U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------
FORM 10-QSB
-----------
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934
For the transition period from period from ______ to _______
Commission File Number 0-21816
INFINITE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1490422
-------------------------------------------------------------------
(State or other jurisdiction (I.R. S. Employer
of organization) Identification No.)
2364 Post Road, Warwick, RI 02886
---------------------------------
(Address of principal executive office) (Zip Code)
(401) 738-5777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of July 27, 1999 the Registrant has a total of 2,128,540 shares of Common
Stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
<PAGE>
INDEX
INFINITE GROUP, INC.
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations - Three Months
and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10
PART II. OTHER INFORMATION
Items
1-5 Not Applicable 16
Item 6 Reports on Form 8-K 17
SIGNATURES
2
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,154,440 $ 1,010,736
Restricted funds 18,056 78,125
Accounts receivable, net of allowances 979,540 1,093,414
Inventories 723,999 193,412
Deferred tax asset -- 825,000
Advance - stockholder 50,795 50,383
Other current assets 267,499 182,567
------------ ------------
Total current assets 3,194,329 3,433,637
Property and equipment, net 7,246,485 4,442,338
Other assets:
Note receivable - stockholders 231,593 47,102
Note receivable 100,000 --
Cash surrender value of officer life insurance 149,753
Prepaid pension costs 784,228 --
Intangible assets, net 300,047 342,565
Other investment 250,000 250,000
------------ ------------
Total other assets 1,815,621 639,667
------------ ------------
$ 12,256,435 $ 8,515,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 675,034 $ 522,757
Stockholders -- 231,031
Accounts payable and accrued expenses 1,649,722 1,171,329
Current maturities of notes payable - stockholders 30,544 29,206
Current maturities of long-term obligations 790,880 307,628
------------ ------------
Total current liabilities 3,146,180 2,261,951
Long term obligations 4,980,589 2,301,862
Notes payable - stockholders 359,930 601,955
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized 2,748,604 and 2,673,334
shares issued; 2,198,529 and 2,673,334 2,748 2,673
shares outstanding
Additional paid-in capital:
Common stock 20,407,037 20,210,268
Warrants 577,399 555,585
Accumulated deficit (15,842,261) (17,418,652)
------------ ------------
5,144,923 3,349,874
Less treasury stock, 550,075 shares, at cost 1,375,187 --
------------ ------------
Total stockholders' equity 3,769,736 3,349,874
------------ ------------
$ 12,256,435 $ 8,515,642
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 2,685,738 1,839,716 $ 3,921,740 $ 3,765,123
Cost of goods sold 2,276,113 1,160,793 3,026,495 2,225,839
----------- ----------- ----------- -----------
Gross profit 409,625 678,923 895,245 1,539,284
Costs and expenses
Research and development 387,050 258,533 992,914 579,033
General and administrative expenses 809,544 390,752 1,303,532 744,365
Selling expenses 275,988 107,660 419,526 223,561
Depreciation and amortization 203,671 144,663 350,746 284,240
----------- ----------- ----------- -----------
Total costs and expenses 1,676,253 901,608 3,066,718 1,831,199
Operating loss (1,266,628) (222,685) (2,171,473) (291,915)
Other income (expense)
Gain on sale of assets -- 85,500 -- 85,500
Interest and other income(expense) 20,704 (40,056) 38,056 (32,775)
Interest expense (119,896) (58,817) (231,313) (135,659)
----------- ----------- ----------- -----------
Total other income (expense) (99,192) (13,373) (193,257) (82,934)
----------- ----------- ----------- -----------
Loss from continuing operations (1,365,820) (236,058) (2,364,730) (374,849)
Disposed business segment:
Loss from operations of disposed
business segment -- (158,997) -- (437,375)
Gain on sale of business segment
(less applicable income taxes of $825,000) -- -- 4,170,315 --
----------- ----------- ----------- -----------
Net income (loss) from discontiued operations -- (158,997) 4,170,315 (437,375)
Income (loss) before extraordinary item (1,365,820) (395,055) 1,805,585 (812,224)
Extraordinary item (Note 6) (222,864) -- (222,864) 0
----------- ----------- ----------- -----------
Net income (loss) $(1,588,684) (395,055) 1,582,721 $ (812,224)
=========== =========== =========== ===========
Income (loss) per share - basic:
Continuing operations (0.62) (0.10) (1.04) (0.15)
Disposed business segment:
Loss from operations -- (0.06) -- (0.18)
Gain on sale -- -- 1.84 --
Extraordinary item (0.10) -- (0.10) --
----------- ----------- ----------- -----------
Net income (loss) per common share (0.72) (0.16) 0.70 (0.33)
=========== =========== =========== ===========
Income (loss) from disposed business segment
per share - diluted -- (0.06) 1.79 (0.18)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 2,198,529 2,451,882 2,270,117 2,451,882
=========== =========== =========== ===========
Diluted 2,261,029 2,451,882 2,332,617 2,451,882
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (2,364,730) $ (812,224)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 350,746 296,518
Loss attributed to unconsolidated subsidiary -- 510,875
Gain on disposition of assets -- (85,500)
Amortization of discount on note payable 23,270
Expenses satisfied via issuance of equity 39,527
Asset write down and allowances 20,225 10,669
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 362,509 (72,872)
Other current assets 44,795 (145,879)
Inventory and inventoried parts 315,002 (26,327)
Increase (decrease) in liabilities:
Accounts payable and accured expenses (687,746) 40,147
---------------- ----------------
Net cash used in continuing operations (1,896,402) (284,593)
Cash flows from investing activities:
Purchase of property and equipment (1,229,663) (825,788)
Purchase of investments (298,701) (250,000)
Increase in intangible assets (18,705) (12,962)
Proceeds from the sale of of investment in Spectra Science Corp. 3,620,128 --
Advance to stockholder (412) --
Advance under note receivable (100,000) --
---------------- ----------------
Net cash used in investing activities 1,972,647 (1,088,750)
Cash flows from financing activities:
Net borrowings (repayments) of short-term debt (280,723) 318,291
Borrowings of long-term obligations 984,026 1,500,000
Repayments of long-term obligations (652,772) --
Repayments of notes payable - stockholders (69,315) --
Decrease in restricted funds, net 60,069 49,889
---------------- ----------------
Net cash provided by (used in) financing activities 41,285 1,868,180
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 117,530 494,837
Cash and cash equivalents - beginning of period 1,036,910 541,654
---------------- ----------------
Cash and cash equivalents - end of period $ 1,154,440 $ 1,036,491
================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Infinite Group, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998,
which includes audited financial statements and footnotes as of and for the
years ended December 31, 1998 and 1997.
NOTE 2. - BUSINESS ACQUISITIONS
In April 1999, the Company acquired 100% of the common stock of Osley &
Whitney, Inc. (O&W). The aggregate consideration paid for the stock was $1.5
million ($300,000 in cash and $1,200,000 in convertible promissory notes payable
in three annual installments of $400,000, beginning March 2000, plus interest at
8% per annum). These notes are included in long term obligations as of June 30,
1999 in the accompanying balance sheet.
The O&W acquisition was accounted for under the purchase method of
accounting, whereby the results of operations of O&W are included in the
accompanying statement of operations beginning from the date of acquisition. The
following is a proforma summary of the results of operations had O&W been
acquired as of January 1, 1998:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ (1,588,684) $ (382,860) $ 1,226,505 $ (957,412)
============ ========== =========== ==========
In April 1999, the Company acquired 100% of the common stock of Materials
& Manufacturing Technologies, Inc. (MMT), of West Kingston, Rhode Island. In
exchange for 20,000 shares of Infinite Group, Inc. common stock. The MMT
acquisition was accounted for under the pooling method of accounting whereby the
results of operations of MMT are included on a combined basis as if the
acquisition occurred at January 1, 1998. MMT was substantially inactive during
1998 and 1999 and as a result, the results of operations of the Company are as
previously reported.
In April 1999, the Company formed a new subsidiary, Express Pattern, which
provides rapid prototyping services. The subsidiary acquired equipment to
start-up operations for approximately $248,000.
6
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - LONG TERM OBLIGATIONS
During the quarter ended June 30, 1999, the Company incurred $984,000 of
additional bank debt, which is included in long term obligations as of June 30,
1999 in the accompanying balance sheet. The proceeds were used to refinance
existing equipment purchased previously out of cash flow ($635,000) and to
purchase new equipment ($349,000). These obligations are payable over a fifteen
year term in aggregate monthly payments of approximately $5,500 plus interest at
prime plus .75%. The notes are secured by certain equipment of the Company.
NOTE 4. - REVERSE STOCK SPLIT
On February 16, 1999, the Company effected a one for five reverse stock
split of the Company's common stock. This transaction was given retroactive
effect in the December 31, 1998 audited financial statements, as well as the
accompanying June 30, 1999 and 1998 financial statements. For further
information, refer to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
NOTE 5. - DISPOSAL OF A BUSINESS SEGMENT
In February 1999, the Company completed the sale of its equity interest in
Spectra Science Corp. (SSC) whereby 611,194 shares of Series A Preferred Stock
of SSC were sold in consideration for the retirement of approximately 550,000
shares of the Company's common stock. As a result the Company recorded a gain of
approximately $1.375 million. Additionally, the Company sold 1,342,249 shares of
SSC for $2.25 per share to two shareholders of SSC, and 477,583 shares were
repurchased by SSC at a price of $1.26 per share, for aggregate cash
consideration to the Company of approximately $3,600,000. The transaction
resulted in a gain of approximately $3,600,000. The total gain recognized in
1999, as a result of the above transactions, amounted to approximately $4.15
million, net of $825,000 in income taxes.
NOTE 6. - EXTRAORDINARY ITEM
In April 1999, the Company prepaid a portion ($420,000) of a ten year
promissory note, payable to the chairman/principal stockholder. As a result of
the early extinguishment of a portion of the note payable, a pro-rata portion of
the loan closing costs and the note discount relating to the detachable warrants
issued with the debt, were written off in the quarter ended June 30, 1999. The
amount charged to expense for the note discount and loan closing costs amounted
to $187,390 and $35,474, respectively. The aggregate amount of $222,864, is
considered a loss on early extinguishment of debt and is classified as an
extraordinary item in the accompanying consolidated statement of operations.
7
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7. - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the Company has reported basic and diluted earnings per
share. The difference between the weighted average number of common shares
outstanding for the basic and diluted calculation represents the effect of
convertible debentures. The conversion of outstanding options and warrants were
not considered in the calculation of diluted earnings per share since the
average market price is less than the exercise price for all excercisable
securities during the quarter ended June 30, 1999. The impact of convertible
debentures was excluded from the computation of loss per share from continuing
operations because their assumed conversion would be antidilutive.
NOTE 8. - SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded approximately $22,000 of additional paid-in capital
for vested detachable warrants issued in connection with a note payable to the
chairman/principal stockholder. In addition, the Company recorded approximately
$125,000 of additional paid-in capital in connection with the issuance of common
stock for consulting services rendered.
NOTE 9. - 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.
Effective with the acquisition of O&W (see Note 2), the Company's
businesses are currently organized, managed and internally reported as two
segments, laser services and plastics. The segments are determined based on
differences in products, production processes and internal reporting. All of the
segments of the Company operate entirely within the United States. Revenues from
customers in foreign countries are minimal.
Transactions between reportable segments are recorded at cost. The Company
relies on intersegment cooperation and management does not represent that these
segments, if operated independently, would report the results shown.
A summary of selected consolidated information for the Company's industry
segments during the three and six month periods ended June 30, 1999 and 1998 is
set forth as follows:
8
<PAGE>
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9. - BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Laser Photonic
Services (1) Materials (2) Plastics Consolidated
------------ ------------- -------- ------------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999
--------------------------------
Sales from external customers $ 1,148,875 $ -- $ 1,536,863 $ 2,685,738
============= ============ ============ ============
Operating loss $ (962,989) $ -- $ (402,831) $ (1,365,820)
============= ============ ============ ============
Extraordinary item $ (222,864) $ -- $ -- $ (222,864)
============= ============ ============ ============
Identifiable assets $ 8,734,671 $ -- $ 3,521,764 $ 12,256,435
============= ============ ============ ============
Three Months Ended June 30, 1998
--------------------------------
Sales from external customers $ 1,823,514 $ -- $ 16,202 $ 1,839,716
============= ============ ============ ============
Operating income (loss) $ 62,698 $ -- $ (298,756) $ (236,058)
============= ============ ============ ============
Net loss from disposed business segments $ -- $ (158,997) $ -- $ (158,997)
============= ============ ============ ============
Identifiable assets as of December 31, 1998 $ 8,026,057 $ -- $ 489,585 $ 8,515,642
============= ============ ============ ============
Six Months Ended June 30, 1999
------------------------------
Sales from external customers $ 2,322,829 $ -- $ 1,598,911 $ 3,921,740
============= ============ ============ ============
Operating loss $ (1,615,415) $ -- $ (749,315) $ (2,364,730)
============= ============ ============ ============
Net income from disposed business segments $ -- $ 4,170,315 $ -- $ 4,170,315
============= ============ ============ ============
Extraordinary item $ (222,864) $ -- $ -- $ (222,864)
============= ============ ============ ============
Six Months Ended June 30, 1998
------------------------------
Sales from external customers $ 3,605,809 $ -- $ 159,314 $ 3,765,123
============= ============ ============ ============
Operating income (loss) $ 180,257 $ -- $ (555,106) $ (374,849)
============= ============ ============ ============
Net loss from disposed business segments $ -- $ (437,375) $ -- $ (437,375)
============= ============ ============ ============
</TABLE>
(1) Includes parent holding company.
(2) Represents Spectra Science Corp.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded by the Company or any other
person that the objectives and plans of the Company will be achieved.
GENERAL
Infinite Group, Inc. (the "Company") is comprised of two business groups: The
Laser Group and The Plastics Group. The Company sells products and services in
the fields of material processing, advanced manufacturing methods, high
productivity production tooling and laser-application technology. The Company
has 153 employees.
The Laser Group, comprised of Laser Fare (Smithfield, RI), Mound Laser &
Photonics Center (Miamisburg. OH), and The Advance Technology Group
(Narragansett, RI), provides comprehensive laser-based materials processing
services to leading manufacturers.
The Plastics Group, comprised of Osley & Whitney (Westfield, MA), ExpressTool,
(Warwick, RI), Materials & Manufacturing Technologies (West Kingston, RI) and
Express Pattern (Buffalo Grove, IL), provides rapid prototyping services and
proprietary mold building services.
10
<PAGE>
The Laser Group
While primarily engaged in contract laser material processing, Laser Fare also
develops new applications for industrial lasers. Laser Fare's 20 high powered
lasers are capable of performing a wide variety of manufacturing processes with
multi-axis laser manipulation. Laser Fare also manufactures complete assemblies
for selective medical product companies. Approximately 75% of Laser Fare's sales
come from customers in the medical device, aerospace and power generation
industries. Customers include General Electric, United Technologies, Allied
Signal, Polaroid, Stryker Medical and Dey Laboratories. Laser Fare also provides
a variety of value-added services, that include assembly, heat treating,
coating, testing and inspection. Laser Fare quotes orders through traditional
sales methods as well as through www.l_Hlt459102735a_Hlt459102735serfare.com.
Laser Fare is certified for overhaul and repair by the Federal Aviation
Administration (FAA No. LQFR37K), and as a Contract Manufacturer (Type E) by the
Food and Drug Administration (FDA No. 1287338).
Mound Laser and Photonics Center ("MLPC") specializes in laser applications
within industry, government and education sectors. The Midwest location, a
region long known for its expertise in materials and material science, gives the
Company a platform for growth into the automotive, aerospace, tool & die, and
other local industries. Specialized services include growth of thin films by
pulsed laser deposition, application of lasers to chemistry and photochemistry,
spectroscopy, and applied optics. MLPC has applied for a provisional patent on
pulsed laser deposition.
The Advanced Technology Group ("ATG") manages research and development programs
for industrial customers. In addition ATG obtains intellectual property rights
to the developments created under these contracts that provide future
opportunities for the Company. For example, intellectual property development
under a contract with Hasbro resulted in the formation of the Company's
ExpressTool subsidiary.
ATG recently entered into a one year consulting agreement with Molecular
Geodesics, Inc., ("MGI"), of Cambridge, MA. MGI is creating technologies using
synthetic biomimetic materials with the mechanical responsiveness of living
cells and tissues and applying these technologies to medical, industrial and
military applications. ATG will utilize Laser Fare and ExpressTool's proprietary
techniques to fabricate structures for these "bioskins". Triton Systems of
Chelmsford, MA contracts with Laser Fare to laser fabricate aerospace components
from metal composite materials. These are strong lightweight materials that are
used in jet engines.
The Plastics Group
In April 1999, Infinite Group acquired 100% of the outstanding capital stock of
privately held Osley & Whitney, Inc. (O&W), a Massachusetts corporation, from
its stockholders for approximately $1.5 million payable is cash and notes. O&W
is a forty-nine-year-old plastic injection moldbuilding company located in
Westfield, MA with fifty-four
11
<PAGE>
employees. O&W serves a blue-ribbon clientele of automotive, automotive
aftermarket, consumer sporting goods, and office machine companies including
Polaroid, Pitney-Bowes, Hardigg Industries, and Titleist, from its 21,500 sq.
ft. manufacturing facility. ExpressTool reports to O&W. Infinite's proprietary
mold fabrication and conformal cooling technologies lower the cost of molded
parts, increase molding capacity and provide shorter delivery times over
conventional constructed molds and compliment O&W's established expertise in the
moldbuilding industry.
ExpressTool incorporates its conformal cooling and proprietary thermal
management for high production injection mold tooling to allow molds used in the
plastic fabrication industries to cool and eject parts up to 75% faster than
traditional molds. Additionally, ExpressTool accepts computer files directly
from its customers who use such software as AutoCad, Pro-E and Cadkey to submit
their 3-D designs directly over the internet at www.ExpressTool.com. ExpressTool
began shipping mold inserts to Cheseborough Pond, 3M, and GE Plastics, and has
been invited to apply for preferred vendor status with Pitney Bowes, FordVisteon
and others.
In April 1999, Infinite formed Express Pattern located in Buffalo Grove, IL, to
expand its Mid-West presence and provide plastic rapid prototyping services to
the metal casting industries. In late June 1999, Express Pattern began shipping
sample plastic prototype parts to Allen-Bradley, Paradigm, Rolls-Royce Allison
and Hewlett-Packard. In addition, Express Pattern provides direct interface from
customer CAD software (such as AutoCad, Pro-E and others) for interface to the
Company's stereolithography systems and equipment. Express Pattern also provides
similar services to the other Infinite Group companies including Osley &
Whitney, ExpressTool and Laser Fare.
Also in April 1999, Infinite Group acquired 100% of the outstanding stock of
Materials & Manufacturing Technologies, Inc. (MMT) of West Kingston, Rhode
Island in exchange for 20,000 shares of Infinite Group common stock. MMT
recently received notification from the U. S. patent office that it had received
a patent, number 5,427,987, on its work in zirconium diboride materials. MMT has
an exclusive licensing arrangement with Texas A&M University (with rights to
sub-license) for use of patents and intellectual property owned by Texas A&M in
the area of electrodes and parts made from zirconium diboride/copper
(Zyrkon(TM)) composites. Zyrkon(TM) composite electrodes have been shown to be
superior to copper, tungsten/copper and graphite electrodes in electrical
discharge machining applications. In addition, parts made from Zyrkon(TM)
exhibit excellent abrasion resistance and resistance to wear by electric arcs as
well as high thermal conductivity and a relatively low coefficient of thermal
expansion. These properties indicate that Zyrkon(TM) can be used to replace
current material systems in applications as varied as injection mold tooling,
spot-welding, waste remediation electrodes, high-current switches and heat
sinks. The acquisition provides Infinite with the ability to take advantage of
these material systems in the Company's areas of expertise as well as providing
Infinite with the ability to address new markets.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a series of
private placements of debt and equity securities. As of June 30, 1999, the
Company has cash, cash equivalents and marketable securities totaling
$1,154,440.
While the majority of the revenues realized in the six months ending June 30,
1999 were attributed to Laser Fare and Osley & Whitney, the Company anticipates
improved revenue from its other divisions and additional expense containment
measures have been implemented. Management is also pursuing other strategies for
raising additional working capital through debt and/or equity transactions.
On June 30, 1998, the Company's president and chief executive officer loaned the
Company an aggregate of $1.15 million. The note evidencing the loan is for a
term of fifteen years and bears interest at the rate of 9.0% for the first
twelve months and adjusts annually thereafter to a rate equal to the one-year
T-Bill rate plus 3%. The president also loaned the Company $250,000 in the first
quarter of 1998. This note is repayable over a term of one year and bears
interest at a rate of 9.0%. In consideration for the loans, the Company granted
the lender detachable warrants to purchase 536,000 shares of Company Common
Stock exercisable at $5.60 per share. Half of the warrants vested immediately
and, provided that the loan remains outstanding, the remaining 50% vest in four
equal tranches; six, nine, twelve, and fifteen months from the anniversary date
of the loan. In the event the notes are prepaid within such period, any unvested
warrants are cancelable. In April 1999, approximately $650,000 of the
outstanding balance of the loan was repaid, including $420,000 that was prepaid
(See Note 4).
During December 1998 and February 1999 the Company consummated the sale of its
investment in Spectra Science Corp. ("SSC") Series A Convertible Preferred Stock
("SSC Stock") yielding net proceeds to the Company of approximately $4.6
million; $1.0 million of which was received in December 1998 and the balance was
received in February 1999. As a result of this transaction the Company
recognized gains of approximately $1.0 million and $3.6 million in 1998 and
1999, respectively.
As of June 30, 1999, the Company had working capital of approximately $48,000.
The Company believes that its working capital, together with its credit
facilities, will be sufficient to satisfy the Company's short-term working
capital needs. In conjunction with its on-going business expansion program,
management is also pursuing alternative sources of funding from conventional
banking institutions as well as exploring the availability of government funds
in the form of revenue bonds for the purchase of equipment and facilities, among
others. There is no assurance, however, that the Company's current working
capital will be adequate to fund its current operations and business expansion
or that management will be successful in raising additional working capital.
13
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Consolidated revenues for the three months ended June 30, 1999 were $2,685,738,
with $1,148,875 of sales coming from the Laser Group and $1,536,863 of sales
coming from the Plastics Group. Cost of sales totaled $2,276,113 and a gross
profit of $409,625 was realized for the quarter. Consolidated revenues for the
three months ended June 30, 1998 were $1,839,716 consisting solely of Laser
Group sales. Cost of sales totaled $1,160,793, and a gross profit of $678,923
was realized for the three months ended June 30, 1998. Continued delayed receipt
of materials, primarily from aerospace customers, and retooling of certain
aerospace products negatively impacted Laser Fare revenues for the three months
ended June 30, 1999.
Research and Development expenses were $387,050 for the three months ended June
30, 1999 as compared to $258,533 for three months ended June 30,1998. The
increase in the second quarter of 1999 is due primarily to the research and
development efforts in the Company's ExpressTool and Advanced Technology
subsidiaries.
General and administrative expenses were $809,544 for the three months ended
June 30, 1999 as compared to $390,752 for the three months ended June 30, 1998.
The increase of $418,792 or 107% was due primarily to expenses for additional
resources at Laser Fare for engineers, training and Y2K compliance, expenses
attributed to the newly acquired/formed companies of O&W, Express Pattern and
MMT, and professional fees in legal and investor relations areas. Selling
expenses were $275,988 for the three months ended June 30, 1999, as compared to
$107,660 for the three months ended June 30, 1998. The increase was primarily
attributed to increase sales expenses at Laser Fare and ExpressTool.
Depreciation and amortization expenses totaled $203,671 for the three months
ended June 30, 1999, as compared to $144,663 for the three months ended June 30,
1998. The increase was primarily due to fixed asset additions.
Interest expense for the first three months ending June 30, 1999 was $119,896 as
compared to $58,817 for the first three months ended June 30,1998. The increase
in interest expense was due to interest paid on the note payable to the
Company's president and chief executive officer, and O & W bank debt. Interest
and other income for the three months ended June 30, 1999 was $20,704 as
compared to $40,056 for the three months ended June 30, 1998.
The Company has a consolidated net loss of $1,588,684 for the three months ended
June 30, 1999, as compared to the net loss of $395,055 for the three months
ended June 30, 1998. The increase in the net loss is primarily attributed to an
interim slow down in sales at Laser Fare, as previously noted above, and start
up costs being incurred at newly acquired/formed entities.
14
<PAGE>
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Consolidated revenue for the six months ended June 30, 1999 were $3,921,740,
with $2,322,829 of sales coming from the Laser Group and $1,598,911 of sales
coming from the Plastics Group. Cost of sales totaled $3,026,495, and a gross
profit of $895,245 was realized for the period. For the six months ended June
30, 1998, sales totaled $3,765,123 and consisted primarily of Laser Group sales.
Consolidated cost of sales was $2,225,839 for the first six months of 1998 and
the Company realized a gross profit of $1,539,284 for the period.
Research and Development expenses were $992,914 during the first six months
ended June 30, 1999 as compared to $579,033 during the first six months ended
June 30, 1998. The increase is primarily due to the research and development
efforts in the Company's ExpressTool and Advanced Technology subsidiaries.
General and administration expenses for the six months ended June 30, 1999 were
$1,303,532 as compared to $744,365 for the six months ended June 30, 1998. The
increase was due primarily to expenses for additional resources at Laser Fare
for engineers, training and Y2K compliance, expenses attributed to the newly
acquired/formed companies of O&W, Express Pattern and MMT, and professional fees
in the legal and investor relations areas. Selling expenses were $419,526 for
the first six months ended June 30, 1999 as compared to $223,561 for the first
six months of 1998. The increase was primarily attributed to increased sales
expenses at Laser Fare.
Depreciation and amortization expenses totaled $350,746 for the six months ended
June 30, 1999 compared to $284,240 for the six months ended June 30, 1998. The
increase was primarily due to fixed asset additions.
Interest expense was $231,313 and $135,659 during the six-month periods ended
June 30, 1999 and 1998 respectively. The increase in interest expense was due to
interest paid on the note payable to the Company's president and chief executive
officer, and O&W bank debt. Interest and other income for the six months ended
June 30, 1999 was $38,056 compared to $32,775 for the first six months ended
June 30, 1998.
The Company had a consolidated net income of $1,582,721 for the six months ended
June 30, 1999 as compared to a net loss of $812,244 during the six months ended
June 30, 1998. The loss from continued operations was $2,364,730 for the six
months ended June 30, 1999 as compared to a loss of $374,849 for the six months
ended June 30, 1998. The variance was due primarily to the reduction of sales in
Laser Fare as previously mentioned.
15
<PAGE>
The Company is on schedule with a project that addresses the Year 2000 issue of
computer systems and other equipment with embedded chips or processors not being
able to properly recognize and process date-sensitive information after December
31, 1999. Many systems use only two digits rather than four to define the year
and these systems will not be able to distinguish between 1900 and the year
2000. This may lead to disruptions in the operations of business and
governmental entities resulting from miscalculations or system failures. The
project is designed to ensure the compliance of all of the Company's
applications, operating systems and hardware platforms, and to address the
compliance of key business partners. Key business partners are those clients and
vendors that have a material impact on the Company's operations. All phases of
the project have been completed, thus minimizing the impact of the Year 2000
problem on the Company's operations.
In 1997 the Company began an initiative to update and upgrade all computer
systems so that it could attain a competitive advantage. Early in 1998 the
Company began to address the Year 2000 (Y2K) issue to insure all computer
hardware and related software were Y2K compliant. Management believes all of the
Company's internal business computer programs and systems were Y2K compliant.
Year 2000 disruptions in client or vendor operations could result in one or more
missing scheduled payments which could impact the Company's cash flow. Year 2000
disruptions of the operations of key vendors could impact the Company's ability
to fulfill some of its contractual obligations. If one or more of these
situations occur, the Company's results of operations, liquidity and financial
condition could be materially and adversely affected. The Company is unable to
determine the readiness of its key business partners at this time and therefore
unable to determine whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
conditions. However, as a part of the Year 2000 project, the Company had mailed
a questionnaire to all of its clients and vendors requesting the status of their
Year 2000 compliance. As of the June 30, 1999, the Company had received a reply
from all of its clients and vendors indicating that they either are or will be
in full compliance by year-end 1999. This has significantly reduced the
Company's level of uncertainty about the Year 2000 problem and reduces the
possibility of significant interruptions of normal business operations.
Part II - Other Information
Items 1-5 Not Applicable
Item 6 Reports on Form 8-K
Reports on Form 8-K dated April 28, 1999 and 8K/A dated June 28,
1999 were filed by the registrant pursuant to item 2 thereof with
respect to the acquisition of Osley & Whitney.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
August 13, 1999
INFINITE GROUP, INC.
By: /s/ Clifford G. Brockmyre
---------------------------------
Clifford G. Brockmyre, President
And Chief Executive Officer
By: /s/ Daniel T. Landi
---------------------------------
Daniel T. Landi
Chief Financial and Accounting
Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from June 30, 1999 10-QSB
and is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,154,440
<SECURITIES> 0
<RECEIVABLES> 1,021,035
<ALLOWANCES> 41,095
<INVENTORY> 723,999
<CURRENT-ASSETS> 3,194,329
<PP&E> 9,494,689
<DEPRECIATION> 2,248,204
<TOTAL-ASSETS> 12,256,435
<CURRENT-LIABILITIES> 3,146,180
<BONDS> 5,340,519
0
0
<COMMON> 2,748
<OTHER-SE> 5,142,175
<TOTAL-LIABILITY-AND-EQUITY> 12,256,435
<SALES> 3,921,740
<TOTAL-REVENUES> 3,921,740
<CGS> 3,026,495
<TOTAL-COSTS> 5,100,299
<OTHER-EXPENSES> 992,914
<LOSS-PROVISION> 26,255
<INTEREST-EXPENSE> 231,313
<INCOME-PRETAX> (2,364,730)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,364,730)
<DISCONTINUED> 4,170,315
<EXTRAORDINARY> (222,864)
<CHANGES> 0
<NET-INCOME> 1,582,721
<EPS-BASIC> .70
<EPS-DILUTED> .68
</TABLE>
