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, 2003
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, 2003 (unaudited)
and December 31, 2002 3
Statements of Operations-(unaudited) for the three and nine
month periods ended September 30, 2002 and 2003 4
Statements of Cash Flows-(unaudited) for the nine month
periods ended September 30, 2002 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 14
Item 3. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
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,
2003 2002
--------------------------------------------------------------------------------
ASSETS (unaudited)
Current assets:
Cash $ 163,766 $ 36,459
Restricted cash 25,507 25,118
Accounts receivable, net of allowance 1,054,351 923,043
Inventories 37,165 127,792
Other current assets 46,752 42,767
Assets of discontinued operations 814,026 943,683
------------ ------------
Total current assets 2,141,568 2,098,862
Property and equipment, net 2,733,873 3,042,587
Other assets:
Note receivable 73,897 73,897
Other intangible assets, net 65,945 60,225
------------ ------------
Total other assets 139,842 134,122
------------ ------------
$ 5,015,283 $ 5,275,571
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes Payable:
Bank $ 179,698 $ 428,276
Other 30,000 --
Related parties 218,906 83,906
Accounts payable 1,341,739 1,317,136
Accrued expenses 785,725 691,332
Current maturities of long-term obligations 2,404,431 2,551,295
Liabilities of discontinued operations 908,442 1,400,203
------------ ------------
Total current liabilities 5,868,942 6,472,148
Long-term obligations
Bank notes payable 33,991 --
Notes payable-related parties 613,324 --
Accrued pension expense 2,182,449 2,159,152
------------ ------------
Total liabilities 8,698,706 8,631,300
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $.001 par value, 20,000,000
shares authorized; 9,474,077 (6,314,077
in 2002) issued and outstanding 9,474 6,314
Additional paid-in capital 27,972,660 27,817,820
Common stock, authorized, not issued 50,000 --
Accumulated deficit (28,743,108) (28,081,158)
Accumulated other comprehensive loss (2,972,449) (3,098,705)
------------ ------------
Total stockholders' deficiency (3,683,423) (3,355,729)
------------ ------------
Total liabilities and stockholders' deficiency $ 5,015,283 $ 5,275,571
============ ============
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,
-------------------------- --------------------------
2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------
(As Restated) (As Restated)
Sales $ 4,402,537 $ 4,745,572 $ 1,458,745 $ 1,472,633
Cost of goods and services 3,032,232 3,702,000 1,028,637 1,030,198
----------- ----------- ----------- -----------
Gross profit 1,370,305 1,043,572 430,108 442,435
Costs and expenses:
General and administrative 1,572,080 1,823,808 517,931 574,823
Depreciation and amortization 458,795 635,763 140,588 186,484
Selling 189,515 201,744 69,397 52,662
Research and development 80,764 1,816 54,210 --
----------- ----------- ----------- -----------
Total costs and expenses 2,301,154 2,663,131 782,125 813,969
----------- ----------- ----------- -----------
Operating loss (930,849) (1,619,559) (352,017) (371,534)
Other income (expense):
Interest expense:
Related parties (22,238) (17,317) (17,607) (7,724)
Others (113,081) (309,650) (37,650) (151,561)
Gain on disposition of assets 11,243 137,418 -- --
Impairment loss -- (45,670) -- --
Other income (expense) 5,487 (16,925) 1,688 2,215
Interest income 221 9,725 54 --
----------- ----------- ----------- -----------
Total other income (expense) (118,368) (242,419) (53,495) (157,070)
----------- ----------- ----------- -----------
Loss from continuing operations before
income tax expense (1,049,217) (1,861,978) (405,513) (528,604)
Income tax expense (424) (15,411) -- (8,021)
----------- ----------- ----------- -----------
Loss from continuing operations (1,049,641) (1,877,389) (405,513) (536,625)
Income (loss) from discontinued operations,
(including $92,211 and $307,365 loss on
disposal in the three and nine months ended 2002) 387,690 (272,566) (56,819) (170,751)
----------- ----------- ----------- -----------
Net loss $ (661,951) $(2,149,955) $ (462,332) $ (707,376)
=========== =========== =========== ===========
Net loss per share-Basic:
Loss from continuing operations $ (.14) $ (.32) $ (.05) $ (.08)
Income (loss) from discontinued operations .05 (.04) (.01) (.03)
----------- ----------- ----------- -----------
Net loss $ (.09) $ (.36) $ (.06) $ (.11)
=========== =========== =========== ===========
Net income (loss) per share- Diluted:
Income (loss) from discontinued operations $ .05 $ (.04) $ (.01) $ (.03)
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 7,668,934 5,896,504 7,687,729 6,270,125
=========== =========== =========== ===========
Diluted 7,918,934 5,896,504 7,687,729 6,270,125
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
INFINITE GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
--------------------------
2003 2002
----------------------------------------------------------------------------------------------------------------
(As Restated)
Operating activities:
Net loss $ (661,950) $(2,149,955)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations (387,690) 272,566
Depreciation and amortization 458,795 635,763
Amortization of discount on note payable -- 37,073
Expenses satisfied via issuance of common stock 50,000 194,943
Gain loss on disposition of assets (11,243) (137,418)
Impairment Loss -- 45,670
(Increase) decrease in:
Accounts receivable, net (131,308) 682,786
Inventories 90,627 25,633
Other current assets (3,985) 86,667
Prepaid pension cost -- 55,000
Increase (decrease) in:
Accounts payable and accrued expenses 166,998 (273,172)
Accrued pension obligations 149,552 --
----------- -----------
Net cash provided by (used in) operating activities of continuing operations (280,204) (524,444)
Net cash provided by (used in) operating activity of discontinued operations 25,586 143,754
----------- -----------
Net cash provided by (used in) operating activities (254,618) (380,690)
Investing activities:
Decrease (increase) in restricted funds (389) 60,320
Purchase of property and equipment (91,360) (128,301)
Proceeds from sale of property and equipment -- 270,000
Payments for intangibles (12,000) --
----------- -----------
Net cash provided by (used in) investing activities (103,749) 202,019
Net cash provided by (used in) investing activities of discontinued operations -- 1,530,745
----------- -----------
Net cash provided by (used in) investing activities (103,749) 1,732,764
----------- -----------
Financing activities:
Net repayments of bank notes payable (51,034) (30,503)
Proceeds from the issuance of notes payable-related parties 165,000 --
Proceeds from issuance of convertible notes payable, net of costs -- 1,374,000
Borrowing of notes payable-Related parties -- (32,906)
Proceeds from issuance of Long-term obligations-related parties 613,324 --
Proceeds from issuance of common stock, net of expenses 110,000 256,132
Repayment of long- term obligations (351,616) (326,464)
----------- -----------
Net cash provided by (used in) financing activities of continuing operations 485,674 1,240,259
Net cash provided by (used in) financing activities of discontinued operations -- (2,663,400)
----------- -----------
Net cash provided by (used in) financing activities 485,674 (1,423,141)
----------- -----------
Net increase (decrease) in cash 127,307 (71,067)
Cash - beginning of period 36,459 73,802
----------- -----------
Cash - end of period $ 163,766 $ 2,735
=========== ===========
Supplemental disclosure- Cash paid for:
Interest $ (111,547) $ (366,269)
=========== ===========
Income taxes $ (424) $ (6,464)
=========== ===========
See notes to consolidated financial statements (unaudited).
5
INFINITE GROUP INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Infinite Group
Inc. ("Infinite Group Inc." or the "Company"), included herein have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. The accompanying unaudited consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and footnotes for the year ended December 31, 2002 and the notes thereto
included in the Company's Annual report on Form 10-KSB filed with the United
States Securities and Exchange Commission. Results of consolidated operations
for the nine month period ended September 30, 2003 are not necessarily
indicative of the operating results that maybe expected for the year ended
December 31, 2003. The consolidated financial statements herein include the
accounts of the Company and its wholly owned subsidiaries. All material
inter-company accounts and transactions have been eliminated.
Note 2. Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
There are several accounting policies that we believe are significant to the
presentation of our consolidated financial statements. These policies require
management to make complex or subjective judgments about matters that are
inherently uncertain. Note 3 to our audited consolidated financial statements
present a summary of significant accounting policies. The most critical
accounting policies follow.
Revenue Recognition
In 2002 we generated substantially our entire sale from traditional laser
manufacturing services, which included welding, machining, cutting, drilling and
engraving. These services related to processes performed on the customers'
parts. The services were performed based upon terms specified and agreed upon by
both parties prior to commencement. Sales relating to these services were
recognized at the point that the completed product was delivered to the
customer. In 2003 we generated sale from our traditional laser manufacturing
services and beginning in the second quarter of 2003, we commenced providing
services in the field of information technology (IT) consulting services through
our IT Services Group.
Stock-Based Compensation
We disclose the pro forma compensation cost relating to stock options granted
under employee stock option plans, based on the fair value of those options at
the date of grant. This valuation is determined utilizing the Black- Scholes,
option-pricing model, which takes into account certain assumptions, including
the expected life of the option and the expected stock volatility and dividend
yield over this life. These assumptions are made based on past experience and
expected future results. In the event the actual performance varies from the
estimated amounts, the value of these options may be misstated.
6
Effect of New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under these new standards, all acquisitions subsequent to
June 30, 2001 must be accounted for under the purchase method of accounting.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step was to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of the adoption), if
any, and must be completed by the end of our fiscal year. Any impairment loss
resulting from the transitional impairment tests are reflected as the cumulative
effect of a change in accounting principle.
We adopted the provisions of SFAS No. 142 in our first quarter ended March 31,
2002. Goodwill in the amount of $88,769 at December 31, 2001, relates to the
Laser Fare (LF) and Mound subsidiaries. Subsequent to December 31, 2001, the
assets of Mound were disposed of and operations were ceased, resulting in the
write-down of goodwill amounting to $17,584. In addition the goodwill relating
to Laser Fare, amounting to $71,185 was written off at December 31, 2002. We
have allocated the other intangible assets to their reporting units. The
remaining useful lives of the other intangibles have been evaluated and no
changes will be made.
SFAS No. 141 also requires that upon adoption of SFAS No. 142, the Company
reclassify the carrying amounts of certain intangibles assets into or out of
goodwill, based upon certain criteria. We did not have any reclassifications.
SFAS No. 142 supersedes APB No. 17, "Intangible Assets," and is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142 prohibit the amortization of
goodwill and indefinite-lived intangible assets; require that goodwill and
indefinite-lived intangible assets be tested annually for impairment, and in
interim periods if certain events occur indicating that the carrying value of
goodwill and / or indefinite-lived intangible assets may be impaired; require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill; and removes the 40-year limitation on the amortization
period of intangible assets that have finite lives.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the related asset.
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, 2003 have been restated to account for the discontinued operations of the
Photonics Group, consisting of Infinite Photonics, Inc. (IPI), which business
was suspended in 2002 as a result of the loss of the DARPA contract and for LF,
which was sold as discussed below.
On October 30, 2002, IPI received a Notice of Termination of its DARPA contract
for the government's convenience under the contract provisions entitled
Termination, Federal Acquisition Regulation (FAR) 52.249.6. The DARPA contract
had provided substantially all of the sales 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 respectively, which was included in
loss on disposal of discontinued operations in the consolidated statement of
operations for the year ended December 31, 2002.
On December 31, 2003, the Company and LF entered into an asset purchase
agreement with LFI, Inc. ("LFI") relating to the purchase by LFI of certain
assets and the assumption of certain liabilities of LF relating to the laser
engraving and medical products manufacturing and assembly businesses of LF (the
"Purchase Agreement"). The principals of LFI are former employees of LF,
including the former chairman and chief executive officer of the Company. The
purchase price for the assets was assumed liabilities of LF and/or the Company.
On December 31, 2004, the Company completed the sale of the remaining assets,
including the assumption of certain liabilities, to an affiliate of LFI,
relating to all the remaining laser businesses of LF. The purchase price was the
assumed liabilities of LF plus the issuance of several notes by the buyer to LF.
LF recorded a loss on sale of approximately $99,000 for the year ended December
31, 2003. LF reclassified the operating assets and liabilities to assets and
liabilities held for sale at December 31, 2003. The balances of the assets held
for sale at December 31, 2003 was $2,919,154 with related liabilities of
$781,847. During the year ended December 31, 2004, LF had income from operations
of approximately $494,000, (loss from operations of $417,000 in 2003, which is
included in loss from discontinued operations.
In accordance with 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.
8
The following is a summary of financial position at September 30, 2003
and December 31, 2002 and results of operations for the three and nine months
ended September 30, 2003 and 2002 for the disposed Photonics (IP) and Plastics
(O&W and EP) segments:
September 30, December 31,
Financial Position 2003 2002
---------- ----------
Current assets and total assets of
discontinued operations $ 814,026 $ 943,683
========== ==========
Liabilities of discontinued operations:
Accounts payable and accrued expenses $ 903,442 $1,395,203
Unsecured note payable 5,000 5,000
---------- ----------
Total liabilities of discontinued
operations $ 908,442 $1,400,203
========== ==========
Three Months Ended
September 30,
-------------------------
Results of Operations 2003 2002
----------- -----------
Revenue from discontinued operations $ -- $ 2,277,123
=========== ===========
Loss from discontinued operations $ (56,819) $ (78,540)
Loss on disposal of discontinued operations -- (92,211)
----------- -----------
Net loss from discontinued operations $ (56,819) $ (170,751)
=========== ===========
Nine Months Ended
September 30,
-------------------------
Results of Operations 2003 2002
----------- ----------
Revenue from discontinued operations $ 740,352 $ 4,218,967
=========== ===========
Income from discontinued operations $ 387,690 $ 34, 799
Loss on disposal of discontinued
operations -- (307,365)
----------- ----------
Net income (loss) from discontinued operations $ 387,690 $ (272,566)
=========== ===========
Certain other amounts in the 2002 financial statements have been reclassified to
conform to the 2003 financial statements.
9
Note 4. Stock Option Plan
As of September the Company's Stock Option Plans (the "Plan") provided for the
grant of incentive or non-qualified stock options for the purchase of common
stock for up to 2,340,000 shares to employees, directors and consultants. The
Plan is administered by the compensation committee established by the Company's
board of directors, which determines the terms of options including the exercise
price, expiration date, number of shares and vesting provisions.
A summary of all stock option activity for the nine months ended September 30,
2003 is as follows:
Weighted
Number Exercise Average
Of Options Price Exercise Price
---------------- --------------------- ------------------
Outstanding at December 31, 2002 300,581 $ 1.38 - $5.50 $ 1.64
============== ======
Options issued 1,610,000 $ .05-$.15 $ .06
========== =====
Options expired (223,006) $ 1.38 - $5.50 $ 1.57
--------- ============== ======
Outstanding at September 30, 2003 1,687,575 $ .05 -$ 2.50 $ .13
========= ============= =====
Exercisable at September 30, 2003 1,587,575 $ .05 -$2.50 $ .13
========= ============ =====
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 2003 2002
-------- --------
Net loss-as reported (000's) $ (462) $ (707)
-------- --------
Total stock based employee compensation
expense determined employee compensation
expense determined under the fair value
method for all awards (000's) $ -- $ 136
-------- --------
Net Loss- pro forma (000's) $ (462) $ (843)
======== ========
Loss per share as reported $ (.06) $ (.11)
======== ========
Loss per share pro forma $ (.06) $ (.13)
======== ========
10
Nine Months Ended
September 30,
--------------------
Results of Operations 2003 2002
-------- --------
Net loss-as reported (000's) $ (662) $ (2,150)
Total stock based employee compensation
expense determined employee compensation
expense determined under the fair value
method for all awards (000's) $ 76 $ 207
-------- --------
Net Loss- pro forma (000's) $ (738) $ (2,357)
======== ========
Loss per share as reported $ (.09) $ (.36)
======== ========
Loss per share pro forma $ (.09) $ (.40)
======== ========
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.
A summary of selected consolidated information for the Company's industry
segments during the periods ended September 30, 2003 and 2002, respectively, is
set forth as follows.
11
Plastics Photonics IT Services Unallocated
Group Group Laser Group Group Corporate Consolidated
----------- ----------- ----------- ----------- ----------- ------------
Three Months ended September 30, 2003
Sales to unaffiliated customers $ -- $ -- $ 1,061,853 $ 396,892 $ -- $ 1,458,745
Operating loss $ -- $ -- $ (200,806) $ 151,211 $ -- $ 352,017
Income from $ -- $ (56,819) $ -- -- $ -- $ (56,819)
discontinued
operations
Three Months ended September 30, 2002
Sales to $ -- -- $ 1,472,633 -- -- 1,472,633
unaffiliated
customers
Operating loss $ -- -- $ (131,139) $ -- $ (240,395) $ (371,534)
including corporate
overhead allocation
Income (loss) from $ (92,211) $ (151,460) $ -- $ -- $ 72,920 $ (170,751)
discontinued
operations including
corporate overhead
allocation
Nine Months ended September 30, 2003
Sales to $ -- $ -- $ 3,913,660 $ 488,877 $ -- $ 4,402,537
unaffiliated
customers
Operating loss $ -- $ -- $ (269,184) $ (661,664) $ -- $ (930,848)
Income (loss) from $ -- $ 387,690 $ -- $ -- $ -- $ 387,690
discontinued
operations
Nine Months ended September 30, 2002
Sales to $ -- $ -- $ 4,745,572 $ -- $ -- $ 4,745,572
unaffiliated
customers
Operating loss $ -- $ -- $ (785,053) $ -- $ (834,506) $(1,619,559)
including corporate
overhead allocation
Income (loss) from $ (340,974) $ (142,690) $ -- $ -- $ 211,098 $ (272,566)
discontinued
operations including
corporate overhead
allocation
12
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,
2003 2002
-------- --------
Demand note reclassed to long-term obligation $197,544 $ --
======== ========
Conversion of legal fees outstanding to common stock $ 48,000 $ --
======== ========
Purchase of vehicle through long-term obligations $ 41,199 $ --
======== ========
Common stock, issued for prepaid services to be provided in future periods $ -- $750,000
======== ========
Conversion of long-term obligation and related accrued interest and
fees to common stock, net of capitalized costs written off $ -- $725,340
======== ========
Notes receivable issued in connection with the sale of assets $ -- $180,000
======== ========
Conversion of long-term obligations- Stockholders and related
accrued interest To common stock $ -- $129,600
======== ========
Value of detachable common stock warrants Issued with long-term obligations $ -- $103,872
======== ========
Common stock warrants issued as satisfaction of accounts payable $ -- $ 58,826
======== ========
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.
13
The following table sets forth the computation of basic and diluted earnings per
share for the nine months ended September 30,2003
Numerator:
Income from discontinued operations $ 387,690
==========
Weighted average shares outstanding 7,668,934
==========
Denominator for diluted income per share:
Weighted average shares outstanding 7,668,934
Common stock options and stock warrants 250,000
----------
Weighted average shares and conversions 7,918,934
==========
For the three and nine months ended September 30, 2002 and three 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.
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.
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.
14
Results of operations
Comparison of Three Months ended September 30, 2003 and 2002
We commenced the operations of our IT services Group in the second quarter of
2003. The following results include the operations of our Laser Group for 2002
and 2003 and our IT Services Group beginning in 2003. The trends suggested by
this table are not indicative of future operating results due to our decision to
sell the business of our Laser Group and focus on our IT Services Group.
Three Months Ended September 30,
------------------------------------------------------------------------
As a % of Net 2002 As a % of Net Increase
2003 Revenues (As Restated) Revenues (Decrease)
---- -------- ----------- -------- ----------
Sales $ 1,458,745 100.0 % $ 1,472,633 100.0 % (0.9)%
Cost of sales 1,028,637 70.5 1,030,198 70.0 (0.2)
------------------------ -------------------------- ---------
Gross profit 430,108 29.5 442,435 30.0 (2.8)
------------------------ -------------------------- ---------
General and administrative 517,931 35.5 574,823 39.0 (9.9)
Depreciation and amortization 140,588 9.6 186,484 12.7 (24.6)
Selling 69,397 4.8 52,662 3.6 31.8
Research and development 54,210 3.7 -- 0.0 --
------------------------ -------------------------- ---------
Total operating expenses 782,125 53.6 813,969 55.3 (3.9)
------------------------ -------------------------- ---------
Operating loss (352,017) (24.1) (371,534) (25.2) (5.3)
Other income (expense) and income taxes, net (53,495) (3.7) (165,091) (11.2) (67.6)
------------------------ -------------------------- ---------
Loss from continuing operations (405,513) (27.8) (536,625) (36.4) (24.4)
Loss from discontinued operations (56,819) (3.9) (170,751) (11.6) (66.7)
------------------------ -------------------------- ---------
Net loss $ (462,332) (31.7)% $ (707,376) (48.0)% (34.6)%
========================= ========================== =========
Sales
Sales for the three months ended September 30, 2003 were relatively unchanged
compared to sales for the three months ended September 30, 2002. Sales were
approximately $1,062,000 from LF and $397,000 from IT Services Group for the
three months ended September 30, 2003. Sales of $1,472,633 were from LF for the
three months ended September 30, 2002. The sales from the IT Services Group are
a result of our new strategy which was implemented in 2003. Sales from LF
declined by approximately $410,000 in the 2003 period from the 2002 period due
to reductions in customer orders.
On October 30, 2002, we received a notice of termination of our DARPA contract.
The contract was terminated for the U.S. Government's convenience. The DARPA
contract had provided substantially the entire sales generated in our Photonics
Group. As a result, we have terminated this line of business and have accounted
for the Photonics Group as a disposal of discontinued operations in the
accompanying financial statements. Accordingly, the statements of operations for
2002 have been restated to reflect the operations of the Photonics Group in
income (loss) from discontinued operations.
Cost of Sales and Gross Profit
Cost of sales represents the cost of labor, materials and overhead related to LF
and the cost of employee services related to the IT Services Group. Cost of
sales for the three months ended September 30, 2003 was relatively unchanged
compared to cost of sales for the three months ended September 30, 2003. Cost of
sales was approximately $795,000 for LF and approximately $233,000 for IT
Services Group for the three months ended September 30, 2002. Gross profit was
approximately $267,000 or 25.1% for LF and approximately $164,000 or 41.2% for
the IT Services Group for the three months ended September 30, 2003. Cost of
sales of $1,030,198 was for LF for the three months ended September 30, 2002 and
resulted in a gross profit of $442,435 or 30%. Gross profit declined for LF due
to the mix of job orders and fixed costs which did not decrease as sales
declined.
15
General and Administrative Expenses
General and administrative expenses include corporate overhead such as
compensation and benefits for administrative and finance personnel, rent,
insurance, professional fees, travel, and office expenses. General and
administrative expenses in the third quarter of 2003 decreased in absolute terms
and as a percentage of sales compared to the third quarter of 2002. The decrease
was due to the relocation of administrative offices from Rhode Island to
Rochester, New York in 2003 and an associated reduction in employee related
expenses as we implemented our new strategies. We also realized reductions in
our professional fees and other operating expenses. We anticipate that general
and administrative expenses will decrease as a percent of sales as we continue
to transition our business strategy. However, 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 $50,000 and income of $8,720
for the three months ended September 30, 2003 and 2002, respectively.
Depreciation and Amortization
Depreciation and amortization expense decreased by $45,856 in the three months
ended September 30, 2003 compared to the three months ended September 30, 2002
principally due to the write off or disposition of assets in connection with the
relocation of our corporate headquarters to Rochester, New York. We are
operating our new corporate headquarters with less capital equipment.
Selling Expenses
For the three months ended September 30, 2003 we incurred selling expenses of
approximately $19,000 associated with growing business in our IT Services Group
and recorded approximately $19,000 for the quarter. Selling expense at LF was
relatively unchanged at approximately $50,000 for the three months ended
September 30, 2003 compared to $52,662 for the three months ended September 30,
2002.
Research and Development
For the three months ended September 30, 2003 we began to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $54,210 of expense for the
quarter 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.
Loss From Operations
For the three months ended September 30, 2003 our operating loss was $352,017
compared to a $371,534 loss from operations in the comparable period of 2002.
This is primarily attributable to our focus on our new IT Services Group and
reductions in general and administrative expenses offset in part by research and
development expenses of our IT Services Group related to our biometrics
applications.
16
Other Expenses
Other income and expense consists principally of interest expense on
indebtedness for the three months ended September 30, 2003. Interest expense was
$55,237 for the three months ended September 30, 2003 compared to $159,000 for
the three months ended September 30, 2002. The decrease in our interest expense
is due primarily to repayment of notes payable as a result of the termination of
our DARPA contract in 2002 and the continued amortization of notes payable of
LF.
Loss from Discontinued Operations
We recorded a loss from discontinued operations of $56,819 for the three months
ended September 30, 2003 compared to a loss of $170,751 for the three months
ended September 30, 2002. These losses are the result of approximately $70,000
recorded in 2002 as a result of the sale of the Osley & Whitney building and
land in the third quarter of 2002. The operations of the Plastics Group and the
Photonics Group were reclassified as discontinued operations and loss from
discontinued operations of $100,751 was recorded in the third quarter of 2002
and $56,819 in third quarter of 2003.
Net Loss
For the three months ended September 30, 2003, we recorded a net loss of
$462,332 or $(.06) per share consisting of a net loss of $405,513, or $(.05) per
share from continuing operations and a loss of $56,819 or $(.01) per share from
discontinued operations. This compares to a net loss of $707,376 or $(.11) per
share consisting of a net loss of $536,625, or $(.08) per share from continuing
operations and a loss of $170,751 or $(.03) per share from discontinued
operations for the three months ended September 30, 2002. The improvement in net
loss is attributable to reductions in general and administrative expenses, an
improvement in the loss from discontinued operations by $113,932, contributions
provided by our new IT Services Group, and a decrease in interest expense, which
were offset by a smaller gross profit from LF's business which were offset by
selling, research and development expenses of our IT Services Group.
Comparison of Nine Months ended September 30, 2003 and 2002
The following table compares our statement of operations data for the first nine
months of 2003 and 2002. We commenced the operations of our IT services Group in
the second quarter of 2003. The following results include the operations of our
Laser Group for 2002 and 2003 and our IT Services Group beginning in 2003. The
trends suggested by this table are not indicative of future operating results
due to our decision to sell the business of our Laser Group and focus on our IT
Services Group.
17
Nine Months Ended September 30,
------------------------------------------------------------------------
As a % of Net 2002 As a % of Net Increase
2003 Revenues (As Restated) Revenues (Decrease)
---- -------- ------------ -------- ----------
Sales $ 4,402,537 100.0 % $ 4,745,572 100.0 % (7.2)%
Cost of sales 3,032,232 68.9 3,702,000 78.0 (18.1)
------------------------- -------------------------- ---------
Gross profit 1,370,305 31.1 1,043,572 22.0 31.3
------------------------- -------------------------- ---------
General and administrative 1,572,080 35.7 1,823,808 38.4 (13.8)
Depreciation and amortization 458,795 10.4 635,763 13.4 (27.8)
Selling 189,515 4.3 201,744 4.3 (6.1)
Research and development 80,764 1.8 1,816 0.0 4,347.3
------------------------- -------------------------- ---------
Total operating expenses 2,301,153 52.3 2,663,131 56.1 (13.6)
------------------------- -------------------------- ---------
Operating loss (930,849) (21.1) (1,619,559) (34.1) (42.5)
Other income (expense) and income taxes, net (118,791) (2.7) (257,830) (5.4) (53.9)
------------------------- -------------------------- ---------
Loss from continuing operations (1,049,641) (23.8) (1,877,389) (39.6) (44.1)
Income (loss) from discontinued operations 387,690 8.8 (272,566) (5.7) (242.2)
------------------------- -------------------------- ---------
Net loss $ (661,951) (15.0)% $(2,149,955) (45.3)% (69.2)%
========================= ========================== =========
Sales
Sales for the nine months ended September 30, 2003 decreased approximately
$343,000 or 7.2% compared to net sales for the nine months ended September 30,
2002. Sales of LF including mound laser decreased by approximately $832,000 or
17.5% to approximately $3,913,000 for the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002. This decrease was offset
by sales from the IT Services Group of approximately $489,000 for the nine
months ended September 30, 2003. The sales from the IT Services Group are a
result of our new strategy which was implemented in 2003. Sales from LF declined
in the 2003 period from the 2002 period due to reductions in customer orders.
For the nine months ended September 30, 2003, we continued to experience
operating losses due primarily to continued weakness in jet engine and turbine
parts sale at LF. These losses have resulted in reductions in cash flow,
continuing defaults in our bank loan covenants and a negative working capital
position.
On October 30, 2002, we received a notice of termination of our DARPA contract.
The contract was terminated for the U.S. Government's convenience. The DARPA
contract had provided substantially the entire sale of our Photonics Group. As a
result, we have terminated this line of business and have accounted for the
Photonics Group as a disposal of discontinued operations in the accompanying
financial statements. Accordingly, the statements of operations and cash flows
for 2002 have been restated to reflect the operations of the Photonics Group in
income (loss) from discontinued operations.
Cost of Sales and Gross Profit
Cost of sales represents the cost of labor, materials and overhead related to LF
and the cost of employee services related to the IT Services Group. Cost of
sales was $2,739,000 for LF and approximately $293,000 for IT Services Group for
the nine months ended September 30, 2003. Cost of sales for the nine months
ended September 30, 2003 decreased 18.1% as compared to cost of sales for the
nine months ended September 30, 2002. Cost of sales as a percent of sales
improved by 9.1% or approximately $670,000 from 78.0% for the nine months ended
September 30, 2002 to 68.9% for the nine months ended September 30, 2003. The
decrease in cost of sales as a percent of sales is principally due to reductions
in employees and related expenses at LF.
Gross profit was approximately $1,174,000 or 30.0% for LF and approximately
$196,000 or 40.1% for the IT Services Group for the nine months ended September
30, 2002. Cost of sales of $3,702,000 for the nine months ended September 30,
2002 was for LF and resulted in a gross profit of $1,043,572 or 22.0%. Gross
profit declined by 12.5% for LF due to the mix of job orders.
18
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, 2003 decreased
in absolute terms and as a percentage of net sales compared to the third quarter
of 2002. The decrease was due to the relocation of administrative offices from
Rhode Island to Rochester, New York in 2003 and an associated reduction in
employee related expenses as we implemented our new strategies. We also realized
reductions in our professional fees and other operating expenses. We anticipate
that general and administrative expenses will decrease as a percent of sales as
we continue to transition our business strategy. However, 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 expenses also decreased at LF due to cost cutting
measures implemented beginning in 2002.
General and administrative expense includes expenses of the Osley & Whitney
defined benefit retirement plan of approximately $150,000 and income of $26,160
for the nine months ended September 30, 2003 and 2002, respectively.
Depreciation and Amortization
Depreciation and amortization expenses decreased by $176,968 in the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
This was due to the write off or disposition of assets in connection with the
relocation of our corporate headquarters to Rochester, New York. We are
operating our new corporate headquarters with less capital equipment. In
addition, depreciation expense at LF decreased as assets came to the end of
their depreciable lives.
Selling Expenses
For the nine months ended September 30, 2003 we incurred selling expenses of
approximately $24,000 associated with growing business in our IT Services Group.
Selling expense at LF decreased by approximately $36,000 for the nine months
ended September 30, 2003 as compared to the nine months ended September 30, 2002
reflecting minor staff reductions.
Research and Development
For the nine months ended September 30, 2003 we began to incur research and
development expenses associated with growing business in our IT Services Group
related to our biometrics applications and recorded $80,764 of expense 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.
19
Loss from Operations
For the nine months ended September 30, 2003 our operating loss was $930,849
compared to a $1,619,559 loss from operations for the nine months ended
September 30, 2002. This improvement is primarily attributable to our focus on
our new IT Services Group and reductions in general and administrative expenses,
depreciation expense and selling expense, offset by research and development
expenses incurred in our IT Services Group related to our biometrics
applications.
Other Income (Expense)
Other income and expense consists principally of interest expense on
indebtedness for the nine months ended September 30, 2003. Interest expense was
$135,319 for the nine months ended September 30, 2003 compared to $326,967 for
the nine months ended September 30, 2002. The decrease in our interest expense
is due primarily to repayment of notes payable as a result of the termination of
our DARPA contract in 2002 and the continued amortization of notes payable of
LF.
Income (Loss) from Discontinued Operations
We recorded income from discontinued operations of $387,690 for the nine months
ended September 30, 2003 compared to a loss of $ 272,566 for the nine months
ended September 30, 2002. The income in 2003 is due to the close out of the
DARPA contract with the Photonics Group and includes settlement of balances due
for less than the carrying values. The loss from discontinued operations for
2002 are the result of the $70,000 recorded in 2002 as a result of the sale of
the Osley & Whitney building and land in the third quarter of 2002 and losses
from discontinued operations of the Osley & Whitney, the Plastics group and the
Photonics Group.
Net Loss
For the nine months ended September 30, 2003, we recorded a net loss of
$661,951, or $(.14) per share from continuing operations and income of $387,690
or $.05 per share from discontinued operations compared to a net loss of
$2,149,955, or $(.32) per share from continuing operations and a loss of
$272,566 $(.04) per share from discontinued operations for the nine months ended
September 30, 2002. The improvement in net loss is attributable to reductions in
cost of sales as a percent of sales, decreases in general and administrative
expenses, an improvement in the loss from discontinued operations by $660,256
(from a loss of $272,566 to income of $387,690), contributions provided by our
new IT Services Group, and a decrease in interest expense, which were offset by
research and development expenses of our IT Services Group related to our
biometrics applications.
Liquidity and Capital Resources
As of September 30, 2003 we had unrestricted cash of approximately $163,000,
substantially all of which was held by LF for its working capital needs.
At September 30, 2003 we had a working capital deficit of $3,727,374 million
($3,632,958 after eliminating the assets and liabilities of our discontinued
operations). Approximately $2,400,000 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.
20
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of the chief executive officer and the chief financial officer,
carried out an evaluation of the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 (the "Exchange
Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by
this report (the "Evaluation Date"). Based upon that evaluation, the chief
executive officer and the chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective, providing
them with material information relating to the company as required to be
disclosed in the reports we file or submit under the Exchange Act.
Changes in Internal Control over Financial Reporting. There were no changes in
our internal controls over financial reporting, known to the chief executive
officer or the chief financial officer, that occurred during our fiscal third
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
21
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.
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, 2003, we issued 200,000 and
2,200,000 restricted shares of common stock at $.05 per share in private
placement transactions, respectively. In addition, for the nine months ending
September 30, 2003, we issued 960,000 restricted shares of common stock for
concession of outstanding liabilities of $48,000.
22
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, 2003
amounted to $812,783 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, 2003
amounted to $1,064,744 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, 2003 amounted to $485,000. Annual
payments of principal were $35,000 for fiscal 2003 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 $2,362,527 at September 30,
2003.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
a. Exhibits:
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
23
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)
24