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. Each
subsidiary was inactive during the years presented in these financial
statements. All significant intercompany accounts and transactions have been
eliminated in consolidation. The inactive subsidiaries are 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").
The
Company is focused in one segment, the fields of IT consulting services.
The
Company operates entirely within the United States. There were no sales from
customers in foreign countries during 2007 and 2006 and all assets are located
in the United States.
NOTE
2. - MANAGEMENT PLANS
Business
Strategy
The
Company operates in the field of information technology (IT) consulting and
integration. The Company’s IT services include strategic staffing, program
management, project management, IT infrastructure management, technical
engineering, software development, and enterprise resource planning. The Company
has entered into several subcontract agreements with a number of prime
contractors to the U.S. government.
In
2003,
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
prime contractor’s initial three year subcontract agreement was renewed for an
additional five year period which extends through 2011 and the Company’s
subcontract agreement with the prime contractor is renewable
annually.
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. During
2007 and 2006, the Company utilized its GSA Contract to secure a prime contract
with the U.S. Department of Homeland Security (DHS) which was effective through
December 31, 2007 and beginning on January 1, 2008 was converted to a
subcontract with a large prime contractor to DHS. The GSA Schedule was revised
in May 2006 to include many new positions and a pricing schedule that extends
through December 28, 2011.
The
Company has 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 continues to focus 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 and
continues
to submit proposals for new projects and awards from certain of these proposals
are anticipated in the future although the government financing and procurement
processes are lengthy.
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 major
hurricanes. Significant opportunities have been identified in the State of
Mississippi that Company management believes will result in sales in future
years. Since the sales cycle has been longer than we anticipated, in December
2007, we closed our Jackson, Mississippi office and renewed our agreement with
a
locally based lobbying firm to identify and monitor new business opportunities
for us. 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.
During 2006 and 2007, the Company’s staff successfully completed the first phase
of a significant virtualization project for a major establishment of the U.S.
government operating one of the largest wide area networks in the United States.
Beginning
in 2007,
the
Company was engaged for the second phase of this virtualization project which
is
scheduled for completion in 2008. Further, the Company is using this experience
and skill set to develop new business opportunities with governmental,
not-for-profit and commercial organizations. For instance, the Company has
secured a contract to design, plan and build a virtualization effort for one
of
the constituent agencies of DHS.
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.
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts
Receivable
-
Credit
is granted to substantially all customers throughout the United States. 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 an 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 $35,000 for doubtful accounts
is necessary at December 31, 2007 ($53,000 - 2006).
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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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, 2007, the Company sold approximately $6,100,000
($4,200,000 - 2006) of its accounts receivable to the Purchaser. As of December
31, 2007, $960,396 ($912,201 - 2006) of these receivables remained outstanding.
After deducting estimated fees and advances from the Purchaser, the net
receivable from the Purchaser amounted to $177,076 at December 31, 2007
($166,456 - 2006), and is included in accounts receivable in the accompanying
balance sheets as of that date. Further, the Company had requested and received
an advance from the Purchaser against this retained interest, which amounted
to
$768,316 as of December 31, 2007 ($729,761 - 2006). These amounts are reflected
as an offset to accounts receivable in the accompanying balance sheets as of
December 31, 2007 and 2006.
There
were no gains or losses on the sale of the accounts receivable because all
were
collected. The cost associated with the fees totaled approximately $135,300
for
the year ended December 31, 2007 ($88,600 - 2006). These fees are 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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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
are deferred. All capitalized software development costs totaling $225,000
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.
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 4) for 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
2007, sales to one client accounted for 85.1% of total sales (75.3% - 2006)
and
83.6% of accounts receivable (81.6% - 2006) at December 31, 2007. In
addition, during 2006 another client accounted for 12.8% of total sales and
4.7%
of accounts receivable. Sales with this client were less than 10% of total
sales
during 2007.
Research
and Development Costs -
All
costs related to internal research and development are expensed as incurred.
Research and development expense amounted to $87,997 for the year ended December
31, 2007 ($256,113 - 2006) 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, which activities were eliminated during
2007.
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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 convertible notes payable, 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.
If
the
Company had generated earnings during the year ended December 31, 2007,
19,768,986 (13,585,431 - 2006) 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
notes payable whose exercise price is less than the average of the Company’s
stock price during the period.
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.
Recent
Accounting Pronouncements
FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes -
An Interpretation of FASB Statement No. 109.” -
In June
2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes”
.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
The
Company adopted the provisions of FIN 48 in the first quarter of fiscal
2008. See footnote 9 for additional information regarding the impact of adopting
the provisions of FIN 48 and the related disclosures.
Statement
of Financial Accounting Standards No. 157, Fair Value Measurements -
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). Among other requirements, SFAS No. 157 defines fair
value and establishes a framework for measuring fair value and also expands
disclosure about the use of fair value to measure assets and liabilities. We
are
required
to
adopt
SFAS No. 157 on January 1, 2008. Subsequent to the
Standard's
issuance, the FASB issued an exposure draft that provides for a one year
deferral for the implementation of SFAS 157 for non-financial assets and
liabilities.
The
Company is currently evaluating the impact of the adoption of SFAS No. 157,
if
any, on its financial position, results of operations and cash
flows.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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
funded status of a defined benefit postretirement plan in the Company’s balance
sheet and to recognize changes in that funded status in comprehensive income.
The implementation of this Statement did not have a significant impact on the
Company’s financial statements. See Note 10.
Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”)
-
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.159 permits companies
to elect to follow fair value accounting for certain financial assets and
liabilities in an effort to mitigate volatility in earnings without having
to
apply complex hedge accounting provisions. The standard also establishes
presentation and disclosure requirements designed to facilitate comparison
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of
the
adoption of SFAS No. 159, if any, on its financial position, results of
operations and cash flows.
Reclassification
-
The
Company reclassifies certain prior year amounts to conform to the current year’s
presentation.
NOTE
4. - PROPERTY AND EQUIPMENT
Property
and equipment consists of:
|
|
Depreciable
|
|
December
31,
|
|
|
|
Lives
|
|
2007
|
|
2006
|
|
Software
|
|
|
3
to
5
years
|
|
$
|
27,461
|
|
$
|
18,296
|
|
Machinery
and equipment
|
|
|
3
3
to
10
years
|
|
|
111,043
|
|
|
146,265
|
|
Furniture
and fixtures
|
|
|
5
3
to
7
years
|
|
|
10,892
|
|
|
10,082
|
|
Leasehold
improvements
|
|
|
3
years
|
|
|
3,286
|
|
|
3,286
|
|
|
|
|
|
|
|
152,682
|
|
|
177,929
|
|
Accumulated
depreciation
|
|
|
|
|
|
(81,959
|
)
|
|
(97,317
|
)
|
|
|
|
|
|
$
|
70,723
|
|
$
|
80,612
|
|
In
connection with the review of software development costs, during the year ended
December 31, 2006, 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, the Company recorded
an
impairment loss, which was approximately $73,000 for the year ended December
31,
2006.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - NOTES PAYABLE
At
December 31, 2007, a demand note for $30,000 ($30,000 - 2006) 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 notes bear
interest at rates ranging from 9.25% to 18%. Amounts outstanding at December
31,
2007 aggregate $140,332 ($148,663 - 2006).
NOTE
6. - LONG-TERM OBLIGATIONS
Long-term
obligations consist of:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Term
notes payable - bank (a)
|
|
$
|
33,783
|
|
$
|
50,354
|
|
Term
notes payable - stockholders (b)
|
|
|
450,000
|
|
|
450,000
|
|
Convertible
term notes payable- related parties (c)
|
|
|
641,624
|
|
|
696,124
|
|
|
|
|
1,125,407
|
|
|
1,196,478
|
|
Less
current maturities
|
|
|
4,077
|
|
|
50,354
|
|
|
|
|
|
|
|
|
|
Total
long-term obligations
|
|
$
|
1,121,330
|
|
$
|
1,146,124
|
|
(a)
Term
Notes Payable - Bank -
The
Company entered into a loan during 2007 for the financing of a vehicle. The
prior loans were repaid during 2007. The loan has an aggregate balance of
$33,783 at December 31, 2007, bears interest at 7.9% and is due in aggregate
monthly installments of approximately $550 through October 26, 2010 at which
time the remaining principal balance of $21,751 is due.
(b)
Term
Notes Payable - Stockholders
-
During
the years ended December 31, 2004 and 2003, the Company issued secured notes
payable to a stockholder aggregating $265,000. All of these borrowings bear
interest at 12% and are due in January 2010. 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, 2007 amounted to $265,000
($265,000 - 2006).
During
2005, the Company issued various notes to a stockholder, who is currently an
employee. Subsequently, the notes were consolidated into one note for $185,000
with interest payable monthly at 12% with all principal maturing on January
1,
2009. The notes are secured by all of the assets of the Company. At December
31,
2007, the notes had a balance of $185,000 ($185,000 - 2006).
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6. - 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. During 2006, the holder
converted $50,000 of the principal of the note into 1,000,000 shares of common
stock reducing the principal balance to $264,000 at December 31, 2007 and 2006.
The notes bear interest at 9.5% at December 31, 2007 (8% - 2006).
The
outstanding balance of a note purchased from a bank by a related party as of
December 31, 2007 and 2006 amounted to $203,324 and bears interest at 9.5%
per
annum (8% - 2006). 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
2003 and 2004, the Company issued various notes to the same related party with
interest at 6%. Effective December 1, 2004, the terms of the notes were
modified. The notes had a principal balance of $292,800 at December 31, 2005.
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. During 2007 and 2006, $54,500 and
$64,000, respectively, of the principal of the notes were converted by the
holder into 1,090,000 and 1,280,000 shares of common stock, respectively,
reducing the principal balance to $174,300 at December 31, 2007 ($228,800 -
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 ended 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
6. - 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, 2007 are
as
follows:
2009
|
|
$
|
189,411
|
|
2010
|
|
|
290,295
|
|
2011
- 2015
|
|
|
-
|
|
2016
|
|
|
641,624
|
|
Total
long-term obligations
|
|
$
|
1,121,330
|
|
NOTE
7. - STOCKHOLDERS' DEFICIENCY
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, 2007 and 2006
there were no preferred shares issued or outstanding.
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.
During
the year ended December 31, 2007, the following common stock transactions took
place:
·
|
The
Company issued 10,000 shares of common stock upon exercise of employee
stock options and receipt of the exercise price of $.05 per share
or
$500.
|
·
|
The
Company issued 1,090,000 shares of common stock upon conversion of
$54,500
of principal of notes payable to related parties. (See Note
6.)
|
·
|
The
Company issued
100,000
shares of common stock valued at $50,000 in exchange for consulting
services provided over one year.
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7. - 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
6.)
|
·
|
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.
|
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
expired in 2007.
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 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, an accredited
investor, and issued the consultant a warrant to acquire 500,000 shares of
the
Company’s 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. During the year ended December 31, 2007, the consultant vested in
100,000 shares as a result of achieving the first performance measure and the
Company valued the warrant using the Black-Scholes option pricing model and
recognized $37,799 of consulting expense. The Company anticipates that the
likelihood of the consultant meeting the next performance criterion is
remote.
On
May 1,
2006, the Company engaged the services of another consultant, an accredited
investor, 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. As of
December 31, 2007, the consultant has not generated any sales for the company
and as a result the Company has not recorded any compensation expense. The
Company anticipates that the likelihood of the consultant meeting the
performance criterion is remote.
On
April
5, 2007, the Company engaged the services of a consultant, an accredited
investor, to assist it with business development for a term of one year through
April 4, 2008 and issued it a warrant to acquire 100,000 shares of its common
stock, exercisable at $.50 per share, which expires on April 4, 2012. The fair
value of the warrant amounted to $24,380 using the Black-Scholes option pricing
model. During the year ended December 31, 2007, the consultant vested in 100,000
shares and the Company recognized $18,285 of consulting expense.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7. - STOCKHOLDERS' DEFICIENCY - CONTINUED
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 Company
uses the Black-Scholes option-pricing model to determine the fair value of
the
awards. The Company periodically evaluates the likelihood of reaching the
performance requirements and will be required to recognize consulting expense
associated with these performance based awards when it becomes probable the
consultants will achieve their performance criteria.
The
compensation cost that has been charged against income and the fair value of
shares vested for warrants granted during the year ended December 31, 2007
was
$56,084 ($16,770 - 2006).
The
following is a summary of the warrant activity for the years ended December
31,
2007 and 2006:
|
|
Number
of Warrants Outstanding
|
|
Weighted
Average Exercise Price
|
|
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2005
|
|
|
75,000
|
|
$
|
2.40
|
|
|
|
|
|
|
|
Granted
|
|
|
650,000
|
|
$
|
.33
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
725,000
|
|
$
|
.55
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
$
|
.50
|
|
|
|
|
|
|
|
Expired
|
|
|
(75,000
|
)
|
$
|
2.40
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
750,000
|
|
$
|
.36
|
|
|
4
years
|
|
$
|
317,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
300,000
|
|
$
|
.43
|
|
|
5.1
years
|
|
$
|
104,000
|
|
The
average fair value of warrants granted was $.24 per share for the year ended
December 31, 2007 ($.23 - 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
7. - STOCKHOLDERS' DEFICIENCY - CONTINUED
A
summary
of the status of nonvested warrant activity for the years ended December 31,
2007 and 2006 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
|
|
Granted
|
|
|
100,000
|
|
|
.50
|
|
Vested
|
|
|
(200,000
|
)
|
|
.40
|
|
Nonvested
at December 31, 2007
|
|
|
450,000
|
|
$
|
.22
|
|
NOTE
8. - 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 5,308,500 shares
at
December 31, 2007 (5,223,000 - 2006). No further grants may be made from the
1993, 1994, 1995, 1996, 1997, and 1998 plans. As of December 31, 2007,
353,500 options to purchase shares remain unissued under the 2005 plan. Such
options may be designated at the time of grant as either incentive stock options
or nonqualified stock options.
Statement
of Financial Accounting Standards No. 123R, Share-Based Payment -
On
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board issued SFAS 123R, Share-Based Payment (“SFAS 123R”) using the
modified prospective transition method.
The
compensation cost that has been charged against income for options granted
to
employees under the plans was $245,272 and $243,050 for the years ended December
31, 2007 and 2006, respectively. The impact of this expense was to increase
basic and diluted net loss per share from $(.02) to $(.03) for the year ended
December 31, 2007 and from $(.06) to $(.08) for the year ended December 31,
2006. 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 years ended December
31,
2007 and 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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8. - STOCK OPTION PLANS- CONTINUED
The
Company used volatility of 50% when computing the value of stock options and
warrants during the year ended December 31, 2007, 71% for the nine months ended
December 31, 2006, and 100% for options issued during the three months ended
March 31, 2006. This is based on historical volatility with consideration given
to activity subsequent to July 2005, when the Company brought current its public
information in filings with the SEC, and the increase in the volume of trading
in the Company’s common stock in 2007 and 2006. The Company believes the
increase in the volume of trading has provided more liquidity and less
volatility than was previously experienced.
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. The risk-free rate for the life of the option is based on the
U.S.
Treasury yield curve in effect at the time of grant.
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
4.1%
- 4.76
|
%
|
4.42%
- 5.1
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Expected
stock price volatility
|
|
|
50
|
%
|
|
71%
- 100
|
%
|
Expected
life of options
|
|
|
10
years
|
|
|
10
years
|
|
The
Company recorded expense for options, warrants and common stock issued to
employees and independent service providers for the years ended December 31,
2007 and 2006 as follows:
|
|
2007
|
|
2006
|
|
Employee
stock options
|
|
$
|
245,272
|
|
$
|
243,050
|
|
Consultant
- common stock warrants
|
|
|
56,084
|
|
|
16,770
|
|
Consultant
- common stock
|
|
|
37,500
|
|
|
-
|
|
Consultant
- stock options
|
|
|
-
|
|
|
5,015
|
|
Total
expense
|
|
$
|
338,856
|
|
$
|
264,835
|
|
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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8. - 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, 2007 and
2006:
|
|
Number
of Options Outstanding
|
|
Weighted
Average Exercise Price
|
|
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
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
|
|
|
|
|
|
|
|
Granted
|
|
|
561,000
|
|
$
|
.52
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,000
|
)
|
$
|
.05
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,500
|
)
|
$
|
.43
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
4,914,500
|
|
$
|
.27
|
|
|
7.2
years
|
|
$
|
2,537,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
4,252,167
|
|
$
|
.25
|
|
|
7.0
years
|
|
$
|
2,315,713
|
|
A
summary
of the status of nonvested stock options for the years ended December 31, 2007
and 2006 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
|
|
Granted
|
|
|
561,000
|
|
|
.34
|
|
Vested
|
|
|
(673,333
|
)
|
|
.33
|
|
Forfeited
|
|
|
(9,334
|
)
|
|
.37
|
|
Nonvested
at December 31, 2007
|
|
|
662,333
|
|
$
|
.30
|
|
At
December 31, 2007, there was approximately $155,000 of total unrecognized
compensation cost related to outstanding non-vested options. This cost is
expected to be recognized over a weighted average period of one year. The total
fair value of shares vested during the year ended December 31, 2007 was
approximately $220,000.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8. - STOCK OPTION PLANS- CONTINUED
The
weighted average fair value of options granted was $.34 and $.33 per share
for
the years ended December 31, 2007 and 2006, 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.
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 vested over
a two-year service period. During each of 2007 and 2006, 500 options expired.
At
December 31, 2007, there were 40,500 (41,000 in 2006) options outstanding to
directors under this plan, all of which are exercisable. These options are
exercisable at prices ranging from $.10 to $2.53 per share with an average
exercise price of $.91 per share. The options expire at various dates from
2008
to 2013. No new options are issuable under the terms of this plan.
NOTE
9. - INCOME TAXES
The
components of the income tax (expense) benefit follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
- State
|
|
$
|
(1,000
|
)
|
$
|
(7,300
|
)
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,657,000
|
|
|
876,350
|
|
State
|
|
|
(289,000
|
|
|
154,650
|
|
|
|
|
(1,946,000
|
)
|
|
1,031,000
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
1,946,000
|
|
|
(1,031,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,000
|
)
|
$
|
(7,300
|
)
|
At
December 31, 2007, the Company had federal net operating loss carryforwards
of
approximately $20,800,000 and various state net operating loss carryforwards
of
approximately $16,000,000, which expire from 2009 through 2027. 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.
The
Company may be unable to use certain of its state tax net operating loss
carryforwards since it presently does not operate in certain states in which
it
has state net operating loss carryforwards.
At
December 31, 2007, a net deferred tax asset, representing the future benefit
attributed primarily to the available net operating loss carryforwards, in
the
amount of approximately $9,371,000, 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.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9. - INCOME TAXES - CONTINUED
The
following is a summary of the Company's temporary differences and carryforwards
which give rise to deferred tax assets and liabilities:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss and tax credit carryforwards
|
|
$
|
8,023,000
|
|
$
|
9,958,000
|
|
Defined
benefit pension liability
|
|
|
960,000
|
|
|
1,068,000
|
|
Property
and equipment
|
|
|
46,000
|
|
|
87,000
|
|
Reserves
and accrued expenses payable
|
|
|
342,000
|
|
|
204,000
|
|
Gross
deferred tax asset
|
|
|
9,371,000
|
|
|
11,317,000
|
|
Deferred
tax asset valuation allowance
|
|
|
(9,371,000
|
)
|
|
(11,317,000
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
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,
|
|
|
|
2007
|
|
2006
|
|
Statutory
U.S. federal tax rate
|
|
|
(
34.0 )
|
%
|
|
(
34.0 )
|
%
|
State
income taxes, net of federal
|
|
|
(
.1
|
)
|
|
(
.6 )
|
%
|
Stock
option expense
|
|
|
(
32.7
|
)
|
|
(
15.1
|
)
|
Excise
taxes
|
|
|
-
|
|
|
(
13.3
|
)
|
Other
|
|
|
(
1 .9
|
)
|
|
(
1.3
|
)
|
Change
in valuation allowance
|
|
|
68.8
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
.1
|
%
|
|
.3
|
%
|
The
Company’s adoption of FIN 48 did not have a material impact on the Company’s
results of operations and financial position, and therefore, the Company did
not
have any adjustments to the January 1, 2007 beginning balance of accumulated
deficit. In addition, the Company did not have any material unrecognized tax
benefit at December 31, 2007. The Company recognizes interest accrued and
penalties related to unrecognized tax benefits in tax expense. During the year
ended December 31, 2007, the Company recognized no interest and
penalties.
The
Company files tax returns in the U.S. federal jurisdiction and various states.
The tax years 2002 through 2007 remain open to examination by the taxing
jurisdictions to which the Company is subject.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - 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 $10,500 for
2007 and 2006. The Company can elect to make a discretionary contribution to
the
plan. For the years ended December 31, 2007 and 2006 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, 2007 was $45,408 ($40,329 - 2006).
Defined
Benefit Plan
-
The
Company has acted as sponsor for a contributory defined benefit pension plan,
the Osley & Whitney, Inc. Retirement Plan (O&W 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 recognizes interest and penalties related to the defined benefit pension
plan in defined benefit plan expense if they are associated with the O&W
Plan. The Company has accrued $380,000 of excise taxes and interest associated
with the unfunded contributions to the O&W Plan through the Plan year ended
December 31, 2005.
Prior
to
December 30, 2002, the Company owned 100% of the common stock of O&W. On
December 30, 2002, the Company sold all of the O&W common stock to a third
party, but mistakenly continued to act as the sponsor of the O&W Plan.
Although the Company continued to act as the sponsor of the O&W Plan after
the sale of all of the common stock of O&W on December 30, 2002, during 2007
it was determined that, as a matter of law, the Company had no legal obligation
to continue as the O&W Plan Sponsor.
During
2007, the Company submitted information advocating this position to the
Department of Treasury (DOT) to ascertain whether they concur or disagree with
this determination. The DOT is presently reviewing this information. If the
DOT
does not concur with this position, the Company may be required to record
additional estimated excise taxes on accumulated unfunded O&W Plan
contributions for the Plan year ended December 31, 2006 of approximately
$135,000, which has not been accrued because the Company has determined that
it
has no legal obligation to continue as Plan sponsor and as a result of its
legal
position the Company estimates that the likelihood is remote that it will be
required to pay these excise taxes. Further, if the DOT does not concur with
this position, the Company may be required to pay interest on these excise
taxes
and potentially incur additional excise taxes up to 100% of all required plan
contributions. Such 100% excise taxes have not been assessed and no portion
of
this amount has been accrued at December 31, 2007 and as a result of its legal
position the Company estimates that the likelihood is remote that it will be
required to pay these excise taxes. If the DOT does not concur with this
position, the Company intends to pursue all appropriate further avenues to
prevail on its position. Depending upon the ultimate outcome regarding the
Company’s obligations as sponsor of the O&W Plan, adjustments to the
financial statements may be necessary. At December 31, 2007 the Company accrued
liabilities of $2,404,189 related to the O&W Plan and an accumulated other
comprehensive loss of $2,227,689 which was recorded as a reduction of
stockholders’ deficiency.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED
Whether
or not The Company ultimately will be responsible to fund any O&W Plan
deficiencies is largely dependent upon the ultimate outcome regarding the
Company’s obligations as sponsor of the O&W Plan, as described above. If it
is determined that the Company is responsible for such deficiencies, then the
Company will be required to make contributions for deficiencies in 2004, 2005,
2006, 2007, and in future years to fund any O&W Plan deficiencies. The
Company did not make any contributions in 2004, 2006 or 2007. During 2005,
the
Company made contributions of $6,439 and 500,000 shares of its common stock,
which were valued on the contribution date at $175,000 using that day’s closing
market price. The Company currently does not have the funds available to make
the required contributions which currently approximate $1.8 million, which
includes the minimum required plan contributions. As a result of its legal
position, the Company does not anticipate making any contributions to the Plan
during the year ending December 31, 2008. The Company recorded defined benefit
pension expense (including professional services and interest costs) of $351,460
and $410,777 for the years ended December 31, 2007 and 2006, respectively.
Included in pension expense in 2006, are excise taxes of $213,000.
During
2006, the Pension Benefit Guarantee Corporation placed a lien on all of the
Company’s assets to secure the contributions due to the O&W Plan. This lien
is subordinate to liens that secure accounts receivable financing and certain
notes payable.
The
measurement date used to determine the pension measurements for the pension
plan
is December 31, 2007. Net periodic pension cost includes the following
components for the years ended December 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Interest
cost
|
|
$
|
296,990
|
|
$
|
303,489
|
|
Expected
return on plan assets
|
|
|
(290,742
|
)
|
|
(274,109
|
)
|
Expected
expenses
|
|
|
65,000
|
|
|
65,000
|
|
Actuarial
loss
|
|
|
109,818
|
|
|
130,250
|
|
Net
periodic pension cost
|
|
$
|
181,066
|
|
$
|
224,630
|
|
The
following sets forth the funded status of the plan and the amounts shown in
the
accompanying balance sheets:
|
|
2007
|
|
2006
|
|
Projected
benefit obligation:
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
5,619,139
|
|
$
|
5,721,136
|
|
Interest
cost
|
|
|
296,990
|
|
|
315,360
|
|
Actuarial
(loss) gain
|
|
|
(85,078
|
)
|
|
(11,057
|
)
|
Benefits
paid
|
|
|
(451,162
|
)
|
|
(406,300
|
)
|
Benefit
obligation at end of year
|
|
$
|
5,379,889
|
|
$
|
5,619,139
|
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS -
CONTINUED
|
|
2007
|
|
2006
|
|
Plan
assets at fair value:
|
|
|
|
|
|
|
|
Fair
value of plan assets at
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
3,457,115
|
|
|
3,315,526
|
|
Actual
return of plan assets
|
|
|
412,619
|
|
|
613,308
|
|
Benefits
paid
|
|
|
(451,162
|
)
|
|
(406,300
|
)
|
Expenses
paid
|
|
|
(30,823
|
)
|
|
(65,419
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
3,387,749
|
|
$
|
3,457,115
|
|
Funded
status (deficit)
|
|
$
|
(1,992,140
|
)
|
$
|
(2,162,024
|
)
|
Unrecognized
actuarial loss
|
|
|
(2,227,689
|
)
|
|
(2,578,639
|
)
|
|
|
|
(4,219,829
|
)
|
|
(4,740,663
|
)
|
Adjustment
required to recognize minimum
|
|
|
|
|
|
|
|
pension
liability
|
|
|
2,227,689
|
|
|
2,578,639
|
|
|
|
|
|
|
|
|
|
Accrued
pension cost
|
|
$
|
(1,992,140
|
)
|
$
|
(2,162,024
|
)
|
The
major
actuarial assumptions used in the calculation of the pension obligation
follow:
|
|
2007
|
|
2006
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
5.75
|
%
|
Expected
return on plan assets
|
|
|
8.90
|
%
|
|
8.90
|
%
|
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, 2007 and 2006, by asset category, are as
follows:
Asset
Category
|
|
Target
%
|
|
2007
|
|
2006
|
|
Domestic
equity securities
|
|
|
|
|
|
50
|
%
|
|
44
|
%
|
International
equity securities
|
|
|
|
|
|
14
|
%
|
|
12
|
%
|
Equity
securities
|
|
|
60
|
%
|
|
64
|
%
|
|
56
|
%
|
Interest
bearing debt securities
|
|
|
40
|
%
|
|
36
|
%
|
|
44
|
%
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. - 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:
2008
|
|
$
|
429,700
|
|
2009
|
|
$
|
427,040
|
|
2010
|
|
$
|
427,172
|
|
2011
|
|
$
|
430,359
|
|
2012
|
|
$
|
423,063
|
|
2013-
2017
|
|
$
|
2,162,298
|
|
|
|
|
|
|
NOTE
11. - COMMITMENTS
Lease
Commitments -
The
Company leases its headquarters, branch office facilities and a vehicle under
operating lease agreements that expire at various dates through 2010. Rent
expense under operating leases for the year ended December 31, 2007 was
approximately $115,200 ($108,600 - 2006).
Following
is the approximate future minimum payments required under these
leases:
2008
|
|
$
|
86,000
|
|
2009
|
|
|
16,500
|
|
2010
|
|
|
31,900
|
|
|
|
$
|
134,400
|
|
Employment
Contracts -
The
Company has employment agreements with two of its executives with terms expiring
in May 2009. These agreements automatically are extended for one year periods
unless the Company gives 180 days notice prior to the termination date of its
intent to terminate the agreement. 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, 2007, the minimum annual severance
payments under these employment agreements are, in the aggregate, approximately
$583,000.
Consulting
Agreements
The
Company has contracted with Intelligent Consulting Corporation (ICC) on a
month-to-month basis to provide consulting services relating to business
development services for the Company and other general corporate matters. The
Company paid ICC $128,400 during the year ended December 31, 2007 ($213,650
-
2006).
The
Company has contracted with an independent consulting firm to provide services
in connection with generating new sales. Beginning January 1, 2008 the Company
has agreed to the terms of a new contract which requires payment of a monthly
fee for services of $3,000 through May 31, 2008. The Company incurred expenses
of $22,500 in 2007 and $76,328 in 2006 for services and expense reimbursements.
Either party may terminate the agreement with two weeks of notice.
INFINITE
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11. - COMMITMENTS - CONTINUED
On
April
5, 2007, the Company engaged the services of a consultant, an accredited
investor, to assist it with business development for a term of one year through
April 4, 2008 and issued it (i) 100,000 restricted shares of its common stock
and (ii) a warrant to acquire 100,000 shares of its common stock, exercisable
at
$.50 per share, which expires on April 4, 2012. The common stock was valued
at
$50,000 using the market price on the date of the agreement and is being
expensed over the term of the agreement. The warrant was valued using the Black
Scholes option pricing model at $24,380 and is being amortized over the term
of
the agreement. During 2007, the Company recorded expense of $55,785 related
to
these equity instruments.
NOTE
12. - SUPPLEMENTAL CASH FLOW INFORMATION
Noncash
investing and financing transactions, including non-monetary exchanges, consist
of the following for the years ended December 31, 2007 and 2006.
|
|
2007
|
|
2006
|
|
Conversion
of notes payable due to related parties to shares of common
stock
|
|
$
|
54,500
|
|
$
|
114,000
|
|
Issuance
of 100,000 shares of common stock in
exchange
for consulting services provided over one
year
|
|
$
|
50,000
|
|
$
|
-
|
|
Purchase
of vehicle through long-term obligations
|
|
$
|
35,388
|
|
$
|
-
|
|
NOTE
13. - FORMER LITIGATION
At
December 31, 2007, 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 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.