U. S. 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 September 30, 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 October 26, 1998 the Registrant has a total of 13,377,516 shares of Common
Stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
<PAGE>
INDEX
INFINITE GROUP, INC.
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 3
Notes to Unaudited Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 6-13
PART II. OTHER INFORMATION
Items
1-6 Not Applicable 13
SIGNATURES 14
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 540,230 $ 541,653
Restricted funds 66,194 69,280
Accounts receivable, net of allowance 1,048,546 954,378
Inventories 279,010 150,389
Other current assets 221,938 174,798
------------ ------------
Total current assets 2,155,918 1,890,498
Property and equipment, net 4,390,500 4,197,305
Other assets
Notes receivable - stockholders 57,214 87,642
Inventoried parts 17,900 71,603
Investment in subsidiary -- 437,375
Investments 250,000 --
Other intangible assets, net 387,688 266,506
------------ ------------
Total other assets $ 712,802 $ 863,126
------------ ------------
$ 7,259,220 $ 6,950,929
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 759,349 $ 440,553
Accounts payable and accrued expenses 779,225 948,713
Current maturities of long-term obligations 529,243 946,305
------------ ------------
Total current liabilities 2,067,817 2,335,571
Long term obligations 2,987,390 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 20,692,388 19,236,206
Accumulated deficit (18,501,701) (17,296,766)
------------ ------------
Total stockholders' equity 2,204,013 1,952,056
------------ ------------
$ 7,259,220 $ 6,950,929
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 1,703,793 $ 1,361,741 $ 5,468,916 $ 4,056,124
Cost of goods sold 1,064,064 817,216 3,289,903 2,370,260
------------- ------------- ------------- -------------
Gross profit 639,729 544,525 2,179,013 1,685,864
Costs and expenses
Operating expenses 79,408 32,058 133,083 91,981
Research and development 153,730 189,785 732,763 660,072
General and administrative expenses 494,080 391,173 1,184,770 1,095,971
Selling expenses 97,067 111,626 320,628 382,302
Depreciation and amortization 154,735 244,847 438,975 569,274
------------- ------------- ------------- -------------
Total costs and expenses 979,020 969,489 2,810,219 2,799,600
Operating loss (339,291) (424,964) (631,206) (1,113,736)
Other income (expense)
Equity in loss of unconsolidated subsidiary -- (276,251) (437,375) (1,008,043)
Loss due to issuance of stock by unconsolidated
subsidiary -- (62,341) -- (62,341)
Interest expense (103,359) (101,493) (239,018) (707,279)
Interest and other income 48,439 33,260 15,664 35,323
Gain on sale of asset 1,500 -- 87,000 38,064
------------- ------------- ------------- -------------
Total other income (expense) (53,420) (406,825) (573,729) (1,704,276)
------------- ------------- ------------- -------------
Loss before provision for income taxes (392,711) (831,789) (1,204,935) (2,818,012)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (392,711) $ (831,789) $ (1,204,935) $ (2,818,012)
============= ============= ============= =============
Per share:
Net loss per common share $ (0.03) $ (0.09) $ (0.09) $ (0.30)
============= ============= ============= =============
Weighted average number of common
shares outstanding 13,016,626 9,318,851 13,016,626 9,318,851
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,204,935) $ (2,818,012)
Ajustments to reconcile net cash used in operating
activities:
Depreciation and amortization 438,975 569,274
Interest expense attributable to convertible debentures discount -- 406,849
Interest expense attributable to note discount amortization 13,686 --
Interest and other expenses related to conversion of debentures
paid via issue of additional common stock -- 57,898
Loss attributed to unconsolidated subsidiary 510,875 1,008,043
Loss due to issuance of stock by unconsolidated subsidiary -- 119,603
Gain on sale of assets (87,000) (38,064)
Asset write down and allowances 30,428 21,647
Changes in assets and liabilities:
(Increase) decrease in assets
Accounts receivable (94,168) (104,702)
Other current assets (47,140) (60,106)
Inventory and inventoried parts (74,917) 45,289
Increase in liabilities:
Litigation settlement payable -- (350,000)
Accounts payable and accured expenses (117,580) 298,473
------------ ------------
Net cash used in operating activities: (631,776) (843,808)
Cash flows from investing activities:
Investment in Spectra Science Corp. -- (200,000)
Purchase of property and equipment (597,597) (754,798)
Purchase of investments (250,000) --
Increase in intangible assets (112,948)
Proceeds from the sale of assets -- 155,898
------------ ------------
Net cash used in investing activities (960,545) (798,900)
Cash flows from financing activities:
Proceeds from convertible debentures, net of expenses -- 968,000
Net borrowings of short term debt 87,812 221,572
Borrowings of long-term obligations 1,500,000 --
Repayments of long-term obligations -- (145,372)
Proceeds from issuance of common stock, net of expenses -- 1,670,000
Decrease in restricted funds, net 3,086 7,001
------------ ------------
Net cash provided by financing activities 1,590,898 2,721,201
------------ ------------
Net decrease in cash and cash equivalents (1,423) 1,078,493
Cash and cash equivalents - beginning of period 541,653 333,187
------------ ------------
Cash and cash equivalents - end of period $ 540,230 $ 1,411,680
============ ============
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 $ 793,862 $ --
============ ============
Forgiveness of note payable as consideration for
options exercised $ 106,743 $ --
============ ============
Net liabilities assumed in connection with acquisition
of subsidiary $ 29,307 $ --
============ ============
Forgiveness of accrued interest in connection with
conversion of notes payable $ 30,032 $ --
============ ============
Discount for warrants attached to note payble $ 504,379 $ --
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<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 nine month period
ended September 30, 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. The Company recorded Goodwill in the amount of
$29,307 in conjunction with this transaction.
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 by the stockholder.
Notes payable of $106,743, convertible into 42,597 shares of common stock were
canceled as consideration for the exercise price of the options.
4
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5. - CONVERSION OF STOCKHOLDER NOTES PAYABLE
The former chairman and principal stockholder of the Company 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 notes payable, which were convertible into 42,597 shares of
common stock, were canceled in payment of the exercise price of options
exercised by the stockholder. The remaining notes of $794,162 plus accrued
interest of $30,032 were converted into 506,777 shares of common stock on the
same date.
NOTE 6. - INVESTMENTS
Investments represent 250,000 shares of common stock of Molecular
Geodesics, Inc. (MGI), purchased in April, 1998. The Company has a one year
consulting agreement with MGI. The Company receives $25,000 per month for the
performance of its services. The investment is recorded at fair market value in
accordance with Statement of Financial Accounting Standard 115, Accounting For
Certain Investments In Debt And Equity Securities. As of September 30, 1998 cost
approximates fair market value.
NOTE 7. - NOTE PAYABLE ISSUED WITH ATTACHED STOCK WARRANTS
Effective June 30, 1998, the Company issued a $1,150,000 note payable to
its President. The note has a term of 15 years and bears interest at a rate of
9.0% for the first year. After the first year the rate is adjusted annually to a
rate equal to the one-year T-Bill rate plus 3.5%. The note is payable in equal
monthly principal installments of approximately $6,400 plus interest.
Additionally, the Company issued a second note in the amount of $250,000. The
note has a one year repayment term and bears interest at the rate of 9.0%.
Warrants to purchase 2,680,000 shares of common stock were issued in connection
with these transactions. One-half of the warrants are fully vested as of
September 30, 1998. A note discount was recorded in the amount of $504,379 for
the value of the vested warrants. This discount will be amortized over the
fifteen year term of the note. The discount associated with the remaining
warrants will be recorded as they vest at the value on the date of vesting.
5
<PAGE>
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, high productivity
production tooling 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 high productivity production tooling
(HTTP) 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.
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 20 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
6
<PAGE>
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 10,000 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 high 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 proprietary 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 Photonics Center ("MLPC") located in Miamisburg, Ohio was
acquired by the Company in February 1998. MLPC specializes in laser
applications, photonics applications and materials processing, and has 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 offers a wide range of materials processing
services with major emphasis on laser marking, as well as applied research and
development and more specialized laser and photonics services. Specialized
services include growth of thin films by pulsed laser deposition, application of
lasers to chemistry and photochemistry, spectroscopy, and applied optics. MLPC
has submitted a provisional patent on pulsed laser deposition, and is preparing
a second provisional patent on specific applications of the technology. 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.
7
<PAGE>
Advanced Technology Group
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 developments created under these services that provide future
opportunities for the Company. The Company's ExpressTool subsidiary is a prime
example of this.
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 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 with The Laser Company (TLC) 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.
In June 1998, ATG was awarded a two-year, $280,000 contract from Triton
Systems of Chelmsford, MA. The goal of the contract is to laser fabricate
aerospace components from metal matrix composite materials. These are strong
lightweight materials that are particularity useful in high temperature
environments. Triton Systems awarded this contract to Laser Fare's Advance
Technology Division as part of its SBIR program funded by the Phillips
Laboratory at Kirkland Air Force Base in New Mexico.
Spectra Science
The Company owns 34% of Spectra Science Corp., ("Spectra") stock and is
its largest shareholder. Spectra Science was created to commercialize a platform
technology licensed from Brown University on an exclusive worldwide basis. In
addition Spectra is commercializing a number of internally developed optically
based technologies in the
8
<PAGE>
areas of product and document authentication, textile coding, combinatorial
chemistry, photodynamic therapy and projection displays.
LaserPaint(TM) materials used in conjunction with low cost and mature
silicon based detector technology can be used to create robust machine readable
coding capabilities for a large number of market opportunities where previous
approaches have failed or are impractical. Applications for Laser Paint(TM)
include document security, world currencies, plastics recycling, product
packaging, anti-counterfeiting of luxury products, textile coding and
combinatorial chemistry.
Spectra has demonstrated the coding of paper products, including
banknotes, using its various technologies in the forms of security threads,
inks, and fiber additives. The rights to the use of Spectra Science technologies
for authentication and coding of currency and negotiable instruments have been
licensed by Crane & Co. In addition, Spectra has developed a number of specialty
phosphorescent materials which will be sold through Crane & Co. beginning in the
last quarter of 1998.
Complementing the use of the technology for security applications, Spectra
has developed a product called LaserThread(TM) that can be used to code linen
and flat goods for the textile rental and services industry. Spectra, with its
partners Albany International Corporation, Lavatec, Inc., Engineered Yarns
Company and General Linen and Uniform Services, is in the late stages of
completing a fully automated sorting system for LaserThread(TM) coded linens.
The system potentially can reduce the labor required to sort these items by over
70%.
As a part of the Spectra's strategy for product development and marketing,
Spectra has created a subsidiary in Georgia, Millennium Textiles, to manufacture
flat goods and garments coded with LaserThread(TM). This subsidiary allows
Spectra to access the multi-billion dollar textile rental market through the
sale of manufactured products, sales of LaserThread(TM) to other manufacturers,
as well as leasing and/or sales of reading and material handling systems.
Peripheral to Spectra's focus on coding and authentication, Spectra
Science has programs in photodynamic therapy, (PDT) and large screen displays.
LaserPaint(TM) materials have been engineered to produce narrowband and
disposable plastic wavelength shifters that match the absorption of important
PDT drugs. Tests performed at Long Island Jewish Medical Center and the Ontario
Cancer Institute have proven the effectiveness of Spectra's low cost and
wavelength versatile light source with a number of drugs including the FDA
approved Photofin(R).
In the areas of large screen displays, Spectra has developed a new lazing
display based on a novel approach that uses polymer-dispersed liquid crystals to
produce a laser output directly corresponding to a desired image. This concept
has generated significant external funding and is primarily under development at
Brown University. Spectra expects to develop an operative prototype by the end
of 1998 to be used to attract strategic corporate partners in the growing
projection display market.
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 September 30, 1998, an aggregate of approximately $21.4 million, net of
expenses, has been provided by debt and equity offerings. As of September 30,
1998 the Company has cash, cash equivalents and marketable securities totaling
$540,230 available for its working capital needs and planned capital asset
expenditures.
While the majority of the revenues realized in the three months ending
September 30, 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 of 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 in turn converted the notes in accordance with their
terms into 684,502 shares of common stock at an average conversion price of
$1.63 per share.
On June 30, 1998, the Company's president and chief executive officer
loaned the Company an aggregate of $1.15 million. The note evidencing the loan
is for a term of fifteen years and bears interest at the rate of 9.0% for the
first twelve months and adjusts annually thereafter to a rate equal to the
one-year T-Bill rate plus 3%. The president and chief executive officer also
loaned the Company $250,000 earlier this year. In consideration for the loans,
the Company granted the lender warrants to purchase 2,680,000 shares of Company
Common Stock exercisable at $1.12 per share. Half of the warrants are
immediately vested and, provided that the loan remains outstanding, the
remaining 50% vest in four equal tranches; six, nine, twelve, and fifteen months
from the anniversary date of the loan. In the event the notes are prepaid within
such period, any unvested warrants are cancelable.
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 $4.0 million in funds would satisfy its
cash requirements over the next eighteen months. The funds are for; acquisition
of a mold company; additional equipment and space to accommodate anticipated new
demand; repayment of debt; and working capital. 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.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Consolidated revenues for the three months ended September 30, 1998 were
$1,703,793 and consisted primarily of laser division sales. Cost of sales
totaled $1,064,064, and a gross profit of $639,729 was realized for the quarter.
Consolidated revenues for the three months ended September 30, 1997 were
$1,361,741 consisting solely of laser division sales. Cost of sales totaled
$817,216, and a gross profit of $544,525 was realized for the three months ended
September 30, 1997.
Operating expenses for the three months ended September 30, 1998 were
$79,408 as compared to $32,058 for the third quarter of 1997. This increase was
primarily as a result of additional operating expenses attributed to the
Company's mid-west subsidiary, Mound Laser and Photonic Center. Research and
Development expenses were $153,730 in the three months ended September 30, 1998
as compared to $189,785 in the third quarter of 1997. The reduction is due
primarily to the Company's ExpressTool subsidiary's reducing its Research and
Development activity, and placing increased emphasis on commercialization of its
proprietary technology.
General and administrative expenses were $494,080 for the three months
ended September 30, 1998 as compared to $391,173 for the third quarter of 1997.
The increase of $102,907 or 26% was primarily due to the Company's ExpressTool
subsidiary's increased commercialization activity of its proprietary technology
as well as the addition of the Company's mid-west subsidiary, Mound Laser and
Photonic Center. Selling expenses were $97,067 for the quarter ended September
30, 1998, as compared to $111,626 for the third quarter of 1997. The decrease
was primarily attributed to the transfer of the Vice President of Sales from the
Laser Fare subsidiary to the ExpressTool subsidiary.
Depreciation and amortization expenses totaled $154,735 for the third
quarter of 1998, as compared to $244,847 for the third quarter of 1997.
Decreased depreciation and amortization expense of $90,112 from the third
quarter of 1997 resulted primarily from older equipment becoming fully
depreciated.
Interest expense during the third quarter ending September 30, 1998 was
$103,359 as compared to $101,493 for the third quarter of 1997. Interest and
other income for the third quarter of 1998 was $48,439 as compared to $33,260
for the third quarter of 1997.
The Company has a consolidated net loss of $392,711 for the three months
ended September 30, 1998, as compared to the net loss of $831,789 for the three
months ended September 30, 1997. The $439,078 decrease in net loss is primarily
attributed to the reduction of the Company's equity in the loss of its
unconsolidated subsidiary Spectra Science of $276,251, a reduction in
depreciation of approximately $90,000 and a third
11
<PAGE>
quarter 1997 non-recurring charge of approximately $62,000 resulting from the
Company's unconsolidated subsidiary's issuance of common stock.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Consolidated revenues for the nine months ended September 30, 1998 were
$5,468,916 and consisted primarily of laser division sales. Cost of sales
totaled $3,289,903, and a gross profit of $2,179,013 was realized for the
period. For the nine months ended September 30, 1997, sales totaled $4,056,124
and consisted solely of laser division sales. Consolidated cost of sales was
$2,370,260 for the first nine months of 1997 and the Company realized a gross
profit of $1,685,864 for that period.
Operating expenses for the nine months ended September 30,1998 were
$133,083 as compared to $91,981 during the first nine months of 1997. The
increase was primarily attributed to increased commercialization activities in
the Company's ExpressTool and Mound Laser and Photonic subsidiaries. Research &
Development expenses were $732,763 during the nine months ended September 30,
1998 as compared to $660,072 during the nine months ended September 30, 1997.
The increase was primarily due to research and development activity in the
Company's ExpressTool subsidiary.
General and administrative expenses for the nine months ended September
30, 1998 were $1,184,770 as compared to $1,095,971 for the nine months ended
September 30, 1997. The increase of $88,799 was primarily due to the increased
commercialization activities in the Company's ExpressTool and Mound Laser and
Photonic subsidiaries. Selling expenses were $320,628 for the first nine months
ended September 30, 1998 as compared to $382,302 for the first nine months of
1997. The decrease was primarily attributed to the transfer of the Vice
President of Sales from the Laser Fare subsidiary to the ExpressTool subsidiary.
Depreciation and amortization expenses totaled $438,975 for the first nine
months of 1998 compared to $569,274 for the first nine months of 1997. The
decrease in depreciation and amortization expenses of $130,299, or 23%, resulted
primarily from older equipment becoming fully depreciated. Interest expense was
$239,018 and $707,279 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in interest expense of $468,261 was due primarily to
the recognition of the discount attributed to the beneficial conversion feature
of convertible debentures during the 1997 period. Interest and other income for
the nine months ended September 30, 1998 was $15,664 compared to $35,323 for the
nine months ended September 30, 1997.
The Company had a consolidated net loss of $1,204,935 for the nine months
ended September 30, 1998, as compared to a net loss of $2,818,012 for the nine
months ended September 30, 1997.
12
<PAGE>
YEAR 2000 COMPLIANCE
The Company is on schedule with a project that addresses the Year 2000
issue of computer systems and other equipment with embedded chips or processors
not being able to properly recognize and process date-sensitive information
after December 31, 1999. Many systems use only two digits rather than four to
define the year and these systems will not be able to distinguish between the
1900 and the year 2000. This may lead to disruptions in the operations of
business and governmental entities resulting from miscalculations or system
failures. The project is designed to ensure the compliance of all of the
Company's applications, operating systems and hardware platforms, and to address
the compliance of key business partners. Key business partners are those clients
and vendors that have a material impact on the Company's operations. All phases
of the project should be completed by mid 1999 thus minimizing the impact of the
Year 2000 problem on the Company's operations.
In 1997 the Company began an initiative to update and upgrade all computer
systems so that it could attain competitive advantage. Early in 1998 the Company
began to address the Year 2000 (Y2K) issue to insure all computer hardware and
related software were Y2K compliant. As of September 30, 1998, all of the
Company's internal business computer programs and systems were Y2K compliant.
The total additional cost of the required modifications to become Y2K compliant
was approximately $100,000.
Year 2000 disruptions in client or vendor operations could result in one
or more missing scheduled payments which could impact the Company's cash flow.
Year 2000 disruptions of the operations of key vendors could impact the
Company's ability to fulfill some of its contractual obligations. If one or more
of these situations occur, the Company's results of operations, liquidity and
financial condition could be materially and adversely affected. The Company is
unable to determine the readiness of its key business partners at this time and
therefore unable to determine whether the consequences of Y2K failures will have
a material impact on the Company's results of operations, liquidity or financial
conditions. However, as a part of the Year 2000 project, the Company is mailing
a questionnaire to all of its clients and vendors requesting the status of their
Year 2000 compliance on or before March 30, 1999. This is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and reduce the possibility of significant interruptions of normal
business operations.
Part II - Other Information
Not Applicable
13
<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.
November 9, 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
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule continas summary financial information extracted from September
30, 1998 10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 540,230
<SECURITIES> 0
<RECEIVABLES> 1,048,546
<ALLOWANCES> 59,743
<INVENTORY> 279,010
<CURRENT-ASSETS> 2,155,918
<PP&E> 6,177,395
<DEPRECIATION> 1,786,895
<TOTAL-ASSETS> 7,259,220
<CURRENT-LIABILITIES> 2,067,817
<BONDS> 2,987,390
0
0
<COMMON> 13,326
<OTHER-SE> 2,190,687
<TOTAL-LIABILITY-AND-EQUITY> 7,259,220
<SALES> 5,468,916
<TOTAL-REVENUES> 5,468,916
<CGS> 3,289,903
<TOTAL-COSTS> 3,289,903
<OTHER-EXPENSES> 2,810,219
<LOSS-PROVISION> 17,776
<INTEREST-EXPENSE> 239,018
<INCOME-PRETAX> (1,204,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,204,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,204,935)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
