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, 1997
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 March 17, 1997
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)
January 31, 1997 April 30, 1996
---------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowance
for doubtful accounts of
$66,527 and $55,140, respectively $ 997,033 $ 974,804
Inventories $ 164,884 $ 114,483
Prepaid expenses $ 64,929 $ 13,312
Other current assets $ 8,801 $ 5,150
----------- -----------
Total current assets $ 1,235,647 $ 1,107,749
PROPERTY, PLANT, AND EQUIPMENT, net $ 704,019 $ 597,896
CAPITALIZED SOFTWARE COSTS, less accumulated amortization
of $5,657,360 and $5,172,848, respectively $ 1,033,104 $ 1,070,280
INVESTMENT IN JOINT VENTURE $ 0 $ 133,587
OTHER ASSETS $ 32,592 $ 23,053
----------- -----------
$ 3,005,362 $ 2,932,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit agreement $ 335,401 $ 264,607
Trade accounts payable $ 317,199 $ 341,393
Accrued salaries, wages, vacations and employee withholdings $ 260,181 $ 277,428
Other accrued expenses $ 281,380 $ 347,555
Deferred revenue $ 164,316 $ 174,484
Current portion of long-term debt $ 204,836 $ 162,697
Current portion of capitalized lease obligations $ 40,906 $ 29,630
----------- -----------
Total current liabilities $ 1,604,219 $ 1,597,794
LONG-TERM DEBT, less current portion $ 9,515 $ 182,784
CAPITALIZED LEASE OBLIGATIONS, less current portion $ 109,881 $ 13,380
STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized 10,000,000 shares, issued and
outstanding 2,382,575 at January 31, 1997 and
2,350,575 at April 30, 1996 $ 4,102,947 $ 4,096,947
Accumulated deficit ($2,821,200) ($2,958,340)
----------- -----------
Total stockholders' equity $ 1,281,747 $ 1,138,607
----------- -----------
$ 3,005,362 $ 2,932,565
=========== ===========
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Nine Month Period
Ended January 31, Ended January 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $1,492,061 $1,415,562 $4,217,525 $3,723,383
Other income $ 5,489 $ 13,479 $ 68,489 $ 33,479
---------- ---------- ---------- ----------
$1,497,550 $1,429,041 $4,286,014 $3,756,862
COSTS AND EXPENSES:
Cost of products sold $ 872,547 $ 784,663 $2,548,281 $2,119,587
Selling, general and administrative $ 472,443 $ 450,095 $1,287,755 $1,262,073
Research and development costs $ 82,812 $ 78,492 $ 243,333 $ 251,000
Interest $ 30,551 $ 30,747 $ 85,762 $ 85,849
---------- ---------- ---------- ----------
Total costs and expenses $1,458,353 $1,343,997 $4,165,131 $3,718,509
---------- ---------- ---------- ----------
OPERATING INCOME $ 39,197 $ 85,044 $ 120,883 $ 38,353
EQUITY IN INCOME OF JOINT VENTURE $ 3,678 $ 6,961 $ 16,257 $ 33,170
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 42,875 $ 92,005 $ 137,140 $ 71,523
INCOME TAXES $ 0 $ 0 $ 0 $ 2,000
---------- ---------- ---------- ----------
NET INCOME $ 42,875 $ 92,005 $ 137,140 $ 69,523
========== ========== ========== ==========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.02 $ 0.03 $ 0.05 $ 0.03
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,764,041 2,674,314 2,704,957 2,719,868
========== ========== ========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited) Nine Month Period
Ended January 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 137,140 $ 69,523
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization $ 698,135 $ 615,438
Equity in income of joint venture ($ 16,257) ($ 33,170)
Changes in asset and liabilities:
Accounts receivable $ 8,804 ($134,203)
Inventories ($ 38,114) $ 15,536
Prepaid expenses ($ 52,266) ($ 71,134)
Other assets ($ 6,140) $ 13,597
Deferred revenue ($ 60,168) ($ 92,563)
Accounts payable, accruals and other accrued expenses $ 48,494 $ 185,780
--------- ---------
Net cash provided by operating activities $ 719,628 $ 568,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capitalized software ($447,336) ($416,776)
Other capital expenditures ($132,508) ($ 18,185)
Purchase of California precision graphics and
services company, net of cash acquired ($ 26,500)
Purchase of joint venture interest, net of cash acquired ($ 52,500)
--------- ---------
Net cash used in investing activities ($632,344) ($461,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in revolving credit agreement $ 70,794 $ 10,998
Payments on long-term debt and principal
payments on capital lease obligations ($164,078) ($136,595)
Proceeds from the issuance of debt $ 18,254
Proceeds from exercise of stock option $ 6,000
--------- ---------
Net cash used in financing activities ($ 87,284) ($107,343)
--------- ---------
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
========= =========
Investing activities not affecting cash:
Capitalized lease obligation incurred for lease of equipment $ 140,725 $ 0
========= =========
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of January 31, 1997 and the Statements of Operations for
the three and nine month periods ended January 31, 1997 and 1996 and Statements
of Cash Flows for the nine months ended January 31, 1997 and 1996 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, 1996 has been derived from the audited Balance
Sheet included in the Company's April 30, 1996 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, 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
January 31, 1997, current liabilities exceed its current assets by $368,572.
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
381,466 and 323,739 for the three month periods ended January 31, 1997 and 1996,
respectively and common stock equivalents of 341,860 and 369,293 for the nine
month periods ended January 31, 1997 and 1996, respectively from the assumed
exercise of outstanding options and warrants using the treasury stock method.
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 final payment on this note is due on November
1, 1997, at which time the partner agrees to transfer ownership of the
photoplotter to the Company. The Company also agreed to assume all the assets
and liabilities of the joint venture and pay the partner $53,000 and $50,000 in
the form of deferred Engineering Services beginning on December 1, 1996, which
satisfied the payable to the joint venture, net of investment in joint venture,
of $95,000.
The Company assigned a value of approximately $30,000 to the photoplotter,
approximately the future principal payments the Company will make on behalf of
the joint venture.
NOTE D:
The Company entered into a lease with The CIT Group/Equipment Financing Inc. in
November, 1996 for the purchase of a photoplotter valuing approximately
$140,000. The term of the lease is for five years with monthly payments of
$2,989 at an interest rate of 10.35%.
NOTE E:
During the nine months ended January 31, 1997, stock options for the purchase of
32,000 shares of the Company's common stock were exercised at a price of .1875
per share.
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1996
Operations for the three months ended January 31, 1997 resulted in sales of
$1,492,000 compared to $1,416,000 for the same period last year or a 5 percent
increase. Engineering Services accounted for $930,000 compared to sales of
$734,000 for the same period last year or a 27 percent increase. Systems sales
were $562,000 compared to sales of $682,000 for the same period a year ago or a
17 percent decrease. The increase in Engineering Services sales of $196,000 is
attributable to increases in the Company's core business and sales resulting
from the purchase of the joint venture in November of 1996. Sales from the
acquisition were $69,000 for the quarter. The decrease in System sales of
$119,000 is attributable to no large orders in the quarter. The decrease in
System sales was also the main contributor to the gross margin decreasing to 42
percent for the three months ended January 31, 1997, compared to 45 percent for
the same period last year.
The Company's total selling, general and administrative (S, G & A) expenses for
the three months ended January 31, 1997 were $472,000 compared to $450,000 for
the same period last year, an increase of $22,000 or 5 percent. S, G & A
increased because of normal increases in costs and some additional spending in
planning and advertising.. Research and development costs were $83,000 compared
to $78,000, or a 6 percent increase. Other income decreased $8,000 because
effective December 1, 1996, the Company is no longer charging the joint venture
a management fee. Interest expense remained the same during the three months
ended January 31, 1997, when compared to the same period in 1996.
The Company's equity in income of the joint venture decreased $3,000 because of
the acquisition of the joint venture. Effective on December 1, 1996, the Company
no longer used the equity method to account for its 50% ownership of the joint
venture in Salem, NH. The sales and operating expenses of this operation are
included in the sales and operating expenses of the Company beginning December
1, 1996.
The Company had net income of $43,000 for the three months ended January 31,
1997, compared to net income of $92,000 for the three months ended January 31,
1996. The decrease in net income is attributable to the decrease in System
sales.
NINE MONTHS ENDED JANUARY 31, 1997 COMPARED TO NINE MONTHS ENDED
JANAURY 31, 1996
Operations for the nine months ended January 31, 1997 resulted in sales of
$4,218,000 compared to $3,723,000 for the same period last year or a 13 percent
increase. Engineering Services accounted for $2,869,000 compared to sales of
$2,236,000 for the same period last year or a 28 percent increase. Systems sales
were $1,349,000 compared to sales of $1,487,000 for the same period a year ago
or a 9 percent decrease. The increase in Engineering Services sales, during the
nine months ended January 31, 1997, is attributable to three factors: 1) the
sales of $127,000 associated with the September 13, 1995 acquisition of a
California precision graphics service company, 2) the sales of $69,000
associated with the purchase of the joint venture on November 27, 1996, and 3)
an increase in the Company's core business of $437,000. The decrease in System
sales of $138,000 is attributable to the lack of large orders during the third
quarter. The Company's gross margin decreased from 44 percent for nine months
ended January 31, 1996 to 41 percent for nine months ended January 31, 1997.
This decrease is attributable to the decrease in System sales.
The Company's total selling, general and administrative (S, G & A) expenses for
the nine months ended January 31, 1997 were $1,288,000 compared to $1,262,000
for the same period last year, an increase of $26,000 or 2%. Research and
development costs were $243,000 compared to $251,000, or a 3 percent decrease.
The decrease in research and development costs is attributable to decreases in
some fixed costs. Other income increased $35,000 from the rental of a newly
acquired photoplotter to a customer and from providing products and services to
the joint venture prior to November 27, 1996. Interest expense remained the same
during the nine months ended January 31, 1997 when compared to the same period
in 1996. Equity in income of joint venture decreased by approximately $17,000
because of increases in the joint venture's operating expenses, decreased
sales, and the change in ownership.
The Company had net income of $137,000 for the nine months ended January 31,
1997 compared to a net income of $70,000 for nine months ended January 31, 1996.
The increase in net income is attributable to the increase in Engineering
Services sales.
Liquidity. The Company's cash flow from operations was $720,000 for the nine
months ended January 31, 1997, compared to $569,000 for the same period last
year. The largest component of cash flow from operations for both periods was
depreciation and amortization of $698,000 and $615,000, 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 the
fourth quarter of fiscal 1997 and through fiscal 1998. 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 January 31, 1997, the current liabilities exceed
current assets by $369,000.
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 final payment on this note is due on November
1, 1997, at which time the partner agrees to transfer ownership of the
photoplotter to the Company. The Company also agreed to assume all the assets
and liabilities of the joint venture and pay the partner $53,000 and $50,000 in
the form of deferred Engineering Services beginning on December 1, 1996 and to
be applied against future payment of invoices.
Effective on December 1, 1996, the Company stopped using 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 December 1, 1996
the former joint venture will be included in the operations of the Company. As a
result of this inclusion, sales increased by $69,000 for three and nine months
ended January 31, 1997 and earnings were $14,000 for the same periods of which
one half was an actual increase to earnings. The joint venture's sales and
earnings on November 30, 1996 were $274,000 and $33,000, respectively.
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 $632,000 and $461,000
for the nine month periods ended January 31, 1997 and 1996, respectively. For
nine months ended January 31, 1997 it consisted primarily of expenditures for
capitalized software of $447,000, $133,000 for other capital expenditures and
$52,000 relating to the purchase of the joint venture interest. For the nine
months ended January 31, 1996 it consisted primarily of expenditures for
capitalized software of $417,000.
The Company's cash flow used in financing activities was $87,000 for the period
ended January 31, 1997 compared to $107,000 in the same period last year. The
largest components of cash flows used in financing activities for period ended
January 31, 1997 consisted of payments on long-term debt and principal payments
on capital lease obligations of $164,000 and an increase of $71,000 in the
revolving credit agreement. The largest components of cash flows used in
financing activities for period ending January 31, 1996 were the increase in the
revolving credit agreement of $11,000 and payments on long-term debt and
principal payments on capital lease obligations of $136,000.
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
None
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.
March 17, 1997 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-30-1997
<PERIOD-END> JAN-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,063,560
<ALLOWANCES> (66,527)
<INVENTORY> 164,884
<CURRENT-ASSETS> 1,235,647
<PP&E> 4,536,614
<DEPRECIATION> (3,832,599)
<TOTAL-ASSETS> 3,005,362
<CURRENT-LIABILITIES> 1,604,219
<BONDS> 0
0
0
<COMMON> 4,102,947
<OTHER-SE> (2,821,200)
<TOTAL-LIABILITY-AND-EQUITY> 3,005,362
<SALES> 4,217,525
<TOTAL-REVENUES> 4,286,014
<CGS> 2,548,281
<TOTAL-COSTS> 2,548,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,762
<INCOME-PRETAX> 137,140
<INCOME-TAX> 0
<INCOME-CONTINUING> 137,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,140
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
