10QSB 1 0001.txt FORM 10-QSB U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB Mark One |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For the transition period from period from ______ to _______ Commission File Number 0-21816 INFINITE GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 52-1490422 ---------------------------- -------------------- (State or other jurisdiction (I.R. S. Employer of organization) Identification No.) 2364 Post Road, Warwick, RI 02886 --------------------------------- (Address of principal executive office) (Zip Code) (401) 738-5777 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of November 2, 2000 the Registrant had a total of 3,353,677 shares of Common Stock, $.001 par value, outstanding. The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on November 3, 2000, based on the average bid and asked price on such date was $9,432,217. Transitional Small Business Disclosure Format Yes |X| No |_| INDEX INFINITE GROUP, INC. PART 1. FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets September 30, 2000 and December 31, 1999 1 Consolidated Statements of Operations - Three Months And Nine Months Ended September 30, 2000 and 1999 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 3 Notes to Unaudited Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 9-15 PART II. OTHER INFORMATION Items 1-6 none 15 SIGNATURES 15 INFINITE GROUP, INC. CONSOLIDATED BALANCE SHEETS Unaudited Audited September 30, December 31, ASSETS 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 109,346 $ 328,094 Restricted funds 68,371 79,235 Accounts receivable, net of allowances 1,704,226 1,496,288 Inventories 600,348 536,554 Advance - stockholder 50,249 50,014 Other current assets 135,217 147,581 Note receivable -- 204,716 ------------ ------------ Total current assets 2,667,757 2,842,482 Property and equipment, net 7,145,663 7,059,367 Other assets: Cash surrender value of officer life insurance 61,546 61,546 Prepaid pension costs 769,101 769,101 Intangible assets, net 256,983 318,342 Other investment 295,000 250,000 Note receivable - stockholders -- 6,652 ------------ ------------ Total other assets 1,382,630 1,405,641 ------------ ------------ $ 11,196,050 $ 11,307,490 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable: Bank $ 938,822 $ 893,957 Stockholder 18,330 40,000 Accounts payable and accrued expenses 2,209,375 1,852,483 Current maturities of long term obligations 800,423 1,042,159 Current maturities of notes payable - stockholder 48,461 21,572 ------------ ------------ Total current liabilities 4,015,411 3,850,171 Long term obligations 4,418,803 5,198,680 Notes payable - stockholders 782,784 380,483 Stockholders' equity Common stock, $.001 par value, 20,000,000 shares authorized 3,521,613, and 2,918,604 shares issued; 3,177,519 and 2,368,529 shares outstanding; 93,650 and -0- shares subscribed 3,615 2,918 Additional paid-in capital: Common stock 21,711,079 20,564,179 Warrants 785,199 671,418 Accumulated deficit (19,473,106) (17,985,172) ------------ ------------ 3,026,787 3,253,343 Less: Treasury stock, 344,094 and 550,075 shares, at cost 860,235 1,375,187 Common stock subscription receivable 187,500 -- ------------ ------------ Total stockholders' equity 1,979,052 1,878,156 ------------ ------------ $ 11,196,050 $ 11,307,490 ============ ============ See accompanying notes to unaudited consolidated financial statements. -1- INFINITE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, -------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Sales $ 3,002,473 2,892,258 9,487,138 6,813,998 Cost of goods sold 1,962,747 2,304,671 6,276,672 5,331,166 ----------- --------- --------- --------- Gross profit 1,039,726 587,587 3,210,466 1,482,832 Costs and expenses Research and development 265,027 147,866 790,403 1,140,780 General and administrative expenses 652,800 520,624 1,989,325 1,824,156 Selling expenses 172,235 286,525 488,667 706,051 Depreciation and amortization 296,260 293,636 851,264 644,382 ----------- --------- --------- --------- Total costs and expenses 1,386,322 1,248,651 4,119,659 4,315,369 Operating loss (346,596) (661,064) (909,193) (2,832,537) Other income (expense) Gain (loss) on sale of assets -- -- (67,274) Interest and other income 46,197 935 51,397 38,991 Interest expense (201,813) (174,506) (562,864) (405,819) ----------- --------- --------- --------- Total other income (expense) (155,616) (173,571) (578,741) (366,828) Loss from continuing operations (502,212) (834,635) (1,487,934) (3,199,365) Gain on sale of business segment (less applicable income taxes of $825,000) -- -- -- 4,170,315 Income (loss) before extraordinary item (502,212) (834,635) (1,487,934) 970,950 Extraordinary item -- -- -- (222,864) ----------- --------- --------- --------- Net income (loss) $ (502,212) (834,635) (1,487,934) 748,086 =========== ========= ========= ========= Income (loss) per share - basic: Continuing operations $ (0.16) (0.38) (0.54) (1.42) Disposed business segment: -- -- -- Gain on sale -- -- -- 1.86 Extraordinary item -- -- -- (0.09) ----------- --------- --------- --------- Net income (loss) per common share $ (0.16) (0.38) (0.54) 0.34 =========== ========= ========= ========= Income from disposed business segment per share - diluted $ -- -- 1.75 Weighted average number of common shares outstanding: Basic 3,070,296 2,198,529 2,736,351 2,246,524 Diluted 3,070,296 2,331,862 2,736,351 2,379,587
See accompanying notes to unaudited consolidated financial statements. -2- INFINITE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Nine Months Ended Ended Sept. 30, Sept. 30, 2000 1999 ------------ ---------- Cash flows from operating activities: Net loss from continuing operations $(1,487,934) (3,199,365) Adjustment to reconcile net loss from continuing operations to net cash used in continuing operations: Depreciation and amortization 851,264 644,382 Loss on disposition of assets 67,274 -- Amortization of discount on note payable 27,355 33,033 Expenses satisfied via issuance of equity -- 39,527 Expenses satisfied via issuance of debt 42,500 -- Asset write down and allowances 6,652 30,338 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable (207,938) (132,885) Other current assets 12,364 64,574 Inventories (63,794) 494,115 Increase (decrease) in liabilities: Accounts payable and accrued expenses 423,972 (673,242) ----------- ----------- Net cash used in continuing operations $ (328,285) (2,699,523) Cash flows from investing activities: Advance under note receivable -- (100,000) Repayment of note receivable 204,716 -- Net collections on advance to stockholder (235) 192 Purchase of property and equipment (447,457) (1,617,409) Proceeds from the sale of property and equipment 122,900 -- Purchase of investments (45,000) (298,701) Increase in intangible assets -- (18,705) Proceeds from the sale of investment in Spectra Science Corp. -- 3,620,128 ----------- ----------- Net cash (used in) provided by (165,076) 1,585,505 investing activities Cash flows from financing activities: Net borrowings (repayments) of short-term debt 729,865 (70,643) Borrowings of long-term obligations -- 1,373,165 Repayments of long-term obligations (775,114) (882,562) Net (repayments to) borrowings from stockholder (8,964) 77,696 Decrease in restricted funds, net 10,864 14,330 Proceeds from the issuance of common stock 317,962 -- ----------- ----------- Net cash provided by financing activities 274,613 511,986 ----------- ----------- Net decrease in cash and cash equivalents (218,748) (602,032) Cash and cash equivalents - beginning of period 328,094 1,036,910 ----------- ----------- Cash and cash equivalents - end of period $ 109,346 $ 434,878 =========== =========== See accompanying notes to unaudited consolidated financial statements -3- 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 generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, which includes audited financial statements and footnotes thereto as of and for the years ended December 31, 1999 and 1998. NOTE 2. - NOTES PAYABLE - STOCKHOLDERS During the quarters ended March 31, 2000 and June 30, 2000, the Company incurred $255,000 and $104,000 of additional debt, payable to its President and principal stockholder. The obligations accrued interest at the rate of 10-1/2%. The principal balance of $399,000, including a loan of $40,000 incurred in December 1999, matured during the quarter ended June 30, 2000. Of these notes payable, $248,285 was applied to the exercise of warrants and options exercised by the Company's President during the quarter ended June 30, 2000 and the balance, including accrued interest, was satisfied by the issuance of common shares (see Note 6). During the quarter ended June 30, 2000, the Company's President loaned $325,000 to the Company evidenced by a note bearing interest at the rate of 11% that matured in September 2000. A portion of this loan, in the amount of $260,000, was satisfied during the quarter ended June 30, 2000, by issuance of common shares (see Note 6). The remaining balance amounting to $65,000, as well as accrued interest of $11,000, was applied to the exercise of warrants and options exercised by the Company's President during the quarter ended September 30, 2000 (see Note 6). During the quarter ended September 30, 2000, the Company issued short-term notes payable to three employee/stockholders, amounting to $42,500. As of September 30, 2000, $24,170 of this amount was applied to the exercise of options exercised by the employees during the quarter ended September 30, 2000. NOTE 3. - CONVERTIBLE NOTES PAYABLE During the quarter ended March 31, 2000, convertible notes payable to former Osley and Whitney, Inc. shareholders, along with accrued interest aggregating $146,540, were converted into 97,700 shares of the Company's common stock. The excess of the fair market value of the common shares issued over the principal and interest reduction, which amounted to $200,000, has been reflected as additional purchase price consideration. -4- INFINITE GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 4. - CAPITAL LEASE OBLIGATION - STOCKHOLDER During the period ended September 30, 2000, the Company entered into a capital lease agreement with its President and principal stockholder for the lease of equipment. The lease provides for monthly payments of approximately $5,650 through April, 2010, including interest at the prime rate plus 1% (10.5% at September 30, 2000). The asset and capital lease obligation recorded as a result of the transaction amounted to approximately $419,000. As of September 30, 2000 the Company was in arrears on the required payments. The outstanding balance as of September 30, 2000 amounted to $436,862, including accrued interest, which is included in notes payable stockholder in the accompanying balance sheet. NOTE 5. - EARNINGS PER SHARE In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," the Company has reported basic and diluted earnings per share. The difference between the weighted average number of common shares outstanding for the basic and diluted calculation represents the effect of convertible debentures. As discussed in Note 5, these debentures were converted into common shares during the quarter ended September 30, 2000. The conversion of outstanding options and warrants were not considered in the calculation of diluted income from disposed segment per share since the average market price is less than the exercise price for all exercisable securities during the periods ended September 30, 1999. The impact of convertible debentures and the exercise of stock options is excluded from the computation of loss per share from continuing operations because their assumed conversion would be antidilutive. NOTE 6. - STOCKHOLDERS' EQUITY During the quarters ended September 30, 2000 and June 30, 2000, the Company's President exercised 15,565 and 62,019 incentive stock options, respectively, as well as 25,000 and 128,000 common stock purchase warrants. These securities had strike prices ranging from $1.031 to $2.50. The aggregate exercise price of $76,000 and $248,285 for the quarters ended September 30, 2000 and June 30, 2000 was paid by reducing Notes Payable- Stockholder which became due during the quarters (see Note 2). During the quarter ended June 30, 2000, the Company's President agreed to accept 75,981 common shares (valued at $2.00 per share) in satisfaction of the balance of the Notes Payable - Stockholder, which became due during that quarter (see Note 2). During the quarter ended June 30, 2000, the Company's President agreed to accept 130,000 common shares (valued at $2.00 per share) in satisfaction of a portion of the Note Payable - Stockholder due September (see Note 2). As additional consideration, the Company granted the President a five-year warrant to purchase -5- INFINITE GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 25,000 common shares at $1.63. During the quarter ended September 30, 2000 these warrants were exercised and are included in the aggregate exercise price previously discussed. During the quarter ended September 30, 2000, various employees of the Company exercised options resulting in the issuance of 44,200 shares of common stock. These options had exercise prices ranging from $1.00 to $2.50 resulting in an aggregate exercise price of $58,832, of which, $53,370 was paid by reducing liabilities outstanding to the employees. During the quarter ended September 30, 2000 a convertible debenture in the amount $100,000, as well as accrued interest of $35,000 was converted into 74,176 shares of common stock. The note was convertible into common shares at the rate of 80% of the average closing price on the ten days prior to conversion. During the quarter ended June 30, 2000, the Company sold, in a private placement transaction, 250,000 shares of its common stock at a price of $2.00 per share, resulting in proceeds of $500,000. As of September 30, 2000, $312,500 of this amount has been received. The unpaid portion has been recorded as a stock subscription receivable, plus interest at 10% per annum, which will be paid in three equal payments, on November 29, 2000, February 26, 2000 and May 26, 2000. The receivable is shown as a reduction of stockholders' equity in the accompanying balance sheet. In connection with this transaction, the Company granted 50,000 warrants to purchase common stock at a price of $1.63 per share. A portion of the proceeds, amounting to $63,000, was allocated to these warrants and recorded as additional paid-in capital warrants. This amount was based on the fair value of the warrants at the date of grant, determined utilizing the Black-Schoeles pricing models. The Company also granted the purchaser's designee a warrant to purchase 100,000 common shares at a price of $2.00 per share, exercisable for a four year period commencing May 31, 2001, for services rendered in connection with the financing. This warrant had a value of $124,000 at the date of grant, which is recorded as a stock offering cost and additional paid-in capital warrants. NOTE 7. - SUBSEQUENT EVENTS During October 2000, various employees of the Company exercised incentive stock options resulting in the issuance of 45,290 shares of the Company's common stock. These options had exercise prices ranging from $1.00 to $2.50 per share resulting in aggregate exercise proceeds of $75,553 of which $72,935 was paid by reducing Company liabilities outstanding to the employees. Additionally, in October 2000, the Company's President agreed to accept 88,668 common shares (valued at $2.73 per share) in satisfaction of a note payable issued to him in October 2000, amounting to $242,064. As additional consideration, the Company granted its President a three-year warrant to purchase 8,900 shares of common stock at $3.42 per share. -6- INFINITE GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Further, in October 2000, the Company sold 42,200 shares of common stock in a private placement transaction at a price of $2.84 per share, resulting in proceeds of $120,000. As additional consideration, three-year warrants to purchase 4,300 shares of common stock at $3.95 per share were granted. NOTE 8. - BUSINESS SEGMENTS 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 April 1, 1999, the Laser segment was the primary segment. Revenue from this segment accounted for 94% and 95% of total revenue in 1998 and the first quarter of 1999, respectively. As a result, corporate expenses were reported as part of the Laser Service segment. With the acquisition of O&W in April 1999, 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 the three and nine month periods ended September 30, 2000 and 1999 is set forth as follows: -7-
Photonic Material Laser Spectra Plastics Unallocated Group Science Group Corporate Eliminations Consolidated ----- ------- ----- --------- ------------ ------------ Three Months Ended September 30, 2000 Sales from external customers $ 1,407,810 $ -- $ 1,594,663 $ -- $ -- $ 3,002,473 =========== ========== =========== ============ ============ ============ Operating loss $ (93,519) $ -- $ (105,017) $ (148,060) $ -- $ (346,596) =========== ========== =========== ============ ============ ============ Identifiable assets $ 8,272,435 $ -- $ 3,842,658 $ 12,714,433 $(13,633,476) $ 11,196,050 =========== ========== =========== ============ ============ ============ Three Months Ended September 30, 1999 Sales from external customers $ 1,465,331 $ -- $ 1,426,927 $ -- $ -- $ 2,892,258 =========== ========== =========== ============ ============ ============ Operating loss $ (57,053) $ -- $ (327,471) $ (276,540) $ -- $ (661,064) =========== ========== =========== ============ ============ ============ Identifiable assets, as of December 31, 1999 $ 8,871,591 $ -- $ 5,072,008 $ 10,922,806 $(13,558,915) $ 11,307,490 =========== ========== =========== ============ ============ ============ Nine Months Ended September 30, 2000 Sales from external customers $ 4,732,199 $ -- $ 4,754,939 $ -- $ -- $ 9,487,138 =========== ========== =========== ============ ============ ============ Operating loss $ (284,949) $ -- $ (57,457) $ (566,787) $ -- $ (909,193) =========== ========== =========== ============ ============ ============ Identifiable assets $ 8,272,435 $ -- $ 3,842,658 $ 12,714,433 $(13,633,476) $ 11,196,050 =========== ========== =========== ============ ============ ============ Nine Months Ended September 30, 1999 Sales from external customers $ 3,788,160 $ -- $ 3,025,838 $ -- $ -- $ 6,813,998 =========== ========== =========== ============ ============ ============ Operating loss $ (962,676) $ -- $(1,030,623) $ (839,238) $ -- $ (2,832,537) =========== ========== =========== ============ ============ ============ Net income from disposed business segment $ -- $4,170,315 $ -- $ -- $ -- $ 4,170,315 =========== ========== =========== ============ ============ ============ Extraordinary item $ -- $ -- $ -- $ (222,864) $ -- $ (222,864) =========== ========== =========== ============ ============ ============ Identifiable assets, as of December 31, 1999 $ 8,871,591 $ -- $ 5,072,008 $ 10,922,806 $(13,558,915) $ 11,307,490 =========== ========== =========== ============ ============ ============
-8- MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements made in this Quarterly Report on Form 10-QSB are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the plans and objectives of management for future operations. 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 judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond 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, 1999 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. GENERAL Our business has two business 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 Advance Technology Group (Narragansett, RI), provides comprehensive laser-based materials processing and photonics services to leading manufacturers and contract research and development. Our Plastics Group, comprised of Osley & Whitney/ExpressTool (Westfield, MA), 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, RI 02886. We own various trademark rights for our name and the Infinite Group logo. "Infinite Group," "Laser Fare," "Osley & Whitney," "ExpressTool," and "Zyrkon" are 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 the web sites is not part of this report. -9- THE LASER AND PHOTONICS GROUP Our Laser Fare (LF) subsidiary is primarily engaged in contract laser material processing; however it also develops new applications for industrial lasers. Laser Fare has 23 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, 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 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 materials 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, application 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. In June 2000, our MLPC subsidiary was awarded a $100,000 Phase 1 Small Business Innovative Research (SBIR) contract from the Air Force Research Laboratory (AFRL). The SBIR is for work on the laser deposition of High Temperature Superconductors (HTS). The work is based on recent developments at our MLPC subsidiary in laser micromachining and fabrication technology. AFRL's Materials and Manufacturing Directorate (AFRL/ML) possesses novel HTS process technology and has developed complementary substrate preparation technology. 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. 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 commercial 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 substrates 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, Micro Electro Mechanical Systems ("MEMS") and actuators. These technologies have applications across a broad range of industries that utilize electronic and photonic materials (including telecommunications, automotive and consumer electronics). -10- ATG has a consulting arrangement with Tensegra Inc. of Cambridge, MA. Tensagra 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 Tensegra. Triton Systems of Chelmsford, MA contracts with our Advanced Technology Group to laser fabricate aerospace components from metal matrix composite materials. These are strong lightweight materials that are used in aerospace engines. In May 2000, our Advanced Technology Group was awarded a contract from MIOX Corporation in support of their award from DARPA for small portable water purification system that can be carried by a soldier in the field. The system will provide filtered, desalinated, and disinfected water in sufficient quantity to supply a single soldier, from natural water sources, including saltwater. We will apply our knowledge of classical manufacturing and additive direct write techniques to enable the cost effective manufacturing of these devices. In June 2000, ATG was awarded a contract from the State University of New York (SUNY) at Stony Brook in support of their award from DARPA for thermally sprayed direct write sensors. The Center for Thermal Spray Technology at SUNY-Stony Brook is a National Science Foundation Materials Research Science and Engineering Center. The Center conducts both basic and applied research in thermal spray materials and processes and has a broad base of industrial support. It is recognized as a world leader in thermal spray technology. This high energy direct write approach will create a new family of sensors and sensor enabled MEMS that will be able to function in harsher environments than today's devices. Our successful completion of this work will open new markets for these devices ranging from aerospace and automotive to telecommunications. 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 payable in cash and notes. O&W is a fifty-year-old plastic injection moldbuilding company located in Westfield, MA with approximately 54 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 others, 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 conventional constructed molds. This compliments our established expertise in the moldbuilding industry. O&W has achieved preferred vendor status with Pitney Bowes, Hardigg Industries and others. ExpressTool (ET) was integrated into our Westfield 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. ET accepts 3-D design computer files directly over the Internet from our customers who use such software as AutoCad, Pro-E, Solidworks and Cadkey. ExpressTool is shipping mold inserts to such customers as Cheeseborough Pond, 3M and GE Plastics among others. In April 1999, we formed Express Pattern (EP) located in -11- 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 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 Infinite Group common stock. MMT has received a patent, number 5,427,987, from the United States patent office on its work in zirconium diboride materials. MMT has an exclusive licensing arrangement with Texas A&M University (with rights to sub-license) for use of patents and intellectual property owned by Texas A&M in the area of electrodes and parts made from zirconium diboride/cooper (Zyrkon(TM)) composites. Zyrkon(TM) composite electrodes have been shown to be superior to copper, tungsten/copper and graphite electrodes in electrical discharge machining applications. In addition, parts made from Zyrkon(TM) exhibit excellent abrasion resistance and resistance to wear by electric arcs as well as high thermal conductivity and a relatively low coefficient of thermal expansion. These properties indicate that Zyrkon(TM) can be used to replace current material systems in applications as varied as injection mold tooling, spot-welding, waste remediation electrodes, high-current switches and heat sinks. The acquisition provides 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. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its product development activities through a series of private placements of debt and equity securities. As of September 30, 2000, we had cash, cash equivalents and marketable debt securities of approximately $ 109,346 available for our working capital needs and planned capital asset expenditures. While the majority of the revenues realized in the nine months ending September 30, 2000 were attributed to Laser Fare and Osley & Whitney operations, we anticipate improved revenue from other divisions and positive results from additional expense containment measures that have been implemented. We are also pursuing other strategies for raising working capital through debt and/or equity transactions. In October 2000, the Company's raised $437,617 in equity from the exercise of employee incentive stock options ($75,553), conversion of debt to equity by the Company's president ($242,064) and a private placement ($120,000). On May 31, 2000, we completed a $500,000 private placement of Common Stock, at a price of $2.00 per share, of which $250,000 was paid in cash and the remainder is due in four equal installments (August 31, 2000, November 29, 2000, February 26, 2001and May 26, 2001) with accrued interest at 10% per annum. In conjunction with the financing, we issued warrants to purchase 50,000 and 100,000 shares of Common Stock, at exercise prices of $1.625 and $2.00 per share, respectively, exercisable commencing on the first anniversary date of the warrant and expiring five years from the date of issuance. During the period from January 1, 1998 through September 30, 2000, the Company's -12- president and chief executive officer loaned the Company an aggregate of $2,274,000, which bore interest at various interest rates. In consideration for these loans, the president was issued warrants to purchase 689,000 shares of common stock. As of September 30, 2000, the Company has repaid approximately $1,045,000 of the loans and approximately $809,000 has been converted into 556,000 shares of common stock, through the exercise of options and warrants, as well as the issuance of shares from treasury. As of September 30, 2000 we had a working capital deficit of approximately $1,347,654. In conjunction with our on-going business expansion program, we are pursuing additional equity, alternative sources of funding from conventional banking institutions and 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. Risk of Nasdaq Delisting. Our Common Stock is listed on the Nasdaq SmallCap Market System and in connection therewith we are required to maintain certain continued listing requirements including $2 million of net tangible asset. At December 31, 1999 and at March 31, 2000, our net tangible assets were $1,732,953 and $1,629,288, respectively. As a result, in April 2000, we received notification from Nasdaq requesting submission by the Company of a plan to achieve and sustain compliance with the Nasdaq SmallCap continued listing requirements (the "Listing Requirements"). In May 2000, we submitted a plan, which demonstrated both current compliance with the Listing Requirements and continued compliance in foreseeable future periods. A response from Nasdaq to our plan is outstanding. Our net tangible assets at June 30, 2000 and at September 30, 2000 were $2,017,252 and $1,854,916, respectively. An additional $187,500 will be added to net tangible assets as a stock subscription receivable is paid through three equal payments of $62,500 each (plus interest) on November 29, 2000, February 26, 2001 and May 26, 2001. Further in October 2000, the Company raised $437,617 in equity from the exercise of employee incentive stock options ($75,553), conversion of debt to equity by the Company's president ($242,064) and through a private placement ($120,000). Had these transactions been completed by September 30, 2000, our net tangible assets at such date would have been $2,642,369. Based upon our compliance plan, we believe that the Company will continue to meet the Listing Requirements for the continued listing of our Common Stock on the Nasdaq SmallCap Market. However, no assurance can be given that we will continue to meet such requirements, or that Nasdaq will concur with our plan. In the event that we do not meet the continued listing requirements, our Common Stock will be 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 our Common Stock. Results of Operatons Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 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 for the quarter. Consolidated revenues for the three months ended September 30, 1999 were $2,892,258 on cost of -13- sales of $2,304,671, resulting in a gross profit of $587,587 for the three months ended September 30, 1999. The increase of $110,215 or 3.8% in consolidated revenues for the quarter ended September 30, 2000 was due to increased revenues within both business segments. Research and development expenses were $265,027 for the three months ended September 30, 2000 as compared to $147,866 for the three months ended September 30,1999. The increase of $117,161, or 79.2%, was primarily attributed to the Advanced Technology Groups research and development programs with its industrial and government customers. General and administrative expenses were $652,800 for the three months ended September 30, 2000 as compared to $520,624 for the three months ended September 30, 1999. The increase of $132,176, or 25.4%, was primarily attributable to professional fees in the legal and investor relations areas. Selling expenses were $172,235 for the quarter ended September 30, 2000, as compared to $286,525 for the three months ended September 30, 1999. The decrease was primarily attributable to productivity improvements such as quoting certain jobs through our Internet websites. Depreciation and amortization expenses were $296,260 for the three months ended September 30, 2000, as compared to $293,636 for the three months ended September 30,1999. Interest expense during the third quarter ending September 30, 2000 was $201,813 as compared to $174,506 for the three months ended September 30, 1999. The increase of $27,307, or 15.6%, was due to interest paid on the note payable to our president, debt obligations related to the O&W acquisition and the increase in the prime interest rates. We had a consolidated net loss of $502,212 for the three months ended September 30, 2000, as compared to the consolidated net loss of $834,635 for the three months ended September 30, 1999. Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999 Consolidated revenue for the nine months ended September 30, 2000 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. Cost of sales totaled $6,276,672 and a gross profit of $3,210,466 was realized for the period. For the nine months ended September 30, 1999, sales totaled $6,813,998 and consisted primarily of Laser Group sales of $3,788,160 and Plastics Group sales of $3,025,838. Consolidated cost of sales was $5,331,166 for the first nine months ended September 30, 1999 and the Company realized a gross profit of $1,482,832 for the period. The increase in consolidated revenues for the nine months ended September 30, 2000 was due to increased revenues within both business segments. Research and development expenses were $790,403 during the nine months ended September 30, 2000 as compared to $1,140,780 during the nine months ended September 30, 1999. The decrease of $350,377, or 30.7%, was primarily attributable to cost containment for research and development efforts in our plastics group, as separate ExpressTool facilities were integrated into our O&W operations. -14- General and administration expenses for the nine months ended September 30, 2000 were $1,989,325 as compared to $1,824,156 for the nine months ended September30, 1999. The increase was primarily due to expenses for additional resources at our Laser Group for engineers, training and for professional fees in the legal and investor relations areas. Selling expenses were $488,667 for the nine months ended September 30, 2000 as compared to $706,051 for the nine months ended September 30, 1999. The decrease was primarily attributable to reduced staffing and higher productivity of Internet based quoting. Depreciation and amortization expenses totaled $851,262 for the nine months ended September 30, 2000 as compared to $644,382 for the nine months ended September 30, 1999. The increase was primarily due to fixed asset additions in both our laser and plastics groups along with depreciation related to the O&W acquisition. Interest expense was $562,864 and $405,819 during the nine month periods ended September 30, 2000 and 1999 respectively. The increase in interest expense was due to interest paid on the note payable to our president and chief executive officer, Osley & Whitney bank acquisition debt and the increase in prime interest rates. The loss from continuing operations was $1,487,934 for the nine months ended September 30, 2000 as compared to a loss of $3,199,365 for the nine months ended September 30, 1999. We had a consolidated net loss of $1,452,445 for the nine months ended September 30, 2000 as compared to consolidated net income of $748,086 during the nine months ended September 30, 1999. The net income for nine months ended September 30, 1999 was primarily attributed to the gain realized on the sale of the Company's Spectra Science Series A Convertible Preferred Stock of approximately $4,170,315, net of $825,000 in income taxes. Part II - Other Information none 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 3, 2000 INFINITE GROUP, INC. By: /s/ Clifford G. Brockmyre ------------------------------------- Clifford G. Brockmyre, President And Chief Executive Officer By: /s/ Bruce J. Garreau ------------------------------------- Bruce J Garreau Chief Financial and Accounting Officer -15-