SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
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, 1996
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[ ] 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: 1-12840
INFINITE MACHINES CORP.
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(Exact name of registrant as specified in its charter)
Delaware 52-1490422
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(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Indemnification No.)
300 Metro Center Boulevard, Warwick, Rhode Island 02886
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(Address) (Zip Code)
Issuer's telephone number: 401-737-7900
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
Common Stock Purchase Warrants
(Title of class)
Indicate by check mark whether the registrant (1) 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, 1996 were
$5,127,166.
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As of April 9, 1997 there were 9,218,475 outstanding shares of common
stock, par value $.001 per share. The aggregate market value of the voting stock
of the registrant held by non-affiliates of the registrant on April 9, 1997
based on the average bid and asked price on such date was $14,403,867.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
of Form 10-KSB is incorporated herein by reference to the registrant's
definitive Proxy Statement relating to its 1997 Annual Meeting of Stockholders
which will be filed with the Commission within 120 days after the end of the
registrant's fiscal year.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
Certain 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. 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. The Company's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve 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 the control of the
Company. Although the Company believes 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 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
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
General
Infinite Machines Corp. (the "Company" or "Infinite") has two principal
operating subsidiaries, HGG Laser Fare, Inc. ("Laser Fare") and Spectra Science
Corporation ("Spectra Science"). Laser Fare was acquired in July 1994, for
stock, and is wholly owned. Spectra Science, which is 63% owned by the Company,
was formed in August,1996.
In addition to these two subsidiaries, Infinite has a division, Advanced
Technology Group ("ATG"), engaged in contract research and development and
Express Tool Corp. ("Express Tool"), a newly formed subsidiary created to
exploit new rapid tooling technology.
Prior to December 31, 1995, the Company's principal business operation
involved the development of a rotary engine for marine recreational
applications. Such operations were discontinued as of December 31, 1995 as a
result of inadequate demand for such products. See, "Note 1 - Notes to
Consolidated Financial Statements."
HGG Laser Fare, Inc.
Laser Fare is a material processing company. As such it provides laser
machining, welding, engraving and marking for an extensive group of customers.
The company has 19 multi-axis machining centers of various powers and sizes,
which are used to perform a variety of operations. Work done includes, but is
not limited to, welding and drilling of gas turbine blade assemblies, welding of
automotive gear sets, welding of cutters used for arthroscopic surgery, cutting
of lenses for sunglasses and engraving on decorative industrial and medical
components.
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Laser Fare is certified by major gas turbine producers and also by the FAA for
repairs of gas turbine engine components. New laser machines were acquired and
others upgraded during 1996 to increase plant capacity.
Laser Fare was a pioneer in the laser material processing business and has
participated significantly in the development of the industry. Many laser
processing techniques were first developed by Laser Fare. Key staff members and
Laser Fare are well known and highly regarded within the industry. Laser
machining and welding were first used in industry in the early 1980's, mostly in
the scientific and aerospace communities. Since that time capabilities have
increased and awareness of the cost effectiveness of the process has become more
widespread, increasing the market size. Approximately 75% of Laser Fare's sales
come from customers in the medical device, aerospace and power generation
industries. Customers include General Electric Corporation, United Technologies
Corporation, Allied Signal Corporation, Polaroid, Stryker Medical Corp. and
Center Laboratories.
Laser Fare markets directly to customers and through independent sales
representatives. The bulk of sales come from customers in the eastern and middle
western states.
Laser Fare operates in 17,000 square foot modern industrial building
located in Smithfield, Rhode Island under a capital lease agreement with the
Rhode Island Industrial Board. In addition, Laser Fare rents 8,000 square feet
of manufacturing space in an adjacent building.
Competitive Factors
Laser Fare competes with a number of small, mostly privately owned,
businesses and in some cases, with laser processing organizations internal to
customer organizations. Laser Fare is successful in building its business based
upon its quality, delivery performance, technical capability and sensitivity to
its customers needs.
Laser Fare's sales volume has been increasing and management expects this
trend to continue.
Spectra Science Corp.
In August 1996, Infinite acquired a majority interest in Spectra Science
for $2.7 million in cash and the transfer of certain technologies licensed from
Brown University. Spectra Science was created to initially commercialize and
expand two platform photonic technologies licensed from Brown University.
The first technology, LaserPaint(TM), is a patented discovery which allows
almost any material to become laser light. The material may be a plastic fiber,
a paint, a fine powder or some other form. The ability to produce intense,
spectrally pure light of any visible color opens the door to many commercial
applications. Some applications include: identification of products which are
not easily adaptable to bar coding, special additives for paper and inks as
anti-counterfeiting features, special packages and labels to combat pirating of
products and medical uses to trigger light activated cancer drugs. Spectra
Science is working in each of these
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applications and management anticipates that sales will occur in one or more of
the areas during 1997.
The second area of technology is direct laser micro patterning of glass.
These inventions allow micro patterns, either engraved or built up, to be
produced on glass rapidly and inexpensively with the use of a computer driven
laser. Potential applications for this technology include compact disc players,
diffractive and refractive optics, micro fluid handling chips and laboratory
devices needed by the biotechnology industry. Direct micro scale laser writing
on glass is expected to begin to generate sales during 1997 with substantial
growth expected in future years.
In addition to the licensed technologies, Spectra Science has developed
"Quantum Dot Phosphors" which hold promise for better high brightness, high
definition video displays. Spectra Science was recently awarded a Phase II SBIR
(Small Business Innovative Research) contract by the Department of Defense,
Ballistic Missile Defense Organization to commercialize this technology in large
scale projection displays.
Spectra Science owns or controls through worldwide exclusive license issued
patents and 8 additional patent applications in process. The issued patents are
believed to be quite basic, protecting fundamental scientific discoveries. Some
of the most recent patent applications are aimed at protecting specific products
and processes.
Dr. Nabil Lawandy is the President and Chief Technical Officer of Spectra
Science and the inventor of the core technologies described above. Spectra
Science has a Technical Advisory Board consisting of eminent scientists in the
fields of physics, electro optics, high frequency electronics and medical
physics.
Spectra Science leases approximately 2,000 square feet of office space in
Providence, Rhode Island, for its administrative office. The annual rent for the
premises is $32,000.00. An additional 4,800 square feet of laboratory space is
leased in East Providence, Rhode Island at an annual rent of $62,400.00.
Competitive Factors
The Company believes that Spectra Science's technology are unique and
protectable by patents which will provide a competitive advantage in connection
with any products or services offered. However, there is no assurance that any
patent, or any patent that issues from currently pending applications, will
provide Spectra Science with significant competitive advantages, or that
challenges will not be instituted against the validity or enforceability of any
patent which may be owned by Spectra Science, or if instituted that such
challenges will not be successful. Furthermore, there ican be no assurance that
others will not independently develop similar or more advanced technologies or
design around aspects of Spectra Science's technology.
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Advanced Technology Group
ATG was established to take advantage of the technical know how built up
during the early years of Laser Fare in the application of lasers toward
solution of industrial problems. Since its inception in 1993 ATG has been
performing contract R&D for industrial customers. Two major programs have been
undertaken, one of which was completed during 1996.
The program which was completed in 1996, was to develop practical methods
to dramatically reduce the time and expense required to build molds for plastic
injection molding. This program, which was funded by a major toy manufacturer,
was successfully completed during 1996. Two processes were developed which can
be used to build new production quality molds in significantly less than half
the time needed for molds built by current industry procedures. The customer is
now using at least one of the methods to build production molds. As part of
ATG's contract, the Company gained exclusive rights to all technology developed
under the contract for use in all fields other than toys, games and infant
furniture. As described below Infinite Machines has formed ExpressTool to
exploit these technologies.
The second program on which ATG has been working for three years is
sponsored by the world leader in jet engine ignition systems. The purpose of the
program is to develop an ignition system for future jet engines and for retrofit
to older engines which will be superior to current ignitions. Progress has been
satisfactory in this development program. When the project reaches production
Infinite Machines expects to be the supplier of key system components.
Production will be several years off, continuing development and system
demonstration will occupy the intervening period.
ATG is involved in several smaller and early stage programs. The Company's
plan is to concentrate the efforts of this small group on advanced manufacturing
techniques in the future.
ExpressTool, Inc.
ExpressTool was formed in 1996 to exploit the rapid mold building
techniques developed by ATG and their sponsor. In 1996 efforts were mostly
directed toward establishing a facility in which limited quantities of molds
could be built and acquiring the staff necessary to operate. Orders have been
taken from several major corporations to build demonstration molds. Presuming
successful customer evaluations we anticipate that production orders will be
forthcoming during 1997. If these orders develop as anticipated additional
investment will be required to expand capacity.
Employees
As of April 1, 1997, the Company had 75 full-time employees, including
three executive officers and Spectra Science had 11 full time employees
including one executive officer. The Company's ability to develop, manufacture
and market its products and to establish and maintain a competitive position in
its businesses will depend, in large part, upon its ability to attract and
retain qualified technical, marketing and managerial personnel, of which there
can be no assurance. The Company believes that its relations with its employees
are good. None of the Company's employees is represented by a collective
bargaining agreement.
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ITEM 2. PROPERTIES
Infinite Machines leases approximately 5,700 square feet of office and
laboratory space in Warwick, RI for its corporate offices, Advance Technology
Group and ExpressTool for a term ending in June, 1998. The annual rent for the
premises is $68,400.
Laser Fare acquired certain equipment and an operations facility with
approximately 17,000 square feet, located in Smithfield, Rhode Island, under a
capital lease obligation. The interest rate on the underlying Industrial Revenue
Bond ranges from 6% to 7.25%. Combined annual payments of principal and interest
are approximately $115,200 per year through June 2002 and $55,200 per year
thereafter through June 2012. Commencing in June 1996, Laser Fare began renting
an additional 8,000 square feet of manufacturing space on a month to month basis
at a rental rate of $2,200 per month.
The Company believes that its current facilities are adequate for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
On November 21, 1995, the Company was served with a summons and complaint
in an action commenced in the Superior Court of the State of California, County
of Yolo, captioned Moller International, Inc. ("Moller"), plaintiff, v. Infinite
Machines Corp., et al (the "Moller Action"). The claims in the complaint against
the Company were alleged to have arisen out of the Development and License
Agreement dated August 16, 1991 between the Company and Moller (the "Agreement")
which related to the Company's licensing of certain technology, know-how and
intellectual property rights of Moller relating to the manufacture and sale of
liquid cooled rotary engines. The Company discontinued its rotary engine
development program during 1995. The Complaint alleges that the Company failed
to reimburse Moller for amounts in excess of $100,000 allegedly incurred by
Moller under the Agreement and failed to pay Moller minimum royalty fees for the
years 1992, 1993, 1994 and 1995 in an amount not less than $800,000. The Company
in its answer to the complaint interposed counterclaims against Moller for
breach of agreement, fraud and negligent misrepresentation.
On December 19, 1996, following a trial, a jury verdict was rendered in the
Moller Action assessing compensatory damages against the Company in the amount
of $1.25 million. Further, a verdict was rendered in favor of Moller on the
Company's counterclaims. Judgment in the amount of $1.25 million was entered
against the Company following such verdict. On February 12, 1997, the Company
filed notice of appeal of the judgment.
As of April 1, 1997, the Company entered into an Accord for Satisfaction of
Judgment with Moller pursuant to which the judgment has been satisfied and
extinguished in exchange for a cash payment of $350,000, the delivery of a note
in the principal amount of $100,000, bearing interest at the rate of 10% per
annum, payable commencing May 1, 1998 in equal monthly installments of $7,019
through maturity on September 1, 1999, and the transfer of certain equipment
related to the Company's discontinued engine development program with a net book
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value of approximately $24,000. In addition, the Company's Chairman transferred
to Moller, in partial satisfaction of the Company's obligation, certain
securities personally held by him in Moller (at an agreed upon value of
$250,000). In consideration of such transfer, the Company reimbursed the
Chairman through the issuance of 160,000 shares of Company Common Stock valued
at fair market value on the date of judgment. See, "Note 15C - Notes to
Consolidated Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 5, 1996, the Company held its 1996 Annual Meeting of
Stockholders pursuant to notice. At such meeting, the following directors were
elected to hold such office until the 1997 Annual Meeting of Stockholders or
until their successors are duly elected and qualified: Carle C. Conway, Clifford
G. Brockmyre, Robert J. Sherwood and Michael Smith (each receiving 7,099,194
votes in favor, with 63,230 votes withheld). Further, the Company's 1996 Stock
Option Plan was approved (6,914,962 votes in favor, 210,352 votes against and
37,110 abstentions) and the appointment of Freed Maxick Sachs & Murphy, P.C. as
the company's auditors for the 1996 fiscal year was ratified (7,140,774 votes in
favor, 10,300 votes against and 11,350 abstentions).
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Common Stock Purchase Warrants are traded in
the over-the-counter market and are quoted through the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on the SmallCap Market
System under the symbols IMCI and IMCIW, respectively. The following table sets
forth, for the periods indicated, the high and low closing bid quotations per
share for the Company's Common Stock and Common Stock Purchase Warrants as
reported by NASDAQ. Trading in both securities commenced on September 23, 1993.
COMMON STOCK High Low
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1995
First Quarter 2-1/4 1-1/2
Second Quarter 2 1-1/2
Third Quarter 3 1-15/32
Fourth Quarter 3-1/8 2-1/2
1996
First Quarter 3-3/4 2-11/16
Second Quarter 6-5/16 3-3/8
Third Quarter 3-1/8 2-1/16
Fourth Quarter 1-15/16 1-3/16
Common Stock Purchase Warrants
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1995
First Quarter 1/2 9/32
Second Quarter 9/32 1/4
Third Quarter 1/2 1/4
Fourth Quarter 1/2 3/8
1996
First Quarter 5/16 3/16
Second Quarter 1-1/16 3/8
Third Quarter 1/2 1/4
Fourth Quarter 1/2 1/4
As of April 9, 1997 the closing bid price for the Company's Common Stock
and Warrants, as reported by NASDAQ, was 1-9/16 and 5/32, respectively. As of
April 9, 1997, the Company had approximately 97 stockholders and 30 warrant
holders of record, respectively.
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Dividend Policy
The Company has not paid dividends to its stockholders since its inception
and has no intention of paying any dividends to its stockholders in the
foreseeable future. The Company intends to reinvest earnings, if any, in the
developments and expansion of its business.
PART II MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Infinite Machines has two principal operating subsidiaries, Laser Fare and
Spectra Science. Laser Fare was acquired in July 1994, for stock, and is wholly
owned. Spectra Science, which is 63% owned by the Company, was formed in August,
1996.
In addition to these two subsidiaries, Infinite has a division, Advanced
Technology Group ("ATG"), engaged in contract research and development and
ExpressTool Corp. ("Express Tool"), a newly formed subsidiary created to exploit
new rapid tooling technology.
Prior to December 31, 1995, the Company's principal business operation
involved the development of a rotary engine for marine recreational
applications. Such operations were discontinued as of December 31, 1995 as a
result of inadequate demand for such products. See, "Note 1 - Notes to
Consolidated Financial Statements."
General
Laser Fare
Laser Fare's material processing activities have progressed satisfactorily.
Sales increased approximately 20% during 1996 compared to 1995 and operations
were profitable when viewed on a stand alone basis. During 1996, Laser Fare
expanded its manufacturing operations into an adjacent building and acquired new
equipment to increase operating capacity. Several new customers began work with
Laser Fare during the year and business with these new accounts is expected to
increase during 1997. Laser Fare has sufficient facilities and equipment to
support it short-term business expansion.
Spectra Science
Spectra Science, which was formed during the third quarter of 1996, is
operating in accordance with its initial start-up plan. A system for automated
identifications of garments using laser coded thread has been demonstrated to
representatives of the rental garment industry. Results from the demonstration
were very positive and orders have been received from two large garment rental
firms. These orders are for pilot programs to be implemented in actual working
environments. If the system works well in use, substantial follow-on orders
could result.
In October 1996, Spectra Science entered into a contract with the Textile
Rental Association to build and demonstrate an automated system for
identification of rental linens and
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other flat goods. The system which uses a LaserPaint(TM) thread woven into the
textile will be demonstrated at the annual convention of the Textile Rental
Association in June 1997. If the demonstration is successful, substantial orders
for LaserPaint(TM) thread and readout instruments could result. Shipment of
LaserPaint(TM) thread and readers may begin as early as the third quarter of
1997.
As noted earlier, Spectra Science has received a Phase II SBIR from the
department of Defense to develop a high definition projection television system.
This work can lead to production and sale of specialized video systems or
licensing to manufacturers.
Spectra is actively evaluating LaserPaint(TM) techniques for use in
photodynamic cancer therapy. Initial testing has been successful in animals and
further tests are being conducted at the request of pharmaceutical producers. It
is management's belief that LaserPaint(TM) will significantly reduce the capital
investment which a clinic or doctor needs to incur prior to offering
photodynamic therapy. This reduction in investment and lower treatment costs may
speed up the acceptance of photodynamic cancer therapy.
Express Tool
ExpressTool is believed to have key technical capabilities which will allow
molds and other types of tools to be made more rapidly than is possible with
traditional methods. Most manufacturers are striving to reduce the time required
to bring new products to market for competitive reasons. Building molds and
other tools in many instances requires half or more of the total new product
development cycle. Therefore building tools more rapidly is much sought after.
ExpressTool's techniques have been proven on a small scale and in small
quantities. Express Tool's challenge for 1997 will be to scale up, and gain
acceptance by customers which were not associated with the process development.
Management believes that ExpressTool should have sales revenue in 1997, which
could increase rapidly with customer acceptance.
Advanced Technology Group
The Advanced Technology Group is continuing development of advanced
ignition systems. In January 1997, ATG received a contract from the firm which
sponsored the rapid tooling project to work more broadly with them in advanced
manufacturing methods. In November 1996, ATG was informed they had been
selected for a Phase II SBIR. This contract with the United States Air Force
Phillips Laboratory is a follow on to an earlier contract and is for
commercialization of high powered diode lasers.
Liquidity
Infinite Machines has several projects which may result in near term
increases in orders. To fulfill substantially increased orders additional
financing for equipment purchases and increased working capital will be
required. The Company is investigating various approaches for funding these
potential requirements.
During 1996, the Company completed a financing through the sale of
$4,000,000 of Subordinated Convertible Debentures. The Debentures bear interest
at the rate of 6% per annum
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until maturity on June 1, 1998. The Debentures are convertible into Shares at a
conversion price equal to 75% of the average closing bid price of the Shares on
the five trading days preceding conversion. Through December 31, 1996,
$3,500,000 of principal amount of such Debentures had been converted into
2,540,962 shares. In February 1996, Laser Fare refinanced its bank obligations
which resulted in short term obligations amounting to $499,680 being converted
to long term and an operating line of credit amounting to $400,000. In addition,
through 1996, the Company's majority shareholder and others have provided
funding through promissory notes issued totaling $995,948. In February 1997, the
Company completed a financing through the sale of $1,100,000 of Subordinated
Convertible Notes. The Notes bear interest at the rate of 6% per annum until
maturity on December 31, 1998. The Notes are convertible into Shares at a
conversion price equal to 73% of the average closing bid price of the Shares on
the five trading days preceding conversion. At the option of the Holder, at any
time from the ninety-first (91st) day following the date of issuance until the
Notes are paid in full, the Notes may be converted, however, no more than fifty
percent (50%) of the principal amount of any Note may be converted prior to the
one-hundred twentieth (120th) day following date of issuance.
At the present time, the Company has minimal working capital and its
continued operation as a going concern is dependent on improving the operating
performance of its sole operating subsidiary, Laser Fare, commercialization of
the technology being developed and marketed by ExpressTool and Spectra Science,
further cost reduction in general and administrative costs, and raising
additional debt and/or equity capital. Management is working to achieve these
objectives, however, there are no assurances that such efforts will be
sufficiently successful to enable the continued operation of the Company as a
going concern.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a
series of private placements of debt and equity securities, and through the
October, 1993 public offering of its common stock. From inception, through
December 31, 1996, an aggregate of approximately $14 million, net of expenses,
has been provided by debt and equity offerings. As of December 31, 1996, the
Company had cash, cash equivalents and marketable debt securities totaling
approximately $1,216,400 available for its working capital needs and planned
capital asset expenditures.
The Company proceeded with planned rotary engine developments through
September, 1995. Due to the absence of orders, development work was stopped and
all personnel associated with the effort were terminated. During 1995, the
Company incurred approximately $1.4 million on engine development activities
including capital expenditures of approximately $321,000. A substantial portion
of the net carrying value of these assets, together with prior year's
acquisitions, were charged off to operations in recognition of management's
estimate of their estimated value. The Company has no ongoing expense related to
the discontinued engine development business.
While revenues were realized in fiscal 1996 on a consolidated basis, the
majority of revenues were attributed to Laser Fare. While improved revenue is
being realized by the Company and expense containment measures have and will
continue to be implemented,
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management is, nonetheless, pursuing several strategies for raising additional
resources through debt or equity transactions.
The Board of Directors has given approval for management to vigorously
pursue several alternate sources of funding including conventional bank
financing, private placement of debt and/or equity securities, and application
has been made for available governmental funds in the form of interest
subsidized financing. Management believes that a total of $2.5 million of funds
would satisfy all of its cash requirements for the next eighteen months. There
is no assurance, however, that management will be successful in raising all or a
part of this amount on satisfactory terms or that it will be sufficient to fund
operations and scheduled debt repayment.
RESULTS OF OPERATIONS
Industry Segments
HGG Laser Fare, Inc.
Revenues from the contract machining and advance technology consulting
services for the year ended December 31, 1996 were approximately $5,080,000 and
provided a gross profit for the period of approximately $1,923,000. Revenues and
gross profit for the prior year were $5,052,366 and $1,970,466, respectively.
Spectra Science Corp.
Revenues from product sales were approximately $18,000 and government
contracts $29,000 which provided a gross profit for the period of approximately
$41,000. 1996 was the first year of Spectra Science's operations.
Rotary Engine Development
The Company suspended operations of its rotary engine business in September
1995 due to continuing delays in the EPA's implementation of proposed marine
engine emission regulations. There was no revenue in 1996 and this segment
produced operating losses of $96,000, $2,736,000 and $2,275,000 during 1996,
1995, and 1994 respectively.
Comparison of the Years Ended
December 31, 1996 and 1995
In 1996, consolidated revenues were $5,127,000 on cost of sales of
$3,164,000 resulting in a gross profit in the amount of $1,964,000 realized
during the year. Revenues and gross profit for the prior year period were
$5,052,366 and $1,970,466, respectively.
Operating expenses decreased to $117,715 in 1996 compared to $157,591 in
1995. The decrease is attributable to a cost reduction initiative taken by the
Company.
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Research and development expenses decreased during 1996 to $402,442 from
$427,468 in 1995, or a decrease of 5.9%. The decrease resulted from the
discontinuance of the Company's engine development activities offset by research
and development expense primarily attributed to Spectra Science's investment in
laser technology research and development.
General and administrative expenses increased to $2,252,003 in 1996 from
$2,192,525 in 1995, an increase of $59,478 or 2.7 %. The increase is primarily
attributed to FTD valuation allowance (See, "Note 4A - Notes to Consolidated
Financial Statements") as well as additional general and administrative expense
attributable to Spectra Science.
Selling expenses of $511,208 in 1996 were attributed primarily to Laser
Fare's materials processing marketing activity, including trade shows,
conventions, brochures and other print materials. Selling expense of $435,605 in
1995 were primarily attributed to similar activities at Laser Fare.
For the year ended December 31, 1996, depreciation and amortization costs
were $1,179,462 as compared to $728,288 for 1995. This increase corresponds to
the effects of increased capital expenditures of $51,174 in 1996, as well as the
impact of machinery and equipment and purchased technology recognized as a
result of the Spectra Science acquisition in 1996. Amortization of deferred
financing costs provided approximately $528,000 of the costs as compared to
$62,003 in 1995, which increase is attributed to the conversion of debt to
common stock in 1996. Amortization of purchased technology during 1996 totaled
$148,531.
Interest expense was $421,910 during 1996, an increase of $122,389 from
1995. The increase is attributed to the significant increase in outstanding
borrowings effected during 1996. Interest income of $102,180 in 1996 represents
an increase of $67,949 over the 1995 period, which is attributed interest earned
on the proceed from financing during the period.
All of these factors contributed to the net loss of $3,299,976 in 1996 as
compared to the net loss of $2,851,759 in 1995.
Comparison of the Years Ended
December 31, 1995 and 1994
In 1995, consolidated revenues were $5,052,000. The cost of sales for 1995
was $3,082,000, and gross profit in the amount of $1,970,000 was realized during
the year. During the approximate six month period of 1994 that the Company owned
its subsidiaries, revenues of $2,270,000 were recorded which provided a gross
profit of $743,000. The net consolidated loss for 1994 was $2,098,000.
Operating costs decreased to $157,591 in 1995 compared to $278,647 in 1994.
The decrease is attributable to a cost reduction initiative taken by the
Company. Also, the Company incurred approximately $33,000 in relocation costs in
1994 related to relocation of the engine design facility from Nevada to
Wisconsin.
Research and development expenses decreased during 1995 to $427,468 from
$501,044 in 1994, or a decrease of 14.7%. These decreases correspond to
management's
-13-
<PAGE>
decision to suspend operations at the engine subsidiary. Neither of the acquired
subsidiaries incurred research and development costs during the period for which
their results of operations were included in the consolidated accounts for 1994.
General and administrative expenses increased from $1,519,237 in 1994 to
$2,192,525 in 1995, and increase of $673,288 or 44.3%. The laser services
segment contributed approximately $327,000 of this increase, with the
engineering consulting segment contributing approximately $304,000 of this
increase. The rotary engine development segment (which includes the Parent
company) contributed approximately $42,000 of this increase.
Selling expenses of $435,605 in 1995 were primarily attributed to Laser
Fare's materials processing marketing activity, including trade shows,
conventions, brochures and other print materials.
For the year ended December 31, 1995, depreciation and amortization costs
were $728,288 as compared to $444,598 for 1994. This increase corresponds to the
effects of increased capital expenditures in 1995, as well as the impact of
machinery and equipment, purchased technology and goodwill recognized as a
result of the subsidiary acquisition in 1994. In addition, amortization of
deferred financing costs provided approximately $62,000 of the increase.
In 1995, in connection with management's decision to suspend development of
the rotary engine, the Company conducted a review of the projected cash flows
expected from alternate uses of the assets related to the rotary engine and
asset write-downs of $592,000 were charged to operations.
Interest expense was $299,521 during 1995, an increase of $188,875 from
1994. The increase is attributed to the significant increase in outstanding
borrowings effected during 1995. Interest income of $34,231 in 1995 represents a
decrease of $47,677 over the 1994 period.
All of these factors contributed to the net loss of $2,851,759 in 1995 as
compared to the net loss of $2,098,101 in 1994.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Financial Statements, the report thereon and notes
thereto, commencing on page F-1 to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-14-
<PAGE>
PART III
MANAGEMENT
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the Company's
directors and executive officers.
Director or
Name Age Position Officer Since
Carle C. Conway(1) 67 Chief Executive Officer, 1986
Chairman of the Board
Robert J. Sherwood (2)(3) 53 Director 1993
Michael S. Smith 42 Director 1996
Clifford G. Brockmyre 55 President and Chief 1994
Operating Officer
Daniel T. Landi 54 Chief Financial and 1993
Accounting Officer
Cotter C. Conway 30 Secretary 1993
- ----------
(1) This person may be deemed a parent and/or promoter of the Company as those
terms are defined in the Rules and Regulations promulgated under the
Securities Act of 1933, as amended.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Each Director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and serve
at the will of the Board of Directors. Cotter C. Conway is the son of Carle C.
Conway.
Background
The principal occupations of each director and executive officer for at
least the past five years are as follows:
Carle C. Conway. Mr. Conway, the founder of the Company, has been its
Chairman and a Director since its inception in 1986. From 1977 to mid 1992, Mr.
Conway was the President of Eastern Molding International, a plastic molding
company, which he founded in 1977 and sold in 1992. Prior to founding the
Company, Mr. Conway served in various capacities with GTE from 1971 to 1977,
including Vice President of GTE Information Systems, where he was responsible
for nationwide data transmission services, and Vice President of Ultronic
Systems Company, a subsidiary of GTE, where he managed a worldwide data network
that provided real-time stock
-15-
<PAGE>
and commodity quotations to investment and stock brokerage firms. From 1953 to
1971, Mr. Conway held several positions with Aerojet-General Corporation, a
manufacturer of rocket engines. Mr. Conway received a Bachelor of Science Degree
in Mechanical Engineering from the Massachusetts Institute of Technology and
holds approximately ten patents in the fields of rocket controls, hydraulic
devices and plastic fabrication processes. He is a recipient of the Air Force
Award of Excellence of Outstanding Management and the Air Force Ballistic
Systems Division Award for Management.
Clifford G. Brockmyre. Mr. Brockmyre has a Director since October 1994 and
President since September 1995. Mr. Brockmyre has been involved with
manufacturing since 1966. He was a majority stockholder in Quabbin Industries,
which he purchased in 1973. He took Quabbin from a nearly bankrupt job shop to
an extremely profitable manufacturer with revenues of over $30 million in 1990.
Mr. Brockmyre sold Quabbin in 1990 for $24 million to a Fortune 500 company. For
over 27 years, he has been involved in the tooling, machining and manufacturing
industries throughout the country. He is a member of the Licensing Executive
Society, a member of the faculty of Mohawk Research's Commercialization Programs
of the Department of Energy and Los Alamos National Laboratory 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.
Robert J. Sherwood. Mr. Sherwood has been a Director of the Company since
April, 1993. Since mid 1991, Mr. Sherwood has been the President of the Center
for Business Innovation, an organization, which provides business services for
high growth, technology-related companies. The Center for Business Innovation
currently has equity interests in 22 client companies engaged in the computer
hardware, software and medical telecommunications industries. From 1990 through
mid 1991, Mr. Sherwood was Vice President, Sales and Marketing of Mass
MicroSystems, Inc., a producer of computer video products. Prior thereto, from
October 1987 through 1989, Mr. Sherwood was Vice President, Sales and Marketing
of RasterOps Corporation. Mr. Sherwood received Bachelors and Masters degrees in
environmental engineering from the University of Kansas and a Master degree in
business from California State University. Mr. Sherwood is currently a member of
the Advisory Board of Directors of the Block School of Business and Public
Administration at the University of Missouri-Kansas City; a member of the Board
of Directors of CycleAware, a California based company, manufacturing products
for bicycle safety; a member of the Board of Directors of Phi Kappa Theta
Fraternity at the University of Kansas; a member of the Advisory Board of the
Capital Resource Network, an organization matching investors with early stage
technology companies; a member of the Board of the Grant Thornton Business
Council; and chairman of the Kansas Technology Corporation Committee, which has
the responsibility of reviewing the management of the Centers for Excellence in
Research and Development, located at all four state universities in Kansas.
Michael Smith. Mr. Smith was elected to the Board of Directors in 1995 and
is a member of the Audit and Compensation committees. Mr. Smith is a principal
of International Capital & Management Inc., a merchant banking and venture
capital firm. From October 1992 through January 1997, Mr. Smith was the Managing
Director of Corporate Finance of H.J.
-16-
<PAGE>
Meyers & Co. (formerly known as Thomas James Associates, Inc.) an investment
banking firm and was general counsel of such firm from May 1991 through May
1995. Mr. Smith serves on the Board of Directors of The Village Green Bookstore,
Inc., and CSL Lighting Manufacturing, Inc. Mr. Smith was associated with the law
firm of Harter, Secrest & Emery from 1987 until 1991. Mr. Smith received a B.A.
from Cornell University and a J.D. from Cornell University School of Law.
Daniel T. Landi. Mr. Landi has extensive domestic and international
experience in finance, accounting and information systems within corporate and
private industry. His background also includes considerable experience with
acquisitions, mergers, joint ventures and start-up operations, including
successful funding, private placements and initial public offerings. He has a BS
in Finance and an MBA from the University of Connecticut. As the IBM
International Finance Systems Manager, Mr. Landi managed the architecture,
development, installation and execution for common financial systems of 16
manufacturing and development facilities throughout Europe. Mr. Landi has over
20 years of progressive growth in overall business and senior financial
management. As the Vice President and Chief Financial Officer of an aerospace
R&D company, he was primarily responsible for business and strategic plans,
financial structuring, funding, as well as establishing an operating
infrastructure for the company, including business and financial systems.
Cotter C. Conway. Cotter C. Conway has served as the Company's Secretary
since 1993. Mr. Conway is an attorney in private practice in Nevada. He received
his law degree from The Vermont Law School in 1991 and a Bachelor of Science
degree from Rensselaer Polytechnic Institute in 1989. He is a member of the Bar
of the states of Nevada and California.
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to general instruction G the information required by Part III
shall be incorporated by reference from the Registrant's definitive proxy
statement for the fiscal year ended December 31, 1996 which is to be filed with
the Commission on or before April 30, 1997.
ITEM 13. 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 By-Laws of the Company. (1)
4.1 Specimen Stock Certificate. (1)
4.2 Form of Common Stock Purchase Warrant. (1)
4.3 Form of Warrants issued to Thomas James Associates, Inc., October 1, 1993.
(1)
4.4 Form of Warrant Agreement issued to Thomas James Associates, Inc.,
in connection with private placement financings. (1)
4.5 Form of Warrant
Agreement with American Stock Transfer and Trust Company. (1)
10.1 Employment Agreement between the Company and Carle C. Conway. (1)
10.2 Form of Note between the Company and Carle C. Conway. (5)
10.3 Form of Stock Option Plan. (1)
10.4 1993 Non-Employee Directors' Stock Option Plan. (1)
10.5 Form of Stock Option Agreement. (1)
10.6 Form of Confidentiality Agreement. (1)
10.7 1994 Stock Option Plan (3)
10.8 Stock Acquisition Agreement between the Company and HGG Laser Fare Inc. (2)
-17-
<PAGE>
10.9 Employment Agreement between the Company and Clifford G. Brockmyre. (2)
10.10 Lease Agreement between Rhode Island Industrial Facilities Corporation and
HGG Laser Fare, Inc. for certain equipment and operating facility in
Smithfield, Rhode Island. (4)
10.11 The Sale of the Business Undertaking and Intellectual Property Rights of
Fleming Thermodynamics Limited Agreement between Fleming Thermodynamics
Limited And Motherwell Bridge Holdings Limited and FTD Infinite Limited.
(4)
10.12 Lease Agreement between East Kilbride Development Corporation and Fleming
Thermodynamics Limited for office space in East Kilbride, Scotland. The
lease was assumed by FTD Infinite Limited. (4)
10.13 Stock Sale Agreement, dated December 31, 1995, with respect to the sale of
FTD Infinite Ltd. (5)
10.14 Loan Agreement between HGG Laser Fare, Inc. and First National Bank of New
England and dated December 21, 1995.(5)
10.15 Spectra Acquisition Corp. - Series A Convertible Stock Purchase Agreement
dated August 23, 1996 (6)
10.16 Spectra Acquisition Corp. -Stockholders' Agreement dated August 23, 1996
(6)
21 Subsidiaries of the Company.*
27 Financial Data Schedule. *
- ----------
* 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 Statements
(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended 12/31/94.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended 12/31/95.
(6) Incorporated by reference to Report on Form 8-K, dated August 26, 1996.
Reports on Form 8-K
-------------------
Report Date: December 19, 1996: Moller litigation jury verdict.
-18-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report............................................. F-2
Consolidated Financial Statements:
Balance Sheets..................................................... F-3
Statements of Operations........................................... F-4
Statements of Stockholders' Equity................................. F-5
Statements of Cash Flows........................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Machines Corp.
We have audited the consolidated balance sheets of Infinite Machines Corp.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Infinite
Machines Corp. as of December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has suffered recurring losses
during the last three years aggregating to approximately $8,250,000. These
factors, among others discussed in Note 2, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
April 1, 1997
F-2
<PAGE>
INFINITE MACHINES CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
ASSETS 1996 1995
------ ----------- -----------
Current assets
Cash and cash equivalents $1,147,791 $24,702
Restricted funds 68,601 70,355
Accounts receivable, net of allowances 741,539 909,833
Inventories 138,893 180,546
Other current assets 150,830 134,323
------------ -----------
Total current assets 2,247,654 1,319,759
Property and equipment, net 4,303,838 3,632,648
Other assets
Notes receivable - stockholders 132,258 195,880
Purchased technology, net 1,389,367 147,732
Inventoried parts 143,206 214,810
Net assets of subsidiary sold
pursuant to contractual obligation, net - 399,595
Other assets, net 443,346 220,378
------------ -----------
2,108,177 1,178,395
------------ -----------
$8,659,669 $6,130,802
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Notes payable $250,000 $447,371
Accounts payable and accrued expenses 952,864 786,011
Current portion of litigation settlement payable 549,000 -
Current maturities of long-term obligations 245,187 140,409
------------ -----------
Total current liabilities 1,997,051 1,373,791
Long term obligations 3,984,557 4,003,097
Litigation settlement payable 100,000 -
Minority interest 476,591 -
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized, 8,693,162 and 5,490,189
shares issued and outstanding 8,694 5,490
Additional paid-in capital 13,423,537 8,779,209
Accumulated deficit (11,330,761) (8,030,785)
------------ -----------
Total stockholders' equity 2,101,470 753,914
------------ -----------
$8,659,669 $6,130,802
============ ===========
See notes to consolidated financial statements
F-3
<PAGE>
INFINITE MACHINES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 5,127,166 $ 5,052,366 $ 2,269,726
Cost of goods sold 3,163,621 3,081,900 1,527,121
----------- ----------- -----------
Gross profit 1,963,545 1,970,466 742,605
Cost and expenses
Operating expenses 117,715 157,591 278,647
Research and development 402,442 427,468 501,044
General and administrative expenses 2,252,003 2,192,525 1,519,237
Selling expenses 511,208 435,605 195,212
Depreciation and amortization 1,179,462 728,288 444,598
Litigation settlement loss 649,000 - -
Asset write-downs - 592,256 -
----------- ----------- -----------
Total costs and expenses 5,111,830 4,533,733 2,938,738
----------- ----------- -----------
Operating loss (3,148,285) (2,563,267) (2,196,133)
Other income (expense)
Interest income 102,180 34,231 81,908
Interest expense (421,910) (299,521) (110,646)
Minority interest in net loss of subsidiary 117,350 - -
Gain on dispositions of assets - - 108,566
Loss on disposition of subsidiary - (40,373) -
Other 53,073 25,066 24,804
----------- ----------- -----------
Total other income (expense) (149,307) (280,597) 104,632
----------- ----------- -----------
Loss before provision for income taxes (3,297,592) (2,843,864) (2,091,501)
Provision for income taxes (2,384) (7,895) (6,600)
----------- ----------- -----------
Net loss $(3,299,976) $(2,851,759) $(2,098,101)
=========== =========== ===========
Per share
Net loss $(.50) $(.53) $(.43)
=========== =========== ===========
Weighted average number of common
shares outstanding 6,610,520 5,375,157 4,851,946
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
INFINITE MACHINES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Equity Adjustments
------------------
Common Stock Additional Unrealized
------------ Paid-In Accumulated Cumulative Investment
Shares Amount Capital Deficit Translation Gain (loss) Total
------ ------ ---------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 4,611,946 $4,612 $7,489,097 $(3,080,925) $ - $ - $4,412,784
Issuance of common stock in connection
with acquisition of subsidiary 520,000 520 739,435 - - - 739,955
Net loss - - - (2,098,101) - - (2,098,101)
Unrealized gain on investment securities - - - - - 2,445 2,445
Translation adjustment - - - - 1,000 - 1,000
--------- ------ ------------ ------------ ------- ------- -----------
Balance - December 31, 1994 5,131,946 5,132 8,228,532 (5,179,026) 1,000 2,445 3,058,083
Issuance of common stock in connection
with earn-out agreement 89,502 89 150,946 - - - 151,035
Issuance of common stock in connection
with debenture conversions 208,102 208 399,792 - - - 400,000
Issuance of common stock in connection
with bridge loans 60,639 61 (61) - - - -
Net loss - - - (2,851,759) - - (2,851,759)
Realized gain on investment securities - - - - - (2,445) (2,445)
Translation adjustment - - - - (1,000) - (1,000)
--------- ------ ------------ ------------ ------- ------- -----------
Balance - December 31, 1995 5,490,189 5,490 8,779,209 (8,030,785) - - 753,914
Issuance of common stock in connection
with acquisition of license 10,000 10 29,990 - - - 30,000
Issuance of common stock in connection
with debenture conversions 2,940,993 2,942 4,296,990 - - - 4,299,932
Issuance of common stock in connection
with employee options exercised 11,740 12 18,832 - - - 18,844
Issuance of common stock in connection
with warrant conversions 173,750 174 173,582 - - - 173,756
Issuance of common stock in connection
with note conversions 66,490 66 124,934 - - - 125,000
Net loss - - - (3,299,976) - - (3,299,976)
--------- ------ ------------ ------------ ------- ------- -----------
Balance - December 31, 1996 8,693,162 $8,694 $13,423,537 $(11,330,761) $ - $ - $2,101,470
========= ====== ============ ============ ======= ======= ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
INFINITE MACHINES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,299,976) $(2,851,759) $ (2,098,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,179,462 728,288 444,598
Loss on sale of subsidiary - 40,373 -
Gain on dispositions of assets - - (108,566)
Minority interest in net loss of subsidiary (117,350) - -
Translation adjustment - (1,000) 1,000
Asset write-downs and allowances 549,591 742,256 -
Changes in assets and liabilities:
(Increase) in assets and liabilities:
Accounts receivable 110,920 (595,485) (209,679)
Other current assets (50,536) (7,501) 65,794
Inventories and inventoried parts 142,255 (143,399) (22,537)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 158,712 153,689 (46,597)
Litigation settlement payable 649,000 - -
---------- ---------- -----------
Net cash used in operating activities (677,922) (1,934,538) (1,974,088)
Cash flows from investing activities:
Available-for-sale securities:
Purchases - - (750,326)
Sales - 751,973 -
Held-to-maturity:
Maturities - - 6,500,000
Purchases - - (2,957,947)
Disposition of subsidiary, net cash disposed - (39,525) -
Acquisition of subsidiaries (net of cash
acquired of $93,586) - - (348,884)
Purchase of net assets of Spectra Science Corp. (1,654,000) - -
Purchase of property and equipment (662,659) (913,291) (397,575)
Purchase of technology and other intangibles (153,934) (4,510) (132,385)
Proceeds from sale of equipment - 13,238 11,408
---------- ---------- -----------
Net cash provided by (used in) investing activities (2,470,593) (192,115) 1,924,291
Cash flows from financing activities:
Proceeds from convertible debentures, net of expenses 3,730,000 874,350 -
Repayments on line of credit - (332,800) -
Borrowings on line of credit - - 187,720
Net borrowings (repayments) of short-term debt (220,000) 414,768 -
Repayments of long-term obligations (161,075) (615,687) (229,114)
Borrowings of long-term debt 75,453 1,616,000 50,000
(Increases)decreases of restricted funds, net 1,754 (6,155) (48,003)
Proceeds from issuance of preferred stock 586,000 - -
Proceeds from issuances of common stock,
net of expenses 259,472 - -
---------- ---------- -----------
Net cash provided by (used in) financing activities 4,271,604 1,950,476 (39,397)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 1,123,089 (176,177) (89,194)
Cash and cash equivalents - beginning of year 24,702 200,879 290,073
---------- ---------- -----------
Cash and cash equivalents - end of year $1,147,791 $24,702 $200,879
========== ========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS
The accompanying consolidated financial statements include the financial
statements of Infinite Machines Corporation and each of its wholly-owned
subsidiaries; Infinite Engines Corporation (IEC), HGG Laser Fare, Inc. (LF) and
Express Tool, Inc. (ET), and its 63% owned subsidiary, Spectra Science
Corporation (SSC) (collectively "the Company"). All significant intercompany
accounts and transactions have been eliminated.
Infinite Machines Corp. was incorporated in 1986 and from its inception
through December 31, 1995, its principal activities involved the research and
development of high-performance multifuel rotary engines and securing the
funding for these activities. In 1994 the rotary engine development center was
relocated to Elkhorn, Wisconsin. At that time Infinite Engines Corporation was
incorporated to facilitate and accelerate the development of rotary engine
propulsion systems. In 1995, the Company completed development of the rotary
engine; however, due to the absence of sales orders for the engine, management
decided to suspend operations of IEC. Coincident with this decision, management
reviewed the carrying values of those assets related to the rotary engine
development and determined that write downs were necessary. Accordingly, the
accompanying financial statements for 1995 reflect adjustments aggregating to
approximately $592,000 ($.11 per share) in the carrying values of these assets.
The Company had been a development-stage enterprise since its inception in
1986. Following the acquisition of HGG Laser Fare, Inc. in 1994, the Company's
focus turned increasingly toward the expansion of LF's consulting for advanced
laser technologies, pursuing the potential of new technology toward
commercialization, and expanding the subsidiary's material processing business
which includes laser welding, machining, drilling and engraving. LF formed a
subsidiary, Express Tool, Inc., in 1996 for the purpose of commercializing
technology developed by LF, primarily rapid tooling technology used in the
manufacturing sector. On August 26, 1996, the Company acquired a majority
interest in Spectra Acquisition Corporation, a development-stage enterprise
specializing in research of advanced laser technologies in the areas of, among
other things, product identification, anti-counterfeiting methods and medical
procedures. (See Note 4.)
NOTE 2. - FINANCIAL CONDITION
During 1996, management continued to investigate and implement strategies
aimed at developing the laser services segment of the Company's business. These
include the creation of Express Tool, Inc. for developing and marketing
technology for rapid tooling processes initially developed by HGG Laser Fare,
Inc. Management believes that commercialization of these technologies will
commence in 1997.
F-7
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. - FINANCIAL CONDITION (CONTINUED)
Also in 1996, the Company acquired a majority interest in Spectra Science
Corp. Spectra Science Corp. was created to commercialize two technologies,
LaserPaint(TM) and the direct patterning on glass by lasers, licensed on an
exclusive worldwide basis from Brown University. The Company intends on
concentrating commercialization of these technologies in the near term in the
areas of product identification for the textile industry, anti-counterfeiting
for currency and other security documents, and in the medical field,
specifically photodynamic therapy. Management believes commercialization of
these technologies will begin in 1997.
As more fully described in Footnote 15, in December 1996, compensatory
damages were assessed against the Company pursuant to a jury verdict in the
amount of $1,250,000. The Company has entered into a settlement agreement which
requires a reduced consideration of $625,000 in cash, notes and common stock in
the Company in addition to a transfer of certain Company equipment with a net
book value of approximately $24,000. The Company believes that it has sufficient
funds to satisfy the judgment.
At the present time, the Company has minimal working capital and its
continued operation as a going concern is dependent on improving the operating
performance of its sole operating subsidiary, HGG Laser Fare, Inc.,
commercialization of the technology being developed and marketed by Express
Tool, Inc. and Spectra Science Corp., further reductions in general and
administrative costs, and raising additional debt and/or equity resources.
Management is working to achieve these objectives, however, there are no
assurances that such efforts will be successful, or if successful, sufficient to
enable the continued operation of the Company as a going concern.
The Board of Directors has given approval for management to vigorously
pursue several alternate sources of funding including conventional bank
financing, private placement of debt and/or equity securities, and application
has been made for available governmental funds in the form of interest
subsidized financing. In March 1997, the Company completed financing through the
sale of $1,100,000 of subordinated convertible debentures. There is no
assurance, however, that management will be successful in obtaining the
necessary financing to fund its operating losses, product development and
marketing, or meet its debt service requirements.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - Cash equivalents include money market funds.
Restricted Funds - Restricted funds represent escrow funds set aside
pursuant to a capital lease financing arrangement to meet scheduled payments.
These funds are held in cash deposit and treasury trust accounts.
F-8
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories - Inventories of the Company consist of the following:
December 31,
--------------------------
1996 1995
---- ----
Raw materials $49,081 $111,758
Work-in-process 66,882 68,788
Finished product 22,930 -
-------- --------
$138,893 $180,546
======== ========
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment - Additions to property and equipment are recorded
at cost and 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.
Inventoried Parts - Spare parts and supplies are stated principally at
cost.
Intangible and Other Assets - Purchased technology consists of patents and
licenses which are being amortized using the straight-line method over the
estimated useful lives of the assets of 5 to 10 years. Other assets consist
primarily of goodwill, deferred financing costs, and organization costs.
Goodwill represents the excess of the purchase price over the fair values of net
tangible assets of acquired businesses and is amortized using the straight-line
method over 10 years. Deferred financing costs are amortized using the
straight-line method over the terms of the debt instruments, which range from
two to fifteen years. Organization costs are being amortized using the
straight-line method over five years.
The Company periodically reviews the recoverability of the carrying value
of its intangible assets. In determining whether there is an impairment for each
subsidiary, the Company compares the sum of the expected future net cash flows
(undiscounted and without interest charges) to the carrying amount of the asset.
At December 31, 1996, the Company believes that no impairment of material
intangibles existed. During the year ended December 31, 1995, a charge to
operations of $200,730 was recognized relating to the impairment in value of
certain purchased technology.
Revenue Recognition - Revenue from job contract work is recognized as the
units are shipped, and consulting revenues are recognized as the consulting
services are provided. Revenue from research contracts is recognized over the
life of the contract as costs are incurred, or as contract milestones are met.
F-9
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs - All costs related to sponsored research
and development are expensed as incurred. Research and development expense was
$402,442, $427,468 and $501,044 for the years ended December 31, 1996, 1995 and
1994, respectively.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was $109,329, $30,989 and $6,514 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Income Taxes - The Company and its wholly owned subsidiaries file a
consolidated federal income tax return. The Company's deferred tax asset and
liability have been determined in accordance with the provisions of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Concentration of Credit Risk - Credit is granted to substantially all LF
customers throughout the United States. LF maintains adequate reserves for
potential credit losses and such losses have been minimal and within
management's estimates. The allowance for doubtful accounts was $29,050 and
$19,755 at December 31, 1996 and 1995, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalent
accounts in financial institutions. Although the cash accounts exceed the
federally insured deposit amount, management does not anticipate nonperformance
by the financial institutions. Management reviews the financial viability of
these institutions on a periodic basis.
Net Loss Per Common Share - Net loss per common share is based upon the
weighted average number of common shares outstanding during the periods.
Outstanding stock options, warrants and convertible debentures have not been
considered common stock equivalents because their assumed exercise would be
antidilutive.
Reclassifications - Certain amounts for 1995 and 1994 have been
reclassified to conform to the 1996 presentation.
Accounting Estimates - The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Such estimates primarily relate to unsettled transactions
and events as of the date of the financial statements. Accordingly, actual
results may differ from estimated amounts.
F-10
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable 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 bank and debenture
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," under which no compensation expense is recognized. In 1996, the
Company adopted Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS No. 123) for disclosure purposes;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plans as required by APB Opinion No. 25.
NOTE 4. - BUSINESS INVESTMENTS
A. FTD Infinite Limited
Effective December 31, 1995, the Company sold all of the outstanding
common stock of FTD Infinite Limited (FTD) to a Scotland, U.K.
corporation. The consideration for the sale was a promissory note in
the face amount of $550,000, due December 2002. The note bears
interest at the rate of 4%, which is payable semi-annually. The note
has been discounted at the rate of 10% yielding a net present value of
approximately $400,000. The purchaser has pledged the common stock of
FTD as collateral, and the purchaser's shareholder has guaranteed
payment on the note. The sale gave rise to a loss of approximately
$40,000.
In 1996, the Company recorded a valuation allowance equal to the net
book value of the note in the amount of $418,003 due to the lack of
current financial information on the purchaser to evaluate its credit
worthiness, which raises uncertainty as to the recoverability of the
face amount of the note at maturity.
Revenues and operating results of FTD included in the consolidated
statements of operations for fiscal 1995 are as follows:
1995
----
Sales $947,190
===========
Net loss $34,765
===========
F-11
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - BUSINESS INVESTMENTS (CONTINUED)
B. HGG Laser Fare, Inc.
Effective July 1, 1994, the Company acquired 100% of the outstanding
capital stock of LF in exchange for 520,000 shares of its common stock
valued at approximately $740,000. The acquisition, accounted for under
the purchase method of accounting, has resulted in the inclusion of
the results of operations of LF from the date of acquisition. Up to an
additional 520,000 shares may be issued pursuant to a earn-out formula
based upon the post-acquisition earnings of LF. The terms of the earn
out provisions of the acquisition agreement provide for the issuance
of additional shares in the event the net income of the subsidiary as
of each of the three periods ending December 31, 1994 and 1995 and
June 30, 1996 exceed certain specified levels. The shares issuable
under the earn out provision shall be determined based on the excess
of the subsidiary's actual earnings in excess of the specified levels.
The excess earnings is to be divided by a per share value determined
as the greater of (a) the average closing price of the Company stock
during the month of March of each 1995 and 1996 (for the first and
second earn out periods) and for the month of August 1996 (for the
third earn out period) or (b) $2.50 per share. The earnings levels to
be achieved in each of the earn out periods and the amount of deemed
excess earnings eligible for additional share consideration is as
follows:
<TABLE>
<CAPTION>
Additional
Consideration
---------------------------------------------------------------
Six Months The Year The Six Months
Ended Ended Ended
Earnings Levels December 31, 1994 December 31, 1995 June 30, 1996
--------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
First period:
$150,000 or less $0 N/A N/A
$450,000 or more $300,000
Greater than $150,000 Actual earnings
but less than $450,000 less $150,000
Second period:
$350,000 or less N/A $0 N/A
$1,050,000 or more $700,000
Greater than $350,000 Actual earnings
but less than $1,050,000 less $350,000
Third period:
$200,000 or less N/A N/A $0
$600,000 or more $400,000
Greater than $200,000 Actual earnings
but less than $600,000 less $200,000
</TABLE>
F-12
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - BUSINESS INVESTMENTS (CONTINUED)
For 1994, an additional 89,502 shares of common stock were issued in
1995 to the former owners of LF at a recorded share price of $1.69 per
share, which resulted in the recognition of additional goodwill in the
amount of $151,035 pursuant to the earn-out provisions of the purchase
agreement. No additional shares were earned in 1995. For 1996, an
additional 48,631 shares of common stock were issued in March 1997 at
a recorded price of $3.19 per share, which resulted in the recognition
of additional goodwill to be recorded in fiscal 1997 in the amount of
$155,141.
C. Spectra Science Corporation
On August 26, 1996, IMC acquired an 82% preferred stock interest in
Spectra Acquisition Corp. (SAC). The aggregate consideration paid for
the preferred stock was $2,7000,000. Simultaneously with the
capitalization of SAC, SAC acquired substantially all of the assets of
Spectra Science Corporation for the aggregate consideration of
$1,654,000 in a business acquisition accounted for under the purchase
method of accounting. SAC subsequently changed is name to Spectra
Science Corporation (SSC). Following is a summary of the assets
acquired and liabilities assumed:
Technology rights $1,265,000
Property and equipment 255,000
Other assets 96,000
Goodwill 98,000
----------
1,714,000
Less: liabilities assumed (60,000)
----------
$1,654,000
----------
The following summarizes on an unaudited pro forma basis the combined
results of operations of the Company as though all of the above
acquisitions were made at January 1, 1994. The pro forma amounts give
effect to appropriate adjustments for the fair value of assets
acquired, salary expense, amortization of intangibles, and the
issuance of common shares.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ 5,213,000 $ 5,453,000 $ 4,256,000
============ ============= =============
Net loss $(4,309,000) $(4,392,000) $(2,289,000)
============ ============= =============
Per share $ (.65) $ (.82) $ (.45)
============ ============= =============
</TABLE>
F-13
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. - NOTES RECEIVABLE - STOCKHOLDERS
The promissory notes mature through December 2004 with interest at 6%,
payable quarterly, and are collateralized by shares of the Company's common
stock held by the stockholders. A valuation allowance of $186,284 ($150,000 -
1995) was recorded based on management's estimate of the net fair value of the
notes.
NOTE 6. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
Depreciable December 31,
------------------------------------------
Lives 1996 1995
-------------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Land N/A $ 100,000 $ 100,000
Building and leaseholds 18 - 40 years 1,016,300 976,713
Machinery and equipment 5 - 10 years 3,906,895 2,849,630
Furniture and fixtures 5 - 7 years 441,102 400,238
-------------- -------------
5,464,297 4,326,581
Accumulated depreciation
and amortization (1,160,459) (693,933)
-------------- -------------
$4,303,838 $3,632,648
============== =============
Included above is the following property and equipment held under capital
leases:
December 31,
------------------------------------------
1996 1995
---------------- ----------------
Land $100,000 $100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 1,194,961 892,835
------------- -------------
2,020,723 1,718,597
Accumulated depreciation
and amortization (337,002) (192,145)
------------- -------------
$1,683,721 $1,526,452
============= =============
</TABLE>
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $144,857, $129,739 and
$62,406 in 1996, 1995 and 1994, respectively.
F-14
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. - PURCHASED TECHNOLOGY
Purchased technology consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995
---------------- -----------------
<S> <C> <C>
Patents and purchased technology $1,595,574 $226,074
Accumulated amortization (206,207) (78,342)
------------- --------------
$1,389,367 $147,732
============== ==============
</TABLE>
The Company has signed an agreement to sell its rights in Sprintex
technology, a rotary engine development segment asset, to an Australian company
for 100,000 British pounds sterling. At December 31, 1996, a $10,000 deposit is
being held by the Company to be applied at the sale, which was consummated March
1997. The total consideration received was approximately $156,000, which
resulted in a gain of approximately $33,000 which will be recognized in fiscal
1997.
NOTE 8. - OTHER ASSETS
<TABLE>
<CAPTION>
Other assets consists of:
December 31,
-------------------------------------------
1996 1995
---------------- -----------------
<S> <C> <C>
Goodwill $248,389 $124,904
Deferred financing costs 150,873 110,849
Organization costs 103,401 -
Other - 36,420
------------- -------------
502,663 272,173
Accumulated amortization (59,317) (51,795)
------------- -------------
$443,346 $220,378
============= =============
</TABLE>
F-15
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. - NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995
---------------- -----------------
<S> <C> <C>
Note payable, officer/shareholder (a) $70,000 $70,000
Bank revolving promissory note (b) 180,000 377,371
------------- -------------
$250,000 $447,371
============= =============
</TABLE>
(a) Note payable, officer/shareholder - The chairman and principal
stockholder of the Company has advanced funds to the Company under a
secured demand note which bears interest at a rate of 10%.
(b) Bank revolving promissory note - A demand note that bears interest at
a rate of prime plus .50% (8.75% at December 31, 1996). The note is
secured by all the assets of LF and the guarantee of the Company.
NOTE 10. - LONG TERM OBLIGATIONS
Long-term obligations consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------------- -----------------
<S> <C> <C>
Convertible debentures (a) $600,000 $605,000
Capital lease obligations (b) 1,483,806 1,364,871
Term note (c) 1,219,990 1,250,000
Note payable, other (d) 40,000 40,000
Notes payable, officer/shareholder (e) 785,948 658,635
Notes payable, related parties (f) 100,000 225,000
-------------- --------------
4,229,744 4,143,506
Less current maturities 245,187 140,409
-------------- --------------
Total long-term obligations $3,984,557 $4,003,097
============== ==============
</TABLE>
F-16
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - LONG TERM OBLIGATIONS (CONTINUED)
(a) Convertible debentures - In 1996 the Company issued $236,000
($1,005,000 - 1995) of convertible subordinated debentures due July
2000 with interest at 7%. The notes are convertible into common stock
at a rate equal to 80% of the prevailing market price of the Company's
common stock. During 1996, debenture holders converted $741,000
($400,000 - 1995) of outstanding principal to 400,031 (208,102 - 1995)
shares of common stock.
In June 1996, the Company issued $4,000,000 of convertible debentures
due June 1998 with interest at 6%. The notes are convertible into
common stock at a rate equal to 75% of the prevailing market price of
the Company's common stock. Through December 31, 1996, debenture
holders converted $3,500,000 of outstanding principal including
$58,938 of accrued interest to 2,540,962 shares of common stock.
(b) Capital lease obligations - The Company is obligated under a capital
lease for an operating facility. The lease provides for monthly
payments in amounts sufficient to allow for the repayment of the
principal of the underlying tax-exempt bonds together with interest at
rates ranging from 6% to 7.25%. Combined payments of principal and
interest are approximately $9,600 per month during the first ten years
of the lease and $4,600 per month thereafter through June 2012.
The Company is also the leasee of machinery and equipment under
capital leases which expire in 1999 and 2001. The aggregate monthly
payments under these leases amount to approximately $5,408 including
interest at rates ranging from 8.25% to 9.25%.
(c) Term note - A term promissory note due in February 2011 bearing
interest at prime plus 1% (9.25% at December 31, 1996). This note is
secured by substantially all of the assets of LF and is guaranteed by
the Company.
(d) Note payable, other - A convertible note due to an individual which
matures in May 1998 with interest at 10%. The note is convertible at
the rate of $1.38 in principal for each share of common stock.
(e) Notes payable, officer/shareholder - The chairman and principal
stockholder of the Company has advanced funds to the Company under
convertible secured notes which mature from December 1997 to September
1998 with interest at 10%. The notes are convertible at rates between
$1.13 and $2.00 in principal for each share of common stock.
F-17
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - LONG TERM OBLIGATIONS (CONTINUED)
(f) Notes payable, related parties - The wife of the Company's president
has advanced funds to the Company under a convertible secured note in
the amount of $100,000 which matures in April 1998 with interest at
10%. The note is convertible at the rate of $1.75 in principal for
each share of common stock. A family trust related to the chairman of
the Company converted a note with a outstanding principal balance of
$125,000 during 1996 to 66,489 shares of common stock.
Minimum future annual payments of long-term obligations as of December 31,
1996 for each of the next five years and in the aggregate are:
1997 $343,793
1998 1,540,232
1999 426,334
2000 403,033
2001 279,566
Thereafter 2,017,740
------------
Total minimum payments 5,010,698
Less amount representing interest
on capital leases 780,954
------------
4,229,744
Less current maturities 245,187
Total long-term obligations $3,984,557
============
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 Series Preferred Stock. The stock is
issuable in series which may vary as to certain rights and preferences
and has a par value of $.01 per share. The Company agreed to not issue
preferred stock for a period of five years from the date of its
initial public offering without the prior written approval of the
Underwriter.
B. Common Stock
On February 26, 1994, the Board of Directors approved an increase in
the number of authorized shares of common stock from 10,000,000 to
20,000,000 with a par value of $.001.
F-18
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. - STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the acquisition of LF in June 1994, the Company
initially issued 520,000 shares of common stock at a recorded share
price of $1.42 (see Note 4). The terms of the purchase agreement
provide that up to 520,000 shares may be issued if certain earning
levels of LF are achieved. For 1994, an additional 89,502 shares of
common stock were issued in 1995 to the former owners of LF at a
recorded share price of $1.69 per share, which resulted in the
recognition of additional goodwill in the amount of $151,035 pursuant
to the earn-out provisions of the purchase agreement. No additional
shares were earned in 1995. For 1996, an additional 48,631 shares of
common stock were issued in March 1997 to the former owners of LF at a
recorded share price of $3.19 per share, which resulted in the
recognition of additional goodwill to be recorded in fiscal 1997 in
the amount of $155,141 pursuant to the earn-out provisions of the
agreement.
In 1995, $400,000 in principal of subordinated convertible debentures
was converted to 208,102 shares of common stock.
In 1996, $4,241,000 in principal and $58,938 of related accrued
interest of subordinated convertible debentures was converted to
2,940,993 shares of common stock.
Warrants, notes and stock options were exercised in amounts totaling
$317,600 for which 251,980 shares of common stock were issued. In
addition, a license to various technology was acquired from Brown
University in exchange in part for 10,000 shares of common stock
issued at a value of $30,000.
C. Warrants
In connection with two private placement offerings of its common
stock, the Company issued to the placement agent, warrants to purchase
up to an aggregate of 31,804 shares of common stock of the Company.
The placement agent's warrants are exercisable for a five-year term
commencing on the closing date of the initial offering at an exercise
price of 120% of the offering's per share price, or $2.42 per warrant.
No warrants were exercised at December 31, 1996.
In connection with the issuance of bridge financing notes in 1993 and
the conversion of officer/stockholder advances to notes, the
noteholders were issued common stock purchase warrants. The warrants
issued to the officer/stockholder were issued at the rate of one
warrant for each $3 of note principal and exercisable over five years
from the date of issuance at the per share price of $1.73. The
warrants attached to the bridge financing notes were issued at the
rate of one warrant for each $4 of note principal and are exercisable
over five years from the date of issuance at the per share exercise
price of $1.00. At December 31, 1996, there were 117,469 (291,219 -
1995) warrants outstanding.
F-19
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. - STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the Company's public stock offering in 1993,
900,000 warrants were issued and are outstanding at December 31, 1996.
The warrants are exercisable at $6.00 per share through March 1996 and
at $7.00 per share through their expiration in September 1998.
NOTE 12. - STOCK OPTION PLANS
A. Employee Stock Option Plan
The Company has granted options to key employees to purchase shares of
the Company's common stock under stock option plans adopted in 1991,
1994, 1995 and 1996 authorizing the granting of options to purchase an
aggregate of 1,130,000 shares. Such options may be designated at the
time of grant as either incentive stock options or nonqualified stock
options. All options granted are to have a term of ten years or such
shorter term as may be provided at the time of grant, and are
exercisable in equal annual increments as stipulated at the time of
grant.
The following is a summary of stock option activity under these plans
for the past three years:
<TABLE>
<CAPTION>
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
<S> <C> <C>
Outstanding at December 31, 1993 88,905 $2.58
Granted 79,000 1.92
Canceled (67,560) 2.57
-----------
Outstanding at December 31, 1994 100,345 $2.07
Granted 340,000 1.70
Canceled (59,582) 2.22
-----------
Outstanding at December 31, 1995 380,763 $1.72
Granted 100,000 1.75
Exercised (11,744) 1.60
Canceled (8,185) 2.75
------------
Outstanding at December 31, 1996 460,834 $1.71
=======
Exercisable at December 31, 1996 169,169 $1.69
===========
</TABLE>
F-20
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. - STOCK OPTION PLANS (CONTINUED)
The average fair value of options granted under this plan were $1.57
and $1.51 per share for the years ended December 31, 1996 and 1995,
respectively.
Exercise prices for options outstanding at December 31, 1996 range
from $1.44 per share to $2.75. The weighted average remaining
contractual life on the options outstanding at December 31, 1996 is
8.9 years.
In 1996, three non-qualified stock option grants aggregating to
300,000 options were provided to the president of the Company. The
options are exercisable in 100,000 increments if the average closing
price of the Company's common stock exceeds $7.00, $10.00 and $13.00
per share, respectively, for a thirty consecutive day period prior to
December 31, 1999. The options become exercisable if prior condition
is not met in August 2005. The options expire in ten years from the
date of grant. The exercise price of the options are $1.375 per share.
The fair value of options granted under this plan during the year
ended December 31, 1996 is $1.23 per share. No shares were exercisable
at December 31, 1996.
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. 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
would have increased as follows:
1996 1995
----------- ----------
Net loss - as reported $3,905M $2,852M
Net loss - pro forma 4,431M 3,365M
Loss per share - as reported .59 .53
Loss per share - pro forma .67 .63
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:
1996 1995
-------- --------
Expected dividend yield 0.000% 0.000%
Expected stock price volatility 91.830% 94.410%
Risk-free interest rate 6.502% 6.313%
Expected life of options 9.25 Years 10.00 Years
F-21
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. - STOCK OPTION PLANS (CONTINUED)
B. 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
options to purchase up to 50,000 shares of common stock. In 1996, a
total of 5,000 options were granted and 7,500 were forfeited. At
December 31, 1996, there were 22,500 options outstanding (25,000 -
1995) to directors under this plan. These options are exercisable at
prices ranging from $1.375 to $3.00 per share.
NOTE 13. - INCOME TAXES
The income tax provision for the years ended December 31, 1996, 1995 and
1994 consist entirely of state income taxes currently payable.
The Company recognizes deferred taxes using the asset and liability method
and recognizes future tax benefits measured by enacted tax rates attributed to
deductible temporary differences, available net operating tax loss
carryforwards, and tax credits to the extent that realization of such benefits
is more likely than not.
In 1994, LF adopted the provisions of FAS No. 109 concurrent with its
acquisition by Infinite Machines Corp., which transaction also terminated its
Subchapter S status for federal tax purposes. At the acquisition date a
previously unrecognized net deferred tax liability of $148,000, representing the
tax effect attributed to the excess net book value on depreciated assets
reported for tax purposes over amounts reported for financial statement
purposes, was recognizable. Available net operating loss carryforwards on a
consolidated basis, which do not expire before the recognition of the taxable
temporary differences, can be used to offset tax effects of such temporary
differences. Accordingly, the liability has not been recognized.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $10,172,000 and state net operating loss
carryforwards of approximately $4,794,000 which expire through 2011. Due to a
greater than 50% change in stock ownership during 1993, the utilization of net
operating loss carryforwards generated to the date of such change is limited.
F-22
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. - INCOME TAXES (CONTINUED)
At December 31, 1996, the Company also had approximately $51,000 in
research and development and state investment tax credit carryforwards which
will expire in 2011. A deferred tax asset, representing the future benefit
attributed primarily to the available net operating loss carryforwards, in the
amount of approximately $3,854,000 ($2,595,000 - 1995) has 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.
The Company's temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $3,613,000 $2,740,000
Litigation settlement payable 238,000 -
Reserves and other 316,000 98,000
-------------- --------------
4,167,000 2,838,000
Deferred tax liabilities:
Property and equipment (313,000) (243,000)
-------------- --------------
Net deferred tax asset 3,854,000 2,595,000
Valuation allowance (3,854,000) (2,595,000)
-------------- --------------
Net deferred $ - $ -
============== ==============
</TABLE>
NOTE 14. - EMPLOYEE PENSION AND 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 1996, a $10,000 ($10,000 - 1995)
contribution was made to the profit-sharing plan.
In 1994 the Company adopted an executive incentive performance plan for
employees qualifying as corporate executives. Incentive awards are payable in
cash or common stock of the Company as determined by the employee. The maximum
award attainable under the plan cannot exceed between 50% to 100% of the
employee's base salary. In 1996 and 1995, there were no earnings under the plan
($5,000 - 1994).
F-23
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. - COMMITMENTS
A. Lease Commitments
The Company utilizes certain equipment, vehicles and facilities under
operating leases which expire at various dates through 2002. Rent
expense under operating leases for the years ended December 31, 1996,
1995, and 1994 was approximately $207,000, $202,000, and $142,000,
respectively.
The minimum operating lease payments required to be paid subsequent to
1996 are as follows:
1997 $107,403
1998 108,255
1999 93,333
2000 69,690
2001 69,083
Thereafter 15,600
-------
$463,364
========
B. Employment Contracts
The President and Chief Operating Officer of the Company is covered
under an employment agreement with a term expiring in 2000. The
agreement provides for minimum aggregate annual salary of $175,000, a
bonus payment of $75,000 for fiscal 1996, and, under certain
circumstances, for a severance payment based upon a multiple of past
annual compensation.
The Chief Executive Officer of the Company is covered under an
employment agreement with a term expiring in 1998. The agreement
provides for minimum aggregate annual salary of $150,000, and, under
certain circumstances, for a severance payment of the greater of the
remaining salary obligation through expiration of the agreement or
$150,000.
F-24
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. - COMMITMENTS (CONTINUED)
C. Litigation Settlement
In December 1996, a jury verdict was rendered in Superior Court in the
State of California, Yolo County in the action entitled Moller
International, Inc. (Moller) v. Infinite Machines Corp. and Carle C.
Conway, assessing compensatory damages against the Company in the
amount of $1,250,000 and against its chairman in the amount of
$100,000. The proceedings involved allegations that the Company
breached its rotary engine development contract with Moller. The
Company suspended its rotary engine development efforts in 1995 (see
Note 2). On April 1, 1997, the Company entered into an accord for
satisfaction of judgment (the Accord) with Moller whereby the Company,
in satisfaction of its assessment, will pay Moller $350,000 upon
execution of the Accord, and will execute a promissory note in the
amount of $100,000 to be payable commencing May 1, 1998 through
September 1, 1999, in monthy installments of $7,019 including interest
at 10% per annum. The note will be collateralized by the personal
guarantee of the Company's chairman. The agreement also requires the
Company to transfer certain equipment to Moller with a net book value
of approximately $24,000. In addition, the Company's chairman
transferred to Moller common stock of Moller and stock options to
purchase stock in Moller owned by him. In consideration of the
transfer of the common stock and options, the Company issued to the
chairman approximately 160,000 shares of stock in the Company which
was recorded at a discounted value of $175,000. The accompanying
financial statements reflect the aggregate consideration given to
satisfy the judgment in the amount of $649,000.
NOTE 16. - RELATED PARTY TRANSACTIONS
Interest expense incurred under notes issued to the Company's chairman and
a family trust and the wife of the Company's CEO amounted to $99,907, $68,325,
and $7,527 for the years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 17. - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
1996 1995 1994
----------- --------- -----------
Interest $407,800 $259,733 $122,219
========== ========= =========
Taxes $ 6,773 $ 7,226 $ -
========== ========= =========
F-25
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. - SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
During 1996, convertible debentures in the amount of $4,366,000 were
converted in to 3,007,483 shares of common stock of the Company. In addition,
accrued interest on a note payable to one of the Company's officers was
converted into principal in the amount of $51,859. The Company also entered into
a capital lease obligation for the acquisition of equipment in the amount of
$250,000. The Company also refinanced short- and long-term obligations in the
amount of $1,627,370. The Company issued 10,000 shares of common stock valued at
$30,000 for acquisition of a technology license from Brown University.
During 1995, convertible debentures in the amount of $400,000 were
converted in to common stock of the Company. Accrued interest on a note payable
to one of the Company's officers was converted in to principal in the amount of
$9,636. In addition, the Company's interest in the common stock of FTD was sold
in exchange for a term note in the face amount of $550,000.
NOTE 18. - INDUSTRY SEGMENTS
In 1994, the Company began operating in three business segments following
the acquisition of its subsidiaries: Rotary Engine Development, Laser Services
and Engineering Consulting. Operations in the Engine Development segment involve
development of high performance multifuel rotary engines, and research and
market development. Operations in the Laser Services segment involve contract
laser machining services and laser technology consulting services. Operations in
the Engineering Consulting segment involve industrial engineering design and
development consulting.
In 1995, following the decision to cease further development and full scale
marketing efforts of the rotary engine segment and the execution of the
agreement to sell its interest in FTD, which represented the Engineering
Consulting segment, the Company had been essentially restructured to one primary
segment, Laser Services.
In 1996, the Company began operating in two new segments following the
acquisition and creation of the two new subsidiaries: Rapid Tooling and
Manufacturing and Photonic Materials Processing. Operations in the Rapid Tooling
and Manufacturing segment involve marketing proprietary rapid mold building
techniques developed by the Advanced Technology Group of LF. Operations in the
Photonic Materials Processing segment involve commercialization and expansion of
platform photonic technologies; LaserPaint(TM), a patented discovery which
allows almost any material to be a generator of laser light; direct laser micro
patterning of glass; and "Quantun Dot Phosphors" which holds promise for better
high brightness, high definition video displays.
A summary of selected consolidated information for the Company's industry
segments during 1996 and 1995 is set forth as follows:
F-26
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. - INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Rotary Rapid
Engine Laser Engineering Photonic Tooling and
Development(1) Services(3) Consulting Materials Manufacturing Eliminations Consolidated
----------- -------- ---------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
----
Sales to unaffiliated
customers $ - $ 5,080,207 $ - $ 46,959 $ - $ - $ 5,127,166
Intersegment sales - 36,650 - - - (36,650) -
----------- ------------ ------------ ------------ --------- ----------- -----------
Total revenue $ - $ 5,116,857 $ - $ 46,959 $ - $ (36,650) $ 5,127,166
=========== ============ ============ ============ ========= =========== ===========
Operating income
(loss) $ (95,797) $ (2,518,080) $ - $ (665,188) $ (110,537) $ 241,317 $ (3,148,285)
=========== ============ ============ ============ ========= =========== ===========
Identifiable assets $ 199,198 $ 12,065,067 $ - $ 2,883,781 $ - $ (6,488,377) $ 8,659,669
=========== ============ ============ ============ ========= =========== ===========
Depreciation and
amortization $ 16,087 $ 976,561 $ - $ 172,678 $ - $ 14,136 $ 1,179,462
=========== ============ ============ ============ ========= =========== ===========
Capital expenditures $ - $ 309,579 $ - $ 347,485 $ - $ - $ 657,064
=========== ============ ============ ============ ======== =========== ===========
1995
----
Sales to unaffiliated
customers $ 25,000 $ 4,081,676 $ 945,690 $ - $ - $ - $ 5,052,366
Intersegment sales - - 1,500 - - (1,500) -
----------- ------------ ------------ ------------ --------- ----------- -------
Total revenue $ 25,000 $ 4,081,676 $ 947,190 $ - $ - $ (1,500) $ 5,052,366
Operating income ----------- ------------ ------------ ------------ --------- ----------- -------
(loss) $ (2,735,682) $ 242,223 $ (46,465) $ - $ - $ (23,343) $ (2,563,267)
----------- ------------ ------------ ------------ --------- ----------- -------
Identifiable assets $ 393,195 $ 5,251,639 $ 485,968(2) $ - $ - $ - $ 6,130,802
=========== ============ ============ ============ ========= =========== ===========
Depreciation and
amortization $ 320,648 $ 330,457 $ 53,840 $ - $ - $ 23,343 $ 728,288
=========== ============ ============ ============ ========= =========== ===========
Capital expenditures $ 307,849 $ 600,861 $ - $ - $ - $ - $ 908,710
=========== ============ ============ ============ ========= =========== ===========
</TABLE>
(1) Includes parent holding company, 1995.
(2) Represents amounts receivable from former subsidiary and purchaser of
former subsidiary.
(3) Includes parent holding company, 1996.
F-27
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. - FOURTH QUARTER ADJUSTMENTS
The fourth quarter for the year ended December 31, 1996 reflected net
adjustments which decreased the operating results of the Company by
approximately $1,689,000. Approximately $649,000 is attributed to a litigation
settlement, $29,000 was charged off in recognition of inventory adjustments,
notes and other receivables were adjusted by a valuation allowance of $504,000,
a bonus was accrued to the President of the Company in the amount of $75,000,
and approximately $432,000 of deferred costs were charged to expense upon
conversion of debentures.
The fourth quarter for the year ended December 31, 1995 reflected net
adjustments which decreased the operating results of the Company by
approximately $1,054,000. Approximately $592,000 is attributed to the decision
to cease development of the rotary engine, $60,000 was charged off in
recognition of inventory adjustments, deferred costs related to new ventures
amounting to $160,000 were charged off, notes receivable was adjusted by a
valuation allowance of $150,000, $52,000 of deferred costs were charged to
expense upon conversion of debentures, and the sale of the subsidiary resulted
in a loss of $40,000.
There were no material adjustments recognized in the fourth quarter of
fiscal 1994.
NOTE 20. - SUBSEQUENT EVENT
In March 1997, the Company issued $1,100,000 of 6% convertible debentures
due December 1998. The notes are convertible into common stock at a rate equal
to 73% of the prevailing market price of the Company's common stock.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
April 10, 1997 on its behalf by the undersigned, thereunto duly authorized.
INFINITE MACHINES CORP.
By: /s/ Clifford G. Brockmyre
------------------------------------
Clifford G. Brockmyre, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ------ -----
<S> <C> <C>
/s/ Carle C. Conway Director, Chairman of the Board and April 10, 1997
- ---------------------------------- Chief Executive Officer
Carle C. Conway
/s/ Daniel T. Landi Chief Financial and Accounting April 10, 1997
- ---------------------------------- Officer
Daniel T. Landi
/s/ Robert J. Sherwood Director April 10, 1997
- ----------------------------------
Robert J. Sherwood
/s/ Michael Smith Director April 10, 1997
- ----------------------------------
Michael Smith
/s/ Clifford G. Brockmyre Director, President and Chief April 10, 1997
- ---------------------------------- Operating Officer
Clifford G. Brockmyre
</TABLE>
EXHIBIT 21. SUBSIDIARIES OF THE COMPANY
HGG LASER FARE, INC.
One Industrial Drive South
Smithfield, RI 02917
SPECTRA SCIENCE CORP.
155 South Main Street
Providence, RI 02903
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-KSB, 12/31/96 and is qualified in it's entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,216,392
<SECURITIES> 0
<RECEIVABLES> 770,589
<ALLOWANCES> 29,050
<INVENTORY> 138,893
<CURRENT-ASSETS> 2,247,654
<PP&E> 5,464,297
<DEPRECIATION> 1,160,459
<TOTAL-ASSETS> 8,659,669
<CURRENT-LIABILITIES> 1,997,051
<BONDS> 4,479,744
0
0
<COMMON> 8,694
<OTHER-SE> 2,092,776
<TOTAL-LIABILITY-AND-EQUITY> 8,659,669
<SALES> 5,127,166
<TOTAL-REVENUES> 5,127,166
<CGS> 3,163,621
<TOTAL-COSTS> 3,163,621
<OTHER-EXPENSES> 149,307
<LOSS-PROVISION> 584,898
<INTEREST-EXPENSE> 421,910
<INCOME-PRETAX> (3,297,592)
<INCOME-TAX> 2,384
<INCOME-CONTINUING> (3,299,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,299,976)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
