FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Nine Month Period Ended September 30, 2001
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 offices) (Zip Code)
Issuer's telephone number (401) 738-5777
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 14, 2001 there were 4,488,517 shares of the registrant's common
stock, par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
INFINITE GROUP, INC.
Form 10-QSB
INDEX
Page
----
PART I. Unaudited Consolidated Financial Statements
Item 1. Consolidated Balance Sheets- September 30, 2001 and
December 31, 2000.....................................................2
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 2001 and 2000.....................................3
Consolidated Statements of Cash Flows -Nine Months
Ended September 30, 2001 and 2000.....................................4
Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations..................................8
PART II. OTHER INFORMATION
Items 1-6 ....................................................................14
SIGNATURES ...................................................................14
1
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 100,765 $ 185,901
Restricted funds 64,092 85,735
Accounts receivable, net of allowance 1,919,947 1,827,275
Inventories 417,659 482,585
Advance - stockholder 53,454 50,249
Other current assets 179,496 104,003
------------ ------------
Total current assets 2,735,413 2,735,748
Property and equipment, net 7,156,117 7,169,794
Other assets:
Preferred stock investment 295,000 295,000
Prepaid pension costs 696,326 726,326
Intangible assets, net 812,957 416,002
Other -- 30,464
------------ ------------
Total other assets 1,804,283 1,467,792
------------ ------------
$ 11,695,813 $ 11,373,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Bank $ 780,924 $ 945,695
Stockholders 162,946 48,946
Accounts payable and accrued liabilities 3,245,331 2,475,853
Current maturities of long term obligations 1,229,766 3,037,365
Current maturities of long term obligations
- stockholder 16,054 55,911
------------ ------------
Total current liabilities 5,435,021 6,563,770
Long term obligations 3,863,782 2,134,934
Long term obligations - stockholder 424,587 787,514
Stockholders' equity
Common stock, $.001 par value, 20,000,000 shares
authorized 4,398,517 and 3,542,049 shares issued;
4,398,517 and 3,450,113 shares outstanding; 0 and
93,750 shares subscribed 4,399 3,636
Additional paid-in capital 24,127,316 22,653,410
Accumulated deficit (22,159,292) (20,352,590)
------------ ------------
Less: 1,972,423 2,304,456
Treasury stock, 0 and 91,936 shares, at cost (229,840)
Common stock subscription receivable -- (187,500)
------------ ------------
Total stockholders' equity 1,972,423 1,887,116
------------ ------------
$ 11,695,813 $ 11,373,334
============ ============
See accompanying notes to unaudited consolidated financial statements.
2
INFINITE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 3,338,383 $ 3,002,473 $ 10,606,359 $ 9,487,138
Cost of goods sold 2,465,923 1,962,747 7,824,147 6,276,672
----------- ----------- ------------ -----------
Gross profit 872,460 1,039,726 2,782,212 3,210,466
Costs and expenses
Research and development 236,470 265,027 404,722 790,403
General and administrative expenses 772,708 652,800 2,290,513 1,989,325
Selling expenses 156,539 172,235 503,256 488,667
Depreciation and amortization 352,219 296,260 884,849 851,264
----------- ----------- ------------ -----------
Total costs and expenses 1,517,936 1,386,322 4,083,340 4,119,659
----------- ----------- ------------ -----------
Operating loss (645,476) (346,596) (1,301,128) (909,193)
Other income (expense)
Interest expense:
Stockholder (25,041) (23,621) (86,027) (72,046)
Other (60,671) (178,192) (372,566) (490,818)
Gain (loss) on dispositions of assets 179 -- 179 (67,274)
Other income (expense) (6,752) 46,197 (3,818) 51,397
----------- ----------- ------------ -----------
Total other income (expense) (92,285) (155,616) (462,232) (578,741)
----------- ----------- ------------ -----------
Net loss $ (737,761) $ (502,212) $ (1,763,360) $(1,487,934)
=========== =========== ============ ===========
Net loss per share - basic and diluted $ (0.17) $ (0.16) $ (0.44) $ (0.54)
=========== =========== ============ ===========
Weighted average number of common
shares outstanding- basic and diluted 4,389,251 3,070,296 3,989,547 2,736,351
=========== =========== ============ ===========
See accompanying notes to unaudited consolidated financial statements.
3
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(1,763,360) $(1,487,934)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 884,849 851,264
(Gain) loss on disposition of assets (179) 67,274
Amortization of discount on note payable 25,778 27,355
Expenses satisfied via issuance of debt or equity
instrument 29,200 42,500
Asset write down and allowances -- 6,652
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (92,672) (207,938)
Inventories 64,926 (63,794)
Other current assets (75,493) 12,364
Prepaid pension cost 30,000 --
Increase in liabilities:
Accounts payable and accrued liabilities 830,442 423,972
----------- -----------
Net cash used in operating activities (66,509) (328,285)
Cash flows from investing activities:
Repayment of note receivable -- 204,716
Advance to stockholder (3,205) (235)
Purchase of property and equipment (470,763) (447,457)
Proceeds from the sale of property and equipment 1,000 122,900
Investment in preferred stock -- (45,000)
Purchase of intangible assets (431,255) --
Proceeds from cancellation of officer life insurance 30,464 --
----------- -----------
Net cash used in investing activities (873,759) (165,076)
Cash flows from financing activities:
Net borrowings of notes payable 29,845 729,865
Repayments of long term obligations (362,751) (775,114)
Net repayments of long term obligations - stockholder (9,644) (8,964)
Proceeds from the issuance of common stock, net of expenses 988,539 317,962
Collection of subscription receivable 187,500 --
Decrease in restricted funds, net 21,643 10,864
----------- -----------
Net cash provided by financing activities 855,132 274,613
----------- -----------
Net decrease in cash and cash equivalents (85,136) (218,748)
Cash and cash equivalents - beginning of period 185,901 328,094
----------- -----------
Cash and cash equivalents - end of period $ 100,765 $ 109,346
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
INFINITE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. - BASIS OF PRESENTATION
The accompanying financial statements of Infinite Group, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001. For further information, refer to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2000, which
includes audited financial statements and footnotes as of and for the years
ended December 31, 2000 and 1999.
NOTE 2. - RECLASSIFICATIONS
Certain amounts in the 2000 financial statements, as well as amounts
reported as of June 30, 2001, have been reclassified to conform with the
September 30, 2001 financial statement presentation.
NOTE 3. - PRONOUNCEMENTS ISSUED NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which will potentially impact the Company's
accounting for its reported goodwill and other intangible assets.
Statement 141:
o Eliminates the pooling method for accounting for business
combinations;
o Requires that intangible assets that meet certain criteria be
reported separately from goodwill; and
o Requires negative goodwill arising from a business combination to be
recorded as an extraordinary gain.
Statement 142:
o Eliminates the amortization of goodwill and other intangibles that
are determined to have an indefinite life; and
o Requires, at a minimum, annual impairment tests for goodwill and
other intangible assets that are determined to have an indefinite
life.
Upon adoption of these Statements, the Company is required to:
o Re-evaluate goodwill and other intangible assets that arose from
business combinations entered into before July 1, 2001. If the
recorded other intangibles assets do not meet the criteria for
recognition, they should be reclassified to goodwill. Similarly, if
there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they
should be reclassified from goodwill.
o Reassess the useful lives of intangible assets and adjust the
remaining amortization periods accordingly.
o Write-off any remaining negative goodwill.
The Company has not yet completed its full assessment of the effects of
these new pronouncements on its financial statements and,accordingly, is
uncertain as to the impact. The standards generally are required to be
implemented by the Company in its 2002 financial statements.
5
NOTE 4. - NOTES PAYABLE - STOCKHOLDERS
During the quarter ended March 31, 2001, the Company issued an unsecured
short-term note payable to its president in the amount of $10,000. The note
bears interest at the rate of 10% and remains unpaid as of September 30, 2001.
During the quarter ended March 31, 2001, the Company issued short-term
notes payable to two stockholders, aggregating $80,000. The notes bear interest
at the rate of 10%. During the quarter ended June 30, 2001, one stockholder
agreed to accept 25,486 shares of the Company's common stock as satisfaction of
the note payable and accrued interest, aggregating $50,972. Also, during the
quarter ended June 30, 2001, the other stockholder agreed to accept 16,268
shares of the Company's common stock as satisfaction of the other note payable
and accrued interest, aggregating $32,536.
During the quarter ended September 30, 2001, the Company issued unsecured
short-term notes payable to its president and a stockholder in the amount of
$84,000 and $20,000, respectively. Both notes bear interest at 10% and both
remain unpaid at September 30, 2001.
NOTE 6. - LONG TERM OBLIGATIONS
At December 31, 2000, the Company was in violation of certain bank debt
covenants on term loans outstanding at its Laser Fare subsidiary. Consequently,
the associated debt was classified as a current liability at December 31, 2000.
Subsequent to the filing of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2000, the Company received a bank waiver of the debt
covenant violations that existed at December 31, 2000. Accordingly, in the
September 30, 2001 financial statements, the debt has been reclassified in
accordance with the stated maturities in the term loan agreements.
In April 2001, the Company received notice that it was in default on a
principal and interest payment due April 16, 2001 in the amount of $342,240,
which is owed to a former shareholder of Osley & Whitney. The notice stated that
the full outstanding principal and interest balance of $618,240 is due and
payable. The Company is currently in discussion with the noteholder to negotiate
payment terms on the outstanding balance. The entire amount is classified as a
current liability as of September 30, 2001.
During the quarter ended September 30, 2001, the Company entered into a
capital lease obligation in the amount of $375,000 for stereolithography
equipment at its Express Pattern, Inc. subsidiary. The lease provides for 48
monthly principal and interest payments of approximately $8,700.
NOTE 7. - LONG TERM OBLIGATIONS - STOCKHOLDER
During the quarter ended June 30, 2001, the Company was released from a
capital lease obligation and related accrued interest aggregating to $448,830
due to the Company's president. The Company's president contributed equipment
owned by him to the Company in exchange for 225,000 shares of common stock. This
equipment was subject to a lease accounted for as a capital lease. As a result,
no further payments are due under the lease.
NOTE 8. - STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2001, the Company issued from treasury
25,000 shares of common stock to an accredited investor at a price of $2.00 per
share, resulting in proceeds of $50,000. The Company also issued from treasury
21,737 shares of common stock in accordance with its equity line of credit
agreement resulting in proceeds of $50,474, net of expenses of $12,026. In
addition, various employees exercised stock options with exercise prices ranging
from $1.50 to $2.50 per share, resulting in the issuance of 4,645 shares of
common stock from treasury and proceeds of $9,160. The original cost of the
above shares issued from treasury exceeded the proceeds from issuances by
$18,823 in aggregate, resulting in a loss charged to accumulated
6
deficit.
During the quarter ended June 30, 2001, the Company sold 306,028 shares of
the common stock to accredited investors at prices ranging from $1.88 to $2.00
per share, resulting in proceeds of $599,900. The Company issued 40,554 of these
shares of common stock from treasury with an original cost exceeding the
proceeds from issuances by $22,609, which was charged to accumulated deficit. In
connection with these transactions, the Company granted 35,400 warrants to
purchase common stock at prices ranging from $3.00 to $4.00 per share. The
warrants became exercisable on June 15, 2001 and expire on June 15, 2004. In
addition, during the second quarter employee stock options with exercise prices
ranging from $1.88 to $2.50 per share were exercised, resulting in the issuance
of 1,228 shares of the Company's common stock and proceeds of $2,875.
During the quarter ended June 30, 2001, convertible notes payable to
former Osley & Whitney, Inc. shareholders, along with accrued interest and other
outstanding liabilities, aggregating $119,131 were converted into 63,963 shares
of the Company's common stock.
During the quarter ended September 30, 2001, the Company sold 137,500
shares of the common stock to accredited investors at prices ranging from $2.00
to $2.25 per share, resulting in proceeds of $270,000, net of expenses of
$30,000. In addition, during the third quarter employee stock options with
exercise prices from $1.00 to $1.50 per share were exercised, resulting in the
issuance of 27,800 shares of common stock. Further, in lieu of a cash payment in
the amount of $29,200, the Company reduced an outstanding employee related
liability to the individual.
NOTE 9. - BUSINESS SEGMENTS
Business segments are determined based on differences in products,
production processes and internal reporting. The Company's businesses were
previously organized, managed and internally reported as two segments. During
the quarter ended June 30, 2001, the Company formed Infinite Photonics, Inc., a
majority owned subsidiary to commercialize production of grating coupled surface
emitting laser (GCSEL) diodes. As a result of the formation of this entity a
third business segment was established. All of the segments of the Company
operate entirely within the United States. Revenues from customers in foreign
countries are minimal. Transactions between reportable segments are recorded at
cost. The Company relies on intersegment cooperation and management does not
represent that these segments, if operated independently, would report the
results shown.
A summary of selected consolidated information for the Company's
industry segments during the periods ended September 30, 2001 and September 30,
2000, respectively, is as follows:
Laser Photonics Plastics Unallocated
Group Group Group Corporate Consolidated
----- ----- ----- --------- ------------
Three Months Ended Sept. 30, 2001
Sales to unaffiliated customers $ 1,923,920 $ 394,584 $ 1,019,879 $ -- $ 3,338,383
=========== ========== =========== ========== ============
Operating loss $ (35,062) $ (114,990) $ (349,451) $ (145,973) $ (645,476)
=========== ========== =========== ========== ============
Three Months Ended Sept. 30, 2000
Sales to unaffiliated customers $ 1,407,810 $ -- $ 1,594,663 $ -- $ 3,002,473
=========== ========== =========== ========== ============
Operating loss $ (93,519) $ -- $ (105,017) $ (148,060) $ (346,596)
=========== ========== =========== ========== ============
Nine Months Ended Sept. 30, 2001
Sales to unaffiliated customers $ 5,870,843 $ 535,794 $ 4,199,722 $ -- $ 10,606,359
=========== ========== =========== ========== ============
Operating income (loss) $ 155,642 $ (427,886) $ (891,963) $ (136,921) $ (1,301,128)
=========== ========== =========== ========== ============
Nine Months Ended Sept. 30, 2000
7
Sales to unaffiliated customers 4,732,199 $ -- $ 4,754,939 $ -- $ 9,487,138
=========== ========== =========== =========== ============
Operating loss $ (284,949) $ -- $ (57,457) $ (566,787) $ (909,193)
=========== ========== =========== =========== ============
NOTE 10. - SUBSEQUENT EVENTS
Subsequent to September 30, 2001, the Company issued unsecured short-term
notes payable to its president and a stockholder in the amount of $37,000 and
$10,000 respectively. The notes bear interest at 10%.
During November 2001, the Company sold 90,000 shares of the common stock
to accredited investors for $1.25 per share, resulting in proceeds of $112,500.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 regarding the plans and objectives of management
for future operations. You can identify these forward-looking statements by our
use of the words "believes," "anticipates," "plans," "expects," "may," "will,"
"intends," "estimates" and similar expressions, whether in the negative or
affirmative. Such statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Our plans and objectives are
based, in part, on assumptions involving judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
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 in "Certain Factors That May Affect Future Growth,"
under Part I, Item 1, of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2000 as filed with the Securities and Exchange Commission. In
light of the significant uncertainties inherent in the forward-looking
statements included herein particularly in view of our early stage operations,
the inclusion of such information should not be regarded by us or any other
person that the objectives and plans of the Company will be achieved.
OUR BUSINESS
Our business has three segments, the Laser Group, the Photonics Group and
the Plastics Group. We sell products and services in the fields of material
processing, advanced manufacturing methods, GCSEL diode manufacturing and
laser-application technology. We have approximately 140 employees.
Our Laser Group, comprised of Laser Fare ("LF"-Smithfield, RI), Mound
Laser & Photonics Center ("MLPC"-Miamisburg, OH), and the Advanced Technology
Group ("ATG"-Narragansett, RI), provides comprehensive laser-based materials
processing services to leading manufacturers.
Our Plastics Group, comprised of Osley & Whitney/ ExpressTool
("OW"-Westfield, MA), Materials & Manufacturing Technologies ("MMT" - West
Kingston, RI) and Express Pattern ("EP" -Buffalo Grove, IL), provides rapid
prototyping services and proprietary mold building services.
During 2000, ATG completed initial prototype testing of proprietary
grating coupled surface emitting laser (GCSEL) diode technology and furthered
initial patent applications on the technology. During the first quarter of 2001,
the Company formed Infinite Photonics, Inc. (IP - Orlando, FL) to begin
manufacturing,
8
marketing and commercialization of the technology for telecommunications,
materials processing, medical and other applications. Facilities are being
developed in Orlando, FL. Infinite Photonics and MetaTek, Inc. ("MT"-
Albuquerque, NM) are included in the Photonics Group.
We were incorporated under the laws of the state of Delaware on October
14, 1986. On January 7, 1998, we changed our name from Infinite Machines Corp.
to Infinite Group, Inc. Our principal executive offices are located at 2364 Post
Road, Warwick, RI 02886 and our facsimile number is (401) 738-6180. Our
subsidiaries are located in Rhode Island, Massachusetts, New Mexico, Ohio,
Florida and Illinois. We maintain sites on the World Wide Web at
www.infinite-group.com, www.laserfare.com, www.infinitephotonics.com,
www.mlpc.com and www.expresspattern.com. Information contained on our websites
does not constitute a part of this Report.
Effects of Recent Events
The terrorist attacks in New York and Washington, D.C. on September 11,
2001, additional threatened terrorist acts, and the ongoing military action have
created uncertainties in our industry, as well as domestic and international
economies, and the financial markets in general. These events, and potential
future terrorist acts, may result in reduced demand from our clients for our
services and products and may potentially have a material adverse effect on our
business, financial condition and operating results. It is too soon, however,
for us to reasonably estimate the impact of these tragic events on our industry
and our future financial performance.
We continue to experience operating losses in 2001, with our third quarter
negatively impacted by the tragedy of September 11. That tragedy resulted in
delays at LF in the receipt of materials for aerospace and jet engine parts, a
slowdown in prototype part orders at EP, and slowed demand for new injection
molds at OW. This tragedy coupled with generally falling demand for plastic
products due to the rapid increase in petroleum prices in 2000 and early 2001,
resulted in reduced O&W/EP profitability. Although the bankruptcy of our
significant long-term OW customer, Polaroid, did not result in accounts
receivable losses, it did result in reduced year over year revenues for OW.
Finally, the events of September 11 have negatively impacted the Nasdaq market
in general and our stock trading price and volume, in particular, and have
reduced our ability to complete private placement transactions to improve our
capital position. This has resulted in reductions in cash flow, increased
borrowings from banks and an increased negative working capital position.
Despite these negative events, we improved net year over year revenues,
and comparable quarter over quarter net revenues, primarily due to increased
revenues at LF from laser materials processing of power generation gas turbine
parts, and increased contract research and development at ATG and MLPC from
DARPA and AFRL, respectively.
The Laser Group
Our Laser Fare (LF) subsidiary is primarily engaged in contract laser
material processing; and develops new applications for industrial lasers. Laser
Fare has 25 high-powered computer controlled lasers that are capable of
performing a wide variety of manufacturing with multi-axis manipulation. Laser
Fare also manufactures stents and 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, Honeywell, 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 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
9
applications and materials processing, and provides services within industry,
government and education sectors. Specialized services include: High Temperature
Superconductor (HTS) applications; growth of thin films by pulsed laser
deposition (patent pending); and application of lasers to chemistry,
photochemistry, spectroscopy, and applied optics.
Our Advanced Technology Group (ATG) conducts 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 (DoD). It manages and directs
selected basic and applied research and development projects for DoD, 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 commercial applications. Laser direct write technologies
enable cost-effective manufacturing of engineered components without the use of
expensive tooling by directly depositing materials on substrates with laser
energy. These laser technologies have applications across a broad range of
industries, including telecommunications, materials processing, and automotive
and consumer electronics.
The Photonics Group
Our GCSEL products can be fabricated for use as either a source laser
(such as1550nM) or pump lasers (such as 980nM) for telecommunications, materials
processing, medical and other applications. We have obtained one patent; have
nine patents pending and an additional 10 patents under development for GCSEL
and related technologies. In addition to our research physicists and engineers,
we have also engaged researchers at the Photonics Research Center at the
University of Connecticut, the Ioffe Institute, and the School of Optics /
Center for Research and Education in Optics and Lasers ("CREOL") at the
University of Central Florida in Orlando on applications of our grating coupled
surface emitting lasers. Semiconductor diode wafers used in the manufacture of
our GCSEL's are processed through our strategic alliance partner, Cutting Edge
Optronics, (a TRW subsidiary) and we are qualifying a second source, as required
by most major telecommunications equipment manufacturers.
To date we have prototyped 980nM and 1550nM GCSEL diodes for use in
telecommunications and other commercial pump and source laser applications, and
tested them for continuous wave (CW) power, linewidth, divergence angle,
tunability and other characteristics necessary for commercial use. We compete
with companies producing traditional edge emitting laser diodes used in
telecommunications, such as Fabry-Perot (FP) and Distributed Feedback (DFB)
diode lasers, as well as Vertically Coupled Surface Emitting Lasers (VCSEL). We
believe our GCSEL's produce the best overall combination of: power and
divergence angle of emitted light; require lower cost or no cost collimating
optics; provide lower test, burn-in and packaging cost; and provide tunable
range over a greater number of available channels than current competitive FP,
DFB and VCSEL technology. Our GCSEL's have:
o Higher CW power than currently commercially available FP, DFB and
VCSEL;
o Lower Divergence Angle than FP, DFB or VCSEL for the emitted light
(which reduces the cost and complexity, or eliminates, collimating
optics needed to focus into the fiber);
o Narrower Emission Linewidth allowing for more channels with greater
tunable range; and
o Surface Emitting qualities similar to VCSEL's (which allow for lower
cost testing on wafer, and simpler and less costly coupling to fiber
optics) over competitive edge emitting FP and DFB.
Our management continues to investigate and implement strategies aimed at
developing the applied photonics segment of our business. These included
acquisition of intellectual property rights, filing of patents, and additional
funds for research and development of GCSEL technology and products. We are
currently involved in discussions with Fortune 500 companies and others, which
would provide funding and additional revenue sources from the formation of
strategic partnerships. In March 2000, we formed a strategic alliance with
Cutting Edge Optronics, Inc., a subsidiary of TRW, for prototype and pilot
manufacture of our GCSEL
10
laser diodes.
In May 2001, we were notified that the Defense Advanced Research Projects
Agency (DARPA) had awarded us a one-year $1.0 (subsequently increased to $1.3)
million contract in support of our proprietary GCSEL development. In June 2001,
the Air Force Research Laboratory (AFRL) at Kirtland AFB, NM signed a
cooperative research and development agreement (CRADA) for development of
scalable GCSEL.
In July 2001, we were certified by the Florida Governor's Office as a
Semiconductor Diode Facility and exempted from sales and use taxes under
Florida's Semiconductor, Defense and Space Technology Facility program. We are
in the process of establishing diode development facilities near UCF-CREOL in
Orlando. We are exploring numerous funding sources to ramp-up product
development, the second site manufacturing capability in Orlando, and develop
additional sales, marketing and administrative infrastructure. On November 13,
2001, we received notice of a pre-award of a contract (subject to final contract
negotiations) for further GCSEL development.
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. O&W is a
fifty-one-year-old plastic injection moldbuilding company located in Westfield,
MA with approximately 42 employees. It serves a blue-ribbon clientele of
automotive, automotive aftermarket, consumer sporting goods, and office machine
equipment from its 21,500-sq. ft. manufacturing facility. Our proprietary
ExpressTool (ET) mold fabrication and conformal cooling technologies lower the
cost of molded parts, increase molding capacity and provide shorter delivery
times over conventional constructed molds and has been integrated into our
Westfield facility.
In April 1999, we formed Express Pattern (EP) located in Buffalo Grove, IL
to expand our midwest presence and provide plastic rapid prototyping services to
the metal casting industries. Express Pattern ships plastic prototype parts to
Allen-Bradley, Paradigm, Rolls-Royce Allison, Motorola, Hewlett-Packard and
others. In addition to quotations and prototype part production from traditional
blueprints, EP provides direct interface (including uploads over the internet)
from customer CAD software (such as AutoCad, Pro-E and others) to our
laser-driven stereolithography systems and equipment. Express Pattern also
provides similar services to our other subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its product development activities through a
series of private placements of debt and equity securities. At September 30,
2001, we had cash and cash equivalents of approximately $100,000 available for
our working capital needs and planned capital asset expenditures.
While the majority of the revenues realized during the nine months ended
September 30, 2001 were attributed to our LF and O&W operations, we anticipate
improved revenue from our other divisions and positive results from expense
containment measures that have been implemented. We anticipate that our equity
line of credit, as well as other strategies for raising additional working
capital through debt and/or equity transactions will provide improved liquidity.
In the first quarter of 2001, $250,469 of proceeds were received from the sale
of equity comprised of (a) two installment payments under the subscription
agreement totaling $137,969, with interest, (b) a drawdown under the equity line
of credit of $62,500, and (c) a private placement of $50,000. Additional private
placements of approximately $200,000, conversions of debt to equity of
approximately $120,000 and conversion of a capital lease obligation to our
principal shareholder of $448,830 to stockholders' equity were completed in
April 2001. In June 2001 an additional private placement of $400,000 was
completed and the final installment payment under a subscription agreement of
$62,500, plus accrued interest was received. In July 2001 an additional private
placement of $270,000, net of expenses of $30,000, was completed.
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At September 30, 2001, we had a working capital deficit of $2,699,608. 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 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.
Risk of Nasdaq Delisting. Our common stock is currently traded on the
Nasdaq SmallCap Market. In order to maintain this listing, we are required to
meet certain requirements relating to our stock price and net tangible assets of
$2.0 million (stockholders' equity, less unamortized goodwill). If we fail to
meet these requirements, our stock could be delisted. Last year we received a
series of letters from Nasdaq addressing our failure to satisfy the minimum net
tangible asset continued listing requirements for the SmallCap Market. As a
result of private placement transactions consummated after December 31, 2000,
and during the quarter ended June 30, 2001, we received a letter from Nasdaq
that we were in compliance with the net tangible asset requirement at that date.
Because of the tragedy of September 11, 2001, and the resultant market
disruptions, our capital raising efforts were substantially impaired. As a
result, at September 30, 2001 we were below the minimum net tangible assets
listing maintenance requirements. With the recovery of the markets we are
actively pursuing private placement transactions that will remedy this
deficiency.
Results of Operations
Laser group
Revenues from our laser material processing, value added services,
advanced technology consulting and laser services for the quarter ended
September 30, 2001 were $1,923,920, ($1,407,810 at September 30, 2000) with a
gross profit for the period of $671,831 ($660,051 at September 30, 2000).
Photonics Group
Revenues related to the Photonics Group in the quarter ending September
30, 2001 amounted to $394,584 with a gross profit of $93,096. There were no
revenues in this group for the quarter ended September 30, 2000.
Plastics group
Revenues from our plastic mold building, conformal cooling and proprietary
thermal management of high production injection mold tooling, and plastic rapid
prototyping services for quarter ended September 30, 2001 were $1,019,879
($1,594,663 at September 30, 2000) with a gross profit for the period of
$107,533 ($379,675 at September 30, 2000).
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Consolidated revenues for the three months ended September 30, 2001 were
$3,338,383 on cost of sales of $2,465,923, resulting in a gross profit of
$872,460 for the quarter. Consolidated revenues for the three months ended
September 30, 2000 were $3,002,473 on cost of sales of $1,962,747, resulting in
a gross profit of $1,039,726. The increase of $335,910 or 11.2% in consolidated
revenues for the quarter ended September 30, 2001, compared to the quarter ended
September 30, 2000, was due to a general increase in revenues associated
12
with gas turbine power generation parts at the Laser Group, and from contract
research and development revenues from DARPA and AFRL.
Research and development expenses were $236,470 for the three months ended
September 30, 2001 as compared to $265,027 for the three months ended September
30, 2000. The decrease of $28,557 or 10.8 % was primarily attributable to a
different mix of development efforts.
General and administrative expenses were $772,708 for the three months
ended September 30, 2001 as compared to $652,800 for the three months ended
September 30, 2000. The increase of $119,908, or 18.4 %, was primarily
attributed to executive and administrative salary increases related to the
addition of the position of chief operating officer, as well as other costs
related to the formation of the Infinite Photonics subsidiary.
Selling expenses were $156,539 for the three months ended September 30,
2001 as compared to $172,235 for the three months ended September 30, 2000,
reflecting lower commissions on lower part revenues.
Depreciation and amortization expense totaled $352,219 for the three
months ended September 30, 2001 as compared to $296,260 for the three months
ended September 30, 2000. The increase reflects increased capital equipment at
our EP subsidiary. Interest expense was $85,712 for the three months ended
September 30, 2001 as compared to $201,813 for the three months ended September
30, 2000. The decrease of $116,101 was due primarily to lower rates from the
decreases in the prime interest rate, the satisfaction of certain obligations
during 2001 and a reduction of interest paid under a capital lease converted to
equity by our president. .
The loss from operations was $645,476 for the three months ended September
30, 2001 as compared to a loss of $346,596 for the three months ended September
30, 2000. The increase of $298,880, or 86.2%, was primarily attributed to
start-up costs at Infinite Photonics and reduced profitability in the Plastics
Group.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Consolidated revenue for the nine months ended September 30, 2001 were
$10,606,359 with $5,870,843 of sales coming from the Laser Group, $535,794
coming from the Photonics Group, and $4,199,722 of sales coming from the
Plastics Group. Cost of sales totaled $7,824,147 and a gross profit of
$2,782,212 was realized for the period. For the nine months ended September 30,
2000 sales were $9,487,138, with $4,732,199 of sales coming from the Laser Group
and $4,754,939 of sales coming from the Plastics Group. Consolidated cost of
sales was $6,276,672 for the first nine months of 2000 and the Company realized
a gross profit of $3,210,466 for the period. The increase in consolidated
revenues of $1,119,221 or 11.8% compared to the nine months ended September 30,
2000 was due to increased revenues within the Laser segment, principally in gas
turbine parts for the power generation industry and contract R&D in the
Photonics Group.
Research and development expenses were $404,722 during the nine months
ended September 30, 2001 as compared to $790,403 during the nine months ended
September 30, 2000. The decrease of $385,681 or 48.8 % was primarily attributed
to a different mix of development efforts for the Infinite Photonics' GCSEL
technology, as previous research and development is moved into
commercialization.
General and administration expenses for the nine months ended September
30, 2001 were $2,290,513 as compared to $1,989,325 for the nine months ended
September 30, 2000. Cost containment savings in the first quarter were partially
offset by the increase due to executive and administrative salary increases
related to the addition of the position of Chief Operating Officer, as well as
other costs related to the formation of the Infinite Photonics subsidiary.
13
Selling expenses were $503,256 for the nine months ended September 30,
2001 as compared to $488,667 for the first nine months of 2000. The increase
reflected commissions paid on higher year over year sales volumes.
Depreciation and amortization expenses totaled $884,849 for the nine
months ended September 30, 2001 as compared to $851,264 for the nine months
ended September 30, 2000. The increase was primarily due to a capital lease at
our EP subsidiary.
Interest expense was $458,593 and $562,864 during the nine-month periods
ended September 30, 2001 and 2000 respectively. The decrease in interest expense
was due primarily to lower rates from the decreases in the prime interest rate,
the satisfaction of certain obligations during 2001 and a reduction of interest
paid under a capital lease converted to equity by our president.
We had a consolidated net loss of $1,763,360 for the nine months ended
September 30, 2001 as compared to consolidated net loss of $1,487,934 during
the nine months ended September 30, 2000.
Part II - Other information
Items 1-5- None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On August 6, 2001, Infinite Group, Inc. filed a Report on Form
8-K regarding a change in Infinite Group, Inc.'s auditors.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
November 14, 2001
INFINITE GROUP, INC.
By: ss/ Clifford G. Brockmyre
-------------------------------------
Clifford G. Brockmyre, President
And Chief Executive Officer
By: ss/ Bruce J. Garreau
-------------------------------------
Bruce J. Garreau
Chief Financial Officer
(principal accounting officer)
14