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: January 31, 1996
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 March 14, 1996
JANUARY, 1996
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
BALANCE SHEETS (UNAUDITED)
ASSETS JANUARY 31, APRIL 30,
1996 1995
----------- -----------
CURRENT ASSETS:
CASH $ 0 $ 0
ACCOUNTS RECEIVABLE, LESS ALLOW-
ANCE FOR DOUBTFULL ACCOUNTS $ 937,146 $ 793,241
INVENTORIES $ 119,378 $ 134,914
PREPAID EXPENSES $ 83,444 $ 12,310
OTHER CURRENT ASSETS $ 6,333 $ 21,760
----------- -----------
TOTAL CURRENT ASSETS $ 1,146,301 $ 962,225
PROPERTY, PLANT, AND EQUIPMENT AT
COST, LESS ACCUMULATED DEPRECIATION $ 699,567 $ 753,273
CAPITALIZED SOFTWARE COSTS $ 1,071,332 $ 1,105,305
OTHER ASSETS $ 25,630 $ 23,800
INVESTMENT IN JOINT VENTURE $ 145,558 $ 112,388
----------- -----------
$ 3,088,388 $ 2,956,991
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
REVOLVING CREDIT AGREEMENT $ 269,938 $ 258,940
TRADE ACCOUNTS PAYABLE $ 522,854 $ 384,396
ACCRUED SALARIES, WAGES, VACATIONS
AND EMPLOYEE WITHHOLDINGS $ 208,100 $ 206,755
OTHER ACCRUED EXPENSES $ 448,584 $ 402,607
DEFERRED REVENUE $ 147,009 $ 239,572
CURRENT MATURITIES OF LONG-TERM DEBT $ 170,862 $ 157,054
CURRENT PORTION CAPITALIZED LEASE $ 31,348 $ 32,261
----------- -----------
TOTAL CURRENT LIABILITIES $ 1,798,695 $ 1,681,585
LONG-TERM DEBT, LESS CURRENT MATURITIES $ 205,710 $ 241,811
CAPITALIZED LEASE OBLIGATIONS $ 19,418 $ 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
ACCUMULATED DEFICIT ($3,032,382) ($3,101,905)
----------- -----------
$ 1,064,565 $ 995,042
----------- -----------
$ 3,088,388 $ 2,956,991
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED JAN 31, ENDED JAN 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
NET SALES $ 1,415,562 $ 960,575 $ 3,723,383 $ 3,074,377
OTHER INCOME $ 13,479 $ 10,000 $ 33,479 $ 30,450
----------- ----------- ----------- -----------
$ 1,429,041 $ 970,575 $ 3,756,862 $ 3,104,827
COSTS AND EXPENSES:
COST OF PRODUCTS SOLD $ 784,663 $ 659,108 $ 2,119,587 $ 1,826,262
SELLING $ 223,828 $ 243,458 $ 632,207 $ 743,904
GENERAL AND ADMINISTRATIVE $ 226,267 $ 186,576 $ 629,866 $ 590,518
RESEARCH AND DEVELOPMENT COSTS $ 78,492 $ 90,462 $ 251,000 $ 212,236
INTEREST $ 30,747 $ 23,771 $ 85,849 $ 57,819
----------- ----------- ----------- -----------
$ 1,343,997 $ 1,203,375 $ 3,718,509 $ 3,430,739
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE EQUITY IN INCOME
OF JOINT VENTURE AND INCOME TAXES $ 85,044 ($ 232,800) $ 38,353 ($ 325,912)
EQUITY IN INCOME OF JOINT VENTURE $ 6,961 $ 10,539 $ 33,170 $ 46,252
INCOME TAXES $ 0 $ 0 $ 2,000 $ 4,000
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 92,005 ($ 222,261) $ 69,523 ($ 283,660)
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
NET EARNINGS (LOSS) $ 0.03 ($ 0.10) $ 0.03 ($ 0.12)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,674,314 2,270,575 2,719,868 2,270,575
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED JAN 31,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS (LOSS) $ 69,523 ($283,660)
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION $ 615,438 $ 578,837
EQUITY INCOME OF JOINT VENTURE ($ 33,170) ($ 46,252)
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (NET) ($134,203) $ 225,757
INVENTORIES $ 15,536 $ 9,928
PREPAID EXPENSES ($ 71,134) ($ 45,397)
OTHER ASSETS $ 13,597 $ 34,457
UNEARNED INCOME ($ 92,563) $ 26,152
CURRENT LIABILITIES $ 185,780 $ 125,951
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 568,804 $ 625,774
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR CAPITALIZED SOFTWARE ($416,776) ($536,134)
OTHER CAPITAL EXPENDITURES ($ 18,185) ($280,935)
PURCHASE OF CALIFORNIA ASSETS, NET OF CASH ACQUIRED ($ 26,500)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ($461,461) ($817,069)
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE (DECREASE) IN OPERATING LINE OF CREDIT $ 10,998 ($ 58,133)
PAYMENTS ON LONG-TERM DEBT ($136,595) ($151,593)
PROCEEDS FROM THE ISSUANCE OF DEBT $ 18,254 $ 288,773
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ($107,343) $ 79,047
========= =========
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)
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of January 31, 1996 and the Statements of
Operations for the three and nine month periods ended January 31, 1996 and 1995
and Statements of Cash Flows for the nine months ended January 31, 1996 and 1995
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 Company's Balance Sheet as of
January 31, 1996, the Company's current liabilities exceeded its current assets
by $652,394 and certain vendors have not been paid in accordance with their
credit terms. 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 extend payment terms of existing obligations, to obtain
additional debt and/or equity financing, to continue to fund required software
development efforts and to sustain profitability. The Company has implemented
plans to increase sales, to continue to extend payables and obtain additional
debt and/or equity financing in the near future. 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 Receivable 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'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1996 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1995
IGI Systems Division (Systems) and Engineering Services Division (ESD)
sales for the three months ended January 31, 1996 were $1,416,000, compared to
sales of $961,000 for the same period in 1995. Systems sales were $681,000
during the 1996 quarter compared to sales of approximately $355,000 during the
1995 quarter. The increase in System sales is primarily due to the newly
assembled sales force. ESD sales were $734,000 during the 1996 quarter compared
to sales of approximately $606,000 during the 1995 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 $109,000 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 increased to 45% of net sales in the three months
ended January 31, 1996 from 31% of net sales in the comparable 1995 period. The
increase in gross margin as a percent of net sales was primarily due to the
increase in System sales that have a higher margin.
Selling expenses decreased by $20,000 during the three months ended
January 31, 1996 when compared to the same period in 1995. The decrease in
selling expenses is mainly due to a decrease in personnel, a change in
commission structure and related expenses.
General and administrative expenses increased by $40,000 during the
three months ended January 31, 1996 when compared to the same period in 1995.
The increases in general and administrative expenses is primarily attributable
to the cash bonus plan of $15,000 and increased travel.
Interest expense increased by $7,000 during the three months ended
January 31, 1996 when compared to the same period in 1995. The increase in
interest expense is primarily due to higher level of borrowings by the Company.
Equity in income of a joint venture decreased $4,000 for the three
months ended January 31, 1996 when compared to the same period in 1995.
Research and development costs decreased by $12,000 during the three
months ended January 31, 1996 when compared to the same period in 1995. The
decrease in research and development costs is due to a cut down in the use of
discrepency cash during the period.
A net profit of $92,000 occurred for the three months ended January 31,
1996 compared to a net loss of $222,000 for the same period in 1995. The
increase in earnings for the three months ended January 31, 1996 is primarily
due to a increase in sales from the Systems and ESD Divisions.
NINE MONTHS ENDED JANUARY 31, 1996 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 1995
IGI Systems Division (Systems) and Engineering Services Division (ESD)
sales for the nine months ended January 31, 1996 were $3,723,000 compared to
sales of $3,074,000 for the same period in 1995. Systems sales were $1,487,000
during the 1996 period compared to sales of approximately $1,283,000 during the
1995 period. The increase in System sales is primarily due to the Company's
newly assembled sales force. ESD sales were $2,236,000 during the 1996 period
compared to sales of $1,791,000 during the 1995 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 $235,000 and the increase in Minneapolis sales was
$210,000 for 1996.
Gross margin has increased to 43% of net sales in the nine months ended
January 31, 1996 from 41% of net sales in the comparable 1995 period. This
increase in gross margin as a percent of net sales was primarily due to the
increase in System sales that have a higher margin.
Selling expenses decreased by $112,000 during the nine months ended
January 31, 1996 when compared to the same period in 1995. The decrease in
selling expenses is mainly due to a decrease in personnel, commissions and
related expenses.
General and administrative expenses increased by approximately $39,000
during the nine months ended January 31, 1996 when compared to the same period
in 1995. The increase in general and administrative expenses is primarily
attributable to the cash bonus plan and increased travel.
Research and development costs increased by $39,000 during the nine
months ended January 31, 1996 when compared to the same period in 1995. 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 $28,000 during the nine months ended
January 31, 1996 when compared to the same period in 1995. The increase in
interest expense is primarily due to the higher level of borrowings by the
Company.
Equity in income of a joint venture decreased $13,000 for the nine
months ended January 31, 1996 when compared to the same period in 1995.
The net income increased by approximately $353,000 for the nine months
ended January 31, 1996 compared to the same period in 1995. The increase in net
income is due to the increase in sales from the Systems and ESD Divisions.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1996, the Company's principal source of liquidity was
net accounts receivable of $937,000. During the nine months ended January 31,
1996, 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 $569,000 and $626,000 for the nine
months ended January 31, 1996 and 1995, respectively. This net cash flow
resulted primarily from depreciation and amortization.
Cash used in investing activities totaled $461,000 and $817,000 for the
nine months ended January 31, 1996 and 1995, 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 ($107,000) and
$79,000 for the nine months ended January 31, 1996 and 1995, respectively.
During 1996, the Company increased borrowings by $29,000 and reduced long-term
debt by approximately $137,000.
RECENT 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 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 for employee stock based transactions, 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.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which will be
effective for financial statements for fiscal years beginning after December 15,
1995. The statement requires that such long-lived assets used by the entity be
reviewed for impairment whenever the carrying amount of an asset may not be
recoverable. The Company has determined that the carrying amounts of its
long-lived assets and intangibles at January 31, 1996 are recoverable through
expected cash flows from the use of such assets. The Company does not currently
expect this new standard to have a significant impact on future earnings.
FORWARD-LOOKING INFORMATION
The information contained in the forward-looking statements, including,
without limitation, those made in this section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations," may differ
materially from actual results due to many risks and uncertainties.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27
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.
March 14, 1996.
by /s/ Clifford F. Stritch, Jr.
Clifford F. Stritch, Jr.
Chief Executive Officer
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JAN-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,057,385
<ALLOWANCES> (120,239)
<INVENTORY> 119,378
<CURRENT-ASSETS> 260,965
<PP&E> 10,328,650
<DEPRECIATION> (8,557,751)
<TOTAL-ASSETS> 3,088,388
<CURRENT-LIABILITIES> 2,023,823
<BONDS> 0
0
0
<COMMON> 4,096,947
<OTHER-SE> (3,032,382)
<TOTAL-LIABILITY-AND-EQUITY> 3,088,388
<SALES> 3,790,032
<TOTAL-REVENUES> 3,790,032
<CGS> 2,119,587
<TOTAL-COSTS> 2,119,587
<OTHER-EXPENSES> 1,513,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,849
<INCOME-PRETAX> 71,523
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 69,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,523
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
