Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: October 31, 1995
Commission File Number: 2-90422-C
Infinite Graphics Incorporated
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0956693
(State of Jurisdiction) (IRS Employer Identification)
4611 East Lake Street, Minneapolis, Minnesota 55406
(Address of Principal Executive Officer)
(Zip Code)
612-721-6283
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,350,575 common shares as of December 12, 1995
OCTOBER, 1995
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
BALANCE SHEETS (UNAUDITED)
ASSETS OCTOBER 31, 1995 APRIL 30, 1995
CURRENT ASSETS:
CASH $ 0 $ 0
ACCOUNTS RECEIVABLE, LESS ALLOW-
ANCE FOR DOUBTFUL ACCOUNTS $ 764,329 $ 793,241
INVENTORIES $ 124,414 $ 134,914
PREPAID EXPENSES $ 88,496 $ 12,310
OTHER CURRENT ASSETS $ 6,333 $ 21,760
TOTAL CURRENT ASSETS $ 983,572 $ 962,225
PROPERTY, PLANT, AND EQUIPMENT AT
COST, LESS ACCUMULATED DEPRECIATION $ 750,550 $ 753,273
CAPITALIZED SOFTWARE COSTS $ 1,110,246 $ 1,105,305
OTHER ASSETS $ 25,630 $ 23,800
INVESTMENT IN JOINT VENTURE $ 138,597 $ 112,388
$ 3,008,595 $ 2,956,991
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
REVOLVING CREDIT AGREEMENT $ 270,555 $ 258,940
TRADE ACCOUNTS PAYABLE $ 558,508 $ 384,396
ACCRUED SALARIES, WAGES, VACATIONS
AND EMPLOYEE WITHHOLDINGS $ 209,791 $ 206,755
OTHER ACCRUED EXPENSES $ 373,854 $ 402,607
DEFERRED REVENUE $ 159,089 $ 239,572
CURRENT MATURITIES OF LONG-TERM DEBT $ 175,953 $ 157,054
CURRENT PORTION CAPITALIZED LEASE $ 30,829 $ 32,261
TOTAL CURRENT LIABILITIES $ 1,778,579 $ 1,681,585
LONG-TERM DEBT, LESS CURRENT MATURITIES $ 229,933 $ 241,811
CAPITALIZED LEASE OBLIGATIONS $ 27,523 $ 38,553
STOCKHOLDERS' EQUITY:
COMMON STOCK, NO PAR VALUE; AUTHORIZED
10,000,000 SHARES, ISSUED AND
OUTSTANDING 2,350,575 $ 4,096,947 $ 4,096,947
RETAINED EARNINGS (DEFICIT) ($3,124,387) ($3,101,905)
$ 972,560 $ 995,042
$ 3,008,595 $ 2,956,991
SEE NOTES TO FINANCIAL STATEMENTS
OCTOBER 1995
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED OCT 31, ENDED OCT 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES:
NET SALES $ 1,077,904 $ 1,143,366 $ 2,307,821 $ 2,113,802
OTHER INCOME $ 10,000 $ 10,000 $ 20,000 $ 20,450
$ 1,087,904 $ 1,153,366 $ 2,327,821 $ 2,134,252
COSTS AND EXPENSES:
COST OF PRODUCTS SOLD $ 715,286 $ 582,429 $ 1,334,924 $ 1,167,154
SELLING $ 190,401 $ 266,166 $ 408,379 $ 500,446
GENERAL AND ADMINISTRATIVE $ 180,935 $ 213,103 $ 403,599 $ 403,942
RESEARCH AND DEVELOPMENT COSTS $ 82,046 $ 56,086 $ 172,508 $ 121,774
INTEREST $ 28,508 $ 21,645 $ 55,102 $ 34,048
$ 1,197,176 $ 1,139,429 $ 2,374,512 $ 2,227,364
(LOSS) EARNINGS BEFORE EQUITY IN INCOME
OF JOINT VENTURE, INCOME TAXES ($ 109,272) $ 13,937 ($ 46,691) ($ 93,112)
EQUITY IN INCOME OF JOINT VENTURE $ 16,322 $ 17,908 $ 26,209 $ 35,713
INCOME TAXES $ 1,000 $ 3,000 $ 2,000 $ 4,000
NET (LOSS) EARNINGS ($ 93,950) $ 28,845 ($ 22,482) ($ 61,399)
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
NET (LOSS) EARNINGS ($ 0.04) $ 0.01 ($ 0.01) ($ 0.03)
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,350,575 2,802,492 2,350,575 2,270,575
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
OCTOBER 1995
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIOD
ENDED OCT 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS EARNINGS ($ 22,482) ($ 61,399)
ADJUSTMENST TO RECONCILE NET LOSS
EARNINGS TO NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION $ 418,822 $ 378,795
EQUITY INCOME OF JOINT VENTURE ($ 26,209) ($ 35,713)
CHANGES IN ASSETS AND LIABILITIES,
NET OF ACQUISITION:
ACCOUNTS RECEIVABLE (NET) $ 38,614 ($ 34,544)
INVENTORIES $ 10,500 $ 328
PREPAID EXPENSES ($ 76,186) ($ 59,116)
OTHER ASSETS $ 13,597 ($ 5,516)
UNEARNED INCOME ($ 80,483) $ 15,310
CURRENT LIABILITIES $ 148,395 $ 171,242
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 424,568 $ 369,387
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR CAPITALIZED SOFTWARE ($314,382) ($373,845)
OTHER CAPITAL EXPENDITURES ($ 13,860) ($260,857)
PURCHASE OF CALIFORNIA ASSETS,
NET OF CASH ACQUIRED ($ 26,500)
NET CASH USED IN INVESTING ACTIVITIES ($354,742) ($634,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE IN OPERATING LINE OF CREDIT $ 11,615 $ 251,387
PAYMENTS ON LONG-TERM DEBT ($ 87,300) ($117,092)
PROCEEDS FROM THE ISSUANCE OF DEBT $ 5,859 $ 18,772
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ($ 69,826) $ 153,067
NET DECREASE IN CASH AND CASH EQUIVALENTS $ 0 ($112,248)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 0 $ 112,248
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $ 0
SEE NOTES TO FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of October 31, 1995 and the Statements of Operations for
the three and six month periods ended October 31, 1995 and 1994 and Statements
of Cash Flows for the six months ended October 31, 1995 and 1994 have been
prepared by the Company without audit. In the opinion of management, these
statements reflect all adjustments, consisting of only normal accruals and
adjustments, necessary for the fair statement of the periods presented. The
Balance Sheet as of April 30, 1995 has been derived from the audited Balance
Sheet included in the Company's April 30, 1995 Annual Report to Shareholders'.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the Company's
April 30, 1995 Annual Report to Shareholders.
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements included in
the Company's Annual Report to Shareholders' during the year ended April 30,
1995, Infinite Graphics Incorporated (the Company) incurred a loss before
extraordinary items of $384,430. As of October 31, 1995, the Company's current
liabilities exceeded its current assets by $795,007 and the Company has
experienced difficulty in generating sufficient cash flows to meets its
obligations and sustain profitable operations. These factors, among others,
raise substantial doubt as to whether the Company will be able to continue as a
going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate cash flow sufficient to meet its obligations as they become due, to
continue to fund required software development efforts, and, ultimately, to
attain profitable operations. The Company has implemented plans to increase
sales, extend payables, and obtain additional debt and/or equity financing in
fiscal 1996. Management of the Company believes this will be sufficient to fund
future operations. However, there can be no assurance that the Company's
business will develop as anticipated by management or that additional financing
will be available.
NOTE B:
The Company acquired the assets of a California precision graphics service
company from bankruptcy court on September 13, 1995. The fair value of the
assets acquired was $103,500. The Company paid $27,500 in cash and financed the
remaining $76,000 with a note payable. Interest on the note is at the prime rate
plus 2% (10.75) at September 30, 1995. The note requires monthly principal and
interest payments of $3,533 until September 1, 1997, at which time the entire
remaining balance is due. This note is secured by the assets acquired.
The assets acquired and consideration paid are as follows:
Cash $ 1,000
Accounts Receivables 9,702
Fixed Assets 92,798
Total Assets $103,500
Note Issued 76,000
Cash Paid $ 27,500
The acquisition was accounted for under the purchase method of accounting. The
Company included the results of operations of the California precision graphics
company beginning September 13, 1995.
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1994
IGI Systems Division (Systems) and Engineering Services Division (ESD) sales for
the three months ended October 31, 1995 were approximately $1,078,000, compared
to sales of $1,143,000 for the same period in 1994. Systems sales were $320,000
during the 1995 quarter compared to sales of $493,000 during the 1994 quarter.
The decrease in System sales is primarily due to the sales force assembled
during fiscal 1995 not meeting its established strategy and goals for fiscal
1995. Rebuilding the sales force in fiscal 1996 has been slower than
anticipated; therefore, System sales have been less than expected for the
interim period of fiscal 1996. ESD sales were $758,000 during the 1995 quarter
compared to sales of $650,000 during the 1994 quarter. The increase in ESD sales
is primarily due to the purchase of a services operation in Irvine, California
in September 1995. Sales from California were $126,000 for the quarter. The
Company purchased the assets of a California competitor from bankruptcy court
and immediately continued operations in the California facility location. This
purchase increases the market opportunities for both services and software by
having a physical presence in the largest high-tech market in the United States.
Gross margin has decreased to 34% of net sales in the three months ended October
31, 1995 from 49% of net sales in the comparable 1994 period. The decrease in
gross margin as a percent of net sales was primarily due to the decrease in
System sales that have a higher margin and some integration costs with the
purchase of the California operation.
Selling expenses decreased by approximately $76,000 during the three months
ended October 31, 1995 when compared to the same period in 1994. The decrease in
selling expenses is mainly due to a decrease in personnel, commissions and
related expenses.
General and administrative expenses decreased by approximately $32,000 during
the three months ended October 31, 1995 when compared to the same period in
1994. The reduction is primarily attributable to a decrease in expenses relating
to a one time change in accruals in fiscal 1995, fully amortized warrants, and
no cash bonus plan due to the loss from operations in fiscal 1996.
Research and development costs increased by approximately $26,000 during the
three months ended October 31, 1995 when compared to the same period in 1994.
The increase in research and development is attributable to the Company's
philosophy of trying to continue to enhance existing products and develop new
products.
Interest expense increased by approximately $7,000 during the three months ended
October 31, 1995 when compared to the same period in 1994. The increase in
interest expense is primarily due to higher level of borrowings by the Company
at higher interest rates. The higher interest expenses are primarily due to the
majority of the Company's debt having interest rates tied to the prime rate
which is higher than last year.
Equity in income of a joint venture decreased approximately $2,000 for the three
months ended October 31, 1995 when compared to the same period in 1994.
A net loss of $94,000 occurred for the three months ended October 31, 1995
compared to a net profit of $29,000 for the same period in 1994. The decrease in
earnings for the three months ended October 31, 1995 is primarily due to a
decrease in sales compared to the same period in 1994.
SIX MONTHS ENDED OCTOBER 31, 1995 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1994
IGI Systems Division (Systems) and Engineering Services Division (ESD) sales for
the six months ended October 31, 1995 were $2,308,000 compared to sales of
$2,114,000 for the same period in 1994. Systems sales were $806,000 during the
1995 period compared to sales of $929,000 during the 1994 period. The decrease
in System sales is primarily due to the sales force assembled during fiscal 1995
not meeting its established strategy and goals for fiscal 1995. Rebuilding the
sales force in fiscal 1996 has been slower than anticipated; therefore, System
sales have been less than expected for the first six months of fiscal 1996. ESD
sales were $1,502,000 during the 1995 period compared to sales of $1,185,000
during the 1994 period. The increases in ESD sales are primarily due to the
purchase of a services operation in Irvine, California in September 1995 and
increased Minneapolis sales. Sales from the California operation were
approximately $126,000 for 1995.
Gross margin has decreased to 42% of net sales in the six months ended October
31, 1995 from 45% of net sales in the comparable 1994 period. This decrease in
gross margin as a percent of net sales was primarily due to the decrease in
System sales that have a higher margin.
Selling expenses decreased by approximately $92,000 during the six months ended
October 31, 1995 when compared to the same period in 1994. The decrease in
selling expenses is mainly due to a decrease in personnel, commissions and
related expenses.
General and administrative expenses remained the same during the six months
ended October 31, 1995 when compared to the same period in 1994.
Research and development costs increased by approximately $51,000 during the six
months ended October 31, 1995 when compared to the same period in 1994. The
increase in research and development is attributable to the Company's philosophy
of trying to continue to enhance existing products and develop new products.
Interest expense increased by approximately $21,000 during the six months ended
October 31, 1995 when compared to the same period in 1994. The increase in
interest expense is primarily due to the higher level of borrowings by the
Company at higher interest rates compared to the Company's 1994 borrowings. The
higher average interest rate is primarily due to the majority of the Company's
debt having interest rates tied to the prime rate, which is higher than last
year.
Equity in income of a joint venture decreased approximately $10,000 for the six
months ended October 31, 1995 when compared to the same period in 1994. The
decrease is primarily due to a decrease in sales during the six months ended
October 31, 1995 compared to the same period in 1994.
The net loss decreased by approximately $49,000 for the six months ended October
31, 1995 compared to the same period in 1994. The decrease in net loss is due to
an increase in sales for the 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1995, the Company's principal source of liquidity was net
accounts receivable of approximately $764,000. During the six months ended
October 31, 1995, the Company has utilized its line of credit and cash generated
from operations to meet its cash flow requirements.
The Company will search for additional financing to purchase additional
equipment for existing operations, and to pursue new opportunities in new
markets with its present capabilities when the Company can optimally take
advantage of the opportunity. The opportunity may require the Company to search
for funds in the range of $900,000 to $1,000,000 with a combination of leasing,
term loans and an operating line of credit.
Cash flows from operations totaled approximately $425,000 and $369,000 for the
six months ended October 31, 1995 and 1994, respectively. This net cash flow
resulted primarily from depreciation and amortization.
Cash used in investing activities totaled approximately $355,000 and $635,000
for the six months ended October 31, 1995 and 1994, respectively. This decrease
is primarily the result of the Company's desire to restrict investment in
capital equipment until the Company's financial position improves.
Net cash (used in) provided by financing activities was approximately ($70,000)
and $153,000 for the six months ended October 31, 1995 and 1994, respectively.
During 1995, the Company increased borrowings by approximately $17,000 and
reduced long-term debt by approximately $87,000. During 1994, the Company
received approximately $19,000 from the issuance of long-term debt and increased
its line of credit and previously existing long-term debt by approximately
$134,000.
RECOST ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for non-employee transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as if the
company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income (loss) and
earnings (loss) per share should it elect to make such a change. Adoption of the
new standard will have no effect on the Company's cash flows.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
The annual meeting of shareholders of Infinite Graphics Incorporated was held at
3:30 pm on Wednesday, September 27, 1995. Shareholders holding 1,782,293 shares,
or approximately 75.8% of outstanding shares were represented at the meeting by
proxy or in person. Matters submitted at the meeting for vote by shareholders
were as follows:
I. Election of Directors.
The following nominees were elected to serve as members of the Board of
Directors until such time as a successor may be elected:
Number of Votes
For Withheld Abstain
Clifford F. Stritch, Jr 1,773,025 9,268 0
Edwin F. Snyder 1,773,025 9,768 0
James D. Bonneville 1,773,025 9,768 0
Mr. Bonneville is being elected for the first time and will begin his
appointment as of the date of the shareholder meeting. Mr. Stritch and Mr.
Snyder are incumbent directors and represent re-elections.
II. Ratification of Selection of Independent Auditors.
Shareholders ratified the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending April 30, 1996 by a vote of
1,777,025 in favor with 5,168 against and 100 abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule (For SEC use only)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
December 13, 1995.
by
Clifford F. Stritch, Jr.
Chief Executive Officer
Chief Financial Officer
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<PERIOD-END> OCT-31-1995
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<RECEIVABLES> 912,435
<ALLOWANCES> (148,106)
<INVENTORY> 124,414
<CURRENT-ASSETS> 259,056
<PP&E> 10,221,931
<DEPRECIATION> (8,361,135)
<TOTAL-ASSETS> 3,008,595
<CURRENT-LIABILITIES> 2,036,035
<BONDS> 0
<COMMON> 4,096,947
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 3,008,595
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<TOTAL-REVENUES> 2,354,030
<CGS> 1,334,924
<TOTAL-COSTS> 1,334,924
<OTHER-EXPENSES> 984,486
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<INCOME-PRETAX> (20,482)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (22,482)
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