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 SEPTEMBER 30, 2004
Commission File Number 0-21816
INFINITE GROUP INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1490422
-------- ----------
(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|
1
INFINITE GROUP INC.
FORM 10-QSB REPORT
Infinite Group Inc.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet - September 30, 2004 (unaudited) and
December 31, 2003 3
Statements of Operations (unaudited) for the three and nine
month periods ended September 30, 2004 and 2003 4
Statements of Cash Flows (unaudited) for the nine month
periods ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 13
Item 3. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 23
SIGNATURES 23
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
September 30, December 31,
2004 2003
---------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash $ 54,587 $ 16,515
Restricted cash 34,265 26,500
Accounts receivable, net of allowance 1,017,801 165,830
Other current assets 25,144 1,060
Assets held for sale 2,650,125 2,919,154
Assets of discontinued operations 791,587 870,287
-------------- --------------
Total current assets 4,573,509 3,999,346
Property and equipment, net 190,230 99,435
Other assets:
Note receivable 73,897 73,897
Intangible assets, net 53,369 62,918
-------------- --------------
Total other assets 127,266 136,815
-------------- --------------
Total assets $ 4,891,005 $ 4,235,596
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable:
Bank 74,392 152,122
Other 30,000 30,000
Related parties 9,906 9,906
Accounts payable 552,910 613,712
Accrued expenses 659,888 359,804
Current maturities of long-term obligations 2,169,687 2,360,840
Liabilities held for sale 742,059 781,847
Liabilities of discontinued operations 958,710 933,349
-------------- --------------
Total current liabilities 5,197,552 5,241,580
Long-term obligations
Bank notes payable 67,182 32,852
Notes payable-related parties 1,145,124 887,124
Accrued pension expense 2,180,520 2,190,214
-------------- --------------
Total liabilities 8,590,378 8,351,770
-------------- --------------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value, 20,000,000 shares authorized;
17,411,965 (10,624,465-2003) shares issued and outstanding 17,412 10,624
Additional paid-in capital 28,360,348 28,026,510
Common stock, 1,500,000 authorized, not issued -- 75,000
Accumulated deficit (29,277,623) (29,297,944)
Accumulated other comprehensive loss (2,799,510) (2,930,364)
-------------- --------------
Total stockholders' deficiency (3,699,373) (4,116,174)
-------------- --------------
Total liabilities and stockholders' deficiency $ 4,891,005 $ 4,235,596
============== ==============
See notes to consolidated financial statements.
3
INFINITE GROUP, INC.
Consolidated Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------
(As Restated) (As Restated)
Sales $ 3,840,603 $ 488,877 $ 2,010,780 $ 396,893
Cost of goods and services 2,579,607 292,645 1,385,657 233,394
------------ ------------ ------------ ------------
Gross profit 1,260,996 196,232 625,123 163,499
Costs and expenses:
General and administrative 854,043 749,772 279,088 238,219
Depreciation and amortization 19,875 2,994 7,358 2,994
Selling 4,364 24,366 -- 19,287
Research and development 214,486 80,764 71,531 54,210
------------ ------------ ------------ ------------
Total costs and expenses 1,092,768 857,896 357,977 314,710
------------ ------------ ------------ ------------
Operating income (loss) 168,228 (661,664) 267,146 (151,211)
Other expense:
Interest expense-related parties (57,187) (23,740) (20,534) (19,359)
------------ ------------ ------------ ------------
Total other expense (57,187) (23,740) (20,534) (19,359)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income tax expense 111,041 (685,404) 246,612 (170,570)
Income tax expense
(350) -- -- --
------------ ------------ ------------ ------------
Income (loss) from continuing operations 110,691 (685,404) 246,612 (170,570)
Income (loss) from discontinued operations
(Including $11,243 gain on disposal in the nine
months ended September 30, 2003) (90,370) 23,454 (15,640) (291,761)
------------ ------------ ------------ ------------
Net income (loss) $ 20,321 $ (661,950) $ 230,972 $ (462,331)
============ ============ ============ ============
Net income (loss) per share-basic:
Income (loss) from continuing operations $ .01 $ (.09) $ .02 $ (.02)
Income (loss) from discontinued operations (.01) .00 .00 (.04)
------------ ------------ ------------ ------------
Net income (loss) $ .00 $ (.09) $ .02 $ (.06)
============ ============ ============ ============
Net income (loss) per share-diluted:
Income (loss) from continuing operations $ .01 $ (.08) $ .02 $ (.02)
Income (loss) from discontinued operations (.01) .00 .00 (.04)
------------ ------------ ------------ ------------
Net income (loss) $ .00 $ (.08) $ .02 $ (.06)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 14,321,335 7,668,934 14,439,201 7,687,729
============ ============ ============ ============
Diluted 15,279,074 7,918,934 15,635,062 7,687,729
============ ============ ============ ============
See notes to consolidated financial statements.
INFINITE GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
------------------------------
2004 2003
---------------------------------------------------------------------------------------------------------------------
(As Restated)
------------ ------------
Operating activities:
Net Income (loss) $ 20,321 $ (661,950)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Income (loss) from discontinued operations 90,370 (23,454)
Depreciation and amortization 19,875 2,994
Stock Based Compensation -- 50,000
(Increase) decrease in:
Accounts receivable, net (851,971) (415,323)
Prepaid expenses and other current assets (24,084) (2,336)
Increase (decrease) in:
Accounts payable and accrued expenses 239,283 248,822
Accrued pension obligations 121,160 149,552
------------ ------------
Net cash provided by (used in) operating activities of continuing operations (385,046) (651,695)
Net cash provided by (used in) operating activities of discontinued operations 247,703 247,429
------------ ------------
Net cash provided by (used in) operating activities (137,343) (404,266)
------------ ------------
Investing activities:
Increase in restricted funds for asset addition, net (7,765) (389)
Purchase of property and equipment (60,772) (12,023)
Payments for intangibles -- (12,000)
------------ ------------
Net cash provided by (used in) investing activities of continuing operations (68,537) (24,412)
Net cash provided by (used in) investing activities of discontinued operations -- (75,724)
------------ ------------
Net cash provided by (used in) investing activities (68,537) (100,136)
------------ ------------
Financing activities:
Net (repayments) borrowings of bank notes payable (77,730) (51,034)
Proceeds from the issuance of notes payable-related parties -- 165,000
Proceeds from issuance of long-term obligations- related parties 463,000 613,324
Repayments of note payable-related parties (205,000) --
Repayment of long-term obligations (201,944) (351,616)
Proceeds from issuance of common stock, net of costs 265,626 110,000
------------ ------------
Net cash provided by (used in) financing activities 243,952 485,674
------------ ------------
Net increase (decrease) in cash 38,072 (18,728)
Cash - beginning of period 16,515 20,870
------------ ------------
Cash - end of period $ 54,587 $ 2,142
============ ============
Supplemental disclosure:
Cash paid for:
Interest $ (13,951) $ --
============ ============
Income taxes $ (350) $ --
============ ============
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, 2003 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 nine month period ended September 30, 2004 are not necessarily
indicative of the operating results that may be expected for the year ended
December 31, 2004. 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
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. Consulting revenues are recognized as the consulting services are
provided. Customer deposits received in advance are recorded as liabilities
until associated services are completed.
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.
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.
6
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 its intangible assets to its reporting units. The remaining
useful lives of the 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.
On 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.
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.
7
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 September
30, 2004 have been restated to account for the discontinued operations of the
Laser Group, 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 an impairment loss in the fourth quarter of
2002 of approximately $468,000 and $148,000, 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.
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, 2003, LF had loss from operations
of approximately $417,000.
In accordance with SFAS 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
in the accompanying consolidated statements of operations and cash flows.
8
The following is a summary of financial position and results of operations at
September 30, 2004 and December 31, 2003 and results of operations for the three
and nine months ended September 30, 2004 and 2003 for the disposed Photonics
(IP), Plastics (O&W and EP), and Laser (LF) segments:
September 30, December 31,
Financial Position 2004 2003
-------------- --------------
Assets held for sale:
Current assets $ 842,917 $ 858,949
Property and equipment 1,807,208 2,060,205
-------------- --------------
Total assets held for sale $ 2,650,125 $ 2,919,154
============== ==============
Accounts payable and accrued
expenses held for sale $ 742,059 $ 781,847
============== ==============
Current assets and total assets of
discontinued operations $ 791,587 $ 870,287
============== ==============
Liabilities of discontinued operations:
Accounts payable and accrued
expenses $ 953,710 $ 928,349
Unsecured note payable 5,000 5,000
-------------- --------------
Total liabilities of discontinued
operations $ 958,710 $ 933,349
============== ==============
Three Months Ended
September 30,
-------------
Results of Operations 2004 2003
-------------- --------------
Revenue from discontinued operations $ 738,384 $ 1,061,853
============== ==============
Income (loss) from discontinued operations $ (15,640) $ 291,761
Gain (loss) on disposal of discontinued
operations -- --
-------------- --------------
Net (loss) from discontinued operations $ (15,640) $ (291,761)
============== ==============
Nine Months Ended
September 30,
-------------
Results of Operations 2004 2003
-------------- --------------
Revenue from discontinued operations $ 2,230,542 $ 4,654,013
============== ==============
Income (loss) from discontinued operations $ (90,370) $ 12,211
Gain (loss) on disposal of discontinued
operations -- 11,243
-------------- --------------
Net income (loss) from discontinued operations $ (90,370) $ 23,454
============== ==============
Certain other amounts in the 2003 financial statements have been reclassified to
conform with the 2004 financial statements.
9
Note 4. Stock Option Plan
As of September 30, 2004 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 approximately 2,314,000 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 nine months ended September
30, 2004 is as follows:
Weighted
Number Exercise Average
Of Options Price Exercise Price
---------- -------------- --------------
Outstanding at December 31, 2003 1,687,575 $ .05 - $2.50 $ .16
============== ==============
Options issued 158,500 $ .01-.14 $ .08
============== ==============
Exercised (25,000) $ .10 $ .10
============== ==============
Options expired (26,129) $ .10- $2.50 $ 1.07
---------- ============== ==============
Outstanding at September 30, 2004 1,794,946 $ .01 $ 2.50 $ .14
========== ============== ==============
Exercisable at September 30, 2004 1,728,279 $ .01-$ 2.50 $ .14
========== ============== ==============
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
September 30,
-------------
Results of Operations 2004 2003
---------- ----------
Net income (loss)-as reported (000's) $ 231 $ (462)
Total stock based employee compensation
expense determined employee compensation
expense determined under the fair value
method for all awards (000's) $ 2 $ --
---------- ----------
Net income (loss)- pro forma (000's) $ 229 $ (462)
========== ==========
Income (loss) per share as reported (.02) (.06)
========== ==========
Income (loss) per share pro forma (.02) (.06)
========== ==========
10
Nine
Months Ended
September 30,
-------------
Results of Operations 2004 2003
---------- ----------
Net income (loss)-as reported (000's) $ 20 $ (662)
Total stock based employee compensation
expense determined employee compensation
expense determined under the fair value
method for all awards (000's) $ 17 $ 76
---------- ----------
Net income (loss)- pro forma (000's) $ 3 $ (738)
========== ==========
Income (loss) per share as reported .00 (.09)
========== ==========
Income (loss) per share pro forma .00 (.09)
========== ==========
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 contra
ct 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. 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 discontinue 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. Transactions between
reportable segments are recorded at cost. The Company relies on inter-segment
cooperation and management does not represent that these segments, if operated
independently, would report the results shown.
11
A summary of selected consolidated information for the Company's industry
segments during the periods ended September 30, 2004 and 2003, respectively, is
set forth as follows:
============================================================================================================================
Plastics Photonics IT Services
Group Group Laser Group Group Consolidated
----------------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2003
----------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $ -- $ -- $ -- $ 396,893 $ 396,893
------------- ------------- ------------- ------------- -------------
Operating loss $ -- $ -- $ -- $ (151,211) $ (151,211)
------------- ------------- ------------- ------------- -------------
Loss from
discontinued
operations $ -- $ (56,819) $ (234,942) -- $ (291,761)
------------- ------------- ------------- ------------- -------------
Three Months ended September 30, 2004
----------------------------------------------------------------------------------------------------------------------------
Sales to
unaffiliated
customers $ -- $ -- $ -- $ 2,010,780 $ 2,010,780
------------- ------------- ------------- ------------- -------------
Operating income $ -- -- $ -- $ 267,146 $ 267,146
------------- ------------- ------------- ------------- -------------
Income (loss) from
discontinued
operations $ -- $ (34,651) $ 19,011 $ -- $ (15,640)
------------- ------------- ------------- ------------- -------------
Nine Months ended September 30, 2003
----------------------------------------------------------------------------------------------------------------------------
Sales to
unaffiliated
customers $ -- $ -- $ -- $ 488,877 $ 488,877
------------- ------------- ------------- ------------- -------------
Operating loss $ -- $ -- $ -- $ (661,664) $ (661,664)
------------- ------------- ------------- ------------- -------------
Income (loss) from
discontinued
operations $ -- $ 387,690 $ (364,236) $ -- $ 23,454
------------- ------------- ------------- ------------- -------------
Nine Months ended September 30, 2004
----------------------------------------------------------------------------------------------------------------------------
Sales to
unaffiliated
customers $ -- $ -- $ -- $ 3,840,603 $ 3,840,603
------------- ------------- ------------- ------------- -------------
Operating income $ -- $ -- $ -- $ 168,228 $ 168,228
------------- ------------- ------------- ------------- -------------
Income (loss) from
discontinued
operations $ -- $ (94,581) $ 4,211 $ -- $ (90,370)
----------------------------------------------------------------------------------------------------------------------------
Note 6. Supplemental Cash Flow Information-
Non-cash investing and financing transactions, including non-monetary
exchanges, consist of the following:
Nine Months Ended
September 30,
-------------
2004 2003
--------------- ---------------
Demand note reclassed to long-term obligation $ -- $ 197,544
=============== ===============
Conversion of legal fees outstanding to common
stock $ -- $ 48,000
=============== ===============
Common stock authorized not issued, transferred
to issued $ 75,000 $ --
=============== ===============
Purchase of vehicle through long-term obligations $ 45,120 $ 41,199
=============== ===============
Conversion of long-term obligation and related
accrued interest and fees to common stock, net
of capitalized costs written off $ 5,000 $ --
=============== ===============
12
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.
The following table sets forth the computation of basic and diluted
earnings per share as of:
Nine Months ended Three Months ended
September 30, 2004
------------------
Numerator:
Income available to common stockholders
from continuing operations $ 110,691 $ 246,612
================ ================
Weighted average shares outstanding 14,321,335 14,439,201
================ ================
Denominator for diluted income per share:
Weighted average shares outstanding 14,321,335 14,439,201
Common stock options and stock warrants 957,739 1,195,861
---------------- ----------------
Weighted average shares and conversions 15,279,074 15,635,062
================ ================
For the three and nine months ended September 30, 2003 all outstanding
stock options and warrants have not been considered common stock equivalents
because their assumed exercise would be anti-dilutive.
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.
13
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. These notes
were refinanced by the acquirer in June 2005 and we are therefore no longer
obligated under the several notes.
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 to
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 September 30, 2004 and 2003
We commenced the operations of our IT services Group in the second quarter of
2003. The following results include the operations of our IT Services Group
beginning in 2003. The trends suggested by this table are not necessarily
indicative of future operating results due to the start up nature of our IT
Services Group.
Three Months Ended September 30,
------------------------------------------------------------------------
As a % of Net 2003 As a % of Net Increase
2004 Revenues (As Restated) Revenues (Decrease)
---- -------- ------------- -------- ----------
Sales $ 2,010,780 100.0% $ 396,893 100.0% 406.6%
Cost of sales 1,385,657 68.9 233,394 58.8 493.7
-------------------------- -------------------------- -----------
Gross profit 625,123 31.1 163,499 41.2 282.3
-------------------------- -------------------------- -----------
General and administrative 279,088 13.9 238,219 60.0 17.2
Depreciation and amortization 7,358 0.4 2,994 0.8 145.8
Selling -- 0.0 19,287 4.9 (100.0)
Research and development 71,531 3.6 54,210 13.7 32.0
-------------------------- -------------------------- -----------
Total operating expenses 357,977 17.8 314,710 79.3 13.7
-------------------------- -------------------------- -----------
Operating Income (loss) 267,146 13.3 (151,211) (38.1) (276.7)
Other income (expense) and income taxes, net (20,534) (1.0) (19,359) (4.9) 6.1
-------------------------- -------------------------- -----------
Income (loss) from continuing operations 246,612 12.3 (170,570) (43.0) (244.6)
Income (loss) from discontinued operations (15,640) (0.8) (291,761) (73.5) (94.6)
-------------------------- -------------------------- -----------
Net income (loss) $ 230,972 11.5% $ (462,331) (116.5)% (150.0)%
========================== ========================== ===========
14
Sales
Sales for the three months ended September 30, 2004 increased substantially by
$1,613,887 to $2,010,780 as compared to sales for the three months ended
September 30, 2003 of $396,893. The increase was due to the the start up nature
of our IT Services Group, which began operations in the second quarter of 2003.
We realized sales increases from new contracts with prime contractors for the
U.S. Government. During 2003, we operated our new IT Services Group for
approximately two quarters and its business base was still developing.
Cost of Sales and Gross Profit
Cost of sales represents the cost of employee services related to the IT
Services Group. Cost of sales for the three months ended September 30, 2004 was
$1,385,657 or 68.9% of sales as compared to $233,394 or 58.8% of sales for the
three months ended September 30, 2003. Gross profit was $625,123 or 31.1% of
sales for the three months ended September 30, 2004 compared to $163,499 or
41.2% of sales from the three months ended September 30, 2003. Gross profit
increased due to increased sales. Gross profit as percentage of sales declined
due to the lower margins associated with new contracts and more reasonably
approximates the gross profit margins that we may realize in the future. We
expect that gross margins as a percent of sales may decrease as sales increase
due to the competitive nature of our business.
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 for the three months ended September 30, 2004 increased
by $40,869 or 17.2% due to the increases in employee compensation and related
fringe benefits expenses as well as increased operating expenses as we manage a
larger volume of business. As a percentage of sales, general and administrative
expense decreased from 60.0 % for the three months ended September 30, 2003 to
13.9% for the three months ended September 30, 2004, which is more realistic
level due to the relatively low sales volume of 2003, which represented our
second quarter of operations from our new IT Services Group strategy. We
anticipate that general and administrative expenses will increase as we continue
to transition our business strategy and incur travel and other expenses
associated with managing a larger business. We expect increases in accounting
and legal expenses in 2004 and 2005 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 $40,000 and $50,000 for the
three months ended September 30, 2004 and 2003, respectively.
15
Depreciation and Amortization
Depreciation and amortization expense was $7,358 for the three months ended
September 30, 2004, an increase of $4,364 compared to the three months ended
September 30, 2003. This was due to establishing our new corporate headquarters
in Rochester, New York in 2003 and the write off or disposition of assets in our
former headquarters in Rhode Island. We began acquiring depreciable assets in
the second quarter of 2003.
Selling Expenses
For the three months ended September 30, 2004 we incurred no selling expenses.
Research and Development
For the three months ended September 30, 2004 we continued to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $71,531 of expense compared
to $54,210 for the three months ended September 30, 2003. These expenses are
principally related to the development of an access control terminal and related
software called TouchThru(TM). TouchThru(TM) is a self-contained terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation, a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first biometric product we introduce, and we intend to be in a position to
market and sell that product beginning in 2006. We plan to market and sell
TouchThru(TM) in a variety of industries and markets, including the federal,
state and local government, health care, travel and general security, and access
control.
Income (Loss) From Operations
For the three months ended September 30, 2004 our operating income was $267,146
compared to a $151,211 loss from operations in the comparable period of 2003.
This is primarily attributable to our focus on our new IT Services Group and the
growth of IT sales which provided gross profit of $625,123 to fund research and
development, general and administrative expense and interest expenses.
Other Income (Expense)
Other income and expense consists of interest expense on indebtedness for the
three months ended September 30, 2004. Interest expense was $20,534 for the
three months ended September 30, 2004 compared to $19,359 for the three months
ended September 30, 2003, which was relatively unchanged for the periods.
Loss from Discontinued Operations
We recorded a loss from discontinued operations of $15,640 for the three months
ended September 30, 2004 compared to a loss of $291,761 for the three months
ended September 30, 2003. The loss is the result of the Photonics Group which
was reclassified as discontinued operations and loss from discontinued
operations was recorded.
Net Income (Loss)
For the three months ended September 30, 2004, we recorded income from
continuing operations of $246,612, or $.02 per share and net income of $230,972,
also $.02 per share. This compares to a net loss from continuing operations of
$170,570 or $(.02) per share and a net loss of $462,331, or $(.06) per share
(the difference of $(.04) per share is from discontinued operations) for the
three months ended September 30, 2003. The improvement in profitability is
attributable to growth of sales and gross profit from our new IT Services which
allowed us to fund our research and development, general and administrative, and
interest expenses.
16
Comparison of Nine Months ended September 30, 2004 and 2003
The following table compares our statement of operations data for the first nine
months of 2004 and 2003. We commenced the operations of our IT services Group in
the second quarter of 2003.
Nine Months Ended September 30,
------------------------------------------------------------------------------
As a % of Net 2003 As a % of Net Increase
2004 Revenues (As Restated) Revenues (Decrease)
---- --------- ------------- --------- ------------
Sales $ 3,840,603 100.0% $ 488,877 100.0% 685.6%
Cost of sales 2,579,607 67.2 292,645 59.9 781.5
---------------------------- ---------------------------- ------------
Gross profit 1,260,996 32.8 196,232 40.1 542.6
---------------------------- ---------------------------- ------------
General and administrative 854,043 22.2 749,772 153.4 13.9
Depreciation and amortization 19,875 0.5 2,994 0.6 563.8
Selling 4,364 0.1 24,366 5.0 (82.1)
Research and development 214,486 5.6 80,764 16.5 165.6
---------------------------- ---------------------------- ------------
Total operating expenses 1,092,768 28.5 857,896 175.5 27.4
---------------------------- ---------------------------- ------------
Operating income (loss) 168,228 4.4 (661,664) (135.3) (125.4)
Other income (expense) and income taxes, net (57,537) (1.5) (23,740) (4.9) 142.4
---------------------------- ---------------------------- ------------
Income (loss) from continuing operations 110,691 2.9 (685,404) (140.2) (116.1)
Income (loss) from discontinued operations (90,370) (2.4) 23,454 4.8 (485.3)
---------------------------- ---------------------------- ------------
Net Income (loss) $ 20,321 0.5% $ (661,950) (135.4)% (103.1)%
============================ ============================ ============
Sales
Sales for the nine months ended September 30, 2004 increased substantially by
$3,351,726 to $3,840,603 as compared to sales for the nine months ended
September 30, 2003 of $488,877. The increase was due to the start up nature of
our IT Services Group, which began operations in the second quarter of 2003. We
realized sales increases from new contracts with prime contractors for the U.S.
Government. During 2003, we operated our new IT Services Group for approximately
two quarters and its business base was still developing. We also secured new
contracts in 2004.
Cost of Sales and Gross Profit
Cost of sales represents the cost of employee services related to the IT
Services Group. Cost of sales for the nine months ended September 30, 2004 was
$2,579,607 or 67.2% of sales as compared to $292,645 or 59.9% of sales for the
nine months ended September 30, 2003. Gross profit was $1,260,996 or 32.8% of
sales for the nine months ended September 30, 2004 compared to $196,232 or 40.1%
of sales for the nine months ended September 30, 2003. Gross profit as a
percentage of sales declined due to the lower margins associated with new
contracts and more reasonably approximates the gross profit margins that we may
realize in the future. We anticipate that gross profit margins may decline
slightly as new contracts originate due to the competitive nature of this
business.
17
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 for the nine months ended September 30, 2004 increased
by $104,271 or 13.9% due to the increases in employee compensation and related
fringe benefits expenses as well as increased operating expenses as we manage a
larger volume of business. As a percentage of sales, general and administrative
expense decreased from 153.4% for the nine months ended September 30, 2004 to
22.2% for the nine months ended September 30, 2003, which is more realistic
level due to the relatively low sales volume of 2003, which represented our
second quarter of operations from our new IT Services Group. We anticipate that
general and administrative expenses will increase as we continue to transition
our business strategy and incur travel and other expenses associated with
managing a larger business. We expect increases in accounting and legal expenses
in 2004 and 2005 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 $120,000 and $150,000 for the
nine months ended September 30, 2004 and 2003, respectively.
Depreciation and Amortization
Depreciation and amortization expense was $19,875 for the nine months ended
September 30, 2004, an increase of $16,881 compared to the nine months ended
September 30, 2003. This was due to establishing our new corporate headquarters
in Rochester, New York in 2003 and the write off or disposition of assets in our
former headquarters in Rhode Island. We began acquiring depreciable assets in
the second quarter of 2003. Beginning the second quarter of 2003, we purchased
equipment related to our Rochester headquarters office, acquired a technology
license and capitalized software development costs related to our TouchThru(TM)
products.
Selling Expenses
For the nine months ended September 30, 2004 we incurred selling expenses of
$4,364 associated with growing business in our IT Services Group compared to
$24,366 for the nine months ended September 30, 2003. We expect that selling
expenses will increase in the future as we develop new contract opportunities. A
portion of the effort to develop new business for 2004 and 2003 is included in
general and administrative expense since certain members of management also
devote their a portion of their time to developing new revenue opportunities and
contracts.
Research and Development
For the nine months ended September 30, 2004 we continued to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $214,486 of expense compared
to $80,764 for the nine months ended September 30, 2003. These expenses are
principally related to the development of an access control terminal and related
software called TouchThru(TM). TouchThru(TM) is a self-contained terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation, a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first biometric product we introduce, and we intend to be in a position to
market and sell that product beginning in 2006. We plan to market and sell
TouchThru(TM) in a variety of industries and markets, including the federal,
state and local government, health care, travel and general security, and access
control.
Income (Loss) From Operations
For the nine months ended September 30, 2004 our operating income was $168,228
compared to a $661,664 loss from operations in the comparable period of 2003.
This is primarily attributable to our focus on our new IT Services Group and the
growth of IT sales which provided gross profit of $1,260,996 to fund research
and development, general and administrative expense and interest expenses.
18
Other Income (Expense)
Other income and expense consists of interest expense on indebtedness for the
nine months ended September 30, 2004. Interest expense was $57,187 for the nine
months ended September 30, 2004 compared to $23,740 for the nine months ended
September 30, 2003. The increase was due to borrowings from related parties to
fund the initial startup and development of the IT Services Group.
Income (Loss) from Discontinued Operations
We recorded income from discontinued operations of $90,370 for the nine months
ended September 30, 2004 compared to income of $23,454 for the nine months ended
September 30, 2003. These results are from the Photonics Group which was
reclassified as discontinued operations and are results of closing down the
terminated DARPA contract in 2003.
Net Income (Loss)
For the nine months ended September 30, 2004, we recorded net income of $20,321
consisting of income from continuing operations of $110,691, or $.01 per share
and loss from discontinued operations of $90,370 or $(.01) per share. This
compares to a net loss of $661,950 or $(.09) per share consisting of loss from
continuing operations of $685,404 or $(.09) per share and income of $23,454 from
discontinued operations for the nine months ended September 30, 2003. The
improvement in profitability is attributable to growth of sales and gross profit
from our new IT Services which allowed us to fund our research and development,
general and administrative, and interest expenses.
Liquidity and Capital Resources
As of September 30, 2004 we had unrestricted cash and of $54,587 which is
available for working capital and property and equipment acquisitions.
At September 30, 2004 we had a working capital deficit of $624,043 ($2,364,986
after eliminating the assets and liabilities of our discontinued operations).
Approximately $2,158,000 of this deficit is caused by bank loan covenant
violations resulting in the classification of long-term maturities 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.
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.
19
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 on a timely
basis.
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 third
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
20
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 judgment 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
September 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.
21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
For the three and nine months ended September 30, 2004, we issued 2,000,000 and
4,520,000 restricted shares of common stock at $.05 per share in private
placement transactions, respectively. In addition, we issued 742,500 restricted
shares in June 2004 to satisfy liabilities. We also issued 1,500,000 restricted
common shares in January 2004 as employee compensation. These shares were valued
at $.05 per share. In September 2004 we issued 25,000 shares pursuant to the
exercise of incentive stock options at $.10 per share.
These transactions were exempt from registration, as they were nonpublic
offerings made pursuant to Sections 4(2) and 4(6) of the Act. All shares issued
in the transactions described hereinabove bore an appropriate restrictive
legend.
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 September 30, 2004
amounted to $720,900 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 was 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 September 30, 2004
amounted to $992,061 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 was 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 September 30, 2004 amounted to $445,000. Annual
payments of principal were $40,000 for fiscal 2004 and increased by $5,000
annually through June 2012. Under the terms of this capital lease, the Company
was prohibited from paying dividends or making other cash distributions.
According to the terms of the lease agreement, the Company was 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 $2,157,961 at September 30,
2004.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
22
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
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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)
23