SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934
For the transition period from period from ______ to _______
Commission File Number 0-21816
INFINITE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1490422
-------------------------------------------------------------------
(State or other jurisdiction (I.R. S. Employer
of organization) Identification No.)
2364 Post Road, Warwick, RI 02886
---------------------------------
(Address of principal executive office) (Zip Code)
(401) 738-5777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 4, 1998 the Registrant had a total of 13,377,516 shares of Common
Stock, $.001 par value, outstanding.
<PAGE>
INDEX
INFINITE GROUP, INC.
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1998 and December 31, 1998 3
Consolidated Statements of Operations - Three
Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 7-11
PART II. OTHER INFORMATION
Items
1-6 Not Applicable
SIGNATURES
2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 218,228 $ 541,653
Restricted funds 118,943 69,280
Accounts receivable, net of allowance 1,179,446 954,378
Inventories 252,978 150,389
Other current assets 178,686 174,798
------------ ------------
Total current assets 1,948,281 1,890,498
Property and equipment, net 4,366,598 4,197,305
Other assets
Notes receivable - stockholders 77,529 87,642
Inventoried parts 53,702 71,603
Investment in subsidiary 158,997 437,375
Other intangible assets, net 305,608 266,506
------------ ------------
Total other assets $ 595,836 $ 863,126
------------ ------------
------------ ------------
$ 6,910,715 $ 6,950,929
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 790,204 $ 440,553
Accounts payable and accrued expenses 942,502 948,713
Current maturities of long-term obligations 202,574 946,305
------------ ------------
Total current liabilities 1,935,280 2,335,571
Long term obligations 2,488,035 2,663,302
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized 13,326,165 and 12,616,483
shares issued and outstanding 13,326 12,616
Additional paid-in capital 20,188,009 19,236,206
Accumulated deficit (17,713,935) (17,296,766)
------------ ------------
Total stockholders' equity 2,487,400 1,952,056
------------ ------------
$ 6,910,715 $ 6,950,929
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-----------------------------
1998 1997
------------ ------------
Sales $ 1,925,407 $ 1,341,930
Cost of goods sold 1,065,046 831,031
------------ ------------
Gross profit 860,361 510,899
Costs and expenses
Operating expenses 66,353 32,208
Research and development 320,500 204,964
General and administrative expenses 287,260 387,440
Selling expenses 115,901 130,081
Depreciation and amortization 139,577 180,985
------------ ------------
Total costs and expenses 929,591 935,678
Operating loss (69,230) (424,779)
Other income (expense)
Equity in loss of unconsolidated subsidiary (278,378) (388,604)
Interest expense (76,842) (87,856)
Interest and other income 7,281 1,701
Gain on sale of asset -- 38,064
------------ ------------
Total other income (expense) (347,939) (436,695)
------------ ------------
Loss before provision for income taxes (417,169) (861,474)
Provision for income taxes -- --
------------ ------------
Net loss $ (417,169) $ (861,474)
============ ============
Per share:
Net loss per common share $ (0.04) $ (0.13)
============ ============
Weighted average number of common
shares outstanding 11,316,649 6,739,099
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(417,169) $(861,474)
Ajustments to reconcile net cash used in operating
activities:
Depreciation and amortization 139,211 180,985
Loss attributed to unconsolidated subsidiary 278,378 388,604
Gain on disposition of assets -- (38,064)
Asset write down and allowances 10,113 7,726
Changes in assets and liabilities:
(Increase) decrease in assets
Accounts receivable (222,568) 44,978
Other current assets (3,888) (55,951)
Inventory and inventoried parts (84,688) (2,097)
Increase in liabilities:
Accounts payable and accured expenses 41,450 42,471
--------- ---------
Net cash used in operating activities: (259,161) (292,822)
Cash flows from investing activities:
Investment in Spectra Sciense Corp. -- (187,524)
Purchase of property and equipment (305,341) (204,269)
Increase in intangible assets (10,417) --
Proceeds from the sale of technology and equipment -- 155,898
--------- ---------
Net cash used in investing activities (315,758) (235,895)
Cash flows from financing activities:
Proceeds from convertible debentures, net of expenses -- 968,000
Net borrowings of short term debt 319,551 75,300
Repayments of long-term obligations (18,394) (25,379)
Increase in restricted funds, net (49,663) (48,146)
--------- ---------
Net cash provided by financing activities 251,494 969,775
--------- ---------
Net increase (decrease) in cash and cash equivalents (323,425) 441,058
Cash and cash equivalents - beginning of period 541,653 333,187
--------- ---------
Cash and cash equivalents - end of period $ 218,228 $ 774,245
========= =========
Supplemental schedule of non-cash transactions:
Issuance of common stock in connection with director
compensation accrued in the previous period $ 21,876 $ --
========= =========
Conversion of notes payable and accrued interest
to common stock $ 823,894 $ --
========= =========
Forgiveness of note payable as consideration for
options exercised $ 106,743 $ --
========= =========
Net liabilities assumed in connection with
acquisition of subsidiary $ 29,757 $ --
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Infinite Group, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997,
which includes audited financial statements and footnotes as of and for the
years ended December 31, 1997 and 1996.
NOTE 2. - CHANGE IN REPORTING ENTITY
Effective September 19, 1997, the Company's voting interest in Spectra
Science Corp. was reduced below 50%. Prior to this time, the Company's financial
statements were prepared on a consolidated basis which included Spectra Science
Corp. as a subsidiary. Effective with this change in interest, the operating
results of Spectra Science Corp. will be reported on the Company's financial
statements under the equity method. All comparative financial information has
been restated to reflect this change in reporting entity. There is no effect on
net income or earning per share for the current or any prior periods due to this
change.
NOTE 3. - BUSINESS ACQUISITIONS
The Company acquired 100% of the stock of Mound Laser and Photonics Center
(MLPC) effective February 12, 1998. The addition of MLPC is expected to create
an opportunity for advancement in laser materials processing, as well as the
development and commercialization of new laser based technology. This
acquisition is expected to enhance Express Tool's and Spectra Science's
capabilities. In exchange for substantially all of the business and assets of
MLPC, the Company agrees to assume the obligations of MLPC incurred in the
ordinary course of business.
NOTE 4. - STOCK OPTIONS EXERCISED
In 1993, the Company issued 177,905 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. On February 25, 1998 these options were exercised. Notes payable of
$106,743, convertible into 42,597 shares of common stock were canceled as
consideration for the exercise price of the options.
6
<PAGE>
NOTE 5. - CONVERSION OF STOCKHOLDER NOTES PAYABLE
The former chairman and principal stockholder of the Company had advanced
funds to the Company under convertible secured notes which mature through
January 2000 with interest at 10%. The notes were convertible at rates between
$1.13 and $4.63 in principal for each share of common stock. On February 25,
1998, $106,443 of note payable convertible into 42,597 shares of common stock
were canceled as consideration for options exercised. The remaining notes of
$794,162 plus accrued interest of $30,032 were converted into 506,597 shares of
common stock on the same date.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded by the Company or any other
person that the objectives and plans of the Company will be achieved.
GENERAL
Infinite Group, Inc., (the "Company") does business in the fields of
material processing, advanced manufacturing methods and laser-application
technology. The Company is comprised of four subsidiaries: Laser Fare, providing
comprehensive laser-based materials processing services to leading
manufacturers; ExpressTool Corp., engaged in commercialization of its new
proprietary tooling technology; Mound Laser & Photonics Center, offering a full
range of laser material processing services in the Mid-West as well as
specialized laser and photonics services and applied research and development;
and The Advance Technology Group engaged in contract research and development.
The Company is also the largest shareholder of Spectra Science Corp., an entity
engaged in commercialization of its LaserPaint(TM) proprietary technology that
allows common disordered materials to be generators of laser light.
7
<PAGE>
Laser Fare
Laser Fare operations continue to be profitable on a stand alone basis.
While primarily engaged in contract laser material processing, Laser Fare also
develops new applications for industrial lasers. Laser Fare's 19 high powered
lasers are capable of performing a wide variety of manufacturing processes with
laser operations requiring five and six-axis manipulation. Laser Fare also
manufactures complete assemblies for selective medical product companies.
Approximately 75% of Laser Fare's sales come from customers in the medical
device, aerospace and power generation industries. Customers include General
Electric, United Technologies, Allied Signal, Polaroid, Stryker Medical and Dey
Laboratories. Laser Fare's facilities and equipment can support near term
demands but will require additional equipment and approximately 5,000 additional
square feet of space to accommodate anticipated new demand, as well as to expand
the scope of services it provides.
ExpressTool
ExpressTool is commercializing its proprietary technology that uses
conformal cooling and proprietary thermal management for production injection
mold tooling. Its technical capabilities allow molds, cavities and other types
of tools to be made more productive than is currently possible with traditional
methods. The Fortune 500 industrial companies that ExpressTool is making molds
for are demanding a reduction in the time required to bring new products to
market. ExpressTool's new technology not only answers the demand, but also
provides superior thermal management. Thus ExpressTool's molds are more
productive than conventional tools because of reduced cycle time, yielding a
major cost reduction for the user. Management is currently searching for
organizations having the needed capabilities that can be combined, through
acquisition or joint business arrangement, to integrate ExpressTool's new
technology with an established infrastructure and business base.
Mound Laser and Photonics Center
Mound Laser and Phontonics Center ("MLPC"), located in Miamisburg, Ohio,
was acquired by the Company in February 1998. Mound is comprised of four
divisions; laser applications, welding applications, photonics applications and
materials processing, having activity within industry, government and education
sectors. The Midwest location, a region long known for its expertise in
materials and material science, gives the Company a platform for growth into the
automotive, aerospace, tool & die, and other local industries. MLPC in addition
to offering a full range of materials processing services, will also offer a
more specialized laser and photonics services and applied research and
development that includes considerable experience in the application of pulsed
laser deposition of thin films and in high-speed photography and motion
analysis. The combination of Laser Fare's expertise in materials processing and
MLPC's experience in laser and photonics applications creates a synergistic
atmosphere for the advancement of laser materials processing and the development
and commercialization of new laser-based technology that can significantly
enhance Laser Fare's, ExpressTool's and Spectra Science's capabilities.
Advanced Technology Group
In January 1998, the Advanced Technology Group, ("ATG") performs technical
consulting and manages research and development programs for industrial
customers. In addition to being compensated for services performed, ATG obtains
intellectual property rights to the
8
<PAGE>
developments created under these services that provide future opportunities for
the Company. The Company's ExpressTool subsidiary is a prime example of this.
In January 1998, ATG entered into a one year consulting agreement with
Molecular Geodesics, Inc., ("MGI"), of Cambridge, MA. MGI is involved in
creating technologies using synthetic biomimetic materials with the mechanical
responsiveness of living cells and tissues and applying these technologies to
medical, industrial and military applications. MGI was awarded a $6.4 million
Defense Advanced Research Project Administration contract to develop "bioskins"
for the 21st century soldier for protection against chemical and biological
weapons. ATG will assist MGI in the creation, development, improvement and
modification of manufacturing techniques for tensegrity structures for medical
and industrial applications to support MGI's business. ATG will utilize
ExpressTool's proprietary techniques to fabricate structures for these
"bioskins". ATG will receive as compensation for the performance of its
services, the sum total of $300,000 plus expenses, payable at $25,000 per month
plus expenses.
ATG was awarded a $500,000 Phase II follow-on contract by the United
States Air Force/Phillips Laboratory, Kirkland AFB, New Mexico in the second
quarter ending June 30, 1997. The contract focused 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. Petersburg, Russia. In April
1998, the Company entered into an agreement to license the Company's high-
brightness laser technology related to the Philips contract for $1 million. The
license agreement would allow the purchaser the right to manufacture and sell
products and services of this technology, and the Company would retain the
rights to materials processing applications of the technology.
Spectra Science
The Company owns 2.9 million shares of Spectra Science Corp., ("Spectra")
stock and is its largest shareholder. Spectra Science was created to
commercialize technologies licensed from Brown University on an exclusive
worldwide basis. One of these technologies, LaserPaint(TM), allows common,
disordered materials to be generators of laser light. Spectra 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.
On March 10, 1998, Spectra established a manufacturing division,
Millennium Textiles, located in Bremen, Georgia. The new division will produce
100% spun polyester fabrics incorporating Spectra's LaserThread(TM)
identification technology. These fabrics will be used in a variety of table
linens, apron and garment products and will be marketed directly for
identification purposes to the textile rental industry and uniform resellers.
On March 17, 1998, Spectra announced a joint venture with Lavatec, Inc. of
Naugatuck, CT. and Heilbrom, Germany for laser based material handling systems
for the textile rental industry. Both companies are committed to the laundry
technology of the future and are dedicated to the commercialization of
hi-technology laundry handling systems.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a
series of private placements of debt and equity securities. From inception,
through March 31, 1998, an aggregate of approximately $20.1 million, net of
expenses, has been provided by debt and equity offerings. As of March 31, 1998
the Company has cash, cash equivalents and marketable securities totaling
approximately $221,000 available for its working capital needs and planned
capital asset expenditures.
While the majority of the revenues realized in the three months ending
March 31, 1998, were attributed to Laser Fare, the Company anticipates improved
revenue from its other divisions, and expense containment measures continue to
be implemented. Management is also pursuing other strategies for raising
additional working capital through debt and equity transactions.
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 to Northeast
Hampton Holdings, which inturn converted the notes in accordance with their
terms into 684,502 shares of common stock at an average conversion price of
$1.63.
The Board of Directors has given approval for management to vigorously
pursue other alternate sources of funding including conventional bank financing,
private placement of debt and/or equity securities, and application for
available governmental funds in the form of interest subsidized financing.
Management estimates that a total of $2.5 million in funds would satisfy its
cash requirements for the next 18 months. There is no assurance, however, that
management will be successful in raising all or part of this amount on
satisfactory terms or that it will be sufficient to fund operations and
scheduled debt repayment.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Consolidated revenues for the three months ended March 31, 1998 were
$1,925,407 and consisted primarily of laser division sales. Cost of sales
totaled $1,065,046, and a gross profit of $860,361 was realized for the quarter.
Consolidated revenues for the three months ended March 1997 were $1,341,930
consisting solely of laser division sales. Cost of sales totaled $831,031, and a
gross profit of $510,899 was realized for the three months ended March 31, 1997.
Operating expenses for the three months ended March 31, 1998 were $66,353
as compared to $32,208 for the first quarter of 1997. This increase was a result
of operating expense from the Company's new subsidiary, Mound Laser & Photonic
Center. Research and Development expenses were $320,500 in the three months
ended March 31, 1998 as compared to $204,964 in the first quarter on 1997. The
increase in the first quarter of 1998 is contributed to the research and
development efforts in the Company's ExpressTool subsidiary.
General and administrative expenses were $287,260 for the three months
ended March 31, 1998 as compared to $387,440 for the first quarter of 1997. The
decrease of $100,180 or 25.9% was primarily due to the reduction of litigation
legal expense and continued cost reduction by management. Selling expenses were
$115,901 for the quarter ended March 31, 1998, as
10
<PAGE>
compared to $130,081 for the first quarter of 1997. The decrease was primarily
attributed to the transfer of the Vice President of Sales from Laser Fare to the
Company's ExpressTool subsidiary.
Depreciation and amortization expenses totaled $139,577 for the first
quarter of 1998, as compared to $180,985 for the first quarter of 1997.
Decreased depreciation and amortization expense of $41,408 or 23% from the first
quarter of 1997, resulted primarily from a reduction in the amount of
convertible debentures issued and related conversions to common stock in the
first quarter of 1997.
Interest expense during the second quarter ending March 31, 1998 was
$76,842 as compared to $87,856 for the first quarter of 1997. The decrease of
$11,014 was primarily due to the conversion of notes payable in the first
quarter of 1998. Interest and other income for the first quarter of 1998 was
$7,281 as compared to $1,701 for the first quarter of 1997.
Equity in loss of unconsolidated subsidiary, Spectra Science, was $278,378
in the first quarter ending March 31, 1998, as compared to $388,604 in the first
quarter ending March 31, 1997. The decrease of $110,226 is a result of a
decrease in Infinite Group's percentage of equity ownership at March 31, 1998 as
compared to March 31, 1997.
The Company has a consolidated net loss of $417,169 for the three months
ended March 31, 1998, as compared to the net loss of $861,474 for the three
months ended March 31, 1997. The $444,305 decrease in net loss is primarily
attributed to an increase in gross profit of $349,462 due to increased sales and
a decrease of the equity in the loss of the company's unconsolidated subsidiary
Spectra Science of $110,226.
Part II - Other Information
Not Applicable
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
May 8,1998 INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre
----------------------------------
Clifford G. Brockmyre, President
And Chief Executive Officer
By: /s/ Daniel T. Landi
----------------------------------
Daniel T. Landi
Chief Financial and Accounting
Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from March 31,
1998 10-QSB and is qualified in it's entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 218,228
<SECURITIES> 0
<RECEIVABLES> 1,179,446
<ALLOWANCES> 51,646
<INVENTORY> 252,978
<CURRENT-ASSETS> 1,948,281
<PP&E> 5,867,528
<DEPRECIATION> 1,500,930
<TOTAL-ASSETS> 6,910,715
<CURRENT-LIABILITIES> 1,935,280
<BONDS> 2,488,035
0
0
<COMMON> 13,326
<OTHER-SE> 20,188,009
<TOTAL-LIABILITY-AND-EQUITY> 6,910,715
<SALES> 1,925,407
<TOTAL-REVENUES> 1,925,407
<CGS> 1,065,046
<TOTAL-COSTS> 1,065,046
<OTHER-EXPENSES> 929,591
<LOSS-PROVISION> 13,113
<INTEREST-EXPENSE> 76,842
<INCOME-PRETAX> (417,169)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (417,169)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
