SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number 0-21816
INFINITE GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1490422
- ----------------------------- ---------------------------------
(State or other (I.R.S. Employer Identification
jurisdiction of No.)
incorporation or
organization)
2364 Post Road, Warwick, RI 02886
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (401) 738-5777
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
- ----------------------------- ---------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The issuer's revenues for the year ended December 31, 1998 were $7,396,105.
As of March 10, 1999 there were 2,125,496 outstanding shares of common
stock, par value $0.001 per share. The aggregate market value of the voting
stock of the registrant held by non-affiliates of the registrant on March 10,
1999, based on the average bid and asked price on such date was $3,023,682.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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INFINITE GROUP, INC.
Form 10-KSB Annual Report
TABLE OF CONTENTS
Page
----
PART I .......................................................... 2
Item 1. Business.................................................. 2
Item 2. Properties................................................ 9
Item 3. Legal Proceedings......................................... 9
Item 4. Submission of Matters to a Vote of Security Holders....... 10
PART II .......................................................... 10
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Item 7. Financial Statements and Supplementary Data............... 21
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures...................... 22
PART III .......................................................... 22
Item 9. Directors and Executive Officers.......................... 22
Item 10. Executive Compensation.................................... 25
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 12. Certain Relationships and Related Transactions............ 31
Item 13. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 32
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-K 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 as a statement by the
Company or any other person that the objectives and plans of the Company will be
achieved. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the factors set forth herein under the headings "Business,"
"Certain Factors That May Affect Future Growth" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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PART I
ITEM 1. BUSINESS
Infinite Group, Inc.'s (the "Company" or Infinite") primary business areas
include laser material processing, high productivity production tooling,
advanced manufacturing methods and laser-application technology. The Company has
four operating groups:
o Laser Fare, providing comprehensive laser-based materials processing
services to leading manufacturers;
o ExpressTool, engaged in commercialization of its new proprietary
high productivity production tooling (HTTP) technology;
o 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
o The Advanced Technology Group, engaged in contract research and
development.
Laser Fare, Inc.
Laser Fare was a pioneer in the laser material processing business and has
participated significantly in the development of the industry. Many
laser-processing techniques were first developed at Laser Fare. The Company, and
its key employees, are well known and highly regarded within the industry. Laser
machining and welding was first used in industry in the early 1980's, mostly in
the scientific and aerospace communities. Since that time capabilities have
increased and awareness of the cost effectiveness of the process has become more
widespread, increasing the market size. Approximately 75% of Laser Fare's sales
come from customers in the land based turbines, medical devices and aerospace
industries. Customers include General Electric Corporation, Pratt & Whitney,
United Technologies Corporation, Allied Signal Corporation, Polaroid, Stryker
Medical Corp. and Dey Laboratories.
Laser Fare, while primarily engaged in contract laser material processing
such as laser machining, welding, engraving and marking, also develops new
applications for industrial lasers. The company has 20 high powered computer
laser machining centers which are used to perform a wide variety of
manufacturing processes and is capable of laser operations requiring four and
five-axis manipulation. Work done includes, but is not limited to, welding and
drilling of gas turbine blade assemblies (Laser Fare is certified by major gas
turbine producers and also by the FAA for repairs of turbine engine components),
welding of automotive gear sets, welding of cutters used for arthroscopic
surgery, cutting of lenses for sunglasses and engraving on decorative industrial
and medical components. During 1998, Laser Fare also provided a variety of
value-add services that include assembly, heat treating, coating, testing, and
inspection. Laser Fare was awarded a multi-year contract in excess of $5 million
by Dey
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Laboratories to manufacture and supply for retail and hospital customers, Astech
Peak Flow Meters which measure lung capacity for asthma patients.
New laser machines were acquired and others upgraded during 1998 providing
Laser Fare with sufficient equipment to support planned near-term requirements
as well as expand the scope of services it provides to existing and new
customers.
Laser Fare, located in Smithfield, Rhode Island, operates in a modern
industrial building of 17,000 square feet under a capital lease agreement with
the Rhode Island Industrial Board and rents 8,000 additional square feet of
manufacturing space in an adjacent building.
Laser Fare competes with a number of small, mostly privately owned
businesses, and in some cases, with laser processing organizations internal to
customer organizations. Laser Fare is successful in building its business based
upon its reputation for quality, delivery performance, technical capability and
sensitivity to its customers needs.
Laser Fare's sales volume has been increasing and management expects this
trend to continue, however, there is no assurance that this will occur.
ExpressTool
ExpressTool is commercializing its proprietary technology that uses
conformal cooling and proprietary thermal management for high productivity
production injection mold tooling. ExpressTool's technical capabilities allow
molds, cavities and other types of tools to be made more productive than is
currently possible with traditional methods. The technology was developed over
the last few years under a collaborative research and development agreement with
a major industrial company. Express Tool has exclusive rights to the technology
for all industries other than the markets its industrial partner competes in.
The new proprietary technology can reduce the molding time of products by 20 to
30 percent by facilitating the use of high productivity production inserts for
molds. A key to the reduction cycle time is the use of conformal cooling, which
removes heat from molds more efficiently and uniformly than conventional
methods. The patent-pending technology utilizes a unique composite fabrication
method, which reduces part cycles and minimizes distortion, thus reducing costs
and improving accuracy.
In August 1998, ExpressTool entered into an exclusive agreement with GE
Plastics to test ExpressTool's new proprietary mold making technology that will
substantially improve the productivity of plastic injection molding tools. The
goal is to validate and accelerate the commercialization of the ExpressTool
technology. It has been found that ExpressTool's molds, incorporating
proprietary cooling techniques, permit more rapid molding cycles than
conventional tools and with highly corrosive glass filled polymers, tool wear
has been significantly reduced and are major benefits to the user. ExpressTool
has had articles on its technology featured in leading industry publications
including Modern Plastics, Injection Molding, Plastics Technology, Molding
Systems,
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and a smaller article in Appliance Manufacturer, which have addressed the
technology and ExpressTool's relationship with G.E. Plastics.
The Company has had discussions with organizations having the needed
capabilities that can be combined, through acquisition or some other business
arrangement, to integrate ExpressTool's new technology with an established
infrastructure and business base. These efforts have resulted in the
establishment of a responsive network of competencies, either owned or
strategically aligned, which allow ExpressTool to participate in projects having
a wide range of scope and complexity. This planned outcome is the foundation and
platform for ExpressTool's growth. It is anticipated that sales revenues in 1999
will increase rapidly with further customer acceptance, but there is no
assurance these results will occur.
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 material processing, and provides
services to the industrial, governmental and educational 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 and 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,
applications of lasers to chemistry and photochemistry, spectroscopy, and
applied optics. MLPC has submitted provisional patents on pulsed laser
deposition and specific applications of the technology. The combination of Laser
Fare's expertise in materials processing and MLPC's expertise 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
Advanced Technology Group ("ATG"), was created to take advantage of the
technical know-how acquired with Laser Fare in the application of lasers for
industrial requirements. Since its inception in 1993, ATG has been performing
technical development and managing research and development programs for
industrial customers. In addition to being compensated for services performed,
ATG obtains intellectual property rights to the proprietary technology
derivative of these services that provide future opportunities for the Infinite
Group. The Company's ExpressTool subsidiary is a prime example of this.
During 1998, ATG entered into a contract with Molecular Geodesics Inc.
("MGI"), of Cambridge, MA. MGI is involved in creating technologies using
biomimetic principals. These principals mimic the mechanical attributes of
living cells
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and tissues and apply these to medical, industrial and military applications.
MGI was awarded a $6.4 million Defense Advanced Research Project Administration
(DARPA) contract to develop "bioskins" for the 21st century soldier for
protection against chemical and biological weapons. ATG will assist MGI in the
creation, development, improvement and modification of manufacturing techniques
for tensegrity structures. 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 of $300,000 payable at the rate of
$25,000 per month, plus expenses.
In March 1997, ATG was awarded a two-year $500,000 Phase II follow-up
contract by the United States Air Force/Phillips Laboratory, Kirkland AFB, New
Mexico. The contract focused on the continued development of direct materials
processing applications and the commercialization of high power, high-brightness
laser diode technology, jointly developed by Laser Fare and the A. F. Joffe
Technical Institute of 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 Phillips contract.
Under this contract, the Company received $10,000 during 1998 and may receive
additional payments.
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 ATG as part of its SBIR
program funded by the Phillips Laboratory at Kirkland Air Force Base in New
Mexico.
ATG is involved in several smaller early stage programs which could
potentially result in contracts in 1999, however, there is no assurance that any
contract will materialize.
Sale of Spectra Science Interest
Infinite acquired a majority interest in Spectra Science Corporation
("Spectra") in August 1996, through the purchase of 2.7 million shares of Series
A Preferred Stock in a cash transaction valued at $2.7 million. Spectra's
operations comprised the Company's Photonic Materials business segment. In
January 1997, Infinite purchased an additional 200,000 Shares of Series A
Preferred Stock from Spectra for $200,000. During 1997, Spectra issued
additional preferred stock to third-party investors, the effect of which reduced
Infinite's voting interest in Spectra from 66% at December 31, 1996 to 34% at
December 31, 1997. Further, its liquidation rights were subordinate to the
Series C and B preferred shares subsequently issued. The Company accounted for
its 34% investment under the equity method of accounting. Under the equity
method, the Company recognized its share of earnings and losses of the
subsidiary as accrued. Accordingly, the Company recognized as its equity in the
losses of Spectra, after the common shareholders, 70% of Spectra's losses until
its original investment had been reduced to zero, which occurred during the
quarter ending June 30, 1998.
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The Company's expectation when it acquired Spectra was that Laser Fare
would provide manufacturing services for Spectra as Spectra developed new
products and materials. This prospective relationship did not materialize.
Accordingly, in December 1998, the Board of Directors of the Company made a
decision to dispose of the Company's equity interest in Spectra and utilize the
proceeds to retire debt obligations, fund expansion of Laser Fare and Express
Tool and for general working capital purposes. During December 1998 and February
1999, the Company consummated the sale of 2,431,056 shares, or 85%, of its
Spectra Series A Convertible Preferred 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,
the Company recognized a $1 million gain on the sale in fiscal 1998 and will
recognize a $3.6 million gain on the sale in fiscal 1999.
In February 1999, the Company completed the divestiture of its equity
interest in Spectra, through the sale of 611,194 shares of Series A Preferred
Stock of Spectra (valued at $2.25 per share) in consideration for the retirement
of 550,075 (post reverse-split) shares of the Company's common stock. As a
result of this transaction the Company will recognize a gain of $1.375 million
in the first quarter of 1999.
As a result of the Company's sale of its investment in Spectra, as more
fully discussed in footnote 13 to the audited financial statements -- Income
Taxes, and the resulting gain of approximately $3.17 million for income tax
reporting purposes, there is the indication that the Company will be able to
utilize a portion of its net operating loss carryforwards to eliminate the
taxable gain. Accordingly, based upon the Company's current and estimated future
taxable income, the Company has determined that it will realize a deferred tax
benefit of $1.067 million attributed to the utilization of the net operating
loss carryforwards that existed at January 1,1998. This deferred tax benefit has
been included in income from continuing operations for the year ended December
31, 1998. At December 31,1998, $825,000 of the benefit has been reflected as a
current deferred tax asset because it relates to the approximate $2.6 million of
the taxable gain from the sale of Spectra that will be reported in fiscal 1999.
The balance of the deferred tax benefit of $242,000 has been charged against the
gain on the disposal of Spectra recognized in the results of operations for the
year ended December 31, 1998.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
The following factors may affect the future growth of the Company and should
be considered by any prospective purchaser of the Company's securities:
Accumulated Deficit; Recurring Losses. At December 31, 1998, the Company had an
accumulated deficit of $17,418,652. The Company also experienced approximately
$4,322,422 and $121,886 of net losses, respectively, during the years ended
December 31, 1997 and 1998. No assurance can be given that the Company will not
continue to incur net losses.
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Vulnerability of Service Businesses. The Company's revenues are primarily
generated by the services offered by the Company's divisions, namely, laser
contract material processing services and laser consulting services. A
substantial portion of these services are being rendered under short-term
contracts which can be terminated or not renewed by the party or parties
receiving the services. In addition, the business of providing services is
always subject to interruptions by external factors, such as customer's
eliminating products, unavailability of materials or customer's developing
internal capacity to perform specialized laser services, which can further
impair revenues. For all of these reasons there can be no assurance that the
Company's revenues from its service businesses will improve or even that its
existing revenues will be maintained.
Uncertainty of Laser Business. The Company's current laser business is subject
to a number of risks including the need for additional financing to fund
acquisitions and expansion, technical obsolescence of its processes and
equipment, increased competition and dependence upon, and need for, qualified
personnel. There is no assurance that the Company's current laser business will
continue to operate profitable in future periods.
Dependence Upon, and Need for, Key Personnel; Possible Adverse Effect if Key
Personnel Are Not Retained. The Company's success will depend, in large part, on
its continued ability to attract and retain highly qualified engineering,
marketing and business personnel. Competition for qualified personnel may be
intense and the Company will be required to compete for such personnel with
companies having substantially greater financial and other resources. The
Company's inability to attract and retain such personnel could have a material
adverse effect upon its business. Further, the Company is dependent on certain
management personnel for the operation and development of its business,
particularly Clifford G. Brockmyre, the President, Chief Executive Officer and a
principal beneficial shareholder of the Company. The loss or a reduction in the
time devoted by Mr. Brockmyre to the Company's business could have a material
adverse effect on the Company's business.
Intense Competition and Rapid Technological Change. The Company is engaged in
rapidly evolving and highly competitive fields. Competition is intense and
expected to increase. Most of the companies in competition with the Company have
substantially greater capital resources, research and development staffs,
facilities and experience in the furnishing of services. These companies, or
others, could undertake extensive research and development in laser technology
and related fields which could result in technological changes not yet adopted
by the Company. There can be no assurance that the Company's competitors will
not succeed in developing technologies in these fields which will enable them to
offer laser services more advanced and less costly than any offered by the
Company or which could render the Company's technologies obsolete.
Lack of Technology Protection. The Company employs various methods, including
confidentiality agreements with employees to protect its proprietary know-how.
Such methods may not afford complete protection, however, and there can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies
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for any breach or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. With respect to patent
applications filed by the Company, there can be no assurance that any patents
will be granted, or that if granted such patents would provide the Company with
meaningful protection from competition.
Loss Carryforward At December 31, 1998, the Company had approximately
$13,096,000 in available federal net operating losses for federal tax reporting
purposes which may be carried forward to offset future years taxable income
subject to certain limitations. Due to a greater than 50% change in stock
ownership during 1993 the utilization of net operating loss carryforward
generated to the date of such change is limited. Moreover, other shareholder
changes including the possible issuance by the Company of additional shares in
one or more financings may further limit the utilization of the operating loss
carryforward.
Risk of Nasdaq Delisting. The Company's Common Stock is listed on the Nasdaq
SmallCap Market System and in connection therewith the Company is required to
maintain continued listing requirements including $2 million of net tangible
assets and a minimum bid price of $1.00. During 1998, the Company received
notifications with respect with its failure to comply with certain of these
requirements including the $1.00 minimum bid price requirement. In connection
therewith, and pursuant to a hearing before Nasdaq's Qualification Listing
Committee, the Company submitted a proposal setting forth a plan for compliance
with the continued listing requirements which included effecting the 1-for-5
reverse stock split. The Company's compliance plan was approved by Nasdaq and in
furtherance thereof the reverse split was consummated in February 1999. The
Company believes that, as a result of the stock split and other recent
transactions, it will continue to meet the minimum listing requirements for the
continued listing of its Common Stock on the Nasdaq SmallCap Market. However, no
assurance can be given that the Company will continue to meet such requirements.
In the event that the Company does not meet the continued listing requirements,
the Common Stock is subject to delisting from the Nasdaq SmallCap Market,
whereupon it would trade on the Nasdaq Electronic Bulletin Board. Such an event
would make it more difficult for shareholders to effect transactions in the
Company's Common Stock.
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
Common Stock. The Securities and Exchange Commission has adopted regulations
which generally define "penny stock" to be any equity security that has a market
price (as defined) of less than $5.00 per share, subject to certain exceptions.
If the Company's Common Stock is removed from listing on Nasdaq, the Common
Stock may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell such Common Stock to persons other than
established customers and accredited investors (generally, those persons with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
the Common Stock and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny
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stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Common Stock and accordingly
the market for the Company's Common Stock.
Employees
As of December 31, 1998, the Company had 93 full-time employees. The
Company's ability to develop, manufacture and market its products and service,
and to establish and maintain a competitive position in its businesses will
depend, in large part, upon its ability to attract and retain qualified
technical, marketing and managerial personnel, of which there can be no
assurance. The Company believes that its relations with its employees are good.
None of the Company's employees are represented by a collective bargaining
agreement.
ITEM 2. PROPERTIES
The Company entered into a new five-year lease of approximately 2,223
square feet for its corporate offices for a term starting March 1, 1998 and
ending March 2002. The fixed annual rent for the premises is $31,122 for the
first year, $33,342 for the second and third years and $35,568 for the fourth
and fifth years. ExpressTool leases approximately 5700 square feet of office and
laboratory space in Warwick, RI for a term starting August 1, 1998 and ending
July 31, 2001. The annual rent is $76,950 per year.
Laser Fare acquired certain equipment and an operations facility with
approximately 17,000 square feet located in Smithfield, Rhode Island, under a
capital lease obligation. The interest rate on the underlying Industrial Revenue
Bond ranges from 6.0% to 7.25%. Combined annual payments of principal and
interest are approximately $115,200 during the first ten years of the lease and
$55,200 per year thereafter through June 2012. As of June 1996, Laser Fare began
renting an additional 8,000 square feet of manufacturing space at $2,300 per
month.
Mound Laser and Photonics operates in a 4,069 square foot facility located
in Miamisburg, Ohio. The annual rent under the lease agreement, which expires on
December 31, 2003, is $30,948.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 3, 1998, the Company held its 1998 Annual Meeting of
Stockholders pursuant to notice. At such meeting, the following directors were
elected to hold such office until the 1999 Annual Meeting of Stockholders or
until their successors are duly elected and qualified: Clifford G. Brockmyre,
James P. Sherblom, Michael S. Smith, Paul Watson and William G. Lyons III
(receiving 10,708,297 votes in favor, with and 125,666 abstentions). Further,
the Company's 1998 Stock Option Plan was approved (10,427,804 votes in favor,
366,548 votes against and 39,611 abstentions) and the appointment of Freed
Maxick, Sachs & Murphy, P. C. as the company's auditors for the 1998 fiscal year
was ratified (10,662,177 votes in favor, 146,275 votes opposed and 25,511
abstentions). Finally, an amendment to the Company's Certificate of
Incorporation authorizing a reverse split was approved (7,713,161 votes in
favor, 570,425 votes against and 2,550,337 abstentions) and a proposal to amend
the Company's Certificate of Incorporation to create three classes of Directors
to serve for staggered terms did not receive the affirmative vote of greater
than 50% of the outstanding shares of the Company's Common Stock (5,206,920
votes in favor, 129,658 votes against and 115,536 abstentions).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") is quoted on the Nasdaq
SmallCap Market System ("Nasdaq") under the symbol "IMCI". The following table
sets forth the high and low bid prices of the Common Stock for the past two
fiscal years by quarter as reported by Nasdaq. Quotations represent interdealer
prices without an adjustment for retail markups, markdowns or commissions and
may not represent actual transactions. On February 16, 1999, the Company
effected a one-for-five reverse stock split of its Common Stock. As a result,
for the twenty trading days commencing on February 16, 1999, the Company's
Common Stock will be quoted on Nasdaq under the symbol "IMCID." The following
historical information does not give effect to the reverse stock split.
Period High Low
- -------------------- ---------------- ---------------
1997
First Quarter 2 1/16 1 9/16
Second Quarter 2 1/8 1 7/8
Third Quarter 1 11/16 1 3/16
Fourth Quarter 1 15/16 21/32
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1998
First Quarter 1 1/5 1 1/8
Second Quarter 1 15/16
Third Quarter 9/16 1/2
Fourth Quarter 1/2 5/16
The Company believes that, as of March 2, 1999, it has approximately 1,800
beneficial stockholders.
Dividend Policy
The Company does not expect to declare or pay any dividends in the
foreseeable future. Instead, the Company intends to retain all earnings, if any,
in order to expand its operations. The payment of dividends, if any, in the
future is within the discretion of the Company's Board of Directors and will
depend upon the Company's earnings, if any, its capital requirements and
financial condition and other relevant factors. Under the terms of the Company's
credit facilities, the Company is prohibited from paying dividends or making
other cash distributions.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements.
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product enhancements,
or estimates or predictions of actions by customers, suppliers, competitors or
regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
the Company and its business.
This report also identifies important factors which could cause actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the factors discussed under
the heading "Certain Factors That May Affect Future Growth" beginning at page 6
of this report.
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The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this report.
Overview
Infinite Group, Inc.'s (the "Company" or Infinite") primary business areas
include laser material processing, high productivity production tooling,
advanced manufacturing methods and laser-application technology. The Company has
four operating groups:
o Laser Fare, providing comprehensive laser-based materials processing
services to leading manufacturers;
o ExpressTool, engaged in commercialization of its new proprietary
high productivity production tooling (HTTP) technology;
o 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
o The Advanced Technology Group, engaged in contract research and
development.
Laser Fare
Laser Fare has been successful in building its business based upon its
reputation for quality, performance, technical capability and sensitivity to its
customers needs and operations, and continue to be profitable on a stand-alone
basis.
While primarily engaged in contract laser material processing, Laser Fare
develops new applications for industrial lasers. The facilities 20 high powered
computer based lasers are capable of performing a wide variety of manufacturing
processes and are capable of laser operations requiring four and five-axis
manipulation. Approximately 75 percent 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, and
Stryker Medical. Laser Fare also provides a variety of value-add services, that
include assembly, heat treating, coating, testing, and inspection. During 1998,
Laser Fare was awarded a two-year contract in excess of $5 million by Dey
Laboratories to manufacture and supply for retail and hospital customers, Astech
Peak Flow Meters which measure lung capacity for asthma patients.
New laser machines were acquired and others were upgraded during 1998
providing Laser Fare with sufficient equipment to support near-term
requirements. Laser Fare's facilities can support near term demands as well,
however its five-year business and marketing plan demonstrates the need for
additional manufacturing space, and, accordingly, it is currently seeking such
additional space. Management believes that such expansion space will be
available on terms and conditions reasonably acceptable to it.
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<PAGE>
Laser Fare's sales volume continues to increase and management expects
this trend to continue; however; there is no assurance that sales volume will
continue to increase.
ExpressTool
ExpressTool is commercializing its proprietary technology that uses
conformal cooling and proprietary thermal management for high productivity
production injection mold tooling. ExpressTool technical capabilities allow
molds, cavities and other types of tools for plastic injection moldings to be
more productive than molds made using conventional techniques. Most
manufacturers are striving to reduce the time required to bring new products to
market for competitive reasons. Building molds and other tools in many instances
requires half or more of the total new product development cycle. ExpressTool's
new proprietary technology can reduce the molding time of products by 20 to 30
percent by facilitating the use of high productivity production inserts for
molds. A key to the reduction cycle time is the use of conformal cooling, which
removes heat from molds more efficiently and uniformly than conventional
methods. The patent-pending technology utilizes a unique composite fabrication
method, which reduces part cycles and minimizes distortion, thus reducing cost
and improving accuracy. ExpressTool is building molds using its proprietary
processes for several Fortune 500 industrial companies.
In August 1998, ExpressTool entered into an exclusive agreement with GE
Plastics to test ExpressTool's new proprietary mold making technology that will
substantially improve the productivity of plastic injection molding tools. The
goal of the agreement is to validate and accelerate the commercialization of the
ExpressTool technology. It has been found that ExpressTool's molds,
incorporating proprietary cooling techniques, permit more rapid molding cycles
than conventional tools, a major benefit to the user.
ExpressTool has had articles on its technology featured in leading
industry publications including Modern Plastics, Injection Molding, Plastics
Technology, Molding Systems and a smaller article in Appliance Manufacturer
which have addressed the technology and ExpressTool's relationship with GE
Plastics.
The Company had discussions with organizations having the needed
capabilities that can be combined, through acquisition or some other business
arrangement, to integrate ExpressTool's new technology with an established
infrastructure and business base. These efforts have resulted in the
establishment of a responsive network of competencies, either owned or
strategically aligned, which allows ExpressTool to participate in projects
having a wide range of scope and complexity.
This planned outcome is the foundation and platform for ExpressTool
growth. It is anticipated that sales in 1999 will increase with further customer
acceptance; however, there is no assurance these results will occur.
13
<PAGE>
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 material processing, and provides
services to the industrial, governmental and educational sectors. The Midwest
location, a region long known for its expertise in materials and materials
science, gives the Company a platform for growth into the automotive, aerospace,
tool and 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 film by pulsed laser deposition,
applications of lasers to chemistry and photochemistry, spectroscopy, and
applied optics. MLPC has submitted provisional patents on pulsed laser
deposition and specific applications of the technology. The combination of Laser
Fare's expertise in materials processing and MLPC's expertise 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
Advanced Technology Group, ("ATG"), was created to take advantage of the
technical know how built up during the early years of Laser Fare in the
application of lasers toward the solution of industrial requirements. ATG has
been performing technical consulting and managing 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
ExpressTool subsidiary is a prime example of this.
During 1998, ATG entered into a one-year consulting agreement with
Molecular Geodesics Inc. ("MGI"), of Cambridge, MA. MGI is involved in creating
technologies using synthetic biomimetic materials with the mechanical
responsiveness of living cells and tissues and applying these technologies to
medical, industrial and military applications. MGI was awarded a $6.4 million
DARPA (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 technology to fabricate structures
for these "bioskins." ATG will receive as compensation for the performance of
its services, the sum of $300,000 payable at the rate of $25,000 per month, plus
expenses.
In March 1997, ATG was awarded a two-year $500,000 Phase II follow-on
contract by the United States Air Force/Phillips Laboratory, Kirkland AFB, New
Mexico. The contract is focused on the continued development of direct materials
processing applications and the commercialization of high power, high-brightness
laser diode
14
<PAGE>
technology, jointly developed by Laser Fare and the A. F. Joffe Technical
Institute of 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 Phillips contract in exchange
for royalty payments. The license agreement provides TLC the right to
manufacture and sell products and services using this technology, and 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 ATG as part of its SBIR
program funded by the Phillips Laboratory at Kirkland Air Force Base in New
Mexico.
ATG is involved in several smaller early stage programs that may result in
contracts in 1999, but there can no assurance that any contracts will
materialize.
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 December 31, 1998, and February 28, 1999 the Company had cash, cash
equivalents and marketable debt securities of approximately $1.0 million and
$3.8 million, respectively, available for its working capital needs and planned
capital asset expenditures.
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 ten years and bears interest at a 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 3.5%. The president and chief executive officer also loaned the
Company $250,000 earlier in the year. 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 $1.12 per share. Half of the warrants are
immediately vested and, provided 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.
During December, 1998 and February 1999 the Company consummated the sale
of 2,431,056 shares, or 85% of its Spectra series A Convertible Preferred Stock
yielding
15
<PAGE>
net proceeds to the Company of approximately $4.6 million, $1.0 million of which
was received in December, 1998 and the balance received in February, 1999.
While revenues were realized in fiscal 1998 on a consolidated basis,
substantially all the of revenues were attributed to Laser Fare. Through
improved revenues being realized by the Company, operating cost reductions being
implemented and reduction of interest costs through the conversion of
debentures, net losses significantly decreased in 1998. At December 31, 1998 and
February 28, 1999 the Company had working capital of approximately $1.0 million
and $3.8 million, respectively. The Company believes that these funds, together
with its credit facilities, will be sufficient to satisfy the Company's short
term working capital needs. In connection 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
Industry Segments
Laser Fare, Inc.
Revenues from the laser material processing, value added services and
advance technology consulting services from its Advanced Technology Group for
the year ended December 31, 1998 were approximately $6,879,052 and provided a
gross profit for the period of approximately $2,751,150.
ExpressTool
Revenue from initial molds produced using its conformal cooling and
proprietary thermal management for high productivity production injection
tooling for the year ended December 31, 1998 was approximately $442,906 and
provided a gross profit of $56,245.
Mound Laser & Photonic Center
Revenue from materials processing services with major emphasis on laser
marking, as well as applied research and development and more specialized laser
and photonics services for the year ended December 31, 1998 was approximately
$74,147 and provided a gross profit of $7,997.
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<PAGE>
Comparison of the Years Ended
December 31, 1998 and 1997
In 1998, consolidated revenues were $7,396,105 on cost of sales of
$4,760,733, resulting in a gross profit of $2,635,372 for the year. Consolidated
revenues in 1997 were $5,448,575 on cost of sales of $3,376,353 resulting in a
gross profit of $2,072,222.
Research and development expenses increased during 1998 to $1,060,021 from
$770,758 in 1997, or an increase of $289,263 or 37.5 %. The increase is
primarily attributed to the Company's ExpressTool subsidiary's continued
investment in its proprietary injection mold tooling technology research and
development.
General and administrative expenses decreased to $1,763,897 in 1998 from
$1,820,663 in 1997, a decrease of $56,766 or 3.1%. The decrease is primarily
attributed to continued cost reduction management.
Selling expenses of $427,889 in 1998 were attributed primarily to Laser
Fare's materials processing marketing activity, including trade shows,
conventions, brochures and other print materials. Selling expense of $470,723 in
1997 were primarily attributed to similar activities at Laser Fare.
For the year ended December 31, 1998, depreciation and amortization costs
were $628,861 as compared to $741,112 for 1997. Amortization of deferred
financing costs provided approximately $12,000 of the costs as compared to
$187,000 in 1997. The decrease resulted from several conversions of convertible
debentures to common stock in 1997, resulting in the write-off of the
corresponding financing costs in that year. Amortization of purchased technology
and goodwill totaled $50,760 and $49,426 for 1998 and 1997, respectively.
Interest expense was $373,405 during 1998, as compared to $804,873 in
1997, a decrease of $407,700 or 52.2%. Included in interest expense is a charge
for convertible debenture discounts in the amount of $406,849 in 1997. This
amount was zero in 1998 due to no debentures being issued. Interest income was
$40,287 in 1998, as compared to $39,154 in 1997.
The decrease in losses of the disposed business segment, Spectra, from
$1,958,520 for 1997 to $437,375 in 1998, was due to the Company's investment
being fully written off during 1998.
The $1,067,000 deferred income tax benefit recognized in fiscal 1998
relates to the Company's ability to utilize the net operating loss carryforwards
for income tax purposes to offset the estimated taxable gain on the sale of
Spectra Science Corp. in fiscal 1998 and 1999. In fiscal 1997 and prior, a
valuation allowance was recorded against the estimated deferred tax benefits
associated with the net operating loss carryforwards because of the uncertainty
as to the Company's ability to generate sufficient taxable income in the future
to utilize the losses before their expiration.
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<PAGE>
Gain on the disposition of a discontinued segment of $831,500, net of
income taxes, in 1998 was due to receipt of the first increment of funds from
the sale of the Company's holdings in Spectra.
All of these factors contributed to the net loss of $121,886 in 1998 as
compared to the net loss of $4,322,422 in 1997.
Comparison of the Years Ended
December 31, 1997 and 1996
In 1997, consolidated revenues were $5,448,575 on cost of sales of
$3,376,353, and gross profit in the amount of $2,072,222 realized during the
year. Revenues and gross profit for the prior year period were $5,080,207 and
$1,922,904, respectively.
Research and development expenses increased during 1997 to $770,758 from
$125,354 in 1996 an increase of $645,404 or 514%. The increase was primarily due
to research and development activity in the Company's ExpressTool subsidiary.
General and administrative expenses decreased to $1,820,663 in 1997 from
$2,113,655 in 1996, a decrease of $292,992. The decrease is primarily attributed
to reduction of litigation legal expense and continued cost reduction
management.
Selling expenses of $470,723 in 1997 were attributed primarily to Laser
Fare's materials processing marketing activity, including trade shows,
conventions, brochures and other print materials. Selling expense of $511,208 in
1996 were primarily attributed to similar activities at Laser Fare.
For the year ended December 31, 1997, depreciation and amortization costs
were $741,712 as compared to $1,006,784 for 1996. Amortization of deferred
financing costs provided approximately $187,000 of costs as compared to $528,000
in 1996. Amortization of purchased technology and goodwill totaled $49,426. The
decrease resulted from a reduction in the amount of convertible debentures
issued and related conversions to common stock in 1997 as compared to 1996.
Interest expense was $804,873 during 1997, as compared to $1,815,465 in
1996, a decrease of $1,010,592 or 56%. Included in interest expense is a charge
for convertible debenture discounts in the amount of $406,849 for 1997, compared
to $1,393,555 in 1996. The decrease in this component of interest expense is due
to a decrease in the issuance of convertible debentures in 1997 compared to 1996
and a significantly reduced level of borrowings during 1997. Interest income of
$39,154 in 1997, as compared to $91,517 in 1996, represents a decrease of
$52,363 or 57.2%.
Losses of a discontinued segment, Spectra Science Corp., were $1,958,520
in 1997, as compared to $504,105 in 1996. Spectra commenced operations in August
1996.
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<PAGE>
All of these factors contributed to the net loss of $4,322,422 in 1997 as
compared to the net loss of $4,693,531 in 1996.
RECENT DEVELOPMENTS AND RELATED PRO FORMA
INFORMATION (unaudited)
Since December 31, 1998, the Company has consummated certain transactions
which have had a material impact on the Company's financial condition. In
addition, the Company anticipates certain transactions in the foreseeable
period. Accordingly, the pro forma information set forth below, gives effect to
the following events as if they had occurred as of January 31, 1999:
Sale of Spectra Holdings. During December 1998 and February 1999, the Company
consummated the sale of 2,431,056 shares, or 85%, of its Spectra Series A
Convertible Preferred 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, the Company
recognized a $1 million gain on the sale in fiscal 1998 and will recognize a
$3.6 million gain on the sale in fiscal 1999.
Recapture of Treasury Shares. In February 1999, the Company completed the
divestiture of its equity interest in Spectra, through the sale of 611,194
shares of Series A Preferred Stock of Spectra (valued at $2.25 per share) in
consideration for the retirement of 550,075 (post reverse-split) shares of the
Company's common stock. As a result of this transaction the Company will
recognize a gain of $1.375 million in the first quarter of 1999.
Proposed Retirement of Debt. 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 ten years and bears interest at a 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 3.5%. The president and chief executive officer
also loaned the Company $250,000 earlier in the year. 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 $1.12 per share. Half of
the warrants are immediately vested and, provided 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
intends at its next meeting to authorize the repayment of these loans. As a
result thereof, warrants covering 134,000 shares will be cancelled.
19
<PAGE>
The following unaudited proforma balance sheet of the Company at January
31, 1999 includes all adjustments to reflect the foregoing transactions:
Pro Forma Balance Sheet:
<TABLE>
<CAPTION>
Proforma Adjustments Proforma January
January 31, --------------------------------- 31, 1999
ASSETS 1999 (unaudited) Debit Credit (unaudited)
- ---------------------------- ---------------- ----- ------ ----------------
<S> <C> <C> <C> <C>
Current assets $ 3,333,637 $ 3,621,881(2) $ 1,364,788(4) $ 4,765,730
825,000(3)
Property and equipment, net 4,442,338 4,442,338
Notes receivable--
stockholders 47,102 47,102
Other intangible assets,
net 342,565 342,565
Other investment 250,000 250,000
------------- ------------ ------------ -------------
$ 8,415,645 $ 3,621,881 $ 2,189,788 $ 9,847,735
============= ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
Proforma Adjustments Proforma January
LIABILITIES AND January 31, --------------------------------- 31, 1999
STOCKHOLDER'S EQUITY 1999 (unaudited) Debit Credit (unaudited)
- ---------------------------- ----- ------ ----------------
<S> <C> <C> <C> <C>
Current liabilities $ 2,261,951 $ 260,237(4) $ 2,001,714
Long Term Obligations 2,301,682 2,301,862
Notes payable --
stockholders 601,955 1,104,551(4) 502,596(5)
Stockholders' equity 3,249,874 1,375,187(1) 1,375,187(1)
825,000(3) 3,621,881(2)
502,596(5) 5,544,159
------------- ------------ ---------- ------------
$ 8,415,652 $ 4,067,571 $5,499,664 $ 9,847,735
============= ============ ========== ============
</TABLE>
- ----------
1 -- To record repurchase of Common Stock in exchange for Spectra shares.
2 -- To record sale of Spectra stock to Spectra insiders and outside third
parties.
3 -- To record tax effect of Spectra stock sale.
4 -- To record repayment of stockholder notes.
5 -- To write-off note discount relating to detachable warrants issued in
conjunction with stockholder notes.
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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 government entities resulting from miscalculations or systems
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 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, the Company's entire
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.
Y2K disruptions in client or vendor operations could result in one or more
missing scheduled payments which could impact the Company's cash flow. Y2K
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 or vendors 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 apart of the Y2K project, the Company is mailing a
questionnaire to all of its clients and vendors requesting the status of their
Y2K compliance on or before March 30, 1999. This is expected to significantly
reduce the Company's level of uncertainty about the Y2K problem and reduce the
possibility of significant interruptions of normal business operations.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Financial Statements, the report thereon and
notes thereto, commencing on page F-1 to this report.
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<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
MANAGEMENT
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below are the names, ages and positions of the Company's
directors, executive officers.
Affiliated
Name Age Position Since
- ------------------------ ------ ---------------------------- ----------
Clifford G. 57 Chairman of the Board, 1994
Brockmyre(1) President and Chief
Executive Officer
Michael S. Smith (2) 44 Director 1995
James P. Sherblom (2) 43 Director 1998
Daniel T. Landi 56 Chief Financial and 1994
Accounting Officer,
Secretary
Terence Feeley 48 President-- ATG 1994
Paul Jacobs, PhD 60 Vice President-- Technology 1997
ATG and Express Tool
- ----------
(1) This person may be deemed a parent and/or promoter of the Company as those
terms are defined in the Rules and Regulations promulgated under the
Securities Act of 1933, as amended.
(2) Member of the Audit and Compensation Committees.
Each Director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and serve
at the will of the Board of Directors.
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<PAGE>
Background
The principal occupation of each director, executive officer and key
employee for at least the past five years is as follows:
Clifford G. Brockmyre. Mr. Brockmyre has been a director of the Company
since October 1994, its President since October 1995 and its Chief Executive
Officer since January 1998. He has been involved with manufacturing since 1966.
He took Quabbin from a nearly bankrupt job shop to an extremely profitable
manufacturer with revenues of over $30 million in 1990. Mr. Brockmyre sold
Quabbin in 1990 for $24 million to a Fortune 500 company. For over 27 years, he
has been involved in the tooling, machining and manufacturing industries
throughout the country. He is a member of the Licensing Executive Society, a
member of the faculty of Mohawk Research's Commercialization Programs of the
Department of Energy and Los Alamos National Laboratory and was the 1992
Chairman of the 3000+ corporation member National Tooling and Machining
Association. He developed the laser manufacturing liaison to the National
Laboratories at Los Alamos, Sandia and Oak Ridge for Laser Fare. The Department
of Energy has set up Laser Fare as a model for technology transfer under its
Small Business Initiative. Mr. Brockmyre was recently appointed by the Governor
of Rhode Island to the State Economic Advisory Council.
Daniel T. Landi. Mr. Landi has been the Company's Chief Financial Officer
since August 1994. Prior thereto, from January 1993 to June 1994 he was the
Chief Financial Officer of a privately held aerospace research and development
company, with primary responsible for business and strategic plans, financial
structuring, funding, as well as establishing an operating infrastructure for
the company, including business and financial systems. From June 1991 through
1992, Mr. Landi was a principal of Focused Management Consulting Group, a firm
concentrating on acquisitions, mergers, joint ventures and start-up operations,
including private placements and initial public offerings. Mr. Landi has
extensive domestic and international experience in finance, accounting and
information systems with his twenty-six years of progressive growth in overall
business and senior financial management with IBM. Mr. Landi has a B.S. in
Finance and an MBA from the University of Connecticut.
Michael S. Smith. Mr. Smith was elected to the Board of Directors in 1995
and is a member of the Audit and Compensation committees. He is the President
and Chief Executive Officer of Micropub Systems International Inc., a brewery
system manufacturer, and is a principal of International Capital and Management
Inc., a merchant banking and venture capital firm. From October 1992 through
January 1997, Mr. Smith was the Managing Director of Corporate Finance of H.J.
Meyers & Co. an investment banking firm and was general counsel of such firm
from May 1991 through May 1995. Mr. Smith serves on the Board of Directors of
CSL Lighting Manufacturing, Inc. Mr. Smith was associated with the law firm of
Harter, Secrest & Emery from 1987 until 1991. Mr. Smith received a B.A. from
Cornell University and a J.D. from Cornell University School of Law.
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<PAGE>
James P. Sherblom. Mr. Sherblom was elected to the Board of Directors in
October 1998 and is a member of the Audit and Compensation Committee. He is the
President of Seaflower Associates, Inc., a venture capital firm which he founded
in 1993. He serves as Chairman or director of numerous early stage biotechnology
companies. He served as Chairman of The Board, President and Chief Executive
Officer of TSI Corporation (formerly Transgenic Sciences, Inc.) from January
1989 to April 1993. From February 1984 to March 1989 he was Senior Vice
President of Finance and Administration, Chief Financial Officer and Treasurer
of Genzyme Corporation, a biopharmaceutical company. Mr. Sherblom received a BS
from Yale University and an MBA degree with high distinction from Harvard
University.
Terence Feeley. Mr. Feeley has been the President of the Laser
Fare-Advanced Technology Group since 1994. He was the co-founder, President and
CEO of Laser Fare prior to it being acquired by the Company. Mr. Feeley is the
President of the Laser Institute of America, the author of over 50 papers on
laser technology and the co-editor of three books in the area of laser based
rapid manufacturing. Mr. Feeley received a BA in from the University of Rhode
Island.
Paul Jacobs, Ph.D. Mr. Jacobs joined ExpressTool in 1996 as its Vice
President of Technology. Mr. Jacobs received a BS in Mechanical Engineering from
Union College and an MS, MA, and Ph.D., in Applied Physics from Princeton
University. He began his career as a senior physicist working on laser-based
optical systems at the Electro-Optical Systems Division of Xerox Corp. He became
Chief Scientist in 1985 and helped develop a tactical training system used by
the US Army. In 1989 he became convinced of the future of stereolithography and
joined 3D Systems as Manage of Process Development and in 1991 was appointed
Director of R&D. Mr. Jacobs became one of the leading authorities of SL
technical development. In 1992 Mr. Jacobs was the principal author and technical
editor of Rapid Prototyping & Manufacturing: Fundamentals of Stereolithography,
the first in the field. This was followed in 1996 by the highly acclaimed:
Stereolithography and Other RP&M Technologies: From Rapid Prototyping to Rapid
Tooling.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee reviews the scope and results of the audit and
other services provided by the Company's independent accountants and internal
controls of the Company. The Compensation Committee is responsible for the
approval of compensation arrangements for officers of the Company and the review
of the Company's compensation plans and policies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater
24
<PAGE>
than ten-percent shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on review
of the copies of such forms furnished to the Company, or written representations
that no Forms 5 were required, the Company believes that all Section 16(a)
filing requirements applicable to its officers and directors were complied.
Directors' Compensation
Directors do not receive any cash consideration for serving as directors
of the Company. All directors are reimbursed for out-of-pocket expenses incurred
in connection with their attendance at board meetings. In addition, pursuant to
the Company's non-discretionary, non-employee directors' stock option plan, each
non-employee director is entitled to receive options to purchase 2,500 shares of
Common Stock upon becoming a director and at the end of each fiscal year during
which he served as a director.
Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of directors' fiduciary duty
of care. The Company's Certificate of Incorporation limits the liability of
Directors of the Company to the Company or its shareholders to the fullest
extent permitted by Delaware law.
The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or Director of the Company who, by reason
of the fact that he or she is an officer or Director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or Director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Insofar as indemnification for liabilities under the
Securities Act may be provided to officers and Directors or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving a Director,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 10. EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal
years ended December 31, 1998, 1997 and 1996, individual compensations for
services to the Company in all capacities paid to the Chief Executive Officer
and the other most highly paid executive officers of the Company in Fiscal 1998
whose salary and bonus exceeded
25
<PAGE>
$100,000 (collectively, the "Named Executives"). All references to shares of the
Company's Common Stock gives effect to the one-for-five reverse stock split
effected on February 16, 1999.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Principal Securities All Other
Position Year Actual Deferred Underlying Options Compensation
-------- ---- ------ -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Clifford G. Brockmyre 1998 $175,000 -- 339,038 --
President and Chief 1997 $175,000 4,038 --
Executive Officer 1996 $157,400 $ 75,000 60,000 --
Daniel T. Landi 1998 $110,000 -- 2,538 --
Chief Financial and 1997 $110,000 -- 2,308 --
Accounting Officer 1996 $100,000 -- -- --
</TABLE>
Employment Agreements
The Company has an employment agreement with Clifford G. Brockmyre, its
President and Chief Executive Officer, for a term expiring on June 30, 2000,
which provides for an annual salary of $175,000 and various benefits. In
addition to the compensation provided under the agreement, Mr. Brockmyre is
eligible to participate in the Company bonus plan and is eligible for other
bonuses as determined in the sole direction of the Board of Directors. The
agreement also provides, among other things, that, if Mr. Brockmyre is
terminated other than for cause (which is defined to include conviction of a
crime involving moral turpitude, engaging in activities competitive with the
Company, divulging confidential information, dishonesty or misconduct
detrimental to the Company or breach of a material term of the agreement), the
Company will pay to him a lump sum payment equal to the product of the sum of
(I) the highest annual rate of salary paid to Mr. Brockmyre, and (ii) the
highest annual bonus paid to or accrued to the benefit of Mr. Brockmyre during
the Employment Term (as defined in the agreement) multiplied by 2.99. The
agreement also provides for payments to Mr. Brockmyre in the event of his death
or permanent disability.
The Company has an employment agreement with Daniel T. Landi, its Chief
Financial and Accounting Officer, for a term expiring on October 19, 2000, which
provides for an annual salary of $110,000 and various benefits. Base Salary
shall be subject to annual review and increase as determined by the Board of
Directors. In addition to the compensation provided under the agreement, Mr.
Landi is eligible to participate in all executive bonus and option plans
established for senior executives of the Company
Stock Options
The following tables show certain information with respect to stock
options granted in 1998 to Named Executives and the aggregate value at December
31, 1998 of all stock options granted to the Named Executives. All information
contained in this
26
<PAGE>
tables and the description of the Stock Option Plans which follow gives effect
to the one-for-five reverse stock split effected on February 16, 1999. No
Options were exercised by Named Executives during 1998.
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of Total
Shares Options/Granted to
Underlying Employees in Exercise Price Expiration
Name Options Granted Fiscal Year ($/Sh) Date
- ---- --------------- ----------- ------ ----
(#)
<S> <C> <C> <C> <C>
Clifford G. Brockmyre 2,019 6.2% $9.75 12/02/08
Clifford G. Brockmyre 2,109 3.9% $4.85 07/02/08
Daniel T. Landi 1,269 1.8% $9.75 12/02/08
Daniel T. Landi 1,269 1.2% $4.85 07/02/08
</TABLE>
Aggregate 1998 Year End Option Values
Number of Shares of Common
Stock
Underlying Unexercised Value of Unexercised
Options In-The Money Options at
At 12/31/98 (#) 12/31/98* ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Clifford G. Brockmyre 24,346/6,731 $ 19,306/$5,338
Daniel T. Landi 4,769/4,077 $ 4,030/$3,445
- ----------
* Based on December 31, 1998 Nasdaq closing price of $1.875.
Stock Option Plans
In December 1991, the Board of Directors and stockholders of the Company
adopted a stock option plan, which was amended in April 1993 (the "1993 Stock
Option Plan"). In April 1994, the Board of Directors adopted the 1994 Stock
Option Plan which was approved and adopted by the Company's stockholders at the
1994 Annual Meeting of Stockholders. In June 1995 the Board of Directors adopted
the 1995 Stock Option Plan which was approved by the Company's stockholders at
the 1995 Annual Meeting of Stockholders. In December 1996, the Board of
Directors adopted the 1996 Stock Option Plan which was approved and adopted by
the Company's stockholders at the 1996 Annual Meeting of Stockholders. In
December 1997, the Board of Directors adopted the 1997 Stock Option Plan which
was approved and adopted by the Company's
27
<PAGE>
stockholders at the 1997 Annual Meeting of Stockholders. In December 1998, the
Board of Directors adopted the 1998 Stock Option Plan which was approved and
adopted by the Company's stockholder at the 1998 Annual Meeting of Stockholders.
The 1993, 1994, 1995, 1996, 1997 and 1998 Option Plans are collectively referred
to herein as the "Option Plans". The 1993, 1994, 1995, 1996, 1997 and 1998
Option Plans provide for the grant to employees, officers and consultants of
options to purchase up to 50,000, 45,000, 51,000, 80,000, 120,000 and 100,000
shares of Common Stock, respectively, consisting of both incentive stock options
within the meaning of Section 422 of the United States Internal Revenue Code of
1986 (the "Code") and non-qualified options. The Option Plans are intended to
qualify under Rule 16b-3 of the Securities Exchange Act of 1934. Incentive stock
options are issuable only to employees of the Company, while non-qualified
options may be issued to non-employees, consultants, and others, as well as to
employees of the Company.
The Option Plans are administered by the Compensation Committee of the
Board of Directors, which determines those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of share of Common Stock that may be purchased under each
option, and the option price. The members of this committee are ineligible to
receive options under the Option Plans.
The per share exercise price of an incentive or non-qualified stock option
may not be less than the fair market value of the Common Stock on the date the
option is granted. The aggregate fair market value (determined as of the date
the option is granted) of the shares of Common Stock for which incentive stock
options are first exercisable by any individual during any calendar year may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him or her, more than 10% of the total
combined voting power of all classes of stock of the Company shall be eligible
to receive any incentive stock option under the Option Plans unless the option
price is at least $110% of the fair market value of the Common Stock subject to
the option, determined on the date of grant. Non-qualified options are not
subject to this limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which to exercise the option.
Upon termination of employment of an optionee by reason of death or permanent
total disability, the option remains exercisable for one year thereafter to the
extent it was exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
In April 1993, the Board of Directors and stockholders of the Company
adopted a non-discretionary non-employee directors' stock option plan (the
"Directors' Plan") that provides for the grant to non-employee directors of
non-qualified options to purchase up to 50,000 shares of Common Stock. Pursuant
to the Directors' Plan, each new non-employee director of the Company is
automatically granted, upon becoming a director, an
28
<PAGE>
option to purchase 2,500 shares of Common Stock at the fair market value of such
shares on the grant date. Each option vests one year from the date of grant. In
addition, each non-employee director shall automatically be granted an option to
purchase 2,500 shares at the fair market value of such shares on the date of
grant, on the last day of each fiscal year during which he or she serves as a
director of the Company. Such options shall vest one year from date of grant.
Options under the Option Plans and Directors' Plan must be granted within
10 years from the effective date of each respective plan. Incentive stock
options granted under the plan cannot be exercised more than 10 years from the
date of grant, except that incentive stock options issued to greater than 10%
stockholders are limited to four-year terms. All options granted under the plans
provide for the payment of the exercise price in cash or by delivery to the
Company of shares of Common Stock already owned by the optionee having a fair
market value equal to the exercise price of the options being exercised, or by a
combination of such methods of payment. Therefore, an optionee may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of his stock options without making any
additional cash investment.
Any unexercised options that expire or that terminate upon an optonnee's
ceasing to be affiliated with the Company become available once again for
issuance. As of February 16, 1999 the Company had outstanding incentive stock
options to purchase 106,791 shares of Common Stock under the Option Plans and
non-qualified options to purchase an aggregate of 1,500 shares of Common Stock
to Michael S. Smith, and 500 shares of Common Stock to James P. Sherblom under
the Directors' Plan. These options are exercisable at prices ranging from $1.875
to $12.50 per share.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
None of the Directors serving on the Compensation Committee is an employee
of the Company. No Director or executive officer of the Company is a director or
executive officer of any other corporation that has a director or executive
officer who is also a Director of the Company.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table, together with the accompanying footnotes, sets forth
information, as of March 10, 1999, regarding stock ownership of all persons
known by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock, all directors and nominees, and all directors and executive
officers of the Company as a group. All stock ownership information has been
adjusted to give effect to the Company's one-for-five reverse split effected
February 16, 1999.
Name of Shares of Common Stock Percentage
Beneficial Owner (1) Beneficially Owned (2) of Class (3)
- -------------------- ---------------------- ------------
Directors and Executive Officers
Clifford G. Brockmyre 496,105(4) 23.3%
Daniel T. Landi 8,846(5) *
Michael S. Smith 1,000(6) *
James P. Sherblom 66,000(7) 3.1%
All executive officers
and directors as a
group (5 persons) 678,874(8) 31.9%(9)
5% Stockholders
Northeast Hampton
Holdings, LLC(10) 497,106 23.4%
- ----------
* less than 1%
(1) Unless otherwise indicated below, each director, executive officer and
each 5% stockholder has sole voting and investment power with respect to
all shares beneficially owned. The address of Mr. Brockmyre is c/o
Infinite Group, Inc. 2364 Post Road, Warwick, RI 02886. The address of
Northeast Hamptons Holding, LLC is 1895 Mt. Hope Avenue, Rochester, New
York 14620.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants or upon the
conversion of securities are deemed to be outstanding for the purpose of
computing the percent of ownership of such individual or group, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(3) Assumes that all currently exercisable options or warrants or convertible
notes owned by the individual have been exercised.
(4) Includes 20,000 shares owned by Mr. Brockmyre's wife as to which shares
Mr. Brockmyre disclaims beneficial ownership, 24,346 shares subject to
currently exercisable options and 335,000 shares subject to currently
exercisable warrants.
30
<PAGE>
(5) Includes 7,769 shares subject to currently exercisable options.
(6) Includes 333 shares subject to currently exercisable options
(7) Includes 14,000 shares subject to currently exercisable options.
(8) Includes 447,558 shares subject to currently exercisable options, warrants
or convertible notes.
(9) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
(10) The information with respect to this stockholder was derived from the
Schedule 13D and Form 4's filed by the reporting person.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1998, the former chairman and principal shareholder of the
Company, along with related parties of the principal shareholder, sold an
aggregate of 470,044 shares of common stock of the Company to Northeast Hampton
Holdings, LLC. Also, the principal stockholder sold his interest in the above
convertible secured notes with a principal balance of $900,605 to Northeast
Hampton Holdings. Northeast Hampton Holdings, in turn, forgave $106,743 of the
notes payable as consideration for 35,581 shares of common stock issued in
connection with the exercise of stock options. The remaining $793,862 of
principal outstanding was converted into 101,355 shares of common stock at an
average conversion price of $8.15 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 3.5%. 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 detachable warrants to purchase 536,000 shares of
Company Common Stock exercisable at $5.60 per share. Half of the warrants are
immediately vested and, provided that the loan remains outstanding, the
remaining 50% are exercisable in four equal allotments; six, nine, twelve, and
fifteen months from the anniversary date of the loan. In the event the notes are
prepaid within such period, any unexercisable warrants are cancelable.
In May, 1998 the Company entered into an agreement with James P. Sherblom
pursuant to which Mr. Sherblom agreed to act as Senior Financial Advisor to the
Company. In consideration for such services, the Company granted to Mr. Sherblom
a non-qualified stock option to purchase 48,000 (post-split) shares of Company's
Common Stock at the fair market value on the date of the agreement. The options
vest with respect to 2,000 shares per month over a 24-month period. The
Agreement is terminable by either party on 30 days' notice, in which event any
unvested options would be forfeited. In October 1998, Mr.
Sherblom became a Director of the Company.
The Company believes the foregoing transactions which involved affiliates
were on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. As a matter of Policy, in order to reduce the
risks of self-
31
<PAGE>
dealing or a breach of the duty of loyalty to the Company, all transactions
between the Company and any of its officers, directors or principal stockholders
are for bona fide purposes and are approved by a majority of the disinterested
members of the Board of Directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
The Exhibits listed below are filed as part of this Report.
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment of Certificate of Incorporation dated January 7,
1998. (8)
3.3 Certificate of Amendment of Certificate of Incorporation dated February
16, 1999.*
3.4 By-Laws of the Company. (1)
4.1 Specimen Stock Certificate. (1)
10.1 1993 Stock Option Plan. (1)
10.2 1993 Non-Employee Directors' Stock Option Plan. (1)
10.3 Form of Stock Option Plan (3)
10.4 Form of Stock Option Agreement. (1)
10.5 Stock Acquisition Agreement between the Company and HGG Laser Fare Inc.
(2)
10.6 Lease Agreement between Rhode Island Industrial Facilities Corporation and
HGG Laser Fare, Inc. for certain equipment and operating facility in
Smithfield, Rhode Island. (4)
10.7 Stock Sale Agreement, dated December 31, 1995, with respect to the sale of
FTD Infinite.(5)
10.8 Loan Agreement between HGG Laser Fare, Inc. and First National Bank of New
England and dated December 21, 1995.(5)
10.9 Spectra Acquisition Corp. - Series A Convertible Stock Purchase Agreement
dated August 23, 1996 (7)
10.10 Spectra Acquisition Corp. -Stockholders' Agreement dated August 23, 1996
(7)
10.14 Employment Agreement between Clifford G. Brockmyre and the Company dated
July 1, 1996. (8)
10.12 Employment Agreement between Daniel T Landi and the Company dated October
20, 1997. (8)
10.13 Employment Agreement between Larry R. Dosser and the Mound Acquisition,
Inc. dated February 12, 1998. (8)
10.14 Mound Acquisition Agreement dated February 12, 1998. (8)
10.15 Supply Agreement between Laser Fare, Inc. and Dey Laboratories, L.P. dated
October 20, 1997. (8)
10.16 Form of Stock Repurchase Agreements dated February 19, 1999 between the
Company and Clearwater Funds.*
10.17 Form of Loan Agreements and Warrant between the Company and Clifford G.
Brockmyre.*
10.18 Form of Spectra Science Corporation Stock Sale Agreement.*
21 Subsidiaries of the Company.(6)
27 Financial Data Schedule.*
32
<PAGE>
- ----------
* Filed herewith.
(1) Previously filed as on Exhibit to the Company's Registration Statement on
Form S-1 (File#33-61856). This Exhibit is incorporated herein by
reference.
(2) Incorporated by reference to Report on Form 8-K, dated July 1, 1994.
(3) Incorporated by reference to 1993 Preliminary Proxy Statement.
(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996.
(7) Incorporated by reference to Report on Form 8-K dated August 26, 1996.
(8) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997.
Reports on Form 8-K
None
33
<PAGE>
CONSOLIDATED
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
================================================================================
DECEMBER 31, 1998
<PAGE>
INFINITE GROUP, INC.
CONTENTS
================================================================================
Page
Independent Auditor's Report........................................... F-2
Consolidated Financial Statements:
Balance Sheets..................................................... F-3
Statements of Operations........................................... F-4
Statements of Stockholders' Equity................................. F-5
Statements of Cash Flows........................................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
[LETTERHEAD OF FREED MAXICK SACHS & MURPHY, PC]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Infinite Group, Inc.
We have audited the consolidated balance sheets of Infinite Group, Inc. as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Infinite Group,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
March 12, 1999
F-2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
December 31,
-------------------------
ASSETS 1998 1997
---------- ----------
Current assets:
Cash and cash equivalents $1,010,736 $ 541,653
Restricted funds 78,125 69,280
Accounts receivable, net of allowances 1,093,414 954,378
Inventories 193,412 150,389
Deferred tax asset 825,000 --
Advance - stockholder 50,383 --
Other current assets 182,567 174,798
---------- ----------
Total current assets 3,433,637 1,890,498
Property and equipment, net 4,442,338 4,197,305
Other assets:
Notes receivable - stockholders 47,102 87,642
Other intangible assets, net 342,565 266,506
Other investment 250,000 --
Investment in disposed subsidiary -- 437,375
Inventoried parts -- 71,603
---------- ----------
639,667 863,126
---------- ----------
$8,515,642 $6,950,929
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 522,757 $ 370,553
Stockholders 231,031 70,000
Accounts payable and accrued expenses 1,171,329 948,713
Current maturities of long term obligations 307,628 242,340
Current portion of notes payable -
stockholders 29,206 703,965
---------- ----------
Total current liabilities 2,261,951 2,335,571
Long term obligations 2,301,862 2,466,662
Notes payable - stockholders 601,955 196,640
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized, 2,673,334 and 2,523,298
shares issued and outstanding 2,673 2,523
Additional paid-in capital:
Common stock 20,210,268 19,246,299
Warrants 555,585 --
Accumulated deficit (17,418,652) (17,296,766)
---------- ----------
Total stockholders' equity 3,349,874 1,952,056
---------- ----------
$8,515,642 $6,950,929
========== ==========
See notes to consolidated financial statements
F-3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
====================================================================================
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 7,396,105 $ 5,448,575 $ 5,080,207
Cost of goods sold 4,760,733 3,376,353 3,157,303
----------- ----------- -----------
Gross profit 2,635,372 2,072,222 1,922,904
Cost and expenses
Research and development 1,060,021 770,758 125,354
General and administrative expenses 1,763,897 1,820,663 2,113,655
Selling expenses 427,889 470,723 511,208
Depreciation and amortization 628,861 741,712 1,006,784
Litigation settlement loss -- -- 649,000
----------- ----------- -----------
Total costs and expenses 3,880,668 3,803,856 4,406,001
----------- ----------- -----------
Operating loss (1,245,296) (1,731,634) (2,483,097)
Other income (expense)
Interest income 40,287 39,154 91,517
Interest expense (373,405) (804,873) (1,815,465)
Gain (loss) on dispositions of assets (5,635) 38,457 --
Other 1,038 94,994 20,003
----------- ----------- -----------
Total other income (expense) (337,715) (632,268) (1,703,945)
----------- ----------- -----------
Loss from continuing operations before
income taxes (1,583,011) (2,363,902) (4,187,042)
Income tax benefit (provision) 1,067,000 -- (2,384)
----------- ----------- -----------
Loss from continuing operations (516,011) (2,363,902) (4,189,426)
Disposed business segment:
Loss from operations of disposed
business segment (437,375) (1,958,520) (504,105)
Gain on sale of business segment
(less applicable income taxes of
$242,000) 831,500 -- --
----------- ----------- -----------
394,125 (1,958,520) (504,105)
----------- ----------- -----------
Net loss $ (121,886) $(4,322,422) $(4,693,531)
=========== =========== ===========
Loss per share:
Continuing operations (0.19) (1.14) (3.17)
Disposed business segment:
Loss from operations (0.17) (0.94) (0.38)
Gain on sale 0.31 -- --
----------- ----------- -----------
Net loss (0.05) (2.08) (3.55)
=========== =========== ===========
Weighted average number of common
shares outstanding $ 2,643,750 $ 2,076,153 $ 1,322,104
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
====================================================================================================================================
Additional
Paid-In Additional
Common Stock Capital Paid-In
---------------------- Common Capital Accumulated
Shares Amount Stock Warrants Deficit Total
--------- --------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 5,490,189 $ 5,490 $ 8,779,209 $ -- $(8,280,813) $ 503,886
Retroactive effect of reverse
stock split (4,392,151) (4,392) 4,392 -- -- --
Issuance of common stock in
connection with debenture conversions 588,199 588 5,942,927 -- -- 5,943,515
Issuance of common stock in
connection with warrant conversions 34,750 35 173,721 -- -- 173,756
Issuance of common stock in
connection with note conversions 13,298 13 124,987 -- -- 125,000
Issuance of common stock in
connection with employee options exercised 2,348 3 18,841 -- -- 18,844
Issuance of common stock in
connection with acquisition of license 2,000 2 29,998 -- -- 30,000
Net loss -- -- -- -- (4,693,531) (4,693,531)
--------- --------- ----------- --------- ------------ -----------
Balance - December 31, 1996 1,738,633 1,739 15,074,075 -- (12,974,344) $ 2,101,470
Issuance of common stock in
connection with private offering 384,615 384 1,669,616 -- -- 1,670,000
Issuance of common stock in
connection with debenture conversions 321,717 322 2,048,898 -- -- 2,049,220
Issuance of common stock in
connection with judgement settlement 32,389 32 174,968 -- -- 175,000
Issuance of common stock in
connection with promissory note conversions 30,087 30 150,403 -- -- 150,433
Issuance of common stock in
connection with earn-out agreement 9,727 10 94,221 -- -- 94,231
Issuance of common stock in
connection with liquidated damages 6,130 6 34,118 -- -- 34,124
Net loss -- -- -- -- (4,322,422) (4,322,422)
--------- --------- ----------- --------- ------------ -----------
Balance - December 31, 1997 2,523,298 2,523 19,246,299 -- (17,296,766) 1,952,056
Issuance of common stock in
connection with note payable conversions 101,355 101 823,793 -- -- 823,894
Issuance of common stock in
connection with stock options excercised 35,581 36 106,707 -- -- 106,743
Issuance of common stock in
connection with services performed for
the Company 13,100 13 33,469 -- -- 33,482
Detachable stock warrants
issued with note payable -- -- -- 529,902 -- 529,902
Stock warrants issued in exchange for services -- -- -- 25,683 -- 25,683
Net loss -- -- -- -- (121,886) (121,886)
--------- --------- ----------- --------- ------------ -----------
Balance - December 31, 1998 2,673,334 $ 2,673 $20,210,268 $ 555,585 $(17,418,652) $ 3,349,874
========= ========= =========== ========= ============ ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
================================================================================================================
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (516,011) $(2,363,902) $(4,189,426)
Adjustments to reconcile net loss from
continuing operations to net cash used in continuing operations:
Depreciation and amortization 628,861 741,712 1,006,784
Interest expense attributed to convertible
debentures discount -- 406,849 1,393,555
Amortization of discount on note payable 27,306 -- --
Expenses satisfied via issue of debt or equity 37,290 140,971 --
(Gain) loss on dispositions of assets 5,635 (38,457) --
Asset write-downs and allowances 40,540 44,616 549,591
Deferred tax benefit (1,067,000) -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (139,036) (298,507) 166,019
Other current assets 37,231 (25,586) (60,526)
Inventories and inventoried parts 28,580 39,318 119,115
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 278,023 270,285 7,417
Litigation settlement payable -- (350,000) 649,000
----------- ----------- -----------
Net cash used in continuing operations (638,581) (1,432,701) (358,471)
Net cash used in disposed business segment -- -- (319,451)
----------- ----------- -----------
Total cash used in operating activities (638,581) (1,432,701) (677,922)
Cash flows from investing activities:
Purchase of property and equipment (830,170) (947,811) (662,659)
Purchase of technology and other intangibles (109,611) -- (153,934)
Proceeds from sale of technology and equipment 13,500 155,898 --
Investment in susidiary - Spectra Acquisition Corp. -- (200,000) (2,700,000)
Purchase of net assets of Spectra Science Corp. -- -- (1,654,000)
Proceeds from sale of investment in
Spectra Science Corp. 955,000 -- --
Cash of unconsolidated subsidiary -- (814,604) --
Advance to stockholder (50,383) -- --
Investment in Molecular Geodesics, Inc. (250,000) -- --
----------- ----------- -----------
Net cash used in investing activities (271,664) (1,806,517) (5,170,593)
Cash flows from financing activities:
Net borrowings (repayments) of short-term debt 383,235 190,553 (220,000)
Borrowings of long-term obligations 125,000 -- 75,453
Repayments of long-term obligations (253,819) (194,794) (161,075)
Proceeds from notes payable - stockholders 1,150,000 -- --
Repayment of notes payable - stockholders (16,243) -- --
(Increase) decrease in restricted funds, net (8,845) (679) 1,754
Proceeds from convertible debentures, net of expenses -- 968,000 3,730,000
Proceeds from issuances of common stock,
net of expenses -- 1,670,000 259,472
Proceeds from issuance of subsidiary preferred stock -- -- 3,286,000
----------- ----------- -----------
Net cash provided by financing activities 1,379,328 2,633,080 6,971,604
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 469,083 (606,138) 1,123,089
Cash and cash equivalents - beginning of year 541,653 1,147,791 24,702
----------- ----------- -----------
Cash and cash equivalents - end of year $ 1,010,736 $ 541,653 $ 1,147,791
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS
The accompanying consolidated financial statements include the financial
statements of Infinite Group, Inc. (IGI) and each of its wholly owned
subsidiaries; HGG Laser Fare, Inc. (LF), Express Tool, Inc. (ET) and Mound Laser
and Photonics Center, Inc. (MLPC) (collectively "the Company"). All significant
intercompany accounts and transactions have been eliminated. The 1996
consolidated financial statements include its formerly majority owned
subsidiary, Spectra Science Corp. (SSC) (see Note 4).
Since the Company's acquisition of HGG Laser Fare, Inc. in 1994, the
Company's operations have primarily consisted of consulting for advanced laser
technologies, pursuing the potential of new technology toward commercialization,
and expanding the subsidiary's material processing business which includes laser
welding, machining, drilling and engraving. LF formed a subsidiary, Express
Tool, Inc., in 1996 for the purpose of commercializing technology developed by
LF, primarily rapid tooling technology used in the manufacturing sector. During
1998, LF acquired a second subsidiary, MLPC, which specializes in laser
applications, photonics applications and materials processing. In 1996, the
Company acquired a majority interest in Spectra Science Corporation, a company
specializing in research of advanced laser technologies in the areas of, among
other things, product identification, anti-counterfeiting methods and medical
procedures. The Company has adopted a plan to dispose of this business segment
during 1999. (See Note 4).
NOTE 2. - FINANCIAL CONDITION
In 1996, the Company acquired a majority interest in SSC. SSC was created
to commercialize two technologies, LaserPaint(TM) and the direct patterning on
glass by lasers, licensed on an exclusive worldwide basis from Brown University.
The Company envisioned that its LF subsidiary would provide the manufacturing
services for SSC as SSC developed new products and materials. Since the
Company's investment in SSC in 1996, SSC's markets have grown divergent from
those of LF. Accordingly, on December 2, 1998 the Company made a decision to
sell its investment in SSC (See Note 4) which resulted in a gain of
approximately $6.0 million and the infusion of approximately $4.7 million in
cash. The Company will utilize the proceeds to retire outstanding debt and for
working capital to fund its internal growth.
During 1998, management continued to investigate and implement strategies
aimed at developing the laser services and rapid tooling segments of the
Company's business. These included ET expending approximately $1 million in
research and development funds for developing and marketing technology for high
productivity injection mold tooling processes initially developed by LF.
Expanded efforts on the commercialization of these technologies continued in
1998, which management expects will be continued in 1999. The Company is
currently involved in discussions with a number of Fortune 500 companies for the
formation of strategic partnerships for the further development and
manufacturing of tools and related molds which would provide funding and
additional revenue sources.
F-7
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2. - FINANCIAL CONDITION (CONTINUED)
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years and has used a significant amount
of working capital in its operations. Management believes that its operations as
restructured, together with its current financial resources will result in
profitable operations in fiscal 1999.
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards Changes - Effective January 1, 1998 the Company
adopted SFAS 128, Earnings Per Share, which requires dual presentation of basic
and diluted earnings per share on the face of the income statement.
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 and related disclosures. The adoption
did not change the Company's reportable segments.
Cash Equivalents - Cash equivalents include money market funds.
Restricted Funds - Restricted funds represent escrow funds set aside
pursuant to a capital lease financing arrangement to meet scheduled payments.
These funds are held in cash deposit and treasury trust accounts.
Inventories - Inventories of the Company consist of the following:
December 31,
------------------------------
1998 1997
---- ----
Raw materials $100,316 $ 59,800
Work-in-process 93,096 90,589
-------- --------
$193,412 $150,389
======== ========
Inventories are stated at the lower of cost (first-in, first-out) or
market.
F-8
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment - Additions to property and equipment are recorded
at cost and depreciated over their estimated useful lives utilizing both
accelerated and straight-line methods. The cost of improvements to leased
properties are amortized over the shorter of the lease term or the life of the
improvement. Maintenance and repairs are charged to expenses as incurred while
improvements are capitalized.
Inventoried Parts - Spare parts and supplies are stated principally at
cost.
Other Intangible Assets - Other intangible assets consist primarily of
goodwill and deferred financing costs. Goodwill represents the excess of the
purchase price over the fair values of net tangible assets of acquired
businesses and is amortized using the straight-line method over ten years.
Deferred financing costs are amortized using the straight-line method over the
terms of the debt instruments, which range from two to fifteen years.
The Company periodically reviews the recoverability of the carrying value
of its intangible assets. In determining whether there is an impairment, the
Company compares the sum of the expected future net cash flows (undiscounted and
without interest charges) to the carrying amount of the asset. In addition, the
Company will consider other significant events or changes in the economic and
competitive environments that may indicate the remaining estimated useful life
of its intangibles may warrant revision. At December 31, 1998, the Company
believes that no impairment of intangibles existed.
Investment in Subsidiary - The Company accounted for its 34% investment in
its subsidiary, SSC, under the equity method of accounting for 1998 and 1997.
Under the equity method, the Company recognizes its share of earnings and losses
of the subsidiary as accrued. Advances and distributions are recorded directly
in the investment account.
The Company's investment consists of approximately 70% of the Series A
preferred shares outstanding (see Note 4) which have voting rights equivalent to
the remaining shareholders, but its liquidation rights are subordinate to other
outstanding preferred shares. Accordingly, the Company recognized as its equity
in the losses, after the common shareholders, 70% of SSC's losses until its
original investment had been reduced to zero, which occurred during fiscal 1998.
Other Investment - The other investment represents a 7% preferred Series A
stock investment in Molecular Geodesics Inc. which is recorded at cost.
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 accompanying financial
statements and related footnotes.
Revenue Recognition - Revenue from job contract work is recognized as the
units are shipped, and consulting revenues are recognized as the consulting
services are provided. Revenue from research contracts is recognized over the
life of the contract as costs are incurred, or as contract milestones are met.
F-9
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs - All costs related to sponsored research
and development are expensed as incurred. Research and development expense was
$1,060,021, $770,758 and $125,354 for the years ended December 31, 1998, 1997
and 1996, respectively. The Company is a party to certain contracts under which
it is obligated to perform research and development activities for others and
also has entered into sub-contract arrangements with third parties for
performance of these activities. The terms of the agreements provide for payment
of fees for the services and in certain instances provides terms for licensing
and/or royalty fees. During the periods presented, the amounts earned and
incurred under the agreements were not significant to the Company's overall
operations.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense was approximately $69,000, $76,000 and $109,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Income Taxes - The Company and its wholly owned subsidiaries file
consolidated federal income tax returns. The Company's deferred tax asset and
liability have been determined in accordance with the provisions of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Concentration of Credit Risk - Credit is granted to substantially all LF
customers throughout the United States. LF maintains adequate reserves for
potential credit losses and such losses have been minimal and within
management's estimates. The allowance for doubtful accounts was $34,195 and
$48,329 at December 31, 1998 and 1997, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalent
accounts in financial institutions. Although the cash accounts exceed the
federally insured deposit amount, management does not anticipate non-performance
by the financial institutions. Management reviews the financial viability of
these institutions on a periodic basis.
Net Loss Per Common Share - Net loss per common share is based upon the
weighted average number of common shares outstanding during the periods.
Outstanding stock options, warrants and convertible debentures have not been
considered common stock equivalents because their assumed exercise would be
anti-dilutive.
Reclassifications - Certain amounts for 1997 and 1996 have been
reclassified to conform to the 1998 presentation.
F-10
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Estimates - The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Such estimates primarily relate to unsettled transactions
and events as of the date of the financial statements. Accordingly, actual
results may differ from estimated amounts.
Fair Value of Financial Instruments - The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable are reasonable estimates
of their fair value due to their short maturity. Based on the borrowing rates
currently available to the Company for loans similar to its term debt and notes
payable, the fair value approximates its carrying amount.
Accounting for Stock Issued to Employees - The Company accounts for its
stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation expense is recognized. In 1996, the
Company adopted Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS No. 123) for disclosure purposes;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plans as required by APB Opinion No. 25.
NOTE 4. - DISPOSAL OF A BUSINESS SEGMENT
On August 26, 1996, IGI acquired an 82% equity interest in Spectra Science
Corp. (SSC). The aggregate consideration paid for shares of Series A preferred
stock was $2,700,000. In 1997, IGI acquired an additional 200,000 Series A
preferred shares for consideration in the amount of $200,000. The preferred
shares are voting shares convertible into common shares on a one-for-one basis
at the option of IGI at any time. Mandatory conversion is required upon a public
offering of at least $3.00 per share with proceeds to SSC of at least $12
million. No shares have been converted through December 31, 1998.
Following is a summary of financial position and results of operations of
SSC:
Financial Position
December 31,
------------------------------
1998 1997
----------- ------------
Current assets $4,165,817 $5,808,524
Property and equipment, net 1,110,914 870,797
Intangibles, net 486,799 688,625
Other 18,600 2,602
---------- ----------
Total assets $5,782,130 $7,370,548
========== ==========
Current liabilities $1,231,373 $ 386,190
Notes payable 160,003 --
Stockholders' equity 4,390,754 6,984,358
---------- ----------
Total liabilities and stockholders'
equity $5,782,130 $7,370,548
========== ==========
F-11
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - DISPOSAL OF A BUSINESS SEGMENT (CONTINUED)
Results of Operations
Years Ended December 31,
------------------------
1998 1997
-------------- --------------
Revenues $ 3,726,073 $ 618,188
============ ==========
Net loss $ (2,810,979) $(2,814,191)
============ ===========
In September 1997, SSC issued approximately 1,650,000 shares of Series B
preferred stock to third party investors for $1.50 per share, for a total
aggregate consideration of approximately $2,300,000, net of issuance costs. This
transaction decreased IGI's ownership interest in SSC to 43%. In November 1997,
SSC issued approximately 1,778,000 shares of Series C preferred stock for $2.25
per share, for a total aggregate consideration of approximately $3,966,000, net
of issuance costs. This transaction decreased IGI's ownership interest in SSC to
34%. The Series B and C preferred shares have identical voting rights to that of
the Company's Series A preferred shares, but the Series B and C shares have
preferential liquidation rights. As a result of these transactions, IGI's share
of equity in the underlying net assets of SSC at December 31, 1997 exceeded its
investment account by approximately $1,674,000. This change in interest gain has
not been recognized in the accompanying financial statements due to the
Company's subordinated liquidation rights to the Series B and C preferred
shareholders whose investments gave rise to the gain.
As discussed in Note 2, on December 2, 1998 the Board of Directors
approved a plan to dispose of the Company's investment in SSC, which represented
its photonic materials business segment. Subsequently, in December 1998, the
Company entered into two separate agreements to sell its remaining 2,875,500
preferred shares of SSC, which had a recorded book value of zero under the
equity method of accounting. The first agreement called for an aggregate of
2,431,056 shares to be sold at a price of $2.25 per share to two unrelated
shareholders of SSC.
On December 31, 1998, 444,444 of the shares were sold pursuant to the
first agreement at the price of $2.25 per share, resulting in a gain of
approximately $832,000, net of income taxes. The terms of the agreement provided
for a deadline of February 15, 1999 for the purchase of the remaining 1,986,612
shares. If the second purchase did not occur, the Company was obligated to
continue to offer the shares for sale at $2.25 per share to accredited investors
until March 31, 1999. On February 28, 1999, the agreement was amended to include
the sale of 1,342,279 shares for $2.25 to the 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. This
transaction resulted in a gain of approximately $3,600,000, which will be
recorded in the first quarter of 1999. The resulting gain on the disposal and
the prior operating results of SSC have been reported under the heading
"Disposed Business Segment" in the accompanying statement of operations.
F-12
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - DISPOSAL OF A BUSINESS SEGMENT (CONTINUED)
In February 1999, the Company consummated a transaction pursuant to which
it repurchased 550,075 (2,750,377 prior to the reverse split (see Note 11))
shares of its common stock for treasury in exchange for 611,194 shares of SSC
stock valued at $1,375,187, or $2.25 per share. This transaction resulted in the
recognition of a gain on the exchange of approximately $1,375,000 in the first
quarter of fiscal 1999.
NOTE 5. - NOTES RECEIVABLE - STOCKHOLDERS
The promissory notes mature through December 2004 with interest at 6%,
payable quarterly, and are collateralized by shares of the Company's common
stock held by the stockholders. A valuation allowance of $271,350 ($230,900 -
1997) was recorded based on management's estimate of the net fair value of the
notes.
NOTE 6. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
Depreciable ------------------------
Lives 1998 1997
------------------- ---------- -----------
Land N/A $ 100,000 $ 100,000
Building and leaseholds 18 - 40 years 988,070 942,785
Machinery and equipment 5 - 10 years 4,725,135 3,986,164
Furniture and fixtures 5 - 7 years 552,340 530,075
---------- -----------
6,365,545 5,559,024
Accumulated depreciation
and amortization (1,923,207) (1,361,719)
---------- -----------
$4,442,338 $ 4,197,305
========== ===========
Included above is the following property and equipment held under capital
leases:
December 31,
-----------------------------
1998 1997
----------- -----------
Land $ 100,000 $ 100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 1,180,178 1,180,178
----------- -----------
2,005,940 2,005,940
Accumulated depreciation
and amortization (645,196) (488,200)
----------- -----------
$ 1,360,744 $ 1,517,740
=========== ===========
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $156,996, $157,368 and
$144,857 in 1998, 1997 and 1996, respectively.
F-13
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. - OTHER INTANGIBLE ASSETS
Other assets consists of the following:
December 31,
----------------------------
1998 1997
------------ ----------
Goodwill $ 273,972 $ 244,665
Deferred financing costs 229,452 90,873
---------- ----------
503,424 335,538
Accumulated amortization (160,859) (69,032)
---------- ----------
$ 342,565 $ 266,506
========== ==========
NOTE 8. - NOTES PAYABLE
Notes payable consists of the following:
December 31,
----------------------------
1998 1997
---------- ----------
Bank revolving demand notes (a) $ 522,757 $ 370,553
Notes payable, principal
stockholders(b) 231,031 70,000
---------- ----------
$ 753,788 $ 440,553
========== ==========
(a) Bank revolving demand notes - A demand note that provides for
borrowings of up to $400,000 that bears interest at a rate of prime
plus .50% (8.25% at December 31, 1998). As of December 31, 1998
there is $397,757 ($370,553 - 1997) outstanding on the line. A
second demand note that provides for borrowings of up to $125,000
that bears interest at a rate of prime plus .75% (8.50% at December
31, 1998). As of December 31, 1998 there was $125,000 ($-0- - 1997)
outstanding on the line. Both notes are secured by all of the assets
of LF and the guarantee of the Company.
(b) Note payable, principal stockholders - The 1998 amount consists of a
one year promissory note issued to the current principal stockholder
in the amount of $250,000. Interest payments are due monthly at the
rate of 9%. Principal payments are made as cash flow allows with the
remaining unpaid principal due in April 1999.
The 1997 amount consists of funds advanced to the Company from the
former principal stockholder of the Company under a secured demand
note which bears interest at a rate of 10%. The note was repaid in
full during the year ended December 31, 1998.
F-14
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - LONG TERM OBLIGATIONS
Long-term obligations consists of the following:
1998 1997
---------- ----------
Convertible debentures (a) $ 100,000 $ 100,000
Capital lease obligations (b) 1,176,072 1,331,646
Term notes (c) 1,333,418 1,277,356
---------- ----------
2,609,490 2,709,002
Less current maturities 307,628 242,340
---------- ----------
Total long-term obligations $2,301,862 $2,466,662
========== ==========
(a) Convertible debentures - Through December 31, 1996, the Company
issued $1,241,000 of convertible subordinated debentures due July
2000 with interest at 7%. The notes were convertible into common
stock at a rate equal to 80% of the prevailing market price of the
Company's common stock. Through December 31, 1996, debenture holders
converted $1,141,000 of outstanding principal to 121,627 shares of
common stock. In 1998 or 1997, there were no debentures, of this
series, issued or converted to common stock.
Interest expense has been recognized on the beneficial conversion
feature of the above convertible debentures issued by the Company.
The intrinsic value of the conversion feature is calculated at the
date of issue as the difference between the conversion price and the
fair value of the Company's common stock, multiplied by the number
of shares into which the debentures are convertible. This discount
resulting from the allocation of the proceeds increases the
effective interest rate of the security that is charged to interest
expense. The amortization period of the interest discount is from
the date of the issuance of the security to the date it first
becomes convertible. For the debentures issued during 1997 and 1996
of $1,100,000 and $5,241,000, respectively, interest expense
recognized for the beneficial conversion feature was $406,849 and
$1,393,555 for the years ended December 31, 1997 and 1996,
respectively.
(b) Capital lease obligations - The Company is obligated under a capital
lease for an operating facility. The lease provides for monthly
payments in amounts sufficient to allow for the repayment of the
principal of the underlying tax-exempt bonds together with interest
at rates ranging from 6% to 7.25%. Combined payments of principal
and interest are approximately $9,600 per month through June 2002
and $4,600 per month thereafter through June 2012.
The Company is also the lessee of machinery and equipment under
capital leases which expire in 1999 and 2001. The aggregate monthly
payments under these leases amount to approximately $5,400 including
interest at rates ranging from 8.25% to 9.25%.
F-15
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - LONG TERM OBLIGATIONS (CONTINUED)
(c) Term notes - A $1,250,000 term promissory note due in February 2011
bearing interest at prime plus 1% (8.75% at December 31, 1998). The
outstanding balance as of December 31, 1998 amounted to $1,130,366
($1,177,356 - 1997). The note is currently being repaid with monthly
principal and interest payments amounting to approximately $13,000.
This note is secured by substantially all of the assets of LF and is
guaranteed by the Company. The note contains restrictive covenants,
which, among other things, restricts the amount of capital
expenditures of LF to $100,000.
A $125,000 bank term promissory note due in July 2006, bearing
interest at prime plus 1% (8.75% at December 31, 1998). The
outstanding balance as of December 31, 1998 amounted to $120,199
($-0- - 1997). The note is currently being repaid with monthly
principal and interest payments amounting to approximately $1,800.
The note is secured by substantially all assets of LF and the
guarantee of the Company.
Two term promissory notes aggregating to $30,100, payable to the
previous shareholders of MLPC, due in February 2001 payable in
monthly installments of $971 including interest at the rate of 10%.
The aggregate outstanding balance at December 31, 1998 amounted to
$22,619 ($-0- - 1997).
A term promissory note due September 1999 payable in monthly
installments of $7,019, including interest at 10%. The note was
executed in April 1997 as partial satisfaction of the litigation
settlement recorded in 1996. The outstanding balance as of December
31, 1998 amounted to $60,234 ($100,000 - 1997).
Minimum future annual payments of long-term obligations as of December 31,
1998 for each of the next five years and in the aggregate are:
1999 $ 382,624
2000 428,381
2001 296,974
2002 267,573
2003 130,719
Thereafter 1,697,365
----------
Total minimum payments 3,203,636
Less:
Amount representing interest
on capital leases 594,146
----------
2,609,490
Less current maturities 307,628
Total long-term obligations $2,301,862
==========
F-16
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10 - NOTES PAYABLE - STOCKHOLDERS
The 1998 balance consists of a ten-year term promissory note to the
current chairman and principal stockholder. The note is currently being repaid
with monthly installments of $10,838, including interest at the one year
Treasury Bill rate plus 3.5%, adjusted annually, (9.0% at December 31, 1998).
The note matures in June 2008 when the remaining unpaid principal of
approximately $715,000 is due. Detachable warrants to purchase 536,000
(2,680,000 shares prior to reverse stock split - see Note 11) of common stock at
a price of $5.60 ($1.12 prior to the reverse stock split) were issued with this
note. One half or 268,000 of the warrants are fully exercisable upon issuance of
the note and the remaining warrants being exercisable in four equal allotments
of 67,000 through September 30, 1999. An additional 67,000 warrants became
exercisable on December 31, 1998. The warrants expire five years from the date
of issuance. At December 31, 1998, $529,902 of the proceeds of the note have
been allocated to the warrants which are exercisable at December 31, 1998 and is
reflected as additional paid-in capital - warrants in the accompanying balance
sheet. The note payable balance has been shown net of the discount allocated to
the warrants. This discount is being amortized to interest expense over the term
of the note. The unamortized discount at December 31, 1998 is $502,596. If the
note is repaid before its maturity the remaining unexercisable warrants are
cancelable.
The 1997 note payable balance consists of funds advanced to the Company
from the former chairman and principal stockholder of the Company under
convertible secured notes which matured through January 2000 with interest at
10%. The notes were convertible at rates between $5.65 and $23.15 in principal
for each share of common stock. During 1998, notes amounting to $106,743 were
forgiven as consideration for stock options exercised by the former chairman and
the remaining notes totaling $793,862 plus accrued interest of $30,032 were
converted to 101,355 shares of common stock.
Minimum future annual maturities of the note payable as of December 31,
1998 for each of the next five years and in the aggregate are:
1999 $ 29,206
2000 31,945
2001 34,942
2002 38,220
2003 41,805
Thereafter 957,639
---------
Total payments 1,133,757
Less unamortized note discount (502,596)
---------
Note payable balance after discount 631,161
Less current maturities 29,206
---------
Total long-term note payable $ 601,955
=========
F-17
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY
A. Reverse Stock Split
On February 16, 1999, the Company effected a one for five reserve
stock split of the Company's $.001 par value common stock. This
transaction was given retroactive effect in the accompanying
financial statements and related footnotes.
B. Preferred Stock
The certificate of incorporation authorizes the Board of Directors
to issue up to 1,000,000 shares of Series Preferred Stock. The stock
is issuable in series which may vary as to certain rights and
preferences and has a par value of $.01 per share.
C. Common Stock
In connection with the acquisition of LF in June 1994, the terms of
the purchase agreement provided that up to an additional 104,000
shares may be issued to the former owners of LF if certain earning
levels of LF are achieved. Through December 31, 1997, an aggregate
of 27,627 shares were earned at recorded share prices of $8.45 and
$9.70, which resulted in the recognition of additional aggregate
goodwill in the amount of $245,263.
In 1996, $4,241,000 in principal and $58,938 of related accrued
interest of subordinated convertible debentures were converted to
588,199 shares of common stock.
In 1996, warrants, notes and stock options were exercised in amounts
totaling $317,600 for which 50,396 shares of common stock were
issued. In addition, a license to utilize various technology was
acquired from Brown University in exchange in part for 2,000 shares
of common stock issued at a value of $30,000.
In 1997, the Company issued 32,389 shares of common stock, at a
discounted value of $175,000, to the Company's principal stockholder
in connection with the partial settlement by the principal
stockholder of certain litigation on behalf of the Company.
In 1997, the Company issued 384,615 shares of common stock in
exchange for aggregate consideration in the amount of $1,670,000.
In 1997, $1,600,000 in principal and $42,375 of related accrued
interest of subordinated convertible debentures were converted to
321,717 shares of common stock.
In 1997, $147,000 in principal and $10,100 of related accrued
interest of convertible notes payable were converted to 30,087
shares of common stock.
F-18
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY (CONTINUED)
In 1998, $793,862 in principal and $30,032 of related accrued
interest of convertible notes payable were converted to 101,355
shares of common stock.
In 1998, stock options were exercised in amounts totaling $106,743
for which 35,581 shares of common stock were issued.
In 1998, 13,100 shares of common stock valued at $33,482 were issued
as consideration for services performed for the Company.
D. Warrants
In connection with two private placement offerings of its common
stock, the Company issued to the underwriter and the placement
agent, warrants to purchase up to an aggregate of 6,361 shares of
common stock of the Company. The placement agent's warrants were
exercisable for a five-year term commencing on the closing date of
the initial offering of September 23, 1993 at an exercise price of
120% of the offering's per share price, or $12.10 per warrant. The
warrants expired unexercised during the year ended December 31,
1998.
In connection with the issuance of bridge financing notes in 1993
and the conversion of officer/stockholder advances to notes, the
noteholders were issued common stock purchase warrants. The warrants
issued to the officer/stockholder were issued at the rate of one
warrant for each $15 of note principal and exercisable over five
years from the date of issuance at the per share price of $8.65. The
warrants attached to the bridge financing notes were issued at the
rate of one warrant for each $20 of note principal and are
exercisable over five years from the date of issuance at the per
share exercise price of $5.00. The warrants expired during the year
ended December 31, 1998 and none were exercised.
In connection with the Company's public stock offering in 1993,
180,000 warrants were issued and were outstanding at December 31,
1997. The warrants were exercisable at $30.00 per share through
March 1997 and at $35.00 per share through their expiration in
September 1998. In connection with the sale of the warrants, the
Company issued to the underwriter warrants to purchase up to an
aggregate of 18,000 warrants at $62.00 per unit. The warrants
expired during the year ended December 31, 1998 and none were
exercised.
In connection with the issuance of convertible debentures in 1997,
the Company issued warrants to the placement agent to purchase up to
an aggregate of 10,775 shares of common stock of the Company. The
warrants are exercisable for a five-year term commencing February
1997 at an exercise price of $10.30 per share. No warrants were
exercised through December 31, 1998.
F-19
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11. - STOCKHOLDERS' EQUITY (CONTINUED)
In connection with issuance of notes payable to the current
principal stockholder during 1998, 536,000 detachable warrants were
issued (see Note 10).
In connection with services provided for the Company during 1998,
warrants to purchase 190,000 shares of common stock at prices
ranging from $2.50 to $5.00 were issued. The warrants expire at
various times through 2003. The value assigned to the warrants,
amounting to $25,683, has been reflected as additional paid-in
capital - warrants in the accompanying balance sheet.
NOTE 12. - STOCK OPTION PLANS
A. Employee Stock Option Plans
The Company has granted options to key employees to purchase shares
of the Company's common stock under stock option plans adopted in
1991, 1994, 1995, 1996, 1997 and 1998 authorizing the granting of
options to purchase an aggregate of 446,000 shares. Such options may
be designated at the time of grant as either incentive stock options
or nonqualified stock options. All options granted are to have a
term of ten years or such shorter term as may be provided at the
time of grant, are exercisable in equal annual increments as
stipulated at the time of grant, and vest over periods of three to
five years from the date of grant.
In 1997, the Company adopted an All Employee Incentive Stock Option
Plan whereby all full-time employees of the Company who meet certain
eligibility requirements will be granted stock options based on a
calculation equal to 1-1/2 options per dollar of biweekly base
salary. The option grant dates are January 2 and July 1. All options
granted are to have a term of ten years and become exercisable in
equal annual installments over three years. The options are only
exercisable so long as the optionee continues to be an employee of
the Company.
F-20
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCK OPTION PLANS (CONTINUED)
The following is a summary of stock option activity under these plans
for the past three years:
Number Weighted
of Shares Average
Under Option Exercise Price
------------ --------------
Outstanding at December 31, 1995 81,153 $ 8.85
Granted 20,000 8.75
Exercised (2,349) 8.00
Forfeited (1,637) 13.75
-------
Outstanding at December 31, 1996 97,167 $ 8.75
Granted 51,433 8.75
Forfeited (1,372) 7.80
-------
Outstanding at December 31, 1997 147,228 $ 8.75
Granted 118,772 5.20
Forfeited (21,821) 7.90
-------
Outstanding at December 31, 1998 244,179 $ 8.60
======= ======
Exercisable at December 31, 1998 106,791 7.15
======= ======
The average fair value of options granted under this plan were
$4.60, $7.75 and $7.85 per share for the years ended December 31,
1998, 1997 and 1996, respectively.
Exercise prices for options outstanding at December 31, 1998 range
from $2.50 per share to $13.75. The weighted average remaining
contractual life on the options outstanding at December 31, 1998 is
8.0 years.
B. Non-Qualified Stock Options
In 1993, the Company issued 35,581 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 $15 of note
principal and were exercisable over five years from the date of
issuance at the per share price of $3. The options were exercised
during the year ended December 31, 1998. Convertible notes payable
in the amount of $106,743 were forgiven as consideration.
F-21
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCK OPTION PLANS (CONTINUED)
On October 28, 1996, the Company entered into three non-qualified
stock option agreements with the president of the Company
authorizing the granting of options to purchase an aggregate of
60,000 shares. The options are exercisable in 20,000 increments if
the average closing price of the Company's common stock exceeds
$35.00, $50.00 and $65.00 per share, respectively, for a thirty
consecutive day period prior to December 31, 1999. The options
become exercisable in August 2005 if the prior conditions are not
met. The options expire ten years from the date of grant. The
exercise price of the options are $6.875 per share, which equaled
the market price of the shares at the date of grant. The fair value
of options granted under this plan during the year ended December
31, 1996 was $6.15 per share. No shares were exercisable at December
31, 1998.
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123 - "Accounting for
Stock-Based Compensation," and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net loss and loss per
share from continuing operations would have increased as follows:
1998 1997 1996
---------- ------- ---------
Net loss from continuing
operations - as reported $ 516 $ 2,364 $ 4,189
Net loss from continuing
operations - pro forma $ 952 $ 2,655 $ 4,716
Loss per share from continuing
operations - as reported $ .19 $ 1.14 $ 3.17
Loss per share from continuing
operations - pro forma $ .36 $ 1.28 $ 3.57
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
weighted-average assumptions:
1998 1997 1996
---------- ------- ---------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 93% 89% 92%
Risk-free interest rate 5.1% 6.3% 6.5%
Expected life of options 10 Years 10 Years 10 Years
F-22
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCK OPTION PLANS (CONTINUED)
C. Directors' Stock Option Plan
In April 1993, the Board of Directors and stockholders of the
Company adopted a non-discretionary outside directors' stock option
plan that provides for the grant to non-employee directors of
non-qualified stock options to purchase up to 10,000 shares of
common stock. In 1998, a total of 1,500 options were granted. At
December 31, 1998, there were 5,500 options outstanding (4,000 -
1997) to directors under this plan. These options are exercisable at
prices ranging from $1.875 to $15.00 per share.
NOTE 13. - INCOME TAXES
The Company recognizes deferred taxes using the asset and liability method
and recognizes future tax benefits measured by enacted tax rates attributed to
deductible temporary differences, available net operating tax loss
carryforwards, and tax credits to the extent that realization of such benefits
is more likely than not. The income tax provision for the year ended December
31, 1996 consisted entirely of state income taxes currently payable.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $13,096,000 and state net operating loss
carryforwards of approximately $5,400,000 which expire through 2013. Due to a
greater than 50% change in stock ownership during 1993, the utilization of net
operating loss carryforwards generated to the date of such change is limited.
At December 31, 1998, the Company also had approximately $123,000 in
research and development and state investment tax credit carryforwards which
will expire through 2013. At December 31, 1997, a net deferred tax asset,
representing the future benefit attributed primarily to the available net
operating loss carryforwards, in the amount of approximately $4,632,000 had been
fully offset by a valuation allowance because management believed that the
regulatory limitations on utilization of the operating losses and concerns over
achieving profitable operations diminish the Company's ability to demonstrate
that it is more likely than not that these future benefits will be realized.
As discussed further in footnote 4, during 1998, the Company entered into
an agreement to sell its investment in Spectra Science Corp. The total gain,
which will be realized for book and income tax reporting purposes, amounts to
approximately $6.07 million and $3.17 million, respectively. The difference in
the gain is attributed to the Company's equity interest in the losses of SSC
that were utilized to reduce the Company's cost basis for financial reporting
purposes but not for income tax reporting purposes. As a result of the gain that
will be realized on the sale for income tax purposes, there is the indication
that the Company will be able to utilize its net operating loss carryforwards to
eliminate the taxable gain. Accordingly, the Company has reassessed the
likelihood of realization of its net deferred tax assets and has determined that
a reduction in the beginning of year valuation allowance is required.
F-23
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - INCOME TAXES (CONTINUED)
Based upon the Company's current and estimated future taxable income, the
Company has determined that it is probable that the Company will realize a
deferred tax asset of $1,067,000 attributed to the utilization of the net
operating loss carryforwards. The valuation allowance at January 1, 1998 has
been reduced by this amount. The resulting deferred tax benefit of $1,067,000
has been included in income from continuing operations, of which $825,000 will
be realized in fiscal 1999 and has been reflected as a current deferred tax
asset at December 31, 1998. The balance of deferred tax benefit of $242,000 has
been realized in fiscal 1998, due to the current year loss from continuing
operations which has been utilized to offset the 1998 taxable gain on the sale
of SSC of approximately $604,000. The tax avoided of $242,000 has been charged
against the gain on the disposal of SSC.
A summary of the Company's temporary differences and carryforwards which
give rise to deferred tax assets and liabilities are as follows:
December 31,
--------------------------
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 4,773,000 $ 4,703,000
Equity method investment 972,000 --
Reserves and other 452,000 345,000
----------- -----------
6,197,000 5,048,000
Deferred tax liabilities:
Property and equipment (618,000) (416,000)
----------- -----------
Net deferred tax asset 5,579,000 4,632,000
Valuation allowance (4,754,000) (4,632,000)
----------- -----------
Net current deferred tax asset $ 825,000 $ --
=========== ===========
NOTE 14. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS
LF has a qualified salary reduction profit sharing 401(k) plan for
eligible employees. Participants may defer up to 20% of their compensation each
year up to the dollar limit set by the Internal Revenue Code. LF's contribution
to the profit-sharing plan is discretionary. During 1998, a $17,366 ($11,650 -
1997) contribution was made to the profit-sharing plan.
The Company maintains an executive incentive performance plan for
employees qualifying as corporate executives. Incentive awards are payable in
cash or common stock of the Company as determined by the employee. The maximum
award attainable under the plan cannot exceed between 50% to 100% of the
employee's base salary. There were no earnings under the plan for 1998, 1997 and
1996.
F-24
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - COMMITMENTS
A. Lease Commitments
The Company utilizes certain equipment, vehicles and facilities under
operating leases which expire at various dates through 2003. Rent
expense under operating leases for the years ended December 31, 1998,
1997 and 1996, was approximately $288,000, $128,000 and $207,000,
respectively.
The minimum operating lease payments required to be paid subsequent to
1998 are as follows:
1999 $ 175,786
2000 169,211
2001 114,286
2002 66,516
2003 36,876
----------
$ 562,675
==========
B. Employment Contract
The President and Chief Executive Officer of the Company is covered
under an employment agreement with a term expiring in 2000. The
agreement provides for minimum aggregate annual salary of $175,000
and, under certain circumstances, for a severance payment based upon
a multiple of past annual compensation.
C. Restricted Stock Grant
The Company, in 1997, issued 10,000 shares of common stock to a
director-consultant pursuant to a restricted stock agreement. The
agreement provided that the shares would vest ratably over a three
year period with the unvested portion subject, upon the occurrence
of certain events, to either forfeiture or accelerated vesting.
During 1997 the risk of forfeiture lapsed with respect to 5,000
shares and an expense in the amount of $21,875 was recognized.
During 1998, the risk of forfeiture lapsed with respect to the
remaining 5,000 shares and an expense was recognized in the amount
of $6,250.
NOTE 16. - RELATED PARTY TRANSACTIONS
Interest expense incurred under notes issued to the Company's principal
stockholders and former chairman, a family trust, the Company's CEO, and the
wife of the Company's CEO amounted to $102,179, $105,327 and $99,907, for the
years ended December 31, 1998, 1997 and 1996, respectively. The 1998 amount
includes $27,306 relating to the amortization of a note discount (see Note 10).
F-25
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 17. - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
1998 1997 1996
------------ ----------- -----------
Interest $360,664 $712,875 $ 407,800
======== ======== =========
Taxes $ 6,144 $ 4,385 $ 6,773
======== ======== =========
During 1998, 35,581 shares of common stock were issued in connection with
the exercise of non-qualified stock options. The consideration received for
these shares was the forgiveness of $106,743 of convertible notes payable. Also,
101,355 shares of common stock were issued in connection with the conversion of
notes payable from the former principal shareholder. In addition, a note payable
in the amount of $70,000 and corresponding accrued interest of $3,500 was repaid
with 24,500 shares of SSC. The Company also recorded $529,902 of additional
paid-in capital for detachable warrants issued with a note payable to the
current principal stockholder. In connection with the acquisition of MLPC, the
Company also recorded goodwill of approximately $29,000 relating to the excess
of the net liabilities assumed over the assets acquired of approximately $5,000.
During 1997, convertible debentures in the amount of $1,600,000 as well as
$42,375 of related accrued interest, were converted in to 321,717 shares of
common stock of the Company. In addition, convertible notes payable in the
amount of $140,000 as well as $10,433 of related accrued interest were converted
in to 30,087 shares of common stock. The Company also issued 9,727 shares of
common stock with a value of $94,228 to the former owners of LF pursuant to the
earn-out provisions of the purchase agreement. The Company also issued 32,389
shares of common stock at a discounted value of $175,000 to the principal
stockholder of the Company in connection with partial settlement of the 1996
litigation settlement.
During 1996, convertible debentures in the amount of $4,366,000 were
converted into 601,497 shares of common stock of the Company. In addition,
accrued interest on a note payable to one of the Company's officers was
converted into principal in the amount of $51,859. The Company also entered into
a capital lease obligation for the acquisition of equipment in the amount of
$250,000. The Company also refinanced short and long-term obligations in the
amount of $1,627,370. The Company issued 2,000 shares of common stock valued at
$30,000 for acquisition of a technology license from Brown University.
F-26
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 18. - 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.
In 1995, the Company had one primary operating segment, Laser Services,
which involves contract laser material processing services and laser technology
consulting services. This is the result of the suspended operation of the Rotary
Engine Development segment at that time.
In 1996, the Company began operating in two new segments following the
acquisition and creation of the two new subsidiaries: Rapid Tooling and
Manufacturing, and Photonic Materials Processing. Operations in the Rapid
Tooling and Manufacturing segment involve marketing proprietary high
productivity production injection mold tooling techniques developed by the
Advanced Technology Group of LF. Operations in the Photonic Materials Processing
segment involve commercialization and expansion of platform photonic
technologies; LaserPaint(TM), a patented discovery which allows almost any
material to be a generator of laser light; direct laser micro patterning of
glass; and "Quantum Dot Phosphors" which holds promise for better high
brightness, high definition video displays. During 1998, the Company decided to
discontinue and sell its photonic materials processing segment (see Note 4).
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 1998, 1997 and 1996 is set forth as follows:
F-27
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. - BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
===================================================================================================================================
Rotary Rapid
Engine Laser Photonic Tooling and
Development(1) Service(2) Materials(3) Manufacturing Eliminations Consolidated
-------------- ---------- ------------ ------------- ------------ ------------
1998
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ -- $ 6,953,199 $ $ 442,906 $ -- $ 7,396,105
Intersegment sales -- -- -- -- -- --
---------- ------------ ------------ ------------ ------------ -----------
Total revenue $ -- $ 6,953,199 $ -- $ 442,096 $ -- $ 7,396,105
========== ============ ============ ============ ============ ===========
Operating loss $ $ (441,083) $ -- $ (1,167,198) $ 362,985 $(1,245,296)
========== ============ ============ ============ ============ ===========
Net income from disposed business
segments $ -- $ $ 394,125 $ -- $ -- $ 394,125
============ ============ ============ ============ ===========
Interest income $ -- $ 40,287 $ -- $ -- $ -- $ 40,287
========== ============ ============ ============ ============ ===========
Interest expense $ -- $ 334,873 $ -- $ 38,532 $ -- $ 373,405
========== ============ ============ ============ ============ ===========
Income tax benefit $ -- $ 1,067,000 $ -- $ -- $ -- $ 1,067,000
========== ============ ============ ============ ============ ===========
Identifiable assets $ $ 8,026,057 $ -- $ 489,585 $ -- $ 8,515,642
========== ============ ============ ============ ============ ===========
Depreciation and amortization $ $ 553,775 $ -- $ 46,475 $ 28,611 $ 628,861
========== ============ ============ ============ ============ ===========
Capital expenditures $ -- $ 754,045 $ -- $ 76,125 $ -- $ 830,170
========== ============ ============ ============ ============ ===========
1997
Sales to unaffiliated customers $ -- $ 5,335,446 $ -- $ 113,129 $ -- $ 5,448,575
Intersegment sales -- 300,000 -- -- (300,000) --
---------- ------------ ------------ ------------ ------------ -----------
Total revenue $ -- $ 5,635,446 $ -- $ 113,129 $ (300,000) $ 5,448,575
========== ============ ============ ============ ============ ===========
Operating loss $ -- $ (939,882) $ -- $ (1,052,778) $ 261,026 $(1,731,634)
========== ============ ============ ============ ============ ===========
Income (loss) from discontinued
operations $ -- $ -- $ (1,958,520) $ -- $ -- $(1,958,520)
========== ============ ============ ============ ============ ===========
Interest income $ -- $ 39,154 $ -- $ -- $ -- $ 39,154
========== ============ ============ ============ ============ ===========
Interest expense $ -- $ 781,105 $ -- $ 23,768 $ -- $ 804,873
========== ============ ============ ============ ============ ===========
Identifiable assets $ -- $ 6,167,917 $ 437,375 $ 345,637 $ -- $ 6,950,929
========== ============ ============ ============ ============ ===========
Depreciation and amortization $ -- $ 704,123 $ -- $ 16,842 $ 20,747 $ 741,712
========== ============ ============ ============ ============ ===========
Capital expenditures $ -- $ 636,436 $ -- $ 318,270 $ -- $ 954,706
========== ============ ============ ============ ============ ===========
1996
Sales to unaffiliated customers $ -- $ 5,080,207 $ -- $ -- $ -- $ 5,080,207
Intersegment sales -- 36,650 -- -- (36,650) --
---------- ------------ ------------ ------------ ------------ -----------
Total revenue $ -- $ 5,116,857 $ -- $ -- $ (36,650) $ 5,080,207
========== ============ ============ ============ ============ ===========
Operating loss $ (95,797) $ (2,518,080) $ -- $ (110,537) $ 241,317 $(2,483,097)
========== ============ ============ ============ ============ ===========
Income (loss) from discontinued
operations $ -- $ -- $ (504,105) $ -- $ -- $ (504,105)
========== ============ ============ ============ ============ ===========
Interest income $ -- $ 91,517 $ -- $ -- $ -- $ 91,517
========== ============ ============ ============ ============ ===========
Interest expense $ -- $ 1,815,465 $ -- $ -- $ -- $ 1,815,465
========== ============ ============ ============ ============ ===========
Identifiable assets $ 34,833 $ 5,718,537 $ 2,883,781 $ 49,994 $ (27,476) $ 8,659,669
========== ============ ============ ============ ============ ===========
Depreciation and amortization $ 16,087 $ 970,966 $ -- $ 5,595 $ 14,136 $ 1,006,784
========== ============ ============ ============ ============ ===========
Capital expenditures $ -- $ 251,664 $ 347,485 $ 57,915 $ -- $ 657,064
========== ============ ============ ============ ============ ===========
</TABLE>
(1) Includes parent holding company, 1996.
(2) Includes parent holding company, 1997 and 1998.
(3) Represents SSC (see Note 4).
F-28
<PAGE>
INFINITE GROUP, INC.
(FORMERLY INFINITE MACHINES CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 19. - FOURTH QUARTER ADJUSTMENTS
There were no material adjustments recognized in the fourth quarter of
fiscal 1998 and 1997.
The fourth quarter for the year ended December 31, 1996 reflected net
adjustments which decreased the operating results of the Company by
approximately $1,689,000. Approximately $649,000 is attributed to a litigation
settlement, $29,000 was charged off in recognition of inventory adjustments,
notes and other receivables were adjusted by a valuation allowance of $504,000,
a bonus was accrued to the President of the Company in the amount of $75,000,
and approximately $432,000 of deferred costs were charged to expense upon
conversion of debentures.
NOTE 20. - SUBSEQUENT EVENT
In February, 1999 the Company disposed of its remaining preferred stock
interest in Spectra Science Corp. (see Note 4).
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
March 15, 1999 on its behalf by the undersigned, thereunto duly authorized.
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre
--------------------------------
Clifford G. Brockmyre, President
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Clifford G. Brockmyre
- ------------------------- Director, President and
Clifford G. Brockmyre Chief Executive Officer March 15, 1999
/s/ Daniel T. Landi
- ------------------------- Chief Financial and March 15, 1999
Daniel T. Landi Accounting Officer
/s/ Michael S. Smith
- ------------------------- Director March 15, 1999
Michael S. Smith
/s/ James P. Sherblom
- ------------------------- Director March 15, 1999
James P. Sherblom
Certificate of Amendment
to the
Certificate of Incorporation
of
Infinite Group, Inc.
The undersigned, being the President and Secretary of Infinite Group, Inc.
(the "Corporation") hereby certifies that:
FIRST: The name of the Corporation is Infinite Group, Inc.
SECOND: The Certificate of Incorporation was filed with the Secretary of
State on October 14, 1986.
THIRD: The Amendment of the Certificate of Incorporation of the
Corporation effected by this Certificate of Amendment is to effectuate a
one-for-five reverse split. Prior to this amendment, the Corporation had
20,000,000 shares of common stock, $.001 par value per share authorized, of
which 13,326,000 shares of common stock, $.001 par value per share, were issued
and outstanding. Upon the reverse split becoming effective, the Corporation will
have 20,000,000 shares of common stock, $.001 par value per share authorized, of
which approximately 2,665,200 shares of common stock, $.001 par value per share,
will be issued and outstanding. Fractional shares which result from the reverse
split shall be rounded upward to the nearest whole share.
FOURTH: To accomplish the foregoing amendment, Article FOURTH is hereby
amended and restated as follows:
"FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is twenty-one million (21,000,000)
shares of which twenty million (20,000,000) shares shall be Common
Stock with a par value of each of $.001 per share and one million
(1,000,000) shares shall be Preferred Stock with a par value of $.01
per share.
Additional designations of powers, the rights and preferences
and the qualifications, limitations or restrictions with respect to
each class of stock of the corporation shall be determined by the
Board of Directors from time to time.
In furtherance of a one-for-five reverse stock split effective
on February 16, 1999 at 7:00 a.m. Eastern Standard Time, every five
shares of common stock issued and outstanding at that time shall be
converted into one share of common stock, par value $.001 per share,
for each stockholder of record on the close of business on February
12, 1999. Fractional shares shall be rounded upward to the nearest
whole share.
<PAGE>
No holder of any shares of the stock of the corporation,
whether now or hereafter authorized and issued, shall be entitled as
of right to purchase or subscribe for (1) any unissued stock of any
class, or (2) any additional shares of any class to be issued by
reason of any increase of the authorized capital stock of the
corporation of any class, or (3) bonds, certificates of
indebtedness, debentures or other securities convertible into stock
of the corporation, or carrying any right to purchase stock of any
class, but any such unissued stock or such additional authorized
issue of any stock or of other securities convertible into stock, or
carrying any right to purchase stock, may be issued and disposed of
pursuant to resolution of the Board of Directors to such person,
firms, corporations or associations and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its
discretion."
FIFTH: The foregoing amendment was adopted by the directors and
stockholders of the Corporation at duly called meetings of the board and
stockholders, respectively, in accordance with the provisions of ss.242 of the
General Corporation Law.
IN WITNESS WHEREOF, this Certificate is subscribed on the 3rd day of
February, 1999 by the undersigned who affirm under penalties of perjury that the
statements contained herein are true and correct.
-------------------------------------
Clifford G. Brockmyre, President
-------------------------------------
Daniel T. Landi, Secretary
2
COMMON STOCK PURCHASE AGREEMENT
COMMON STOCK PURCHASE AGREEMENT dated as of the 19th day of February, 1999
by and among CLEARWATER FUND IV, LLC ("Seller") and INFINITE GROUP, INC. (the
"Company" or "Purchaser").
W I T N E S S E T H:
WHEREAS, Seller is the holder of a 2,493,277 shares of Common Stock, $.001
par value, of the Company (the "Securities"); and
WHEREAS, the Company desires to acquire the Securities from Seller, and
Seller is willing to sell the Securities to the Company, all upon the terms and
subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
unconditionally acknowledged, the parties hereto do hereby agree as follows:
1. Purchase and Sale. Upon the terms and subject to the conditions
hereinafter set forth, Purchaser hereby purchases the Securities from the Seller
and the Seller hereby sells the Securities to Purchaser, for the "Purchase
Price" (as hereinafter defined). The Purchase Price shall consist of 554,062
shares of Series A Convertible Preferred Stock of Spectra Science Corporation
(the "Spectra Stock").
2. Closing. The closing of the transaction contemplated hereby shall be
deemed to have occurred on the date hereof. On the date hereof, Seller shall
cause to be delivered to the Company certificates representing the Securities
duly endorsed for transfer to the Company. The Company shall deliver to Spectra
Science Corporation ("Spectra") the certificate(s) representing the Spectra
Stock duly endorsed for transfer to the Seller with instructions for reissuance
in accordance with the written instructions of Seller.
3. Representations and Warranties of Seller. Seller hereby represents and
warrants to the Purchaser as follows:
(a) Seller owns the Securities being sold hereunder and hereby
transfers same to Purchaser, free and clear of any liens, pledges, security
interests or encumbrances of any kind or nature whatsoever.
(b) Seller is not party to or bound by any agreement which prohibits
the sale by Seller to Purchaser of the Securities to be sold by Seller
hereunder.
<PAGE>
(c) All action on the part of Seller necessary for the
authorization, execution, delivery and performance of this Agreement has been
properly taken and obtained and this Agreement constitutes a legally binding
obligation of Seller enforceable in accordance with its terms.
(d) Seller is an "accredited investor" as that term is defined in
Rule 501(a)(3) of Regulation D under the Securities Act of 1933, as amended.
Seller is acquiring the Spectra Stock for investment and not with a view to the
sale or distribution thereof. Seller is aware that the shares of Spectra Stock
are restricted securities within the meaning of the Act and the rules and
regulations of thereunder, and acknowledges and understands that the Securities
may not be offered or sold, directly or indirectly, unless registered or exempt
from registration under the Act. Seller further acknowledges that the Spectra
Stock shall be subject to the Shareholders' Agreement between Seller, Spectra
and certain other shareholders of Spectra.
(e) Seller hereby acknowledges that it is an existing Shareholder of
Spectra and that it is acquiring the Spectra Stock based upon its personal
knowledge of Spectra's business, assets and financial affairs without any
representations or warranties whatsoever with respect to the business, assets or
financial affairs of Spectra by the Company. Seller has had an opportunity to
meet with management of Spectra in furtherance of its due diligence
investigation with respect to this transaction.
4. Representations and Warranties of Company. Purchaser hereby represents
and warrants to the Seller as follows:
(a) Seller owns the Securities being sold hereunder and hereby
transfers same to Purchaser, free and clear of any liens, pledges, security
interests or encumbrances of any kind or nature whatsoever; except for those
restrictions and other encumbrances set forth in the Shareholders' Agreement
(the "Shareholders' Agreement") among, inter alia, Seller and Spectra.
(b) The Company has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated by
this Agreement; this Agreement constitutes the valid and binding obligation of
the Company enforceable in accordance with its terms.
5. Indemnity. Each party (the "Indemnifying Party") hereto does hereby
indemnify and hold harmless the other parties (the "Indemnified Parties") to
this Agreement against and from any and all loss, liability, claim, damage and
expense (including, without limitation, attorneys' fees and disbursements)
incurred as a result of a misrepresentation, or breach of an agreement or
warranty, made by the Indemnifying Party whether made orally or contained herein
or in any other document furnished by the Indemnifying Party to any of such
persons in connection with this transaction. The parties acknowledges that this
obligation will survive the purchase of Securities hereunder.
2
<PAGE>
6. Sole and Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof,
superseding and terminating any and all prior or contemporaneous oral and prior
written agreements or understandings between or among the parties hereto with
respect to the subject matter of this Agreement. This Agreement may not be
modified or amended, nor may any right hereunder be waived, except by a written
instrument which expressly refers to this Agreement, states that it is a
modification or amendment of this Agreement and is signed by the party to be
bound thereby, or in the case of a waiver, by the party granting the waiver. No
course of conduct or dealing or trade usage or custom and no course of
performance shall be relied on or referred to by any party to contradict,
explain or supplement any provision of this Agreement, it being acknowledged by
the parties to this Agreement that this Agreement is intended to be, and is, the
complete and exclusive statement of the agreement of the parties hereto with
respect to its subject matter.
7. Severability. If any term or provision of this Agreement shall, to any
extent, be or is determined to be invalid or unenforceable, the remaining terms
and provisions thereof shall nevertheless continue in full force and effect.
8. Counsel. Each of the parties hereto has been represented by counsel, or
had the opportunity to be so represented, in connection with the negotiation,
execution and delivery of this Agreement and each of the parties hereto shall
bear their respective costs and expenses (including counsel fees) incurred in
connection with the execution, delivery and performance of this Agreement.
9. Notices. All notices provided for, and other communications required
under, this Agreement shall be in writing and shall be sent by certified or
registered mail, or international equivalent, return receipt requested, or may
be delivered by hand or overnight courier service against receipt or sent by
facsimile transmission or other similar means of communication if receipt is
acknowledged or transmission is confirmed as provided in this Paragraph 9 and
addressed to the parties as follows:
(a) If to Seller, to it at:
Clearwater Fund IV, LLC
611 Druid Road East, Suite 200
Clearwater, FL 34616
Attn: Hans F. Heye, Managing Member
(b) If to the Company, to it at:
Infinite Group, Inc.
2364 Post Road
Warwick, RI 02886
Attn: Clifford C. Brockmyre, CEO
3
<PAGE>
With a copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, NY 10022-2605
Attn: Kenneth S. Rose, Esq.
Any party hereto may, by like notice, change the address or telecopier number to
which notice shall thereafter be sent.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
executed and to be performed wholly within such State. Each of the parties
hereto hereby(i) irrevocably consents and agrees that any legal or equitable
action or proceeding arising under or in connection with this Agreement shall be
brought exclusively in any Federal or state court in the County of New York,
State of New York, (ii) by execution and delivery of this Agreement, irrevocably
submits to and accepts, with respect to such party and its properties and
assets, generally and unconditionally, the jurisdiction of the aforesaid courts,
and (iii) waives any defense that such forum is an inconvenient forum for such
purpose.
11. Non-Assignability. This Agreement shall not be assigned without the
written consent of all of the parties hereto.
12. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, heirs, personal
representatives and permitted assigns.
13. Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14. Further Assurances. Each of the parties hereto agrees at their own
expense to take such further action as is reasonably necessary in order to
fulfill the intent of the parties with respect to the transfer of the Securities
and the Spectra Stock pursuant hereto.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the day and year first above written.
CLEARWATER FUND IV, LLC
By:
-----------------------------------
Name: Hans F. Heye
Title: Managing Member
INFINITE GROUP, INC.
By:
-----------------------------------
Name: Clifford C. Brockmyre
Title: Chief Executive Officer
COMMON STOCK PURCHASE AGREEMENT
COMMON STOCK PURCHASE AGREEMENT dated as of the 19th day of February, 1999
by and among CLEARWATER OFFSHORE FUND, LTD ("Seller") and INFINITE GROUP, INC.
(the "Company" or "Purchaser").
W I T N E S S E T H:
WHEREAS, Seller is the holder of a 257,100 shares of Common Stock, $.001
par value, of the Company (the "Securities"); and
WHEREAS, the Company desires to acquire the Securities from Seller, and
Seller is willing to sell the Securities to the Company, all upon the terms and
subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
unconditionally acknowledged, the parties hereto do hereby agree as follows:
1. Purchase and Sale. Upon the terms and subject to the conditions
hereinafter set forth, Purchaser hereby purchases the Securities from the Seller
and the Seller hereby sells the Securities to Purchaser, for the "Purchase
Price" (as hereinafter defined). The Purchase Price shall consist of 57,133
shares of Series A Convertible Preferred Stock of Spectra Science Corporation
(the "Spectra Stock").
5
<PAGE>
2. Closing. The closing of the transaction contemplated hereby shall be
deemed to have occurred on the date hereof. On the date hereof, Seller shall
cause to be delivered to the Company certificates representing the Securities
duly endorsed for transfer to the Company. The Company shall deliver to Spectra
Science Corporation ("Spectra") the certificate(s) representing the Spectra
Stock duly endorsed for transfer to the Seller with instructions for reissuance
in accordance with the written instructions of Seller.
3. Representations and Warranties of Seller. Seller hereby represents and
warrants to the Purchaser as follows:
(a) Seller owns the Securities being sold hereunder and hereby
transfers same to Purchaser, free and clear of any liens, pledges, security
interests or encumbrances of any kind or nature whatsoever.
(b) Seller is not party to or bound by any agreement which prohibits
the sale by Seller to Purchaser of the Securities to be sold by Seller
hereunder.
(c) All action on the part of Seller necessary for the
authorization, execution, delivery and performance of this Agreement has been
properly taken and obtained and this Agreement constitutes a legally binding
obligation of Seller enforceable in accordance with its terms.
(d) Seller is an "accredited investor" as that term is defined in
Rule 501(a)(3) of Regulation D under the Securities Act of 1933, as amended.
Seller is acquiring the Spectra Stock for investment and not with a view to the
sale or distribution thereof. Seller is aware that the shares of Spectra Stock
are restricted securities within the meaning of the Act and the rules and
regulations of thereunder, and acknowledges and understands that the Securities
may not be offered or sold, directly or indirectly, unless registered or exempt
from registration under the Act. Seller further acknowledges that the Spectra
Stock shall be subject to the Shareholders' Agreement between Seller, Spectra
and certain other shareholders of Spectra.
(e) Seller hereby acknowledges that it is an existing Shareholder of
Spectra and that it is acquiring the Spectra Stock based upon its personal
knowledge of Spectra's business, assets and financial affairs without any
representations or warranties whatsoever with respect to the business, assets or
financial affairs of Spectra by the Company. Seller has had an opportunity to
meet with management of Spectra in furtherance of its due diligence
investigation with respect to this transaction.
4. Representations and Warranties of Company. Purchaser hereby represents
and warrants to the Seller as follows:
(a) Seller owns the Securities being sold hereunder and hereby
transfers same to Purchaser, free and clear of any liens, pledges, security
interests or encumbrances of
2
<PAGE>
any kind or nature whatsoever; except for those restrictions and other
encumbrances set forth in the Shareholders' Agreement (the "Shareholders'
Agreement") among, inter alia, Seller and Spectra.
(b) The Company has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated by
this Agreement; this Agreement constitutes the valid and binding obligation of
the Company enforceable in accordance with its terms.
5. Indemnity. Each party (the "Indemnifying Party") hereto does hereby
indemnify and hold harmless the other parties (the "Indemnified Parties") to
this Agreement against and from any and all loss, liability, claim, damage and
expense (including, without limitation, attorneys' fees and disbursements)
incurred as a result of a misrepresentation, or breach of an agreement or
warranty, made by the Indemnifying Party whether made orally or contained herein
or in any other document furnished by the Indemnifying Party to any of such
persons in connection with this transaction. The parties acknowledges that this
obligation will survive the purchase of Securities hereunder.
6. Sole and Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof,
superseding and terminating any and all prior or contemporaneous oral and prior
written agreements or understandings between or among the parties hereto with
respect to the subject matter of this Agreement. This Agreement may not be
modified or amended, nor may any right hereunder be waived, except by a written
instrument which expressly refers to this Agreement, states that it is a
modification or amendment of this Agreement and is signed by the party to be
bound thereby, or in the case of a waiver, by the party granting the waiver. No
course of conduct or dealing or trade usage or custom and no course of
performance shall be relied on or referred to by any party to contradict,
explain or supplement any provision of this Agreement, it being acknowledged by
the parties to this Agreement that this Agreement is intended to be, and is, the
complete and exclusive statement of the agreement of the parties hereto with
respect to its subject matter.
7. Severability. If any term or provision of this Agreement shall, to any
extent, be or is determined to be invalid or unenforceable, the remaining terms
and provisions thereof shall nevertheless continue in full force and effect.
8. Counsel. Each of the parties hereto has been represented by counsel, or
had the opportunity to be so represented, in connection with the negotiation,
execution and delivery of this Agreement and each of the parties hereto shall
bear their respective costs and expenses (including counsel fees) incurred in
connection with the execution, delivery and performance of this Agreement.
9. Notices. All notices provided for, and other communications required
under, this Agreement shall be in writing and shall be sent by certified or
registered mail, or international equivalent, return receipt requested, or may
be delivered by hand or overnight
3
<PAGE>
courier service against receipt or sent by facsimile transmission or other
similar means of communication if receipt is acknowledged or transmission is
confirmed as provided in this Paragraph 9 and addressed to the parties as
follows:
(a) If to Seller, to it at:
Clearwater Offshore Fund, Ltd.
611 Druid Road East, Suite 200
Clearwater, FL 34616
Attn: Hans F. Heye, Managing Member
(b) If to the Company, to it at:
Infinite Group, Inc.
2364 Post Road
Warwick, RI 02886
Attn: Clifford C. Brockmyre, CEO
With a copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, NY 10022-2605
Attn: Kenneth S. Rose, Esq.
Any party hereto may, by like notice, change the address or telecopier number to
which notice shall thereafter be sent.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
executed and to be performed wholly within such State. Each of the parties
hereto hereby(i) irrevocably consents and agrees that any legal or equitable
action or proceeding arising under or in connection with this Agreement shall be
brought exclusively in any Federal or state court in the County of New York,
State of New York, (ii) by execution and delivery of this Agreement, irrevocably
submits to and accepts, with respect to such party and its properties and
assets, generally and unconditionally, the jurisdiction of the aforesaid courts,
and (iii) waives any defense that such forum is an inconvenient forum for such
purpose.
11. Non-Assignability. This Agreement shall not be assigned without the
written consent of all of the parties hereto.
12. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, heirs, personal
representatives and permitted assigns.
4
<PAGE>
13. Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14. Further Assurances. Each of the parties hereto agrees at their own
expense to take such further action as is reasonably necessary in order to
fulfill the intent of the parties with respect to the transfer of the Securities
and the Spectra Stock pursuant hereto.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the day and year first above written.
CLEARWATER OFFSHORE FUND, LTD
By:
-----------------------------------
Name: Hans F. Heye
Title: Managing Member
INFINITE GROUP, INC.
By:
-----------------------------------
Name: Clifford C. Brockmyre
Title: Chief Executive Officer
LOAN AGREEMENT
INFINITE GROUP, INC., a Delaware corporation, with its principal office at
2364 Post Road, Warwick, RI 02886 (hereinafter referred to as "Borrower"), and
CLIFFORD G. BROCKMYRE, having an address at 335 West Beach Road, Charlstown, RI
02813 (hereinafter referred to as "Lender"), hereby enter into this Loan
Agreement ("Agreement") dated as of June 26, 1998.
SECTION 1. CERTAIN DEFINITIONS
1.1 The following terms used in this Agreement will have the meanings
given below:
Claims and Expenses Any and all claims, lawsuits of any kind,
judgments, losses, damages, liabilities,
penalties, costs and reasonable expenses
arising out of transactions contemplated
under this Agreement or under the Collateral
Documents, including all "Legal Costs and
Expenses" (defined below) incurred in
connection therewith.
Collateral Documents The Note and the Warrant.
Loan Defined in Section 2.1.
Loan Amount $1,150,000.00.
Loan Closing and the
Loan Closing Date Defined in Section 2.2.
Legal Costs and Expenses Any and all reasonable attorneys' fees and
disbursements, court costs and other
litigation expenses.
Maturity Date June 26, 2008.
Note Defined in Section 2.2.
<PAGE>
Shares Borrower's shares of common stock, par value
$.001 per share.
Warrant The warrant to be issued to the Lender
pursuant to Section 3 of this Agreement.
SECTION 2. THE LOAN
2.1 Simultaneously with the execution of this Agreement, Lender is making
a loan (the "Loan") to Borrower in the principal amount of $1,150,000 US
Dollars, receipt of which is hereby acknowledged by Borrower.
2.2 The Loan is evidenced by a promissory note ("the Note") made by
Borrower payable to Lender, which is being executed and delivered to Lender
contemporaneously herewith (such loan and delivery being hereinafter called the
"Loan Closing" and the date thereof being hereinafter called the "Loan Closing
Date"). A copy of the Note is attached to this Agreement as Exhibit 1.
2.3 The Note is payable in accordance with its provisions which include,
inter alia:
(a) interest at the rate of 9% per annum on the unpaid balance of
the Note adjusted as described on Rider A hereto (the "Interest Rate
Adjustment");
(b) equal monthly payments of $10,838.23 commencing on July 1, 1998
and on the first day of each month thereafter to and including June 1, 2008
(which monthly payments shall include both principal and interest), adjusted
annually to give effect to the Interest Rate Adjustment;
(c) a final payment equal to all unpaid principal and accrued
interest payable on June 26, 2008;
(d) the right to Borrower, exercisable at any time prior to the
Maturity Date to prepay, without penalty, all or part (each such payment being a
minimum of $10,000 or covering the unpaid balance of the Note) of the unpaid
principal amount and accrued interest thereon of the Note; and
(e) the principal of the Note and accrued interest thereon shall
become immediately due and payable upon the occurrence of an Event of Default.
2
<PAGE>
2.4 The obligation of Lender to make the Loan shall be conditioned on the
satisfaction of Lender that the representations and warranties of Borrower
contained in this Agreement and in the Collateral Documents are true, complete
and correct. Borrower understands and agrees that any investigation by Lender
shall in no way limit the responsibility of the Borrower for such
representations and warranties being true, complete and correct.
2.5 Notwithstanding any provision in this Agreement or in the Note, in no
event shall the interest rate applicable to the Loan exceed that permitted by
the laws or governmental regulations applicable to Lender, Borrower or the Loan
that limit rates of interest that may be charged or collected by Lender. If any
payment hereunder or under the Note shall be found to constitute a payment of
interest in excess of that permitted under the laws or governmental regulations
applicable to Lender, Borrower or the Loan that limit rates of interest that may
be charged or collected by Lender, then the amount of such excess payment shall
be refunded to Borrower.
SECTION 3. WARRANT
3.1 Simultaneously with the Closing hereunder Borrower has delivered to
Lender a warrant, a copy of which is attached hereto as Exhibit 3 (the
"Warrant"), to purchase up to 2,680,000 Shares, at an exercise price equal to
$1.12 per share.
3.2 In the event of any change in the number of outstanding Shares by
reason of any reclassification, recapitalization, split-up, combination, merger,
exchange of Shares, stock dividend or the like, which has occurred prior to the
issuance date of any of the Warrant referred to in Section 3.1, the number of
Shares to which such Warrant shall apply and the price per share at which such
Warrant shall be exercisable shall be correspondingly adjusted.
3
<PAGE>
SECTION 4. USE OF PROCEEDS
4.1. The proceeds of the Loan will be used by Borrower for working capital
purposes.
SECTION 5. CLOSING DOCUMENTS
5.1 Simultaneously with the execution and delivery of this Agreement, the
Loan is being funded and Borrower is delivering or has delivered to Lender the
following documents, duly executed and (where required) witnessed or notarized:
(a) the Note;
(b) Secretary's Certificate of Borrower as to resolutions of its
Board of Directors authorizing (i) the borrowing hereunder, (ii) the issuance of
the Warrants, and (iii) the execution and delivery of this Agreement, the
Collateral Documents and the transactions contemplated hereby and thereby; and
(c) the Warrant.
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS
6.1 To induce Lender to make the Loan hereunder, Borrower represents and
warrants to and agrees with Lender that:
(a) Borrower is a corporation duly and validly existing and in good
standing under the laws of the State of Delaware and is qualified to do business
in such other jurisdictions where the ownership of property or the nature of the
business conducted by it requires such qualification, except insofar as the
failure to so qualify would not materially and adversely affect Borrower.
(b) Borrower has the requisite corporate authority and power to
enter into this Agreement, to borrow money as contemplated hereby, to issue the
Note and the Warrant and to execute and deliver each of those documents required
and described in this Agreement. The execution and delivery of this Agreement,
the Collateral Documents and the Warrant have been duly authorized by Borrower
and this Agreement, the Collateral Documents and the Warrants are enforceable
against Borrower in accordance with their terms.
4
<PAGE>
SECTION 7. CERTAIN AFFIRMATIVE COVENANTS
7.1 So long as any amount due to Lender pursuant to the Note, this
Agreement or any of the other Collateral Documents is outstanding, the Borrower
will do and comply with the following:
(a) Borrower will promptly make all payments of the principal and
interest on the Note when due; and
(b) Borrower will comply with the terms and conditions of this
Agreement and of those contained in each Collateral Document.
SECTION 8. CERTAIN NEGATIVE COVENANTS
8.1 So long as any amount due to Lender pursuant to the Note, this
Agreement or any of the other Collateral Documents is outstanding, except with
the prior written consent of Lender (whose consent, except as otherwise
indicated below, may be refused without explanation and without any legal
recourse by Borrower), Borrower will not:
(a) engage in any line of business materially different from those
which Borrower is now engaged in; or
(b) become a party to any merger or consolidation with any
corporation, company or entity of any kind whatsoever, or sell substantially all
of its assets, or otherwise liquidate or dispose of its business.
SECTION 9. IRREGULAR PAYMENT
9.1 Lender may accept late payments and partial payments even though
marked "payment in full" or words of similar import, without losing any of its
rights under this Agreement or under the Note.
SECTION 10. DELAY IN ENFORCEMENT
10.1 Lender may delay in enforcing its rights under this Agreement or a
Collateral Document without losing or prejudicing such rights.
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<PAGE>
SECTION 11. NO BROKER
11.1 Borrower represents and warrants to Lender that it has not dealt with
any broker or finder, whether or not licensed, in connection with this Agreement
or the loan transactions under this Agreement. Lender represents and warrants
that it has not dealt with any broker or finder.
SECTION 12. LOAN EXPENSES
12.1 Borrower agrees and acknowledges that Lender is simultaneously
entering into a series of loan agreements with First National Bank of New
England and Borrower agrees to pay, promptly after demand is made, all
reasonable out-of-pocket expenses incurred by Lender in connection with the
making, amending, perfection, enforcement or payment or liquidation of such loan
agreements and the Loan which is the subject of this Agreement, including (but
not limited to) Lender's legal fees and disbursements, title fees, title
insurance fees, bank consultant fees, appraisal fees, mortgage recording fees
and mortgage taxes, bank attorneys' fees and any other expense incurred, or to
be incurred by Lender in connection with his loans from First National Bank of
New England the proceeds of which are being used to fund the Loan.
SECTION 13. NOTICES
13.1 Unless otherwise expressly provided elsewhere in this Agreement, any
notice, request, consent, election, demand or other communication ("notice") to
be given or made by the parties under this Agreement must be in writing and
either:
(a) delivered by hand, telecopier or overnight delivery by Federal
Express or other recognized carrier; or
(b) sent by certified or registered mail, return receipt requested,
postage prepaid.
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13.2 Each notice to be given to Lender or Borrower will be addressed to it
at its address set forth in the preamble on page 1 of this Agreement.
13.3 A copy of each notice must be sent simultaneously and in like manner
to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue, Suite 902
New York, New York 10022
Attn: Kenneth S. Rose, Esq.
Fax: 212-838-9190
13.4 Borrower and Lender may, by notice to the others, change the address
to which future notices are to be sent or add or change a person to whom a
notice or a copy of a notice is to be sent.
13.5 Unless otherwise provided elsewhere in this Agreement, each notice
shall be considered to be given on:
(a) the date delivered by hand or telecopier (unless it is not a
business day or is not received before 5:30 P.M., in which case the notice shall
be considered given on the next business day after being sent);
(b) the next business day after being sent by overnight courier;
(c) the third full business day following the date of mailing
postage prepaid in the United States Mail.
However, a notice of a change of address of person pursuant to Section 13.4
shall not be deemed given until received.
13.6 A notice that is mailed must be deposited into an official mail
depository maintained by the United States Postal Service or (if mailed outside
the United States) by an equivalent postal authority.
13.7 Failure to accept a notice is deemed receipt of it and does not
invalidate the notice or excuse the performance of an obligation.
7
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SECTION 14. ENTIRE AGREEMENT
14.1 All prior and contemporaneous statements, representations, promises,
understandings, agreements, projections and opinions, whether written or oral
made to each other with regard to this transaction, are merged in this Agreement
and the Collateral Documents. This Agreement and the Collateral Documents
constitute the entire agreement of the parties.
SECTION 15. CHANGES AND WAIVERS
15.1 A provision of this Agreement will be considered to have been changed
or waived only if the change or waiver is expressly made in writing signed by
the party to be charged.
15.2 The failure to insist on strict performance of any provision will not
mean that the provision has been waived or that the right to insist thereafter
on strict performance of that or any other provision has been waived.
SECTION 16. PARTIES TO COOPERATE
16.1 Each party will reasonably cooperate with the other to close the
transactions that are the subject of this Agreement.
16.2 In furtherance of such cooperation, each party will obtain, execute
and deliver such documents as are in its possession or control and are
reasonably necessary in order to close or effectuate or confirm any provisions
of this Agreement.
SECTION 17. GOVERNING LAW
17.1 The laws of the State of Rhode Island will govern this Agreement and
the interpretation and enforcement of its provisions, without regard to legal
principles of conflict of laws.
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SECTION 18. WAIVER OF JURY TRIAL; VENUE
18.1 THE BORROWER AND THE LENDER EACH WAIVE THEIR RESPECTIVE RIGHTS TO A
TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR
RELATED TO THIS AGREEMENT, THE COLLATERAL DOCUMENTS, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF
ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY, RELATED PERSON,
PARTICIPANT, OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS,
OR OTHERWISE. BORROWER AND LENDER EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF
ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR ANY COLLATERAL DOCUMENT OR ANY PROVISIONS
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE COLLATERAL
DOCUMENTS.
18.2 THE BORROWER AGREES THAT IT WILL NOT ASSERT AGAINST THE LENDER ANY
CLAIM FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES IN CONNECTION
WITH THIS AGREEMENT OR ANY OF THE COLLATERAL DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
18.3 WITH RESPECT TO ANY CLAIM OR ACTION ARISING UNDER THIS AGREEMENT OR
THE COLLATERAL DOCUMENTS, THE BORROWER HEREBY (A) IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF RHODE ISLAND AND THE UNITED
STATES DISTRICT COURT LOCATED IN THE STATE OF RHODE ISLAND, AND (B) IRREVOCABLY
WAIVES ANY OBJECTION WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
COLLATERAL DOCUMENTS BROUGHT IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM
THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO
OBJECT, WITH RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH PARTY. NOTHING
IN THIS AGREEMENT WILL BE DEEMED TO PRECLUDE THE LENDER FROM BRINGING AN ACTION
OR PROCEEDING IN RESPECT HEREOF IN ANY OTHER JURISDICTION.
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<PAGE>
SECTION 19. INVALID PROVISIONS SEVERED
19.1 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity of the other provisions, which shall be enforced
to the fullest extent permitted by law.
SECTION 20. CAPTIONS; EXHIBITS; AND GRAMMAR
20.1 The paragraph captions are for convenience only. They are not part of
the text of this Agreement and are not to be used to interpret its provisions.
20.2 All Schedules and Exhibits to this Agreement are incorporated in, and
are part of, this Agreement as fully as though set forth herein.
20.3 The use of the singular includes the plural and the use of any gender
includes any other gender whenever required by the sense of this Agreement.
SECTION 21. REIMBURSEMENT FOR ENFORCEMENT
21.1 In the event Borrower fails to perform any of its obligations under
this Agreement or under any Collateral Document, then Borrower shall pay any and
all Claims and Expenses incurred by the Lender in enforcing or establishing its
rights hereunder or thereunder.
SECTION 22. NO NEGATIVE CONSTRUCTION AGAINST DRAFTING PARTY
22.1 The parties acknowledge that they are sophisticated and are
represented by experienced, knowledgeable attorneys. The parties agree that the
normal rules of construction to resolve ambiguities against the party whose
counsel drafted this Agreement shall not be followed in the interpretation of
this Agreement. Consequently, no negative inference or interpretation shall be
made by a court in enforcing the provisions of this Agreement against the party
whose attorney drafted this Agreement.
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SECTION 23. NO OTHER PARTIES
23.1 The representations, warranties and agreements of Borrower contained
herein are intended solely for the benefit of Lender and/or its assignees, and
shall confer no rights hereunder, whether legal or equitable, in any other third
person, and no other person shall be entitled to rely thereon.
SECTION 24. COUNTERPARTS
24.1 This Agreement may be signed in counterpart, each of which will be
deemed an original document. All counterparts will constitute one document which
may be sufficiently evidenced by one such counterpart. Each counterpart will be
binding on the signatory to such counterpart notwithstanding that it is not
signed by both signatories to this Agreement.
SECTION 24. INDEMNIFICATION
24.1 Borrower agrees to indemnify Lender, its officers, directors,
principals and affiliates from and against any Claims and Expenses incurred or
suffered by them or any of them arising out of the transactions contemplated
hereunder, except for any of the foregoing which are solely the result of
Lender's gross negligence or willful misconduct.
SECTION 25. SUCCESSORS AND ASSIGNS
25.1 This Agreement shall bind Borrower and its successors.
25.2 This Agreement shall be binding upon and shall inure to the benefit
of Lender, its successors and assigns.
SECTION 26. LENDER'S RIGHT TO TRANSFER AND ASSIGN
26.1 Lender has the right, in its sole and absolute discretion, without
consent or affecting the obligations of Borrower, to transfer and assign
participation interests in its rights under this Agreement and the Collateral
Documents.
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IN WITNESS WHEREOF Borrower and Lender have executed this Agreement and
affixed their seals as of the date first above stated.
INFINITE GROUP, INC.
By:
---------------------------------
Daniel Landi, Chief Financial
Officer
------------------------------------
CLIFFORD G. BROCKMYRE
12
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RIDER A
INTEREST RATE ADJUSTMENT
The interest rate under this Loan Agreement and the Note shall be fixed
for twelve (12) months from the date of this Agreement. The rate shall adjust
annually thereafter on each one (1) year anniversary to a rate, determined by
Lender, of the one-year Treasury Bill Index plus three and one-half percent (3
1/2%). The rate hereunder shall not increase by more than two percent (2%) in
any year and more than six percent (6%) over the life of the Loan. Each year
Lender shall adjust the monthly payment to reamortize the loan over the original
term of one hundred and twenty (120) months.
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LOAN AGREEMENT
INFINITE GROUP, INC., a Delaware corporation, with its principal office at
2364 Post Road, Warwick, RI 02886 (hereinafter referred to as "Borrower"), and
CLIFFORD G. BROCKMYRE, having an address at 335 West Beach Road, Charlstown, RI
02813 (hereinafter referred to as "Lender"), hereby enter into this Loan
Agreement ("Agreement") dated as of April 15, 1998.
SECTION 1. CERTAIN DEFINITIONS
1.1 The following terms used in this Agreement will have the meanings
given below:
Claims and Expenses Any and all claims, lawsuits of any kind,
judgments, losses, damages, liabilities,
penalties, costs and reasonable expenses
arising out of transactions contemplated
under this Agreement or under the Collateral
Documents, including all "Legal Costs and
Expenses" (defined below) incurred in
connection therewith.
Collateral Documents The Note.
Loan Defined in Section 2.1.
Loan Amount $250,000.00.
Loan Closing and the
Loan Closing Date Defined in Section 2.2.
Legal Costs and Expenses Any and all reasonable attorneys' fees and
disbursements, court costs and other
litigation expenses.
Maturity Date April 14, 1999.
Note Defined in Section 2.2.
<PAGE>
SECTION 2. THE LOAN
2.1 Simultaneously with the execution of this Agreement, Lender is making
a loan (the "Loan") to Borrower in the principal amount of $250,000 US Dollars,
receipt of which is hereby acknowledged by Borrower.
2.2 The Loan is evidenced by a promissory note ("the Note") made by
Borrower payable to Lender, which is being executed and delivered to Lender
contemporaneously herewith (such loan and delivery being hereinafter called the
"Loan Closing" and the date thereof being hereinafter called the "Loan Closing
Date"). A copy of the Note is attached to this Agreement as Exhibit 1.
2.3 The Note is payable in accordance with its provisions which include,
inter alia:
(a) interest at the rate of 9% per annum on the unpaid balance of
the Note;
(b) equal monthly payments of $1,406.55, plus any amounts due on the
revolving credit facilities in the aggregate principal amount of $50,000.00
between Lender and Bank of Western Massachusetts, commencing on May 1, 1998 and
on the first day of each month thereafter to and including April 1, 1999 (which
monthly payments shall include both principal and interest);
(c) a final payment equal to all unpaid principal and accrued
interest payable on April 14, 1999;
(d) the right to Borrower, exercisable at any time prior to the
Maturity Date to prepay, without penalty, all or part (each such payment being a
minimum of $1,000 or covering the unpaid balance of the Note) of the unpaid
principal amount and accrued interest thereon of the Note; and
(e) the principal of the Note and accrued interest thereon shall
become immediately due and payable upon the occurrence of an Event of Default.
2.4 The obligation of Lender to make the Loan shall be conditioned on the
satisfaction of Lender that the representations and warranties of Borrower
contained in this
2
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Agreement and in the Collateral Documents are true, complete and correct.
Borrower understands and agrees that any investigation by Lender shall in no way
limit the responsibility of the Borrower for such representations and warranties
being true, complete and correct.
2.5 Notwithstanding any provision in this Agreement or in the Note, in no
event shall the interest rate applicable to the Loan exceed that permitted by
the laws or governmental regulations applicable to Lender, Borrower or the Loan
that limit rates of interest that may be charged or collected by Lender. If any
payment hereunder or under the Note shall be found to constitute a payment of
interest in excess of that permitted under the laws or governmental regulations
applicable to Lender, Borrower or the Loan that limit rates of interest that may
be charged or collected by Lender, then the amount of such excess payment shall
be refunded to Borrower.
SECTION 3. USE OF PROCEEDS
3.1. The proceeds of the Loan will be used by Borrower for working capital
purposes.
SECTION 4. CLOSING DOCUMENTS
4.1 Simultaneously with the execution and delivery of this Agreement, the
Loan is being funded and Borrower is delivering or has delivered to Lender the
following documents, duly executed and (where required) witnessed or notarized:
(a) the Note; and
(b) a Secretary's Certificate of Borrower as to resolutions of its
Board of Directors authorizing (i) the borrowing hereunder, and (ii) the
execution and delivery of this Agreement, the Collateral Documents and the
transactions contemplated hereby and thereby.
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SECTION 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS
5.1 To induce Lender to make the Loan hereunder, Borrower represents and
warrants to and agrees with Lender that:
(a) Borrower is a corporation duly and validly existing and in good
standing under the laws of the State of Delaware and is qualified to do business
in such other jurisdictions where the ownership of property or the nature of the
business conducted by it requires such qualification, except insofar as the
failure to so qualify would not materially and adversely affect Borrower.
(b) Borrower has the requisite corporate authority and power to
enter into this Agreement, to borrow money as contemplated hereby, to issue the
Note and to execute and deliver each of those documents required and described
in this Agreement. The execution and delivery of this Agreement and the
Collateral Documents have been duly authorized by Borrower and this Agreement
and the Collateral Documents are enforceable against Borrower in accordance with
their terms.
SECTION 6. CERTAIN AFFIRMATIVE COVENANTS
6.1 So long as any amount due to Lender pursuant to the Note, this
Agreement or any of the other Collateral Documents is outstanding, the Borrower
will do and comply with the following:
(a) Borrower will promptly make all payments of the principal and
interest on the Note when due; and
(b) Borrower will comply with the terms and conditions of this
Agreement and of those contained in each Collateral Document.
SECTION 7. CERTAIN NEGATIVE COVENANTS
7.1 So long as any amount due to Lender pursuant to the Note, this
Agreement or any of the other Collateral Documents is outstanding, except with
the prior written consent of Lender (whose consent, except as otherwise
indicated below, may be refused without explanation and without any legal
recourse by Borrower), Borrower will not:
(a) engage in any line of business materially different from those
which Borrower is now engaged in; or
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(b) become a party to any merger or consolidation with any
corporation, company or entity of any kind whatsoever, or sell substantially all
of its assets, or otherwise liquidate or dispose of its business.
SECTION 8. IRREGULAR PAYMENT
8.1 Lender may accept late payments and partial payments even though
marked "payment in full" or words of similar import, without losing any of its
rights under this Agreement or under the Note.
SECTION 9. DELAY IN ENFORCEMENT
9.1 Lender may delay in enforcing its rights under this Agreement or a
Collateral Document without losing or prejudicing such rights.
SECTION 10. NO BROKER
10.1 Borrower represents and warrants to Lender that it has not dealt with
any broker or finder, whether or not licensed, in connection with this Agreement
or the loan transactions under this Agreement. Lender represents and warrants
that it has not dealt with any broker or finder.
SECTION 11. LOAN EXPENSES
11.1 Borrower agrees to pay, promptly after demand is made, all reasonable
out-of-pocket expenses incurred by Lender in connection with the making,
amending, perfection, enforcement or payment or liquidation of the Loan which
are the subject of this Agreement, including (but not limited to) Lender's legal
fees and disbursements, title fees, title insurance fees and any other expense
incurred, or to be incurred by Lender in connection with his loans from the Bank
of Western Massachusetts, the proceeds of which are being used to fund the Loan.
5
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SECTION 12. NOTICES
12.1 Unless otherwise expressly provided elsewhere in this Agreement, any
notice, request, consent, election, demand or other communication ("notice") to
be given or made by the parties under this Agreement must be in writing and
either:
(a) delivered by hand, telecopier or overnight delivery by Federal
Express or other recognized carrier; or
(b) sent by certified or registered mail, return receipt requested,
postage prepaid.
12.2 Each notice to be given to Lender or Borrower will be addressed to it
at its address set forth in the preamble on page 1 of this Agreement.
12.3 A copy of each notice must be sent simultaneously and in like manner
to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue, Suite 902
New York, New York 10022
Attn: Kenneth S. Rose, Esq.
Fax: 212-838-9190
12.4 Borrower and Lender may, by notice to the others, change the address
to which future notices are to be sent or add or change a person to whom a
notice or a copy of a notice is to be sent.
12.5 Unless otherwise provided elsewhere in this Agreement, each notice
shall be considered to be given on:
(a) the date delivered by hand or telecopier (unless it is not a
business day or is not received before 5:30 P.M., in which case the notice shall
be considered given on the next business day after being sent);
(b) the next business day after being sent by overnight courier;
(c) the third full business day following the date of mailing
postage prepaid in the United States Mail.
6
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However, a notice of a change of address of person pursuant to Section 12.4
shall not be deemed given until received.
12.6 A notice that is mailed must be deposited into an official mail
depository maintained by the United States Postal Service or (if mailed outside
the United States) by an equivalent postal authority.
12.7 Failure to accept a notice is deemed receipt of it and does not
invalidate the notice or excuse the performance of an obligation.
SECTION 13. ENTIRE AGREEMENT
13.1 All prior and contemporaneous statements, representations, promises,
understandings, agreements, projections and opinions, whether written or oral
made to each other with regard to this transaction, are merged in this Agreement
and the Collateral Documents. This Agreement and the Collateral Documents
constitute the entire agreement of the parties.
SECTION 14. CHANGES AND WAIVERS
14.1 A provision of this Agreement will be considered to have been changed
or waived only if the change or waiver is expressly made in writing signed by
the party to be charged.
14.2 The failure to insist on strict performance of any provision will not
mean that the provision has been waived or that the right to insist thereafter
on strict performance of that or any other provision has been waived.
7
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SECTION 15. PARTIES TO COOPERATE
15.1 Each party will reasonably cooperate with the other to close the
transactions that are the subject of this Agreement.
15.2 In furtherance of such cooperation, each party will obtain, execute
and deliver such documents as are in its possession or control and are
reasonably necessary in order to close or effectuate or confirm any provisions
of this Agreement.
SECTION 16. GOVERNING LAW
16.1 The laws of the State of Rhode Island will govern this Agreement and
the interpretation and enforcement of its provisions, without regard to legal
principles of conflict of laws.
SECTION 17. WAIVER OF JURY TRIAL; VENUE
17.1 THE BORROWER AND THE LENDER EACH WAIVE THEIR RESPECTIVE RIGHTS TO A
TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR
RELATED TO THIS AGREEMENT, THE COLLATERAL DOCUMENTS, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF
ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY, RELATED PERSON,
PARTICIPANT, OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS,
OR OTHERWISE. BORROWER AND LENDER EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF
ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR ANY COLLATERAL DOCUMENT OR ANY PROVISIONS
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE COLLATERAL
DOCUMENTS.
17.2 THE BORROWER AGREES THAT IT WILL NOT ASSERT AGAINST THE LENDER ANY
CLAIM FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES IN CONNECTION
WITH THIS AGREEMENT OR ANY OF THE
8
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COLLATERAL DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
17.3 WITH RESPECT TO ANY CLAIM OR ACTION ARISING UNDER THIS AGREEMENT OR
THE COLLATERAL DOCUMENTS, THE BORROWER HEREBY (A) IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF RHODE ISLAND AND THE UNITED
STATES DISTRICT COURT LOCATED IN THE STATE OF RHODE ISLAND, AND (B) IRREVOCABLY
WAIVES ANY OBJECTION WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
COLLATERAL DOCUMENTS BROUGHT IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM
THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO
OBJECT, WITH RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH PARTY. NOTHING
IN THIS AGREEMENT WILL BE DEEMED TO PRECLUDE THE LENDER FROM BRINGING AN ACTION
OR PROCEEDING IN RESPECT HEREOF IN ANY OTHER JURISDICTION.
SECTION 18. INVALID PROVISIONS SEVERED
18.1 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity of the other provisions, which shall be enforced
to the fullest extent permitted by law.
SECTION 19. CAPTIONS; EXHIBITS; AND GRAMMAR
19.1 The paragraph captions are for convenience only. They are not part of
the text of this Agreement and are not to be used to interpret its provisions.
19.2 All Schedules and Exhibits to this Agreement are incorporated in, and
are part of, this Agreement as fully as though set forth herein.
19.3 The use of the singular includes the plural and the use of any gender
includes any other gender whenever required by the sense of this Agreement.
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SECTION 20. REIMBURSEMENT FOR ENFORCEMENT
20.1 In the event Borrower fails to perform any of its obligations under
this Agreement or under any Collateral Document, then Borrower shall pay any and
all Claims and Expenses incurred by the Lender in enforcing or establishing its
rights hereunder or thereunder.
SECTION 21. NO NEGATIVE CONSTRUCTION AGAINST DRAFTING PARTY
21.1 The parties acknowledge that they are sophisticated and are
represented by experienced, knowledgeable attorneys. The parties agree that the
normal rules of construction to resolve ambiguities against the party whose
counsel drafted this Agreement shall not be followed in the interpretation of
this Agreement. Consequently, no negative inference or interpretation shall be
made by a court in enforcing the provisions of this Agreement against the party
whose attorney drafted this Agreement.
SECTION 22. NO OTHER PARTIES
22.1 The representations, warranties and agreements of Borrower contained
herein are intended solely for the benefit of Lender and/or its assignees, and
shall confer no rights hereunder, whether legal or equitable, in any other third
person, and no other person shall be entitled to rely thereon.
SECTION 23. COUNTERPARTS
23.1 This Agreement may be signed in counterpart, each of which will be
deemed an original document. All counterparts will constitute one document which
may be sufficiently evidenced by one such counterpart. Each counterpart will be
binding on the signatory to such counterpart notwithstanding that it is not
signed by both signatories to this Agreement.
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SECTION 24. INDEMNIFICATION
24.1 Borrower agrees to indemnify Lender, its officers, directors,
principals and affiliates from and against any Claims and Expenses incurred or
suffered by them or any of them arising out of the transactions contemplated
hereunder, except for any of the foregoing which are solely the result of
Lender's gross negligence or willful misconduct.
SECTION 25. SUCCESSORS AND ASSIGNS
25.1 This Agreement shall bind Borrower and its successors.
25.2 This Agreement shall be binding upon and shall inure to the benefit
of Lender, its successors and assigns.
SECTION 26. LENDER'S RIGHT TO TRANSFER AND ASSIGN
26.1 Lender has the right, in its sole and absolute discretion, without
consent or affecting the obligations of Borrower, to transfer and assign
participation interests in its rights under this Agreement and the Collateral
Documents.
IN WITNESS WHEREOF Borrower and Lender have executed this Agreement and
affixed their seals as of the date first above stated.
INFINITE GROUP, INC.
By:
---------------------------------
Daniel Landi, Chief Financial
Officer
------------------------------------
CLIFFORD G. BROCKMYRE
11
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PROMISSORY NOTE
$1,150,000.00 Warwick, RI
June 26, 1998
INFINITE GROUP, INC., a Delaware corporation (the "Maker"), FOR VALUE
RECEIVED, hereby promises to pay to the order of CLIFFORD G. BROCKMYRE (the
"Holder"), at the office of the Maker at 2364 Post Road, Warwick, RI 02886, the
principal amount of ONE MILLION ONE HUNDRED FIFTY THOUSAND DOLLARS
($1,150,000.00) in lawful money of the United States of America. The unpaid
principal balance of this Note shall bear interest at the rate of nine (9%)
percent per annum adjusted as described on Rider A hereto. Interest and
principal on the Note shall be payable as follows:
(i) $10,838.23 on the first day of each month beginning in August
1998 through and including June 2008 (which payments represent
interest only), adjusted as described on Rider A hereto.
(ii) the remaining unpaid principal and accrued interest shall be
payable on June 26, 2008.
Upon the occurrence of any "Event of Default" (as defined in the Loan
Agreement referred to below), the amounts then due and payable under this Note
(including the entire principal and accrued interest if such payments are
accelerated at the election of the Holder) shall bear interest equal to the
lesser of (a) the maximum amount permitted to be charged under applicable law or
(b) fifteen percent (15%) per annum from the due date thereof until paid in
full.
If this Note, or any payment hereunder, falls due on a Saturday, Sunday or
a Rhode Island public holiday, this Note shall be made on the next succeeding
business day and such additional time shall be included in the computation of
any interest payable hereunder.
If any payment due hereunder is not paid when due, the Maker agrees to pay
all reasonable costs of collection, including reasonable attorney's fees, all of
which shall be added to the amount due hereunder. In addition, if this Note is
referred by Holder to any attorney for collection, the Maker shall pay all
reasonable attorney fees incurred by Holder therefor.
This Note is referred to in, and arises out of the transactions
contemplated by, a loan agreement (the "Loan Agreement"), dated as of June 26,
1998 by and among the Maker and the Holder. This Note is subject to the terms
and conditions of the Loan Agreement.
The Maker may prepay, without penalty, all or part (each such payment
being a minimum of $10,000 or covering the unpaid balance on the Note) of the
unpaid principal amount of this Note and accrued interest thereon.
<PAGE>
UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE LOAN
AGREEMENT), THEN, AND IN ANY SUCH EVENT, THE HOLDER, BY WRITTEN NOTICE TO THE
MAKER, MAY DECLARE THE ENTIRE BALANCE OF THE UNPAID PRINCIPAL OF AND ACCRUED
INTEREST ON THIS NOTE TO BE DUE, WHEREUPON THE SAME AND ANY OTHER AMOUNTS DUE
HEREUNDER SHALL IMMEDIATELY BECOME DUE AND PAYABLE WITHOUT PRESENTATION, DEMAND,
PROTEST OR OTHER NOTICE OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY
THE MAKER.
This Note has been executed and delivered and shall be construed and
enforced in accordance with the laws of the State of Rhode Island, including,
but not limited to, matters of construction, validity and performance.
INFINITE GROUP, INC.
By:
---------------------------------
Daniel Landi, Chief Financial
Officer
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<PAGE>
RIDER A
INTEREST RATE ADJUSTMENT
The interest rate under this Note shall be fixed for twelve (12) months
from the date of the Note. The rate shall adjust annually thereafter on each one
(1) year anniversary to a rate, determined by Lender, of the one-year Treasury
Bill Index plus three and one-half percent (3 1/2%). The rate hereunder shall
not increase by more than two percent (2%) in any year and more than six percent
(6%) over the life of the Loan. Each year lender shall adjust the monthly
payment to reamortize the loan over the original term of one hundred and twenty
(120) months.
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<PAGE>
PROMISSORY NOTE
$250,000.00 Warwick, RI
April 15, 1998
INFINITE GROUP, INC., a Delaware corporation (the "Maker"), FOR VALUE
RECEIVED, hereby promises to pay to the order of CLIFFORD G. BROCKMYRE (the
"Holder"), at the office of the Maker at 2364 Post Road, Warwick, RI 02886, the
principal amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) in lawful
money of the United States of America. The unpaid principal balance of this Note
shall bear interest at the rate of nine (9%) percent per annum. Interest and
principal on the Note shall be payable as follows:
(i) $1,406.55, plus any amounts due on the revolving credit
facilities in the aggregate principal amount of $50,000.00 between
Lender and Bank of Western Massachusetts, on the first day of each
month beginning in May 1998 through and including March 1999 (which
payments represent both interest and principal); and
(ii) the remaining unpaid principal and accrued interest shall be
payable on April 14, 1999.
Upon the occurrence of any "Event of Default" (as defined in the Loan
Agreement referred to below), the amounts then due and payable under this Note
(including the entire principal and accrued interest if such payments are
accelerated at the election of the Holder) shall bear interest equal to the
lesser of (a) the maximum amount permitted to be charged under applicable law or
(b) fifteen percent (15%) per annum from the due date thereof until paid in
full.
If this Note, or any payment hereunder, falls due on a Saturday, Sunday or
a Rhode Island public holiday, this Note shall be made on the next succeeding
business day and such additional time shall be included in the computation of
any interest payable hereunder.
If any payment due hereunder is not paid when due, the Maker agrees to pay
all reasonable costs of collection, including reasonable attorney's fees, all of
which shall be added to the amount due hereunder. In addition, if this Note is
referred by Holder to any attorney for collection, the Maker shall pay all
reasonable attorney fees incurred by Holder therefor.
This Note is referred to in, and arises out of the transactions
contemplated by, a loan agreement (the "Loan Agreement"), dated as of April 15,
1998 by and among the Maker and the Holder. This Note is subject to the terms
and conditions of the Loan Agreement.
<PAGE>
The Maker may prepay, without penalty, all or part (each such payment
being a minimum of $1,000 or covering the unpaid balance on the Note) of the
unpaid principal amount of this Note and accrued interest thereon.
UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE LOAN
AGREEMENT), THEN, AND IN ANY SUCH EVENT, THE HOLDER, BY WRITTEN NOTICE TO THE
MAKER, MAY DECLARE THE ENTIRE BALANCE OF THE UNPAID PRINCIPAL OF AND ACCRUED
INTEREST ON THIS NOTE TO BE DUE, WHEREUPON THE SAME AND ANY OTHER AMOUNTS DUE
HEREUNDER SHALL IMMEDIATELY BECOME DUE AND PAYABLE WITHOUT PRESENTATION, DEMAND,
PROTEST OR OTHER NOTICE OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY
THE MAKER.
This Note has been executed and delivered and shall be construed and
enforced in accordance with the laws of the State of Rhode Island, including,
but not limited to, matters of construction, validity and performance.
INFINITE GROUP, INC.
By:
---------------------------------
Daniel Landi, Chief Financial
Officer
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<PAGE>
THIS WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS
SPECIFIED IN SECTION 11 HEREOF. NEITHER THE RIGHTS REPRESENTED BY THIS WARRANT
NOR THE SHARES ISSUABLE UPON THE EXERCISE HEREOF (COLLECTIVELY, THE
"SECURITIES") HAVE BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE LAW, AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED, ABSENT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT, OR UNLESS THE COMPANY SHALL HAVE
RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR
SALE IN WHOLE OR IN PART NOR THE WARRANT EXERCISED EXCEPT IN ACCORDANCE WITH THE
PROVISIONS OF SECTION 2 AND SECTION 11 HEREOF.
INFINITE GROUP, INC.
WARRANT TO PURCHASE 2,680,000 SHARES OF COMMON STOCK
JUNE 30, 1998
Infinite Group, Inc. a Delaware corporation (the "Company"), hereby
certifies that, for value received, Clifford G. Brockmyre, the registered holder
hereof, or its registered assigns ("Investor"), is entitled, subject to the
terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time or times on or after June 30, 1998 but not after 5:00 P.M.,
New York time, on the Expiration Date (as defined herein), Two Million Six
Hundred and Eighty Thousand (2,680,000) fully paid nonassessable shares (the
"Warrant Shares") of Common Stock (as defined herein) of the Company (as
adjusted from time to time as provided in this Warrant) at an initial purchase
price of U.S. $1.12 per share in lawful money of the United States. This Warrant
shall be exercisable as follows: (a) with respect to 1,340,000 Warrant Shares
from and after the date hereof; (b) with respect to an additional 335,000
Warrant Shares from and after December 31, 1998, provided that the Company shall
not have repaid its loan of even date hereof to Investor (the "Loan") by such
date; (c) with respect to an additional 335,000 Warrant shares from and after
March 31, 1999, provided that the Company shall not have repaid the Loan by such
date; (d) with respect to an additional 335,000 Warrant shares from and after
June 30, 1999, provided that the Company shall not have repaid the Loan by such
date; (e) with respect to an additional 335,000 Warrant shares from and after
September 30, 1999, provided that the Company shall not have repaid the Loan by
such date;
Section 1. (a) Definitions. The following words and terms as used in this
Warrant shall have the following meanings:
<PAGE>
"Common Stock" means (a) the Company's common stock and (b) any capital
stock into which such "Common Stock" shall have been changed or any capital
stock resulting from a reclassification of such "Common Stock."
"Expiration Date" means June 30, 2003.
"Warrant Exercise Price" shall initially be U.S. $1.12 per share and shall
be adjusted and readjusted from time to time to the extent as provided for in
this Warrant.
(b) Other Definitional Provisions. (i) Except as otherwise specified
herein, all references herein (A) to any person other than the Company, shall be
deemed to include such person's successors and assigns, (B) to the Company shall
be deemed to include the Company's successors and (C) to any applicable law
defined or referred to herein, shall be deemed references to such applicable law
as the same may have been or may be amended or supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as a whole
and not to any provision of this Warrant, and the words "Section," "Schedule,"
and "Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this
Warrant unless otherwise specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
Section 2. Exercise of Warrant. (a) Subject to the terms and conditions
hereof, this Warrant may be exercised, in whole or in part, at any time during
normal business hours on or after the opening of business on the date hereof and
prior to the close of business on the Expiration Date. The rights represented by
this Warrant may be exercised by the holder hereof then registered on the books
of the Company, in whole or from time to time in part (except that this Warrant
shall not be exercisable as to a fractional share) by (i) delivery of a written
notice, in the form of the Subscription Notice attached as Exhibit A hereto, of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which the Warrant is being exercised (plus any applicable issue or
transfer taxes) in cash or by certified or official bank check or otherwise as
permitted by Section 2(c) hereof, for the number of Warrant Shares as to which
this Warrant shall have been exercised, and (iii) the surrender of this Warrant,
properly endorsed, at the principal office of the Company in Warwick, Rhode
Island (or at such other agency or office of the Company as the Company may
designate by notice to the holder hereof); provided, that if such Warrant Shares
are to be issued in any name other than that of the registered holder of this
Warrant, such issuance shall be deemed a transfer and the provisions of Section
11 shall be applicable. In the event of any exercise of the rights represented
by this Warrant in compliance with this Section 2(a), a certificate or
certificates for the Warrant Shares so purchased, registered in the name of, or
as directed by, the holder, shall
2
<PAGE>
be delivered to, or as directed by such holder within a reasonable time, not
exceeding 15 days, after such rights shall have been so exercised.
(b) Unless the rights represented by this Warrant shall have expired or
have been fully exercised, the Company shall issue a new Warrant identical in
all respects to the Warrant exercised except (x) it shall represent rights to
purchase the number of Warrant Shares purchasable immediately prior to such
exercise under the Warrant exercised, less the number of Warrant Shares with
respect to which such Warrant was exercised, and (y) the holder thereof shall be
deemed to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant was surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes was made, irrespective of the date of delivery of such share certificate,
except that, if the date of such surrender and payment is a date when the stock
transfer books of the Company are properly closed, such person shall be deemed
to have become the holder of such Warrant Shares at the opening of business on
the next succeeding date on which the stock transfer books are open.
(c) Payment of the Warrant Exercise Price may be made, where permitted by
law, by any of the following methods:
(1) In cash or by certified or official bank check;
(2) by the Company's cancellation of indebtedness of the Company to the
holder of the Warrant;
(3) by waiver of compensation due or accrued to holder of the Warrant for
services rendered;
(4) provided that a public market for the Company's stock exists, through
a "same day sale" commitment from the holder of the Warrant and a broker-dealer
that is a member of the National Association of Securities Dealers, Inc. (an
"NASD Dealer") whereby the holder of the Warrant irrevocably elects to exercise
the Warrant and to sell a portion of the Warrant Shares so purchased to pay for
the exercise price and whereby the NASD Dealer irrevocably commits upon receipt
of such Warrant Shares to forward the exercise price directly to the Company; or
(5) provided that a public market for the Company's stock exists, through
a "margin" commitment from the holder of the Warrant and an NASD Dealer whereby
the holder of the Warrant irrevocably elects to exercise this Warrant and to
pledge the Warrant Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Warrant
Shares to forward the exercise price directly to the Company.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this
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<PAGE>
Warrant will, upon issuance, be validly issued, fully paid and nonassessable.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common Stock
to provide for the exercise of the rights then represented by this Warrant.
Section 4. Adjustment of Warrant Exercise Price Upon Stock Splits.
Dividends. Distributions and Combinations; and Adjustment of Number of Shares.
(a) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares or issue a stock dividend or make a
distribution with respect to outstanding shares of Common Stock payable in
Common Stock, the Warrant Exercise Price in effect immediately prior to such
subdivision or stock dividend or distribution shall be proportionately reduced
and, conversely, in case the outstanding shares of Common Stock of the Company
shall be combined into a smaller number of shares, the Warrant Exercise Price in
effect immediately prior to such combination shall be proportionately increased
in each case by multiplying the then effective Warrant Exercise Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such action and the denominator of which shall
be the number of shares of Common Stock outstanding immediately after such
action, and the product so obtained shall thereafter be the Warrant Exercise
Price.
(b) Upon each adjustment of the Warrant Exercise Price as provided above
in this Section 4, the registered holder of this Warrant shall thereafter be
entitled to purchase, at the Warrant Exercise Price resulting from such
adjustment, the number of shares obtained by multiplying the Warrant Exercise
Price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Warrant Exercise Price after such adjustment.
Section 5. Notice of Adjustment of Warrant Exercise Price and Sale of
Company. Upon any adjustment of the Warrant Exercise Price, the Company shall
give notice thereof to the registered holder of this Warrant, which notice shall
state the Warrant Exercise Price in effect after such adjustment and the
increase, or decrease, if any, in the number of shares purchasable at the
Warrant Exercise Price upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. In the event of a merger, consolidation or reorganization
of the Company with or into another corporation or corporations in which the
Company is not the surviving entity (other than a mere reincorporation
transaction), a sale of all or substantially all of the assets of the Company,
or a transaction in which the Company issues shares representing more than fifty
percent (50%) of the voting power in the Company immediately after giving effect
to such transaction, the Company shall give notice thereof to the registered
holder of this Warrant at least three (3) business days prior to the
consummation of such transaction.
Section 6. Computation of Adjustments. Upon each computation of an
adjustment in the Warrant Exercise Price and the number of shares which may be
subscribed for and purchased upon exercise of this Warrant, the Warrant Exercise
Price shall be computed to the
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<PAGE>
nearest cent (i.e., fractions of .5 of a cent, or greater, shall be rounded to
the next highest cent) and the number of shares which may be subscribed for and
purchased upon exercise of this Warrant shall be calculated to the nearest whole
share (i.e., fractions of less than one half of a share shall be disregarded and
fractions of one half of a share, or greater, shall be treated as being a whole
share).
Section 7. No Change in Warrant Terms on Adjustments. Irrespective of any
adjustment in the Warrant Exercise Price or the number of shares of Common Stock
issuable upon exercise hereof, this Warrant, whether theretofore or thereafter
issued or reissued, may continue to express the same price and number of shares
as are stated herein and the Warrant Exercise Price and such number of shares
specified herein shall be deemed to have been so adjusted.
Section 8. Taxes. The Company shall not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any transfer
involved in the issue or delivery of any certificates for Warrant Shares of
Common Stock in a name other than that of the registered holder hereof or upon
any transfer of this Warrant.
Section 9. Warrant Holder Not Deemed a Shareholder. No holder, as such, of
this Warrant shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the holder hereof, as such, any of the
rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he is then entitled to receive upon the due exercise of this
Warrant.
Section 10. No Limitation on Corporate Action. No provisions of this
Warrant and no right or option granted or conferred hereunder shall in any way
limit, affect or abridge the exercise by the Company of any of its corporate
rights or powers to recapitalize, amend its Certificate of Incorporation,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any other
of its corporate rights and powers.
Section 11. Transfer; Opinions of Counsel: Restrictive Legends.
(a) Prior to any sale, transfer or other disposition of this Warrant or
the Warrant Shares, the holder thereof will give ten (10) business days' notice
to the Company of such holder's intention to effect such transfer. Each such
notice shall describe the manner and circumstances of the proposed transfer and,
if such transfer is not registered under the Securities Act of 1933, as amended
("Securities Act"), shall be accompanied by an opinion, addressed to the Company
and reasonably satisfactory in form and substance to it, of counsel (reasonably
satisfactory to the Company) for such holder, stating whether, in the opinion of
5
<PAGE>
such counsel, such transfer will be a transaction exempt from registration under
the Securities Act.
(b) If such sale, transfer or other disposition may in the opinion of such
counsel be effected without registration under the Securities Act, such holder
shall thereupon be entitled to the terms of the notice delivered by such holder
to the Company. If in the opinion of such counsel such transfer may not be
effected without registration under the Securities Act, such holder shall not be
entitled to so transfer this Warrant, or the Warrant Shares unless the Company
shall have filed a registration statement relating to such proposed transfer and
such registration statement has become effective under the Securities Act;
provided, however, notwithstanding the foregoing, the Company shall under no
circumstances be obligated to file such a registration statement relating to the
transfer of this Warrant or the Warrant Shares.
(c) Any Warrant Shares issued pursuant to the exercise of this Warrant may
bear one or more of the legends in similar form to the legend set forth on this
Warrant.
Section 12. Exchange of Warrant. This Warrant is exchangeable upon the
surrender hereof by the holder hereof at such officer or agency of the Company,
for new Warrants of like tenor representing in the aggregate the right to
subscribe for and purchase the number of shares which may be subscribed for and
purchased hereunder from time to time me after giving effect to all the
provisions hereof, each of such new Warrants to represent the right to subscribe
for and purchase such number of shares as shall be designated by said holder
hereof at the time of such surrender.
Section 13. Lost,. Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated
or destroyed Warrant shall be at any time enforceable by anyone.
Section 14. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant for its own
account for investment and not with a view to, or sale in connection with, any
distribution hereof or of any of the shares of Common Stock or other securities
issuable upon the exercise thereof, nor with any present intention of
distributing any of the same. Investor represents that it is an "accredited
investor" as such term is defined under Regulation D of the Securities Act. Upon
exercise of this Warrant, the holder will confirm in writing, in form reasonably
satisfactory to the Company, the holder's investment intent.
Section 15. Notice. All notices and other communications under this
Warrant shall (a) be in writing (which shall include communications by
telecopy), (b) be (i) sent by registered or certified mail, postage prepaid,
return receipt requested, by telecopier, or (ii) delivered by
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<PAGE>
hand, (c) be given at the following respective addresses and telecopier numbers
and to the attention of the following persons:
(i) if to the Company, to it at:
Infinite Group, Inc.
2364 Post Road
Warwick, RI 02886
Telephone: (401) 738-5777
Telecopier: (401) 738-6180
with a copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022-2605
Attention: Kenneth S. Rose, Esq.
Telephone: (212) 838-5030
Telecopier: (212) 838-9190
(ii) if to Investor, to it at the address set forth below
Investor's signature on the signature page hereof;
or at such other address or telecopier number or to the attention of such other
person as the party to whom such information pertains may hereafter specify for
the purpose in a notice to the other specifically captioned "Notice of Change of
Address", and (d) be effective or deemed delivered or furnished (i) if given by
mail, on the fifth Business Day after such communication is deposited in the
mail, addressed as above provided, (ii) if given by telecopier, when such
communication is transmitted to the appropriate number determined as above
provided in this Section and the appropriate answer back is received or receipt
is otherwise acknowledged, and (iii) if given by hand delivery, when left at the
address of the addressee addressed as above provided, except that notices of a
change of address, telecopier or telephone number, shall not be deemed
furnished, until received.
Section 16. Registration Rights.
(a) The Company shall be obligated to the owners of the Warrants and the
Warrant Shares, to file a Registration Statement as follows:
Whenever during the four-year period beginning on June 30, 1999 and ending
on June 30, 2003 the Company proposes to file with the Commission a Registration
Statement (other than as to securities issued pursuant to an employee benefit
plan or as to a transaction subject to Rule 145 promulgated under the Act or
which a Form S-4 Registration Statement could be used), it shall, at least ten
(10) days prior to each filing, give written notice of such proposed filing to
the Warrantholder and each holder of Warrant Shares, at their respective
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<PAGE>
addresses as they appear on the records of the Company, and shall offer to
include and shall include in such filing any proposed disposition of the Warrant
Shares upon receipt by the Company, not less than five (5) days prior to the
proposed filing date, of a request therefor setting forth the facts with respect
to such proposed disposition and all other information with respect to such
person reasonably necessary to be included in such Registration Statement. In
the event that the managing underwriter, if any, for said offering advises the
Company in writing that the inclusion of such securities in the offering would
be detrimental to the offering, the Company shall have no obligation to include
such securities in such registration statement.
(b) Except as set forth in the last sentence of this paragraph, all fees,
disbursements and out-of-pocket expenses (other than Warrantholder's brokerage
fees and commissions and legal fees of counsel to the Warrantholder, if any) in
connection with the filing of any Registration Statement under this Section 16
(or obtaining the opinion of counsel and any no-action position of the
Commission with respect to sales under Rule 144) and in complying with
applicable securities and Blue Sky laws shall be borne by the Company. The
Company at its expense will supply any Warrantholder and any holder of Warrant
Shares with copies of such Registration Statement and the prospectus included
therein and other related documents and opinions and no-action letters in such
quantities as may be reasonably requested by the Warrantholder or holder of
Warrant Shares.
Section 17. Indemnification. In the event any of the Warrant Shares (for
purposes of this Section 17, the "Registrable Securities") are included in a
Registration Statement filed by the Company with the Securities and Exchange
Commission (a "Registration Statement"):
(a) To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, employees, agents and each person who
control any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), if any, (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 17(c) with respect to
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<PAGE>
the number of legal counsel, the Company shall reimburse the Investors and each
such underwriter or controlling person, promptly as such expenses are incurred
and are due and payable, for any reasonable legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 17(a): (i) shall not apply
to a Claim arising out of or based upon a Violation which occurs in reliance
upon and in conformity with information furnished in writing to the Company by
any Indemnified Person expressly for use in connection with the preparation of
the Registration Statement or any such amendment thereof or supplement thereto;
(ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld; and (iii) with respect to any
preliminary prospectus, shall not inure to the benefit of any Indemnified Person
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, if such corrected prospectus was timely made
available to the Indemnified Person by the Company, and the Indemnified Person
was promptly advised in writing not to use the incorrect prospectus prior to the
use giving rise to a Violation and such Indemnified Person, notwithstanding such
advice, used it. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive any permitted transfer of the Registrable Securities by the Investor
pursuant to this Warrant.
(b) In connection with any Registration Statement of the Company in which
an Investor is participating, each such Investor agrees severally and not
jointly to indemnify, hold harmless and defend, to the same extent and in the
same manner set forth in Section 17(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, and any
other stockholder selling securities pursuant to the Registration Statement or
any of its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the 1933 Act or the 1934 Act (collectively, an
"Indemnified Party"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and subject to Section 17(c)
such Investor will reimburse any legal or other expenses (promptly as such
expenses are incurred and are due and payable) reasonably incurred by them in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 17(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Warrant for only that amount as does not exceed the net
proceeds to such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Investors pursuant to this Warrant. Notwithstanding anything to the
contrary contained herein, the indemnification
9
<PAGE>
agreement contained in this Section 17(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 17 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 17, deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The indemnifying party shall pay for only one separate legal counsel
for the Indemnified Persons or the Indemnified Parties, as applicable, and such
legal counsel shall be selected by Investors holding a majority-in-interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates (with the approval of the Initial Investor if it holds Registrable
Securities included in such Registration Statement), if the Investors are
entitled to indemnification hereunder, or the Company, if the Company is
entitled to indemnification hereunder, as applicable. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 17,
except to the extent that the indemnifying party is actually prejudiced in its
ability to defend such action.
Section 18. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought.
The headings in this Warrant are for purposes of reference only and shall
not limit or otherwise affect the meaning hereof This Warrant shall be governed
by and interpreted under the laws of the State of New York.
Section. 19. Date. The date of this Warrant is June 30, 1998. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 11 shall
10
<PAGE>
continue in full force and effect after such date as to any Warrant Shares or
other securities issued upon the exercise of this Warrant.
INFINITE GROUP, INC.
By:
---------------------------------
Name: Daniel Landi
Title: Chief Financial Officer
AGREED TO AND ACCEPTED
- -------------------------------------
Clifford G. Brockmyre
Address: 335 West Beach Road
Charlstown, RI, 02813
11
<PAGE>
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH REGISTERED HOLDER DESIRES TO
EXERCISE THIS WARRANT
INFINITE GROUP, INC.
The undersigned hereby exercises the right to purchase Warrant Shares
covered by this Warrant according to the conditions thereof and herewith makes
payment of U.S. $___________, the aggregate Warrant Exercise Price of such
Warrant Shares in full.
The undersigned represents that it is purchasing the Warrant Shares for
its own account for investment and not with a view to, or sale in connection
with, any distribution hereof, nor with any present intention of distributing
the same. The undersigned represents that it is an "accredited investor" as such
term is defined under Regulation D of the Securities Act of 1933, as amended
("Securities Act"). The Warrant Shares may not be sold, pledged, transferred,
hypothecated, or otherwise disposed of except pursuant to an effective
registration thereof under the Securities Act, or unless the Company shall have
received an opinion of counsel satisfactory to the Company that such
registration is not required.
INVESTOR
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address:
-------------------------
---------------------------------
---------------------------------
Number of Warrant Shares Being Purchased:
---------------------------------
Dated:___________, _____.
12
CONFIDENTIAL
February 23, 1999
Infinite Group, Inc.
300 Metro Center Boulevard
Warwick, Rhode Island 02886
Attention: Mr. Clifford G. Brockmyre
RE: Purchase of 2,875,500 Shares of Series A Convertible
Preferred Stock of Spectra Science Corporation
Ladies and Gentlemen:
The parties to this letter agreement are also parties to an earlier
agreement dated December 29, 1998 (the "Agreement") among Spectra Science
Corporation (the "Company"), Infinite Group, Inc. ("Infinite" or the "Seller"),
Crane & Co., Inc. ("Crane") and Pillar Investment Limited, as representative of
the Pillar Group (as defined in the Agreement). The Agreement sets forth the
terms of the proposed purchase of 2,875,500 shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share (the "Shares") from the
Seller.
The purpose of this letter is to confirm, notwithstanding contrary
provisions of the Agreement, the following:
A. The Shares shall be sold by Infinite in the following amounts, for the
following purchase prices, and to the following Purchasers:
(i) Crane: 666,667 Shares, for an aggregate purchase price of
$1,500,000.75.
(ii) Pillar Group: 1,120,056 Shares, for an aggregate purchase
price of $2,520,126.00; 444,444 of which Shares were
previously purchased on the First Closing Date for $999,999,
and 675,612 of which Shares are being purchased on the Second
Closing Date for an aggregate purchase price of $1,520,127.
(iii) The Company: 477,583 Shares for an aggregate purchase price of
$601,754.58.
(iv) Clearwater Fund IV, LLC ("Clearwater"): 611,194 Shares, to be
transferred by Infinite to Clearwater in exchange for certain
shares of Infinite held by Clearwater, as previously agreed
between Infinite and Clearwater.
B. The Second Closing Date shall be no later than February 26, 1999.
C. Section 7 of the Agreement, which provides that the Seller shall bear
the reasonable attorney's fees of Warner & Stackpole LLP not in excess of
$15,000, is hereby amended to provide (a) that each party shall bear its own
costs with respect to the transaction, and (b) that reasonable attorney's fees
and expenses of Warner & Stackpole LLP shall be borne by the Company.
<PAGE>
All other provisions of the Agreement not inconsistent with the foregoing
shall remain in full force and effect.
If the foregoing accurately represents the terms of our mutual agreement,
please acknowledge below, send an executed copy by facsimile transmission to
Kenneth S. Boger, Esq., Warner & Stackpole LLP (fax number 617-951-9151), 75
State Street, Boston, MA 02109 not later than 10:00 AM on February 26, 1999, and
send an original executed copy to Mr. Boger by overnight mail.
Very truly yours,
SPECTRA SCIENCE CORPORATION
By:
--------------------------------
Nabil Lawandy, President
Agreed and Acknowledged: CRANE & CO., INC.
By:
--------------------------------
Name:
Title:
PILLAR INVESTMENTS LIMITED,
as representative of each member of
the Pillar Group pursuant to power of
attorney
By:
--------------------------------
Name:
Title:
INFINITE GROUP INC.
By:
--------------------------------
Name:
Title:
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Infinite
Group, Inc. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,010,736
<SECURITIES> 0
<RECEIVABLES> 1,127,609
<ALLOWANCES> 34,195
<INVENTORY> 193,412
<CURRENT-ASSETS> 3,433,637
<PP&E> 6,365,545
<DEPRECIATION> 1,923,207
<TOTAL-ASSETS> 8,515,642
<CURRENT-LIABILITIES> 2,261,951
<BONDS> 2,903,817
0
0
<COMMON> 2,673
<OTHER-SE> 3,349,874
<TOTAL-LIABILITY-AND-EQUITY> 8,515,642
<SALES> 7,396,105
<TOTAL-REVENUES> 7,396,105
<CGS> 4,760,733
<TOTAL-COSTS> 3,880,668
<OTHER-EXPENSES> 337,715
<LOSS-PROVISION> 52,450
<INTEREST-EXPENSE> 373,405
<INCOME-PRETAX> (1,583,011)
<INCOME-TAX> (1,067,000)
<INCOME-CONTINUING> (516,091)
<DISCONTINUED> 394,125
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,886)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
