UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission File Number 001-32300
INFINITE GROUP INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-4100476
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
595 Blossom Rd., Suite 309
Rochester, New York 14610
--------------------------
(Address of principal executive office)
(585) 654-5525
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of July 15, 2005, there were 19,206,965
shares of common stock outstanding.
Transitional Small Business Disclosure Format. Yes |_| No |X|
INFINITE GROUP, INC.
FORM 10-QSB REPORT
March 31, 2003
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets -March 31, 2003 (unaudited) and December 31, 2002 3
Statements of Operations- (unaudited) for the three
month periods ended March 31, 2003 and 2002 4
Statements of Cash Flows- (unaudited) for the three month
periods ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934 regarding the plans and objectives of management for
future operations and market trends and expectations. Such statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by 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 the continued
expansion of our business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. The terms
"we", "our", "us", or any derivative thereof, as used herein refer to Infinite
Group, Inc., a Delaware corporation..
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 74,477 $ 36,459
Restricted cash 42,809 25,118
Accounts receivable, net of allowance 883,094 923,043
Inventories 68,802 127,792
Other current assets 42,473 42,767
Assets of discontinued operations 312,950 943,683
------------ ------------
Total current assets 1,424,605 2,098,862
PROPERTY AND EQUIPMENT, NET 2,913,933 3,042,587
OTHER ASSETS:
Note receivable 73,897 73,897
Intangible assets, net 58,634 60,225
------------ ------------
Total other assets 132,531 134,122
------------ ------------
Total assets $ 4,471,069 $ 5,275,571
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable:
Bank $ 418,087 $ 428,276
Other 30,000 --
Related parties 33,906 83,906
Accounts payable 1,358,673 1,317,136
Accrued expenses 671,385 691,332
Current maturities of long-term obligations 2,500,468 2,551,295
Liabilities of discontinued operations 891,399 1,400,203
------------ ------------
Total current liabilities 5,903,918 6,472,148
LONG-TERM OBLIGATIONS
Notes payable-related parties 125,000 --
Accrued pension expense 2,166,918 2,159,152
------------ ------------
8,195,836 8,631,309
------------ ------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY:
Common stock, $.001 par value, 20,000,000 shares authorized;
6,314,077 (6,314,077 in 2002) shares issued and outstanding 6,314 6,314
Additional paid-in capital 27,817,820 27,817,820
Accumulated deficit (28,492,281) (28,081,158)
Accumulated other comprehensive loss (3,056,620) (3,098,705)
------------ ------------
Total stockholders' deficiency (3,724,767) (3,355,729)
------------ ------------
Total liabilities and stockholders' deficiency $ 4,471,069 $ 5,275,571
============ ============
See notes to consolidated financial statements
3
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS- (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------------------
(As Restated)
SALES $ 1,413,248 $ 1,771,941
Cost of goods and services 1,044,308 1,450,656
----------- -----------
GROSS PROFIT 368,940 321,285
Costs and expenses:
General and administrative 459,259 569,100
Depreciation and amortization 162,512 198,095
Selling 48,500 80,487
Research and development 1,932 1,816
----------- -----------
672,203 849,498
----------- -----------
OPERATING LOSS (303,263) (528,213)
Other income (expense):
Interest expense:
Related parties (1,481) (4,572)
Others (37,520) (76,451)
Gain on disposition of assets -- 137,417
Other 2,911 --
Interest income 55 402
----------- -----------
Total other income (expense) (36,035) 56,796
----------- -----------
Loss from continuing operations
before income tax expense (339,298) (471,417)
Income tax expense (200) (3,750)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (339,498) (475,167)
Income (loss) from discontinued operations,
(including $60,366 gain on disposal in 2002) (71,625) 75,012
----------- -----------
Net loss $ (411,123) $ (400,155)
=========== ===========
Net loss per share -basic:
Loss from continuing operations $ (.05) $ (.08)
Income (loss) from discontinued operations (.01) .01
----------- -----------
Net loss $ (.06) $ (.07)
=========== ===========
Weighted average number of shares outstanding- basic 6,314,077 5,524,561
Net income (loss) per share-diluted:
Income (loss) from discontinued operations $ (.01) $ .01
=========== ===========
Weighted average number of shares outstanding-diluted 6,314,077 5,785,416
=========== ===========
See notes to consolidated financial statements.
4
INFINITE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS- (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------------------------------------
(As Restated)
OPERATING ACTIVITIES:
Net (loss) $ (411,123) $ (400,155)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
(Income) loss from discontinued operations 71,625 (75,012)
Depreciation and amortization 162,512 198,095
Amortization of discount on note payable -- 6,552
Expenses satisfied via issuance of common stock -- 51,333
(Gain) loss on disposition of assets -- (137,416)
(Increase) decrease in:
Accounts receivable, net 39,951 497,085
Other current assets 294 826
Inventories 58,990 (41,245)
Prepaid pension cost -- 15,000
Increase (decrease) in:
Accounts payable and accrued expenses 21,591 (303,503)
Accrued pension obligations 49,851 --
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS (6,309) (188,440)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS 50,302 (345,495)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 43,993 (533,935)
----------- -----------
INVESTING ACTIVITIES:
Increase in restricted funds (17,691) (47,105)
Purchase of property and equipment (32,268) (25,134)
Proceeds from sale of property and equipment -- 270,000
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (49,959) 197,761
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS -- 990,602
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (49,959) 1,188,363
FINANCING ACTIVITIES:
Net repayments of bank notes payable (10,189) (11,820)
Repayment of notes payable- related parties (20,000) (23,000)
Proceeds from issuance of notes payable, net of costs -- 911,000
Proceeds from issuance of long term obligations-related parties 125,000 --
Repayment of long-term obligations (50,827) (114,668)
Proceeds of common stock, net of costs -- 156,132
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS 43,984 917,644
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS -- (1,498,134)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 43,984 (580,490)
----------- -----------
NET INCREASE (DECREASE) IN CASH 38,018 73,938
Cash - beginning of period 36,459 73,802
----------- -----------
Cash - end of period $ 74,477 $ 147,740
=========== ===========
Supplemental disclosure:
Interest $ (38,341) $ (81,023)
=========== ===========
Income taxes $ (200) $ (3,750)
=========== ===========
See notes to consolidated financial statements
5
INFINITE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Infinite Group
Inc. ("Infinite Group Inc." or the "Company"), included herein have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. The accompanying unaudited consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and footnotes for the year ended December 31, 2002 and the notes thereto
included in the Company's Annual Report on Form 10-KSB filed with the United
States Securities and Exchange Commission. Results of consolidated operations
for the three month period ended March 31,2003 are not necessarily indicative of
the operating results that may be expected for the year ended December 31, 2003.
The consolidated financial statements herein include the accounts of the Company
and its wholly owned subsidiaries. All material inter-company accounts and
transactions have been eliminated.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There are several accounting policies that we believe are significant to the
presentation of our consolidated financial statements. These policies require
management to make complex or subjective judgments about matters that are
inherently uncertain. Note 3 to our audited consolidated financial statements
present a summary of significant accounting policies. The most critical
accounting policies follow.
REVENUE RECOGNITION
In 2002 we generated substantially all of our revenue from traditional laser
manufacturing services, which included welding, machining, cutting, drilling and
engraving. These services related to processes performed on the customers'
parts. The services were performed based upon terms specified and agreed upon by
both parties prior to commencement. Revenues relating to these services were
recognized at the point that the completed product was delivered to the
customer.
In 2003 we generated revenue from our traditional laser manufacturing services
and beginning in the second quarter of 2003, we commenced providing services in
the field of information technology (IT) consulting services through our IT
Services Group.
STOCK-BASED COMPENSATION
We disclose the pro forma compensation cost relating to stock options granted
under employee stock option plans, based on the fair value of those options at
the date of grant. This valuation is determined utilizing the Black-Scholes,
option-pricing model, which takes into account certain assumptions, including
the expected life of the option and the expected stock volatility and dividend
yield over this life. These assumptions are made based on past experience and
expected future results. In the event the actual performance varies from the
estimated amounts, the value of these options may be misstated.
6
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under these new standards, all acquisitions subsequent to
June 30, 2001 must be accounted for under the purchase method of accounting.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step was to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of the adoption), if
any, and must be completed by the end of our fiscal year. Any impairment loss
resulting from the transitional impairment tests are reflected as the cumulative
effect of a change in accounting principle.
We adopted the provisions of SFAS No. 142 in our first quarter ended March 31,
2002. Goodwill in the amount of $88,769 at December 31, 2001, relates to the
Laser Fare (LF) and Mound subsidiaries. Subsequent to December 31, 2001, the
assets of Mound were disposed of and operations were ceased, resulting in the
write-down of goodwill amounting to $17,584. In addition the goodwill relating
to Laser Fare, amounting to $71,185 was written off at December 31, 2002. We
have allocated the other intangible assets to their reporting units. The
remaining useful lives of the other intangibles have been evaluated and no
changes will be made.
SFAS No. 141 also requires that upon adoption of SFAS No. 142, the Company
reclassify the carrying amounts of certain intangibles assets into or out of
goodwill, based upon certain criteria. We did not have any reclassifications.
SFAS No. 142 supersedes APB No. 17, "Intangible Assets," and is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142 prohibit the amortization of
goodwill and indefinite-lived intangible assets; require that goodwill and
indefinite-lived intangible assets be tested annually for impairment, and in
interim periods if certain events occur indicating that the carrying value of
goodwill and / or indefinite-lived intangible assets may be impaired; require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill; and removes the 40-year limitation on the amortization
period of intangible assets that have finite lives.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the related asset.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which provides guidance in the accounting for impairment of disposal of
long-lived assets. For long-lived asset to be held and used, the new rules are
similar to previous guidance, which required the recognition of impairment when
the undiscounted cash flows will not recover the carrying amount. The
computation of fair value now removes goodwill from consideration and
incorporates a probability-weighted cash flow estimation approach. Additionally,
assets qualifying for discontinued operations treatment have been expanded
beyond the former major line of business or class of customer approach. We
adopted the provisions of SFAS 144 in fiscal 2001 and utilized this guidance for
the disposal of the Plastics Group. Accordingly, the assets and liabilities of
the discontinued operations are reflected as gross amounts, rather than net, in
the accompanying balance sheet in accordance with SFAS 144. There was no impact
from the adoption of this standard on its impairment tests of long-lived assets
or its accounting for discontinued operations.
7
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS No. 4, 44 and 64,
"Amendment of SFAS No.13, and Technical Corrections". SFAS No. 145, among other
things, amends SFAS No. 4 and SFAS No. 64, to require that gains and losses from
the extinguishments of debt generally be classified within continuing
operations. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002 and early application is encouraged. We do not
believe that the adoption of SFAS No. 145 will have a significant impact on our
financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 replaces Emerging Issues Task Force
("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for exit or disposal activities that are initiated
after December 31, 2002. We do not believe that the adoption of SFAS No. 146
will have a significant impact on our financial statements.
In February 2003, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based
Compensation, and Its Related Interpretations, and IASB Proposed IFRS,
Share-based Payments." SFAS 148 amends SFAS 123 to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based compensation. The statement also amends APB Opinion
No. 28, "Interim Financial Reporting", to require disclosure about those effects
in interim financial information. We have chosen not to voluntarily change to
the fair value based method of accounting for stock-based employee compensation
but have adopted the disclosure rules under SFAS 148.
NOTE 3. DISCONTINUED OPERATIONS AND RECLASSIFICATIONS
The statements of operations and cash flows for the three months ended March 31,
2002 have been restated to account for the discontinued operations of the
Photonics Group, consisting of Infinite Photonics, Inc. (IPI), which business
was suspended in 2002 as a result of the loss of the DARPA contract and for LF,
which was sold as discussed below.
On October 30, 2002, IPI received a Notice of Termination of its DARPA contract
for the government's convenience under the contract provisions entitled
Termination, Federal Acquisition Regulation (FAR) 52.249.6. The DARPA contract
had provided substantially all of the revenue of the Photonics Group. As of
December 31, 2004, the contract termination process was substantially complete.
We have been reimbursed for substantially all costs associated with the
termination. The termination of the contract had a detrimental effect on the
development of our technology. During 2002, all of our Photonics Group employees
were released and the operations of the Photonics Group ceased. We also
determined that our Photonics Group patents and property and equipment were
impaired, and consequently recorded impairment losses in the fourth quarter of
2002 of approximately $468,000 and $148,000 respectively, which was included in
loss on disposal of discontinued operations in the consolidated statement of
operations for the year ended December 31, 2002.
On December 31, 2003, the Company and LF entered into an asset purchase
agreement with LFI, Inc. ("LFI") relating to the purchase by LFI of certain
assets and the assumption of certain liabilities of LF relating to the laser
engraving and medical products manufacturing and assembly businesses of LF (the
"Purchase Agreement"). The principals of LFI are former employees of LF,
including the former chairman and chief executive officer of the Company. The
purchase price for the assets was assumed liabilities of LF and/or the Company.
On December 31, 2004, the Company completed the sale of the remaining assets,
including the assumption of certain liabilities, to an affiliate of LFI,
relating to all the remaining laser businesses of LF. The purchase price was the
assumed liabilities of LF plus the issuance of several notes by the buyer to LF.
8
LF recorded a loss on sale of approximately $99,000 for the year ended December
31, 2003. LF reclassified the operating assets and liabilities to assets and
liabilities held for sale at December 31, 2003. The balances of the assets held
for sale at December 31, 2003 was $2,919,154 with related liabilities of
$781,847. During the year ended December 31, 2004, LF had income from operations
of approximately $494,000 (loss from operations of $417,000 in 2003) which is
included in loss from discontinued operations.
In accordance with FASB 144, the disposal of the Photonics and Laser segments
have been accounted for as a disposal of business segments and accordingly, the
assets and liabilities for IP and LF have been segregated from continuing
operations in the accompanying consolidated balance sheets and classified as
assets of discontinued operations and assets held for sale. The operating
results for both segments are segregated and reported as discontinued
operations.
The following is a summary of financial position at March 31, 2003 and
December 31, 2002 and results of operations for the three months ended March 31,
2003 and 2002 for the disposed Photonics (IP) and Plastics (O&W and EP)
segments:
FINANCIAL POSITION MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
Current assets and total assets of
discontinued operations $ 312,950 $ 943,683
========== ==========
Liabilities of discontinued operations:
Accounts payable and accrued
expenses $ 886,399 $1,395,203
Unsecured note payable 5,000 5,000
---------- ----------
Total liabilities of discontinued
operations $ 891,399 $1,400,203
========== ==========
THREE MONTHS ENDED
MARCH 31,
-----------------------
RESULTS OF OPERATIONS 2003 2002
---------- ----------
Revenue from discontinued operations $ 133,428 $ 435,182
========== ==========
Income (loss) from discontinued
operations $ (71,625) $ 14,646
Gain on disposal of discontinued
operations -- 60,366
---------- ----------
Net income (loss) from discontinued
operations $ (71,625) $ 75,012
========== ==========
Certain other amounts in the 2002 financial statements have been reclassified to
conform with the 2003 financial statement presentation.
9
NOTE 4. STOCK OPTION PLANS
As of March 31, 2003 the Company's Stock Option Plans (the "Plan")
provided for the grant of incentive or non-qualified stock options for the
purchase of common stock for up to 2,340,000 shares to employees, directors and
consultants. The Plan is administered by the compensation committee established
by the Company's board of directors, which determines the terms of options
including the exercise price, expiration date, number of shares and vesting
provisions.
A summary of all stock option activity for the three months ended March
31, 2003 is as follows:
WEIGHTED
NUMBER EXERCISE AVERAGE
OF OPTIONS PRICE EXERCISE PRICE
---------- ----------- --------------
Outstanding at December 31, 2002 300,581 $1.38-$5.50 $ 1.64
=========== ==============
Options issued 100,000 $ .15 $ .15
========== ==============
Options expired (217,477) $1.38-$5.50 $ 1 .53
---------- ========== ==============
Outstanding at March 31, 2003 183,104 $ .15-$2.50 $ .96
========== =========== ==============
Exercisable at March 31, 2003 83,104 $.15-$ 2.50 $ 1.93
========== =========== ==============
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 -"Accounting for Stock-Based Compensation, "
and, accordingly, does not recognize compensation cost for stock option grants
under fixed awards. If the Company had elected to recognize compensation costs
based on the fair value of the options granted at grant date as prescribed by
SFAS No.123, net loss and loss per share from continuing operations would have
increased as follows:
THREE MONTHS ENDED
MARCH 31,
RESULTS OF OPERATIONS -----------------------
2003 2002
---------- ----------
Net loss-as reported (000's) $ (411) $ (400)
Total stock based employee compensation
expense determined employee compensation
expense determined under the fair value
method for all awards (000's) $ 7 $ 69
---------- ----------
Net Loss- pro forma (000's) $ (418) $ (469)
========== ==========
Loss per share as reported $ (.06) $ (.07)
========== ==========
Loss per share pro forma $ (.06) $ (.08)
========== ==========
NOTE 5. BUSINESS SEGMENTS
Prior to 2002, the Company's business were organized, managed and internally
reported as three segments. The segments are determined based on differences in
products, production processes and internal reporting. During the year ended
December 31, 2001, the Company approved of a plan to discontinue the operations
of the Plastics Group. During the fourth quarter of 2002, the Company's contract
with DARPA was terminated and as a result of the termination, management decided
to suspend the activities of the Photonics Group in 2002 and liquidate the
remaining assets.
10
During the fourth quarter of the year ended December 31, 2003, the Company
approved the sale of the assets and certain liabilities of its Laser Fare, Inc.
subsidiary, referred to as the Laser Group. As a result, in accordance with FASB
144, the disposal of the Plastics, Photonics, and Laser segments have been
accounted for as disposals of business segments and accordingly, the respective
assets (liabilities) have been segregated from continuing operations and
classified as assets of discontinued operations and the operating results for
all three segments are segregated and reported as discontinued operations.
Beginning in 2003, the Company revised its business strategy and began operating
its newly formed IT Services Group.
All of the segments of the Company operate entirely within the United States.
Revenues from customers in foreign countries are minimal. The Company relies on
inter-segment cooperation and management does not represent that these segments,
if operated independently, would report the results shown.
A summary of selected consolidated information for the Company's industry
segments during the periods ended March 31, 2003 and 2002, respectively, is set
forth as follows:
------------------------------------------------------------------------------------------------------
Plastics Photonics IT Services Unallocated
Group Group Laser Group Group Corporate Consolidated
------------------------------------------------------------------------------------------------------
Three Months ended March 31, 2003
Sales to unaffiliated $ -- $ -- $ 1,412,045 $ 1,203 $ -- $ 1,413,248
------------------------------------------------------------------------------------------------------
Operating loss $ -- $ -- $ (121,047) $ (182,216) $ -- $ (303,263)
------------------------------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ -- $ (71,625) $ -- $ -- $ -- $ (71,625)
------------------------------------------------------------------------------------------------------
Three Months ended March 31, 2002
------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $ -- $ -- $ 1,771,941 $ -- $ -- $ 1,771,941
------------------------------------------------------------------------------------------------------
Operating loss, including
corporate overhead
allocation $ -- $ -- $ (371,272) $ -- $ (156,941) $ (528,213)
------------------------------------------------------------------------------------------------------
Income (loss) from
discontinued operations,
including corporate
overhead calculations $ 92,549 $ 15,359 $ -- $ -- $ (32,896) $ 75,012
------------------------------------------------------------------------------------------------------
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION-
Non-cash investing and financing transactions, including non-monetary
exchanges, consist of the following:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
----------- ----------
Notes receivable issued in connection with
the sale of assets $ -- $ 150,000
=========== ==========
Value of detachable common stock warrants
issued with long-term obligations $ -- $ 78,628
=========== ==========
Common stock warrants issued as satisfaction
of accounts payable $ -- $ 58,826
=========== ==========
11
NOTE 7. EARNINGS PER SHARE
Basic income per share is based on the weighted average number of common shares
outstanding during the periods presented. Diluted income per share is based on
the weighted average number of common shares outstanding, as well as dilutive
potential common shares which, in the Company's case, comprise shares issuable
under the stock options and stock warrants. The treasury stock method is used to
calculate dilutive shares, which reduces the gross number of dilutive shares by
the number of shares purchasable from the proceeds of the options assumed to be
exercise. In a loss year, the calculation for basic and diluted earnings per
share is considered to be the same, as the impact of potential common shares is
anti-dilutive.
As of March 31, 2003, all outstanding stock options and warrants have not been
considered common stock equivalents because their assumed exercise would be
anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share as of March 31, 2003:
Numerator:
Income available to common stockholders
from discontinued operations $ 75,012
==========
Weighted average shares outstanding 5,524,561
==========
Denominator for diluted income per share:
Weighted average shares outstanding 5,524,561
Common stock options and stock warrants 260,855
----------
Weighted average shares and conversions 5,785,416
==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
On January 3, 2003, our former president and chief executive officer, Clifford
G. Brockmyre II, resigned and was replaced by Michael S. Smith, one of our board
members. At the same time, we moved our corporate headquarters from Rhode Island
to Rochester, New York. On May 6, 2003, Dr. Allan Robbins and Paul Delmore were
appointed to fill two existing vacancies on our board. Mr. Brockmyre remained on
our board of directors until October 30, 2003 at which time he resigned. On
March 15, 2004, Brian Corridan resigned from our board.
In the fourth quarter of 2003, we decided to dispose of our Laser Fare, Inc.
subsidiary (LF) and to restructure our business. We sold a portion of the
business of LF (primarily the medical and engraving business) as of December 31,
2003 and the remaining business as of December 31, 2004, although we continued
to operate the business during the disposal process.
The purchase price for the assets consisted of LFI's assumption of certain of
our liabilities in the aggregate amount of approximately $358,000. On December
31, 2004, we sold the remaining assets of LF to Rolben Acquisition Corporation
(Rolben), a company affiliated with LFI. The purchase price for the remaining
assets consisted of Rolben's assumption of substantially all of the liabilities
of LF and the delivery of promissory notes in the aggregate amount of
approximately $2.1 million. Because certain required consents were not yet
obtained at December 31, 2004, we remained obligated under several notes to UPS
Capital Business Credit (UPS) and the Rhode Island Industrial Facilities
Corporation (RIIFC) in the same amounts as the notes from Rolben,
12
During the second quarter of 2003, we commenced providing services in the field
of information technology (IT) consulting services through our IT Services
Group. We provide business and technology integration and systems support
primarily to U.S. government clients. We focus on aligning business processes
with technology for delivery of solutions meeting the client's exact needs.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 AND 2002
We commenced the operations of our IT services Group in the second quarter of
2003. The following results include the operations of our Laser Group for 2002
and 2003 and our IT Services Group beginning in 2003. The trends suggested by
this table are not indicative of future operating results due to our decision to
sell the business of our Laser Group and focus on our IT Services Group.
Three Months Ended March 31,
As a % As a %
of Net 2002 of Net Increase
2003 Revenues (As Restated) Revenues (Decrease)
----------- -------- ----------- -------- ---------
Sales $ 1,413,248 100.0% $ 1,771,941 100.0% (20.2)%
Cost of sales 1,044,308 73.9 1,450,656 81.9 (28.0)
-------------------- ------------------------ ---------
Gross profit 368,940 26.1 321,285 18.1 14.8
-------------------- ------------------------ ---------
General and administrative 459,259 32.5 569,100 32.1 (19.3)
Depreciation and amortization 162,512 11.5 198,095 11.2 (18.0)
Selling 48,500 3.4 80,487 4.5 (39.7)
Research and development 1,932 0.1 1,816 0.1 --
-------------------- ------------------------ ---------
Total operating expenses 672,203 47.6 849,498 47.9 (20.9)
-------------------- ------------------------ ---------
Operating loss (303,263) (21.5) (528,213) (29.8) (42.6)
Other income (expense) and income taxes, net (36,235) (2.6) 53,046 3.0 (168.3)
-------------------- ------------------------ ---------
Income (loss) from continuing operations (339,498) (24.0) (475,167) (26.8) (28.6)
Income (loss) from discontinued operations (71,625) (5.1) 75,012 4.2 (195.5)
-------------------- ------------------------ ---------
Net loss $ (411,123) (29.1)% $ (400,155) (22.6)% 2.7%
===================== ======================== =========
SALES
Sales for the three months ended March 31, 2003 decreased $358,693 compared to
net sales for the three months ended March 31, 2002. Sales were $1,412,045 from
LF and $1,203 from IT Services Group for the three months ended March 31, 2003.
Sales of $1,771,941 were from LF for the three months ended March 31, 2002. The
sales from the IT Services Group are a result of our new strategy which was
implemented in 2003. Sales from LF declined by $359,896 in the 2003 period from
the 2002 period due to reductions in customer orders.
On October 30, 2002, we received a notice of termination of our DARPA contract.
The contract was terminated for the U.S. Government's convenience. The DARPA
contract had provided substantially all of the revenue of our Photonics Group.
As a result, we have terminated this line of business and have accounted for the
Photonics Group as a disposal of discontinued operations in the accompanying
financial statements. Accordingly, the statements of operations and cash flows
for 2002 have been restated to reflect the operations of the Photonics Group in
income (loss) from discontinued operations.
13
COST OF SALES AND GROSS PROFIT
Cost of sales represents the cost of labor, materials and overhead related to LF
and the cost of employee services related to the IT Services Group. Cost of
sales was $1,044,308 for LF and $0 for IT Services Group for the three months
ended March 31, 2003. Gross profit was $367,736 or 26.0% for LF for the three
months ended March 31, 2003.
Cost of sales was $1,450,656 for LF for the three months ended March 30, 2002
and resulted in a gross profit of $321,285 or 18.1%. Gross profit increased for
LF due to personnel and other expense reductions which were implemented during
2003 that reduced cost of sales as a percent of sales from 81.9% for the three
months ended March 31, 2002 to 73.9% for the three months ended March 31, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include corporate overhead such as
compensation and benefits for administrative and finance personnel, rent,
insurance, professional fees, travel, and office expenses. General and
administrative expenses in the first quarter of 2003 decreased in absolute terms
and remained relatively unchanged as a percentage of net revenues compared to
the first quarter of 2002. The decrease was due to the relocation of
administrative offices from Rhode Island to Rochester, New York in 2003 and an
associated reduction in employee related expenses as we implemented our new
strategies. We also realized reductions in our professional fees and other
operating expenses. We anticipate that general and administrative expenses will
decrease as a percent of revenues as we continue to transition our business
strategy. However, we expect increases in accounting and legal expenses due to
our focus on completing audits of our financial statements and related public
information filings.
General and administrative expense includes expenses of the Osley & Whitney
defined benefit retirement plan of approximately $50,000 and income of $8,720
for the three months ended March 31, 2003 and 2002, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased by $35,583 in the three months
ended March 31, 2003 compared to the three months ended March 31, 2002
principally due to the write off or disposition of assets in connection with the
relocation of our corporate headquarters to Rochester, New York. We are
operating our new corporate headquarters with less capital equipment.
SELLING EXPENSES
For the three months ended March 31, 2003 we incurred selling expenses of
$48,500. Selling expense at LF decreased $31,987 for the three months ended
March 30, 2003 compared to $80,487 for the three months ended March 30, 2002 due
to a decrease in sales activity.
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 2003 we incurred research and development
expenses at LF of $1,932 compared to $1,816 at LF for the three months ended
March 30, 2002. This amount was relatively unchanged.
14
LOSS FROM OPERATIONS
For the three months ended March 31, 2003 our operating loss was $303,263
compared to a $528,213 loss from operations in the comparable period of 2002.
This is primarily attributable to our focus on our new IT Services Group and
reductions in general and administrative and selling expenses.
OTHER EXPENSES
Other income and expense consists principally of interest expense on
indebtedness for the three months ended March 31, 2003. Interest expense was
$39,000 for the three months ended March 31, 2003 compared to $81,023 for the
three months ended March 31, 2002. The decrease in our net interest expense is
due primarily to repayment of notes payable as a result of the termination of
our DARPA contract in 2002 and the continued amortization of notes payable of
LF.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
We recorded a loss from discontinued operations of $71,625 for the three months
ended March 31, 2003 compared to income of $75,012 for the three months ended
March 31, 2002. The operations of the Plastics Group and the Photonics Group
were reclassified as discontinued operations and loss from discontinued
operations of $71,625 was recorded in the first quarter of 2003 and income of
$75,012 in first quarter of 2002.
NET LOSS
For the three months ended March 31, 2003, we recorded a net loss of $411,123 or
(.06) per share consisting of a loss of $399,498 or $(.05) per share from
continuing operations and $(.01) per share from discontinued operations. This
compares to a net loss of $400,155 or (.07) per share consisting of a loss from
continuing operations of $475,167 or $(.08) per share and $.01 per share from
discontinued operations for the three months ended March 31, 2002. The
improvement in loss from operations is attributable to reductions in general and
administrative and selling expenses. Our net loss was relatively unchanged at
$411,123 and $400,155 for the three months ended March 31, 2003 and 2002
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003 we had unrestricted cash $74,477, substantially all of
which was held by LF for its working capital needs. We expect minimal capital
expenditures for LF.
At March 31, 2003 we had a working capital deficit of $4,479,313 ($3,900,864)
after eliminating the assets and liabilities of our discontinued operations).
Approximately $2,500,000 of this deficit is caused by bank loan covenant
violations resulting in the classification of all related debt with these
financial institutions being classified as current liabilities.
We have financed the activity of our new IT Services Group through the issuance
of notes payable to related parties and private placements of common stock. In
the future, we may issue additional debt or equity securities to satisfy our
cash needs. Any debt incurred or issued may be secured or unsecured, at a fixed
or variable interest rates and may contain other terms and conditions that our
board of directors deems prudent. Any sales of equity securities may be at or
below current market prices. We cannot assure you that we will be successful in
generating sufficient capital to adequately fund our liquidity needs.
15
RISK FACTORS
You should consider the risk factors included in our Annual Report on Form
10-KSB in evaluating our business and us. Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or that are similar to
those faced by other companies in our industry or business in general, such as
competitive conditions, may also impair our business operations. If any of the
results of the risks occur, our business, financial condition, or results of
operations could be materially adversely affected.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of the chief executive officer and the chief financial officer,
carried out an evaluation of the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 (the "Exchange
Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by
this report (the "Evaluation Date"). Based upon that evaluation, the chief
executive officer and the chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective, providing
them with material information relating to the company as required to be
disclosed in the reports we file or submit under the Exchange Act.
Changes in Internal Control over Financial Reporting. There were no changes in
our internal controls over financial reporting, known to the chief executive
officer or the chief financial officer, that occurred during our fiscal first
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
16
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
We are the plaintiff in a lawsuit filed in the Superior Court, State of Rhode
Island on August 13, 1999 captioned Infinite Group, Inc. vs. Spectra Science
Corporation and Nabil Lawandy. In the action, we assert that by fraud and in
breach of fiduciary duties owed, Spectra and its president, Nabil Lawandy,
caused us to sell to Spectra shares of Spectra's Series A Preferred stock at a
substantial discount to fair market value. We allege that in entering into the
transaction we relied on various representations made by Spectra and Mr.
Lawandy, which were untrue at the time they were made. In the action, we seek
compensatory damages in the amount of $500,000 plus statutory interest, punitive
damages as well as an award of attorney's fees and costs. One of Spectra's
counterclaims was dismissed by the court in response to our motion for summary
judgment. The trial was completed in February 2005. The jury returned a verdict
and a judgment was entered in our favor in the amount of approximately $600,000.
We have filed a notice of appeal with respect to the damages portion of the
verdict. On June 1, 2005, Spectra voluntarily dismissed with prejudice its
remaining pending counterclaim against us. We have entered into an escrow
agreement with the defendants pursuant to which approximately $600,000
representing the amount of the judgment has been deposited. Withdrawal of the
funds will be permitted only upon the date that judgment in the matter becomes a
final, non-appealable decision, or earlier upon the written agreement of all
parties.
We are the respondent in an arbitration proceeding filed on December 10, 2002
captioned J. Terrence Feeley v. Infinite Group, Inc. Claimant, a former employee
and former member of our board of directors, alleges that the parties entered
into a consulting agreement dated June 27, 2002 relative to the early
termination of claimant's employment requiring certain cash payments to be made.
Claimant alleges that we have failed or refused to make such cash payments and
have breached the agreement and seeks all monies owed to him, said amount
alleged to be approximately $130,000. We answered the claim by admitting that a
letter agreement was entered into but denied all of the remaining allegations.
We also filed a counterclaim in the arbitration proceeding. We filed a related
claim against Mr. Feeley in the Superior Court, State of Rhode Island on March
5, 2003. We claim that he breached certain provisions of his employment
agreement, breached fiduciary duties he owed to us and violated several
provisions of the June 27, 2002 letter agreement. We seek compensatory damages
in amounts to be shown at trial, and preliminary and permanent injunctive relief
and other relief as may be appropriate.
Mr. Feeley's arbitration claims are pending before the American Arbitration
Association and an arbitrator selected by the parties. Our claims against Mr.
Feeley are pending in the Rhode Island Superior Court. In January of 2004, the
parties agreed to stay arbitration proceedings and to mediate all the disputes
under procedures available through the Superior Court. To date, neither party
has initiated mediation proceedings.
Other than the foregoing proceeding, we are not a party to any material legal
proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
None.
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company's LF subsidiary had a $1,250,000 bank term promissory note that
required monthly principal and interest payments amounting to approximately
$13,000 through February 2011. The outstanding balance as of March 31, 2003
amounted to $849,347 and bore interest at the bank's prime rate plus 1.0%. All
the assets of LF and the guarantee of the Company secured the note. We continued
to be in violation of certain loan covenants. These violations related to
exceeding certain levels of the ratio of debt to intangible net worth, not
meeting the minimum current ratio or the working capital ratio, and exceeding
capital expenditure limits. Accordingly, the entire outstanding portion of the
note has been classified as current.
The Company's LF subsidiary had a $1,260,000 bank term promissory note that
required monthly principal and interest payments amounting to approximately
$13,000 through December 2014. The outstanding balance as of March 31, 2003
amounted to $1,093,703 and bore interest at the bank's prime rate plus .75%. We
continued to be in violation of certain covenants under the term of this note.
Accordingly, the entire outstanding portion of the note has been classified as
current.
The Company's LF subsidiary was obligated under a capital lease for the LF
operating facility. The lease provided for monthly payments to an escrow account
in amounts sufficient to allow for the repayment of the principal of the
underlying tax-exempt bonds together with interest at 7.25% through June 2012.
The outstanding balance as of March 31, 2003 amounted to $520,000. Annual
payments of principal were $35,000 for fiscal 2003 and increase by $5,000
annually through June 2012. Under the terms of this capital lease facility, the
Company was prohibited from paying dividends or making other cash distributions.
According to the terms of the lease agreement, the Company is required to comply
with certain covenants. We continued to be in violation of these covenants.
Accordingly, the entire outstanding portion of this obligation has been
classified as current.
The aggregate amount of the aforementioned notes payable and capital lease
obligations classified as current liabilities was $2,463,050 at March 31, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS.
a. Exhibits:
Exhibit No. Description
----------- --------------------------------------------------------
31.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Infinite Group Inc.
(Registrant)
Date: July 26, 2005 /s/ Michael S. Smith
-----------------------------------
Chief Executive Officer
Date: July 26, 2005 /s/ Michael S. Smith
-----------------------------------
Chief Financial Officer
(Principal Financial Officer)
19