FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 52-1490422
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
2364 Post Road, Warwick, RI 02886
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(Address of principal executive
offices) (Zip Code)
Issuer's telephone number (401) 738-5777
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
The registrant's revenues for the year ended December 31, 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 3
Item 2.Properties 16
Item 3.Legal Proceedings. 16
Item 4.Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 17
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7. Financial Statements 25
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 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 33
Item 12. Certain Relationships and Related Transactions 35
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. Our Laser Group provides comprehensive laser-based materials and
processing services. Our Photonics Group develops and markets diodes for source
and pump lasers and semiconductor optical amplifiers.
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 sale of EP was consummated on March 14, 2002 and
we are in the process of selling off the remaining assets of O&W.
The Laser Group
Our Laser Group provides laser-based manufacturing services (cutting, welding,
drilling and assembly) to industrial customers. It uses 26 multi-axis 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). We use lasers to
fabricate components for customers in the aerospace, defense, medical,
telecommunications and sensing industries. We have developed proprietary
manufacturing techniques that, we believe, have established us as a valued
supplier of engineered components.
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.
The United States Federal Aviation Administration (FAA) has licensed us to
perform overhaul and repair of jet engine and aerospace parts and the United
States Food and Drug Administration (FDA) has licensed us as a contract
manufacturer of medical devices. Our customers are responsible for obtaining all
regulatory approvals of their products or components; we solely manufacture
these components to our customers' specifications. We cut, weld, drill and / or
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assemble parts for over 100 industrial companies, including: General Electric
Jet Engine and Gas Turbine divisions; United Technologies' Jet and Aerospace;
Barnes Aerospace; Johnson & Johnson; Mitek, Smith & Nephew; Dey Laboratories;
and Stryker Medical.
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
acoustic bandgap research for the United States Naval Underwater Warfare Center
and the Electric Boat division of General Dynamics, as well as photonic bandgap
and high temperature superconductor research for 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
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.
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 ten patents pending
and an additional ten patents are under
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development 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
overall combination of cost, power and beam quality of emitted light. 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).
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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. 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.
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 this 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.
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
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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;
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 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
7
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 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
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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.
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.
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Our products and services are subject to industry standards, which increases
their cost and could delay or bar their commercial acceptance.
Since some of our products and services in development are used in the
telecommunications industry, they must comply with the Bellcore Testing
standards for traditional equipment and/or Bluetooth standards for wireless
devices. These standards govern the design, manufacture and marketing of these
items. If we fail to comply with these standards, we will not be able to sell
our products. We may encounter significant delays or incur additional costs in
our efforts to comply with these industry standards.
We depend on our relationship with third parties to develop and commercialize
new products.
Our strategy for research and development and for the commercialization of our
products contemplates a continuing relationship with various publicly and
privately funded consortia and our existing relationships will continue with
strategic partners, 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
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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 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.
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We face potential product liability claims.
The sale of our telecommunications, aerospace and medical products and services
will involve the inherent risk of product liability claims by others. We
maintain product liability insurance coverage. However, we cannot assure that
the amount and scope of our existing coverage is adequate to protect us in the
event that a product liability claim is successfully asserted. Moreover, we
cannot assure you that we will continue to maintain 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 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 24% 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.
12
Some provisions in our charter documents and bylaws may have anti-takeover
effects.
Our certificate of incorporation and bylaws contain provisions that may make it
more difficult for a third party to acquire us, with the result that it may
deter potential suitors. For example, our board of directors is authorized,
without action of the stockholders, to issue authorized but unissued common
stock and preferred stock. The existence of undesignated preferred stock and
authorized but unissued common stock enables us to discourage or to make it more
difficult to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise.
Absence of dividends to shareholders.
We have never declared a dividend on our common stock. We do not anticipate
paying dividends on the common stock in the foreseeable future. We anticipate
that earnings, if any, will be reinvested in the expansion of our business 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
13
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of the common stock and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the 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. 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 and medical device customer needs, our Laser Fare subsidiary
is certified for overhaul and repair by the FAA, and as a Contract Manufacturer
by the FDA. 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. Additionally, we maintain the license with the
FDA as a contract manufacturer of medical devices to produce such products as
asthma testing devices for Dey Laboratories (in which some of the components are
cut using laser workstations). However, customers are responsible for the sale
and distribution of their products and devices and we do not believe we have
liability to end users. 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.
14
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. 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 estimated $6.0 billion 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 affected zone), and
medical applications (low heat affected 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,
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
15
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
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
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 has asserted
counterclaims against us which we believe are without merit.
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.
16
PART II
Market for common equity and related stockholder 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.
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.
17
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 "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 Group. 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, which includes Infinite Photonics, Inc., (Orlando, FL) and the
Advanced Technology Group (Narragansett, RI), manufactures and markets our
proprietary grating coupled 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
18
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. We expect to sell
the O&W real estate during 2002 and satisfy the remaining mortgage. On March 14,
2002 we closed on the sale of the assets of Express Pattern, Inc. for $575,000
in cash (of which $300,000 was paid to O&W's secured lender) and a five year 8%
subordinated $100,000 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 have
approximately $10.0 million in revenue 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 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.
19
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,
in February, 2002, we closed on a $1.0 million, two year convertible note (see
below).
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). 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 equity line of credit (that will be available for use if the trading
volume in our common stock reaches certain levels), and an asset based
convertible note that is available to fund sales volume increases and working
capital needs at our Photonics Group.
Our equity line of credit agreement
On November 20, 2000 we entered into an equity line of credit agreement with
Cockfield Holdings Limited (Cockfield). The purpose of the equity line of credit
is to provide us with a source of funding for our current activities and for the
development of our current and planned products. The equity line of credit
agreement establishes what is sometimes referred to as an equity drawdown
facility.
Under the equity line of credit agreement, we have the right to sell and
Cockfield has agreed to purchase up to 3,000,000 shares of our common stock
during a 36-month period. During this period, we may request a drawdown under
the equity line of credit by selling shares of our common stock to Cockfield,
and Cockfield is obligated to purchase the shares we put to them. The minimum
amount we can draw down at any one time is $200,000. The maximum amount we can
draw down at any one time will be determined at the time of the drawdown request
under a formula contained in the equity line of credit agreement, but cannot be
more than $5,000,000.
20
We may request a drawdown once every 20 trading days, although we are under no
obligation to request any drawdowns.
In order to exercise our drawdown rights, we must have an effective registration
statement on file with the SEC registering the resale of the shares of our
common stock that may be sold to Cockfield. We must also give at least 20
business days advance notice to Cockfield of the date on which we intend to
exercise a particular put right and we must indicate the maximum number of
shares of our common stock that we intend to sell to Cockfield. At our option,
we may also designate a maximum dollar amount of our common stock that we will
sell under the put and/or a minimum purchase price per share at which Cockfield
may purchase shares under the put. The maximum amount may not to exceed the
lesser of a) $5,000,000 or b) fifteen percent (15%) of the weighted average
price of our common stock during the 20 trading days immediately prior to the
put date, multiplied by the total trading volume of our common stock during the
20 trading days immediately prior to that date.
During the 20 trading days following a drawdown request, we will calculate the
number of shares we will sell to Cockfield and the price per share. The purchase
price per share of common stock will be at a discount to the daily volume
weighted average price of our common stock during the 20 trading days
immediately following the drawdown date. On each of the 20 trading days during
the calculation period, the number of shares to be purchased by Cockfield will
be determined by dividing 1/20th of the drawdown amount by the purchase price on
each trading day. If we designate a minimum purchase price in our drawdown
request and the daily volume weighted average price for our common stock on any
trading day during the 20 trading day calculation period is below the minimum
threshold price, and Cockfield elects not to purchase shares at the minimum
threshold price, then the drawdown amount will be reduced by 1/20th.
For each share of our common stock, Cockfield will pay us 87.5% of the volume
weighted market price for a share of our common stock during the 20-day trading
period following the exercise of a put. The percentage will increase to 90% if
we move our principal market to the Nasdaq National Market or to 91% if we move
our principal market to the New York Stock Exchange. It will decrease to 84% if
our common stock is delisted from the Nasdaq SmallCap Market. Market price is
defined as the volume weighted average price for our common stock (as reported
by Bloomberg Financial LP using its VAP function) on its principal market during
the pricing period. The pricing period is defined as the 20 day trading period
immediately prior to the day we exercise our put right.
Cockfield will pay for the shares on the 22nd trading day following the drawdown
request. We will receive the purchase price less a brokerage fee payable to
Jesup & Lamont ranging between 4.25% and 4.75% of the aggregate purchase price,
depending on the dollar volume of the transaction. Jesup & Lamont is the
placement agent that introduced Cockfield to us and is a registered
broker-dealer.
At the closing of each drawdown, we will also grant Cockfield warrants to
purchase a number of shares of our common stock equal to 33% of the number of
shares purchased by Cockfield at the closing of the drawdown. These unit
warrants will expire one day after they are granted and will have an exercise
price equal to the weighted average of the purchase price of a share of our
21
common stock purchased at the closing of each drawdown. The 3,000,000 shares
available under the equity line of credit will be reduced by the number of
shares issued as a result of the exercise of these unit warrants.
The equity line of credit agreement prevents us from drawing down funds and
issuing the corresponding shares of common stock to Cockfield if the issuance
would result in Cockfield beneficially owning more than 9.9% of our then
outstanding shares of common stock. In addition, the listing requirements of the
Nasdaq SmallCap Market prohibit us from issuing 20% or more of our issued and
outstanding shares of common stock in a single transaction at a price less than
the greater of market value or book value unless we get stockholder approval. At
our annual meeting held on March 22, 2001, our stockholders approved the
issuance of the shares of our common stock contemplated by the equity line of
credit agreement.
As consideration for establishing the equity line of credit, we granted
Cockfield warrants to purchase up to 200,000 shares of our common stock. As
consideration for the services rendered by Jesup & Lamont as placement agent in
connection with the equity line of credit, we granted Jesup & Lamont warrants to
purchase up to 100,000 shares of our common stock. These warrants, covering
300,000 shares of our common stock, are exercisable at any time prior to
November 20, 2003, for $3.135 per share.
On February 8, 2001, we issued a drawdown notice to Cockfield. This notice
offered to sell up to $250,000 of our common stock to Cockfield based on the
formula in the stock purchase agreement, during the 20 trading day period
beginning on February 9, 2001 and ending on March 9, 2001, but at not less than
$3.00 per share. During this period, Cockfield purchased a total of 21,737
shares of our common stock at an average net purchase price of $2.8753 per
share. These purchases resulted in aggregate proceeds of $62,500 being paid and
released from escrow to us by Cockfield. Jesup & Lamont Securities Corporation
received $2,969 as a placement fee in connection with this draw down. Because of
relatively low trading volume in our stock, weakness in the general price level
of the Nasdaq Stock Market, and a relatively low market price per share of our
common stock, we have not been able to meet the minimum put price of $200,000
under that agreement. We expect that as market conditions continue to improve we
may be able to meet those minimums in the future.
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
$1,000,000 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.
22
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 loan
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 revenue was due to
increased sales to gas turbine and 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 was attributable to the DARPA contract performed
during the period.
Plastics Group
The loss from our discontinued Plastics Group for the year ended December 31,
2001 was $994,045 compared to a loss of $383,665 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
Division for power generation equipment 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
23
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.
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
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 reduction taken in the previous eighteen months by our
executives, and increased legal, investment banking and other fees related to
our capital raising activities.
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.
The decrease of $124,060, or 21.4%, was due to a reduction of interest paid on
the debt obligations related to the acquisition of O&W, a reduction in short
term borrowings in our Laser Group and conversions of debt to equity. 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.
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.
24
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, and purchased goodwill is no longer amortized
over its useful life. Rather, goodwill will be subject to a periodic impairment
test based upon its fair value.
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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
discontinued operations.
We are currently evaluating the impact of these pronouncements to determine the
effect, if any, they may have on the consolidated financial position and results
of operations. We are required to adopt these statements effective January 1,
2002.
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
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 or procedure.
25
PART III
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, 1994
president and chief executive
officer
Thomas J. Mueller 50 Chief operating officer 2000
Bruce J. Garreau 51 Chief financial and accounting 1999
officer
Daniel T. Landi 59 Corporate controller and 1994
secretary
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.
26
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 a director in November 2000 and is a member of our
audit and compensation committees. Since 1994, he has been president of Corridan
& Co. after founding the privately owned full service investment firm registered
with the SEC, NYSE and NASD. He has served as a Registered Representative with
Prudential Securities, Tucker Anthony-R.L., Day,
27
and Kidder Peabody & Co. Mr. Corridan received a BA from Stonehill College, and
is a graduate of the Naval Officers Candidate School in Newport, RI. Also, he is
a director of Health New England, serves on the Finance Committee of Baystate
Health System, and as a Trustee for several civic and educational organizations,
including Our Lady of Elms College and Springfield Technical Community College
Assistance Corporation.
Our board of directors has an audit committee and a compensation committee. The
audit committee reviews the scope and results of the audit and other services
provided by our independent accountants and our internal controls. The
compensation committee is responsible for the approval of compensation
arrangements for our officers and the review of our compensation plans and
policies.
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
Forms 5 were required, we believe that all Section 16(a) filing requirements
applicable to its officers and directors were complied 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 -
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 7,500 shares of common stock upon
becoming a director and an additional 5,000 shares 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
28
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
Other Restricted stock All
Name and annual stock underlying other
principal position Salary Bonus compensation* awards 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........... 156,651 -- 10,500 -- 50,000 --
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........... 158,277 -- 6,750 -- -- --
2000........... 124,868 -- 8,308 -- 108,500 --
1999........... 51,714 -- -- -- 75,000 --
Daniel T. Landi
Corporate
controller and
secretary
2001........... 75,944 -- -- -- 6,500 --
2000........... 87,966 -- -- -- 1,270 --
1999........... 101,539 -- -- -- -- --
----------
*Reflects executive's contribution to our 401k plan.
29
Employment Agreements
We have an employment agreement with Clifford G. Brockmyre II, our president and
chief executive officer, for a term expiring on June 30, 2003, which provides
for an annual salary of $175,000 and various benefits. In addition to the
compensation provided under the agreement, Mr. Brockmyre is eligible to
participate in our bonus plan and is eligible for other bonuses as determined in
the sole direction of the board of directors. The agreement also provides, among
other things, that, if Mr. Brockmyre is terminated other than for cause (which
is defined to include conviction of a crime involving moral turpitude, engaging
in activities competitive with us, divulging confidential information,
dishonesty or misconduct detrimental to us or breach of a material term of the
agreement), we will pay to him a lump sum payment equal to the product of the
sum of (i) the highest annual rate of salary paid to Mr. Brockmyre, and (ii) the
highest annual bonus paid to or accrued to the benefit of Mr. Brockmyre during
the employment term multiplied by 2.99. The agreement also provides for payments
to Mr. Brockmyre, or his estate, in the event of his death or permanent
disability.
We have an employment agreement with 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 have an employment agreement with Bruce J. Garreau, our chief financial and
accounting officer, for a term expiring on October 1, 2002, which provides for
an annual salary of $135,000 and various benefits including the grant of 10,000
shares of our common stock and 75,000 stock options exercisable at $1.00 per
share. The 10,000 shares had a value of $7,312 upon issuance. The options vest
in three equal installments of 25,000 shares over an eighteen-month period. In
addition to the compensation provided under the agreement, Mr. Garreau is
eligible to participate in our bonus plan and is eligible for other bonuses as
determined in the sole direction of the board of directors. The agreement also
provides, among other things, that if Mr. Garreau is terminated other than for
Cause, we will pay to him a lump sum payment equal to the product of the sum of
(i) the highest annual rate of salary paid to Mr. Garreau and (ii) the highest
annual bonus paid to or accrued to the benefit of Mr. Garreau during the
employment term multiplied by two. The agreement also provides for payments to
Mr. Garreau, or his estate, in the event of his death or permanent disability.
30
Stock options
Option grants
The following table sets forth certain information regarding options granted by
us in 2001 to each of the Named Executives.
Option Grants in Last Fiscal Year
------------------------------------------------------------------------------------
Individual Grants
------------------------------------------------------ Potential
Percent Realizable Value
of Total at Assumed
Options Annual Rates of
Number of Granted Stock Price
Shares to Appreciation for
Underlying Employees Exercise Option Term(1)
Options in Fiscal Price Expiration -------------------------
Name Granted Year ($/share) Date 5% 10%
---------- --------- --------- ---------- --------- --------
Clifford G Brockmyre ................... -- -- -- -- -- --
Thomas J. Mueller ...................... 50,000 28.6 $ 2.04 8/30/06 $28,181 $ 62,272
J. Terrence Feeley ..................... 125,000 71.4 2.01 9/15/06 69,416 153,391
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
Shares Fiscal Year-End Fiscal Year-End(2)
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 4,607 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
31
Stock Option Plans
We have stock option plans, which were adopted by our board and approved by our
shareholders covering an aggregate of 2,077,014 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 7,500 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, at the end of each fiscal year during which he served as a director.
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
32
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, 2002, 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.
33
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) 33.38%
J. Terence Feeley 199,454(5) 3.76%
Bruce J. Garreau 130,333(6) 2.54%
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) 38.89%
5% Stockholders
Northeast Hampton
Holdings, LLC (11) 497,106 8.85%
Estate of Ralph P. Lazarra 379,253 6.90%
-----------------
* 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
stockholders Schedule 13D.
(12) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
34
Certain relationships and related transactions
During 2000 and 2001, our president and chief executive officer loaned us an
aggregate of $1,124,000, which bore interest at various interest rates ranging
from 10% to 11%. In consideration for these loans, our president was issued
warrants to purchase 152,900 shares of common stock at exercise prices ranging
from $1.03125 to $3.42 per share. As of December 31, 2001, $50,000 of the loans
remained outstanding and $1,074,000 had been converted into 584,599 shares of
common stock. In addition, $ 628,579 (including $8,998 of accrued interest) of
long-term debt which was outstanding at December 31, 1999 was converted during
2001 into 248,450 shares of common stock. Additionally, during 2000 and 2001,
respectively, $168,830 and $117,796 of interest was paid to our president and
chief executive officer. The following table summarizes these transactions:
Loan/Maturity Date Amount Purpose Status
------------------ ------ ------- ------
2000
2/1/00-5/1/00 $30,000.00 Working capital Converted to stock
2/16/00-5/16/00 $30,000.00 Working capital Converted to stock
3/15/00-6/15/00 $180,000.00 Working capital Converted to stock
3/30/00-6/30/00 $15,000.00 Working capital Converted to stock
4/11/00-7/11/00 $20,000.00 Working capital Converted to stock
4/25/00-7/25/00 $5,000.00 Working capital Converted to stock
4/25/00-7/25/00 $4,000.00 Working capital Converted to stock
5/3/00-8/03/00 $35,000.00 Working capital Converted to stock
5/10/00-8/10/00 $40,000.00 Working capital Converted to stock
6/6/00-9/6/00 $325,000.00 Working capital Converted to stock
10/11/00-1/11/01 $290,000.00 Working capital Converted to stock
Sub-total 2000 $974,000.00
-------------- -----------
2001
01/24/01-3/25/01 $10,000.00 Working capital Converted to stock
9/10/01-10/10/01 $51,000.00 Working capital Converted to stock
9/17/01-10/17/01 $12,000.00 Working capital Converted to stock
10/26/01-10/26/01 $21,000.00 Working capital Converted to stock
10/02/01-11/02/01 $2,000.00 Working capital Converted to stock
35
10/09/01-11/09/01 $23,000.00 Working capital $19,000 outstanding,
$4,000 converted to
stock
10/18/01-11/18/01 $12,000.00 Working capital Outstanding
10/25/01-11/25/01 $19,000.00 Working capital Outstanding
Sub-total 2001 $150,000.00
-------------- -----------
Total $1,124,000
===========
During the quarter ended June 30, 2001, we were released from a capital lease
due to 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 our president at a point in time that we
did not have the resources to acquire the equipment, which was necessary for our
operations.
We believe that the foregoing transactions were on terms no less favorable to us
than could have been obtained from third parties. As a matter of policy, in
order to reduce the risks of self-dealing or a breach of the duty of loyalty to
the company, all transactions between the company and any of its officers,
directors or principal stockholders are for bona fide purposes and are approved
by a majority of the disinterested members of our Board.
Exhibits and Reports on Form 8-K
Exhibits
The Exhibits listed below are filed as part of this Report.
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment of Certificate of Incorporation dated January 7,
1998. (8)
3.3 Certificate of Amendment of Certificate of Incorporation dated February
16, 1999.(9)
3.4 By-Laws of the Company. (1)
4.1 Specimen Stock Certificate. (1)
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)
36
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.(13)
23 Consent of Freed Maxick Sachs & Murphy, PC*
---------------------------
* Filed herewith.
(1) Previously filed as on Exhibit to the Company's Registration Statement on
Form S-1 (File #33-61856). This Exhibit is incorporated herein by
reference.
(2) Incorporated by reference to Report on Form 8-K, dated July 1, 1994.
(3) Incorporated by reference to 1993 Preliminary Proxy Statement.
(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996.
(7) Incorporated by reference to Report on Form 8-K dated August 26, 1996.
(8) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997.
(9) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December, 31, 1998.
(10) Incorporated by reference to report on Form 8-K dated April 16, 1999.
(11) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December, 31, 1999.
(12) Previously filed as on Exhibit to the Company's Registration Statement on
Form S-2 (File #333-51768). This Exhibit is incorporated herein by
reference.
(13) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000.
37
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
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the company has duly caused this Report to be signed on March 29, 2002
on its behalf by the undersigned, thereunto duly authorized.
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre II
-----------------------------
Clifford G. Brockmyre II, President
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the company and in the
capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Clifford G. Brockmyre II Director, President and
---------------------------- Chief Executive Officer March 29, 2002
Clifford G. Brockmyre II
/s/ Bruce J. Garreau Chief Financial and March 29, 2002
---------------------------- Accounting Officer
Bruce J. Garreau
/s/ J. Terence Feeley Director March 29, 2002
----------------------------
J. Terence Feeley
/s/ Michael S. Smith Director March 29, 2002
----------------------------
/s/ Brian Q. Corridan Director March 29, 2002
----------------------------
Brian Q. Corridan
39
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.
Buffalo, New York
March 15, 2002
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
=========== ===========
1
December 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
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 li
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
================================================================================
Years Ended
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)
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)
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 provided by discontinued operations 371,467 97,140
----------- -----------
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), 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. The
Company's 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 consolidated and other cost reduction measures.
8
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2. - MANAGEMENT PLANS - CONTINUED
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).
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.
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 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. The
Company does not expect the adoption of this standard to have a material impact
on its financial statements.
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).
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.
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.
10
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
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
11
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 Note 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, inventory and
accounts receivable at O&W to their net realizable value.
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
$675,000, plus the assumption of liabilities, of which $575,000 was received in
cash. The remaining $100,000 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 Statement of Financial Accounting Standards Board No.
144, 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 assets/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.
12
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - DISCONTINUED OPERATIONS - CONTINUED
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
========== ==========
Net loss $ 994,055 $ 383,665
========== ==========
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.
13
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
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.
14
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
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).
15
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8. - NOTES PAYABLE - CONTINUED
(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 note includes certain financial covenants that require
the Company to, among other things, maintain certain working
capital, current and debt to net worth ratios. The Company was in
violation of certain of its covenants for the year ended December
31, 2001, however, these violations have been waived by the bank.
Certain of these covenants had been violated as of December 31,
2000, which were not waived by the bank. Accordingly, the entire
outstanding portion 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%.
The Company was in violation of certain of its covenants for the
year ended December 31, 2001, however, these violations have been
waived by the bank. Certain of these covenants had been violated as
of December 31, 2000, which were not waived by the bank.
Accordingly, the entire outstanding portion 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.
The Company was in violation of certain of its covenants for the
year ended December 31, 2001, however, these violations have been
waived by the bank. Certain of these covenants had been violated as
of December 31, 2000, which were not waived by the bank.
Accordingly, the entire outstanding portion 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.
(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. 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
B. Common Stock (continued)
o Various employees exercised stock options with exercise
prices ranging from $1.00 to $2.50 per share, resulting
in the issuance of 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.
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.
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 4,200 shares of common stock at an
exercise price of $3.95. These warrants vest immediately
and expire in October 2003.
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). 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.
In connection with the issuance of notes payable to the Company's
president/principal stockholder 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, amounting to $73,219, 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, 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. 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
D. Warrants
In connection with a private placement transaction during 2000, the
Company issued warrants to various accredited investors to purchase
an aggregate of 4,300 shares of common stock at an exercise price of
$3.95 per share. The warrants vest immediately and have a three-
year term.
In connection with a private placement transaction during 2000, the
Company issued a warrant to purchase 50,000 shares of common stock.
The warrant is exercisable for a four-year term commencing May 31,
2001 at an exercise price of $1.63 per share. For services rendered
in connection with the financing the Company also granted the
purchaser's designee a warrant to purchase 100,000 common shares at
a price of $2.00 per share, exercisable for a four-year period
commencing May 31, 2001.
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,
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.
In addition, in connection with the private placement transactions
during 2001, 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.
All warrants issued in connection with debt and equity financing
transactions, exclusive of those issued with the purchase of common
stock, have been valued utilizing the Black-Scholes pricing model.
25
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY - CONTINUED
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 Average
of 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
========= ==========
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.
26
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCK OPTION PLANS - CONTINUED
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 so long as the optionee continues to be an employee
of the Company.
The following is a summary of stock option activity for individuals
classified as employees for the past two years:
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
Outstanding at December 31, 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 Weighted Weighted
Number Contracted Average Number Average
of Life in Exercise of Exercise
Options Years Price Options Price
------- ----- ----- ------- -----
$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.
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
=========== ===========
29
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%
30
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.
31
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
========== ==========
32
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:
33
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
============== ============== ==============
2000
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
============== ============== ==============
2000
Sales to unaffiliated customers $ -- $ -- $ 6,627,570
Intersegment sales -- -- --
-------------- -------------- --------------
Total revenue $ -- $ -- $ 6,627,570
============== ============== ==============
Operating loss $ 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
============== ============== ==============
34
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 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 rate reduction of 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.
35