-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HC/vQdALtZHDXPPEw151r38OxUWi20PKlz80xCf6v/9ns6uMcjS722cH1PKpMPwE CEf9qzPvUKKje5LvFaSVYg== 0001144204-05-024653.txt : 20050811 0001144204-05-024653.hdr.sgml : 20050811 20050811161427 ACCESSION NUMBER: 0001144204-05-024653 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050811 DATE AS OF CHANGE: 20050811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINITE GROUP INC CENTRAL INDEX KEY: 0000884650 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 521490422 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21816 FILM NUMBER: 051017318 BUSINESS ADDRESS: STREET 1: 2364 POST RD STREET 2: 923 INCLINE WAY 8 CITY: WARWICK STATE: RI ZIP: 02886 BUSINESS PHONE: 4017385777 MAIL ADDRESS: STREET 1: 2364 POST ROAD STREET 2: 923 INCLINE WAY 8 CITY: WARWICK STATE: RI ZIP: 02886 FORMER COMPANY: FORMER CONFORMED NAME: INFINITE MACHINE CORP DATE OF NAME CHANGE: 19971015 10QSB 1 v023305_10qsb.txt 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 JUNE 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 July 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 - June 30, 2005 (unaudited) and December 31, 2004 (audited) 3 Statements of Operations-(unaudited) for the three and six month periods ended June 30, 2005 and 2004 4 Statements of Cash Flows-(unaudited) for the six month periods ended June 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 13 Item 3. Controls and Procedures 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of 22 Security Holders 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
June 30, December 31, 2005 2004 (unaudited) (audited) - ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 338,205 $ 97,297 Restricted cash -- 30,327 Accounts receivable, net of allowance of $56,202 ($25,000 - 2004) 1,285,175 1,054,623 Current portion of notes receivable -- 270,347 Inventories 23,239 -- Other current assets 53,207 41,207 Assets of discontinued operations -- 205,921 -------------- -------------- Total current assets 1,699,826 1,699,722 Property and equipment, net 275,442 239,907 Other assets: Note receivable 73,897 1,940,857 Intangible assets, net -- 50,526 -------------- -------------- Total other assets 73,897 1,991,383 -------------- -------------- Total assets $ 2,049,165 $ 3,931,012 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Notes payable: Bank -- 50,207 Other 175,427 176,184 Related parties 9,906 9,906 Accounts payable 537,272 504,327 Accrued expenses 823,653 542,066 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 1,601,983 3,672,562 Long-term obligations Bank notes payable 57,425 64,133 Notes payable-related parties 1,100,124 1,100,124 Accrued pension expense 2,236,687 2,177,287 -------------- -------------- Total liabilities 4,996,219 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 Accumulated deficit (28,666,173) (28,719,963) Accumulated other comprehensive loss (2,755,891) (2,755,891) -------------- -------------- Total stockholders' deficiency (2,947,054) (3,083,094) -------------- -------------- Total liabilities and stockholders' deficiency $ 2,049,165 $ 3,931,012 ============== ==============
See notes to consolidated financial statements. 3 INFINITE GROUP, INC. Consolidated Statements of Operations (Unaudited)
Six Months Ended Three Months Ended June 30, June 30, --------------------------------------------------------------- 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------------- Sales $ 4,134,550 $ 1,829,823 $ 2,009,823 $ 1,269,388 Cost of goods and services 2,886,028 1,193,950 1,371,147 833,965 ------------ ------------ ------------ ------------ Gross profit 1,248,522 635,873 638,676 435,423 Costs and expenses: General and administrative 787,554 574,954 399,711 310,775 Depreciation and amortization 23,749 12,517 12,568 5,911 Write-off of capitalized financing costs 44,857 -- 44,857 -- Selling 140,072 4,364 139,178 4,195 Research and development 161,924 142,955 90,243 74,309 ------------ ------------ ------------ ------------ Total costs and expenses 1,158,156 734,790 686,557 395,190 ------------ ------------ ------------ ------------ Operating income (loss) 90,366 (98,917) (47,881) 40,233 Other income (expense): Interest income 66,255 -- 32,193 -- Interest expense: Related parties (44,333) (36,653) (22,476) (19,565) Other (69,431) -- (33,889) ------------ ------------ ------------ ------------ (113,764) (36,653) (56,365) (19,565) ------------ ------------ ------------ ------------ Total other expense (47,509) (36,653) (24,172) (19,565) ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income tax expense 42,857 (135,570) (72,053) 20,668 Income tax expense (1,300) (350) -- -- ------------ ------------ ------------ ------------ Income (loss) from continuing operations 41,557 (135,920) (72,053) 20,668 Discontinued operations: Income (loss) from discontinued operations 12,233 (74,731) 4,979 13,938 ------------ ------------ ------------ ------------ Net income (loss) $ 53,790 $ (210,651) $ (67,074) $ 34,606 ============ ============ ============ ============ Net income (loss) per share-basic: Income (loss) from continuing operations $ .00 $ (.01) $ (.00) $ .00 Income (loss) from discontinued operations .00 (.01) .00 .00 ------------ ------------ ------------ ------------ Net income (loss) $ .00 $ (.02) $ (.00) $ .00 ============ ============ ============ ============ Net income (loss) per share-diluted: Income (loss) from continuing operations $ .00 $ (.01) $ (.00) $ .00 Income (loss) from discontinued operations .00 (.01) .00 .00 ------------ ------------ ------------ ------------ Net income (loss) $ .00 $ (.02) $ (.00) $ .00 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 18,910,805 13,692,968 19,206,965 13,769,822 ============ ============ ============ ============ Diluted 20,181,583 13,692,968 19,206,965 14,807,219 ============ ============ ============ ============
See notes to consolidated financial statements. 4 INFINITE GROUP, INC. Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2005 2004 - ---------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ 53,790 $ (210,651) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: (Income) loss from discontinued operations (12,233) 74,731 Depreciation and amortization 24,019 12,517 Write-off of capitalized financing costs 44,587 -- Increase in: Accounts receivable (230,552) (481,156) Inventories (23,239) -- Other current assets (12,000) (16,097) Increase (decrease) in: Accounts payable 35,195 (59,974) Accrued expenses 281,587 316,747 Accrued pension obligations 59,400 80,773 ------------ ------------ Net cash provided by (used in) operating activities of continuing operations 220,554 (283,110) Net cash provided by (used in) operating activities of discontinued operations 854 161,952 ------------ ------------ Net cash provided by (used in) operating activities 221,408 (121,158) ------------ ------------ Investing activities: Decrease in restricted funds 30,327 12,179 Purchase of property and equipment (53,615) (3,768) Proceeds from notes receivable 2,137,307 -- ------------ ------------ Net cash provided by (used in) investing activities 2,114,019 8,411 ------------ ------------ Financing activities: Net repayments of bank notes payable (50,207) (53,930) Net repayments of notes payable-other (757) -- Proceeds from issuance of long-term obligations-related parties -- 463,000 Repayment of notes payable-related parties -- (188,000) Repayments of long-term obligations (2,123,555) (158,585) Proceeds from issuance of common stock, net of costs 80,000 163,126 ------------ ------------ Net cash provided by (used in) financing activities (2,094,519) 225,611 ------------ ------------ Net increase in cash 240,908 112,864 Cash - beginning of period 97,297 16,515 ------------ ------------ Cash - end of period $ 338,205 $ 129,379 ============ ============ Supplemental disclosure: Cash paid for: Interest $ 103,196 $ 7,057 ============ ============ 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 six month period ended June 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 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. 123R (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 June 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 June 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 statements of operations and cash flows for the three and six months ended June 30, 2005 and 2004 account for the discontinued operations of the Photonics Group, consisting of Infinite Photonics, Inc. (IP), which business was suspended in 2002 as a result of the loss of the DARPA contract, and Laser Group (LF), which was sold as discussed below. 7 On October 30, 2002, IP 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 intellectual property 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. 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 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 June 30, 2005 and December 31, 2004 and results of operations for the three and six months ended June 30, 2005 and 2004 for the disposed Photonics (IP) and Laser (LF) segments:
June 30, December 31, Financial Position 2005 2004 ---------------- ---------------- 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 June 30, -------- Results of Operations 2005 2004 ---------------- ---------------- Revenue from discontinued operations $ -- $ 821,648 ================ ================ Income (loss) from discontinued operations $ 4,979 $ 13,938 ================ ================ Six Months Ended June 30, -------- Results of Operations 2005 2004 ---------------- ---------------- Revenue from discontinued operations $ -- $ 1,492,158 ================ ================ Income (loss) from discontinued operations $ 12,233 $ (74,731) ================ ================
8 Certain other amounts in the 2004 financial statements have been reclassified to conform with the 2005 financial statements. Note 4. Stock Option Plan and Stock Warrants As of June 30, 2005 the Company's Stock Option Plans (the "Plan"), as approved by shareholders, 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 4,000,000 shares to employees, directors and consultants, which is 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 all stock option activity for the six months ended June 30, 2005 is as follows:
Weighted Number Exercise Average Of Options Price Exercise Price --------- ------------- -------------- Outstanding at December 31, 2004 1,895,482 $ .01 - $2.50 $ .13 ============= ===== Options issued 2,428,000 $ .09 - $.25 $ .18 ============= ===== Options expired (676,982) $ .09 - $2.50 $ .42 --------- ============= ===== Outstanding at June 30, 2005 3,646,500 $ .01 - $.25 $ .11 ========= ============= ===== Exercisable at June 30, 2005 3,646,500 $ .01 - $ .25 $ .11 ========= ============= =====
At December 31, 2004, the Company had 425,000 warrants outstanding at an average exercise price of $2.50 per share. During the six months ended June 30, 2005, 350,000 warrants expired. At June 30, 2005, the Company had 75,000 warrants outstanding at an average exercise price of $2.40. 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: 9
Three Months Ended June 30, -------- Results of Operations 2005 2004 ---------- ---------- Net income (loss)-as reported (000's) $ (67) $ 35 Total stock based employee compensation expense determined under the fair value method for all awards (000's) $ (119) $ (8) ---------- ---------- Net income (loss) - pro forma (000's) $ (186) $ 27 ========== ========== Income (loss) per share as reported-basic and diluted $ (.00) $ .00 ========== ========== Income (loss) per share pro forma-basic and diluted $ (.01) $ .00 ========== ========== Six Months Ended June 30, -------- Results of Operations 2005 2004 ---------- ---------- Net income (loss)-as reported (000's) $ 54 $ (211) Total stock based employee compensation expense determined under the fair value method for all awards (000's) $ (251) $ (15) ---------- ---------- Net loss- pro forma (000's) $ (197) $ (226) ========== ========== Income (loss) per share as reported-basic and diluted $ .00 $ (.02) ========== ========== Loss per share pro forma-basic and diluted $ (.01) $ (.02) ========== ==========
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 and liabilities have been segregated from continuing operations and classified as assets and liabilities 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. 10 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 June 30, 2005 and 2004, respectively, is set forth as follows.
- ------------------------------ ----------- ----------- ----------- ----------- IT Services Photonics Group Laser Group Group Consolidated - ------------------------------ ----------- ----------- ----------- ----------- Three Months ended June 30, 2004 - ------------------------------ ----------- ----------- ----------- ----------- Sales to unaffiliated $ -- $ -- $ 1,269,388 $ 1,269,388 customers - ------------------------------ ----------- ----------- ----------- ----------- Operating income $ -- $ -- $ 40,233 $ 40,233 - ------------------------------ ----------- ----------- ----------- ----------- Income (loss) from discontinued operations $ (19,752) $ 33,690 $ -- $ 13,938 - ------------------------------ ----------- ----------- ----------- ----------- Three Months ended June 30, 2005 - ------------------------------ ----------- ----------- ----------- ----------- Sales to unaffiliated customers $ -- $ -- $ 2,009,823 $ 2,009,823 - ------------------------------ ----------- ----------- ----------- ----------- Operating (loss) $ -- $ (46,486) $ (1,395) $ (47,881) - ------------------------------ ----------- ----------- ----------- ----------- Income (loss) from discontinued operations $ 4,979 $ -- $ -- $ 4,979 - ------------------------------ ----------- ----------- ----------- ----------- - ------------------------------ ----------- ----------- ----------- ----------- IT Services Photonics Group Laser Group Group Consolidated - ------------------------------ ----------- ----------- ----------- ----------- Six Months ended June 30, 2004 - ------------------------------ ----------- ----------- ----------- ----------- Sales to unaffiliated customers $ -- $ -- $ 1,829,823 $ 1,829,823 - ------------------------------ ----------- ----------- ----------- ----------- Operating loss $ -- $ -- $ (98,917) $ (98,917) - ------------------------------ ----------- ----------- ----------- ----------- Income (loss) from discontinued operations $ (59,930) $ (14,801) $ -- $ (74,731) - ------------------------------ ----------- ----------- ----------- ----------- Six Months ended June 30, 2005 - ------------------------------ ----------- ----------- ----------- ----------- Sales to unaffiliated customers $ -- $ -- $ 4,134,550 $ 4,134,550 - ------------------------------ ----------- ----------- ----------- ----------- Operating income (loss) $ -- $ (48,087) $ 138,453 $ 90,366 - ------------------------------ ----------- ----------- ----------- ----------- Income (loss) from discontinued operations $ 12,233 $ -- $ -- $ 12,233 - ------------------------------ ----------- ----------- ----------- -----------
11 Note 6. Supplemental Cash Flow Information Non-cash investing and financing transactions, including non-monetary exchanges, consist of the following: Six Months Ended June 30, -------- 2005 2004 ----------- ----------- Conversion of accounts payable to common stock $ 2,250 $ -- =========== =========== Common stock authorized not issued, transferred to issued $ -- $ 75,000 =========== =========== Purchase of equipment through long-term lease obligation $ -- $ 45,120 =========== =========== 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. 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: Six Months Three Months Ended Ended June 30, 2005 June 30, 2004 ------------- ------------- Numerator: Income available to common stockholders from continuing operations $ 53,790 $ 20,668 ============= ============= Weighted average shares outstanding 18,910,805 13,769,822 ============= ============= Denominator for diluted income per share: Weighted average shares outstanding 18,910,805 13,769,822 Common stock options and stock warrants 1,270,778 1,037,397 ------------- ------------- Weighted average shares and conversions 20,181,583 14,807,219 ============= ============= For the three months ended June 30, 2005 and six months ended June 30, 2004 all outstanding stock options and warrants have not been considered common stock equivalents because their assumed exercise would be anti-dilutive. 12 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. Results of Operations Comparison of Three Months ended June 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. 13
Three Months Ended June 30, --------------------------- As a % of Net As a % of Net Increase 2005 Revenues 2004 Revenues (Decrease) ----------- ----- ---------- ------ ------- Sales $ 2,009,823 100.0% $ 1,269,388 100.0% 58.3% Cost of sales 1,371,147 68.2 833,965 65.7 64.4 ----------- ----- ---------- ------ ------- Gross profit 638,676 31.8 435,423 34.3 46.7 ----------- ----- ---------- ------ ------- General and administrative 399,711 19.9 310,775 24.5 28.6 Depreciation and amortization 12,568 0.6 5,911 0.5 112.6 Write-off of capitalized financing costs 44,857 2.2 -- 0.0 Selling 139,178 6.9 4,195 0.3 3,217.7 Research and development 90,243 4.5 74,309 5.9 21.4 ----------- ----- ---------- ------ ------- Total operating expenses 686,557 34.2 395,190 31.1 73.7 ----------- ----- ---------- ------ ------- Operating income( loss) (47,881) (2.4) 40,233 3.2 (219.0) Other income (expense) and income taxes, net (24,172) (1.2) (19,565) (1.5) (23.5) ----------- ----- ---------- ------ ------- Income (loss) from continuing operations (72,053) (3.6) 20,668 1.6 (448.6) Income from discontinued operations 4,979 0.2 13,938 1.1 (64.3) ----------- ----- ---------- ------ ------- Net income (loss) $ (67,074) (3.3)% $ 34,606 2.7% (293.8)% =========== ===== ========== ====== =======
Sales Sales for the three months ended June 30, 2005 were $2,009,823 which was a substantial increase of $740,435 or 58.3% as compared to sales for the three months ended June 30, 2004 of $1,269,388. 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 in 2005 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 three months ended June 30, 2005 was $1,371,147 or 68.2% of sales as compared to $833,965 or 65.7% of sales for the three months ended June 30, 2004. Gross profit was $638,676 or 31.8% of sales for the three months ended June 30, 2005 compared to $435,423 or 34.3% of sales from the three months ended June 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. 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 June 30, 2005 were $399,711 which was an increase of $88,938 or 28.6% as compared to $310,775 for the three months ended June 30, 2004. As a percentage of sales, general and administrative expenses were 19.9 % for the three months ended June 30, 2005 as compared to 24.5% for the three months ended June 30, 2004. We anticipate that 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 also experienced increases in accounting and legal expenses in 2005 due to our focus on completing audits of our financial statements and related regulatory filings. 14 General and administrative expenses include expenses (including professional services and interest costs) associated with the Osley & Whitney defined benefit retirement plan of approximately $48,000 and $54,000 for the three months ended June 30, 2005 and 2004, respectively. Depreciation and Amortization Depreciation and amortization expense was $12,568 for the three months ended June 30, 2005 compared to $5,911 for the three months ended June 30, 2004. This increase is due to depreciation of equipment and software that were added in 2004 and 2005. 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 its notes receivables to us, which proceeds were used to pay off all of LF's bank promissory notes and LF's capital lease obligation. As a result we wrote off the balance of LF's capitalized financing costs of $44,857. Selling Expenses For the three months ended June 30, 2005 we incurred selling expenses of $139,178 associated with growing business in our IT Services Group as compared to $4,195 for the three months ended June 30, 2004. We added new employees and changed the work assignment of one employee in the second quarter of 2005 to focus on generating new sales leads and new contract opportunities. We expect that selling expenses will increase as we devote more resources to increasing our sales. Research and Development For the three months ended June 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 $90,243 of expense compared to $74,309 for the three months ended June 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. Operating Income (Loss) The non-recurring write off of capitalized financing costs of $44,857 recorded in the three months ended June 30, 2005 had a significant impact in the reduction of net operating income from $40,233 for the three months ended June 30, 2004 to a net operating loss of $47,881 for the three months ended June 30, 2005. For the three months ended June 30, 2005, we experienced increases in operating expenses of $291,367 as discussed above, offset in part by an improvement in gross margin of $203,253. 15 Other Income (Expense) Other income and expense consists of interest expense on indebtedness for the three months ended June 30, 2005. Interest expense was $56,365 (including $32,193 of interest expense on notes payable of LF) for the three months ended June 30, 2005 compared to interest expense of $19,565 for the three months ended June 30, 2004, which was an increase of $36,800. This increase is principally offset by $32,193 of interest income from the notes receivable due from the buyer of LF's businesses. Income (Loss) from Discontinued Operations We recorded income from discontinued operations of $4,979 for the three months ended June 30, 2005 compared to income of $13,938 for the three months ended June 30, 2004. The income is the result of the Laser Group and the Photonics Group which were reclassified as discontinued operations. Net Income (Loss) For the three months ended June 30, 2005, we recorded a loss from continuing operations of $72,053 or breakeven per share, and a net loss of $67,074 or breakeven per share. This compares to net income from continuing operations of $20,668 or breakeven per share and a net income of $34,606, or breakeven per share for the three months ended June 30, 2004. The decrease in profitability is attributable to the write off of capitalized financing costs of $44,857 and increases in other expenses, especially selling expenses during the three months ended June 30, 2005. Comparison of Six Months ended June 30, 2005 and 2004 The following table compares our statements of operations data for the first six 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.
Six Months Ended June 30, --------------------------- As a % of Net As a % of Net Increase 2005 Revenues 2004 Revenues (Decrease) ------------- ---------- ------------- ------------- ------------- Sales $ 4,134,550 100.0% $ 1,829,823 100.0% 126.0% Cost of sales 2,886,028 69.8 1,193,950 65.2 141.7 ------------- ---------- ------------- ------------- ------------- Gross profit 1,248,522 30.2 635,873 34.8 96.3 ------------- ---------- ------------- ------------- ------------- General and administrative 787,554 19.0 574,954 31.4 37.0 Depreciation and amortization 23,749 0.6 12,517 0.7 89.7 Write-off of capitalized financing costs 44,857 1.1 -- 0.0 Selling 140,072 3.4 4,364 0.2 3,109.7 Research and development 161,924 3.9 142,955 7.8 13.3 ------------- ---------- ------------- ------------- ------------- Total operating expenses 1,158,156 28.0 734,790 40.2 57.6 ------------- ---------- ------------- ------------- ------------- Operating income (loss) 90,366 2.2 (98,917) (5.4) 191.4 Other income (expense) and income taxes, net (48,809) (1.2) (37,003) (2.0) (31.9) ------------- ---------- ------------- ------------- ------------- Income (loss) from continuing operations 41,557 1.0 (135,920) (7.4) 130.6 Income (loss) from discontinued operations 12,233 0.3 (74,731) (4.1) 116.4 ------------- ---------- ------------- ------------- ------------- Net income (loss) $ 53,790 1.3% $ (210,651) (11.5)% 125.5% ------------- ---------- ------------- ------------- -------------
16 Sales Sales for the six months ended June 30, 2005 increased substantially by $2,304,727 or 126% to $4,134,550 as compared to sales for the six months ended June 30, 2004 of $1,829,823. 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 six months ended June 30, 2005 was $2,886,028 or 69.8% of sales as compared to $1,193,950 or 65.2% of sales for the six months ended June 30, 2004. Gross profit was $1,248,522 or 30.2% of sales for the six months ended June 30, 2005 compared to $635,873 or 34.8% of sales for the six months ended June 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. 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 six months ended June 30, 2005 increased by $212,600 or 37.0% due to the increases in employee compensation and related fringe benefits expenses as well as increased operating expenses as we manage a larger volume of business. As a percentage of sales, general and administrative expense was 19.0% for the six months ended June 30, 2005 and 31.4% for the six months ended June 30, 2004. We anticipate that 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 experienced increases in accounting and legal expenses in 2005 due to our focus on completing audits of our financial statements and related regulatory filings. General and administrative expenses include expenses (including professional services and interest costs) associated with the Osley & Whitney defined benefit retirement plan of approximately $123,000 and $108,000 for the six months ended June 30, 2005 and 2004, respectively. Depreciation and Amortization Depreciation and amortization expense was $23,949 for the six months ended June 30, 2005. 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. The increase is due to depreciations and amortization of these 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 its notes receivable to us, which proceeds were used to pay off all of LF's bank promissory notes and LF's capital lease obligation. As a result we wrote off the balance of LF's capitalized financing costs of $44,857. 17 Selling Expenses For the six months ended June 30, 2005 we incurred selling expenses of $140,072 associated with growing business in our IT Services Group compared to $4,364 for the six months ended June 30, 2004. We expect that selling expenses will increase in the future as we hire additional personnel and expand our development of new contract opportunities. We added new employees and changed the work assignment of one employee in the second quarter of 2005 to focus on generating new sales leads and new contract opportunities. Research and Development For the six months ended June 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 $161,924 of expense compared to $142,955 for the six months ended June 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. Operating Income (Loss) For the six months ended June 30, 2005 our operating income was $90,366 compared to a $98,917 loss from operations in the comparable period of 2004. This is primarily attributable to our focus on our new IT Services Group and the growth of IT sales which provided gross profit of $1,248,522, an increase of $612,649 over the six months ended June 30, 2004, to fund research and development, general and administrative expenses and interest expenses. Operating expenses were $1,158,156, for the six months ended June 30, 2005, an increase of $423,366 over the six months ended June 30, 2004. Other Income (Expense) Other income and expense consists of interest expense on indebtedness for the six months ended June 30, 2005. Interest expense was $113,764 (including $66,255 of interest expense on notes payable of LF) for the six months ended June 30, 2005 compared to $36,653 for the six months ended June 30, 2004. The increase of $77,111 is principally offset by $66,255 of interest income from the notes receivable due from the buyer of LF's business. Interest expense for notes payable to related parties increased by $7,680 to $44,333 due to an increase in the average outstanding principal balance of notes payable to related parties. Income (Loss) from Discontinued Operations We recorded income from discontinued operations of $12,233 for the six months ended June 30, 2005 compared to a loss of $74,731 for the six months ended June 30, 2004. These results are from the Laser Group and the Photonics Group which were reclassified as discontinued operations. 18 Net Income (Loss) For the six months ended June 30, 2005, we recorded income from continuing operations of $41,557, or breakeven per share and net income of $53,790 or breakeven per share. This compares to a net loss from continuing operations of $135,920 or $(.01) per share and a net loss of $210,651 or $(.02) per share (the difference of $(.01) per share is from discontinued operations) for the six months ended June 30, 2004. The improvement in profitability is attributable to growth of sales and gross profit from our expanding IT Services which allowed us to fund our research and development, general and administrative, and interest expenses. Liquidity and Capital Resources As of June 30, 2005 we had unrestricted cash of $338,205, which is available for working capital and property and equipment acquisitions. Approximately $220,000 of this cash was used to fund June 2005 payroll accruals which were paid in July 2005. At June 30, 2005 we had working capital of $97,843. In previous periods 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 obligation (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 related parties, private placements of common stock and financing of our accounts receivable. 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. 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 June 1, 2005, Spectra voluntarily dismissed with prejudice its remaining pending counterclaim against us. We have entered into an escrow agreement with the defendants pursuant to which approximately $600,000, representing the amount of the judgment has been deposited. Withdrawal of the funds will be permitted only upon the date that judgment, in the matter, becomes a final non-appealable decision, or earlier upon the written agreement of all parties. We are the respondent in an arbitration proceeding filed on December 10, 2002 captioned J. Terrence Feeley v. Infinite Group, Inc. Claimant, a former employee and former member of our board of directors, alleges that the parties entered into a consulting agreement dated June 27, 2002 relative to the early termination of claimant's employment requiring certain cash payments to be made. Claimant alleges that we have failed or refused to make such cash payments and have breached the agreement and seeks all monies owed to him, said amount alleged to be approximately $130,000. We answered the claim by admitting that a letter agreement was entered into but denied all of the remaining allegations. We also filed a counterclaim in the arbitration proceeding. We filed a related claim against Mr. Feeley in the Superior Court, State of Rhode Island on September 5, 2003. We claim that he breached certain provisions of his employment agreement, breached fiduciary duties he owed to us and violated several provisions of the June 27, 2002 letter agreement. We seek compensatory damages in amounts to be shown at trial, and preliminary and permanent injunctive relief and other relief as may be appropriate. Mr. Feeley's arbitration claims are pending before the American Arbitration Association and an arbitrator selected by the parties. Our claims against Mr. Feeley are pending in the Rhode Island Superior Court. In January of 2004, the parties agreed to stay arbitration proceedings and to mediate all the disputes under procedures available through the Superior Court. To date, neither party has initiated mediation proceedings. Other than the foregoing proceeding, we are not a party to any material legal proceeding. 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. 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: August 11, 2005 /s/ Michael S. Smith -------------------- Chief Executive Officer Date: August 11, 2005 /s/ Michael S. Smith -------------------- Chief Financial Officer (Principal Financial Officer) 23 EX-31.1 2 v023305_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Michael S. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Infinite Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 11, 2005 /s/ MICHAEL S. SMITH --------------------- Michael S. Smith Chief Executive Officer and Chief Financial Officer EX-32.2 3 v023305_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Infinite Group Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael S. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. August 11, 2005 /s/ MICHAEL S. SMITH --------------------- Michael S. Smith Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----