FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21816
INFINITE GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1490422
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2364 Post Road, Warwick, RI 02886
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (401) 738-5777
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
The registrant's revenues for the year ended December 31, 2000 were
$13,165,739.
As of April 12, 2001, there were 3,919,279 outstanding shares of common
stock, par value $0.001 per share.
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on April 12, 2001, based on the average bid and
asked price on such date was $4,802,860.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Transitional Small Business Disclosure Format: Yes |_| No |X|
INFINITE GROUP, INC.
Form 10-KSB
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................ 2
Item 2. Properties...................................................................................... 19
Item 3. Legal Proceedings............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................. 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........................................ 20
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 21
Item 7. Financial Results............................................................................... 24
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures........... 25
PART III
Item 9. Directors and Executive Officers................................................................ 26
Item 10. Executive Compensation.......................................................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and Management. ................................ 34
Item 12. Certain Relationships and Related Transactions.................................................. 36
Item 13. Exhibits, and Reports on Form 8-K............................................................... 36
PART IV
Item 14. Financial Statements............................................................................ F-1
FORWARD LOOKING STATEMENT INFORMATION
Various statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgements about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by forward-looking statements include, but are
not limited to, the factors set forth elsewhere in this Report under the
headings "Business," "Certain Factors That May Affect Future Growth," and
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
1
PART I
BUSINESS
Our business has two segments, the Laser and Photonics Group and the
Plastics Group. We sell products and services in the fields of material
processing, advanced manufacturing methods, high productivity production mold
building and laser-application technology. Our Laser and Photonics Group
provides comprehensive laser-based materials and processing services. Our
Plastics Group provides rapid prototyping services and proprietary mold building
services.
The Laser and Photonics Group
We are a provider of applied photonics. Specifically, we provide high
value, laser-based manufacturing services to industrial customers. We use laser
driven technologies that enable cost effective component fabrication for
customers in the aerospace, defense, medical, telecommunications and sensing
industries. Through industry and government funded research, we have developed
proprietary manufacturing techniques that, we believe, have established us as a
valued supplier of engineered components. These skill sets range from classical
laser materials processing to state of the art injection molding tooling
technology.
Photonics is the science of generating and harnessing light to do useful
work. Lasers and fiber optics are the best-known expressions of photonics
technology. According to Lucent Technologies' Vision Statement: "Optical
technology will be as important to the 21st Century as electricity was to the
20th Century."
Photonic technologies use light to:
o deposit materials;
o detect, transmit, store and process information;
o generate energy; and
o capture and display images.
The basic unit of light is the photon, while in electronics it is the
electron. Because photons are massless and travel faster than electrons,
photonic devices can be smaller and significantly faster than electronic
devices. For example, replacing electronics (copper wire) with photonics (fiber
optic cable) boosts the capacity of telecommunications transmission lines by a
factor of 10,000.
Photonic components are the "enabling technology" in many familiar
consumer products including CD-ROM players, digital cameras, displays on laptop
computers and calculators, fiber optic cable for telephones, cable television,
and networked computer systems. In industry, photonics "eyes" enable robots to
"see." Photonics is also found in
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semiconductor manufacturing as well as analytical and process-monitoring
applications. In medicine, photonics is at the core of diagnostic
instrumentation, laser microsurgery, and filmless real-time imaging.
Our Evolution in Applied Photonics
Since their invention in the early 1960's, lasers have played an
increasingly important role in manufacturing through processes including
welding, cutting, drilling, and engraving. Laser Fare, one of our subsidiaries,
was formed in 1978 to provide these services and has established itself as a
leading provider in that area. One of our founders was the past president of the
Laser Institute of America, a not-for-profit trade group representing the
photonics industry.
In the last several years, improvements in laser performance and new
adaptations of their use have enabled the development of a number of new
manufacturing processes. These processes not only provide significant
improvements over older generation laser processes, but also permit the
manufacture of products that previously could not be produced on a
cost-effective basis. Through our Laser Fare Advanced Technology Group ("ATG"),
the research and development unit within Laser Fare, we have played a key role
in developing several laser processes and, as a result, have developed a
portfolio of intellectual property rights. We are focusing our future business
development efforts and our future growth in these new areas.
Our Strategic Alliance Partners and Consortia
As a result of our expertise in the field of applied photonics, we have
established strategic alliances with a number of private sector companies,
academic institutions and public/private consortia. For example, our expertise
in the area of direct write and grating coupled surface emitting lasers
("GCSEL") has made possible our alliances with Cutting Edge Optronics, Inc.,
Triton Systems Inc. and the University of Connecticut. We are also a member of
the LENS(R) CRADA (Laser Engineered Net Shaping -- Cooperative Research and
Development Agreement) at Sandia National Laboratories. Other members of LENS(R)
CRADA include Ford Motor, Motorola, Lockheed Martin, and others. In addition, we
serve on all four DARPA MICE (Defense Advanced Research Projects Agency
-Mesoscopic Integrated Conformal Electronics) teams along with Optomec, CMS
Technetronics, Potomac Photonics and the State University of New York at
Stonybrook. Third parties fund substantially all of our research and
development. We believe this strategy provides us with a built-in customer base
and market. Generally, we retain the rights to intellectual property developed
in our fields of use.
Our Services
We use lasers to either subtract metals from a block of metal (known as,
precision laser materials processing) or to add or deposit metals (known as
laser material deposition processing). The subtractive process uses lasers to
cut away, drill or weld metals to form
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a part. The additive process uses lasers to add or build metals on to a surface.
Both processes can be used for a wide variety of commercial applications,
including:
o Large parts ("macroscale"), such as jet engine components;
o Handheld parts ("mesoscale"), such as GPS (global positioning
system) antennas and sensors; and
o Barely visible or not visible to the human eye size parts
("microscale"), such as medical stents used in angioplasty, gratings
for tunable lasers in telecommunications, and circuitry for next
generation electronics, sensors and medical devices.
Our photonics services can be grouped into three major categories:
1. Precision Laser Materials Processing. Improved performance of lasers
has allowed classic laser materials processing, such as cutting and
welding, to be done at the micro-level. For example, through our
Laser Fare and Mound Laser and Photonics Center, another of our
subsidiaries, we believe we have superior technological capabilities
in this area. Current applications include:
Micro Machining -- Both Laser Fare and Mound provide laser machining
on a micro scale. For example, we currently manufacture
medical devices, such as stents. Stents are sections of small
stainless steel tubing, most of which have been machined away
to leave a mesh which can be expanded once the surgeon has
inserted it into an artery. The stent is used to hold open an
artery once an angiogram has been performed.
Macro Machining -- Laser Fare is a provider of laser material
processing services to the aerospace, gas turbine, automotive,
and medical industries.
2. Laser Material Deposition Processing. LENS(R) CRADA has developed a
number of methods, many with our involvement, to deposit controlled
amounts of a metal material on a selected surface. Our Laser Fare,
Mound Laser and Photonics Center and Express Pattern subsidiaries
have developed and continue to develop high value manufacturing
services in this area. Examples of laser material deposition
processes, or additive processes, include:
LENS Process -- The LENS(R) CRADA process was developed at Sandia
National Laboratories by a consortium of companies of which we
are a part. As a result, we have an irrevocable, fully paid
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nonexclusive, world-wide license for the technology developed
under this program. Laser Fare has entered into contracts for
macro applications relating to this process. These
applications include depositing metals for the overhaul and
repair of military and high value commercial parts, such as
aerospace parts. We have also begun building mesoscale parts
for such diverse applications as titanium golf club heads and
titanium spinal medical devices. Micro applications include
small fractal antenna fabricated using silver alloys for
handheld GPS (global positioning systems), and other wireless
applications.
Furthermore, the design, manufacture and marketing of wireless
devices is standardized under industry conventions, known as
the Bluetooth conventions, in a manner similar to those set
for traditional telecommunications applications under the
Bellcore standards. We expect to be able to deploy laser
direct write technologies to address wireless components.
Pulsed Laser Deposition -- This is a proprietary process developed
by Mound Laser and Photonics Center to bond one metal to a
different metal using lasers. For example, we can bond very
thin layers of titanium to other metals for high temperature
superconductors (HTS) used in satellite electronics and other
applications.
Rapid Prototyping -- Express Pattern and ATG use a variety of
additive techniques to provide rapid prototyping services to
industrial customers. These services enable customers to
reduce risk in product development by providing fast, low cost
prototypes that allow designs to be tested before large
investments in tooling are made.
3. Laser-related Contract Research and Development. We continue
research and development in both additive and subtractive laser
material processes, as well as GCSEL and diode lasers. We are both a
prime contractor and subcontractor to several projects sponsored by
DARPA. We are subcontractors on all four of DARPA's MICE programs.
Other projects include acoustic bandgap research for the U.S. Naval
Underwater Warfare Center ("NUWC") and Electric Boat, as well as
photonic bandgap and high temperature superconductor ("HTS")
research for the U.S. Air Force Research Laboratory ("AFRL"). We
also have an agreement with the National Center for Manufacturing
Sciences to provide higher quality metal part repairs at a lower
cost than traditional methods under NCMS's Commercial Technologies
for Maintenance Activities Program. This program enables the
cost-effective repair of parts that previously would have been
discarded at significant cost to military and commercial users.
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NCMS is a not-for-profit cooperative research consortium and is
funded by the Department of Defense as well as over 175 corporations
in the United States and Canada.
We are also working with researchers at the Photonics Research
Center at the University of Connecticut and at the Ioffe Institute
in St. Petersburg, Russia on grating coupled surface emitting
lasers. The AFRL funds this work.
We intend to continue to use a combination of direct sales to customers,
contract research and development for new and existing customer applications and
early stage prototype assistance to foster our growth and satisfy specific
customer requirements. For example, production of an asthma-testing device for
Dey Laboratories, now a significant medical customer, began as a small
laser-cutting job. We will continue to provide these customers with traditional
and advanced manufacturing services to fabricate their components in the most
cost-effective manner.
The Plastics Group
Our Plastics Group provides rapid prototyping services through our Express
Pattern subsidiary, and builds both conventional precision molds and our
proprietary Express Tool molds at our Osley & Whitney subsidiary. We believe the
Express Tool process provides superior thermal management properties over
conventional tooling. Better thermal management allows parts to be ejected from
the molds more quickly than by conventional means, which reduces part distortion
and the cost per part. The process resulted from a research contract in advanced
manufacturing methods at our Laser Fare ATG research facility conducted for
Hasbro. Hasbro retains the rights to the process for the toy and game industry.
We have the intellectual property rights in other fields of use. Once in
production, the process was moved to Osley & Whitney in order to service our
customers. Osley & Whitney is a 50 year-old precision mold builder. In addition
to their customers, they also provide manufacturing support to some Laser and
Photonic Group customers.
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We were incorporated under the laws of the state of Delaware on October
14, 1986. On January 7, 1998, we changed our name from Infinite Machines Corp.
to Infinite Group, Inc. Our principal executive offices are located at 2364 Post
Road, Warwick, RI 02886 and our facsimile number is (401) 738-6180. Our
subsidiaries are located in Rhode Island, Massachusetts, New Mexico, Ohio and
Illinois. We maintain sites on the World Wide Web at www.infinite-group.com,
www.laserfare.com, www.infinitephotonics.com, www.expresstool.com and
www.expresspattern.com. Information contained on any of our websites do not
constitute a part of this Report on Form 10-KSB.
6
RECENT DEVELOPMENT
The Equity Line of Credit Agreement
On November 20, 2000 we entered into an equity line of credit agreement
with Cockfield Holdings Limited. The purpose of the equity line of credit is to
provide us with a source of funding for our current activities and for the
development of our current and planned products. The equity line of credit
agreement establishes what is sometimes referred to as an equity drawdown
facility. Under the equity line of credit agreement we have the right to sell to
Cockfield up to 3,000,000 shares of our common stock.
Under the equity line of credit agreement, Cockfield has agreed to
purchase up to 3,000,000 shares of our common stock during the 36-month period
following the effective date of the registration statement. During this 36-month
period, we may request a drawdown under the equity line of credit by selling
shares of our common stock to Cockfield, and Cockfield will be obligated to
purchase the shares we put to them. The minimum amount we can draw down at any
one time is $200,000. The maximum amount we can draw down at any one time will
be determined at the time of the drawdown request under a formula contained in
the equity line of credit agreement, but cannot be more than $5,000,000. We may
request a drawdown once every 20 trading days, although we are under no
obligation to request any drawdowns.
In order to exercise our drawdown rights under the equity line of credit
agreement, we must have an effective registration statement on file with the
Securities and Exchange Commission registering the resale of the shares of our
common stock that may be sold to Cockfield. We must also give at least 20
business days advance notice to Cockfield of the date on which we intend to
exercise a particular put right and we must indicate the maximum number of
shares of our common stock that we intend to sell to Cockfield. At our option,
we may also designate a maximum dollar amount of our common stock that we will
sell under the put and/or a minimum purchase price per share at which Cockfield
may purchase shares under the put. The maximum amount may not to exceed the
lesser of a) $5,000,000 or b) fifteen percent (15%) of the weighted average
price of our common stock during the 20 trading days immediately prior to the
put date, multiplied by the total trading volume of our common stock during the
20 trading days immediately prior to that date.
During the 20 trading days following a drawdown request, we will calculate
the number of shares we will sell to Cockfield and the price per share. The
purchase price per share of common stock will be at a discount to the daily
volume weighted average price of our common stock during the 20 trading days
immediately following the drawdown date. On each of the 20 trading days during
the calculation period, the number of shares to be purchased by Cockfield will
be determined by dividing 1/20th of the drawdown amount by the purchase price on
each trading day. If we designate a minimum purchase price in our drawdown
request and the daily volume weighted average price for
7
our common stock on any trading day during the 20 trading day calculation period
is below the minimum threshold price, and Cockfield elects not to purchase
shares at the minimum threshold price, then the drawdown amount will be reduced
by 1/20th.
For each share of our common stock, Cockfield will pay us 87.5% of the
volume weighted market price for a share of our common stock during the 20-day
trading period following the exercise of a put. The percentage will increase to
90% if we move our principal market to the Nasdaq National Market or to 91% if
we move our principal market to the New York Stock Exchange. It will decrease to
84% if our common stock is delisted from the Nasdaq SmallCap Market. Market
price is defined as the volume weighted average price for our common stock (as
reported by Bloomberg Financial LP using its VAP function) on its principal
market during the pricing period. The pricing period is defined as the 20 day
trading period immediately prior to the day we exercise our put right.
Cockfield will pay for the shares on the 22nd trading day following the
drawdown request. We will receive the purchase price less a brokerage fee
payable to Jesup & Lamont ranging between 4.25% and 4.75% of the aggregate
purchase price, depending on the dollar volume of the transaction. Jesup &
Lamont is the placement agent that introduced Cockfield to us and is a
registered broker-dealer.
At the closing of each drawdown, we will also grant Cockfield warrants to
purchase a number of shares of our common stock equal to 33% of the number of
shares purchased by Cockfield at the closing of the drawdown. These unit
warrants will expire one day after they are granted and will have an exercise
price equal to the weighted average of the purchase price of a share of our
common stock purchased at the closing of each drawdown. The 3,000,000 shares
available under the equity line of credit will be reduced by the number of
shares issued as a result of the exercise of these unit warrants.
The equity line of credit agreement prevents us from drawing down funds
and issuing the corresponding shares of common stock to Cockfield if the
issuance would result in Cockfield beneficially owning more than 9.9% of our
then outstanding shares of common stock. In addition, the listing requirements
of the Nasdaq SmallCap Market prohibit us from issuing 20% or more of our issued
and outstanding shares of common stock in a single transaction at a price less
than the greater of market value or book value unless we get stockholder
approval. At our annual meeting held on March 22, 2001, our stockholders
approved the issuance of the shares of our common stock contemplated by the
equity line of credit agreement.
As consideration for establishing the equity line of credit, we granted
Cockfield warrants to purchase up to 200,000 shares of our common stock. As
consideration for the services rendered by Jesup & Lamont as placement agent in
connection with the equity line of credit, we granted Jesup & Lamont warrants to
purchase up to 100,000 shares of our common stock. These warrants, covering
300,000 shares of our common stock, are exercisable at any time prior to
November 20, 2003, for $3.135 per share.
8
On February 8, 2001, we issued a drawdown notice to Cockfield. This notice
offered to sell up to $250,000 of our common stock to Cockfield based on the
formula in the stock purchase agreement, during the 20 trading day period
beginning on February 9, 2001 and ending on March 9, 2001, but at not less than
$3.00 per share. During this period, Cockfield purchased a total of 21,737
shares of our common stock at an average net purchase price of $2.8753 per
share. These purchases resulted in aggregate proceeds of $62,500 being paid and
released from escrow to us by Cockfield. Jesup & Lamont Securities Corporation
received $2,969 as a placement fee in connection with this draw down.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
We have experienced losses in the current and prior years and we anticipate that
we will continue to generate losses for the near future.
Our operations to date have not been profitable. As of December 31, 2000
we had an accumulated deficit of $20.4 million. We expect to continue operating
at a loss during the first quarter of 2001. These losses are primarily
attributable to low margins in our injection molding and laser processing
businesses and the significant costs and expenses associated with manufacturing
and marketing many of our other laser technology services as well as our general
and administrative expenses. Other factors that could adversely affect our
operating results include:
o the cost of manufacturing scale-up and production;
o introduction of new products and product enhancements by us or our
competitors;
o changes in applied photonics technologies; and
o changes in general economic conditions.
We cannot assure you that our revenues will increase sufficiently to offset our
operating costs or that, even if they do, that our operations will ever be
profitable.
Going Concern Limitation.
The report of our independent auditors with respect to our financial
statements for the year ended December 31, 2000 included in this report states
that there is substantial doubt regarding our ability to continue as a going
concern. There can be no assurance that our existing operations will not
continue to generate negative cash flows. However, we believe that increased
cash flows from operations during the current year, coupled with fixed costs of
sales leverage, and cost saving measures that have been implemented will satisfy
our working capital needs.
We are highly leveraged, which increases our operating deficit and makes it
difficult for us to grow.
As of December 31, 2000 we had current liabilities, including trade
payables, of $6.6 million, and long-term liabilities of $2.7 million and a
working capital deficit of $3.8 million. We continue to experience working
capital shortages that materially impair our business operations and growth
strategy. If we continue to incur debt and experience working capital
limitations, our business, operations and financial condition will be materially
adversely affected. At December 31, 2000, we were not in compliance with certain
covenants under our borrowing facilities. Accordingly, the lender may, upon
notice, declare the entire unpaid principal balance due and payable.
9
We depend on Cockfield to provide us with capital under the equity line of
credit agreement.
Our immediate financing needs depend on our ability to sell shares of our
common stock to Cockfield under the equity line of credit agreement. There are a
number of factors that could adversely affect our ability to sell shares of our
common stock to Cockfield under the equity line of credit agreement, including:
o Cockfield's ability or willingness to perform its obligations under
the agreement; and
o The trading price and volume of our stock. If the market price is
low or the volume is thin, we may not be able to sell a sufficient
number of shares to meet our capital requirements.
We may require additional financing in the future, which may not be available on
acceptable terms.
Depending on the amount of money we raise under the equity line of credit
agreement with Cockfield and our ability to generate additional revenues, we may
require additional funds to expand our production capability, continue to
develop new applications for our direct write technology and for working capital
and general corporate purposes. At this time, we do not believe that product
sales will reach the level required to sustain our operations and growth plans
in the near term. Therefore, we are actively pursuing additional financing
alternatives. We cannot assure you that adequate additional financing will be
available or, if available, will be offered on acceptable terms. The equity line
of credit agreement limits our ability to sell our securities to third parties
at a discount to the market price during its term. Accordingly, if we need
additional capital but are unable to draw down under the equity line of credit
agreement for any reason, our access to capital may be limited. In addition, any
additional equity financing may be dilutive to stockholders, and debt
financings, if available, may involve restrictive covenants that further limit
our ability to make decisions that we believe will be in our best interests. In
the event we cannot obtain additional financing on terms acceptable to us when
required, our operations will be materially adversely affected and we will have
to cease or substantially reduce operations.
Some of our products and services are at an early stage of development and may
not achieve market acceptance.
Currently, our primary focus is to develop new commercial applications for
GCSEL, diode laser and laser-driven direct write technologies. Many of the
benefits of GCSEL, diode laser and laser driven direct write technologies are
not widely known. Therefore, we anticipate that we will need to educate our
target markets to generate
10
demand for our services and, as a result of market feedback, we may be required
to further refine these services. In order to persuade potential customers to
purchase our services, we will need to overcome industry resistance to, and
suspicion of, new technologies. In addition, developing new applications for
these technologies and other new technologies will require significant further
research, development, testing and marketing prior to commercialization. We
cannot assure you that commercial applications of these technologies can be
successfully developed, marketed or produced.
Some of our current products and services have not been commercially successful.
Our laser materials processing and mold building products and services do
not generate a significant amount of revenue, even though they have been
available for some time. In addition, most of our revenue from these businesses
is generated from a limited number of customers. We cannot assure you that these
customers will continue to purchase these products and services or that we will
be able to expand the market for these products and services. Our resources
available for sales and marketing activities are limited. Therefore, any
material delay, retooling, cancellation or reduction in orders from the
customers who purchase these products and services could have a material adverse
affect on our business, operations and financial condition.
We have limited marketing and sales capabilities and must make sales in
fragmented markets.
Our future success depends, to a great extent, on our ability to
successfully market our products and services. We currently have limited sales
and marketing capabilities and experience and we will need to hire qualified
sales and marketing personnel, develop additional sales and marketing programs
and establish sales distribution channels in order to achieve and sustain
commercial sales of our products. Qualified sales and marketing personnel in
this area are in short supply and we cannot assure you that we will be able to
hire them. In addition, our ability to successfully market our products and
services is further complicated by the fact that our principal markets, laser
photonics, telecommunications, aerospace and medical components, are highly
fragmented. Consequently, we will need to identify and successfully target
particular market segments in which we believe we will have the most success.
These efforts will require a substantial, but unknown, amount of effort and
resources. We cannot assure you that any marketing and sales efforts undertaken
by us will be successful or will result in any significant product sales.
We depend on the aerospace, laser photonic and medical device industries, which
continually produce technologically advanced products.
A majority of our sales are to companies in the aerospace, laser photonic,
telecommunications and medical device industries, which are subject to rapid
technological change and product obsolescence. If our customers are unable to
create products that keep pace with the changing technological environment and
market
11
demand, their products could become obsolete and the demand for our services
could decline significantly. If we are unable to offer cost-effective,
quick-response manufacturing services to customers, demand for our services will
also decline. This would have a material adverse affect on our business,
operations and financial condition.
Our industry is intensely competitive, which may adversely affect our operations
and financial results.
All our markets are intensely competitive and numerous companies offer
conventional and laser driven products and services that compete with our
products and services. We anticipate that competition for our products and
services will continue to increase. Most of our competitors have substantially
greater capital resources, research and development staffs, manufacturing
capabilities, sales and marketing resources, facilities and experience. These
companies, or others, could undertake extensive research and development in
laser technology and related fields that could result in technological changes.
Many of these companies also are primary customers for various components, and
therefore have significant control over certain markets that we have targeted.
In addition, we may not be able to offer prices as low as some of our
competitors because those competitors may have lower cost structures as a result
of their geographic location or the services they provide. Our inability to
provide comparable or better products and services at a lower cost than our
competitors could cause our net sales to decline. We cannot assure you that our
competitors will not succeed in developing technologies in these fields which
will enable them to offer laser services more advanced and less costly than
those we offer or which could render our technologies obsolete.
Our products and services are subject to industry standards, which increases
their cost and could delay or bar their commercial acceptance.
Since some of our products and services in development are used in the
telecommunications industry, they must comply with the Bellcore Testing
standards for traditional equipment and/or Bluetooth standards for wireless
devices. These standards govern the design, manufacture and marketing of these
items. If we fail to comply with these standards, we will not be able to sell
our products. We may encounter significant delays or incur additional costs in
our efforts to comply with these industry standards.
We depend on our relationship with third parties to develop and commercialize
new products.
Our strategy for research and development and for the commercialization of
our products contemplates a continuing relationship with various publicly and
privately funded consortia and our existing relationships will continue with
strategic partners, OEMs, licensees and others. We depend on these associations
and relationships not only to underwrite our research and development efforts,
but also for product testing and to create markets for our products and
services. We cannot assure you that our existing relationships will continue or
the extent to which the parties to such arrangements will
12
continue to allocate time of resources to these strategic alliances. Similarly,
we cannot assure you that we will be able to enter into new arrangements in the
future. In addition, we cannot assure you that such agreements will progress to
a production phase or, if production commences, that we will receive significant
revenues as a result of these relationships. We cannot assure you that these
parties, or any future partners, will perform their obligations as expected or
that any revenue will be derived from such arrangements.
We have only limited manufacturing capabilities and our inability to continually
manufacture products on a cost-effective basis would harm our business.
We have limited production facilities and limited experience in
manufacturing our product offerings. To the extent any of our existing or future
products must be produced in commercially reasonable quantities, we will have to
either develop that expertise quickly or outsource that function. Developing
manufacturing capability is an expensive and time-consuming endeavor and we do
not have the resources that are required for a full-scale manufacturing
capability. Therefore, in all likelihood we will have to engage a third party to
manufacture our products for us. In that event, we will depend on the
manufacturer to produce high-quality products based on our specifications, on
time and within budget. If we are unable to manufacture products in sufficient
quantities and in a timely manner to meet customer demand ourselves or by
others, our business, financial condition and results of operations will be
materially adversely affected.
We depend on our intellectual property rights to provide us with a competitive
advantage.
Our ability to compete successfully depends, in part, on our ability to
protect our products and technologies under United States and foreign patent
laws, to preserve trade secrets and other proprietary information and
technologies, and to operate without infringing the proprietary rights of
others. We cannot assure you that patent applications relating to our products
or potential products will result in patents being issued, that any issued
patents will afford adequate protection or not be challenged, invalidated,
infringed or circumvented, or that any rights granted will give us a competitive
advantage. Furthermore, we cannot assure you that others have not independently
developed, or will not independently develop, similar products and/or
technologies, duplicate any of our product or technologies, or, if patents are
issued to, or licensed by, us, design around such patents. We cannot assure you
that patents owned or licensed and issued in one jurisdiction will also be
issued in any other jurisdiction. In addition, we cannot assure you that we can
adequately protect our proprietary technology and processes that we maintain as
trade secrets. If we are unable to develop and adequately protect our
proprietary technology and other assets, our business, financial condition and
results of operations will be materially adversely affected.
13
We depend on the continued services of our key personnel.
Our future success depends, in part, on the continuing efforts of our
senior executive officers, Clifford G. Brockmyre II, Thomas Mueller, J. Terence
Feeley and Bruce J. Garreau, who conceived our strategic plan and who are
responsible for executing that plan. The loss of any of these key employees may
adversely affect our business. At this time we do not have any term "key man"
insurance on any of these executives other than a $1.7 million policy on
Clifford G. Brockmyre II. If we lose the services of any of these senior
executives, our business, operations and financial condition could be materially
adversely affected.
We may have difficulties in managing our growth.
Our future growth depends, in part, on our ability to implement and expand
our financial control systems and to expand, train and manage our employee base
and provide support to an expanded customer base. If we cannot manage growth
effectively, it could have material adverse effect on our results of operations,
business and financial condition. Acquisitions and expansion involve substantial
infrastructure and working capital costs. We cannot assure you that we will be
able to integrate our acquisitions and expansions efficiently. Similarly, we
cannot assure you that we will continue to expand or that any expansion will
enhance our profitability. If we do not achieve sufficient revenue growth to
offset increased expenses associated with our expansion, our results will be
adversely affected.
We must attract, hire and retain qualified personnel.
As we continue to develop new products and as our business grows,
significant demands will be placed on our managerial, technical, financial and
other resources. One of the keys to our future success will be our ability to
attract, hire and retain highly qualified engineering, marketing, sales and
administrative personnel. Competition for qualified personnel in these areas is
intense and we will be competing for their services with companies that have
substantially greater resources than we do. We cannot assure you that we will be
able to identify, attract and retain employees with skills and experience
necessary and relevant to the future operations of our business. Our inability
to retain or attract qualified personnel in these areas could have a material
adverse effect on our business and results of operations.
We face potential product liability claims.
The sale of our telecommunications, aerospace and medical products and
services will involve the inherent risk of product liability claims by others.
We maintain product liability insurance coverage. However, we cannot assure that
the amount and scope of our existing coverage is adequate to protect us in the
event that a product liability claim is successfully asserted. Moreover, we
cannot assure you that we will continue to maintain
14
the coverage we currently have. Product liability insurance is expensive,
subject to various coverage exclusions and may not always be obtainable on terms
acceptable to us.
Our stock price is volatile and could be further affected by events not within
our control.
The trading price of our common stock has been volatile and will continue
to be subject to:
o volatility in the trading markets generally;
o significant fluctuations in our quarterly operating results;
o announcements regarding our business or the business of our
competitors;
o changes in prices of our or our competitors' products and services;
o changes in product mix; and
o changes in revenue and revenue growth rates for us as a whole or for
geographic areas, and other events or factors.
Statements or changes in opinions, ratings or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we operate
or expect to operate could also have an adverse effect on the market price of
our common stock. In addition, the stock market as a whole has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market price for the securities of many small cap companies and
which often have been unrelated to the operating performance of these companies.
The price of our common stock may be adversely affected by the possible issuance
of shares of our common stock under the equity line of credit agreement and as a
result of the exercise of outstanding warrants and options.
In addition to the 3,300,000 shares of our common stock covered by our
equity line of credit agreement, we have previously registered all of the shares
of our common stock reserved for issuance under our stock option plans. To date,
we have granted unexercised options covering 984,429 of these shares. In
addition, we have issued warrants covering 709,975 shares of common stock. We
have agreed with certain of these holders to register the shares underlying
their warrants. As a result of the actual or potential sale of these shares into
the market, our common stock price may decrease and we would probably find it
more difficult to obtain additional financing.
15
Our stockholders may experience significant dilution as a result of stock
issuances under the equity line of credit agreement.
Under the equity line of credit agreement we will sell shares of our
common stock to Cockfield at a price that may be below the market price of our
stock at that time. As a result, these sales will dilute the interests of our
existing stockholders. In addition, as the price of our common stock decreases,
we will be required to issue more shares of our common stock for any given
dollar amount invested by Cockfield. The more shares that are issued under the
equity line of credit, the more our shares will be diluted and the more our
stock price may decrease. This may encourage short sales, which could place
further downward pressure on the price of our common stock. Furthermore, for the
life of any outstanding options and warrants, the holders will have the
opportunity to profit from a rise in the price of the underlying common stock.
When the holders of these options and warrants exercise their rights to acquire
shares of our common stock, the interests of the other stockholders will be
diluted. In addition, the holders of the options and warrants can be expected to
exercise their options and warrants at a time when we would, in all likelihood,
be able to obtain additional capital by an offering of our unissued common stock
on terms more favorable to us than those provided by such options or warrants.
Concentration of ownership
As of January 30, 2001, our chief executive officer, Clifford G. Brockmyre
II, is our largest stockholder, owning approximately 24% of our issued and
outstanding shares of our common stock. Mr. Brockmyre, as a result, effectively
controls all our affairs, including the election of directors and any proposals
regarding a sale of the Company or its assets or a merger.
Some provisions in our charter documents and bylaws may have anti-takeover
effects.
Our certificate of incorporation and bylaws contain provisions that may
make it more difficult for a third party to acquire us, with the result that it
may deter potential suitors. For example, our board of directors is authorized,
without action of the stockholders, to issue authorized but unissued common
stock and preferred stock. The existence of undesignated preferred stock and
authorized but unissued common stock enables us to discourage or to make it more
difficult to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise.
Absence of dividends to shareholders.
We have never declared a dividend on our common stock. We do not
anticipate paying dividends on the common stock in the foreseeable future. We
anticipate that earnings, if any, will be reinvested in the expansion of our
business.
16
We have agreed to limitations on the potential liability of our directors.
Our certificate of incorporation provides that, in general, directors will
not be personally liable for monetary damages to the company or our stockholders
for a breach of fiduciary duty. Although this limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission, the presence of these provisions in the certificate of incorporation
could prevent us from recovering monetary damages.
We must maintain compliance with certain criteria in order to maintain listing
of our shares on the Nasdaq market.
Our common stock is currently traded on the Nasdaq SmallCap Market. In
order to maintain this listing, we are required to meet certain requirements
relating to our stock price and our net tangible assets. If we fail to meet
these requirements, our stock could be delisted. We have received a series of
letters from Nasdaq that we failed to satisfy the minimum net tangible asset
listing requirements for the SmallCap Market. As a result of private placements
of equity and other transactions consummated after December 31, 2000, we believe
we are currently in compliance with the net tangible asset requirement. However,
we cannot assure you that Nasdaq will agree or that we will continue to satisfy
the Nasdaq SmallCap Market listing requirements. If our stock is delisted, it
will trade on the OTC Bulletin Board or in the "pink sheets" maintained by the
National Quotation Bureau Incorporated. As a consequence of such delisting, an
investor could find it more difficult to dispose of or to obtain accurate
quotations as to the market value of our securities. Among other consequences,
delisting from Nasdaq may cause a decline in the stock price and difficulty in
obtaining future financing.
The liquidity of our stock could be severely reduced if it becomes classified as
"penny stock".
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any non-Nasdaq equity security that has a
market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share. If our securities were subject to
the existing rules on penny stocks, the market liquidity for our securities
could be severely adversely affected. For any transaction involving a penny
stock, unless exempt, the rules require substantial additional disclosure
obligations and sales practice obligations on broker-dealers where the sale is
to persons other than established customers and accredited investors (generally,
those persons with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of the common stock and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the
17
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and accordingly the market for our common stock.
Competition
We have a unique blend of capabilities. To our knowledge there is no one
company that competes with us across the industries we service. However, on a
segment-by-segment basis, our plastics group competes with traditional mold
makers and large OEMs. Our competitive advantage lies in proprietary processes
such as GCSEL's and high productivity production tooling.
Our laser and photonics group competes in two areas: laser materials
processing and laser driven research and development. The materials and
processing department of LF competes with laser and traditional job shops.
Universities compete for some laser research. However, we are not aware of
companies that have both manufacturing and research capabilities with applied
practical solutions for advanced manufacturing.
We compete with different manufacturers, depending on the type of service
or product we provide and the geographic locale of our different operations.
These competitors may have greater manufacturing, financial, research and
development and/or marketing resources than we have. In addition, we may not be
able to offer prices as low as some of our competitors because those competitors
may have lower cost structures as a result of their geographic location or the
services they provide. Our inability to provide comparable or better
manufacturing services at a lower cost than our competitors could cause our net
sales to decline.
Employees
As of December 31, 2000, we had 140 full-time employees including 90
production personnel, 18 engineering and research personnel, and 12 sales
personnel. Our ability to develop, manufacture and market our products and
service, and to establish and maintain a competitive position in our businesses
will depend, in large part, upon our ability to attract and retain qualified
technical, marketing and managerial personnel, of which there can be no
assurance. We believe that our relations with our employees are good. None of
our employees are covered by a collective bargaining agreement.
18
Properties
The table below lists our manufacturing and administrative office
locations and square feet owned or leased:
Square Feet
----------- Leased Lease Termination
Location Owned Leased Annual Rent Date
-------- ----- ------ ----------- ----
Warwick, RI -- 2,223 $35,568 2002
Smithfield, RI 16,800 8,000 $28,800 2001
Narragansett, RI -- 326 $ 6,850 2001
Westfield, MA 21,500 -- -- --
Buffalo Grove, IL -- 5,960 $43,210 2002
Miamisburg, OH -- 4,069 $30,948 2003
Albuquerque, NM -- 625 $ 8,400 N/A
We anticipate the need for additional manufacturing facilities in the
foreseeable future that we believe will be available on commercially reasonable
terms. We believe all properties are in good operating condition.
Legal Proceedings
We are the plaintiff in a lawsuit filed in the Rhode Island Superior Court
on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra Science
Corporation and Nabil Lawandy. In the action, we asserts that by fraud and in
breach of fiduciary duties owed, Spectra and its president, Nabil Lawandy,
caused us to sell to Spectra shares of Spectra's Series A Preferred stock at a
substantial discount to fair market value. We allege that in entering into the
transaction it relied on various representations made by Spectra and Mr.
Lawandy, which were untrue at the time they were made. In the action, we seek
compensatory damages in the amount of $500,000 plus punitive damages as well as
an award of attorneys' fees and costs. In its response to the complaint, Spectra
has asserted counterclaims against us which we believe are without merit. We
intends to vigorously prosecute this action and defend the counterclaims.
Other than the foregoing proceeding, we are not a party to any material
legal proceeding.
Submission Of Matters To A Vote Of Security Holders
On March 22, 2001, we held our annual meeting of stockholders pursuant to
notice. At such meeting, the following directors were elected to hold office
until the 2001 annual meeting of stockholders or until their successors are duly
elected and qualified: Clifford G. Brockmyre II, Michael S. Smith, J. Terence
Feeley, William G. Lyons III, and Brian Q. Coridan (2,837,497 votes in favor and
35,216 against). Further, the proposal to approve the issuance of up to
3,300,000 under the equity line of credit agreement was approved (1,598,831
votes in favor and 57,848 votes against) and the appointment of McGladrey &
Pullen, LLP, as our auditors for the 2000 fiscal year was ratified (2,860,517
votes in favor and 31,080 votes against).
19
PART II
Market For Common Equity And Related Matters
Our common stock is quoted on the Nasdaq SmallCap Market System ("Nasdaq")
under the symbol "IMCI". The following table sets forth the high and low bid
prices of the common stock for the past two fiscal years by quarter as reported
by Nasdaq. Quotations represent interdealer prices without an adjustment for
retail markups, markdowns or commissions and may not represent actual
transactions. On February 16, 1999, we effected a one-for-five reverse stock
split of our common stock. All information presented for periods prior to
February 16, 1999 gives effect to the reverse stock split.
Period High Low
--------------------- ---------------- ---------------
1999
First Quarter $3.2810 $1.3750
Second Quarter 2.5000 1.3750
Third Quarter 2.0000 1.0625
Fourth Quarter 1.7500 0.7500
2000
First Quarter $18.3750 $1.0625
Second Quarter 4.9375 1.5625
Third Quarter 6.1250 2.0000
Fourth Quarter 3.8130 1.5000
As of April 9, 2001, we believe that we had approximately 1,650 beneficial
stockholders.
Dividend Policy
We do not expect to declare or pay any dividends in the foreseeable future.
Instead, we intend to retain all earnings, if any, in order to expand our
operations. The payment of dividends, if any, in the future is within the
discretion of our board of directors and will depend upon our earnings, if any,
our capital requirements and financial condition and other relevant factors.
Under the terms of our credit facilities, we are prohibited from paying
dividends or making other cash distributions.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary statement identifying important factors that could cause our actual
results to differ from those projected in forward-looking statements.
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward-looking
statements. Forward-looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward-looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of our plans and objectives,
including product enhancements, or estimates or predictions of actions by
customers, suppliers, competitors or regulatory authorities, (iii) statements of
future economic performance, and (iv) statements of assumptions underlying other
statements and statements about is and our business.
This report also identifies important factors, which could cause our
actual results to differ materially from those indicated by the forward-looking
statements. These risks and uncertainties include the factors discussed under
the heading "Certain Factors That May Affect Future Growth" beginning at page 9
of this report.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our Consolidated
Financial Statements and the notes thereto appearing elsewhere in this report.
Overview
Our business has two segments, the Laser and Photonics Group and the
Plastics Group. We sell products and services in the fields of material
processing, advanced manufacturing methods, high productivity production mold
building and laser-application technology. We have approximately 140 employees.
Our Laser and Photonics Group, comprised of Laser Fare (Smithfield, RI),
Mound Laser & Photonics Center (Miamisburg, OH), MetaTek, Inc. (Albuquerque, NM)
and the Advanced Technology Group (Narragansett, RI), provides comprehensive
laser-based materials processing services to leading manufacturers. Subsequent
to year-end, we formed Infinite Photonics, Inc., which is charged with
developing the manufacturing and sales of our proprietary GCSEL laser diodes.
Our Plastics Group, comprised of Osley & Whitney/ ExpressTool (Westfield,
MA), Materials & Manufacturing Technologies (West Kingston, RI) and Express
Pattern
21
(Buffalo Grove, IL), provides rapid prototyping services and proprietary mold
building services.
Since the Company's acquisition of LF in 1994 and MLPC in 1998, the
Company's operations have primarily consisted of contract research and
development for applied photonics, advanced laser and photonics technologies,
and traditional laser welding, machining, drilling and engraving manufacturing
services. In addition, MLPC and LF's Advanced Technology (ATG) divisions
specialize in applied photonics research for governmental and commercial
customers, if the research is reasonably expected to result in a commercially
viable product for an Infinite unit. To meet aerospace and medical device
customer needs, Laser Fare is certified for overhaul and repair by the Federal
Aviation Administration (FAA No. LQFR37K), and as a Contract Manufacturer (Type
E) by the Food and Drug Administration (FDA No. 1287338).
One of our research projects conducted with Hasbro, Inc. resulted in the
formation of ExpressTool (ET) in 1996. ET was formed for the purpose of
commercializing the technology developed in business areas unrelated to Hasbro's
operations. In April 1999, we acquired Osley & Whitney (O&W), a 50-year-old
moldbuilder and we integrated ET into the production process at O&W.
We formed Express Pattern (EP) in April 1999 to allow customers' design
engineers to produce rapid prototype parts.
During 2000, ATG completed initial prototype testing of proprietary
grating coupled surface emitting laser (GCSEL) diode technology and furthered
initial patent applications on the technology. Shortly after year-end, the
Company formed Infinite Photonics, Inc. to begin commercialization of the
technology for telecommunications and other applications.
We continued to experience operating losses in 2000, due primarily to
delays at LF in the receipt of materials for aerospace and jet engine parts. Due
to falling demand for plastic due to the rapid increase in petroleum prices in
2000, demand for our injection molds declined and O&W/EP suffered operating
losses. These losses resulted in reductions in cash flow, increased borrowings
from banks and a negative working capital position. Management is focused on our
two primary lines of business and is actively pursuing additional capital
through the equity line of credit agreement, private equity sources, strategic
alliances, venture capital and investment banking sources. Further we continue
to implement cost reduction programs.
During 2000, our management continued to investigate and implement
strategies aimed at developing the applied photonics segment of our business.
These included LF-ATG expending approximately $0.6 million in research and
development funds for developing and marketing technology for GCSEL and high
temperature superconductor applications initially developed by LF-ATG. We also
expended approximately $0.5 million on labor and related costs pursuant to a
non-monetary exchange agreement to
22
acquire equipment for the first pilot manufacturing of LENS products. We are
currently involved in discussions with a number of Fortune 500 companies, which
would provide funding and additional revenue sources, for the formation of
strategic partnerships. In March 2000, we formed a strategic alliance with
Cutting Edge Optronics, Inc., a subsidiary of TRW, for prototype and pilot
manufacture of our GCSEL laser diodes.
Our financial statements included in this report have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of our business as a going concern. However, we have sustained
substantial operating losses in recent years and have used a significant amount
of working capital in our operations. Management believes that our operations,
as currently structured, together with our current financial resources, will
result in improved financial performance in fiscal 2001. However, our auditors
have included a paragraph in their report expressing substantial doubt about our
ability to continue as a going concern.
Liquidity and Capital Resources
We have financed our product development activities and operations through
a series of private placements of debt and equity securities. As of December 31,
2000, we had cash and cash equivalents of approximately $186,000 available for
our working capital needs and planned capital asset expenditures.
While the majority of the revenues realized as of December 31, 2000 were
attributed to our LF and O&W operations, we anticipate improved revenue from our
other divisions and positive results from additional expense containment
measures that have been implemented. We anticipate that our equity line of
credit, as well as other strategies for raising additional working capital
through debt and/or equity transactions will provide liquidity. Subsequent to
year-end in the first quarter of 2001, two installment payments under the
subscription agreement totaling $ 137,969, with interest, a drawdown under the
equity line with Cockfield of $62,500, and a private placement of $50,000 were
received, or $ 250,469 in total was received. An additional private placement of
$250,000 and conversion of a capital lease obligation to our principal
shareholder of $448,830 to stockholders's equity was completed in early April
2001.
As of December 31, 2000 we had a working capital deficit of approximately
$3.8 million. In conjunction with our on-going business expansion program, we
are pursuing alternative sources of funding from conventional banking
institutions as well as exploring the availability of government funds in the
form of revenue bonds for the purchase of equipment and facilities, among
others. There is no assurance, however, that our current resources will be
adequate to fund our current operations and business expansion or that we will
be successful in raising additional working capital. Our failure to raise
necessary working capital could force us to curtail operations, which would have
a material adverse effect on our financial condition and results of operations.
In addition, at December 31, 2000, we were not in compliance with certain
covenants under our borrowing facilities. Accordingly, the lender may, upon
notice, declare the entire unpaid principal balance due and payable.
23
Results of Operations
Laser and photonics group
Revenues from our laser material processing, value added services,
advanced technology consulting and laser and photonics services for the year
ended December 31, 2000 were $6,507,860 with a gross profit for the period of
$2,225,459.
Plastics group
Revenues from our plastic moldbuiding, conformal cooling and proprietary
thermal management of high production injection mold tooling, plastic rapid
prototyping services and electrodes and parts made from zirconium
diboride/copper (Zykron(TM)) composites for year ended December 31, 2000 were
$6,657,879 with a gross profit for the period of $1,594,131.
Comparison of the years ended December 31, 2000 and 1999
In 2000, consolidated revenues were $13,165,739 on cost of sales of
$9,346,149, resulting in a gross profit of $3,819,590 for the year. Consolidated
revenues in 1999 were $9,239,969 on cost of sales of $7,155,817 resulting in a
gross profit of $2,084,152. The increase of $3,925,770, or 42% in consolidated
revenues for the year ended December 31, 2000 compared to the year ended
December 31, 1999 was primarily due to increased EP and ATG revenues and a full
year of O&W operations. Gross profit margin increased in 2000 to 29% from 22% in
1999. This increase was due to fixed costs of sales leverage, higher margin
revenue and cost savings measures implemented during 2000.
Research and development expenses were $583,686 for the year ended
December 31, 2000 as compared to $1,273,437 for the year ended December 31,
1999. The decrease is primarily attributed to the transfers of personnel and
equipment from research and development efforts to production of product for
both our photonics (LENS project) and plastics (ExpressTool) groups and out of
our Advanced Technology Group. We anticipate that research and development
expenses will expand rapidly in 2001, based on relatively high levels of
proposal activity for contract R&D, as well as GCSEL and direct write product
development efforts for our new Infinite Photonics subsidiary.
General and administrative expenses were $2,747,081 for the year ended
December 31, 2000 as compared to $2,794,605 for the year ended December 31,
1999. The decrease of $47,524 is primarily due to reductions in administrative
staff and executive salary expenses.
Selling expenses were $640,313 for the year ended December 31, 2000 as
compared to $900,166 for the year ended December 31, 1999. The decrease of
$259,853 or 28.9% was primarily attributed to decreased sales salaries and
commissions at our new subsidiaries, partially resulting from use of our
Internet- based quoting system, and other efficiencies.
24
Depreciation and amortization expense totaled $1,126,116 for the year
ended December 31, 2000 as compared to $962,925 for the year ended December 31,
1999. The increase was primarily due to medical lasers for stent production at
our laser group, and depreciation related to the new subsidiaries.
Interest expense was $748,606 during 2000 as compared to $655,032 during
1999. The increase of $93,574 or 14.3% was due to interest paid on the debt
obligations related to O&W and on financing stent equipment. Interest and other
income for the year ended December 31, 2000 was $60,587 as compared to $74,633
for the year ended December 31, 1999.
We had a consolidated net loss of $2,094,247 for the year ended December
31, 2000 as compared to $560,190 in 1999. The loss from continued operations was
$2,094,247 for the year ended December 31, 2000 as compared to $4,507,640 for
the period ended December 31, 1999. The improvement is due primarily due to
higher sales from new photonics services and at Express Pattern, as well as cost
containment of general and administrative costs at newly acquired companies.
Year 2000 Readiness
We have not experienced any business interruptions or supplier or customer
delays from year 2000 problems and have not discovered any year 2000 problems in
internal computer systems material to our operations. There can be no assurance,
however, that we or our suppliers or customers may not face future problems as a
result of year 2000 issues.
Financial Statements
Reference is made to the financial statements, the report thereon and
notes thereto, beginning on page F-1 of this report.
Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure
On November 1, 2000, we were notified that Freed Maxick Sachs & Murphy, PC
had merged with McGladrey & Pullen, LLP and that Freed Maxick Sachs & Murphy, PC
would no longer be our auditor. McGladrey & Pullen, LLP was appointed as the
Registrant's new auditor. The appointment of McGladrey & Pullen, LLP was
approved by shareholders at the Annual Meeting on March 22, 2001.
25
PART III
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the our directors and
executive officers.
Affiliated
Name Age Position Since
------------------------------------- -------- ---------------------------------------- -------------
Clifford G. Brockmyre II(1) 59 Chairman of the board, president and 1994
chief executive officer
Bruce J. Garreau 50 Chief financial and accounting officer 1999
Daniel T. Landi 58 Corporate controller and secretary 1994
William G. Lyons III (2) 44 Director 1998
J. Terence Feeley 50 President - ATG and director 1994
Michael S. Smith (2) 46 Director 1995
Brian C. Corridan (2) 52 Director 2000
--------------------
(1) This person may be deemed a parent and/or promoter as those terms are
defined in the Rules and Regulations promulgated under the Securities Act
of 1933, as amended.
(2) Member of the audit and compensation committees.
Each director is elected for a period of one year and serves until his
successor is duly elected by our stockholders. Officers are elected by and serve
at the will of our board of directors.
26
Background
The principal occupation of each of our directors and executive officers
for at least the past five years is as follows:
Clifford G. BrockmyreII. Mr. Brockmyre has been a director since October
1994, our president since October 1995 and our chief executive officer since
January 1998. For over 27 years, Mr. Brockmyre has been involved in the tooling,
machining and manufacturing industries and was the 1992 chairman of the 3000+
corporation member National Tooling and Machining Association. He developed the
laser manufacturing liaison to the National Laboratories at Los Alamos, Sandia
and Oak Ridge for Laser Fare. The Department of Energy has set up Laser Fare as
a model for technology transfer under its Small Business Initiative. Mr.
Brockmyre serves on the Rhode Island State Economic Advisory Council, a position
he was appointed to by the Governor of Rhode Island.
J. Terence Feeley. Mr. Feeley has been the president of the Laser Fare --
Advanced Technology Group since 1994. He became a director in March, 1999. He
was the co-founder, president and chief executive officer of Laser Fare prior to
its acquisition by us. Mr. Feeley is the immediate past President of the Laser
Institute of America, the author of over 50 papers on laser technology and the
co-editor of three books in the area of laser based rapid manufacturing. Mr.
Feeley received a BA from the University of Rhode Island.
Bruce J. Garreau, Mr. Garreau became our chief financial officer in July
1999. Prior thereto, he served as a consulting principal with the Corporate
Financial Group (CFG) which provided financial, merger and acquisition, planning
and strategy services to venture capital funded technology and other start-ups,
as well as product and other development services to larger companies. Prior to
CFG he was executive vice president and controller of Northeast Savings, FA
Hartford, CT, then the largest publicly traded thrift institution in New England
(subsequently acquired by Fleet Bank). He served nine years as senior manager
and senior computer specialist at KPMG. He is a graduate of State University of
New York at Albany with a BS in public accountancy and is a certified public
accountant in New York and Connecticut.
Daniel T. Landi. Mr. Landi is our corporate controller and secretary and
was our chief financial officer from August 1994 to July 1999. Prior thereto,
from January 1993 to June 1994 he was the chief financial officer of a privately
held aerospace research and development company. From June 1991 through 1992,
Mr. Landi was a principal of Focused Management Consulting Group, a firm
concentrating on acquisitions, mergers, joint ventures and start-up operations,
including private placements and initial public offerings. Mr. Landi has
extensive domestic and international experience in finance, accounting and
information systems with his twenty-six years of progressive growth in overall
business and senior financial management with IBM. Mr. Landi has a B.S. in
Finance and an MBA from the University of Connecticut.
27
Michael S. Smith. Mr. Smith became a director in 1995 and is a member of
the audit and compensation committees. He is the president and chief executive
officer of Micropub Systems International Inc., a brewery system manufacturer.
From October 1992 through January 1997, Mr. Smith was the managing director of
corporate finance of H.J. Meyers & Co., an investment-banking firm and was
general counsel of such firm from May 1991 through May 1995. Mr. Smith was
associated with the law firm of Harter, Secrest & Emery from 1987 until 1991.
Mr. Smith received a B.A. from Cornell University and a J.D. from Cornell
University School of Law.
William G. Lyons III Mr. Lyons became a director in December 1998 and is a
member of the audit and compensation committees. He is president of Third
Generation Consultants, LLC and chairman of Blackstone Medical, Inc. Previously,
Mr. Lyons was employed by Brimfield Precision, Inc. from 1981 through 1998, a
manufacturer of surgical instruments and orthopedic implants, in various
capacities including president and chief executive officer. Mr. Lyons received a
B.S. in Mechanical Engineering- Material Science from the University of
Connecticut and a M.S. in biomedical Engineering from Hartford Graduate
Center/Rensselaer Polytechnical Institute.
Brian Q. Corridan. Mr. Corridan became a director in November 2000 and is
a member of the audit and compensation committees. Since 1994, he has been
president of Corridan & Co. after founding the privately owned full service
investment firm registered with the SEC, NYSE and NASD. He has served as a
Registered Representative with Prudential Securities, Tucker Anthony-R.L., Day,
and Kidder Peabody & Co. Mr. Corridan received his BA from Stonehill College,
and is a graduate of the Naval Officers Candidate School in Newport. Also, he is
a director of Health New England, serves on the Finance Committee of Baystate
Health System, and as a Trustee for several civic and educational organizations,
including Our Lady of Elms College and Springfield Technical Community College
Assistance Corporation.
Our board of directors has an audit committee and a compensation
committee. The audit committee reviews the scope and results of the audit and
other services provided by our independent accountants and our internal
controls. The compensation committee is responsible for the approval of
compensation arrangements for our officers and the review of our compensation
plans and policies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
Forms 5 were required, we believe that all Section 16(a) filing requirements
applicable to its officers and directors were complied
28
with except as follows: Bruce Garreau -- late Form 3 filing; Clifford G.
Brockmyre -- Form 4 one transaction.
Directors' Compensation
Our directors do not receive any cash consideration for serving as
directors. All directors are reimbursed for out-of-pocket expenses incurred in
connection with their attendance at board meetings. In addition, pursuant to our
non-discretionary, non-employee directors' stock option plan, each non-employee
director is granted options to purchase 5,000 shares of common stock upon
becoming a director and at the end of each fiscal year during which he served as
a director.
Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law (DGCL) authorizes corporations to
limit or eliminate the personal liability of directors to corporations and their
shareholders for monetary damages for breach of directors' fiduciary duty of
care. Our certificate of incorporation limits the liability of our directors to
the company or its shareholders to the fullest extent permitted by Delaware law.
Our certificate of incorporation provides mandatory indemnification rights
to any officer or director who, by reason of the fact that he or she is an
officer or director, is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
officer or director in advance of the final disposition of such proceeding in
accordance with the applicable provisions of the DGCL. Insofar as
indemnification for liabilities under the Securities Act may be provided to
officers and directors or persons controlling the company, we have been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification by us will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth certain information
concerning compensation for services in all capacities awarded to, earned by or
paid to our chief executive officer and the other four most highly compensated
executive officers ("Named Executives") during 2000, 1999 and 1998 whose
aggregate compensation exceeded $100,000.
29
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Principal ($) Securities All Other
Position Year Salary Deferred Underlying Options(#) Compensation ($)
-------- ---- -------- -------- --------------------- ----------------
Clifford G. Brockmyre 2000 $132,966 -- 11,000 --
President and chief 1999 $163,096 -- 60,019 --
executive officer 1998 $175,000 -- 4,038 --
J. Terence Feeley 2000 $140,297 $ 9,288 240,000 --
President -- Advanced 1999 $151,603 $ 9,652 1,731 --
Technology Group 1998 $169,120 $ 10,000 56,928 --
Bruce J. Garreau 2000 $ 94,868 $ 8,308 108,500 --
Chief financial and 1999 $ 51,714 $ 75,000 -- $ 7,312
accounting officer 1998 -- -- -- --
Daniel T. Landi 2000 $ 87,966 -- 6,500 --
Corporate controller 1999 $101,539 -- 1,270 --
and secretary 1998 $110,000 -- 2,308 --
Employment Agreements
We have an employment agreement with Clifford G. Brockmyre II, our
president and chief executive officer, for a term expiring on June 30, 2003,
which provides for an annual salary of $175,000 and various benefits. In
addition to the compensation provided under the agreement, Mr. Brockmyre is
eligible to participate in our bonus plan and is eligible for other bonuses as
determined in the sole direction of the board of directors. The agreement also
provides, among other things, that, if Mr. Brockmyre is terminated other than
for cause (which is defined to include conviction of a crime involving moral
turpitude, engaging in activities competitive with us, divulging confidential
information, dishonesty or misconduct detrimental to us or breach of a material
term of the agreement), we will pay to him a lump sum payment equal to the
product of the sum of (i) the highest annual rate of salary paid to Mr.
Brockmyre, and (ii) the highest annual bonus paid to or accrued to the benefit
of Mr. Brockmyre during the employment term multiplied by 2.99. The agreement
also provides for payments to Mr. Brockmyre, or his estate, in the event of his
death or permanent disability.
We have an employment agreement with Mr. J. Terence Feeley, president of
the Advanced Technology Group, for a term expiring on July 1, 2002, which
provides for an annual salary of $150,000 and various benefits. In addition to
the compensation provided under the agreement, Mr. Feeley is eligible to
participate in our bonus plan and is eligible for other bonuses as determined in
the sole direction of the board of directors. This agreement also provides,
among other things, that, if Mr. Feeley is terminated other than for Cause, we
will pay to him a lump sum payment equal to the product of the sum of (i) the
highest annual rate of salary paid to Mr. Feeley, and (ii) the highest annual
bonus paid to or accrued to the benefit of Mr. Feeley during the employment term
multiplied by two.
30
The agreement also provided for payments to Mr. Feeley, or his estate, in the
event of his death or permanent disability.
We have an employment agreement with Bruce J. Garreau, our chief financial
and accounting officer, for a term expiring on October 1, 2002, which provides
for an annual salary of $135,000 and various benefits including the grant of
10,000 shares of our common stock and 75,000 stock options exercisable at $1.00
per share. The 10,000 shares had a value of $7,312 upon issuance. The options
vest in three equal installments of 25,000 shares over an eighteen-month period.
In addition to the compensation provided under the agreement, Mr. Garreau is
eligible to participate in our bonus plan and is eligible for other bonuses as
determined in the sole direction of the board of directors. The agreement also
provides, among other things, that if Mr. Garreau is terminated other than for
Cause, we will pay to him a lump sum payment equal to the product of the sum of
(i) the highest annual rate of salary paid to Mr. Garreau and (ii) the highest
annual bonus paid to or accrued to the benefit of Mr. Garreau during the
employment term multiplied by two. The agreement also provides for payments to
Mr. Garreau, or his estate, in the event of his death or permanent disability.
Stock Options. The following tables show certain information with respect to
stock options exercised and granted in 2000 to Named Executives and the
aggregate value at December 31, 2000 of all stock options granted to the Named
Executives. All information contained in this tables and the description of the
stock option plans which follow gives effect to the one-for-five reverse stock
split affected on February 16, 1999.
Aggregated Options Exercised in Last Fiscal Year
Number of Shares Acquired by Exercise
-------------------------------------
Name Total Shares (#)* (#)Shares/ Exercise Price per Share
---- ----------------- -----------------------------------
Clifford G. Brockmyre II 96,758 3,663 shares at $1.50; 62,019 at $1.875; and 31,076 at $2.50
Bruce J. Garreau 52,800 50,000 shares at $1.00; 2,800 at $1.50
J. Terence Feeley 6,050 3,333 shares at $1.50; 1731 at $1.875; and 987 at $2.50
----------
*Shares acquired are subject to restrictions on resale, under the incentive
stock option plan (two years from the date of grant or one year from the date of
exercise, whichever is later) and insider "six-month short-swing" rules.
31
Option Grants in Last Fiscal Year
Individual Grants
Number of Percent of Total
Shares Options/Granted to
Underlying Employees in Exercise Price Expiration
Name Options Granted Fiscal Year ($/Sh) Date
---- --------------- ----------- -------------- ----
(#)
Clifford G. Brockmyre 11,000 1.5% $ 1.50 12/20/10
Thomas J. Mueller 131,250 18.1% $ 1.50 12/20/10
J. Terence Feeley 240,000 33.0% $ 1.50 12/20/10
Bruce J. Garreau 108,500 14.9% $ 1.50 12/20/10
Daniel T. Landi 6,500 0.9% $ 1.50 12/20/10
Aggregate 2000 Year End Option Values
Number of Shares of Common
Stock
Underlying Unexercised Value of Unexercised
Options In-The Money Options at
At 12/31/00 (#) 12/31/00* ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Clifford G. Brockmyre 3,668/3,669 $ 859/860
J. Terence Feeley 109,271/ 233,333 $ --/54,600
Bruce J. Garreau 30,700/ 100,000 $ 19,684 /23,400
Daniel T. Landi 14,454/ 2,268 $ 1,014/507
--------------------
* Based on December 31, 2000 Nasdaq closing price of $1.734.
Stock Option Plans
We have stock option plans, which were adopted by our board and approved
by our shareholders covering an aggregate of 2,172,926 unexercised shares of our
common stock, consisting of both incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986 (the "Code") and
non-qualified options. The option plans are intended to qualify under Rule 16b-3
of the Securities Exchange Act of 1934, and were registered under Form S-8 on
May 4, 2000. Incentive stock options are issuable only to our employees, while
non-qualified options may be issued to non-employees, consultants, and others,
as well as to employees.
The option plans are administered by the compensation committee of the
board of directors, which determines those individuals who shall receive
options, the time period
32
during which the options may be partially or fully exercised, the number of
share of common stock that may be purchased under each option, and the option
price.
The per share exercise price of an incentive or non-qualified stock option
may not be less than the fair market value of the common stock on the date the
option is granted. The aggregate fair market value (determined as of the date
the option is granted) of the shares of common stock for which incentive stock
options are first exercisable by any individual during any calendar year may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him or her, more than 10% of the total
combined voting power of all classes of stock of the company shall be eligible
to receive any incentive stock option under the option plans unless the option
price is at least $110% of the fair market value of our common stock subject to
the option, determined on the date of grant. Non-qualified options are not
subject to this limitation.
An optionee may not transfer an incentive stock option, other than by will
or the laws of descent and distribution, and during the lifetime of an optionee,
the option will be exercisable only by him or her. In the event of termination
of employment other than by death or disability, the optionee will have three
months after such termination during which to exercise the option. Upon
termination of employment of an optionee by reason of death or permanent total
disability, the option remains exercisable for one year thereafter to the extent
it was exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
Pursuant to the option plan adopted at our shareholders' meeting held
during 1999, each new non-employee director of the company is automatically
granted, upon becoming a director, an option to purchase 5,000 shares of common
stock at the fair market value of such shares on the grant date. In addition,
each non-employee director shall automatically be granted an option to purchase
5,000 shares at the fair market value of such shares on the date of grant, on
the date of our annual meeting of shareholders. Each such option shall vest 1/3
upon grant and 1/3 at the end of each subsequent year of service.
Options under the option plans must be granted within 10 years from the
effective date of each respective plan. Incentive stock options granted under
the plan cannot be exercised more than 10 years from the date of grant, except
that incentive stock options issued to greater than 10% stockholders are limited
to four-year terms. All options granted under the plans provide for the payment
of the exercise price in cash or by delivery of shares of common stock already
owned by the optionee having a fair market value equal to the exercise price of
the options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of common stock to purchase
additional shares of common stock and may theoretically exercise all of his
stock options without making any additional cash investment.
33
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be affiliated with the Company become available once again for
issuance. As of January 31, 2001, we had outstanding stock options to purchase
984,429 shares of Common Stock under the Option Plans, including 17,000 shares
to Michael S. Smith, 15,500 shares to William G. Lyons III, and 7,500 shares to
Brian Q. Corridan under the Directors' Plan. These options are exercisable at
prices ranging from $1.375 to $9.40 per share.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
None of the directors serving on the compensation committee of our board of
directors is employed by us. In addition, none of our directors or executive
officers is a director or executive officer of any other corporation that has a
director or executive officer who is also a member of our board of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 28, 2001 by:
o each person known to us to be the beneficial owner of more than 5%
of our outstanding shares;
o each of our directors;
o each executive officer named in the Summary Compensation Table
above;
o all of our directors and executive officers as a group.
Except as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all shares of common stock owned by them.
All information with respect to beneficial ownership has been furnished to us by
the respective stockholder.
34
Name of Shares of Common Stock Percentage
Beneficial Owner (1) Beneficially Owned (2) of Class (3)
-------------------- ---------------------- ------------
Directors and Executive Officers
Clifford G. Brockmyre II 1,383,058(4) 34.49%
J. Terence Feeley 127,106(5) 3.56%
Bruce J. Garreau 97,000(6) 2.78%
Daniel T. Landi 17,695(7) *
Thomas J. Mueller 5,000 *
Brian Q. Corridan 2,500(8) *
William G. Lyons III 8,333(9) *
Michael S. Smith 10,333(10) *
All executive officers
and directors as a
group (7 persons) 1,651,025(14) 39.41%
5% Stockholders
Northeast Hampton
Holdings, LLC (11) 497,106 14.36%
Neptune Capital, Inc. (12) 300,000 8.49%
Cockfield Holdings, LLC (13) 200,000 5.46%
----------
* less than 1%
(1) The address of Mr. Brockmyre is c/o Infinite Group, Inc. 2364 Post Road,
Warwick, RI 02886. The address of Northeast Hamptons Holding, LLC is P. O.
Box 146, Boca Raton, FL 33429. The address of Neptune Capital, Inc. is
6119 Camino-de-la-Costa, La Jolla, CA 92037. The address of Cockfield
Holdings, LLC is c/o Mischon deReya Solicitors, 21 Southhampton Row,
London WC1B 5HS England Attn: Kevin Gold.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
common stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants or upon the
conversion of securities are deemed to be outstanding for the purpose of
computing the percent of ownership of such individual or group, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(3) Assumes that all currently exercisable options or warrants or convertible
notes owned by the individual have been exercised.
(4) Includes 20,000 shares owned by Mr. Brockmyre's wife as to which shares
Mr. Brockmyre disclaims beneficial ownership, 3,668 shares subject to
currently exercisable options and 544,900 shares subject to currently
exercisable warrants.
(5) Includes 105,939 shares subject to currently exercisable options
(6) Includes 30,700 shares subject to currently exercisable options.
(7) Includes 12,284 shares subject to currently exercisable options.
(8) Includes 2,500 shares subject to currently exercisable options.
35
(9) Includes 8,333 shares subject to currently exercisable options.
(10) Includes 8,333 shares subject to currently exercisable options.
(11) The information with respect to this stockholder was derived from the
Schedule 13D and Form 4's filed by the reporting person.
(12) Includes 50,000 shares subject to currently exerciseable warrants and
31,250 shares subject to a subscription agreement.
(13) Includes 200,000 shares subject to currently exerciseable warrants.
(14) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the period from January 1, 1998 through December 31, 2000, our
president and chief executive officer loaned the Company an aggregate of
$2,564,000, which bore interest at various interest rates. In consideration for
these loans, our president was issued warrants to purchase 697,900 shares of
common stock. As of December 31, 2000, the Company had repaid approximately
$717,000 of the loans and approximately $1,164,000 had been converted into
704,407 shares of common stock. Additionally, during 2000, $145,000 of interest
was paid on these loans.
In May 2000, we completed a $500,000 private placement of common stock with
Neptune Capital, Inc., at a price of $2.00 per share, of which $250,000 was paid
in cash and the remainder is due in four equal installments (August 31, 2000,
November 29, 2000, February 26, 2001 and May 26, 2001) with accrued interest at
10% per annum. In conjunction with the financing, we issued warrants to purchase
50,000 and 100,000 shares of common stock, at exercise prices of $1.625 and
$2.00 per share, respectively, exercisable commencing on the first anniversary
date of the warrant and expiring five years from the date of issuance.
During the year ended December 31, 2000, we entered into a capital lease
agreement for equipment with our president and principal stockholder. The lease
provides for monthly payments of approximately $5,650 through April 2010,
including interest at the prime rate plus 1% (10.5% at December 31, 2000). As of
December 31, 2000, we were in arrears on the required payments. The outstanding
balance as of December 31, 2000 amounted to $418,918, plus accrued interest of
$26,912. In April 2001, our president and principal stockholder contributed the
assets under this lease to the Company in exchange for 225,000 shares of our
common stock and released us from all obligations under the lease.
We believe that the foregoing transactions were on terms no less favorable
to us than could have been obtained from third parties. As a matter of policy,
in order to reduce the risks of self-dealing or a breach of the duty of loyalty
to the company, all transactions between the company and any of its officers,
directors or principal stockholders are for bona fide purposes and are approved
by a majority of the disinterested members of our Board.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
The Exhibits listed below are filed as part of this Report.
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment of Certificate of Incorporation dated January 7,
1998. (8)
3.3 Certificate of Amendment of Certificate of Incorporation dated February
16, 1999.(9)
3.4 By-Laws of the Company. (1)
4.1 Specimen Stock Certificate. (1)
36
10.1 1993 Stock Option Plan. (1)
10.2 1993 Non-Employee Directors' Stock Option Plan. (1)
10.3 Form of Stock Option Plan. (3)
10.4 Form of Stock Option Agreement. (1)
10.5 Stock Acquisition Agreement between the Company and HGG Laser Fare Inc.
(2)
10.6 Lease Agreement between Rhode Island Industrial Facilities Corporation and
HGG Laser Fare, Inc. for certain equipment and operating facility in
Smithfield, Rhode Island. (4)
10.8 Loan Agreement between HGG Laser Fare, Inc. and First National Bank of New
England and dated December 21, 1995.(5)
10.9 Spectra Acquisition Corp. - Series A Convertible Stock Purchase Agreement
dated August 23, 1996. (7)
10.10 Spectra Acquisition Corp. -Stockholders' Agreement dated August 23, 1996.
(7)
10.11 Employment Agreement between Clifford G. Brockmyre II and the Company.
(12)
10.12 Employment Agreement between Larry R. Dosser and the Mound Acquisition,
Inc. dated February 12, 1998. (8)
10.13 Mound Acquisition Agreement dated February 12, 1998. (8)
10.14 Supply Agreement between Laser Fare, Inc. and Dey Laboratories, L.P. dated
October 20, 1997. (8)
10.15 Stock Repurchase Agreements dated February 19, 1999 between the Company
and Clearwater Funds. (9)
10.16 Form of Loan Agreements and Warrant between the Company and Clifford G.
Brockmyre. (9)
10.17 Form of Spectra Science Corporation Stock Sale Agreement. (9)
10.18 Employment Agreement between J. Terence Feeley and the Company dated July
1, 1999. (11)
10.19 Employment Agreement between Bruce J. Garreau and the Company dated
October 1, 1999. (11)
10.20 Employment Agreement between Thomas M. O'Connor and the Company dated
November 15, 1999. (11)
10.21 Stock Acquisition Agreement between Infinite Group, Inc. and Osley &
Whitney, Inc. dated April 16, 1999. (10)
10.22 Stock Acquisition Agreement between Infinite Group, Inc. and Materials &
Manufacturing Technologies, Inc. dated March 24, 1999. (11)
10.23 Equity Line of Credit Agreement dated November 20, 2000, between
Registrant and Cockfield Holdings Limited. (12)
10.24 Registration Rights Agreement dated November 20, 2000, between Registrant
and Cockfield Holdings Limited. (12)
10.25 Escrow Agreement dated as of November 20, 2000, among Registrant,
Cockfield Holdings Limited and Epstein Becker & Green, P.C. (12)
10.26 Form of Stock Purchase Warrant dated November 20, 2000, issued to each of
Cockfield Holdings Limited and Jesup & Lamont Securities Corporation. (12)
21 Subsidiaries of the Company.*
23 Consent of McGladrey and Pullen, LLP.*
24 Consent of Freed Maxick Sachs & Murphy, PC*
---------------------
* Filed herewith.
(1) Previously filed as on Exhibit to the Company's Registration Statement on
Form S-1 (File #33-61856). This Exhibit is incorporated herein by
reference.
37
(2) Incorporated by reference to Report on Form 8-K, dated July 1, 1994.
(3) Incorporated by reference to 1993 Preliminary Proxy Statement.
(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996.
(7) Incorporated by reference to Report on Form 8-K dated August 26, 1996.
(8) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997.
(9) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December, 31, 1998.
(10) Incorporated by reference to report on Form 8-K dated April 16, 1999.
(11) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December, 31, 1999.
(12) Previously filed as on Exhibit to the Company's Registration Statement on
Form S-2 (File #333-51768). This Exhibit is incorporated herein by
reference.
Reports on Form 8-K
(1) November 2, 2000, Freed Maxick Sachs & Murphy, PC, the Registrant's
independent auditors, had merged with McGladrey & Pullen, LLP
(2) On December 29, 2000, the Registrant acquired all of the outstanding
shares of MetaTek, Inc.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities
Exchange Act of 1934, the company has duly caused this Report to be signed on
April 16, 2001 on its behalf by the undersigned, thereunto duly authorized.
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre II
-----------------------------
Clifford G. Brockmyre II, President
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons on behalf of the company and in
the capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Clifford G. Brockmyre II Director, President and
---------------------------- Chief Executive Officer April 16, 2001
Clifford G. Brockmyre II
/s/ Bruce J. Garreau Chief Financial and April 16, 2001
---------------------------- Accounting Officer
Bruce J. Garreau
/s/ J. Terence Feeley Director April 16, 2001
----------------------------
J. Terence Feeley
/s/ William G. Lyons III Director April 16, 2001
----------------------------
William G. Lyons III
/s/ Michael S. Smith Director April 16, 2001
----------------------------
/s/ Brian Q. Corridan Director April 16, 2001
----------------------------
Brian Q. Corridan
39
CONSOLIDATED
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
================================================================================
DECEMBER 31, 2000
with
INDEPENDENT AUDITOR'S REPORTS
INFINITE GROUP, INC.
CONTENTS
================================================================================
Page
----
Independent Auditor's Reports............................................ 1 - 2
Consolidated Financial Statements:
Balance Sheets..................................................... 3
Statements of Operations........................................... 4
Statements of Stockholders' Equity................................. 5 - 6
Statements of Cash Flows........................................... 7 - 8
Notes to Consolidated Financial Statements............................... 9 - 34
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Group, Inc.
We have audited the accompanying consolidated balance sheet of Infinite
Group, Inc. as of December 31, 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Infinite
Group, Inc. as of December 31, 2000, and the consolidated results of their
operations and their cash flows for the year then ended 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 2 to the
financial statements, the Company has suffered recurring losses from operations
and its current liabilities exceeds its current assets. In addition the Company
was in default of certain debt covenants at December 31, 2000, which are
explained in Note 10. This raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MCGLADREY & PULLEN, LLP
Buffalo, New York
March 2, 2001, except for Note 11,
as to which the date is April 16, 2001.
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Group, Inc.
We have audited the consolidated balance sheet of Infinite Group, Inc. as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Infinite Group,
Inc. as of December 31, 1999, and the consolidated results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
February 25, 2000
F-2
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31,
-----------------------------------------
ASSETS 2000 1999
---------------- --------------
Current assets:
Cash and cash equivalents $ 185,901 $ 328,094
Restricted funds 85,735 79,235
Accounts receivable, net of allowance 1,827,275 1,496,288
Inventories 482,585 536,554
Other current assets 104,003 147,581
Advance - stockholder 50,249 50,014
Note receivable -- 204,716
---------------- --------------
Total current assets 2,735,748 2,842,482
Property and equipment, net 7,169,794 7,059,367
Other assets:
Preferred stock investment 295,000 250,000
Cash surrender value of officer life insurance 30,464 61,546
Prepaid pension cost 726,326 769,101
Intangible assets, net 416,002 318,342
Notes receivable - stockholders -- 6,652
---------------- --------------
1,467,792 1,405,641
---------------- --------------
$ 11,373,334 $ 11,307,490
================ ==============
See notes to consolidated financial statements.
F-3
December 31,
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------- -------------
Current liabilities:
Notes payable:
Bank $ 945,695 $ 893,957
Stockholders 48,946 40,000
Accounts payable 1,429,906 918,663
Accrued liabilities 1,045,947 933,820
Current maturities of long-term obligations 3,037,365 1,042,159
Current maturities of long-term obligations - stockholder 55,911 21,572
------------ ------------
Total current liabilities 6,563,770 3,850,171
Long-term obligations 2,134,934 5,198,680
Long-term obligations - stockholder 787,514 380,483
Commitments and contingencies (see Note 17 and 22)
Stockholders' equity
Common stock, $.001 par value, 20,000,000 shares
authorized; 3,542,049 and 2,918,604 shares issued;
3,450,113 and 2,368,529 outstanding; 93,750
subscribed in 2000 3,636 2,918
Additional paid-in capital 22,653,410 21,235,597
Accumulated deficit (20,352,590) (17,985,172)
------------ ------------
2,304,456 3,253,343
Less:
Treasury stock, 91,936 and 550,075 shares, at cost (229,840) (1,375,187)
Common stock subscription receivable (187,500) --
------------ ------------
Total stockholders' equity 1,887,116 1,878,156
------------ ------------
$ 11,373,334 $ 11,307,490
============ ============
See notes to consolidated financial statements.
F-4
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Years Ended
December 31,
------------------------------
2000 1999
------------- -------------
Sales $ 13,165,739 $ 9,239,969
Cost of goods sold 9,346,149 7,155,817
------------ ------------
Gross profit 3,819,590 2,084,152
Costs and expenses:
General and administrative 2,747,081 2,794,605
Depreciation and amortization 1,126,116 962,925
Selling 640,313 900,166
Research and development 583,686 1,273,437
------------ ------------
Total costs and expenses 5,097,196 5,931,133
------------ ------------
Operating loss (1,277,606) (3,846,981)
Other income (expense):
Interest expense:
Stockholder (144,894) (265,155)
Other (603,712) (389,877)
Loss on dispositions of assets (60,587) (109,096)
Other (4,427) (6,106)
Interest income 21,163 74,633
------------ ------------
Total other expense (792,457) (695,601)
------------ ------------
Loss from continuing operations before
income tax (expense) benefit (2,070,063) (4,542,582)
Income tax (expense) benefit (24,184) 34,942
------------ ------------
Loss from continuing operations (2,094,247) (4,507,640)
Gain on sale of disposed business segment (Note 5) -- 4,170,315
------------ ------------
Loss before extraordinary item (2,094,247) (337,325)
Extraordinary item (Note 16) -- (222,865)
------------ ------------
Net loss $ (2,094,247) $ (560,190)
============ ============
Income (loss) per share - basic and diluted:
Continuing operations $ (.72) $ (1.98)
Gain on sale of disposed business segment -- 1.83
Extraordinary item -- (.10)
------------ ------------
Net loss per share $ (.72) $ (.25)
============ ============
Weighted average number of common
shares outstanding - basic and diluted 2,911,217 2,276,823
============ ============
See notes to consolidated financial statements.
F-5
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000 and 1999
================================================================================
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
Balance - December 31, 1998 2,673,334 $ 2,673 $ 20,765,853 $(17,418,652)
Issuance of common stock in connection
with conversion of note payable 160,000 160 149,840 --
Issuance of common stock in connection
with services performed for the Company 50,000 50 124,950 --
Issuance of common stock in connection
with acquisition of MMT 20,000 20 32,297 (6,330)
Issuance of common stock in connection
with an employment agreement 10,000 10 7,302 --
Issuance of common stock 5,270 5 39,522 --
Detachable stock warrants issued with
notes payable -- -- 95,033 --
Stock warrants issued in exchange for
services -- -- 20,800 --
Common stock repurchased for treasury -- -- -- --
Net loss -- -- -- (560,190)
------------ ------------ ------------ ------------
Balance - December 31, 1999 2,918,604 2,918 21,235,597 (17,985,172)
Common
Treasury Stock Stock
---------------------- Subscription
Shares Amount Receivable Total
------ ------ ---------- -----
Balance - December 31, 1998 -- $ -- $ -- $ 3,349,874
Issuance of common stock in connection
with conversion of note payable -- -- -- 150,000
Issuance of common stock in connection
with services performed for the Company -- -- -- 125,000
Issuance of common stock in connection
with acquisition of MMT -- -- -- 25,987
Issuance of common stock in connection
with an employment agreement -- -- -- 7,312
Issuance of common stock -- -- -- 39,527
Detachable stock warrants issued with
notes payable -- -- -- 95,033
Stock warrants issued in exchange for
services -- -- -- 20,800
Common stock repurchased for treasury (550,075) (1,375,187) -- (1,375,187)
Net loss -- -- -- (560,190)
------------ ------------ ------------ ------------
Balance - December 31, 1999 (550,075) (1,375,187) -- 1,878,156
See notes to consolidated financial statements.
F-6
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
================================================================================
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
Issuance of common stock in connection
with conversion of notes payable 97,700 98 346,402 --
Issuance of common stock in connection
with conversion of debentures 74,176 74 134,926 --
Issuance of common stock under
subscription agreement, 93,750 shares
subscribed, net of fees 250,000 250 484,269 --
Issuance of common stock in connection
with the exercise of stock options 121,784 122 210,246 (37,672)
Issuance of common stock in connection
with the exercise of stock warrants 153,000 153 172,597 --
Issuance of common stock in connection
with the satisfaction of a liability 20,535 21 22,678 --
Issuance of common stock, from treasury -- -- -- (235,499)
Stock options issued in exchange for
services -- -- 46,695 --
Net loss -- -- -- (2,094,247)
------------ ------------ ------------ ------------
Balance - December 31, 2000 3,635,799 $ 3,636 $ 22,653,410 $(20,352,590)
============ ============ ============ ============
Common
Treasury Stock Stock
---------------------- Subscription
Shares Amount Receivable Total
------ ------ ---------- -----
Issuance of common stock in connection
with conversion of notes payable -- -- -- 346,500
Issuance of common stock in connection
with conversion of debentures -- -- -- 135,000
Issuance of common stock under
subscription agreement, 93,750 shares
subscribed, net of fees -- -- (187,500) 297,019
Issuance of common stock in connection
with the exercise of stock options 45,290 113,225 -- 285,921
Issuance of common stock in connection
with the exercise of stock warrants -- -- -- 172,750
Issuance of common stock in connection
with the satisfaction of a liability -- -- -- 22,699
Issuance of common stock, from treasury 412,849 1,032,122 -- 796,623
Stock options issued in exchange for
services -- -- -- 46,695
Net loss -- -- -- (2,094,247)
------------ ------------ ------------ ------------
Balance - December 31, 2000 (91,936) $ (229,840) $ (187,500) $ 1,887,116
============ ============ ============ ============
See notes to consolidated financial statements.
F-7
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
Years Ended
December 31,
-----------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(2,094,247) $ (560,190)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on disposed business segment -- (4,170,315)
Extraordinary item -- 222,865
Depreciation and amortization 1,126,116 962,925
Amortization of discount on note payable 36,104 42,347
Expenses satisfied via issuance of debt or
equity instruments 143,297 140,859
Loss on dispositions of assets 60,587 109,096
Asset write-downs and allowances 6,652 40,449
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (331,222) (153,870)
Inventories 87,141 502,447
Other current assets 43,578 164,713
Prepaid pension cost 42,775 15,127
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 681,751 (484,985)
----------- -----------
Net cash used in operating activities (197,468) (3,168,532)
Cash flows from investing activities:
Collection of note receivable 204,716 --
Purchase of property and equipment (788,411) (1,530,512)
Proceeds from sale of property and equipment 129,463 --
Investment in preferred stock (45,000) --
Increase in cash surrender value of officer
life insurance (11,282) (11,793)
Proceeds from cancellation of officers life
insurance policy 42,364 --
Purchase of intangibles (36,762) (32,559)
Purchase of subsidiary, including advances -- (473,826)
Proceeds from sale of investment in Spectra
Science Corp. -- 3,620,128
----------- -----------
Net cash (used in) provided by investing
activities (504,912) 1,571,438
See notes to consolidated financial statements.
F-8
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
================================================================================
Years Ended
December 31,
------------------------------
2000 1999
------------- ------------
Cash flows from financing activities:
Increase in restricted funds, net (6,500) (1,110)
Borrowings against cash surrender value of
officer life insurance -- 100,000
Net borrowings (repayments) of notes payable 52,354 (252,831)
Proceeds from notes payable - stockholders 1,004,000 --
Borrowings of long-term obligations -- 2,560,000
Repayments of long-term obligations (836,540) (1,204,577)
Repayment of long-term obligations - stockholder (13,652) (437,030)
Proceeds from convertible note payable -- 150,000
Proceeds from issuances of common stock,
net of expenses 447,943 --
Cash paid for deferred financing costs (87,418) --
----------- -----------
Net cash provided by financing activities 560,187 914,452
----------- -----------
Net decrease in cash and cash equivalents (142,193) (682,642)
Cash and cash equivalents - beginning of year 328,094 1,010,736
----------- -----------
Cash and cash equivalents - end of year $ 185,901 $ 328,094
=========== ===========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 669,411 $ 443,830
=========== ===========
Income taxes $ 27,334 $ 2,420
=========== ===========
See notes to consolidated financial statements.
F-9
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS
The accompanying consolidated financial statements include the financial
statements of Infinite Group, Inc. (IGI) and each of its wholly owned
subsidiaries: Laser Fare, Inc. (LF), Mound Laser and Photonics Center, Inc.
(MLPC); Osley and Whitney, Inc. (O&W) Express Tool, Inc. (ET); Materials and
Manufacturing Technologies, Inc. (MMT); Express Pattern (EP) and MetaTek, Inc.
(MT) (collectively "the Company"). The Company operates in two segments: the
Infinite Laser and Photonics Group (LF, MT and MLPC) and the Infinite Plastics
Group (O&W, ET, MMT and EP). All significant intercompany accounts and
transactions have been eliminated.
Since the Company's acquisition of LF in 1994 and MLPC in 1998, the
Company's operations have primarily consisted of contract research and
development for applied photonics, advanced laser and photonics technologies,
and traditional laser welding, machining, drilling and engraving manufacturing
services under the Laser and Photonics Group. In addition, MLPC and LF's
Advanced Technology (ATG) divisions specialize in applied photonics research for
governmental and commercial customers if the research is reasonably expected to
result in a commercially viable product for an IGI unit.
One of the Company's research projects conducted with Hasbro, resulted in
LF's formation of ET in 1996, which began the Plastics Group. As a result of
that research, ET was formed for the purpose of commercializing the technology
developed in areas other than toys and games. In April 1999, the Company
acquired O&W, a 50-year-old moldbuilder and integrated ET into the production
process at O&W. The Company formed EP in April 1999 to allow customers' design
engineers to produce rapid prototype parts.
During 2000, ATG completed initial prototype testing of proprietary
grating coupled surface emitting laser (GCSEL) diode technology and furthered
initial patent applications on the technology. Shortly after year-end, the
Company formed Infinite Photonics, Inc. to begin commercialization of the
technology for telecommunications and other applications.
NOTE 2. - MANAGEMENT PLANS
The Company continued experiencing operating losses in 2000, but at a
reduced rate from 1999. Improved sales levels and cost containment measures
improved gross profit and reduced costs and expenses, resulting in a reduction
in the loss from continuing operations. However, these operating losses resulted
in negative operating cash flow, increased borrowings, defaults on debt
obligations and negative working capital. The Company is focused on its two
primary lines of business, and is concentrating on expanding its sales volume
through the acquisition of new customers with limited increases in operating
costs. The Company is also actively pursuing additional capital through
strategic alliances, venture capital, private equity and investment banking
sources. Management estimates it will need at least $750,000 in additional debt
or equity capital to meet its obligations in 2001. See Note 21 for a discussion
of amounts raised in 2001. Due to the formation of Infinite Photonics, Inc., the
Company expects increased levels of product research, manufacturing expansion
and capital raising activities in the next fiscal year to fund the
commercialization of its GCSEL products. It is anticipated that a substantial
portion of the research will be contracted with outside funding and therefore
will minimize the amount of required funding from the Company's operating cash
flows. If the Company is successful in commercializing its GCSEL products,
F-10
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
it could provide significant revenues and opportunities for infusion of
investment capital in the Company. As discussed in Note 10, the Company was in
violation of certain debt covenants as of December 31, 2000 which have not been
waived by the bank.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. Management believes it needs to generate
additional revenues to attain a break-even operating cash flow position. The
estimated quarterly revenues necessary to attain break-even operating cash flow
is approximately $4.2 million and estimated quarterly revenues to meet all of
the Company's current cash flow commitments is approximately $4.4 million.
Management believes, but can offer no assurances, that its operations as
structured, together with its current financial resources, equity amounts raised
in 2001 and equity amounts committed for 2001 will allow the Company to meet its
financial obligations in 2001.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - For purposes of reporting cash flows, the Company
considers all highly liquid instruments purchased with original maturities of 90
days or less to be cash equivalents. Cash equivalents at December 31, 2000 and
1999 consist primarily of money market funds.
Restricted Funds - Restricted funds represent escrow funds set aside to
meet scheduled payments pursuant to a capital lease financing arrangement. These
funds are held in cash deposit and treasury trust accounts.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market and consist of the following:
December 31,
--------------------------------------
2000 1999
------------- ------------
Raw materials $ 235,153 $ 212,466
Work-in-process 247,432 324,088
------------- ------------
$ 482,585 $ 536,554
============= ============
Property and Equipment - Additions to property and equipment are recorded
at cost and are depreciated over their estimated useful lives utilizing both
accelerated and straight-line methods. The cost of improvements to leased
properties are amortized over the shorter of the lease term or the life of the
improvement. Maintenance and repairs are charged to expenses as incurred while
improvements are capitalized.
Preferred Stock Investment - The Company owns 7% and 5%, respectively, of
the outstanding Preferred Series A and B Stock of Tensegra, Inc., (formerly
Molecular Geodesics Inc.) which is recorded at cost. The Company monitors this
investment on a periodic basis to determine if an impairment exists.
Intangible Assets - Intangible assets consist of goodwill, deferred
financing costs and patents. Goodwill represents the excess of the purchase
price over the fair values of net assets of
F-11
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
acquired businesses and is amortized using the straight-line method over ten
years. Deferred financing costs are amortized using the straight-line method
over the terms of the related debt instruments, which range from two to fifteen
years. Patents are being amortized on the straight-line method over their
estimated lives of five years, commencing with the date of issuance.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company periodically reviews the recoverability of the carrying value
of its intangible assets. In determining whether there is an impairment, the
Company compares the sum of the expected future net cash flows (undiscounted and
without interest charges) to the carrying amount of the asset. In addition, the
Company will consider other significant events or changes in the economic and
competitive environments that may indicate that the remaining estimated useful
lives of its intangibles may warrant revision. At December 31, 2000 and 1999,
the Company believed that no impairment of intangibles existed.
Investment in Subsidiary - The Company accounted for its 34% investment in
a subsidiary, SSC, under the equity method of accounting. Under the equity
method, the Company formerly recognized its share of earnings and losses of the
subsidiary as incurred. Advances and distributions were recorded directly in the
investment account. During 1999 and 1998, the Company disposed of its entire
investment in SSC (see Note 5).
Revenue Recognition - Revenues are primarily recognized as the units are
shipped and consulting revenues are recognized as the consulting services are
provided. Customer deposits received in advance are recorded as liabilities
until associated services are completed. Revenue from research contracts is
recognized over the life of the contract as costs are incurred, or as contract
milestones are met. Revenue from mold manufacturing contracts is recognized
using the completed contract method of accounting which does not vary
significantly from the percentage of completion method. Accordingly, revenue and
related costs are included in operations upon substantial completion of the
contract.
Research and Development Costs - All costs related to research and
development are expensed as incurred. Research and development expense was
$583,686 and $1,273,437 for the years ended December 31, 2000 and 1999,
respectively.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was approximately $62,000 and $137,000 for the years ended
December 31, 2000 and 1999, respectively.
Income Taxes - The Company and its wholly owned subsidiaries file
consolidated federal income tax returns. Deferred taxes are provided on an asset
and liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
F-12
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Concentration of Credit Risk - Credit is granted to substantially all
customers throughout the United States. The Company maintains adequate reserves
for potential credit losses and such losses have been minimal and within
management's estimates. The allowance for doubtful accounts was approximately
$46,000 and $48,000 at December 31, 2000 and 1999, respectively.
During the year ended December 31, 2000 sales to one customer accounted
for 12% of total revenues and 4% of accounts receivable at December 31, 2000. No
one customer accounted for more than 10% of revenue in 1999.
Net Loss Per Common Share - Net loss per common share is based upon the
weighted average number of common shares outstanding during the period
presented. As of December 31, 2000 and 1999, all outstanding stock options,
warrants and convertible debentures have not been considered common stock
equivalents because their assumed exercise would be anti-dilutive.
Reclassifications - Certain amounts for 1999 have been reclassified to
conform to the 2000 presentation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable and accrued expenses
are reasonable estimates of their fair value due to their short maturity. Based
on the borrowing rates currently available to the Company for loans similar to
its term debt and notes payable, the fair value approximates its carrying
amount.
Accounting for Stock Issued to Employees - The Company accounts for its
stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is recognized for the excess of
the fair market value of the Company's common stock over the exercise price. In
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS No. 123) the Company discloses the summary
of proforma effects to reported net loss and loss per share for 2000 and 1999,
as if the Company had elected to recognize compensation costs based on the fair
value of the options granted at grant date (see Note 13).
NOTE 4. - BUSINESS ACQUISITION
Effective March 29, 1999, the Company acquired 100% of the common stock of
O&W. The aggregate consideration paid for the stock was $1.5 million ($300,000
in cash and $1,200,000 in promissory notes, see Note 10). During the year ended
December 31, 2000, $132,000 of these
F-13
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
notes payable and related accrued interest of $14,500 were converted into 97,700
shares of common stock. The O&W acquisition was accounted for under the purchase
method of accounting. Accordingly, the results of operations of O&W are included
in the accompanying statement of operations beginning from the date of
acquisition. The following is an unaudited proforma summary of the results of
operations for the year ended December 31, 1999 had O&W been acquired as of
January 1, 1999:
Sales $ 10,059,529
================
Loss from continuing operations $ (4,873,627)
================
Net loss $ (926,177)
================
Basic and diluted loss per share:
Continuing operations $ (2.14)
================
Net loss $ (.41)
================
NOTE 5. - DISPOSAL OF A BUSINESS SEGMENT
On December 2, 1998 the Board of Directors approved a plan to dispose of
the Company's 34% ownership interest in SSC. SSC was previously a majority owned
subsidiary which represented the Company's photonic materials business segment.
In 1997 the Company's ownership dropped below 50% and the Company began
reporting the results of SSC utilizing the equity method of accounting. The
Company's investment represented 2,875,500 preferred shares of SSC, which had a
recorded book value of zero under the equity method of accounting. On December
31, 1998, 444,444 shares were sold at a price of $2.25 per share, resulting in a
gain of approximately $832,000, net of deferred income taxes of $242,000. On
February 28, 1999, the Company sold 1,342,279 shares at a price of $2.25 per
share and 477,583 shares, to be repurchased by SSC, at a price of $1.26 per
share, yielding a gain of approximately $2,795,000, net of deferred income taxes
of $825,000. Also, in February 1999, the Company repurchased, from a shareholder
of SSC, 550,075 shares of its common stock for treasury in exchange for the
remaining 611,194 shares of SSC stock valued at $1,375,187, or $2.25 per share,
which resulted in a gain of approximately $1,375,000. The gain on the disposal
has been reported under the heading "gain on sale of disposed business segment"
in the accompanying statement of operations.
F-14
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6. - NOTES RECEIVABLE
Long term promissory notes in the amount of $318,452, receivable from two
stockholders, mature through December 2004 and accrue interest at 6%, which is
payable quarterly. Shares of the Company's common stock held by the stockholders
collateralize the note. A valuation allowance of $318,452 ($311,800 - 1999) has
been recorded based on management's estimate of the net realizable value of the
notes.
The $204,716 current note receivable as of December 31, 1999 represented
premiums paid by O&W on a life insurance policy, which was owned by a former
stockholder of O&W. The note was repaid in the current year.
NOTE 7. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
Depreciable ---------------------------------------
Lives 2000 1999
--------------------------- -------------- ---------------
Land N/A $ 143,625 $ 143,625
Building and leaseholds 18 - 40 years 1,853,346 1,751,471
Machinery and equipment 5 - 10 years 7,536,898 7,180,489
Furniture and fixtures 5 - 7 years 856,038 778,715
-------------- ---------------
10,389,907 9,854,300
Accumulated depreciation
and amortization (3,776,637) (2,794,933)
-------------- ---------------
6,613,270 7,059,367
Contracts in progress 556,524 --
-------------- ---------------
$ 7,169,794 $ 7,059,367
============== ===============
Included above is the following property and equipment held under capital
leases:
December 31,
-----------------------------------------
2000 1999
--------------- ---------------
Land $ 100,000 $ 100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 1,539,369 1,416,629
--------------- ---------------
2,365,131 2,242,391
Accumulated depreciation
and amortization (898,374) (818,841)
---------------- ---------------
$ 1,466,757 $ 1,423,550
================ ===============
F-15
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $190,697 and $173,645 in
2000 and 1999, respectively.
During the year ended December 31, 2000, the Company entered into an
agreement to provide certain consulting services in exchange for equipment to be
utilized in its Laser and Photonics segment. The transaction was accounted for
as a non-monetary exchange, whereby the Company is recording the fair value of
the services rendered. The fair value of services rendered and to be rendered
are expected to approximate the fair value of the equipment to be received,
which is estimated at $795,000. The services are anticipated to be completed in
early 2001. Amounts capitalized relating to this agreement as of December 31,
2000 amounted to $556,524 and have been recorded as contracts in progress. Upon
completion, the equipment will be depreciated over its estimated useful life.
NOTE 8. - INTANGIBLE ASSETS
Intangible assets consists of the following:
December 31,
-----------------------------------------
2000 1999
---------------- ---------------
Goodwill $ 249,227 $ 249,227
Deferred financing costs 296,419 217,682
Patents 69,749 32,987
--------------- ---------------
615,395 499,896
Accumulated amortization (199,393) (181,554)
--------------- ---------------
$ 416,002 $ 318,342
=============== ===============
NOTE 9. - NOTES PAYABLE
Notes payable consists of the following:
December 31,
-----------------------------------------
2000 1999
--------------- ---------------
Bank revolving demand notes (a) $ 945,695 $ 893,957
Notes payable, stockholders (b) 48,946 40,000
--------------- ---------------
$ 994,641 $ 933,957
=============== ===============
(a) Bank revolving demand notes - LF maintains a bank demand note that
provides for borrowings of up to $400,000 with interest at the
bank's prime rate (9.5% at December 31, 2000) plus .50%. As of
December 31, 2000 there was $398,757 ($308,757 - 1999) outstanding
under this line. A second demand note provides for borrowings of up
to $125,000 with interest at the bank's prime rate plus 0.75%
(10.25% at December 31, 2000). As of December 31, 2000 and 1999,
there was $125,000
F-16
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
outstanding under this line. These notes expire in December 2001.
All of the assets of LF and the guarantee of the Company secure both
notes. The Company has violated certain covenants under the terms of
these notes and other term notes with the same bank.
O&W maintains a bank demand note that provides for borrowings of up
to $500,000 with interest at the bank's prime rate (9.5% at December
31, 2000) plus 0.50%. As of December 31, 2000, there was $421,938
($460,200 - 1999) outstanding under this line. Substantially all of
O&W's assets and the guarantee of the Company secure the line.
(b) Notes payable, stockholders - During the year ended December 31,
2000, the Company issued unsecured short-term notes payable to three
employees/stockholders, amounting to $42,500 as consideration for
unpaid compensation. As of December 31, 2000, approximately $24,000
of this amount was applied to the exercise of options for common
stock of the Company (see Note 12). The outstanding balance of
$18,946 is due, bears interest at 8% per annum and remains unpaid.
During the year ended December 31, 2000, the Company issued two
unsecured short-term notes payable to an employee/stockholder,
amounting to $30,000. The outstanding balance as of December 31,
2000 bears interest at 8% and is due May 1, 2001.
The 1999 amount represented a $40,000 note to the
president/principal stockholder, due in full in March 2000. The note
accrued interest at the rate of 10.0%. This note, along with others,
aggregating $974,000, issued during 2000 together with accrued
interest of $12,000 were applied to the exercise of stock warrants
and options and the purchase of common stock by the principal
stockholder (see Note 12).
NOTE 10. - LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
2000 1999
--------------- ---------------
Term notes (a) $ 4,230,385 $ 4,920,829
Capital lease obligations (b) 941,914 1,220,010
Convertible debentures (c) -- 100,000
--------------- ---------------
5,172,299 6,240,839
Less current maturities 3,037,365 1,042,159
--------------- ---------------
Total long-term obligations $ 2,134,934 $ 5,198,680
=============== ===============
(a) Term notes - A $1,250,000 bank term promissory note that requires
monthly principal and interest payments amounting to approximately
$13,000 through February 2011. The outstanding balance as of
December 31, 2000 amounted to $1,023,297 ($1,077,640 - 1999) and
bears interest at the bank's prime rate (9.5% at December 31, 2000)
plus 1.0%. All the assets of LF and the guarantee of the Company
secure the note. The note includes certain financial covenants that
require the Company to, among other things, maintain certain working
capital and current and debt to net worth ratios. Certain of these
F-17
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
covenants had been violated as of December 31, 2000. Accordingly,
the entire outstanding portion of the note has been classified as
current.
A $1,260,000 bank term promissory note that requires monthly
principal and interest payments amounting to approximately $13,000
through December 2014. The outstanding balance as of December 31,
2000 amounted to $1,227,064 ($1,260,000 - 1999) and bears interest
at the bank's prime rate (9.5% at December 31, 2000) plus 0.75%. All
the assets of LF and the guarantee of the Company secure the note.
The Company has violated certain covenants under the terms of this
and other notes outstanding with the same bank. Accordingly, the
entire outstanding portion of these loans have been classified as
current.
An $828,000 note payable to a former shareholder of O&W, due in
three equal annual installments of $276,000, with interest at 8.0%,
beginning in April 2000. The outstanding balance as of December 31,
2000 amounted to $552,000 ($828,000 - 1999).
Convertible notes payable to former shareholders of O&W, aggregating
$372,000, due in three equal annual aggregate installments of
$124,000, with interest at 8.0%, beginning in April 2000. The
outstanding balance as of December 31, 2000 amounted to $240,000
($372,000 - 1999). The Company has the option to pay interest by
delivery of shares of the Company's common stock. The former
shareholders have the option to convert 50% of the principal balance
due into common stock of the Company on each payment date based on
the fair value of the stock one-year preceding the payment date.
During the year ended December 31, 2000, a portion of these notes
were satisfied through the issuance of common stock (see Note 12).
A $700,000 mortgage loan, payable in monthly installments of $5,746
including interest at 7.75% through April 2006, at which time a
balloon payment of approximately $565,000 is due. The outstanding
balance as of December 31, 2000 amounted to $676,932 ($690,600 -
1999). Substantially all the assets of O&W and the guarantee of the
Company secure the loan.
A $500,000 bank term loan, payable in monthly installments of
$7,731, including interest at 7.75%, through April 2006. The
outstanding balance as of December 31, 2000 amounted to $410,401
($463,343 - 1999). Substantially all the assets of O&W and the
guarantee of the Company secure the loan.
A $125,000 bank term promissory note which requires monthly
principal and interest payments amounting to approximately $1,800
through July 2006. The outstanding balance as of December 31, 2000
amounted to $96,078 ($108,968 - 1999) and bears interest at the
bank's prime rate plus 1.0% (10.5% at December 31, 2000). All the
assets of the LF and the guarantee of the Company secure the loan.
The Company has violated certain covenants under the terms of this
and other notes outstanding with the same bank. Accordingly, the
entire outstanding portion of these loans have been classified as
current.
Two unsecured term promissory notes aggregating $30,100 are payable
to the former shareholders of MLPC, payable in monthly installments
of $971, including interest at the rate of 10.0%. The aggregate
outstanding balance as of December 31, 2000 amounted to $1,919
($12,783 - 1999).
F-18
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
An installment loan, payable in monthly installments of $391,
including interest at the rate of 10% per annum, through September
2001. The outstanding balance as of December 31, 2000 amounted to
$2,694 ($7,495 - 1999).
A $100,000 bank note, bearing interest at the bank's prime rate plus
0.5%, due and paid in May 2000.
(b) Capital lease obligations - The Company is obligated under a capital
lease for an operating facility. The lease provides for monthly
payments in amounts sufficient to allow for the repayment of the
principal of the underlying tax-exempt bonds together with interest
at rates ranging from 6.0% to 7.25%. The outstanding balance as of
December 31, 2000 amounted to $795,000 ($920,000 - 1999). Combined
payments of principal and interest are approximately $9,600 per
month through June 2002 and $4,600 per month thereafter through June
2012. Under the terms of this credit facility, the Company is
prohibited from paying cash dividends or making other cash
distributions.
The Company is also the lessee of certain machinery and equipment
under a capital lease that expires in 2002. The outstanding balance
as of December 31, 2000 amounted to $146,914 ($300,010 - 1999). The
monthly payments under this lease amount to approximately $7,200,
including interest at the rate of 10.47%. The 1999 outstanding
balance included a lease which was repaid in 2000.
(c) Convertible debentures - Through December 31, 1996, the Company
issued $1,241,000 of convertible subordinated debentures due July
2000 with interest at 7.0%. The notes were convertible into common
stock at a rate equal to 80% of the prevailing market price of the
Company's common stock. Through December 31, 1996, debenture holders
converted $1,141,000 of outstanding principal into 121,627 shares of
common stock. In 2000, the final debenture of this series amounting
to $100,000 along with accrued interest of $35,000, was converted
into 74,176 shares of common stock.
Minimum future annual payments of long-term obligations as of December 31,
2000 are as follows:
2001 $ 3,100,463
2002 742,159
2003 132,249
2004 139,842
2005 148,045
Thereafter 1,376,818
------------
Total minimum payments 5,639,576
Less amount representing interest 467,277
------------
5,172,299
Less current maturities 3,037,365
------------
Total long-term obligations $ 2,134,934
============
F-19
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11 - LONG-TERM OBLIGATIONS - STOCKHOLDER
The long-term obligations - stockholder consists of a ten-year term note
to the Company's current president and principal stockholder in the original
amount of $1,150,000, with interest at the one year Treasury Bill rate plus
3.5%, adjusted annually, (9.66% at December 31, 2000). The balance as of
December 31, 2000 amounted to $683,076 ($696,728 - 1999) and is currently being
repaid in monthly installments of $6,671, including interest. The note matures
in June 2008 when the remaining unpaid principal of approximately $525,000 is
due. Detachable warrants to purchase 536,000 shares of common stock at a price
of $5.60 were issued with this note. One half, or 268,000, of the warrants were
fully exercisable upon issuance of the note and the remaining warrants became
exercisable in four equal allotments of 67,000 beginning December 31, 1998. The
warrants expire five years from the date of issuance. A portion of the proceeds
of the note have been allocated to the warrants which are exercisable and is
reflected as additional paid-in capital - warrants in the amount of $551,716 in
the accompanying balance sheet. The note payable balance has been shown net of
the discount allocated to the warrants. This discount is being amortized to
interest expense over the term of the note. During 1999, the Company prepaid a
portion of the note. As a result, a portion of the discount, amounting to
$187,390, was written off (see Note 16). The unamortized discount at December
31, 2000 was $258,569 ($294,673 - 1999).
During the year ended December 31, 2000, the Company entered into a
capital lease agreement for equipment with its president and principal
stockholder. The lease provides for monthly payments of approximately $5,650
through April 2010, including interest at the prime rate plus 1% (10.5% at
December 31, 2000). As of December 31, 2000, the Company was in arrears on the
required payments. The outstanding balance as of December 31, 2000 amounted to
$418,918, plus accrued interest of $26,912. In April 2001, the Company's
president and principal stockholder contributed the assets under this lease to
the Company in exchange for 225,000 shares of common stock and released the
Company from all obligations under the lease.
Minimum future annual maturities of the note payable and capital lease as
of December 31, 2000 are as follows:
2001 $ 122,108
2002 84,205
2003 85,860
2004 87,681
2005 89,685
Thereafter 891,024
-------------
Total payments 1,360,563
Less unamortized note discount 258,569
-------------
Balance after discount 1,101,994
Less amount representing interest
on capital lease 258,569
-------------
843,425
Less current maturities 55,911
-------------
Total long-term obligations $ 787,514
=============
F-20
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY
A. Preferred Stock
The certificate of incorporation authorizes the Board of Directors
to issue up to 1,000,000 shares of Preferred Stock. The stock is
issuable in series that may vary as to certain rights and
preferences, as determined upon issuance, and has a par value of
$.01 per share. As of December 31, 2000 and 1999, there were no
preferred shares issued or outstanding.
B. Common Stock
During the year ended December 31, 2000, the following common stock
transactions took place:
o Notes payable in the amount of $132,000 and $14,500 of
related accrued interest associated with the acquisition
of O & W (See Note 10) were converted into 97,700 shares
of common stock.
o Convertible debentures in the amount of $100,000 and
$35,000 of related accrued interest were converted into
74,176 shares of common stock. (See Note 10).
o In a private placement transaction with an accredited
investor, the Company entered into an agreement to sell
250,000 shares of its common stock at a price of $2.00
per share, resulting in expected proceeds of $500,000.
As of December 31, 2000, $312,500 of this amount has
been received and 156,250 shares were issued. The unpaid
portion of $187,500 has been recorded as a stock
subscription receivable, which is scheduled to be
received in 2001, at which time the remaining 93,750
shares will be issued. The receivable is shown as a
reduction to stockholders' equity in the accompanying
balance sheet. In connection with this transaction, the
Company granted a warrant to the investor to purchase
50,000 shares of common stock at a price of $1.63 per
share. The Company also granted the purchaser's
designee, for services rendered in connection with the
financing, a warrant to purchase 100,000 common shares
at a price of $2.00 per share. Both warrants are
exercisable for a four-year period commencing May 31,
2001.
F-21
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY - CONTINUED
B. Common Stock (continued)
o Various employees exercised stock options with exercise
prices ranging from $1.00 to $2.50 per share, resulting
in the issuance of 167,074 shares of common stock, of
which, 45,290 were issued from treasury. Total
consideration resulting from these exercised options
amounted to $285,921. In lieu of cash payments $199,472
related to the satisfaction of outstanding notes payable
to the president/principal stockholder (See Note 9),
$24,170 related to the satisfaction of notes payable to
other stockholders (See Note 9) and $54,200 reduced an
outstanding employee related liability due to an
officer.
o The Company's president exercised 153,000 common stock
warrants with exercise prices ranging from $1.03 to
$1.63 per share resulting in consideration of $172,750.
In lieu of cash payments outstanding notes payable to
the president/principal stockholder were satisfied for
this amount (see Note 9).
o The Company issued 20,535 shares of common stock as
satisfaction of outstanding liabilities amounting to
$22,699. The fair market value of the shares issued
equaled the amount of the recorded liability.
o The Company issued from treasury 294,649 shares of
common stock to the Company's president at prices
ranging from $2.00 to $2.73 per share aggregating
$653,778, as satisfaction of outstanding notes payable
to the president (See Note 9). In connection with these
transactions the Company granted warrants to purchase
33,900 shares of common stock at prices ranging from
$1.63 to $3.42. These warrants vested immediately.
o In other transactions, the Company issued from treasury,
118,200 shares of common stock to various accredited
investors resulting in proceeds of $120,000. In
connection with these transactions, the Company granted
warrants to purchase 4,200 shares of common stock at an
exercise price of $3.95. These warrants vest immediately
and expire in October, 2003.
F-22
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY - CONTINUED
During the year ended December 31, 1999, the following common stock
transactions took place:
o A convertible note, payable to the principal
stockholder, in the amount of $150,000 was converted to
160,000 shares of common stock.
o The Company issued 50,000 shares of common stock with a
fair market value $125,000 as consideration for services
performed for the Company.
o The Company issued 20,000 shares of common stock in
connection with the acquisition of MMT.
o The Company issued 10,000 shares of common stock to an
employee in connection with the execution of an
employment agreement. The fair market value of these
shares was $7,312.
C. Equity line of credit
On November 20, 2000, the Company entered into an equity line
of credit agreement with an accredited investor to purchase up to
3,000,000 shares of common stock of the Company over a three-year
period beginning February 9, 2001. During this three-year period the
Company may request a drawdown under the equity line of credit by
selling shares of the Company's common stock to the investor. The
price per share will be determined using a formula based on 87.5% of
the Company's closing share price 20 days immediately following the
drawdown date.
The minimum amount which can be raised from each drawdown is
$200,000. The maximum amount is determined as the lower of a)
$5,000,000 or b) 15% of the weighted average share price over the 20
days immediately prior to the drawdown multiplied by the total
trading volume during those days. Further, the shares issued as the
result of a drawdown cannot cause the investor's ownership in the
Company to exceed 9.9% of the outstanding shares.
In conjunction with the establishment of the equity line of
credit, the Company issued warrants to this investor to purchase
200,000 shares of the Company's common stock for an exercise price
of $3.135, which expire November 30, 2003. In addition, at the close
of each drawdown the Company will issue the investors additional
warrants to purchase a number of shares of the Company's common
stock equal to 33% of the number of shares purchased by the investor
at the close of the drawdown. These warrants will expire one day
after they are granted and will be exercisable for a price equal to
the weighted average fair value of a share of the Company's common
stock purchased at the closing of each drawdown. If any of these
warrants are exercised, the shares available for future drawdowns
will be reduced so that the aggregate may not exceed 3,000,000
shares.
F-23
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY - CONTINUED
Expenses related to the establishment of the equity line of
credit, amounting to approximately $108,000, have been recorded as a
prepaid expense. The expenses will be charged to additional paid in
capital as an offset to the proceeds raised upon issuance of the
securities. As of December 31, 2000 no securities have been issued
under this agreement. In addition, as part of this transaction the
Company issued warrants to the placement agent to purchase 100,000
shares of common stock at an exercise price of $3.135, expiring in
November 2003.
D. Warrants
In connection with the issuance of convertible debentures in 1997,
the Company issued warrants to the placement agent to purchase up to
an aggregate of 10,775 shares of common stock of the Company. The
warrants are exercisable for a five-year term commencing February
1997 at an exercise price of $10.30 per share.
In connection with the issuance of notes payable to the Company's
president and principal stockholder during 1998, 536,000 detachable
warrants were issued (see Note 11). As the warrants vested, they
were valued and recorded as additional paid-in capital in the
accompanying balance sheet. The value assigned to the warrants
vesting during the year ended December 31, 1999 amounted to $21,814.
In connection with the issuance of a $150,000 convertible note
payable to the Company's president and principal stockholder during
1999, 128,000 detachable warrants were issued. The value assigned to
the warrants, amounting to $73,219, has been reflected as additional
paid-in capital in the accompanying balance sheet.
In connection with common stock issued to the Company's president
and principal stockholder during 2000, the Company issued warrants
to purchase 33,900 shares of common stock at exercise prices ranging
from $1.63 to $3.42 per share. The warrants vested immediately and
have a three-year term.
In connection with a private placement transaction during 2000, the
Company issued warrants to various accredited investors to purchase
an aggregate of 4,300 shares of common stock at an exercise price of
$3.95 per share. The warrants vest immediately and have a three-
year term.
In connection with a private placement transaction during 2000, the
Company issued a warrant to purchase 50,000 shares of common stock.
The warrant is exercisable for a four-year term commencing May 31,
2001 at an exercise price of $1.63 per share. For services rendered
in connection with the financing the Company also granted the
purchaser's designee a warrant to purchase 100,000 common shares at
a price of $2.00 per share, exercisable for a four-year period
commencing May 31, 2001.
F-24
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY - CONTINUED
In connection with the equity line of credit, discussed in Note 12C,
the Company issued a warrant to purchase 200,000 shares of the
Company's common stock. In addition, the Company issued, to a
placement agent, a warrant to purchase 100,000 shares of common
stock. Both warrants are exercisable immediately for a price of
3.135 and expire in November 2003.
In connection with services performed for the Company during 1999,
warrants to purchase 26,000 (190,000 - 1998) shares of common stock
at a price of $2.50 (from $2.50 to $5.00 - 1999) were issued. The
fair value assigned to the warrants, determined utilizing the Black
Scholes pricing model, amounted to $20,800 and has been reflected as
additional paid-in capital in the accompanying balance sheet. During
the year ended December 31, 2000 all of these warrants expired
unexercised.
The following is a summary of the warrant activity for the past two years:
Number Weighted
of Warrants Average
Outstanding Exercise Price
----------- --------------
Outstanding at December 31, 1998 736,775 $5.14
Granted 154,000 1.70
----------
Outstanding at December 31, 1999 890,775 4.54
Granted 488,200 2.68
Forfeited/expired (216,000) 3.72
Exercised (153,000) 1.13
----------
Outstanding at December 31, 2000 1,009,975 $4.34
========== =====
All warrants are exercisable as of December 31, 2000 and 1999.
F-25
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - STOCK OPTION PLANS
The Company's Board of Directors has approved stock option plans adopted
in 1993, 1994, 1995, 1996, 1997, 1998 and 1999 authorizing the granting of
options to purchase up to an aggregate of 2,340,000 shares. Such options may be
designated at the time of grant as either incentive stock options or
nonqualified stock options. As of December 31, 2000, options to purchase
1,187,661 shares remain un-issued under these plans.
A. Employee Stock Option Plans
The Company grants stock options to its key employees, as it deems
appropriate. In addition, the Company previously followed an All Employee
Incentive Stock Option Plan whereby all full-time employees of the Company
who meet certain eligibility requirements were granted stock options from
the above plans. Subsequent to January 2, 1999 the Company discontinued
grants under this plan. The options are only exercisable so long as the
optionee continues to be an employee of the Company.
The following is a summary of stock option activity for individuals
classified as employees for the past two years:
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
Outstanding at December 31, 1998 244,179 $ 2.62
Granted 171,208 1.49
Forfeited (9,274) 2.70
------------
Outstanding at December 31, 1999 406,113 2.20
Granted 663,731 1.52
Exercised (167,074) 1.71
Forfeited (22,506) 2.10
------------
Outstanding at December 31, 2000 880,264 $ 1.76
=========== ========
Exercisable at December 31, 2000 217,372 $ 2.53
=========== ========
The average fair value of options granted was $1.40 and $1.08 per share
for the years ended December 31, 2000 and 1999, respectively. The exercise
price for all options granted equaled or exceeded the market value of the
Company's common stock on the date of grant.
F-26
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - STOCK OPTION PLANS- CONTINUED
Options outstanding at December 31, 2000 are made up of the following:
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contracted Average Number Average
of Life in Exercise of Exercise
Options Years Price Options Price
------- ----- ----- ------- -----
$1.50 and Less 667,121 9.37 $ 1.48 10,459 $ 1.50
======= ======= ========
$1.51 - $2.50 197,821 6.77 $ 2.47 197,821 $ 2.47
======= ======= ========
Greater than $2.50 15,322 3.02 $ 4.93 9,092 $ 5.50
---------- ======= ======= ---------- ========
Total 880,264 8.67 217,372
========== ======= ==========
B. Nonqualified Stock Option
In connection with services performed for the Company during 2000,
65,000 options to purchase shares of common stock at a price of
$1.50 were granted. The options were immediately exercisable and
expire on December 31, 2009. The fair value assigned to these
options, determined utilizing the Black Scholes pricing model,
amounted to approximately $47,000 and has been reflected as
additional paid-in capital in the accompanying balance sheet.
C. Directors' Stock Option Plan
In April 1993, the Board of Directors and stockholders of the
Company adopted a non-discretionary outside directors' stock option
plan that provides for the grant to non-employee directors of
non-qualified stock options to purchase up to 50,000 shares of
common stock. Under this plan, each non-employee director is granted
7,500 options upon becoming a director and 5,000 each year
thereafter. In 2000, there were 17,500 options granted (20,000 -
1999) and none forfeited (2,000 - 1999). At December 31, 2000, there
were 40,000 (22,500 - 1999) options outstanding to directors under
this plan, of which 27,498 options were exercisable (7,500 - 1999).
These options are exercisable at prices ranging from $1.375 to $9.40
per share. The options vest over a two-year service period.
F-27
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - STOCK OPTION PLANS - CONTINUED
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 - "Accounting for Stock-Based Compensation,"
and, accordingly, does not recognize compensation cost for stock option grants
under fixed awards. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net loss and loss per share from continuing operations would have
increased as follows:
2000 1999
----------- -----------
Net loss from continuing operations:
As reported (000's) $ 2,094 $ 4,508
Pro forma (000's) $ 2,275 $ 4,809
Loss per share from continuing operations:
As reported $ .72 $ 1.98
Pro forma $ .78 $ 2.11
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
weighted-average assumptions:
2000 1999
----------------- -----------------
Expected dividend yield 0% 0%
Expected stock price volatility 100% 54%
Risk-free interest rate 5.4% 5.4%
Expected life of options 10 years 10 years
F-28
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14. - INCOME TAXES
At December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $18,500,000 and state net operating loss
carryforwards of approximately $10,600,000, which expire from 2007 through 2015.
Due to a greater than 50% change in stock ownership of certain subsidiaries, the
utilization of net operating loss carryforwards generated to the date of such
change may be limited.
At December 31, 2000, a net deferred tax asset, representing the future
benefit attributed primarily to the available net operating loss carryforwards,
in the amount of approximately $6,558,000 had been fully offset by a valuation
allowance because management believed that the regulatory limitations on
utilization of the operating losses and concerns over achieving profitable
operations diminish the Company's ability to demonstrate that it is more likely
than not that these future benefits will be realized before they expire.
A summary of the Company's temporary differences and carryforwards which
give rise to deferred tax assets and liabilities are as follows:
December 31,
-----------------------------
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss and tax credit
carryforwards $ 7,046,000 $ 6,210,000
Reserves and other 426,000 394,000
----------- -----------
Gross deferred tax asset 7,472,000 6,604,000
Deferred tax liabilities:
Property and equipment (624,000) (696,000)
Defined benefit pension asset (290,000) (308,000)
----------- -----------
Gross deferred tax liability (914,000) (1,004,000)
----------- -----------
Net deferred tax asset 6,558,000 5,600,000
Deferred tax asset valuation allowance (6,558,000) (5,600,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
NOTE 15. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS
Profit Sharing Plans - LF has a qualified salary reduction profit sharing
401(k) plan for eligible employees. Participants may defer up to 20% of their
compensation each year up to the dollar limit set by the Internal Revenue Code.
LF's contribution to the profit-sharing plan is discretionary. During 2000, a
$14,439 ($20,299 - 1999) contribution was made to the profit-sharing plan.
F-29
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
Defined Benefit Plan - O&W has a contributory defined benefit pension plan
covering all salaried and hourly employees that are scheduled to work at least
1,000 hours per year. The Company's policy is to fund pension costs accrued. Net
periodic pension expense includes the following components:
2000 1999
------------- --------------
Service cost $ 246,541 $ 195,541
Interest cost 334,125 216,606
Expected return on plan assets (537,891) (397,020)
-------------- --------------
Total pension expense $ 42,775 $ 15,127
============== ==============
The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheets:
2000 1999
------------- -------------
Projected benefit obligation:
Benefit obligation at beginning of year $ 4,367,511 $ --
Acquisition of Osley and Whitney -- 4,513,965
Service cost 246,541 195,541
Interest cost 334,145 216,606
Plan participants' contributions 163,987 126,062
Actuarial loss (gain) 469,609 (539,120)
Benefits paid (201,158) (111,977)
Expenses paid (44,052) (33,566)
-------------- --------------
Benefit obligation at end of year 5,336,583 4,367,511
Plan assets at fair value:
Fair value of plan assets at
beginning of year 5,318,523 --
Acquisition of Osley and Whitney -- 5,298,193
Actual return of plan assets 67,709 39,811
Plan participants' contributions 163,987 126,062
Benefits paid (201,158) (111,977)
Expenses paid (44,052) (33,566)
-------------- --------------
Fair value of plan assets at end of year 5,305,009 5,318,523
-------------- --------------
Funded status (31,574) 951,012
Unrecognized actuarial loss (gain) 757,900 (181,911)
-------------- --------------
Prepaid pension cost $ 726,326 $ 769,101
============== ==============
F-30
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
The major actuarial assumptions used in the calculation of the pension
obligation were as follows:
2000 1999
--------------- --------------
Discount rate 7.5% 7.5%
Expected return on plan assets 10.0% 10.0%
Rate of increase in compensation 5.5% 5.5%
NOTE 16. - EXTRAORDINARY ITEM
In April 1999, the Company prepaid a portion ($420,000) of the ten-year
promissory note, payable to the chairman/principal stockholder (See Note 11). As
a result, a pro-rata portion of the deferred financing costs and the note
discount relating to the detachable warrants issued with the debt were written
off in 1999. The amount charged to expense for the note discount and loan
closing costs amounted to $187,390 and $35,475, respectively. The aggregate
amount of $222,865 is considered a loss on early extinguishment of debt and is
classified as an extraordinary item in the accompanying consolidated statement
of operations.
NOTE 17. - COMMITMENTS
A. Lease Commitments
The Company utilizes certain equipment, vehicles and facilities
under operating leases that expire at various dates through 2005.
Rent expense under operating leases for the years ended December 31,
2000 and 1999, was approximately $465,000 and $403,000,
respectively.
The approximate future minimum payments required under these leases
are as follows:
2001 $ 417,000
2002 362,000
2003 257,000
2004 216,000
2005 177,000
----------
$1,429,000
==========
B. Employment Contracts
The Company is obligated under various employment agreements with
certain officers that expire at various times through 2004. The
agreements provide for minimum aggregate annual salaries of
$764,000. Certain agreements also provide for, among other things,
cash bonuses and stock options if certain performance measures are
met,
F-31
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
and for severance payments. For the years ended December 31, 2000
and 1999 no bonuses or stock options were earned.
NOTE 18. - RELATED PARTY TRANSACTIONS
Interest expense incurred under notes issued to the Company's
employee/stockholder amounted to approximately $145,000 and $265,000, for the
years ended December 31, 2000 and 1999, respectively. The 2000 amount includes
$36,103 ($42,347 - 1999) relating to the amortization of a note discount (see
Note 11). The 1999 amount includes $73,219 relating to warrants issued with a
convertible short-term note (see Note 12).
NOTE 19. - SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing transactions consist of the following:
2000 1999
------------- -------------
Property and equipment acquired under
capital leases $ 418,918 $ 236,456
============= =============
Conversion of debentures and related
accrued interest to common stock (see
Note 12) $ 135,000 $ --
============= =============
Conversion of notes payable and related
accrued interest to common stock
(see Note 12) $ 146,500 $ 150,000
============= =============
Common stock issued as satisfaction of
accounts payable (see Note 12) $ 22,699 $ --
============= =============
Satisfaction of employee liabilities in lieu
of cash payment as consideration for the
exercise of stock options and warrants
(see Note 12) $ 450,592 $ 7,312
============= =============
Satisfaction of note payable in lieu of cash
payments as consideration for stock
issued (see Note 12) $ 653,778 $ --
============= =============
Common stock, stock options and
warrants issued for services provided $ 46,695 $ 145,800
============= =============
F-32
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 20 - BUSINESS SEGMENTS
The Company's businesses are organized, managed and internally reported as
two segments. The segments are determined based on differences in products,
production processes and internal reporting. All of the segments of the Company
operate entirely within the United States. Revenues from customers in foreign
countries are minimal.
Transactions between reportable segments are recorded at cost. The Company
relies on intersegment cooperation and management does not represent that these
segments, if operated independently, would report the results shown.
A summary of selected consolidated information for the Company's industry
segments during 2000 and 1999 is set forth as follows:
F-33
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 20. - BUSINESS SEGMENTS - CONTINUED
Laser
and
Photonics Plastics Unallocated
Group Group Corporate Eliminations Consolidated
----- ----- --------- ------------ ------------
2000
----
Sales to unaffiliated customers $ 6,507,860 $ 6,657,879 $ -- $ -- $ 13,165,739
============ ============ =============== ================ ============
Operating loss $ (249,374) $ (454,327) $ (573,905) $ -- $ (1,277,606)
============ ============ =============== ================ ============
Interest income $ 14,429 $ 160 $ 70,299 $ (63,725) $ 21,163
============ ============ =============== ================ ============
Interest expense $ 377,791 $ 232,092 $ 202,448 $ (63,725) $ 748,606
============ ============ =============== ================ ============
Identifiable assets $ 6,264,657 $ 4,601,763 $ 506,914 $ -- $ 11,373,334
============ ============ =============== ================ ============
Depreciation and amortization $ 717,452 $ 371,064 $ 37,600 $ -- $ 1,126,116
============ ============ =============== ================ ============
Capital expenditures $ 731,011 $ 62,597 $ -- $ -- $ 793,608
============ ============ =============== ================ ============
1999
----
Sales to unaffiliated customers $ 5,252,099 $ 3,987,870 $ -- $ -- $ 9,239,969
============ ============ =============== ================ ============
Operating loss $ (1,001,770) $ (1,971,809) $ (873,402) $ -- $ (3,846,981)
============ ============ =============== ================ ============
Interest income $ 23,400 $ 551 $ 79,482 $ (28,800) $ 74,633
============ ============ =============== ================ ============
Interest expense $ 279,720 $ 137,674 $ 266,438 $ (28,800) $ 655,032
============ ============ =============== ================ ============
Identifiable assets $ 5,852,601 $ 4,882,208 $ 572,681 $ -- $ 11,307,490
============ ============ =============== ================ ============
Depreciation and amortization $ 596,009 $ 286,516 $ 80,400 $ -- $ 962,925
============ ============ =============== ================ ============
Capital expenditures $ 924,897 $ 595,515 $ 10,100 $ -- $ 1,530,512
============ ============ =============== ================ ============
F-34
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 21 - UNAUDITED SUBSEQUENT INFORMATION
The Company is required to maintain certain minimum financial conditions
in order to maintain its Nasdaq Small-Cap Market listing. In November 2000, the
Company received notification from NASDAQ that it no longer met the minimum $2
million net tangible asset criteria for continued listing. Pursuant to the terms
of an extension agreement with NASDAQ to demonstrate compliance with the minimum
net tangible asset test as of April 15, 2001, the Company is providing the
following unaudited balance sheet prepared by management as of February 28, 2001
with proforma adjustments reflecting certain transactions from February 28, 2001
through April 15, 2001.
Unaudited
------------------------------------------------------
February 28, Proforma April 15,
ASSETS 2001 Adjustments 2001
------------ ----------------- ------------
Current assets $ 2,641,801 $ 358,516(2)(3) $ 3,000,317
Fixed assets 7,188,379 7,188,379
Goodwill 113,100 113,100
Other long term assets 1,303,482 1,303,482
------------ ------------
Total assets $ 11,246,762 $ 11,605,278
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 6,487,945 $ 100,000(4) $ 6,587,945
Long term liabilities 3,130,300 (448,831)(1) 2,681,469
------------ ------------
Total liabilities 9,618,245 9,269,414
Common stock 3,640 403(1)(2)(3) 4,043
Paid-in capital 22,662,565 806,944(1)(2)(3) 23,469,509
Accumulated deficit (20,745,348) (100,000)(4) (20,845,348)
------------ ------------
1,920,857 2,628,204
Less:
Treasury stock (229,840) (229,840)
Subscription receivable (62,500) (62,500)
------------ ------------
Total stockholders' equity 1,628,517 2,335,864
------------ ------------
Total liabilities and
stockholders' equity $ 11,246,762 $ 11,605,278
============ ============
Description of proforma adjustments:
(1) Release from capital lease obligation and related accrued interest
due to the Company's president and principal stockholder. In April
2001, the Company's president and principal stockholder contributed
equipment owned by him to the Company in exchange for 225,000 shares
of common stock. This equipment was subject to a lease accounted for
as a capital lease. As a result, no further payments are due under
this lease.
(2) Proceeds of $58,516 from issuance of 21,737 shares of common stock,
net of expenses of $3,984, in connection with a drawdown in
accordance with the equity line of credit (Note 12c)
(3) Proceeds of $300,000 from the issuance of 156,514 shares of common
stock to various individual investors.
(4) Estimated loss from operations for the period from March 1, 2001
through April 15, 2001.
F-35
NOTE 22. - LITIGATION
The Company is the plaintiff in a lawsuit filed in the Rhode Island
Superior Court on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra
Science Corporation and Nabil Lawandy. In the action, the Company asserts that
by fraud and in breach of fiduciary duties owed, Spectra and its president,
Nabil Lawandy, caused the Company to sell to Spectra shares of Spectra's Series
A Preferred stock at a substantial discount to fair market value. The Company
alleges that in entering into the transaction it relied on various
representations made by Spectra and Mr. Lawandy, which were untrue at the time
they were made. In the action, the Company seeks compensatory damages in the
amount of $500,000 plus punitive damages as well as an award of attorneys' fees
and costs. In its response to the complaint, Spectra has asserted counterclaims
against the Company which management believes are without merit. The Company
intends to vigorously prosecute this action and defend the counterclaims.
F-36