SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 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, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21816
INFINITE GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1490422
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2364 Post Road, Warwick RI 02886
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (401) 738-5777
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
- --------------------- --------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will 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 issuer's revenues for the year ended December 31, 1997 were $5,448,575.
As of March 13, 1998 there were 12,616,483 of outstanding shares of common
stock, par value $0.001 per share. The aggregate market value of the voting
stock of the registrant held by non-affiliates of the registrant on March 13,
1998, based on the average bid and asked price on such date was approximately
$16.6 million. The foregoing calculation assumes that only officers and
directors of the registrant were affiliates.
DOCUMENTS INCORPORATED BY REFERENCE: None
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 risk 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 judgements
with respect to, among other things, future economics, 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 the representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
General
Infinite Group, Inc, formerly known as Infinite Machines Corp. (the
"Company" or IGI") does business in the fields of laser material processing,
advanced manufacturing methods and laser-application technology. IGI's wholly
owned operating subsidiary Laser Fare, Inc., has two divisions, the Advance
Technology Group ("ATG"), engaged in contract research and development, and
ExpressTool, ("ExpressTool"), which was created to exploit new rapid tooling
technology. The Company is also the largest shareholder of Spectra Science Corp.
("Spectra Science"), which was formed in August 1996.
HGG Laser Fare, Inc.
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 at Laser Fare. Key staff members and
Laser Fare itself 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
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power generation industries. Customers include General Electric Corporation,
United Technologies Corporation, Allied Signal Corporation, Polaroid, Stryker
Medical Corp. and Center Laboratories.
While Laser Fare is primarily engaged in contract laser material
processing such as laser machining, welding, engraving and marking, Laser Fare
also is actively involved in developing new applications for industrial lasers.
Laser Fare has 19 high powered laser machining stations which are used to
perform a wide variety of manufacturing processes and are capable of laser
operations requiring four and five-axis manipulation. Work done includes, but is
not limited to, welding and drilling of gas turbine blade assemblies (Laser Fare
is certified by major gas turbine producers and also by the FAA for repairs of
gas turbine engine components), 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. Laser Fare also
provides a variety of value-add services that include assembly, heat treating,
coating, testing, and inspection. On October 23, 1997, Laser Fare was awarded a
two-year contract in excess of $5 million by Dey Laboratories to manufacture and
supply for retail and hospital customers, Astech Peak Flow Meters, which
measures lung capacity for asthma patients.
New laser machines were acquired and others upgraded during 1997 providing
Laser Fare with sufficient equipment to support planned near-term requirements
as well as expand the scope of services it provides to existing and new
customers.
Laser Fare operates in a modern industrial building of 17,000 square feet
in Smithfield, Rhode Island under a capital lease agreement with the Rhode
Island Industrial Board. Laser Fare leases 8,000 additional square feet of
manufacturing space in an adjacent building. An additional 5000 square feet of
facilities are being planned for 1998 to increase operating capacity.
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 competes based upon the quality of its
services, 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 however there is no assurance that this will occur.
Advanced Technology Group
Advanced Technology Group, ("ATG"), was created to take advantage of the
technical know-how of Laser Fare in the application of lasers toward solution of
industrial requirements. Since its inception in 1993, ATG has been performing
contract research and development for industrial customers.
As a result of a program funded by a major toy manufacturer that was
successfully completed in 1996, ATG developed practical methods to reduce the
time and expense required to build molds for plastic injection molding. Two
processes were developed to build new production quality molds in significantly
less time than current industry procedures. The major toy manufacturer is now
using one of the methods to build production molds. As part of ATG's contract,
ATG gained exclusive rights to all technology developed under the contract for
use in all fields other than toys, games and infant furniture. ExpressTool was
created to exploit these technologies.
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During the second quarter of 1997, ATG was awarded a $500,000 follow-on
contract by the United States Air Force/Phillips Laboratory, Kirkland AFB, New
Mexico. This contract focuses on the continued development of direct materials
processing applications and the commercialization of novel high power,
high-brightness Laser diode technology, jointly developed by Laser Fare and the
A. F. Joffe Technical Institute, St. of Petersburg, Russia. The grant will
enable Laser Fare to complete the commercialization of new high brightness diode
technology for a variety of applications such as marking, mirco-welding,
micro-machining and desktop rapid prototyping and machining. This work is also
providing ATG with increasing access to solid state laser technology within the
Commonwealth of Independent States (the former Soviet Union). During the third
quarter of 1997, ATG entered into a six-month phase I contract with Molecular
Geodesics Inc. ("MGI"), of Cambridge, MA. MGI was awarded a $6.4 million Defense
Advanced Research Project Administration (DARPA) contract to develop "bioskins"
for the 21st century soldier for protection against chemical and biological
weapons. ATG will use rapid prototyping techniques to fabricate structures for
these "bioskins". Under the phase I contract, ATG will receive $5,000 per month
for its services, and received options to acquire 10,000 shares of MGI Common
Stock.
ATG is also involved in several smaller early stage programs.
ExpressTool
ExpressTool was formed to commercialize proprietary technology which
permits molds for plastic injection moldings to be more productive than molds
made by conventional techniques. In October 1997, ExpressTool was awarded a
contract in excess of $450,000 by Magnetec(R) Corporation, a wholly owned
subsidiary of Transact Technologies Inc., (NASDAQ-TACT), to produce components
for a new generation of high speed printers. ExpressTool has utilized several of
its proprietary technologies in rapid tooling to assist in the acceleration of
Magnetec's(R) product introduction. ExpressTool is building molds, using its
proprietary processes, for a number of Fortune 500 industrial companies. Its
technical capabilities allow molds, mold cavities and other types of tools to be
made more rapidly than is possible with traditional methods. It has been found
that ExpressTool's molds, incorporating proprietary cooling techniques, permit
more rapid molding cycles than conventional tools, a major benefit for the
industrial user. This rapid tooling technology was developed over the last few
years under a collaborative research and development agreement with a major
industrial company. Laser Fare has exclusive rights to the technology for all
industries other than the markets its industrial partner competes in. Management
has been searching for organizations having the needed capabilities that can be
combined, through acquisition or some other business arrangement, to integrate
ExpressTool's new technology with an established infrastructure and business
base. These efforts have resulted in the establishment of a responsive network
of competencies, either owned or strategically aligned, which allows ExpressTool
to participate in projects having a wide range of scope and complexity. This
planned outcome is the foundation and platform for ExpressTool growth. It is
anticipated that sales revenues in 1998 will increase rapidly with further
customer acceptance, but there is no assurance these results will occur.
Spectra Science Corp.
The Company owns 2.9 million shares of Spectra Science Corp. ("SSC" or
Spectra") stock and is its largest shareholder. Spectra was created in August
1996 to commercialize technologies licensed from Brown University on an
exclusive worldwide basis. One of these technologies, LaserPaint(TM), technology
allows common, disordered materials to be generators of laser light. Spectra
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currently has specific product development programs in three major areas, these
are: medical and pharmaceutical, display, and identification anti-counterfeiting
technologies. Within each of these broad areas are a number of specific markets
with products in various stages of development.
In the medical and pharmaceutical area, Spectra has created a number of
products and product opportunities, which are leveraged off the LaserPaint(TM)
technology. Spectra has developed a functional optical excitation platform for
the photodynamic therapy of external conditions such as psoriasis, Kaposi
sarcoma, acne, and some skin cancers. This wavelength versatile system, which
uses disposable plastic LaserPaint(TM) disks, has been validated with three
major drugs using in-viro trials at both the Ontario Cancer Institute and the
Long Island Jewish Medical Center. Currently Spectra is examining the
possibility of a catheter-based device to target the FDA approval procedures for
esophageal cancer and Barret's esophagus.
In the area of displays, Spectra has adopted the strategy of only
developing products through external funding. This approach has to date been
successful and has attracted nearly $1 million of funding from state and federal
sources. Most recently, Spectra was awarded a Samuel Slater Award for $100,000
to continue the development of a Digital Laser Projection Display with Brown
University.
The area of identification technology represents a significant number of
separate commercial opportunities, many of which share a common product
development plan. The identification anti-counterfeiting technology area is
comprised of two distinct areas of functionality, product authentication and
coding. In the product authentication segment, Spectra is developing products
which authenticate items including luxury cosmetics, apparel and bank notes.
Spectra has developed with its R&D partner, Alkahn Labels Inc., a woven label
containing LaserThread(TM) for use with high-end apparel such as cravats and
scarves. In addition, Spectra has developed identification prototype programs
using LaserPaint(TM) a number of highly counterfeited products such as lipstick
and toys. These products and the complimentary reader devices are currently
being introduced to a number of luxury product manufacturers in France. On a
parallel track, Spectra is in discussions with Thomas de la Rue, the world's
largest security printer regarding a joint venture and licensing opportunity in
this area.
In the area of secure document authentication, Spectra is working with
Crane & Co. to persuade the U. S. Bureau of Engraving and Printing and the U. S.
Federal Reserve Bank to adopt LaserPaint(TM) technology as a high level covert
machine readable feature for U. S. currency. Since Spectra's entry into a
license agreement with Crane, a great deal of progress towards this end has been
made. LaserPaint(TM) technology is currently positioned among three other
alternatives for adoption in late 1998.
Product development in the coding technology area has focused on two major
areas, textile identification and combinatorial chemistry. In the area of
textile identification, Spectra internally developed reader systems as well as
focused on product development through strategic partnerships. Spectra has
recently entered into an agreement with Lavatec Inc., a leading supplier of
laundry equipment to the textile rental industry worldwide. Lavatec has a
world-recognized expertise in material handling systems and has agreed to
internally fund a critical component of Spectra's textile classification system.
In addition, Spectra has formalized an agreement with General Linen and Uniform
of Detroit, Michigan to act as a beta-site for the system. General Linen and
Uniform as a well recognized rental textile operation with high visibility in
the U.S., is an ideal platform to help Spectra communicate the documented
performance of the system to the rental industry.
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In order to both control the R&D process of incorporating LaserPaint(TM)
in napery and garments, as well as commercially benefit on another side of the
commercial flow, Spectra acquired a textile product manufacturing division in
late November 1997. This division known as Millennium Textiles, and it is based
in Bremen, GA. Beginning in the third quarter of 1997, all Millennium Textile
products will incorporate LaserThread(TM) in anticipation of the completion of
the sorting system by year-end.
In the area of combinatorial chemistry, Spectra has recognized the
potential use of LaserPaint(TM) technology for coding solid state supports used
for small molecule synthesis. By providing as many as 100,000 codes with unique
numbers which can be rapidly and accurately read in fluid environments,
LaserPaint(TM) technology can be used with well know mix and split techniques to
greatly accelerate the parallel synthesis of lead drug compounds. Spectra is
currently in licensing negotiations with a leader in combinatorial chemistry,
regarding the development of such a system. Should a deal not be consummated in
the near future, Spectra will consider other partners, or moving the technology
independently and vertically as it has with its PDT effort.
Employees
As of December 31, 1997, the Company had 90 full-time employees, including
three executive officers. 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 are represented by a collective bargaining
agreement.
ITEM 2. PROPERTIES
Infinite Group leases approximately 5,700 square feet of office &
laboratory space in Warwick, RI for its corporate offices and its ExpressTool
subsidiary for a term ending in July 1998. The annual rent for the premises is
$68,400. Due to the expansion of ExpressTool operations, the Company plans to
exercise the "First Option Term" covering the period from August 1, 1998 through
July 31, 2001. The annual rent for the extension term will be $79,800.
Consequently, corporate has entered into a new five-year lease of approximately
2,223 square feet for its corporate offices for a term starting March 1, 1998
and ending March 2002. The fixed annual rent for the premises is $31,122 for the
first year, $33,342 for the second and third years and $35,568 for the fourth
and fifth years.
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 6.0% to 7.25%. Combined annual payments of principal and
interest are approximately $115,200 during the first ten years of the lease and
$55,200 per year thereafter through June 2012. In addition, as of June 1996,
Laser Fare began renting an additional 8,000 square feet of manufacturing space
at rental rate of $2200 per month. Due to increased demand, an additional 5,000
square feet will be needed in the near future. The Company believes that such
space will be available on terms acceptable to it.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material, threatened or pending
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 12, 1997, the Company held its 1997 Annual Meeting of
Stockholders pursuant to notice. At such meeting, the following directors were
elected to hold such office until the 1998 Annual Meeting of Stockholders or
until their successors are duly elected and qualified: Clifford G. Brockmyre,
Carle C. Conway, Robert J. Sherwood and Michael S. Smith (receiving 11,957,729
votes in favor, with 62,272 votes opposed and 6,900 abstentions) Further, the
Company's 1997 Stock Option Plan was approved (11,540,184 votes in favor,
450,331 votes opposed and 39,590 abstentions) and the appointment of Freed
Maxick, Sachs & Murphy, P. C. as the company's auditors for the 1997 fiscal year
was ratified (11,859,994 votes in favor, 140,807 votes opposed and 26,100
abstentions).
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER 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.
COMMON STOCK High Low
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1996
First Quarter 3 3/4 2 /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
1997
First Quarter 2 1/16 1 9/16
Second Quarter 2 1/8 1 7/8
Third Quarter 1 11/16 1 3/16
Fourth Quarter 1 15/16 21/32
Common Stock Purchase Warrants
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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
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1997
First Quarter 9/32 1/8
Second Quarter 13/32 3/32
Third Quarter 9/16 3/8
Fourth Quarter 1/4 1/32
As of March 13, 1998, the closing bid price for the Company's Common Stock
and Warrants, as reported by NASDAQ, was $1.31 and $0.125 respectively. As of
March 13, 1998, the Company had approximately 112 stockholders and 33 warrant
holders of record, respectively.
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.
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PART II
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Infinite Group, Inc. (formerly known as Infinite Machines Corp.) (the
"Company" or IGI") does business in the fields of laser material processing,
advanced manufacturing methods and laser-application technology. IGI's wholly
owned operating subsidiary Laser Fare has two divisions, Advance Technology
Group ("ATG"), engaged in contract research and development, and ExpressTool,
(ExpressTool"), created to exploit new rapid tooling technology. The Company is
also the largest shareholder of Spectra Science Corp. ("Spectra"), which was
formed in August 1996.
During 1997, the Company's ownership interest in Spectra decreased from
66% at December 31, 1996 to 34% at December 31, 1997. (See Notes 2 and 5 --Notes
to Consolidated Financial Statements.) As a result of this decrease in ownership
interest, Infinite retroactively applied the equity method for accounting to its
investment in Spectra as of January 1, 1997. The financial position and results
of operations of Spectra as of and for the year ended December 31, 1996 were
consolidated with the Company. These financial statements have not been restated
to apply the equity method. Had the equity method of accounting been
retroactively applied to 1996, there would have been no impact on the Company's
net loss and loss per share. At December 31, 1996, Spectra's financial condition
reflected working capital of approximately $772,000 and stockholders' equity of
approximately $2,672,600, of which Infinite owned approximately 66%. As a result
of the foregoing, the following discussions of liquidity and capital resources
and comparison of the year ended December 31, 1997 have been presented
separately for Infinite Group (excluding Spectra) and Spectra.
Prior to December 31, 1995, the Company's principal business operations
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 operations continue to be profitable on a stand-alone basis.
While primarily engaged in contract laser material processing, Laser Fare
develops new applications for industrial lasers. The facilities 18 high powered
lasers are capable of performing a wide variety of manufacturing processes and
is capable of laser operations requiring four and five-axis manipulation.
Approximately 75 percent of Laser Fare's sales comes from customers in the
medical device, aerospace and power generation industries. Customers include
General Electric, United Technologies, Allied Signal, Polaroid and Stryker
Medical. Laser Fare also provides a variety of value-added services, that
include assembly, heat treating, coating, testing, and inspection. In October
1997, Laser Fare was awarded a two-year contract in excess of $5 million by Dey
Laboratories to manufacture and supply for retail and hospital customers, Astech
Peak Flow Meters which measure lung capacity for asthma patients. Laser Fare's
facilities and equipment can support near term demands but will require
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approximately 5,000 additional square feet of space to accommodate anticipated
new demand, as well as expand the scope of services it provides to existing and
new customers.
Advanced Technology Group
As discussed in the Business section, the Advanced Technology Group is
continuing work on a follow-on Phase II contract with the United States Air
Force/Phillips Laboratory, Kirkland AFB, New Mexico. This contract is focusing
on the commercialization of high power diode lasers for direct material
processing applications. Work is progressing on schedule and may lead to the
introduction of high power, high brightness lasers in a wide range of commercial
applications including marking, micro-welding, micro-machining, desktop
machining and rapid prototyping. This work is also providing ATG with increasing
access to solid state laser technology within the Commonwealth of Independent
States (former Soviet Union). Additionally, ATG entered into a six month Phase I
contractual relationship with Molecular Geodesics Inc. ("MGI"), of Cambridge,
MA. MGI was awarded a $6.4 million Defense Advanced Research Project
Administration (DARPA) contract to develop "bioskins" for the 21st century
soldier for protection against chemical and biological weapons. ATG will use
ExpressTool's rapid prototyping techniques to fabricate structures for these
"bioskins". Under this Phase I contract, ATG will receive $5,000 a month for six
months for its services, and received options to acquire 10,000 shares of MGI
Common Stock.
ExpressTool
ExpressTool was formed to commercialize proprietary technology which
permits molds for plastic injection moldings to be more productive than molds
made by conventional techniques. 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. In October 1997, ExpressTool was awarded a contract in excess of $450,000
by Magnetec(R) Corporation, a wholly owned subsidiary of Transact Technologies
Inc., (NASDAQ-TACT), to produce components for a new generation of high speed
printers. ExpressTool will utilize several of its proprietary technologies in
rapid tooling to assist in the acceleration of Magnetec's(R) product
introduction. Additionally, ExpressTool is building molds using its proprietary
processes for a number of Fortune 500 industrial companies. ExpressTool's molds
have been found to permit more rapid molding cycles than conventional tools, a
major benefit for the user. Management is currently searching for organizations
having the needed capabilities that can be combined, through acquisition or some
other business arrangement, to integrate ExpressTool's new technology with
established infrastructure and business base.
Spectra Science Corp.
Spectra was created to commercialize LaserPaint(TM) technology licensed
from Brown University on an exclusive worldwide basis. LaserPaint(TM) technology
allows common disordered materials to be generators of laser light. Infinite
Group owns 2.9 million shares of Spectra stock and is the largest shareholder of
this company.
Spectra currently has specific product development programs in three major
areas. These are: medical and pharmaceutical, display, and identification
anti-counterfeiting technologies.
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In the medical and pharmaceutical area, Spectra has developed a functional
optical excitation platform for the photodynamic therapy of external conditions
such as psoriasis, Kaposi sarcoma, acne, and some skin cancers. This wavelength
versatile system, which uses disposable plastic LaserPaint(TM) disks, has been
validated with three major drugs using in-vivo trials at both the Ontario Cancer
Institute as well as the Long Island Jewish Medical Center. Spectra currently is
examining the possibility of a catheter-based device to target the FDA approval
procedures for esophageal cancer and Barret's esophagus.
In the area of displays, Spectra has decided on only developing products
with external funding. To date, Spectra has attracted nearly $1 million of
funding from state and federal sources. Most recently, Spectra was awarded a
Samuel Slater Award for $100,000 to continue its development of Digital Laser
Projection Display with Brown University. This funding, as well as widespread
visibility of the technologies through invited seminars and external press, will
assist in the product incubation process, as well as increase the chances of
attracting a corporate partner to join in specific display product development.
The identification technology opportunity splits out into two distinct
areas of functionality, product authentication and coding. The product
authentication segment is developing products which authenticate items for
luxury cosmetics, apparel and banknotes. Spectra has developed with its R&D
partner, Alkahn Labels Inc., a woven label containing LaserThread(TM) for use
with high-end apparel. Additionally, Spectra has prototyped a number of highly
counterfeited products, such as lipstick containers and toys out of Laser
Paint(TM) materials. These prototype products have been introduced to a number
of luxury product manufactures in France. In the area of secure documents,
Spectra continues to work with Crane &: Co. to convince the U. S. Bureau of
Engraving and Printing and the U. S. Federal Reserve Bank to adopt
LaserPaint(TM) technology as a high level convert machine readable feature for
U. S. currency. On a parallel track, Spectra is in discussions with Thomas de la
Rue, the world's largest security printer, regarding a joint venture and
licensing opportunity in this area.
In the area of textile identification, Spectra has internally developed
reader systems as well as focused on product development through strategic
partnerships. Spectra recently entered into an agreement with Lavatec Inc., who
is a leading supplier of laundry equipment to the textile rental industry, whose
expertise in material handling systems has worldwide recognition. Lavatec will
fund a critical component of Spectra's textile classification system. In
addition, Spectra also formalized an agreement with General Linen and Uniform of
Detroit, Michigan to act as a beta-site for Spectra's textile classification
system. General Linen and Uniform being well recognized in the rental textile
with high visibility in the U. S. is an ideal platform to help Spectra
communicate the documented performance of the system to the rental industry.
Liquidity
Infinite Group
Infinite Group has several projects which may result in near term
increases in orders. To fulfill substantially increased orders additional
financing for facilities, equipment purchases and increased working capital will
be required. The Company is currently pursuing various approaches for funding
these potential requirements.
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In 1996 the Company completed a financing through the sale of $4,000,000
of Subordinated Convertible Debentures. The Debentures bore interest at the rate
of 6% per annum. The Debentures were 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, 1997, such Debentures
had been converted into 3,040,035 shares. In February 1997, the Company
completed financing through the sale of $1,100,000 of Subordinated Convertible
Debentures. The Debentures bore interest at the rate of 6% per annum. The
Debentures were 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. Through December 31, 1997, such debentures had been converted into
1,109,744 shares.
In addition, through 1997, certain Company shareholders and others have
provided funding through convertible promissory notes totaling $1,110,605. As of
December 29, 1997, $140,000 of principal amount had been converted into 150,433
shares. Subsequent to December 31, 1997, an additional $900,605 of principal
amount was converted into 900,605 shares.
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 operating subsidiary, HGG Laser Fare, Inc., commercialization
of the technology being developed and marketed by ExpressTool, Inc., continued
control in general and administrative costs, and raising additional debt and/or
equity capitol. 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.
Spectra Science
Spectra is currently involved in research and development projects which
will require substantial working capital to commercialize resultant technology.
During 1997, Spectra issued 881,000 shares of Series A preferred stock,
1,653,665 shares of Series B preferred stock, and 1,777,778 shares of Series C
preferred stock for aggregate consideration of $7,125,478, net of issuance
costs. At December 31, 1997, Spectra has approximately $5.4 million in cash
available to be used in its operation.
LIQUIDITY AND CAPITAL RESOURCES
Infinite Group
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. Since its inception to
December 31, 1996, an aggregate of approximately $15 million, net of expenses,
has been provided by debt and equity offerings. As of December 31, 1997, the
Company had cash, cash equivalents and marketable debt securities totaling
approximately $541,653 available for its working capital needs and planned
capital asset expenditures.
While revenues were realized in fiscal 1997 on a consolidated basis, the
majority of revenues were attributed to Laser Fare. Although improved revenue
are being realized by the Company and expense containment measures have and will
continue to be implemented, management is, nonetheless, pursuing 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
11
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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 at satisfactory terms and
that it will be sufficient to fund operations and scheduled debt repayment.
Spectra Science
Spectra has financed its product development activities through a series
of private placements of preferred stock. Since its inception in August 1996,
through December 31, 1997, Spectra has been capitalized by a series of equity
offerings totaling approximately $10,420,000, net of offering costs. Although
commercialization of its optically-based technologies currently in development
including identification technologies, display technology and photomedicine is
anticipated during 1998, there will be expenditures required to continue
research and development activities. However, there is no assurance that
significant commercialization of any of the technologies will occur in 1998. At
December 31, 1997, Spectra had cash and cash equivalents of approximately
$5,421,000, which Spectra's management feels will meet all of the funding
requirements through 1998, however Spectra will continue to pursue financing
through additional private placement of preferred stock.
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, 1997 were approximately $5,335,446 and
provided a gross profit for the period of approximately $2,037,400.
ExpressTool
Revenues from initial molds produced using its proprietary processes for
the year ended December 31, 1997 were approximately $113,130 and provided a
gross profit of $34,822.
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 and $2,736,000 during 1996 and
1995, respectively.
Comparison of the Years Ended
December 31, 1997 and 1996
INFINITE GROUP
In 1997, consolidated revenues were $5,448,575 on cost of sales of
$3,376,353 resulting in a gross profit in the amount of $2,072,222. Revenues and
gross profit for the prior period were $5,080,207and $1,922,904, respectively.
12
<PAGE>
Research and development expenses increased during 1997 to $770,758 from
$125,354 in 1996, or an increase of $645,404 or 615%. The increase is attributed
to the Company's ExpressTool subsidiary's continued investment in rapid tooling
technology, research and development.
General and administrative expenses decreased to $1,820,663 in 1997 from
$2,113,655 in 1996, a decrease of $292,992 or 14%. The decrease is primarily
attributed to the reduction of litigation legal expense and continued cost
reduction by management.
Selling expenses of $470,723 in 1997 were attributed primarily to Laser
Fare's materials processing marketing activity, including trade shows,
conventions, brochures and other print materials. Selling expenses of $511,208
in 1996 were primarily attributed to similar activities at Laser Fare.
For the year ended December 31, 1997, depreciation and amortization costs
were $741,712 as compared to $1,006,784 for 1996. Amortization of deferred
financing costs provided approximately $187,000 of the costs as compared to
$528,000 in 1996. Amortization of purchased technology and goodwill totaled
$49,426. The decrease resulted from a reduction in the amount of convertible
debentures issued and related conversions to common stock in 1997 compared to
1996.
Interest expense was $804,873 during 1997, as compared to $1,815,465 in
1996, an decrease of $1,010,592 or 56%. Included in interest expense is a charge
for convertible debenture discounts in the amount of $406,849 for 1997 compared
to $1,393,555 in 1996. The decrease in this component of interest expense is due
to a decrease in the issuance of convertible debentures in 1997 compared to 1996
and a significantly reduced level of borrowings during 1997. Interest income of
$39,154 in 1997, as compared to $91,517 in 1996, represents an decrease of
$52,363 or 57.2%.
Equity in loss of unconsolidated subsidiary, Spectra, was $1,958,520 in
1997, as compared to $504,105 in 1996. Spectra commenced operations in August
1996.
All of these factors contributed to the net loss of $4,322,422 in 1997 as
compared to the net loss of $4,693,531 in 1996.
SPECTRA SCIENCE
Revenues were $618,188 in 1997, as compared to $46,959 in 1996. Cost of
goods sold was $456,117 in 1997, compared to $39,178 in 1996. Gross profit was
$162,071 in 1997 compared to $7,781 in 1996. The increase related to revenue,
cost of goods sold and related gross profits is primarily attributed to the
awarding of a SBIR Phase II contract related to the development of Digital Laser
Projection Display with Brown University and licensing fees earned associated
with its LaserPaint(TM) technologies.
Research and development expense was $1,352,940 in 1997 as compared to
$408,709 in 1996. General and administrative expenses were $1,278,465 in 1997 as
compared to $264,260 in 1996. These increases are attributable to only four
months of activity in 1996 compared to a full year in 1997. Spectra commenced
operations in August 1996.
Write-off of intangible expense was $426,667 in 1997, compared to $0 in
1996. The write-off was attributable to a determination by Spectra in 1997 that
the carrying value of two of its patents became impaired as a result of the
likelihood of decreased commercial application of the underlying technology.
13
<PAGE>
Interest income was $68,184 in 1997 compared to $10,663 in 1996. The
increase was attributed to the capital raised as a result of the private
placement of preferred stock in 1997.
The above factors contributed to a net loss of $2,814,191 in 1997,
compared to $621,455 in 1996.
Comparison of the Years Ended
December 31, 1996 and 1995
INFINITE GROUP (INCLUSIVE OF SPECTRA SCIENCE)
In 1996, consolidated revenues were $5,127,166 on cost of sales of
$3,163,621, and a gross profit in the amount of $1,963,545 was realized during
the year. Revenues and gross profit for the prior year period were $5,052,366
and $1,970,466, respectively.
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 developmentactivities, offset by research
and development expense primarily attributed to Spectra's investment in laser
technology research and development.
General and administrative expenses decreased to $2,369,718 in 1996 from
$2,350,116 in 1995, a decrease of $19,602. The decrease is primarily attributed
to continued cost reduction management
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 acquisition in 1996. Amortization of deferred financing
costs provided approximately $528,000 of the costs as compared to $60,003 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 $1,815,465 during 1996, an increase of $1,265,916
from 1995. Included in interest expense is a charge for convertible debenture
discounts in the amount of $393,533 for 1996, compared to $250,028 in 1995. The
increase in this component of interest expense is due to an increase in the
issuance of convertible debentures in 1996 as compared to 1995. Interest income
of $102,180 in 1996 as compared to $34,231 in 1995 an increase of $67,949 over
the 1995 period, was attributed to interest earned on the proceed from financing
during the period.
All of these factors contributed to the net loss of $4,693,531in 1996 as
compared to the net loss of $3,101,787 in 1995.
Year 2000 Issues
Management does not anticipate material costs, problems or uncertainties
associated with the Year 2000 issue. The Company will rely upon third party
vendors of the software used internally to become Year 2000 compliant.
ITEM 7. FINANCIAL STATEMENTS
14
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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
15
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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 (2) 67 Chairman of the Board, 1986
Director
Clifford G. Brockmyre 56 President and Chief 1994
Executive Officer
Daniel T. Landi 55 Chief Financial and 1994
Accounting Officer,
Secretary
Robert J. Sherwood (1)(2) 53 Director 1993
Michael S. Smith(1)(2) 43 Director 1996
- ----------
(1) Member of the Audit Committee
(2) 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.
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 of the Board and a Director since its inception in 1986. Mr. Conway was
the Chief Executive Officer of the Corporation through December 1997. 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 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.
16
<PAGE>
Robert J. Sherwood. Mr. Sherwood has been a Director of the Company since
April, 1993. Since mid 1991, Mr. Sherwood is the President and Chief Executive
Officer of Teneron Corporation, an internet based technology company. From 1991
through mid-1997, Mr. Sherwood was President of the Center for Business
Innovation, an organization, which provides business services for high growth,
technology-related companies. 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 teaching courses
on Venture Capital and Small Business Management and Entrepreneurship; a
Price-Babson SEE-10 Fellow at Babson College in 1994; and the University of
Missouri Presidents Technology appointee to the Mid-America Universities
Association; was recently appointed a Distinguished Executive Lecturer 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.
Michael S. Smith. Mr. Smith was elected to the Board of Directors in 1995.
He is the President and Chief Executive Officer of Micropub Systems
International Inc., a brewery system manufacturer, and is a principal of
International Capital and 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. Meyers & Co. (formerly known as Thomas
James Associates, Inc.) and 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 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.
Clifford G. Brockmyre. Mr. Brockmyre has been a director of the Company
since October 1994, its President since October 1995 and its Chief Executive
Officer since January 1998. He has been involved with manufacturing since 1966.
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.
Mr. Brockmyre was recently appointed by the Governor of Rhode Island to the
State Economic Advisory Council.
Daniel T. Landi. Mr. Landi has been the Company's Chief Financial Officer
since August 1994 and its Secretary since October 1997. Prior thereto, from
January 1993 to June 1994 he was the Chief Financial Officer of a privately held
aerospace research and development company, with primary responsible for
business and strategic plans, financial structuring, funding, as well as
establishing an operating infrastructure for the company, including business and
financial systems. From June 1991 through 1992, Mr. Landi was a principal of
Focused Management Consulting Group, a firm concentrating on acquisitions,
mergers, joint ventures and start-up operations, including private placements
and initial public offerings. Mr. Landi has extensive domestic and international
experience in finance, accounting and information systems with his twenty-six
years of progressive growth in overall business and senior financial management
with IBM. Mr. Landi received a BS in Finance from Rider University and an MBA
from the University of Connecticut.
17
<PAGE>
Directors' Compensation
Directors do not receive any cash consideration for serving as directors
of the Company. All directors are reimbursed for out-of-pocket expenses incurred
in connection with their attendance at board meetings. In addition, pursuant to
the Company's non-discretionary, non-employee directors' stock option plan, each
non-employee director is entitled to receive options to purchase 2,500 shares of
Common Stock upon becoming a director and at the end of each fiscal year during
which he served as a director.
Indemnification
The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the duty of
loyalty, failure to act in good faith, engaging in intentional misconduct or
knowingly violating the law. In addition, the Company's By-Laws include
provisions indemnifying its officers and directors and other persons against
pending or completed suits or proceedings against such persons by reason of
serving or having served as officers, directors or in other capacities, except
in relation to matters with respect to which such persons shall be determined to
not have acted in good faith, unlawfully or in the best interests of the
Company. With respect to matters as to which the Company's officers and
directors and others are determined to be liable for misconduct or negligence in
the performance of their duties, the Company's By-Laws provide for
indemnification only to the extent that the Company determines that such person
acted in good faith and in a manner not opposed to the best interests of the
Company. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
ITEM 10. EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal
years ended December 31, 1997, 1996 and 1995, individual compensations for
services to the Company and its subsidiaries paid to: (1) the Chief Executive
Officer, and (2) the other most highly paid executive officers of the Company in
Fiscal 1997 whose salary and bonus exceeded $100,000 (together, the "Named
Executives").
Long-Term
Annual Compensation Compensation
-------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Actual Deferred Options Compensation
- ---------------------- ------ --------- --------- ------------ ------------
Carle C. Conway(1) 1997 $150,000 -- 17,308 --
Chairman of Board 1996 $150,000 -- -- --
and Chief Executive 1995 $150,000 -- 75,000 --
Clifford G. Brockmyre(1) 1997 $175,000 -- 20,192 --
President and Chief 1996 $157,500 $75,000 300,000 --
Operating Officer 1995 $140,000 -- 115,000 --
18
<PAGE>
Daniel T. Landi 1997 $110,000 -- 11,538 --
Chief Financial and 1996 $100,000 -- -- --
Accounting Officer 1995 $72,000 -- -- --
- ----------
(1) Mr. Conway resigned as Chief Executive Officer, effective December 31, 1997
whereupon Mr. Brockmyre was appointed to such position.
Employment Agreements
The Company has an employment agreement with Carle C. Conway, its former
Chairman and Chief Executive Officer, for a term expiring on May 31, 1998, which
provides for an annual base salary of $150,000 and various benefits. The
agreement also provides, among other things, that, if Mr. Conway is terminated
other than for cause (which is defined to include conviction of a crime
involving moral turpitude, engaging in activities competitive with the Company,
divulging confidential information, dishonesty or misconduct detrimental to the
Company or breach of material term of the agreement), the Company will pay to
him a lump sum amount equal to the greater of $150,000 or the salary payable
over the unexpired term of the employment agreement.
The Company has an employment agreement with Clifford G. Brockmyre, its
President and Chief Financial Officer, for a term expiring on June 30, 2000,
which provides for an annual salary of $175,000 and various benefits. In
addition to the compensation provided under the agreement, Mr. Brockmyre is
eligible to participate in the Company bonus plan and is eligible for other
bonuses as determined in the sole direction of the Board of Directors. The
agreement also provides, among other things, that, if Mr. Brockmyre is
terminated other than for cause (which is defined to include conviction of a
crime involving moral turpitude, engaging in activities competitive with the
Company, divulging confidential information, dishonesty or misconduct
detrimental to the Company or breach of a material term of the agreement), the
Company will pay to him a lump sum payment equal to the product of the sum of
(i) the highest annual rate of salary paid to Mr. Brockmyre, and (ii) the
highest annual bonus paid to or accrued to the benefit of Mr. Brockmyre during
the Employment Term (as defined in the agreement) multiplied by 2.99. The
agreement also provides for payments to Mr. Brockmyre in the event of his death
or permanent disability.
The Company has an employment agreement with Daniel T. Landi, its Chief
Financial and Accounting Officer, for a term expiring on October 19, 2000, which
provides for an annual salary of $110,000 and various benefits. Base Salary
shall be subject to annual review and increase as determined by the Board of
Directors. In addition to the compensation provided under the agreement, Mr.
Landi is eligible to participate in all executive bonus and option plans
established for senior executives of the Company.
19
<PAGE>
Stock Options
The following tables show certain information with respect to stock
options granted in 1997 to Named Executives and the aggregate value at December
31, 1997 of all stock options granted to such executives. No Options granted to
Named Executives were exercised in 1997.
Option Grants in 1997
Individual Grants of Options
Number of Percent of Total
Securities Options/Granted
Underlying to Employees Exercise
Options/Granted in Fiscal Price Expiration
Name # 1997 ($/Sh) Date
- --------------------- --------------- --------------- --------- ----------
Carle C. Conway 8,654 17.6% $1.56 12/02/06
Carle C. Conway 8,654 17.6% $1.94 12/02/06
Clifford G. Brockmyre 10,096 20.6% $1.56 12/02/06
Clifford G. Brockmyre 10,096 20.6% $1.94 12/02/06
Daniel T. Landi 5,769 11.8% $1.56 12/02/06
Daniel T. Landi 5,769 11.8% $1.94 12/02/06
Number of Shares of Common
Stock
Underlying Unexercised Value of Unexercised
Options In-The Money Options at
At 12/31/97 (#) 12/31/97*($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- -------------------------- -------------------------
Carle C. Conway 55,770/36/538 $20,053/$13,294
Clifford G. Brockmyre 78,397/56/795 $38,195/$26,640
Daniel T. Landi 23,846/7,692 $ 8,602/$ 2,904
- ----------
* Based on the December 31, 1997 closing price on NASDAQ of $1.9375
Stock Option Plans
In December 1991, the Board of Directors and stockholders of the Company
adopted a stock option plan, which was amended in April 1993 (the "1993 Stock
Option Plan"). In April 1994, the Board of Directors adopted the 1994 Stock
Option Plan which was approved and adopted by the Company's stockholders at the
1994 Annual Meeting of Stockholders. In June 1995, the Board of Directors
adopted the 1995 Stock Option Plan which was approved by the Company's
stockholders at the 1995 Annual Meeting of Stockholders. In December 1996, the
Board of Directors adopted the 1996 Stock Option Plan which was approved and
adopted by the Company's stockholders at the 1996 Annual
20
<PAGE>
Meeting of Stockholders. In December 1997, the Board of Directors adopted the
1997 Stock Option Plan which was approved and adopted by the Company's
stockholders at the 1997 Annual Meeting of Stockholders. The 1993, 1994, 1995,
1996 and 1997 Option Plans are collectively referred to herein as the "Option
Plans". The 1993, 1994, 1995, 1996 and 1997 Option Plans provide for the grant
to employees, officers and consultants of options to purchase up to 250,000,
225,000, 255,000, 400,000 and 600,000 shares of Common Stock, respectively,
consisting of both" incentive stock options" within the meaning of Section 422
of the United States Internal Revenue Code of 1986 (the "Code") and
non-qualified options. The Option Plans are intended to qualify under Rule 16b-3
of the Securities Exchange Act of 1934. Incentive stock options are issuable
only to employees of the Company, while non-qualified options may be issued to
non-employees, consultants, and others, as well as to employees of the Company.
The Option Plans are administered by the Compensation Committee of the
Board of Directors, which determines those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of share of Common Stock that may be purchased under each
option, and the option price. The members of this committee are ineligible to
receive options under the Option Plans.
The per share exercise price of an incentive or non-qualified stock option
may not be less than the fair market value of the Common Stock on the date the
option is granted. The aggregate fair market value (determined as of the date
the option is granted) of the shares of Common Stock for which incentive stock
options are first exercisable by any individual during any calendar year may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him or her, more than 10% of the total
combined voting power of all classes of stock of the Company shall be eligible
to receive any incentive stock option under the Option Plans unless the option
price is at least $110% of the fair market value of the Common Stock subject to
the option, determined on the date of grant. Non-qualified options are not
subject to this limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which to exercise the option.
Upon termination of employment of an optionee by reason of death or permanent
total disability, the option remains exercisable for one year thereafter to the
extent it was exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
In April 1993, the Board of Directors and stockholders of the Company
adopted a non-discretionary non-employee directors' stock option plan (the
"Directors' Plan") that provides for the grant to non-employee directors of
non-qualified options to purchase up to 50,000 shares of Common Stock. Pursuant
to the Directors' Plan, each new non-employee director of the Company is
automatically granted, upon becoming a director, an option to purchase 2,500
shares of Common Stock at the fair market value of such shares on the grant
date. Each option vests one year from the date of grant. In addition, each
non-employee director shall automatically be granted an option to purchase 2.500
shares at the fair market value of such shares on the date of grant, on the last
day of each fiscal year during which he or she serves as a director of the
Company. Such options shall vest one year from date of grant.
Options under the Option Plans and Directors' Plan must be granted within
10 years from the effective date of each respective plan. Incentive stock
options granted under the plan cannot be
21
<PAGE>
exercised more than 10 years from the date of grant, except that incentive stock
options issued to greater than 10% stockholders are limited to four-year terms.
All options granted under the plans provide for the payment of the exercise
price in cash or by delivery to the Company of shares of Common Stock already
owned by the optionee having a fair market value equal to the exercise price of
the options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options without making any additional cash investment.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be affiliated with the Company become available once again for
issuance. As of March 2, 1998, the Company had outstanding incentive stock
options to purchase 1,022,884 shares of Common Stock under the Option Plans and
non-qualified options to purchase an aggregate of 15,000 shares of Common Stock
to Robert J. Sherwood and 5,000 shares of Common Stock to Michael S. Smith under
the Directors' Plan. These options are exercisable at prices ranging from $1.56
to $3.00 per share.
Directors Compensation
Directors receive 2,500 Stock Options at the end of each year of service
as a director. The Company does not pay a fee to directors for services rendered
as directors. Each director is reimbursed for travel expenses incurred in
connection with attendance at meetings of the Board of Directors and its
committees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten-percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company, or written representation that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with.
The following table, together with the accompanying footnotes, sets forth
information, as of December 31, 1997, regarding stock ownership of all persons
known by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock, all directors and nominees, and all directors and executive
officers of the Company as a group.
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<PAGE>
Shares of Common
Stock
Name of Beneficially Owned
Beneficial Owner (1) Percentage of Class (2)
- ---------------------------- ------------------ -----------------------
Directors and Executive
Officers
- ----------------------------
Carle C. Conway -- -- % (4)
Clifford G. Brockmyre 666,551 (4) 4.9% (4)
Daniel T. Landi 23,846 (5) * (4)
Robert J. Sherwood 59,167 (6) * (4)
Michael S. Smith 1,666 (7) * (4)
All executive officers,
and directors as a group
(6 persons) 917,790 (8) 15.6% (9)
5% Stockholders
- ----------------
Clearwater Fund IV LLC(10)
611 David Road East
Clearwater, FL 34616 2,452,277 19.6% (3)
Northeast Hampton
Holdings, LLC (10)
1895 Mt. Hope Avenue
Rochester, NY 14620 2,528,126 20.2% (3)
- ----------
* less than 1%
(1) Unless otherwise indicated below, each director, executive officer and
each 5% stockholder has sole voting and investment power with respect to
all shares beneficially owned.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants or upon the
conversion of securities are deemed to be outstanding for the purpose of
computing the percent of ownership of such individual or group, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(3) Assumes that all currently exercisable options or warrants or convertible
notes owned by the individual have been exercised.
(4) Includes 100,000 shares issued on conversion of an outstanding promissory
note of the Company held by Mr. Brockmyre's wife as to which shares Mr.
Brockmyre disclaims beneficial ownership and 83,396 shares subject to
currently exercisable options.
(5) Includes 23,846 shares subject to currently exercisable options.
(6) Includes 9,167 shares subject to currently exercisable options.
(7) Includes 1,666 shares subject to currently exercisable options
(8) Includes 917,790 shares subject to currently exercisable options, warrants
or convertible notes.
(9) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
(10) This information was derived from the Schedule 13D filed by the reporting
person.
23
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1997, the Company issued to Carle C. Conway, a stockholder,
officer and director of the Company, an aggregate of 161,943 shares of Common
Stock in consideration for Mr. Conway's payment to Moller International, Inc. of
a $250,000 portion of the settlement judgement against the Company. The shares,
which are unregistered, were valued at $1.544, the fair market value of the
Company's Common Stock on the date the judgement was entered.
On December 29, 1997, Sheelagh Brockmyre, the wife of Clifford C.
Brockmyre, the Company's Chief Executive Officer, converted $100,000 of
outstanding notes payable, due April 17, 1998, bearing interest at the rate of
10% per annum, into 100,000 shares of Common Stock. The conversion was at the
fair market value of the Company's Common Stock on the date of conversion.
The Company believes the foregoing transactions which involved affiliates
were on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. As a matter of Policy, in order to reduce the
risks of self-dealing or a breach of the duty of loyalty to the Company, all
transactions between the Company and any of its officers, directors or principal
stockholders are for bona fide purposes and are approved by a majority of the
disinterested members of the Board of Directors.
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 Certificate of Amendment of Certificate of Incorporation.*
3.3 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 Lenders' Note and Warrant Agreement issued to certain lenders in
February through July 1993.(1)
4.5 Form of Warrant Agreement issued to Thomas James Associates, Inc., in
connection with private placement financings.(1)
4.6 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.(1) 10.4 1993 Stock
Option Plan.(1) 10.3 1993 Non-Employee Directors' Stock Option Plan.(1)
10.6 Form of Stock Option Plan(3) 10.6 Form of Stock Option Agreement.(1)
10.7 Stock Acquisition Agreement between the Company and HGG Laser Fare
Inc.(2)
10.8 Employment Agreement between the Company and Clifford G. Brockmyre.(2)
10.9 Lease Agreement between Rhode Island Industrial Facilities Corporation
and HGG Laser Fare, Inc. for certain equipment and operating facility in
Smithfield, Rhode Island.(4)
10.10 Stock Sale Agreement, dated December 31, 1995, with respect to the sale
of FTD Infinite.(5)
24
<PAGE>
10.11 Loan Agreement between HGG Laser Fare, Inc. and First National Bank of
New England and dated December 21, 1995.(5)
10.12 Spectra Acquisition Corp. - Series A Convertible Stock Purchase Agreement
dated August 23, 1996(7)
10.13 Spectra Acquisition Corp. -Stockholders' Agreement dated August 23,
1996(7)
10.14 Employment Agreement between Clifford G. Brockmyre and the Company dated
July 1, 1996.*
10.15 Employment Agreement between Daniel T Landi and the Company dated October
20, 1997.*
10.16 Employment Agreement between Larry R. Dosser and the Mound Acquisition,
Inc. dated February 12, 1998.*
10.17 Mound Acquisition Agreement dated February 12, 1998.*
10.18 Supply Agreeement between Laser Fare, Inc. and Dey Laboratories, L.P.
dated October 20, 1997.*
21 Subsidiaries of the Company.(6)
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 Statement.
(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996.
(7) Incorporated by reference to Report on Form 8-K dated August 26, 1996.
25
<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
March 30, 1998 on its behalf by the undersigned, thereunto duly authorized.
INFINITE GROUP, INC.
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.
SIGNATURE TITLE DATE
- ---------------------- ------------------------------------- ----------------
/s/ Carle C. Conway Chairman of the Board and Director March 30, 1998
- -------------------------
Carle C. Conway
/s/ Clifford G. Brockmyre Director, President and Chief March 30, 1997
- ------------------------- Executive Officer
Clifford G. Brockmyre
/s/ Daniel T. Landi Chief Financial and Accounting March 30, 1998
- ------------------------- Officer
Daniel T. Landi
/s/ Robert J. Sherwood Director March 30, 1998
- -------------------------
Robert J. Sherwood
/s/ Michael Smith Director March 30, 1998
- -------------------------
Michael Smith
26
<PAGE>
CONSOLIDATED
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
DECEMBER 31, 1997
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report........................................... 1
Consolidated Financial Statements:
Balance Sheets..................................................... 2
Statements of Operations........................................... 3
Statements of Stockholders' Equity................................. 4
Statements of Cash Flows........................................... 5
Notes to Consolidated Financial Statements............................. 6 - 29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Group, Inc. (formerly Infinite Machines Corp.)
We have audited the consolidated balance sheets of Infinite Group, Inc.
(formerly Infinite Machines Corp.) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 Group,
Inc. (formerly Infinite Machines Corp.) as of December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
March 11, 1998
1
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 541,653 $ 1,147,791
Restricted funds 69,280 68,601
Accounts receivable, net of allowances 954,378 741,539
Inventories 150,389 138,893
Other current assets 174,798 150,830
------------ ------------
Total current assets 1,890,498 2,247,654
Property and equipment, net 4,197,305 4,303,838
Other assets
Notes receivable - stockholders 87,642 132,258
Purchased technology, net -- 1,389,367
Inventoried parts 71,603 143,206
Investment in subsidiary 437,375 --
Other intangible assets, net 266,506 443,346
------------ ------------
863,126 2,108,177
------------ ------------
$ 6,950,929 $ 8,659,669
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 440,553 $ 250,000
Accounts payable and accrued expenses 948,713 952,864
Current portion of litigation settlement payable -- 549,000
Current maturities of long-term obligations 946,305 245,187
------------ ------------
Total current liabilities 2,335,571 1,997,051
Long term obligations 2,663,302 3,984,557
Litigation settlement payable -- 100,000
Minority interest -- 476,591
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized, 12,616,483 and 8,693,162
shares issued and outstanding 12,616 8,694
Additional paid-in capital 19,236,206 15,067,120
Accumulated deficit (17,296,766) (12,974,344)
------------ ------------
Total stockholders' equity 1,952,056 2,101,470
------------ ------------
$ 6,950,929 $ 8,659,669
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 5,448,575 $ 5,127,166 $ 5,052,366
Cost of goods sold 3,376,353 3,163,621 3,081,900
------------ ------------ ------------
Gross profit 2,072,222 1,963,545 1,970,466
Cost and expenses
Research and development 770,758 402,442 427,468
General and administrative expenses 1,820,663 2,369,718 2,350,116
Selling expenses 470,723 511,208 435,605
Depreciation and amortization 741,712 1,179,462 728,288
Litigation settlement loss -- 649,000 --
Asset write-downs -- -- 592,256
------------ ------------ ------------
Total costs and expenses 3,803,856 5,111,830 4,533,733
------------ ------------ ------------
Operating loss (1,731,634) (3,148,285) (2,563,267)
Other income (expense)
Interest income 39,154 102,180 34,231
Interest expense (804,873) (1,815,465) (549,549)
Equity in loss of unconsolidated subsidiary (1,958,520) -- --
Minority interest in net loss of subsidiary -- 117,350
Gain on dispositions of assets 38,457 -- --
Loss on disposition of subsidiary -- -- (40,373)
Other 94,994 53,073 25,066
------------ ------------ ------------
Total other income (expense) (2,590,788) (1,542,862) (530,625)
------------ ------------ ------------
Loss before provision for income taxes (4,322,422) (4,691,147) (3,093,892)
Provision for income taxes -- (2,384) (7,895)
------------ ------------ ------------
Net loss $ (4,322,422) $ (4,693,531) (3,101,787)
============ ============ ============
Per share
Net loss $ (0.42) (0.71) (0.58)
============ ============ ============
Weighted average number of common
shares outstanding 10,380,763 6,610,520 5,375,157
============ ============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1994 5,131,946 $ 5,132 $ 8,228,532 $ (5,179,026)
Issuance of common stock in connection
with earn-out agreement 89,502 89 150,946 --
Issuance of common stock in connection
with debenture conversions 208,102 208 399,792 --
Issuance of common stock in connection
with bridge loans 60,639 61 (61) --
Net loss -- -- -- (3,101,787)
Realized gain on investment securities -- -- -- --
Translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance - December 31, 1995 5,490,189 5,490 8,779,209 (8,280,813)
Issuance of common stock in connection
with acquisition of license 10,000 10 29,990 --
Issuance of common stock in connection
with debenture conversions 2,940,993 2,942 5,940,573 --
Issuance of common stock in connection
with employee options exercised 11,740 12 18,832 --
Issuance of common stock in connection
with warrant conversions 173,750 174 173,582 --
Issuance of common stock in connection
with note conversions 66,490 66 124,934 --
Net loss -- -- -- (4,693,531)
------------ ------------ ------------ ------------
Balance - December 31, 1996 8,693,162 8,694 15,067,120 (12,974,344)
Issuance of common stock in connection
with earn-out agreement 48,634 49 94,182 --
Issuance of common stock in connection
with debenture conversions 1,608,585 1,608 2,047,612 --
Issuance of common stock in connection
with liquidated damages 30,649 30 34,094 --
Issuance of common stock in connection
with judgement settlement 161,943 162 174,838 --
Issuance of common stock in connection
with promissory note conversions 150,433 150 150,283 --
Issuance of common stock in connection
with private offering 1,923,077 1,923 1,668,077 --
Net loss -- -- -- (4,322,422)
------------ ------------ ------------ ------------
Balance - December 31, 1997 12,616,483 $ 12,616 $ 19,236,206 $(17,296,766)
============ ============ ============ ============
<CAPTION>
Equity Adjustments
---------------------------
Unrealized
Cumulative Investment
Translation Gain (loss) Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance - December 31, 1994 $ 1,000 $ 2,445 $ 3,058,083
Issuance of common stock in connection
with earn-out agreement -- -- 151,035
Issuance of common stock in connection
with debenture conversions -- -- 400,000
Issuance of common stock in connection
with bridge loans -- -- --
Net loss -- -- (3,101,787)
Realized gain on investment securities -- (2,445) (2,445)
Translation adjustment (1,000) -- (1,000)
------------ ------------ ------------
Balance - December 31, 1995 -- -- 503,886
Issuance of common stock in connection
with acquisition of license -- -- 30,000
Issuance of common stock in connection
with debenture conversions -- -- 5,943,515
Issuance of common stock in connection
with employee options exercised -- -- 18,844
Issuance of common stock in connection
with warrant conversions -- -- 173,756
Issuance of common stock in connection
with note conversions -- -- 125,000
Net loss -- -- (4,693,531)
------------ ------------ ------------
Balance - December 31, 1996 -- -- $ 2,101,470
Issuance of common stock in connection
with earn-out agreement -- -- 94,231
Issuance of common stock in connection
with debenture conversions -- -- 2,049,220
Issuance of common stock in connection
with liquidated damages -- -- 34,124
Issuance of common stock in connection
with judgement settlement -- -- 175,000
Issuance of common stock in connection
with promissory note conversions -- -- 150,433
Issuance of common stock in connection
with private offering -- -- 1,670,000
Net loss -- -- (4,322,422)
------------ ------------ ------------
Balance - December 31, 1997 $ -- $ -- $ 1,952,056
============ ============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,322,422) $(4,693,531) $(3,101,787)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 741,712 1,179,462 728,288
Interest expense attributed to convertible
debentures discount 406,849 1,393,555 250,028
Expenses satisfied via issue of debt or equity 140,971 -- --
Loss on sale of subsidiary -- -- 40,373
Gain on dispositions of assets (38,457) -- --
Loss attributed to unconsolidated subsidiary 1,958,520 -- --
Translation adjustment -- -- (1,000)
Asset write-downs and allowances 44,616 549,591 742,256
Minority interest in net loss of subsidiary -- (117,350) --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (298,507) 110,920 (595,485)
Other current assets (25,586) (50,536) (7,501)
Inventories and inventoried parts 39,318 142,255 (143,399)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 270,285 158,712 153,689
Litigation settlement payable (350,000) 649,000 --
----------- ----------- -----------
Net cash used in operating activities (1,432,701) (677,922) (1,934,538)
Cash flows from investing activities:
Available-for-sale securities:
Purchases -- -- --
Sales -- -- 751,973
Disposition of subsidiary, net cash disposed -- -- (39,525)
Investment in Spectra Science Corp. (200,000) -- --
Purchase of net assets of Spectra Science Corp. -- (1,654,000) --
Purchase of susidiary - Spectra Acquisition Corp. -- (2,700,000) --
Cash of unconsolidated subsidiary (Note 2) (814,604) -- --
Purchase of property and equipment (947,811) (662,659) (913,291)
Purchase of technology and other intangibles -- (153,934) (4,510)
Proceeds from sale of technology and equipment 155,898 -- 13,238
----------- ----------- -----------
Net cash used in investing activities (1,806,517) (5,170,593) (192,115)
Cash flows from financing activities:
Proceeds from convertible debentures, net of expenses 968,000 3,730,000 874,350
Repayments on line of credit -- -- (332,800)
Net borrowings (repayments) of short-term debt 190,553 (220,000) 414,768
Repayments of long-term obligations (194,794) (161,075) (615,687)
Borrowings of long-term obligations -- 75,453 1,616,000
(Increase) decrease in restricted funds, net (679) 1,754 (6,155)
Proceeds from issuances of common stock,
net of expenses 1,670,000 259,472 --
Proceeds from issuance of subsidiary preferred stock -- 3,286,000 --
----------- ----------- -----------
Net cash provided by financing activities 2,633,080 6,971,604 1,950,476
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (606,138) 1,123,089 (176,177)
Cash and cash equivalents - beginning of year 1,147,791 24,702 200,879
----------- ----------- -----------
Cash and cash equivalents - end of year $ 541,653 $ 1,147,791 $ 24,702
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
INFINITE GROUP, INC.
(FORMERLY 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 Group, Inc. (IGI) (formerly Infinite Machines Corp.) and
each of its wholly owned subsidiaries; Infinite Engines Corporation (IEC), HGG
Laser Fare, Inc. (LF) and Express Tool, Inc. (ET) (collectively "the Company").
All significant intercompany accounts and transactions have been eliminated. The
1996 consolidated financial statements include its formerly majority owned
subsidiary, Spectra Science Corp. (see Note 2).
IGI 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. 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.
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. In 1996, the Company acquired a majority interest in
Spectra Acquisition Corporation, a company specializing in research of advanced
laser technologies in the areas of, among other things, product identification,
anti-counterfeiting methods and medical procedures. (See Note 5.)
NOTE 2. - CHANGE IN REPORTING ENTITY
Effective September 19, 1997, the Company's voting interest in its
majority owned subsidiary, Spectra Science Corp., (Spectra) was reduced below
50% (see Note 5). For fiscal 1996, Spectra's financial position and results of
operations were consolidated with those of the Company. As a result of the
Company's reduction in its ownership interest below 50%, the Company changed its
method of accounting for its investment in Spectra Science Corp. to the equity
method retroactively to January 1, 1997 (see Note 4). If Spectra was accounted
for under the equity method for fiscal 1996, there would be no effect on net
income or earnings per share. For purposes of the 1997 statement of cash flows,
the previously consolidated cash balance of Spectra at December 31, 1996 in the
amount of $814,604 has been adjusted for as a component of investing activities.
6
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. - FINANCIAL CONDITION
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 1998.
During 1997, management continued to investigate and implement strategies
aimed at developing the laser services segment of the Company's business. These
included approximately $770,000 in research and development funds being expended
by Express Tool, Inc. for developing and marketing technology for rapid tooling
processes initially developed by HGG Laser Fare, Inc. Limited commercialization
of these technologies commenced in 1997, which management believes will be
expanded in 1998. The Company is currently involved in discussions with a number
of Fortune 500 companies for the formation of strategic partnerships for the
further development and manufacturing of tool and related molds which would
provide funding and additional revenue sources. In addition, overall research
and development expenditures will be substantially reduced in 1998 due to
funding obtained from outside third parties and the overall general reductions
in research and development activities.
Subsequent to year end the Company has obtained a letter of intent from
its primary lender to provide financing in the aggregate amount of approximately
$2.4 million for the acquisition of a business, the refinancing of existing debt
and a revolving line of credit for working capital needs. The letter is not a
commitment to lend and is contingent upon among other things the Company's
maintenance of a satisfactory financial condition and the lender's completion of
its credit analysis.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years and has used a significant amount
of working capital in its operations. In addition, at December 31, 1997, current
liabilities exceed current assets by approximately $445,000.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent on the Company expanding the
operations of its primary 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 believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern.
7
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards Changes - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which establishes accounting standards for the impairment of long-lived assets,
related goodwill and certain identifiable intangible assets to be held and used
or to be disposed of. The adoption did not have a material effect on the
Company's consolidated financial position or results of operations. Also
effective January 1, 1996, the Company adopted SFAS 123, Accounting for
Stock-Based Compensation. For further discussion, see note 13.
In February 1997, the Financial Accounting Standards Board issued SFAS
128, Earnings Per Share, which requires dual presentation of basic and diluted
earnings per share on the face of the income statement. For fiscal years ended
1997, 1996 and 1995, the basic and diluted earnings per share calculated
pursuant to SFAS 128 are not materially different from primary earnings per
share calculated under Accounting Principles Board (OPB) Opinion 15.
Also issued in 1997, SFAS 131, Disclosures about Segments of an Enterprise
and Related Information, establishes standards for the way public companies
report information about operating segments in both interim and annual financial
statements and related disclosures. The Company has determined that when SFAS
131 is adopted in fiscal 1998, there will be no impact on the Company's current
segment groupings and current disclosures will not be materially different.
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.
Inventories - Inventories of the Company consist of the following:
December 31,
--------------------------
1997 1996
---- ----
Raw materials $ 59,800 $ 49,081
Work-in-process 90,589 66,882
Finished product -- 22,930
-------- --------
$150,389 $138,893
======== ========
Inventories are stated at the lower of cost (first-in, first-out) or
market.
8
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Purchased Technology and Other Intangible 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 intangible assets consist primarily of goodwill and deferred
financing 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.
The Company periodically reviews the recoverability of the carrying value
of its intangible assets. In determining whether there is an impairment, the
Company compares the sum of the expected future net cash flows (undiscounted and
without interest charges) to the carrying amount of the asset. In addition, the
Company will consider other significant events or changes in the economic and
competitive environments that may indicate the remaining estimated useful life
of its intangibles may warrant revision. At December 31, 1997, the Company
believes that no impairment of 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.
Investment in Subsidiary - The Company accounts for its 34% investment in
its subsidiary, Spectra Science Corp., under the equity method of accounting for
1997. Under the equity method, the Company recognizes its share of earnings and
losses of the subsidiary as accrued. Advances and distributions are recorded
directly in the investment account.
The Company's investment consists of approximately 70% of the Series A
preferred shares outstanding (see Note 5) which have voting rights equivalent to
the remaining shareholders, but its liquidation rights are subordinate to the
Series C and B preferred shares, respectively. Accordingly, the Company will
recognize as its equity in the losses, after the common shareholders, 70% of
Spectra Science Corp.'s losses until its original investment has been reduced to
zero. In the event the subsidiary has earnings, the Company will recognize as
its equity share 70% of the earnings up to replenishment of its initial
investment of $2,900,000, at which time its equity in the earnings will be
recognized based on its voting interest percentage.
9
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Research and Development Costs - All costs related to sponsored research
and development are expensed as incurred. Research and development expense was
$770,758, $402,442 and $427,468 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company is party to certain contracts under which it is
obligated to perform research and development activities for others and also has
entered into sub-contract arrangements with third parties for performance of
these activities. The terms of the agreements provide for payment of fees for
the services and in certain instances provides terms for licensing and/or
royalty fees. The amounts earned and incurred under the agreements were not
significant to the Company's overall operations.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was $46,237, $109,329 and $30,989 for the years ended
December 31, 1997, 1996 and 1995, 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 $48,329 and
$29,050 at December 31, 1997 and 1996, 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.
10
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications - Certain amounts for 1996 and 1995 have been
reclassified to conform to the 1997 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.
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 5. - 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.
11
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. - 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 provided 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.
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 48,634 shares of common stock were issued in
March 1997 at a recorded price of $1.94 per share, which resulted in
the recognition of additional goodwill recorded in 1997 in the
amount of $94,228.
C. Spectra Science Corporation
On August 26, 1996, IGI acquired an 82% Series A preferred stock
interest in Spectra Science (SSC). The aggregate consideration paid
for the preferred stock was $2,700,000. In 1997, IGI acquired
another 200,000 shares of Series A preferred stock of SSC for
consideration in the amount of $200,000. The preferred shares are
voting shares convertible into common shares on a one-for-one basis
at the option of IGI at any time. Mandatory conversion is required
upon a public offering of at least $3 per share with proceeds of at
least $12 million. No shares have been converted through December
31, 1997.
12
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. - BUSINESS INVESTMENTS (CONTINUED)
Following is a summary of financial position and results of
operations of SSC:
Financial Position
December 31,
------------------------------
1997 1996
---------- -----------
Current assets $ 5,808,524 $ 933,585
Property and equipment, net 870,797 530,733
Intangibles, net 688,625 1,419,463
Other 2,602 --
----------- -----------
Total assets $ 7,370,548 $ 2,883,781
=========== ===========
Current liabilities $ 386,190 $ 211,295
Stockholders' equity 6,984,358 2,672,486
----------- -----------
Total liabilities and
stockholders' equity $ 7,370,548 $ 2,883,781
=========== ===========
Results of Operations
Period July
3, 1996
(Date of
Year Ended Inception)
December 31, to December
1997 31, 1996
------------ ------------
Revenues $ 618,188 $ 46,959
=========== ==========
Net loss $(2,814,191) $ (621,455)
=========== ==========
During 1997, SSC issued additional preferred stock to third-party
investors whereby IGI's voting interest decreased from 66% at December 31, 1996
to 34% at December 31, 1997. In September 1997, SSC issued approximately
1,650,000 shares of Series B preferred stock for $1.50 per share, for a total
aggregate consideration of approximately $2,300,000, net of issuance costs. This
issue effectively decreased IGI's ownership to 43%. In November 1997, SSC issued
approximately 1,778,000 shares of Series C preferred stock for $2.25 per share,
for a total aggregate consideration of approximately $3,966,000, net of issuance
costs. This issue effectively decreased IGI's ownership to 34%. The Series B and
C preferred shares have identical voting rights to that of the Company's Series
A preferred shares, but the Series B and C shares have preferential liquidation
rights. As a result of these transactions, IGI's share of equity in the
underlying net assets of SCC at December 31, 1997 exceed its investment account
by approximately $1,674,000. This change in interest gain has not been
recognized in the accompanying financial statements due to the Company's
subordinated liquidation rights to the Series B and C preferred shareholders
whose investments gave rise to the gain.
13
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. - 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 $230,900 ($186,284 -
1996) was recorded based on management's estimate of the net fair value of the
notes.
NOTE 7. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
Depreciable -----------------------------
Lives 1997 1996
--------------- ------------ ------------
Land N/A $ 100,000 $ 100,000
Building and
leaseholds 18 - 40 years 942,785 1,016,300
Machinery and
equipment 5 - 10 years 3,986,164 3,906,895
Furniture and fixtures 5 - 7 years 530,075 441,102
----------- -----------
5,559,024 5,464,297
Accumulated
depreciation
and amortization (1,361,719) (1,160,459)
----------- -----------
$ 4,197,305 $ 4,303,838
=========== ===========
Included above is the following property and equipment held under capital
leases:
December 31,
----------------------------
1997 1996
----------- -----------
Land $ 100,000 $ 100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 1,180,178 1,180,178
----------- -----------
2,005,940 2,005,940
Accumulated depreciation
and amortization (488,200) (337,002)
----------- -----------
$ 1,517,740 $ 1,668,938
=========== ===========
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $157,368, $144,857 and
$129,739 in 1997, 1996 and 1995, respectively.
14
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. - PURCHASED TECHNOLOGY
Purchased technology at December 31, 1996 consists of the following:
Patents and purchased technology $ 1,595,574
Accumulated amortization (206,207)
-----------
$ 1,389,367
===========
In March 1997, the Company sold its rights in Sprintex technology, a
rotary engine development segment asset, to an Australian company for 100,000
British pounds sterling (approximately $156,000). This sale resulted in a gain
of approximately $56,000. The remaining purchased technology related to the
Company's formerly consolidated subsidiary, Spectra Science Corp. (see Note 2).
NOTE 9. - OTHER INTANGIBLE ASSETS
Other assets consists of the following:
December 31,
--------------------------
1997 1996
--------- ---------
Goodwill $ 244,665 $ 248,389
Deferred financing costs 90,873 150,873
Organization costs -- 103,401
--------- ---------
335,538 502,663
Accumulated amortization (69,032) (59,317)
--------- ---------
$ 266,506 $ 443,346
========= =========
15
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. - NOTES PAYABLE
Notes payable consists of the following:
December 31,
--------------------
1997 1996
-------- --------
Note payable, principal stockholder (a) $ 70,000 $ 70,000
Bank revolving promissory note (b) 370,553 180,000
-------- --------
$440,553 $250,000
======== ========
(a) Note payable, principal stockholder - The 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 provides for
borrowings of up to $400,000 that bears interest at a rate of prime plus
.50% (9.00% at December 31, 1997). The note is secured by all the assets
of LF and the guarantee of the Company.
NOTE 11. - LONG TERM OBLIGATIONS
Long-term obligations consists of the following:
1997 1996
---------- ----------
Convertible debentures (a) $ 100,000 $ 600,000
Capital lease obligations (b) 1,331,646 1,483,806
Term note (c) 1,177,356 1,219,990
Notes payable, other (d) 100,000 40,000
Notes payable, principal stockholder (e) 900,605 785,948
Note payable, related party (f) -- 100,000
---------- ----------
3,609,607 4,229,744
Less current maturities 946,305 245,187
---------- ----------
Total long-term obligations $2,663,302 $3,984,557
========== ==========
16
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. - LONG TERM OBLIGATIONS (CONTINUED)
(a) Convertible debentures - Through December 31, 1996, the Company
issued $1,241,000 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. Through December 31, 1996, debenture holders
converted $1,141,000 of outstanding principal to 608,133 shares of
common stock. In 1997, there were no debentures issued or converted
of this series to 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. In 1997,
debenture holders converted $500,000 ($3,500,000 - 1996) of
outstanding principal including $17,046 ($58,938- 1996) of accrued
interest to 499,073 (2,540,962 - 1996) shares of common stock.
In February 1997, the Company issued $1,100,000 of convertible
debentures due December 1998 with interest at 6%. The notes are
convertible into common stock at a rate equal to 73% of the
prevailing market price of the Company's common stock. Through
December 31, 1997, debenture holders converted $1,100,000 of
outstanding principal including $25,329 of accrued interest to
1,109,744 shares of common stock.
Interest expense has been recognized on the beneficial conversion
feature of the above convertible debentures. The intrinsic value is
calculated at the date of issue as the difference between the
conversion price and the fair value of the Company's common stock,
multiplied by the number of shares into which the debentures are
convertible. This discount resulting from the allocation of the
proceeds increases the effective interest rate of the security that
is charged to interest expense. The amortization period of the
interest discount is from the date of the issuance of the security
to the date it first becomes convertible. Interest expense
recognized for the beneficial conversion feature was $406,849,
$1,393,555 and $250,028 for the years ended December 31, 1997, 1996
and 1995, respectively.
(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 through June 2002
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%.
17
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. - LONG TERM OBLIGATIONS (CONTINUED)
(c) Term note - A term promissory note due in February 2011 bearing
interest at prime plus 1% (9.5% at December 31, 1997). This note is
secured by substantially all of the assets of LF and is guaranteed
by the Company. The rate contains restructure covenants, which,
among other things, restricts the amount of capital expenditures of
LF to $100,000. The Company is in violation of certain covenants at
December 31, 1997, which the bank has agreed to waive through
January 1, 1999.
(d) Notes payable, other - The 1996 balance consists of a convertible
note due to an individual which matures in May 1998 with interest at
10%. In 1997, the note was converted including $10,433 of accrued
interest to 50,433 shares of common stock.
The 1997 balance consists of a term promissory note due September
1999 payable in monthly installments commencing May 1998. The note
was executed in April 1997 as partial satisfaction of the litigation
settlement recorded in 1996 (see Note 3).
(e) Notes payable, principal stockholder - The former chairman and
principal stockholder of the Company has advanced funds to the
Company under convertible secured notes which mature through January
2000 with interest at 10%. The notes are convertible at rates
between $1.13 and $4.63 in principal for each share of common stock.
(f) Note payable, related party - The wife of the Company's Chief
Executive Officer advanced funds to the Company under a convertible
secured note in the amount of $100,000 with interest at 10%. In
1997, the note was converted to 100,000 shares of common stock.
Minimum future annual payments of long-term obligations as of December 31,
1997 for each of the next five years and in the aggregate are:
1998 $1,034,485
1999 485,773
2000 471,628
2001 278,916
2002 250,466
Thereafter 1,770,692
----------
Total minimum payments 4,291,960
Less amount representing interest
on capital leases 682,353
----------
3,609,607
Less current maturities 946,305
----------
Total long-term obligations $2,663,302
==========
18
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. - STOCKHOLDERS' EQUITY
A. Preferred Stock
The certificate of incorporation authorizes the Board of Directors
to issue up to 1,000,000 shares of 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
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 an additional 520,000 shares may be issued to the
former owners of LF if certain earning levels of LF are achieved.
For 1994, an additional 89,502 shares of common stock were earned
which were issued in 1995 at a recorded share price of $1.69 per
share, which resulted in the recognition of additional goodwill in
the amount of $151,035. No additional shares were earned in 1995.
For 1996, an additional 48,634 shares of common stock were earned
which were issued in March 1997 at a recorded share price of $1.94
per share, which resulted in the recognition of additional goodwill
in the amount of $94,228.
In 1996, $4,241,000 in principal and $58,938 of related accrued
interest of subordinated convertible debentures were converted to
2,940,993 shares of common stock.
In 1996, 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.
In 1997, $1,600,000 in principal and $42,375 of related accrued
interest of subordinated convertible debentures were converted to
1,608,585 shares of common stock.
In 1997, $147,000 in principal and $10,100 of related accrued
interest of convertible notes payable were converted to 150,433
shares of common stock.
19
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. - STOCKHOLDERS' EQUITY (CONTINUED)
In 1997, the Company issued 1,923,077 shares of common stock in
exchange for aggregate consideration in the amount of $1,900,000.
In 1997, the Company issued 161,943 shares of common stock to the
Company's principal stockholder in connection with the partial
settlement by the principal stockholder of the 1996 litigation
settlement on behalf of the Company at a discounted value of
$175,000.
C. Warrants
In connection with two private placement offerings of its common
stock, the Company issued to the underwriter and 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
through December 31, 1997.
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, 1997, there were
125,578 (125,578 - 1996) warrants outstanding.
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. In connection with the sale of the warrants, the Company
issued to the underwriter warrants to purchase up to an aggregate of
90,000 warrants at $12.40 per unit. The warrants are exercisable
through September 1998.
In connection with the issuance of convertible debentures in 1997,
the Company issued warrants to the placement agent to purchase up to
an aggregate of 53,877 shares of common stock of the Company. The
warrants are exercisable for a five-year term commencing February
1997 at an exercise price of $2.06 per share. No warrants were
exercised through December 31, 1997.
20
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. - STOCK OPTION PLANS
A. Employee Stock Option Plans
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, 1996 and 1997 authorizing the granting of options
to purchase an aggregate of 1,730,000 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, are exercisable in equal annual increments as stipulated at
the time of grant, and vest over periods of three to five years from
the date of grant.
In 1997, the Company adopted an All Employee Incentive Stock Option
Plan whereby all full-time employees of the Company who meet certain
eligibility requirements will be granted stock options based on a
calculation equal to 1-1/2 options per dollar of biweekly base
salary. The option grant dates are January 2 and July 1. All options
granted are to have a term of ten years and become exercisable in
equal annual installments over three years. The options are only
exercisable so long as the optionee continues to be an employee of
the Company.
The following is a summary of stock option activity under these
plans for the past three years:
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
Outstanding at December 31, 1994 100,345 $ 2.07
Granted 365,000 1.76
Forfeited (59,582) 2.22
--------- -------
Outstanding at December 31, 1995 405,763 $ 1.77
Granted 100,000 1.75
Exercised (11,744) 1.60
Forfeited (8,185) 2.75
--------- -------
Outstanding at December 31, 1996 485,834 $ 1.75
Granted 257,165 1.75
Forfeited (6,859) 1.56
--------- -------
Outstanding at December 31, 1997 736,140 $ 1.75
=======
Exercisable at December 31, 1997 380,837 $ 1.74
=======
21
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. - STOCK OPTION PLANS (CONTINUED)
The average fair value of options granted under this plan were
$1.55, $1.57 and $1.51 per share for the years ended December 31,
1997, 1996 and 1995, respectively.
Exercise prices for options outstanding at December 31, 1997 range
from $1.44 per share to $2.75. The weighted average remaining
contractual life on the options outstanding at December 31, 1997 is
8.4 years.
B. Non-Qualified Stock Options
In 1993, the Company issued 177,908 non-qualified stock options to
an officer/stockholder in connection with bridge financing notes.
The options were issued at the rate of one option for each $3 of
note principal and were exercisable over five years from the date of
issuance at the per share price of $.60. At December 31, 1997, there
were 177,908 (177,908 - 1996) options outstanding.
On October 28, 1996, the Company entered into three non-qualified
stock option agreements with the president of the Company
authorizing the granting of options to purchase an aggregate of
300,000 shares. 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 in August 2005 if the prior conditions are not
met. The options expire in ten years from the date of grant. The
exercise price of the options are $1.375 per share, which equaled
the market price of the shares at the date of grant. 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, 1997.
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:
1997 1996 1995
-------- --------------------
Net loss - as reported $ 4,322M $ 4,694M $ 3,102M
Net loss - pro forma $ 4,611M 5,221M $ 3,223M
Loss per share - as reported $ .42 $ .71 $ .58
Loss per share - pro forma $ .44 $ .79 $ .60
22
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. - STOCK OPTION PLANS (CONTINUED)
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:
1997 1996 1995
----------- ----------- -----------
Expected dividend yield 0.000% 0.000% 0.000%
Expected stock price
volatility 89.280% 91.830% 94.410%
Risk-free interest rate 6.291% 6.502% 6.313%
Expected life of options 10.00 Years 10.00 Years 10.00 Years
C. Directors' Stock Option Plan
In April 1993, the Board of Directors and stockholders of the
Company adopted a non-discretionary outside directors' stock option
plan that provides for the grant to non-employee directors of
non-qualified options to purchase up to 50,000 shares of common
stock. In 1997, a total of 5,000 options were granted and 7,500 were
forfeited. At December 31, 1997, there were 20,000 options
outstanding (22,500 - 1996) to directors under this plan. These
options are exercisable at prices ranging from $1.375 to $3.00 per
share.
NOTE 14. - INCOME TAXES
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. The income tax provision for the years ended December
31, 1997, 1996 and 1995 consist entirely of state income taxes currently
payable.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $13,611,000 and state net operating loss
carryforwards of approximately $8,230,000 which expire through 2012. 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.
23
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. - INCOME TAXES (CONTINUED)
At December 31, 1997, the Company also had approximately $97,000 in
research and development and state investment tax credit carryforwards which
will expire through 2012. A deferred tax asset, representing the future benefit
attributed primarily to the available net operating loss carryforwards, in the
amount of approximately $4,632,000 ($3,854,000 - 1996) 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:
December 31,
--------------------------
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 4,703,000 $ 3,613,000
Litigation settlement payable -- 238,000
Reserves and other 345,000 316,000
----------- -----------
5,048,000 4,167,000
Deferred tax liabilities:
Property and equipment (416,000) (313,000)
----------- -----------
Net deferred tax asset 4,632,000 3,854,000
Valuation allowance (4,632,000) (3,854,000)
----------- -----------
Net deferred $ -- $ --
=========== ===========
NOTE 15. - 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 1997, a $11,650 ($10,000 -
1996) 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. There were no earnings under the plan for 1997, 1996 and
1995.
24
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. - COMMITMENTS
A. Lease Commitments
The Company utilizes certain equipment, vehicles and facilities
under operating leases which expire at various dates through 2003.
Rent expense under operating leases for the years ended December 31,
1997, 1996 and 1995, was approximately $128,000, $207,000 and
$202,000, respectively.
The minimum operating lease payments required to be paid subsequent
to 1997 are as follows:
1998 $ 102,250
1999 60,972
2000 54,397
2001 35,568
2002 35,568
Thereafter 5,928
---------
$ 294,683
=========
B. Employment Contracts
The President and Chief Executive 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 former Chief Executive Officer of the Company is covered under
an employment agreement with a term expiring in May 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.
The Chief Financial 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 $110,000, and, under
certain circumstances, for a severance payment based upon the
remaining salary obligation through expiration of the agreement.
25
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. - COMMITMENTS (CONTINUED)
C. Directors' Stock Plan
In 1997, the Company entered into an agreement with a member of the
Board of Directors whereby an aggregate of 50,000 shares of common
stock are to be issued over the next three years in exchange for
service as a director. For 1997, a director fee in the amount of
$21,875 has been recognized for 25,000 shares of common stock
earned. The stock will be issued in 1998.
NOTE 17. - RELATED PARTY TRANSACTIONS
Interest expense incurred under notes issued to the Company's principal
stockholder and former chairman, a family trust, the Company's CEO, and the wife
of the Company's CEO amounted to $105,327, $99,907 and $68,325, for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company subleases office and laboratory space from SSC for $5,700 per
month pursuant to an agreement which expires in July 1998, but contains two,
three-year option terms. Lease expense for 1997 was $66,000 ($16,650 - 1996).
The Company utilized the services of a company owned by one of its
directors for purposes of business acquisition due diligence. The fees paid in
1997 to the company were $35,000.
NOTE 18. - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
1997 1996 1995
-------- -------- --------
Interest $712,875 $407,800 $259,733
======== ======== ========
Taxes $ 4,385 $ 6,773 $ 7,226
======== ======== ========
During 1997, convertible debentures in the amount of $1,600,000 as well as
$42,375 of related accrued interest, were converted in to 1,608,585 shares of
common stock of the Company. In addition, convertible notes payable in the
amount of $140,000 as well as $10,433 of related accrued interest were converted
in to 150,433 shares of common stock. The Company also issued 48,631 shares of
common stock with a value of $94,228 to the former owners of LF pursuant to the
earn-out provisions of the purchase agreement. The Company also issued 161,943
shares of common stock at a discounted value of $175,000 to the principal
stockholder of the Company in connection with partial settlement of the 1996
litigation settlement.
26
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. - 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 into 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 19. - 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 "Quantum 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 1997, 1996 and 1995 is set forth as follows:
27
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. - INDUSTRY SEGMENTS (CONTINUED)
NOTE 19. - INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Rotary Rapid
Engine Laser Engineering Photonic Tooling and
Development(1) Services(3) Consulting Materials(4) Manufacturing
----------- -------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
1997
----
Sales to unaffiliated
customers $ -- $ 5,335,446 $ -- $ -- $ 113,129
Intersegment sales -- 300,000 -- -- --
----------- ------------ ------------ ------------- -------------
Total revenue $ -- $ 5,635,446 $ -- $ -- $ 113,129
=========== ============ ============ ============= =============
Operating income (loss) $ -- $ (939,880) $ -- $ -- $ (1,052,778)
=========== ============ ============ ============= =============
Loss from unconsolidated subsidiary $ -- $ -- $ -- $ (1,958,520) $ --
=========== ============ ============ ============= =============
Identifiable assets $ -- $ 6,167,917 $ -- $ 437,375 $ 345,637
=========== ============ ============ ============= =============
Depreciation and amortization $ -- $ 704,123 $ -- $ -- $ 16,842
=========== ============ ============ ============= =============
Capital expenditures $ -- $ 636,436 $ -- $ -- $ 318,270
=========== ============ ============ ============= =============
1996
----
Sales to unaffiliated
customers $ -- $ 5,080,207 $ -- $ 46,959 $ --
Intersegment sales -- 36,650 -- -- --
----------- ------------ ------------ ------------- -------------
Total revenue $ -- $ 5,116,857 $ -- $ 46,959 $ --
=========== ============ ============ ============= =============
Operating income (loss) $ (95,797) $ (2,518,080) $ -- $ (665,188) $ (110,537)
=========== ============ ============ ============= =============
Identifiable assets $ 34,833 $ 5,718,537 $ -- $ 2,883,781 $ 49,994
=========== ============ ============ ============= =============
Depreciation and amortization $ 16,087 $ 970,966 $ -- $ 172,678 $ 5,595
=========== ============ ============ ============= =============
Capital expenditures $ -- $ 251,664 $ -- $ 347,485 $ 57,915
=========== ============ ============ ============= =============
1995
----
Sales to unaffiliated customers $ 25,000 $ 4,081,676 $ 945,690 $ -- $ --
Intersegment sales -- -- 1,500 -- --
----------- ------------ ------------ ------------- -------------
Total revenue $ 25,000 $ 4,081,676 $ 947,190 $ -- $ --
=========== ============ ============ ============= =============
Operating income (loss) $(2,735,682) $ 242,223 $ (46,465) $ -- $ --
=========== ============ ============ ============= =============
Identifiable assets $ 393,195 $ 5,251,639 $ 485,968(2) $ -- $ --
=========== ============ ============ ============= =============
Depreciation and amortization $ 320,648 $ 330,457 $ 53,840 $ -- $ --
=========== ============ ============ ============= =============
Capital expenditures $ 307,849 $ 600,861 $ -- $ -- $ --
=========== ============ ============ ============= =============
</TABLE>
Eliminations Consolidated
------------ ------------
1997
----
Sales to unaffiliated
customers $ -- $ 5,448,575
Intersegment sales (300,000) --
----------- -----------
Total revenue $ (300,000) $ 5,448,575
=========== ===========
Operating income (loss) $ 261,026 $(1,731,634)
=========== ===========
Loss from unconsolidated subsidiary $ -- $(1,958,520)
=========== ===========
Identifiable assets $ -- $ 6,950,929
=========== ===========
Depreciation and amortization $ 20,747 $ 741,712
=========== ===========
Capital expenditures $ -- $ 954,706
=========== ===========
1996
----
Sales to unaffiliated
customers $ -- $ 5,127,166
Intersegment sales (36,650) --
----------- -----------
Total revenue $ (36,650) $ 5,127,166
=========== ===========
Operating income (loss) $ 241,317 $(3,148,285)
=========== ===========
Identifiable assets $ 27,476) $ 8,659,669
=========== ===========
Depreciation and amortization $ 14,136 $ 1,179,462
=========== ===========
Capital expenditures $ -- $ 657,064
=========== ===========
1995
----
Sales to unaffiliated customers $ -- $ 5,052,366
Intersegment sales (1,500) --
----------- -----------
Total revenue $ (1,500) $ 5,052,366
=========== ===========
Operating income (loss) $ (23,343) $(2,563,267)
=========== ===========
Identifiable assets $ -- $ 6,130,802
=========== ===========
Depreciation and amortization $ 23,343 $ 728,288
=========== ===========
Capital expenditures $ -- $ 908,710
=========== ===========
(1) Includes parent holding company, 1995.
(2) Represents amounts receivable from former subsidiary and purchaser of
former subsidiary.
(3) Includes parent holding company, 1996 and 1997.
(4) Represents SSC, an unconsolidated subsidiary in 1997 (see Note 5).
28
<PAGE>
INFINITE MACHINES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. - FOURTH QUARTER ADJUSTMENTS
There were no material adjustments recognized in the fourth quarter of
fiscal 1997.
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 $1,304,000. Approximately $250,000 is attributed to additional
interest expense which was recorded pursuant to the issuance of convertible
debentures (see Note 18), $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.
NOTE 21. - SUBSEQUENT EVENT
On February 23, 1998, the former chairman and principal stockholder in the
Company, along with related parties of the principal stockholder, sold an
aggregate of 2,350,221 shares of common stock of the Company to Northeast
Hampton Holdings, LLC. Also, the principal stockholder sold his interest in
convertible secured notes with a principal balance of $900,605.
29
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INFINITE MACHINES CORP.
The undersigned, being the President and Secretary of Infinite Machines
Corp. (the "Corporation") hereby certify that:
FIRST: The name of the Corporation is INFINITE MACHINES CORP.
SECOND: The Certificate of Incorporation was filed with the Secretary of
State on October 14,1986.
THIRD: The Certificate of Incorporation is hereby amended to change the
Corporation's name.
FOURTH: To accomplish the foregoing amendment, Article FIRST is hereby
amended and restated as follows:
"FIRST: The name of the corporation (hereinafter called the
"Corporation") is Infinite Group, Inc."
FIFTH: The foregoing amendment was adopted by the directors and
stockholders of the Corporation at duly called meetings of the board and
stockholders, respectively, in accordance with the provisions of Section 242 of
the General Corporation Law.
1
<PAGE>
IN WITNESS WHEREOF, this Certificate is subscribed as of this 31st day of
December, 1997 by the undersigned who affirm under penalties of perjury that the
statements contained herein are true and correct.
------------------------------
Clifford G. Brockmyre, President
------------------------------
Daniel Landi, Secretary
2
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of July 1, 1996 (the "Agreement"), between
INFINITE MACHINES CORP., a Delaware corporation, having an office at 300 Metro
Center Boulevard, Warwick, Rhode Island 02886 (the "Company"), and CLIFFORD G.
BROCKMYRE, residing at 335 West Beach Road, Charlestown, Rhode Island 02813 (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive to devote full time
to the business of the Company, which includes various businesses carried on by
HGG Laser-Fare, Inc., a Rhode Island corporation ("Subsidiary"), and the
Executive desires to be so employed hereunder effective as of the date hereof.
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT
1.1. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to serve, as President and Chief Operating Officer
of the Company, and as President and Chief Executive Officer of Subsidiary upon
the terms and conditions herein contained. The Executive shall be the most
senior executive officer of Subsidiary. In his capacity as an officer, subject
to the joint direction of the Chairman and Board of Directors of the Company and
the direction of the Board of Directors of Subsidiary in exercising their
fiduciary duties, the Executive shall have the executive power and authority to
carry out the business plans and
<PAGE>
policies of the Company and Subsidiary and make decisions in connection
therewith and to designate other officers for election by such Boards of
Directors in the exercise of their fiduciary duties. The Executive shall report
to the Chairman and Board of Directors of the Company, jointly, and to the Board
of Directors of Subsidiary on a regular basis.
1.2. The term of employment under this Agreement shall
commence as of the date hereof (the "Effective Date"), and, subject to the terms
hereof, shall terminate on the earlier of (i) June 30, 2000 (the "Termination
Date"), or (ii) termination of the Executive's employment pursuant to this
Agreement (such term of employment referred to hereinafter as the "Employment
Term"); provided, however, that on the Termination Date and on each subsequent
anniversary of such Termination Date, the Termination Date shall be extended for
a period of one year, unless either party shall have given written notice to the
other party not less than six months prior to any such date that the Termination
Date shall not be so extended.
1.3. Throughout the Employment Term, the Executive shall
devote his best efforts and substantially all his business time and services to
the business and affairs of the Company and Subsidiary.
1.4. This Agreement shall not be interpreted to prohibit the
Executive from making passive personal investments or conducting private
business affairs if those activities do not
-2-
<PAGE>
materially interfere with the services required under this Agreement.
1.5 The Company shall take such action as a shareholder of
Subsidiary necessary to carry out the terms of the Agreement with respect to
Subsidiary.
2. SALARY
2.1. From the Effective Date, subject to the provisions of
Section 2.8, the Executive shall be entitled to receive a base salary at a rate
of not less than $175,000 for each year, payable in arrears in equal
installments not less frequently than monthly in accordance with the Company's
payroll practices, with such increases as are hereinafter provided. Once
increased, such higher amount shall constitute the Executive's annual base
salary.
2.2. The Company shall increase the Executive's annual base
salary on each July 1 after the Effective Date which occurs during the
Employment Term so that the Executive will remain the most highly compensated
employee of the Company or Subsidiary or any other wholly-owned subsidiary of
the Company.
2.3. In addition to any increases under Section 2.2, the
Company at any time may increase the Executive's base salary.
2.4. The Company shall pay the Executive a bonus of $75,000 on
or before December 31, 1997 on account of services performed during the calendar
year 1996.
-3-
<PAGE>
3. BONUSES
3.1. The Executive shall participate in all executive bonus
plans now existing and established from time to time by the Company or
Subsidiary, including the Company's Executive Incentive Performance Plan. The
Company may grant bonuses to the Executive in such amounts and at such times as
the Board of Directors shall determine. In no event shall bonuses be less than
proportionately comparable bonuses granted to other senior executives of the
Company, Subsidiary or any other wholly-owned subsidiary.
4. EMPLOYEE BENEFITS
4.1. The Executive shall be included to the extent eligible
thereunder under any and all existing and future plans, programs or arrangements
providing benefits for senior executives of the Company, Subsidiary or any other
wholly-owned subsidiary of the Company on terms no less favorable than those
available for other senior executives and at least comparable to those
maintained by the Company and/or Subsidiary as of the date hereof.
4.2. The Executive shall be included in all incentive, profit
sharing, bonus, or other similar or comparable plans applicable to senior
executives of the Company, Subsidiary and/or other wholly-owned subsidiaries
(including, without limitation, the Company's Executive Performance Incentive
Plan) in accordance with the terms thereof.
4.3. The Executive shall be provided with an automobile and
shall be entitled to all other perquisites or
-4-
<PAGE>
privileges of office which are made available to other senior executives of the
Company and/or Subsidiary during the Employment Term.
4.4. The Executive shall be provided, at the expense of the
Company, a level of disability and life insurance, the terms, conditions and
amounts of which are no less favorable to the Executive than those in effect on
the Effective Date or as the same may be increased for other senior executives
of the Company and/or Subsidiary.
4.5. The Executive shall be entitled to no less than 4 weeks
paid vacation in each year, which vacation shall be increased annually by one
additional week up to a maximum of six weeks. The Company may grant additional
vacation time to the Executive.
5. EXPENSES
5.1. The Executive is authorized to incur reasonable expenses
necessary to carry out his duties under this Agreement. The Company and
Subsidiary will reimburse the Executive for all such expenses upon presentation
by the Executive from time to time of an itemized account of such expenditures
in accordance with Company practices consistently applied.
6. TERMINATION
6.1. In the event that the Executive's employment is
terminated by the Company (other than as provided in Section 7, or for Cause, as
defined below) or the Executive terminates his employment for Good Reason (as
defined below) prior to the
-5-
<PAGE>
Termination Date, as then in effect, the Executive shall be entitled to receive,
in an immediate lump sum payment, the product of:
(i) The sum of (A) the Executive's highest annual rate
of salary, determined pursuant to Section 2 of this Agreement during the
Employment Term, and (B) the highest annual bonus paid to or accrued for the
benefit of the Executive during the Employment Term; multiplied by
(ii) 2.99.
6.2. In addition, the Company shall provide the Executive with a
continuation of those employee benefits,if any, designated with an asterisk on
Exhibit A (attached hereto) and the benefit provided under Section 4.4, or
substantially equivalent coverage (or the full value thereof in cash), for the
period from the end of the Employment Term until the Termination Date (as then
in effect); provided, however, that in the event that the Executive obtains
other substantially comparable employment during such period, the Executive
shall notify the Company and the amount of any health or medical benefits to
which the Executive is entitled under this Section 6.2 shall be reduced (but not
below zero) by any such benefits provided by the Executive's new employer. The
Executive shall also be entitled to receive a pro rata share of the maximum
award available under any incentive plan or program (including but not limited
to the Executive Performance Incentive Plan or any substitute, successor or
replacement thereto) for which the performance period has not closed (or, if
closed, payment has not been made) prior to the end of the Employment Term.
-6-
<PAGE>
7. DEATH OR PERMANENT DISABILITY
7.1. In the event the Executive shall fail during the
Employment Term, because of illness, physical or mental disability or other
incapacity, for a period of six consecutive months to render the services
provided for by this Agreement ("Permanent Disability"), then the Company may
terminate the Employment Term, by notice to the Executive effective not less
than 30 days after giving such notice which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under this Section 7.1; provided, however, that the
Company shall, after such termination due to Permanent Disability, continue to
pay the Executive's annual base salary (as set forth in Section 2 of this
Agreement) and provide for the continuation of the employee benefits designated
with an asterisk on Exhibit A and the benefit provided under Section 4.4 of this
Agreement or substantially equivalent coverage (or the full value thereof in
cash) for a period of 24 months. The Executive will use his reasonable best
efforts to cooperate with any physician engaged by the Company to determine
whether or not Permanent Disability exists. Any payments provided for in this
Section 7.1 shall be offset (but not below zero) by any salary continuation
payments received by the Executive under any plan, program or arrangements
described in Section 4.1 of this Agreement.
7.2. In the event of the death of the Executive during the
Employment Term, the Employment Term shall terminate on the date of the
Executive's death, and the Company shall pay or
-7-
<PAGE>
cause to be paid the amount of $750,000 to his estate (or other beneficiary
designated by him). Thereafter, the Company shall have no further obligation to
compensate the Executive under this Agreement. The Executive acknowledges that
the Company intends to fund such payment through a life insurance policy under
which the beneficiary will be designated by the Executive. Such life insurance
policy will be in addition to any other insurance benefit to which the Executive
may be entitled under this Agreement. The Executive agrees to cooperate with the
Company in obtaining such policy.
8. TERMINATION FOR GOOD REASON
8.1. The Executive may terminate his employment hereunder for
Good Reason at any time during the Employment Term. For purposes of this
Agreement, "Good Reason" shall mean any of the following (without the
Executive's express prior written consent):
(i) The assignment to the Executive by the Company of
duties inconsistent with the Executive's positions, duties, responsibilities,
titles or offices, or any removal of the Executive from or any failure to
re-elect the Executive to any of such positions, except in connection with the
termination of the Executive's employment for Cause, Permanent Disability as set
forth in Section 7, or as a result of the Executive's death or by the Executive
other than for Good Reason;
(ii) A reduction by the Company in the Executive's base
salary as in effect at the Effective Date hereof, as the same may be increased
according to the terms of this Agreement;
(iii) The Company's requiring the Executive to be based
anywhere other than the Company's executive offices in Rhode Island, except for
required travel on the Company's business to an extent substantially consistent
with the Executive's business travel obligations at the Effective Date hereof,
or any material reduction or adverse change in the emoluments or perquisites of
office provided to the Executive at the Effective Date hereof;
-8-
<PAGE>
(iv) A failure by the Company to continue in effect any
benefit or compensation plan (including any pension, profit sharing, bonus, life
insurance, health, accidental death or dismemberment or disability plan) in
which the Executive is participating at the Effective Date hereof (or in the
case of plans adopted after the date hereof and providing a type of benefit not
provided by the Company at the Effective Date hereof, at the respective dates of
adoption of such plans) without providing for or establishing plans or
arrangements providing the Executive with substantially similar benefits or the
taking of any action by the Company which would materially adversely affect the
Executive's participation in or materially reduce the Executive's benefits under
any of such plans;
(v) The taking of any action by the Company which would
deprive the Executive of any material fringe benefit enjoyed by the Executive
under this Agreement at the Effective Date (or in the case of a fringe benefit
not provided by the Company on the Effective Date, at the respective dates of
adoption of such plans first providing such fringe benefits) or the failure by
the Company to provide the Executive with the number of paid vacation days to
which the Executive is entitled hereunder or, if greater, in accordance with the
Company's practices at the Effective Date hereof;
(vi) The failure by the Company to obtain the specific
assumption of this Agreement by any successor or assign of the Company or any
person acquiring a substantial portion of the assets of the Company;
(vii) Any material breach by the Company of any
provision of this Agreement and, in the case of a breach, other than the failure
to pay base salary or bonuses when due, which is susceptible of cure without
material risk of permanent loss to the Executive, the continuation of such
breach for thirty (30) or more days following written notice to the Company; or
(viii) Subject to the provisions of Section 8.3, any
Change in Control (as defined below).
8.2 Change in Control.
For purposes of this Agreement, a "Change in Control" of
the Company shall be deemed to have occurred if:
(i) any Person (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
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<PAGE>
(ii) during any period of no more than two consecutive
years (not including any period prior to the execution of this Agreement)
individuals who at the beginning of such period constitute the Board, and any
new director (other than a director designated by a person who has entered into
an agreement with the Company to effect a transaction described in clause (i),
(ii) or (iv) of this definition) whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or whose nomination for
election was previously so approved, cease for any reason to constitute at least
a majority thereof;
(iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other entity, other than (a) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 75% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
Person acquires 25% or more of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
As used in this Agreement, the term "Person" has the meaning given such
term in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) of the Exchange Act, but excludes (x) the Company, (y) any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company (or of any subsidiary of the Company) and (z) any corporation owned,
directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company.
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<PAGE>
8.3. The Executive's right to terminate his employment
pursuant to clause (viii) of Section 8.1 shall be exercised, if at all, by
written notice within one hundred twenty (120) days of the date of Change in
Control.
9. DISCHARGE FOR CAUSE
9.1. The Company shall have the right to terminate the
employment of the Executive for Cause. In the event that prior to the
Termination Date the Executive's employment is (a) terminated by the Company for
Cause, as hereinafter defined, or (b) by the Executive other than for Good
Reason or (c) other than as a result of Permanent Disability or death, the
Executive shall be entitled to receive all salary, bonuses, and benefits to
which the Executive is entitled or which have accrued up to and including the
effective date of the Executive's termination of employment hereunder. All
bonuses and similar amounts shall accrue through the date of termination. If the
Company follows the procedures specified in this Section 9, in the case of the
termination of the Executive's employment for Cause, the Company's obligation
under this Agreement to make any further payments, or provide any benefits
specified herein, to the Executive shall thereupon cease and terminate. As used
herein, the term "Cause" shall mean (i) the willful and continued failure by the
Executive to substantially perform his duties with the Company (other than such
failure resulting from his incapacity due to physical and mental illness or any
such actual or anticipated failure resulting from his termination for Good
Reason), after a demand for substantial
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<PAGE>
performance is delivered to the Executive by the Board of Directors of the
Company which specifically identified the manner in which the Board of Directors
believe that the Executive has not substantially performed his duties, or (ii)
the willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or Subsidiary, monetarily or otherwise, or
(iii) the Executive's willful and continued personal dishonesty, breach of
fiduciary duty involving personal profit, or conviction of a felony (other than
minor traffic violations). For purposes of this Section, no act or failure to
act on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company or
Subsidiary. Termination of the Executive's employment pursuant to this Section 9
shall be communicated by a Notice of Termination. For purposes of this Agreement
a "Notice of Termination" shall mean delivery to the Executive of a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for the purpose (after reasonable notice to the Executive
and reasonable opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board prior to such vote), finding that in the
good faith opinion of the Board that any event constituting Cause for
termination in accordance with this Section 9 has occurred and specifying the
particulars thereof in detail. For purposes of this Agreement, no
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<PAGE>
such purported termination of the Executive's employment shall be effective
without such Notice of Termination.
10. NO OBLIGATION TO MITIGATE DAMAGES
10.1. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the termination of his employment
hereunder or otherwise, except to the extent set forth in Section 6.2 of this
Agreement. In addition, the Company shall reimburse the Executive on a quarterly
basis for all costs and expenses incurred by the Executive to enforce or protect
his rights under this Agreement unless it shall ultimately be determined by a
final judgment of a court of competent jurisdiction that the Executive was
without any justification for commencing or continuing any such action or
proceedings. In the event of such final judgment, the Executive shall repay to
the Company any amounts of reimbursement paid under this Section 10.
11. NONCOMPETITION
(a) During the Employment Term and provided the Company
performs its obligations hereunder, for a period of one (1) year thereafter, the
Executive shall not, directly or indirectly become under contract to or
associated with, employed by, render services to or own an interest (other than
as a shareholder owning
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<PAGE>
not more than a 5% interest) in any business that is then in competition with
the Company or Subsidiary.
(b) The necessity for protection of the Company and its
affiliates against the Executive's competition, as well as the nature and scope
of such protection, has been carefully considered by the parties hereto in light
of the uniqueness of the Executive's talent and his importance to the Company.
Accordingly, the Executive agrees that, in addition to any other relief to which
the Company may be entitled, the company shall be entitled to seek and obtain
injunctive relief (without the requirement of any bond) from a court of
competent jurisdiction for the purpose of restraining the Executive from any
actual or threatened breach of the covenant contained in this Section 11. If for
any reason a final decision of any court determines that the restrictions under
this Section 11 are not reasonable or that consideration therefor is inadequate,
such restrictions shall be interpreted, modified or rewritten by such court to
include as much of the duration, scope and geographic area identified in this
Section 11 as will render such restrictions valid and enforceable.
12. INDEMNIFICATION; DIRECTORS & OFFICERS INSURANCE
12.1. The Company agrees to indemnify the Executive and agrees
to cause Subsidiary and each other wholly-owned subsidiary to indemnify the
Executive to the fullest extent permitted under the applicable laws of Delaware
and Rhode Island, respectively. Such indemnification shall be in no way
exclusive of any other right of indemnification to which the Executive may be
entitled.
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<PAGE>
12.2. The Company shall use its best efforts as soon as
practical to obtain and thereafter during the Employment Term maintain
directors' and officers' liability insurance with limits of at least $1,000,000
under policies and issued by a company or companies reasonably acceptable to the
Executive.
13. CONFIDENTIALITY
13.1. The Executive shall not intentionally disclose or reveal
to any unauthorized person, during or for a three (3) year period after the
employment Term any trade secret or other confidential information relating to
the Company or Subsidiary, or any of their respective businesses or principals,
that has not been previously disclosed or revealed, and the Executive confirms
that such information is the exclusive property of the Company and Subsidiary.
14. NOTICES
14.1. All notices or communications hereunder shall be in
writing, addressed to each party at its or his address set forth above. Any such
notice or communication shall be sent certified or registered mail, return
receipt requested, postage prepaid, or by prepaid nationally-recognized courier
service addressed as above (or to such other address as such party may designate
in writing from time to time), and the actual date of receipt, as shown by the
receipt therefor, shall determine the time at which notice was given.
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<PAGE>
15. SEPARABILITY
15.1. If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
16. ASSIGNMENT
16.1. This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of the Executive and the assigns and
successors of the Company, but neither this Agreement nor any rights hereunder
shall be assignable or otherwise subject to hypothecation by the Executive;
provided, however, that no such assignment by the Company without the
Executive's consent shall release the Company from any of its obligations
hereunder.
17. ENTIRE AGREEMENT
17.1. This Agreement represents the entire agreement of the
parties and shall supersede any and all previous contracts, arrangements or
understandings between the Company and the Executive; provided however, that the
benefits provided for in this Agreement are in addition to and shall in no way
reduce or diminish any right to which he is otherwise entitled that is already
accrued for or granted to the Executive pursuant to a plan, program or
arrangement of the Company. The Agreement may be amended at any time by mutual
written agreement of the parties hereto.
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<PAGE>
18. GOVERNING LAW
18.1. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of Rhode Island.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
INFINITE MACHINES CORP.
By /s/
-----------------------------------
/s/
-----------------------------------
Clifford G. Brockmyre
-17-
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of October 20, 1997,
between INFINITE MACHINES CORP., a Delaware corporation ("Employer"), and DANIEL
T. LANDI of 43 Charter Oak Court, North Kingstown, Rhode Island 02852
("Executive").
1. Employment. Subject to the terms and conditions of this Agreement,
Employer hereby agrees to employ Executive, and Executive accepts such
employment, as Chief Financial Officer of Employer or in such other capacity or
capacities as Employer and Executive may from time to time determine. In such
capacity, Executive shall be responsible for the day-to-day administration of
the accounting and financial affairs of the Employer and for supervising and
managing the accounting and financial affairs of Laser Fare, Inc., Express Tool,
Inc. and such other divisions and/or subsidiaries of Employer as Employer and
Executive may agree from time to time.
2. Duties of Executive. Consistent with Section 1 above, Executive shall
have such duties as the President and Board of Directors of Employer may from
time to time determine. Executive agrees to perform faithfully, industriously
and to the best of Executive's ability, experience and talents, all of the
duties that may be required by the terms of this Agreement, to the reasonable
satisfaction of the President and Board of Directors of Employer.
3. Compensation of Executive. (a) As compensation for the services
provided by Executive under this Agreement during the Employment Period (as
defined in Section 9 below), Employer will pay Executive a base salary at an
annual rate of One Hundred Ten Thousand Dollars ($110,000) (the "Base Salary")
payable in accordance with Employer's usual payroll procedures. Base Salary
shall be subject to annual review and increase as determined by the Board of
Directors of Employer.
(b) During the term of this Agreement, Executive shall be entitled to
participate in any employee benefit plans, medical insurance plans, employee
education plans, life insurance plans, disability plans and other benefit plans
for which he is otherwise eligible and qualified, customarily made available by
Employer from time to time to its employees generally. Such participation shall
be subject to (i) the terms of the applicable plan documents and (ii) generally
applicable Employer policies.
(c) Executive shall be entitled to up to four (4) weeks paid vacation for
each year during the Employment Period. Such vacation shall be taken at a time
mutually convenient to Employer and Executive and must be approved by Employer.
(d) Executive shall be entitled to paid holidays in accordance with
Employer's normal policies.
<PAGE>
(e) Employer shall provide Executive with an automobile for Executive's
business use. Executive shall be responsible for recording all business and
non-business use and for the payment of all taxes in connection with any
non-business use.
(f) All salary, bonuses and other compensation payable to Executive shall
be subject to applicable federal and state income tax and other withholding
requirements.
(g) Executive shall participate in all executive bonus and option plans
established from time to time for senior executives of Employer generally.
4. Business Expenses. Employer will reimburse Executive for all authorized
travel and out-of-pocket expenses reasonably incurred by him for the purposes of
and in connection with performing his services to Employer hereunder. Such
reimbursement shall be made promptly upon presentation to Employer of vouchers
or other statements itemizing the expenses in reasonable detail in conformity
with Employer's policies.
5. Confidentiality. Executive acknowledges that in the course of
employment, Executive has obtained and will obtain information relating to
legitimate, protectible business interests of Employer or its Affiliates,
including information concerning business operations, customer lists, patents,
inventions, methods of doing business, suppliers, and strategic plans (the
"Confidential Information"). Executive agrees that at all times, Executive will
hold in strict confidence, will not use for Executive's own account or for the
benefit of any person other than Employer or its Affiliates, and will not
publish or otherwise disclose to persons not under an obligation of secrecy or
confidentiality to Employer no less restrictive than this Agreement, all
Confidential Information disclosed or made available to Executive by the Company
or its Affiliates, except for: Confidential Information which (a) was already
known to Executive at the time such Confidential Information was disclosed to
Executive; (b) is or becomes publicly known or publicly available through no
violation of any of Executive's obligations in this Agreement; (c) is or has
been furnished to a third party by Employer without limitation on the third
party's use or disclosure of such Confidential Information; or (d) is disclosed
pursuant to a regulatory requirement or request of a governmental agency or in
response to a valid subpoena or the like or an order, judgment or decree of a
court of competent jurisdiction.
6. Enforcement. If Executive violates or threatens to commit a breach of
any of the provisions of Section 5 of this Agreement (the "Restrictive
Covenants"), Employer, in addition to, and not in lieu of, any other rights and
remedies available to Employer at law or in equity, shall have the right and
remedy to have the Restrictive Covenants specifically enforced by any court
having
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<PAGE>
equity jurisdiction and to have Executive's breach or threatened breach of the
Restrictive Covenants restricted by temporary restraining order, temporary or
permanent injunction or the like, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to Employer and that
monetary damages will not provide adequate remedy to Employer.
7. Definition of Affiliate. The term "Affiliate" or "Affiliates" as used
herein shall mean an entity controlled by Employer, under common control with
Employer, controlling Employer or otherwise affiliated with Employer, directly
or indirectly through stock ownership, and shall include (but not be limited to)
each corporation a majority of the voting stock of which is owned by Employer or
any such other majority-owned subsidiary (or chain thereof) of Employer.
8. Non-waiver of Rights. The failure to enforce at any time of the
provisions of this Agreement or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement, or
any part hereof, or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
9. Term; Termination. (a) Unless sooner terminated, Executive's employment
under this Agreement shall begin the date hereof and end October 19, 2000 (the
"Employment Period"). This Agreement may be terminated by Employer at any time
for cause. The term "cause" as used herein shall mean gross or habitual neglect
of duty, continuing default of Executive's obligations hereunder, prolonged
absence from duty without the consent of Employer other than from illness and
intentional harm or to the business of Employer or willful or serious misconduct
on the part of Executive.
(b) In the event Employer terminates this Agreement without cause,
Executive shall be entitled to receive Base Salary and all benefits under
Section 3(b) then in effect for the remainder of the original Employment Term.
10. Notices. All notices required or permitted under this Agreement shall
be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
Employer:
Infinite Machines Corp.
300 Metro Center Blvd.
Warwick, RI 02886
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<PAGE>
Executive:
Daniel T. Landi
43 Charter Oak Court
North Kingstown, RI 02852
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
11. Indemnification. Employer shall indemnify Executive to the full extent
provided under Delaware law.
12. Entire Agreement. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
13. Amendment. This Agreement may be modified or amended, if the amendment
is made in writing and is signed by both parties.
14. Severability. If any provisions of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall to be
valid and enforceable. If a court finds that a provision of this Agreement is
invalid or unenforceable, then such provision shall be deemed to be written,
construed and enforced as so limited.
15. Applicable Law. This Agreement shall be governed by and contained in
accordance with the laws of the State of Rhode Island.
16. Binding Agreement. This Agreement shall bind and inure the benefit of
the parties and their respective legal representatives, successors and assigns,
except that Executive may not delegate any of his obligations under this
Agreement or assign this Agreement and that Employer will not assign its rights
under this Agreement without the consent of Executive, which consent shall not
be unreasonably withheld, conditioned or delayed.
IN WITNESS WHEREOF, the parties hereto executed this Agreement as of the
day and year first written above.
INFINITE MACHINES CORP.
By: /s/
-------------------------------
/s/
-------------------------------
Daniel T. Landi
-4-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of February 12, 1998,
between MOUND ACQUISITION, INC., an Ohio corporation ("Employer"), and LARRY R.
DOSSER of Centerville, Ohio ("Employee").
1. Employment. Subject to the terms and conditions of this Agreement,
Employer hereby agrees to employ Employee, and Employee accepts such employment,
as President of Employer or in such other capacity or capacities as Employer and
Employee may from time to time determine.
2. Duties of Employee. Consistent with Section 1 above, Employee shall
have such duties as the Chairman and Chief Executive Officer and Board of
Directors of Employer may from time to time determine. Employee agrees to
perform faithfully, industriously and to the best of Employee's ability,
experience and talents, all of the duties that may be required by the terms of
this Agreement, to the reasonable satisfaction of the chief executive officer
and Board of Directors of Employer.
3. Compensation of Employee. (a) As compensation for the services provided
by Employee under this Agreement during the Employment Period (as defined in
Section 11 below), Employer will pay Employee a base salary at an annual rate of
Seventy-Five Thousand Dollars ($75,000) (the "Base Salary") payable in
accordance with Employer's usual payroll procedures.
(b) During the term of this Agreement, Employee shall be entitled to
participate in any employee benefit plans, medical insurance plans, employee
education plans (collectively, "Benefit Programs"), life insurance plans,
disability plans and other benefit plans for which he is otherwise eligible and
qualified, customarily made available by Employer from time to time to its
employees generally. Such participation shall be subject to (i) the terms of the
applicable plan documents and (ii) generally applicable Employer policies.
Employer agrees that such Benefit Programs will be substantially comparable to
those offered by Laser Fare, Inc., a Rhode Island corporation which is an
affiliate of Employer.
(c) Employee shall be entitled to up to three (3) weeks paid vacation for
each year during the Employment Period. Such vacation shall be taken at a time
mutually convenient to Employer and Employee and must be approved by Employer.
(d) Employee shall be entitled to paid holidays in accordance with
Employer's normal policies.
<PAGE>
(e) Subject to the following limitations, Employee shall also be paid a
Sales Incentive which, for purposes hereof, shall mean 2.5% of the Annual Net
Sales. The term Annual Net Sales shall mean for each year the gross annual sales
of Employer, less discounts and returns, determined by Employer's independent
certified public accountant (the "Accountant") in accordance with generally
accepted accounting principles ("GAAP"). In order to be paid such compensation,
the Annual Net Sales shall equal or be greater than the following amounts on a
yearly basis; provided, that if such amounts are achieved for the stated year
the Sales Incentive shall be paid on the entire amount of the Annual Net Sales.
Year Ending Minimum Annual
December 31 Net Sales
----------- ---------
1998 400,000.00
1999 600,000.00
2000 800,000.00
(f) Employee shall also be paid Profit Incentive which, for purposes
hereof, shall mean 40% of the Annual Net Profit in excess of (i) 12% of the
Annual Net Profit for 1998, (ii) 15% of the Annual Net Profit for 1999, and
(iii) 17% of the Annual Net Profit for 2000. The term Annual Net Profit shall
mean for each year the net after tax profit of Employer determined by the
Accountant in accordance with GAAP; provided, however, that any amounts of
principal paid by Employer to Employee or Carl Kershner under promissory notes
assumed by Employer shall not be considered as an expense in such determination.
(g) The Sales Incentive and the Profit Incentive for any calendar year
shall be paid on or about March 31 of the following year.
4. Business Expenses. Employer will reimburse Employee for all authorized
travel and out-of-pocket expenses reasonably incurred by him for the purposes of
and in connection with performing his services to Employer hereunder. Such
reimbursement shall be made promptly upon presentation to Employer of vouchers
or other statements itemizing the expenses in reasonable detail in conformity
with Employer's policies.
5. Discoveries. Except as otherwise provided in contracts between Employer
and third parties, any and all processes, methods, designs, work of authorship
and know-how which Employee may conceive or make, either alone or in conjunction
with others, during Employee's term of employment with Employer or its
subsidiaries or Affiliates relating to, or in any way pertaining to or connected
with the business of Employer or its subsidiaries or Affiliates, shall be the
sole and exclusive property of Employer;
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<PAGE>
and Employee, whenever requested to do so by Employer or any subsidiary or
affiliate thereof, and without further compensation or consideration, shall
promptly execute any and all applications, assignments and other instruments
which Employer shall deem necessary in order to assign and convey to Employer
the sole and exclusive right, title and interest in and to such processes,
methods, designs, works of authorship and know-how.
6. Non-Competition; Confidentiality. Employee acknowledges that he has
entered into a Non-Competition Agreement of even date (the "Non-Competition
Agreement") with Employer restricting his ability to compete with Employer and
requiring him to maintain in confidence information concerning Employer and
Mound Laser & Photonics Center, Inc. A breach of Employee's obligations under
the Non-Competition Agreement shall constitute a breach of this Agreement.
7. Non-waiver of Rights. The failure to enforce at any time of the
provisions of this Agreement or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement, or
any part hereof, or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
8. Term/Termination. (a) Unless sooner terminated, Employee's employment
under this Agreement shall be for an initial period of three (3)) years,
beginning the date hereof and ending December 31, 2000 and continuing thereafter
until terminated by either party or not less than thirty (30) days prior written
notice (the "Employment Period"); provided that this Agreement may be terminated
by Employer at any time for cause. The term "cause" as used herein shall mean
gross or habitual neglect of duty, continuing default of Employee's obligations
hereunder, prolonged absence from duty without the consent of Employer, breach
of the Non-Competition Agreement or intentional harm or to the business of
Employer or willful misconduct on the part of Employee.
(b) In the event Employer's office at which Employee is required to render
the majority of services hereunder is moved to a location more than twenty-five
(25) miles from Miamisburg, Ohio, Employee shall have the right within ten (10)
days of notice of relocation, to terminate this Agreement and his obligations
under the Non-competition Agreement. In the event of such termination, Employer
shall continue to pay Base Salary to Employee and shall provide benefits under
Section 3(b) for a period of four (4) months.
9. Notices. All notices required or permitted under this Agreement shall
be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
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<PAGE>
Employer:
Mound Acquisition, Inc.
c/o Infinite Group, Inc.
300 Metro Center Boulevard
Warwick, RI 02886
Attn: Clifford G. Brockmyre, Chairman
Employee:
Larry R. Dosser
1352 E. Social Row Road
Centerville, Ohio 45458
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
10. Entire Agreement. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
11. Amendment. This Agreement may be modified or amended, if the amendment
is made in writing and is signed by both parties.
12. Severability. If any provisions of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall to be
valid and enforceable. If a court finds that a provision of this Agreement is
invalid or unenforceable, then such provision shall be deemed to be written,
construed and enforced as so limited.
13. Applicable Law. This Agreement shall be governed by and contained in
accordance with the laws of the State of Ohio.
14. Binding Agreement. This Agreement shall bind and inure the benefit of
the parties and their respective legal representatives, successors and assigns,
except that Employee may not delegate any of his obligations under this
Agreement or assign this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto executed this Agreement as of the
day and year first written above.
EMPLOYER:
MOUND ACQUISITION, INC.
By: /s/
-------------------------------
EMPLOYEE:
/s/
----------------------------------
INFINITE GROUP, INC., a Delaware corporation and the owner of all of the
outstanding capital stock of Employer, hereby guarantees the obligations of
Employer under the foregoing Agreement.
INFINITE GROUP, INC.
By: /s/
-------------------------------
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AGREEMENT OF SALE AND
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT made as of February 12, 1998 among MOUND LASER & PHOTONICS
CENTER, INC., an Ohio corporation ("Seller"), LARRY R. DOSSER of Centerville,
Ohio ("LRD"), CARL J. KERSHNER of Dayton, Ohio ("CJK") (LRD and CJK being
individually referred to as a "Shareholder" and together as the "Shareholders"),
and MOUND ACQUISITION, INC., an Ohio corporation ("Buyer").
RECITALS
A. Seller is engaged in the business of laser applications, welding,
photonics applications and materials processing (collectively, "Seller's
Business").
B. Shareholders own all of the issued and outstanding capital
stock of Seller;
C. Buyer desires to purchase substantially all of the business and assets
of Seller's Business and Seller and Shareholders desire that Seller sell such
business and assets to Buyer as provided below.
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions as used in this Agreement, the following terms shall have
the following meanings unless the context expressly otherwise requires:
1.1 "Seller's Business" shall have the meaning set forth in the
recitals to this Agreement.
1.2 "Assets" shall mean all of the business and assets of Seller
relating to Seller's Business, including::
(a) all personal property used or usable in Seller's Business,
including machinery, equipment, tools, dies, molds, drawings, furniture and
fixtures, inventories of raw materials and supplies, work-in-process and
finished goods, customer lists, customer purchase orders, and goodwill;
(b) all rights, title and interests in and to Seller's
intellectual properties associated with Seller's Business, such as (without
limitation) know-how, trade secrets, trademarks, trade names, copyrights,
patents and other rights or registrations, including the name "Mound Laser &
Photonics Center";
(c) all accounts receivable of Seller;
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(d) all forms, labels, shipping material, art work and
advertising matter pertaining to Seller's Business; and
(e) all records relating to the Seller's Business or any of
the assets referred to in clauses (a) through (d) such as operating records,
property records, and purchasing and sale records.
The term "Assets" shall exclude notes receivable, investment securities, any
personal property not used or relating to Seller's Business and any records not
relating to Seller's Business.
2. Sale of Assets.
2.1 Seller has conveyed, granted, bargained, sold, transferred, set
over, assigned, delivered and confirmed, and by this agreement does hereby
convey, grant, bargain, sell, transfer, set over, assign, deliver and confirm
unto Buyer, its successors and assigns forever, all of the right, title and
interest of Seller in, to and under the Assets.
TO HAVE AND TO HOLD the same to Buyer, its successors and assigns,
forever. Seller and Shareholders, jointly and severally, agree to warrant and
defend the same and title thereto against the claims of all parties.
2.2 Seller, for itself and for its successors and assigns does
hereby constitute and appoint Buyer, its successors and assigns, the true and
lawful attorney for Seller, with full power of substitution in the name of
Seller or in the name of Buyer, but for the benefit and at the expense of Buyer
(a) to institute and prosecute all proceedings which Buyer may deem proper in
order to assert or enforce any claim, right or title of any kind in or to the
Assets, to defend or compromise any and all actions, suits or proceedings in
respect of any of the Assets, and to do all such acts and things in relation
thereto as Buyer shall deem advisable; and (b) to take all action which Buyer,
its successors or assigns, may deem proper in order to provide for Buyer, its
successors or assigns, the benefits of any contracts, licenses, leases or
commitments where any required consent of another party to the assignment
thereof to Buyer pursuant to this Agreement shall not have been obtained. Seller
acknowledges that the foregoing powers are coupled with an interest and shall be
irrevocable by Seller. Seller, for itself and for its successors and assigns,
for the consideration aforesaid, hereby covenants with Buyer, its successors and
assigns, to execute, acknowledge, deliver and perform or to authorize Buyer or
any officer of Buyer as the agent and attorney of Seller to execute,
acknowledge, deliver or perform, any and all further deeds, instruments and acts
which may be reasonably required to convey, transfer and
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<PAGE>
assign to Buyer all of the Purchased Assets or to accomplish the intent and
purposes hereof.
3. Representations and Warranties.
To induce Buyer to enter into this Agreement and to purchase the Assets,
Seller and Shareholders, jointly and severally, represent and warrant to Buyer
that:
3.1 Seller is a corporation duly organized and validly existing in
good standing under the laws of Ohio with full corporate power and authority to
conduct its business as now conducted, to own its assets and enter into and
perform its obligations under this Agreement. Seller's execution, delivery and
performance of this Agreement and the sale to Buyer of the Assets have been duly
authorized by all requisite corporate action on the part of Seller. This
Agreement constitutes Seller's legal, valid and binding obligations, enforceable
against Seller in accordance with their respective terms.
3.2 Seller has no subsidiaries and no other equity investments in
any other corporation, partnership or other business entity. Seller is not
required to qualify to transact business. All outstanding shares of Seller's
capital stock have been duly authorized for issuance, have been validly issued
and are outstanding, are fully paid and non-assessable, and are owned of record
and beneficially by Shareholders.
3.3 Seller's execution and delivery of this Agreement and
performance of its obligations hereunder will not (a) conflict with, violate or
result in any breach or default or, with notice or lapse of time constitute a
default, under (i) Seller's Articles of Incorporation or Bylaws, or (ii) any
mortgage, indenture, agreement, instrument or other contract to which Seller is
a party or by which Seller or its property is bound, (b) result in the creation
of any mortgage, pledge, lien, encumbrance or charge upon any assets or
properties of Seller, or (c) violate any judgment, order, decree, law, statute,
regulation or other judicial or governmental restriction to which Seller or any
of its assets is subject or by which it is bound. Seller's execution and
delivery of this Agreement and performance of its obligations hereunder,
including the sale of the Assets, will not require the consent of, or any prior
filing with or notice to, any governmental authority, lender or other third
party.
3.4 The financial statements of Seller (collectively, the "Financial
Statements") attached hereto as Exhibit A (i) are true and correct (ii) present
fairly the financial position of Seller at the periods then ended and the
results of its operations and cash flows for the periods then ended, (iii) have
been prepared in accordance with generally accepted accounting
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<PAGE>
principles ("GAAP") consistently applied, (iv) show all material liabilities,
absolute and contingent, of Seller required to be shown by GAAP and (v) contain
no misrepresentations, misstatements or omissions of material facts.
3.5 Since the date of the most current Balance Sheet included in the
Financial Statements, there has not been any material adverse change in the
financial position of Seller or in Seller's Business or in the results of its
operations or any material liability incurred by Seller contingent or otherwise.
3.6 The rights of Seller under all agreements included in the Assets
are valid and enforceable by Seller and have validly assigned to and are
enforceable by Buyer, in each case in accordance with their respective terms.
Neither Seller nor any of the other parties thereto is in default in any
material respect, and the assignment by Seller of its rights thereunder to Buyer
will not violate the terms thereof. Seller has good and marketable title to the
Assets, free and clear of all liens, claims, security interests and encumbrances
and has the right to convey the Assets to Buyer.
3.7 All of the machinery, equipment, tools, dies, molds and similar
property included in the Assets is currently operating and is in good condition
and repair. All of the inventory of Seller is in good condition, is not obsolete
or defective, and is usable or salable in the usual and ordinary course of
business at prevailing market prices without discount.
3.8 There are no claims, actions, suits or other proceedings
pending, or to the knowledge of Seller threatened, against Seller, Shareholders
or any of the Assets before any court, agency or other judicial, administrative
or other governmental body or arbitrator, and to Seller's or Shareholders'
knowledge, no state of facts exists which would be likely to give rise to any
such claim, action, suit or other proceeding.
3.9 Seller has complied with, and is in compliance with, all laws,
statutes, regulations, rules and other requirements of any governmental
authority applicable to Seller, its assets and properties and the conduct of its
business.
3.10 Seller has not caused or permitted any of its assets or
property, including property owned or occupied by Seller under leases or other
agreements, to be used to generate, manufacture, refine, transport, treat,
store, handle, dispose, transfer, produce or process Hazardous Substances (as
defined below), or other dangerous or toxic substances, or solid waste, except
in compliance with all Environmental Laws, and has not caused or permitted and
has no knowledge of the Release (as defined below) of any Hazardous Substances
on or off-site of
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<PAGE>
Seller's property (including property leased by Seller). "Hazardous Substances"
include any pollutants, dangerous substances, toxic substances, hazardous
wastes, hazardous materials, or hazardous substances as defined in or pursuant
to the Resource Conservation and Recovery Act 942 U.S.C. Section 6901, et seq.,
as amended ("RECRA"), the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 6901, et seq., as amended ("CERCLA"), the Clean
Air Act, as amended, the Clean Water Act, as amended, the Toxic Substances
Control Act, as amended, or any other Environmental Law. "Release" means
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping. Seller has complied with
all applicable Environmental Laws and rules and regulations pertaining to
Hazardous Substances or protection of environmental quality. Neither the leasing
of real property and improvements by Buyer pursuant to the Lease included in the
Assumed Obligations (defined below) nor the acquisition of the Assets will
subject Buyer to, or give rise to any claim against or liability of Seller under
or on account of any Environmental Laws. For purposes of this Agreement, the
term "Environmental Laws" means federal, state or local laws, rules,
regulations, ordinances, standards or judicial decisions relating to or
regulating human safety or the condition of the environment, or the use,
handling or disposal of any Hazardous Substance including, without limitation,
RCRA, CERCLA, and other federal laws referred to in this Section 3.10.
3.11 All Federal, state and local income, excise or franchise tax
returns, real estate and personal property tax returns, sales and use tax
returns and all other tax returns required to be filed on or prior to the date
hereof by Seller with all taxing authorities have been filed. All amounts shown
to be due and payable on such returns, all other taxes, duties and other
governmental charges payable by Seller or imposed upon any of the Assets and for
the payment of which there may arise any lien upon the Assets sold hereunder
subsequent to such sale, and all deficiencies, assessments, penalties and
interest with respect thereto, in each case due and payable on or before the
date hereof, have been paid. All sales, use and excise taxes collectible with
respect to all transactions connected with Seller's Business have been
collected, all amounts due in connection therewith to state and local revenue
authorities have been remitted to the appropriate authorities, and no lien or
claim with respect thereto will be asserted by such authorities. There has been
withheld or collected from each payment made to each employee of Seller the
amount of all taxes (including without limitation federal income taxes, Federal
Insurance Contributions Act taxes, and state and local income, payroll and wage
taxes) required to be withheld or collected and the same have been paid to the
proper tax depositories or collecting authorities. Buyer, by reason of the
transactions contemplated by this Agreement, will
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<PAGE>
not incur any claims, losses, damages, costs, and expenses with respect to or in
connection with any pension, welfare, fringe, or other employee benefit plan
maintained or contributed to by Seller or any predecessor that provides or
provided benefits to any current or former employees or other parties who
performed services for Seller (or their beneficiaries or dependents).
3.12 There are no orders, decrees, statements, citations or
decisions by any court or governmental or regulatory body, or other claim
pending or threatened that any product sold or distributed by Seller within the
last five (5) years is defective or fails to meet in any material respect any
standards promulgated by any such governmental or regulatory body. There have
been no recalls ordered by any such governmental or regulatory body with respect
to any such product.
3.13 The representations and warranties of Seller and Shareholders
in this Agreement do not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements made therein not
misleading.
4. Consideration. (a) As consideration for the sale of the
Assets to Buyer, Buyer:
(i) assumes and will be responsible for the contractual obligations
of Seller incurred in the ordinary course of business, in existence on the date
hereof, not in default and requiring Seller to supply customers with products or
services within the Seller's Business at prices consistent with prior practices
and also assumes the obligations listed on Exhibit B hereto (collectively, the
"Assumed Obligations"); and
(ii) assume, subject to the terms hereof, Seller's obligations under
two (2) certain promissory notes of Seller to the Shareholders copies of which
are attached hereto (the "Notes").
(b) Concurrently with the execution and delivery of this Agreement, Buyer
and each of the Shareholders shall execute and deliver an endorsement or allonge
to each of the Notes setting forth Buyer's rights pursuant to Section 15 of this
Agreement.
5. Other Liabilities. Apart from the Assumed Liabilities, Buyer will
neither assume nor have any responsibility for any obligations, liabilities or
indebtedness of Seller or to which any of its assets or properties may be
subject, of whatever nature or kind, whether fixed, contingent, ascertainable or
unascertainable and whether or not classifiable as a current liability under
generally accepted accounting principles. All such obligations, liabilities and
indebtedness of Seller, except the Assumed Liabilities, are referred to as the
"Excluded Liabilities", and
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<PAGE>
Seller and Shareholders, jointly and severally, agree to defend and indemnify
Buyer against, and hold Buyer harmless from all loss cost, expense and
liability, including reasonable attorneys' fees, arising from or in connection
with the Excluded Liabilities.
6. Change of Name. Within ten (10) days of the date hereof, Seller will
take all action necessary to enable Buyer exclusively to use the name "Mound
Laser & Photonics Center" as a corporate name in Ohio and shall deliver to Buyer
all documents necessary to accomplish the foregoing.
7. Maintenance of Records. Buyer and Seller agree that they shall each
maintain for at least four (4) years after the date hereof (or for such longer
period as may be required by applicable law) the respective books, records and
documents sold or retained hereunder. During such period, representatives of
Buyer shall be permitted to inspect and make copies of said books, records and
documents retained by Seller during normal business hours and upon reasonable
notice for purposes related to the continuation by Buyer of Seller's business;
and representatives of Seller shall be permitted to inspect and make copies of
said books, records, and documents sold to Buyer during normal business hours
and upon reasonable notice for purposes related to winding up its affairs.
8. Fees, Expenses and Sales Taxes. Seller, Buyer, and Shareholders shall
each pay its or his own fees and other costs or expenses incident to the
negotiation, preparation and execution of this Agreement and the transactions
contemplated hereby. Seller shall pay all sales taxes and transfer taxes imposed
with respect to the sale of the Assets hereunder.
9. No Brokers. Each of Seller and Buyer represents that no broker or
finder has been involved or engaged by it in connection with the transactions
contemplated hereby.
10. Bulk Transfer Compliance. Buyer and Seller hereby mutually agree to
waive compliance with the provision of Article 6 of the Ohio Uniform Commercial
Code and of the corresponding laws of any other jurisdiction, to the extent
applicable to the transactions contemplated hereby. Seller and the Shareholders,
jointly and severally, agree to indemnify and hold harmless Buyer from and
against any and all loss, liability, cost and expense (including reasonable
attorneys' fees) arising out of noncompliance with said Bulk Transfers laws
except to the extent arising out of Buyer's failure to pay, perform and
discharge the Assumed Liabilities.
11. Collection of Assets. Seller agrees that it will promptly transfer or
deliver to Buyer from time to time, any cash or other property that Seller may
receive with respect to any claims, contracts, licenses, leases, commitments,
sales orders,
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<PAGE>
purchase orders, receivables of any character or any other items included in the
Assets. Seller shall pay all of the Excluded Liabilities in the ordinary course
of business as they become due.
12. Survival of Representations and Warranties. All representations and
warranties made in this Agreement shall survive the execution and delivery of
this Agreement.
13. Indemnification of Buyer by Seller and Shareholders. Seller and
Shareholders, jointly and severally, shall indemnify and hold Buyer and its
attorneys, affiliates, representatives, agents, officers, directors, successors
or assigns harmless from and against any liability, loss, cost, expense,
judgment, order, settlement, obligations, deficiency, claim, suit, proceeding
(whether formal or informal), investigation, lien or other damage, including,
without limitation, reasonable attorneys' fees and expenses (collectively,
"Damages"), resulting from, arising out of or incurred with respect to (a) a
breach of any representation, warranty, covenant or agreement of Seller or
Shareholders contained herein or (b) the Excluded Liabilities.
14. Indemnification of Seller. Buyer shall indemnify and hold Seller and
its attorneys, affiliates, representatives, agents, officers, directors,
successors or assigns, harmless from and against any Damages resulting from,
arising out of, or incurred with respect to (a) a breach of any representation,
warranty, covenant or agreement by Buyer contained herein or (b) the Assumed
Liabilities.
15. Set-Off. In addition to any other rights or remedies which Buyer may
have, at law or equity, against Seller or the Shareholders, Buyer shall have the
right to set-off the amount of Damages against any amounts due and owing the
Shareholders under the Notes and against any other amounts owing Seller or the
Shareholders by, or rights against, Buyer or any affiliate of Buyer.
16. Miscellaneous.
16.1 This Agreement contains the final, complete and exclusive
statement of the agreement between the parties with respect to the transactions
contemplated herein and all prior or contemporaneous written or oral agreements
with respect to the subject matter hereof are merged herein.
16.2 No change, amendment, qualification or cancellation hereof
shall be effective unless in writing and executed by each of the parties hereto
by their duly authorized officers.
16.3 This Agreement shall be binding upon and shall
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<PAGE>
inure to the benefit of the parties hereto and their respective successors and
assigns. Buyer may form a wholly-owned subsidiary or other business entity for
the purpose of assuming all of Buyer's rights and obligations under this
Agreement.
16.4 The captions are for convenience of reference only and shall
not be construed as a part of this Agreement.
16.5. This Agreement shall be construed, interpreted, enforced and
governed by and under the laws of Ohio.
16.6 The invalidity or unenforceability of any one or more phrases,
sentences, clauses or provisions of this Agreement shall not affect the validity
or enforceability of the remaining portions of this Agreement or any part
thereof.
16.7 This Agreement may be executed in any number of counterparts,
all of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, Seller, Shareholders and Buyer have each executed this
Agreement or caused this Agreement to be executed by their respective duly
authorized officers as of the day and year first above written.
MOUND LASER & PHOTONICS
CENTER, INC.
By:____________________________
President
-------------------------------
Larry R. Dosser
-------------------------------
Carl J. Kershner
MOUND ACQUISITION, INC.
By:____________________________
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SUPPLY AGREEMENT
THIS AGREEMENT, effective as of October 20, 1997, is made by and between
Laser Fare, Inc. having offices at One Industrial Drive, South, Smithfield,
Rhode Island 02917 ("Laser Fare") and Dey Laboratories, L.P. having offices at
2751 Napa Valley Corporate Drive, Napa California 94558 ("DEY").
WITNESSETH
WHEREAS, DEY is the exclusive licensee to a particular design for a Peak
Flow Meter (Astech(R)), and DEY desires to purchase from Laser Fare and Laser
Fare agrees to manufacture, test, and sell to DEY Peak Flow Meters, hereinafter
referred to as the "PRODUCTS" (and described in Addendum I of the Agreement) and
DEY desires to sell the PRODUCTS in all countries of the world;
NOW, THEREFORE, in consideration of the premises, the mutual covenants,
promises and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby covenant, promise, and agree as follows:
1. MARKETING RIGHTS
a. Laser Fare hereby acknowledges that DEY is the holder of all rights
to the PRODUCTS and that Laser Fare has no rights of ownership of
the PRODUCTS.
2. MANUFACTURE AND PRODUCTS SPECIFICATIONS
a. Laser Fare shall manufacture and supply the PRODUCTS in accordance
with the specifications set forth in DEY's 510K notification and
Laser Fare's standard operating procedures, as agreed to by DEY and
in accordance with the Medical Devices Good Manufacturing Practices
(MDGMP) as promulgated by the FDA.
b. PRODUCTS shall be manufactured, assembled, tested, labeled, and
packaged by Laser Fare in accordance with Laser Fare's
specifications as approved by DEY and the MDGMP.
<PAGE>
c. DEY shall be responsible for the costs of any and all labeling
artwork, printing plates and dies to be used in the production of
labeling and packaging materials for the PRODUCTS.
d. Laser Fare shall perform all necessary process validations of the
manufacturing processes in accordance with Laser Fare's
specifications, applicable compendia, and MDGMP and shall make
records of such validations available to DEY for review at Laser
Fare's manufacturing facility.
e. The PRODUCTS shall be packaged in configurations specified in
Addendum I to this Agreement.
3. ORDERS
a. DEY shall provide Laser Fare with non-binding twelve month forecasts
at the beginning of each quarter. Firm purchase orders for delivery
during a calendar quarter shall be initiated by DEY through
submission to Laser Fare of purchase orders (PO's) specifying
PRODUCTS and quantities, delivery dates, and shipping instructions,
such PO's to be received by Laser Fare at least sixty (60) days
prior to the earliest shipment date specified in the order.
b. Should Laser Fare determine that there is a need to commit to the
purchase of materials used in the production of the PRODUCTS in
quantities which exceed the quantities required to cover the firm
orders, Laser Fare will provide DEY with a justification for the
purchase including the value of the commitment and if approved by
DEY, DEY will accept responsibility for the value of the materials
purchased should there be a decrease in order quantities. Should
Laser Fare purchase an excess of materials without the approval of
DEY, Laser Fare will accept full responsibility for those materials.
c. All orders placed by DEY shall be subject to the terms and
conditions of such PO's, and DEY shall accept and pay for all
PRODUCTS supplied at the purchase price in effect as of the date or
order. Laser Fare may deliver between ninety-five percent (95%) and
one hundred five percent (105%) of each order.
d. Laser Fare will promptly produce and ship all orders pursuant to DEY
instructions. Should Laser Fare experience productions difficulties
which may result in significant delay in the aforesaid lead time,
Laser Fare will promptly advise DEY of the fact and shall meet with
DEY in an effort to comply with section 3.e. of this Agreement.
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e. Estimated Annual Requirements are specified in Addendum II to this
agreement. DEY anticipates that it shall purchase no less than these
minimum quantities each year and Laser Fare shall provide capacity
to produce these estimated annual requirements plus capacity to
produce a quantity at least twenty five percent (25%) greater.
4. PRICE
a. The price for the PRODUCTS shall be as set forth in Addendum III to
this agreement.
5. TERMS
a. Invoices for PRODUCTS shall be at prices in effect as of the date of
the purchase order.
b. All payments shall be made in United States dollars.
c. The payment terms of DEY's orders shall be 2% ten days, net 30 days.
d. Deliveries shall be made to DEY at such locations designated by the
PO. All shipments of PRODUCTS hereunder shall be F.O.B. Laser Fare's
facility as specified on each purchase order and shall be shipped
via the carrier of DEY's choice.
6. QUALITY ASSURANCE, RECALLS, AND PRODUCT COMPLAINTS
a. On the same day of each shipment of PRODUCTS to DEY, Laser Fare will
complete and fax to DEY a Certificate of Analysis (CofA) document
and a batch record of each lot or batch included in the shipment,
certifying that each lot or batch was manufactured according to
Laser Fare's procedures and in compliance with applicable
regulations and each lot or batch was tested and confirmed to meet
all specifications as agreed to by DEY. Each document shall include
the quantities released and shipped by Laser Fare and shall be
signed and dated by a duly authorized official of Laser Fare's
Quality Control or Quality Assurance department.
b. The Certificate of Analysis and batch record shall be in a format
and of a content as mutually agreed upon by the QA/QC departments of
Laser Fare and DEY.
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c. Certificates of Analysis and batch records will be faxed to the
Quality Assurance Manager of DEY. Originals will be sent for second
day delivery by express service of Laser Fare's choice.
d. DEY shall have a period of forty-five (45) days from date of receipt
of PRODUCTS to inspect and reject any shipment of PRODUCTS because
it does not conform with the specifications.
e. Laser Fare shall decide whether non-conforming PRODUCTS should be
destroyed by DEY or returned to Laser Fare. All expenses related to
destroying or returning the PRODUCTS will be paid by Laser Fare.
Laser Fare shall use reasonable efforts to promptly replace the
non-conforming PRODUCTS with PRODUCTS meeting the specification.
Within thirty (30) days of a determination that any PRODUCTS in
non-conforming, Laser Fare shall replace the products or issue a
credit to DEY equal to the sum of the amount invoiced, freight
charges invoiced and actually paid by DEY, any amounts paid by DEY
for testing by an independent laboratory relative to the
non-conforming PRODUCTS, any amounts paid by DEY for the destruction
of the non-conforming PRODUCTS, and any applicable transit insurance
premium, taxes, or other similar costs.
f. In the event Laser Fare shall be required (or shall voluntarily
decide) to initiate a recall, PRODUCT withdrawal, or field
correction, of any PRODUCTS, whether or not such recall has been
requested or ordered by any state or Federal agency, Laser Fare
shall notify DEY's Director of Quality Assurance, and DEY shall
notify customers to return all such PRODUCTS and shall follow any
other instructions provided by Lase Fare.
In the event DEY believes that a recall, PRODUCT withdrawal or field
correction may be necessary and/or appropriate, prior to taking any
action DEY shall immediately notify Laser Fare and the parties shall
cooperate with each other in determining the necessity and nature of
such action.
g. In any event, with respect to any recall, PRODUCTS withdrawal, or
field correction, DEY shall make all contacts with the USFDA and
shall be responsible for coordinating all of the necessary
activities in connection with the recall, PRODUCT withdrawal, or
field correction. Laser Fare will full cooperate in providing all
requested information to DEY for DEY's submission the USFDA.
h. Laser Fare shall bear all costs associated with any recall, PRODUCTS
withdrawal, or field correction, and shall credit DEY for all costs
thereof, for any recall or field correction which was caused by
Laser Fare's negligence.
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i. DEY shall respond to all complaints regarding the PRODUCTS and
coordinate the investigation thereof. Upon written request by DEY,
Laser Fare agrees to provide all reasonable assistance to DEY in
investigating and analyzing product complaints. If DEY determines
that an evaluation with respect to the manufacture of components,
assembly of components, packaging of components, or other
manufacturing process shall be made, Laser Fare will perform such
evaluation. Laser Fare shall provide DEY a written report of its
determinations and conclusions from any such investigation and any
such evaluation within thirty (30) days from receipt of DEY's
written request.
7. SPECIAL REQUIREMENTS
a. PRODUCTS produced for DEY will be labeled with a unique, identifying
lot number which shall not be used on any other Laser Fare PRODUCTS.
b. Laser Fare's QA and QC representatives will observe and verify all
line clearance activities, all labeling control, and reconciliation
activities and shall review and approve all manufacturing
documentation collected as the "batch record".
c. Each party shall promptly notify the other, in writing, of any
adverse reports, reactions or third party complaints concerning the
PRODUCTS or any other information relating to the failure of the
PRODUCTS to meet specifications.
8. WARRANTIES
a. Laser Fare represents and warrants to DEY that PRODUCTS manufactured
and shipped to DEY hereunder will be manufactured in accordance with the
specifications, CGMP and Medical Device GMP, and will not be adulterated
or misbranded within the meaning of the U.S. Food, Drug and Cosmetic Act,
as amended (the "ACT"), nor an article which may not be introduced into
interstate commerce under the provisions of Section 404 or 505 of the Act.
THE FOREGOING WARRANTIES ARE MADE BY Laser Fare EXPRESSLY IN LIEU OF ANY
OTHER EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT BY WAY OF
LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS OF PURPOSE.
9. IDEMNIFICATION
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<PAGE>
a. Laser Fare shall indemnify, defend and hold DEY and its officers,
directors, and employees harmless from and against any and all
liability, damage, loss, cost or expense (including any costs or
expenses incurred by DEY in connection with any recall of the
PRODUCTS), including reasonable attorney's fees, resulting from
Laser Fare's breach of its warranties hereunder, whether by reason
of Laser Fare's negligence or intentional acts.
b. DEY will indemnify, defend, and hold Laser Fare and its officers,
directors, and employees harmless from and against any and all
liability, damage, loss, cost or expense, resulting from the
promotion, distribution, sale, or use of any PRODUCTS by DEY,
arising as a result of DEY's negligence or intentional acts, unless
such liability, damage, loss, cost or expense is caused by the
breach of Laser Fare's warranties under Section 8 hereof.
c. Laser Fare shall maintain product liability insurance in an amount
not less than $5,000,000 and shall supply DEY with proof of
insurance.
10. REGULATORY REQUIREMENTS
Each party shall, in performing its obligations hereunder, comply with all
applicable federal and state laws and regulations and shall not be
required to perform any service or obligation in respect to the PRODUCTS
manufactured by Laser Fare and sold to DEY if in so doing it might, in its
reasonable opinion, be violating the provisions of such law or regulation.
11. TERM
This agreement shall become effective as of the date first written above
and, unless earlier terminated in accordance with Section 12 hereof, shall
continue in full force and effect for a period of two (2) years (the
"Initial Term"). Upon the expiration of the Initial Term, this Agreement
shall be automatically renewed in successive one (1) year increments
unless and until the Agreement is terminated either (i) by mutual
agreement of the parties or (ii) in accordance with Section 12 hereof.
12. Termination
a. This agreement may be terminated at any time by either party
provided notice is presented to the other party in writing not less
than 180 days prior to the planned termination date.
6
<PAGE>
b. In the event either party breaches any material provision of this
Agreement and fails to cure such breach within one hundred twenty
(120) days after receiving written notice of the breach from the
nonbreaching party, the nonbreaching party may terminate this
Agreement upon written notice to the breaching party. The right to
terminate under this Section 12(a) shall be in addition to, and not
in lieu of, all other rights and remedies the nonbreaching party may
have at law or in equity.
c. DEY may terminate this agreement at any time if there have been
recurring quality or delivery problems which have been unresolved to
the satisfaction of DEY or if Laser Fare receives an unsatisfactory
inspection by the USFDA. DEY may also terminate this agreement,
without notice, if Laser Fare fails to pass a Quality Assurance
audit by DEY and is unwilling to make or fails to make reasonable
corrective actions.
d. If any proceedings in bankruptcy or reorganization or for the
appointment of a receiver or trustee or any other proceedings under
law for the relief of debtors shall be instituted by or against DEY
or Laser Fare or if either of such parties shall make an assignment
for the benefit of creditors, this Agreement may be terminated by
notice to the party which is subject to such proceedings; provided,
however, that if such party vacates or has the proceedings dismissed
within one hundred twenty (12) days, it may reinstate this Agreement
by notice to the other party no later than ten (10) days after said
one hundred twenty (120) day period.
e. Any termination of this Agreement shall not release the parties from
liabilities and obligations accrued as of the date thereof. If this
Agreement is terminated for any reason other than a material breach
by Laser Fare or by mutual agreement of the parties, then DEY shall
be responsible for payment to Laser Fare for all components in
process and finished PRODUCTS, packaging, labeling, and other
materials ordered by Laser Fare for DEY's requirements or at DEY's
request.
f. The warranties and indemnification provisions set forth in Sections
9 and 10 hereof, respectively, shall survive any expiration or
termination of this Agreement.
g. Laser Fare will maintain all equipment supplied by DEY in workable
order and will provide all normal maintenance, calibration, and
validation services as required. Complete records of all
maintenance, calibration, and validation will be maintained by Laser
Fare and will be subject to a Quality Assurance audit by DEY.
13. ASSIGNMENT
7
<PAGE>
This Agreement shall not be assigned by either party without the prior
written consent of the other party.
14. FORCE MAJEURE
Neither party shall be responsible for any delay or failure to perform its
obligations under this Agreement, in whole or in part, if occasioned by
strikes, stoppages, or boycotts; or riots, insurrections, or revolutions;
demands, embargoes, or restrictions thereof; fires, floods, explosions,
droughts, or any other natural catastrophes; accidents; or by any other
causes beyond the control of that party. In the event of force majeure,
the party affected thereby shall give the other party prompt written
notice of the existence of force majeure, the causes thereof, and an
estimate of the reasonably anticipated delay that may be caused thereby.
15. INSPECTIONS
a. Laser Fare shall permit authorized representatives of DEY to inspect
Laser Fare's facilities used for the production of PRODUCTS during
Laser Fare's business hours and for reasonable periods for the
purpose of assuring that Laser Fare is complying with the federal
and state laws and regulations relating to the production of
PRODUCTS. Such inspection shall be at DEY's sole expense and may be
conducted annually or more frequently if any audit or USFDA
inspection should give cause.
b. Laser Fare shall immediately notify DEY of inspections by the USFDA
of the manufacturing facility and shall provide copies to DEY of any
FDA reports relative to such inspections as may be related to the
manufacture of the PRODUCTS as soon as practical but in any event
within ten (10) days after receiving such report. Laser Fare agrees
that DEY shall have the right to be present to observe any
inspection involving the PRODUCTS.
16. ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement between the parties with
respect to the supply of PRODUCTS and there are no understandings of any
kind except as expressly set forth herein. No modification of the
Agreement shall be of any force or effect unless in writing and signed by
both parties hereto.
8
<PAGE>
17. NOTES
All notices required or permitted by the terms of this Agreement by either
party shall be given by prepaid, registered or certified mail to the
address of the party as set forth below, or to such other address as may,
from time to time, be designated in writing by such other party.
If to DEY: DEY Laboratories, Inc.
2751 Napa Valley Corporate Drive
Napa, California 94558
Attention: Mr. Charles A. Rice
President and CEO
If to Laser Fare: Laser Fare
One Industrial Drive South
Smithfield, Rhode Island 02917
Attention: Mr. Clifford G. Brockmyre
President, CEO
18. GOVERNING LAW
This Agreement shall be construed and interpreted according to the laws of
the State of California.
19. WAIVER
A waiver by either party of any term or condition of the Agreement in any
one instance shall not be deemed or construed to be a waiver of such term
or condition for any similar instance in the future of any subsequent
breach hereof. None of the rights, remedies, undertakings, and obligations
hereunder shall be a limitation of any other remedy, right undertaking,
obligation, or agreement of either party.
20. INTERPRETATION
If there is any inconsistency between the provisions of this Agreement and
any purchase order or other document passing between the parties, the
provisions of this Agreement shall be determinative.
9
<PAGE>
21. SEVERABILITY
Any information or data (included but not limited to technical
information, experience or data) regarding either party's formulations,
plans, programs, plants, process, technical, materials, products,
production requirements, standard specifications, costs, equipment,
operations, procedures, instructions or customers (all of which is herein
referred to as "Confidential Information") is the sole property of each
respective party. Each party shall treat the other party's Confidential
Information in the same protective manner that it treats its own
confidential information. Neither party shall use, except for carrying out
this agreement, or disclose to others, or permit their employees or agents
to use, except for carrying out this Agreement, or disclose to others,
during the term of this agreement and for a period of five (5) years from
the date of termination or expiration of this Agreement, Confidential
Information which has heretofore come or hereafter may come within the
knowledge of, or which has been or may hereafter be received from the
other party during the term of this agreement, provided, however, that
nothing contained herein shall prevent a party from submitting information
to a governmental authority to the extent it is desirable to secure
governmental approvals or in response to a request from a governmental
agency or to a court subpoena and provided further, that this paragraph
shall not prevent either party from using or disclosing to others
information:
(i) Which is known to the receiving party at the time it is disclosed by
or obtained form the disclosing party, which knowledge can be
established by competent evidence; or
(ii) Which is in the public domain at the time of disclosure, or through
no fault of the receiving party becomes lawfully available to the
public;
(iii) Which lawfully becomes available to the receiving party from a
source other than the disclosing party; or
(iv) Which a party can prove by written records dated prior to the date
of germane disclosures hereunder that such information was
independently developed by persons not engaged in activities
hereunder and without regard to any information conveyed by the
other party hereunder.
Upon termination of this agreement, if requested, the receiving party
shall deliver to the disclosing party all notes, drawings, manuals,
letters, notebooks, reports of or pertaining to the Confidential
Information received from the other party hereunder, including all copies
thereof, and all other Confidential Information which is in the possession
of or under control of the receiving party.
The parties shall restrict access to Confidential Information to as few as
practicable of their employees and agents, and in all cases shall restrict
such knowledge to only those employees and agents who are directly
connected with the performance of the services covered by this agreement.
23. HEADINGS
10
<PAGE>
Headings in this Agreement are included herein for convenience of
reference only and have no legal affect.
24. INDEPENDENT CONTRACTORS
Nothing herein shall create any association, partnership, joint venture,
or the relation of principal and agent between the parties hereto, it
being understood that Laser Fare is manufacturing PRODUCTS as an
independent contractor, and neither party shall have the authority to bind
the other or the other's representatives in any way.
25. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
parties and their permitted assigns.
IN WITNESS WHEREOF, Laser Fare and DEY have caused this instument to be
executed as of the date first above written.
11
<PAGE>
DEY LABORATORIES, L.P.
By: /s/ Charles A. Rice
-------------------------------
Charles A. Rice
President and CEO
Date: 10/14/97
-----------------------------
LASER FARE
By: /s/ Clifford G. Brockmyre
-------------------------------
Clifford G. Brockmyre
President, CEO
Date: 10/16/97
-----------------------------
12
<PAGE>
ADDENDUM I
1. PRODUCTS
For the purposes of this Agreement, PRODUCTS are as follows:
Item Description
---- -----------
307010 Astech Peak Flow Meter, Retail Pack
307025 Astech Peak Flow Meter, Hospital Pack
13
<PAGE>
ADDENDUM II
1. ESTIMATED ANNUAL QUANTITIES
a. DEY estimates that it shall purchase the following quantities of
PRODUCTS per year:
Estimated
Item Description Annual Quantity
- ---- ----------- ---------------
307010 Astech Peak Flow Meter, Retail Pack 120,000
307025 Astech Peak Flow Meter, Hospital Pack 96,000
14
<PAGE>
ADDENDUM III
1. PRICING
a. Initial pricing through December 31, 1998 shall be as follows:
Astech Peak Flow Meter Retail Pack $9.00 per unit
Astech Peak Flow Meter Hospital Pack $7.95 per unit
b. Retail Pack pricing is for finished PRODUCTS, packaged in shelf
cartons and shipping cases per DEY approved specifications,
delivered to locations designated on the purchase order, FOB Laser
Fare's facility.
c. Hospital Pack pricing is for finished PRODUCTS, packaged as per DEY
approved specifications, delivered to locations designated on the
purchase order, FOB Laser Fare's facility. The hospital pack price
is valid for the initial term of this agreement.
d. Prior to the end of 1998 the parties shall meet to discuss and
negotiate Retail pack pricing for 1999 and subsequent years. Laser
Fare has estimated the following Retail Pack prices for the average
volumes indicated below:
Year Price Quantity
---- ----- --------
1999 $7.98 per unit 7,700 units per week average
2000 $7.05 per unit 7,700 units per week average
e. Laser Fare shall diligently pursue cost reduction opportunities and
Dey recognizes that future price reductions will be dependent on the
implementation of cost reduction opportunities and annual volume
increases beyond those indicated in Addendum II of this agreement.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Infinite
Group, Inc and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 541,563
<SECURITIES> 0
<RECEIVABLES> 954,378
<ALLOWANCES> 48,329
<INVENTORY> 150,389
<CURRENT-ASSETS> 1,890,498
<PP&E> 5,559,024
<DEPRECIATION> 1,361,719
<TOTAL-ASSETS> 6,980,929
<CURRENT-LIABILITIES> 2,335,571
<BONDS> 5,663,302
0
0
<COMMON> 12,616
<OTHER-SE> 19,236,206
<TOTAL-LIABILITY-AND-EQUITY> 6,950,929
<SALES> 5,448,575
<TOTAL-REVENUES> 5,448,575
<CGS> 3,376,353
<TOTAL-COSTS> 3,803,856
<OTHER-EXPENSES> 2,590,788
<LOSS-PROVISION> 64,994
<INTEREST-EXPENSE> 804,873
<INCOME-PRETAX> (4,322,422)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,731,634)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,322,422)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
