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 March 31, 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 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 05, 1999 the Registrant has a total of 2,178,529 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
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10-17
PART II. OTHER INFORMATION
Items
1-6 Not Applicable 17
SIGNATURES 18
2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,067,604 $ 1,010,736
Restricted funds 125,585 78,125
Accounts receivable, net of allowances 773,381 1,093,414
Inventories 157,998 193,412
Deferred tax asset -- 825,000
Advance - stockholder 51,029 50,383
Other current assets 239,926 182,567
------------ ------------
Total current assets 4,415,523 3,433,637
Property and equipment, net 4,812,856 4,442,338
Other assets:
Note receivable - stockholders 36,990 47,102
Note receivable 200,000 --
Other intangible assets, net 352,602 342,565
Other investment 250,000 250,000
------------ ------------
Total other assets 839,592 639,667
------------ ------------
$ 10,067,971 $ 8,515,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 433,757 $ 522,757
Stockholders 231,031 231,031
Accounts payable and accrued expenses 886,271 1,171,329
Current maturities of notes payable - stockholders 29,206 29,206
Current maturities of long-term obligations 280,330 307,628
------------ ------------
Total current liabilities 1,860,595 2,261,951
Long term obligations 2,288,627 2,301,862
Notes payable - stockholders 590,297 601,955
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized 2,728,604 and 2,673,334
shares issued; 2,178,529 and 2,673,334 2,728 2,673
shares outstanding
Additional paid-in capital:
Common stock 20,374,740 20,210,268
Warrants 573,418 555,585
Accumulated deficit (14,247,247) (17,418,652)
------------ ------------
6,703,639 3,349,874
Less treasury stock, 550,075 shares, at cost 1,375,187 --
------------ ------------
Total stockholders' equity 5,328,452 3,349,874
------------ ------------
$ 10,067,971 $ 8,515,642
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1999 1998
----------- -----------
Sales $ 1,236,002 $ 1,925,407
Cost of goods sold 947,403 1,065,046
----------- -----------
Gross profit 288,599 860,361
Costs and expenses
Operating expenses 38,937 66,353
Research and development 408,843 320,500
General and administrative expenses 455,051 287,260
Selling expenses 143,538 115,901
Depreciation and amortization 147,075 139,577
----------- -----------
Total costs and expenses 1,193,444 929,591
Operating loss (904,845) (69,230)
Other income (expense)
Interest and other income 17,352 7,281
Interest expense (111,417) (76,842)
----------- -----------
Total other income (expense) (94,065) (69,561)
----------- -----------
Loss from continuing operations (998,910) (138,791)
Disposed business segment:
Loss from operations of disposed
business segment -- (278,378)
Gain on sale of business segment
(less applicable income taxes of $825,000) 4,170,315 --
----------- -----------
Net income (loss) $ 3,171,405 $ (417,169)
=========== ===========
Income (loss) per share- basic:
Continuing operations (0.39) (0.06)
Disposed business segment:
Loss from operations -- (0.12)
Gain on sale 1.61 --
----------- -----------
Net income (loss) per common share 1.22 (0.18)
=========== ===========
Income (loss) from disposed business
segment per share - diluted 1.57 (0.12)
=========== ===========
Weighted average number of common
shares outstanding:
Basic $ 2,591,311 $ 2,263,330
=========== ===========
Diluted $ 2,657,978 $ 2,263,330
=========== ===========
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,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (998,910) $ (138,791)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 147,075 139,211
Amortization of discount on note payable 13,967 --
Expenses satisfied via issuance of equity 39,527 --
Asset write down and allowances 10,112 10,113
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 320,033 (222,568)
Other current assets 67,641 (3,888)
Inventory and inventoried parts 35,414 (84,688)
Increase (decrease) in liabilities:
Accounts payable and accured expenses (285,058) 41,450
----------- -----------
Net cash used in continuing operations (650,199) (259,161)
Cash flows from investing activities:
Purchase of property and equipment (508,925) (305,341)
Proceeds from the sale of of investment in Spectra Science Corp. 3,620,128 --
Increase in other assets (18,705) (10,417)
Advance to stockholder (646) --
Advance on note receivable (200,000) --
----------- -----------
Net cash provided by (used in) investing activities 2,891,852 (315,758)
Cash flows from financing activities:
Net borrowings (repayments) of short-term debt (89,000) 319,551
Repayments of long-term obligations (40,533) (18,394)
Repayments of notes payable - stockholders (7,792) --
Increase in restricted funds, net (47,460) (49,663)
----------- -----------
Net cash provided by (used in) financing activities (184,785) 251,494
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,056,868 (323,425)
Cash and cash equivalents - beginning of period 1,010,736 541,653
----------- -----------
Cash and cash equivalents - end of period $ 3,067,604 $ 218,228
=========== ===========
</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, 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. - REVERSE STOCK SPLIT
On February 16, 1999, the Company effected a one for five reverse stock
split of the Company's $.001 par value common stock. This transaction was given
retroactive effect in the December 31, 1998 audited financial statements, as
well as the accompanying March 31, 1999 and 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 3. - DISPOSAL OF A BUSINESS SEGMENT
In February 1999, the Company completed the sale of its equity interest in
Spectra Science Corp. (SSC). 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 an 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.
6
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - 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 March 31, 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 5. - SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded approximately $18,000 of additional paid-in capital
for detachable warrants issued in connection with a note payable to the current
principal stockholder. In addition, the Company recorded approximately $125,000
of additional paid-in capital in connection with the issuance of common stock
for consulting services rendered.
NOTE 6. - SUBSEQUENT EVENT
In April 1999, the Company acquired 100% of the common stock of Osley &
Whitney, Inc. The aggregate consideration paid for the stock was $1.5 million
($300,000 in cash paid at closing and $1,200,000 in promissory notes payable
over three years at 8% per annum). In April 1999, the Company acquired 100% of
the common stock of Materials & Manufacturing Technologies, Inc., of West
Kingston, Rhode Island. The aggregate consideration paid for the stock was
20,000 shares of Infinite Group, Inc. common stock valued at approximately
$32,500. Both transactions will be accounted for under the purchase method of
accounting, whereby the results of operations of the acquired companies will be
included from the date of acquisition.
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.
7
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. - BUSINESS SEGMENTS
Effective Fiscal 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.
The Company's businesses are currently organized, managed and internally
reported as two segments. 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 months ended March 31, 1999 and 1998 is set forth as
follows:
8
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. - BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Rapid
Laser Photonic Tooling and
Service (1) Materials (2) Manufacturing Consolidated
----------- ------------- ------------- ------------
Three Months Ended March 31, 1999
---------------------------------
<S> <C> <C> <C> <C>
Sales from external customers $ 1,173,954 $ -- $ 62,048 $ 1,236,002
=========== =========== =========== ===========
Operating loss $ (562,782) $ -- $ (342,063) $ (904,845)
=========== =========== =========== ===========
Net income from disposed business
segments $ -- $ 4,170,315 $ -- $ 4,170,315
=========== =========== =========== ===========
Identifiable assets $ 9,466,371 $ -- $ 440,663 $ 9,907,034
=========== =========== =========== ===========
Three Months Ended March 31, 1998
---------------------------------
Sales from external customers $ 1,782,295 $ -- $ 143,112 $ 1,925,407
=========== =========== =========== ===========
Operating loss $ 180,264 $ -- $ (249,494) $ (69,230)
=========== =========== =========== ===========
Net loss from disposed business segments $ -- $ (278,378) $ -- $ (278,378)
=========== =========== =========== ===========
Identifiable assets as of December 31, 1998 $ 8,026,057 $ -- $ 489,585 $ 8,515,642
=========== =========== =========== ===========
</TABLE>
(1) Includes parent holding company.
(2) Represents Spectra Science Corp.
9
<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") is comprised of two business groups:
The Laser Group and The Plastics Group, and does business in the fields of
material processing, advanced manufacturing methods, high productivity
production tooling and laser-application technology. The Company's 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 (HPPT ) 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. In April 1999, the Company acquired Osley &
Whitney, ("O&W"), a 49-year-old moldbuilding company located in Westfield,
Massachusetts. The Company's proprietary mold fabrication and conformal cooling
technologies compliment O&W's established expertise in the moldbuilding
industry. The Company also acquired Materials & Manufacturing Technologies,
Inc., ("MMT"), of West Kingston, Rhode Island in April 1999. MMT holds a U.S.
patent on its work in zirconium diboride materials. With this acquisition, the
Company is in a unique position, with its O&W and Laser Fare subsidiaries, to
take advantage of the many benefits of MMT's material system and its
applications. As a result of the recent acquisitions, the Company has 153
employees.
10
<PAGE>
Laser Fare, Inc.
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 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 also provides a variety of value-add services,
that include assembly, heat treating, coating, testing and inspection. 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 changing demand for services.
ExpressTool. Inc.
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. Accordingly,
ExpressTool's molds are more productive than conventional tools because of
reduced cycle time, yielding a major cost reduction for the user. Management has
been and will continue to search 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. The recent acquisition of Osley & Whitney is
the initial phase toward this goal.
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
11
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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 and
ExpressTool's capabilities.
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 recently 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 $150,000, payable at $12,500 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. The license agreement provides that TLC may manufacture and sell
products and services incorporating this technology; provides however that the
Company retains 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.
12
<PAGE>
Osley & Whitney, Inc.
In April 1999, Infinite Group 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. Mr. John T. Monaghan
will continue to serve as its President, and Mr. Roger Poirer will remain as
Vice President of Sales and Engineering. O&W 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 in Westfield, Massachusetts.
Infinite Group's ExpressTool subsidiary will report to O&W and will remain in
Warwick, RI. Infinite's 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 O&W's established expertise in the moldbuilding industry.
Materials Manufacturing Technologies, Inc.
In April 1999, Infinite Group acquired 100% of the outstanding stock of
Materials & Manufacturing Technologies, Inc. (MMT) of West Kingston, Rhode
Island in exchange for 20,000 shares of Infinite Group common stock and the
delivery of the MMT Royalty. 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/cooper (Zyrkon(TM)) composites. Zyrkon(TM)
composite electrodes have been shown to be superior to cooper, tungsten/cooper
and graphite electrodes in electrical discharge machining 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 Infinite with the
ability to take advantage of these material systems in the Company's areas of
expertise as well as providing Infinite with the ability to address and
aggressively pursue new market opportunities.
Express Pattern, Inc.
In April 1999, Infinite formed of Express Pattern a new rapid prototyping
service provider. Express Pattern, located in Buffalo Grove, IL, will focus on
providing rapid prototyping services to the metal casting industries. Express
Pattern will also provide services to other Infinite Group companies including
Osley & Whitney, a supplier of production injection molding, ExpressTool, the
developer of a high productivity
13
<PAGE>
production tooling process for injection molding, and Laser Fare, a laser
material processing company. Mr. Tom Mueller and Mr. Dave Flynn, two long time
industry leaders, will head up Express Pattern, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a
series of private placements of debt and equity securities, and through the
October 1993 public offering of its common stock. During the year ended December
31, 1998, an aggregate of approximately $1.65 million, net of expenses, was
provided by debt offerings. In addition, approximately $900,000 of debt was
retired in connection with the conversion of notes payable to common stock. As
of March 31, 1999, the Company has cash, cash equivalents and marketable
securities totaling $3,067,604 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, 1999 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 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 in the first quarter of 1998. This note is repayable
over a term of one year and bears interest at a rate of 9.0%. In consideration
for the loans, the Company granted the lender detachable warrants to purchase
536,000 shares of Company Common Stock exercisable at $5.60 per share. Half of
the warrants vested immediately 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. In April 1999,
approximately $650,000 of the outstanding balance of the loan from the Chief
Executive Officer was repaid.
During December 1998 and February 1999 the Company consummated the sale of
2,431,056 shares, or 85% of its Spectra Science Corp ("SSC"). Series A
Convertible Preferred Stock ("SSC Stock") yielding net proceeds to the Company
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 the Company recognized gains of approximately $1 million and $3.6
million in 1998 and 1999, respectively.
In February 1999, the Company completed the sale of its equity interest in
SSC. 611,194 shares of SSC Stock were sold in consideration for the retirement
of 550,000 shares of the Company's common stock. Additionally, the Company sold
1,342,249 shares of SSC Stock for $2.25 per share to the two
14
<PAGE>
shareholders of SSC, and 477,583 shares of SSC Stock were repurchased by SSC at
a price of $1.26 per share for an aggregate cash consideration to the Company of
approximately $3,600,000. The total gain recorded in 1999 amounted to
approximately $4.15 million, net of $825,000 for taxes.
While revenues were realized in the first quarter ended March 31, 1999 on
a consolidated basis, substantially all the revenues were attributed to Laser
Fare. As of March 31, 1999, the Company had working capital of approximately
$2,554,928. Subsequent to the quarter, in April 1999, approximately $650,000 of
the outstanding balance of the loan from the Company's chief executive officer
was repaid. The Company believes that its working capital, together with its
credit facilities, will be sufficient to satisfy the Company's short-term
working capital needs. In conjunction with its on-going business expansion
program, management is also 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 the Company's
current working capital will be adequate to fund its current operations and
business expansion or that management will be successful in raising additional
working capital.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Consolidated revenues for the three months ended March 31, 1999 were
$1,236,002 and consisted primarily of laser division sales. Cost of sales
totaled $947,403, and a gross profit of $288,599 was realized for the quarter.
Consolidated revenues for the three months ended March 31, 1998 were $1,925,407
consisting solely of laser division sales. Cost of sales totaled $1,065,046, and
a gross profit of $860,361 was realized for the three months ended March 31,
1998. Delayed receipt of materials, primarily from aerospace customers, and
retooling of certain aerospace products negatively impacted revenues for the
quarter ending March 31, 1999.
Operating expenses for the three months ended March 31, 1999 were $38,937
as compared to $66,353 for the first quarter ended March 31, 1998. This decrease
was primarily due to reclassification of Mound Laser & Photonic expenses for the
three months ended March 31, 1998, as well as operating cost reductions being
implemented. Research and Development expenses were $408,843 in the three months
ended March 31, 1999 as compared to $320,500 in the first quarter ended March
31,1998. The increase in the first quarter of 1999 is due primarily to the
research and development efforts in the Company's ExpressTool subsidiary.
General and administrative expenses were $455,051 for the three months
ended March 31, 1999 as compared to $287,260 for the first quarter ended March
31, 1998.
15
<PAGE>
The increase of $167,791 or 58% was primarily due to corporate investor
relations expenses of $77,672, expenses from Mound Laser & Photonics of $46,501,
and expenses related to additional resources at Laser Fare of $27,806,
accounting for $151,979 or 91% of the increase. Selling expenses were $143,538
for the quarter ended March 31, 1999, as compared to $115,901 for the first
quarter ended March 31, 1998. The increase was attributed to increase sales
efforts at Laser Fare.
Depreciation and amortization expenses totaled $147,075 for the first
quarter ended March 31, 1999, as compared to $139,577 for the first quarter of
1998. The increase was primarily due to fixed asset additions.
Interest expense during the first quarter ending March 31, 1999 was
$111,417 as compared to $76,842 for the first quarter of 1998. The increase in
interest expense was due to interest paid on the note payable to the Company's
president and chief executive officer. Interest and other income for the first
quarter of 1999 was $17,352 as compared to $7,281 for the first quarter of 1998.
The increase of $10,071 is primarily due to the interest earned on cash and
equivalents.
The Company has a consolidated net income of $3,171,405 for the three
months ended March 31, 1999, as compared to the net loss of $417,169 for the
three months ended March 31, 1998. The net income is primarily attributed to the
gain realized on the sale of the Company's Spectra Science Series A Convertible
Preferred Stock of approximately $4,170,315, net of $825,000 in taxes.
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 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 a 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.
16
<PAGE>
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 has mailed
a questionnaire to all of its clients and vendors requesting the status of their
Year 2000 compliance on or before March 30, 1999. As of the March 31, 1999, the
Company has not received a reply from all of its clients and vendors as
requested by the Company and follow up on those that have not responded is in
process. When completed 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
17
<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 11, 1999
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
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from March 31,
1999 10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,067,604
<SECURITIES> 0
<RECEIVABLES> 811,476
<ALLOWANCES> 38,095
<INVENTORY> 157,998
<CURRENT-ASSETS> 4,415,523
<PP&E> 6,874,470
<DEPRECIATION> 2,061,614
<TOTAL-ASSETS> 10,067,971
<CURRENT-LIABILITIES> 1,860,595
<BONDS> 2,878,924
0
0
<COMMON> 2,728
<OTHER-SE> 5,325,724
<TOTAL-LIABILITY-AND-EQUITY> 10,067,971
<SALES> 1,236,002
<TOTAL-REVENUES> 1,236,002
<CGS> (947,403)
<TOTAL-COSTS> (1,193,444)
<OTHER-EXPENSES> (94,065)
<LOSS-PROVISION> (13,113)
<INTEREST-EXPENSE> (111,417)
<INCOME-PRETAX> (998,910)
<INCOME-TAX> 0
<INCOME-CONTINUING> (998,910)
<DISCONTINUED> 4,170,315
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,171,405
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
