Income Taxes

In the fiscal years ended December 31, 2000 and 1999, the Company did not incur any income tax expense as the result of operating losses in both years.

Net Income (Loss)

In the fiscal year ended December 31, 2000, the Company had a net loss of ($1,258,670), compared to a net loss of ($1,931,784) in the fiscal year ended December 31, 1999, a decrease of $673,114, or 35%. The Company's net loss decreased in 2000 principally as the result of lower general and administrative expenses and increased gross profit and lower interest expenses resulting from the conversion of notes payable into common stock in the previous year.

Results of Operations for the Years ended December 31, 1999 and 1998

Revenues

For the fiscal year ended December 31, 1999, the Company had net sales of $707,809, as compared to net sales in the fiscal year ended December 31, 1998 of $248,688, an increase of $459,121, or 184%. The Company's increased sales are the result of sales of the Company's products in a greater number of markets.

Cost of Goods Sold

For the fiscal year ended December 31, 1999, cost of goods sold were $458,982, as compared to cost of goods sold in the fiscal year ended December 31, 1998 of $184,968, an increase of $274,014, or 148%. As a percentage of net sales, cost of goods sold decreased from 74.3% to 64.8% from 1998 to 1999. Cost of goods sold remained relatively stable as a percentage of net sales as the result of a stable pricing environment for the raw materials that are converted into the Company's products.

Gross Profit

Gross profit for the fiscal year ended December 31, 1999 increased to $248,827 from $63,720 in the fiscal year ended December 31, 1998. As a percentage of sales, gross profit increased to 35.1% in 1999 from 25.6% in 1998. The increase in gross profit in 1999 was primarily attributable to the decrease in cost of goods sold as described above.

General and Administrative Expenses

For the fiscal year ended December 31, 1999, general and administrative expenses were $1,957,215, as compared to $486,198 in the fiscal year ended December 31, 1998, an increase of $1,471,017, or 302%. As a percentage of net sales, general and administrative expenses increased from 195.5% to 276% from 1998 to 1999. The increase in general and administrative expenses was primarily the result of additional expenses incurred by the Company in testing and developing its products for different applications, and in marketing its products, and a noncash expense of $1,150,000 resulting from the issuance of stock in payment of consulting services in 1999.

Interest Expense

For the fiscal year ended December 31, 1999, interest expense was $223,396 as compared to $142,953 in the fiscal year ended December 31, 1998, an increase of $80,443. Of that amount, cash interest expense was $91,396 and $28,953 in 1999 and 1998, respectively. Cash interest expense increased in 1999 as compared to 1998 as the result of the issuance of convertible notes in 1998 and 1999. In both 1999 and 1998, the Company recorded significant noncash interest expense resulting from the issuance of warrants to purchase common stock at $0.02 per share to the purchasers of the convertible notes.

Income Taxes

In the fiscal years ended December 31, 1999 and 1998, the Company did not incur any income tax expense as the result of operating losses in both years.

Net Income (Loss)

In the fiscal year ended December 31, 1999, the Company had a net loss of ($1,931,784), compared to a net loss of ($565,431) in the fiscal year ended December 31, 1998, an increase of $1,366,353, or 241%. Even though net sales and gross profit increased significantly in fiscal 1999, the Company's net loss increased as the result of higher general and administrative expenses, especially a noncash expense of $1,150,000 resulting from the issuance of stock in payment of consulting services, and increased interest expenses resulting from the issuance of convertible notes and warrants.

Liquidity and Capital Resources

As of December 31, 2000, the Company had a net working capital deficit of ($151,027), as compared to a net working capital deficit of ($217,741) at December 31, 1999. The reduction of the working capital deficit from December 31, 1999 to December 31, 2000 was primarily attributable the conversion of convertible notes by the holders into shares of the Company's common stock, and the issuance of common stock in various offerings in 2000, offset by increases in accrued expenses and accounts payable resulting from the Company's operating losses in fiscal 2000, and increases in inventories and accounts receivable from normal levels. In addition, the Company invested in an in-house application facility during fiscal 2000. The application facility cost about $15,000, and was constructed to enable the Company to apply its products on a value-added basis to items shipped directly to its facilities.

The Company's liquidity has been adversely affected by operating losses and lower sales in 2000 resulting from the failure of three customers. As a result of the failure of the customers, the Company established a reserve of $73,352 at December 31, 1999 for doubtful accounts relating to the customers. The Company does not believe that any additional reserve will be necessary. The Company considers the bad debt to be a onetime event. The Company believes that it replaced the lost business in late 2000. Finally, liquidity was adversely affected at December 31, 2000 by an increase in inventories and accounts receivable from historical levels. The Company's inventory levels increased as a result of the commencement of volume purchases of raw materials in order to take advantage of discounts available in the marketplace, as well as the need to build inventories late in 2000 to enable the Company to fulfill some significant contacts obtained late in the period. The increased receivables were largely the result of a large job performed for Norfolk Southern late in the year. The receivables were collected in early 2001, thereby reducing the Company's outstanding receivables to a more normal level. As a result, the Company does not believe that the increased level of receivables at December 31, 2000 has had any long-term effect on the Company's liquidity.

At December 31, 2000, the Company's accounts payable and payroll taxes payable were at higher than normal levels. The increase in accounts payable was primarily the result of increased purchases of materials late in the year to meet requirements of the Norfolk Southern job. The increased payroll taxes payable was primarily the result of the deferral of payroll taxes in order to meet the liquidity needs of the Company's business, which primarily were attributable to operating losses incurred during the year as well as working capital requirements of the Norfolk Southern job begun late in the year. After the end of the fiscal year, the Company was able to reduce its payables to more normal levels from the completion of the Norfolk Southern job in early 2001 and with the proceeds of the Company's warrant dividend received in February 2001. Therefore, the Company does not believe that the high level of payables as of December 31, 2000 represent a threat to the Company's ability to continue as a going concern.

The Company's operations to date have been concentrated on the development of its coatings and initial marketing expenses, as well as costs associated with the refinement of its business plan. Through 2000, the Company funded its short-term working capital needs primarily through the issuance of convertible notes and common stock in private placements.

As a part of its growth strategy, however, the Company requires greater working capital to fund the costs of product approvals and marketing expenses. If certain marketing initiatives result in orders, the Company projects that it will become profitable in the last half of fiscal 2001. However, the Company is currently exploring other avenues for additional financing in order to enable the Company to expedite the implementation of its business plan and achieve profitability.

Going Concern Qualification

The Company's independent auditors have included an explanatory paragraph in their report on the December 31, 2000 financial statements discussing issues which raise substantial doubt about the Company's ability to continue as a "going concern." The going concern qualification is attributable to the Company's historical operating losses, the Company's lack of cash reserves and capital, and the amount of capital which the Company projects it needs to achieve profitable operations. For the year ended December 31, 2000 and during the first half of fiscal 2001, the Company continued to experience a negative cash flow from operations, and projects that it will need additional capital to enable it to continue operations at its current level past September 30, 2001.

Once the Company's brand and product is established, the Company expects to become profitable in a short time due to the Company's low operating costs. However, the Company's business historically takes substantial working capital to fund research and development into specific chemical formulations, the cost of obtaining health and safety approvals for a given application, and sales and marketing costs to generate sales within a new industry. The Company is looking at various options to raise additional capital from large private investors or strategic investors.

ITEM 3. DESCRIPTION OF PROPERTY.

The Company does not own any property. The Company leases a facility that is 20,000 square feet, of which 6,000 square feet is used as office space and the remaining 14,000 square feet is used as warehouse/manufacturing space. The lease agreement expires on November 30, 2002, although the Company has an option to renew the lease for an additional two years. The current lease payments are $7,881 per month. The Company believes that it has sufficient space to meet its needs for the foreseeable future.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information, as of July 10, 2001, with respect to the beneficial ownership of the Company's Common Stock by all officers and directors and by each person known to the Company to be the beneficial owner of more than five percent (5%) of any class of the Company's voting securities.

Name and Address of Beneficial Owner

Amount of Beneficial Ownership

Percent of Class (1)

Jerry S. Phillips (2)

1650 Airport Dr., Suite 110

Kennesaw, Georgia 30144

1,250,000

15.91%
     

Donald Sigler (3)

1650 Airport Dr., Suite 110

Kennesaw, Georgia 30144

1,250,000

15.9%
     

Wayne Bean (4)

1650 Airport Dr., Suite 110

Kennesaw, Georgia 30144

1,250,000

15.9%
     

Greyfield Consultants, Inc. (5)

3081 Holcomb Bridge Road

Suite F2

Norcross, Georgia 30071

986,024

12.5%
     

John C. Thomas, Jr. (6)

1650 Airport Dr., Suite 110

Kennesaw, Georgia 30144

250,000

3.2%
     

All Officers and Directors as a group

4,000,000

50.8%

(1) Based on 7,879,109 shares of Common Stock issued and outstanding as of July 10, 2001 (after taking into consideration 937,500 shares which the Company has repurchased from a former officer). In addition, the Company has 1,247,483 shares of Preferred Stock issued and outstanding, each of which is convertible at any time into one share of Common Stock.

(2) Includes 875,000 shares of Common Stock owned by Mr. Phillips and 375,000 shares of Common Stock owned by the Phillips Family Limited Liability Company.

(3) Includes 750,000 shares of Common Stock owned by Mr. Sigler and 500,000 shares of Common Stock owned by the Sigler Family Limited Company.

(4) Includes 937,500 shares of Common Stock owned by Mr. Bean and 312,500 shares owned by the Bean Family Limited Liability Company. The share totals from Mr. Bean do not include 25,000 shares held by other relatives of Mr. Bean who acquired their shares as the result of conversion of notes issued by the Company in one or more private placements.

(5) Includes 1,034,691 shares of Preferred Stock held by Greyfield Consultants, Inc. and 150,000 shares of Preferred Stock held by Edison Holdings, Inc., which is owned by the shareholder of Greyfield Consultants, Inc. Mr. James Shaw is the sole shareholder of Greyfield Consultants, Inc. The Preferred Stock does not have voting rights.

(6) Includes 125,000 shares of Common Stock owned by Mr. Thomas and 125,000 shares of Common Stock owned by John C. Thomas, Jr. IRA.

Messrs. Sigler, Phillips, Bean, Brown and Thomas are the founding shareholders of the Company. Messrs. Sigler, Phillips, Bean and Brown each acquired 625,000 shares of Common Stock in 1997 for $0.002 per share. At the same time, Mr. Thomas acquired 275,000 shares of our Common Stock for $0.002 per share. Mr. Thomas subsequently transferred 25,000 shares to third parties.

In July 1998, the Company executed employment agreements with Messrs. Sigler, Phillips, Bean and Brown, and also issued each person a warrant to purchase an additional 625,000 shares of Common Stock for $0.002 per share. Messrs. Sigler, Phillips, Bean and Brown each exercised his warrant in full in 1999.

On February 4, 2000, the Company effected a one for two reverse split of its Common Stock. All share amounts herein are after giving effect to the reverse split.

Effective April 30, 2001, Mr. Brown resigned as an officer, director and employee of the Company. As part of his resignation, the Company and Mr. Brown entered into a Mutual Release and Settlement Agreement, under which Mr. Brown granted the Company an option to purchase all of his shares of common stock in the Company in four installments for an aggregate of $24,000. As of July 10, 2001, the Company had exercised its option to purchase 937,500 shares of Mr. Brown's common stock, leaving Mr. Brown with 312,500 as of that date.

ITEM 5. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS

Listed below are the directors and executive officers of the Company.

Name

Age

First Year as Director

Position

Jerry Phillips

53

1997

President and Director

Donald H. Sigler, Jr.

54

1997

Chairman of the Board

C. Wayne Bean

42

1997

Vice President of Research and Development, Chemist, and Director

John C. Thomas, Jr.

46

1997

Director

The term of office of each director of the Company ends at the next annual meeting of the Company's stockholders or when such director's successor is elected and qualifies. No date for the next annual meeting of stockholders is specified in the Company's bylaws or has been fixed by the Board of Directors. The term of office of each officer of the Company ends at the next annual meeting of the Company's Board of Directors, expected to take place immediately after the next annual meeting of stockholders, or when such officer's successor is elected and qualifies. Except as otherwise indicated below, no organization by which any officer or director previously has been employed is an affiliate, parent, or subsidiary of the Company.

Directors are entitled to reimbursement for expenses in attending meetings but receive no other compensation for services as directors. Directors who are employees may receive compensation for services other than as director. No compensation was paid during the fiscal years ended December 31, 1999 and 1998 to directors for services in their capacity as director.

The following information sets forth the backgrounds and business experience of the directors and executive officers.

Jerry Phillips joined the Company at its inception in 1997. From 1983 to January 1993, Mr. Phillips was the founder and Chairman of North American E and S Brokers, Inc., a firm specializing in financial guarantees for asset backed lenders. From January 1993 to August 1997, Mr. Phillips were Senior Vice President of EPG, Inc., a firm specializing in financial guarantees and extended warranties through international insurers. Mr. Phillips is a cum laude graduate of the University of Memphis, with a Bachelor of Arts degree.

Donald H. Sigler, Jr. joined the Company at its inception in 1997. From 1986 to 1997, Mr. Sigler was the founder and Chairman of Credit Depot Corporation, (NASDAQ: "LEND"), a publicly traded company, which engaged in the subprime mortgage finance business. From 1980 to 1987, Mr. Sigler served as Vice President of Gulf States Mortgage Corporation, a national mortgage lender based in Atlanta, Georgia, until its sale to the Royal Bank of Scotland in 1987. Mr. Sigler is a graduate of the Georgia Institute of Technology with a Bachelor Science degree in Industrial Management.

C. Wayne Bean joined the Company at its inception in 1997. From 1989 to August 1997, Mr. Bean served as a Manager of the Polyurea Coatings Division and Senior Chemist for Flexible Products Company. From 1984 to 1989, Mr. Bean served as the Senior Chemist for Imperial Coatings, Inc. Mr. Bean has a Bachelor of Science degree in Chemistry from the University of Georgia, 1981.

John C. Thomas, Jr. joined the Company at its inception in 1997. Mr. Thomas serves as part-time Chief Financial Officer of several start-up entities including Surgi-Vision, Inc., a privately held development-stage company formed around magnetic resonance imaging technology developed at Johns Hopkins, and has been the Chief Financial Officer of Biomechanics, Inc. since 1992 and the various entities that have been formed utilizing biomechanics technology. Mr. Thomas has also served as Chief Financial Officer of several other companies, including EntreMed, Inc., a publicly held biopharmaceutical research and development company (September 1991 to January 1997), Credit Depot Corporation, a public company engaged in loan financing (August 1990 to March 1993, January 1995 to April 1996), Tapistron International, Inc., a public company engaged in the development of technology for the textile industry (August 1991 to July 1995), Medicis Pharmaceutical, a public company engaged in the pharmaceutical industry (July 1988 to March 1991), CytRx Corporation and its subsidiary CytRx Biopool, both publicly held companies in the pharmaceutical research and development industry (March 1986 to July 1990). Mr. Thomas is a certified public accountant.

The Company is actively searching for additional directors who have credentials, experience, and contacts, which will assist us in the fulfillment of our business plan. The Company currently does not have an audit or compensation committee, but anticipates forming such committees once it has appointed more outside directors.

ITEM 6. EXECUTIVE COMPENSATION.

The following table sets forth the compensation earned by the Company's Chief Executive Officers during the last three fiscal years and other officers who received compensation in excess of $100,000 during any of the last three fiscal years.

Summary Compensation Table

Name

Position

Years

Salary

Other Compensation (1)

Option Grants

(# shares)

Jerry Phillips

President and Director

2000

1999

1998

$80,000

$80,000

--

$20,000

$20,000

--

--

--

625,000
           

Donald H. Sigler, Jr. (2)

Chairman of the Board

2000

1999

1998

$70,000

--

--

$20,000

--

--

--

--

625,000
           

C. Wayne Bean

Vice President of Research and Development, Chemist, and Director

2000

1999

1998

$80,000

$80,000

--

--

--

--

--

--

625,000
           

David Brown (3)

Vice President of Engineering and Development and Director

2000

1999

1998

$80,000

$70,000

--

--

--

--

--

--

625,000
           

John C. Thomas, Jr.

Director

2000

1999

1998

--

--

--

--

--

--

--

--

--

(1) Messrs. Phillips and Sigler are each entitled to a non-accountable expense allowance of $20,000 per year.

(2) Mr. Sigler and the Company have entered into an employment agreement dated June 1, 1998, under which Mr. Sigler is entitled to compensation of $70,000 per year. By agreement between Mr. Sigler and Company, Mr. Sigler did not begin receiving his compensation until July 1, 2000.

(3) Mr. Brown resigned effective April 30, 2001. As part of his resignation, the Company and Mr. Brown terminated Mr. Brown's employment agreement with the Company.

In accordance with Item 402(a)(5) of Regulation S-B of the Securities and Exchange Commission, certain columns of the table required by Item 402(b) of Regulation S-B have been omitted where there has been no compensation paid or awarded to any of the named executives in any fiscal year covered by the table.

The Company did not grant any executive officers options or stock appreciation rights during the last fiscal year ended December 31, 2000, and therefore the table required by Item 402(c) has been omitted.

Aggregate Option/SAR Exercises and Fiscal Year and Fiscal Year End Option/SAR Values

During the last fiscal year ended December 31, 2000, none of the Company's executive officers exercised any options or stock appreciation rights, or had outstanding any options or stock appreciation rights as of December 31, 2000. However, a table containing the information required by Item 402(d) for the year ended December 31, 1999 is set forth below:

Name

Shares acquired on exercise (#)

Value realized ($)(1)

Number of securities underlying unexercised options/SARs at year end

Value of unexercised in-the-money options/SARs at fiscal year end ($) exerciseable/unexercisable

Jerry Phillips

625,000

$11,250

0

0

Donald Sigler

625,000

$11,250

0

0

Wayne Bean

625,000

$11,250

0

0

David Brown

625,000

$11,250

0

0

(1) Based on the fair market value of the Company's common stock of $0.02 per share, and an exercise price of $0.002 per share with respect to each of the options exercised.

Compensation of Directors

Directors are entitled to reimbursement for expenses in attending meetings but receive no cash compensation for services as directors. Directors who are employees may receive compensation for services other than as director. During 1999 and 2000, the Company did not provide any compensation to its directors.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

None of the Company's officers, directors, key personnel or principal stockholders is related by blood or marriage.

The Company has loaned three employees a total of $60,000 pursuant to notes that bear interest at the rate of 10% per annum, and are due and payable on June 30, 2001. As of July 10, 2001, the amount outstanding under the loans was:

Employee

Due Date

Total Due

Jerry S. Phillips

December 31, 2001

$23,823.30

David W. Brown

December 31, 2001

$32,231.50

C. Wayne Bean

December 31, 2001

$11,210.95

item 8. description of securities

General

Under the Company's Articles of Incorporation, the Company is authorized to issue 15,000,000 shares of common stock, no par value, of which 7,879,109 shares are issued and outstanding, and 5,000,000 shares of preferred stock, par value $0.01 per share, of which 1,247,483 shares are issued and outstanding.

Common Stock

The holders of shares of common stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefore and, upon liquidation, are entitled to share pro rata in any distribution to common shareholders. Holders of the common stock have one non-cumulative vote for each share held. There are no preemptive, conversion or redemption privileges, nor sinking fund provisions, with respect to the common stock. All of the Company's outstanding shares of common stock are validly issued, fully paid and non-assessable. Corporate Stock Transfer, Inc. serves as transfer agent for the common stock.

Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock containing such rights, privileges and limitations that the Board of Directors may determine. The Board of Directors has authorized the issuance of one series of preferred stock, of which 1,247,483 shares are issued and outstanding. Each share of such series is convertible into one share of common stock, is not entitled to receive any dividends, has no preemptive rights, and is entitled to a liquidation preference of $0.01 per share. In addition, each share of such series is not entitled to vote, except to the extent provided by the Georgia Business Corporation Act with respect to any proposed amendment to the Company's Articles of Incorporation which affects the rights of holders of Preferred Stock. The Company serves as transfer agent and registrar for the preferred stock.

PART II

ITEM I. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.

The Company's common stock is not registered with the United States Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934. Since August 2, 2000, the Company's common stock has been traded on the Pink Sheets, operated by Pink Sheets, LLC, under the symbol "IVGC". The following table summarizes the low and high prices for the Company's common stock for each of the calendar quarters prior to the filing of this registration statement.

 

2000

2001
 

High

Low

High

Low

First Quarter

--

--

2.30

1.01

Second Quarter

--

--

--

--

Third Quarter

4.00

1.063

--

--

Fourth Quarter

2.250

1.10

--

--

There were 199 holders of record of the common stock as of July 10, 2001. This number does not include an indeterminate number of shareholders whose shares are held by brokers in "street name." The above quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. The Company has not declared any cash dividends on its Common Stock during its fiscal years ended on December 31, 2000, 1999 or 1998. The Board of Directors of the Company has made no determination to date to declare cash dividends during the foreseeable future.

ITEM 2. LEGAL PROCEEDINGS.

The Company is not a party to any pending litigation or government investigation, nor is there any threatened litigation, or investigation, involving the Company or its business or assets of which management is aware.

ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.

Not applicable.

ITEM 4. recent sales of unregistered securities.

Shares Issued on Formation

At or about the time of the Company's formation in 1997, the Company issued shares of its common stock for nominal consideration to the following persons involved in the formation in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 ("Section 4(2)"):

Name of Purchaser

Date of Purchase

No. of Shares

Amount Invested

Donald H. Sigler

9/30/97

625,000

$1,250

Jerry S. Phillips

9/30/97

625,000

$1,250

Wayne Bean

9/30/97

625,000

$1,250

David Brown

9/30/97

625,000

$1,250

John C. Thomas, Jr.

9/30/97

277,500

$555

Total:

 

2,777,500

$5,555

Of the founding shareholders, only Mr. Thomas was accredited, but the others were deemed sophisticated based on their years of experience. As founding shareholders, the recipients had all information about the Company that existed at the time, and specifically were aware that the Company had not assets, liabilities, or operations at the time of their investment.

Convertible Note Offering

Within the last three years, the Company sold convertible promissory notes and warrants to certain investors in unregistered transactions (the "Convertible Note Offering"). Each promissory note bore interest at 10% per annum, matured one year after the date of issuance, and the principal and interest due thereunder was convertible into common stock at the rate of one share of common stock for each $2 of indebtedness. Each purchaser of a convertible note also received a warrant to purchase one share of common stock for each $2 of principal indebtedness at $0.02 per share for one year. The Convertible Note Offering was affected pursuant to Section 4(2) of the Securities Act. Each purchaser received the Company's business plan, financial statements and a private placement memorandum. The Company did not advertise or solicit the offering.

The following is a list of investors who purchased securities in the Convertible Note Offering:

Note Purchaser

Date

Original Principal Amount

Accredited (A) or Sophisticated (S)

Poe, James

6/3/98

$75,000.00

A

Witkin, Eugene N.

6/6/98

$50,000.00

A

Wolbe, Daniel H.

6/6/98

$50,000.00

A

Shields, Kevin A.

6/6/98

$25,000.00

A

Cross, Steven R.

6/12/98

$50,000.00

A

Havrilla, John L.

6/12/98

$25,000.00

A

Havrilla, Edward J.

6/16/98

$25,000.00

A

Carroll, Robert E.

6/29/98

$25,000.00

A

Havrilla, Edward J.

7/3/98

$50,000.00

A

Bean, John P.

7/12/98

$25,000.00

A

Workman, Victor and Catherine

7/15/98

$25,000.00

A

Staufer, Hermann

8/6/98

$25,000.00

A

Bean, Steve A.

8/11/98

$5,000.00

A

Bean, Steve A.

8/11/98

$20,000.00

A

Staufer, Hermann

3/23/99

$100,000.00

A

Poe, James

4/5/99

$50,000.00

A

Sam Pierce

4/8/99

$25,000.00

A

Art Glaser

4/8/99

$75,000.00

A

James McIntyre

4/8/99

$25,000.00

A

Daniel Grzeskowiak

5/28/99

$25,000.00

A

Daniel Grzeskowiak

5/31/99

$7,000.00

A

D. Mark Mosher

5/31/99

$2,500.00

S

Diane P. and Pierre Belanger

5/31/99

$8,500.00

A

Massimiliano and Gail Carone

5/31/99

$50,000.00

A

Steven A. Bean

5/31/99

$7,000.00

A

Steven K. Craig

6/29/99

$5,000.00

A

Catherine Swearingen

6/29/99

$10,000.00

A

Linda J. Vore

6/29/99

$10,000.00

A

Bobby J. Peaks

7/15/99

$25,000.00

A

Ray Moses

7/15/99

$50,000.00

A

Ronald and Annette Harlow

7/23/99

$25,000.00

A

Russell Friedman

9/16/99

$25,000.00

A

Andrea-Lee Friedman

9/16/99

$25,000.00

A

Total:

$1,025,000

Shares issued upon Conversion of Employee Warrants

In reliance on Rule 701, the Company issued shares of its common stock upon the conversion of warrants issued to employees, directors and consultants in the following transactions:

Stockholder

Date Issued

Amount Paid

Shares

Jerry S. Phillips

12/31/99

$1,250

625,000

Donald H. Sigler

12/31/99

$1,250

625,000

C. Wayne Bean

12/31/99

$1,250

625,000

David W. Brown

12/31/99

$1,250

625,000

Barry Beamish

12/31/99

$500

25,000

John Shepherd

12/31/99

$250

12,500

Michael Havrilla

12/31/99

$2,500

125,000

Larry Carter

12/31/99

$500

25,000

Total:

$8,750.00

2,687,500

Shares issued upon Conversion of Notes and Exercise of Warrants

On December 31, 1999, the Company issued shares of its Common Stock in the following transactions as a result of the conversion of notes and the exercise of warrants issued in the Convertible Note Offering. Each investors status as accredited or sophisticated is as stated under the heading "Convertible Note Offering." The number of shares issued equals in the amount principle and interest due under the convertible note at the time of conversion, plus the number of shares issuable upon exercise of the warrant (except that those investors with an asterisk by their name paid the exercise price under the warrant by offsetting such amount against the amount due under the convertible note). At the time the investors converted their notes and exercised their warrants, they received an updated business plan and financial statements.

Name

No. of Shares

James and Laura Poe

132,767

Steven and Elaine Cross

53,884

John and Donna Havrilla

26,942

Edward J. Havrilla

80,668

Daniel H. Wolbe*

53,675

Kevin A. Shields*

26,837

John and Lois Bean

26,839

Steven A. Bean*

23,764

Robert E. Carroll*

14,259

Herman Stauffer*

130,005

James McIntyre

13,414

Daniel Grzeskowiak

25,743

Daniel Grzeskowiak

7,205

D. Mark Mosher

2,573

Diane P. and Blair Belanger

8,749

Massimiliano and Gail Carone

51,466

Steven K. Craig

5,127

Bobby J. Peaks

25,579

Russell Friedman

25,363

Andrea-Lee Friedman

25,363

Ronald and Annette Harlow

25,551

Steven A. Bean

7,170

Sam Pierce*

24,875

Art Glaser*

77,368

Ray Moses*

50,908

Catherine Swearingen

10,253

Linda J. Vore

10,253

Totals

966,600

In addition, on December 31, 1999, the Company issued shares of common stock upon exercise of warrants to two investors who elected not to convert their notes into common stock:

Name

No. of Shares

Katherine and Vic Workman

12,500

Eugene N. Witkin

25,000

Total:

37,500

The shares issued upon conversion of notes and the exercise of warrants issued in the Convertible Note Offering were issued in reliance on Section 4(2) and/or Section 3(a)(9) of the Securities Act of 1933.

2000 Convertible Note Offering

In January 2000, the Company issued promissory notes to three individuals for a total of $121,000 in reliance on Section 4(2). Each note bears interest at the rate of 10% per annum, and is due and payable in one year. The principal amount due thereunder is convertible into 2.5 shares of common stock for each $1.00 of indebtedness, and any interest due thereunder is convertible into one share of common stock for each $1.00 of interest owed. The three individuals who purchased notes were:

Name

Amount

Accredited (A) or Sophisticated (S)

Mark A. Porter

$75,000

A

Buford Salmon

$21,000

A

Steven Mills

$25,000

A

In April 2000, Mr. Salmon and Mr. Mills converted their notes, including $1,724 of interest, into 116,724 shares of common stock. In February 2001, Mr. Porter converted his note into 187,500 shares of common stock. At the time of their original investments, the investors received a copy of the Company's current business plan and financial statements.

Rule 504 Offering

During February and March 2000, the Company conducted an offering of up to 425,000 shares of its common stock at $2.00 per share pursuant to Rule 504(b)(1)(ii). All 425,000 shares offered were sold. The Company filed a Form D with the Securities and Exchange Commission and utilized offering materials that had been approved by the Georgia Securities Commission pursuant to O.C.G.A. Section 10-5-5(e). Set forth below are the investors in the offering:

Name of Purchaser

Date of Sale

No. of Shares

Amount Invested

McAdoo, Carol Young

324/00

1,500

$3,000

Meyer, Stuart and Denise

2/24/00

2,500

$5,000

Boland, William F

3/7/00

2,500

$5,000

Lantham, William F

3/10/00

1,250

$2,500

Gage, Richard Allen

3/13/00

2,500

$5,000

Mandel, Larry

3/13/00

2,500

$5,000

Werksman, Alan J

3/13/00

10,000

$20,000

Wolf, M.D.

3/13/00

5,000

$10,000

Wolf, Roger

3/13/00

2,500

$5,000

Albertini, Anthony

3/14/00

3,500

$7,000

Disney, Ronald W and Jeannine V

3/14/00

5,000

$10,000

Mottern, Robert

3/14/00

12,500

$25,000

Gadberry,Donald

3/15/00

2,000

$4,000

Gadberry,Patricia A

3/15/00

1,000

$2,000

Mills, Steven

3/15/00

9,500

$19,000

Norton, Gene

3/15/00

2,500

$5,000

Bobby, Steve

3/16/00

1,250

$2,500

Lee, Ginny and Supan, David

3/16/00

7,500

$15,000

Sapp, David

3/16/00

2,500

$5,000

Saunders, James

3/16/00

3,750

$7,500

Wesley, Mark

3/16/00

2,500

$5,000

Willis, Karon

3/16/00

2,500

$5,000

Hartsfield, Jeff

3/17/00

2,500

$5,000

Nalls, Thomas

3/17/00

2,500

$5,000

Sims, John S

3/17/00

2,500

$5,000

Weaver,Billy

3/17/00

2,500

$5,000

Dion, Sedef S.

3/20/00

17,500

$35,000

Kaufman, Richard

3/20/00

10,000

$20,000

Lyell, Nathan

3/20/00

1,500

$3,000

Young, Steven G

3/20/00

50,000

$100,000

Anderson, Robert G.

3/21/00

2,500

$5,000

Altikulac, Can

3/22/00

7,500

$15,000

Corneli, Glenda

3/22/00

12,500

$25,000

Prentis, John

3/22/00

2,500

$5,000

Solomonic, Robert

3/22/00

5,000

$10,000

Varney, Michael

3/22/00

3,000

$6,000

Wheeler, Mark

3/22/00

2,500

$5,000

Wood, M.A.E.E.

3/22/00

7,000

$14,000

Bishop, Bruce

3/23/00

5,000

$10,000

Cooley, Joseph and Joyce

3/23/00

2,500

$5,000

Holloway, Theodore and Revonda

3/23/00

6,000

$12,000

Mathis, Donald and Sheri

3/23/00

25,000

$50,000

Smallwood, James

3/23/00

3,500

$7,000

ACI Investments LTD

3/24/00

20,000

$40,000

Banks, H. Rodney

3/24/00

2,000

$4,000

Baxter, Peter

3/24/00

20,000

$40,000

Cagle, Pattie and Robert

3/24/00

7,500

$15,000

Ellis, Ernest

3/24/00

1,000

$2,000

Menter, Beverly J

3/24/00

3,000

$6,000

Menter, Gerald Alan

3/24/00

20,000

$40,000

Menter, Gerald Alan

3/24/00

20,000

$40,000

Barfield, James T.

3/27/00

2,500

$5,000

Bell, Keith

3/27/00

2,500

$5,000

Kavanaugh, Tammy

3/27/00

14,500

$29,000

Mills, Harris

3/27/00

2,500

$5,000

Kirkland, Kim Andrew Cameron

3/28/00

5,000

$10,000

Shiver, Ann M

3/28/00

3,750

$7,500

Beamish, Barry

3/29/00

9,500

$19,000

Hughs, Sarah

3/29/00

4,000

$8,000

Johnson, Andrew Leonard

3/29/00

2,500

$5,000

Lamas, Jane

3/29/00

7,500

$15,000

Bell, G. F.

3/30/00

2,500

$5,000

Butler, Daniel Mark

3/30/00

2,500

$5,000

Hardwick , Lucy

3/30/00

2,500

$5,000

Sabine, Particia A

3/30/00

2,500

$5,000

Wilkinson, Neal S

3/30/00

4,000

$8,000

Unland, Robert

3/31/00

3,500

$7,000

Total:

425,000

$850,000

Issuance of Preferred Stock

On July 1, 1999, the Company issued 2,300,000 shares of its Preferred Stock to Michael D. Dion for services rendered pursuant to Section 4(2). The services and the stock issued in payment thereof were valued at $0.02 per share, or $46,000, which was the par value of the Preferred Stock, and the price of the most recent sales of common stock. The services performed by Mr. Dion included: advice on the structure and capitalization of the Company, investor relations, investment banking introductions, services in connection with the location of a transfer agent, introductions to potential market makers to initiate trading in the Company's common stock, licensee/distributor introductions, general administrative services relating to securities offerings conducted by the Company. Prior to issuing the Preferred Stock to Mr. Dion, the Company provided Mr. Dion with a current business plan and financial statement, and also met extensively with Mr. Dion in its offices.

Offering under Rule 505

During August and September 2000, the Company sold 45,900 shares of its common stock in a private offering under Rule 505 at $2.00 per share, for a total of $91,800. With respect to the offering, the Company filed a Form D with the Securities and Exchange Commission (the Company originally filed a Form D claiming an exemption under Rule 506, and later filed an amendment claiming an exemption under Rule 506), utilized a private placement memorandum which contained substantially the same information as the original Form 10-SB, and obtained representations from each investor that he/she was suitable to purchase shares of Common Stock in the offering. A list of investors in the offering is set forth below:

Name of Purchaser

Date of Sale

No. of Shares

Amount Invested

Accredited (A) or Unaccredited (U)

Helen M. Spryn

8/1/00

5,000

$10,000

U

Nanon and Melinda Sonnett

8/1/00

2,500

5,000

U

Theresa L. Stabura

8/1/00

5,000

10,000

A

Fred Friesen

8/2/00

2,500

5,000

U

Carole S. Frasure

8/4/00

2,600

5,200

U

Linda J. Vore

8/9/00

3,300

6,600

A

Catherine Swearingen

8/9/00

2,500

5,000

A

Malcolm L. Cox

8/12/00

4,000

8,000

A

Harold C. Grzeskowiak

9/7/00

2,500

5,000

A

Daniel M. Grzeskowiak

9/8/00

5,000

10,000

A

Massimiliano and Gail Carone

9/27/00

3,500

7,000

A

Stephen DeNoia

9/25/00

4,000

8,000

U

Catherine Swearingen

9/25/00

3,500

7,000

A

Andrzej Bogusz

12/20/00

12,500

25,000

A

Totals:

 

58,400

$116,800

  

Warrant Dividend and Exercise

In December 2000, the Company distributed by dividend its Class A Common Stock Purchase Warrants to its shareholders, except for the following shareholders, who are affiliates of the Company and waived their right to receive the dividend: Donald H. Sigler, the Sigler Family Limited Company, Jerry S. Phillips, Phillips Family Limited Liability Company, C. Wayne Bean, Bean Family Limited Liability Company, David W. Brown, John C. Thomas, Jr. Each shareholder received one Class A Warrant for each two shares of common stock held by the shareholder on the record date. Fractional Class A Warrants were not issued, and all fractional Class A Warrants were rounded up to the nearest whole Class A Warrant. Each Class A Warrant entitled the holder to purchase one share of common stock for $1.00 per share until December 31, 2001, which date was extended to February 15, 2001 by the Company. In addition, the Company committed to file a registration statement to register any shares issued upon exercise of the warrants. The Company declared the warrant dividend in reliance on various no action letters released publicly by the Securities and Exchange Commission that indicated the SEC's position that registration was not required in similar transactions. (See, e.g., Union Valley Corporation, July 19, 1989).

Prior to the deadline for exercising the Class A Warrants, 41 shareholders exercised warrants to purchase a total of 207,857 shares. A total of $207,857.68 was received by the Company. The shares issued upon exercise of the warrants were issued in reliance on Rule 505. Prior to accepting an exercise of Class A Warrants, the Company distributed to the interested holder a private placement memorandum which consisted primarily of the Form 10-SB filed previously with the Securities and Exchange Commission, along with supplemental materials containing, among other things, a risk factor analysis and details of the warrant offering. In addition, the Company required that each purchaser execute subscription materials providing information to enable the Company to determine whether the purchaser was accredited. The warrant materials stated that subscriptions would not be accepted under the warrant offering to the extent the acceptance of the subscription would cause the warrant offering to fail to qualify for an exemption from registration. The purchasers in the warrant offering were:

Name of Purchaser

Date of Sale

No. of Shares

Amount Invested

Accredited (A) or Unaccredited (U)

Edwin F. and Ruth M. Kanienberg

1/16/01

513

$513.00

U

Thomas J. and Julie Greiner

1/22/01

5,000

$5,000.00

A

James C. and/or Patricia L. McIntyre

1/27/01

6,250

$6,250.00

A

Paine Webber Acct# YY NN15600101

1/29/01

5,000

$5,000.00

A

Patricia A. Vari

1/24/01

257

$257.00

A

David N. Scott

1/27/01

3,000

$3,000.00

A

Andrzej Bogusz

1/29/01

6,250

$6,250.00

A

Paine Webber Acct# YY NN15600101

1/31/01

2,100

$2,100.00

A

Loretta F. Vore

1/31/01

250

$250.00

A

Linda J. Vore

1/31/01

750

$750.00

A

Theresa L. Stahura

1/31/01

2,500

$2,500.00

A

Helen M. Spryn

1/31/01

2,500

$2,500.00

U

Bruce Bishop

1/31/01

6,000

$6,000.00

A

Marcia Daniel

1/31/01

300

$300.00

U

Larry A. and Susan I. Mandel

2/7/01

1,250

$1,250.00

A

Harris Mills

2/5/01

1,251

$1,251.00

A

Catherine M. Swearingen

02/08/01

2,000

$2,000.00

A

Alan J Werksman, TTEE FBO A J Werksman

02/08/01

10,063

$10,063.00

A

Alan J Werksman, Trustee

02/08/01

1,050

$1,050.00

A

David Yablin and Gerald Yablin

02/08/01

6,667

$6,667.00

A

Gail E. or Massimiliano Carone

02/07/01

25,000

$25,000.00

A

Annette B. and Ronald M. Harlow, JT TEN

02/07/01

12,776

$12,776.00

A

Taylor: Alan J. Werksman, Esquire

02/08/01

625

$625.00

A

DuBow: Alan J. Werksman, Esquire

02/08/01

625

$625.00

A

AJW: Alan J. Werksman, Esquire

02/08/01

10,000

$10,000.00

A

Angelique M. Kern

02/09/01

1,500

$1,500.00

U

Andrzej Bogusz

2/14/01

5,000

$5,000.00

A

Howard or Elizabeth B. Cummins

02/13/01

10,000

$10,000.00

A

Shirley J. Carozza

02/14/01

3,334

$3,334.00

A

Kathryn M. and Joseph R. Fabian

02/15/01

3,333

$3,333.34

A

Kevin A. Kensel

02/15/01

3,333

$3,333.34

A

James M. and Kathleen Virginia Poe

02/16/01

20,000

$20,000.00

A

Joseph and Joyce Cooley

02/14/01

1,250

$1,250.00

A

Bear Stearns and Co.

02/14/01

50

$50.00

A

Beverly J. Menter

02/14/01

2,450

$2,450.00

A

Gerald Menter IRA

02/14/01

22,425

$22,425.00

A

Alan Werksman

02/14/01

500

$500.00

A

Dolores and John Boon

02/14/01

500

$500.00

U

David Scott

02/14/01

400

$400.00

A

Patty Cagle

02/14/01

4,000

$4,000.00

A

Kenneth A. Thomas

02/14/01

500

$500.00

U

William Hoffman

02/14/01

500

$500.00

U

Wendy and Sidney Pederson

02/14/01

780

$780.00

A

Charles Schwab

02/14/01

50

$50.00

A

Cede and Co.

02/14/01

225

$225.00

A

Marshal Dinerman

02/23/01

15,000

$15,000

S

Marshal Ivan Mizell

02/14/01

750

$750.00

A

Total:

 

207,857

$207,857.68

  

Shares issued for Consulting Services

On February 6, 2001, the Company issued 37,500 shares of Common Stock to Mark Porter as compensation under a consulting agreement dated the same date. The services related to utilizing Mr. Porter's home as a test vehicle for the Company's products. On or about August 1, 2001, the Company issued Mark Porter 50,000 shares of common stock as compensation for introducing the Company's products to insulated concrete form residential contractors in the North Georgia and South Georgia areas. The shares were issued pursuant to the exemption from registration provided by Section 4(2). Mr. Porter was an existing, accredited investor in the Company who was familiar with the Company at the time of the issuance of the shares. In addition, pursuant to the August 1, 2001 agreement, the Company issued 50,000 warrants to purchase common stock at $1.00 per share for a one year period, 50,000 warrants at an exercise price of $1.00 for a two year period, and 50,000 warrants at an exercise price of $1.00 for a three year period.

On May 15, 2001, the Company issued 33,350 shares of Common Stock to Richard Kaufman as compensation under a consulting agreement dated on the same date. Mr. Kaufman agreed to expose the Company to individuals and/or corporations in the building supply industry for the purpose of developing business relationships and sales. Mr. Kaufman was an accredited investor. The shares were issued pursuant to the exemption from registration provided by Section 4(2). In addition, pursuant to the same agreement, Mr. Kaufman received warrants to purchase additional shares of common stock on the following terms: 33,500 warrants to purchase stock at $1.00 per share until May 31, 2002; 33,500 warrants to purchase stock at $1.50 per share until May 31, 2003; and 33,500 warrants to purchase stock at $2.00 per share until May 31, 2004.

On or about February 5, 2001, the Company issued Robert Carroll 25,000 shares of common stock. The shares were issued as consideration for Mr. Carroll's services in procuring significant sales of the Company's products to Norfolk Southern Railway. The shares were issued pursuant to the exemption from registration provided by Section 4(2). Mr. Carroll is an accredited investor who was an existing investor in the Company as well as a business partner of the Company.

Shares Issued in 2001 Under Section 4(2)

The Company issued shares of stock in 2001 to the following persons in transactions exempt from registration under Section 4(2). In each case, the Company believed the person was either accredited or sophisticated based on prior investments made by the person in the Company, representations made to the Company, or other information available to the Company about the person's business affairs. The Company provided the investors with a current business plan and financial statements.

Name of Purchaser

Date of Sale

No. of Shares

Amount Invested

Accredited (A) or Unaccredited (U)

Dawn Fink

03/28/01

30,000

$30,000

S

Ronald E. and Patricia E. Cail

04/26/01

50,000

$50,000

S

Russell and Rita Friedman

04/27/01

10,000

$10,000

A

Robert Unland

05/09/01

2,000

$2,000

S

Richard Kaufman

05/15/01

100,000

$100,000

A

Gerald A. Menter

07/02/01

40,000

$40,000

A

Glen Clark

08/15/01

4,000

$3,000

S

C. Neil and Wanda Morgan

07/15/01

10,000

$7,500

A

Michael Cheokas

07/08/01

10,000

$7,500

A

Mark Porter

08/01/01

100,000

100,000

A

Total:

  

356,000

$350,000

  

All share amounts herein have been adjusted to give effect to a one for two reverse stock split effected by the Company on February 4, 2000.

Item 5. indemnification of directors and officers.

The Company's Articles of Incorporation and Bylaws do not contain any provision that limits the personal liability of directors to the Company and its stockholders.

The Company Bylaws provide that the Company's officers, directors, employees and agents are entitled to indemnification from the Company for any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that the person was or is a director, officer, employee or agent of the Company or served in another enterprise at the request of the Company, provided that the person indemnified acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or its shareholders, and, with respect to a criminal action or proceeding, had no reason to believe his/her conduct was unlawful. Therefore, while the directors and officers may be accountable to the Company as fiduciaries, the Company has a more limited right of action then it would have absent the indemnification provisions contained in the Bylaws.

The Company believes that the indemnification provisions of its Bylaws covers at least negligence and gross negligence by such directors and officers, and requires the Company to advance litigation expenses in case of actions, including shareholder derivative actions, against an undertaking by the officer or director to repay such advances if it is ultimately determined that the officer or director is not entitled to indemnification. These provisions do not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We believe that these provisions are essential to attracting and retaining qualified persons as directors and officers.

Insofar as indemnification for liabilities under the 1933 Act may be permitted to directors, officers or persons controlling the Company, we has been informed that in the opinion of the Securities an Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and unenforceable.

At the present, there is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought nor are aware of any threatened litigation that may result in claims for indemnification by any officer or director. The Company does not currently maintain directors and officers liability insurance.

PART F/S

Audited financial statements for the fiscal years December 31, 2000, 1999 and 1998 are located at Exhibit A herein.

 

EXHIBIT A

INNOVATIVE COATINGS CORPORATION

FINANCIAL STATEMENTS

DECEMBER 31, 2000, 1999 AND 1998

 

INNOVATIVE COATINGS CORPORATION

TABLE OF CONTENTS
 

Page

Independent Auditors' Report

1

Balance Sheet

2

Statements of Operations

3

Statements of Shareholders' Equity (Deficit)

4

Statements of Cash Flows

5

Notes to Financial Statements

7

 

 

 

INDEPENDENT AUDITORS' REPORT

To the Shareholders

Innovative Coatings Corporation

Kennesaw, Georgia

We have audited the accompanying balance sheet of Innovative Coatings Corporation as of December 31, 2000 and 1999, and the related statements of operations, shareholders' equity (deficit), and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Innovative Coatings Corporation as of December 31, 2000 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note H of the financial statements, the Company has had losses in operations since its inception and had a net capital deficiency at December 31, 2000 and 1999, which raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note H. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

With respect the financial statements for the years ended December 31, 1999 and 1998, as described in Note O to the financial statements, the effects of beneficial conversion features relating to the Series A preferred stock and convertible debt, interest costs associated with short-term, financing were not recorded in the financial statements. Adjustments have been made to interest expense, additional paid-in capital, accumulated deficit, and related per share amounts to correct the errors.

/s/ Tauber and Balser, P.C.

Atlanta, Georgia

April 26, 2001

INNOVATIVE COATINGS CORPORATION

BALANCE SHEET

DECEMBER 31, 1999 and 2000
   

Restated

ASSETS

2000

1999

Current Assets

    

Cash

$ 31,476

$ 23,243

Accounts receivable, net of allowance of $73,352 in 1999 and $10,000 in 2000

50,214

28,726

Employee loans

60,000

--

Inventories

93,991

74,192

Deposits

29,813

14,137

Employee advances

6,350

16,275

Other

7,088

3,680

Total Current Assets

278,932

160,253

Property and Equipment

    

Equipment

96,357

66,818

Furniture and fixtures

19,043

15,179

115,400

81,997

Less accumulated depreciation

27,326

14,023

88,074

67,974

TOTAL ASSETS

$ 367,006

$ 228,227

 

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

2000

1999
     

Current Liabilities

    

Notes payable

$ 75,000

$ 106,638

Capital lease, current portion

3,668

--

Accounts payable

209,863

142,048

Accrued expenses

24,947

37,112

Payroll taxes payable

111,468

82,518

Interest payable

5,013

9,678

Total Current Liabilities

429,959

377,994
     

Long-term portion of capital lease

14,860

--
     

Shareholders' Equity (Deficit)

    

Preferred stock, no par value; 5,000,000 shares authorized,

    

2,300,000 shares outstanding

--

--

Common stock, no par value; 15,000,000 shares authorized,

    

6,496,100 and 7,079,224 shares outstanding at December 31, 1999 and 2000, respectively

--

--

Additional Paid-in capital

4,648,9926

2,403,756

Accumulated deficit

(4,726,805)

(2,553,523)

Total Shareholders' Equity (Deficit)

(77,813)

(149,767)

   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY EQUITY (DEFICIT)

$ 367,006

$228,227

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
   

Restated

Restated
 

2000

1999

1998

Revenues

671,151

$ 707,809

$ 248,688

Cost of goods sold

352,675

458,982

184,968

Gross Profit

318,476

248,827

63,720

Selling, general and administrative

1,387,173

1,957,215

486,198

Loss from Operations

(1,068,697)

(1,708,388)

(422,478)

Other income (expense)

      

Gain on sale of assets

1,526

--

--

Interest expense related to:

      

Warrants issued with convertible debt

--

(132,000)

(114,000)

Beneficial conversion feature of convertible debt

(181,500)

--

--

Other

(9,999)

(91,396)

(28,953)
 

(189,973)

(223,396)

(142,953)

Net loss

$ (1,258,670)

$ (1,931,784)

$ (565,431)
       

Basic loss per common share

(0.21)

$ (0.69)

$ (0.21)

Diluted loss per common share

(0.21)

$ (0.69)

$ (0.21)

Weighted average common shares outstanding

6,044,564

2,792,135

2,777,500

 

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 (RESTATED) AND 1998 (RESTATED)

Common Stock

Preferred Stock

Additional Paid-in Capital

Accumulated Deficit

Total Stockholders' Equity

Shares

Amount

Shares

Amount
               

Balance, December 31, 1997

2,777,500

$ -

-

$ -

$ 5,555

$(56,308)

$ (50,753)

Warrants issued with convertible debt

-

-

-

-

114,000

-

114,000

Net loss

-

-

-

-

  

(565,431)

(565,431)

Balance, December 31, 1998

2,777,500

-

-

-

119,555

(621,739)

(502,184)
               

Issuance of preferred shares for services performed

-

-

2,300,000

-

1,150,000

-

1,150,000

Common Stock issued for:

              

Conversion of convertible debt to equity

447,500

-

-

-

895,000

-

895,000

Interest on convertible debt

44,100

-

-

-

88,201

-

88,201

Warrants issued with convertible debt

-

-

-

-

132,000

-

132,000

Warrants exercised

3,200,000

-

-

-

19,000

-

19,000

Net loss

-

-

-

-

  

(1,931,784)

(1,931,784)

Balance, December 31, 1999

6,469,100

$ -

2,300,000

$ -

$2,403,756

$(2,553,523)

$ (149,767)
               

Common stock issued for:

              

Conversion of convertible debt to equity

112,516

-

-

-

46,000

-

46,000

Interest on convertible debt

4,208

-

-

-

1,724

-

1,724

Warrants issued for consulting services

-

-

-

-

129,600

-

129,600

Shares issued in private placements

493,400

-

-

-

971,800

-

971,800

Interest expense related to beneficial conversion feature of convertible debt

-

-

-

-

181,500

-

181,500

Warrant dividends

-

-

-

-

914,612

(914,612)

-

Net loss

-

-

-

-

-

(1,258,670)

(1,258,670)

Balance, December 31, 2000

7,079,224

-

2,300,000

-

$ 4,648,992

($ 4,726,805)

($ 77,813)

 

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
   

Restated

Restated

2000

1999

1998

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net loss

$ (1,258,670)

$ (1,931,784)

$ (565,431)

Adjustments:

      

Depreciation

14,828

7,291

1,657

Preferred stock issued for services

-

1,150,000

-

Warrants issued for consulting services

129,600

-

-

Common stock issued in payment of interest

1,724

88,201

-

Interest associated with:

      

Beneficial conversion feature of convertible debt

181,500

    

Warrants issued with convertible debt

-

132,000

114,000

Gain on sale of asset

(1,525)

-

-
       

Changes in:

      

Accounts receivable

(21,490)

(10,446)

2,317

Inventories

(19,799)

(49,070)

(14,752)

Other assets

(3,406)

(867)

(2,815)

Deposits

(15,676)

(11,320)

3,477

Accounts payable 7

67,814

95,453

39,533

Accrued expenses

(12,166)

28,333

10,815

Payroll taxes payable

28,951

61,653

20,865

Interest payable

(4,665)

(12,197)

21,875

Total Adjustments

345,690

1,479,031

196,972

Net cash used by operating activities

(912,980

(452,753)

(368,459)
       

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Capital expenditures

(49,177)

(47,941)

(9,768)

Employee advances

9,925

(13,275)

(3,000)

Proceeds from sale of productive assets

15,775

-

-

Principle payments on capital lease

(1,472)

-

-

Employee loans

(60,000)

-

-

Net cash used by investing activities

(84,949)

(61,216)

(12,768)
       

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from warrants exercised

-

19,000

-

Principal repayments of notes payable

(86,638)

(146,800)

(18,400)

Proceeds from sale of common stock

971,800

-

-

Proceeds from issuance of convertible notes

121,000

550,000

475,000

Net cash provided by financing activities

1,006,162

422,200

456,600
       

NET (DECREASE) INCREASE IN CASH

8,233

(91,769)

75,373
       

CASH, BEGINNING OF YEAR

23,243

115,012

39,639
       

CASH, END OF YEAR

31,476

$ 23,243

$ 115,012
       

CASH PAID FOR INTEREST

24,690

$ 3,185

$ 7,078
       

NONCASH ACTIVITIES:

      

Notes converted to equity

46,000

$895,000

--

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2000, 1999 AND 1998

NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Innovative Coatings Corporation (the "Company") was established in 1997 and manufactures and distributes InstaCoat, a polyurea elastomeric coating used for protection and strengthening on a variety of substrates including extruded foams, wood, metal and concrete. The Company is also developing various types of equipment to be used in the application of InstaCoat. The accounting principles followed by the Company and the methods of applying those principles, which materially affect the determination of financial position, cash flows, or results of operations, are summarized below.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market.

Income Taxes

Deferred income tax assets and liabilities are determined for the effect of net operating loss carryforwards and the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

Property and Equipment

Equipment and furniture and fixtures are stated at cost. Depreciation is provided on the straight-line method over the estimated lives of the various assets, generally 5 to 7 years.

Use of Estimates

The timely preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimated.

Revenue Recognition

Revenue is recognized when persuasive evidence of an agreement exists, shipment of the product has occurred, the price to the buyer is fixed and determinable and collection is probable. The Company does not refund the purchase price of products accepted for return, but gives the customer a credit against future purchases. The Company does not reserve any amount at the time of sale for uncollectible accounts or anticipated credits for returns and warranty claims based on its experience that such claims are minimal.

Loss Per Share

Basic loss per share is computed by dividing loss applicable to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share is similar to basic loss per share except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. There were no dilutive potential common shares in 1999 or 1998 because the assumed exercise of warrants and conversion of convertible preferred stock and debt would be anti-dilutive.

Research and Development

Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company records expense in conjunction with the issuance of its stock for various services in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, stock-based expense for non-employees is recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

NOTE B - INVENTORIES

Inventories consist of raw materials.

NOTE C - OPERATING LEASES

Included in 1999 and 1998 operating lease expense is the expense for the prior building lease which expired in 1999, a new building lease which commenced December 1, 1999 which after amendment covers a period of 60 months ending November 30, 2004, and a corporate apartment lease which commenced September 30, 1998 for a 12 month period. Future minimum rentals under the operating leases are as follows:

2001

$ 107,816

2002

110,319

2003

110,319

2004

101,125
 

$429,579

Rent expense under the building leases was $98,595, $34,795 and $26,665, respectively, for the years ended December 31, 2000, 1999 and 1998.

NOTE D - NOTES PAYABLE

2000 Note Offering

During 2000, $121,000 of convertible notes payable were issued. The notes were convertible into common stock at $0.40 per share, bear interest at 10% per annum and are due and payable in full one year after the date of the loan. During 2000, $46,000 of notes payable, along with $1,724 of accrued interest, were converted into 116,724 shares of common stock of the Company. As of December 31, 2000, $75,000, along with accrued interest of $5,013, remained unpaid.

The issuance of the notes payable included a beneficial conversion feature in the total amount of $181,500 in 2000 which represents the aggregate fair value at the issue date of the common stock into which the notes are convertible over the proceeds received in the issuance of the notes. These amounts have been included in additional paid-in capital and interest expense.

1999 and 1998 Convertible Note Offering

During 1999 and 1998, $550,000 and $475,000 of convertible notes payable were issued. These notes were convertible into common stock at a price of $2.00 per share, bore interest at 10% per annum and were due and payable at the earlier of one year or the date the Company raised equity financing of at least $2,500,000. During 1999, $895,000 of convertible notes payable along with $88,201 of accrued interest, were converted into 491,600 shares of common stock of the Company. As of December 31, 1999, $100,000 of notes, along with accrued interest of $6,638, remained unpaid. In 1999 and 1998, as part of the convertible note offering, and as an inducement for the note holders to invest in the offering, each purchaser of notes received a warrant to purchase one share of common stock for each $2 of principle of the note. The warrants had an exercise price of $0.02 per share. In the note offering, the Company issued warrants to purchase 275,000 and 237,500 shares of the Company's common stock in 1999 and 1998, respectively, which warrants were valued at $132,000 and $114,000, respectively. These amounts were included in interest expense in the Company's statement of operations for the year ended December 31, 1999 and 1998.

During 1999, $895,000 of the convertible notes issued in 1998 and 1999 were converted, along with 88,201 of accrued interest, into 491,600 shares of common stock of the Company.

NOTE E - CAPITAL LEASE

During 2000 the Company leased a forklift for $20,000 under a capital lease. Amortization of the capital lease included in depreciation expense for 2000 and accumulated amortization at December 31, 2000 amounted to $1,000. Future minimum payments under the lease are:

2001

$4,563

2002

$4,563

2003

$4,563

2004

$4,563

2005

$2,662

Less interest

(2,386)
 

$18,528

NOTE F - INCOME TAXES

The effective tax rate varies from the maximum federal statutory rate as a result of the following items:
 

2000

1999

1998

Tax benefit computed at the maximum federal statutory rate

(34.0)%

(34.0)%

(34.0)%

Decrease in tax benefit resulting from:

      

Imputed interest and beneficial conversion feature on warrants issued

16.0

6.0

7.0

Preferred stock issued for services

-

20.0

-

Other

3.0

3.0

-

Loss to be carried forward

15.0

5.0

27.0

Income tax provision

0.0%

0.0%

0.0%

Deferred income tax assets and the related valuation allowances result principally from the potential tax benefits of tax carryforwards.

The Company has recorded a valuation allowance to reflect the uncertainty of the ultimate utilization of the deferred tax assets as follows:
 

2000

1999

1998

Deferred tax assets

$850,000

$ 460,000

$ 213,000

Less valuation allowance

(850,000)

(460,000)

(213,000)

Net deferred tax assets

$ -

$ -

$ -

For financial statement purposes, no tax benefit has been reported in 2000, 1999 and 1998 as the Company has had significant losses in recent years and realization of the tax benefits is uncertain. Accordingly, a valuation allowances has been established for the full amount of the deferred tax asset.

The net change in the deferred tax valuation allowance was an increase of $390,000, $247,000 and $192,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

At December 31, 2000, the Company's net operating losses expire in 2018 and 2020. The utilization of the carryforwards is dependent upon the ability to generate sufficient taxable income during the carryforward period.

NOTE G - PAYROLL TAXES

The Company did not make any of the required quarterly payroll tax payments in 1999. The penalties and interest related to the nonpayment of these items were approximately $38,000 and have been included in accrued expenses at December 31, 1999. The amount was included in accrued expenses at December 31, 2000, and was paid in the first quarter of 2001.

NOTE H - GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

The Company has incurred operating losses since inception totaling approximately $3,800,000. In addition, at December 31, 2000, current liabilities exceed current assets by $151,027 and its net equity deficiency amounted to $77,813. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company is in the process of raising additional capital to satisfy the operating needs for its continued development of its product line and customer base.

NOTE I - RESEARCH AND DEVELOPMENT COSTS

Research and development costs of $17,570, $32,205 and $13,785, respectively, were charged to expense in 2000, 1999 and 1998.

INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2000, 1999 AND 1998

NOTE J - OPTIONS

Various employees have been granted a total of 125,000 stock options with an exercise price of $1.00 per share and an expiration date of December 31, 2002. All of these options were exercisable at December 31, 2000 and all remained outstanding at that date.

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for warrants issued to its officers/employees rather than Statement of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with APB 25, since the exercise price of the officer warrants equaled the fair market value on the date of grant, no compensation expense was recognized.

SFAS 123 requires the Company to provide pro forma information regarding net loss and loss per share as if compensation cost had been determined in accordance with the fair value based method prescribed in SFAS 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000: no dividend yield for each year; expected volatility of 10%; weighted-average risk-free interest rates of 6.43%, and weighted-average expected option lives of one year.
 

2000

Net loss available to common shareholders:

  

As reported

($1,258,670)

Pro forma

($1,280,521)
   

Net loss per common share:

  

As reported

$ (0.21)

Pro forma

$ (0.22)

NOTE K - WARRANTS

The Company has issued stock warrants in conjunction with the issuance of common stock and the conversion of convertible debt to common stock.

During 2000 the Company issued 140,000 stock warrants valued at $129,600 as compensation for consulting services which was included in selling, general and administrative expenses in the statement of operations. The consulting services are described in the agreements and include assisting in taking the Company public and preparing filings. The warrants were valued using the Black-Scholes option-pricing method under the following assumptions: no dividend yield; expected volatility of 10%; risk free interest of 6.51%; and expected warrant life of two to five years.

During 1999 and 1998 the Company issued 275,000 and 237,500 stock warrants, respectively, valued at $132,000 and $114,000, respectively, as debt costs associated with short term financing. These amount were included in interest expense in the Company's statements of operations. The 1999 warrants were valued using the Black-Scholes option-pricing method under the following assumptions: no dividend yield; expected volatility of 0%; risk free interest of 4.95%; and expected warrant life of three to nine months. The 1998 warrants were valued using the Black-Scholes option-pricing method under the following assumptions: no dividend yield, expected volatility of 0%, risk free interest of 5.44%, and expected warrant life of 16 months to 18 months.

In December 2000, the Company distributed to its shareholders by dividend one stock warrant fore each two shares outstanding. Simultaneously, the Company's officers and directors agreed to cancel any warrants distributable on shares held by them and their affiliates, which resulted in the net distribution of 914,662 warrants. Each warrant entitled the holder to purchase one share of common stock for $1.00 per share until January 31, 2001, which date was subsequently extended to February 14, 2001. A total of 207,858 warrants were exercised.

Activity related to stock warrants was as follows:
 

Warrants

Weighted Average Exercise Price

Outstanding at December 31, 1997

--

$ -

Granted

2,925,000

.006

Outstanding at December 31, 1998

2,925,000

.006

Granted

275,000

.006

Exercised

(3,200,000)

.006

Outstanding at December 31, 1999

-

.006

Granted

1,054,612

1.06

Outstanding at December 31, 2000

1,054,612

1.06

At December 31, 2000, the Company had stock warrants outstanding as follows:

Common Shares

Exercise Price

Expiration

Under Warrant

Per Share

Date

40,000

$2.50

January 2002

100,000

$1.00

March 2005

914,612

$1.00

February 2001

The Company issued 2,687,500 stock warrants to officers of the Company during 1998.

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for warrants issued to its officers/employees rather than Statement of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). No officer warrants were issued in 2000. For 1999, in accordance with APB 25, since the exercise price of the officer warrants equaled the fair market value on the date of grant, no compensation expense was recognized.

SFAS 123 requires the Company to provide pro forma information regarding net loss and loss per share as if compensation cost had been determined in accordance with the fair value based method prescribed in SFAS 123. The Company estimated the fair value of each officer warrant at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998: no dividend yield; expected volatility of 0%; weighted-average risk-free interest rates of 5.5%, and weighted-average expected option lives of two years.
 

1999

1998

Net loss available to common shareholders:

    

As reported

$ (1,931,784)

$ (565,431)

Pro forma

$ (2,576,784)

$ (1,210,431)
     

Net loss per common share:

    

As reported

$ (0.69)

$ (0.21)

Pro forma

$ (0.92)

$ (0.44)

NOTE L - EMPLOYEE LOANS

Employee loans with an unpaid principal balance of $60,000 are non-interest bearing, unsecured and are due December 31, 2001.

NOTE M - PREFERRED STOCK

In 1999, the Company issued 2,300,000 shares of its Series A preferred stock for services rendered. The cost of the services in the amount of $1,150,000is based on the fair value of the stock on the date of issuance. The value of the services have been charged to operations. The contracted services are described in the agreement and include: strategic planning, assisting in taking the Company public, finding merger candidates, potential acquisitions, assisting with distributions, and fund raising and filings.

The Series A preferred stock has no par value, is not entitled to vote on any matter submitted to a vote of stockholders generally, is not entitled to dividends, but is entitled to a liquidation preference of $0.0002 per share. Each share of Series A preferred stock is convertible into one share of common stock at the option of the holder.

In addition, the Company has the right to compel conversion of the Series A preferred stock at any time after December 31, 1999 or any time after a majority of the shares of Series A preferred stock have been converted.

The Series A preferred stock will automatically be converted upon closing of an initial public offering by the Company of at least $10,000,000.

NOTE N - REVERSE STOCK SPLIT

On February 4, 2000, the Board of Directors declared a one for two reverse split of its common stock. All share data has been adjusted to give effect to such stock split, applied retroactively as if the split occurred on January 1, 1998.

NOTE O - RESTATEMENTS

The December 31, 1999 and 1998 financial statements have been restated to reflect interest expense of $132,000 and $114,000, respectively, from the issuance of warrants in connection with short-term financing. The effect of the adjustment increased the loss available to common shareholders by $132,000 and $114,000, respectively, and increased the loss per common share by $.05 and $.04, respectively.

The December 31, 1999 financial statements have been restated to reflect additional compensation expense in the amount of $1,104,000 relating to the issuance of the Series A preferred stock. The effect of the adjustment increased the loss available to common shareholders by $1,104,000 and increased the loss per common share by $0.39.

The December 31, 2000 financial statements have been restated to reflect additional paid in capital of $754,550 related to the issuance of warrants in connection with a warrant dividend to common stockholders in 2000. The effect of the adjustment increased additional paid in capital by $754,550 and decreased accumulated deficit by $754,550. The restatement had no effect on the loss available to common shareholders or on the loss per common share.

PART III

ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS

Exhibit No.

Description

3

Bylaws (1)

4.1

Articles of Incorporation dated August 4, 1997 (1)

4.2

Articles of Amendment dated June 1, 1998 (1)

4.3

Articles of Amendment dated June 8, 1998 (1)

4.4

Articles of Amendment dated August 31, 1998 (1)

4.5

Stock Specimen (1)

10.1

Employment Agreement for Don Sigler (2)

10.2

Employment Agreement for Jerry Phillips (2)

10.3

Employment Agreement for Wayne Bean (2)

10.4

Mutual Release and Settlement Agreement dated April 30, 2001 (3)

11.1

Statement re: computation of earnings per share (4)

22

Subsidiaries of the Registrant (1)

24

Consent of Tauber and Balser, P.C.

(1) Incorporated by reference from the Form 10-SB/A filed on January 24, 2001.

(2) Incorporated by reference form the Form 10-SB/A filed on April 3, 2001.

(3) Incorporated by reference from the Form 8-K filed on May 15, 2001.

(4) The information required by this Exhibit can be determined from the Financial Statements included in Part F/S.

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
 

INNOVATIVE COATINGS CORPORATION

Dated: November 9, 2001

/s/ Jerry Phillips
 

By: Jerry Phillips, President, Chief Executive Officer and Director
   

Dated: November 9, 2001

/s/ Donald H. Sigler
 

By: Donald H. Sigler, Chairman