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, 2005
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 |X| No | |
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of October 31, 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, 2005 (unaudited) and December 31, 2004 (audited) 3
Statements of Operations-(unaudited) for the three and nine
month periods ended September 30, 2005 and 2004 4
Statements of Cash Flows-(unaudited) for the nine month
periods ended September 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 12
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 22
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,
2005 2004
(unaudited) (audited)
----------------- -----------------
ASSETS
Current assets:
Cash $ 79,521 $ 97,297
Restricted cash -- 30,327
Accounts receivable, net of allowance of $56,202 ($25,000 - 2004) 1,759,265 1,054,623
Current portion of notes receivable 4,449 270,347
Inventories 23,239 --
Other current assets 40,771 41,207
Assets of discontinued operations -- 205,921
------------ ------------
Total current assets 1,907,245 1,699,722
Property and equipment, net 293,126 239,907
Other assets:
Note receivable 79,824 1,940,857
Other assets 16,703 --
Intangible assets, net -- 50,526
------------ ------------
Total other assets 96,527 1,991,383
------------ ------------
Total assets $ 2,296,898 $ 3,931,012
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable:
Bank -- 50,207
Other 249,166 176,184
Related parties 184,906 9,906
Accounts payable 678,540 504,327
Accrued expenses 708,256 542,066
Current maturities of long-term obligations 11,725 2,128,572
Current maturities of long-term obligations-related party 44,000 44,000
Liabilities of discontinued operations -- 217,300
------------ ------------
Total current liabilities 1,876,593 3,672,562
Long-term obligations:
Bank notes payable 54,341 64,133
Notes payable-related parties 1,100,124 1,100,124
Accrued pension expense 2,091,387 2,177,287
------------ ------------
Total liabilities 5,122,445 7,014,106
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value, 20,000,000 shares authorized;
19,206,965 (17,561,965 in 2004) shares issued and outstanding 19,207 17,562
Additional paid-in capital 28,455,803 28,375,198
Common stock authorized, not issued 40,800 --
Accumulated deficit (28,585,466) (28,719,963)
Accumulated other comprehensive loss (2,755,891) (2,755,891)
------------ ------------
Total stockholders' deficiency (2,825,547) (3,083,094)
------------ ------------
Total liabilities and stockholders' deficiency $ 2,296,898 $ 3,931,012
============ ============
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,
---------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------------
Sales $ 6,370,558 $ 3,840,603 $ 2,236,008 $ 2,010,780
Cost of goods and services 4,467,602 2,579,607 1,581,574 1,385,657
------------ ------------ ------------ ------------
Gross profit 1,902,956 1,260,996 654,434 625,123
Costs and expenses:
General and administrative 1,208,061 854,043 420,507 279,088
Depreciation and amortization 31,593 19,875 7,844 7,358
Write-off of capitalized financing costs 44,857 -- -- --
Selling 371,500 4,364 231,428 --
Research and development 240,347 214,486 78,423 71,531
------------ ------------ ------------ ------------
Total costs and expenses 1,896,358 1,092,768 738,202 357,977
------------ ------------ ------------ ------------
Operating income (loss) 6,598 168,228 (83,768) 267,146
Other income (expense):
Interest income 66,255 -- -- --
Interest expense:
Related parties (68,331) (57,187) (23,998) (20,534)
Other (81,149) -- (11,718) --
------------ ------------ ------------ ------------
(149,480) (57,187) (35,716) (20,534)
------------ ------------ ------------ ------------
Gain on settlement with terminated employee 191,739 -- 191,739 --
Gain on sale of equipment 8,452 -- 8,452 --
------------ ------------ ------------ ------------
Total other income (expense) 116,966 (57,187) 164,475 (20,534)
------------ ------------ ------------ ------------
Income from continuing operations before
income tax expense 123,564 111,041 80,707 246,612
Income tax expense (1,300) (350) -- --
------------ ------------ ------------ ------------
Income from continuing operations 122,264 110,691 80,707 246,612
Discontinued operations:
Income (loss) from discontinued operations 12,233 (90,370) -- (15,640)
------------ ------------ ------------ ------------
Net income $ 134,497 $ 20,321 $ 80,707 $ 230,972
============ ============ ============ ============
Net income (loss) per share-basic:
Income from continuing operations $ .01 $ .01 $ .00 $ .02
Income (loss) from discontinued operations .00 (.01) .00 (.00)
------------ ------------ ------------ ------------
Net income $ .01 $ .00 $ .00 $ .02
============ ============ ============ ============
Net income (loss) per share-diluted:
Income from continuing operations $ .01 $ .01 $ .00 $ .02
Income (loss) from discontinued operations .00 (.01) .00 (.00)
------------ ------------ ------------ ------------
Net income $ .01 $ .00 $ .00 $ .02
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 18,946,141 14,321,335 19,206,965 14,439,201
============ ============ ============ ============
Diluted 20,504,570 15,279,074 21,087,499 15,635,062
============ ============ ============ ============
See notes to consolidated financial statements.
4
INFINITE GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
-------------------------------
2005 2004
---------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 134,497 $ 20,321
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
(Income) loss from discontinued operations (12,233) 90,370
Gain on sale of equipment (8,450) --
Expenses satisfied with common stock 40,800 --
Depreciation and amortization and write-off of capitalized financing costs 76,450 19,875
Gain on settlement with terminated employee (191,739) --
(Increase) decrease in:
Accounts receivable, net (704,642) (851,971)
Inventories (23,239) --
Other current assets 436 (24,084)
Other assets (16,703) --
Increase (decrease) in:
Accounts payable 193,203 (60,801)
Accrued expenses 166,189 300,084
Accrued pension obligations 89,100 121,160
----------- -----------
Net cash used in operating activities of continuing operations (256,331) (385,046)
Net cash provided by operating activities of discontinued operations 854 247,703
----------- -----------
Net cash used in operating activities (255,477) (137,343)
----------- -----------
Investing activities:
Decrease (increase) in restricted funds 30,327 (7,765)
Purchase of property and equipment (81,768) (60,772)
Proceeds from notes receivable 2,138,006 --
----------- -----------
Net cash provided by (used in) investing activities 2,086,565 (68,537)
----------- -----------
Financing activities:
Net repayments of bank notes payable (50,207) (77,730)
Net borrowings of notes payable-other 72,982 --
Net borrowings of notes payable-related parties 175,000 --
Proceeds from issuance of long-term obligations-related parties -- 463,000
Repayment of notes payable-related parties -- (205,000)
Repayments of long-term obligations (2,126,639) (201,944)
Proceeds from issuance of common stock, net of costs 80,000 265,626
----------- -----------
Net cash provided by (used in) financing activities (1,848,864) 243,952
----------- -----------
Net increase (decrease) in cash (17,776) 38,072
Cash - beginning of period 97,297 16,515
----------- -----------
Cash - end of period $ 79,521 $ 54,587
=========== ===========
Supplemental disclosure:
Cash paid for:
Interest $ 119,165 $ 13,951
=========== ===========
Income taxes $ 1,300 $ 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, 2004 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 months ended September 30, 2005 are not necessarily indicative of
the operating results to be attained in the year ending December 31, 2005. 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 at
December 31, 2004 presents a summary of significant accounting policies. The
most critical accounting policies follow.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of component parts for the TouchThru(TM) biometric product.
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.
6
Effect of New Accounting Pronouncements
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.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". For public companies, the cost of employee services received in
exchange for equity instruments generally should be measured at fair value at
the grant date. The cost of employee services received in exchange for an award
of liability instruments should be measured initially at fair value and
re-measured subsequently at each reporting date through the settlement date.
Publicly traded companies, other than small business issuers, must apply this
Standard as of the beginning of the first interim or annual period that begins
after September 15, 2005. Public entities that file as small business issuers
must comply as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29". This amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Statement is
effective for nonmonetary asset exchanges occurring in periods beginning after
September 15, 2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
Note 3. Discontinued Operations and Reclassifications
The consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2005 and 2004 account for the discontinued operations
of the Photonics Group, consisting of Infinite Photonics, Inc., which business
was suspended in 2002 as a result of the loss of the DARPA contract, and the
Laser Group (LF), which was sold.
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 were included in
loss on disposal of discontinued operations in the consolidated statement of
operations for the year ended December 31, 2002.
7
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.
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 and liabilities of discontinued operations. The operating results for
both segments are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows.
The following is a summary of financial position at September 30, 2005 and
December 31, 2004 and results of operations for the three and nine months ended
September 30, 2005 and 2004 for the disposed Photonics (IP) and Laser (LF)
segments:
September 30, December 31,
2005 2004
-------- --------
Financial Position
Current assets and total assets of
discontinued operations $ -- $ 205,921
======== ==========
Liabilities of discontinued operations:
Accounts payable and accrued expenses $ -- $ 212,300
Unsecured note payable -- 5,000
-------- ----------
Total liabilities of discontinued operations $ -- $ 217,300
======== ==========
Three Months Ended September 30,
2005 2004
-------- --------
Results of Operations
Revenue from discontinued operations $ -- $ 738,384
======== ==========
Loss from discontinued operations $ -- $ (15,640)
======== ==========
Nine Months Ended September 30,
2005 2004
-------- ----------
Results of Operations
Revenue from discontinued operations $ -- $2,230,542
======== ==========
Income (loss) from discontinued operations $ 12,233 $ (90,370)
======== ==========
Certain other amounts in the 2004 financial statements have been reclassified to
conform with the 2005 financial statements.
8
Note 4. Stock Option Plan and Stock Warrants
As of September 30, 2005 the Company's Stock Option Plans (the "Plan"), as
approved by stockholders, provided for the grant of incentive or non-qualified
stock options for the purchase of common stock for up to approximately 1,840,000
shares to employees, directors and consultants. The Company's board of directors
has approved the grant of incentive stock options for the purchase of common
stock for up to an additional 4,000,000 shares to employees, directors and
consultants, which are subject to approval by shareholders. 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 incentive stock option activity for the nine months ended September
30, 2005 follows:
Weighted
Number Exercise Average
Of Options Price Exercise Price
---------------- --------------------- ------------------
Outstanding at December 31, 2004 1,895,482 $ .01 - $2.50 $ .13
============= =====
Options issued 2,640,000 $ .09-$.35 $ .18
============= =====
Options expired (692,982) $ .01 - $2.50 $ .41
--------- ============= =====
Outstanding at September 30, 2005 3,842,500 $ .01 -$.35 $ .13
========= =========== =====
Exercisable at September 30, 2005 3,842,500 $ .01 -$ .35 $ .13
========= ============ =====
At December 31, 2004, the Company had 425,000 warrants outstanding at an average
exercise price of $2.50 per share. During the nine months ended September 30,
2005, 350,000 warrants expired. At September 30, 2005, the Company had 75,000
warrants outstanding at an average exercise price of $2.40.
At December 31, 2004 under the outside directors' stock option plan, there were
42,000 options outstanding to directors at an average exercise price of $1.15
per share. During the nine months ended September 30, 2005, 500 options expired.
At September 30, 2005, there were 41,500 options outstanding to directors under
this plan at an average exercise price of $1.05.
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 income (loss) and income (loss) per share from continuing
operations would have changed as follows:
Three Months Ended September 30,
2005 2004
----- -----
Results of Operations
Net income - as reported (000's) $ 81 $ 231
Total stock based employee compensation
expense determined under the fair value
method for all awards (000's) $ (35) $ (2)
----- -----
Net income - pro forma (000's) $ 46 $ 229
===== =====
Income per share as reported-basic and diluted $ .00 $ .02
===== =====
Income per share pro forma-basic and diluted $ .00 $ .02
===== =====
9
Nine Months Ended September 30,
2005 2004
----- -----
Results of Operations
Net income - as reported (000's) $ 134 $ 20
Total stock based employee compensation
expense determined under the fair value
method for all awards (000's) $(284) $ (17)
----- -----
Net income (loss) - pro forma (000's) $(150) $ 3
===== =====
Income per share as reported-basic and diluted $ .01 $ .00
===== =====
Income (loss) per share pro forma-basic and diluted $(.01) $ .00
===== =====
Note 5. Business Segments
Prior to 2002, our business was organized, managed and internally reported as
three segments. The segments were determined based on differences in products,
production processes and internal reporting. During the fourth quarter of 2002,
our 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. During the fourth quarter of the year ended
December 31, 2003, we approved the sale of the assets and certain liabilities of
our 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, we revised our business strategy and began operating our
newly formed IT Services Group.
All of our business segments operate entirely within the United States. Revenues
from customers in foreign countries are minimal. Transactions between reportable
segments are recorded at cost. We rely 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 our industry segments during the periods ended September 30, 2005 and 2004,
respectively, is set forth as follows.
-------------------------------------------------------------------------------------------------------
Photonics IT Services
Group Laser Group Group Consolidated
-------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2004
-------------------------------------------------------------------------------------------------------
Sales to $ -- $ -- $ 2,010,780 $ 2,010,780
unaffiliated customers
-------------------------------------------------------------------------------------------------------
Operating income $ -- $ -- $ 267,146 $ 267,146
-------------------------------------------------------------------------------------------------------
Income (loss) from $ (34,651) $ 19,011 $ -- $ (15,640)
discontinued operations
-------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2005
-------------------------------------------------------------------------------------------------------
Sales to unaffiliated $ -- $ -- $ 2,236,008 $ 2,236,008
customers
-------------------------------------------------------------------------------------------------------
Operating (loss) $ -- $ -- $ (83,768) $ (83,768)
-------------------------------------------------------------------------------------------------------
Income from $ -- $ -- $ -- $ --
discontinued operations
-------------------------------------------------------------------------------------------------------
10
-----------------------------------------------------------------------------------------------------
Photonics Laser IT Services Consolidated
Group Group Group
-----------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2004
-----------------------------------------------------------------------------------------------------
Sales to $ -- $ -- $ 3,840,603 $ 3,840,603
unaffiliated customers
-----------------------------------------------------------------------------------------------------
Operating income $ -- $ -- $ 168,228 $ 168,228
-----------------------------------------------------------------------------------------------------
Income (loss) from $ (94,581) $ 4,211 $ -- $ (90,370)
discontinued operations
-----------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2005
-----------------------------------------------------------------------------------------------------
Sales to $ -- $ -- $ 6,370,558 $ 6,370,558
unaffiliated customers
-----------------------------------------------------------------------------------------------------
Operating income $ -- $ -- $ 6,598 $ 6,598
-----------------------------------------------------------------------------------------------------
Income from $ 12,233 $ -- $ -- $ 12,233
discontinued operations
-----------------------------------------------------------------------------------------------------
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,
2005 2004
---------- ----------
Conversion of accounts payable to common stock $ 2,250 $ --
========== ==========
Common stock received in connection with settlement
agreement with terminated employee $ 175,000 $ --
========== ==========
Common stock contributed to Osley & Whitney Retirement
Plan which reduced the balance of accrued pension
expense obligation $ 175,000 $ --
========== ==========
Common stock authorized not issued, transferred to
issued $ -- $ 75,000
========== ==========
Purchase of vehicle through long-term obligations $ -- $ 45,120
========== ==========
Conversion of long-term obligation and related accrued
interest and fees to common stock, net of capitalized
costs written off $ -- $ 5,000
========== ==========
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 our 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 exercised.
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.
11
The following table sets forth the computation of basic and diluted earnings per
share for those periods with net income from continuing operations as follows:
Nine Months ended Three Months ended
September 30, 2005 September 30, 2005
Numerator:
Income available to common stockholders from
continuing operations $ 122,264 $ 80,707
=========== ===========
Weighted average shares outstanding 18,946,141 19,206,965
=========== ===========
Denominator for diluted income per share:
Weighted average shares outstanding 18,946,141 19,206,965
Common stock options and stock warrants 1,558,429 1,880,534
----------- -----------
Weighted average shares and conversions 20,504,570 21,087,499
=========== ===========
Nine Months ended Three Months ended
September 30, 2004 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
=========== ==========
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. In May 2005,
the UPS and RIIFC notes were paid in full and we were released from all of our
obligations thereunder. At the same time, the notes from Rolben to us
terminated.
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.
12
Results of Operations
Comparison of Three Months ended September 30, 2005 and 2004
We commenced the operations of our IT services Group in the second quarter of
2003. The trends suggested by the following table are not necessarily indicative
of future operating results due to the startup nature of our IT Services Group.
Three Months Ended September 30,
------------------------------------------------------------------------
As a % of Net As a % of Net Increase
2005 Revenues 2004 Revenues (Decrease)
---------- ---------- ---------- ---------- ----------
Sales $2,236,008 100.0% $2,010,780 100.0% 11.2%
Cost of sales 1,581,574 70.7 1,385,657 68.9 14.1
-------------------------- -------------------------- ----------
Gross profit 654,434 29.3 625,123 31.1 4.7
-------------------------- -------------------------- ----------
General and administrative 420,507 18.8 279,088 13.9 50.7
Depreciation and amortization 7,844 0.4 7,358 0.4 6.6
Selling 231,428 10.4 -- 0.0
Research and development 78,423 3.5 71,531 3.6 9.6
-------------------------- -------------------------- ----------
Total operating expenses 738,202 33.0 357,977 17.8 106.2
-------------------------- -------------------------- ----------
Operating income (loss) (83,768) (3.7) 267,146 13.3 (131.4)
Gain on settlement with terminated employee 191,739 8.6 -- 0.0
Other income (expense) and income taxes, net (27,264) (1.2) (20,534) (1.0) 32.8
-------------------------- -------------------------- ----------
Income from continuing operations 80,707 3.6 246,612 12.3 (67.3)
Loss from discontinued operations -- 0.0 (15,640) (0.8) (100.0)
-------------------------- -------------------------- ----------
Net income $ 80,707 3.6% $ 230,972 11.5% (65.1)%
========================== ========================== ==========
Sales
Sales for the three months ended September 30, 2005 were $2,236,008 which was an
increase of $225,228 or 11.2% as compared to sales for the three months ended
September 30, 2004 of $2,010,780. The increase was due to more billable hours in
our IT Services Group in 2005 from expanded contracts with prime contractors for
the U.S. Government.
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, 2005 was
$1,581,574 or 70.7% of sales as compared to $1,385,657 or 68.9% of sales for the
three months ended September 30, 2004. Gross profit was $654,434 or 29.3% of
sales for the three months ended September 30, 2005 compared to $625,123 or
31.1% of sales from the three months ended September 30, 2004. We experienced a
decrease in gross profit margin as a percent of sales due to the competitive
nature of our business, which generally provides for lower gross profit margins
on larger sales volume contracts. As the mix of different projects changes, our
gross profit margin changes. In the future we may submit bids on new work with
lower gross profit margins to generate opportunities for long-term, larger
volume contracts and more stable sales.
13
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, 2005 were
$420,507 which was an increase of $141,419 or 50.7% as compared to $279,088 for
the three months ended September 30, 2004. Approximately 62% of this increase is
due to the increases in employee compensation and related fringe benefits
expenses. We also incurred increased operating expenses as we manage a larger
volume of business.
We experienced increases in accounting and legal expenses of approximately
$42,000 for the three months ended September 30, 2005 principally due to our
focus on completing audits of our financial statements and related regulatory
filings, which were completed and filed with the Securities and Exchange
Commission in July 2005.
General and administrative expense includes expenses (including professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement plan, increased by approximately $11,100 from approximately $41,500
for the three months ended September 30, 2004 to approximately $51,600 for the
three months ended September 30, 2005.
As a percentage of sales, general and administrative expense was 18.8 % for the
three months ended September 30, 2005 as compared to 13.9 % for the three months
ended September 30, 2004. We anticipate that the amount of general and
administrative expenses will increase as we continue to grow our business and
incur travel and other expenses associated with managing a larger business. We
expect that legal and accounting expenses will decrease in the future since our
public filings for several years were brought current.
Depreciation and Amortization
Depreciation and amortization expense was relatively unchanged at $7,844 for the
three months ended September 30, 2005 compared to $7,358 for the three months
ended September 30, 2004.
Selling Expenses
For the three months ended September 30, 2005 we incurred selling expenses of
$231,428 associated with growing business in our IT Services Group as compared
to no expenses for the three months ended September 30, 2004. Beginning in the
second quarter of 2005, we added new employees and changed the work assignment
of one employee and added sales consultants to focus on generating new sales
leads and new contract opportunities. We engaged the services of a sales
consultant in the three months ended September 2005. The consultant earned and
we therefore expensed $40,800 in fees, payable in shares of our common stock. We
expect that selling expenses, consisting principally of salaries, benefits,
sales consultants, and travel expenses will increase as we devote more resources
to increasing our sales.
Research and Development
For the three months ended September 30, 2005 we continued to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $78,423 of expense compared
to $71,531 for the three months ended September 30, 2004. 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.
14
Income (Loss) From Operations
For the three months ended September 30, 2005 our operating loss was $83,768
compared to net income of $267,146 for the comparable period of 2004. For the
three months ended September 30, 2005, we experienced increases in operating
expenses of $380,225 offset in part by an improvement in gross margin of
$29,311.
Other Income (Expense)
Other income and expense consists of three components for the three months ended
September 30, 2005.
One component of other income (expense) for the three months ended September 30,
2005 is a gain on settlement with a terminated employee of $191,739, which
consists of the return to us of 500,000 shares of our common stock less legal
expenses that we incurred in connection with the settlement. The shares were
valued at the fair value on the date the settlement agreement was executed.
Interest expense was $35,716 for the three months ended September 30, 2005
compared to expense of $20,534 for the three months ended September 30, 2004, an
increase of $15,182. This increase is principally due to an increase in
short-term borrowings to finance accounts receivable of approximately $10,100
and increased borrowings from a related party. The principal balance due to this
related party was $175,000 at September 30, 2005 versus zero at September 30,
2004.
Another component of other income (expense) for the three months ended September
30, 2005 consists of a gain on the sale of office equipment of $8,452 in
connection with the relocation and sublease of office space in the Washington,
D.C. area.
Income (Loss) from Discontinued Operations
We recorded a loss from discontinued operations of $15,640 for the three months
ended September 30, 2004 compared with none for the three months ended September
30, 2005. The loss is the result of the Laser Group and the Photonics Group
which were reclassified as discontinued operations.
Net Income
For the three months ended September 30, 2005, we recorded income from
continuing operations and net income of $80,707 or $.00 per share. This compares
to net income from continuing operations of $246,612 or $.02 per share and net
income of $230,972, or $.02 per share for the three months ended September 30,
2004. The decrease in profitability is attributable to increases in operating
expenses of $380,225, especially selling expenses, offset in part by the gain on
settlement with a terminated employee of $191,739 for the three months ended
September 30, 2005.
15
Comparison of Nine Months ended September 30, 2005 and 2004
The following table compares our statement of operations data for the first nine
months of 2005 and 2004. We commenced the operations of our IT Services Group in
the second quarter of 2003. The trends suggested by this table are not
indicative of future operating results due to the startup nature of our IT
Services Group, our termination of the DARPA contract and our decision to sell
the business of our Laser Group and focus on our IT Services Group.
Nine Months Ended September 30,
-------------------------------------------------------------------------------
As a % of Net As a % of Net Increase
2005 Revenues 2004 Revenues (Decrease)
----------- ----------- ----------- ----------- -----------
Sales $ 6,370,558 100.0% $ 3,840,603 100.0% 65.9%
Cost of sales 4,467,602 70.1 2,579,607 67.2 73.2
---------------------------- ---------------------------- -----------
Gross profit 1,902,956 29.9 1,260,996 32.8 50.9
---------------------------- ---------------------------- -----------
General and administrative 1,208,061 19 854,043 22.2 41.5
Depreciation and amortization 31,593 0.5 19,875 0.5 59
Write-off of capitalized financing costs 44,857 0.7 -- 0.0
Selling 371,500 5.8 4,364 0.1 8,412.80
Research and development 240,347 3.8 214,486 5.6 12.1
---------------------------- ---------------------------- -----------
Total operating expenses 1,896,358 29.8 1,092,768 28.5 73.5
---------------------------- ---------------------------- -----------
Operating income 6,598 0.1 168,228 4.4 (96.1)
Gain on settlement with terminated employee 191,739 3.0 -- 0.0
Other income (expense) and income taxes, net (76,073) (1.2) (57,537) (1.5) 32.2
---------------------------- ---------------------------- -----------
Income from continuing operations 122,264 1.9 110,691 2.9 10.5
Gain (loss) from discontinued operations 12,233 0.2 (90,370) (2.4) (113.5)
---------------------------- ---------------------------- -----------
Net income $ 134,497 2.1% $ 20,321 0.5% 561.9%
============================ =========== =========== ===========
Sales
Sales for the nine months ended September 30, 2005 increased substantially by
$2,529,955 or 65.9% to $6,370,558 as compared to sales for the nine months ended
September 30, 2004 of $3,840,603. The increase was due to the continued
development of our IT Services Group, which began operations in the second
quarter of 2003. We realized sales increases from new and expanded contracts
with prime contractors for the U.S. Government.
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, 2005 was
$4,467,602 or 70.1% of sales as compared to $2,579,607 or 67.2% of sales for the
nine months ended September 30, 2004. Gross profit was $1,902,956 or 29.9% of
sales for the nine months ended September 30, 2005 compared to $1,260,996 or
32.8% of sales for the nine months ended September 30, 2004. We experienced a
decrease in gross profit margin as a percent of sales due to the competitive
nature of our business, which generally provides for lower gross profit margins
on larger sales volume contracts. As the mix of different projects changes, our
gross profit margin changes. In the future we may submit bids on new work with
lower gross profit margins to generate opportunities for long-term, larger
volume contracts and more stable sales.
16
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, 2005 increased
by $354,018 or 41.5%. Approximately half of this increase is due to the
increases in employee compensation and related fringe benefits expenses. We also
incurred increased operating expenses as we manage a larger volume of business.
General and administrative expenses include increases in accounting and legal
expenses for the nine months ended September 30, 2005 of approximately $148,000
principally due to our focus on completing audits of our financial statements
and related regulatory filings, which were completed and filed with the
Securities and Exchange Commission in July 2005.
General and administrative expenses include expenses (including professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement plan, which increased by approximately $26,700 from approximately
$149,100 for the nine months ended September 30, 2004 to approximately $175,800
for the nine months ended September 30, 2005.
As a percentage of sales, general and administrative expense was 19.0% for the
nine months ended September 30, 2005 and 22.2% for the nine months ended
September 30, 2004. We anticipate that the amount of general and administrative
expenses will increase as we continue to implement our business strategy and
incur travel and other expenses associated with managing a larger business. We
expect that legal and accounting expenses will decrease in the future since our
public filings for several years were brought current in the quarter ended
September 30, 2005.
Depreciation and Amortization
Depreciation and amortization expense was $31,593 for the nine months ended
September 30, 2005 compared to $19,875 for the nine months ended September 30,
2004. Beginning in 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. We have
continued to acquire office equipment such as personal computers as we hire
additional personnel. We relocated our Washington, D.C. office in the third
quarter of 2005 and acquired additional office equipment. The increase is due to
depreciations and amortization of these recently acquired assets.
Write-off of Capitalized Closing Costs
In the second quarter of 2005, the buyer of the assets and businesses of LF
obtained new bank financing. The buyer paid all of our notes receivable from it,
which proceeds were used to pay off all of LF's bank promissory notes and LF's
capital lease. As a result we wrote off the balance of the capitalized financing
costs of $44,857, which was included in amortization expense.
Selling Expenses
For the nine months ended September 30, 2005 we incurred selling expenses of
$371,500 associated with growing business in our IT Services Group compared to
$4,364 for the nine months ended September 30, 2004. Beginning in the second
quarter of 2005, we added new employees and changed the work assignment of one
employee and added sales consultants to focus on generating new sales leads and
new contract opportunities. We engaged the services of a sales consultant in the
three months ended September 2005. The consultant earned and we therefore
expensed $40,800 in fees, payable in shares of our common stock. We expect that
selling expenses, consisting principally of salaries, benefits, sales
consultants, and travel expenses will increase as we devote more resources to
increasing our sales.
17
Research and Development
For the nine months ended September 30, 2005 we continued to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $240,347 of expense compared
to $214,486 for the nine months ended September 30, 2004. 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, 2005 our operating income was $6,598
compared to a $168,228 for the comparable period of 2004. This is attributable
to our focus on our new IT Services Group and the growth of IT sales which
provided gross profit of $1,902,956, an increase of $641,960 over the nine
months ended September 30, 2004, to fund research and development, general and
administrative expense and interest expenses. Operating expenses were
$1,896,358, for the nine months ended September 30, 2005, an increase of
$803,590 over the nine months ended September 30, 2004.
Other Income (Expense)
Other income and expense consists of three components for the nine months ended
September 30, 2005.
One component of other income (expense) for the three months ended September 30,
2005 is a gain on settlement with a terminated employee of $191,739, which
consists of his return to us of 500,000 shares of our common stock less legal
expense that we incurred in connection with the settlement. The shares were
valued at the fair value on the date the settlement agreement was executed.
Interest expense was $149,480 (including $66,255 of interest expense on notes
payable of LF) for the nine months ended September 30, 2005 compared to $57,187
for the nine months ended September 30, 2004. The increase of $92,293 is offset
by $66,255 of interest income from the notes receivable due from the buyer of
LF's business for a net increase of $26,038. This net increase is principally
due to (i) an increase in interest on notes payable to related parties of
$11,144 due to an increase in the average outstanding principal balance of notes
payable to related parties; (ii) an increase in interest to others of $10,100,
which is interest on short-term notes to finance accounts receivable; and (iii)
an increase in interest on equipment loans.
Another component of other income (expense) for the three months ended September
30, 2005 consists of a gain on the sale of office equipment of $8,452 in
connection with the relocation and sublease of office space in the Washington,
D.C. area.
Income (loss) from Discontinued Operations
We recorded income from discontinued operations of $12,233 for the nine months
ended September 30, 2005 compared to a loss of $90,370 for the nine months ended
September 30, 2004. These results are from the Laser Group and the Photonics
Group which were reclassified as discontinued operations.
Net Income (Loss)
For the nine months ended September 30, 2005, we recorded income from continuing
operations of $122,264, or $.01 per share and net income of $134,497 or $.01 per
share. This compares to net income from continuing operations of $110,691 or
$.01 per share and a net income of $20,321 or $.00 per share (the difference of
$(.01) per share is from discontinued operations) for the nine months ended
September 30, 2004. The improvement in profitability is attributable to an
increase in gross profit of $641,960 and a gain on settlement with a terminated
employee of $191,739 which offset increases in operating expenses of $803,590,
especially selling expenses, for the nine months ended September 30, 2005. We
also recorded a gain from discontinued operations of $12,233 for the nine months
ended September 30, 2005 versus a loss of $90,370 for the comparable period of
2004.
18
Liquidity and Capital Resources
As of September 30, 2005 we had unrestricted cash of $79,521, which is available
for working capital and property and equipment acquisitions.
At September 30, 2005 we had working capital of $30,652. Prior to June 30, 2005
we reported a working capital deficit. The improvement from a deficit of
$1,972,840 at December 31, 2004 is a result of the buyer of the assets and
businesses of LF obtaining new bank financing and paying off all of LF's notes
receivable, which proceeds were used to pay off LF's bank promissory notes and
capital lease (which were all classified as current liabilities due to
violations of certain loan covenants).
We have financed the activity of our new IT Services Group through the issuance
of notes payable to third parties and to related parties, private placements of
common stock and financing of our accounts receivable. We have established and
use a financing line with a financial institution which enables us to sell, with
full recourse against us, certain accounts receivable invoices. 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 working capital needs.
We have used our common stock to provide compensation to certain employees and
consultants and to fund liabilities.
During the three months ended September 30, 2005, one consultant provided
services to us valued at $40,800. Those services are payable in 149,916 shares
of common stock.
During the three months ended September 30, 2005, we made a contribution to the
Osley & Whitney defined benefit retirement plan of 500,000 shares of our common
stock, which was valued at $175,000.
Risk Factors
You should consider the risk factors included in our annual report on Form
10-KSB for the year ended December 31, 2004 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 our chief executive officer and 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 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 our chief executive
officer and chief financial officer, that occurred during our fiscal second
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
September 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 September 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 September 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.
During the three months ended September 30, 2005, we completed settlement
negotiations with a former employee. The parties agreed to settle all claims to
avoid the expense and time of litigation. The parties executed mutual releases.
The former employee surrendered 500,000 shares of our common stock that he owned
to us, which was recorded at fair value at the date of the settlement agreement.
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.
During the three months ended September 30, 2005, we received services from a
consultant and are obligated to issue 149,916 restricted shares of common stock
valued at $40,800, based on the value of the services provided. The shares were
accounted for as common stock authorized, not issued at September 30, 2005. We
will issue the shares in the quarter ending December 31, 2005.
Item 3. Defaults Upon Senior Securities.
None.
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 Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
22
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 November 11, 2005 /s/ Michael S. Smith
------------------------------
Chief Executive Officer
Date November 11, 2005
/s/ Michael S. Smith
------------------------------
Chief Financial Officer
(Principal Financial Officer)
23