FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Three Month Period Ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21816
INFINITE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1490422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2364 Post Road, Warwick, RI 02886
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (401) 738-5777
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 |_|
As of May 15, 2002 there were 5,670,121 shares of the registrant's common stock,
par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
INFINITE GROUP, INC.
Form 10-QSB
INDEX
Page
----
PART I. Unaudited Consolidated Financial Statements
Item 1. Consolidated Balance Sheets- March 31, 2002 and December 31, 2001...2
Consolidated Statements of Operations - Three Months
Ended March 31, 2002 and 2001.......................................3
Consolidated Statements of Cash Flows -Three Months
Ended March 31, 2002 and 2001.......................................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations................................8
PART II. OTHER INFORMATION
Items 1-6 ...................................................................12
SIGNATURES ..................................................................14
1
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 303,412 $ 130,242
Restricted funds 895,740 86,318
Accounts receivable, net of allowance 1,326,692 1,498,463
Inventories 171,069 129,824
Other current assets 159,902 112,728
Assets of discontinued operations 836,071 2,566,674
------------ ------------
Total current assets 3,692,886 4,524,249
Property and equipment, net 4,168,998 4,463,122
Other assets:
Note receivable 150,000 --
Prepaid pension costs 889,673 904,673
Intangible assets, net 1,099,674 1,045,959
------------ ------------
Total other assets 2,139,347 1,950,632
------------ ------------
$ 10,001,231 $ 10,938,003
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 270,386 $ 282,206
Stockholders/ officers 101,906 124,906
Accounts payable 874,203 1,146,016
Accrued expenses 678,300 708,762
Current maturities of long-term obligations 841,878 841,878
Current maturities of long-term obligations - stockholder 120,000 120,000
Liabilities of discontinued operations 1,629,208 2,986,904
------------ ------------
Total current liabilities 4,515,881 6,210,672
Long term obligations 3,399,952 2,586,696
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized 5,601,185 and 5,119,047
shares issued and outstanding 5,601 5,119
Additional paid-in capital 25,930,300 25,585,864
Accumulated deficit (23,850,503) (23,450,348)
------------ ------------
Total stockholders' equity 2,085,398 2,140,635
------------ ------------
$ 10,001,231 $ 10,938,003
============ ============
See accompanying notes to unaudited consolidated financial statements.
2
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(As Restated)
Sales $ 2,207,123 $ 2,069,383
Cost of goods sold 1,756,982 1,384,760
----------- -----------
Gross profit 450,141 684,623
Costs and expenses:
General and administrative 612,009 461,891
Depreciation and amortization 200,000 176,717
Selling 80,487 98,714
Research and development 69,066 --
----------- -----------
Total costs and expenses 961,562 737,322
----------- -----------
Operating loss (511,421) (52,699)
Other income (expense)
Interest expense:
Stockholder (4,572) (31,099)
Other (76,451) (124,744)
Gain on dispositions of assets 137,417 --
Interest Income 402 2,220
Other expense (1,433) --
----------- -----------
Total other income (expense) 55,363 (153,623)
----------- -----------
Loss from continuing operations before
income tax expense (456,058) (206,322)
Income tax expense (3,750) --
----------- -----------
Loss from continuing operations (459,808) (206,322)
Income (loss) from discontinued operations, including
$60,366 gain on disposal in 2002 (Note 3) 59,653 (172,871)
----------- -----------
Net loss $ (400,155) $ (379,193)
=========== ===========
Income (loss) per share - basic:
Continuing operations $ (0.08) $ (0.06)
Income (loss) from discontinued operations $ 0.01 $ (0.05)
----------- -----------
Net loss $ (0.07) $ (0.11)
=========== ===========
Income (loss) per share - diluted:
Income (loss) from discontinued operations $ .01 $ (.05)
=========== ===========
Weighted average number of common
shares outstanding- basic 5,524,561 3,503,670
=========== ===========
Weighted average number of common
shares outstanding- diluted 5,785,416 3,503,670
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(As Restated)
Operating activities:
Net loss $(400,155) $(379,193)
Adjustments to reconcile net loss to net cash
used in operating activities of continuing operations
(Gain) loss from discontinued operations (59,653) 172,871
Depreciation and amortization 200,000 176,717
Amortization of discount on note payable 6,552 8,656
Expenses satisfied via issuance of common stock 51,333 --
Gain on disposition of assets (137,417)
(Increase) decrease in assets:
Accounts receivable 171,771 (400,053)
Inventories (41,245) 10,868
Other current assets (17,174) (34,958)
Prepaid pension cost 15,000 10,000
Increase in liabilities:
Accounts payable and accrued liabilities (243,450) 271,909
--------- ---------
Net cash used by operating activities of continuing operations (454,438) (163,183)
Investing activities:
Increase in restricted funds (47,105) (48,852)
Purchase of property and equipment (33,174) (217,776)
Proceeds from the sale of property and equipment 270,000 --
Purchase of intangible assets -- (48,517)
--------- ---------
Net cash provided (used) by investing activities of
continuing operations 189,721 (315,145)
Financing activities:
Net (repayments) borrowings of bank notes payable (11,820) 1,110
Proceeds from issuance of convertible note payable, net of costs 911,000 --
Deposits to restricted funds (911,000) --
Withdraws from restricted funds 148,683
Proceeds from notes payable- stockholder/ officers -- 90,000
Repayments of long-term obligations (114,668) (17,537)
Repayments of notes payable - stockholder/ officer (23,000) (2,399)
Proceeds from the issuance of common stock, net of expenses 156,132 242,675
--------- ---------
Net cash provided by financing activities of continuing
operations 155,327 313,849
Net cash provided by discontinued operations 282,560 72,267
--------- ---------
Net increase (decrease) in cash and cash equivalents 173,170 (92,212)
Cash and cash equivalents - beginning of period 130,242 185,901
--------- ---------
Cash and cash equivalents - end of period $ 303,412 $ 93,689
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - BASIS OF PRESENTATION
The accompanying financial statements of Infinite Group, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. For further information, refer to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001,
which includes audited financial statements and footnotes as of and for the
years ended December 31, 2001 and 2000.
NOTE 2. - RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 financial statement presentation.
NOTE 3. - DISCONTINUED OPERATIONS
In November 2001 and December 2001, the Company's Board of Directors
resolved to dispose of Osley & Whitney (O&W) and Express Pattern (EP),
respectively. These two subsidiaries represented the Company's Plastics Group
segment. 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 the employees. The Company is in the process of liquidating
all of the assets of O&W. During the first quarter of 2002, all of the inventory
and equipment of O&W were sold at auction, resulting in net proceeds of
approximately $416,000 and a gain of approximately $27,000. The land and
building of O&W remain for sale and the Company expects to sell this property by
December 2002. The proceeds from the sale of these assets are being used to
repay the outstanding bank obligations, which are secured by the assets. As of
March 31, 2002, the amounts outstanding under these bank obligations amounted to
approximately $791,000, plus accrued interest to the settlement date. These
obligations are guaranteed by the Company. Any bank obligation remaining after
the sale of the assets will be assumed by the Company and will be payable based
on a seven year amortization with a balloon payment after 18 months.
On March 14, 2002, the Company consummated the sale of the operating
assets of EP to certain officers/ employees of the Company. The purchase price
amounted to $725,000, plus the assumption of certain liabilities, of which
$575,000 was received in cash. The remaining $150,000 is evidenced by a
subordinated note, which bears interest at the rate of 8% and is payable in
March 2005. The gain resulting from this transaction amounted to approximately
$45,000.
In accordance with FAS 144, the disposal of the Plastics Group has been
accounted for as a disposal of a business segment and accordingly, the assets
and liabilities of O&W and EP have been segregated from the continuing
operations in the accompanying consolidated balance sheets as of March 31, 2002
and 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 quarter
ended March 31, 2001 have been restated to present separately the operating
results and cash flows of these discontinued operations.
5
The following is the summary of the financial position as of March 31,
2002 and December 31, 2001 for the disposed Plastics segment (O&W and EP):
March 31, December 31,
2002 2001
---- ----
Current assets $ 74,784 $ 580,799
Property and equipment, net 761,287 1,985,875
---------- ----------
Assets of discontinued operations $ 836,071 $2,566,674
========== ==========
Secured bank obligations $ 790,679 $1,550,038
Accounts payable and accrued expenses 838,529 963,646
Capital lease obligations -- 473,220
---------- ----------
Liabilities of discontinued operations $1,629,208 $2,986,904
========== ==========
The following is a summary of the results of operations for the quarters
ending March 31, 2002 and 2001 including the gain on disposal of approximately
$60,000 for March 31, 2002 for the disposed Plastics segment (O&W and EP):
Quarters Ended March 31,
2002 2001
---- ----
Revenues $317,453 $ 1,340,359
======== ===========
Net income (loss) $ 59,653 $ (172,871)
======== ===========
NOTE 4. - SALE OF ASSETS
On March 28, 2002, the Company sold all of the property and equipment of
its Mound Laser and Photonics Center subsidiary, including customer lists, to a
third party and ceased operations of this subsidiary. The sale price of $300,000
consisted of cash of $270,000 and a $30,000 promissory note, which bears
interest at 8% and is due in July 2002. This note receivable is included in
other current assets at March 31, 2002. The transaction resulted in a gain of
approximately $137,000.
NOTE 5. - LONG TERM OBLIGATIONS
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"). In accordance with the Agreement, the Estate purchased 379,253 shares
of the Company's common stock, which were paid for by the cancellation of
certain indebtedness of the Company to the Estate amounting to $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. The
Agreement puts certain restrictions on the number of shares of the 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
the sales of the Company's common stock. As of March 31, 2002 and the date of
this report, no shares have been sold by the Estate. As a result, the Company is
still obligated for the entire Indebtedness and it is recorded as a liability in
the accompanying balance sheet and the increase in equity has not been recorded.
6
On February 5, 2002, the Company completed a transaction with an investor
for $1.0 Million in cash, less fees amounting to $89,000, in exchange for a
$1,000,000 two-year convertible note bearing interest and fees at the annual
rate of 15%, payable quarterly. For every $100,000 in principal converted, the
annual fees shall be reduced by 1% (up to an aggregate 10%), retroactively back
to February 5, 2002. The outstanding principal and interest is due in full on
February 5, 2004. The note is convertible, at the option of the Company and the
holder, into shares of the Company's common stock at a price of $2.25 per share.
In the event of default by the Company, the holder will have the right to
exercise, without approval from the Company, at a reduced conversion rate. The
proceeds from the note are held in a secured deposit account. Withdrawals from
this account are restricted to funding expenses for work under the Defense
Advanced Research Projects Agency (DARPA) contract and for the growth of
accounts receivable with commercial customers in the operation of the Company's
Photonics subsidiary. The account balance as of March 31, 2002, amounting to
$762,317, is included in restricted funds in the accompanying balance sheet. The
note is secured by this restricted account, the accounts receivable under the
DARPA contract, and substantially all other assets of the Company and its
Infinite Photonics, Inc. subsidiary. Detachable warrants to purchase 50,000
shares of the common stock of the Company at $2.65 per share were issued with
this note. The warrants vest immediately and expire five years from the date of
grant. A portion of the proceeds of the note amounting to approximately $79,000
have been allocated to the warrants and is reflected as additional paid-in
capital and as a note discount. The warrant value was determined using the
Black-Scholes option-pricing model. The note discount is being amortized to
interest expense over the term of the note. The note payable balance has been
shown net of unamortized discount amounting to approximately $72,000 as of March
31, 2002.
NOTE 6. - STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2002, the Company issued 75,000 shares
of common stock to accredited investors at a price of $2.00 per share, resulting
in proceeds of $150,000.
During the quarter ended March 31, 2002, employee stock options were
exercised, resulting in the issuance of 3,786 shares of common stock. Total
consideration resulting from these exercised options amounted to $6,132.
The Company issued 24,100 shares of common stock during the quarter ended
March 31, 2002 as satisfaction of outstanding payroll related liabilities
amounting to $51,333. The fair market value of the shares issued equaled the
amount of the recorded liability.
During the quarter ended March 31, 2002, the Company granted warrants to
purchase 200,000 shares of common stock as satisfaction of outstanding
liabilities amounting to $58,826. The warrants are exercisable at $3.00 per
share, vest immediately and expire three years from the date of grant.
NOTE 7. - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the Company has reported basic earnings per share and
diluted earnings per share. The diluted weighted average number of common shares
outstanding at March 31, 2002 includes the impact of the assumed exercise of
approximately 900,000 stock options and warrants with exercise prices ranging
from $1.00 to $2.04 per share and the assumed conversion of convertible notes
payable, which were converted to common stock in April 2002 (see Note 9). The
amount was determined using the treasury stock method. All other securities are
anti-dilutive and have not been included in the diluted weighted average shares
calculation.
NOTE 8. - 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 3). Going forward, the Company's businesses are
organized, managed and internally reported as two segments.
7
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
inter-segment 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 the periods ended March 31, 2002 and 2001, respectively, is set
forth as follows:
Laser Photonics Plastics Unallocated
Group Group Group Corporate Consolidated
----- ----- ----- --------- ------------
Three Months Ended March 31, 2002
Sales to unaffiliated customers $1,529,046 $678,077 $ -- $ -- $2,207,123
========== ======== ======= ========= ==========
Operating income (loss) $ (371,272) $ 15,260 $ -- $(155,409) $ (511,421)
========== ======== ======= ========= ==========
Income (loss) from discontinued operations $ -- $ -- $92,549 $ (32,896) $ 59,653
========== ======== ======= ========= ==========
Three Months Ended March 31, 2001
Sales to unaffiliated customers $1,961,200 $108,183 $ -- $ -- $2,069,383
========== ======== ======= ========= ==========
Operating income (loss) $ 108,010 $(26,052) $ -- $(134,657) $ (52,699)
========== ======== ======= ========= ==========
Income (loss) from discontinued operations $ -- $ -- $25,586 $(198,457) $ (172,871)
========== ======== ======= ========= ==========
NOTE 9 SUBSEQUENT EVENT
During April 2002, stockholder term notes payable in the amount of
$120,000 and $9,600 of related accrued interest were converted into 68,936
shares of common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB 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. You can identify these forward-looking statements by our
use of the words "believes," "anticipates," "plans," "expects," "may," "will,"
"intends," "estimates" and similar expressions, whether in the negative or
affirmative. Such statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving judgments with respect to, 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 its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that
8
the forward-looking statements included in this report will prove to be
accurate. 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 in "Certain Factors That May Affect Future
Growth," under Part I, Item 1, of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2001 as filed with the Securities and Exchange
Commission. In light of the significant uncertainties inherent in the
forward-looking statements included herein particularly in view of our early
stage operations, the inclusion of such information should not be regarded by us
or any other person that the objectives and plans of the Company will be
achieved.
Overview
Our business currently operates under two segments; our Laser Group and our
Photonics Groups. During 2001, we sold or discontinued operations of our
Plastics Group. Our Laser Group, which had been 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. In March 2002 we sold MLPC. Our Photonics Group, which includes
Infinite Photonics, Inc. (IP - Orlando, FL) and the Advanced Technology Group
(Narragansett, RI), manufactures and markets our proprietary grating coupled
surface emitting laser (GCSEL) diodes. The operations of MetaTek, Inc. of
Albuquerque, NM were merged into Infinite Photonics, Inc.
Our Plastics Group, which had been comprised of Osley & Whitney, Inc. (O&W -
Westfield, MA), Materials & Manufacturing Technologies, Inc. (MMT - West
Kingston, RI) and Express Pattern, Inc. (EP - 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 working capital position. We
are currently focused on our two primary lines of business and may from time to
time consider 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 do 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 $150,000 note, due upon maturity in March 2005 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 twelve
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
9
$10.0 million in revenue capacity by year-end. In addition, we closed on a $1.0
Million convertible note with Laurus Master Fund, Ltd., which has been used to
fund working capital, 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.
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 March 31,
2002, we had cash and cash equivalents of approximately $303,000 available for
our working capital needs and planned capital asset expenditures. In addition,
on February 5, 2002, we closed on a $1.0 million, two-year convertible note. The
proceeds from this note are held as restricted funds available to fund certain
operations of our Photonics Group. Restricted funds available under this
agreement as of March 31, 2002 amounted to approximately $762,000. While the
majority of the revenues realized as of March 31, 2002 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.
During the quarter ended March 31, 2002, additional private placements of our
common stock yielded gross proceeds of $150,000 and employees accepted 24,100
shares in lieu of cash payments for employee related obligations of $51,333.
At March 31, 2002 we had a working capital deficit of approximately $823,000,
(approximately $30,000 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.
Risk of Nasdaq Delisting. Our common stock is currently traded on the Nasdaq
SmallCap Market. In order to maintain this listing, we are required to meet
certain requirements relating to our stock price and net tangible assets of $2.0
million (stockholders' equity, less unamortized goodwill). If we fail to meet
these requirements, our stock could be delisted. Last year we received a series
of letters from Nasdaq addressing our failure to satisfy the minimum net
tangible asset continued listing requirements for the SmallCap Market. On March
19, 2002, we received a letter from Nasdaq that we were in compliance with the
continued listing requirements.
10
Results of Operations
Laser Group
Revenues from our laser material processing, value added services and
laser services for the quarter ended March 31, 2002 were $1,529,046, ($1,961,200
at March 31, 2001) with a gross profit for the period of $299,505 ($698,184 at
March 31, 2001). The decrease in Laser Group revenues resulted from postponed
orders for gas turbine parts used for power generation and reduced or delayed
orders for jet engine components. Gross profit margin decreased in 2002 to 20%
from 36% in 2001 due to increased set-up costs to replace the postponed orders
with other customers and from proportionately higher fixed cost on lower
utilization of our laser workstations. With airline traffic and commercial
demand for power generation recovering from the tragedies of September 11, 2001,
we expect a higher, but indeterminate, proportion of those orders to return in
the third and fourth quarters of 2002.
Photonics Group
Revenues related to the Photonics Group in the quarter ended March 31,
2002 were $678,077, ($108,183 at March 31, 2001) with a gross profit (loss) for
the period of $150,636 (($13,561) at March 31, 2001). The increase of $569,894,
or 527% in revenues for the quarter ended March 31, 2002 compared to the quarter
ended March 31, 2001 was primarily due to commencing work on a $12.0 million
DARPA contract signed on January 23, 2002. Net profits are limited to
approximately seven percent for that government research contract, which
historically has been approximately eight percent. As a result, we expect
revenues to increase significantly in 2002, but at a lower net profit rate.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Consolidated revenues for the three months ended March 31, 2002 were
$2,207,123 on cost of sales of $1,756,982, resulting in a gross profit of
$450,141 for the quarter. Consolidated revenues for the three months ended March
31, 2001 were $2,069,383 on cost of sales of $1,384,760, resulting in a gross
profit of $684,623 The increase of $137,740 or 6.7% in consolidated revenues for
the quarter ended March 31, 2002, compared to the quarter ended March 31, 2001,
was due to a general increase in revenues associated with contract research and
development revenues from DARPA. This was offset by a reduction in revenues of
432,154 at the Laser Group which directly impacted the reduction in gross
margins of $234,482.
Research and development expenses were $69,066 for the three months ended
March 31, 2002. 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 only
internal costs associated with new product development efforts. We anticipate
that internal research and development expenses will increase in 2002, for
expected GCSEL product development efforts in our Photonics Group, subject to
customer demand and funded by discretionary cash flows.
General and administrative expenses were $612,009 for the three months
ended March 31, 2002 as compared to $461,891 for the three months ended March
31, 2001. The increase of approximately $150,000 was primarily attributed to
executive and administrative salary increases related to the addition of the
position of chief operating officer, reinstating executive salary reductions, as
well as other costs related to the formation of the Infinite Photonics
subsidiary.
Selling expenses were $80,487 for the three months ended March 31, 2002 as
compared to $98,714 for the three months ended March 31, 2001, reflecting lower
commissions on lower jet engine and turbine parts revenues.
Depreciation and amortization expense totaled $200,000 for the three
months ended March 31, 2002 as compared to $176,717 for the three months ended
March 31, 2001. The increase was primarily due to depreciation expense for new
lasers acquired for medical device production and laser engineered net shaping
equipment (LENS) at our Laser Group. Interest expense was $81,023 for the three
months ended March 31, 2002 as compared to $155,843 for the three months ended
March 31, 2001. The decrease of $74,820 was due primarily from the decreases in
the
11
prime interest rate, the satisfaction of certain obligations during 2001 and a
reduction of interest paid under a capital lease converted to equity by our
president in 2001.
The loss from continuing operations was $459,808 for the three months
ended March 31, 2002 as compared to a loss of $206,322 for the three months
ended March 31, 2001.
Part II - Other information
Item 2(c): A description of all unregistered common stock sold by the registrant
since January 1, 2001 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Purchase Price per Consideration Expiration
Name(1) Date No. of Shares Common Share ($)(4) Warrants Date Price
------------------------------------------------------------------------------------------------------------------------------------
Roger P. Moore 6/5/2001 12,500 2.00 25,000 1,250 6/15/2004 4.00
------------------------------------------------------------------------------------------------------------------------------------
Gulati Family, LP 6/4/2001 12,500 2.00 25,000 1,250 6/15/2004 4.00
------------------------------------------------------------------------------------------------------------------------------------
Douglas J 6/15/2001 12,500 2.00 25,000 1,250 6/15/2004 4.00
Rademacher
------------------------------------------------------------------------------------------------------------------------------------
David R. Johnson 6/14/2001 12,500 2.00 25,000 1,250 6/15/2004 4.00
Living Trust
------------------------------------------------------------------------------------------------------------------------------------
Delivery From 6/15/2001 25,000 2.00 50,000 2,500 6/15/2004 4.00
Heaven Foundation
------------------------------------------------------------------------------------------------------------------------------------
David P. Pilotte 11/6/2001 50,000 1.25 62,500 n/a
------------------------------------------------------------------------------------------------------------------------------------
David P. Pilotte 7/3/2001 25,000 2.00 50,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Laurus Master 2/5/2002 444,444 2.25 1,000,000 50,000 2/5/2007 2.65
Fund, LTD (David
Grin-Partner)(2)
------------------------------------------------------------------------------------------------------------------------------------
Christopher
DiNapoli 6/14/2001 25,000 2.00 50,000 2,500 6/15/2004 4.00
------------------------------------------------------------------------------------------------------------------------------------
John J. Perkins 6/8/2001 50,000 2.00 100,000 5,000 6/15/2004 3.00
------------------------------------------------------------------------------------------------------------------------------------
John J. Perkins 12/12/2001 25,000 2.00 50,000 2,500 12/12/04 3.00
------------------------------------------------------------------------------------------------------------------------------------
Dana A. Marshall 6/11/2001 50,000 2.00 100,000 5,000 6/15/2004 4.00
------------------------------------------------------------------------------------------------------------------------------------
Daniel Cohen 7/24/2001 100,000 2.25 225,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Larry Dosser 6/11/2001 16,268 2.00 32,536 n/a
------------------------------------------------------------------------------------------------------------------------------------
Allan J. Ligi 7/17/2001 12,500 2.00 25,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Allan J. Ligi 11/10/2001 40,000 1.25 50,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Allan J. Ligi 3/7/2002 35,000 2.00 70,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Allan J. Ligi 12/11/2001 30,000 2.00 60,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Christopher Murney 11/30/2001 15,000 2.00 30,000 1,500 11/30/2004 3.00
------------------------------------------------------------------------------------------------------------------------------------
IHC, Inc. 3/5/2002 30,000 2.00 60,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
John Corridan III 12/11/2001 3,750 2.00 7,500 n/a
------------------------------------------------------------------------------------------------------------------------------------
William M. Johnson 12/11/2001 25,000 2.00 50,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
William M. Johnson 3/6/2002 10,000 2.00 20000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Richard G. Heidt 12/11/2001 50,000 2.00 100,000 n/a
------------------------------------------------------------------------------------------------------------------------------------
Estate of Ralph 1/4/2002 379,253 2.00 758,507 n/a
P. Lazzara
(Executrix
Genevieve M
Lazzara) (3)
------------------------------------------------------------------------------------------------------------------------------------
(1) Each of the transactions was private placement of securities pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
(2) Shares subject to conversion under a $1,000,000 two-year convertible note
bearing interest and fees at the annual rate of 15%, payable quarterly.
The outstanding principal and interest is due in full on February 5, 2004.
The note is convertible, at the option of the Company and if we allow the
note holder to convert, the Note is convertible into shares of the
Company's common stock at $2.25 per share. In the event of default by the
Company, the holder will have the right to exercise, without approval from
the Company, at a reduced conversion rate. For every $100,000 in principal
converted, the annual fee shall be reduced by 1% (up to an aggregate 10%),
retroactively back to February 5, 2002.
(3) In accordance with an Agreement with Estate of a former shareholder of
Osley & Whitney, Inc., the Estate purchased 379,253 shares of the
Company's common stock, which were paid for by the cancellation of certain
indebtedness of the Company to the Estate amounting to $758,507. The
indebtedness related to consulting fees and outstanding debt owed by the
Company to the Estate at December 31, 2001.
(4) All gross proceeds received by the Company were used for working capital
purposes.
12
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On February 13, 2002, Infinite Group, Inc. filed a Report on Form
8-K regarding a $12.0 Million contract from the Defense Advanced
Research projects Agency. On March 15, 2002, Infinite Group, Inc.
filed a Report on Form 8-K regarding the Company's Preliminary
earnings for the year ended December 31, 2001. On March 29, 2002,
Infinite Group, Inc. filed a Report on Form 8-K regarding the sale
of the Company's Express Pattern, Inc. subsidiary.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
May 15, 2002
INFINITE GROUP, INC.
By: ss/ Clifford G. Brockmyre
-------------------------------
Clifford G. Brockmyre, President
And Chief Executive Officer
By: ss/ Bruce J. Garreau
-------------------------------
Bruce J. Garreau
Chief Financial Officer
(principal accounting officer)
14