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, 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.
2,382,575 common shares as of December 13, 1996
Total number of pages: 10
Exhibit index on page : 10
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
BALANCE SHEETS (Unaudited)
ASSETS October 31, 1996 April 30, 1996
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<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts
of $72,480 and $55,140, respectively $ 1,058,791 $ 974,804
Inventories $ 125,662 $ 114,483
Prepaid expenses $ 61,907 $ 13,312
Other current assets $ 0 $ 5,150
----------- -----------
Total current assets $ 1,246,360 $ 1,107,749
PROPERTY, PLANT, AND EQUIPMENT, net $ 523,955 $ 597,896
CAPITALIZED SOFTWARE COSTS, less accumulated amortization
of $5,493,840 and $5,172,848, respectively $ 1,052,686 $ 1,070,280
INVESTMENT IN JOINT VENTURE $ 146,166 $ 133,587
OTHER ASSETS $ 23,053 $ 23,053
----------- -----------
$ 2,992,220 $ 2,932,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit agreement $ 367,143 $ 264,607
Trade accounts payable $ 295,056 $ 341,393
Accrued salaries, wages, vacations and employee withholdings $ 259,430 $ 277,428
Other accrued expenses $ 419,396 $ 347,555
Deferred revenue $ 128,518 $ 174,484
Current portion of long-term debt $ 135,632 $ 162,697
Current portion of capitalized lease obligations $ 23,648 $ 29,630
----------- -----------
Total current liabilities $ 1,628,823 $ 1,597,794
LONG-TERM DEBT, less current portion $ 122,109 $ 182,784
CAPITALIZED LEASE OBLIGATIONS, less current portion $ 2,416 $ 13,380
STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized 10,000,000 shares, issued and
outstanding 2,382,575 at October 31, 1996 and
2,350,575 at April 30, 1996 $ 4,102,947 $ 4,096,947
Accumulated deficit ($2,864,075) ($2,958,340)
----------- -----------
Total stockholders' equity $ 1,238,872 $ 1,138,607
----------- -----------
$ 2,992,220 $ 2,932,565
=========== ===========
See notes to financial statements
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited))
Three Month Period Six Month Period
Ended October 31, Ended October 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 1,466,917 $ 1,077,904 $ 2,725,464 $ 2,307,821
Other income $ 23,000 $ 10,000 $ 63,000 $ 20,000
----------- ----------- ----------- -----------
$ 1,489,917 $ 1,087,904 $ 2,788,464 $ 2,327,821
COSTS AND EXPENSES:
Cost of products sold $ 878,002 $ 715,286 $ 1,675,734 $ 1,334,924
Selling, general and administrative $ 442,270 $ 371,336 $ 815,312 $ 811,978
Research and development costs $ 78,154 $ 82,046 $ 160,521 $ 172,508
Interest $ 28,724 $ 28,508 $ 55,211 $ 55,102
----------- ----------- ----------- -----------
Total costs and expenses $ 1,427,150 $ 1,197,176 $ 2,706,778 $ 2,374,512
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) $ 62,767 ($ 109,272) $ 81,686 ($ 46,691)
EQUITY IN INCOME OF JOINT VENTURE $ 15,485 $ 16,322 $ 12,579 $ 26,209
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES $ 78,252 ($ 92,950) $ 94,265 ($ 20,482)
INCOME TAXES $ 0 $ 1,000 $ 0 $ 2,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 78,252 ($ 93,950) $ 94,265 ($ 22,482)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.03 ($ 0.04) $ 0.04 ($ 0.01)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,696,386 2,350,575 2,674,937 2,350,575
=========== =========== =========== ===========
See notes to financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited) Six Month Period
Ended October 31,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 94,265 ($ 22,482)
Adjustments to reconcile net income (loss) to net cash flows provided by
operating activities:
Depreciation and amortization $ 460,116 $ 418,822
Equity in income of joint venture ($ 12,579) ($ 26,209)
Changes in asset and liabilities:
Accounts receivable ($ 83,987) $ 38,614
Inventories ($ 11,179) $ 10,500
Prepaid expenses ($ 48,595) ($ 76,186)
Other assets $ 5,150 $ 13,597
Deferred revenue ($ 45,966) ($ 80,483)
Accounts payable, accruals and other accrued expenses $ 7,506 $ 148,395
--------- ---------
Net cash provided by operating activities $ 364,731 $ 424,568
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capitalized software ($303,398) ($314,382)
Other capital expenditures ($ 65,183) ($ 13,860)
Purchase of California precision graphics and
services company, net of cash acquired $ 0 ($ 26,500)
--------- ---------
Net cash used in investing activities ($368,581) ($354,742)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in revolving credit agreement $ 102,536 $ 11,615
Payments on long-term debt and principal
payments on capital lease obligations ($104,686) ($ 87,300)
Proceeds from the issuance of debt $ 0 $ 5,859
Proceeds from exercise of stock option $ 6,000 $ 0
--------- ---------
Net cash provided by (used in) financing activities $ 3,850 ($ 69,826)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 0 $ 0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 0 $ 0
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $ 0
========= =========
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PART 1 - FINANCIAL INFORMATION (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of October 31, 1996 and the Statements of Operations for
the three and six month periods ended October 31, 1996 and 1995 and Statements
of Cash Flows for the six months ended October 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. 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, 1996
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 sheets as of
October 31, 1996, current liabilities exceed its current assets by $382,463.
During fiscal 1997, the Company has plans to increase sales approximately the
same level as that achieved in fiscal 1996 and to obtain additional debt and/or
equity financing. If these sales are not achieved and additional debt and/or
equity financing is not obtained, the Company will not be able to implement its
growth plans and could be required to reduce software development activity.
NOTE B:
Net income per common and common equivalent share was computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during each period. This amount includes common stock equivalents of
340,185 for the three month period ended October 31, 1996 and common stock
equivalents of 321,579 for the six month period ended October 31, 1996 from the
assumed exercise of outstanding options and warrants using the treasury stock
method. Common stock equivalents were not included in the net loss per share
computation for the three and six month period ended October 31, 1995 due to
them being antidilutive.
NOTE C:
The Company entered into a purchase agreement with the joint venture partner on
November 27, 1996 to purchase a photoplotter and all of the partner's interest
in the joint venture. The Company agreed to continue monthly payments to the
partner in the amount of $5,500 (which includes $3,000 for a monthly service
agreement) until the original $100,000 note entered into by the partner for the
photoplotter is paid in full. The note expires on or approximately November 1,
1997, at which time the partner agrees to release ownership and all claims to
the photoplotter. The Company also agreed to pay the partner $53,000 and an
additional $50,000 in the form of reduced invoicing for photoplotting services
beginning on December 1, 1996.
NOTE D:
During the six months ended October 31, 1996, stock options for the purchase of
32,000 shares of the Company's common stock were exercised at a price of $.1875
per share.
PART 1 - FINANCIAL INFORMATION (CONTINUED)
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1995
Operations for the three months ended October 31, 1996 resulted in sales of
$1,467,000 compared to $1,078,000 for the same period last year or a 36 percent
increase. Engineering Services accounted for $990,000 compared to sales of
$758,000 for the same period last year or a 31 percent increase. Systems sales
were $477,000 compared to sales of $320,000 for the same period a year ago or a
49 percent increase. The increase in Engineering Services sales of $232,000 is
attributable to increases in the Company's core business. The increase in System
sales of $157,000 is attributable to additional sales activity and new
development. The increase in System sales was also the main contributor to the
gross margin increasing to 40 percent for the three months ended October 31,
1996, compared to 34 percent for the same period last year.
The Company's total selling, general and administrative (S, G & A) expenses for
the three months ended October 31, 1996 were $442,000 compared to $371,000 for
the same period last year, an increase of $71,000 or 19 percent. S, G & A
increased because of costs associated with the Company's commitment to increase
sales and to improve its planning process. Therefore, the increase is
attributable primarily to advertising, trade shows, training, staff development,
and the cash bonus plan, which accounted for $34,000 or about one half of the
increase. Research and development costs were $78,000 compared to $82,000, or a
5 percent decrease. Other income increased $13,000 from the rental of a newly
acquired photo plotter to a customer. Interest expense remained the same during
the three months ended October 31, 1996 when compared to the same period in
1995.
The Company had net income of $78,000 for the three months ended October 31,
1996 compared to a net loss of $94,000 for the three months ended October 31,
1995. The increase in net income is attributable to the increase in sales.
SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1995
Operations for the six months ended October 31, 1996 resulted in sales of
$2,725,000 compared to $2,308,000 for the same period last year or an 18 percent
increase. Engineering Services accounted for $1,938,000 compared to sales of
$1,502,000 for the same period last year or a 29 percent increase. Systems sales
were $787,000 compared to sales of $806,000 for the same period a year ago or a
2 percent decrease. The increase in Engineering Services sales is attributable
to the sales of $127,000 during three months ended July 31, 1996, associated
with the September 13, 1995 acquisition of a California precision graphics
service company, and a $309,000 increase in the Company's core business. The
decrease in System sales of $19,000 is attributable to a change in sales mix.
The Company's gross margin dropped from 42 percent for six months ended October
31, 1995 to 39 percent for six months ended October 31, 1996. This decrease is
attributable to the Company's California operations, which is currently
operating at a low gross margin due to increased maintenance costs.
The Company's total selling, general and administrative (S, G & A) expenses for
the six months ended October 31, 1996 were $815,000 compared to $812,000 for the
same period last year, an increase of $3,000. Research and development costs
were $161,000 compared to $173,000, or a 7 percent decrease. The decrease in
research and development costs is attributable to decreases in some fixed costs.
Other income increased $43,000 from the rental of a newly acquired photoplotter
to a customer and from providing products and services to the joint venture.
Interest expense remained the same during the six months ended October 31, 1996
when compared to the same period in 1995. Equity in income of joint venture
decreased by approximately $13,000 because of increases in the joint venture's
operating expenses and decreased sales.
The Company had net income of $94,000 for the six months ended October 31, 1996
compared to a net loss of $22,000 for six months ended October 31, 1995. The
increase in net income is attributable to the increase in Engineering Services
sales.
Liquidity. The Company's cash flow from operations was $365,000 for the six
months ended October 31, 1996, compared to $425,000 for the same period last
year. The largest component of cash flow from operations for both periods was
depreciation and amortization of $460,000 and $419,000, respectively.
Cash provided from planned operations, the obtaining of additional debt and/or
equity financing, and availability under the Company's line of credit are
estimated to be sufficient to support the Company's expected cash needs for
fiscal 1997. In November of 1996, the Company was able to obtain a five year
equipment lease for a photoplotter for $140,000. While the Company is exploring
additional funding possibilities, it has no agreements to provide additional
debt or equity capital and there can be no assurance that additional funds will
be available, or if available, available on terms acceptable to the Company.
However, if the Company is unable to obtain additional debt and/or equity
financing, it still may not be able to expand its investment into new
operations, and may still also have to reduce its level of product development.
As of October 31, 1996, the current liabilities exceed current assets by
$382,000.
The Company entered into a purchase agreement with the joint venture partner on
November 27, 1996 to purchase a photoplotter and all of the partner's interest
in the joint venture. The Company agreed to continue monthly payments to the
partner in the amount of $5,500 (which includes $3,000 for a monthly service
agreement) until the original $100,000 note entered into by the partner for the
photoplotter is paid in full. The note expires on or approximately November 1,
1997, at which time the partner agrees to release ownership and all claims to
the photoplotter. The Company also agreed to pay the partner $53,000 and an
additional $50,000 in the form of reduced invoicing for photoplotting services
beginning on December 1, 1996.
Effective on December 1, 1996, the Company will no longer use the equity method
to account for its 50% ownership of the joint venture in Salem, NH. Under the
equity method, original investments are recorded at cost and are adjusted by the
Company's share of undistributed earnings or losses. Effective on December 1,
1996 the former joint venture will be included in the operations of the Company.
The joint venture sales for three months and six months ended, respectively,
were $123,000 and $237,000. The joint venture earnings for three months and six
months ended, respectively, were $31,000 and $25,000.
Capital Resources: The Company has invested primarily in equipment and
improvements essential for present operations in fiscal 1997, but plans to
increase its investment in capital resources for future operations over the next
two or three years by obtaining additional debt and/or equity financing.
The Company's cash flow used in investing activities was $369,000 and $355,000
for periods ended October 31, 1996 and 1995, respectively. For both periods it
consisted primarily of expenditures for capitalized software of $304,000 for the
six months ended October 31, 1996 and $314,000 for the six months ended October
31, 1995.
The Company's cash flow provided by financing activities was $4,000 for the
period ended October 31, 1996 compared to $70,000 used for financing activities
in the same period last year. The largest components of cash flows provided by
financing activities for period ended October 31, 1996 consisted of payments on
long-term debt and principal payments on capital lease obligations of $105,000
and a $103,000 increase in the revolving credit agreement. The largest
components of cash flows used in financing activities for period ending October
31, 1995 were the increase in the revolving credit agreement of $12,000 and
payments on long-term debt and principal payments on capital lease obligations
of $87,000.
Other Items. Inflation has not had any significant impact upon the Company's
results of operation.
Recently Issued Accounting Standards. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
SFAS No. 123, encourages companies to adopt a new accounting method that
accounts for stock compensation awards based on their estimated fair value at
the date they are granted. However, companies are permitted to continue
following current accounting requirements for employee stock-based transactions,
which generally do not result in an expense charge for most options if the
exercise price is at least equal to the fair market value of the stock at the
date of grant. Companies that follow existing standards would be required to
disclose in a note to the financial statements the effect on net income (loss)
and net income (loss) per share had the Company recognized expense for options
issued to employees based on SFAS No. 123. SFAS No. 123 is effective for the
Company's fiscal year ending April 30, 1997 and will require disclosure
information in those financial statements about stock options granted in fiscal
1996 and thereafter. The Company has determined that it will not adopt the fair
value method prescribed by SFAS 123 for employee stock-based transactions. The
"as if" disclosures will be included in the Company's annual financial
statements for the year ending April 30, 1997.
Securities Litigation Reform Act. Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements which involve risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices, and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
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 25, 1996.
Shareholders holding 1,898,380 shares, or approximately 81% 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 1,886,874 5,768 0
Edwin F. Snyder 1,886,874 5,768 0
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, 1997 by a vote of 1,886,942 in favor with 5,500 against
and 200 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 16, 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> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> OCT-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,131,271
<ALLOWANCES> (72,480)
<INVENTORY> 125,662
<CURRENT-ASSETS> 61,907
<PP&E> 4,282,050
<DEPRECIATION> 3,758,095
<TOTAL-ASSETS> 2,992,220
<CURRENT-LIABILITIES> 1,628,823
<BONDS> 0
0
0
<COMMON> 4,102,947
<OTHER-SE> (2,864,075)
<TOTAL-LIABILITY-AND-EQUITY> 2,992,220
<SALES> 2,725,464
<TOTAL-REVENUES> 2,788,464
<CGS> 1,675,734
<TOTAL-COSTS> 1,675,734
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,211
<INCOME-PRETAX> 94,265
<INCOME-TAX> 0
<INCOME-CONTINUING> 94,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,265
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
