ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Cautionary
statement identifying important factors that could cause our actual results
to
differ from those projected in forward looking statements.
Readers
of this report are advised that this document contains both statements of
historical facts and forward looking statements. Forward looking statements
are
subject to certain risks and uncertainties, which could cause actual results
to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of our plans and objectives with respect to business transactions
and
enhancement of stockholder value, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements
and
statements about our business prospects.
This
report also identifies important factors, which could cause actual results
to
differ materially from those indicated by the forward looking statements. These
risks and uncertainties include the factors discussed under the heading “Risk
Factors” beginning at page 10 of this report.
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and the notes thereto appearing elsewhere in this
report.
Overview
Beginning
in the second quarter of 2003 we commenced operations in the field of
information technology (IT) consulting services and biometric technology, and
we
opened an office in the Washington, D.C. metropolitan area.
We
now
provide business and technology integration and systems support primarily to
U.S. government clients. We focus on aligning business processes with technology
for delivery of solutions to meet our clients’ exact needs and providing expert
management services to the lifecycle of technology-based projects.
As
of
December 31, 2004, we sold or closed all of our prior businesses. Currently,
our
sole business is the provision of IT consulting services.
The
following discussion relates to the businesses that were sold or closed and
the
current effect on our operations and financial position.
Osley
& Whitney, Inc. Retirement Plan
Since
our
sale of all of the common stock of Osley & Whitney, Inc. (O&W) on
December 30, 2002, we have continued to act as the sponsor of the O&W
Retirement Plan.
At
December 31, 2006, the O&W defined benefit pension plan had an accrued
pension obligation liability of $2,471,391 and an accumulated other
comprehensive loss of $2,578,639 which we have recorded as a reduction of
stockholders’ equity. The market value of plan assets increased from $3,315,526
at December 31, 2005 to $3,457,115 at December 31, 2006. The increase was
comprised of investment returns of $613,308 which were offset by benefit
payments of $406,300 and expenses paid of $65,419. The benefit obligation
decreased during 2006 by $101,997 to $5,619,139 at December 31, 2006 as a result
of benefits paid of $406,300 and an actuarial gain of $11,057 which were offset
by interest cost of $315,360
At
December 31, 2005, the O&W defined benefit pension plan had an accrued
pension obligation liability of $2,405,612 and an accumulated other
comprehensive loss of $3,046,855 which we recorded as a reduction of
stockholders’ equity. The market value of plan assets decreased from $3,510,324
at December 31, 2004 to $3,315,524 at December 31, 2005. The decrease was
comprised of payment of benefits of $413,193 and expenses paid of $90,964,
which
were offset in part by an investment return of $127,918 and contributions of
$181,439. The benefit obligation increased during 2005 by $33,525 to $5,721,136
at December 31, 2005 as a result of benefits paid of $413,193 which were offset
by an actuarial loss of $131,358, and interest cost of $315,360.
As
plan
sponsor, we were required to contribute amounts in 2004, 2005 and 2006 and
are
required to make contributions in future years to fund the deficiency. We did
not make a contribution in 2004 or 2006. During 2005, we made contributions
of
$6,439 and 500,000 shares of our common stock, which were valued on the
contribution date at $175,000 using the closing market price. We currently
do
not have the funds available to make required contributions which currently
approximate $1.4 million. We recorded defined benefit pension expense of
approximately $411,000 in 2006, including excise taxes of $213,000 for failing
to make plan contributions and $222,000 in 2005, including excise taxes of
$55,200. We may be required to pay interest on these excise taxes and
potentially could incur additional excise taxes up to 100% of required plan
contributions that were not made.
In
March
2005, we filed a funding waiver application requesting waivers of the minimum
funding standard for the 2005 plan year of $513,551 and for the 2004 plan year
of $979,328 (which includes quarterly cash disbursements aggregating
approximately $455,000 for the year ended December 31, 2004 and unfunded prior
year amounts). In August 2006, we received a reply from the Department of the
Treasury denying our request for waivers of the minimum funding standard for
the
2005 and 2004 plan years.
Although
we have acted as the sponsor of the Plan since we acquired O&W, recently it
was determined that we may not have had, or currently have, a legal obligation
to do so from December 30, 2002 when we sold all of the common stock of O&W
to a third party. We are presently advocating this position with the appropriate
regulatory authorities to ascertain whether they concur or disagree with this
determination. If our current efforts do not result in a concurrence with our
position, we intend to pursue all appropriate further avenues to prevail our
position. Depending upon the ultimate outcome regarding our obligations as
sponsor of the Plan, adjustments to our financial statements may be
necessary.
Express
Pattern (EP) Note Receivable
On
March
14, 2002, we sold the net assets of EP. The remaining balance of the note
receivable at December 31, 2005 after the offset and write-off was approximately
$74,000. The interest earned on this note through December 31, 2005 in the
amount of $27,545 was fully reserved, because we believed that collection of
the
interest was doubtful at that time. In December 2006, we collected the principal
balance of $74,000 and recorded interest income of $22,103 upon collection,
in
full satisfaction for all amounts owned.
Sales
of Laser Fare Assets
In
2003,
we decided to sell the net assets of the Laser Group and sold a portion of
the
business on December 31, 2003 and the remaining business on December 31, 2004.
We
sold
the remaining assets of our Laser Group to Rolben Acquisition Corporation,
a
company affiliated with LFI, on December 31, 2004. The purchase price for the
remaining assets consisted of Rolben’s assumption of substantially all of the
liabilities of Laser Fare, Inc. and the delivery of promissory notes in the
aggregate amount of approximately $2.1 Million. Because certain required
consents were not yet obtained, 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 buyer obtained new bank financing and paid off all of LF’s notes receivable,
which proceeds were used to pay off LF’s bank promissory notes and capital lease
obligation.
IT
Consulting Strategy
Our
IT
services include strategic staffing, program management, project management,
network services, technical engineering, software development, and enterprise
resource planning. Beginning in 2003, we have entered into several subcontract
agreements with a number of prime contractors to several U.S. government
agencies.
In
December 2003, we were awarded a Federal Supply Schedule Contract by the U.S.
General Services Administration (GSA) for IT consulting services. Having a
GSA
Contract allows us to compete for and secure prime contracts with all executive
agencies of the U.S. Government as well as other national and international
organizations.
Liquidity
and Capital Resources
At
December 31, 2006, we had cash of $73,786 available for our working capital
needs and planned capital asset expenditures.
At
December 31, 2006, we had working capital deficit of approximately $2.1 million
and a current ratio of .22. Our objective is to improve our working capital
position from profitable operations. If we continue to incur operating losses
or
net losses, we may continue to experience working capital shortages that impair
our business operations and growth strategy. Presently, we have sufficient
cash
flow and short-term financing sources, through sales with recourse of accounts
receivable, to pay our payrolls and recurring invoices on a timely basis.
We
have
financed the activity of our new IT Services Group through the issuance of
notes
payable to third parties, including related parties, private placements of
common stock and financing through sales with recourse of our accounts
receivable.
We
established in 2004 a financing line of up to $800,000 with a financial
institution that allows us to sell selected accounts receivable invoices to
the
financial institution with full recourse against us. We pay fees based on the
length of time that the invoice remains unpaid. At December 31, 2006, we had
approximately $70,000 of availability under this line and could finance up
to
another approximately $70,000 based on eligible accounts receivable at December
31, 2006.
We
have
used our common stock to provide compensation to certain employees and
consultants and to fund liabilities. During 2005, one consultant provided
services to us valued at $89,328. Those services were paid with 300,000 shares
of our common stock.
We
have
issued stock options and warrants to service providers and recorded $21,785
of
expense during 2006 and $2,381 during 2005 related to these
issuances.
We
do not
have sufficient funds to pay the required contributions to the Osley
&Whitney, Inc. Retirement Plan (Plan) which currently approximate $1.4
million. We were required to contribute amounts in 2004, 2005 and 2006 and
are
required to make contributions in future years to fund the deficiency. We did
not make a contribution in 2004. During 2005, we made contributions of $6,439
and 500,000 shares of our common stock, which were valued on the contribution
date at $175,000 using the closing market price. In March 2005, we filed a
funding waiver application requesting waivers of the minimum funding standard
for the 2005 plan year of $513,551 and for the 2004 plan year of $979,328.
In
August 2006, we received a reply from the Department of the Treasury denying
our
request for waivers of the minimum funding standard for the 2005 and 2004 plan
years. As a result of these denials and our inability to fund pension plan
contributions which were due through September 2006, we have evaluated various
alternatives. We recorded defined benefit pension expense of approximately
$411,000 in 2006, including excise taxes of $213,000 for failing to make plan
contributions and plan expense of $222,000 in 2005, including excise taxes
of
$55,200. We may be required to pay interest on these excise taxes and
potentially could incur additional excise taxes of up to 100% of required plan
contributions that were not made. If we were to incur additional excise taxes,
we could lose the ability to generate cash using our secured accounts receivable
financing line or from other financing sources.
During
2006, the Pension Benefit Guarantee Corporation placed a lien on all of the
Company’s assets to secure pension payments due to the Plan. This lien is
subordinate to liens that secure accounts receivable financing and notes
payable. Although we have acted as the sponsor of the Plan since we acquired
O&W, recently it was determined that we may not have had, or currently have,
a legal obligation to do so from December 30, 2002 when we sold all of the
common stock of O&W to a third party. We are presently advocating this
position with the appropriate regulatory authorities to ascertain whether they
concur or disagree with this determination. If our current efforts do not result
in a concurrence with our position, we intend to pursue all appropriate further
avenues to prevail our position. Depending upon the ultimate outcome regarding
our obligations as sponsor of the Plan, adjustments to our financial statements
may be necessary.
In
March
2006, one of our subcontracts for services to the U.S. government ended when
required additional funds were not approved. We earned approximately $2.2
million or 26% of our revenue from this subcontract in 2005. Due to the nature
of certain of our contracts, contract terminations occur when projects are
completed or when appropriations of funds are used and new appropriations are
not approved. We have submitted proposals and have identified opportunities
for
other new contracts in 2005 and 2006 to replace revenue that does not continue
in the ordinary course of business, as well as to increase our
revenues.
When
we
experience contract terminations or reductions in customer staffing
requirements, we attempt to identify other revenue generating project
opportunities with our existing prime contractors or others to redeploy those
employees who are no longer providing billable services. In March 2006, in
response to the termination of the contract discussed above, we placed several
formerly billable employees on unpaid leave, realigned positions of our business
development staff, and redirected our selling and marketing activities towards
those opportunities that heighten the probability of increased revenues in
2006,
while preserving our long term business development initiatives. We are focusing
on a tactical program that seeks to grow business with existing clients and
a
Strategic Program that aligns us with major procurement activity for long term
growth.
We
are
actively pursuing opportunities to develop additional revenues in new and
existing target markets. In March 2006 we opened a regional office in Jackson,
Mississippi, and hired a new business development employee to pursue state
and
local government business opportunities within the Gulf Coast region. We also
retained a lobbying firm to assist us in that effort. Moreover, we are
channeling energies towards forming alliances with large systems integrators,
who are mandated by federal policy to direct defined percentages of their work
to small business subcontractors. In addition, we are currently working on
proposals for contract awards that we believe will enhance our posture as a
government contractor.
Early
successes in our 2006 initiatives are evident in the preferred relationships
we
have earned with several large systems integrators and one major product house.
In addition, we are member of one of only seven teams that won the U.S. Army’s
recent Strategic Services Sourcing (S3) Government-Wide Acquisition Contract.
Under our agreement with the prime contractor, we are identified as a primary
Earned Value Management resource, as well as a provider of network and software
services. In June 2006, we were awarded a prime contract under the Department
of
the Navy’s SeaPort-Enhanced (SeaPort-e) program. This contract allows us to
compete for and perform service requirements solicited by various Navy commands,
the Marine Corps, other organizations within the Department of Defense (DoD),
non-DoD agencies, and certain joint agency organizations for work that is
integrally related to the scope and mission of the contract. This work involves
professional services in
all
phases of naval ship and weapon systems acquisition and life-cycle support,
including
research and development support, prototyping, technology analysis, acquisition
logistics, project management support, modeling, test and evaluation trials,
crisis and consequence management, and engineering support.
Although
our future prospects appear promising, the lengthy government financing and
procurement processes may result in temporary operating losses until sales
increase to support our infrastructure and provide consistent cash flow to
support profitability.
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.
Future
Trends
We
believe that our operations, as currently structured, together with our current
financial resources, will result in improved financial performance in future
years.
There
is
no assurance, that our current resources will be adequate to fund the
liabilities for the O&W retirement plan or our current operations and
business expansion or that we will be successful in raising additional working
capital. Our failure to raise necessary working capital could force us to
curtail operations, which would have a material adverse effect on our financial
condition and results of operations.
Results
of Operations
Comparison
of the years ended December 31, 2006 and 2005
The
following table compares our statement of operations data for 2006 and 2005.
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.
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
As
a % of
|
|
|
|
As
a % of
|
|
%
Increase
|
|
Amount
of
|
|
|
|
|
2006
|
|
Sales
|
|
2005
|
|
Sales
|
|
(Decrease)
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
6,444,706
|
|
|
100.0
|
%
|
$
|
8,505,199
|
|
|
100.0
|
%
|
|
(24.2
|
)%
|
$
|
(2,060,493
|
)
|
|
Cost
of services
|
|
|
4,814,826
|
|
|
74.7
|
|
|
5,962,989
|
|
|
70.1
|
|
|
(19.3
|
)
|
|
(1,148,163
|
)
|
|
Gross
profit
|
|
|
1,629,880
|
|
|
25.3
|
|
|
2,542,210
|
|
|
29.9
|
|
|
(35.9
|
)
|
|
(912,330
|
)
|
|
General
and administrative
|
|
|
908,073
|
|
|
14.1
|
|
|
1,142,322
|
|
|
13.4
|
|
|
(20.5
|
)
|
|
(234,249
|
)
|
|
Defined
benefit pension plan
|
|
|
410,777
|
|
|
6.4
|
|
|
221,860
|
|
|
2.6
|
|
|
85.2
|
|
|
188,917
|
|
|
Selling
|
|
|
1,595,221
|
|
|
24.8
|
|
|
777,645
|
|
|
9.1
|
|
|
105.1
|
|
|
817,576
|
|
|
Research
and development
|
|
|
256,113
|
|
|
4.0
|
|
|
318,038
|
|
|
3.7
|
|
|
(19.5
|
)
|
|
(61,925
|
)
|
|
Impairment
loss and inventory obsolescence
|
|
|
261,100
|
|
|
4.1
|
|
|
-
|
|
|
0.0
|
|
|
|
|
|
261,100
|
|
|
Depreciation
and amortization
|
|
|
97,488
|
|
|
1.5
|
|
|
41,547
|
|
|
0.5
|
|
|
134.6
|
|
|
55,941
|
|
|
Write-off
of capitalized financing costs
|
|
|
-
|
|
|
0.0
|
|
|
44,857
|
|
|
0.5
|
|
|
|
|
|
(44,857
|
)
|
|
Total
operating expenses
|
|
|
3,528,772
|
|
|
54.8
|
|
|
2,546,269
|
|
|
29.9
|
|
|
38.6
|
|
|
982,503
|
|
|
Operating
loss
|
|
|
(1,898,892
|
)
|
|
(29.5
|
)
|
|
(4,059
|
)
|
|
(0.0
|
)
|
|
46,682.3
|
|
|
(1,894,833
|
)
|
|
Net
interest expense
|
|
|
(194,270
|
)
|
|
(3.0
|
)
|
|
(269,513
|
)
|
|
(3.2
|
)
|
|
(27.9
|
)
|
|
75,243
|
|
|
Other
income
|
|
|
498,088
|
|
|
7.7
|
|
|
298,985
|
|
|
3.5
|
|
|
66.6
|
|
|
199,103
|
|
|
Income
tax expense
|
|
|
(7,300
|
)
|
|
(0.1
|
)
|
|
(3,500
|
)
|
|
(0.0
|
)
|
|
108.6
|
|
|
(3,800
|
)
|
|
Net
income (loss) from continuing operations
|
|
|
(1,602,374
|
)
|
|
(24.9
|
)
|
|
21,913
|
|
|
0.3
|
|
|
(7,412.4
|
)
|
|
(1,624,287
|
)
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
0.0
|
|
|
12,233
|
|
|
0.1
|
|
|
(100.0
|
)
|
|
(12,233
|
)
|
|
Net
income (loss)
|
|
$
|
(1,602,374
|
)
|
|
(24.9
|
)%
|
$
|
34,146
|
|
|
0.4
|
%
|
|
(4,792.7
|
)%
|
$
|
(1,636,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-basic and diluted
|
|
$
|
(0.08
|
)
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales
for
the year ended December 31, 2006 decreased substantially by $2,060,493 or 24.2%
to $6,444,706 as compared to sales for the year ended December 31, 2005 of
$8,505,199. In March 2006, one of our subcontracts for services to the U.S.
government ended when required additional funds were not approved. We earned
approximately $2.2 million or 26% of our revenue from this subcontract during
the year ended December 31, 2005. One other subcontract had staffing reductions.
Due to the nature of certain of our contracts, contract terminations occur
when
projects are completed or when appropriations of funds are used and new
appropriations are not approved.
We
have
submitted proposals and have identified opportunities for other new contracts
to
replace sales that did not continue in the ordinary course of business, as
well
as to increase our sales. During the year ended December 31, 2006 we completed
new agreements and received new and expanded consulting services purchase
orders. Beginning in August 2006, we began to staff new projects and continued
to staff those projects with new employees during the fourth quarter of 2006.
Certain of these projects are short-term in nature and accordingly we expect
fluctuations in sales until longer term contracts are closed.
When
we
experience contract terminations or reductions in customer staffing
requirements, we attempt to identify other revenue generating project
opportunities with our existing prime contractors or others to redeploy those
employees who are no longer providing billable services. In March 2006, in
response to the termination of the contract discussed above, we placed several
formerly billable employees on unpaid leave, realigned positions of our business
development staff, and redirected our selling and marketing activities towards
those opportunities that heighten the probability of increased sales in 2006,
while preserving our long term business development initiatives.
During
the year ended December 31, 2006 and continuing in 2007, we are actively
pursuing opportunities to develop additional sales in new and existing target
markets. In March 2006, we opened a regional office in Jackson, Mississippi,
hired a new business development employee and retained a lobbying firm to pursue
state and local government business opportunities within the Gulf Coast region.
Moreover, we are also channeling energies towards forming alliances with large
systems integrators, who are mandated by federal policy to direct defined
percentages of their work to small business subcontractors. In addition, we
are
currently working on proposals for contract awards that we believe will enhance
our posture as a government contractor.
We
are
focusing on a tactical program that seeks to grow business with existing clients
and a strategic program that aligns us with major procurement activity for
long
term growth. We terminated our former business development director during
the
fiscal quarter ended March 31, 2006 and hired a new business development
director, who commenced employment on June 1, 2006, in our Vienna, Virginia
office with the objective of increasing our sales. During the fourth quarter
of
2006, we recruited new employees to fill positions in our expanded service
provider role with a major subcontractor to the U.S. government.
Early
successes in our 2006 initiatives are evident in the preferred relationships
we
have earned with several large systems integrators and one major technology
company. In addition, we are a member of one of only seven teams that in March
2006 won the U.S. Army’s Strategic Services Sourcing (S3) Government-Wide
Acquisition Contract. Under our agreement with the prime contractor, we are
identified as a primary Earned Value Management resource, as well as a provider
of network and software services. In June 2006, we were awarded a prime contract
under the Department of the Navy’s SeaPort-Enhanced (SeaPort-e) program. This
contract allows us to compete for and perform service requirements solicited
by
various Navy commands, the Marine Corps, other organizations within the
Department of Defense (DoD), non-DoD agencies, and certain joint agency
organizations for work that is integrally related to the scope and mission
of
the contract. This work involves professional services in
all
phases of naval ship and weapon systems acquisition and life-cycle support,
including
research and development support, prototyping, technology analysis, acquisition
logistics, project management support, modeling, test and evaluation trials,
crisis and consequence management, and engineering support.
Although
we believe that our future prospects are robust, the lengthy government
financing and procurement processes may result in operating losses until revenue
increases to support our infrastructure and provides consistent
profitability.
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 year ended December 31, 2006 was $4,814,826 or 74.7%
of
sales as compared to $5,962,989 or 70.1% of sales for the year ended December
31, 2005. Gross profit was $1,629,880 or 25.3% of sales for 2006 compared to
$2,542,210 or 29.9% of sales for 2005. The decrease in gross profit is due
to a
change in the mix of our business resulting from the termination of one
contract, a reduction in staffing for another contract, and the costs of
employees who did not generate billable revenue after contract reductions.
In
addition, we recorded $28,184 as cost of sales as a result of adopting SFAS
123R
in 2006. Although our objective is to maintain an overall gross margin of
approximately 30%, 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
year ended December 31, 2006 decreased by $234,249 or 20.5%. In 2006, we
experienced a decrease in accounting and legal expenses as a result of
completing audits of our financial statements and related regulatory filings
in
2005.
As
a
percentage of sales, general and administrative expenses were 14.1% for the
year
ended December 31, 2006 and 13.4% for the year ended December 31, 2005. We
anticipate that general and administrative expenses as a percent of sales will
decrease as we continue to implement our business strategy and grow our sales.
In addition, we recorded $9,807 as expense for the year ended December 31,
2006
as a result of adopting SFAS 123R. For 2006 we reclassified defined benefit
pension plan expense from general and administrative expense to a separate
line
item.
Defined
Benefit Pension Plan Expenses
Defined
benefit pension expenses include expenses (including excise taxes, professional
services and interest costs) associated with the O&W defined benefit
retirement plan of $410,777 for the year ended December 31, 2006 and $221,860
for the year ended December 31, 2005, an increase of $188,917. During the year
ended December 31, 2006 we received a reply from the Department of the Treasury
denying our request for waivers of the minimum funding standard for the 2005
plan year of $513,551 and for the 2004 plan year of $979,328. As a result of
these denials and our inability to fund pension plan contributions which were
due in 2006, we recorded defined benefit pension expense of approximately
$411,000 in 2006, including excise taxes of $213,000 for failing to make plan
contributions and $222,000 in 2005, including excise taxes of $55,200. Since
the
waivers were not granted, we have evaluated various alternatives.
During
2006, the Pension Benefit Guarantee Corporation placed a lien on all of the
Company’s assets to secure pension payments due to the Plan. This lien is
subordinate to liens that secure accounts receivable financing and notes
payable. Although we have acted as the sponsor of the Plan since we acquired
O&W, recently it was determined that we may not have had, or currently have,
a legal obligation to do so from December 30, 2002 when we sold all of the
common stock of O&W to a third party. We are presently advocating this
position with the appropriate regulatory authorities to ascertain whether they
concur or disagree with this determination. If our current efforts do not result
in a concurrence with our position, we intend to pursue all appropriate further
avenues to prevail our position. Depending upon the ultimate outcome regarding
our obligations as sponsor of the Plan, adjustments to our financial statements
may be necessary.
Selling
Expenses
For
the
year ended December 31, 2006, we incurred selling expenses of $1,595,221
associated with the growth of business in our IT Services Group, compared to
$777,645 for the year ended December 31, 2005, an increase of $817,576. We
recorded $205,059 of expense for the year ended December 31, 2006 as a result
of
adopting SFAS 123R. Selling expenses consist of our business development staff
including salaries, benefits, sales consultants, and travel
expenses.
Beginning
in the second quarter of 2005, we added new employees and changed the work
assignment of one employee and added sales consultants to focus on generating
new sales leads and new contract opportunities
.
As
a
result of the termination of one subcontract during the first quarter of 2006,
we reduced certain salaried selling positions. In the second quarter of 2006,
we
hired new business development personnel, including a new business development
director.
We
incurred additional expenses in 2006 associated with our new business
development efforts in the Gulf Coast region. We employ one person full time
and
use a lobbying firm in the Gulf Coast region. These individuals work closely
with our Chief Operations Officer to develop business opportunities in the
region.
We
added
one business development employee during August 2006, who formerly represented
us as a business development consultant. We believe that our current staffing
is
adequate to manage the existing volume of business and development
efforts.
Research
and Development, Impairment Loss and Inventory Obsolescence
For
the
year ended December 31, 2006, we continued the development of an access control
terminal and related software called TouchThru™. TouchThru™ is a self-contained
terminal enabling physical access control using biometric identification. It
incorporates fingerprint matching technology licensed from Ultra-Scan
Corporation, a private biometric technology company headquartered in Buffalo,
New York. TouchThru™ is the first biometric product we have developed and had
planned to market and sell it in 2006. We recorded $256,113 of research and
development expense compared to $318,038 for the year ended December 31, 2005,
a
decrease of $61,925. Expenses are related to the development of the TouchThru™
access control terminal including product testing and documentation. Also
included are expenses incurred to examine new business opportunities. During
the
year ended December 31, 2006, we eliminated one engineering position since
the
TouchThru™ product development was substantially complete.
During
the year ended December 31, 2006, we recorded an impairment loss
of
approximately $235,000 related to the carrying costs of TouchThru™ capitalized
software development costs, tooling costs and approximately $26,000 of inventory
obsolescence related to inventory we determined to be obsolete. Our TouchThru™
unit was designed around Ultra-Scan’s unique ultrasonic scanner. Although we
have demonstrated working prototypes and pre-production units of TouchThru™ at
several trade shows and to potential customers, we have decided to postpone
our
marketing and sales efforts on the current version of TouchThru™ pending the
release by Ultra-Scan of a revised and improved version of the scanner which
is
under development. We believe that the revised scanning technology and
TouchThru™ will be available by the end of 2007 or early 2008. We believe that
the new technology will reduce the size and cost of our access control terminal
and significantly enhance our marketing and sales success. Given these and
other
uncertainties, during 2006, we recorded an impairment loss for TouchThru™
tooling costs and the balance of unamortized capitalized software development
costs. In addition, we determined all related inventory was
obsolete.
Although
we are in a position to market and sell that product, we have revised our
strategy based on Ultra-Scan’s development of a next generation scanner that is
expected to replace the current scanner. We plan to market and sell a
re-designed TouchThru™ unit. We will expend very limited resources on our
current product version to introduce the capabilities of this product to the
market. The TouchThru™ unit will be marketed in a variety of industries and
markets, including the federal, state and local government, health care, travel
and general security, and access control. During the year ended December 31,
2006, we delivered demonstration and pre-production units for trial to certain
prospective customers in two industries.
We
believe that significant resources will be required to market and sell a newly
designed TouchThru™ product that is based on Ultra-Scan’s next generation
scanner. Given our limited financial resources at this time and other business
priorities, this may be deferred until the market is better established and
we
have the necessary working capital to support this product. We will continue
to
monitor the market and to determine when to enter this market in the future
at
the appropriate time and with sufficient resources.
Depreciation
and Amortization
Depreciation
and amortization expense was $97,488 for the year ended December, 31 2006
compared to $41,547 for the year ended December 31, 2005. This increase is
due
to depreciation of equipment and software that were added in 2005 and 2006
and
amortization of software development costs as we began to place TouchThru™
demonstration units with prospective customers.
Write-off
of Capitalized Closing Costs
During,
2005, the buyer of the assets and businesses of our prior business, 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. There was no write-off of capitalized financing
costs in 2006.
Operating
Loss
For
the
year ended December 31, 2006 our operating loss was $1,898,892 compared to
an
operating loss of $4,059 in the year ended December 31, 2005.
The
increase of $1,894,833 is principally attributable to:
|
·
|
a
decrease in gross profit of $912,330 incurred as a result of a decrease
in
sales of $2,060,493 and a decline in gross profit margin from 29.9%
to
25.3%;
|
|
·
|
recording
an impairment loss and inventory obsolescence of $261,100 related
to the
carrying values of TouchThru™
assets;
|
|
·
|
an
increase in selling expenses of $817,576 as we increased efforts
to grow
sales, including expense of $205,059 as a result of adopting SFAS
123R in
2006;
|
|
·
|
recording
$213,000 of excise taxes on unpaid contributions related to the O&W
defined benefit retirement plan upon receiving a reply from the Department
of the Treasury denying our request for waivers of the minimum funding
standard and our inability to make required pension plan contributions;
and
|
|
·
|
an
offset in part by a decrease in general and administrative expense
of
$234,249.
|
Included
in the above are expenses of $243,050 as a result of adopting SFAS 123R in
2006
and $21,785 as a result of warrants and stock options issued to
consultants.
The
non-recurring write off of capitalized financing costs of $44,857 recorded
in
the year ended December 31, 2005 contributed to the reduction of operating
income for the year ended December 31, 2005.
Net
Interest Expense
Net
interest expense consists of interest income offset by interest expense on
indebtedness and fees for financing accounts receivable invoices. Net interest
expense was $194,270 for the year ended December 31, 2006 compared to $269,513
for the year ended December 31, 2005. The reduction in net interest expense
of
$75,243 was principally due to a decrease in the volume of accounts receivable
invoices that were financed in 2006 compared to 2005. We also recorded interest
income of $22,103 upon collection of the balance of the note due from Express
Pattern.
Other
Income
Other
income for the year ended December 31, 2006 was $498,088 compared to other
income of $298,985 recorded in the year ended December 31, 2005. This was an
increase of $199,103 or 66.6%
We
were
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 asserted 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 alleged that in entering into
the
transaction it relied on various representations made by Spectra and Mr.
Lawandy, which were untrue at the time they were made. The trial was completed
in February 2005, and the jury returned a verdict in our favor in the amount
of
approximately $600,000. We appealed the amount of the verdict and entered into
a
settlement with the defendants in January 2006 and we received and recorded
other income of $498,088, net of legal fees and expenses of $164,412, in the
first quarter of 2006.
Other
income for the year ended December 31, 2005 is a gain on settlement with a
terminated employee of $290,533, which consists of his return to us of 500,000
shares of our common stock less legal expense that we incurred in connection
with the settlement. The shares were valued at the fair value on the date the
settlement agreement was executed. Another component of other income for the
year ended December 31, 2005 consists of a gain on the sale of office equipment
of $8,452 in connection with the relocation and sublease of office space in
the
Washington, D.C. area. These total $298,985.
Income
Taxes
Income
tax expense was $7,300 and $3,500 for the year ended December 31, 2006 and
2005,
respectively, consisting of state taxes.
Income
From Discontinued Operations
We
recorded income from discontinued operations of $12,223 for the year ended
December 31, 2005 which was the result of our former business, the Photonics
Group, which was reclassified as discontinued operations and no income was
recorded from discontinued operations for the year ended December 31, 2006.
Net
(Loss) Income
For
the
year ended December 31, 2006,
we
recorded a loss from continuing operations and a net loss of $(1,602,374),
or
$(.08) per share. This compares to income from continuing operations of $21,913
or $.00 per share and net income of $34,146 or $.00 per share for the year
ended
December 31, 2005
.
The
decrease of $1,636,520 from net income to a net loss is principally attributable
to:
|
·
|
a
decrease in gross profit of $912,330 incurred as a result of a decrease
in
sales of $2,060,493 and a decline in gross profit margin from 29.9%
to
25.3%;
|
|
·
|
recording
an impairment loss and inventory obsolescence of $261,100 related
to the
carrying values of TouchThru™
assets;
|
|
·
|
an
increase in selling expenses of $817,576 as we increased efforts
to grow
sales, including expense of $205,059 as a result of adopting SFAS
123R in
2006;
|
|
·
|
recording
$213,000 of excise taxes on unpaid contributions related to the O&W
defined benefit retirement plan upon receiving a reply from the Department
of the Treasury denying our request for waivers of the minimum funding
standard and our inability to make required pension plan
contributions;
|
|
·
|
an
offset in part by a decrease in general and administrative expense
of
$234,249 and net interest expense of $75,243;
and
|
|
·
|
an
offset in part due to an increase in other income of $199,103 in
2006 from
$298,985 in 2005 to $498,088 in
2006.
|
Included
in the above are expenses in 2006 of $243,050 as a result of adopting SFAS
123R
and $21,785 as a result of warrants and stock options issued to
consultants
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 consolidated financial statements presents a summary
of
significant accounting policies. The most critical accounting policies
follow.
Revenue
Recognition
Consulting
revenues are recognized as the consulting services are provided. Client deposits
received in advance are recorded as liabilities until associated services are
completed. During the year ended December 31, 2006 sales to three customers
accounted for 97% (91% in 2005) of total revenues from continuing operations
and
93% (92% in 2005) of accounts receivable at December 31, 2006. The mix of
clients changed from 2005 to 2006.
Accounts
Receivable Provisions
As
part
of the financial reporting process, management estimates and establishes
reserves for potential credit losses relating to the collection of certain
receivables. This analysis involves a degree of judgment regarding customers’
ability and willingness to satisfy its obligations to us. These estimates are
based on past history with customers and current circumstances. Management’s
estimates of doubtful accounts historically have been within reasonable limits
of actual bad debts. Management’s failure to identify all factors involved in
determining the collectibility of an account receivable could result in bad
debts in excess of reserves established.
Deferred
Tax Asset Valuation and Income Taxes
Management
calculates the future tax benefit relating to certain tax timing differences
and
available net operating losses and credits available to offset future taxable
income. This deferred tax asset is then reduced by a valuation allowance if
management believes it is more likely than not that all or some portion of
the
asset will not be realized. This estimate is based on historical profitability
results, expected future performance and the expiration of certain tax
attributes which give rise to the deferred tax asset. As of the balance sheet
date, a reserve has been established for the entire amount of the deferred
tax
asset. In the event, we generate future taxable income we will be able to
utilize the net operating loss carry forwards subject to any utilization
limitations. This will result in the realization of the deferred tax asset,
which has been fully reserved. As a result, we would have to revise estimates
of
future profitability and determine if its valuation reserve requires downward
adjustment.
At
December 31, 2006, we had federal net operating loss (NOL) carry forwards of
approximately $27.1 million that expire in years 2009 through 2026. Our ability
to utilize the federal NOL carry forwards may be impaired if we continue to
incur operating losses and may be limited by the change of control provisions
if
we issue substantial numbers of new shares or stock options.
Defined
Benefit Plan Assumptions
We
have
acted as sponsor to a defined benefit plan, under which participants earned
a
retirement benefit based upon a formula set forth in the plan. We record income
or expense related to the plan using actuarially determined amounts that are
calculated under the provisions of SFAS No. 87, "Employers' Accounting for
Pensions." Key assumptions used in the actuarial valuations include the discount
rate and the anticipated rate of return on plan assets. These rates are based
on
market interest rates, and therefore fluctuations in market interest rates
could
impact the amount of pension income or expense recorded for these plans. Despite
our belief that these estimates are reasonable for these key actuarial
assumptions, future actual results will likely differ from our estimates, and
these differences could materially affect our future financial statements either
unfavorably or favorably.
The
discount rate enables a company to state expected future cash flows at a present
value on the measurement date. We have little latitude in selecting this rate
since it is based on the yield on high-quality fixed income investments at
the
measurement date. A lower discount rate increases the present value of benefit
obligations and increases pension expense.
To
determine the expected long-term rate of return on pension plan assets,
management considers a variety of factors including historical returns and
asset
class return expectations based on the plan's current asset allocation.
Although
we have acted as the sponsor of the Plan since we acquired O&W, recently it
was determined that we may not have had, or currently have, a legal obligation
to do so from December 30, 2002 when we sold all of the common stock of O&W
to a third party. We are presently advocating this position with the appropriate
regulatory authorities to ascertain whether they concur or disagree with this
determination. If our current efforts do not result in a concurrence with our
position, we intend to pursue all appropriate further avenues to prevail our
position. Depending upon the ultimate outcome regarding our obligations as
sponsor of the Plan, adjustments to our financial statements may be
necessary.
Impairment
of Long-Lived Assets
We
evaluate at each balance sheet date the continued appropriateness of the
carrying value of our long-lived assets including our long-term receivables
and
property, plant and equipment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposals of Long Lived Assets." We review long-lived assets for impairment
when
events or changes in circumstances indicate that the carrying amount of any
such
assets may not be recoverable. If indicators of impairment are present,
management would evaluate the undiscounted cash flows estimated to be generated
by those assets compared to the carrying amount of those items. The net carrying
value of assets not recoverable is reduced to fair value. We consider continued
operating losses, or significant and long-term changes in business conditions,
to be the primary indicators of potential impairment. In measuring impairment,
we look to quoted market prices, if available, or the best information available
in the circumstances.
Share-Based
Payments
Prior
to
January 1, 2006, we accounted for stock option awards granted under our stock
option plan in accordance with the recognition and measurement provisions
of
Accounting Principles Board Option No. 25, “Accounting for Stock Issued to
Employees”, (“APB 25”) and related interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation”, (SFAS 123”). Share-based employee compensation expense was not
recognized in our consolidated statements of operations prior to January
1,
2006, as all stock option awards granted had an exercise price equal to or
greater than the market value of the common stock on the date of grant. As
permitted by SFAS 123, we reported pro-forma disclosures presenting operating
results and net income (loss) per share as if we had used the fair value
recognition provisions of SFAS 123 in the notes to the consolidated financial
statements. Stock-based compensation related to non-employees is accounted
for
based in the fair value of the related stock options in accordance with SFAS
123
and its interpretations.
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment”, (SFAS 123R) using the
modified prospective transition method.
Effect
of New Accounting Pronouncements
Statement
of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132R
This
Statement improves financial reporting by requiring an employer to recognize
the
over funded or under funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its balance sheet
and to recognize changes in that funded status in the year in which changes
occur through comprehensive income of a business entity. The implementation
of
this Statement did not have a significant impact on our financial
statements.
Statement
of Financial Accounting Standards No. 157, Fair Value
Measurements
On
September 15, 2006, the FASB issued
Statement
of Financial Accounting Standards No. 157, Fair Value Measurements, that
provides enhanced guidance for using fair value to measure assets and
liabilities. The standard responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever other
standards require or permit assets or liabilities to be measured at fair value.
The standard does not expand the use of fair value in any new circumstances.
It
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements.
Under
this standard, fair value refers to the price that would be received to sell
an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability. In support
of
this principle, the standard establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. The fair value hierarchy
gives the highest priority to quoted prices in active markets and the lowest
priority to unobservable data, for example, the reporting entity’s own data.
Under the standard, fair value measurements would be separately disclosed by
level within the fair value hierarchy.
This
Statement is effective for us as of December 31, 2007, and interim periods
within that year. The implementation of this Statement will not have a
significant effect on our financial statements.
FASB
Interpretation No. 48 (FIN 48), an Interpretation of SFAS 109
In
June
2006, the FASB issued FIN 48, an interpretation of SFAS 109.
FIN 48 clarifies the accounting for uncertainty in income taxes and reduces
the diversity in current practice associated with the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return by defining a “more-likely-than-not” threshold regarding the
sustainability of the position. We are required to adopt FIN 48 by the
first quarter of fiscal 2007. We do not believe that the adoption of FIN48
on
January 1, 2007 will have a material effect on our financial position, cash
flows or results of operations.
Statement
of Financial Accounting Standards No. 123R, Share-Based
Payment
In
December 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payment (“SFAS 123R”). SFAS 123R supersedes SFAS 123, Accounting for
Stock Based Compensation, and Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees (“APB 25) and its related implementation guidance.
On January 1, 2006, we adopted the provisions of SFAS 123R using the modified
prospective transition method. Under this method, we are required to record
compensation expense for all stock based awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding as of the beginning of the adoption. Prior period financial
statements have not been restated. Under SFAS 123R, compensation expense related
to stock based payments is recorded over the requisite service period based
on
the grant date fair value of the awards.
Prior
to
the adoption of SFAS 123R, we accounted for employee stock options using the
intrinsic value method in accordance with APB 25. Accordingly, no compensation
expense was recognized for stock options issued to employees as long as the
exercise price was greater than or equal to the market value of the common
stock
at the date of grant. In accordance with SFAS 123, we disclosed the summary
of
pro forma effects to reported net income or net loss as if we had elected to
recognize compensation costs based on the fair value of the awards at the grant
date.
The
compensation cost that has been charged against income for options granted
to
employees under the plans was $243,050 for the year ended December 31, 2006.
The
impact of this expense was to increase basic and diluted net loss per share
from
$(.06) to $(.08) for the year ended December 31, 2006. The adoption of SFAS
123R
did not have an impact on cash flows from operating or financing activities.
For
stock options issued as Non-ISO’s, a tax deduction is not allowed for income tax
purposes until the options are exercised. The amount of this deduction will
be
the difference between the fair value of our common stock and the exercise
price
at the date of exercise. Accordingly, there is a deferred tax asset recorded
for
the tax effect of the financial statement expense recorded. The tax effect
of
the income tax deduction in excess of the financial statement expense will
be
recorded as an increase to additional paid-in capital. Due to the uncertainty
of
the our ability to generate sufficient taxable income in the future to utilize
the tax benefits of the options granted, hawse have recorded a valuation
allowance to reduce its gross deferred tax asset to zero. As a result, for
the
year ended December 31, 2006, there is no income tax expense impact from
recording the fair value of options granted. No tax deduction is allowed for
stock options issued as ISO’s.
We
used
volatility of 71% when computing the value of stock options and warrants issued
during the nine months ended December 31, 2006 and 100% for options issued
during the three months ended March 31, 2006. This is based on a combination
of
both historical and implied volatility since the historical volatility has
trended downward especially during the period from July 2005, when we became
current in its 1934 Act filings with the SEC. In addition, our volume of shares
traded has increased in the past several quarters which we believe has provided
more liquidity and less volatility than was previously experienced. Each option
awarded in 2006 has a ten year exercise term and a holding period of ten years
was assumed. The expected dividend yield is zero percent and the expected life
of the options is ten years. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant and ranged from 4.42% to 5.11% for the year ended
December 31, 2006. We recorded expense for options and warrants issued to
employees and independent service providers for the year ended December 31,
2006
as follows:
|
Employee
stock options
|
|
$
|
243,050
|
|
|
Consultant
stock options
|
|
|
5,015
|
|
|
Warrants
|
|
|
16,770
|
|
|
Total
expense
|
|
$
|
264,835
|
|
Statement
of Financial Accounting Standards No. 154
,
"Accounting Changes and Error Corrections, - a Replacement of APB Opinion No.
20
and FASB Statement No.3"
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". The
Statement establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle
in the absence of explicit transition requirements specific to the newly adopted
accounting principle. The provisions of this Statement are effective for
accounting changes and corrections of errors occur in 2007 and thereafter.
Our
financial condition and results of
operations
will only be impacted by SFAS 154 if there are any accounting changes or
corrections of errors in the future.
ITEM
8A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures. Our management, with the participation
of
our 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
to
ensure
that information required to be disclosed by us in the reports that we file
or
submit under the Exchange Act is (i) recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms (ii)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes
in Internal Control over Financial Reporting. There were no changes in our
internal controls over financial reporting that occurred during our fiscal
fourth quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
AND
CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Set
forth
below are the names, ages and positions of our directors and executive officers
at December 31, 2006.
|
Name
|
|
Age
|
|
Position
|
|
Affiliated
Since
|
|
Michael
S. Smith
|
|
52
|
|
Chairman,
President, Chief Executive Officer and Chief Financial
Officer
|
|
1995
|
|
Paul
J. Delmore (1)
|
|
50
|
|
Director
|
|
2003
|
|
Allan
M. Robbins (1)
|
|
55
|
|
Director
|
|
2003
|
|
James
D. Frost
|
|
57
|
|
Chief
Technology Officer and Chief Operations Officer
|
|
2003
|
|
Deanna
Wohlschlegel
|
|
35
|
|
Secretary
|
|
2003
|
(1)
Member of the audit and compensation committees.
Each
director is elected for a period of one year and serves until his successor
is
duly elected by our stockholders. Officers are elected by and serve at the
will
of our board of directors.
Background
The
principal occupation of each of our directors and executive officers for at
least the past five years is as follows:
Michael
S. Smith
became a
director in 1995 and assumed the positions of chairman, president, chief
executive officer and chief financial officer in January 2003. Before joining
us, Mr. Smith co-founded and served as the president and chief executive officer
of Micropub Systems International Inc., a brewery system manufacturer, from
July
1997 to January 2003. Mr. Smith holds a BA degree from Cornell University and
a
JD degree from Cornell University School of Law.
Paul
J. Delmore
became a
director in April 2003 and is a member of the audit and compensation committees.
Mr. Delmore is a Managing Partner of Simpson, Delmore, Greene LLP, a full
service law firm located in San Diego, California. Mr. Delmore’s practice
includes representation of small companies, private and public, with respect
to
early formation issues, private placements, regulatory requirements for sale
of
securities, assistance with regulatory filing concerns and mergers and
acquisitions. Mr. Delmore has a BA degree from the State University of New
York
at Oswego and a JD degree from the University of San Diego School of Law. Mr.
Delmore is a member of the State Bar of California, the San Diego County Bar
Association, the Association of Southern California Defense Counsel and the
San
Diego Defense Lawyers Association.
Dr.
Allan M. Robbins
became a
director in April 2003 and is a member of the audit and compensation committees.
Dr. Robbins is the Medical Director and Chief Surgeon at Robbins Eye Associates
and Robbins Laser Site in Rochester, New York. He has also served as the CEO
of
the Genesee Valley Eye Institute. Dr. Robbins is a board-certified
ophthalmologist and completed his fellowship training at the University of
Rochester. Dr. Robbins has been recognized and received the AMA Commendation
for
Continuing Medical Education as well as the Americas Top Ophthalmologists
2002-2003 Award from the Consumers Research Council of America. Dr. Robbins
is a
member of the New York State Medical Society, New York State Ophthalmologist
Society, American Academy of Ophthalmology, American College of Surgeons,
International Society of Refractive Surgery (ISRS), and the American Society
of
Cataract and Refractive Surgery (ASCRS). Dr. Robbins was on the Scientific
Advisory Council for Phoenix Laser and a principal clinical investigator for
the
VISX laser during the FDA clinical trials.
James
D. Frost
has been
our chief technology officer since 2003 and our Chief Operations Officer since
2006. Mr. Frost is a Professional Engineer possessing over 25 years of
experience at senior and executive levels in information technology,
engineering, and environmental business units. Prior to joining us, Mr. Frost
was the practice director for Ciber, Inc. where he was responsible for managing
the technical IT practice for the federal systems division and the commercial
division for the mid-atlantic region. Mr. Frost also led the business process
re-engineering and start-up operations for multiple small business enterprises.
He has served as the operations manager for ABB Environmental Services, and
the
deputy program manager and section head at Lee Wan & Associates in Oak
Ridge, Tennessee. Mr. Frost has also served 20 years in the United States Navy
as a Navy Civil Engineer Corps Officer.
Deanna
Wohlschlegel
has been
our corporate secretary and controller since May 2003. Prior to that Ms.
Wohlschlegel was corporate controller for Micropub Systems International, Inc.
from January 1999 until joining Infinite Group. She has an associates degree
in
accounting from Finger Lakes Community College.
Committees
of the board of directors
Our
board
of directors has an audit committee and a compensation committee. The audit
committee reviews the scope and results of the audit and other services provided
by our independent accountants and our internal controls. The compensation
committee is responsible for the approval of compensation arrangements for
our
officers and the review of our compensation plans and policies. Each committee
is comprised of Messrs. Delmore and Robbins, our non-employee independent
outside directors.
Compensation
committee interlocks and insider participation in compensation decisions
None
of
the directors serving on the compensation committee of our board of directors
is
employed by us. In addition, none of our directors or executive officers is
a
director or executive officer of any other corporation that has a director
or
executive officer who is also a member of our board of directors.
Audit
committee financial expert
Our
audit
committee is comprised of Paul Delmore, as chairman, and Allan Robbins. The
Board has determined that Paul Delmore qualifies as our “audit committee
financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-B.
Neither Mr. Delmore nor Dr. Robbins is independent for audit committee purposes
under the definition contained in Section 10A(m)(3) of the Exchange
Act.
Code
of Ethics
We
have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer and other persons performing similar functions,
as
well as all of our other employees and directors. This code of ethics is posted
on our website at
www.us-igi.com
.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers and directors, and persons
who
own more than ten percent of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.
Based
solely on review of the copies of such forms furnished to us, or written
representations that no Forms 5 were required, we believe that all Section
16(a)
filing requirements applicable to our officers and directors were complied
with
during the year ended December 31, 2006. With respect to any former directors,
officers, and greater than ten-percent stockholders of Infinite Group, Infinite
Group does not have any knowledge of any known failures to comply with the
filing requirements of Section 16(a).
ITEM
10. EXECUTIVE COMPENSATION
The
Summary Compensation Table below includes, for each of the fiscal year ended
December 31, 2006 individual compensation for services to Infinite Group paid
to: (1) the chief executive officer, and (2) the other most highly paid
executive officers of Infinite Group in 2006 whose salary and bonus exceeded
$100,000 (together, the “Named Executives”).
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
All
Other
Compensation
(1)
|
|
Total
|
|
|
Michael
S. Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President,
Chief Executive Officer, Chief Financial Officer and Director
|
|
|
2006
|
|
$
|
181,194
|
|
$
|
51,728
|
|
$
|
2,272
|
|
$
|
235,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
D. Frost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Technology Officer and Chief Operations Officer
|
|
|
2006
|
|
$
|
225,000
|
|
$
|
—
|
|
$
|
7,387
|
|
$
|
232,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects
life insurance premiums paid by Infinite
Group.
|
Stock
Options
The
following table provides information with respect to the value of all
unexercised options previously awarded to our Named Executives. There were
no
outstanding stock awards at December 31, 2006.
|
Name
|
|
Number
of Securities Underlying Unexercised Options
Exercisable
|
|
Option
Exercise Price
|
|
Option
Expiration Date
|
|
|
Michael
S. Smith
|
|
|
500
|
|
$
|
5.00
|
|
|
6/26/2007
|
|
|
|
|
|
500
|
|
$
|
1.88
|
|
|
6/30/2008
|
|
|
|
|
|
10,000
|
|
$
|
1.38
|
|
|
7/1/2009
|
|
|
|
|
|
5,000
|
|
$
|
1.50
|
|
|
12/31/2010
|
|
|
|
|
|
5,000
|
|
$
|
2.53
|
|
|
12/31/2011
|
|
|
|
|
|
5,000
|
|
$
|
.14
|
|
|
12/31/2012
|
|
|
|
|
|
500,000
|
|
$
|
.05
|
|
|
5/5/2013
|
|
|
|
|
|
500,000
|
|
$
|
.25
|
|
|
3/8/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
D. Frost
|
|
|
500,000
|
|
$
|
.05
|
|
|
5/5/2013
|
|
|
|
|
|
500,000
|
|
$
|
.09
|
|
|
3/8/2015
|
|
|
|
|
|
500,000
|
|
$
|
.25
|
|
|
3/8/2015
|
|
Employment
Agreements
In
2003,
we entered into employment agreements with Messrs. Smith and Frost with terms
of
five years through May 2008. These agreements are essentially identical and
provide for annual base compensation of $150,000 for five-year terms. In
addition, in accordance with each agreement we have issued 500,000 shares of
our
common stock with a value of $25,000 as of the date of issuance and 500,000
employee stock options exercisable at $.05 per share. The agreements provide
for
severance payments of 12 months and 24 months, respectively, of salary in the
event of termination for certain causes. Each agreement also provides for
incentive compensation, termination benefits in the event of death, disability
and termination for other than cause, and a covenant against competition.
Compensation
of Directors
The
following table provides compensation information for the year ended December
31, 2006 for each of the independent members of our board of directors. We
do
not pay any directors’ fees. Directors are reimbursed for the costs relating to
attending board and committee meetings.
|
Name
|
|
Option
Awards (1)
|
|
Total
|
|
|
Paul
J. Delmore
|
|
$
|
918
|
|
$
|
918
|
|
|
Allan
M. Robbins
|
|
$
|
918
|
|
$
|
918
|
|
(1)
Amounts are calculated using the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, Share-Based Payment. See the section titled
“Statement of Financial Accounting Standards No. 123R, Share-Based Payment” in
this Form 10-KSB regarding assumptions underlying valuation of equity awards.
At
December 31, 2006, the aggregate number of option awards outstanding for each
director was 62,500 options for shares of which 59,167 were vested for each
director.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
The
following table sets forth information regarding the beneficial ownership of
our
common stock, our only class of voting securities, as of March 31, 2007
by:
|
·
|
each
person known to us to be the beneficial owner of more than 5% of
our
outstanding shares;
|
|
·
|
each
Named Executive named in the Summary Compensation Table above;
|
|
·
|
all
of our directors and executive officers as a group.
|
Except
as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of common stock owned by them. All information
with respect to beneficial ownership has been furnished to us by the respective
stockholder. The address of record of each individual listed in this table,
except if set forth below, is c/o Infinite Group, Inc., 60 Office Park Way,
Pittsford, New York 14534.
|
Name
of Beneficial Owner (1)
|
|
Shares
of Common Stock Beneficially Owned (2)
|
|
Percentage
of Ownership
|
|
Michael
S. Smith
|
|
1,516,000(4)
|
|
4.7%
|
|
Paul
J. Delmore
|
|
4,887,834(5)
|
|
15.2%
|
|
Allan
M. Robbins
|
|
7,818,154(6)
|
|
24.3%
|
|
James
D. Frost
|
|
2,000,000(7)
|
|
6.2%
|
|
Michael
Tartal
|
|
333,333(8)
|
|
*
|
|
All
Directors and Officers (6 persons) as a group
|
|
16,585,322(3)
|
|
51.5%
|
|
|
|
|
|
|
|
5%
Stockholders
|
|
|
|
|
|
Northwest
Hampton Holdings, LLC (9)
c/o
Stuart L. Levison, Esq.
Allen
& O’Brien
One
East Avenue
Rochester,
New York 14604
|
|
10,301,440
|
|
31.5%
|
|
|
|
|
|
|
|
David
N. Slavny Family Trust
20
Cobble Creek Road
Victor,
NY 14564
|
|
1,266,667
(10)
|
|
5.6%
|
*
less
than 1%
|
(1)
|
Pursuant
to the rules of the Securities and Exchange Commission, shares of
common
stock which an individual or group has a right to acquire within
60 days
from March 31, 2007 pursuant to the exercise of options or warrants
or
upon the conversion of securities are deemed to be outstanding for
the
purpose of computing the percent of ownership of such individual
or group,
but are not deemed to be outstanding for the purpose of computing
the
percentage ownership of any other person shown in the table. On March
31,
2007, we had 22,414,965 shares of common stock
outstanding.
|
|
(2)
|
Assumes
that all currently exercisable options or warrants or convertible
notes
owned by the individual have been exercised.
|
|
(3)
|
Assumes
that all currently exercisable options or warrants owned by members
of the
group have been exercised and includes options granted to Deanna
Wohlschlegel, Infinite Group’s Secretary and
Controller.
|
|
(4)
|
Includes
1,026,000 shares subject to currently exercisable
options.
|
|
(5)
|
Includes
(i) 4,827,000 shares owned of record by Upstate Holding Group, LLC,
an
entity wholly-owned by Mr. Delmore, and 60,834 shares subject to
currently
exercisable options.
|
|
(6)
|
Includes
(i) 6,757,320 shares, which are issuable upon the conversion of the
notes
including principal in the amount of $264,000 and accrued interest
in the
amount of $73,866 through March 31, 2007; and 60,834 shares subject
to
currently exercisable options.
|
|
(7)
|
Includes
1,500,000 shares subject to currently exercisable options.
|
|
(8)
|
Includes
333,333 shares subject to currently exercisable
options.
|
|
(9)
|
Includes
10,301,440 shares, which are issuable upon the conversion of notes
including principal in the amount of $432,124 and accrued interest
in the
amount of $82,948 through March 31, 2007.
|
|
(10)
|
Includes
166,667 shares subject to currently exercisable
options.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
We
have
stock option plans, which were adopted by our board and approved by our
stockholders, covering an aggregate of 5,223,000 unexercised shares of our
common stock at December 31, 2006, consisting of both incentive stock options
within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986
(the
Code) and non-qualified options. The option plans are intended to qualify under
Rule 16b-3 of the Securities Exchange Act of 1934. Incentive stock options
are
issuable only to our employees, while non-qualified options may be issued to
non-employees, consultants, and others, as well as to employees.
The
option plans are administered by the our compensation committee, which
determines those individuals who shall receive options, the time period during
which the options may be partially or fully exercised, the number of share
of
common stock that may be purchased under each option, and the option
price.
The
per
share exercise price of an incentive or non-qualified stock option may not
be
less than the fair market value of the common stock on the date the option
is
granted. The aggregate fair market value (determined as of the date the option
is granted) of the shares of common stock for which incentive stock options
are
first exercisable by any individual during any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him or her, more than 10% of the total
combined voting power of all classes of stock of Infinite Group shall be
eligible to receive any incentive stock option under the option plans unless
the
option price is at least 110% of the fair market value of our common stock
subject to the option, determined on the date of grant. Non-qualified options
are not subject to this limitation.
An
optionee may not transfer an incentive stock option, other than by will or
the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. In the event of termination
of
employment other than by death or disability, the optionee will have thirty
(30)
days after such termination during which to exercise the option. Upon
termination of employment of an optionee by reason of death or permanent total
disability, the option remains exercisable for one year thereafter to the extent
it was exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
Pursuant
to our option plans, each new non-employee director is automatically granted,
upon becoming a director, an option to purchase 7,500 shares of our common
stock
at the fair market value of such shares on the grant date. In addition, each
non-employee director is automatically granted an option to purchase 5,000
shares at the fair market value of such shares on the date of grant, on the
date
of our annual meeting of stockholders. These options vest 1/3 upon grant and
1/3
at the end of each subsequent year of service. In April 2003, we granted 7,500
options to each of our two new directors. In addition to the foregoing, in
March
2005, we granted 50,000 non-qualified options and in February 2006 on the date
of our annual meeting of stockholders, we granted 5,000 options to each of
our
two outside directors. As of December 31, 2006, we have granted 151,000 options
to our three board members, of which 144,344 are exercisable at December 31,
2006 at prices ranging from $.10 to $5.00.
Options
under the option plans must be granted within 10 years from the effective date
of each respective plan. Incentive stock options granted under the plan cannot
be exercised more than 10 years from the date of grant, except that incentive
stock options issued to greater than 10% stockholders are limited to four-year
terms. All options granted under the plans provide for the payment of the
exercise price in cash or by delivery of shares of common stock already owned
by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of common stock to purchase
additional shares of common stock and may theoretically exercise all of his
stock options without making any additional cash investment.
Any
unexercised options that expire or that terminate upon an optionee's ceasing
to
be affiliated with Infinite Group become available once again for issuance.
The
following table summarizes as of December 31, 2006 the (i) currently exercisable
options granted under our plans and (ii) all other securities subject to
contracts, options, warrants and rights or authorized for future issuance
outside our plans. The shares covered by outstanding options or authorized
for
future issuance are subject to adjustment for changes in capitalization stock
splits, stock dividends and similar events.
|
|
|
Equity
Compensation Plan Table
|
|
|
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity
Compensation Plans Previously Approved By Security
Holders
(1)
|
|
|
4,421,000
|
|
$
|
.23
|
|
|
802,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Granted to Service Providers
(2)
|
|
|
725,000
|
|
$
|
.55
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,146,000
|
|
$
|
.27
|
|
|
802,000
|
|
|
(1)
|
Consists
of grants under our Board of Directors, 1995, 1996, 1997, 1998, 1999
and
2005 Stock Option Plans.
|
|
(2)
|
Consists
of warrants to purchase 75,000 shares of common stock issued to a
service
provider in connection with debt financings in 2002, which are exercisable
at $2.40 per share and expire in 2007; warrants to purchase 500,000
and
50,000 shares of common stock issued to two consultants which are
exercisable at $.30 and $.35 per share, respectively, expire in 2011
and
are only exercisable if we realize certain sales as a result of each
consultant’s efforts on our behalf; and warrants to purchase 100,000
shares of common stock issued to an investment banking group for
services
during 2006, which are exercisable at $.50 per share and expire in
2010.
|
At
December 31, 2006, we had notes payable and accrued interest of $331,681 due
to
Dr. Allan M. Robbins, a member of our board, and $504,950 due to Northwest
Hampton Holdings, LLC. These notes and accrued interest are convertible into
shares of our common stock at $.05 per share at the option of the note, provided
that such conversions do not result in a change of control that would limit
Infinite Group’s utilization of its net operating loss carryforwards. If the
principal and accrued interest were converted in full, we would be required
to
issue 6,633,638 common shares to the Dr. Robbins and 10,098,992 common shares
to
Northwest Hampton Holdings, LLC.
As
of
December 31, 2006 if all of the aforementioned incentive and non-qualified
options and warrants were to be exercised and notes including accrued interest
were to be converted to shares of our common stock, we would be obligated to
issue an additional 21,378,630 common shares.
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
Intelligent
Consulting, LLC
We
are
obligated under various convertible notes payable to Northwest Hampton Holdings,
LLC at December 31, 2006. The sole member of Northwest Hampton Holdings, LLC
is
James Villa, an individual. He is also the sole member of Intelligent
Consulting, LLC (“ICC”), a consulting firm which provides consulting services to
us. We have contracted with ICC on a month to month basis since 2003. The
consulting services provided by ICC have included developing new business
strategies that led to our disposal of all of our former businesses and to
implementing our current business plans; developing and implementing our
business plans for TouchThru™ and biometric applications; developing and
implementing improvements to our technology infrastructure; and specific
projects as directed by our President to assist us in developing and
implementing our business plans and other corporate matters. During the years
ended December 31, 2005 and 2006, we paid ICC $223,384 and $213,650,
respectively, for services its personnel provided.
Northwest
Hampton Holdings, LLC, Dr. Allan M. Robbins and Paul
Delmore
As
of
December 31, 2006 and 2005, we were obligated to Northwest Hampton Holdings,
LLC
under the terms of a convertible note payable of $203,324 bearing interest
at 8%
per annum. The terms of the note were subsequently revised and the maturity
date
was extended to January 1, 2016 with principal and accrued interest convertible
at the option of the holder into shares of common stock at $.05 per
share.
At
December 31, 2006, we were obligated to Northwest Hampton Holdings, LLC under
the terms of convertible notes payable of $228,800 with interest at 8%. The
terms of the notes were revised and the maturity dates were extended to January
1, 2016 with principal and accrued interest convertible at the option of the
into shares of common stock at $.05 per share. In December, 2005, $25,000 of
the
principal of the notes was converted by the holder into 500,000 shares of common
stock reducing the principal balance to $292,800 at December 31, 2005. In May
2006, another $50,000 was converted by the holder into 1,000,000 shares of
common stock and in December 2006 another $14,000 was converted by the holder
into 280,000 shares of common stock, reducing the principal balance to $228,800
at December 31, 2006.
At
December 31, 2006, we were obligated to Dr. Allan M. Robbins, a member of our
board of directors under the terms of convertible notes payable of $264,000
with
interest at 8%. The terms of the notes were modified and the maturity dates
were
extended to January 1, 2016 with principal and accrued interest convertible
into
shares of common stock at $.05 per share. In May 2006, $50,000 was converted
by
the holder into 1,000,000 shares of common stock.
Thereafter,
the interest rates for the aforementioned notes payable will be adjusted
annually, on January 1
st
of
each
year, to a rate equal to the prime rate in effect on December 31
st
of the
immediately preceding year, plus one and one quarter percent, and in no event,
shall the interest rate be less than 6% per annum. We executed collateral
security agreements with the note holders providing for a security in interest
in all our assets.
Generally,
upon notice, prior to the note maturity date, we can prepay all or a portion
of
the outstanding note principal; provided, however, at no time can we prepay
an
amount that would result in a change of control and limit the use of our net
operating loss carryforwards if the same amount were converted by the note
holder.
The
notes
are convertible into shares of common stock subject to the following
limitations. The notes are not convertible to the extent that shares of common
stock issuable upon the proposed conversion would result in a change in control
which would limit the use of our net operating loss carryforwards; provided,
however, if we close a transaction with another third party or parties that
results in a change of control which will limit the use of our net operating
loss carryforwards, then the foregoing limitation shall lapse.
Prior
to
any conversion, each note holder holding a note which is then convertible into
5% or more of our common stock shall be entitled to participate on a pari passu
basis with the requesting note holder and upon any such participation the
requesting note holder shall proportionately adjust his conversion request
such
that, in the aggregate, a change of control, which will limit the use of our
net
operating loss carryforwards, does not occur.
During,
2006, we entered into two short-term note demand note payable agreements with
Dr. Allan Robbins, a member of our board of directors, totaling $130,000 with
interest at 18%. The balance of the notes at December 31, 2006 was
$105,000.
During
2006, we entered into a short-term demand note payable agreement with Mr. Paul
Delmore, our chairman of the board of directors, for $45,000 with interest
at
10.25%. The balance of the note at December 31, 2006 was $43,663.
David
N. Slavny Family Trust
During
2005, we issued various notes to the individuals that control the David N.
Slavny Family Trust, which is a stockholder. The notes were consolidated into
one note of $185,000 with interest payable monthly at 12% with all principal
maturing on January 1, 2008. The notes are secured by all of the assets of
Infinite Group, Inc.
Director
Independence
Our
board
of directors has determined that Messrs. Delmore and Robbins are “independent”
in accordance with the Nasdaq’s standards. Messrs. Delmore and Robbins are the
sole members of our audit
and
compensation committees
. They are independent for compensation committee
purposes but are not sufficiently independent for audit committee purposes
under
the Nasdaq’s standards by virtue of their respective beneficial ownership of
15.2% and 24.3% of our common stock.
ITEM
13.
EXHIBITS
The
Exhibits listed below are filed as part of this Report:
|
3.1
|
Restated
Certificate of Incorporation of the Company. (1)
|
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation
dated January 7, 1998. (3)
|
|
3.3
|
Certificate
of Amendment of Certificate of Incorporation dated February 16, 1999.
(4)
|
|
3.4
|
Certificate
of Amendment of Certificate of Incorporation dated February 28, 2006.
(6)
|
|
3.5
|
By-Laws
of the Company. (1)
|
|
4.1
|
Specimen
Stock Certificate. (1)
|
|
10.1
|
Form
of Stock Option Plan. (2)
|
|
10.2
|
Form
of Stock Option Agreement. (1)
|
|
10.3
|
Employment
Agreement between Michael Smith and the Company dated May 5, 2003.
(5)
|
|
10.4
|
Employment
Agreement between James Frost and the Company dated May 12, 2003.
(5)
|
|
10.5
|
License
Agreement between Ultra-Scan Corporation and the Company dated June
11,
2003. (5)
|
|
10.6
|
Promissory
Note dated August 13, 2003 in favor of Carle C. Conway.
(5)
|
|
10.7
|
Promissory
Note dated January 16, 2004 in favor of Carle C. Conway.
(5)
|
|
10.8
|
Promissory
Noted dated March 11, 2004 in favor of Carle C. Conway.
(5)
|
|
10.9
|
Promissory
Note dated December 31, 2003 in favor of Northwest Hampton Holdings,
LLC.
(5)
|
|
10.10
|
Modification
Agreement to Promissory Notes between Northwest Hampton Holdings,
LLC and
the Company dated December 1, 2004.
(5)
|
|
10.11
|
Modification
Agreement to Promissory Notes between Allan
Robbins and the Company dated December 1, 2004.
(5)
|
|
10.12
|
Modification
Agreement No. 2 to Promissory Notes between Northwest Hampton Holdings,
LLC and the Company dated June 1, 2005.
(5)
|
|
10.13
|
Modification
Agreement No. 2 to Promissory Notes between Allan Robbins and the
Company
dated June 1, 2005. (5)
|
|
10.14
|
Modification
Agreement No. 3 to Promissory Notes between Northwest Hampton Holdings,
LLC and the Company dated October 1, 2005.
(6)
|
|
10151
|
Modification
Agreement No. 3 to Promissory Notes between Allan Robbins and the
Company
dated October 1, 2005. (6)
|
|
10.16
|
Modification
agreement to promissory notes between the Company and Carle C. Conway
dated December 31, 2005. (6)
|
|
10.17
|
Promissory
note dated December 31, 2005 in favor of David N. Slavny and Leah
A.
Slavny.*
|
|
10.18
|
Collateral
security agreement between the Company and David N. Slavny and Leah
A.
Slavny dated December 31, 2005. (6)
|
|
10.19
|
Modification
Agreement to Promissory Note between Northwest Hampton Holdings,
LLC and
the Company dated December 6, 2005. (6)
|
|
10.20
|
Collateral
security agreement between the Company and Northwest Hampton Holdings,
LLC
dated February 15, 2006. (6)
|
|
10.21
|
Collateral
security agreement between the Company and Allan Robbins dated February
15, 2006. (8)
|
|
10.22
|
Purchase
and sale agreement between the Company and Amerisource Funding, Inc.
dated
May 21, 2004*
|
|
10.23
|
Account
modification agreement between the Company and Amerisource Funding,
Inc.
dated August 5, 2005*
|
|
21.1
|
Subsidiaries
of the Registrant. (5)
|
|
23.1
|
Consent
of Freed Maxick & Battaglia, CPAs, PC, independent registered public
accounting firm*
|
|
31.1
|
Chief
Executive Officer Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Chief
Financial Officer Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
32.1
|
Chief
Executive Officer Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
32.2
|
Chief
Financial Officer Certification pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.*
|
*Filed
as
an exhibit hereto.
|
(1)
|
Previously
filed as an Exhibit to the Company's Registration Statement on Form
S-1
(File #33-61856). This Exhibit is incorporated herein by reference.
|
|
(2)
|
Incorporated
by reference to 1993 Preliminary Proxy Statement.
|
|
(3)
|
Incorporated
by reference to Annual Report on Form 10-KSB for the fiscal year
ended
December 31, 1997.
|
|
(4)
|
Incorporated
by reference to Annual Report on Form 10-KSB for the fiscal year
ended
December 31, 1998.
|
|
(5)
|
Incorporated
by reference to Annual Report on Form 10-KSB for the fiscal year
ended
December 31, 2002.
|
|
(6)
|
Incorporated
by reference to Annual Report on Form 10-KSB for the fiscal year
ended
December 31, 2005.
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
aggregate fees billed by our principal accounting firm, Freed Maxick &
Battaglia, CPAs, PC, for the years ended December 31, 2006 and 2005 are as
follows:
|
|
|
2006
|
|
2005
|
|
|
Audit
fees
|
|
$
|
89,156
|
|
$
|
174,344
|
|
|
Audit
related fees
|
|
|
-
|
|
|
-
|
|
|
Total
audit and audit related fees
|
|
$
|
89,156
|
|
$
|
174,344
|
|
|
Tax
fees
|
|
|
-
|
|
|
-
|
|
|
All
other fees
|
|
|
3,219
|
|
|
-
|
|
|
Total
fees
|
|
$
|
92,375
|
|
$
|
174,344
|
|
During
2005, Infinite Group, Inc. and its independent registered public accounting
firm
completed the audits and related SEC reports in connection with fiscal 2003,
2004 and 2005. The audit fees (including fees for Form 10-QSB reviews) for
2005
in the preceding table consist of fees billed of $25,636 for fiscal 2005,
$111,530 for fiscal 2004 and $37,178 for fiscal 2003.
As
a
matter of policy, each of the permitted non-audit services has been pre-approved
by the audit committee or the audit committee’s chairman pursuant to delegated
authority by the audit committee, other than de minimus non-audit services
for
which the pre-approval requirements are waived in accordance with the rules
and
regulations of the SEC.
Audit-Related
Fees
The
audit
related fees were zero for the periods presented.
Tax
Fees
The
tax
fees were zero for the periods presented.
All
Other Fees
All
other
fees were for consulting services.
Audit
Committee Pre-Approval Policies and Procedures
The
audit
committee charter provides that the audit committee will pre-approve audit
services and non-audit services to be provided by our independent auditors
before the accountant is engaged to render these services. The audit committee
may consult with management in the decision-making process, but may not delegate
this authority to management. The audit committee may delegate its authority
to
pre-approve services to one or more committee members, provided that the
designees present the pre-approvals to the full committee at the next committee
meeting.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act the registrant caused
this report to be signed on March 31, 2007 on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
Infinite
Group, Inc.
|
|
|
|
|
|
By:
|
/s/ Michael
S. Smith
|
|
|
Michael
S. Smith, President
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
|
|
|
|
|
/s/
Michael S. Smith
|
|
|
|
|
Michael
S. Smith
|
|
Chief
Executive Officer, President and Director
(principal
executive officer)
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael S. Smith
|
|
|
|
|
Michael
S. Smith
|
|
Chief
Financial Officer
(principal
financial and accounting officer)
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Paul J. Delmore
|
|
|
|
|
Paul
J. Delmore
|
|
Director
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Allan M. Robbins
|
|
|
|
|
Allan
M. Robbins
|
|
Director
|
March
31, 2007
|
CONSOLIDATED
FINANCIAL
STATEMENTS
INFINITE
GROUP, INC.
DECEMBER
31, 2006
with
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INFINITE
GROUP, INC.
CONTENTS
|
|
|
Page
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
Balance
Sheets
|
|
F-2
- F-3
|
|
|
|
|
|
Statements
of Operations
|
|
F-4
|
|
|
|
|
|
Statements
of Stockholders' Deficiency
|
|
F-5
|
|
|
|
|
|
Statements
of Cash Flows
|
|
F-6
- F-7
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
- F-33
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Infinite
Group, Inc.:
We
have
audited the accompanying consolidated balance sheets of Infinite Group, Inc.
as
of December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders' deficiency, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Infinite Group, Inc. as
of
December 31, 2006 and 2005, and the consolidated results of its operations
and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 3 to the consolidated financial statements, in connection
with
the required adoption of a new accounting principle in 2006, the Company changed
its method of accounting for equity based payments.
/s/
FREED
MAXICK & BATTAGLIA, CPAs, PC
Buffalo,
New York
March
30,
2007
INFINITE
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
73,786
|
|
$
|
109,090
|
|
|
Accounts
receivable, net of allowances of $53,000
|
|
|
487,240
|
|
|
875,538
|
|
|
Notes
receivable, current portion
|
|
|
4,968
|
|
|
4,746
|
|
|
Inventories
|
|
|
-
|
|
|
24,664
|
|
|
Prepaid
expenses and, other current assets
|
|
|
38,600
|
|
|
49,516
|
|
|
Total
current assets
|
|
|
604,594
|
|
|
1,063,554
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
80,612
|
|
|
190,520
|
|
|
|
|
|
|
|
|
|
|
|
Software
development costs, net
|
|
|
-
|
|
|
207,348
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Note
receivable
|
|
|
-
|
|
|
78,439
|
|
|
Deposits
|
|
|
19,523
|
|
|
16,703
|
|
|
|
|
|
19,523
|
|
|
95,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
704,729
|
|
$
|
1,556,564
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
224,051
|
|
$
|
412,100
|
|
|
Accrued
payroll
|
|
|
216,397
|
|
|
186,863
|
|
|
Accrued
interest payable
|
|
|
176,734
|
|
|
118,913
|
|
|
Accrued
retirement and pension
|
|
|
1,807,524
|
|
|
152,050
|
|
|
Accrued
expenses-other
|
|
|
62,042
|
|
|
60,977
|
|
|
Current
maturities of long-term obligations-bank
|
|
|
50,354
|
|
|
12,778
|
|
|
Notes
payable
|
|
|
30,000
|
|
|
30,000
|
|
|
Notes
payable-related parties
|
|
|
148,663
|
|
|
-
|
|
|
Total
current liabilities
|
|
|
2,715,765
|
|
|
973,681
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Bank
|
|
|
-
|
|
|
50,600
|
|
|
Related
parties
|
|
|
1,146,124
|
|
|
1,260,124
|
|
|
Accrued
pension obligation
|
|
|
706,196
|
|
|
2,405,612
|
|
|
Total
liabilities
|
|
|
4,568,085
|
|
|
4,690,017
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 13 and 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficiency:
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value, 60,000,000 shares
|
|
|
|
|
|
|
|
|
Authorized
(20,000,000 -2005);
|
|
|
|
|
|
|
|
|
22,414,965
(19,856,881 - 2005) shares
|
|
|
|
|
|
|
|
|
issued
and outstanding
|
|
|
22,415
|
|
|
19,857
|
|
|
Additional
paid-in capital
|
|
|
28,981,059
|
|
|
28,523,334
|
|
|
Common
stock, shares authorized, not
|
|
|
|
|
|
|
|
|
issued
(175,084 - 2005)
|
|
|
-
|
|
|
56,028
|
|
|
Accumulated
deficit
|
|
|
(30,288,191
|
)
|
|
(28,685,817
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(2,578,639
|
)
|
|
(3,046,855
|
)
|
|
Total
stockholders’ deficiency
|
|
|
(3,863,356
|
)
|
|
(3,133,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
704,729
|
|
$
|
1,556,564
|
|
See
notes
to consolidated financial statements.
INFINITE
GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Years
Ended
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
6,444,706
|
|
$
|
8,505,199
|
|
|
Cost
of goods sold
|
|
|
4,814,826
|
|
|
5,962,989
|
|
|
Gross
profit
|
|
|
1,629,880
|
|
|
2,542,210
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
908,073
|
|
|
1,142,322
|
|
|
Defined
benefit pension
|
|
|
410,777
|
|
|
221,860
|
|
|
Selling
|
|
|
1,595,221
|
|
|
777,645
|
|
|
Research
and development
|
|
|
256,113
|
|
|
318,038
|
|
|
Impairment
loss and inventory obsolescence
|
|
|
261,100
|
|
|
-
|
|
|
Depreciation
and amortization
|
|
|
97,488
|
|
|
41,547
|
|
|
Write-off
of capitalized financing costs
|
|
|
-
|
|
|
44,857
|
|
|
Total
costs and expenses
|
|
|
3,528,772
|
|
|
2,546,269
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,898,892
|
)
|
|
(4,059
|
)
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Related
parties
|
|
|
(127,279
|
)
|
|
(96,734
|
)
|
|
Other
|
|
|
(89,960
|
)
|
|
(239,552
|
)
|
|
Total
interest expense
|
|
|
(217,239
|
)
|
|
(336,286
|
)
|
|
Interest
income
|
|
|
22,969
|
|
|
66,773
|
|
|
Settlement
of litigation
|
|
|
498,088
|
|
|
-
|
|
|
Gain
on settlements with terminated employees
|
|
|
-
|
|
|
290,533
|
|
|
Gain
on sale of equipment
|
|
|
-
|
|
|
8,452
|
|
|
Total
other income
|
|
|
303,818
|
|
|
29,472
|
|
|
(Loss)
income from continuing operations before
|
|
|
|
|
|
|
|
|
income
tax expense
|
|
|
(1,595,074
|
)
|
|
25,413
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(7,300
|
)
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
|
(1,602,374
|
)
|
|
21,913
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations (Note 4)
|
|
|
-
|
|
|
12,233
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,602,374
|
)
|
$
|
34,146
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - basic:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(.08
|
)
|
$
|
.00
|
|
|
Income
from discontinued operations
|
|
|
.00
|
|
|
.00
|
|
|
Net
(loss) income
|
|
$
|
(.08
|
)
|
$
|
.00
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
21,254,194
|
|
|
19,074,607
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - diluted:
|
|
|
|
|
|
|
|
|
(Loss)
income
from
continuing operations
|
|
$
|
(.08
|
)
|
$
|
.00
|
|
|
Income
from discontinued operations
|
|
|
.00
|
|
|
.00
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(.08
|
)
|
$
|
.00
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
21,254,194
|
|
|
20,828,747
|
|
See
notes
to consolidated financial statements.
INFINITE
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Years
Ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Stock
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Authorized
|
|
Accumulated
|
|
Treasury
Stock
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Not
Issued
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Loss
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2004
|
|
|
17,561,965
|
|
$
|
17,562
|
|
$
|
28,375,198
|
|
$
|
-
|
|
$
|
(28,719,963
|
)
|
|
-
|
|
$
|
-
|
|
$
|
(2,755,891
|
)
|
$
|
(3,083,094
|
)
|
|
Sales
of common stock
|
|
|
1,600,000
|
|
|
1,600
|
|
|
78,400
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
satisfaction of liabilities
|
|
|
45,000
|
|
|
45
|
|
|
2,205
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,250
|
|
|
Note
payable related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
converted
to common stock
|
|
|
500,000
|
|
|
500
|
|
|
24,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
Common
stock received in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreement
with terminated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(500,000
|
)
|
|
(175,000
|
)
|
|
-
|
|
|
(175,000
|
)
|
|
Treasury
stock contributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
Osley & Whitney, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Plan
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
175,000
|
|
|
-
|
|
|
175,000
|
|
|
Common
stock issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
services
|
|
|
149,916
|
|
|
150
|
|
|
40,650
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,800
|
|
|
Common
stock authorized, not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued,
for consulting services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,528
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,528
|
|
|
Common
stock authorized,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not
issued, for settlement
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,500
|
|
|
Stock
options issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
services
|
|
|
-
|
|
|
-
|
|
|
2,381
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,381
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
34,146
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
34,146
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pension
obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(290,964
|
)
|
|
(290,964
|
)
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(256,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2005
|
|
|
19,856,881
|
|
$
|
19,857
|
|
$
|
28,523,334
|
|
$
|
56,028
|
|
$
|
(28,685,817
|
)
|
|
-
|
|
$
|
-
|
|
$
|
(3,046,855
|
)
|
$
|
(3,133,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of common stock
|
|
|
100,000
|
|
|
100
|
|
|
24,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with the exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
stock options
|
|
|
3,000
|
|
|
3
|
|
|
417
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
420
|
|
|
Notes
payable related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
converted
to common stock
|
|
|
2,280,000
|
|
|
2,280
|
|
|
111,720
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
114,000
|
|
|
Common
stock issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
services
|
|
|
175,084
|
|
|
175
|
|
|
55,853
|
|
|
(56,028
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Stock
options issued to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees
and directors
|
|
|
-
|
|
|
-
|
|
|
243,050
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
243,050
|
|
|
Stock
options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
for consulting services
|
|
|
-
|
|
|
-
|
|
|
21,785
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,785
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,602,374
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,602,374
|
)
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pension
obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
468,216
|
|
|
468,216
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,134,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2006
|
|
|
22,414,965
|
|
$
|
22,415
|
|
$
|
28,981,059
|
|
$
|
-
|
|
$
|
(30,288,191
|
)
|
|
-
|
|
$
|
-
|
|
$
|
(2,578,639
|
)
|
$
|
(3,863,356
|
)
|
See
notes
to consolidated financial statements.
INFINITE
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Years
Ended
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Cash
Flows From Operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,602,374
|
)
|
$
|
34,146
|
|
|
Adjustments
to reconcile net (loss) income to net cash
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities of continuing
|
|
|
|
|
|
|
|
|
operations:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
(12,233
|
)
|
|
Gain
on sale of equipment
|
|
|
-
|
|
|
(8,452
|
)
|
|
Stock
based compensation
|
|
|
264,835
|
|
|
91,709
|
|
|
Depreciation
and amortization and write-off of
|
|
|
|
|
|
|
|
|
capitalized
financing costs
|
|
|
97,487
|
|
|
86,404
|
|
|
Impairment
loss and inventory obsolescence
|
|
|
261,100
|
|
|
-
|
|
|
Gain
on settlements with terminated employees
|
|
|
-
|
|
|
(290,533
|
)
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
388,298
|
|
|
179,085
|
|
|
Inventories
|
|
|
(2,013
|
)
|
|
(24,664
|
)
|
|
Prepaid
expenses and other assets
|
|
|
10,916
|
|
|
(8,309
|
)
|
|
Deposits
|
|
|
(2,820
|
)
|
|
(16,703
|
)
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(188,048
|
)
|
|
(89,977
|
)
|
|
Accrued
expenses
|
|
|
88,420
|
|
|
89,864
|
|
|
Accrued
pension obligations
|
|
|
424,274
|
|
|
112,361
|
|
|
Net
cash provided by (used in) operating activities
of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(259,925
|
)
|
|
142,698
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
-
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(259,925
|
)
|
|
143,552
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(14,655
|
)
|
|
(94,530
|
)
|
|
Proceeds
from notes receivable
|
|
|
78,217
|
|
|
2,139,094
|
|
|
Decrease
in restricted funds, net
|
|
|
-
|
|
|
30,327
|
|
|
Software
development costs incurred
|
|
|
-
|
|
|
(101,932
|
)
|
|
Net
cash provided by investing activities
|
|
|
63,562
|
|
|
1,972,959
|
|
See
notes
to consolidated financial statements
INFINITE
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
|
|
|
Years
Ended
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing activities:
|
|
|
|
|
|
|
Net
repayments of bank notes payable
|
|
|
(13,024
|
)
|
|
(50,207
|
)
|
|
Net
repayments of notes payable - other
|
|
|
-
|
|
|
(146,184
|
)
|
|
Proceeds
from the issuance of notes
|
|
|
|
|
|
|
|
|
payable
- related parties
|
|
|
175,000
|
|
|
-
|
|
|
Proceeds
from the issuance of long-term
|
|
|
|
|
|
|
|
|
obligations
- related parties
|
|
|
-
|
|
|
185,000
|
|
|
Repayments
of notes payable - related parties
|
|
|
(26,337
|
)
|
|
(44,000
|
)
|
|
Repayments
of long-term obligations
|
|
|
-
|
|
|
(2,129,327
|
)
|
|
Proceeds
from issuances of common stock
|
|
|
25,420
|
|
|
80,000
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
161,059
|
|
|
(2,104,718
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(35,304
|
)
|
|
11,793
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- beginning of year
|
|
|
109,090
|
|
|
97,297
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- end of year
|
|
$
|
73,786
|
|
$
|
109,090
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
continuing operations cash flow
|
|
|
|
|
|
|
|
|
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
151,614
|
|
$
|
305,538
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
7,300
|
|
$
|
1,300
|
|
See
notes
to consolidated financial statements.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS
The
accompanying consolidated financial statements include the financial statements
of Infinite Group, Inc. (IGI), and each of its wholly owned subsidiaries:
Infinite Photonics, Inc. (IP), Laser Fare, Inc. (LF), and LF’s wholly-owned
subsidiary, Mound Laser and Photonics Center, Inc. (MLPC); Express Tool, Inc.
(ET); Materials and Manufacturing Technologies, Inc. (MMT); Express Pattern
(EP)
and MetaTek, Inc. (MT) (collectively "the Company"). During 2006 and 2005,
IGI
was the only operating company; the subsidiaries were inactive. All significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE
2. - MANAGEMENT PLANS
Business
Strategy
Beginning
in 2003, the Company began commercial operations in the field of information
technology (IT) consulting and integration. The Company’s IT services include
strategic staffing, program management, project management, network management,
technical engineering, software development, and enterprise resource planning.
The Company has entered into one prime contract with the U.S. government and
several subcontract agreements with a number of prime contractors to the U.S.
government.
The
Company entered into a three year subcontract agreement with a large computer
equipment manufacturer pursuant to which it is engaged in a server management
and service program with an establishment of the U.S. government. The Company’s
initial three year subcontract agreement was renewed for an additional five
year
period which extends through 2011.
In
December 2003, the Company was awarded a Federal Supply Schedule Contract by
the
U.S. General Services Administration (“GSA”). Having a GSA Contract allows the
Company to compete for and secure prime contracts with all executive agencies
of
the U.S. Government as well as other national and international organizations.
The Company has utilized its GSA Contract to secure a prime contract with the
U.S. Department of Homeland Security. The GSA Schedule was revised in May 2006
to include many new positions and a pricing schedule that extends through
December 28, 2011.
During
2006, the Company established several areas of specific focus with the objective
of increasing its sales, including the following:
Federal
Government Sector -
The
Company maintains a business development staff in the Washington, D.C. area
to
identify and respond to new sales opportunities within the federal government
market. The Company has a prime contract with the U.S. Department of Homeland
Security. Its focus continues to be on providing quality services and seeking
other business opportunities. The Company has also focused on increasing U.S.
government sales by developing teaming agreements with major systems integrators
and has established several such agreements. The Company through its prime
contractor teaming partners has submitted proposals for new projects and awards
from certain of these proposals are anticipated in the future.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2. - MANAGEMENT PLANS - CONTINUED
State
and Local Government Sector -
The
Company has focused its development efforts in the Gulf coast area of the U.S.
which is undergoing a major rebuilding of its state and local government
technology infrastructure as a result of damage and destruction from recent
hurricanes. Significant opportunities have been identified in the State of
Mississippi that Company management believes will result in sales in 2007.
The
Company has also established itself as a preferred vendor in the States of
North
Carolina and Mississippi in connection with certain specialized technology
offerings and has prepared and is preparing proposals for work in these two
states.
Virtualization
Projects -
The
Company has hired and trained a staff of specialists that upgrade computer
systems using the latest technologies that allow for more efficient use of
existing infrastructure, which the Company refers to as virtualization projects.
The Company’s staff has successfully completed the first phase of a significant
virtualization project during the past six months for a major establishment
of
the U.S. government operating one of the largest wide area networks in the
U.S.
Further, the Company is using this experience and skill set to develop new
business opportunities with governmental, not-for-profit and commercial
organizations.
Existing
Clients -
The
Company continues to devote resources to serve its existing client base. It
has
account managers that are focused on serving the existing needs of clients
as
well as seeking opportunities for which it can provide cost effective solutions.
The Company has experienced growth from existing clients resulting from their
satisfaction with the quality of the Company’s services.
In
2003,
the Company entered into a license agreement with a privately held technology
company. The license agreement gives the Company the ability to use, market
and
sell certain proprietary fingerprint recognition technology. The Company has
substantially completed development of an access control terminal and related
software called TouchThru™ incorporating that technology. During 2006, the
Company continued the development of an access control terminal and related
software called TouchThru™. TouchThru™ is a self-contained terminal enabling
physical access control using biometric identification. It incorporates the
licensed fingerprint matching technology. TouchThru™ is the first biometric
product has developed. Although the Company has demonstrated working prototypes
and pre-production units of TouchThru™ at several trade shows and to potential
customers, the Company has decided to postpone its marketing and sales efforts
on the current version of TouchThru™ pending the release by the licensor of a
revised and improved version of the scanner which is under development. The
Company believes that the revised scanning technology and TouchThru™ will be
available by the end of 2007 or early 2008 and that the new technology will
reduce the size and cost of an access control terminal and significantly enhance
marketing and sales success. The Company expects that
significant
resources will be required to market and sell a newly designed TouchThru™
product that is based on Ultra-Scan’s next generation scanner. Given the
Company’s limited financial resources at December 31, 2006 and other business
priorities, this may be deferred until the market is better established and
the
Company has the necessary working capital to support this product. The Company
plans to continue to monitor the market and to determine when to enter this
market in the future at the appropriate time and with sufficient resources.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2. - MANAGEMENT PLANS - CONTINUED
On
October 30, 2002, Infinite Photonics, Inc. (included in the Photonics Group)
received a Notice of Termination of its DARPA Contract. The Contract was
terminated for the U.S. government’s convenience under the clause entitled
Termination, Federal Acquisition Regulation (FAR) 52.249.6. The Company worked
very closely with the government throughout the settlement process. The Company
presented the Terminating Contracting Officer with all costs associated with
the
terminated contract and a negotiated final settlement. All work allowable under
the Contract that has occurred as of the termination date, and all reasonable
costs allowable under the settlement provisions, have been reimbursed by the
government.
Because
of the termination of the DARPA contract, the Company’s new management team
decided to discontinue the Photonics segment of its business (Note 4). Without
the government funding provided by the DARPA contract, management did not
believe that sufficient funds could be raised to successfully commercialize
its
laser diode technology in the foreseeable future. Consequently, the Company
decided to restructure its business along different lines.
The
Company believes, but can offer no assurances, that its current business
development efforts as summarized above, coupled with its ability to raise
capital will provide sufficient working capital to fund its operations through
2007 and beyond.
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts
Receivable
-
Credit
is granted to substantially all customers throughout the U.S. The Company
carries its accounts receivable at invoice amount, less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes the allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions. The
Company’s policy is to not accrue interest on past due receivables. Management
has determined that an allowance of approximately $53,000 for doubtful accounts
for continuing operations is necessary for the year ended December 31, 2006
($53,000 - 2005).
Concentration
of Credit Risk
-
Financial instruments that potentially subject the Company to concentration
of
credit risk consist of cash accounts in financial institutions. The cash
accounts occasionally exceed the federally insured deposit amount, however,
management does not anticipate nonperformance by financial institutions.
Management reviews the financial viability of these institutions on a periodic
basis.
Sale
of Certain Accounts Receivable
-
The
Company has available a financing line with a financial institution (the
Purchaser). In connection with this line of credit the Company adopted Statement
of Financial Accounting Standards Board (SFAS) Statement No. 140, “
Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
”.
SFAS
140 enables the Company to sell selected accounts receivable invoices to the
Purchaser with full recourse
against
the Company. These transactions qualify for a sale of assets since (1) the
Company has transferred all of its right, title and interest in the selected
accounts receivable invoices to the financial institution, (2) the Purchaser
may
pledge, sell or transfer the selected accounts receivable invoices, and (3)
the
Company has no effective control over the selected accounts receivable invoices
since it is not entitled to or obligated to repurchase or redeem the invoices
before their maturity and it does not have the ability to unilaterally cause
the
Purchaser to return the invoices. Under SFAS 140, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and
the liabilities it has incurred, derecognizes financial assets when control
has
been surrendered, and derecognizes liabilities when extinguished.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Pursuant
to the provisions of SFAS 140, the Company reflects the transactions as a sale
of assets and establishes an accounts receivable from the Purchaser for the
retained amount less the costs of the transaction and less any anticipated
future loss in the value of the retained asset. The retained amount is generally
equal to 20% of the total accounts receivable invoice sold to the Purchaser,
less 1.5% of the total invoice as a fee for the first 30 days the invoice
remains open. For every ten day period or portion thereof that the invoice
remains unpaid after the first 30 days, the Company is required to pay an
additional fee of one half of one percent. The estimated future loss reserve
for
each receivable included in the estimated value of the retained asset is based
on the payment history of the accounts receivable customer and is included
in
the allowance for doubtful accounts, if any. As collateral, the Company granted
the Purchaser a first priority interest in accounts receivable and a blanket
lien, which may be junior to other creditors, on all other assets.
During
the year ended December 31, 2006, the Company sold approximately $4,200,000
($4,100,000 - 2005) of its accounts receivable to the Purchaser. As of December
31, 2006, $912,201 ($367,684 - 2005) of these receivables remained outstanding.
After deducting estimated fees and advances from the purchaser, the net
receivable from the Purchaser amounted to $166,456 at December 31, 2006 ($68,022
- 2005), and is included in accounts receivable in the accompanying balances
sheets as of that date. Further, the Company had requested and received an
advance from the Purchaser against this interest, which amounted to $729,761
as
of December 31, 2006 ($294,147 - 2005). These amounts are reflected as an offset
to accounts receivable in the accompanying balance sheets as of December 31,
2006 and 2005.
There
were no gains or losses on the sale of the accounts receivable because all
were
eventually collected. The cost associated with the fees totaled approximately
$88,600 for the year ended December 31, 2006 ($159,600 - 2005). These fees
were
classified on the statements of operations as interest expense.
Property
and Equipment
-
Property
and equipment are recorded at cost and are depreciated over their estimated
useful lives for financial statement purposes. The cost of improvements to
leased properties is amortized over the shorter of the lease term or the life
of
the improvement. Maintenance and repairs are charged to expense as incurred
while improvements are capitalized.
Software
Development Costs -
Software
development costs are accounted for in accordance with Statement of Financial
Accounting Standard (“SFAS”) 86, “Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed”. All costs incurred to establish the
technological feasibility of a computer software product are expensed as
incurred. Software development costs, incurred subsequent to the determination
that the project is technically
feasible,
in the amount $225,000 have been deferred as of December 31, 2005 for the
TouchThru™ software product development project. All capitalized software
development costs were amortized or written off through an impairment loss
during 2006. During 2006, the Company determined that the estimated future
cash
flows relating to the deferred software costs for the TouchThru™ product no
longer supported the unamortized costs and as a result recorded an impairment
loss of approximately $162,000.
The
Company recorded amortization expense of deferred software development costs
of
$8,473 for the year ended December 31, 2005 and had accumulated amortization
of
$17,652 at December 31, 2005.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Accounting
for the Impairment or Disposal of Long-Live Assets
-
The
Company adopted the provisions of Financial Accounting Standards Board Statement
No. 144 (FASB 144),
“Accounting
for the Impairment or Disposal of Long-live Assets”
.
This
standard specifies, among other things, that long-lived assets are to be
reviewed for potential impairment whenever events or circumstances indicate
that
the carrying amounts may not be recoverable. See Property and Equipment (Note
5)
for the current year’s impairment.
Inventories
-
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist
of
component parts for the TouchThru™ biometric product. During 2006, it was
determined that inventory had no market value due to obsolescence and as a
result the balance amounting to approximately $26,000 was written
off.
Revenue
Recognition
-
Consulting revenues are recognized as the consulting services are provided.
Customer deposits received in advance are recorded as liabilities until
associated services are completed.
During
the year ended December 31, 2006 sales to three customers accounted for 96%
of
total revenues from continuing operations (91% for three customers in 2005)
and
93% of accounts receivable at December 31, 2006 (92% - 2005). The mix of
customers changed from 2005 to 2006.
Research
and Development Costs -
All
costs related to internal research and development are expensed as incurred.
Research and development expense from continuing operations amounted to $256,113
for the year ended December 31, 2006 ($318,038 - 2005) and consists primarily
of
salaries and related fringe benefits and consulting fees associated with the
development of its Touch Thru
TM
biometric
access control product.
Income
Taxes -
The
Company and its wholly owned subsidiaries file consolidated federal income
tax
returns. The Company accounts for income tax expense in accordance with
Statement of Financial Accounting Standards No. 109 “Accounting for Income
Taxes”, (SFAS 109). Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences,
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the
date of enactment.
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 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 and warrants
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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
The
following table sets forth the computation of basic and diluted earnings per
share as of December 31:
|
|
|
2006
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
Income
(loss) available to common stockholders
|
|
$
|
(1,602,374
|
)
|
$
|
34,146
|
|
|
Weighted
average shares outstanding
|
|
|
21,254,194
|
|
|
19,074,607
|
|
|
Denominator
for diluted income per share:
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
21,254,194
|
|
|
19,074,607
|
|
|
Common
stock options and stock warrants
|
|
|
13,585,431
|
|
|
1,754,140
|
|
|
Weighted
average shares and conversions
|
|
|
34,839,625
|
|
|
20,828,747
|
|
For
the
year ended
December
31, 2006 all outstanding stock options, warrants and convertible debt have
not
been considered common stock equivalents because their assumed exercise would
be
anti-dilutive. The convertible debt became eligible for conversion during the
second quarter of 2006. If the Company had generated earnings during the year
ended December 31, 2006, 13,585,431 common stock equivalent shares would have
been added to the weighted average shares outstanding. These additional shares
represent the assumed exercise of common stock options, warrants and convertible
debt whose exercise price is less than the average of the Company’s stock price
during the period. The proceeds of the exercise are assumed to be used to
purchase common shares for treasury and the incremental shares are added to
the
weighted average shares outstanding.
Use
of Estimates -
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
-
The
carrying amounts of cash, accounts receivable and accounts payable and accrued
expenses are reasonable estimates of their fair value due to their short
maturity. Based on the borrowing rates currently available to the Company for
loans similar to its term debt and notes payable, the fair value approximates
its carrying amount.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards No. 123R, Share-Based Payment
-
Prior to
January 1, 2006, the Company accounted for stock option awards granted under
the
Company’s stock option plan in accordance with the recognition and measurement
provisions of Accounting Principles Board Option No. 25, “Accounting for Stock
Issued to Employees”, (“APB 25”) and related interpretations, as permitted by
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation”, (SFAS 123”). Share-based employee compensation expense was not
recognized in the Company’s consolidated statements of operations prior to
January 1, 2006, as all stock option awards granted had an exercise price equal
to or greater than the market value of the common stock on the date of grant.
As
permitted by SFAS 123, the Company reported pro-forma disclosures presenting
operating results and net income (loss) per share as if the Company has used
the
fair value recognition provisions of SFAS 123 in the notes to the consolidated
financial statements. Stock-based compensation related to non-employees is
accounted for based in the fair value of the related stock options in accordance
with SFAS 123 and its interpretations.
Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (SFAS 123R)
using the modified prospective transition method. See Note 9 for further details
on the impact of SFAS 123R to the Company’s consolidated financial
statements.
Statement
of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88,106 and 132R -
This
Statement improves financial reporting by requiring an employer to recognize
the
over funded or under funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its balance sheet
and to recognize changes in that funded status in the year in which changes
occur through comprehensive income of a business entity. The implementation
of
this Statement did not have a significant impact on the Company’s financial
statements. See Note 12.
Statement
of Financial Accounting Standards No. 157, Fair Value Measurements -
On
September 15, 2006, the FASB issued
Statement
of Financial Accounting Standards No. 157, Fair Value Measurements
,
that
provides enhanced guidance for using fair value to measure assets and
liabilities. The standard responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever other
standards require or permit assets or liabilities to be measured at fair value.
The standard does not expand the use of fair value in any new circumstances.
It
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements.
Under
this standard, fair value refers to the price that would be received to sell
an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability. In support
of
this
principle,
the standard establishes a fair value hierarchy that prioritizes the information
used to develop those assumptions. The fair value hierarchy gives the highest
priority
to
quoted
prices in active markets and the lowest priority to unobservable data, for
example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
This
Statement is effective for the Company as of December 31, 2007, and interim
periods within that year. The implementation of this Statement will have no
significant effect on the Company’s financial statements.
FASB
Interpretation No. 48 (FIN 48), an Interpretation of SFAS 109 -
In
June
2006, the FASB issued FIN 48, an interpretation of SFAS 109.
FIN 48 clarifies the accounting for uncertainty in income taxes and reduces
the diversity in current practice associated with the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return by defining a “more-likely-than-not” threshold regarding the
sustainability of the position. The Company is required to adopt FIN 48 by
the first quarter of fiscal 2007. The Company does not believe that the adoption
of FIN 48 on January 1, 2007 will have a material effect on the Company’s
financial position, cash flows or results of operations.
Statement
of Financial Accounting Standards No. 154
,
"Accounting Changes and Error Corrections, - a Replacement of APB Opinion No.
20
and FASB Statement No.3" -
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". The
Statement establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle
in the absence of explicit transition requirements specific to the newly adopted
accounting principle. The provisions of this Statement are effective for
accounting changes and corrections of errors occur in 2007 and thereafter.
The
Company’s financial condition and results of
operations
will only be impacted by SFAS 154 if there are any accounting changes or
corrections of errors in the future.
Staff
Accounting Bulletin 108
-
The
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 108
was
adopted during the fourth quarter of 2006. SAB 108 requires SEC registrants
to
quantify the impact of correcting all identified misstatements, including both
the carryover and reversing effects of prior-year uncorrected misstatements,
on
the current-year financial statements using both the rollover and iron curtain
approaches. Previously, the Company used the rollover approach to evaluate
misstatements. There was no material effect on the current or prior -year
financial statements as a result of the adoption of SAB 108.
Reclassification
-
The
Company reclassifies certain prior year amounts to conform with the current
year’s presentation.
NOTE
4. - DISCONTINUED OPERATIONS - PHOTONICS
On
October 30, 2002, the Company’s IP subsidiary received a Notice of Termination
of its DARPA contract. The contract was terminated for the government’s
convenience under the clause entitled Termination, Federal Acquisition
Regulation (FAR) 52.249.6. The DARPA contract had provided substantially all
of
the revenue of the Company’s IP Subsidiary. As a result of the termination,
management decided to suspend the activities of the Photonics Group and
liquidate the
remaining
assets. During 2005, the Company completed winding down the operations, which
resulted in income from discontinued operations of $12,223 which is included
in
income from discontinued operations in the accompanying statements of
operations.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5. - PROPERTY AND EQUIPMENT
Property
and equipment consists of:
|
|
|
Depreciable
|
|
December
31,
|
|
|
|
|
Lives
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
3
|
|
|
to
|
|
|
5
years
|
|
$
|
18,296
|
|
$
|
16,015
|
|
|
Machinery
and equipment
|
|
|
3
|
|
|
to
|
|
|
10
years
|
|
|
160,918
|
|
|
229,290
|
|
|
Furniture
and fixtures
|
|
|
5
|
|
|
to
|
|
|
7
years
|
|
|
10,082
|
|
|
3,101
|
|
|
Leasehold
improvements
|
|
|
|
|
|
3
years
|
|
|
|
|
|
3,286
|
|
|
2,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,582
|
|
|
250,469
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
|
|
|
(111,970
|
)
|
|
(59,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,612
|
|
$
|
190,520
|
|
In
connection with the review of software development costs, the Company determined
that the estimated future cash flows relating to the TouchThru™ product no
longer supported the current carrying amount of the related tooling costs,
and
as a result, during 2006, the Company recorded an impairment loss, which was
approximately $73,000 at December 31, 2006.
NOTE
6. - NOTES RECEIVABLE
Notes
receivable consist of the following:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Note
receivable due in connection with the sale of assets of EP, with
interest
at 8%.
|
|
$
|
-
|
|
$
|
73,897
|
|
|
Note
receivable due in connection with the sale of office furniture and
equipment with interest at 12%, due in monthly installments of
approximately $500, including interest, through October
2007.
|
|
|
4,968
|
|
|
9,288
|
|
|
|
|
|
4,968
|
|
|
83,185
|
|
|
Less
current portion
|
|
|
4,968
|
|
|
4,746
|
|
|
Notes
receivable, net of current portion
|
|
$
|
-
|
|
$
|
78,439
|
|
The
note
receivable from EP was paid in full during 2006 with interest of
$22,103.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - NOTES PAYABLE
At
December 31, 2006, a note for $30,000 ($30,000 - 2005) was outstanding with
interest at 10%.
During
the year ended December 31, 2006, the Company entered into short-term demand
notes payable with two related parties aggregating $175,000. These two notes
bear interest at rates ranging from 10.25% to 18%. Amounts outstanding at
December 31, 2006 aggregate $148,663.
NOTE
8. - LONG-TERM OBLIGATIONS
Long-term
obligations consist of:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Term
notes - bank (a)
|
|
$
|
50,354
|
|
$
|
63,378
|
|
|
Term
notes - stockholders (b)
|
|
|
450,000
|
|
|
450,000
|
|
|
Convertible
term notes - related parties (c)
|
|
|
696,124
|
|
|
810,124
|
|
|
|
|
|
1,196,478
|
|
|
1,323,502
|
|
|
Less
current maturities
|
|
|
50,354
|
|
|
12,778
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term obligations
|
|
$
|
1,146,124
|
|
$
|
1,310,724
|
|
(a)
Term
Notes Payable
- The
Company entered into loans during 2004 relating to the financing of equipment.
The loans have an aggregate balance of $50,354 at December 31, 2006 ($63,378
-
2005), bear interest at rates ranging from 3.5 % to 5.8% and are due in
aggregate monthly installments of approximately $1,200 through July 31, 2007
at
which time the remaining principal balance of approximately $45,000 is due.
(b)
Term
Notes Payable - Stockholders
- During
the year ended December 31, 2004, the Company issued two secured notes payable
to a stockholder aggregating $115,000. During the year ended December 31, 2003
the Company issued a secured note payable to this same stockholder for $150,000.
All of these borrowings bear interest at 12% and are due in January 2008. The
notes are secured by a first lien on accounts receivable that are not otherwise
used by the Company as collateral for other borrowings and by a second lien
on
all other accounts receivable. Amounts outstanding at December 31, 2006 amounted
to $265,000 ($265,000 - 2005).
During
2005, the Company issued various notes to a stockholder. Subsequently, the
notes
were consolidated into one note for $185,000 with interest payable monthly
at
12% with all principal maturing on January 1, 2008. The notes are secured by
all
of the assets of the Company. At December 31, 2006, the notes had a balance
of
$185,000 ($185,000 - 2005).
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8. - LONG-TERM OBLIGATIONS - CONTINUED
(c)
Convertible Term Notes Payable - Related Parties
- During
2004, the Company issued various unsecured notes payable to a member of its
board of directors. Effective December 1, 2004, the terms of the notes were
modified. The maturity dates were extended to January 1, 2007 (which as noted
below, was subsequently extended to January 1, 2016) with principal and accrued
interest convertible at the option of the holder any time after September 1,
2005 into shares of common stock at $.05 per share. In May 2006, $50,000 of
the
principal of the notes was converted by the holder into 1,000,000 shares of
common stock reducing the principal balance to $264,000 at December 31, 2006
($314,000 - 2005). The notes bear interest at 8% at December 31, 2006
The
outstanding balance of a note purchased from a bank by a related party as of
December 31, 2006 and 2005 amounted to $203,324 and bears interest at 8% per
annum. Effective December 31, 2003, the terms of the note were revised and
the maturity date was extended to January 1, 2007 (which as noted below, was
subsequently extended to January 1, 2016) with principal and accrued interest
convertible at the option of the holder any time after September 1, 2005 into
shares of common stock at $.05 per share.
During
the years ended December 31, 2004 and 2003, the Company issued various notes
to
the same related party amounting to $317,800 with interest at 6%. Effective
December 1, 2004, the terms of the notes were modified. The maturity dates
were
extended to January 1, 2007 (which as noted below, was subsequently extended
to
January 1, 2016) with principal and accrued interest convertible at the option
of the holder any time after September 1, 2005 into shares of common stock
at
$.05 per share. In December 2005, $25,000 of the principal of the notes was
converted by the holder into 500,000 shares of common stock reducing the
principal balance to $292,800 at December 31, 2005. In May 2006, another $50,000
was converted by the holder into 1,000,000 shares of common stock and in
December 2006 another $14,000 was converted by the holder into 280,000 shares
of
common stock, reducing the principal balance to $228,800 with interest at 8%
at
December 31, 2006.
Effective
October 1, 2005, the terms of each of the aforementioned notes were further
modified. The interest rates were revised to 8% for the year ending December
31,
2006. Thereafter, the interest rate will be adjusted annually, on January
1
st
of
each
year, to a rate equal to the prime rate in effect on December 31
st
of the
immediately preceding year, plus one and one quarter percent, and in no event,
shall the interest rate be less than 6% per annum. The maturity dates were
extended to January 1, 2016 with principal and accrued interest convertible
at
the option of the holder any time, subject to restrictions stated below, into
shares of common stock at $.05 per share. Subsequently, the Company executed
collateral security agreements with the note holders providing for a security
in
interest in all of the Company’s assets.
Generally,
upon notice, prior to the note maturity date, the Company can prepay all or
a
portion of the outstanding note principal; provided, however, at no time can
the
Company prepay an amount that would result in a change of control and limit
the
use of
the
Company’s net operating loss carryforwards if the same amount were converted by
the note holder.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8. - LONG-TERM OBLIGATIONS - CONTINUED
The
Notes
are convertible into shares of common stock subject to the following
limitations. The Notes are not convertible to the extent that shares of common
stock issuable upon the proposed conversion would result in a change in control
of the Company which would limit the use of its net operating loss
carryforwards; provided, however, if the Company closes a transaction with
another third party or parties that results in a change of control which will
limit the use of its net operating loss carryforwards, then the foregoing
limitation shall lapse.
Prior
to
any conversion by a requesting note holder, each note holder holding a note
which is then convertible into 5% or more of the Company’s common stock shall be
entitled to participate on a pari passu basis with the requesting note holder
and upon any such participation the requesting note holder shall proportionately
adjust his conversion request such that, in the aggregate, a change of control,
which will limit the use of the Company’s net operating loss carryforwards, does
not occur.
Minimum
future annual payments of long-term obligations as of December 31, 2006 are
as
follows:
|
|
|
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
450,000
|
|
|
2009
to 2011
|
|
|
-
|
|
|
Thereafter
|
|
|
696,124
|
|
|
Total
minimum payments
|
|
|
1,196,478
|
|
|
Less
current maturities
|
|
|
50,354
|
|
|
Total
long-term obligations
|
|
$
|
1,146,124
|
|
NOTE
9. - STOCKHOLDERS' DEFICIENCY
(a)
Preferred
Stock -
The
Company’s certificate of incorporation authorizes its board of directors to
issue up to 1,000,000 shares of preferred stock. The stock is issuable in series
that may vary as to certain rights and preferences, as determined upon issuance,
and has a par value of $.01 per share. As of December 31, 2006 and 2005
there were no preferred shares issued or outstanding.
(b
)
Common Stock
-
At the
Annual Meeting of Stockholders of the Company held on February 28, 2006 the
Company’s stockholders approved an amendment to the Company’s certificate of
incorporation increasing the number of authorized shares of common stock from
20,000,000 to 60,000,000.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9. - STOCKHOLDERS' DEFICIENCY - CONTINUED
During
the year ended December 31, 2006, the following common stock transactions took
place:
|
|
·
|
The
Company issued 2,280,000 shares of common stock upon conversion of
$114,000 of principal of notes payable to related parties. (See Note
8.)
|
|
|
·
|
The
Company issued 100,000 shares of common stock for
$25,000.
|
|
|
·
|
The
Company issued 3,000 shares of common stock upon exercise of employee
stock options and receipt of the exercise price of $.14 per share
or
$420.
|
During
the year ended December 31, 2005, the following common stock transactions took
place:
|
|
·
|
The
Company issued 1,600,000 shares of common stock to a member of the
board
of directors at $.05 per share, for proceeds of
$80,000.
|
|
|
·
|
The
Company issued 45,000 shares of common stock as satisfaction of
liabilities amounting to $2,250. The fair market value of the shares
issued equaled the amount of the recorded liability
satisfied.
|
|
|
·
|
The
Company issued 149,916 shares of common stock in consideration for
consulting services amounting to $40,800 and authorized, but has
not
issued, an additional 150,084 shares to the same consultant for services
amounting to $48,528. The fair value of the shares was based on the
value
of the services provided.
|
|
|
·
|
The
Company issued 500,000 shares of common stock upon conversion of
$25,000
of principal of notes payable to a related party (see Note
8).
|
|
|
·
|
The
Company received 500,000 shares of common stock according to the
terms of
a settlement agreement with a terminated employee and recorded it
as
treasury stock. The 500,000 shares of treasury stock were immediately
issued to the Osley & Whitney Retirement Plan as a Plan contribution.
The shares were valued at $175,000 based on the closing market price
on
the date of the settlement
agreement.
|
|
|
·
|
The
Company has authorized, but not issued, 25,000 shares of common stock
valued at $7,500 in connection with a settlement agreement with a
former
employee using the closing market price on the date of the settlement
agreement.
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9. - STOCKHOLDERS' DEFICIENCY - CONTINUED
(c
)
Warrants
-
In
connection with debt financing during 2002, the Company issued detachable
warrants to Laurus Master Fund, Ltd. to purchase 75,000 shares of the Company’s
common stock at $2.40 per share. The warrants were immediately exercisable
and
expire in 2007. The warrant value amounting to $103,872 was determined using
the
Black-Scholes option pricing model.
During
2006, the Company engaged the services of an investment banking group on a
non-exclusive basis to provide advice concerning financial planning, corporate
organization and structure, business combinations, and related services. The
Company issued a warrant to acquire 100,000 shares of common stock exercisable
at $.50 per share, which became vested on January 1, 2006, and expires on
December 31, 2010. The warrant value amounting to $16,770 was determined using
the Black-Scholes option pricing model and was recognized as expense during
2006.
On
March
3, 2006, the Company engaged the services of a consultant and
issued the consultant a warrant to acquire 500,000 shares of our
common stock, exercisable at $.30 per share which expires on March 2, 2011.
The
warrant is only exercisable in increments of 100,000 common shares
as the Company realizes aggregate sales of $200,000, $1,200,000,
$2,200,000, $3,200,000, and $4,200,000 from the consultant’s efforts on the
Company's behalf. On May 1, 2006, we engaged the services of another
consultant and issued the consultant a warrant to acquire 50,000
shares of the Company's common stock, exercisable at $.35 per share
which expires on April 30, 2016. The warrant is only exercisable if the
Company realizes sales of $500,000 or more as a result of the consultant’s
efforts on the Company's behalf. The agreements have been accounted
for in accordance with EITF 96-18 “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services” whereby the fair value of the warrant will be recorded as the
performance criteria are being met.
The
following is a summary of the warrant activity for the years ended December
31,
2006 and 2005:
|
|
|
|
Number
of Warrants Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at December 31, 2004
|
|
|
425,000
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(350,000
|
)
|
$
|
2.52
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
75,000
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
Granted
|
|
|
650,000
|
|
$
|
.33
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
725,000
|
|
$
|
.55
|
|
|
3.7
years
|
|
$
|
127,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
175,000
|
|
$
|
1.31
|
|
|
2.4
years
|
|
$
|
3,000
|
|
The
average fair value of warrants granted was $.23 per share for the year ended
December 31, 2006. The exercise price for all warrants granted equaled or
exceeded the market value of the Company’s common stock on the date of grant.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9. - STOCKHOLDERS' DEFICIENCY - CONTINUED
A
summary
of the status of nonvested warrant activity for the years ended December 31,
2006 and 2005 follows:
|
Nonvested
Shares
|
|
|
Shares
|
|
|
Weighted
Average
Fair
Value
at
Grant Date
|
|
|
Nonvested
at December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
Granted
|
|
|
650,000
|
|
|
.23
|
|
|
Vested
|
|
|
(100,000
|
)
|
|
.17
|
|
|
Nonvested
at December 31, 2006
|
|
|
550,000
|
|
$
|
.24
|
|
At
December 31, 2006, there was approximately $131,000 of total unrecognized
compensation cost related to non-vested warrants granted. That cost is expected
to be recognized when performance requirements are being met. The compensation
cost that has been charged against income and the fair value of shares vested
for warrants granted during 2006 was $16,770 for the year ended December 31,
2006.
NOTE
10. - STOCK OPTION PLANS
The
Company’s Board of Directors and stockholders have approved stock option plans
adopted in 1993, 1994, 1995, 1996, 1997, 1998, 1999, and 2005, which have
authority to grant options to purchase up to an aggregate of 5,223,000 shares
at
December 31, 2006 (5,626,500 - 2005). No further grants may be made from the
1993, 1994, 1995, and 1996 plans. Such options may be designated at the time
of
grant as either incentive stock options or nonqualified stock options. As of
December 31, 2006, options to purchase 802,000 shares remain unissued under
these plans.
Statement
of Financial Accounting Standards No. 123R, Share-Based
Payment
In
December 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payment (“SFAS 123R”). SFAS 123R supersedes SFAS 123, Accounting for
Stock Based Compensation, and Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees (“APB 25) and its related implementation guidance.
On January 1, 2006, the Company adopted the provisions of SFAS 123R using the
modified prospective transition method. Under this method, the Company is
required to record compensation expense for all stock based awards granted
after
the date of adoption and for the unvested portion of previously granted awards
that remain outstanding as of the beginning of the adoption. Prior period
financial statements have not been restated. Under SFAS 123R, compensation
expense related to stock based payments is recorded over the requisite service
period based on the grant date fair value of the awards.
Prior
to
the adoption of SFAS 123R, the Company accounted for employee stock options
using the intrinsic value method in accordance with APB 25. Accordingly, no
compensation expense was recognized for stock options issued to employees as
long as the exercise price was greater than or equal to the market value of
the
common stock at the date of grant. In accordance with SFAS 123, the Company
disclosed the summary of pro forma effects to reported net income or net loss
as
if the Company had elected to recognize compensation costs based on the fair
value of the awards at the grant date.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - STOCK OPTION PLANS - CONTINUED
The
compensation cost that has been charged against income for options granted
to
employees under the plans was $243,050 for the year ended December 31, 2006.
The
impact of this expense was to increase basic and diluted net loss per share
from
$(.06) to $(.08) for the year ended December 31, 2006. The adoption of SFAS
123R
did not have an impact on cash flows from operating or financing activities.
For
stock options issued as Non-ISO’s, a tax deduction is not allowed for income tax
purposes until the options are exercised. The amount of this deduction will
be
the difference between the fair value of the Company’s common stock and the
exercise price at the date of exercise. Accordingly, there is a deferred tax
asset recorded for the tax effect of the financial statement expense recorded.
The tax effect of the income tax deduction in excess of the financial statement
expense will be recorded as an increase to additional paid-in capital. Due
to
the uncertainty of the Company’s ability to generate sufficient taxable income
in the future to utilize the tax benefits of the options granted, the Company
has recorded a valuation allowance to reduce its gross deferred tax asset to
zero. As a result, for the year ended December 31, 2006, there is no income
tax
expense impact from recording the fair value of options granted. No tax
deduction is allowed for stock options issued as ISO’s.
The
Company used volatility of 71% when computing the value of stock options and
warrants issued during the nine months ended December 31, 2006 and 100% for
options issued during the three months ended March 31, 2006. This is based
on a
combination of both historical and implied volatility since the historical
volatility has trended downward especially during the period from July 2005,
when the Company brought current its public information in filings with the
SEC.
In addition, the Company’s volume of shares traded has increased in the past
several quarters which the Company believes has provided more liquidity and
less
volatility than was previously experienced. Each option awarded in 2006 has
a
ten year exercise term and a holding period of ten years was assumed. The
expected dividend yield is zero percent and the expected life of the options
is
ten years. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant
and ranged from 4.42% to 5.11% for the year ended December 31, 2006. The Company
recorded expense for options and warrants issued to employees and independent
service providers for the year ended December 31, 2006 as follows:
|
Employee
stock options
|
|
$
|
243,050
|
|
|
Consultant
stock options
|
|
|
5,015
|
|
|
Common
stock warrants
|
|
|
16,770
|
|
|
Total
expense
|
|
$
|
264,835
|
|
(a)
Stock
Option Plans -
The
Company grants stock options to its key employees and independent service
providers, as it deems appropriate. Qualified options are exercisable as long
as
the optionee continues to be an employee of the Company and for thirty days
subsequent to employee termination.
In
connection with services performed beginning in 2005, 50,000 non-qualified
options to purchase shares of common stock at a price of $.16 were granted,
which vest over two years and expire on October 31, 2010. The fair value
assigned to these
determined
using the Black-Scholes pricing model, amounted to approximately $7,400 and
is
being recorded over the related service period, which amounted to $5,015 for
the
year ended December 31, 2006 ($2,381 - 2005).
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - STOCK OPTION PLANS - CONTINUED
The
following is a summary of stock option activity, including qualified and
non-qualified options, for the years ended December 31, 2006 and
2005:
|
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at December 31, 2004
|
|
|
1,960,482
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,753,400
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(692,982
|
)
|
$
|
.27
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
4,020,900
|
|
$
|
.16
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,400,000
|
|
$
|
.40
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,000
|
)
|
$
|
.14
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,037,900
|
)
|
$
|
.17
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
4,380,000
|
|
$
|
.24
|
|
|
8.1
years
|
|
$
|
1,328,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
3,596,000
|
|
$
|
.21
|
|
|
7.8
years
|
|
$
|
1,208,117
|
|
A
summary
of the status of nonvested stock options for the years ended December 31, 2006
and 2005 follows:
|
Nonvested
Shares
|
|
|
Shares
|
|
|
Weighted
Average
Fair
Value
at
Grant Date
|
|
|
Nonvested
at December 31, 2005
|
|
|
50,666
|
|
$
|
.22
|
|
|
Granted
|
|
|
1,400,000
|
|
|
.33
|
|
|
Vested
|
|
|
(653,333
|
)
|
|
.35
|
|
|
Forfeited
|
|
|
(13,333
|
)
|
|
.31
|
|
|
Nonvested
at December 31, 2006
|
|
|
784,000
|
|
$
|
.30
|
|
At
December 31, 2006, there was approximately $193,000 of total unrecognized
compensation cost related to non-vested options granted. That cost is expected
to be recognized over a weighted average period of 2.1 years. The total fair
value of shares vested during the year ended December 31, 2006 was approximately
$227,000.
The
average fair value of options granted was $.33 and $.11 per share for the years
ended December 31, 2006 and 2005, respectively. The exercise price for all
options granted equaled or exceeded the market value of the Company’s common
stock on the date of grant.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - STOCK OPTION PLANS - CONTINUED
(b)
Directors’
Stock Option Plan -
In
April
1993, the Board of Directors and stockholders of the Company adopted a
non-discretionary outside directors' stock option plan that provides for the
grant to non-employee directors of non-qualified stock options to purchase
up to
50,000 shares of common stock. Under this plan, each non-employee director
was
granted 7,500 options upon becoming a director and 5,000 each year thereafter
on
the date of the Company’s annual stockholders’ meeting. The options vest over a
two-year service period. There was no annual stockholders’ meeting during 2005,
therefore, there were no options granted under this plan during that year.
During each of 2006 and 2005, 500 options expired. At December 31, 2006, there
were 41,000 (41,500 in 2005) options outstanding to directors under this plan,
of which all were exercisable. These options are exercisable at prices ranging
from $.10 to $5.00 per share. The options expire at various dates from 2007
to
2013. No new options are issuable under the terms of this plan. Options with
the
same terms are issuable to directors under the 1999 Plan.
For
the
year ended December 31, 2005, the Company 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 cost 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 decreased as follows for the
year ended December 31, 2005:
|
Net
income - as reported
|
|
$
|
34,146
|
|
Total
stock based employee compensation expense determined under the
fair value
method for all awards
|
|
|
(295,336
|
)
|
|
Net
income (loss) - pro forma
|
|
$
|
(261,190
|
)
|
|
Basic:
|
|
|
|
|
|
Income
per share as reported
|
|
$
|
.00
|
|
|
Income
(loss) per share pro forma
|
|
$
|
(.01
|
)
|
|
Diluted:
|
|
|
|
|
|
Income
per share as reported
|
|
$
|
.00
|
|
|
Income
(loss) per share pro forma
|
|
$
|
(.01
|
)
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model based on the following weighted-average
assumptions:
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
Expected
stock price volatility
|
|
|
71%
- 100
|
%
|
|
100
|
%
|
|
Risk-free
interest rate
|
|
|
4.42%
- 5.1
|
%
|
|
4.4
|
%
|
|
Expected
life of options
|
|
|
10
years
|
|
|
10
years
|
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11. - INCOME TAXES
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Current
- State
|
|
$
|
(7,300
|
)
|
$
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
876,350
|
|
|
(186,150
|
)
|
|
State
|
|
|
154,650
|
|
|
(32,850
|
)
|
|
|
|
|
1,031,000
|
|
|
(219,000
|
)
|
|
Change
in valuation allowance
|
|
|
(1,031,000
|
)
|
|
219,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,300
|
)
|
$
|
(3,500
|
)
|
At
December 31, 2006, the Company had federal net operating loss carryforwards
of
approximately $27,100,000 and state net operating loss carryforwards of
approximately $17,000,000, which expire from 2009 through 2026. Utilization
of
the net operating loss carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenues Code and similar state provisions. The annual limitation may result
in
the expiration of the net operating loss carryforwards before utilization.
At
December 31, 2006, a net deferred tax asset, representing the future benefit
attributed primarily to the available net operating loss carryforwards, in
the
amount of approximately $11,317,000, had been fully offset by a valuation
allowance because management believes that the regulatory limitations on
utilization of the operating losses and concerns over achieving profitable
operations diminish the Company's ability to demonstrate that it is more likely
than not that these future benefits will be realized before they
expire.
The
following is a summary of the Company's temporary differences and carryforwards
which give rise to deferred tax assets and liabilities:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss and tax credit carryforwards
|
|
$
|
9,958,000
|
|
$
|
9,331,000
|
|
|
Defined
benefit pension liability
|
|
|
1,068,000
|
|
|
961,000
|
|
|
Property
and equipment
|
|
|
87,000
|
|
|
-
|
|
|
Reserves
and other
|
|
|
204,000
|
|
|
97,000
|
|
|
Gross
deferred tax asset
|
|
|
11,317,000
|
|
|
10,389,000
|
|
|
Deferred
tax asset valuation allowance
|
|
|
(11,317,000
|
)
|
|
(10,286,000
|
)
|
|
|
|
|
-
|
|
|
103,000
|
|
|
Deferred
tax liabilities - property and equipment
|
|
|
-
|
|
|
103,000
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11. - INCOME TAXES - CONTINUED
The
differences between the U.S. statutory federal income tax rate and the effective
income tax rate in the accompanying consolidated statements of income are as
follows:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
U.S. federal tax rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
State
income taxes, net of federal benefit
|
|
|
.6
|
|
|
1.2
|
%
|
|
Stock
option expense
|
|
|
15.1
|
|
|
-
|
|
|
Excise
taxes
|
|
|
13.3
|
|
|
-
|
|
|
Other
|
|
|
1.3
|
|
|
12.5
|
|
|
Change
in valuation allowance
|
|
|
(64.6
|
)
|
|
(46.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
(.3
|
|
|
1.4
|
%
|
NOTE
12. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS
Retirement
Plan
-
The
Company offers a simple IRA plan as a retirement plan for eligible employees.
Employees are eligible to participate in the plan if they earn at least $5,000
of compensation from the Company during the year. Eligible employees may
contribute a percentage of their compensation up to a maximum of $11,000 for
2006 ($10,000 - 2005). The Company can elect to make a discretionary
contribution to the plan. For the years ended December 31, 2006 and 2005 the
Company elected to make a matching contribution equal to the employee’s
contribution up to a limit of 3% of the employee’s compensation for the year.
The Company match for the year ended December 31, 2006 was $40,329 ($41,685
-
2005).
Defined
Benefit Plan
-
The
Company has acted as sponsor for a contributory defined benefit pension plan
that covered all salaried and hourly employees at Osley & Whitney, Inc.
(O&W) that were scheduled to work at least 1,000 hours per year. During the
year ended December 31, 2001, the Company discontinued the operations of O&W
and on December 30, 2002 sold all of the common stock of O&W to a third
party but continued to act as sponsor for the plan. The termination of the
employees’ services earlier than expected resulted in a plan curtailment,
accounted for in accordance with Statement of Financial Standards Statement
88
in 2001. No future benefits will be earned by plan participants. However, the
plan remains in existence and continues to pay benefits as participants qualify
and receive contributions. The Company’s policy is to fund pension costs accrued
subject to the Company’s available cash to make such contributions.
The
Company made contributions in 2005 of $6,439 and 500,000 shares of its common
stock which were valued at $175,000 at the date of contribution. Such
contributions did not satisfy the minimum funding requirements. The Company
did
not make any contributions for the year ended December 31, 2006, although as
sponsor it was required to make minimum required contributions based upon IRS
rules. The minimum required contributions to prevent a deficiency in the funding
standard account is $1,350,581 as of December 31, 2005. The Company does not
anticipate making any substantial contributions to the Plan during the year
ended December 31,
2007.
The
Company recorded excise taxes on unpaid plan contributions as employee benefit
pension expense amounting to $213,000 and $55,200 for the years ended December
31, 2006 and 2005.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS -
CONTINUED
In
March
2005, the Company filed with the IRS a funding waiver application requesting
waivers of the minimum funding standard for the 2005 plan year of $513,551
and
for the 2004 and prior plan years of $979,328. In August 2006, the Company
received a reply from the Department of the Treasury denying its request for
waivers of the minimum funding standard for the 2005 and 2004 plan years.
During
2006, the Pension Benefit Guarantee Corporation placed a lien on all of the
Company’s assets to secure pension payments due to the Plan. This lien is
subordinate to liens that secure accounts receivable financing and notes
payable. Although the Company has acted as the sponsor of the Plan since we
acquired O&W, recently it was determined that we may not have had, or
currently have, a legal obligation to do so from December 30, 2002 when we
sold
all of the common stock of O&W to a third party. The Company is presently
advocating this position with the appropriate regulatory authorities to
ascertain whether they concur or disagree with this determination. If the
Company’s current efforts do not result in a concurrence with its position, the
Company intends to pursue all appropriate further avenues to prevail its
position. Depending upon the ultimate outcome regarding the obligations as
sponsor of the Plan, adjustments to the Company’s financial statements may be
necessary.
The
measurement date used to determine the pension measurements for the pension
plan
is December 31, 2006. Net periodic pension cost includes the following
components for the years ended December 31, 2006 and 2005:
|
|
|
|
2006
|
|
|
2005
|
|
|
Interest
cost
|
|
$
|
303,489
|
|
$
|
315,360
|
|
|
Expected
return on plan assets
|
|
|
(274,109
|
)
|
|
(305,919
|
)
|
|
Expected
expenses
|
|
|
65,000
|
|
|
-
|
|
|
Actuarial
loss
|
|
|
130,250
|
|
|
109,357
|
|
|
Net
periodic pension cost
|
|
$
|
224,630
|
|
$
|
118,798
|
|
|
|
|
|
|
|
|
|
|
The
following sets forth the funded status of the plan and the amounts shown in
the
accompanying balance sheets:
|
|
|
|
2006
|
|
|
2005
|
|
|
Projected
benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
5,721,136
|
|
$
|
5,687,611
|
|
|
Interest
cost
|
|
|
315,360
|
|
|
315,360
|
|
|
Actuarial
loss (gain)
|
|
|
(11,057
|
)
|
|
131,358
|
|
|
Benefits
paid
|
|
|
(406,300
|
)
|
|
(413,193
|
)
|
|
Benefit
obligation at end of year
|
|
$
|
5,619,139
|
|
$
|
5,721,136
|
|
|
|
|
|
|
|
|
|
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12.
- EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
|
|
|
|
2006
|
|
|
2005
|
|
|
Plan
assets at fair value:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
3,315,526
|
|
|
3,510,324
|
|
|
Actual
return of plan assets
|
|
|
613,308
|
|
|
95,482
|
|
|
Employer
contributions
|
|
|
-
|
|
|
181,439
|
|
|
Benefits
paid
|
|
|
(406,300
|
)
|
|
(406,300
|
)
|
|
Expenses
paid
|
|
|
(65,419
|
)
|
|
(65,419
|
)
|
|
Fair
value of plan assets at end of year
|
|
$
|
3,457,115
|
|
$
|
3,315,526
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status (deficit)
|
|
$
|
(2,162,024
|
)
|
$
|
(2,405,612
|
)
|
|
Unrecognized
actuarial loss
|
|
$
|
(2,578,639
|
)
|
|
(3,046,855
|
)
|
|
|
|
|
(4,740,663
|
)
|
|
(5,452,467
|
)
|
|
Adjustment
required to recognize minimum
|
|
|
|
|
|
|
|
|
pension
liability
|
|
|
2,578,639
|
|
|
3,046,855
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
pension cost
|
|
$
|
(2,162,024
|
)
|
$
|
(2,405,612
|
)
|
The
major
actuarial assumptions used in the calculation of the pension obligation
follow:
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.50
|
%
|
|
Expected
return on plan assets
|
|
|
8.90
|
%
|
|
9.25
|
%
|
|
Rate
of increase in compensation
|
|
|
N/A
|
|
|
N/A
|
|
Assets
in
the trust fund are held for the sole benefit of participating former employees
and retirees. They are comprised of corporate debt and equity securities
and U.S Treasury debt instruments. The expected long-term rate of return on
plan
assets assumption is determined from the plan’s asset allocation using
historical returns and surveys of other reporting company’s rate of return
assumptions. The discount rate assumption is based on published pension
liability indices.
The
investment strategy is to manage the assets of the plan to generate sufficient
returns to meet the long-term liabilities while maintaining adequate liquidity
to pay current benefits. This strategy is implemented by holding equity
investments while investing a portion of the assets in fixed income debt
securities to match the long-term nature of the liabilities.
The
Company's weighted-average asset allocations for its defined benefit pension
plan at December 31, 2006 and 2005, by asset category, are as
follows:
|
Asset
Category
|
|
|
Target
%
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
equity securities
|
|
|
|
|
|
44
|
%
|
|
65
|
%
|
|
International
equity securities
|
|
|
|
|
|
12
|
%
|
|
-
|
|
|
Equity
securities
|
|
|
60
|
%
|
|
56
|
%
|
|
65
|
%
|
|
Fixed
income debt securities
|
|
|
|
|
|
44
|
%
|
|
-
|
|
|
Guaranteed
investment contracts
|
|
|
|
|
|
-
|
|
|
35
|
%
|
|
Interest
bearing debt securities
|
|
|
40
|
%
|
|
44
|
%
|
|
35
|
%
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12.
- EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
The
benefits expected to be paid in each of the next five fiscal years, and in
aggregate for the five fiscal years thereafter are as follows:
|
2007
|
|
$
|
430,146
|
|
|
2008
|
|
$
|
427,506
|
|
|
2009
|
|
$
|
427,688
|
|
|
2010
|
|
$
|
430,994
|
|
|
2011
|
|
$
|
423,901
|
|
|
2012- 2017
|
|
$
|
2,166,616
|
|
NOTE
13. - COMMITMENTS
(a)
Lease
Commitments -
The
Company leases its headquarters and branch office facilities under operating
lease agreements that expire at various dates through 2009. Rent expense for
continuing operations under operating leases for the year ended December 31,
2006 was approximately $108,600 ($76,000 - 2005).
Following
is the approximate future minimum payments required under these
leases:
|
2007
|
|
$
|
148,344
|
|
|
2008
|
|
|
79,800
|
|
|
2009
|
|
|
9,500
|
|
|
|
|
$
|
237,644
|
|
(b)
Employment
Contracts -
The
Company has employment agreements with two of its executives with terms expiring
in May 2008. The agreements provide for severance payments of 12 months and
24
months, respectively, of salary in the event of termination for certain causes.
As of December 31, 2006, the minimum annual severance payments under these
employment agreements is, in the aggregate, approximately $625,000.
(c)
Consulting Agreements
The
Company has contracted with Intelligent Consulting Corporation (ICC) on a
month-to-month basis to provide consulting services relating to the development,
production, marketing and sales of the Company’s TouchThru™ access control
product, marketing services for the Company’s consulting business and other
general corporate matters. The Company paid ICC $213,650 during the year ended
December 31, 2006 ($223,384 - 2005).
The
Company has contracted with an independent consulting firm to provide services
in connection with generating new revenues. The Company has agreed to pay a
monthly fee for services covering a period of one year which ended on October
31, 2006. The Company paid $15,000 in 2005 and has incurred expenses of $76,328
for services and expense reimbursements in 2006. In addition the Consulting
firm
will receive one half of one percent of the Company’s gross revenue growth
subject to certain limitations as outlined in the agreement.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13.
- COMMITMENTS - CONTINUED
For
a
period of one year which ended January 1, 2007, the Company engaged the services
of an investment banking group on a non-exclusive basis to provide advice
concerning financial planning, corporate organization and structure, business
combinations, and related services. The Company issued a warrant to acquire
100,000 shares of common stock exercisable at $.50 per share which expires
on
December 31, 2010 and was obligated to provide additional compensation
contingent upon closing a business combination introduced by the investment
banking group. No additional compensation was earned by the investment banking
group. The agreement expired on January 1, 2007.
NOTE
14. - SUPPLEMENTAL CASH FLOW INFORMATION
Noncash
investing and financing transactions, including non-monetary exchanges, consist
of the following:
|
|
|
|
2006
|
|
|
2005
|
|
|
Conversion
of notes payable due to related parties to
shares
of common
stock
|
|
$
|
1
14,000
|
|
$
|
25,000
|
|
|
Conversion
of accounts payable to common
s
tock
|
|
$
|
-
|
|
$
|
2,250
|
|
|
500,000
shares of common stock contributed to O&W
Retirement
Plan which reduced the balance of accrued
pension
obligation
|
|
$
|
-
|
|
$
|
175,000
|
|
|
25,000
common shares authorized for issuance in
connection
with a settlement agreement with a former
employee
|
|
$
|
-
|
|
$
|
7,500
|
|
|
Sale
of property and equipment for note
r
eceivable
|
|
$
|
-
|
|
$
|
11,075
|
|
NOTE
15. - BUSINESS SEGMENTS
Prior
to
2002, the Company’s business was organized, managed and internally reported as
several segments. The segments were determined based on differences in products,
production processes and internal reporting. During the fourth quarter of 2002,
The Company’s contract with DARPA was terminated and as
a
result
of the termination, management decided to suspend the activities of the
Photonics Group in 2002 and liquidate the remaining assets. 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. (LF) subsidiary,
referred to as the Laser Group. As a result, in accordance with FASB 144, the
disposal of the Photonics and Laser segments have been accounted for as
disposals of business segments and accordingly, the operating results were
segregated and reported as discontinued operations. The Company
sold or
closed its prior businesses on or before December 31, 2004. During the year
ended December 31, 2005,
the
Company recorded income from discontinued operations of $12,223 from its former
business, the Photonics Group.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15. - BUSINESS SEGMENTS - CONTINUED
Beginning
in 2003, the Company revised its business strategy and began operating its
newly
formed IT Services Group, which is organized, managed and internally reported
as
one segment, the IT Services Group.
The
Company is now solely focused in one segment, the fields of IT consulting
services.
The
Company operates entirely within the U.S. There were no revenues from customers
in foreign countries during 2005 and 2006 and all assets are located in the
U.S.
A
summary
of selected consolidated information for the Company’s industry segments during
2005 is set forth as follows:
|
2005
|
|
|
Photonics
Group
|
|
|
IT
Services
|
|
|
Consolidated
|
|
|
Sales
to unaffiliated customers
|
|
$
|
-
|
|
$
|
8,505,199
|
|
$
|
8,505,199
|
|
|
Operating
loss
|
|
$
|
-
|
|
$
|
(4,059
|
)
|
$
|
(4,059
|
)
|
|
Income
from discontinued
operations
|
|
$
|
12,233
|
|
$
|
-
|
|
$
|
12,233
|
|
|
Interest
expense
|
|
$
|
-
|
|
$
|
336,286
|
|
$
|
336,286
|
|
|
Identifiable
assets
|
|
$
|
-
|
|
$
|
1,556,564
|
|
$
|
1,556,564
|
|
|
Depreciation
and amortization
|
|
$
|
-
|
|
$
|
41,547
|
|
$
|
41,547
|
|
|
Capital
expenditures
|
|
$
|
-
|
|
$
|
196,462
|
|
$
|
196,462
|
|
|
Gain
on settlement with
terminated employee
|
|
$
|
-
|
|
$
|
290,533
|
|
$
|
290,533
|
|
|
Common
stock contributed to O&W pension plan
|
|
$
|
-
|
|
$
|
175,000
|
|
$
|
175,000
|
|
|
Expenses
satisfied via equity
|
|
$
|
-
|
|
$
|
91,709
|
|
$
|
91,709
|
|
NOTE
16. - FORMER LITIGATION
At
December 31, 2006, the Company was not a party to any litigation proceedings.
Previously, the Company was involved in litigation as follows.
The
Company was the plaintiff in a lawsuit filed on April 22, 2005 in the Supreme
Court, State of New York, captioned Infinite Group, Inc. v. Mark Ackley and
Ackco, Inc. In this action, the Company alleged that Mr. Ackley, its former
chief operations officer and director of business development, breached his
contractual and fiduciary obligations to the Company by causing a company he
controls to enter into a consulting arrangement with and perform services for
another firm while employed by us. The Company terminated Mr. Ackley’s
employment for cause on March 11, 2005. The Company also alleged that Mr. Ackley
violated his non-compete obligations contained in his employment agreement.
In
2005, the parties agreed to settle all claims to avoid the expense and time
of
litigation. As part of the settlement, the Company was released of certain
obligations to Mr. Ackley. The parties executed mutual releases. The former
employee surrendered to the Company 500,000 shares of the Company’s common stock
that he owned, which was recorded at fair value of $175,000 at the date of
the
settlement agreement. The shares were contributed to the O&W Retirement
Plan. In addition, as part of the settlement, the Company was released of
certain liabilities owed to Mr. Ackley in the amount of $25,000. The settlement
resulted in a gain of $191,739, net of related expenses, and has been recorded
as a gain on settlement in the accompanying consolidated statement of
income.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16. - FORMER LITIGATION - CONTINUED
The
Company was 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, the Company asserted
that
by fraud and in breach of fiduciary duties owed, Spectra and its president,
Nabil Lawandy, caused the Company to sell to Spectra shares of Spectra’s Series
A Preferred stock at a substantial discount to fair market value. The Company
alleged that in entering into the transaction it relied on various
representations made by Spectra and Mr. Lawandy, which were untrue at the time
they were made. The trial was completed in February 2005, and the jury returned
a verdict in favor of the Company in the amount of approximately $600,000.
The
Company appealed the amount of the verdict and entered into a settlement with
the defendants in January 2006. As a result the Company received and recorded
other income of approximately $500,000, net of legal fees and expenses, in
the
first quarter of 2006.
The
Company was the respondent in an arbitration proceeding filed on December 10,
2002 captioned J. Terrence Feeley v. Infinite Group, Inc. The Claimant, a former
employee of the Company and former member of the Company’s board of directors,
alleged 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 alleged that the Company had failed to make
such cash payments and had breached the agreement and sought all monies owed
to
him, in an amount alleged to be $130,000. The Company and the Claimant settled
the matter in the fourth quarter of 2005. Pursuant to the terms of the
settlement agreement, the Company recorded a gain on settlement with the
terminated employee of approximately $99,000 in the accompanying 2005
consolidated statement of income when it adjusted the carrying amounts of the
related liabilities to actual. The Company also authorized the issuance of
25,000 shares of common stock in connection with the settlement agreement valued
at $7,500, which was based on the closing price of the stock on the date of
the
settlement agreement.