-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZauWCzV/xDlHbPqZC+wru2OYfT8KPxUXkyoWT1eG89nMULGW2wx3x6k4bj+ZVB6 z0CgU/t03/JbxQNbDwccIw== 0001005477-99-002968.txt : 19990629 0001005477-99-002968.hdr.sgml : 19990629 ACCESSION NUMBER: 0001005477-99-002968 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990416 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINITE GROUP INC CENTRAL INDEX KEY: 0000884650 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 521490422 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-21816 FILM NUMBER: 99653360 BUSINESS ADDRESS: STREET 1: 2364 POST RD STREET 2: 923 INCLINE WAY 8 CITY: WARWICK STATE: RI ZIP: 02886 BUSINESS PHONE: 4017385777 MAIL ADDRESS: STREET 1: 2364 POST ROAD STREET 2: 923 INCLINE WAY 8 CITY: WARWICK STATE: RI ZIP: 02886 FORMER COMPANY: FORMER CONFORMED NAME: INFINITE MACHINE CORP DATE OF NAME CHANGE: 19971015 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 16, 1999 INFINITE GROUP, INC. --------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 0-21816 52-1490422 - ------------------------------ ----------------------- ---------------------- (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) 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: N/A ---------------------------------------------------- (Former name or former address, if changed since last report) Item 2. Acquisition and Disposition of Assets. On April 16, 1999, Infinite Group, Inc. (the "Registrant") acquired 100% of the outstanding capital stock of Osley & Whitney ("O&W"), a Massachusetts corporation, from its stockholders. The aggregate consideration paid for the capital stock of O&W was $1.5 million, payable $300,000 in cash and $1,200,000 pursuant to three-year 8.0% promissory notes of the Registrant. O&W, whose operations are based in Westfield, Massachusetts, is a 49 year-old plastic injection mold building company with approximately 50 employees. In connection with the transaction, the Registrant entered into employment agreements with each of John T. Monahan and Roger Poirier, former shareholders of O&W, for five-year terms. Item 7. Financial Statements, Pro-Forma Financial Information and Exhibits. Financial Statements, Pro-Forma Financial Information (filed herewith). Osley & Whitney, Inc. Audited Financial Statements - August 2, 1998 Osley & Whitney, Inc. Financial Statements - March 28, 1999 (unaudited) Infinite Group, Inc. and Osley & Whitney, Inc. Proforma Combined Financial Statements - December 31, 1998 (unaudited) and March 31, 1999 (unaudited) Exhibits. Exhibit A -- Form of Stock Purchase Agreement dated as of April 16, 1999 by and among the stockholders of Osley & Whitney, Inc. and Infinite Group, Inc. (previously filed) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INFINITE GROUP, INC. By: /s/ Clifford G. Brockmyre ---------------------------------- Clifford G. Brockmyre Chief Executive Officer Date: June 28, 1999 FINANCIAL STATEMENTS OSLEY & WHITNEY, INC. ================================================================================ AUGUST 2, 1998 with INDEPENDENT AUDITOR'S REPORT OSLEY & WHITNEY, INC. CONTENTS ================================================================================ Page ---- Independent Auditor's Report ........................................... 1 Financial Statements: Balance Sheet..................................................... 2 Statement of Operations and Retained Earnings..................... 3 Statement of Cash Flows........................................... 4 Notes to Financial Statements........................................... 5 - 11 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Osley & Whitney, Inc. We have audited the accompanying balance sheet of Osley & Whitney, Inc. as of August 2, 1998, and the related statements of operations and retained earnings, and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Osley & Whitney, Inc. as of August 2, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. FREED MAXICK SACHS & MURPHY, P.C. May 14, 1999 Buffalo, New York 1 OSLEY & WHITNEY, INC. BALANCE SHEET August 2, 1998 ================================================================================ ASSETS 1998 ---- Current assets: Cash $ 99,036 Accounts receivable 517,271 Inventory: Raw materials 110,557 Work in progress 523,657 ---------- 634,214 Prepaid expenses 18,563 Deferred income taxes 24,653 ---------- Total current assets 1,293,737 Cash value of life insurance 170,080 Due from officer 204,716 Property, plant and equipment, net 664,574 Prepaid pension costs 795,443 ---------- Total assets $3,128,550 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $ 285,000 Accounts payable 129,458 Accrued liabilities 263,771 Accrued income taxes 41,500 Customer deposits 737,799 Current maturities of long-term debt 103,630 ---------- Total current liabilities 1,561,158 Long-term debt 672,181 Deferred income taxes 211,653 ---------- Total liabilities 2,444,992 Shareholders' equity: Common stock, no par value, 1,000 shares authorized, 100 issued and outstanding 100,000 Retained earnings 583,558 ---------- Total shareholders' equity 683,558 ---------- Total liabilities and shareholders' equity $3,128,550 ========== See accompanying notes. 2 OSLEY & WHITNEY, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS For the Year Ended August 2, 1998 ================================================================================ 1998 ---- Net sales $ 5,258,983 Cost of sales 4,506,720 ----------- Gross profit 752,263 Selling and administrative expenses: Selling 263,311 Administrative 399,832 ----------- 663,143 ----------- Operating profit 89,120 Non-operating expenses: Interest expense 101,531 Other 3,766 ----------- 105,297 ----------- Loss before income taxes (16,177) Income tax benefit 15,900 ----------- Net loss (277) Retained earnings, beginning of year 583,835 ----------- Retained earnings, end of year $ 583,558 =========== See accompanying notes. 3 OSLEY & WHITNEY, INC. STATEMENT OF CASH FLOWS For the Year Ended August 2, 1998 =============================================================================== 1998 ---- Cash flows from operating activities: Net loss $ (277) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 120,898 Deferred income taxes (51,600) Change in assets and liabilities: Accounts receivable 401,320 Inventory 197,367 Prepaid expenses (17,220) Prepaid pension costs (68,749) Accounts payable (433,673) Accrued liabilities 49,374 Customer deposits 129,507 --------- Net cash provided by operating activities 326,947 Cash flows from investing activities: Capital expenditures (351,102) Cash surrender value of officer life insurance (10,281) --------- Net cash used in investing activities (361,383) Cash flows from financing activities: Net repayments under lines of credit (109,000) Borrowings on long-term debt 288,400 Payments on long-term debt (115,922) Repayment of loan on cash value of life insurance (40,000) --------- Net cash provided by financing activities 23,478 --------- Net decrease in cash (10,958) Cash - beginning of year 109,994 --------- Cash - end of year $ 99,036 ========= See accompanying notes. 4 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 1. - SIGNIFICANT ACCOUNTING POLICIES Organization - Osley & Whitney, Inc. (the Company), a Massachusetts Corporation, manufactures molds. The Company sells primarily to other manufacturing companies throughout the United States. The Company grants credit to substantially all of its customers. It is the Company's policy to require a deposit equal to approximately 30% of the total sale price on all orders. Management has determined that a reserve for uncollectible accounts receivable is not necessary. Fiscal Year - The fiscal year of the Company, consisting of 52/53 weeks, ends on the Sunday nearest to July 31. In 1998, the year end date was August 2 and consists of 52 weeks. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventory - Inventory is stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation is charged to operations over the estimated useful lives of the respective assets using principally accelerated methods. Depreciation expense for the year ended August 2, 1998 totaled $120,898. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. Income Taxes - The Company recognizes amounts of tax currently payable and deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Income Recognition - Anticipated losses are recognized in full when such losses become known. Customer deposits received in advance are recorded as liabilities until the job has been completed. Cash Flows - Cash paid during the year ended August 2, 1998 for interest amounted to $108,069. 5 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 1. - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in financial institutions. Although deposits exceed federally insured limits, management does not anticipate non-performance by the financial institutions. Sales to three customers accounted for approximately $3,433,000 or 65% of net sales for the year ended August 2, 1998. At August 2, 1998, accounts receivable from these same customers approximate 66% of total accounts receivable. NOTE 2. - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following: Land and improvements $ 58,625 Buildings and improvements 304,206 Machinery and equipment 1,687,322 ---------- 2,050,153 Less accumulated depreciation 1,385,579 ---------- $ 664,574 ========== NOTE 3. - DUE FROM OFFICER Due from officer of $204,716 represents premiums paid by the Company on a life insurance policy (the Policy), which is owned by an officer of the Company. Under the terms of a related agreement, the Company is entitled to receive a portion of the death benefits provided under the Policy equal to the total amount of related premiums paid by the Company. This receivable is collateralized by the death benefits under the Policy. NOTE 4. - LINES OF CREDIT The Company maintains a $350,000 and a $100,000 bank lines of credit, which bear interest at the bank's prime rate plus .75% (9.25% at August 2, 1998). As of August 2, 1998, amounts outstanding under these lines were $280,000 and $5,000, respectively. The lines are collateralized by substantially all of the Company's assets. In addition, the Company has a non-revolving equipment line of credit up to $500,000 bearing interest at the bank's prime rate plus 1% (9.5% at August 2, 1998). At August 2, 1998, $287,801 in bank loans were outstanding under this line. The equipment line is collateralized by substantially all of the Company's assets. Subsequent to year end the Company refinanced the lines of credit. The outstanding balances were repaid and a new agreement was signed with another financial institution. The new agreement provides for borrowings of up to $500,000 at the bank's prime rate plus .5% The new line is collateralized by substantially all of the Company's assets. 6 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 5. - LONG-TERM DEBT Long-term debt consists of the following: Mortgage loan, payable in monthly principal installments of $1,971 plus interest through May 2000 when a balloon payment of approximately $355,000 is due. Interest is payable at the prime rate plus 1.25% (9.75% at August 2, 1998). (A) $ 397,906 Bank loan, payable in monthly installments of $2,800 plus interest through October 2002. Interest is payable at the prime rate plus 1% (9.5% at August 2, 1998). (B) 142,800 Bank loan, payable in monthly principal installments of $4,222 plus interest through January 2001. Interest is payable at the prime rate plus 1% (9.5% at August 2, 1998). (B) 123,334 Bank loan, payable in monthly installments of $1,335 plus interest through May 2003. Interest is payable at the prime rate plus .75% (9.25% at August 2, 1998). (B) 77,427 Bank loan, payable in monthly installments of $417 plus interest through November 2002. Interest is payable at the prime rate plus 1% (9.5% at August 2, 1998). (B) 21,667 Installment loan, payable in monthly installments of $391, including interest at the rate of 9.99% per annum through September 2001. 12,677 --------- 775,811 Less current portion 103,630 --------- $ 672,181 ========= (A) Subsequent to year end the Company refinanced the mortgage loan. The outstanding balance was repaid and a new agreement was established with another financial institution. The new agreement was for the principal sum of $700,000 plus interest at a rate of 7.75% through April of 2006 when a balloon payment of approximately $566,000 is due. (B) Subsequent to year end the Company refinanced these bank loans. The outstanding balances were repaid and a new term loan agreement was established with another financial institution. The new agreement was for the principal sum of $500,000 plus interest at a rate of 7.75% through April of 2006. 7 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 5. - LONG-TERM DEBT The following annual maturities reflect the repayment terms of the existing debt under the refinanced agreements: 1999 - $ 103,630 2000 - 72,613 2001 - 78,445 2002 - 84,749 2003 - 91,552 Thereafter - 344,822 ---------- $ 775,811 ========== Substantially all of the assets of the Company, with the exception of amounts due from officer, are pledged as collateral on the loans. NOTE 6. - INCOME TAXES Income tax (expense) benefit for the year ended August 2, 1998 consists of the following: Federal income taxes: Current $ (7,000) Deferred 36,000 State income taxes: Current (28,700) Deferred 15,600 ---------- $ 15,900 ========== 8 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 6. - INCOME TAXES (CONTINUED) The tax effect of temporary differences that give rise to deferred tax assets and liabilities at August 2, 1998 are as follows: Deferred tax assets: Inventory $ 4,600 Net operating loss carryforwards 116,000 Accrued officers' bonus 20,100 AMT credit carryforwards 5,300 Other credit carryforwards 15,900 ---------- 161,900 ---------- Deferred tax liabilities: Property, plant and equipment (28,600) Prepaid pension cost (320,300) ---------- (348,900) ---------- Net deferred tax liability $ (187,000) ========== At August 2, 1998, the Company has approximately $297,000 of federal net operating loss and $182,000 of state net operating loss carryforwards available to reduce future federal income taxes. These carryforwards will begin to expire in the year 2007. NOTE 7. - PENSION PLAN The Company 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. Periodic pension expense (income) for 1998 included the following components: Service cost - benefits earned during the year $ 97,248 Interest cost on projected benefit obligation 291,501 Actual return on plan assets (653,323) Net amortization and deferral 195,825 ---------- $ (68,749) ========== Net periodic pension income is included in cost of sales on the statement of operations and retained earnings. 9 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 7. - PENSION PLAN (CONTINUED) Assumptions used in the accounting for the pension income in 1998 were as follows: Weighed average discount rate 7.50% Salary increase rate 5.50% Expected long-term rate of return on plan assets 10.00% The funded status of the plan as of August 2, 1998 is as follows: Projected benefit obligation: Vested benefits $(3,344,955) Nonvested benefits (123,526) ----------- Accumulated benefit obligation $(3,468,481) =========== Projected benefit obligation (4,882,400) Plan assets, consisting primarily of common stock and insurance contracts 5,123,141 ----------- Plan assets in excess of obligation 240,741 Unrecognized net obligation being recognized over 15 years (243,272) Unrecognized net loss 413,409 Unrecognized prior service cost 384,565 ----------- Prepaid pension cost $ 795,443 =========== The Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" in February 1998. This statement amends the disclosures required regarding pensions and is effective for fiscal years beginning after December 15, 1997. The adoption of this statement by the Company is not expected to have a material impact on the Company's financial statements. 10 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS ================================================================================ NOTE 8. - OPERATING LEASES The Company leases equipment under four operating leases. Rental expense under these leases amounted to approximately $34,000 in 1998. Approximate future rental payments on these operating leases are as follows: 1999 $ 30,600 2000 12,800 2001 7,400 --------- $ 50,800 ========= NOTE 9. - SUBSEQUENT EVENTS On April 16, 1999, all of the outstanding common stock of the Company was acquired by Infinite Group, Inc. (Infinite). The gross purchase price of $1.5 million consisted of cash in the amount of $300,000 and $1.2 million in promissory notes payable over three years with interest at 8% to the previous shareholders. The combination was accounted for by Infinite using the purchase method of accounting. 11 REVIEWED FINANCIAL STATEMENTS OSLEY & WHITNEY, INC. ================================================================================ MARCH 28, 1999 OSLEY & WHITNEY, INC. CONTENTS ================================================================================ Page ---- Accountants' Review Report ............................................. 1 Financial Statements: Balance Sheet..................................................... 2 Statement of Operations and Retained Earnings..................... 3 Statement of Cash Flows........................................... 4 Notes to Financial Statements........................................... 5 - 10 To the Shareholders of Osley & Whitney, Inc. We have reviewed the accompanying balance sheet of Olsey & Whitney, Inc. as of March 28, 1999, and the related statements of operations and retained earnings, and cash flows for the eight month period then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All of the information included in these financial statements is the representation of the management of Osley & Whitney, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. FREED MAXICK SACHS & MURPHY, P.C. May 14, 1999 Buffalo, New York 1 OSLEY & WHITNEY, INC. BALANCE SHEET March 28, 1999 See Accountants' Review Report ================================================================================ ASSETS Current assets: Cash $ 26,174 Accounts receivable 248,635 Inventory: Raw materials 115,325 Work in progress 730,264 ---------- 845,589 Prepaid expenses 4,727 Deferred income taxes 34,230 ---------- Total current assets 1,159,355 Cash value of life insurance, net of loans in the amount of $30,000 149,753 Due from officer 204,716 Property, plant and equipment, net 636,253 Prepaid pension costs 784,228 ---------- Total assets $2,934,305 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $ 433,000 Accounts payable 460,037 Accrued liabilities 175,804 Accrued income taxes 35,170 Customer deposits 495,128 Current portion of long term debt 71,226 ---------- Total current liabilities 1,670,365 Long-term debt 968,250 Deferred income taxes 9,098 ---------- Total liabilities 2,647,713 Shareholders' equity: Common stock, no par value, 1,000 shares authorized, 100 issued and outstanding 100,000 Retained earnings 186,592 ---------- Total shareholders' equity 286,592 ---------- Total liabilities and shareholders' equity $2,934,305 ========== See accompanying notes. 2 OSLEY & WHITNEY, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINS For the Period Ended March 28, 1999 See Accountants' Review Report ================================================================================ Net sales $ 2,519,857 Cost of sales 2,683,778 ----------- Gross loss (163,921) Selling and administrative expenses: Selling 151,743 Administrative 224,229 ----------- 375,972 ----------- Operating loss (539,893) Nonoperating income (expense): Interest expense (69,412) Other 207 ----------- (69,205) ----------- Loss before income tax benefit (609,098) Income tax benefit 212,132 ----------- Net loss (396,966) Retained earnings, beginning of period 583,558 ----------- Retained earnings, end of period $ 186,592 =========== See accompanying notes. 3 OSLEY & WHITNEY, INC. STATEMENT OF CASH FLOWS For the Period Ended March 28, 1999 See Accountants' Review Report ================================================================================ 1999 ---- Cash flows from operating activities: Net loss $(396,966) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 88,522 Deferred income tax benefit (212,132) Change in assets and liabilities: Accounts receivable 268,636 Inventory (211,375) Prepaid expenses 13,836 Prepaid pension costs 11,215 Accounts payable 330,579 Accrued liabilities (94,297) Customer deposits (242,671) --------- Net cash used in operating activities (444,653) Cash flows from investing activities: Capital expenditures (60,201) Cash surrender value of officer life insurance, net of loans 20,327 --------- Net cash used in investing activities (39,874) Cash flows from financing activities: Net borrowings under lines of credit 148,000 Borrowings on long-term debt 350,000 Payments on long-term debt (86,335) --------- Net cash provided by financing activities 411,665 --------- Net decrease in cash (72,862) Cash - beginning of period 99,036 --------- Cash - end of period $ 26,174 ========= See accompanying notes. 4 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 1. - SIGNIFICANT ACCOUNTING POLICIES Organization - Osley & Whitney, Inc. (the Company), a Massachusetts Corporation, manufactures molds. The Company sells primarily to other manufacturing companies throughout the United States. The Company grants credit to substantially all of its customers. It is the Company's policy to require a deposit equal to approximately 30% of the total sale price on all orders. Management has determined that a reserve for uncollectible accounts receivable is not necessary. Fiscal Period - The fiscal period of the Company ends on the Sunday nearest to the end of the period. Accordingly, the fiscal period for this report ends on March 28, 1999 and consists of 34 weeks. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventory - Inventory is stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment - Property, plant and equipment is recorded at cost. Depreciation is charged to operations over the estimated useful lives of the respective assets using principally accelerated methods. Depreciation expense for the period totaled $88,522. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. Income Taxes - The Company recognizes amounts of tax currently payable and deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Income Recognition - Income is recognized when molds are shipped and accepted by customers. Customer deposits received in advance are recorded as liabilities until the job has been completed. Cash Flows - Cash paid during the period ended March 28, 1999 for interest amounted to $61,511. Concentration of Credit Risk - Sales to three customers accounted for approximately $1,970,000 or 78% of net sales for the period ended March 28, 1999. At March 28, 1999, accounts receivable from these same customers approximate 67% of total accounts receivable. It is the Company's policy to require a deposit on all orders equal to approximately thirty percent of the total sales price. 5 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 2. - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following: Land and improvements $ 58,625 Buildings and improvements 319,703 Machinery and equipment 1,732,026 ---------- 2,110,354 Less accumulated depreciation 1,474,101 ---------- $ 636,253 ========== NOTE 3. - DUE FROM OFFICER Due from officer of $204,716 represents premiums paid by the Company on a life insurance policy (the Policy), which is owned by an officer of the Company. Under the terms of a related agreement, the Company is entitled to receive a portion of the death benefits provided under the Policy equal to the total amount of related premiums paid by the Company. This receivable is collateralized by the death benefits under the Policy. NOTE 4. - LINES OF CREDIT The Company maintains a $350,000 and a $100,000 bank lines of credit, which bear interest at the bank's prime rate plus .75% (8.5% at March 28, 1999). As of March 28, 1999, amounts outstanding under these lines were $343,000 and $90,000, respectively. The lines are collateralized by substantially all of the Company's assets. In addition, the Company has a nonrevolving equipment line of credit up to $500,000 bearing interest at the bank's prime rate plus 1% (8.75% at March 28, 1999). At March 28, 1999, $228,289 in bank loans were outstanding under this line. The equipment line is collateralized by substantially all of the Company's assets. Subsequent to March 28, 1999 the Company refinanced the lines of credit. The outstanding balances were repaid and a new agreement was signed with another financial institution. The new agreement provides for borrowings of up to $500,000 at the bank's prime rate plus .5%. The new line is collateralized by substantially all of the Company's assets. 6 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 5. - LONG-TERM DEBT Long-term debt consists of the following: Mortgage loan, payable in monthly principal installments of $1,971 plus interest through May 2000 when a balloon payment of approximately $355,000 is due. Interest is payable at the prime rate plus 1.25% (9% at March 28, 1999). (A) $ 384,110 Bank loan, payable in monthly installments of $2,800 plus interest through October 2002. Interest is payable at the prime rate plus 1% (8.75% at March 28, 1999). (B) 120,400 Bank loan, payable in monthly principal installments of $4,222 plus interest through January 2001. Interest is payable at the prime rate plus 1% (8.75% at March 28, 1999). (B) 89,555 Bank loan, payable in monthly installments of $1,335 plus interest through May 2003. Interest is payable at the prime rate plus .75% (8.5% at March 28, 1999). (B) 66,747 Bank loan, payable in monthly installments of $417 plus interest through November 2002. Interest is payable at the prime rate plus 1% (8.75% at March 28, 1999). (B) 18,334 Installment loan, payable in monthly installments of $391, including interest at the rate of 9.99% per annum through September 2001. 10,330 Note payable to Infinite (see Note 9), bearing interest at 8.75% payable February 2000. 200,000 7 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 5. - LONG-TERM DEBT (CONTINUED) Bank loan, requiring monthly interest payments at the prime rate plus .75% (8.5% at March 28, 1999) through December 1999 and thereafter payable in monthly installments of $2,500 plus interest through December 2004. (B) 150,000 ---------- 1,039,476 Less current portion 71,226 ---------- $ 968,250 ========== (A) Subsequent to March 28, 1999 the Company refinanced the mortgage loan. The outstanding balance was repaid and a new agreement was established with another financial institution. The new agreement was for the principal sum of $700,000 plus interest at a rate of 7.75% through April of 2006 when a balloon payment of approximately $566,000 is due. (B) Subsequent to March 28, 1999 the Company refinanced these bank loans. The outstanding balances were repaid and a new term loan agreement was established with another financial institution. The new agreement was for the principal sum of $500,000 plus interest at a rate of 7.75% through April of 2006. The following annual maturities reflect the repayment terms of the existing debt under the refinanced agreement: 2000 - $ 71,226 2001 - 76,944 2002 - 83,127 2003 - 89,802 2004 - 97,010 Thereafter - 621,367 ---------- $1,039,476 ========== NOTE 6. - INCOME TAXES Income tax benefit for the period ended March 28, 1999 consists of the following: Federal income taxes: Deferred $ 170,951 State income taxes: Deferred 41,181 ---------- $ 212,132 ========== 8 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 6. - INCOME TAXES (CONTINUED) The tax effect of temporary differences that give rise to deferred tax assets and liabilities at March 28, 1999 are as follows: Deferred tax assets: Inventory $ 4,027 Net operating loss carryforwards 340,067 Accrued officers' bonus 30,203 AMT credit carryforwards 1,838 Other credit carryforwards 5,707 ---------- 381,842 ---------- Deferred tax liabilities: Property, plant and equipment (40,901) Prepaid pension cost (315,809) ---------- (356,710) ---------- Net deferred tax asset $ 25,132 ========== At March 28, 1999, the Company has approximately $862,000 of federal net operating loss and $747,000 of state net operating loss carryforwards available to reduce future federal income taxes. These carryforwards will begin to expire in the year 2007. NOTE 7. - PENSION PLAN The Company 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. The following sets forth the funded status of the Plan at March 28, 1999: Projected benefit obligation $5,634,111 Plan assets at fair value 5,298,193 ---------- Plan assets deficient of projected benefit obligations $ (335,918) ========== 9 OSLEY & WHITNEY, INC. NOTES TO THE FINANCIAL STATEMENTS =============================================================================== NOTE 7. - PENSION PLAN (CONTINUED) The following is a summary of the activity in the Plan and the accrued pension liability and benefit costs recognized in the accompany financial statements: Prepaid pension costs $ 784,228 ========== Benefit cost $ 11,215 ========== Employer contributions $ -- ========== Benefits paid $ 119,582 ========== The major assumptions used in the calculation of the pension obligation were as follows: Discount rate 6.5% Expected long-term rate of return on plan assets 10.0% Rate of increase in compensation 5.5% NOTE 8. - OPERATING LEASES The Company leases equipment under four operating leases. Rental expense under these leases amounted to approximately $22,000 for the period. Approximate future rental payments on these operating leases are as follows: 2000 $ 16,700 2001 9,900 2002 2,500 --------- $ 29,100 ========= NOTE 9. - SUBSEQUENT EVENTS On April 16, 1999, all of the outstanding common stock of the Company was acquired by Infinite Group, Inc. (Infinite). The gross purchase price of $1.5 million consisted of cash in the amount of $300,000 and $1.2 million in three year 8% promissory notes payable to the previous shareholders. The combination was accounted for by Infinite using the purchase method of accounting. 10 INFINITE GROUP, INC. AND OSLEY & WHITNEY, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ BASIS OF COMBINATION - PRO FORMA The accompanying combined financial statements present on a pro forma basis the combined balance sheet and the statement of combined operations of Infinite Group, Inc. (Infinite) and Osley & Whitney, Inc. (O&W) (acquired by Infinite in April, 1999). Proforma adjustments for the balance sheet were computed assuming the acquisition was consummated as of the balance sheet date. Proforma adjustments for the statements of operations were computed as if the acquisition had taken place as of the beginning of the period presented. On April 16, 1999, Infinite acquired 100% of the outstanding capital stock of O&W, a Massachusetts corporation, from its stockholders. The aggregate consideration paid for the capital stock of O&W was $1.5 million, payable $300,000 in cash and $1,200,000 of promissory notes payable over three years with interest at 8.0%. The pro forma combined financial statements are derived from historical financial statements which have been adjusted on a pro forma basis for certain transactions and assumptions (pro forma adjustments) discussed in the accompanying notes to the pro forma combined financial statements. The pro forma combined financial statements of Infinite and O&W as of and for the year ended December 31, 1998 and for the three months ended March 31, 1999 are not necessarily indicative of the financial position or actual operating results which would have occurred had the acquisition taken place on January 1, 1998 or of future operations of the combined companies. In the opinion of management, all adjustments considered necessary for fair presentation of the pro forma combined financial statements have been included. The pro forma adjustments do not reflect any operating efficiencies or cost savings which management of Infinite believes are achievable with respect to the combined companies through eliminating duplicative functions and realigning business practices. The pro forma balance sheet adjustments include those necessary to record Infinite's acquisition of O&W (including related adjustments required under purchase accounting) and the elimination of deferred taxes recorded on O&W historically. Certain reductions in pro forma earnings for the period January 1, 1998 through December 31, 1998 (see following pro forma statement of combined earnings) have not been recorded as an adjustment to stockholders' deficit in the pro forma combined balance sheet; had such earnings been recognized and recorded, stockholders' equity would have been reduced by approximately $363,000. 1 INFINITE GROUP, INC. AND OSLEY & WHITNEY, INC. NOTES TO PRO FORMA COMBINED BALANCE SHEET (UNAUDITED) ================================================================================ BASIS OF COMBINATION - HISTORICAL FINANCIAL STATEMENTS Infinite includes combined assets, liabilities and shareholders' deficit as of December 31, 1998 for Infinite, HGG Laser Fare, Inc., Express Tool, Inc. and Mound Laser and Photonics Center, Inc. For further information, refer to the March 1999 filing of the Annual Report on Form 10-KSB, which includes audited financial statements and related notes. O&W includes assets, liabilities and shareholders' equity of Olsey & Whitney, Inc. as of December 31, 1998. PRO FORMA ADJUSTMENTS AND ELIMINATIONS (A) To record the purchase of O&W, for the aggregate consideration of $1,500,000, consisting of cash of $300,000 and promissory notes in the amount of $1,200,000 payable over three years with interest at 8.0%; to allocate purchase price including adjusting the assets and liabilities of O&W to fair value; to adjust the pension asset relating to the defined benefit pension plan to the excess of plan assets over the projected benefit obligation; and to closeout the O&W equity accounts. Cash $ (300,000) Property and equipment - O&W, to adjust to fair value 884,024 Prepaid pension asset 9,162 Other assets (24,653) Long term debt 1,200,000 Other liabilities (211,653) Common stock - O&W (100,000) Retained earnings - O&W (319,814) 2 INFINITE GROUP, INC. and OSLEY & WHITNEY, INC. PROFORMA COMBINED BALANCE SHEET DECEMBER 31, 1998
Osley & Proforma Infinite Whitney Adjustments Combined ----------- ----------- ----------- ----------- ASSETS Cash & cash equivilants $ 1,010,736 11,575 (300,000) A $ 722,311 Accounts receivable, net 1,093,414 403,811 1,497,225 Inventories 193,412 858,485 1,051,897 Other current assets 1,136,075 28,143 (24,653) A 1,139,565 ----------- ----------- ----------- ----------- 3,433,637 1,302,014 (324,653) 4,410,998 Property and equipment, net 4,442,338 667,368 884,024 A 5,993,730 Notes receivable - stockholders 47,102 204,716 251,818 Other intangible assets 503,424 503,424 Accumulated amortization (160,859) (160,859) CSV - Officer Life 140,080 140,080 Prepaid pension costs 795,443 9,162 A 804,605 Other investment 250,000 250,000 ----------- ----------- ----------- ----------- $ 8,515,642 $ 3,109,621 $ 568,533 $12,193,796 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts & notes payable $ 1,694,086 437,799 $ 2,131,885 Other current liabilities 567,865 1,537,827 (211,653) A 1,894,039 ----------- ----------- ----------- ----------- $ 2,261,951 $ 1,975,626 $ (211,653) 4,025,924 Long term obligations 2,301,862 714,181 1,200,000 A 4,216,043 Notes payable - stockholders 601,955 601,955 Common stock 2,673 100,000 (100,000) A 2,673 Additional paid-in capital - common stock 20,210,268 20,210,268 Additional paid-in capital - warrants 555,585 555,585 Accumulated deficit (17,418,652) 319,814 (319,814) A (17,418,652) ----------- ----------- ----------- ----------- $ 8,515,642 $ 3,109,621 $ 568,533 $12,193,796 =========== =========== =========== ===========
3 INFINITE GROUP, INC. AND OSLEY & WHITNEY, INC. NOTES TO PRO FORMA STATEMENT OF COMBINED OPERATIONS (UNAUDITED) For the Year Ended December 31, 1998 ================================================================================ BASIS OF COMBINATION HISTORICAL FINANCIAL STATEMENTS Infinite operating results represent the combined historical operating results as reported by Infinite, HGG Laser Fare, Inc., Express Tool, Inc. and Mound Laser and Photonics Center, Inc. for the year ending December 31, 1998. For further information, refer to the March 1999 filing of the Annual Report Form 10-KSB, which includes audited financial statements and related notes. O&W includes results of operations for the twelve-month period ended December 31, 1998 PRO FORMA ADJUSTMENTS (B) Pension Expense To adjust pension expense to give effect to the recognition of the revised pension asset at the date of acquisition. (C) Depreciation To retroactively record the depreciation of the increased basis of property and equipment for 1998 arising from the acquisition of O&W. The estimated useful life of the property and equipment has been estimated at 32 and 7, respectively. (D) Interest Expense To retroactively record the interest cost arising from borrowings to finance the acquisition of O&W. (E) Income Taxes To eliminate deferred taxes recorded on O&W historically which are offset by a valuation allowance on a combined basis. 4 INFINITE GROUP, INC. and OSLEY & WHITNEY, INC. PROFORMA STATEMENT OF COMBINED OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Osley & Proforma Infinite Whitney Adjustments Combined ----------- ----------- ----------- ----------- Sales $ 7,396,105 $ 4,812,537 $12,208,642 Cost of goods sold 4,760,733 4,245,809 147,000 B 9,153,542 ----------- ----------- ----------- ----------- Gross Profit 2,635,372 566,728 (147,000) 3,055,100 Research & Development 1,060,021 -- 1,060,021 Selling, general & administrative 2,191,786 543,922 2,735,708 Depreciation and amortization 628,861 132,898 73,000 C 834,759 ----------- ----------- ----------- ----------- 3,880,668 676,820 73,000 4,630,488 ----------- ----------- ----------- ----------- (1,245,296) (110,092) (220,000) (1,575,388) Other income 35,690 (3,637) 32,053 Interest expense 373,405 93,725 96,000 D 563,130 ----------- ----------- ----------- ----------- Loss from contiuing operations before income taxes (1,583,011) (207,454) (316,000) (2,106,465) Income tax benefit (expense) 1,067,000 15,900 (51,600) E 1,031,300 ----------- ----------- ----------- ----------- Loss from contiuing operation (516,011) (191,554) (367,600) (1,075,165) =========== =========== =========== =========== Loss from continuing operations per share (0.20) (0.41) =========== =========== Weighted average number of common shares outstanding 2,643,750 2,643,750 =========== ===========
5 INFINITE GROUP, INC. AND OSLEY & WHITNEY, INC. NOTES TO PRO FORMA STATEMENT OF COMBINED OPERATIONS (UNAUDITED) For the Period Ended March 31, 1999 ================================================================================ BASIS OF COMBINATION HISTORICAL FINANCIAL STATEMENTS Infinite operating results represent the combined historical operating results as reported by Infinite, HGG Laser Fare, Inc., Express Tool, Inc. and Mound Laser and Photonics Center, Inc. for the period ended March 28, 1999. For further information, refer to the March 1999 filing of the Annual Report on Form 10-KSB, which includes audited financial statements and related notes. O&W includes results of operations for the three month period ended March 31, 1999. PRO FORMA ADJUSTMENTS (F) Pension Expense To adjust pension expense to give effect to the recognition of the revised pension asset at the date of acquisition. (G) Depreciation and Amortization To retroactively record the depreciation of the increased basis of property and equipment for 1998 arising from the acquisition of O&W. The estimated useful life of the property and equipment has been estimated at 32 and 7, respectively. (H) Interest Expense To retroactively record the interest cost arising from borrowings to finance the acquisition of O&W. (I) Income Taxes To eliminate deferred taxes recorded on O&W historically which are offset by a valuation allowance on a combined basis. 6 INFINITE GROUP, INC. and OSLEY & WHITNEY, INC. PROFORMA STATEMENT OF COMBINED OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1999
Osley & Proforma Infinite Whitney Adjustments Combined ----------- ----------- ----------- ----------- Sales $ 1,236,002 $ 833,973 $ 2,069,975 Cost of goods sold 947,403 1,035,360 36,750 F 2,019,513 ----------- ----------- ----------- ----------- Gross Profit 288,599 (201,387) (36,750) 50,462 Research & Development 408,843 -- 408,843 Selling, general & administrative 637,526 77,784 715,310 Depreciation and amortization 147,075 32,700 18,000 G 197,775 ----------- ----------- ----------- ----------- 1,193,444 110,484 18,000 1,321,928 ----------- ----------- ----------- ----------- (904,845) (311,871) (54,750) (1,271,466) Other income 17,352 14 17,366 Interest expense 111,417 33,497 24,000 H 168,914 ----------- ----------- ----------- ----------- Loss from contiuing operations before income taxes (998,910) (345,354) (78,750) (1,423,014) Income tax benefit (expense) -- 212,132 (212,132) I -- ----------- ----------- ----------- ----------- Loss from contiuing operation (998,910) (133,222) (290,882) (1,423,014) =========== =========== =========== =========== Loss from continuing operations per share (0.39) (0.55) =========== =========== Weighted average number of common shares outstanding 2,591,311 2,591,311 =========== ===========
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