FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
2364 Post Road, Warwick, RI 02886
- ------------------------------------ ------------------------------------
(Address of principal executive (Zip Code)
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. |_|
The registrant's revenues for the year ended December 31, 1999 were
$9,239,969.
As of March 20, 2000 there were 2,368,529 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 20,
2000, based on the average bid and asked price on such date was $20,280,530.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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INFINITE GROUP, INC.
Form 10-KSB
TABLE OF CONTENTS
Page
PART I
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
Item 5. Market for 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............................................. 21
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures........................................ 22
PART III
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, and Reports on Form 8-K................................ 32
FORWARD LOOKING STATEMENT INFORMATION
Various statements made in this Annual Report on Form 10-KSB 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. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgements about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
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 in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by forward-looking statements include, but are
not limited to, the factors set forth 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
BUSINESS
Overview
Our business has two segments, the Laser and Photonics Group and the
Plastics Group. We sell products and services in the fields of material
processing, advanced manufacturing methods, high productivity production mold
building and laser-application technology. We have approximately 145 employees.
Our Laser and Photonics Group, comprised of Laser Fare (Smithfield, RI),
Mound Laser & Photonics Center (Miamisburg, OH) and the Advanced Technology
Group (Narragansett, RI), provides comprehensive laser-based materials
processing services to leading manufacturers.
Our 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.
We were organized as a Delaware corporation on October 14, 1986. On
January 7, 1998, we changed our name from Infinite Machines Corp. to Infinite
Group, Inc. Our executive offices are located at 2364 Post Road, Warwick, Rhode
Island 02886. We own various trademark rights and hold federal trademark
registration for our name and the Infinite Group logo. "Infinite Group," "Laser
Fare," "Osley & Whitney," "ExpressTool" and "Zyrkon" are registered trademarks
of Infinite Group, Inc. We maintain sites on the World Wide Web at
www.infinite-group.com, www.laserfare.com, www.mlpc.com, www.expresspattern.com
and www.expresstool.com. However, the information found on our Web sites is not
part of this report.
The laser and photonics group
Our Laser Fare subsidiary is primarily engaged in contract laser material
processing; however it also develops new applications for industrial lasers.
Laser Fare has 22 high powered computer controlled lasers that are capable of
performing a wide variety of manufacturing processes with multi-axis laser
manipulation. Laser Fare also manufactures complete assemblies for selective
medical product companies. Approximately 75% of 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. Through Laser Fare we also
provide a variety of value-added services that include assembly, heat treating,
coating, testing and inspection. We quote orders through traditional sales
methods as well as through our Web site at www.laserfare.com. Laser Fare is
certified
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for overhaul and repair by the Federal Aviation Administration (FAA No.
LQFR37K), and as a Contract Manufacturer (Type E) by the Food and Drug
Administration (FDA No. 1287338).
Our Mound Laser and Photonics Center (MLPC) subsidiary specializes in
laser applications, photonics applications and material processing and provides
services within industry, government and education sectors. The midwest
location, a region long known for its expertise in materials and material
science, gives us a platform for growth into the automotive, aerospace, tool and
die and other local industries. Specialized services include growth of thin
films by pulsed laser deposition, applications of lasers to chemistry and
photochemistry, spectroscopy and applied optics. MLPC has applied for a
provisional patent on pulsed laser deposition. 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.
Our Advanced Technology Group (ATG) manages research and development
programs for industrial and government sponsors. ATG has recently been awarded
several contracts and subcontracts sponsored by the Defense Advanced Research
Project Agency (DARPA). DARPA is the central research and development
organization for the Department of Defense. It manages and directs selected
basic and applied research and development projects for the Department of
Defense, and pursues research and technology where risk and payoff are both very
high and where success may provide dramatic advances for traditional military
roles and missions and dual-use applications. As it effects ATG, these programs
have been focused on laser driven direct write technologies. Laser direct
technologies enable cost-effective manufacturing of engineered components
without the use of expensive tooling by directly depositing materials on the
substrate with laser energy. Active and passive devices for electronic and
photonic applications can be manufactured this way as well as a wide variety of
sensors and activators. These technologies have applications across a broad
range of industries that utilize electronic and photonic materials (including
telecommunications, automotive and consumer electronics).
ATG has a consulting arrangement with Molecular Geodesics Inc. (MGI) of
Cambridge, MA. MGI is creating technologies using synthetic biomimetic materials
with the mechanical responsiveness of living cells and tissues and applying
these technologies to medical, industrial and military applications. Our
Advanced Technology Group will utilize Laser Fare's and ExpressTool's
proprietary techniques to fabricate structures for MGI.
Through ATG, Triton Systems of Chelmsford, MA contracts with our Laser
Fare subsidiary to laser fabricate aerospace components from metal composite
materials. These are strong lightweight materials that are used in jet engines.
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The plastics group
In April 1999, we acquired 100% of the outstanding capital stock of Osley
& Whitney, Inc. (O& W), a privately held Massachusetts corporation, from its
stockholders for approximately $1.5 million in cash and notes. O&W is a
fifty-year-old plastic injection moldbuilding company located in Westfield, MA
with approximately 50 employees. It serves a blue-ribbon clientele of
automotive, automotive aftermarket, consumer sporting goods and office machine
companies, including Polaroid, Pitney-Bowes, Hardigg Industries and Titleist,
from its 21,500 sq. ft. manufacturing facility. Our proprietary mold fabrication
and conformal cooling technologies lower the cost of molded parts, increase
molding capacity and provide shorter delivery times over conventionally
constructed molds. This compliments our established expertise in the
moldbuilding industry.
During 1999, ExpressTool was integrated into our Westfield, MA facility
and separate facilities in Warwick, RI were closed to reduce cost and improve
productivity. The ExpressTool process incorporates its conformal cooling and
proprietary thermal management for high production injection mold tooling to
allow molds used in the plastic fabrication industries to cool and eject parts
up to 75% faster than traditional molds. Additionally, they accept computer
files directly from their customers who use such software as AutoCad, ProE and
Cadkey to submit their 3D designs directly over the internet at
www.expresstool.com. ExpressTool began shipping mold inserts to Cheseborough
Pond, 3M, and GE Plastics and has achieved preferred vendor status with Pitney
Bowes, FordVisteon and others.
In April 1999, we formed Express Pattern located in Buffalo Grove, IL, to
expand our midwest presence and provide plastic rapid prototyping services to
the metal casting industries. During 1999, Express Pattern shipped plastic
prototype parts to Allen-Bradley, Paradigm, Rolls-Royce Allison, Motorola, and
Hewlett-Packard. In addition, it provides direct interface from customer CAD
software (such as AutoCad, ProE and others) to our stereolithography systems and
equipment. Express Pattern also provides similar services to our other
subsidiaries.
Also in April 1999, we acquired 100% of the outstanding stock of Materials
& Manufacturing Technologies, Inc. (MMT) of West Kingston, Rhode Island in
exchange for 20,000 shares of our common stock. MMT recently received
notification from the United States 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)
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can be used to replace current material systems in applications as varied as
injection mold tooling, spot-welding, waste remediation electrodes, high-current
switches and heat sinks. The acquisition provides us with the ability to take
advantage of these material systems in our areas of expertise as well as
providing us with the ability to address new markets.
Competition
We have a unique blend of capabilities. To our knowledge there is no one
company that competes with us across the industries we service. However, on a
segment by segment basis, our plastics group competes with traditional mold
makers and large OEMs. Our competitive advantage lies in proprietary processes
such as high productivity production tooling.
Our laser and photonics group competes in two areas: laser materials
processing and laser driven research and development. The materials and
processing department of LF competes with laser and traditional job shops.
Universities compete for some laser research. However, we are not aware of
companies that have both manufacturing and research capabilities with applied
practical solutions for advanced manufacturing.
We compete with different manufacturers, depending on the type of service
or product we provide and the geographic locale of our different operations.
These competitors may have greater manufacturing, financial, research and
development and/or marketing resources than we have. In addition, we may not be
able to offer prices as low as some of our competitors because those competitors
may have lower cost structures as a result of their geographic location or the
services they provide. Our inability to provide comparable or better
manufacturing services at a lower cost than our competitors could cause our net
sales to decline.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
The following factors may affect our future growth and should be
considered by any prospective purchaser of our securities:
We have an accumulated deficit and have experienced recurring losses. At
December 31, 1999, we had an accumulated deficit of $17,985,172. We also
experienced approximately $121,886 and $560,190 of net losses, respectively,
during the years ended December 31, 1998 and 1999. No assurance can be given
that we will not continue to incur losses.
We require working capital. At December 31, 1999 we had negative working capital
of approximately $1.0 million. We continue to experience working capital
shortages which materially impair our business operations and growth strategy.
If we continue to experience working capital limitations it will materially
impact our operations and growth prospects.
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We require additional financing. To date we have met our working capital and
operating requirements through public and private sales of equity and through
borrowings. Our continued operations and expansion will depend upon increased
revenues from operations and the availability of equity or debt financing. We
have no commitments for additional financing. Further, there can be no assurance
that we will be able to generate levels of revenues and cash flows sufficient to
fund operations or that we will be able to obtain additional financing on
satisfactory terms, if at all, to achieve profitable operations.
Our service businesses are vulnerable. A significant portion of our annual net
sales comes from a small number of our customers. Since we are dependent upon
continued net sales from many customers, any material delay, retooling,
cancellation or reduction of orders from these or other major customers could
cause our net sales to decline significantly. We cannot guarantee that we will
be able to retain any of our largest customers or any other accounts. In
addition, our customers may materially reduce the level of services ordered from
us at any time. This could cause a significant decline in our net sales and we
may not be able to reduce the accompanying expenses at the same time.
Further, although we have long-standing purchase orders with many of our
top customers, including Dey Laboratories, General Electric, Polaroid and Pitney
Bowes, under which these customers are obligated to obtain services from us,
they are not obligated to purchase any minimum amount of services. As a result,
we cannot guarantee that we will receive any net sales from these orders. In
addition, these customers with whom we have long-term contracts may materially
reduce the level of services ordered at any time. This could cause a significant
decline in our net sales.
We are dependent upon the aerospace, laser photonic and medical device
industries, which continually produce technologically advanced products; our
inability to continually manufacture such products on a cost-effective basis
would harm our business. A majority of our sales are to companies in the
aerospace, laser photonic and medical device industries, which are subject to
rapid technological change and product obsolescence. If our customers are unable
to create products that keep pace with the changing technological environment,
our customers' products could become obsolete and the demand for our services
could decline significantly. If we are unable to offer technologically advanced,
cost-effective, quick-response manufacturing services to customers, demand for
our services will also decline. In addition, a portion of our net sales are
derived from our ability to offer complete service solutions for our customers.
Accordingly, if we fail to maintain high-quality services, our net sales would
significantly decline.
Our industry is subject to intense competition and rapid technological change.
We are engaged in rapidly evolving and highly competitive fields. Competition is
intense and expected to increase. Most of our competitors 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. There can be
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no assurance that our competitors will not succeed in developing technologies in
these fields which will enable them to offer laser services more advanced and
less costly than those we offer or which could render our technologies obsolete.
If we are unable to manage our growth and acquisitions and assimilate new
operations in a cost-effective manner, our results will be adversely effected.
In 1999 we made two acquisitions and opened a rapid prototyping facility in
Illinois. As we manage and continue to expand new operations, we may incur
substantial infrastructure and working capital costs. If we do not achieve
sufficient growth to offset increased expenses associated with our expansion,
our results will be adversely effected. We need to manage integration of our
acquisitions to achieve efficient and profitable operations.
We may not be able to adequately protect or enforce our intellectual property
rights; and we could become involved in intellectual property disputes. Our
ability to effectively compete may be affected by our ability to protect our
proprietary information. We hold a number of patents and other license rights.
These patent and license rights may not provide meaningful protection for our
manufacturing processes and equipment innovations. In the future, third parties
may assert infringement claims against us or our customers. In the event of an
infringement claim, we may be required to spend a significant amount of money to
develop a non-infringing alternative or to obtain licenses. We may not be
successful in developing such an alternative or obtaining a license on
reasonable terms, if at all. In addition, any such litigation could be lengthy
and costly and could harm our financial condition.
We are dependent upon key personnel. Our 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 we will be required to compete for such personnel with companies
having substantially greater financial and other resources. Our inability to
attract and retain such personnel could have a material adverse effect upon its
business. Further, we are is dependent on certain management personnel for the
operation and development of its business, particularly Clifford G. Brockmyre,
our president, chief executive officer and a principal shareholder. The loss or
a reduction in the time devoted by Mr. Brockmyre to our business could have a
material adverse effect on our business.
Possible fluctuation of operating results from quarter to quarter could affect
the market price of our common stock. Our quarterly earnings may fluctuate in
the future due to a number of factors including the following:
o Differences in the profitability of the types of manufacturing
services we provide. For example, mold bases have lower gross
margins than medical device assembly services;
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o Our ability to maximize the hours of use of our equipment and
facilities is dependent on the duration of the production run time
for each job and customer;
o The amount of automation that we can use in the manufacturing
process for cost reduction varies depending upon the complexity of
the product being made;
o Our ability to optimize the delivery of materials from customers as
to timing and amount to optimize production schedules; and
o Fluctuations in demand for our services or the products being
manufactured.
Therefore, our operating results in the future could be below the expectations
of securities analysts and investors. If this occurs, the market price of our
common stock could be harmed.
We must maintain compliance with the Nasdaq Small-Cap listing maintenance
requirements for our common stock to continue to be listed. Our common stock is
listed on the Nasdaq SmallCap Market Market and in connection therewith we are
required to maintain compliance with continued listing requirements including $2
million of net tangible assets and a minimum bid price of $1.00. There is no
assurance that we will continue to meet such requirements. In the event that we
do not meet the continued listing requirements, our 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 our common stock.
"Penny stock" regulations may impact the market for our 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 our
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 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.
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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 our
common stock.
Employees
As of December 31, 1999, we had 144 full-time employees including 94
production personnel, 17 engineering personnel and 12 sales personnel. Our
ability to develop, manufacture and market our products and service, and to
establish and maintain a competitive position in our businesses will depend, in
large part, upon our ability to attract and retain qualified technical,
marketing and managerial personnel, of which there can be no assurance. We
believe that our relations with our employees are good. None of our employees
are represented by a collective bargaining agreement.
PROPERTIES
The table below lists our manufacturing and administrative office
locations and square feet owned or leased:
Square Feet
----------- Leased Lease Termination
Location Owned Leased Annual Rent Date
- -------- ----- ------ ----------- ----
Warwick, RI -- 2,223 $35,568 2002
Smithfield, RI 16,800 8,000 $28,800 2000
Narragansett, RI -- 326 $ 6,850 2000
Westfield, MA 21,500 -- -- --
Buffalo Grove, IL -- 5,960 $43,210 2002
Miamisburg, OH -- 4,069 $30,948 2003
We anticipate the need for additional manufacturing facilities in the
foreseeable future which we believe will be available on commercially reasonable
terms.
LEGAL PROCEEDINGS
We are the plaintiff in a lawsuit filed in the Rhode Island Superior Court
on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra Science
Corporation and Nabil Lawandy. In the action, we assert that by fraud and in
breach of fiduciary duties owed, Spectra and its president, Dr. Nabil Lawandy,
caused us to sell to Spectra shares of Spectra's preferred stock at a
substantial discount to fair market value. We allege that in entering into the
transaction we relied on various representations made by Spectra and Dr.
Lawandy, which were untrue at the time they were made. In the action, we seek
compensatory damages in the amount of $500,000 plus punitive damages as well as
an award of attorneys' fees and costs. In its response to the complaint, Spectra
has asserted
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counterclaims against us which we believe are without merit. We intend to
vigorously prosecute this action and defend the counterclaims.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1999, we held our annual meeting of stockholders pursuant
to notice. At such meeting, the following directors were elected to hold office
until the 2000 annual meeting of stockholders or until their successors are duly
elected and qualified: Clifford G. Brockmyre II, Michael S. Smith, J. Terence
Feeley and William G. Lyons III (1,476,686 votes in favor and 37,730 against).
Further, our 1999 Stock Option Plan was approved (1,378,201 votes in favor,
122,703 votes against and 3,992 abstentions) and the appointment of Freed
Maxick, Sachs & Murphy, P. C. as our auditors for the 1999 fiscal year was
ratified (1,491,128 votes in favor, 18,180 votes opposed and 5,308 abstentions).
PART II
MARKET FOR COMMON EQUITY AND RELATED MATTERS
Our 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, we effected a one-for-five reverse stock
split of our common stock. All information presented for periods prior to
February 16, 1999 gives effect to the reverse stock split.
Period High Low
- ------------------------- ------------------ -----------------
1998
First Quarter 6 5 5/8
Second Quarter 5 4 11/16
Third Quarter 2 13/16 2 1/2
Fourth Quarter 2 1/2 1 9/16
1999
First Quarter 1 7/8 1 14/16
Second Quarter 2 1 3/4
Third Quarter 1 15/16
Fourth Quarter 1 3/8 3/4
As of March 20, 2000, we believe that we had approximately 1,750
beneficial stockholders.
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Dividend Policy
We do not expect to declare or pay any dividends in the foreseeable
future. Instead, we intend to retain all earnings, if any, in order to expand
our operations. The payment of dividends, if any, in the future is within the
discretion of our board of directors and will depend upon our earnings, if any,
our capital requirements and financial condition and other relevant factors.
Under the terms of our credit facilities, we are prohibited from paying
dividends or making other cash distributions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary statement identifying important factors that could cause our 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 our plans and objectives,
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 is and our business.
This report also identifies important factors which could cause our 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 5
of this report.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our Consolidated
Financial Statements and the notes thereto appearing elsewhere in this report.
Overview
Our business has two segments, the Laser and Photonics Group and the
Plastics Group. We sell products and services in the fields of material
processing, advanced manufacturing methods, high productivity production mold
building and laser-application technology. We have approximately 145 employees.
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Our Laser and Photonics Group, comprised of Laser Fare (Smithfield, RI),
Mound Laser & Photonics Center (Miamisburg, OH) and the Advanced Technology
Group (Narragansett, RI), provides comprehensive laser-based materials
processing services to leading manufacturers.
Our 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.
Since our acquisition of Laser Fare (LF) in 1994, and Mound Laser &
Photonics Center (MLPC) in 1998, our operations have primarily consisted of
contract research and development for advanced laser and related technologies,
pursuing the potential of new technology toward commercialization and expanding
LF's material processing business which includes laser welding, machining,
drilling and engraving. In addition, MLPC and LF's Advanced Technology division
specialize in laser applications, photonics applications and laser dependent
materials processing. MLPC received a patent for Pulsed Laser Deposition in
1999. LF 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).
One of our research projects conducted with Hasbro, Inc. resulted in the
formation of ExpressTool (ET) in 1996. ET was formed for the purpose of
commercializing the technology developed in business areas unrelated to Hasbro's
operations. In April 1999, we acquired Osley & Whitney (O&W), a 50 year old
moldbuilder and we integrated ET into the production process at O&W.
In April 1999, we acquired Materials and Manufacturing, Inc. (MMT) whose
primary assets relate to patents and trademarks in zirconium diboride, and a
zirconium diboride copper materials processing system, which will be used to
fabricate high durability, high conductivity electrodes at O&W and for other
applications. Further, we formed Express Pattern (EP) in April 1999 to allow
customers' design engineers to produce rapid prototype parts.
We continued to experience operating losses in 1999, due primarily to
delays at LF in the receipt of materials for aerospace and jet engine parts, as
well as combustion liner retooling at customers for new aircraft engine designs.
LF also experienced increased costs for engineers, training and Y2K compliance.
Expenses attributable to our newly acquired/formed companies (O&W, EP, MMT) and
in integrating the EP process also increased operating losses. These losses
resulted in substantial reductions in cash flow, increased borrowings from banks
and a negative working capital position. Management is focused on our two
primary lines of business and is actively pursuing additional capital through
strategic alliances, venture capital and investment banking sources. Further we
continue to implement cost reduction programs.
12
<PAGE>
During 1999, our management continued to investigate and implement
strategies aimed at developing the laser services and rapid tooling segments of
our 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. We are
currently involved in discussions with a number of Fortune 500 companies, which
would provide funding and additional revenue sources, for the formation of
strategic partnerships for the further development and manufacturing of tools.
Our financial statements included in this report have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of our business as a going concern. However, we have sustained
substantial operating losses in recent years and have used a significant amount
of working capital in our operations. Management believes that our operations as
restructured, together with our current financial resources, will result in
profitable operations in fiscal 2000.
Liquidity and Capital Resources
We have financed our product development activities through a series of
private placements of debt and equity securities. As of December 31, 1999, we
had cash, cash equivalents and marketable debt securities of approximately
$328,000 available for our working capital needs and planned capital asset
expenditures.
While the majority of the revenues realized as of December 31, 1999 were
attributed to our LF and O&W operations, we anticipate improved revenue from our
other divisions and positive results from additional expense containment
measures that have been implemented. We are also pursuing other strategies for
raising additional working capital through debt and/or equity transactions.
On June 30, 1998, our president and 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% (8.64 % at December 31, 1999). Our president also loaned the
company $250,000 in the first quarter of 1998 pursuant to a one year note which
bore interest at a rate of 9.0%. This note was repaid during 1999. In
consideration for the loans, we granted detachable warrants to purchase 536,000
shares of our common stock exercisable at $5.60 per share. Half of the warrants
vested immediately and the remaining 50% vested in four equal tranches, six,
nine, twelve, and fifteen months from the anniversary date of the loan. In April
1999, approximately $650,000 of the outstanding balance of the loans was repaid.
As of December 31, 1999, all warrants had vested. During the quarter ended
September 30, 1999, our president also loaned us an additional $150,000 pursuant
to a note that was convertible to common stock at $0.9375 per share and bore
interest at the prime interest rate. Subsequently, in
13
<PAGE>
December 1999, our president converted the note into 160,000 shares of common
stock. In consideration for the loan, we granted detachable warrants to purchase
128,000 shares of our common stock exercisable at $1.0375 per share. In December
1999, our president also loaned the company an additional $40,000 pursuant to a
ninety day promissory note which bears interest at a rate of 10% per annum.
During December 1998 and February 1999 we consummated the sale of our
investment in Spectra Science Corp. (SSC) Series A Convertible Preferred Stock.
As a result of this transaction, we recognized gains of $831,500 and $4,170,315
in 1998 and 1999, respectively.
As of December 31, 1999 we had a working capital deficit of approximately
$1,008,000. In conjunction with our on-going business expansion program, we are
pursuing alternative sources of funding from conventional banking institutions
as well as exploring the availability of government funds in the form of revenue
bonds for the purchase of equipment and facilities, among others. There is no
assurance, however, that our current resources will be adequate to fund our
current operations and business expansion or that we will be successful in
raising additional working capital. Our failure to raise necessary working
capital could force us to curtail operations which would have a material adverse
effect on our financial condition and results of operations.
Results of Operations
Laser and photonics group
Revenues from our laser material processing, value added services,
advanced technology consulting and laser and photonics services for the year
ended December 31, 1999 were $5,252,099 with a gross profit for the period of
$1,656,174.
Plastics group
Revenues from our plastic moldbuiding, conformal cooling and proprietary
thermal management of high production injection mold tooling, plastic rapid
prototyping services and electrodes and parts made from zirconium
diboride/copper (Zykron(TM)) composites for year ended December 31, 1999 were
$3,987,870 with a gross profit for the period of $427,978.
Comparison of the years ended December 31, 1999 and 1998
In 1999, consolidated revenues were $9,239,969 on cost of sales of
$7,155,817, resulting in a gross profit of $2,084,152 for the year. Consolidated
revenues in 1998 were $7,396,105 on cost of sales of $4,340,421 resulting in a
gross profit of $3,055,684. The increase of $1,834,864 or 25% in consolidated
revenues for the year ended December
14
<PAGE>
31,1999 compared to the year ended December 31, 1998 was primarily due to the
O&W acquisition.
Research and development expenses were $1,273,437 for the year ended
December 31, 1999 as compared to $1,430,333 for the year ended December 31,
1998. The decrease is primarily attributed to cost containment for research and
development efforts in our plastics group and our advanced technology group.
General and administrative expenses were $2,794,605 for the year ended
December 31, 1999 as compared to $1,813,897 for the year ended December 31,
1998. The increase of $980,708 is primarily due to expenses for additional
resources at our Laser Group for engineers, training, Y2K compliance, expenses
attributed to our acquired/formed companies of O&W, EP and MMT, and professional
fees in the legal and investor relations areas.
Selling expenses were $900,166 for the year ended December 31,1999 as
compared to $427,889 for the year ended December 31, 1998. The increase of
$472,277 or 110% was primarily attributed to increased sales employees at our
laser and plastics groups.
Depreciation and amortization expense totaled $962,925 for the year ended
December 31, 1999 as compared to $628,861 for the year ended December 31, 1998.
The increase was primarily due to fixed asset additions in both our laser and
plastics groups along with depreciation related to O&W.
Interest expense was $655,032 during 1999 as compared to $373,405 during
1998. The increase of $281,627 or 75% was due to interest paid on the note
payable to our president, and debt obligations related to O&W. Interest and
other income for the year ended December 31,1999 was $74,633 as compared to
$40,287 for the year ended December 31, 1998.
We had a consolidated net loss of $560,190 for the year ended December 31,
1999 as compared to $121,886 in 1998. The loss from continued operations was
$4,507,640 for the year ended December 31, 1999 as compared to $516,011 for the
period ended December 31, 1998. The variance is due primarily due to lower than
anticipated sales at the laser and plastics business segments and an increase in
general and administrative costs related to newly acquired companies.
Comparison of the years ended December 31, 1998 and 1997
In 1998, consolidated revenues were $7,396,105 on cost of sales of
$4,340,421 and gross profit in the amount of $3,055,684 realized during the
year. Revenues and gross profit for 1997 were $5,448,575 and $2,402,797,
respectively.
15
<PAGE>
Research and development expenses increased during 1998 to $1,430,333 from
$1,051,333 in 1997 an increase of $379,000 or 36%. The increase was primarily
due to ET research and development activity.
General and administrative expenses decreased to $1,813,897 in 1998 from
$1,870,663 in 1997. The decrease is primarily attributed to the 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 expenses of $470,723
in 1997 were primarily attributed to similar activities at LF.
For the year ended December 31, 1998, depreciation and amortization costs
were $628,861 as compared to $741,712 for 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 deferred financing costs provided approximately $12,000 of the costs as
compared to $187,000 in 1997. 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 $431,468 or 53.6%. Included in interest expense is a charge
for convertible debenture discounts in the amount of $406,849 for 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 Science,
from $1,958,520 for 1997 to $437,375 in 1998, was due to the investment being
fully written off during 1998.
The $1,067,000 deferred income tax benefit recognized in fiscal 1998
relates to our ability to utilize the net operating loss carryforwards for
income tax purposes to offset the estimated taxable gain on the sale of our
Spectra Science interest 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 carryforwards because of the uncertainty as to
our ability to generate sufficient taxable income in the future to utilize the
losses before their expiration.
Gain on the disposition of a discontinued segment of $831,500, net of
income taxes, in 1998 was due to the sale of the first increment of our holdings
in Spectra Science.
16
<PAGE>
All of these factors contributed to the net loss from continuing
operations of $516,011 in 1998 as compared to $2,363,902 in 1997 and a net loss
of $211,886 in 1998 as compared to $4,322,422 in 1997.
Year 2000 Readiness
We have not experienced any business interruptions or supplier or customer
delays from year 2000 problems to date and have not discovered any year 2000
problems in internal computer systems material to our operations. We intend to
continue to monitor our internal system for year 2000 problems. There can be no
assurance, however, that we or our suppliers or customers may not face future
problems as a result of year 2000 issues.
FINANCIAL STATEMENTS
Reference is made to the Financial Statements, the report thereon and
notes thereto, commencing on page F-1 of this report.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age Position Affiliated
Since
- ------------------------------------ -------- ---------------------------------------- -------------
<S> <C> <C> <C>
Clifford G. Brockmyre(1) 58 Chairman of the board, president and 1994
chief executive officer
Bruce J. Garreau 49 Chief financial and accounting officer 1999
Daniel T. Landi 57 Corporate controller and secretary 1994
William G. Lyons III (2) 43 Director 1998
J. Terence Feeley 49 President - ATG and director 1994
Michael S. Smith (2) 45 Director 1995
</TABLE>
- ----------
(1) This person may be deemed a parent and/or promoter 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 our board of directors.
Background
The principal occupation of each of our directors and executive officers
for at least the past five years is as follows:
Clifford G. Brockmyre. Mr. Brockmyre has been a director since October
1994, our president since October 1995 and our chief executive officer since
January 1998. For over 27 years, Mr. Brockmyre has been involved in the tooling,
machining and manufacturing industries and was the 1992 Chairman of the 3000+
corporation member
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<PAGE>
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 serves on
the Rhode Island State Economic Advisory Council, a position he was appointed to
by the Governor of Rhode Island.
J. Terence Feeley. Mr. Feeley has been the president of the Laser Fare--
Advanced Technology Group since 1994. He became a director in March, 1999. He
was the co-founder, president and chief executive officer of Laser Fare prior to
its acquisition by us. Mr. Feeley is the immediate past 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 from the University of Rhode Island.
Bruce J. Garreau, Mr. Garreau became our chief financial officer in July
1999. Prior thereto, he served as a consulting principal with the Corporate
Financial Group (CFG) that provided financial, merger and acquisition, planning
and strategy services to venture capital funded technology and other start-ups,
as well as product and other development services to larger companies. Prior to
CFG he was executive vice president and controller of Northeast Savings, FA
Hartford, CT, then the largest thrift institution in New England (subsequently
acquired by Fleet Bank). He served nine years as senior manager and senior
computer specialist at KPMG Peat Marwick (now KPMG). He is a graduate of State
University of New York at Albany with a BS in public accountancy and is a
certified public accountant in New York and Connecticut.
Daniel T. Landi. Mr. Landi is our corporate controller and secretary and
was our chief financial officer from August 1994 to July 1999. Prior thereto,
from January 1993 to June 1994 he was the chief financial officer of a privately
held aerospace research and development company. 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 became a director 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 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.
19
<PAGE>
William G. Lyons III Mr. Lyons became a director in December 1998 and is a
member of the audit and compensation committees. He is president of Third
Generation Consultants, LLC and chairman of Blackstone Medical, Inc. Previously,
Mr. Lyons was employed by Brimfield Precision, Inc. from 1981 through 1998, a
manufacturer of surgical instruments and orthopedic implants, in various
capacities including president and chief executive officer. Mr. Lyons received a
B.S. in Mechanical Engineering- Material Science from the University of
Connecticut and a M.S. in biomedical Engineering from Hartford Graduate
Center/Rensselaer Polytechnical Institute.
Our 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 our independent accountants and our internal
controls. The compensation committee is responsible for the approval of
compensation arrangements for our officers and the review of our compensation
plans and policies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
Forms 5 were required, we believe that all Section 16(a) filing requirements
applicable to its officers and directors were complied with except as follows:
Bruce Garreau -- late Form 3 filing; Clifford G. Brockmyre -- Form 4 one
transaction.
Directors' Compensation
Our directors do not receive any cash consideration for serving as
directors. All directors are reimbursed for out-of-pocket expenses incurred in
connection with their attendance at board meetings. In addition, pursuant to our
non-discretionary, non-employee directors' stock option plan, each non-employee
director is entitled to receive options to purchase 5,000 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 (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. Our certificate of incorporation limits the liability of our directors to
the company or its shareholders to the fullest extent permitted by Delaware law.
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<PAGE>
Our certificate of incorporation provides mandatory indemnification rights
to any officer or director who, by reason of the fact that he or she is an
officer or director, 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, we have 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 any of our
directors, officers, employees or agents in which indemnification by us will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth certain information
concerning compensation for services in all capacities awarded to, earned by or
paid to our chief executive officer and the other four most highly compensated
executive officers ("Named Executives") during 1999, 1998 and 1997 whose
aggregate compensation exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Principal ($) Securities All Other
Position Year Salary Deferred Underlying Options(#) Compensation ($)
-------- ---- ------ -------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Clifford G. Brockmyre 1999 $163,096 -- 60,019 --
President and chief 1998 $175,000 -- 4,038 --
executive officer 1997 $175,000 -- 4,038 --
J. Terence Feeley 1999 $151,603 $ 9,652 1,731 --
President-- Advanced 1998 $169,120 $ 10,000 56,928 --
Technology Group 1997 $142,230 $ 9,500 23,462 --
Bruce J. Garreau 1999 $ 51,714 -- 75,000 $ 7,312
Chief financial and 1998 -- -- -- --
accounting officer 1997 -- -- -- --
Daniel T. Landi 1999 $101,539 -- 1,270 --
Corporate controller 1998 $110,000 -- 2,308 --
and secretary 1997 $110,000 -- 2,308 --
</TABLE>
21
<PAGE>
Employment Agreements
We have an employment agreement with Clifford G. Brockmyre, our 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 our 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 us, divulging confidential information,
dishonesty or misconduct detrimental to us or breach of a material term of the
agreement), we 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 multiplied by 2.99. The agreement also provides for payments
to Mr. Brockmyre, or his estate, in the event of his death or permanent
disability.
We have an employment agreement with Mr. J. Terence Feeley, president of
the Advanced Technology Group, for a term expiring on July 1, 2002, which
provides for an annual salary of $150,000 and various benefits. In addition to
the compensation provided under the agreement, Mr. Feeley is eligible to
participate in our bonus plan and is eligible for other bonuses as determined in
the sole direction of the board of directors. This agreement also provides,
among other things, that, if Mr. Feeley is terminated other than for Cause, we
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. Feeley, and (ii) the highest annual
bonus paid to or accrued to the benefit of Mr. Feeley during the employment term
multiplied by two. The agreement also provided for payments to Mr. Feeley, or
his estate, in the event of his death or permanent disability.
We have an employment agreement with Bruce J. Garreau, our chief financial
and accounting officer, for a term expiring on October 1, 2002, which provides
for an annual salary of $135,000 and various benefits including the grant of
10,000 shares of our common stock and 75,000 stock options exercisable at $1.00
per share. The 10,000 shares had a value of $7,312 upon issuance. The options
vest in three equal installments of 25,000 shares upon the closing price of our
common stock exceeding $3.00, $4.50 and $6.75, respectively. In addition to the
compensation provided under the agreement, Mr. Garreau is eligible to
participate in our 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. Garreau is terminated other than for Cause, we 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. Garreau and (ii) the highest annual bonus paid
to or accrued to the benefit of Mr. Garreau during the employment term
multiplied by two. The agreement also provides for payments to Mr. Garreau, or
his estate, in the event of his death or permanent disability.
22
<PAGE>
We have an employment agreement with Daniel T. Landi, our corporate
comptroller, for a term expiring on October 19, 2000, which provides for an
annual salary of $110,000 and various benefits. In addition to the compensation
provided under the agreement, Mr. Landi is eligible to participate in all
executive bonus and option plans established for our senior executives.
We have an employment agreement with Thomas M. O'Connor, president of our
plastics group, for a term expiring on December 15, 2001, which provides for an
annual salary of $125,000 and various benefits. In addition to the compensation
provided under the agreement, Mr. O'Connor is eligible to participate in all
executive bonus and option plans established for our senior executives.
Stock Options. The following tables show certain information with respect to
stock options granted in 1999 to Named Executives and the aggregate value at
December 31, 1999 of all stock options granted to the Named Executives. All
information contained in this tables and the description of the stock option
plans which follow gives effect to the one-for-five reverse stock split effected
on February 16, 1999. No options were exercised by Named Executives during 1999.
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of Total
Shares Options/Granted to
Underlying Employees in
Name Options Granted Fiscal Year Exercise Price Expiration
- ---- --------------- ----------- ($/Sh) Date
(#) ------ ----
<S> <C> <C> <C> <C>
Clifford G. Brockmyre 62,019 37.2% $ 1.875 5/6/09
J. Terence Feeley 1,730 1.04% $ 1.875 1/4/04
Bruce J. Garreau 75,000 45.0% $ 1.00 10/1/09
Daniel T. Landi 1,269 0.76% $ 1.875 1/4/04
</TABLE>
Aggregate 1999 Year End Option Values
<TABLE>
<CAPTION>
Number of Shares of Common
Stock
Underlying Unexercised Value of Unexercised
Options In-The Money Options at
At 12/31/99 (#) 12/31/99* ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Clifford G. Brockmyre 81,689/11,406 $ --/--
J. Terence Feeley 71,857/36,798 $ --/--
Bruce J. Garreau -- /75,000 $ --/$28,125
Daniel T. Landi 6,317/ 3,801 $ --/--
</TABLE>
- --------------------
* Based on December 31, 1999 Nasdaq closing price of $1.375.
23
<PAGE>
Stock Option Plans
We have stock option plans, which were adopted by our board and approved
by our shareholders covering an aggregate of 556,000 shares of our common stock,
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
our employees, while non-qualified options may be issued to non-employees,
consultants, and others, as well as to employees.
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 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 our 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
24
<PAGE>
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Pursuant to the option plan adopted at our shareholders' meeting held
during 1999, each new non-employee director of the company is automatically
granted, upon becoming a director, an option to purchase 7,500 shares of common
stock at the fair market value of such shares on the grant date. In addition,
each non-employee director shall automatically be granted an option to purchase
5,000 shares at the fair market value of such shares on the date of grant, on
the date of our annual meeting of shareholders. Each such option shall vest 1/3
upon grant and 1/3 at the end of each subsequent year of service.
Options under the option plans 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 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 optionee
ceasing to be affiliated with the company become available once again for
issuance. As of December 31, 1999 we had outstanding incentive stock options to
purchase 444,114 shares of common stock under the option plans and non-qualified
options to purchase an aggregate of 22,500 shares including 12,000 to Michael S.
Smith, and 10,500 to William G. Lyons III our outside directors. These options
are exercisable at prices ranging from $1.375 to $9.40 per share.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
None of the directors serving on the compensation committee of our board
of directors is employed by us. In addition, none of our directors or executive
officers is a director or executive officer of any other corporation that has a
director or executive officer who is also a member of our board of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 7, 2000 by:
25
<PAGE>
o each person known to us to be the beneficial owner of more than 5%
of our outstanding shares;
o each of our directors;
o each executive officer named in the Summary Compensation Table
above;
o all of our directors and executive officers as a group.
Except as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all shares of common stock owned by them.
All information with respect to beneficial ownership has been furnished to us by
the respective stockholder.
Name of Shares of Common Stock Percentage
Beneficial Owner (1) Beneficially Owned (2) of Class (3)
-------------------- ---------------------- ------------
Directors and Executive Officers
Clifford G. Brockmyre 1,047,163(4) 33.0%
Daniel T. Landi 11,195(5) *
J. Terence Feeley 111,906(6) 5.0%
Bruce J. Garreau 88,500(7) 4.0%
Michael S. Smith 12,000(8) *
William G. Lyons III 10,500(9) *
All executive officers
and directors as a
group (7 persons) 1,221,684(10) 36.4%(11)
5% Stockholders
Northeast Hampton
Holdings, LLC(12) 497,106 21.7%
- ----------
* less than 1%
(1) 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 P. O.
Box 146, Boca Raton, FL 33429.
(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.
26
<PAGE>
(4) Includes 20,000 shares owned by Mr. Brockmyre's wife as to which shares
Mr. Brockmyre disclaims beneficial ownership, 93,095 shares subject to
currently exercisable options and 536,000 shares subject to currently
exercisable warrants.
(5) Includes 10,118 shares subject to currently exercisable options.
(6) Includes 108,655 shares subject to currently exercisable options
(7) Includes 75,000 shares subject to currently exercisable options.
(8) Includes 4,500 shares subject to currently exercisable options.
(9) Includes 3,000 shares subject to currently exercisable options
(10) Includes 830,368 shares subject to currently exercisable options, warrants
or convertible notes.
(11) Assumes that all currently exercisable options or warrants owned by
members of the group have been exercised.
(12) The information with respect to this stockholder was derived from the
Schedule 13D and Form 4's filed by the reporting person.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1998, our 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%. Our president also loaned the company $250,000 in the first
quarter of 1998 pursuant to a one year note which bore interest at a rate of
9.0%. This note was repaid during 1999. In consideration for the loans, we
granted detachable warrants to purchase 536,000 shares of our common stock
exercisable at $5.60 per share. Half of the warrants vested immediately and the
remaining 50% vested in four equal tranches, six, nine, twelve, and fifteen
months from the anniversary date of the loan. In April 1999, approximately
$650,000 of the outstanding balance of the loans was repaid. As of December 31,
1999, all warrants had vested. During the quarter ended September 30, 1999, our
president also loaned us an additional $150,000 pursuant to a note that was
convertible to common stock at $0.9375 per share and bore interest at the prime
interest rate. Subsequently, in December 1999, our president converted the note
into 160,000 shares of common stock. In consideration for the loan, we granted
detachable warrants to purchase 128,000 shares of our common stock exercisable
at $1.0375 per share. In December 1999, our president also loaned the company an
additional $40,000 pursuant to a ninety day promissory note which bore interest
at a rate of 10% per annum.
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)
27
<PAGE>
3.3 Certificate of Amendment of Certificate of Incorporation dated February
16, 1999.(9)
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 Stock Repurchase Agreements dated February 19, 1999 between the Company
and Clearwater Funds.(9)
10.17 Form of Loan Agreements and Warrant between the Company and Clifford G.
Brockmyre.(9)
10.18 Form of Spectra Science Corporation Stock Sale Agreement.(9)
10.19 Employment Agreement between J. Terence Feeley and the Company dated
July 1, 1999 *
10.20 Employment Agreement between Bruce J. Garreau and the Company dated
October 1, 1999 *
10.21 Employment Agreement between Thomas M. O'Connor and the Company dated
November 15, 1999 *
10.23 Stock Acquisition Agreement between Infinite Group, Inc. and Osley &
Whitney, Inc. dated April 16, 1999.(10)
10.24 Stock Acquisition Agreement between Infinite Group, Inc. and Materials
& Manufacturing Technologies, Inc. dated March 24, 1999.
21 Subsidiaries of the Company.*
27 Financial Data Schedule.*
- ---------------------
* 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.
28
<PAGE>
(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.
(9) Incorporated by reference to Annual Report on Form 10-KSB for he fiscal
year ended December, 31, 1998.
(10) Incorporated by reference to report on Form 8-K dated April 16, 1999.
Reports on Form 8-K
None
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 29, 2000 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
- ------------------------- Chief Executive Officer March 29, 2000
Clifford G. Brockmyre
/s/ Bruce J. Garreau Chief Financial and March 29, 2000
- ---------------------- Accounting Officer
Bruce J. Garreau
/s/ J. Terence Feeley Director March 29, 2000
- ----------------------
J. Terence Feeley
/s/ William G. Lyons III Director March 29, 2000
- ------------------------
William G. Lyons III
/s/ Michael S. Smith Director March 29, 2000
- --------------------------
30
<PAGE>
CONSOLIDATED
FINANCIAL STATEMENTS
INFINITE GROUP, INC.
================================================================================
DECEMBER 31, 1999
with
INDEPENDENT AUDITOR'S REPORT
F-1
<PAGE>
INFINITE GROUP, INC.
CONTENTS
================================================================================
Page
----
Independent Auditor's Report............................................. F-3
Consolidated Financial Statements:
Balance Sheets...................................................... F-4
Statements of Operations............................................ F-5
Statements of Stockholders' Equity.................................. F-7
Statements of Cash Flows............................................ F-8
Notes to Consolidated Financial Statements............................... F-9
F-2
<PAGE>
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
February 25, 2000
F-3
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31,
----------------------------
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 328,094 $ 1,010,736
Restricted funds 79,235 78,125
Accounts receivable, net of allowances 1,496,288 1,093,414
Inventories 536,554 193,412
Note receivable 204,716 --
Advance - stockholder 50,014 50,383
Other current assets 147,581 182,567
Deferred tax asset -- 825,000
------------ ------------
Total current assets 2,842,482 3,433,637
Property and equipment, net 7,059,367 4,442,338
Other assets:
Notes receivable 6,652 47,102
Other investment 250,000 250,000
Cash surrender value of officer life insurance 61,546 --
Prepaid pension costs 769,101 --
Other intangible assets, net 318,342 342,565
------------ ------------
1,405,641 639,667
------------ ------------
$ 11,307,490 $ 8,515,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 893,957 $ 522,757
Stockholder 40,000 231,031
Accounts payable and accrued expenses 1,852,483 1,171,329
Current maturities of long-term obligations 1,042,159 307,628
Current portion of notes payable - stockholder 21,572 29,206
------------ ------------
Total current liabilities 3,850,171 2,261,951
Long-term obligations 5,198,680 2,301,862
Notes payable - stockholder 380,483 601,955
Stockholders' equity
Common stock, $.001 par value, 20,000,000
shares authorized; 2,918,604 and 2,673,334
shares issued; 2,368,529 and 2,673,334 outstanding 2,918 2,673
Additional paid-in capital:
Common stock 20,564,179 20,210,268
Warrants 671,418 555,585
Accumulated deficit (17,985,172) (17,418,652)
------------ ------------
3,253,343 3,349,874
Less treasury stock, 550,075 shares, at cost 1,375,187 --
------------ ------------
Total stockholders' equity 1,878,156 3,349,874
------------ ------------
$ 11,307,490 $ 8,515,642
============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 9,239,969 $ 7,396,105 $ 5,448,575
Cost of goods sold 7,155,817 4,340,421 3,045,778
----------- ----------- -----------
Gross profit 2,084,152 3,055,684 2,402,797
Costs and expenses:
Research and development 1,273,437 1,430,333 1,051,333
General and administrative expenses 2,794,605 1,813,897 1,870,663
Selling expenses 900,166 427,889 470,723
Depreciation and amortization 962,925 628,861 741,712
----------- ----------- -----------
Total costs and expenses 5,931,133 4,300,980 4,134,431
----------- ----------- -----------
Operating loss (3,846,981) (1,245,296) (1,731,634)
Other income (expense):
Interest income 74,633 40,287 39,154
Interest expense (655,032) (373,405) (804,873)
Gain (loss) on dispositions of assets (109,096) (5,635) 38,457
Other (6,106) 1,038 94,994
----------- ----------- -----------
Total other expense (695,601) (337,715) (632,268)
----------- ----------- -----------
Loss from continuing operations before
income tax benefit (4,542,582) (1,583,011) (2,363,902)
Income tax benefit 34,942 1,067,000 --
----------- ----------- -----------
Loss from continuing operations (4,507,640) (516,011) (2,363,902)
Disposed business segment (Note 5):
Loss from operations of disposed
business segment -- (437,375) (1,958,520)
Gain on sale of business segment 4,170,315 831,500 --
----------- ----------- -----------
4,170,315 394,125 (1,958,520)
----------- ----------- -----------
Loss before extraordinary item (337,325) (121,886) (4,322,422)
Extraordinary item (Note 16) (222,865) -- --
----------- ----------- -----------
Net loss $ (560,190) $ (121,886) $(4,322,422)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) per share - basic:
Continuing operations $ (1.98) $ (0.19) $ (1.14)
Disposed business segment:
Loss from operations -- (0.17) (0.94)
Gain on sale 1.83 0.31 --
Extraordinary item (.10) -- --
----------- ----------- -----------
Net loss per share $ (.25) $ (0.05) $ (2.08)
=========== =========== ===========
Gain on sale of disposed business
segment per share - diluted $ 1.74 $ .29 $ --
=========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 2,276,823 2,643,750 2,076,153
=========== =========== ===========
Diluted 2,390,284 2,818,713 2,512,197
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<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, 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 exercised 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
Issuance of common stock in connection
with note payable conversions 160,000 160 149,840 -- -- 150,000
Issuance of common stock in connection
with services performed for the Company 50,000 50 124,950 -- -- 125,000
Issuance of common stock in connection
with acquisition of MMT 20,000 20 32,297 -- (6,330) 25,987
Issuance of common stock in connection
with an employment agreement 10,000 10 7,302 -- -- 7,312
Issuance of common stock 5,270 5 39,522 -- -- 39,527
Detachable stock warrants issued with
notes payable -- -- -- 95,033 -- 95,033
Stock warrants issued in exchange for services -- -- -- 20,800 20,800
Net loss -- -- -- -- (560,190) (560,190)
--------- ------ ----------- -------- ------------ -----------
Balance - December 31, 1999 2,918,604 $2,918 $20,564,179 $671,418 $(17,985,172) $ 3,253,343
========= ====== =========== ======== ============ ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (4,507,640) $ (516,011) $ (2,363,902)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 962,925 628,861 741,712
Interest expense attributed to convertible
debentures discount -- -- 406,849
Amortization of discount on note payable 42,347 27,306 -
Expenses satisfied via issue of debt or equity 140,859 37,290 140,971
(Gain) loss on dispositions of assets 109,095 5,635 (38,457)
Asset write-downs and allowances 40,450 40,540 44,616
Deferred tax benefit -- (1,067,000) --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (154,239) (139,036) (298,507)
Inventories 502,447 28,580 39,318
Other current assets 164,713 37,231 (25,586)
Prepaid pension costs 15,127 -- --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (484,985) 278,023 270,285
Litigation settlement payable -- -- (350,000)
------------ ------------ -------------
Net cash used in continuing operations (3,168,901) (638,581) (1,432,701)
Cash flows from investing activities:
Purchase of property and equipment (1,530,512) (830,170) (947,811)
Purchase of subsidiary, including advances (473,826) -- --
Purchase of technology and other intangibles (32,559) (109,611) --
Proceeds from sale of technology and equipment -- 13,500 155,898
Investment in subsidiary - Spectra Acquisition Corp. -- -- (200,000)
Proceeds from sale of investment in Spectra Science Corp. 3,620,128 955,000 --
Increase in cash surrender value of officer life insurance (11,793) -- --
Net (repayments) advance to stockholder 369 (50,383) --
Investment in Molecular Geodesics, Inc. -- (250,000) --
Cash of unconsolidated subsidiary -- -- (814,604)
------------ ------------ -------------
Net cash provided by (used in) investing activities 1,571,807 (271,664) (1,806,517)
Cash flows from financing activities:
Borrowings against cash surrender value of officer life
insurance 100,000 -- --
Net borrowings (repayments) of short-term debt (252,831) 383,235 190,553
Borrowings of long-term obligations 2,560,000 125,000 -
Repayments of long-term obligations (1,204,577) (253,819) (194,794)
Proceeds from notes payable - stockholders -- 1,150,000 -
Repayment of notes payable - stockholders (437,030) (16,243) -
(Increase) decrease in restricted funds, net (1,110) (8,845) (679)
Proceeds from convertible debentures, net of expenses 150,000 -- 968,000
Proceeds from issuances of common stock,
net of expenses -- -- 1,670,000
------------ ------------ -------------
Net cash provided by financing activities 914,452 1,379,328 2,633,080
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (682,642) 469,083 (606,138)
Cash and cash equivalents - beginning of year 1,010,736 541,653 1,147,791
------------ ------------ -------------
Cash and cash equivalents - end of year $ 328,094 $ 1,010,736 $ 541,653
============ ============ =============
</TABLE>
See notes to consolidated financial statements
F-8
<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), Mound Laser and Photonics Center, Inc.
(MLPC); Osley and Whitney, Inc. (O&W); Express Tool, Inc. (ET); Materials and
Manufacturing Technologies, Inc. (MMT); and Express Pattern, Inc. (EP)
(collectively "the Company"). The Company operates in two segments: the Infinite
Laser and Photonics Group (LF and MLPC) and the Infinite Plastics Group (O&W,
ET, MMT and EP). All significant intercompany accounts and transactions have
been eliminated.
Since the Company's acquisition of LF in 1994 and MLPC in 1998, the
Company's operations have primarily consisted of contract research and
development for advanced laser and related technologies, pursuing the potential
of new technology toward commercialization and expanding the Company's material
processing business which includes laser welding, machining, drilling and
engraving. In addition, MLPC and LF's Advanced Technology division specialize in
laser applications, photonics applications and laser dependent materials
processing. MLPC received a patent for Pulsed Laser Deposition in 1999. 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).
One of the Company's research projects conducted with Hasbro, Inc.,
resulted in LF's formation of ET in 1996. As a result of that research, ET was
formed for the purpose of commercializing the technology developed in areas
other than toys and games. In April 1999, the Company acquired O&W, a 50 year
old moldbuilder and integrated ET into the production process at O&W.
In April 1999, the Company acquired MMT whose primary assets relate to
patents and trademarks in zirconium diboride, and a zirconium diboride/copper
materials processing system, which will be used to fabricate high durability,
high conductivity electrodes at O&W and for other applications. The Company
formed EP in April 1999 to allow customers' design engineers to produce rapid
prototype parts.
In 1996, the Company acquired a majority interest in Spectra Science
Corporation (SSC), a company specializing in research of advanced photonic
material technologies in the areas of, among other things, product
identification, anti-counterfeiting methods and medical procedures. The Company
adopted a plan to dispose of this business segment during 1998 and 1999. (See
Note 5).
F-9
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2. - FINANCIAL CONDITION
The Company continued experiencing operating losses in 1999, due primarily
to delays at LF in the receipt of materials for aerospace and jet engine parts,
as well as combustion liner retooling at customers for new aircraft engine
designs. LF also experienced increased costs for engineers, training and Y2K
compliance. Expenses attributable to the Company's newly acquired/formed
companies (O&W, EP, MMT) and in integrating the EP process also increased
operating losses. These losses resulted in substantial reductions in cash flow,
increased borrowings from banks and a negative working capital position. The
Company is focused on its two primary lines of business and is actively pursuing
additional capital through strategic alliances, venture capital and investment
banking sources and is implementing cost reduction programs.
During 1999, 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
1999. The Company is currently involved in discussions with a number of Fortune
500 companies, which would provide funding and additional revenue sources, for
the formation of strategic partnerships for the further development and
manufacturing of tools and related molds.
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 2000.
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 in 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.
F-10
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are stated at the lower of cost (first-in,
first-out) or market and consist of the following:
December 31,
----------------------
1999 1998
---- ----
Raw materials $ 212,466 $ 100,316
Work-in-process 324,088 93,096
--------- ---------
$ 536,554 $ 193,412
========= =========
Property and Equipment - Additions to property and equipment are recorded
at cost and are 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.
Other Investment - The other investment represents a 7% preferred Series A
stock investment in Molecular Geodesics Inc. which is recorded 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 that the remaining estimated useful
lives of its intangibles may warrant revision. At December 31, 1999, the Company
believed that no impairment of intangibles existed.
F-11
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Subsidiary - The Company accounted for its 34% investment in
its subsidiary, SSC, under the equity method of accounting. Under the equity
method, the Company recognized its share of earnings and losses of the
subsidiary as accrued. Advances and distributions were recorded directly in the
investment account. During 1999 and 1998, the Company disposed of its entire
investment in SSC (see Note 5).
Reverse Stock Split - On February 16, 1999, the Company effected a one for
five reverse stock split of the Company's common stock. This transaction was
given retroactive effect in the financial statements and related footnotes
reported as of December 31, 1998.
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. Customer deposits received in advance are recorded as
liabilities until associated services are completed. Revenue from research
contracts is recognized over the life of the contract as costs are incurred, or
as contract milestones are met.
Research and Development Costs - All costs related to sponsored research
and development are expensed as incurred. Research and development expense was
$1,273,437, $1,430,333 and $1,051,333 for the years ended December 31, 1999,
1998 and 1997, 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 $129,000, $69,000 and $76,000 for the
years ended December 31, 1999, 1998 and 1997, 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
customers throughout the United States. The Company maintains adequate reserves
for potential credit losses and such losses have been minimal and within
management's estimates. The allowance for doubtful accounts was $48,188 and
$34,195 at December 31, 1999 and 1998, 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.
F-12
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The convertible debentures were considered to be converted as of
the beginning of each period for purposes of calculating the diluted gain on
sale of disposed business segment. These debentures were convertible into
113,461, 174,963 and 436,044 shares of the Company's common stock in 1999, 1998
and 1997, respectively.
Reclassifications - Certain amounts for 1998 and 1997 have been
reclassified to conform to the 1999 presentation.
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 and 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." If the stock option grants are determined to be a fixed award, no
compensation expense is recognized. In accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) the Company discloses the summary of proforma effects to reported net
income and earnings per share for 1999, 1998 and 1997, as if the Company had
elected to recognize compensation costs based on the fair value of the options
granted at grant date (see Note 13). If the stock option grants are determined
to be a variable award, compensation costs are recognized into income based on
the difference between the exercise price and the fair market value of the
Company's common stock at the measurement date when the number of shares to be
issued is known.
F-13
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4. - BUSINESS ACQUISITIONS
Effective March 29, 1999, the Company acquired 100% of the common stock of
O&W. The aggregate consideration paid for the stock was $1.5 million ($300,000
in cash and $1,200,000 in promissory notes, see Note 10). 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 an unaudited proforma
summary of the results of operations had O&W been acquired as of January 1,
1998:
For the Twelve
Months Ended
----------------------------
1999 1998
------------ ------------
Sales $ 10,059,526 $ 12,208,642
============ ============
Loss from continuing operations $ (4,873,627) $ (928,465)
============ ============
Net loss $ (926,177) $ (534,340)
============ ============
Loss per share:
Continuing operations $ (2.14) $ (.35)
============ ============
Net loss $ (.41) $ (.20)
============ ============
Weighted average number of
common shares outstanding $ 2,276,823 $ 2,643,750
============ ============
NOTE 5. - DISPOSAL OF A BUSINESS SEGMENT
On December 2, 1998 the Board of Directors approved a plan to dispose of
the Company's 34% ownership interest in SSC, which represented its photonic
materials business segment. Subsequently, in December 1998, the Company entered
into two separate agreements to sell its 2,875,500 preferred shares of SSC,
which had a recorded book value of zero under the equity method of accounting.
The first agreement provided 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 shares were sold pursuant to the first
agreement at a price of $2.25 per share, resulting in a gain of approximately
$832,000, net of income taxes. On February 28, 1999, the first agreement was
amended to provide for the sale of 1,342,279 shares at a price of $2.25 per
share to the two shareholders of SSC and for 477,583 shares to be repurchased by
SSC at a price of $1.26 per share, yielding a gain of approximately $3,600,000,
net of income taxes, which was recorded in the first quarter of 1999. The 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.
In February 1999, the Company repurchased 550,075 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, which was recorded in the
first quarter of fiscal 1999.
F-14
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6. - NOTES RECEIVABLE
Promissory notes in the amount of $318,452 receivable from two
stockholders mature through December 2004 and accrue interest at 6%, which is
payable quarterly. The notes are collateralized by shares of the Company's
common stock held by the stockholders. A valuation allowance of $311,800
($271,350 - 1998) was recorded based on management's estimate of the net fair
value of the notes.
The remaining $204,716 current note receivable represents premiums paid by
O&W on a life insurance policy, which is owned by a former stockholder of O&W.
Under the terms of a split dollar agreement, the Company is entitled to receive
a portion of the death benefits provided under the policy, or cash value upon
termination of the policy, equal to the total amount of related premiums paid by
the Company. Subsequent to year end the former shareholder deceased and, as a
result, repayment of the note is anticipated in fiscal 2000.
NOTE 7. - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
Depreciable -------------------------------
Lives 1999 1998
--------------- ------------ ------------
Land N/A $ 143,625 $ 100,000
Building and leaseholds 18 - 40 years 1,751,471 988,070
Machinery and equipment 5 - 10 years 7,180,489 4,725,135
Furniture and fixtures 5 - 7 years 778,715 552,340
------------ ------------
9,854,300 6,365,545
Accumulated depreciation
and amortization (2,794,933) (1,923,207)
------------ ------------
$ 7,059,367 $ 4,442,338
============ ============
Included above is the following property and equipment held under capital
leases:
December 31,
----------------------------
1999 1998
------------ ------------
Land $ 100,000 $ 100,000
Building and leaseholds 725,762 725,762
Machinery and equipment 1,416,629 1,180,178
------------ ------------
2,242,391 2,005,940
Accumulated depreciation
and amortization (818,841) (645,196)
------------ ------------
$ 1,423,550 $ 1,360,744
============ ============
Depreciation charges for assets under capital leases are included in
depreciation and amortization expense and amounted to $173,645, $156,996 and
$157,368 in 1999, 1998 and 1997, respectively.
F-15
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8. - OTHER INTANGIBLE ASSETS
Other intangible assets consists of the following:
December 31,
---------------------------
1999 1998
---------- -----------
Goodwill $ 248,439 $ 24273,972
Deferred financing costs 218,470 229,452
Patents 32,987 --
---------- -----------
499,896 503,424
Accumulated amortization (181,554) (160,859)
---------- -----------
$ 318,342 $ 342,565
========== ===========
NOTE 9. - NOTES PAYABLE
Notes payable consists of the following:
December 31,
----------------------------
1999 1998
------------ ------------
Bank revolving demand notes (a) $ 893,957 $ 522,757
Notes payable, principal stockholder (b) 40,000 231,031
------------ ------------
$ 933,957 $ 753,788
============ ============
(a) Bank revolving demand notes - LF maintains a bank demand note that
provides for borrowings of up to $400,000 with interest at the
bank's prime rate plus 0.50% (9.0% at December 31, 1999). As of
December 31, 1999 there was $308,757 ($397,757 - 1998) outstanding
under this line. A second demand note provides for borrowings of up
to $125,000 with interest at the bank's prime rate plus 0.75% (9.25%
at December 31, 1999). As of December 31, 1999 and 1998, there was
$125,000 outstanding under this line. Both notes are secured by all
of the assets of LF and the guarantee of the Company.
O&W maintains a bank demand note that provides for borrowings of up
to $500,000 with interest at the bank's prime rate plus 0.5% (9.0%
at December 31, 1999). The line is secured by substantially all of
the Company's assets and guaranteed by the Company. As of December
31, 1999, there was $460,200 outstanding under this line.
(b) Note payable, principal stockholder - The 1999 amount represents a
$40,000 note due in full in March 2000. The note accrues interest at
the rate of 10.0%. The 1998 amount represents a one year promissory
note issued to the current principal stockholder in the amount of
$250,000. Interest payments were due monthly at the rate of 9.0%.
The entire amount was repaid in April 1999.
F-16
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10. - LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
1999 1998
------------ ------------
Term notes (a) $ 4,920,829 $ 1,333,418
Capital lease obligations (b) 1,220,010 1,176,072
Convertible debentures (c) 100,000 100,000
------------ ------------
6,240,839 2,609,490
Less current maturities 1,042,159 307,628
------------ ------------
Total long-term obligations $ 5,198,680 $ 2,301,862
============ ============
(a) Term notes - A $1,250,000 bank term promissory note which requires
monthly principal and interest payments amounting to approximately
$13,000 through February 2011. The outstanding balance as of
December 31, 1999 amounted to $1,077,640 ($1,130,366 - 1998) and
bears interest at the bank's prime rate plus 1.0% (9.5% at December
31, 1999). The note is secured by all the assets of LF and the
guarantee of the Company. The note includes certain financial
covenants which LF was in compliance with at December 31, 1999.
A $1,260,000 bank term promissory note which requires monthly
principal and interest payments amounting to approximately $13,000
beginning February 2000 through December 2014. The outstanding
balance as of December 31, 1999 amounted to $1,260,000 and bears
interest at the bank's prime rate plus 0.75% (9.25% at December 31,
1999). The note is secured by all the assets of LF and the guarantee
of the Company.
An $828,000 note payable to a former shareholder of O&W, due in
three equal annual installments of $276,000, with interest at 8.0%
beginning in April 2000.
Convertible notes payable to former shareholders of O&W, aggregating
$372,000, due in three equal annual aggregate installments of
$124,000, with interest of 8.0%, beginning in April 2000. The
Company has the option to pay interest by delivery of shares of the
Company's common stock. The former shareholder's have the option to
convert 50% of the principal balance due into common stock of the
Company on each payment date based on the fair value of the stock
one year preceding the payment date.
A $700,000 mortgage loan, payable in monthly installments of $5,746
including interest at 7.75% through April 2006, at which time a
balloon payment of approximately $565,000 is due. The outstanding
balance as of December 31, 1999 amounted to $690,600. The loan is
secured by substantially all the assets of O&W and the guarantee of
the Company.
F-17
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10. - LONG-TERM OBLIGATIONS (CONTINUED)
a) Term notes (continued)
A $500,000 bank term loan, payable in monthly installments of $7,731
including interest at 7.75% through April 2006. The outstanding
balance as of December 31, 1999 amounted to $463,343. The loan is
secured by substantially all the assets of O&W and the guarantee of
the Company.
A $125,000 bank term promissory note which requires monthly
principal and interest payments amounting to approximately $1,800
through July 2006. The outstanding balance as of December 31, 1999
amounted to $108,968 ($120,199 - 1998) and bears interest at the
bank's prime rate plus 1.0% (9.5% at December 31, 1999). The note is
secured by all the assets of the LF and the guarantee of the
Company.
A $100,000 bank note, bearing interest at the bank's prime rate plus
0.5% (9.0% at December 31, 1999), due in May 2000. The loan is
secured by substantially all the assets of O&W and the guarantee of
the Company.
Two term promissory notes aggregating $30,100, payable to the former
shareholders of MLPC, due in February 2001, payable in monthly
installments of $971, including interest at the rate of 10.0%. The
aggregate outstanding balance as of December 31, 1999 amounted to
$12,783 ($22,619 - 1998).
Installment loan, payable in monthly installments of $391, including
interest at the rate of 9.99% per annum through September 2001. The
outstanding balance as of December 31, 1999 amounted to $7,495.
A term promissory note, 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, which amounted to
$60,234 was due and paid in September 1999.
(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 6.0% to 7.25%. The outstanding balance as of
December 31, 1999 amounted to $920,000 ($1,035,000 - 1998). 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 certain machinery and equipment
under capital leases which expire through 2002. The outstanding
balance as of December 31, 1999 amounted to $300,010 ($141,072 -
1998). The monthly payments under these leases aggregate
approximately $12,200 including interest at rates ranging from 8.25%
to 10.47%.
F-18
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10. - LONG-TERM OBLIGATIONS (CONTINUED)
(c) Convertible debentures - Through December 31, 1996, the Company
issued $1,241,000 of convertible subordinated debentures due July
2000 with interest at 7.0%. 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 into 121,627 shares of
common stock. In 1999, 1998 or 1997, there were no debentures, of
this series, issued or converted into common stock.
Interest expense has been recognized on the beneficial conversion
feature of the above convertible debentures issued by the Company
which amounted to $406,849 for the year ended December 31, 1997.
Minimum future annual payments of long-term obligations as of December 31,
1999 for each of the next five years and in the aggregate are:
2000 $ 1,125,468
2001 909,585
2002 878,151
2003 277,083
2004 298,770
Thereafter 3,303,535
-----------
Total minimum payments 6,792,592
Less amount representing interest
on capital leases 551,753
-----------
6,240,839
Less current maturities 1,042,159
-----------
Total long-term obligations $ 5,198,680
===========
NOTE 11 - NOTES PAYABLE - STOCKHOLDER
The notes payable - stockholder consists of a ten-year term note to the
current chairman and principal stockholder in the original amount of $1,150,000,
with interest at the one year Treasury Bill rate plus 3.5%, adjusted annually,
(8.64% at December 31, 1999) (See Note 16). The balance as of December 31, 1999
amounted to $696,728 ($1,133,758 - 1998) and is currently being repaid in
monthly installments of $6,744 including interest. The note matures in June 2008
when the remaining unpaid principal of approximately $437,893 is due. Detachable
warrants to purchase 536,000 of common stock at a price of $5.60 were issued
with this note. One half, or 268,000, of the warrants were fully exercisable
upon issuance of the note and the remaining warrants became exercisable in four
equal allotments of 67,000 beginning December 31, 1998. The warrants expire five
years from the date of issuance. At December 31, 1999, $551,716 ($529,902 -
1998) of the proceeds of the note have been allocated to the warrants which are
exercisable and is reflected as
F-19
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11 - NOTES PAYABLE - STOCKHOLDER (CONTINUED)
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. During 1999, the Company prepaid a portion of the note. As a result, a
portion of the discount, amounting to $187,390, was written off (see Note 16).
The unamortized discount at December 31, 1999 was $294,673 ($502,596 - 1998).
Minimum future annual maturities of the note payable as of December 31,
1999 for each of the next five years and in the aggregate are:
2000 $ 21,572
2001 23,511
2002 25,625
2003 27,929
2004 30,440
Thereafter 567,651
---------
Total payments 696,728
Less unamortized note discount 294,673
---------
Note payable balance after discount 402,055
Less current maturities 21,572
---------
Total long-term note payable $ 380,483
=========
NOTE 12. - STOCKHOLDERS' EQUITY
A. Reverse Stock Split
On February 16, 1999, the Company effected a one for five reserve
stock split of the Company's 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 1997, the Company issued 384,615 shares of common stock in
exchange for aggregate consideration 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.
F-20
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY (CONTINUED)
In 1997, the Company issued 32,389 shares of common stock, at a
discounted value of $175,000, to the Company's former chairman in
connection with the partial settlement by the former chairman of
certain litigation on behalf of the Company.
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.
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 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, $106,743 in principal of convertible notes payable were
converted to 35,581 shares of common stock.
In 1998, 13,100 shares of common stock valued at $33,482 were issued
as consideration for services performed for the Company.
In 1999, a convertible note payable to the principal stockholder in
the amount of $150,000 were converted to 160,000 shares of common
stock.
In 1999, 50,000 shares of common stock valued at $125,000 were
issued as consideration for services performed for the Company.
In 1999, 20,000 shares were issued in connection with the
acquisition of MMT.
In 1999, the Company issued 10,000 shares of common stock to an
employee in connection with the execution of an employment
agreement. These shares were valued at $7,312.
D. Warrants
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, 1999.
F-21
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12. - STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the issuance of notes payable to the current
principal stockholder during 1998, 536,000 detachable warrants were
issued (see Note 11). As the warrants vested, they were valued and
recorded as additional paid-in capital-warrants in the accompanying
balance sheet. The value assigned for the warrant vesting during the
year ended December 31, 1999 amounted to $21,814 ($529,902 - 1998).
In connection with the issuance of a $150,000 convertible note
payable to the principal stockholder during 1999, 128,000 detachable
warrants were issued. The value assigned to the warrants, amounting
to $73,219, has been reflected as additional paid-in capital-
warrants in the accompanying balance sheet. The note was converted
to 160,000 shares of common stock in 1999.
In connection with services performed for the Company during 1999,
warrants to purchase 26,000 (190,000 - 1998) shares of common stock
at a price of $2.50 (from $2.50 to $5.00 - 1998) were issued. The
warrants expire at various times through 2003. The value assigned to
the warrants, amounting to $20,800 ($25,683 - 1998), has been
reflected as additional paid-in capital - warrants in the
accompanying balance sheet.
NOTE 13. - 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, 1998 and 1999 authorizing the granting
of options to purchase up to an aggregate of 556,000 shares. Such
options may be designated at the time of grant as either incentive
stock options or nonqualified stock options.
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 were 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. Subsequent to the January 2, 1999 grant, future grants
under this plan were discontinued by the Company. In December 1999 a
new plan was approved which will allow for the annual grant of up to
110,000 shares. Grants under this plan will begin in 2000.
F-22
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - 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, 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
Granted 36,208 1.88
Forfeited (9,274) 11.28
-------- -------
Outstanding at December 31, 1999 271,113 $ 6.41
======== =======
Exercisable at December 31, 1999 167,352 $ 8.38
======== =======
The average fair value of options granted under this plan were
$1.56, $4.60 and $7.75 per share for the years ended December 31,
1999, 1998 and 1997, respectively.
Exercise prices for options outstanding at December 31, 1999 range
from $1.88 to $12.50 per share. The weighted average remaining
contractual life on the options outstanding at December 31, 1999 was
7.2 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 $3.00. The options were exercised
during the year ended December 31, 1998. Convertible notes payable
in the amount of $106,743 were forgiven as consideration.
On May 26, 1999, non-qualified options to purchase 60,000 shares of
the Company's common stock were granted to the President exercisable
at $1.875 per share (the fair market value at that date). The
options vest in increments of 20,000 when the Company's stock closes
at prices of $3.00, $4.50 and $6.75 or greater. The options expire
ten years from the date of grant. The fair value of the options at
the date of grant amounted to a $0.78 based on the Black Scholes
model.
F-23
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - STOCK OPTION PLANS (CONTINUED)
In September 1999, the Company executed an employment agreement with
its chief financial officer. In conjunction with the agreement, the
individual was granted options to purchase 75,000 shares of the
Company's common stock. The options vest in increments of 25,000
when the Company's stock closes at prices of $3.00, $4.50 and $6.75
or greater. The options expire ten years from the date of grant.
Based on the Black-Scholes pricing model, the fair value of these
options at the date of grant amounted to $0.49 per share. As of
December 31, 1999 there were no shares exercisable.
Subsequent to December 31, 1999, the target prices of the Company's
common stock were attained and the options became fully vested.
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 50,000 shares of
common stock. Under this plan, each non-employee director is granted
2,500 options upon becoming a director and 2,500 each year
thereafter. The options vest one year from the date of grant. At
December 31, 1999, there were 22,500 (4,500 - 1998) options
outstanding to directors under this plan. In 1999, there were 20,000
options granted (2,000 - 1998) and 2,000 forfeited (3,000 - 1998)
These options are exercisable at prices ranging from $1.375 to $9.40
per share. In 1999, the plan was amended to allow for the grant of
7,500 options upon initial election to the Board of Directors and
5,000 options each year thereafter. These options will vest one
third on the date of grant and one third at the end of each
subsequent year of service.
F-24
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13. - STOCK OPTION PLANS (CONTINUED)
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 for stock option grants
under fixed awards. 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:
1999 1998 1997
-------- ------ --------
Net loss from continuing
operations - as reported $ 4,508 $ 516 $ 2,364
Net loss from continuing
operations - pro forma $ 4,899 $ 952 $ 2,655
Loss per share from continuing
operations - as reported $ 1.98 $ .19 $ 1.14
Loss per share from continuing
operations - pro forma $ 2.15 $ .36 $ 1.28
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:
1999 1998 1997
---------- --------- ---------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 54% 93% 89%
Risk-free interest rate 5.4% 5.1% 6.3%
Expected life of options 10 years 10 Years 10 Years
NOTE 14. - 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.
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $16,143,000 and state net operating loss
carryforwards of approximately $8,292,000 which expire through 2014. 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.
F-25
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14. - INCOME TAXES (CONTINUED)
At December 31, 1999, the Company also had approximately $224,000 in
research and development and state investment tax credit carryforwards which
will expire through 2014. At December 31, 1999, a net deferred tax asset,
representing the future benefit attributed primarily to the available net
operating loss carryforwards, in the amount of approximately $5,600,000 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
before they expire.
As discussed further in footnote 5, during 1998, the Company entered into
an agreement to sell its investment in Spectra Science Corp. The total gain,
which was realized for book and income tax reporting purposes, amounts to
approximately $6.07 million and $3.17 million, respectively. These gains were
recognized during the years ended December 31, 1998 and 1999. The difference in
the book and tax gains 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 was realized on the sale for income tax purposes, at
December 31, 1998 it was determined that the Company would be able to utilize
its net operating loss carryforwards to eliminate the taxable gain. Accordingly,
during the year ended December 31, 1998 the Company recorded a deferred tax
asset of $1,067,000. As a result of the utilization of the net operating losses
during 1999, a deferred tax expense of $825,000 ($242,000 - 1998) 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,
---------------------------
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss and tax credit
carryforwards $ 6,210,000 $ 4,773,000
Reserves and other 394,000 452,000
Equity method investment -- 972,000
----------- -----------
6,604,000 6,197,000
Deferred tax liabilities:
Property and equipment (696,000) (618,000)
Defined benefit pension assets (308,000) --
----------- -----------
Net deferred tax asset 5,600,000 5,579,000
Valuation allowance (5,600,000) (4,754,000)
----------- -----------
Net current deferred tax asset $ -- $ 825,000
=========== ===========
F-26
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS
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 1999, a
$20,299 ($17,366 - 1998) 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 1999, 1998 and
1997.
Defined Benefit Plan - O&W has a contributory defined benefit pension plan
covering all salaried and hourly employees that are scheduled to work at least
1,000 hours per year. The Company's policy is to fund pension costs accrued. Net
periodic pension expense for the year ended December 31, 1999 includes the
following components:
Service cost of the current period $ 195,541
Interest cost 216,606
Expected return on plan assets (397,020)
---------
Total pension expense $ 15,127
=========
The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheets:
Projected benefit obligation
Benefit obligation at beginning of year $ --
Acquisition of Osley and Whitney 4,513,965
Service cost 195,541
Interest cost 216,606
Plan participants' contributions 126,062
Actuarial gain (539,120)
Benefits paid (111,977)
Expenses paid (33,566)
-----------
Benefit obligation at end of year $ 4,367,511
===========
F-27
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 15. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS (CONTINUED)
Plan assets at fair value
Plan assets at fair value at beginning of year $ --
Acquisition of Osley and Whitney 5,298,193
Actual return of plan assets 39,811
Plan participants' contributions 126,062
Benefits paid (111,977)
Expenses paid (33,566)
-----------
Plan assets at fair value end of year $ 5,318,523
===========
Fund status 951,012
Unrecognized actuarial gain (181,911)
-----------
Prepaid benefit cost $ 769,101
===========
The major assumptions used in the calculation of the pension obligation
were as follows:
Discount rate 7.5%
Expected long-term rate of return on plan assets 10.0%
Rate of increase in compensation 5.5%
NOTE 16. - EXTRAORDINARY ITEM
In April 1999, the Company prepaid a portion ($420,000) of the ten year
promissory note, payable to the chairman/principal stockholder (See Note 11). As
a result, a pro-rata portion of the deferred financing costs and the note
discount relating to the detachable warrants issued with the debt were written
off in 1999. The amount charged to expense for the note discount and loan
closing costs amounted to $187,390 and $35,475, respectively. The aggregate
amount of $222,865 is considered a loss on early extinguishment of debt and is
classified as an extraordinary item in the accompanying consolidated statement
of operations.
NOTE 17. - 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,
1999, 1998 and 1997, was approximately $395,000, $288,000 and
$128,000, respectively.
F-28
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 17. - COMMITMENTS (CONTINUED)
The approximate future minimum payments required under these leases are as
follows:
2000 $ 151,000
2001 130,000
2002 89,000
2003 37,000
---------
$ 407,000
=========
B. Employment Contracts
The Company is obligated under various employment agreements with
certain officers which expire at various times from 2000 to 2004.
The agreements provide for minimum aggregate annual salaries of
$1,204,000. Certain agreements also provide for, among other things,
cash bonuses and stock options if certain Company performance
measures are met, and for severance payments. For the year ended
December 31, 1999 no bonuses or stock options were earned.
NOTE 18. - RELATED PARTY TRANSACTIONS
Interest expense incurred under notes issued to the Company's principal
stockholders and their affiliates amounted to $265,155, $102,179 and $105,327,
for the years ended December 31, 1999, 1998 and 1997, respectively. The 1999
amount includes $42,347 ($27,306 - 1998) relating to the amortization of a note
discount (see Note 11) and $73,219 relating to warrants issued with a
convertible short-term note (see Note 12).
NOTE 19. - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
1999 1998 1997
----------- ----------- ------------
Interest $ 387,149 $ 360,664 $ 712,875
=========== =========== ============
Taxes $ 2,420 $ 6,144 $ 4,385
=========== =========== ============
During 1999, property, plant and equipment in the amount of $236,450 was
acquired under a capital lease.
F-29
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 19. - SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
During 1998, 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.
In addition, see Note 12 for noncash transactions related to the issuance
of the Company's common stock.
NOTE 20. - FOURTH QUARTER ADJUSTMENTS
There were no material adjustments recognized in the fourth quarter of
fiscal 1999, 1998 and 1997.
NOTE 21. - LITIGATION
The Company is the plaintiff in a lawsuit filed in the Rhode Island
Superior Court on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra
Science Corporation and Nabil Lawandy. In the action, the Company asserts that
by fraud and in breach of fiduciary duties owed, Spectra and its president, Dr.
Nabil Lawandy, caused the Company to sell to Spectra shares of Spectra's Series
A Preferred stock at a substantial discount to fair market value. The Company
alleges that in entering into the transaction it relied on various
representations made by Spectra and Dr. Lawandy, which were untrue at the time
they were made. In the action, the Company seeks compensatory damages in the
amount of $500,000 plus punitive damages as well as an award of attorneys' fees
and costs. In its response to the complaint, Spectra has asserted counterclaims
against the Company which management believes are without merit. The Company
intends to vigorously prosecute this action and defend the counterclaims.
NOTE 22. - 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.
F-30
<PAGE>
INFINITE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 22. - BUSINESS SEGMENTS (CONTINUED)
The Company's businesses are 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.
Prior to 1999, the Laser segment was the primary segment. Revenue from
this segment accounted for 94% and 98% of total revenue in 1998 and 1997,
respectively. As a result, corporate expenses were reported as part of the Laser
Service segment. With the acquisition of O&W in 1999 (see Note 4), the Plastics
segment became a significant component of the Company's consolidated financial
statements. Based on the increased activity of the second segment, general
corporate activity is reported as a separate segment. Prior periods were
restated to conform with this presentation.
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 1999, 1998 and 1997 is set forth as follows:
F-31
<PAGE>
NOTE 22. - BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Photonic
Laser Material Plastics Unallocated
Group Spectra Science Group Corporate Eliminations Consolidated
----- --------------- ----- --------- ------------ ------------
1999
----
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 5,252,099 $ -- $ 3,987,870 $ -- $ -- $ 9,239,969
Intersegment sales -- -- -- -- -- --
----------- ----------- ----------- ------------ ------------ ------------
Total revenue $ 5,252,099 $ -- $ 3,987,870 $ -- $ -- $ 9,239,969
=========== =========== =========== ============ ============ ============
Operating loss $(1,001,770) $ -- $(1,971,809) $ (873,402) $ -- $ (3,846,981)
=========== =========== =========== ============ ============ ============
Interest income $ 23,400 $ -- $ 551 $ 79,482 $ (28,800) $ 74,633
=========== =========== =========== ============ ============ ============
Interest expense $ 279,720 $ -- $ 137,674 $ 266,438 $ (28,800) $ 655,032
=========== =========== =========== ============ ============ ============
Net income from disposed business segment $ -- $ 4,170,315 $ -- $ -- $ -- $ 4,170,315
=========== =========== =========== ============ ============ ============
Extraordinary item $ -- $ -- $ -- $ (222,865) $ -- $ (222,865)
=========== =========== =========== ============ ============ ============
Identifiable assets $ 8,871,591 $ -- $ 5,072,008 $ 10,922,806 $(13,558,915) $ 11,307,490
=========== =========== =========== ============ ============ ============
Depreciation and amortization $ 596,009 $ -- $ 286,516 $ 80,400 $ -- $ 962,925
=========== =========== =========== ============ ============ ============
Capital expenditures $ 924,895 $ -- $ 595,515 $ 10,100 $ -- $ 1,530,510
=========== =========== =========== ============ ============ ============
1998
----
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 $ 652,974 $ -- $(1,167,198) $ (1,094,057) $ 362,985 $ (1,245,296)
=========== =========== =========== ============ ============ ============
Net income from disposed business
segment $ -- $ 394,125 $ -- $ -- $ -- $ 394,125
=========== =========== =========== ============ ============ ============
Interest income $ 22,842 $ -- $ -- $ 17,445 $ -- $ 40,287
=========== =========== =========== ============ ============ ============
Interest expense $ 215,252 $ -- $ 38,532 $ 119,621 $ -- $ 373,405
=========== =========== =========== ============ ============ ============
Income tax benefit $ 242,000 $ -- $ -- $ 825,000 $ -- $ 1,067,000
=========== =========== =========== ============ ============ ============
Identifiable assets $ 7,858,816 $ -- $ 489,585 $ 7,764,393 $ (7,597,152) $ 8,515,642
=========== =========== =========== ============ ============ ============
Depreciation and amortization $ 485,235 $ -- $ 46,475 $ 68,540 $ 28,611 $ 628,861
=========== =========== =========== ============ ============ ============
Capital expenditures $ 745,959 $ -- $ 76,125 $ 8,086 $ -- $ 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 $ 657,526 $ -- $(1,052,778) $ (1,597,408) $ 261,026 $ (1,731,634)
=========== =========== =========== ============ ============ ============
Income (loss) from discontinued
operations $ -- $(1,958,520) $ -- $ -- $ -- $ (1,958,520)
=========== =========== =========== ============ ============ ============
Interest income $ 22,626 $ -- $ -- $ 16,528 $ -- $ 39,154
=========== =========== =========== ============ ============ ============
Interest expense $ 218,695 $ -- $ 23,768 $ 562,410 $ -- $ 804,873
=========== =========== =========== ============ ============ ============
Identifiable assets $ 6,188,928 $ 437,375 $ 345,637 $ 5,902,847 $ (5,923,858) $ 6,950,929
=========== =========== =========== ============ ============ ============
Depreciation and amortization $ 486,799 $ -- $ 16,842 $ 217,324 $ 20,747 $ 741,712
=========== =========== =========== ============ ============ ============
Capital expenditures $ 619,856 $ -- $ 318,270 $ 16,580 $ -- $ 954,706
=========== =========== =========== ============ ============ ============
</TABLE>
F-32
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of July 1,1999 (the "Agreement"), between INFINITE
GROUP, INC., a Delaware corporation, having its principal office at 2364 Post
Road, Warwick, Rhode Island 02886, (the "Company"), and J. Terence Feeley,
residing at 40 Charlotte Avenue, Saunderstown, RI 02864 (the "Executive").
WITNESSETH:
WHEREAS, the Company desires to employ the Executive as the President of
the Company's Laser Fare, Inc. , Advanced Technology Group Division ("ATG") to
devote full time to the business of the Company, and the Executive desires to be
so employed hereunder effective as of the date thereof.
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 The Company hereby agrees to employ the Executive and the Executive
hereby agrees to serve, as the President of ATG upon the terms and conditions
herein contained. The Executive shall report regularly and administratively to
the Chief Executive Officer of the Company and to the Board of Directors in the
exercise of their fiduciary duties and responsibilities. The Executive shall
have the executive power and authority to carry out the business plans and
policies of the Company and its Subsidiaries, and to make decisions in
connection therewith.
1.2 The term of employment under this Agreement shall commence as of the
date hereof (the "Effective Date"), and, subject to the terms thereof, shall
terminate on the earlier of: (i) July 1, 2002 (the "Termination Date"), or the
(ii) termination of the Executive's employment pursuant to this Agreement (such
term of employment referred to hereinafter as the "Employment Term"); provided,
however, that on the Termination Date and on the date one year thereafter, the
Termination Date shall be extended for up to two consecutive periods of one year
each unless either party shall have given written notice to the other party not
less than six months prior to any such date that the Termination Date shall not
be so extended.
1.3 Throughout the Employment Term, the Executive shall devote his best
efforts and substantially all his business time and services to the business and
affairs of the Company and its Subsidiaries.
1.4 This Agreement shall not be interpreted to prohibit the Executive from
making passive personal investments or conducting private business affairs if
those activities do not materially affect the services required under this
Agreement.
<PAGE>
2. SALARY
2.1 From the Effective Date, the Executive shall be entitled to receive a
base salary at a rate of not less than $150,000 for each year, payable in
arrears in equal installments not less frequently than monthly in accordance
with the Company's payroll practices, with such increases as are hereinafter
provided. Once increased, such higher amount shall constitute the Executive's
annual salary.
2.2 The Company shall increase the Executive's annual base salary on each
January 1 after the Effective Date,which occurs during the Employment Term for
the 12 month period ending on each December 31.
2.3 In addition to any increase under Section 2.2, the Company at any time
may increase the Executive's base salary.
2.4 The Company shall pay the Executive a bonus of $50,000 on or before
January 31, 2000 on account of services performed during the calendar year 1999,
if the Company's operations are profitable.
3. BONUSES
3.1 The Executive shall participate in all executive bonus plans now
existing and established from time to time by the Company including the
Company's Executive Incentive Performance Plan. The Company may grant bonuses to
the Executive in such amounts and at such times, as the Board of Directors shall
determine.
4. EMPLOYEE BENEFITS
4.1 The Executive shall be included to the extent eligible thereunder
under any and all existing and future plans, programs or arrangements providing
benefits for the senior executives and at least comparable to those maintained
by the Company and/or Subsidiary as of the date hereof.
4.2 The Executive shall be included in all incentive, profit-sharing,
bonus, stock option or other similar or comparable plans applicable to senior
executives of the Company, and/ or other subsidiaries (including, without
limitation, the Company's Executive Performance Plan) in accordance with the
terms thereof.
4.3 The Executive shall be provided with an automobile and shall be
entitled to all other perquisites or privileges of office which have been and
are made available to other senior executives of the Company and / or
Subsidiaries.
4.4 The Executive shall be provided, at the expense of the Company, a
level of disability and life insurance, the terms, conditions and amounts of
which are no less favorable to the Executive than those in effect on the
Effective Date or as the same may be increased for the senior executives of the
Company and/ or Subsidiary.
<PAGE>
4.5 The Executive shall be entitled to no less than four (4) weeks paid
vacation in each year. The Company may grant additional vacation time to the
Executive.
5. EXPENSES
5.1 The Executive is authorized to incur reasonable expenses necessary to
carry out his duties under this Agreement. The Company will reimburse the
Executive for all such expenses upon presentation by the Executive from time to
time of an itemized account of such expenditures in accordance with Company
practices consistently applied.
6. TERMINATION
6.1 In the event that the Executive's employment is terminated by the
Company (other than as provided in Section 7, or for Cause, as defined below) or
the Executive terminates his employment for Good Reason (as defined below) prior
to the Termination Date, as then in effect, the Executive shall be entitled to
receive, in an immediate lump sum payment, the product of:
(i) The sum of (A) the Executive's highest annual rate of salary,
determined pursuant to Section 2 of this Agreement during the
Employment Term, and (B) the highest annual bonus paid to or accrued
for the benefit of the Executive during the Employment Term;
multiplied by
(ii) The greater of :
(A) 2.00; or
(B) the number of months (counting any portion of the month as a
full month) occurring between the date on which the
Executive's employment is terminated and the Executive's
Termination Date, as then in effect, divided by 12.
6.2 In addition, the Company shall provide the Executive with a
continuation of the employee benefits or substantially equivalent coverage ( or
the full value thereof in cash), for the period from the end of the Employment
Term until the Termination Date (as then in effect); provided, however, that in
the event that the Executive obtains other substantially comparable employment
during such period, the Executive is entitled under this Section 6.2 shall be
reduced (but not below zero) by any such benefits provided by the Executive's
new employer. The Executive shall also be entitled to receive a pro rate share
of the maximum award available under any incentive plan or program (including
but not limited to the Executive Performance Incentive Plan or any substitute,
successor or replacement thereto) for which the performance period has not
closed (or, if closed, payment has not been made) prior to the end of the
Employment Term.
6.3 If the Employment Term ends on or after the Termination Date (as then
in effect), the executive shall be entitled to payment by the Company of a
special performance bonus for his services hereunder equal to one (1) year's
base salary as then in effect.
<PAGE>
7. DEATH OR PERMANENT DISABILITY
7.1 In the event the Executive shall fail during the Employment Term,
because of illness, physical or mental disability or other incapacity, for a
period of six consecutive months to render the services provided for by this
Agreement ("Permanent Disability"), then the Company may terminate the
Employment Term, by notice to the Executive effective not less than 30 days
after giving such notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under this Section 7.1; provided, however, that the Company shall,
after such termination due to Permanent Disability, continue to pay the
Executive's annual base salary ( as set forth in Section 2 of this Agreement)
and provide for the continuation of the employee benefits and the benefit
provided under Section 4.4 of this agreement or substantially equivalent
coverage ( or the full value thereof in cash) for a period of 24 months. The
Executive will use his reasonable best efforts to cooperate with any physician
engaged by the Company to determine whether or not Permanent Disability exists.
Any payments provided for in this Section 7.1 shall be offset (but not below
zero) by any salary continuation payments received by the Executive under any
plan, program or arrangements described in Section 4.1 of this Agreement.
7.2 In the event of the death of the Executive during the Employment Term,
the Employment Term shall terminate on the date of the Executive's death, and
the Company shall pay an amount, or provide Life Insurance, equal to (i) 2.99
times (ii) the Executive's base salary for the period of twelve (12) months, to
his estate or other beneficiary designated by him. Thereafter, the Company shall
have no further obligation to compensate the Executive, under this agreement.
8. TERMINATION FOR GOOD REASON
8.1 The Executive may terminate his employment hereunder for Good Reason
at any time during the Employment Term. For purposes of this Agreement, "Good
Reason" shall mean any of the following (without the Executive's express prior
written consent):
(i) The assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities, titles or
offices, or any removal of the Executive from or any failure to re-elect the
Executive to any of such positions, except in connection with the termination of
the Executive's employment for Cause, Permanent Disability as set forth herein
in Section 7, or as a result of the Executive's death or by the Executive other
than for Good Reason;
(ii) A reduction by the Company in the Executive's base salary as in
effect at the Effective Date hereof, as the same may be increased according to
the terms of this Agreement;
(iii) A relocation of the Company's principal executive offices to a
location outside Rhode Island or the Company's requiring the Executive to be
based anywhere other than the Company's principal executive offices, except for
required travel on the Company's business to an extent substantially
<PAGE>
consistent with the Executive's business travel obligations at the Effective
Date hereof, or any material reduction or adverse change in the emoluments or
perquisites of office provided to the Executive at the Effective Date hereof;
(iv) A failure by the Company to continue in effect any benefit or
compensation plan (including any pension, profit sharing, bonus, life insurance,
health, accidental death or dismemberment or disability plan) in which the
Executive is participating at the Effective Date hereof (or in the case of plans
adopted after the date hereof and providing a type of benefit not provided by
the Company at the Effective Date hereof, at the respective dates of adoption of
such plans) without providing for or establishing plans or arrangements
providing the Executive with substantially similar benefits or the taking of any
action by the Company which would adversely affect the Executive's participation
in or reduce the Executive's benefits under any of such plans;
(v) The taking of any action by the Company which would deprive the
Executive of any material fringe benefit enjoyed by the Executive at the
Effective Date hereof ( or in the case of a fringe benefit not provided by the
Company on the Effective Date hereof, at the respective dates of adoption of
such plans first providing such fringe benefits) or the failure by the Company
to provide the Executive with the number of paid vacation days to which the
Executive is entitled hereunder or, if greater, in accordance with the Company's
practices at the Effective Date hereof;
(vi) The failure by the Company to obtain the specific assumption of
this Agreement by any successor or assign of the Company or any person acquiring
a substantial portion of the assets of the Company or, following any such
assumption, assignment or acquisition by an entity other than Subsidiary, the
occurrence of any event the Executive reasonably believes will impair his duties
under this Agreement;
(vii) Any material breach by the Company of any provision of this
Agreement;
(viii) Any purported termination of the Executive's employment which
is not effected pursuant to a notice of termination satisfying the requirements
of Section 7 or 9 of this Agreement, no such purported termination shall be
effective, or
(ix) Any Change in Control (as defined below).
8.2 CHANGE IN CONTROL
For purposes of this Agreement, a "Change in Control" of the Company shall be
deemed to have occurred if:
(i) any Person (as defined below) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act, as amended
(the "Exchange Act")), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities; however, purchases of securities of the Company
conducted by the Company's Investment Banker (who was under contract to the
Company prior to July 1, 1999), from any such Person representing 25% or more of
the combined voting power (who was also a shareholder of record at July 1, 1999)
shall not be deemed a "Change of Control" if purchased by Investment Banker on
or before February 11, 2001;
(ii) during any period of no more than two consecutive years (not
including any period prior to the execution of this Agreement) individuals who
at the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (i), (iii), or (iv)
of this definition)
<PAGE>
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or whose nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other than (a) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity
) more than 75% immediately after such merger or the consolidation or (b) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person acquires 25% or more of the combined
voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
As used in this Agreement, the term "Person" has the meaning given such
term in Section 3 (a) (9) of the Exchange Act, as modified and used in Sections
13 (d) and 14 (d) of the Exchange Act, but excludes (x) the Company, (y) any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company ( or of any subsidiary of the Company) and (z) any corporation
owned, directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the stock of the
Company.
9. DISCHARGE FOR CAUSE
The Company shall have the right to terminate the employment of the
Executive for Cause. In the event that prior to the Termination Date the
Executive's employment is (a) terminated by the Company for Cause, as
hereinafter defined, or (b) by the Executive other than for Good Reason or (c)
other than as a result of Permanent Disability or death, the Executive shall be
entitled to receive all salary, bonuses, and benefits to which the Executive is
entitled or which have accrued up to and including the effective date of the
Executive's termination of employment hereunder. All bonuses and similar amounts
shall accrue through the date of termination. If the Company follows the
procedures specified in this Section 9, in the case of the termination of the
Executive's employment for Cause, the Company's obligation under this Agreement
to make any further payments, or provide any benefits specified herein, to the
Executive shall thereupon cease and terminate. As used herein, the term "Cause"
shall mean (i) the willful and continued failure by the Executive to
substantially perform his duties with the Company (other than such failure
resulting from his incapacity due to physical and mental illness or any such or
anticipated failure resulting from his termination for Good Reason), after a
demand for substantial performance is delivered to the Executive by the Board of
Directors of the Company which specifically identified the manner in which the
Board of Directors believe that the Executive has not substantially performed
his duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or Subsidiary monetarily or
otherwise, or (iii) the Executive's willful and continued personal dishonesty,
breach of fiduciary duty involving personal profit, or conviction of a felony
(other than minor traffic violations). For purposes of this Section, no act or
failure to act on the Executive's part shall be considered
<PAGE>
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that his action or omission was in the best
interest of the Company or Subsidiary. Termination of the Executive's employment
pursuant to this Section 9 shall be communicated by a Notice of Termination. For
purposes of this Agreement a "Notice of Termination" shall mean delivery to the
Executive of a copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Company's Board of
Directors at a meeting of the Board called and held for the purpose (after
reasonable notice to the Executive and reasonable opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board prior to
such vote), finding that in the good faith opinion of the Board that any event
constituting Cause for Termination in accordance with this Section 9 has
occurred and specifying the particulars thereof in detail. For purposes of this
Agreement, no such purported termination of the Executive's employment shall be
effective without such Notice of Termination.
10. NO OBLIGATION TO MITIGATE DAMAGES
10.1 The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, not shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by the Executive as a result of employment
by another employer after the termination of his employment hereunder or
otherwise, except to the extent set forth in Section 6.2 of this Agreement. In
addition, the Company shall reimburse the Executive on a quarterly basis for all
costs and expenses incurred by the Executive to enforce or protect his rights
under this Agreement unless it shall ultimately be determined by a final
judgment of a court of competent jurisdiction that the Executive was without any
justification for commencing or continuing any such action or proceedings. In
the event of such final judgement, the Executive shall repay to the Company any
amounts of reimbursement paid under this Section 10.
11. NONCOMPETITION
During the Employment Term, the Executive shall not, directly or
indirectly become under contract to or associated with, employed by, render
services to or own an interest (other than as a shareholder owning not more than
a 5% interest) in any business that is then in competition with the Company or
Subsidiary, unless so directed or permitted by a majority of the Board of
Directors.
12. INDEMNIFICATION: DIRECTORS & OFFICERS INSURANCE
12.1 The Company agrees to indemnify the Executive and agrees to cause
Subsidiary to indemnify the Executive to the fullest extent permitted under the
applicable laws of Delaware and Rhode Island, respectively. Such indemnification
shall be in no way exclusive of any other right of indemnification to which the
Executive may be entitled.
<PAGE>
12.2 Within 30 days of the date hereof, the Company shall obtain and
thereafter during the Employment Term maintain directors' and officers'
liability insurance with limits of at least $1,000,000 under policies and issued
by a company or companies reasonably acceptable to the Executive.
13. CONFIDENTIALITY
13.1 The Executive shall not intentionally disclose or reveal to any
unauthorized person, during the period of the Employment Term any trade secret
or other confidential information relating to the Company or Subsidiary that has
not been previously disclosed or revealed.
14. NOTICES
14.1 All notices or communications hereunder shall be in writing,
addressed to each party at its or his address set forth above. Any such notice
or communications shall be sent certified or registered mail, return receipt
requested, postage prepaid, or by prepaid nationally-recognized courier service
addressed as above (or to such other address as such party may designate in
writing from time to time), and the actual date of receipt, as shown by the
receipt therefor, shall determine the time at which notice was given.
15. SEPARABILITY
15.1 If any provision of this Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof, which shall remain in full force and
effect.
16. ASSIGNMENT
16.1 This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the assigns and successors of the
Company, but neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by the Executive, provided, however, that
no such assignment by the Company without the Executive's written consent shall
release the Company from any of its obligations hereunder.
17. ENTIRE AGREEMENT
18.1 This Agreement represents the entire agreement of the parties and
shall supercede any and all previous contracts, arrangements or understandings
between the Company and the Executive; provided however, that the benefits
provided for in this Agreement are in addition to and shall in no way reduce or
diminish any right to which he is otherwise entitled that is already accrued for
or granted to the
<PAGE>
Executive pursuant to a plan, program or arrangement of the Company. This
Agreement may be amended at any time by mutual written agreement of the parties
hereto.
18. GOVERNING LAW
19.1 This Agreement shall be construed, interpreted, and governed in
accordance with the laws of the State of Rhode Island.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
Witness: /s/ Doris A. Connor
by: /s/Clifford G. Brockmyre II
Chairman and CEO
by: /s/ J. Terence Feeley
Executive
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of October 1,1999 (the "Agreement"), between
INFINITE GROUP, INC., a Delaware corporation, having its principal office at
2364 Post Road, Warwick, Rhode Island 02886, (the "Company"), and Bruce J.
Garreau, residing at 350 Phelps Avenue North, Winter Park, Florida 32789-4070
(the "Executive").
WITNESSETH:
WHEREAS, the Company desires to employ the Executive as the Chief
Financial Officer and Treasurer of the Company to devote full time to the
business of the Company, and the Executive desires to be so employed hereunder
effective as of the date thereof.
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 The Company hereby agrees to employ the Executive and the Executive
hereby agrees to serve, as the Chief Financial Officer of the Company, and as
Treasurer of the Board of Directors upon the terms and conditions herein
contained. The Executive shall report regularly and administratively to the
Chief Executive Officer of the Company and to the Board of Directors in the
exercise of their fiduciary duties and responsibilities. The Executive shall
have the executive power and authority to carry out the business plans and
policies of the Company and its Subsidiaries, and to make financial decisions in
connection therewith.
1.2 The term of employment under this Agreement shall commence as of the
date hereof (the "Effective Date"), and, subject to the terms thereof, shall
terminate on the earlier of: (i) October 1, 2002 (the "Termination Date"), or
the (ii) termination of the Executive's employment pursuant to this Agreement
(such term of employment referred to hereinafter as the "Employment Term");
provided, however, that on the Termination Date and on the date one year
thereafter, the Termination Date shall be extended for up to two consecutive
periods of one year each unless either party shall have given written notice to
the other party not less than six months prior to any such date that the
Termination Date shall not be so extended.
1.3 Throughout the Employment Term, the Executive shall devote his best
efforts and substantially all his business time and services to the business and
affairs of the Company and its Subsidiaries.
1.4 This Agreement shall not be interpreted to prohibit the Executive from
making passive personal investments or conducting private business affairs if
those activities do not materially affect the services required under this
Agreement.
<PAGE>
2. SALARY
2.1 From the Effective Date, the Executive shall be entitled to receive a
base salary at a rate of not less than $135,000 for each year, payable in
arrears in equal installments not less frequently than monthly in accordance
with the Company's payroll practices, with such increases as are hereinafter
provided. Once increased, such higher amount shall constitute the Executive's
annual salary.
2.2 The Company shall increase the Executive's annual base salary on each
January 1 after the Effective Date which occurs during the Employment Term for
the 12 month period ending on each December 31.
2.3 In addition to any increase under Section 2.2, the Company at any time
may increase the Executive's base salary.
3. BONUSES
3.1 The Executive shall participate in all executive bonus plans now
existing and established from time to time by the Company including the
Company's Executive Incentive Performance Plan. The Company may grant bonuses to
the Executive in such amounts and at such times, as the Company shall determine.
4. EMPLOYEE BENEFITS
4.1 The Executive shall be included to the extent eligible thereunder
under any and all existing and future plans, programs or arrangements providing
benefits for the senior executives and at least comparable to those maintained
by the Company and/or Subsidiary as of the date hereof.
4.2 The Executive shall be included in all incentive, profit-sharing,
bonus, stock option or other similar or comparable plans applicable to senior
executives of the Company, and/ or other subsidiaries (including, without
limitation, the Company's Executive Performance Plan) in accordance with the
terms thereof.
4.3 The Executive shall be provided with an automobile and shall be
entitled to all other perquisites or privileges of office which have been and
are made available to other senior executives of the Company and / or
Subsidiaries.
4.4 The Executive shall be provided, at the expense of the Company, a
level of disability and life insurance, the terms, conditions and amounts of
which are no less favorable to the Executive than those in effect on the
Effective Date or as the same may be increased for the senior executives of the
Company and/ or Subsidiary.
4.5 The Executive shall be entitled to no less than four (4) weeks paid
vacation in each year. The Company may grant additional vacation time to the
Executive.
<PAGE>
5. EXPENSES
5.1 The Executive is authorized to incur reasonable expenses necessary to
carry out his duties under this Agreement. The Company will reimburse the
Executive for all such expenses upon presentation by the Executive from time to
time of an itemized account of such expenditures in accordance with Company
practices consistently applied.
6. TERMINATION
6.1 In the event that the Executive's employment is terminated by the
Company (other than as provided in Section 7, or for Cause, as defined below) or
the Executive terminates his employment for Good Reason (as defined below) prior
to the Termination Date, as then in effect, the Executive shall be entitled to
receive, in an immediate lump sum payment, the product of:
(i) The sum of (A) the Executive's highest annual rate of salary,
determined pursuant to Section 2 of this Agreement during the
Employment Term, and (B) the highest annual bonus paid to or accrued
for the benefit of the Executive during the Employment Term;
multiplied by
(ii) The greater of :
(A) 2.00; or
(B) the number of months (counting any portion of the month as a
full month) occurring between the date on which the
Executive's employment is terminated and the Executive's
Termination Date, as then in effect, divided by 12.
6.2 In addition, the Company shall provide the Executive with a
continuation of the employee benefits or substantially equivalent coverage ( or
the full value thereof in cash), for the period from the end of the Employment
Term until the Termination Date (as then in effect); provided, however, that in
the event that the Executive obtains other substantially comparable employment
during such period, the Executive is entitled under this Section 6.2 shall be
reduced (but not below zero) by any such benefits provided by the Executive's
new employer. The Executive shall also be entitled to receive a pro rate share
of the maximum award available under any incentive plan or program (including
but not limited to the Executive Performance Incentive Plan or any substitute,
successor or replacement thereto) for which the performance period has not
closed (or, if closed, payment has not been made) prior to the end of the
Employment Term.
6.3 If the Employment Term ends on or after the Termination Date (as then
in effect), the executive shall be entitled to payment by the Company of a
special performance bonus for his services hereunder equal to one (1) year's
base salary as then in effect.
7. DEATH OR PERMANENT DISABILITY
<PAGE>
7.1 In the event the Executive shall fail during the Employment Term,
because of illness, physical or mental disability or other incapacity, for a
period of six consecutive months to render the services provided for by this
Agreement ("Permanent Disability"), then the Company may terminate the
Employment Term, by notice to the Executive effective not less than 30 days
after giving such notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under this Section 7.1; provided, however, that the Company shall,
after such termination due to Permanent Disability, continue to pay the
Executive's annual base salary ( as set forth in Section 2 of this Agreement)
and provide for the continuation of the employee benefits and the benefit
provided under Section 4.4 of this agreement or substantially equivalent
coverage ( or the full value thereof in cash) for a period of 24 months. The
Executive will use his reasonable best efforts to cooperate with any physician
engaged by the Company to determine whether or not Permanent Disability exists.
Any payments provided for in this Section 7.1 shall be offset (but not below
zero) by any salary continuation payments received by the Executive under any
plan, program or arrangements described in Section 4.1 of this Agreement.
7.2 In the event of the death of the Executive during the Employment Term,
the Employment Term shall terminate on the date of the Executive's death, and
the Company shall pay an amount, or provide Life Insurance, equal to (i) 2.99
times (ii) the Executive's base salary for the period of twelve (12) months, to
his estate or other beneficiary designated by him. Thereafter, the Company shall
have no further obligation to compensate the Executive, under this agreement.
8. TERMINATION FOR GOOD REASON
8.1 The Executive may terminate his employment hereunder for Good Reason
at any time during the Employment Term. For purposes of this Agreement, "Good
Reason" shall mean any of the following (without the Executive's express prior
written consent):
(i) The assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities, titles or
offices, or any removal of the Executive from or any failure to re-elect the
Executive to any of such positions, except in connection with the termination of
the Executive's employment for Cause, Permanent Disability as set forth herein
in Section 7, or as a result of the Executive's death or by the Executive other
than for Good Reason;
(ii) A reduction by the Company in the Executive's base salary as in
effect at the Effective Date hereof, as the same may be increased according to
the terms of this Agreement;
(iii) A relocation of the Company's principal executive offices to a
location outside Rhode Island or the Company's requiring the Executive to be
based anywhere other than the Company's principal executive offices, except for
required travel on the Company's business to an extent substantially consistent
with the Executive's business travel obligations at the Effective Date hereof,
or any material
<PAGE>
reduction or adverse change in the emoluments or perquisites of office provided
to the Executive at the Effective Date hereof;
(iv) A failure by the Company to continue in effect any benefit or
compensation plan (including any pension, profit sharing, bonus, life insurance,
health, accidental death or dismemberment or disability plan) in which the
Executive is participating at the Effective Date hereof (or in the case of plans
adopted after the date hereof and providing a type of benefit not provided by
the Company at the Effective Date hereof, at the respective dates of adoption of
such plans) without providing for or establishing plans or arrangements
providing the Executive with substantially similar benefits or the taking of any
action by the Company which would adversely affect the Executive's participation
in or reduce the Executive's benefits under any of such plans;
(v) The taking of any action by the Company which would deprive the
Executive of any material fringe benefit enjoyed by the Executive at the
Effective Date hereof ( or in the case of a fringe benefit not provided by the
Company on the Effective Date hereof, at the respective dates of adoption of
such plans first providing such fringe benefits) or the failure by the Company
to provide the Executive with the number of paid vacation days to which the
Executive is entitled hereunder or, if greater, in accordance with the Company's
practices at the Effective Date hereof;
(vi) The failure by the Company to obtain the specific assumption of
this Agreement by any successor or assign of the Company or any person acquiring
a substantial portion of the assets of the Company or, following any such
assumption, assignment or acquisition by an entity other than Subsidiary, the
occurrence of any event the Executive reasonably believes will impair his duties
under this Agreement;
(vii) Any material breach by the Company of any provision of this
Agreement;
(viii) Any purported termination of the Executive's employment which
is not effected pursuant to a notice of termination satisfying the requirements
of Section 7 or 9 of this Agreement, no such purported termination shall be
effective, or
(ix) Any Change in Control (as defined below).
8.2 CHANGE IN CONTROL
For purposes of this Agreement, a "Change in Control" of the Company shall be
deemed to have occurred if:
(i) any Person (as defined below) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act, as amended
(the "Exchange Act")), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities; however, purchases of securities of the Company
conducted by the Company's Investment Banker (who was under contract to the
Company prior to July 1, 1999), from any such Person representing 25% or more of
the combined voting power (who was also a shareholder of record at July 1, 1999)
shall not be deemed a "Change of Control" if purchased by Investment Banker on
or before February 11, 2001;
(ii) during any period of no more than two consecutive years (not
including any period prior to the execution of this Agreement) individuals who
at the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (i), (iii), or (iv)
of this definition) whose election by the Board or nomination for election by
the Company's stockholders was approved by a
<PAGE>
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or whose
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other than (a) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity
) more than 75% immediately after such merger or the consolidation or (b) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person acquires 25% or more of the combined
voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
As used in this Agreement, the term "Person" has the meaning given such
term in Section 3 (a) (9) of the Exchange Act, as modified and used in Sections
13 (d) and 14 (d) of the Exchange Act, but excludes (x) the Company, (y) any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company ( or of any subsidiary of the Company) and (z) any corporation
owned, directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the stock of the
Company.
9. DISCHARGE FOR CAUSE
The Company shall have the right to terminate the employment of the
Executive for Cause. In the event that prior to the Termination Date the
Executive's employment is (a) terminated by the Company for Cause, as
hereinafter defined, or (b) by the Executive other than for Good Reason or (c)
other than as a result of Permanent Disability or death, the Executive shall be
entitled to receive all salary, bonuses, and benefits to which the Executive is
entitled or which have accrued up to and including the effective date of the
Executive's termination of employment hereunder. All bonuses and similar amounts
shall accrue through the date of termination. If the Company follows the
procedures specified in this Section 9, in the case of the termination of the
Executive's employment for Cause, the Company's obligation under this Agreement
to make any further payments, or provide any benefits specified herein, to the
Executive shall thereupon cease and terminate. As used herein, the term "Cause"
shall mean (i) the willful and continued failure by the Executive to
substantially perform his duties with the Company (other than such failure
resulting from his incapacity due to physical and mental illness or any such or
anticipated failure resulting from his termination for Good Reason), after a
demand for substantial performance is delivered to the Executive by the Board of
Directors of the Company which specifically identified the manner in which the
Board of Directors believe that the Executive has not substantially performed
his duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or Subsidiary monetarily or
otherwise, or (iii) the Executive's willful and continued personal dishonesty,
breach of fiduciary duty involving personal profit, or conviction of a felony
(other than minor traffic violations). For purposes of this Section, no act or
failure to act on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable
<PAGE>
belief that his action or omission was in the best interest of the Company or
Subsidiary. Termination of the Executive's employment pursuant to this Section 9
shall be communicated by a Notice of Termination. For purposes of this Agreement
a "Notice of Termination" shall mean delivery to the Executive of a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for the purpose (after reasonable notice to the Executive
and reasonable opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board prior to such vote), finding that in the
good faith opinion of the Board that any event constituting Cause for
Termination in accordance with this Section 9 has occurred and specifying the
particulars thereof in detail. For purposes of this Agreement, no such purported
termination of the Executive's employment shall be effective without such Notice
of Termination.
10. NO OBLIGATION TO MITIGATE DAMAGES
10.1 The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, not shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by the Executive as a result of employment
by another employer after the termination of his employment hereunder or
otherwise, except to the extent set forth in Section 6.2 of this Agreement. In
addition, the Company shall reimburse the Executive on a quarterly basis for all
costs and expenses incurred by the Executive to enforce or protect his rights
under this Agreement unless it shall ultimately be determined by a final
judgment of a court of competent jurisdiction that the Executive was without any
justification for commencing or continuing any such action or proceedings. In
the event of such final judgement, the Executive shall repay to the Company any
amounts of reimbursement paid under this Section 10.
11. NONCOMPETITION
During the Employment Term, the Executive shall not, directly or
indirectly become under contract to or associated with, employed by, render
services to or own an interest (other than as a shareholder owning not more than
a 5% interest) in any business that is then in competition with the Company or
Subsidiary, unless so directed or permitted by a majority of the Board of
Directors.
12. INDEMNIFICATION: DIRECTORS & OFFICERS INSURANCE
12.1 The Company agrees to indemnify the Executive and agrees to cause
Subsidiary to indemnify the Executive to the fullest extent permitted under the
applicable laws of Delaware and Rhode Island, respectively. Such indemnification
shall be in no way exclusive of any other right of indemnification to which the
Executive may be entitled.
<PAGE>
12.2 Within 30 days of the date hereof, the Company shall obtain and
thereafter during the Employment Term maintain directors' and officers'
liability insurance with limits of at least $1,000,000 under policies and issued
by a company or companies reasonably acceptable to the Executive.
13. CONFIDENTIALITY
13.1 The Executive shall not intentionally disclose or reveal to any
unauthorized person, during the period of the Employment Term any trade secret
or other confidential information relating to the Company or Subsidiary that has
not been previously disclosed or revealed.
14. NOTICES
14.1 All notices or communications hereunder shall be in writing,
addressed to each party at its or his address set forth above. Any such notice
or communications shall be sent certified or registered mail, return receipt
requested, postage prepaid, or by prepaid nationally-recognized courier service
addressed as above (or to such other address as such party may designate in
writing from time to time), and the actual date of receipt, as shown by the
receipt therefor, shall determine the time at which notice was given.
15. SEPARABILITY
15.1 If any provision of this Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof, which shall remain in full force and
effect.
16. ASSIGNMENT
16.1 This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the assigns and successors of the
Company, but neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by the Executive, provided, however, that
no such assignment by the Company without the Executive's written consent shall
release the Company from any of its obligations hereunder.
17. SIGNING SHARES AND STOCK OPTIONS OF THE COMPANY'S COMMON STOCK
17.1 The Executive shall receive 10,000 shares and additional stock
options for at least 75,000 shares at a strike price not greater than $1.00 per
share of the Company's common stock upon signing this Agreement.
17.2 Such shares of stock shall be deemed as earned and exchanged on
September 27, 1999, and the Executive shall terminate development of future
consulting contracts for the benefit of Corporate Financial Group on or before
such date.
<PAGE>
17.3 Stock options shall be vested to the benefit of the Executive on the
date the per share price of Common Stock of the Company first closes for trading
on the NASDAQ (or its successor) as follows:
Options Price
------- -----
25000 closes at a price of $3.00;
25000 closes at a price of $4.50; and
25000 closes at a price of $6.75
17.4 Shares and stock options will be delivered within 30 days of the
signing of this Agreement.
18. ENTIRE AGREEMENT
18.1 This Agreement represents the entire agreement of the parties and
shall supercede any and all previous contracts, arrangements or understandings
between the Company and the Executive; provided however, that the benefits
provided for in this Agreement are in addition to and shall in no way reduce or
diminish any right to which he is otherwise entitled that is already accrued for
or granted to the Executive pursuant to a plan, program or arrangement of the
Company. This Agreement may be amended at any time by mutual written agreement
of the parties hereto.
19. GOVERNING LAW
19.1 This Agreement shall be construed, interpreted, and governed in
accordance with the laws of the State of Rhode Island.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
Witness: /s/ Doris A. Connor
by: /s/ Clifford G. Brockmyre II
Chairman and CEO
by: /s/ Bruce J. Garreau
Executive
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of November 15, 1999 (the "Agreement"), between
INFINITE GROUP, INC., a Delaware corporation, having its principal office at
2364 Post Road, Warwick, Rhode Island 02886, (the "Company"), and Thomas M.
O'Connor, residing at 31 Bentrup Court, Lenox, Massachusetts 01240 (the
"Executive").
WITNESSETH:
WHEREAS, the Company desires to employ the Executive as the President of
the Company's Plastics Group, to devote full time to the business of the
Company, and the Executive desires to be so employed hereunder effective as of
the date thereof.
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 The Company hereby agrees to employ the Executive and the Executive
hereby agrees to serve, as the President of The Plastics Group upon the terms
and conditions herein contained. The Executive shall report regularly and
administratively to the Chief Executive Officer of the Company and to the Board
of Directors in the exercise of their fiduciary duties and responsibilities. The
Executive shall have the executive power and authority to carry out the business
plans and policies of the Company and its Subsidiaries, and to make decisions in
connection therewith.
1.2 The term of employment under this Agreement shall commence as of the
date hereof (the "Effective Date"), and, subject to the terms thereof, shall
terminate on the earlier of: (i) December 15, 2001 (the "Termination Date"), or
the (ii) termination of the Executive's employment pursuant to this Agreement
(such term of employment referred to hereinafter as the "Employment Term");
provided, however, that on the Termination Date and on the date one year
thereafter, the Termination Date shall be extended for up to two consecutive
periods of one year each unless either party shall have given written notice to
the other party not less than six months prior to any such date that the
Termination Date shall not be so extended.
1.3 Throughout the Employment Term, the Executive shall devote his best
efforts and substantially all his business time and services to the business and
affairs of the Company and its Subsidiaries.
1.4 This Agreement shall not be interpreted to prohibit the Executive from
making passive personal investments or conducting private business affairs if
those activities do not materially affect the services required under this
Agreement.
<PAGE>
2. SALARY
2.1 From the Effective Date, the Executive shall be entitled to receive a
base salary at a rate of not less than $125,000 for each year, payable in
arrears in equal installments not less frequently than monthly in accordance
with the Company's payroll practices, with such increases as are hereinafter
provided. Once increased, such higher amount shall constitute the Executive's
annual salary.
2.2 The Company may increase the Executive's annual base salary on each
January 1 after the Effective Date, which occurs during the Employment Term for
the 12 month period ending on each December 31.
2.3 In addition to any increase under Section 2.2, the Company at any time
may increase the Executive's base salary.
2.4 The Company shall pay the Executive a bonus of $25,000 on or before
January 31, 2001 on account of services performed during the calendar year 2000,
if the Company's operations (Plastics Group) reach $12,000,000 in revenues, and
are profitable.
3. BONUSES
3.1 The Executive shall participate in all executive bonus plans now
existing and established from time to time by the Company including the
Company's Executive Incentive Performance Plan. The Company may grant bonuses to
the Executive in such amounts and at such times, as the Board of Directors shall
determine.
4. EMPLOYEE BENEFITS
4.1 The Executive shall be included to the extent eligible thereunder
under any and all existing and future plans, programs or arrangements providing
benefits for the executives.
4.2 The Executive shall be included in all incentive, profit-sharing,
bonus, stock option or other similar or comparable plans applicable to
executives of the Company, in accordance with the terms thereof.
4.3 The Executive shall be provided with an automobile and shall be
entitled to all other perquisites or privileges of office which have been and
are made available to other senior executives of the Company and / or
Subsidiaries.
4.4 The Executive shall be provided, at the expense of the Company, a
level of disability and life insurance, the terms, conditions and amounts of
which are applicable to the executives of the Company and/ or Subsidiary.
4.5 The Executive shall be entitled to no less than two (2) weeks paid
vacation in each year. During the term of the contract, the Company may grant
additional vacation time to the Executive.
<PAGE>
5. EXPENSES
5.1 The Executive is authorized to incur reasonable expenses necessary to
carry out his duties under this Agreement. The Company will reimburse the
Executive for all such expenses upon presentation by the Executive from time to
time of an itemized account of such expenditures in accordance with Company
practices consistently applied.
6. TERMINATION
6.1 In the event that the Executive's employment is terminated by the
Company (other than as provided in Section 7, or for Cause, as defined below) or
the Executive terminates his employment for Good Reason (as defined below) prior
to the Termination Date, as then in effect, the Executive shall be entitled to
receive (other than as provided in Section 10) up to one year's salary in effect
at the time of termination.
6.2 In addition, the Company shall provide the Executive with a
continuation of the employee benefits or substantially equivalent coverage ( or
the full value thereof in cash), for the period from the end of the Employment
Term until the Termination Date (as then in effect); provided, however, that in
the event that the Executive obtains other substantially comparable employment
during such period, the Executive is entitled under this Section 6.2 shall be
reduced (but not below zero) by any such benefits provided by the Executive's
new employer.
7. DEATH OR PERMANENT DISABILITY
7.1 In the event the Executive shall fail during the Employment Term,
because of illness, physical or mental disability or other incapacity, for a
period of six consecutive months to render the services provided for by this
Agreement ("Permanent Disability"), then the Company may terminate the
Employment Term, by notice to the Executive effective not less than 30 days
after giving such notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under this Section 7.1; provided, however, that the Company shall,
after such termination due to Permanent Disability, continue to pay the
Executive's annual base salary ( as set forth in Section 2 of this Agreement)
and provide for the continuation of the employee benefits and the benefit
provided under Section 4.4 of this agreement. The Executive will use his
reasonable best efforts to cooperate with any physician engaged by the Company
to determine whether or not Permanent Disability exists. Any payments provided
for in this Section 7.1 shall be offset (but not below zero) by any salary
continuation payments received by the Executive under any plan, program or
arrangements described in Section 4.1 of this Agreement.
7.2 In the event of the death of the Executive during the Employment Term,
the Employment Term shall terminate on the date of the Executive's death, and
the Company shall pay an amount, or
<PAGE>
provide Life Insurance, equal to the Executive's base salary for the period of
twelve (12) months, to his estate or other beneficiary designated by him.
Thereafter, the Company shall have no further obligation to compensate the
Executive, under this agreement.
8. TERMINATION FOR GOOD REASON
8.1 The Executive may terminate his employment hereunder for Good Reason
at any time during the Employment Term. For purposes of this Agreement, "Good
Reason" shall mean any of the following (except that upon written notice to the
Companies Chief executive Officer, the Company shall have 30 days to cure ).
(i) The assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities, titles or
offices, except in connection with the termination of the Executive's employment
for Cause, Permanent Disability as set forth herein in Section 7, or as a result
of the Executive's death or by the Executive other than for Good Reason;
(ii) A failure by the Company to continue in effect any applicable
employee benefit or compensation plan (including any pension, profit sharing,
bonus, life insurance, health, accidental death or dismemberment or disability
plan) in which the Executive is participating at the Effective Date hereof (or
in the case of plans adopted after the date hereof and providing a type of
benefit not provided by the Company at the Effective Date hereof, at the
respective dates of adoption of such plans) without providing for or
establishing plans or arrangements providing the Executive with substantially
similar benefits or the taking of any action by the Company which would
adversely affect the Executive's participation in or reduce the Executive's
benefits under any of such plans;
(iii) The taking of any action by the Company which would deprive
the Executive of any material fringe benefit enjoyed by the Executive at the
Effective Date hereof ( or in the case of a fringe benefit not provided by the
Company on the Effective Date hereof, at the respective dates of adoption of
such plans first providing such fringe benefits) or the failure by the Company
to provide the Executive with the number of paid vacation days to which the
Executive is entitled hereunder or, if greater, in accordance with the Company's
practices at the Effective Date hereof;
(iv) Any material breach by the Company of any provision of this
Agreement;
(v) Any purported termination of the Executive's employment which is
not effected pursuant to a notice of termination satisfying the requirements of
Section 7 or 9 of this Agreement, no such purported termination shall be
effective.
9. DISCHARGE FOR CAUSE
The Company shall have the right to terminate the employment of the
Executive for Cause. In the event that prior to the Termination Date the
Executive's employment is (a) terminated by the Company for Cause, as
hereinafter defined, or (b) by the Executive other than for Good Reason or (c)
other than as a result of Permanent Disability or death, the Executive shall be
entitled to receive all salary, bonuses, and
<PAGE>
benefits to which the Executive is entitled or which have accrued up to and
including the effective date of the Executive's termination of employment
hereunder. All bonuses and similar amounts shall accrue through the date of
termination. If the Company follows the procedures specified in this Section 9,
in the case of the termination of the Executive's employment for Cause, the
Company's obligation under this Agreement to make any further payments, or
provide any benefits specified herein, to the Executive shall thereupon cease
and terminate. As used herein, the term "Cause" shall mean (i) the willful and
continued failure by the Executive to substantially perform his duties with the
Company (other than such failure resulting from his incapacity due to physical
and mental illness or any such or anticipated failure resulting from his
termination for Good Reason), after a demand for substantial performance is
delivered to the Executive by the Chief Executive Officer of the Company which
specifically identified the manner in which the Company believes that the
Executive has not substantially performed his duties, or (ii) the willful
engaging by the Executive in conduct which is demonstrably and materially
injurious to the Company or Subsidiary monetarily or otherwise, or (iii) the
Executive's willful and continued personal dishonesty, breach of fiduciary duty
involving personal profit, or conviction of a felony (other than minor traffic
violations). Termination of the Executive's employment pursuant to this Section
9 shall be communicated by a Notice of Termination. For purposes of this
Agreement a "Notice of Termination" shall mean delivery to the Executive of a
written notice constituting Cause for Termination in accordance with this
Section 9 has occurred
10. OBLIGATION TO MITIGATE DAMAGES
9.1 The Executive shall be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment.
11. NONCOMPETITION
During the Employment Term, the Executive shall not, directly or
indirectly become under contract to or associated with, employed by, render
services to or own an interest (other than as a shareholder owning not more than
a 5% interest) in any business that is then in competition with the Company or
Subsidiary, unless so directed or permitted by the Chief Executive Officer in
writing.
12. INDEMNIFICATION: DIRECTORS & OFFICERS INSURANCE
12.1 The Company agrees to indemnify the Executive to the fullest extent
permitted under the applicable laws of Delaware and Rhode Island, respectively.
Such indemnification shall be in no way exclusive of any other right of
indemnification to which the Executive may be entitled.
13. CONFIDENTIALITY
<PAGE>
13.1 The Executive shall not intentionally disclose or reveal to any
unauthorized person, during the period of the Employment Term any trade secret
or other confidential information relating to the Company or Subsidiary that has
not been previously disclosed or revealed.
14. NOTICES
14.1 All notices or communications hereunder shall be in writing,
addressed to each party at its or his address set forth above. Any such notice
or communications shall be sent certified or registered mail, return receipt
requested, postage prepaid, or by prepaid nationally-recognized courier service
addressed as above (or to such other address as such party may designate in
writing from time to time), and the actual date of receipt, as shown by the
receipt therefor, shall determine the time at which notice was given.
15. SEPARABILITY
15.1 If any provision of this Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof, which shall remain in full force and
effect.
16. ASSIGNMENT
16.1 This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the assigns and successors of the
Company.
17. ENTIRE AGREEMENT
17.1 This Agreement represents the entire agreement of the parties and
shall supercede any and all previous contracts, arrangements or understandings
between the Company and the Executive; provided however, that the benefits
provided for in this Agreement are in addition to and shall in no way reduce or
diminish any right to which he is otherwise entitled that is already accrued for
or granted to the Executive pursuant to a plan, program or arrangement of the
Company. This Agreement may be amended at any time by mutual written agreement
of the parties hereto.
18. GOVERNING LAW
18.1 This Agreement shall be construed, interpreted, and governed in
accordance with the laws of the State of Rhode Island.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
By: Infinite Group, Inc. /s/ Clifford G. Brockmyre II
Its President and Chief Executive Officer
<PAGE>
by: /s/ Thomas M. O'Connor
Executive
Witness: /s/ Valarie G. O'Connor
Exhibit 21
Subsidiaries of the Company
State of
Name Incorporation
- ----------------------------------------------- ----------------
Laser Fare, Inc. Rhode Island
Mound Laser & Photonics, Inc. Ohio
Osley & Whitney, Inc. Massachusetts
Express Pattern, Inc. Delaware
Material & Manufacturing Technologies, Inc. Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Infinite
Group, Inc and is qualified in it's entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 328,094
<SECURITIES> 0
<RECEIVABLES> 1,544,476
<ALLOWANCES> 48,188
<INVENTORY> 536,554
<CURRENT-ASSETS> 2,842,482
<PP&E> 9,854,300
<DEPRECIATION> 2,794,933
<TOTAL-ASSETS> 11,307,490
<CURRENT-LIABILITIES> 3,850,171
<BONDS> 6,642,894
0
0
<COMMON> 2,918
<OTHER-SE> 1,875,238
<TOTAL-LIABILITY-AND-EQUITY> 11,307,490
<SALES> 9,239,969
<TOTAL-REVENUES> 9,239,969
<CGS> 7,155,817
<TOTAL-COSTS> 11,813,513
<OTHER-EXPENSES> 1,273,437
<LOSS-PROVISION> 52,450
<INTEREST-EXPENSE> 655,032
<INCOME-PRETAX> (4,542,482)
<INCOME-TAX> 34,942
<INCOME-CONTINUING> (4,507,640)
<DISCONTINUED> 4,170,315
<EXTRAORDINARY> (222,865)
<CHANGES> 0
<NET-INCOME> (560,190)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
