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, 1999
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 (I.R.S. Employer (I.R.S.
jurisdiction of Employer Identification No.)
organization)
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 November 9, 1999 the Registrant has a total of 2,128,540 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, 1999 and December 31, 1998 3
Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11-18
PART II. OTHER INFORMATION
Items
1-5 Not Applicable 18
SIGNATURES 19
2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 434,878 $ 1,010,736
Restricted funds 63,795 78,125
Accounts receivable, net of allowances 1,474,934 1,093,414
Inventories 544,886 193,412
Deferred tax asset -- 825,000
Advance - stockholder 50,191 50,383
Other current assets 347,720 182,567
----------------- -----------------
Total current assets 2,916,404 3,433,637
Property and equipment, net 7,360,216 4,442,338
Other assets:
Note receivable - stockholders 221,480 47,102
Cash surrender value of officer life insurance 149,753 --
Prepaid pension costs 784,228 --
Intangible assets, net 280,426 342,565
Other investment 250,000 250,000
----------------- -----------------
Total other assets 1,685,887 639,667
----------------- -----------------
$ 11,962,507 $ 8,515,642
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 885,113 $ 522,757
Stockholders -- 231,031
Accounts payable and accrued expenses 1,663,065 1,171,329
Current maturities of notes payable - stockholders 30,544 29,206
Current maturities of long-term obligations 1,064,432 307,628
----------------- -----------------
Total current liabilities 3,643,154 2,261,951
Long term obligations 4,866,386 2,301,862
Notes payable - stockholders 516,705 601,955
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized 2,748,604 and 2,673,334
shares issued; 2,198,529 and 2,673,334 2,748 2,673
shares outstanding
Additional paid-in capital:
Common stock 20,407,037 20,210,268
Warrants 577,399 555,585
Accumulated deficit (16,675,735) (17,418,652)
----------------- -----------------
4,311,449 3,349,874
Less treasury stock, 550,075 shares, at cost (1,375,187) --
----------------- -----------------
Total stockholders' equity 2,936,262 3,349,874
----------------- -----------------
$ 11,962,507 $ 8,515,642
================= =================
</TABLE>
3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 2,892,258 1,703,793 6,813,998 5,468,916
Cost of goods sold 2,304,671 1,064,064 5,331,166 3,289,903
------------ --------- --------- ---------
Gross profit 587,587 639,729 1,482,832 2,179,013
Costs and expenses
Research and development 147,866 153,730 1,140,780 732,763
General and administrative expenses 520,624 573,488 1,824,156 1,317,853
Selling expenses 286,525 97,067 706,051 320,628
Depreciation and amortization 293,636 154,735 644,382 438,975
------------ --------- --------- ---------
Total costs and expenses 1,248,651 979,020 4,315,369 2,810,219
Operating loss (661,064) (339,291) (2,832,537) (631,206)
Other income (expense)
Gain on sale of assets -- 1,500 -- 87,000
Interest and other income 935 48,439 38,991 15,664
Interest expense (174,506) (103,359) (405,819) (239,018)
------------ --------- --------- ---------
Total other income (expense) (173,571) (53,420) (366,828) (136,354)
------------ --------- --------- ---------
Loss from continuing operations (834,635) (392,711) (3,199,365) (767,560)
Disposed business segment:
Loss from operations of disposed
business segment -- -- -- (437,375)
Gain on sale of business segment
(less applicable income taxes of $825,000) -- -- 4,170,315
------------ --------- --------- ---------
Net income (loss) from discontued operations -- -- 4,170,315 (437,375)
Income (loss) before extraordinary item (834,635) (392,711) 970,950 (1,204,935)
Extraordinary item (Note 7) -- -- (222,864)
------------ --------- --------- ---------
Net income (loss) $ (834,635) (392,711) 748,086 (1,204,935)
============ ========= ========= =========
Income (loss) per share - basic:
Contining operations (0.38) (0.15) (1.42) (0.29)
Disposed business segment
Loss from operations -- -- -- (0.17)
Gain on sale -- -- 1.86 --
Extraordinary item -- -- (0.09) --
------------ --------- --------- ---------
Net income(loss) per share (0.38) (0.15) 0.34 (0.45)
============ ========= ========= =========
Income from disposed business segment
per share - diluted -- -- 1.75 --
============ ========= ========= =========
Weighted average number of common
shares outstanding:
Basic 2,198,529 2,665,233 2,246,524 2,648,907
============ ========= ========= =========
Diluted 2,331,862 2,665,233 2,379,587 2,648,907
============ ========= ========= =========
</TABLE>
4
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $(3,199,365) $ (767,560)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 644,382 438,975
Loss attributed to unconsolidated subsidiary -- 73,500
Gain on disposition of assets -- (87,000)
Amortization of discount on note payable 33,033
Expenses satisfied by issuance of equity 39,527 13,686
Asset write down and allowances 30,338 30,428
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (132,885) (94,168)
Other current assets 64,574 (47,140)
Inventory and inventoried parts 494,115 (74,917)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (673,242) (117,580)
----------- -----------
Net cash used in continuing operations (2,699,523) (631,776)
Cash flows from investing activities:
Purchase of property and equipment (1,617,409) (597,597)
Purchase of investments (298,701) (250,000)
Increase in intangible assets (18,705) (112,948)
Proceeds from the sale of of investment in Spectra Science Corp. 3,620,128 --
Net collections on advance to stockholder 192 --
Advance under note receivable (100,000) --
----------- -----------
Net cash used in investing activities 1,585,505 (960,545)
Cash flows from financing activities:
Net borrowings (repayments) of short-term debt (70,643) 87,812
Net borrowings of long-term obligations 1,373,165 1,500,000
Repayments of long-term obligations (882,562) --
Net borrowings from stockholder 77,696
Decrease in restricted funds, net 14,330 3,085
----------- -----------
Net cash provided by (used in) financing activities 511,986 1,590,897
----------- -----------
Net increase (decrease) in cash and cash equivalents (602,032) (1,424)
Cash and cash equivalents - beginning of period 1,036,910 541,654
----------- -----------
Cash and cash equivalents - end of period $ 434,878 $ 540,230
=========== ==========
</TABLE>
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 nine month period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. For further information, refer
to the Company's Annual Report on Form 10-KSB for the year ended December 31,
1998, which includes audited financial statements and footnotes as of and for
the years ended December 31, 1998 and 1997.
NOTE 2. - BUSINESS ACQUISITIONS
In April 1999, the Company acquired 100% of the common stock of Osley &
Whitney, Inc. (O&W). The aggregate consideration paid for the stock was $1.5
million ($300,000 in cash and $1,200,000 in convertible promissory notes payable
in three annual installments of $400,000, beginning March 2000, plus interest at
8% per annum). These notes are included in long term obligations as of September
30, 1999 in the accompanying balance sheet.
The O&W acquisition was accounted for under the purchase method of
accounting, whereby the results of operations of O&W are included in the
accompanying statement of operations beginning from the date of acquisition. The
following is a proforma summary of the results of operations had O&W been
acquired as of January 1, 1998:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $(834,635) $(613,283) $391,870 $(1,280,306)
========= ========= ======== ===========
In April 1999, the Company also acquired 100% of the common stock of
Materials & Manufacturing Technologies, Inc. (MMT), of West Kingston, Rhode
Island, in exchange for 20,000 shares of Infinite Group, Inc. common stock. The
MMT acquisition was accounted for under the pooling method of accounting whereby
the results of operations of MMT are included on a combined basis as if the
acquisition occurred at January 1, 1998. MMT was substantially inactive during
1998 and 1999 and as a result, the proforma results of operations of the Company
are as previously reported.
In April 1999, the Company formed a new subsidiary, Express Pattern, which
provides rapid prototyping services. The subsidiary acquired equipment to
start-up operations for approximately $248,000.
6
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - LONG TERM OBLIGATIONS
During the quarters ended June 30, 1999 and September 30, 1999, the
Company incurred $1,223,000 of additional bank debt, which is included in long
term obligations as of September 30, 1999 in the accompanying balance sheet. The
proceeds were used to refinance equipment purchased previously out of cash flow
($635,000) and to purchase new equipment ($588,000). These obligations are
payable over a fifteen year term in monthly payments aggregating approximately
$6,800 plus interest at prime plus .75%. This debt is secured by certain
equipment of the Company.
NOTE 4. - NOTES PAYABLE - STOCKHOLDERS
During the quarter ended September 30, 1999, the Company incurred $150,000
of additional debt, payable to the President and principal stockholder, which is
included in note payable - stockholders as of September 30, 1999 in the
accompanying balance sheet. The obligation is convertible into shares of the
Company's common stock at $.9375 per share. Until conversion, interest accrues
at the prime interest rate (8.25% at September 30, 1999).
NOTE 5. - REVERSE STOCK SPLIT
On February 16, 1999, the Company effected a one for five reverse stock
split of the Company's common stock. This transaction was given retroactive
effect in the December 31, 1998 audited financial statements, as well as the
accompanying September 30, 1998 financial statements. For further information,
refer to the Company's Annual Report on Form 10-KSB for the year ended December
31, 1998.
NOTE 6. - DISPOSAL OF A BUSINESS SEGMENT
In February 1999, the Company completed the sale of its equity interest in
Spectra Science Corp. (SSC) whereby 611,194 shares of Series A Preferred Stock
of SSC were sold in consideration for the retirement of approximately 550,000
shares of the Company's common stock. As a result the Company recorded a gain of
approximately $1.375 million. Additionally, the Company sold 1,342,249 shares of
SSC for $2.25 per share to two shareholders of SSC, and 477,583 shares were
repurchased by SSC at a price of $1.26 per share, for aggregate cash
consideration to the Company of approximately $3,600,000. The transaction
resulted in a gain of approximately $3,600,000. The total gain recognized in
1999, as a result of the above transactions, amounted to approximately $4.15
million, net of $825,000 in income taxes.
7
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. - EXTRAORDINARY ITEM
In April 1999, the Company prepaid a portion ($420,000) of a ten year
promissory note, payable to the chairman/principal stockholder. As a result of
the early extinguishment of a portion of the note payable, a pro-rata portion of
the loan closing costs and the note discount relating to the detachable warrants
issued with the debt were written off in the quarter ended June 30, 1999. The
amount charged to expense for the note discount and loan closing costs amounted
to $187,390 and $35,474, respectively. The aggregate amount of $222,864 is
considered a loss on early extinguishment of debt and is classified as an
extraordinary item in the accompanying consolidated statement of operations.
NOTE 8. - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the Company has reported basic and diluted earnings per
share. The difference between the weighted average number of common shares
outstanding for the basic and diluted calculation represents the effect of
convertible debentures. The conversion of outstanding options and warrants were
not considered in the calculation of diluted earnings per share since the
average market price is less than the exercise price for all excercisable
securities during the quarter ended June 30, 1999. The impact of convertible
debentures was excluded from the computation of loss per share from continuing
operations because their assumed conversion would be antidilutive.
NOTE 9. - SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded approximately $22,000 of additional paid-in capital
for vested detachable warrants issued in connection with a note payable to the
chairman/principal stockholder. In addition, the Company recorded approximately
$125,000 of additional paid-in capital in connection with the issuance of common
stock to outside consultants for services rendered.
NOTE 10. - BUSINESS SEGMENTS
Effective with fiscal year 1998, the Company adopted SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, which establishes
standards for the way public companies report information about operating
segments in both interim and annual financial statements as well as related
disclosures. The adoption did not change the Company's reportable segments.
Prior periods have been restated to conform with the reporting requirements of
this statement.
8
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10. - BUSINESS SEGMENTS (CONTINUED)
Effective with the acquisition of O&W (see Note 2), the Company's
businesses are currently organized, managed and internally reported as two
segments, laser services and plastics. The segments are determined based on
differences in products, production processes and internal reporting. All of the
segments of the Company operate entirely within the United States. Revenues from
customers in foreign countries are minimal.
Transactions between reportable segments are recorded at cost. The Company
relies on intersegment cooperation and management does not represent that these
segments, if operated independently, would report the results shown.
A summary of selected consolidated information for the Company's industry
segments during the three and nine month periods ended September 30, 1999 and
1998 is set forth as follows:
9
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Laser Photonic
Services (1) Materials (2) Plastics Consolidated
------------ ------------- -------- ------------
<S> <C> <C> <C> <C>
Three Months Ended September 30, 1999
Sales from external customers $ 1,465,331 $ -- $ 1,426,927 $ 2,892,258
================= =============== =============== =================
Operating loss $ (380,018) $ -- $ (281,046) $ (661,064)
================= =============== =============== =================
Identifiable assets $ 8,259,457 $ -- $ 3,703,050 $ 11,962,507
================= =============== =============== =================
Three Months Ended September 30, 1998
Sales from external customers $ 1,685,305 $ -- $ 18,488 $ 1,703,793
================= =============== =============== =================
Operating loss $ (56,166) $ -- $ (283,125) $ (339,291)
================= =============== =============== =================
Identifiable assets as of December 31, 1998 $ 8,026,057 $ -- $ 489,585 $ 8,515,642
================= =============== =============== =================
Nine Months Ended September 30, 1999
Sales from external customers $ 3,788,160 $ -- $ 3,025,838 $ 6,813,998
================= =============== =============== =================
Operating loss $ (1,920,740) $ -- $ (911,797) $ (2,832,537)
================= =============== =============== =================
Net income from disposed business segments $ -- $ 4,170,315 $ -- $ 4,170,315
================= =============== =============== =================
Extraordinary item $ (222,864) $ -- $ -- $ (222,864)
================= =============== =============== =================
Nine Months Ended September 30, 1998
Sales from external customers $ 5,291,114 $ -- $ 177,802 $ 5,468,916
================= =============== =============== =================
Operating income (loss) $ 186,455 $ -- $ (817,661) $ (631,206)
================= =============== =============== =================
Net loss from disposed business segments $ -- $ (437,375) $ -- $ (437,375)
================= =============== =============== =================
</TABLE>
(1) Includes parent holding company.
(2) Represents Spectra Science Corp.
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 regarding
the plans and objectives of management for future operations. You can identify
these forward-looking statements by our use of the words "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates" and
similar expressions, whether in the negative or affirmative. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions involving 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 our control.
Although we believe that the 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 our early stage operations, the inclusion of such
information should not be regarded by us or any other person that the objectives
and plans will be achieved.
GENERAL
We were organized as a Delaware corporation on October 14, 1986. On January 7,
1998, we changed our name from Infinite Machines Corp. to Infinite Group, Inc.
Our executive offices are located at 2364 Post Road, Warwick, Rhode Island
02886. Our internet home page is located at http://www.infinite-group.com. We
own various trademark rights and hold federal trademark registration for our
name and the Infinite Group logo. "Infinite Group", "Laser Fare", "Osley &
Whitney", "ExpressTool", and "Zyrkon" are registered trademarks of Infinite
Group, Inc.
Our business has two segments, The Laser Group and The Plastics Group. We sell
products and services in the fields of material processing, advanced
manufacturing methods, high productivity production mold building and
laser-application technology. We have approximately 145 employees.
The Laser Group, comprised of Laser Fare (Smithfield, RI), Mound Laser &
Photonics Center (Miamisburg. OH), and The Advance Technology Group
(Narragansett, RI), provides comprehensive laser-based materials processing
services to leading manufacturers. More information on these services is
available on our internet web sites; http://www.laserfare.com and
http://www.mlpc.com.
11
<PAGE>
The Plastics Group, comprised of Osley & Whitney (Westfield, MA), ExpressTool,
(Warwick, RI), Materials & Manufacturing Technologies (West Kingston, RI) and
Express Pattern (Buffalo Grove, IL), provides rapid prototyping services and
proprietary mold building services. More information on these services is
available on our internet web site; http://www.expresstool.com.
The Laser Group
Our Laser Fare subsidiary is primarily engaged in contract laser material
processing, although it also develops new applications for industrial lasers.
Laser Fare has 20 high powered lasers that are capable of performing a wide
variety of manufacturing processes with multi-axis laser manipulation. Laser
Fare also manufactures complete assemblies for selective medical product
companies. Approximately 75% of its 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. Through Laser Fare we also provide a variety of value-added
services that include assembly, heat treating, coating, testing and inspection.
We quote orders through traditional sales methods as well as through
www.laserfare.com. Laser Fare is certified for overhaul and repair by the
Federal Aviation Administration (FAA No. LQFR37K), and as a Contract
Manufacturer (Type E) by the Food and Drug Administration (FDA No. 1287338).
Our Mound Laser and Photonics Center ("MLPC") subsidiary specializes in laser
applications within industry, government and education sectors. The midwest
location, a region long known for its expertise in materials and material
science, gives us a platform for growth into the automotive, aerospace tool &
die, and other local industries. Specialized services include growth of thin
films by pulsed laser deposition, application of lasers to chemistry and
photochemistry, spectroscopy, and applied optics. MLPC has applied for a
provisional patent on pulsed laser deposition.
Our Advanced Technology Group ("ATG") manages research and development programs
for industrial customers. In addition, ATG obtains intellectual property rights
to the developments created under these contracts that provide future
opportunities for us. For example, intellectual property development under a
contract with Hasbro resulted in the formation of our ExpressTool subsidiary.
ATG recently entered into a one year consulting agreement with Molecular
Geodesics, Inc., ("MGI"), of Cambridge, MA. MGI is 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. Our Advanced Technology Group will utilize Laser Fare's
and ExpressTool's proprietary techniques to fabricate structures for these
"bioskins". Triton Systems of Chelmsford,
12
<PAGE>
MA contracts with our Laser Fare subsidiary to laser fabricate aerospace
components from metal composite materials. These are strong lightweight
materials that are used in jet engines.
The Plastics Group
In April 1999, we acquired 100% of the outstanding capital stock of privately
held Osley & Whitney, Inc. (O&W), a Massachusetts corporation, from its
stockholders for approximately $1.5 million payable is cash and notes.
O&W is a forty-nine-year-old plastic injection moldbuilding company located in
Westfield, MA with fifty-four employees. It serves a blue-ribbon clientele of
automotive, automotive aftermarket, consumer sporting goods, and office machine
companies including Polaroid, Pitney-Bowes, Hardigg Industries, and Titleist,
from its 21,500 sq. ft. manufacturing facility. Our proprietary mold fabrication
and conformal cooling technologies lower the cost of molded parts, increase
molding capacity and provide shorter delivery times over conventional
constructed molds and compliment our established expertise in the moldbuilding
industry.
Our ExpressTool subsidiary incorporates its conformal cooling and proprietary
thermal management for high production injection mold tooling to allow molds
used in the plastic fabrication industries to cool and eject parts up to 75%
faster than traditional molds. Additionally, they accept computer files directly
from its customers who use such software as AutoCad, Pro-E and Cadkey to submit
their 3-D designs directly over the internet at www.expresstool.com. ExpressTool
began shipping mold inserts to Cheseborough Pond, 3M, and GE Plastics, and has
been invited to apply for preferred vendor status with Pitney Bowes, FordVisteon
and others.
In April 1999, we formed Express Pattern located in Buffalo Grove, IL, to expand
our midwest presence and provide plastic rapid prototyping services to the metal
casting industries. In June 1999, Express Pattern began shipping sample plastic
prototype parts to Allen-Bradley, Paradigm, Rolls-Royce Allison and
Hewlett-Packard. In addition, it provides direct interface from customer CAD
software (such as AutoCad, Pro-E and others) for interface to our
stereolithography systems and equipment. Express Pattern also provides similar
services to our other subsidiaries.
Also in April 1999, we acquired 100% of the outstanding stock of Materials &
Manufacturing Technologies, Inc. (MMT) of West Kingston, Rhode Island in
exchange for 20,000 shares of our common stock. MMT recently received
notification from the U. S. patent office that it had received a patent, number
5,427,987, on its work in zirconium diboride materials. MMT has an exclusive
licensing arrangement with Texas A&M University (with rights to sub-license) for
use of patents and intellectual property owned by Texas A&M in the area of
electrodes and parts made from zirconium diboride/copper (Zyrkon(TM))
composites. Zyrkon(TM) composite electrodes have been shown to be superior to
copper, tungsten/copper and graphite electrodes in electrical discharge
machining
13
<PAGE>
applications. In addition, parts made from Zyrkon(TM) exhibit excellent abrasion
resistance and resistance to wear by electric arcs as well as high thermal
conductivity and a relatively low coefficient of thermal expansion. These
properties indicate that Zyrkon(TM) can be used to replace current material
systems in applications as varied as injection mold tooling, spot-welding, waste
remediation electrodes, high-current switches and heat sinks. The acquisition
provides us with the ability to take advantage of these material systems in our
areas of expertise as well as providing us with the ability to address new
markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a series of
private placements of debt and equity securities. As of September 30, 1999, the
Company has cash, cash equivalents and marketable securities totaling $434,878.
While the majority of the revenues realized in the nine months ending September
30, 1999 were attributed to our Laser Fare and Osley & Whitney operations, we
anticipate improved revenue from our other divisions and positive results from
additional expense containment measures that have been implemented. We are also
pursuing other strategies for raising additional working capital through debt
and/or equity transactions.
On June 30, 1998, our president and principal stockholder loaned us $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%. Our president
had also loaned us $250,000 in the first quarter of 1998 pursuant to a one year
note which bore interest at a rate of 9.0%. This note was repaid during 1999. In
consideration for the loans, we granted detachable warrants to purchase 536,000
shares of our Common Stock exercisable at $5.60 per share. Half of the warrants
vested immediately and, provided that the loan remained outstanding, the
remaining 50% vest would 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. As of September 30,
1999, all these warrants had vested. In April 1999, approximately $650,000 of
the outstanding balance of the loan was repaid, including $420,000 that was
prepaid. During the quarter ended September 30, 1999, our president also loaned
us an additional $150,000. The obligation is convertible to common stock at
$.9375 per share and bears interest at the prime interest rate.
During December 1998 and February 1999 we consummated the sale of our investment
in Spectra Science Corp. ("SSC") Series A Convertible Preferred Stock ("SSC
Stock") yielding net proceeds of approximately $4.6 million; $1.0 million of
which was received in December 1998 and the balance was received in February
1999. As a result of this transaction we recognized gains of approximately $1.0
million and $3.6 million in 1998 and 1999, respectively.
14
<PAGE>
As of September 30, 1999, we had a working capital deficit of approximately
$726,750. In conjunction with our on-going business expansion program, we are
pursuing alternative sources of funding from conventional banking institutions
as well as exploring the availability of government funds in the form of revenue
bonds for the purchase of equipment and facilities, among others. There is no
assurance, however, that our current resources will be adequate to fund our
current operations and business expansion or that we will be successful in
raising additional working capital. Our failure to raise necessary working
capital could force us to curtail operations which would have a material adverse
effect on the Company.
In October 1999, we received a letter from the Nasdaq-Amex Market Group
("Nasdaq") advising us that, based upon the Nasdaq staff review, our Common
Stock failed to meet the continued listing requirement that the market value of
our public float be greater than or equal to $1 million, as required by Nasdaq
Marketplace Rule 4310(c)(7). We were provided with 90 calendar days, or until
January 10, 2000, to regain compliance with this continued listing requirement.
If we are unable to demonstrate compliance with this minimum market float
requirement on or before January 10, 2000, Nasdaq has advised us that our Common
Stock will be delisted at the opening of business on January 12, 2000. While we
believe that we will achieve compliance with this continued listing requirement,
compliance is predicated in part upon the market price of our Common Stock over
which we have no control. Accordingly, there is no assurance that we will be
able to comply with this continued listing requirement and maintain our Nasdaq
SmallCap Market listing. The failure to maintain such listing could have a
material adverse effect on the market price and liquidity for our Common Stock.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Consolidated revenues for the three months ended September 30, 1999 were
$2,892,258, with $1,465,331of sales coming from our Laser Group and $1,426,927
of sales coming from our Plastics Group. Cost of sales totaled $2,304,671 and a
gross profit of $587,587 was realized for the quarter. Consolidated revenues for
the three months ended September 30, 1998 were $1,703,793 consisting primarily
of our Laser Group sales. Cost of sales totaled $1,064,064, and a gross profit
of $639,729 was realized for the three months ended September 30, 1998. The
increase of $1,188,465 or 69.8% in consolidated revenues for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998
was primarily due to the acquisitions.
Research and development expenses were $147,866 for the three months ended
September 30, 1999 as compared to $153,730 for three months ended September
30,1998. The decrease in the third quarter of 1999 is due primarily to a
reduction in research and development efforts and an increase in the
commercialization of our proprietary technology in our Plastics Group.
15
<PAGE>
General and administrative expenses were $520,624 for the three months ended
September 30, 1999 as compared to $573,488 for the three months ended September
30, 1998. The decrease of $52,864 or 9.2% was due primarily to cost containment
measures we implemented. Selling expenses were $286,525 for the three months
ended September 30, 1999, as compared to $97,067 for the three months ended
September 30, 1998. The increase was primarily attributed to increased sales
expenses in both our Laser and Plastics Groups.
Depreciation and amortization expenses totaled $293,636 for the three months
ended September 30, 1999, as compared to $154,735 for the three months ended
September 30, 1998. The increase of $138,901 or 89.8% was primarily due to fixed
asset additions of approximately $2.5 million over the last twenty-one months in
both our Laser and Plastics Groups.
Interest expense for the three months ending September 30, 1999 was $174,506 as
compared to $103,359 for the first three months ended September 30,1998. The
increase in interest expense was due to interest paid on the note payable to our
president and chief executive officer and Osley & Whitney bank debt.
We had a consolidated net loss of $834,635 for the three months ended September
30, 1999, as compared to a consolidated net loss of $392,711 for the three
months ended September 30, 1998. The increase in the net loss is primarily
attributed to an interim slow down in sales at our Laser Fare and Osley &
Whitney subsidiaries, and start up costs being incurred at newly acquired/formed
entities.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Consolidated revenue for the nine months ended September 30, 1999 were
$6,813,998, with $3,788,160 of sales coming from our Laser Group and $3,025,838
of sales coming from our Plastics Group. Cost of sales totaled $5,331,166, and a
gross profit of $1,482,832 was realized for the period. For the nine months
ended September 30, 1998, sales totaled $5,468,916 and consisted primarily of
our Laser Group sales. Consolidated cost of sales was $3,289,903 for the first
nine months ended September 30, 1998 and we realized a gross profit of
$2,179,013 for the nine months period ended September 30, 1998.
Research and development expenses were $1,140,780 during the first nine months
ended September 30, 1999 as compared to $732,763 during the first nine months
ended September 30, 1998. The increase is primarily due to the research and
development efforts in our Plastics Group and our Advanced Technology Group.
General and administration expenses for the nine months ended September 30, 1999
were $1,824,156 as compared to $1,317,853 for the nine months ended September
30, 1998. The increase of $506,303 was due primarily to expenses for additional
resources at our
16
<PAGE>
Laser Fare subsidiary for engineers, training and Y2K compliance; expenses
attributed to our newly acquired/formed companies of Osley &Whitney, Express
Pattern and MMT; and professional fees in the legal and investor relations
areas. Selling expenses were $706,051 for the first nine months ended September
30, 1999 as compared to $320,628 for the first nine months ended September 30,
1998. The increase of $385,423 or 120% was primarily attributed to increased
sales expenses at our Laser Group and Plastics Group for its proprietary
technology.
Depreciation and amortization expenses totaled $644,382 for the nine months
ended September 30, 1999 compared to $438,975 for the nine months ended
September 30, 1998. The increase was primarily due to fixed asset additions in
both our Laser and Plastics Groups.
Interest expense was $405,819and $239,018 during the nine-month periods ended
September 30, 1999 and 1998, respectively. The increase in interest expense was
due to interest paid on the note payable to our president and chief executive
officer, and Osley & Whitney bank debt. Interest and other income for the nine
months ended September 30, 1999 was $38,991 compared to $15,664 for the nine
months ended September 30, 1998.
We had a consolidated net income of $748,086 for the nine months ended September
30, 1999 as compared to a net loss of $1,204,935 during the nine months ended
September 30, 1998. The loss from continued operations was $3,199,365 for the
nine months ended September 30, 1999 as compared to a loss from continued
operations of $767,560 for the nine months ended September 30, 1998. The
variance was due primarily to the reduction of sales in our Laser Group as
previously discussed.
YEAR 2000 COMPLIANCE
We are 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 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 our 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 our operations. All phases of the project have been completed, thus
minimizing the impact of the Year 2000 problem on our operations.
In 1997 we began an initiative to update and upgrade all computer systems so
that it could attain a competitive advantage. Early in 1998 we began to address
the Year 2000 (Y2K) issue to insure all computer hardware and related software
were Y2K compliant. Management believes all of our internal business computer
programs and systems are Y2K compliant.
17
<PAGE>
Year 2000 disruptions in client or vendor operations could result in one or more
missing scheduled payments which could impact our cash flow. Year 2000
disruptions of the operations of key vendors could impact our ability to fulfill
some of its contractual obligations. If one or more of these situations occur,
our results of operations, liquidity and financial condition could be materially
and adversely affected. We are 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 our results of
operations, liquidity or financial conditions. However, as a part of the Year
2000 project, we have mailed a questionnaire to all of its clients and vendors
requesting the status of their Year 2000 compliance. As of the June 30, 1999, we
had received a reply from all of its clients and vendors indicating that they
either are or will be in full compliance by year-end 1999. This has
significantly reduced our level of uncertainty about the Year 2000 problem and
reduces the possibility of significant interruptions of normal business
operations.
Part II - Other Information
Items 1-5 Not Applicable
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 10, 1999
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre
-----------------------------
Clifford G. Brockmyre, President
And Chief Executive Officer
By: /s/ Bruce J. Garreau
-----------------------------
Bruce J. Garreau, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from September
30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 434,878
<SECURITIES> 0
<RECEIVABLES> 1,520,122
<ALLOWANCES> 45,088
<INVENTORY> 544,886
<CURRENT-ASSETS> 2,916,404
<PP&E> 10,791,986
<DEPRECIATION> 3,431,770
<TOTAL-ASSETS> 11,962,507
<CURRENT-LIABILITIES> 3,643,419
<BONDS> 5,383,091
0
0
<COMMON> 2,748
<OTHER-SE> 2,933,514
<TOTAL-LIABILITY-AND-EQUITY> 11,962,507
<SALES> 6,813,998
<TOTAL-REVENUES> 6,813,998
<CGS> 5,331,166
<TOTAL-COSTS> 8,505,755
<OTHER-EXPENSES> 1,140,780
<LOSS-PROVISION> 39,388
<INTEREST-EXPENSE> 405,819
<INCOME-PRETAX> (3,199,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,199,365)
<DISCONTINUED> 4,170,315
<EXTRAORDINARY> (222,864)
<CHANGES> 0
<NET-INCOME> 748,086
<EPS-BASIC> .34
<EPS-DILUTED> .34
</TABLE>
