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, 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.
2,462,575 common shares as of December 22, 1997
Total number of pages: 11
Exhibit index on page : 11
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GRAPHICS INCORPORATED
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
October 31, 1997 April 30, 1997
---------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 33,532 $ 0
Accounts receivable, less allowance for doubtful accounts
of $85,673 and $104,441, respectively $ 1,051,739 $ 1,390,198
Inventories $ 189,155 $ 162,952
Prepaid expenses and other $ 73,141 $ 36,312
----------- -----------
Total current assets $ 1,347,567 $ 1,589,462
PROPERTY, PLANT, AND EQUIPMENT, net $ 674,545 $ 691,002
CAPITALIZED SOFTWARE COSTS, less accumulated amortization
of $6,148,249 and $5,819,399, respectively $ 1,062,889 $ 1,022,628
OTHER ASSETS $ 16,342 $ 30,025
----------- -----------
$ 3,101,343 $ 3,333,117
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit borrowings $ 362,301 $ 427,291
Trade accounts payable $ 325,221 $ 317,451
Accrued salaries, wages, vacations and employee withholdings $ 316,228 $ 310,962
Other accrued expenses $ 274,549 $ 317,772
Deferred revenue $ 186,851 $ 259,308
Current portion of long-term debt $ 25,950 $ 175,096
Current portion of capitalized lease obligations $ 34,238 $ 43,054
----------- -----------
Total current liabilities $ 1,525,338 $ 1,850,934
LONG-TERM DEBT, less current portion $ 238,825 $ 7,395
CAPITALIZED LEASE OBLIGATIONS, less current portion $ 94,519 $ 111,465
STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized 10,000,000 shares,
issued and outstanding 2,462,575 at October 31, 1997 and
April 30, 1997 $ 4,112,947 $ 4,112,947
Accumulated deficit ($2,870,286) ($2,749,624)
----------- -----------
Total stockholders' equity $ 1,242,661 $ 1,363,323
----------- -----------
$ 3,101,343 $ 3,333,117
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended October 31, Ended October 31,
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 1,252,242 $1,466,917 $ 2,611,045 $2,725,464
Other income $ 0 $ 23,000 $ 0 $ 63,000
----------- ---------- ----------- ----------
$ 1,252,242 $1,489,917 $ 2,611,045 $2,788,464
COSTS AND EXPENSES:
Cost of products sold $ 836,644 $ 878,002 $ 1,654,859 $1,675,734
Selling, general and administrative $ 461,105 $ 442,270 $ 901,925 $ 815,312
Research and development costs $ 67,661 $ 78,154 $ 128,456 $ 160,521
Interest $ 19,597 $ 28,724 $ 46,467 $ 55,211
----------- ---------- ----------- ----------
Total costs and expenses $ 1,385,007 $1,427,150 $ 2,731,707 $2,706,778
----------- ---------- ----------- ----------
OPERATING (LOSS) INCOME ($ 132,765) $ 62,767 ($ 120,662) $ 81,686
EQUITY IN INCOME OF JOINT VENTURE $ 0 $ 15,485 $ 0 $ 12,579
----------- ---------- ----------- ----------
NET (LOSS) INCOME ($ 132,765) $ 78,252 ($ 120,662) $ 94,265
=========== ========== =========== ==========
NET (LOSS) INCOME PER COMMON AND
COMMON EQUIVALENT SHARE ($ 0.05) $ 0.03 ($ 0.05) $ 0.04
=========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,462,575 2,696,386 2,462,575 2,674,937
=========== ========== =========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended October 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($120,662) $ 94,265
Adjustments to reconcile net (loss) income to net cash flows
provided by operating activities:
Depreciation and amortization $ 484,494 $ 460,116
Equity in income of joint venture $ 0 ($ 12,579)
Changes in asset and liabilities:
Accounts receivable $ 338,459 ($ 83,987)
Inventories ($ 26,203) ($ 11,179)
Prepaid expenses and other and other assets ($ 23,146) ($ 43,445)
Deferred revenue ($ 72,457) ($ 45,966)
Accounts payable, accruals and other accrued expenses ($ 30,189) $ 7,506
--------- ---------
Net cash provided by operating activities $ 550,296 $ 364,731
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capitalized software ($369,111) ($303,398)
Other capital expenditures ($139,185) ($ 65,183)
--------- ---------
Net cash used in investing activities ($508,296) ($368,581)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in revolving credit borrowings ($ 64,990) $ 102,536
Payments on long-term debt and principal
payments on capital lease obligations ($193,478) ($104,686)
Proceeds from exercise of stock option $ 6,000
Proceeds from long-term debt $ 250,000
--------- ---------
Net cash (used in) provided by financing activities ($ 8,468) $ 3,850
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 33,532 $ 0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 0 $ 0
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,532 $ 0
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
PART 1 - FINANCIAL INFORMATION (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of October 31, 1997 and the Statements of Operations for
the three and six months ended July 31, 1997 and 1996 and the Statements of Cash
Flows for the six months ended October 31, 1997 and 1996 have been prepared by
Infinite Graphics Incorporated 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, 1997 has been derived from the audited Balance
Sheet included in the Company's April 30, 1997 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, 1997 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
October 31, 1997, current liabilities exceed its current assets by $178,000.
During fiscal 1998, the Company has plans to increase sales approximately the
same level as that achieved in fiscal 1997. If these increased sales are not
achieved, the Company could have difficulties implementing its growth plans and
could be required to reduce development and expansion activity.
NOTE B:
Net (loss) income per common and common equivalent share was computed by
dividing net (loss) income by the weighted average number of common and common
equivalent shares outstanding during each period. Common stock equivalents were
not included in the net loss per share computation for the three and six months
ended October 31, 1997 because they are antidilutive. Weighted average common
and common equivalent shares includes common stock equivalents of 340,185 for
the three months ended October 31, 1996 and common stock equivalents of 321,579
for the six months ended October 31, 1996 from the assumed exercise of
outstanding options and warrants using the treasury stock method.
NOTE C:
On October 24, 1997, the Company entered into a revolving credit agreement (the
Agreement), a mortgage note (the Mortgage Note), and an equipment note (the
Equipment Note). The Agreement and Mortgage Note replaced existing financing
agreements.
The Agreement, at the lender's discretion, allows the Company to borrow 75% of
its eligible services receivable and a certain percentage of its eligible
software receivables, up to $750,000, as defined. The original advance rate
pertaining to eligible software receivables is 70% until January 30, 1998, when
the advance rate is based on the Company's operations for rolling six month
periods. The advance rate range is from 0% to 70%. In addition the total of all
eligible software receivables outstanding at any one time shall not exceed
$500,000. Interest on outstanding
<PAGE>
borrowings is payable monthly and is the greater of prime plus 4.5%, never to be
readjusted below 10%, or a minimum monthly interest charge of $2,500. The
interest rate as of October 31, 1997 is 13%. In the event of default, as
determined at the lender's discretion, the interest rate increases to the
greater of prime plus 9.5%, never to be readjusted below 15%, or a minimum
monthly interest charge of $2,900. The Agreement also requires payment of a
$1,500 quarterly administrative fee. The Agreement terminates the earlier of a
date determined at the lender's discretion, the Company terminates the
Agreement, or October 12, 1999. If approved by the lender and the Company, the
termination date may be extended for six months. If the Agreement is terminated
by the Company, the Company is required to pay a prepayment charge of $2,500
multiplied by the number of calendar months from the prepayment date to October
23, 1999, unless the funds used to prepay the Agreement are borrowed from
Riverside Bank then no prepayment charge is due.
The Mortgage Note provided for a $250,000 term loan and interest payable at the
bank's reference rate, as defined, plus 2% (10.5% at October 31, 1997). The
Company is required to make monthly principal and interest payments in an amount
necessary to fully amortize the principal balance over a period of ten years.
The Mortgage Note matures on October 15, 2000. Monthly principal and interest
payments are currently $3,385. A portion of the Mortgage Note proceeds,
$112,000, was used to pay an existing mortgage.
The Equipment Note provides for a $700,000 line of credit for the purchase of
machinery, equipment, furniture, and fixtures and there was no balance
outstanding as of October 31, 1997. The term of the Equipment Note is from
October 24, 1997 to October 24, 2004. Interest on borrowings under the Equipment
Note is payable at prime plus 2%, and is adjusted quarterly if the prime rate
changes. The bank writes individual term notes under the Equipment Note after
purchases are made and advances are requested and submitted by the Company. The
individual term notes require the Company to make monthly principal and interest
payments in an amount necessary to fully amortize the principal balance from the
date of the borrowings to October 24, 2004.
Borrowings under the Agreement, Mortgage Note, and Equipment Note are secured by
substantially all of the Company's assets and personally guaranteed by the
Company's Chief Executive Officer. The Agreement, Mortgage Note, and/or
Equipment Note contain various restrictive covenants relating to a net loss of
no more than $100,000 for each succeeding six month period beginning January 31,
1998, limitations on additional indebtedness and capital expenditures, prohibits
dividend payments, and other matters.
On October 29, 1997, the Company entered into an agreement with General Electric
Capital Corporation to lease equipment costing approximately $1,100,000. The
term of the lease will be for five years with an initial monthly payment of
$110,000 in January 1998 and monthly payments thereafter of $20,168. Firm
acceptance of the equipment is planned for January 1998.
<PAGE>
PART 1 - FINANCIAL INFORMATION (CONTINUED)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1996
Operations for the three months ended October 31, 1997 resulted in sales of
$1,252,000 compared to $1,467,000 for the same period last year or a 15 percent
decrease. Engineering Services accounted for $886,000 compared to sales of
$990,000 for the same period last year or a 11 percent decrease. Systems sales
were $366,000 compared to sales of $477,000 for the same period a year ago or a
23 percent decrease. The decrease in Engineering Services sales of $104,000 is
mainly attributable to two customers adding in house capabilities and a third
going out of business which is offset by an increase of $96,000 in sales
resulting from the purchase of the joint venture in November 1996 (the Joint
Venture). The decrease in System sales of $111,000 is attributable to delays in
repackaging and releasing the Company's CAM products. Other income for the three
months ended October 31, 1996 related to management fees, products, and services
provided to the Joint Venture.
The decrease in System sales was the primary contributor to the gross margin
decreasing to 33 percent for the three months ended October 31, 1997 compared to
40 percent for the same period last year.
The Company's total selling, general and administrative (S, G & A) expenses were
$461,000 and $442,000 for the three months ended October 31, 1997 and 1996,
respectively. S, G & A increased because of increases in salary, travel, and
promotion expenses related to additional employees. Research and development
costs were $68,000 compared to $78,000, or a 13 percent decrease. The decrease
is primarily attributable to the Company capitalizing costs relating to the
development of a new call product. Interest expense for three months ended
October 31, 1997 was $20,000 compared to $29,000 for the same period last year
or a 32% decrease. The decrease in the interest expense is primarily
attributable to lower borrowings on the Company's line of credit.
The Company's portion of equity in joint venture for the three months ended
October 31, 1996 related to the operations of the Joint Venture, which was
acquired in November 1996. The operations of the former Joint Venture are now
included in the individual line items in the statements of operations.
The Company had a net loss of $133,000 for three months ended October 31, 1997,
compared to net income of $78,000 for the three months ended October 31, 1996.
The net loss is attributable to decreased sales.
<PAGE>
SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1996
Operations for the six months ended October 31, 1997 resulted in sales of
$2,611,000 compared to $2,725,000 for the same period last year or a 4 percent
decrease. Engineering Services accounted for $1,818,000 compared to sales of
$1,938,000 for the same period last year or a 6 percent decrease. Systems sales
were $793,000 compared to sales of $787,000 for the same period a year ago or a
1 percent increase. The decrease in Engineering Services sales of $120,000 is
mainly attributable to two customers adding in house capabilities and a third
going out of business which is offset by an increase of $202,000 in sales
resulting from the purchase of the joint venture in November 1996 (the Joint
Venture). Other income for the six months ended October 31, 1996 related to
management fees, products, and services provided to the Joint Venture.
The decrease in Engineering Services sales was the primary contributor to the
gross margin decreasing to 37 percent for the six months ended October 31, 1997
compared to 39 percent for the same period last year.
The Company's total selling, general and administrative (S, G & A) expenses for
the six months ended October 31, 1997 was $902,000 compared to $815,000 for the
same period last year, an increase of $87,000 or 11 percent. S, G & A increased
because of increases in salary, travel, and promotion expenses related to
additional employees. Research and development costs were $128,000 compared to
$161,000, or a 20 percent decrease. The decrease is primarily attributable to
the Company capitalizing costs relating to the development of a new CAM product.
Interest expense for six months ended October 31, 1997 was $46,000 compared to
$55,000 for the same period last year or a 16% decrease. The decrease in the
interest expense is primarily attributable to lower borrowings on the Company's
line of credit during three months ended October 31, 1997.
The Company's portion of equity in joint venture for the six months ended
October 31, 1996 related to the operations of the Joint Venture, which was
acquired in November 1996. The operations of the former Joint Venture are now
included in the individual line items in the statements of operation.
The Company had a net loss of $121,000 for six months ended October 31, 1997,
compared to net income of $94,000 for the six months ended October 31, 1996. The
net loss is attributable to decreased sales.
<PAGE>
Liquidity. The Company's cash flow from operations was $550,000 for the six
months ended October 31, 1997, compared to $365,000 for the same period last
year. The largest components of cash flow from operations for six months ended
October 31, 1997 were depreciation and amortization of $485,000 and the decrease
in accounts receivable of $338,000. The largest component of cash flow from
operations for six months ended October 31, 1996 was depreciation and
amortization of $460,000.
Cash provided from planned operations and availability under the Company's
revolving credit agreement are estimated to be sufficient to support the
Company's expected cash needs for the remainder of fiscal 1998. On October 24,
1997 the Company entered into a revolving credit agreement, a mortgage note, and
an equipment note as described in Note C to the Financial Statements. If the
Company is unable to increase sales approximately the same level as that
achieved in fiscal 1997, the Company could have difficulties implementing its
growth plans and could be required to reduce its level of development and
expansion activity. As of October 31, 1997, current liabilities exceed current
assets by $178,000.
Capital Resources: The Company has invested primarily in equipment and
improvements essential for present operations in fiscal 1998, 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 capital expenditures for equipment, automation improvements and new
opportunities during fiscal 1998 are expected to be approximately $2,500,000 of
which the Company has secured financing of $1,938,000. The Company anticipates
that additional financing will be derived from planned operations, leases and
obtaining additional debt and/or equity financing. If the Company does not
achieve its operations plan it could restrict planned business growth.
The Company's cash flow used in investing activities was $508,000 and $369,000
for the six months ended October 31, 1997 and 1996, respectively. For the six
months ended October 31, 1997 it consisted primarily of expenditures for
capitalized software of $369,000 and $139,000 for other capital expenditures.
For the six months ended October 31, 1996 it consisted primarily of expenditures
for capitalized software of $303,000.
The Company's cash flow used in financing activities was $8,000 for the six
months ended October 31, 1997 compared to cash flows provided by financing
activities of $4,000 during the same period last year. Cash flows used in
financing activities for the six months ended October 31, 1997 consisted of
payments on long-term debt and principal payments on capital lease obligations
of $193,000 and a decrease of $65,000 in the revolving credit agreement
partially offset by proceeds of $250,000 from the placement of long term debt.
The largest components of cash flows provided by financing activities for the
six months 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.
Other Items. Inflation has not had any significant impact upon the Company's
results of operation.
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128 EARNINGS PER SHARE, which is effective for
interim and annual reporting periods ending after December 15, 1997. SFAS No.
128 supersedes Accounting Principles Board Opinion No. 15, EARNINGS PER SHARE,
and replaces the presentation of primary earnings (loss) per share with a
presentation of basic earnings (loss) per share. It also requires dual
presentation for all entities with complex capital structures and provides
guidance on other computational changes. The implementation of SFAS No. 128 is
expected to change earnings (loss) per share by an immaterial amount.
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.
<PAGE>
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.
December 22, 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> 6-MOS
<FISCAL-YEAR-END> Apr-30-1998
<PERIOD-END> Oct-31-1997
<CASH> 33,532
<SECURITIES> 0
<RECEIVABLES> 1,137,412
<ALLOWANCES> (85,673)
<INVENTORY> 189,155
<CURRENT-ASSETS> 1,347,567
<PP&E> 4,799,117
<DEPRECIATION> (4,124,572)
<TOTAL-ASSETS> 3,101,343
<CURRENT-LIABILITIES> 1,525,338
<BONDS> 333,344
<COMMON> 4,112,947
0
0
<OTHER-SE> (2,870,286)
<TOTAL-LIABILITY-AND-EQUITY> 3,101,343
<SALES> 2,611,045
<TOTAL-REVENUES> 2,611,045
<CGS> 1,654,859
<TOTAL-COSTS> 1,654,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,467
<INCOME-PRETAX> (120,662)
<INCOME-TAX> 0
<INCOME-CONTINUING> (120,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (120,662)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
