FORM 10-KSB/A
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, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-21816
INFINITE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1490422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2364 Post Road, Warwick, RI 02886
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (401) 738-5777
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
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, 2001 were $8,507,648.
As of March 27, 2002, there were 5,577,086 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 March 27, 2002, based
on the average bid and asked price on such date was $11,711,881.
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 judgments 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," "Factors That May Affect Future Growth," and Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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PART I
BUSINESS
We operate through two business segments, our Laser Group and our Photonics
Group.
Revenues from our Laser Group for the quarter ended March 31, 2002 were
$1,529,046 (69.3% of total quarterly continuing revenues) compared to $1,961,200
for the quarter ended March 31, 2001. Revenues related to the Photonics Group in
the quarter ended March 31, 2002 were $678,077 (30.7% of total quarterly
continuing revenues) compared to $108,013. Each business segment is essential to
our overall growth. The Laser Group has been in business for over twenty years,
while the Photonics Group started just over one year ago. Research and
development performed in the Laser Group led to the original patent on the diode
technology that became the core business of the Photonics Group. We expect the
Laser Group to grow at the rate of the general economy, and for the Photonics
Group to grow from approximately $1.2 million in annual revenues in 2001 to in
excess of approximately $5.7 million of revenues from the DARPA contract in
2002. We anticipate developing diode lasers for defense, telecommunications,
materials processing, laser printers, and medical applications and anticipate
that the Photonics Group will continue to grow much more rapidly than the Laser
Group. In general, we expect most commercial and governmental customers to pay
for contract research and development in order to design diodes specific to
their application in terms of wattage output needed and other characteristics.
During 2001, we also had a Plastics Group, which consisted of two subsidiaries,
Express Pattern, Inc. (EP) and Osley & Whitney, Inc. (O&W). Our Plastics Group
provided rapid prototyping services and proprietary mold building services. In
November 2001 and December 2001, our board of directors determined to dispose of
O&W and EP. Our plan consisted of shutting down the operations of O&W and
selling the assets of EP. The O&W equipment was sold at auction in March 2002.
The O&W land and building were sold at auction on July 16, 2002 for $650,000. A
closing of this sale is scheduled for August 8, 2002. This closing will complete
the liquidation of the O&W assets, resulting in a net obligation to the secured
lender, including accrued interest and closing expenses, of approximately
$200,000. The obligation of O&W to the secured lender was guaranteed by
Infinite. Accordingly, we will assume that remaining outstanding balance. The
secured lender has tentatively agreed with us to convert the balance into a term
loan amortizing monthly based upon a seven year amortization schedule, with a
balloon payment due eighteen months from issuance. It is anticipated that this
note will be executed and delivered following the closing of the sale of the
land and building.
On March 14, 2002, we sold the net assets of our Express Pattern subsidiary for
$725,000, consisting of $575,000 in cash (of which $300,000 was paid to O&W's
secured lender) and a five-year 8% subordinated $150,000 note, due upon maturity
with quarterly interest payments. The purchasers included a former employee of
Express Pattern and Thomas J. Mueller, our chief operating officer, who is a
passive investor in the purchasing entity. The sale was negotiated at "arm's
length" by disinterested management with the former employee and his financier.
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The Laser Group
Our Laser Group provides comprehensive laser-based materials and processing
services (cutting, welding, drilling and assembly) to aerospace, power
generation and medical device customers. As to the Laser Group, the majority of
revenues are derived from one-time purchase orders, usually from repeat
customers such as General Electric, United Technologies, Barnes Aerospace, Dey
Laboratories, etc. Work begins when materials arrive from the customer (our
inventories are minimal and the customer is responsible for the quality of the
materials), and we cut, weld, drill and assemble the parts according to
engineering drawings and specifications provided by the customer or determined
by our engineers with customer approval. Upon completion of the parts, they are
inspected by quality control personnel, compared to the engineering
specifications, packaged and delivered to the customer. The customer is billed
for the number of parts delivered.
The Laser Group uses 26 laser workstations to process parts ranging in size from
very large (jet engine or gas turbine parts) to very small medical products,
such as stents (stents are medical implants used to open veins for better blood
flow). Substantially all of our laser workstations employ multi-axis lasers,
commonly used for industrial component fabrication. One of our laser
workstations uses a new system developed with and licensed from Sandia National
Laboratories (Sandia). This workstation uses a process called Laser Engineered
Net Shaping (LENS(R)), which was developed cooperatively at Sandia by Sandia and
a consortium that included our Laser Group, Ford, Motorola, Lockheed Martin and
others. The LENS(R) workstation is used to make parts or resurface parts
directly in metal by introducing powdered metals through a feeder system,
melting the airborne powdered metals as they pass through a small tube with a
laser beam, and depositing the metal on to a surface. This process is computer
controlled and the systems deposit metals based on information provided from
three-dimensional engineering files, such as AutoCad(R). LENS(R) workstations
are useful for the overhaul and repair of expensive aerospace parts that would
otherwise be discarded, and for depositing rare metals, such as titanium, in
complex structures used in medical devices. Lockheed Martin, Barnes Aerospace,
United States Government military overhaul depots and Triton Systems are our
primary customers to date for these services.
To meet aerospace customer needs, our Laser Fare subsidiary is certified for
overhaul and repair of jet engine and aerospace parts by the FAA. We maintain
the overhaul and repair license in order to perform laser material processing
services on jet engine parts (cutting, welding, drilling) and to use the LENS
process to repair or deposit titanium or other metals to aerospace components.
To become FAA certified for overhaul and repair of jet engine and aerospace
parts, Laser Fare contacted the FAA and submitted a quality manual and the
required procedures for the parts involved. After the FAA staff reviewed the
documentation, FAA inspectors visited the facility and performed an inspection.
Thereafter, they require an inspection if procedures are changed. Our last
change was in 2000, for which we passed inspection. We are subject to audit by
the FAA at any time, either on a scheduled or periodic basis, or at our request
if we change procedures. Loss of the license could impair our ability to conduct
overhaul and repair of jet engine and aerospace parts.
Additionally, we are registered with the FDA as a Contract Manufacturer of
medical devices to produce products such as asthma testing devices for Dey
Laboratories (in which some of the components are cut using laser workstations).
We are subject to quality control audits by the
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FDA at any time.We have never been audited by their inspectors. However, our
medical customers are responsible for the inspection, sale and distribution of
their products and devices and we do not believe we have liability to end-users.
The process for registration as a contract manufacturer involves completion of
an application Form FDA 2891A, which Laser Fare completed in 1995, and renewal
forms every two years thereafter. Loss of the registration could impair our
ability to perform contract manufacturing of medical devices or components.
Our Laser Group also provides laser-related contract research and development.
We are both a prime contractor and subcontractor on several projects sponsored
by the Defense Advanced Research Projects Agency (DARPA). We are a subcontractor
on all four of DARPA's Mesoscopic Integrated Conformal Electronics (or MICE)
programs. Mesoscopic refers to "handheld", and MICE programs are aimed at
providing a series of sophisticated handheld devices for military, industrial
and consumer use based on very small electronic components, many of which may be
manufactured using lasers. Other research and development projects include
research for the United States Naval Underwater Warfare Center, the Electric
Boat division of General Dynamics, and the United States Air Force Research
Laboratory (AFRL).
The Laser Group employs 68 full-time technical and engineering personnel in
Smithfield and Narragansett, RI in 16,800 square feet of facilities that we own
and 8,326 square feet of facilities that we lease.
The Photonics Group
Our Photonics Group develops and markets diode lasers for source and pump lasers
and semiconductor optical amplifiers. Diode lasers and amplifiers are small
semiconductor products (as small as one millimeter). The structure of a diode
laser is much the same as a basic laser, with two specially designed slabs of
semiconductor material on top of each other, with another material in between
them forming the "active layer." An electrical current is sent through the
device in order to excite electrons, which can then fall back to the non-excited
ground state and give out photons ("particles" of light). Depending on the power
generated (as measured in watts) and other characteristics, the laser energy
generated can be used as the light source for a wide variety of products ranging
from being the light source for fiber optic cable to the energy source to cut
metals in materials processing equipment. Just as light bulbs can be designed
with different shapes, characteristics and wattage for different applications,
we can design diodes to provide different characteristics and wattages to meet
specific customer needs.
An amplifier couples two or more of these diode lasers in such a fashion that
the output of the second or third diode in terms of wattage is much greater than
one diode laser alone.
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.
We believe photonics technology will be as important to the 21st century as
electronics was to the 20th century.
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.
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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, photonic "eyes" enable robots to "see."
Photonics is also found in 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.
In April 2001, we organized Infinite Photonics, Inc. to develop and market laser
diodes based on our proprietary, patented and patent pending grating coupled
surface emitting lasers (GCSEL) diode technology platform developed by our Laser
Group's research and development unit over the last four years. In addition to
our staff researchers, we also engaged researchers at the Photonics Research
Center at the University of Connecticut, the Ioffe Institute in St. Petersburg,
Russia and the Center for Research and Education in Optics and Lasers at the
University of Central Florida in Orlando to develop applications of our GCSEL's.
To date we have obtained one patent (expiring in 2018), have nineteen patents
pending for GCSEL and related technologies. We own the intellectual property,
which in addition to patents and patent applications, includes the trade secrets
and processing techniques used to manufacture these diodes.
Our diode lasers are produced from two to four inch semiconductor wafer
material, usually indium phosphide (InP), gallium arsenide (GaAs), or gallium
nitride (GaN). The semiconductor wafer material chosen determines the wavelength
of the laser beam, such as 980 nanometers for GaAs, 1550 nanometers for InP, and
1480 nanometers for GaN. A nanometer is one billionth of a meter. The
semiconductor diode wafers we currently use in the manufacture of GCSEL's are
processed at Industrial Microphotonics Company (a TRW subsidiary). We are
currently qualifying a second wafer-manufacturing source, as required by most
larger telecommunications equipment manufacturers.
A three-inch semiconductor wafer has the potential to produce substantially more
than 2,000 individual diode lasers as small as a millimeter by one and one-half
millimeters. Each diode can emit laser energy (lase) with continuous power of
greater than one watt. Each individual diode has two sections, active and
passive. The passive area of each diode on the wafer is etched with one of a
variety of grating patterns. It is through this grating on the surface of the
diode that the laser beam emits, hence the name, Grating Coupled Surface
Emitting Laser. At the opposite end of the diode from the grating, a contact is
placed on the diode to provide electrical power, and a thermo-electric cooler or
heat sink may be used to cool the diode during operation. When electrical power
is applied to the contact, lasing begins in the semiconductor material, and
laser energy is emitted through the grating. The device is packaged to protect
the diode, along with a very small focusing lens, and that lens is used to focus
the laser beam into the end of the fiber optic cable.
Our competitors produce diode lasers that can either emit from the edge of the
wafer material, such as processes known as Fabry-Perot or Distributed Feedback
diode lasers, or through the surface, such as through a surface emitting
technology different from ours, known as Vertically Coupled Surface Emitting
Lasers. Each technology has different characteristics in terms of cost, power
output and laser beam quality. We believe that our GCSEL diodes produce the best
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overall combination of cost, power and beam quality of emitted light for high
power (0.5 to 8 watts) applications used in defense, telecommunications,
materials processing, laser printers and medical device equipment. Because the
beam comes out of the grating in a cylindrical shape (low beam spreading), our
diodes require lower cost focusing optics. Emitting the beam from the wide
surface of the wafer (as opposed to the narrow edge of the wafer) allows our
diodes to be tested on the wafer, which provides lower test, burn-in and
packaging costs. Finally, the very narrow line width of the beam allows for
tunability over a greater number of available channels. The qualities of our
diode lasers in comparison to competitive diodes include:
o Power of up to eight watts compared to currently commercially
available power of under one watt;
o Beam spreading of less than one degree as compared to 12 to 30
degrees for edge emitted laser energy (which reduces the cost and
complexity of the optics needed to focus to the fiber); and
o Relatively narrow line width of emitted laser energy (which allows
for more than 50 communication channels on a single fiber optic
cable).
We have many of the same disadvantages of most emerging technology start-ups,
which includes among others: market acceptance of a new technology; customer
commitment to engineer or re-engineer their products to incorporate our
technology; the need to expand rapidly and attract talented personnel; and the
need to raise capital to fund that expansion.
On January 23, 2002, Infinite Photonics, Inc. signed and commenced a $12.0
million research and development contract with DARPA, which is scheduled to
conclude by the end of 2003. Payments under this contract will be received as
services are rendered and billed for. As of May 31, 2002, approximately $1.4
million has been billed under this contract in the current year. Of the
remaining contract balance we believe that an additional $4.3 million will be
billed during 2002 with the balance billed during 2003. If we fail to meet
technical milestones and defense contract audit requirements, DARPA may
terminate the contract which could result in less than $12 million of revenue to
us under this contract. The purpose of the contract is to provide DARPA with
pump and source laser diodes and grating coupled semiconductor optical
amplifiers with powers much higher than the current industry standard of about
0.3 watts (more than one watt with a goal as high as ten watts), high repetition
rates (up to 20,000 laser pulses per second), and high beam quality (minimum
beam spreading of the laser). We will own the intellectual property developed
under the contract.
In March 2002, we signed a one-year lease with the Central Florida Research Park
in Orlando, Florida for a 6,750 square foot laboratory and manufacturing
facility. This facility replaces laboratory and office space we were leasing on
a short-term basis from the University of Central Florida. Depending on market
acceptance of our products once we achieve full production, we may require more
space in the foreseeable future.
Our Photonics Group employs ten full-time personnel. We expect to grow our
Photonics Group staff to approximately 30 to 40 full-time employees by the end
of 2002. We currently have subcontractors producing raw material (semiconductor
wafers), electrical drivers, power supplies and devices to control the heat
produced by our diodes (thermal management). The proprietary grating patterns
etched into the semiconductor wafers for different applications are accomplished
at our current facilities in Orlando, FL and in St. Petersburg, Russia at the
Ioffe Institute.
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We expect to acquire a minimum of approximately $1.2 million in capital
equipment over the next year through equipment operating leases that will be
negotiated under terms available at the time of acquisition. Additionally, we
currently have semiconductor steppers and other relatively high cost equipment
available to us on a per hour basis from the University of Central Florida, as
well as from other commercial facilities. We estimate that our current and
proposed leased and rented equipment will support up to $10.0 million in annual
revenue capacity. Our Florida facility is certified for exemption by the
Governor's Office from sales and use taxes under Florida's Semiconductor,
Defense and Space Technology Facilities Program.
Dey Laboratories, Inc. accounted for 12% and 7% of our revenues during the year
ended December 31, 2000 and 2001, respectively. DARPA accounted for 12 % of our
revenues for 2001 and we expect DARPA to account for over 40% of our
consolidated revenues for the year ending December 31, 2002.
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 Photonics Group's growth.
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 and Florida. We maintain sites on the
World Wide Web at www.infinite-group.com, www.laserfare.com, and
www.infinitephotonics.com. Information contained on any of our websites do not
constitute a part of this Report on Form 10-KSB.
Factors that may affect future growth.
In addition to the other information provided in our reports, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
We have experienced losses in the current and prior years and we anticipate that
we will continue to generate operating losses for at least the first quarter of
2002.
Our operations to date have not been profitable. As of December 31, 2001 we had
an accumulated deficit of approximately $23.5 million. We expect to continue
operating at a loss during the first quarter of 2002. The majority of the
operating losses during 2001 were primarily attributable to discontinued
injection molding operations at our former Osley & Whitney, Inc. subsidiary and
start up costs at our Infinite Photonics, Inc. subsidiary. Other factors that
could adversely affect our operating results in the future include:
o the cost of manufacturing scale-up and production at our Photonics
Group;
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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.
We are highly leveraged, which increases our operating deficit and makes it
difficult for us to grow.
At December 31, 2001 we had current liabilities, including trade payables, of
$6.2 million, and long-term liabilities of $2.6 million and a working capital
deficit of $1.7 million. We continue to experience working capital shortages
that impair our business operations and growth strategy. If we continue to incur
operating losses and experience working capital limitations, our business,
operations and financial condition will be materially adversely affected.
We have been dependent on our chief executive officer to fund working capital
needs and provide equipment.
Mr. Brockmyre, our chief executive officer, lent us $974,000 and $150,000 during
2000 and 2001, respectively. He converted $974,000 and $100,000 of this amount
into shares of our common stock during 2000 and 2001, respectively. In addition,
Mr. Brockmyre has purchased and leased to us equipment necessary for our
operations. There is no assurance that he will be willing or able to fund future
working capital needs.
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 our existing credit facilities,
we may require additional funds to expand our production capability, continue to
develop new applications for our diode technology and for working capital and
general corporate purposes. At this time, we cannot assure you that cash flow
from product sales will reach the level required to sustain our operations and
growth plans in the near term. Further, we cannot assure you that adequate
additional financing will be available or, if available, will be offered on
acceptable terms. Our existing credit facilities limit our ability to raise
capital through the sale of our securities. Accordingly, if we need additional
capital but are unable to access it under our existing facilities, 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
9
cannot obtain additional financing on terms acceptable to us when required, our
operations will be materially adversely affected and we may 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.
Our primary focus is to develop new commercial applications for our diode laser
and laser-driven technologies. Many of the benefits of our diode laser and laser
technologies are not widely known. Therefore, we anticipate that we will need to
educate our target markets to generate demand for our products and 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 may 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 services have not generated a significant amount
of revenue, even though they have been available for some time. In addition,
since the number of jet engine, aerospace and medical device manufacturers is
relatively small, 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. 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 at our Photonics Group (generally limited to
technical trade conferences, technical publications, and direct customer
inquiry) 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. 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 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.
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We depend on the aerospace, laser photonic, telecommunications and medical
device industries, which continually produce technologically advanced products.
A majority of our sales in our Laser Group 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 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.
We depend on government research and development contracts to support our
Photonics Group.
Substantially all of our Photonics Group revenue has been derived from
governmental research programs. Any reduction in spending on these programs
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. Our
inability to provide comparable or better products and services at a lower cost
than our competitors could adversely effect demand for our products and
services. 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
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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, original equipment manufacturers (OEMs), potential 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. The majority of our product
research has been funded by customers or potential customers. We cannot assure
you that our existing relationships will continue or the extent to which the
parties to such arrangements will 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 any agreement will progress to a production phase or, if production
commences, that we will receive significant revenues as a result of these
relationships. The majority of our relationships for product development or
contract research is for one to two years in duration, and is generally
cancelable based on attaining or not attaining the customers' milestones.
We have only limited manufacturing capabilities and our inability to
continuously 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 those patents. We cannot assure you that patents owned or licensed
and
12
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.
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, Bruce J. Garreau,
and Jeff Bullington 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 scientific, 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.
13
Moreover, we cannot assure you that we will continue to maintain 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 under our credit facilities and as a result of the exercise of
outstanding warrants and options.
In addition to the shares that may be issuable under our credit facilities, as
of December 31, 2001 we have granted options to employees and directors covering
1,036,037 shares of our common stock under our stock option plans. In addition,
we have issued warrants covering 1,083,375 shares of common stock. As a result
of the actual or potential sale of these shares into the market, our common
stock price may decrease.
Concentration of ownership
As of March 27, 2002, our chief executive officer, Clifford G. Brockmyre II, is
our largest stockholder, owning approximately 26% of the 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
14
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 and
debt reduction.
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 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 net tangible assets of $2.0 million (stockholders' equity, less
unamortized goodwill). If we fail to meet these requirements, our stock could be
delisted. 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 our 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
15
commissions payable to both the broker-dealer and the 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.
Customer concentration
Both our Laser Group and our Photonics Group have experienced significant
customer concentration. The Laser Group sells laser services to over 100
customers for jet engine and aerospace parts including: General Electric; United
Technologies; Rolls Royce Allison; Barnes Aerospace; and Orenta. Medical laser
services are sold to over 20 customers, including Dey Laboratories (a Merck
Germany unit), Stryker Medical, and Johnson & Johnson. In our Photonics Group,
over 90% of our revenues are derived from sales to the United States Government,
including DARPA and AFRL. Dey Laboratories, Inc. accounted for 12% and 7% of
revenues during the year ended December 31, 2000 and 2001, respectively. DARPA
accounted for 12 % of revenues for 2001 and we expect DARPA to account for over
40% of the consolidated revenues for the year ending December 31, 2002. Due to
the concentration of revenues in both groups, loss of any of these customers
could have a significant detrimental effect on that group's business and
financial results.
Government regulation
To meet aerospace customer needs, our Laser Fare subsidiary is certified for
overhaul and repair of jet engine and aerospace parts by the FAA. We maintain
the overhaul and repair license in order to perform laser material processing
services on jet engine parts (cutting, welding, drilling) and to use the LENS
process to repair or deposit titanium or other metals to aerospace components.
To become FAA certified for overhaul and repair of jet engine and aerospace
parts, Laser Fare contacted the FAA and submitted a quality manual and the
required procedures for the parts involved. After the FAA staff reviewed the
documentation, FAA inspectors visited the facility and performed an inspection.
Thereafter, they require an inspection if procedures are changed. Our last
change was in 2000, for which we passed inspection. We are subject to audit by
the FAA at any time, either on a scheduled or periodic basis, at our request if
we change procedures. Loss of the license could impair our ability to conduct
overhaul and repair of jet engine and aerospace parts.
Additionally, we are registered with the FDA as a Contract Manufacturer of
medical devices to produce products such as asthma testing devices for Dey
Laboratories (in which some of the components are cut using laser workstations).
We are subject to quality control audits by the FDA at any time. We have never
been audited by their inspectors. However, our medical customers are responsible
for the inspection, sale and distribution of their products and devices and we
do not believe we have liability to end-users. The process for registration as a
contract manufacturer involves completion of an application Form FDA 2891A,
which Laser Fare completed in 1995, and renewal forms every two years
thereafter. Loss of the registration could impair our ability to perform
contract manufacturing of medical devices or components.
16
As we perform government defense contracts in both our Laser and Photonics
Groups, a number of our employees have received National Security Clearance by
the appropriate agencies, and we are responsible for compliance with Federal
Acquisition Regulations, or "FAR's." In addition, we are audited by the Defense
Contract Audit Agency (DCAA), who must periodically approve our hourly billing
rates for direct labor charged to our federal contracts.
Patents and intellectual property
Our patents and patent applications relate to diode grating structure, design
and processes to produce the diode; thermal management devices to control the
heat of the diode and other manufacturing processes; titanium processes for the
LENS application, and other manufacturable product discovered or acquired in the
course of our research. The majority of our intellectual property is employed
directly in the development and manufacture of laser diodes, products using the
LENS process or processes used to provide laser processing services. A patent on
our GCSEL technology was awarded on April 17, 2001. Presently, this is our only
material issued patent. Additionally, we have nineteen patent applications
pending, including twelve related to our GCSEL technology and seven related to
thermal management applications to disperse the heat created by diode lasers and
for other uses. All patents have a duration of seventeen years from the date of
issuance.
For intellectual property that we discover or develop that is not related to our
core businesses, we intend to seek to license or sell this technology to
unaffiliated third parties.
Competition
Our Laser Group's materials processing business competes with laser and
traditional job shops. We principally compete with universities and large
corporations for some of our laser research services. Our proprietary technology
allows us to compete in these markets.
Our Photonics Group competes in the laser diode market. Laser diodes are
produced for a large number of consumer, industrial and government purposes. We
are focused on three of the larger components of those markets:
telecommunications; materials processing; and medical products. We compete
against a large global market of component manufacturers, and against many
large, well-funded diode manufacturers including industry leaders, such as JDS
Uniphase, Nortel, Coherent and Novalux. Much of the industry addresses low to
mid-range power applications under 0.5 watts, such as edge emitting diode and
vertically coupled surface emitting laser manufacturers. Our product development
program is concentrated on applications requiring mid to high power (greater
than 1.0 watts), relatively high beam quality (beam spreading less than 1%), and
narrow line width (for greater than 50 channel applications). We believe that
such applications are and will be important to current and future
telecommunications requirements for optical amplification (Raman and EDFA);
materials processing applications for ablation (low heat effected zone), and
medical applications (low heat effected zone).
We compete with different manufacturers, depending on the type of service or
product we provide and the geographic locale of our different operations. Most
of our competitors 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,
17
economies of scale, 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 March 29, 2002, we had 78 full-time employees including 38 production
personnel, 26 engineering and research personnel, three sales personnel and 11
general and administrative 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.
Properties
The table below lists our manufacturing and administrative office locations and
square feet owned or leased. The Orlando, Florida rent includes electric power,
water and high speed internet.
Square feet
--------------------------
Location Owned Leased Annual Rent Termination Date
---------------------- ----------- ----------- --------------- ----------------
Warwick, RI -- 2,223 $ 35,568 2002
Smithfield, RI 16,800 8,000 $ 28,800 Month to Month
Narragansett, RI -- 326 $ 6,850 2002
Orlando, FL -- 6,750 $ 104,123 2003
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. We do not
expect to renew the leases for our Warwick and Narragansett facilities in our
continuing effort to reduce general and administrative costs, and to further
consolidate functions and personnel either in Smithfield, RI or Orlando, FL.
Legal proceedings
We are a defendant in an action commenced in the Circuit Court for the Sixteenth
Judicial Circuit, Kane County, Illinois, by Craftsman Tool & Mold Co. in which
the plaintiff alleges that we guaranteed an obligation of O&W in the approximate
amount of $130,000. We intend to vigorously defend this action, and believe the
plaintiff's position is without merit.
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
("Spectra") and Nabil Lawandy. In the action we assert 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 we relied on various representations made by Spectra and Mr.
Lawandy, which were
18
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 attorney's
fees and costs. In its response to the complaint, Spectra asserted counterclaims
against us which we believe are without merit. The first counterclaim alleges
that Infinite, through Laser Fare, breached a contract to sell four lasers to
Spectra for a total price of $30,000. Spectra asserted that the lasers did not
meet its specifications or operate satisfactorily and, thus, seeks a refund of
the purchase price. The second counterclaim alleges that Infinite, by bringing
suit against Spectra, has breached a fiduciary duty to Spectra and has
intentionally interfered with advantageous relations.
Our motion to dismiss the counterclaims was denied. We are currently engaged in
the discovery stage of the proceedings and believe that the matter will be
placed on the trial calendar during the fourth quarter of 2002 or first quarter
of 2003. We intend to vigorously prosecute this proceeding.
Other than the foregoing proceeding, we are not a party to any material legal
proceeding.
Submission of matters to a vote of security holders
None.
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.
19
Period High Low
-------------------- ------ ------
2001
First Quarter $4.234 $1.500
Second Quarter 3.990 1.688
Third Quarter 3.320 1.600
Fourth Quarter 4.170 1.500
2000
First Quarter $18.375 $ 1.063
Second Quarter 4.938 1.531
Third Quarter 6.125 2.000
Fourth Quarter 4.000 1.375
As of March 27, 2002, 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 7
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; our Laser Group and our Photonics Groups. During
2001, we sold or discontinued operations of our Plastics Group.
Our Laser Group, comprised of Laser Fare, Inc. (LF -Smithfield, RI) and Mound
Laser & Photonics Center, Inc. (MLPC- Miamisburg, OH) provides comprehensive
laser-based materials processing services to leading manufacturers. Our
Photonics Group, includes Infinite Photonics, Inc., (Orlando, FL) and the
Advanced Technology Group (Narragansett, RI) manufactures and markets our
proprietary grating coupleted surface emitting laser (GCSEL) diodes. MetaTek,
Inc. of Albuquerque, NM was merged into Infinite Photonics, Inc.
Our Plastics Group, which had been comprised of Osley & Whitney, Inc.
(Westfield, MA), Materials & Manufacturing Technologies, Inc. (West Kingston,
RI) and Express Pattern, Inc. (Buffalo Grove, IL), provided rapid prototyping
services and proprietary mold building services, which were discontinued or
sold.
During 2001, we continued to experience operating losses, due primarily to
losses in the discontinued Plastics Group attributed to falling demand for our
injection molds, and start-up costs for our Photonics Group. These losses
resulted in reductions in cash flow and a negative
21
working capital position. We are currently focused on our two primary lines of
business and we are actively pursuing additional capital through the equity line
of credit agreement, private equity sources, strategic alliances, venture
capital and investment banking sources.
Our financial statements included in this report have been prepared in
conformity with accounting principles generally accepted in the United States.
During 2001, there were a number of new accounting standards issued by the
Financial Accounting Standards Board, which we have determined, did not have any
effect on our financial statements in 2001 and we anticipate they will not have
a material effect on our financial statements in 2002. We believe that our
operations, as currently structured, together with our current financial
resources, will result in improved financial performance in fiscal 2002.
Forward looking strategy
Our business plan for 2002 includes the completion of our plan to dispose of the
Plastics Group commenced in November 2001 and the ramp up of research,
engineering, manufacturing, marketing and administrative capability for our
Photonics Group.
In cooperation with O&W's secured lender, the majority of O&W's equipment and
furnishings were sold at public auction on March 12, 2002, and accounts
receivable are being remitted to the secured lender as paid. The Osley & Whitney
land and building were sold at auction on July 22, 2002 for $650,000. A closing
of this sale is scheduled for August 8, 2002. This transaction will complete the
liquidation the Osley & Whitney's assets, resulting in a net obligation to the
secured lender, including accrued interest and closing expenses, of
approximately $200,000. The obligation of Osley & Whitney to the secured lender
was guaranteed by Infinite. Accordingly, Infinite will assume that remaining
outstanding balance. The secured lender has tentatively agreed to convert the
balance into a term loan amortizing monthly based upon a seven year amortization
schedule, with a balloon payment due eighteen months from issuance. It is
anticipated that this note will be executed and delivered following the closing
of the sale of the land and building.
On March 14, 2002 we closed on the sale of the assets of Express Pattern, Inc.
for $725,000, consisting of $575,000 in cash (of which $300,000 was paid to
O&W's secured lender) and a five year 8% subordinated $150,000 note, due upon
maturity with quarterly interest payments.
Our Photonics Group is completing leasehold improvements to its semiconductor
laser diode manufacturing facilities in Orlando, Florida, which will be
completed during the second quarter of 2002. We have hired or transferred ten
research and administrative personnel who are working on the DARPA contract and
we are actively interviewing for additional engineering, quality control,
manufacturing and administrative personnel. Equipment has started arriving at
the facility, and we expect to complete about $1.2 million in capital equipment
expansion by the end of 2002, primarily funded through operating leases. As a
result of these steps, we expect that our Photonics Group will significantly
increase capacity by year-end. In addition, we closed on a $1.0 convertible note
with Laurus Master Fund, which has been used to fund salaries and other costs
billable under our DARPA contract. We have completed the first technical review
with
22
DARPA and believe we are on schedule to meet their timetable for completion of
that contract by the end of 2003.
Our Photonics Group is actively engaged in discussions with a number of
potential commercial customers to incorporate our technology in their next major
product updates planned for late 2002 or early 2003. Our marketing efforts are
aimed at customer education and in that regard our staff members have recently
presented papers at technical trade shows, such as the recent Photonics West and
Optical Fiber conferences, which are attended by representatives of leading
companies using diode devices. Additionally, we are actively exploring financing
alternatives for our Photonics Group, including through venture capital firms
with, in many cases, portfolio companies that could be end users of our
products.
Finally, we are completing steps to further reduce corporate overhead including
facilities consolidation and other cost reduction measures. We believe that the
successful implementation of this plan will result in profitable operations
during 2002.
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,
2001, we had cash and cash equivalents of approximately $130,242 available for
our working capital needs and planned capital asset expenditures. In addition,
on February 5, 2002, we closed on a $1.0 million, two year convertible note (see
below).
The December 31, 2001 financial statements reflect a decrease in accounts
receivable from December 31, 2000 of approximately $328,000, or 18%.
Approximately $873,000 of the accounts receivable at December 31, 2000 is
related to the continuing operations. These receivables have increased by
approximately $626,000 to $1,498,463, or 72% at December 31, 2001. This increase
is primarily related to an increase of approximately $500,000 in accounts
receivable due under a $1 million DARPA contract at the Photonics Group. This
contract was new in the second quarter of 2001 and accounted for approximately
$986,000 in new revenues for 2001. Accounts receivable from continuing
operations, excluding this amount have increased approximately 15%. The total
increase in revenues from the Photonics Group for 2001 of approximately $860,000
coupled with approximately $1.0 million (16%) increase in revenues from the
Laser Segment provided for the overall increase in revenues from 2000 of
approximately $1,880,000, or 28%. The balance of the accounts receivable at
December 31, 2000 of approximately $954,000 relate to the discontinued
operations of the Plastics Group. Theses accounts receivable balances have been
reduced to approximately $355,000 at December 31, 2001 and are included in the
balance sheet as "assets of discontinued operations". This reduction reflects
the shut down of the O& W operations in November 2001.
The December 31, 2001 financial statements also reflect a reduction in inventory
levels from December 31, 2000 of approximately $352,000, or 73%. A reduction of
approximately $329,000 relates to inventories of the discontinued Plastics Group
that existed at December 31, 2000,
23
which have been included in the balance sheet as "assets of discontinued
operations" at December 31, 2001. The remaining marginal reduction of
approximately $23,000 from continuing operations relates to the timing of
inventory purchases at year-end for the Laser Group.
Property and equipment purchases at our Laser Fare subsidiary amounted to
approximately $360,000 of which $308,000 related to the LENS process. The
majority of the remaining increase occurred at our Infinite Photonics subsidiary
(approximately $30,000) and consisted of furniture and fixtures at the new
Orlando facility. Cash flows for intangible assets increased from the
development and acquisition of patents pending and other intellectual property
relating to the GCSEL technology used at the Photonics Group. We anticipate that
increased equipment needs in the Photonics Group during 2002 will be obtained
through operating leases.
During 2000 and 2001, our president and chief executive officer loaned us an
aggregate of $1,124,000 evidenced by a series of short-term notes, which bore
interest at various interest rates ranging from 10% to 11%. In addition, at
December 31, 1999, a $40,000 loan from our president and chief executive officer
was outstanding. The proceeds of these loans were used for working capital
purposes. In consideration for these loans, our president and chief executive
officer was issued warrants to purchase 153,000 shares of common stock at
exercise prices ranging from $1.03125 to $2.73 per share. As of December 31,
2001, approximately $50,000 of the loans, along with $4,375 of unpaid interest
remained outstanding, and approximately $1,126,000 (including interest of
$12,000 which accrued during 2000) had been repaid through the issuance of
shares of common stock and the application of portions of the loan balance to
satisfy the exercise price of outstanding options and warrants. During 2000,
$1,026,000 of principal and interest were repaid through (a) the issuance of
294,649 shares of common stock issued at a weighted average price of $2.22; (b)
the application of $199,471 in satisfaction of the exercise price of outstanding
options; and (c) the application of $172,750 in satisfaction of the exercise
price of outstanding warrants. During 2001, $100,000 of principal was repaid
through the issuance of 39,526 shares of common stock issued at a price of
$2.53. All share issuances were valued at fair market value on the date of
conversion, which was determined based upon price of the common stock on the
twenty trading days preceding the conversion.
While the majority of the revenues realized as of December 31, 2001 were
attributed to our Laser Group operations, we anticipate improved revenue from
our Photonics Group and positive results from additional expense containment
measures that have been implemented. We anticipate that our existing credit
facilities, together with our other strategies for raising additional working
capital through debt and/or equity transactions will provide adequate liquidity
to fund our operations. Subsequent to year-end, additional private placements of
our common stock yielded gross proceeds of $150,000.
At December 31, 2001 we had a working capital deficit of approximately $1.7
million, ($1.3 million after eliminating the assets and liabilities of our
discontinued operations). The working capital deficit was primarily caused by
recurring losses at the former Plastics Group resulting in slow payments to the
Company's vendors.
24
A going concern qualification was included in the opinion issued by our auditors
on our 2000 financial statements as a result of one of the Company's primary
lenders not having issued its waiver for certain loan covenant violations that
existed at December 31, 2000 at our Laser Fare subsidiary. The loan covenants
are measured annually at December 31. The loan covenant violations which existed
at December 31, 2000 related to failure to meet certain levels of working
capital, debt to tangible net worth ratio and exceeding capital expenditure
limits. Due to the acquisition of LENS equipment in a non-monetary transaction
and acquisition of stent equipment, we exceeded the capital expenditure
limitations to support the growth of our Laser Group. Subsequent to the issuance
of the financial statements and the repayment of a certain portion of the
related debt, the bank issued a waiver letter for the violations.
At December 31, 2001, the Company was in violation of certain covenants related
to its failure to meet certain levels of debt to tangible net worth ratio and
exceeding the capital expenditure limits. We completed acquisition of the LENS
equipment in a non-monetary transaction in 2001, which also caused us to exceed
our capital limitation requirements. The covenant violations were waived by the
bank prior to the issuance of the financial statements.
During the year ended December 31, 2001, the Company adopted a plan to
discontinue the operations of its former Plastics Group, which was suffering
recurring losses and required significant levels of cash flows to operate. In
addition, during the first quarter of 2002 the Company sold its Express Pattern
and Mound subsidiaries. These events provided an infusion of approximately
$845,000 in cash, which has been used to pay down existing bank debt, as well as
for working capital needs.
As a result of the above transactions, the Company currently operates under two
business segments. The Laser Group is expected to have positive income from
operations and cash flow based on its current and budgeted revenue levels from
its existing customer base. The Photonics Group was awarded a $12.0 million
DARPA contract, for which work began during the first quarter of 2002. The
Photonics Group should be able to sustain break even or better operating
performance. In addition, during the first quarter of 2002, the Company closed
on a $1.0 million convertible debt financing with the Laurus Fund, the proceeds
of which will be used to finance the working capital needs of the Photonics
Group for 2002. The Company has also reduced its corporate overhead costs by
reducing personnel and reallocating personnel resources to the Photonics Group,
who will generate revenues under the DARPA contract. These factors have led to
our improved liquidity in 2002 and the absence of a going concern qualification
on our 2001 financial statements.
In conjunction with our on-going business expansion program, we are pursuing
alternative sources of funding. We have put several agreements in place to
potentially provide future liquidity and are exploring several additional
arrangements including private placements, direct investment by strategic
alliance partners, and venture capital sources. To date we have arranged an
asset based convertible note that is available to fund sales volume increases
and working capital needs at our Photonics Group.
On July 23,2002 we terminated the equity line of credit agreement which we had
entered into with Cockfield Holdings Limited (Cockfield) on November 30, 2000.
As a result, we were released, and released Cockfield, from any further
obligation thereunder.
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
25
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 and survived the
termination of the agreement.
Our asset based convertible note
On February 8, 2002, we completed a transaction with Laurus Master Fund, Ltd., a
New York based hedge fund, (Laurus) for $1.0 Million in cash in exchange for a
$100,000 two-year note bearing interest at 15%, with interest payable quarterly.
If we allow Laurus to convert the Note into shares of common stock at $2.25 per
share, we will receive an interest rebate from Laurus equal to one percent per
$100,000 converted. The Note is secured by a deposit account and by the accounts
receivable of our Infinite Photonics subsidiary. Our use of the proceeds of this
note is limited to funding expenses under our DARPA contract, and the growth of
accounts receivable with commercial customers.
In connection with the transaction, we issued five-year warrants to Laurus to
purchase 50,000 shares of common stock at $2.65 per share, paid a $50,000
origination fee at closing and paid legal and closing expenses of $37,500.
There is no assurance, 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.
Results of operations
Laser Group
Revenues from our Laser Group for the years ended December 31, 2001 and 2000
were $7,305,574 and $6,285,882, respectively, with a net operating loss of
$140,742 and $239,704, respectively. The increase in revenues was due primarily
to increased services performed for General Electric (approximately $411,000)
and Barnes Aerospace (approximately $436,000) on gas turbine parts and the
remainder from medical device manufacturers. The reduced operating loss resulted
from economies of scale.
Photonics Group
Revenues from our Photonics Group for the years ended December 31, 2001 and 2000
were $1,202,074 and $341,688, respectively. Net operating loss for the 2001
period was $332,245 as compared to net income of $84,727 for the 2000 period.
The 2001 operating loss was due to start-up costs at Infinite Photonics. The
increased revenue in 2001 of approximately $860,000 was attributable to work
performed and billed under the DARPA contract during the period."
Plastics Group
26
The loss from our discontinued Plastics Group for the year ended December 31,
2001 was $1,774,085 compared to a loss of $775,827 for the year ended December
31, 2000. The increased loss during 2001 was attributable to a general reduction
in revenues at O&W primarily attributable to loss of business from key customers
and a $622,000 loss on the disposal of assets divested in connection with these
discontinued operations.
Comparison of the years ended December 31, 2001 and 2000
In 2001, consolidated revenues were $8,507,648 on cost of goods sold of
$5,897,511 resulting in a gross profit of $ 2,610,137 from continuing operations
for the year. Consolidated revenues from continuing operations in 2000 were
$6,627,570 on cost of sales of $ 4,720,649, resulting in a gross profit of
$1,906,921. The increase of $ 1,880,078 or 28.4% in consolidated revenues for
the year ended December 31, 2001 compared to the year ended December 31, 2000
was primarily due to a $1.3 Million DARPA contract in 2001 awarded to our
Photonics Group, and increases in sales in our Laser Group to GE Gas Turbine and
Barnes Aerospace for gas turbine parts and to medical device manufacturers.
Gross profit margin increased in 2001 to 30.7% from 28.8% in 2000. This increase
was due to slightly higher margins in both gas turbine and medical devices. We
signed a large $12.0 million DARPA contract on January 23, 2002 where net
margins are limited to approximately 6.7% for government research which
historically has been approximately eight percent. As a result, we expect
revenues to increase significantly in 2002, but at lower net margins.
As to the Laser Group, the majority of revenues are derived from one-time
purchase orders, usually from repeat customers such as General Electric, United
Technologies, Barnes Aerospace, Dey Laboratories, etc. Work begins when
materials arrive from the customer (our inventories are minimal and the customer
is responsible for the quality and quantity of the materials), and we cut, weld,
drill and assemble the parts according to engineering drawings and
specifications provided by the customer or determined by our engineers with
customer approval. Upon completion, the parts are inspected by quality control
personnel, compared to the engineering specifications, packaged and delivered to
the customer. The customer is billed for the number of parts delivered.
As to the Photonics Group, the majority of revenues are derived from contract
research and development. We expect to complete approximately $5.7 million of
effort in 2002 under the current DARPA contract totaling $12.0 million, with the
remainder to be completed in 2003. The work is subject to periodic technical
reviews and government audit, and is cancelable if we fail to meet technical and
financial milestones. We completed both a technical DARPA review and a Defense
Contract Audit Agency review in May 2002, and we believe we are on schedule
technically and in audit compliance.
Research and development expenses were $94,665 for the year ended December 31,
2001. Because we are in the contract research and development business and mark
up our services to reflect an anticipated profit on such services, the majority
of our research revenues and related costs are reflected in sales and cost of
goods sold, respectively. Research and development reflects internal costs
associated with new product development efforts. We anticipate that internal
research and development expenses will increase in 2002, based on expected GCSEL
27
product development efforts in our Photonics Group based upon customer demand
and discretionary cash flows.
General and administrative expenses were $2,735,782 for the year ended December
31, 2001 as compared to $1,775,596 for the year ended December 31, 2000. The
increase of $960,186, or 54.1%, is primarily due to Infinite Photonics start-up
expenses, the hiring of our new chief operating officer in 2001, reinstatement
in 2001 of a 20% salary reductions and increased legal, investment banking and
other fees related to our capital raising activities. The Chief Operating
Officer was hired in January 2001 at an annual salary of $160,000, of which
$156,651 was paid during 2001. The CEO, CFO and Secretary took salary reductions
of 20% of their base salaries of $175,000, $135,000, and $110,000, respectively
for approximately half of 1999, all of 2000, and the first quarter of 2001.
During the last three quarters of 2001, salaries were paid at the normal rate
resulting in an increase of approximately $63,000 over the period ended December
31, 2000. Increased legal and accounting expenses of approximately $30,000 and
$63,000, respectively, resulted from general corporate matters. The new Infinite
Photonics subsidiary, which began operations in 2001, resulted in increased
general and administrative costs of approximately $383,000. Finally, public
company costs for our stock transfer agent, share listing costs, etc. increased
by approximately $52,000.
Selling expenses were $307,030 for the year ended December 31, 2001 as compared
to $433,845 for the year ended December 31, 2000. The decrease of $126,815, or
29.2%, was primarily attributed to decreased sales salaries and commissions in
our Laser Group due to better utilization of cross selling to existing
customers, and other efficiencies.
Depreciation and amortization expense totaled $775,924 for the year ended
December 31, 2001 as compared to $755,052 for the year ended December 31, 2000.
The increase was primarily due to depreciation expense for new lasers acquired
for stent production at our Laser Group.
Interest expense was $456,179 during 2001 as compared to $580,239 during 2000,
or a decrease of $124,060, or 21.4%. Interest expense to stockholders was
$128,567 during 2001 as compared to $173,694 during 2000. The decrease of
$45,127, or 26.0% was due primarily to the satisfaction of a capital lease
obligation to the president/principal stockholder in exchange for the issuance
of common stock during 2001. The decrease is also due to reduced interest
expense caused by the general reduction of amounts outstanding, in accordance
with the terms of the debt. Other interest expense was $327,612 during 2001 as
compared to $406,545 during 2000. The decrease of $78,933, or 19.4% was due
primarily to a reduction of short-term borrowings in our Laser Group and the
reduction in the prime interest rate during 2001.
Interest income for the year ended December 31, 2001 was $18,508 as compared to
$21,003 for the year ended December 31, 2000 due to comparatively lower interest
rates in 2001.
The loss from the disposition of assets in 2001 was $11,856, as compared to
$60,587 in 2000. The 2001 amount relates to a gain on the sale of a laser in our
Laser Group in the amount of $9,500 offset by the disposal of an asset no longer
used, resulting in a loss of $21,356. The 2000 amount relates to the sale of an
obsolete laser in our Laser Group. Each year as we complete our capital budget,
assets at or approaching the end of their useful lives are reviewed for upgrade,
disposal or replacement.
28
In November 2001 and December 2001, the Company's Board of Directors resolved to
dispose of Osley & Whitney and Express Pattern. The formal plan consisted of
shutting down the operations of the O&W subsidiary and selling the net assets of
the EP subsidiary. Effective November 30, 2001, the Company shut down the
operations of O&W and terminated all of the employees. The loss from the
operations of the discontinued business segment amounted to $372,055 as compared
to $383,665 during 2000. The loss on disposal of discontinued operations in the
amount of $622,000 for the year ending December 31, 2001, represents the
writedown of property, plant and equipment and inventory at O&W to their net
realizable value ($472,000), and an allowance for doubtful accounts receivable
of $150,000.
On March 13, 2002, the Company sold the net assets of Express Pattern to certain
officers/employees of the Company.
We had a consolidated net loss from continuing operations of $1,788,459 for the
year ended December 31, 2001 as compared to $1,710,582 in 2000. The loss from
discontinued operations was $994,055 for the year ended December 31, 2001 as
compared to $383,665 for the period ended December 31, 2000. Disappointing
results, offshore Asian competition in the mold business, and a weak market
after the tragedies of September 11, 2001 lead to the discontinuance of our
Plastics Group.
Critical Accounting Policies
Revenue Recognition
The Company generates substantially all of its revenue from two sources. The
first source represents services performed relating to contracted research and
development. These services are performed based upon terms specified and agreed
upon by both parties prior to commencement of the project. Revenues relating to
these services are recognized at the point that the services are performed.
There may or may not be a product delivered at the end of the project. The
second area relates to traditional laser services, which include welding,
machining, cutting, drilling and engraving. These services relate to processes
performed on the customers' parts. The services are performed based upon terms
specified and agreed upon by both parties prior to commencement. Revenues
relating to these services are recognized at the point that the completed
product is delivered to the customer. Generally there is little judgment or
uncertainty that goes into the recognition of revenue from both revenue sources
that would impact the reporting
Accounts Receivable Provisions
As part of the financial reporting process, management estimates and establishes
reserves for potential credit losses relating to the collection of certain
receivables. This analysis involves a degree of judgment regarding customers'
ability and willingness to satisfy its obligations to us. These estimates are
based on past history with customers and current circumstances. Management's
estimates of doubtful accounts historically have been within reasonable limits
of actual bad debts. Management's failure to identify all factors involved in
determining the collectability of an account receivable could result in bad
debts in excess of reserves established.
29
Deferred Tax Asset Valuation
Management calculates the future tax benefit relating to certain tax timing
differences and available net operating losses and credits available to offset
future taxable income. This deferred tax asset is then reduced by a valuation
allowance if management believes it is more likely than not that all or some
portion of the asset will not be realized. This estimate is based on historical
profitability results, expected future performance and the expiration of certain
tax attributes which give rise to the deferred tax asset. As of the balance
sheet date, a reserve has been established for the entire amount of the deferred
tax asset. In the event, we generate future taxable income we will be able to
utilize the net operating loss carry forwards. This will result in the
realization of the deferred tax asset, which has been fully reserved. As a
result, we would have to revise its estimates of future profitability and
determine if its valuation reserve requires downward adjustment.
Stock-Based Compensation
We disclose the pro forma compensation cost relating to stock options granted
under employee stock option plans, based on the fair value of those options at
the date of grant. This valuation is determined utilizing the Black- Scholes,
option-pricing model, which takes into account certain assumptions, including
the expected life of the option and the expected stock volatility and dividend
yield over this life. These assumptions are made based on past experience and
expected future results. In the event the actual performance varies from the
estimated amounts, the value of these options may be misstated."
Effect of new accounting pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under these new standards, all
acquisitions subsequent to June 30, 2001 must be accounted for under the
purchase method of accounting.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step was to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of the adoption), if
any, and must be completed by the end of the Company's fiscal year. Any
impairment loss resulting from the transitional impairment tests are reflected
as the cumulative effect of a change in accounting principle.
The Company adopted the provisions of SFAS No. 142 in its first quarter ended
March 31, 2002. The Company's goodwill in the amount of approximately $88,769 at
December 31, 2001, relates to the Laser Fare and Mound subsidiaries. Subsequent
to December 31, 2001, the assets of Mound were disposed of and operations were
ceased, resulting in the write-down of goodwill amounting to $17,584. The
remaining goodwill, amounting to $71,185, relates to Laser Fare, which will be a
reporting unit by itself for purposes of determining any impairment of goodwill.
The Company will no longer record $28,612 of annual amortization expense related
to its existing goodwill at December 31, 2001. The Company has allocated its
intangible assets to its
30
reporting units. The remaining useful lives of the intangibles have been
evaluated and no changes will be made.
SFAS No. 141 also requires that upon adoption of SFAS No. 142, the company
reclassify the carrying amounts of certain intangibles assets into or out of
goodwill, based upon certain criteria. The Company does not anticipate any
reclassifications. SFAS No. 142 supersedes APB No. 17, "Intangible Assets," and
is effective for fiscal years beginning after December 15, 2001. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS No. 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets; require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment, and in interim periods if certain events occur indicating that the
carrying value of goodwill and / or indefinite-lived intangible assets may be
impaired; require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill; and removes the 40-year
limitation on the amortization period of intangible assets that have finite
lives.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
On January 1, 2002, the Financial Accounting Standards Board issued Statement
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which provides guidance in the accounting for impairment of disposal of
long-lived assets. For long-lived asset to be held and used, the new rules are
similar to previous guidance, which required the recognition of impairment when
the undiscounted cash flows will not recover the carrying amount. The
computation of fair value now removes goodwill from consideration and
incorporates a probability-weighted cash flow estimation approach. Additionally,
assets qualifying for discontinued operations treatment have been expanded
beyond the former major line of business or class of customer approach. The
Registrant adopted the provisions of SFAS 144 in fiscal 2001 and utilized this
guidance for the disposal of the Plastics Group. Accordingly, the assets and
liabilities of the discontinued operations are reflected as gross amounts,
rather than net, in the accompanying balance sheet in accordance with SFAS 144.
There was no impact from the adoption of this standard on its impairment tests
of long lived assets nor its accounting for discontinued operations.
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
31
During the third quarter of 2001 we filed a current report on Form 8-K regarding
a change in our certified public accountants. On August 2, 2001, we were
notified that the firm of Freed Maxick Sachs & Murphy, PC, which had previously
merged with McGladrey & Pullen, LLP on November 1, 2000, elected to demerge from
McGladrey & Pullen, LLP effective August 1, 2001 and that McGladrey & Pullen,
LLP would no longer be our auditors. The demerged firm, which is newly named
Freed Maxick & Battaglia, CPAs, Pc, was appointed as our new auditors by our
board of directors. We had no disagreements with McGladrey & Pullen, LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure.
32
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) 60 Chairman of the board, president and 1994
chief executive officer
Thomas J. Mueller 50 Chief operating officer 2000
Bruce J. Garreau 51 Chief financial and accounting officer 1999
Daniel T. Landi 59 Corporate controller and secretary 1994
J. Terence Feeley 51 Director 1994
Michael S. Smith (2) 47 Director 1995
Brian C. Corridan (2) 53 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.
Background
The principal occupation of each of our directors and executive officers for at
least the past five years is as follows:
Clifford G. Brockmyre II 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.
33
Thomas J. Mueller became our Chief Operating Officer in December 2000. He joined
us in April 1999 as founder and president of our Express Pattern, an Infinite
Group subsidiary. He has a long history in rapid prototyping, previously
founding Prototype Express, an early rapid prototyping service bureau. Mr.
Mueller held engineering and management positions at Baxter Healthcare and
Caterpillar. He received BS and MS degrees in mechanical engineering from the
University of Illinois and an MS in Management from the Sloan School of
Management at MIT.
Bruce J. 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. Mr. Garreau received a BS in public accountancy from State
University of new York at Albany and is a certified public accountant in New
York and Connecticut.
Daniel T. 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 received a BS in
Finance and an MBA from the University of Connecticut.
J. Terence 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 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.
Michael S. Smith became a director in 1995 and is a member of our 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 that 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
BA from Cornell University and a JD from Cornell University School of Law.
Brian Q. Corridan became director in November 2000 and is a member of our audit
and compensation committees. Since 1994 he has been president of Corridan & Co.,
an independent financial services firm, an OSJ (Office of Supervisory
Jurisdiction) of Raymond James Financial Services. He has served as a Registered
Representative with Prudential Securities, Tucker
34
Anthony & R.L. Day, and Kidder Peabody & Co. where he participated in brokerage
services as well as corporate and municipal financings with these firms. Mr.
Corridan received a BA from Stonehill College, and is a former Naval Officer. He
serves as a trustee of a number of civic and educational organizations including
chairman of the Springfield Technical Community College Technology Park. He
serves on the finance committee of Baystate Health System, Inc., is a trustee of
Our Lady of the Elms College and was a director of Health New England a mid
sized HMO.
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 with except as follows:
Thomas J. Mueller - Form 4 two transactions; J. Terence Feeley -- Form 4 two
transactions; Bruce J. Garreau - Form 4 one transaction; Clifford G. Brockmyre,
II - 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
35
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 2001, 2000 and 1999 whose
aggregate compensation exceeded $100,000.
Annual compensation Long-term compensation
----------------------------------------- ----------------------
Shares of
common
Restricted stock
Name and principal Other annual stock underlying All other
position Salary Bonus compensation* awards(1) options compensation**
----------------------- ------ ----- ------------- --------- ---------- --------------
Clifford G. Brockmyre
President and chief
executive officer
2001 ............... $ 99,836 $ -- $ -- $ -- -- --
2000 ............... 132,966 -- -- -- 11,000 --
1999 ............... 163,096 -- -- -- 60,019 --
Thomas J. Mueller
Chief operating officer
2001 ............... 124,326 -- 10,500 -- 50,000 $32,523
2000 ............... 125,643 -- -- -- 131,250 --
1999 ............... 71,876 -- -- -- -- --
J. Terrence Feeley
President -- Advanced
Technology Group
2001 ............... 139,861 -- 10,298 -- 125,000 --
2000 ............... 140,297 -- 9,288 -- 240,000 --
1999 ............... 151,603 -- 9,652 -- 1,731 --
Bruce J. Garreau
Chief financial officer
2001 ............... 81,027 -- 6,750 -- -- $76,450
2000 ............... 94,868 -- 8,308 -- 108,500 30,000
1999 ............... 51,714 -- -- -- 75,000 --
Daniel T. Landi
Corporate controller
and secretary
2001 ............... 75,944 -- -- -- -- --
2000 ............... 87,966 -- -- -- 6,500 --
1999 ............... 101,539 -- -- -- 1,270 --
----------
* Reflects executive's Contribution to our 401k plan.
** Reflects application of accrued and unpaid salary to satisfy stock option
exercise price.
36
Employment Agreements
We have an employment agreement dated June 30, 2001 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 dated July 1, 1999 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. The agreement also provided for payments to
Mr. Feeley, or his estate, in the event of his death or permanent disability.
We entered into an employment agreement dated October 1, 1999 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
$7,312 upon issuance. The options vest in three equal installments of 25,000
shares over an eighteen-month period. In addition to the compensation provided
under the agreement, Mr. Garreau is eligible to participate in our bonus plan
and is eligible for other bonuses as determined in the sole direction of the
board of directors. The agreement also provides, among other things, that if Mr.
Garreau is terminated other than for Cause, we will pay to him a lump sum
payment equal to the product of the sum of (i) the highest annual rate of salary
paid to Mr. Garreau and (ii) the highest annual bonus paid to or accrued to the
benefit of Mr. Garreau during the employment term multiplied by two. The
agreement also provides for payments to Mr. Garreau, or his estate, in the event
of his death or permanent disability.
37
Stock options
Option grants
The following table sets forth certain information regarding options granted by
us in 2001 to each of the Named Executives.
Option Grants in Last Fiscal Year
-----------------------------------------------------------------------------------
Individual Grants Potential Realizable
--------------------------------------------------------- Value at Assumed
Annual Rates of
Stock Price
Number of Percent of Appreciation for
Shares Total Options Option Term(1)
Underlying Granted to Exercise ----------------------
Options Employees in Price Expiration
Name Granted Fiscal Year ($/share) Date 5% 10%
------------------------- ---------- -------------- --------- ---------- ------- -------
Clifford G. Brockmyre ... -- -- -- -- -- --
Thomas J. Mueller ....... 50,000 28.6 $ 2.04 8/30/11 $ 5,100 $10,200
J. Terrence Feeley ...... 125,000 71.4 2.01 9/15/11 12,562 25,125
Bruce J. Garreau ........ -- -- -- -- -- --
Daniel T. Landi ......... -- -- -- -- --
------------
(1) Potential realizable values are net of exercise price but before taxes,
and are based on the assumption that our common stock appreciates at the
annual rate shown (compounded annually) from the date of grant until the
expiration date of the options. These numbers are calculated based on
Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Actual gains, if any,
on stock option exercises are dependent on our future financial
performance, overall market conditions and the option holder's continued
employment through the besting period. This table does not take into
account any appreciation in the price of the common stock from the date of
grant to the date of this Form 10KSB.
Option exercises and year-end option values
The following table provides information with respect to options exercised by
the Named Executives during 2001 and the number and value of unexercised options
held by the Named Executives as of December 31, 2001.
Aggregated option exercises in last fiscal year and year-end option values
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options At
Fiscal Year-End Fiscal Year-End(2)
Shares ---------------------------- ------------------------
Acquired on Value
Name Exercise (#) Realized(1) Exercisable Unexercisable 5% 10%
------------------------- ------------ ----------- ----------- ------------- -------- --------
Clifford G. Brockmyre ... -- -- 7,337 -- $ 7,557 --
Thomas J. Mueller ....... 21,550 $ 22,197 22,200 137,500 $ 22,866 $114,625
J. Terrence Feeley ...... -- 184,953 278,333 $ 85,549 $222,933
Bruce J. Garreau ........ 59,300 58,845 4,733 66,667 $ 4,875 $ 68,667
Daniel T. Landi ......... 3,438 2,486 13,284 -- $ 4,732 --
----------
(1) For the purposes of this calculation, value is based upon the difference
between the exercise price of the options and the stock price at date of
exercise.
(2) For the purpose of this calculation value is based upon the difference
between the exercise price of the exercisable and unexercisable options
and the stock price at December 31, 2001 of $2.53 per share
38
Stock Option Plans
We have stock option plans, which were adopted by our board and approved by our
shareholders covering an aggregate of 2,003,226 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. 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 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 our option plans, each new non-employee director is automatically
granted, upon becoming a director, an option to purchase 5,000 shares of our
common stock at the fair market value of such shares on the grant date. In
addition, each non-employee director is automatically 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 stockholders. These options 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
39
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.
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 1,161,037
shares under our option plans, including 22,000 shares to Michael S. Smith and
12,500 shares to Brian Q. Corridan under the our non-employee 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.
40
Name of Shares of Common Stock Percentage
Beneficial Owner (1) Beneficially Owned (2) of Class (3)
-------------------- ---------------------- ------------
Directors and Executive Officers
Clifford G. Brockmyre II 1,899,703(4) 33.51%
J. Terence Feeley 199,454(5) 3.78%
Bruce J. Garreau 130,333(6) 2.55%
Thomas J. Mueller 49,250(7) *
Daniel T. Landi 13,180(8) *
Brian Q. Corridan 4,157(9) *
Michael S. Smith 10,002(10) *
All executive officers
and directors as a
group (7 persons) 2,307,065(12)(13) 39.04%
5% Stockholders
Northeast Hampton
Holdings, LLC (11) 497,106 8.89%
Estate of Ralph P. Lazarra 379,253 6.93%
----------
* 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 for the Estate of Ralph P.
Lazarra is % Gary A. Martinelli, Esq., 1500 Main Street, Suite 912, Tower
Square, PO Box 15407, Springfield, MA 0115.
(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, 7,337 shares subject to
currently exercisable options and 544,900 shares subject to currently
exercisable warrants.
(5) Includes 184,953 shares subject to currently exercisable options
(6) Includes 4,733 shares subject to currently exercisable options.
(7) Includes 22,200 shares subject to currently exercisable options.
(8) Includes 13,180 shares subject to currently exercisable options.
(9) Includes 4,157 shares subject to currently exercisable options.
(10) Includes 10,002 shares subject to currently exercisable options.
(11) The information with respect to this stockholder was derived from the
stockholder's Schedule 13D. According to the filing James Villa is the
beneficial owner of these shares.
(12) Includes 200,000 shares subject to currently exercisable warrants.
(13) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
41
Certain relationships and related transactions
During 2000 and 2001, our president and chief executive officer loaned us an
aggregate of $1,124,000 evidenced by a series of short-term notes, which bore
interest at various interest rates ranging from 10% to 11%. In addition, at
December 31, 1999, a $40,000 loan from our president and chief executive officer
was outstanding. The proceeds of these loans were used for working capital
purposes. In consideration for these loans, our president and chief executive
officer was issued warrants to purchase 153,000 shares of common stock at
exercise prices ranging from $1.03125 to $2.73 per share. As of December 31,
2001, approximately $50,000 of the loans, along with $4,375 of unpaid interest
remained outstanding, and approximately $1,126,000 (including interest of
$12,000 which accrued during 2000) had been repaid through the issuance of
shares of common stock and the application of portions of the loan balance to
satisfy the exercise price of outstanding options and warrants. During 2000,
$1,026,000 of principal and interest were repaid through (a) the issuance of
294,649 shares of common stock issued at a weighted average price of $2.22; (b)
the application of $199,471 in satisfaction of the exercise price of outstanding
options; and (c) the application of $172,750 in satisfaction of the exercise
price of outstanding warrants. During 2001, $100,000 of principal was repaid
through the issuance of 39,526 shares of common stock issued at a price of
$2.53. All share issuances were valued at fair market value on the date of
conversion, which was determined based upon price of the common stock on the
twenty trading days preceding the conversion.
Total interest paid to Mr. Brockmyre relating to short term borrowing, long term
obligations and a capital lease amounted to $168,830 and $117,796 during 2000
and 2001 respectively.
A summary of Mr. Brockmyre's loans to us during 2000 and 2001 is as follows:
Loan Date Amount Maturity Date
--------- ------ -------------
2/1/00 $30,000.00 5/1/00
2/16/00 30,000.00 5/16/00
3/15/00 180,000.00 6/15/00
3/30/00 15,000.00 6/30/00
4/11/00 20,000.00 7/11/00
4/25/00 5,000.00 7/25/00
4/25/00 4,000.00 7/25/00
5/3/00 35,000.00 8/3/00
5/10/00 40,000.00 8/10/00
6/6/00 325,00.00 9/6/00
9/11/00 290,000.00 1/11/01
42
Loan Date Amount Maturity Date
--------- ------ -------------
1/24/01 10,000.00 3/25/01
9/10/01 51,000.00 10/10/01
9/17/01 12,000.00 10/17/01
10/26/01 $21,000.00 11/26/01
10/02/01 2,000.00 11/02/01
10/09/01 23,000.00 11/09/01
10/18/01 12,000.00 11/18/01
10/25/01 19,000.00 11/25/01
During the quarter ended June 30, 2001, we were released from a capital lease
due to an affiliate of our president relating a laser workstation for stent
manufacture and related accrued interest aggregating $448,830. Our president
contributed this equipment, which had been purchased in April 2000 for
approximately $412,000, to us in exchange for 225,000 shares of our common stock
valued at $1.995 per share. The workstation was purchased by the affiliate at a
point in time that we did not have the resources to acquire the equipment, which
was necessary for our operations. We have been dependent on our president to
fund equipment to support our operations.
Mr. Brockmyre's son, Clifford G. Brockmyre III, is employed as the General
Manager of our Laser Fare, Inc. subsidiary at an annual salary of $100,000.
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)
43
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)
10.1 Form of Stock Option Plan. (3)
10.2 Form of Stock Option Agreement. (1)
10.3 Lease Agreement between Rhode Island Industrial Facilities Corporation and
HGG Laser Fare, Inc. for certain equipment and operating facility in
Smithfield, Rhode Island. (4)
10.4 Loan Agreement between HGG Laser Fare, Inc. and First National Bank of New
England and dated December 21, 1995.(5)
10.5 Employment Agreement between Clifford G. Brockmyre II and the Company.
(12)
10.6 Supply Agreement between Laser Fare, Inc. and Dey Laboratories, L.P. dated
October 20, 1997. (8)
10.7 Form of Loan Agreements and Warrant between the Company and Clifford G.
Brockmyre. (9)
10.8 Employment Agreement between J. Terence Feeley and the Company dated July
1, 1999. (11)
10.9 Employment Agreement between Bruce J. Garreau and the Company dated
October 1, 1999.(11)
10.10 Employment Agreement between Thomas M. O'Connor and the Company dated
November 15, 1999. (11)
10.11 Stock Acquisition Agreement between Infinite Group, Inc. and Osley &
Whitney, Inc. dated April 16, 1999. (10)
10.12 Stock Acquisition Agreement between Infinite Group, Inc. and Materials &
Manufacturing Technologies, Inc. dated March 24, 1999. (11)
10.13 Equity Line of Credit Agreement dated November 20, 2000, between
Registrant and Cockfield Holdings Limited. (12)
10.14 Registration Rights Agreement dated November 20, 2000, between Registrant
and Cockfield Holdings Limited. (12)
10.15 Escrow Agreement dated as of November 20, 2000, among Registrant,
Cockfield Holdings Limited and Epstein Becker & Green, P.C. (12)
10.16 Form of Stock Purchase Warrant dated November 20, 2000, issued to each of
Cockfield Holdings Limited and Jesup & Lamont Securities Corporation. (12)
10.17 Securities Purchase Agreement dates as of February 5, 2002 between the
Company and Laurus Master Fund, Ltd.
21 Subsidiaries of the Company.*
23 Consent of Freed Maxick & Battaglia, CPA's, 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.
(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.
44
(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
Date Item/Description
----------------- -----------------------------------------------------
November 29, 2001 #5 / Press Release : Closure of Osley & Whitney, Inc.
December 12, 2001 #5 / Press Release : DARPA Contract Grant
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the company has duly caused this Report on Form 10-KSB/A to be signed
on July 31, 2002 on its behalf by the undersigned, thereunto duly authorized.
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre II
-----------------------------------
Clifford G. Brockmyre II, President
/s/ Bruce J. Garreau
---------------------------------------
Bruce J. Garreau
Chief Financial and
Accounting Officer
46
CONSOLIDATED
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
================================================================================
DECEMBER 31, 2001
with
INDEPENDENT AUDITOR'S REPORTS
INFINITE GROUP, INC.
CONTENTS
================================================================================
Page
----
Independent Auditor's Report......................................... 1
Consolidated Financial Statements:
Balance Sheets................................................. 2
Statements of Operations....................................... 3
Statements of Stockholders' Equity............................. 4 - 5
Statements of Cash Flows....................................... 6 - 7
Notes to Consolidated Financial Statements........................... 8 - 36
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Group, Inc.
We have audited the accompanying consolidated balance sheets of Infinite
Group, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Infinite
Group, Inc. as of December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
FREED MAXICK & BATTAGLIA, CPAs, PC
Buffalo, New York
March 15, 2002
1
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31,
-----------------------------
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 130,242 $ 185,901
Restricted funds 86,318 85,735
Accounts receivable, net of allowance 1,498,463 1,827,275
Inventories 129,824 482,585
Other current assets 112,728 104,003
Assets of discontinued operations 2,566,674 --
Advance - stockholder -- 50,249
------------ ------------
Total current assets 4,524,249 2,735,748
Property and equipment, net 4,463,122 7,169,794
Other assets:
Prepaid pension cost 904,673 726,326
Intangible assets, net 1,045,959 416,002
Preferred stock investment -- 295,000
Cash surrender value of officer life insurance -- 30,464
------------ ------------
1,950,632 1,467,792
------------ ------------
$ 10,938,003 $ 11,373,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 282,206 $ 945,695
Stockholders/officers 124,906 48,946
Accounts payable 1,146,016 1,429,906
Accrued expenses 708,762 1,045,947
Current maturities of long-term obligations 841,878 2,917,365
Current maturities of long-term obligations - stockholders 120,000 175,911
Liabilities of discontinued operations 2,986,904 --
------------ ------------
Total current liabilities 6,210,672 6,563,770
Long-term obligations 2,586,696 2,014,934
Long-term obligations - stockholders -- 907,514
Commitments and contingencies (see Notes 16 and 20)
Stockholders' equity
Common stock, $.001 par value, 20,000,000 shares
authorized; 5,119,047 and 3,542,049 shares issued;
5,119,047 and 3,450,113 outstanding; 93,750
subscribed in 2000 5,119 3,636
Additional paid-in capital 25,585,864 22,653,410
Accumulated deficit (23,450,348) (20,352,590)
------------ ------------
2,140,635 2,304,456
Less:
Treasury stock, at cost -- (229,840)
Common stock subscription receivable -- (187,500)
------------ ------------
Total stockholders' equity 2,140,635 1,887,116
------------ ------------
$ 10,938,003 $ 11,373,334
============ ============
See notes to consolidated financial statements.
2
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Years Ended
December 31,
---------------------------
2001 2000
----------- -----------
(As Restated)
Sales $ 8,507,648 $ 6,627,570
Cost of goods sold 5,897,511 4,720,649
----------- -----------
Gross profit 2,610,137 1,906,921
Costs and expenses:
General and administrative 2,735,782 1,775,596
Depreciation and amortization 775,924 755,052
Selling 307,030 433,845
Research and development 94,665 --
----------- -----------
Total costs and expenses 3,913,401 2,964,493
----------- -----------
Operating loss (1,303,264) (1,057,572)
Other income (expense):
Interest expense:
Stockholders (128,567) (173,694)
Other (327,612) (406,545)
Loss on dispositions of assets (11,856) (60,587)
Other (21,135) (4,427)
Interest income 18,508 21,003
----------- -----------
Total other expense (470,662) (624,250)
----------- -----------
Loss from continuing operations before
income tax expense (1,773,926) (1,681,822)
Income tax expense (14,533) (28,760)
----------- -----------
Loss from continuing operations (1,788,459) (1,710,582)
Loss from discontinued operations, including
$622,000 loss on disposal (Note 4) (994,055) (383,665)
----------- -----------
Loss before extraordinary loss (2,782,514) (2,094,247)
Extraordinary loss (Note 15) (273,813) --
----------- -----------
Net loss $(3,056,327) $(2,094,247)
=========== ===========
Loss per share - basic and diluted:
Continuing operations $ (.43) $ (.59)
Loss from discontinued operations (.24) (.13)
Extraordinary loss (.07) --
----------- -----------
Net loss $ (.74) $ (.72)
=========== ===========
Weighted average number of common
shares outstanding - basic and diluted 4,132,724 2,911,217
=========== ===========
See notes to consolidated financial statements.
3
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001 and 2000
================================================================================
Common Stock Additional
------------------- Paid-in Accumulated
Shares Amount Capital Deficit
--------- ------ ----------- ------------
Balance - December 31, 1999 2,918,604 $2,918 $21,235,597 $(17,985,172)
Issuance of common stock in connection with
conversion of stockholder notes payable 97,700 98 346,402 (82,844)
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 -- -- -- (152,655)
Stock options issued in exchange for
services rendered -- -- 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
----------- ----------- ------------- -----------
Balance - December 31, 1999 (550,075) $(1,375,187) $ -- $ 1,878,156
Issuance of common stock in connection with
conversion of stockholder notes payable 294,649 736,622 -- 1,000,278
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 118,200 295,500 -- 142,845
Stock options issued in exchange for
services rendered -- -- -- 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.
4
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 stockholder notes payable 415,256 415 973,930 --
Issuance of common stock in connection
with conversion of capital lease 225,000 225 448,605 --
Issuance of common stock in connection
with the pension plan contribution 100,000 100 269,900 --
Issuance of common stock, from treasury,
in connection with a draw on the equity line
of credit, net of fees -- -- -- (3,869)
Issuance of common stock, net of fees 637,974 638 1,089,616 (35,109)
Issuance of common stock in connection
with services rendered 3,750 4 7,496 --
Issuance of common stock in connection
with the exercise of stock options 101,268 101 142,907 (2,453)
Cash payment received under common stock
subscription agreement -- -- -- --
Net loss -- -- -- (3,056,327)
--------- ------ ----------- ------------
Balance - December 31, 2001 5,119,047 $5,119 $25,585,864 $(23,450,348)
========= ====== =========== ============
Common
Treasury Stock Stock
-------------------- Subscription
Shares Amount Receivable Total
------ -------- ------------ -----------
Issuance of common stock in connection with
conversion of stockholder notes payable -- -- -- 974,345
Issuance of common stock in connection
with conversion of capital lease -- -- -- 448,830
Issuance of common stock in connection
with the pension plan contribution -- -- -- 270,000
Issuance of common stock, from treasury,
in connection with a draw on the equity line
of credit, net of fees 21,737 54,343 -- 50,474
Issuance of common stock, net of fees 65,554 163,884 -- 1,219,029
Issuance of common stock in connection
with services rendered -- -- -- 7,500
Issuance of common stock in connection
with the exercise of stock options 4,645 11,613 -- 152,168
Cash payment received under common stock
subscription agreement -- -- 187,500 187,500
Net loss -- -- -- (3,056,327)
------ -------- -------- -----------
Balance - December 31, 2001 -- $ -- $ -- $ 2,140,635
====== ======== ======== ===========
See notes to consolidated financial statements.
5
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
December 31,
-----------------------------
2001 2000
----------- -----------
(As Restated)
Operating activities:
Net loss $(3,056,327) $(2,094,247)
Adjustments to reconcile net loss to net cash
used in operating activities of continuing operations:
Loss from discontinued operations 994,055 383,665
Extraordinary loss 273,813 --
Depreciation and amortization 775,924 755,052
Amortization of discount on note payable 34,044 36,104
Expenses satisfied via issuance of debt or
equity instruments 169,459 143,297
Loss on dispositions of assets 11,856 60,587
(Increase) decrease in assets:
Accounts receivable (684,406) (84,034)
Inventories 23,510 57,062
Other current assets (74,692) 99,876
Prepaid pension cost 91,653 42,775
Note receivable allowance -- 6,652
Increase in liabilities:
Accounts payable and accrued expenses 581,023 168,329
----------- -----------
Net cash used in operating activities of
continuing operations (860,088) (424,882)
Net cash provided by operating activities of discontinued
operations 460,991 227,414
----------- -----------
Net cash used in operating activities (399,097) (197,468)
Investing activities:
Increase in restricted funds, net (583) (6,500)
Purchase of property and equipment (392,384) (731,211)
Proceeds from sale of property and equipment 9,500 134,860
Investment in preferred stock -- (45,000)
Purchase of intangible assets (372,664) (12,670)
----------- -----------
Net cash used in investing activities of
continuing operations (756,131) (660,521)
Net cash provided by (used in)
investing activities of discontinued operations (10,297) 155,609
----------- -----------
Net cash used in investing activities (766,428) (504,912)
See notes to consolidated financial statements.
6
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
================================================================================
Years Ended
December 31,
-----------------------------
2001 2000
----------- -----------
(As Restated)
Financing activities:
Net (repayments) borrowings of bank notes payable (241,551) 90,000
Proceeds from notes payable - stockholders/officers 270,000 1,004,000
Repayments of long-term obligations (269,478) (594,803)
Repayment of long-term obligations - stockholders (13,245) (13,652)
Proceeds from issuances of common stock,
net of expenses 1,476,535 447,943
Cash paid for deferred financing costs (33,168) (87,418)
----------- -----------
Net cash provided by financing activities
of continuing operations 1,189,093 846,070
Net cash used in financing activities of
discontinued operations (79,227) (285,883)
----------- -----------
Net cash provided by financing activities 1,109,866 560,187
----------- -----------
Net decrease in cash and cash equivalents (55,659) (142,193)
Cash and cash equivalents - beginning of year 185,901 328,094
----------- -----------
Cash and cash equivalents - end of year $ 130,242 $ 185,901
=========== ===========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 358,399 $ 669,411
=========== ===========
Income taxes $ 15,591 $ 32,060
=========== ===========
See notes to consolidated financial statements.
7
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: Infinite Photonics, Inc. (IP), Laser Fare, Inc. (LF), and LF's
wholly-owned subsidiary, 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 operated in three segments: the Laser
Group (LF, MLPC, ET and MMT) the Photonics Group (IP and MT) and the Plastics
Group (O&W and EP). All significant intercompany accounts and transactions have
been eliminated.
The Company's continuing operations consist of contracted research and
development for government and commercial customers in applied photonics and
advanced laser technologies, as well as traditional laser services, which
include welding, machining, drilling and engraving manufacturing services. Our
Plastics Group previously provided proprietary mold building and rapid
prototyping services. During the year ended December 31, 2001, the operations of
the Plastics Group were discontinued (see Note 4).
NOTE 2. - MANAGEMENT PLANS
The Company continued experiencing operating losses in 2001. Improved
sales levels at the Laser Group and Company wide cost containment measures
improved gross profit levels, which were offset by start-up costs at the
Company's Infinite Photonics subsidiary. These operating losses resulted in the
Company experiencing negative operating cash flow for the year ended December
31, 2001. The infusion of funds in the form of sales of the Company's common
stock during 2001 were sufficient enough to fund these losses and the Company's
other investing and financing requirements.
The Company's business plan for 2002 and beyond is to focus on its two
primary remaining business segments, the Laser and Photonics Groups. This will
include the ramp up of research, engineering, manufacturing, marketing and
administrative capability for the Photonics Group and concentrating on expanding
its sales volume in the Laser Group through the acquisition of new customers
with limited increases in operating costs.
This business plan also includes the completion of the plan to dispose of
the Plastics business segment, which historically experienced operating losses.
The Company is in the process of liquidating the remaining assets at Osley &
Whitney through auction and anticipates that the proceeds should be sufficient
to repay the secured bank debt, which the Company has guaranteed. The Company
completed the sale of its subsidiary Express Pattern, which resulted in the
infusion of $575,000 in cash that will be used also to repay the O&W debt and
for working capital purposes (see Note 4).
Finally, the Company is completing steps to further reduce corporate
overhead, including facilities consolidation and other cost reduction measures.
The Company is also actively pursuing additional capital through strategic
alliances, venture capital, private equity and investment banking sources.
Subsequent to year end the Company raised $1 million through the issuance of
convertible debt, the proceeds of which will be utilized to fund the working
capital needs of the Photonics Group for 2002 (see Note 19).
8
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2. - MANAGEMENT PLANS - CONTINUED
The Company believes, but can offer no assurances, that its operations, as
restructured, coupled with its capital raising efforts will provide sufficient
working capital to fund its operations for 2002 and the near future.
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, 2001 and
2000 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. Inventories at EP and O&W are included in the December 31,
2000 amounts, however, at December 31, 2001 they are included in assets of
discontinued operations in the accompanying balance sheet (see Note 4).
Inventories consist of the following:
December 31,
--------------------------
2001 2000
-------- --------
Raw materials $ 60,805 $235,153
Work-in-process 69,019 247,432
-------- --------
$129,824 $482,585
======== ========
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.
Organizational and Start-up Costs - In accordance with SOP 98-5,
developmental and organizational costs are expensed as incurred.
Intangible Assets - Intangible assets consist of goodwill, deferred
financing costs and patents. Goodwill represents the excess of the purchase
price over the fair value of net assets of 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 financing
instruments, which range from two to fifteen years. The Company capitalizes
certain costs for internally developed patents related to legal fees, patent
filing fees, consulting and internal payroll costs related to patent
applications, models and drawings. Patents are being amortized on the
straight-line method over their estimated useful lives, commencing with the date
of issuance.
9
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 2001 and 2000,
the Company believed that no impairment of intangibles existed.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which becomes
effective January 1, 2002. This standard specifies, among other things, that
goodwill no longer be amortized. The standard requires goodwill to be
periodically tested for impairment and written down to fair value if considered
impaired. In addition SFAS No. 142 requires that the reporting units be
identified for purposes of assessing potential future impairments of goodwill,
and removes the 40-year limitations on the amortization period of intangible
assets that have finite lives. The Company is currently in the process of
identifying its reporting units and the amounts of its goodwill and intangible
assets to be allocated to those reporting units. In addition, remaining useful
lives of intangible assets are being evaluated with no material changes
anticipated. As of December 31, 2001, the Company had $88,769 of goodwill
recorded, net of accumulated amortization. The estimated annual reduction in
amortization expense from adoption of SFAS No. 142 is approximately $29,000. The
Company does not expect an impairment loss from the adoption of these rules.
On January 1, 2002, the Financial Accounting Standards Board issued
Statement No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which provides guidance in the accounting for impairment of
disposal of long-lived assets. For long-lived assets to be held and used, the
new rules are similar to previous guidance, which required the recognition of
impairment when the undiscounted cash flows will not recover the carrying
amount. The computation of fair value now removes goodwill from consideration
and incorporates a profitability-weighted cash flow estimation approach.
Additionally, assets qualifying for discounted operations treatment have been
expanded beyond the former major line of business or class of customer approach.
The Company adopted the provisions of SFAS 144 in fiscal 2001 and utilized this
guidance for the disposal of the Plastics Group (see Note 4). There was no
impact from the adoption of this standard on its impairment tests of long-lived
assets nor its accounting for discontinued operations.
Preferred Stock Investment - As of December 31, 2000, the Company owned 7%
and 5%, respectively, of the outstanding Preferred Series A and B Stock of
Tensegra, Inc., which was recorded at cost. During the year ended December 31,
2001, the Company disposed of this investment as part of a non-monetary exchange
transaction, accounted for in accordance with APB 29. As consideration for the
purchase of certain intellectual property owned by Tensegra, the Company
transferred its investment in Tensegra, recorded at $295,000, and discharged
certain accounts receivable from Tensegra, amounting to $58,512. The
intellectual property received was recorded at the carrying value of the assets
surrendered in the aggregate amount of $353,512. The intellectual property
received will be utilized in its Laser Group. This asset is included in other
intangible assets (see Note 7).
10
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was approximately $33,000 and $40,000 for the years ended
December 31, 2001 and 2000, respectively.
Revenue Recognition - Revenues are primarily recognized after the services
are performed and the units are shipped. 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. Revenues from mold manufacturing contracts are recognized using the
completed contract method of accounting, which does not vary significantly from
the percentage 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 internal research
and development are expensed as incurred. Research and development expense was
$94,665 for the year ended December 31, 2001 and consists primarily of salaries.
There was no research and development expense during the year ended December 31,
2000. Contracted research and development conducted for others is classified as
cost of sales. Research and development costs for which the Company has
subcontracted out is recognized as cost of sales as incurred.
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.
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 of continuing
operations was approximately $40,000 and $46,000 at December 31, 2001 and 2000,
respectively. As of December 31, 2001, there was an allowance for doubtful
accounts receivable of $150,000 relating to assets of discontinued operations
(see Note 4).
During the year ended December 31, 2001 sales to one customer accounted
for 12% of total revenues from continuing operations and 33% of accounts
receivable at December 31, 2001. During the year ended December 31, 2000, sales
to a different customer accounted for 12% of total revenues and 4% of accounts
receivable from continuing operations at December 31, 2000.
Net Loss Per Common Share - Net loss per common share is based upon the
weighted average number of common shares outstanding during the periods
presented. As of December 31, 2001 and 2000, all outstanding stock options,
warrants and convertible obligations have not been considered common stock
equivalents because their assumed exercise would be anti-dilutive.
11
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Reclassifications - Certain amounts for 2000 have been reclassified to
conform to the 2001 presentation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 2001 and 2000,
as if the Company had elected to recognize compensation costs based on the fair
value of the options granted at grant date (see Note 12).
NOTE 4. - DISCONTINUED OPERATIONS
On March 29, 1999, the Company acquired 100% of the common stock of O&W, a
mold building Company. The aggregate consideration paid for the stock was $1.5
million ($300,000 in cash and $1,200,000 in promissory notes, See Notes 9 and
10). The O&W acquisition was accounted for under the purchase method of
accounting. In April 1999, the Company formed EP to compliment it's O&W
subsidiary. EP was formed to allow customers' design engineers to produce rapid
prototype parts.
In November 2001 and December 2001, the Company's Board of Directors
resolved to dispose of O&W and EP, respectively. The formal plan consisted of
shutting down the operations of the O&W subsidiary and selling the net assets of
the EP subsidiary.
Effective November 30, 2001, the Company shut down the operations of O&W
and terminated all of the employees. The Company is in the process of
liquidating all of the assets of O&W. The proceeds from the sale of these assets
will be used to repay the outstanding bank obligations, which are secured by the
assets. As of December 31, 2001, the amounts outstanding under these bank
obligations amounted to approximately $1,550,000. These obligations are
guaranteed by IGI. Any bank obligation remaining after the sale of assets will
be assumed by IGI and will be payable based on a seven year amortization with a
balloon payment due after 18 months. The loss on disposal of discontinued
operations in the amount of $622,000 for the year ending December 31, 2001,
represents the writedown of property, plant and equipment and inventory to their
net realizable value ($472,000) and an allowance for doubtful accounts
receivable ($150,000).
12
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - DISCONTINUED OPERATIONS - CONTINUED
On March 14, 2002, the Company consummated the sale of the net assets of
EP to certain officers/employees of the Company. The purchase price amounted to
$725,000, plus the assumption of liabilities, of which $575,000 was received in
cash. The remaining $150,000 is in the form of a subordinated note which bears
interest at the rate of 8% and is payable in March 2005.
In accordance with FAS 144 (see Note 3), the disposal of the Plastics
Group has been accounted for as a disposal of a business segment and
accordingly, the assets and liabilities for O&W and EP have been segregated from
continuing operations in the accompanying consolidated balance sheet as of
December 31, 2001 and classified as gross assets and liabilities of discontinued
operations. The operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows. The accompanying statement of operations and cash flows for the year
ended December 31, 2000 have been restated to present separately the operating
results and cash flows of these discontinued operations. The 2000 balance sheet
has not been restated.
The following is a summary of financial position and results of operations
for the years ended December 31, 2001 and 2000 for the disposed Plastics segment
(O&W and EP):
December 31,
Financial Position 2001
------------
Current assets $ 580,799
Property and equipment, net 1,985,875
----------
Assets of discontinued operations $2,566,674
==========
Secured bank obligations $1,550,038
Accounts payable and accrued expenses 963,646
Capital lease obligations 473,220
----------
Liabilities of discontinued
operations $2,986,904
==========
Years Ended December 31,
-------------------------
Results of Operations 2001 2000
---------- ----------
Revenue $5,389,327 $6,538,169
========== ==========
Loss from discontinued operations $ 372,055 $ 383,665
Loss on disposal of discontinued operations 622,000 --
---------- ----------
Net loss $ 994,055 $ 383,665
========== ==========
13
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 5. - 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 notes. As of December 31, 2001 and 2000 the notes have been
fully offset by a valuation allowance based on management's estimate of the net
realizable value of the notes.
NOTE 6. - PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation and
amortization at EP and O&W are included in the December 31, 2000 amounts below,
however, amounts at December 31, 2001 are included in assets of discontinued
operations (see Note 4). Property and equipment consists of:
December 31,
Depreciable ------------------------------
Lives 2001 2000
------------ ------------
Land N/A $ 100,000 $ 143,625
Building and leaseholds 18 - 40 years 1,007,145 1,853,346
Machinery and equipment 5 - 10 years 6,487,227 7,536,898
Furniture and fixtures 5 - 7 years 694,988 856,038
------------ ------------
8,289,360 10,389,907
Accumulated depreciation
and amortization (3,826,238) (3,776,637)
------------ ------------
4,463,122 6,613,270
Contracts in progress -- 556,524
------------ ------------
$ 4,463,122 $ 7,169,794
============ ============
Included above is the following property and equipment held under capital
leases.
December 31,
------------------------------
2001 2000
------------ ------------
Land $ 100,000 $ 100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 878,052 1,539,369
----------- -----------
1,703,814 2,365,131
Accumulated depreciation
and amortization (917,255) (898,374)
----------- -----------
$ 786,559 $ 1,466,757
=========== ===========
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $101,348 and $190,697 in
2001 and 2000, respectively.
14
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6. - PROPERTY AND EQUIPMENT - CONTINUED
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 Group. 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 approximated the fair value of the
equipment received, which amounted to $796,000. The services and asset exchange
were completed in July 2001. Amounts capitalized relating to this agreement as
of December 31, 2000 amounted to $556,524 and were recorded as contracts in
progress.
NOTE 7. - INTANGIBLE ASSETS
Intangible assets consists of the following:
December 31,
---------------------------
2001 2000
----------- ---------
Goodwill $ 249,227 $ 249,227
Deferred financing costs 257,958 296,419
Patents 796,985 69,749
----------- ---------
1,304,170 615,395
Accumulated amortization (258,211) (199,393)
----------- ---------
$ 1,045,959 $ 416,002
=========== =========
NOTE 8. - NOTES PAYABLE
Notes payable consists of the following:
December 31,
---------------------------
2001 2000
----------- ---------
Bank (a) $ 282,206 $ 945,695
Stockholders/officers (b) 124,906 48,946
----------- ---------
$ 407,112 $ 994,641
=========== =========
(a) Bank revolving demand notes - LF maintained a line of credit with a
financial institution that provided for borrowings of up to $525,000
with interest at the bank's prime rate plus .50%. As of December 31,
2000 there was $523,757 outstanding under this line. During November
2001, LF refinanced the outstanding balance on the line of credit,
which amounted to approximately $285,000, into a demand note. The
bank demand note requires monthly principal and interest payments
amounting to approximately $5,800 through November 2002, at which
point the remaining unpaid balance is due. The outstanding balance
as of December 31, 2001 amounted to $282,206 and bears interest at
the bank's prime rate (4.75% at December 31, 2001) plus 3%. All the
assets of LF and the guarantee of the Company secure the note.
15
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8. - NOTES PAYABLE - CONTINUED
O&W maintains a bank demand note that provides for borrowings of up
to $500,000 with interest at the bank's prime rate (4.75% at
December 31, 2001) plus 0.50%. As of December 31, 2001, there was
$497,554 ($421,938 - 2000) outstanding under this line.
Substantially all of O&W's assets and the guarantee of IGI secure
the line. This demand note is included in liabilities of
discontinued operations on the accompanying balance sheet at
December 31, 2001 (see Note 4). The proceeds from the liquidation of
the assets of O&W will be used to repay the bank obligation, with
any remaining balance being assumed by IGI as guarantor.
(b) Notes payable, stockholders/officers - During the year ended
December 31, 2001, the Company issued various unsecured short-term
notes payable to the president/principal stockholder amounting to
$150,000 of which $100,000 was subsequently applied to the purchase
of 39,526 shares of common stock of the Company (see Note 11). The
remaining outstanding balance of $50,000 bears interest at 10%.
During the year ended December 31, 2001, the Company issued
unsecured short-term notes payable to various
employees/stockholders, amounting to an aggregate of $120,000 of
which $50,000 was subsequently applied to the purchase of 25,486
shares of common stock of the Company (see Note 11). The remaining
outstanding balance of $70,000 bears interest at 10%.
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.
During the year ended December 31, 2001, approximately $14,000
($24,000 - 2000) of this amount was applied to the exercise of
options for 8,104 shares of common stock of the Company (see Note
11). The remaining outstanding balance of $4,906 ($18,946 - 2000)
bears interest at 8% per annum.
During the year ended December 31, 2000, the Company issued two
unsecured short-term notes payable to an employee/stockholder,
amounting to $30,000 which were outstanding at December 31, 2000.
During the year ended December 31, 2001 the outstanding balance of
$30,000 along with accrued interest of $2,536 was applied to the
purchase of 16,268 shares of common stock of the Company (see Note
11).
During the year ended December 31, 2000, the Company issued various
unsecured short-term notes payable to the president/principal
stockholder amounting to $974,000. Also during 2000, this amount,
along with $40,000 previously outstanding notes payable and $12,000
of related accrued interest was applied to the exercise of 153,000
stock warrants ($172,750), 96,758 options ($199,472) and the
purchase of 294,649 shares of common stock of the Company
($653,778).
16
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
2001 2000
---------- ----------
Term notes(a) $2,768,574 $3,990,385
Capital lease obligations(b) 660,000 941,914
---------- ----------
3,428,574 4,932,299
Less current maturities and classifications 841,878 2,917,365
---------- ----------
Total long-term obligations $2,586,696 $2,014,934
========== ==========
(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, 2001 amounted to $957,882 ($1,023,297 - 2000) and bears
interest at the bank's prime rate (4.75% at December 31, 2001) plus
1.0%. All the assets of LF and the guarantee of the Company secure
the note. The Company was in violation of certain loan covenants as
of December 31, 2001. These violations related to exceeding certain
levels of the ratio of debt to tangible net worth and exceeding
capital expenditure limits. The bank, prior to the issuance of the
financial statements, waived the violations as of December 31, 2001.
According to the terms of the loan agreement, the covenants are only
measurable annually on December 31. As a result the corresponding
debt has been classified as long-term as of December 31, 2001. The
Company was also in violation of certain covenants as of December
31, 2000. These violations related to the failure to meet certain
levels of working capital, exceeding certain levels of the ratio of
debt to tangible net worth and exceeding capital expenditure limits.
The bank did not waive these violations as of December 31, 2000.
Accordingly, the entire outstanding balance of the note was
classified as current as of December 31, 2000.
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,
2001 amounted to $1,178,766 ($1,227,064 - 2000) and bears interest
at the bank's prime rate (4.75% at December 31, 2001) plus 0.75%.
Due to the violations of the covenants above not being waived by the
bank as of December 31, 2000, the Company was in violation with
terms of this agreement. Accordingly, the entire outstanding balance
of the note was classified as current as of December 31, 2000.
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, 2001
amounted to $79,926 ($96,078 - 2000) and bears interest at the
bank's prime rate (4.75% at December 31, 2001) plus 1.0%. All the
assets of the LF and the guarantee of the Company secure the loan.
Due to the violations of the covenants above not being waived by the
bank as of December 31, 2000, the Company was in violation with
terms of this agreement. Accordingly, the entire outstanding balance
of the note was classified as current as of December 31, 2000.
17
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - LONG-TERM OBLIGATIONS - CONTINUED
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,
2001 and 2000 amounted to $552,000. Subsequent to December 31, 2001,
the Company entered into an agreement with the holder to convert the
entire outstanding balance along with accrued interest into common
stock of the Company based upon certain conditions (see Note 19).
Two unsecured term promissory notes aggregating $30,100 were 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.
These noted were repaid in full during 2001.
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. This note was repaid in full during 2001.
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, 2001 amounted to $670,155 ($676,932 -
2000). Substantially all the assets of O&W and the guarantee of IGI
secure the loan. This mortgage loan is included in liabilities of
discontinued operations on the accompanying balance sheet at
December 31, 2001 (see Note 4). The outstanding balance at December
31, 2000 is included in long-term obligations.
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, 2001 amounted to $379,998
($410,401 - 2000). Substantially all the assets of O&W and the
guarantee of IGI secure the loan. This bank term loan is included in
liabilities of discontinued operations on the accompanying balance
sheet at December 31, 2001 (see Note 4). The outstanding balance at
December 31, 2000 is included in long-term obligations.
The proceeds from the liquidation of the assets of O&W (see Note 4)
will be used to repay the mortgage and term loan, with any remaining
balance being assumed by IGI, as guarantor.
(b) Capital lease obligations - The Company is obligated under a capital
lease for an operating facility. The lease provides for monthly
payments to an escrow account 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, 2001 amounted to $660,000
($795,000 - 2000). 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 dividends or making
other cash distributions.
18
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - LONG-TERM OBLIGATIONS - CONTINUED
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, 2001 amounted to $74,508 ($146,914 - 2000). The
monthly payments under this lease amount to approximately $7,200,
including interest at the rate of 10.47%. The Company entered into
another capital lease for certain machinery and equipment during the
year ended December 31, 2001. The monthly payments under this lease
amounted to approximately $8,700, including interest at 5.42%
through June 2005, at which time a balloon payment of approximately
$66,000 is due. The outstanding balance as of December 31, 2001
amounted to $398,712. These capital leases are included in
liabilities of discontinued operations on the accompanying balance
sheet at December 31, 2001 (see Note 4). The outstanding balance at
December 31, 2000 is included in long-term obligations.
Minimum future annual payments of long-term obligations as of December 31,
2001 are as follows:
2002 $ 884,198
2003 196,277
2004 205,478
2005 215,214
2006 212,756
Thereafter 2,115,121
----------
Total minimum payments 3,829,044
Less amount representing interest 400,470
----------
3,428,574
Less current maturities 841,878
----------
Total long-term obligations $2,586,696
==========
NOTE 10. - LONG-TERM OBLIGATIONS - STOCKHOLDERS
Long-term obligations - stockholders consists of the following:
2001 2000
---------- ----------
Term notes (a) $ 120,000 $ 664,507
Capital lease obligation (b) -- 418,918
---------- ----------
120,000 1,083,425
Less current maturities - stockholders 120,000 175,911
---------- ----------
Total long-term obligations - stockholders $ -- $ 907,514
========== ==========
19
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10. - LONG-TERM OBLIGATIONS - STOCKHOLDER - CONTINUED
(a) Term Notes - 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, 2001 amounted to $120,000 ($240,000 - 2000). 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 years ended December 31, 2001 and December 31, 2000, a portion of these
notes were satisfied through the issuance of 85,526 and 97,700 shares common
stock, respectively (see Note 11).
A ten-year term note to the Company's current president/principal
stockholder in the original amount of $1,150,000, with interest at the one year
Treasury Bill rate plus 3.5%, adjusted annually. The balance as of December 31,
2000 amounted to $683,076 and was being repaid in monthly installments of
approximately $6,000 including interest. The note matured in June 2008 when the
remaining unpaid principal of approximately $525,000 was due. In December 2001,
the entire outstanding balance of $619,582, along with accrued interest at
$8,998 was applied to the purchase of 248,450 shares of common stock (see Note
11). Detachable warrants to purchase 536,000 shares of common stock at a price
of $5.60 were issued with this note. The warrants expire five years from the
date of issuance. A portion of the proceeds of the note, in the amount of
$551,716, was allocated to the warrants as they became exercisable and was
reflected as additional paid-in capital. The note payable balance had been shown
net of the discount allocated to the warrants. This discount was being amortized
to interest expense over the term of the note, which amortization amounted to
$34,044 and $36,104 for 2001 and 2000. As a result of the conversion of the note
during 2001, the unamortized discount, amounting to $224,525, was written off
(see Note 15). The unamortized discount at December 31, 2000 was $258,569.
(b) Capital Lease Obligation - During the year ended December 31, 2000,
the Company entered into a capital lease agreement for equipment with its
president/principal stockholder. The lease provided for monthly payments of
approximately $5,650 through April 2010, including interest at the prime rate
plus 1%. 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 (see Note 11) and released the
Company from all obligations, amounting to $448,830, under the lease.
NOTE 11. - 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, 2001 and 2000, there were no
preferred shares issued or outstanding.
20
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
B. Common Stock
During the year ended December 31, 2001, the following common stock
transactions took place:
o Stockholder notes payable in the amount of $180,000 and
$3,508 of related accrued interest (see Note 8) were
converted into 81,280 shares of common stock. The fair
market value of the shares issued equaled the amount of
the recorded liability.
o Stockholder term notes in the amount of $739,582 and
$42,455 of related accrued interest (see Note 10), as
well as accrued employee related expenses of $8,800 were
converted into 333,976 shares of common stock. The fair
market value of the shares issued equaled the amount of
the recorded liability.
o The Company issued 225,000 shares of common stock as
satisfaction for a capital lease obligation and related
accrued interest, amounting to $448,830 due to the
Company's president and principal stockholder (see Note
10). The fair market value of the shares issued equaled
the amount of the outstanding liability.
o The Company issued 100,000 shares of its common stock at
a price of $2.70 per share as a contribution to the
defined benefit pension plan (see Note 14). The total
common stock contribution amounted to $270,000. The fair
value of the shares issued equaled the recorded
contribution.
o In connection with a drawdown on the equity line of
credit, (Note 11c), the Company issued 21,737 shares of
common stock from treasury, resulting in proceeds of
$50,474, net of expenses of $12,206.
o In private placement transactions with accredited
investors, the Company entered into agreements to sell
common stock at prices ranging from $1.25 to $2.25 per
share, resulting in the issuance of 703,528 shares of
its common stock, of which 65,554 shares were issued
from treasury. Total consideration resulting from these
agreements amounted to $1,219,029, net of fees of
$133,371. In connection with these transactions, the
Company granted warrants to the investors to purchase,
in aggregate, 24,000 shares of common stock with
exercise prices ranging from $3.00 to $4.00 per share.
The Company also granted 49,400 warrants to the
placement agents with exercise prices ranging from $3.00
to $4.00 per share. A portion of the proceeds, amounting
to $51,706 and $62,414, respectively, was allocated to
these warrants (see Note 11D). The Company issued 3,750
shares of common stock, valued at $7,500, to a placement
agent in exchange for services provided in connection
with the private placement transactions. The fair market
value of the shares issued equaled the amount of the
services provided.
21
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
o Various employees exercised stock options with exercise
prices ranging from $1.00 to $2.50 per share, resulting
in the issuance of 105,913 shares of common stock, of
which, 4,645 were issued from treasury. Total
consideration resulting from these exercised options
amounted to $152,168. In lieu of cash payments, $14,040
related to the satisfaction of outstanding notes payable
(see Note 8) and $126,094 reduced outstanding employee
related expenses.
o The unpaid portion of $187,500 related to a private
placement transaction in 2000, which was recorded as a
stock subscription receivable, was received, at which
time 93,750 shares were issued.
During the year ended December 31, 2000, the following common stock
transactions took place:
o Stockholder notes payable due to the Company's
president/principal stockholder in the amount of
$641,778 and $12,000 of related accrued interest (see
Note 8) were converted into 294,649 shares of common
stock, issued from treasury. 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. A
portion of the proceeds, amounting to $105,666, was
allocated to these warrants (see Note 11D).
o Stockholder term notes payable in the amount of $132,000
and $14,500 of related accrued interest associated with
the loans (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.
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 was
received and 156,250 shares were issued. The unpaid
portion of $187,500 was recorded as a stock subscription
receivable, which was received in 2001, at which time
the remaining 93,750 shares were 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. A portion of the proceeds,
amounting to $66,025 and $127,779, respectively, was
allocated to these warrants (see Note 11D).
22
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - 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 8),
$24,170 related to the satisfaction of notes payable to
other stockholders (see Note 8) and $54,200 reduced an
outstanding employee related liability due to an
officer.
o The Company's president/principal stockholder 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 8).
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 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 4,300 shares of common stock at an
exercise price of $3.95. These warrants vest immediately
and expire in October 2003. A portion of the proceeds,
amounting to $8,514, was allocated to these warrants
(see Note 11D).
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.
23
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
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.
During the year ended December 31, 2001, the Company drew down on
the equity line of credit and issued 21,737 shares of treasury stock
resulting in net proceeds of $50,474 (see Note 11C). The aggregate
discount of the selling price from the market price of the Company's
common stock on the date of issuance was not material. No securities
were issued under this agreement for the year ended December 31,
2000.
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. When the warrants
were granted, they were valued and recorded as additional paid-in
capital in the accompanying balance sheet.
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 10). As the warrants vested, they
were valued and recorded as additional paid-in capital in the
accompanying balance sheet.
In connection with the issuance of a $150,000 convertible note
payable to the Company's president/principal stockholder during
1999, 128,000 detachable warrants were issued. The value assigned to
the warrants has been reflected as additional paid-in capital in the
accompanying balance sheet. During the year ended 2000, the
Company's president/principal stockholder exercised these warrants
(see Note 11B).
In connection with common stock issued to the Company's
president/principal stockholder during 2000 (see Note 11B), 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. A portion of the
proceeds, amounting to $105,666 was allocated to these warrants.
During 2000, 25,000 of these warrants were exercised. (see Note
11B). As of December 31, 2001, 8,900 of these warrants remain
outstanding.
24
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
In connection with a private placement transaction during 2000 (see
Note 11B), 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. A portion of the proceeds,
amounting to $8,514, was allocated to these warrants.
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. A portion of the proceeds, amounting to
$66,025 and $127,779, respectively, was allocated to these warrants.
In connection with the equity line of credit, discussed in Note 11C,
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 the private placement transactions during 2001
(see Note 11B), the Company issued warrants to various accredited
investors to purchase in aggregate 24,000 shares of common stock at
exercise prices ranging from $3.00 to $4.00. The warrants vested
immediately and have a three-year term. A portion of the proceeds,
amounting to $51,706, was allocated to these warrants.
In addition, in connection with the private placement transactions
during 2001 (see Note 11B), the Company issued warrants to various
placement agents to purchases, in aggregate, 49,400 warrants at
exercise prices ranging from $3.00 to $4.00. The warrants vested
immediately and have a three year term. A portion of the proceeds,
amounting to $62,414, was allocated to these warrants.
25
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
All warrants issued have been valued on the date of grant utilizing
the Black-Scholes pricing model. Following is the weighted average
assumptions used in the model for warrants granted during the years
ended December 31, 2001 and 2000.
2001 2000
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 100% 100%
Risk-free interest rate 3.80% 6.54%
Expected life of warrants 3.00 years 4.59 years
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, 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
Granted 73,400 3.41
---------
Outstanding at December 31, 2001 1,083,375 4.28
=========
All warrants are exercisable as of December 31, 2001 and 2000.
Warrants outstanding at December 31, 2001 are made up of the following:
Weighted
Number of Average
Warrants Exercise Price
$2.00 and Less 150,000 $ 1.88
========
$2.01 - $4.00 386,600 $ 3.20
========
Greater than $4.00 546,775 $ 5.69
--------- ========
Total 1,083,375 $ 4.28
========= ========
26
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - 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, 2001, options to purchase
1,025,477 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 met 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 as 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, 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
Granted 175,000 2.02
Exercised (105,913) 1.41
Expired (12,814) 2.50
--------
Outstanding at December 31, 2001 936,537 1.84
========
Exercisable at December 31, 2001 372,794 2.08
========
The average fair value of options granted was $1.58 and $1.40 per
share for the years ended December 31, 2001 and 2000, 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.
27
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCK OPTION PLANS - CONTINUED
Options outstanding at December 31, 2001 are made up of the following:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining
Number Contracted Weighted Number Weighted
of Life in Average of Average
Options Price Exercise Options Exercise
------- ----- -------- ------- --------
$1.50 and Less 570,237 8.49 $ 1.50 183,570 $ 1.50
==== ======= =========
$1.51 - $2.50 350,978 5.39 $ 2.25 175,979 $ 2.48
==== ======= =========
Greater than $2.50 15,322 2.02 $ 4.93 13,245 $ 5.06
------- ==== ======= ------ =========
Total 936,537 7.22 372,794
======= ==== =======
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 2001, there were 10,000 options granted (17,500 -
2000) and 15,500 forfeited (0 - 2000). At December 31, 2001, there
were 34,500 (40,000 - 2000) options outstanding to directors under
this plan, of which 23,667 options were exercisable (27,498 - 2000).
These options are exercisable at prices ranging from $1.375 to $9.40
per share. The options vest over a two-year service period. The
options expire at various dates from 2005 to 2011.
28
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - 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:
2001 2000
--------- ---------
Net loss:
As reported (000's) $ 3,006 $ 2,094
Pro forma (000's) $ 3,353 $ 2,275
Loss per share:
As reported $ .73 $ .72
Pro forma $ .81 $ .78
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:
2001 2000
--------- ---------
Expected dividend yield 0% 0%
Expected stock price volatility 100% 100%
Risk-free interest rate 4.0% 5.4%
Expected life of options 5.27 years 10 years
NOTE 13. - INCOME TAXES
At December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $21,000,000 and state net operating loss
carryforwards of approximately $10,000,000, which expire from 2009 through 2021.
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, 2001, a net deferred tax asset, representing the future
benefit attributed primarily to the available net operating loss carryforwards,
in the amount of approximately $6,440,000, had been fully offset by a valuation
allowance because management believes 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.
29
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - INCOME TAXES - CONTINUED
The following is a summary of the Company's temporary differences and
carryforwards which give rise to deferred tax assets and liabilities:
December 31,
--------------------------
2001 2000
----------- -----------
Deferred tax assets:
Net operating loss and tax credit
carryforwards $ 6,950,000 $ 7,046,000
Reserves and other 402,000 426,000
----------- -----------
Gross deferred tax asset 7,352,000 7,472,000
Deferred tax liabilities:
Property and equipment (550,000) (624,000)
Defined benefit pension asset (362,000) (290,000)
----------- -----------
Gross deferred tax liability (912,000) (914,000)
----------- -----------
Net deferred tax asset 6,440,000 6,558,000
Deferred tax asset valuation allowance (6,440,000) (6,558,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
NOTE 14. - 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 2001, a
$27,836 ($14,439 - 2000) contribution was made to the profit-sharing plan.
Defined Benefit Plan - The Company has a contributory defined benefit
pension plan that covered all salaried and hourly employees at O&W that were
scheduled to work at least 1,000 hours per year. During the year ended December
31, 2001 the Company discontinued the operations of O&W (see Note 4). The
termination of the employees' services earlier than expected resulted in a plan
curtailment, accounted for in accordance with Statement of Financial Standards
Statement 88. No future benefits will be earned by plan participants. However,
the plan will remain in existence and continue to pay benefits as participants
qualify, invest assets and receive contributions. The Company's policy is to
fund pension costs accrued. Net periodic pension expense includes the following
components:
2001 2000
--------- ---------
Service cost $ 246,386 $ 246,541
Interest cost 359,922 334,125
Expected return on plan assets (526,588) (537,891)
Actuarial loss 11,933 --
--------- ---------
Total pension expense $ 91,653 $ 42,775
========= =========
30
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheets:
2001 2000
----------- -----------
Projected benefit obligation:
Benefit obligation at beginning of year $ 5,336,583 $ 4,367,511
Service cost 246,386 246,541
Interest cost 359,922 334,145
Plan participants' contributions 142,767 163,987
Actuarial loss (gain) (37,077) 469,609
Curtailment (774,183) --
Benefits paid (255,147) (201,158)
Expenses paid (50,829) (44,052)
----------- -----------
Benefit obligation at end of year 4,968,422 5,336,583
Plan assets at fair value:
Fair value of plan assets at
beginning of year 5,305,009 5,318,523
Actual return of plan assets (391,871) 67,709
Employer contributions 270,000 --
Plan participants' contributions 142,767 163,987
Benefits paid (255,147) (201,158)
Expenses paid (50,829) (44,052)
----------- -----------
Fair value of plan assets at end of year 5,019,929 5,305,009
----------- -----------
Funded status 51,507 (31,574)
Unrecognized actuarial loss 853,166 757,900
----------- -----------
Prepaid pension cost $ 904,673 $ 726,326
=========== ===========
The major actuarial assumptions used in the calculation of the pension
obligation were as follows:
2001 2000
------- --------
Discount rate 7% 7%
Expected return on plan assets 10.0% 10.0%
Rate of increase in compensation N/A 5.5%
31
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - EXTRAORDINARY LOSS
In December 2001, the outstanding balance of the ten-year promissory note,
payable to the president/principal stockholder was applied to the purchase of
common stock of the Company (see Note 10). As a result, the unamortized deferred
financing costs and note discount relating to the detachable warrants issued
with the debt were written off in 2001. The aggregate amount of $273,813 is
considered a loss on early extinguishment of debt and is classified as an
extraordinary item in the accompanying consolidated statement of operations.
NOTE 16. - 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,
2001 and 2000, was approximately $319,000 and $246,000,
respectively.
Following is the approximate future minimum payments required under
these leases:
2002 $321,000
2003 272,000
2004 228,000
2005 177,000
--------
$998,000
========
B. Employment Contracts
The Company is obligated under various employment agreements with
certain officers and other employees that expire at various times
from 2002 through 2003. The agreements provide for minimum aggregate
annual salaries of approximately $900,000. Certain agreements also
provide for, among other things, cash bonuses and stock options if
certain performance measures are met, and for severance payments.
For the years ended December 31, 2001 and 2000 no bonuses or stock
options were earned.
32
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 17. - SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing transactions, including non-monetary
exchanges, consist of the following:
2001 2000
-------------- --------
Satisfaction of obligations to stockholders
and related accrued interest in lieu of cash
payments as consideration for stock
issued (see Notes 8, 10 and 11) $ 1,393,852 $800,278
============== ========
Intellectual property received in exchange
for preferred stock investment and
satisfaction of accounts receivable (see
Note 3) $ 353,512 $ --
============== ========
Contribution of common stock to pension
plan to satisfy obligation (see Note 14) $ 270,000 $ --
============== ========
Acquisition of equipment in exchange
for services rendered (see Note 6) $ 239,476 $556,524
============== ========
Advance - stockholder satisfied in lieu
of cash payment as consideration for
long-term obligation - stockholder $ 50,249 $ --
============== ========
Satisfaction of employee liabilities in lieu
of cash payment as consideration for the
exercise of stock options and warrants
(see Note 11) $ -- $450,592
============== ========
Property and equipment acquired under
capital leases $ -- $418,918
============== ========
Conversion of debentures and related
accrued interest to common stock (see
Note 11) $ -- $135,000
============== ========
Common stock, stock options and
warrants issued for services provided $ 7,500 $ 46,695
============== ========
Common stock issued as satisfaction of
accounts payable (see Note 11) $ -- $ 22,699
============== ========
33
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 18. - BUSINESS SEGMENTS
The Company's businesses were organized, managed and internally reported
as three segments. The segments are determined based on differences in products,
production processes and internal reporting. During the year ended December 31,
2001 the Company approved of a plan to discontinue the operations of the
Plastics Group (see Note 4). Going forward the Company's businesses will be
organized, managed and internally reported as two segments.
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 2001 and 2000 is set forth as follows:
34
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 18. - BUSINESS SEGMENTS - CONTINUED
Laser Photonics Plastics
2001 Group Group Group
------- ------------ ------------- ------------
Sales to unaffiliated customers $ 7,305,574 $ 1,202,074 $ --
Intersegment sales 188,235 84,136 --
------------ ------------- ------------
Total revenue $ 7,493,809 $ 1,286,210 $ --
============ ============= ============
Operating loss $ 140,742 $ 332,245 $ --
============ ============= ============
Loss from discontinued operations, including corporate
overhead allocation $ -- $ -- $ 1,774,085
============ ============= ============
Interest income $ 3,338 $ 59 $ --
============ ============= ============
Interest expense $ 282,940 $ -- $ --
============ ============= ============
Extraordinary loss $ -- $ -- $ --
============ ============= ============
Identifiable assets $ 6,371,894 $ 452,211 $ 2,566,674
============ ============= ============
Depreciation and amortization $ 710,650 $ 2,346 $ --
============ ============= ============
Capital expenditures $ 362,928 $ 29,456 $ --
============ ============= ============
Capital expenditures of discontinued segment $ -- $ -- $ 430,224
============ ============= ============
2002
-------
Sales to unaffiliated customers $ 6,285,882 $ 341,688 $ --
Intersegment sales -- -- --
------------ ------------- ------------
Total revenue $ 6,285,882 $ 341,688 $ --
============ ============= ============
Operating loss (income) $ 239,704 $ (84,727) $ --
============ ============= ============
Loss from discontinued operations, including corporate
overhead allocation $ -- $ -- $ 775,827
============= ============
Interest income $ 13,989 $ 440 $ --
============ ============= ============
Interest expense $ 377,791 $ -- $ --
============ ============= ============
Identifiable assets $ 6,244,114 $ 114,971 $ 4,507,335
============ ============= ============
Depreciation and amortization $ 706,788 $ 10,664 $ --
============ ============= ============
Capital expenditures $ 719,225 $ 11,986 $ --
============ ============= ============
Capital expenditures of discontinued segment $ -- $ -- $ 62,597
============ ============= ============
Unallocated
2001 Corporate Eliminations Consolidated
------- ------------- ------------- ------------
Sales to unaffiliated customers $ -- $ -- $ 8,507,648
Intersegment sales -- (272,371) --
------------- ------------- ------------
Total revenue $ -- $ (272,371) $ 8,507,648
============= ============= ============
Operating loss $ 833,296 $ (3,019) $ 1,303,264
============= ============= ============
Loss from discontinued operations, including corporate
overhead allocation $ (749,197) $ (30,833) $ 994,055
============= ============= ============
Interest income $ 48,963 $ (33,852) $ 18,508
============= ============= ============
Interest expense $ 173,239 $ -- $ 456,179
============= ============= ============
Extraordinary loss $ (273,813) $ -- $ (273,813)
============= ============= ============
Identifiable assets $ 1,547,224 $ -- $ 10,938,003
============= ============= ============
Depreciation and amortization $ 62,928 $ -- $ 775,924
============= ============= ============
Capital expenditures $ -- $ -- $ 392,384
============= ============= ============
Capital expenditures of discontinued segment $ -- $ -- $ 430,224
============= ============= ============
2002
-------
Sales to unaffiliated customers $ -- $ -- $ 6,627,570
Intersegment sales -- -- --
------------- ------------- ------------
Total revenue $ -- $ -- $ 6,627,570
============= ============= ============
Operating loss (income) $ 902,595 $ -- $ 1,057,572
============= ============= ============
Loss from discontinued operations, including corporate
overhead allocation $ (328,437) $ (63,725) $ 383,665
============= ============= ============
Interest income $ 70,299 $ (63,725) $ 21,003
============= ============= ============
Interest expense $ 202,448 $ -- $ 580,239
============= ============= ============
Identifiable assets $ 506,914 $ -- $ 11,373,334
============= ============= ============
Depreciation and amortization $ 37,600 $ -- $ 755,052
============= ============= ============
Capital expenditures $ -- $ -- $ 731,211
============= ============= ============
Capital expenditures of discontinued segment $ -- $ -- $ 62,597
============= ============= ============
35
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 19. - SUBSEQUENT EVENTS
On January 4, 2002, the Company consummated a securities purchase
agreement (the "Agreement") with the estate of a former stockholder of O&W (the
"Estate"). The Agreement provides that the Estate will purchase 379,253 shares
of the Company's common stock, which will be paid for by the cancellation of
certain indebtedness of the Company to the Estate of $758,507 (the
"Indebtedness"). The Indebtedness relates to past due consulting fees and
outstanding debt owed to the estate by the Company at December 31, 2001 (see
Note 9). The agreement puts certain restrictions on the amount of shares of
common stock that may be sold on any day by the Estate. In addition, at any time
prior to May 31, 2002, the Company has the option to repurchase any shares still
held by the Estate for a price equal to the difference between the aggregate net
proceeds received by the Estate on sales of the underlying stock and the
Indebtedness. If on April 15, 2002, the proceeds received by the Estate from the
sale of the Company's common stock is less than the Indebtedness, then at any
time on or after April 16, 2002 and on or before May 31, 2002, the Estate may
notify the Company that it wishes the Company to repurchase the shares then held
by the Estate. The purchase price to the Company will be equal to the difference
between the Indebtedness and the aggregate proceeds received by the Estate on
sales of the Company's common stock.
On February 5, 2002 the Company entered into a $1 million convertible note
with a third party, the proceeds of which are restricted for the use in the
operations of Infinite Photonics. The note accrues interest and fees at an
annual rate of 15% and is convertible, at the holder's option, into shares of
the Company's common stock at a price of $2.25 per share. For every $100,000
converted by the holder, the Company will receive an interest reduction in the
fee rate by 1% retroactively to February 5, 2002.
On March 14, 2002, the Company consummated the sale of the net assets of
its subsidiary, Express Pattern (see Note 4).
NOTE 20. - 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 attorney's 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.
36