FORM 10-QSB
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, 1998
Commission File Number: 2-90422-C
Infinite Graphics Incorporated
(Exact Name of Small Business Issuer 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 Offices)
(Zip Code)
612-721-6283
(Issuer's Telephone Number)
Check whether the issuer (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
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
2,752,575 common shares as of December 15, 1998
Total number of pages: 10
Exhibit index on page: 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITE GRAPHICS
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
October 31, 1998 April 30, 1998
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 355,342 $ 195,984
Accounts receivable, less allowance for doubtful accounts $ 689,676 $ 735,870
of $73,575 and $43,420 respectively
Account receivable - other (Note D ) $ 405,228 $ 200,000
Inventories $ 326,377 $ 187,743
Prepaid expenses and other $ 74,867 $ 44,723
------------ ------------
Total current assets $ 1,851,490 $ 1,364,320
PROPERTY, PLANT, AND EQUIPMENT, NET $ 1,995,796 $ 758,076
PURCHASED SOFTWARE, NET $ 84,653 $ 94,364
ACCOUNTS RECEIVABLE-OTHER $ 0 $ 313,254
OTHER ASSETS $ 29,609 $ 31,183
------------ ------------
TOTAL ASSETS $ 3,961,548 $ 2,561,197
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit agreement $ 59,580 $ 141,324
Trade accounts payable $ 331,149 $ 237,834
Accrued salaries, wages, vacations, and employee withholdings $ 220,859 $ 198,762
Other accrued expenses $ 238,097 $ 239,673
Current portion of long-term debt $ 75,495 $ 38,855
Current portion of capitalized lease obligations $ 203,469 $ 34,442
------------ ------------
Total current liabilities $ 1,128,649 $ 890,890
LONG-TERM DEBT, less current portion $ 598,314 $ 403,651
CAPITALIZED LEASE OBLIGATIONS, less current portion $ 881,050 $ 76,795
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:
Common stock, no par value; authorized 10,000,000 shares
issued and outstanding 2,752,575 and 2,652,575, respectively $ 4,167,635 $ 4,136,697
Accumulated deficit ($ 2,783,162) ($ 2,946,836)
------------ ------------
$ 1,384,473 $ 1,189,861
Notes and related interest receivable from purchase of common stock ($ 30,938) $ 0
------------ ------------
Total stockholders' equity $ 1,353,535 $ 1,189,861
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 3,961,548 $ 2,561,197
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED OCTOBER 31 ENDED OCTOBER 31
1998 1997 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $1,170,596 $886,248 $2,146,966 $1,817,680
COSTS AND EXPENSES:
Costs of products sold $735,615 $652,681 $1,434,895 $1,314,253
Selling, general and administrative $266,949 $282,075 $486,069 $525,859
Interest $42,289 $5,774 $62,328 $15,486
---------- ---------- ---------- ----------
Total costs and expenses $1,044,853 $940,530 $1,983,292 $1,855,598
INCOME (LOSS) FROM CONTINUING OPERATIONS $125,743 ($54,282) $163,674 ($37,918)
DISCONTINUED OPERATIONS-Loss from operations
of discontinued software division (Note D) $0 ($78,483) $0 ($82,744)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $125,743 ($132,765) $163,674 ($120,662)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 2,688,445 2,462,575 2,670,510 2,462,575
========== ========== ========== ==========
Diluted 2,749,601 2,462,575 2,740,974 2,462,575
========== ========== ========== ==========
BASIC NET INCOME (LOSS) PER SHARE:
Continuing operations $0.05 ($0.02) $0.06 ($0.02)
Discontinued operations $0.00 ($0.03) $0.00 ($0.03)
---------- ---------- ---------- ----------
Net income (loss) $0.05 ($0.05) $0.06 ($0.05)
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER SHARE:
Continuing operations $0.05 ($0.02) $0.06 ($0.02)
Discontinued operations $0.00 ($0.03) $0.00 ($0.03)
---------- ---------- ---------- ----------
Net income (loss) $0.05 ($0.05) $0.06 ($0.05)
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Six Month Period
Ended October 31
1998 1997
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $163,674 ($120,662)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization $147,832 $484,494
Changes in assets and liabilities:
Accounts receivable $46,194 $338,459
Inventories ($138,634) ($26,203)
Prepaid expenses and other ($28,570) ($23,146)
Deferred revenue ($72,457)
Accounts payable, accruals and other accrued expenses $113,836 ($30,189)
--------------------------
Net cash provided by operating activities $304,332 $550,296
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capitalized software $0 ($369,111)
Other capital expenditures ($385,841) ($139,185)
Decrease in account reveivable-other $108,026 $0
--------------------------
Net cash provided by (used in) investing activities ($277,815) ($508,296)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in revolving credit agreement ($81,744) ($64,990)
Proceeds from issuance of debt $256,470 $250,000
Payments on long-term debt and capital lease obligations ($41,885) ($193,478)
--------------------------
Net cash used in financing activities $132,841 ($8,468)
--------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $159,358 $33,532
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $195,984 $0
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $355,342 $33,532
==========================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Stock options purchased with note receivable $30,938
Equipment acquired by capital lease $990,000
</TABLE>
See notes to financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
NOTE A:
The Balance Sheet as of October 31, 1998 and the Statements of Operations for
the three and six months ended October 31, 1998 and 1997 and the Statements of
Cash Flows for the six months ended October 31, 1998 and 1997 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, 1998 has been derived from the audited Balance
Sheet included in the Company's April 30, 1998 Annual Report to Shareholders.
Certain information and footnote disclosures normally included in the annual
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, 1998 Annual Report to Shareholders.
Effective May 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." For the periods
presented comprehensive income is the same as net income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending upon the use of
the derivative and whether it qualifies as hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company has not yet determined the effects SFAS No. 133 will
have on its financial position or the results of its operations.
Reclassifications - Certain amounts in the financial statements have been
reclassified for fiscal year 1998 to conform with fiscal 1999 presentation.
NOTE B:
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share assumes the exercise of stock options and warrants using the
treasury stock method, if dilutive.
NOTE C:
During 1998, the Company installed equipment costing approximately $1,100,000.
The Company was not required to pay for the equipment until it was operating
within specific tolerances. Arrangements were made with a financing company to
lease the equipment at the time of acceptance. The sixty month lease has
payments of $21,025 per month and a fair market buy out at the end of the lease.
The Company accepted the equipment on October 23, 1998. The equipment and the
lease are reflected on the financials dated October 31, 1998.
NOTE D:
Effective February 27, 1998, the Company sold an exclusive license to use,
market and distribute the Company's PAR/ICE, ParCAM, and CheckMate (PAR for
Design) software products; sold a
5
<PAGE>
nonexclusive license to certain other CAD/CAM products, including those known as
2100, ProCADD, ProFLEX, and ProCHEM; and sold certain assets of its software
systems business to Global MAINTECH Corporation (Global MAINTECH). The Company
however, has retained the right to use all of this software in its own business.
The Company has also agreed that for a period of five years it will not
distribute, market, promote, or provide to any third parties software that is
competitive with the software with respect to which Global MAINTECH was granted
an exclusive license. As consideration for the grant of the license agreements
(the Agreements) and the sale of the software systems division assets to Global
MAINTECH, the Company received $500,000 on February 27, 1998 and $200,000 on
June 2, 1998 and may receive additional payments totaling not more than
$3,300,000 on or before June, 1999, depending on the level of profit performance
of the license software.
The above transaction was recognized as a disposal of a business. At October 31,
1998, the Company has a $405,000 receivable from Global MAINTECH.
At the present time, management of the Company believes the future payments in
connection with the Agreements will exceed $405,000. The Company has only
recorded a future receivable to the extent of the realized loss resulting in no
gain or loss recognition on the sale of discontinued operations. Future receipts
in connection with the Agreements will be recorded as a reduction of the Global
MAINTECH receivable and any excess will be recorded as gain on sale of
discontinued operations.
The Company has also agreed to continue to manage the day to day operations of
the business relating to the software products and assets licensed and sold to
Global Maintech through May, 1999.
NOTE E:
During the six months ended October 31, 1998, stock options for the purchase of
100,000 shares of the Company's common stock were exercised at $.31 per share.
NOTE F:
On September 28, 1998, the Company borrowed an additional $256,000 on their
$700,000 Equipment note line of credit. The balance outstanding as of October
31, 1998 was $436,000.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
Operations for the three months ended October 31, 1998 resulted in sales of
$1,171,000 compared to $886,000 for the same period last year or a 32 percent
increase. The increase in sales is primarily the result of production equipment
purchased in fiscal 1999.
The increase in sales was the primary contributor to the gross margin increasing
to 37% for the three month period ending October 31, 1998 compared to 26% for
the same period last year.
The Company's total selling, general and administrative (S, G & A) expenses were
$267,000 and $282,000 for the three months ended October 31, 1998 and 1997,
respectively. S, G & A decreased because of decreases in salary, travel, and
commissions. Interest expense for the three months ended October 31, 1998 was
$42,000 compared to $6,000 for the same period last year. The increase in the
interest expense is primarily attributable to increased borrowings as a result
of current year capital expenditures.
The Company had income from continuing operations of $126,000 for three months
ended October 31, 1998, compared to a loss from continuing operations of
$133,000 for the three months ended October 31, 1997.
SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1997
Operations for the six months ended October 31, 1998 resulted in sales of
$2,147,000 compared to $1,818,000 for the same period last year or a 18 percent
increase. The increase is attributable to production equipment purchased in
fiscal 1999.
The increase in sales was the primary contributor to the gross margin increasing
to 33% for the six-month period ending October, 31, 1998 compared to 27% 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, 1998 was $486,000 compared to $526,000 for the
same period last year, a decrease of $40,000 or 8 percent. S, G & A decreased
because of decreases in salary, travel, and commissions. Interest expense for
the six months ended October 31, 1998 was $62,000 compared to $15,000 for the
same period last year. The increase in the interest expense is primarily
attributable to increased borrowings as a result of current year capital
expenditures.
The Company had income from continuing operations of $164,000 for six months
ended October 31, 1998, compared to a loss from continuing operations of
$121,000 for the six months ended October 31, 1997.
7
<PAGE>
Liquidity and Capital Resources. The Company's cash flow from operations was
$304,000 for the six months ended October 31, 1998, compared to $550,000 for the
same period last year. The largest components of cash flow from operations for
the six months ended October 31, 1998 were depreciation and amortization of
$148,000 and net income of $164,000. The largest component of cash flow from
operations for six months ended October 31, 1997 was depreciation and
amortization of $484,000 and accounts receivable of $338,000.
The Company has invested primarily in equipment and improvements essential for
present operations in fiscal 1999, 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 1999 are expected to be approximately $2,500,000, which includes
$1,100,000 of equipment accepted in late October, 1998. The Company anticipates
that financing for such expenditures will be derived from planned operations,
leases and obtaining additional debt and/or equity financing. Although 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. If the Company does not achieve its operations plan
and additional financing is not obtained, it will restrict planned business
growth.
The Company's cash flow used in investing activities was $278,000 for the
six-month period ended October 31, 1998. In fiscal 1999 cash used in investing
activities consisted of payments for capital expenditures partially offset by a
decrease in other accounts receivable. For the six- month period ended October
31, 1997 cash flow used in investing activities was $508,000. In fiscal 1998,
cash used in investing activities consisted of expenditures for capitalized
software and other capital expenditures.
The Company's cash flow provided by financing activities was $133,000 for the
six months ended October 31, 1998 compared cash flow used in financing
activities of $8,000 in the same period last year. Cash flows provided by
financing activities for the period ended October 31, 1998, consisted of
proceeds of $256,000 from the placement of long-term debt partially offset by
payments on long-term debt and principal payments on capital lease obligations
of $42,000, and a decrease of $82,000 in the revolving credit agreement. Cash
flows used in financing activities for the period ended October 31, 1997, were
for payments made on long-term debt and principal payment on capital lease
obligations of $193,000 and a decrease of $65,000 in the revolving credit
agreement offset by proceeds of $250,000 from the placement of long term debt.
Other Items. Inflation has not had any significant impact upon the Company's
results of operation.
Year 2000 Compliance. The year 2000 issue focuses on whether computer systems
will properly recognize date-sensitive information in the year 2000 and beyond.
Many installed computer systems and software products are coded to accept only
two digit entries in the date code field. As the year 2000 approaches, these
code fields will need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20". This inability to recognize
or properly treat the Year 2000 may cause systems to process financial and
operational information incorrectly. As a result, in less than two years,
computer systems and/or software products used by many companies may need to be
upgraded to comply with such year 2000
8
<PAGE>
requirements. The company is dependent on computer processing in its business
activities and the year 2000 issue creates risk for the Company from unforeseen
problems in the Company's computer system and from third parties with whom the
Company does business. The failure of the Company's computer systems and/or
third parties computer systems from unforeseen problems could have a material
adverse effect on the Company's ability to conduct its business.
The Company has conducted a review of its computer systems to identify those
areas that could be affected by the Year 2000 problem and is developing an
implementation plan to resolve the issues identified. The Company has not
developed a Year 2000 contingency plan.
The Company's accounting software is not Year 2000 compliant. The Company is
currently evaluating vendor software packages to meet its future needs. The
Company is currently unable to estimate the acquisition cost of the hardware and
software and related costs of conversion, training, and support. The Company
intends to finance the acquisition of this system through a multiple year lease
arrangement. The Company anticipates that the acquisition cost of the
non-recurring transition costs will be financed through the use of the Company's
available operating cash flow and advances under its line of credit.
The Company is currently working with its customers and suppliers to certify
Year 2000 compliance. The Company cannot predict whether noncompliance by
customers and suppliers will have an adverse effect on sales and operating
income.
Accounting Pronouncements. In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the value of those derivatives would be accounted for
depending upon the use of the derivative and whether it qualifies as hedge
accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999, with earlier adoption encouraged. The Company has not yet determined the
effects SFAS No. 133 will have on its financial position or the results of its
operations.
Securities Litigation Reform Act. Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements which involve risk 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.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
During the quarter ended October 31, 1998 the Company sold unregistered
securities as follows: as of September 28, 1998, the Company issued
100,000 shares of its common stock in connection with the exercise of a
stock option by an officer of the Company. There were no underwriters
involved with the acquisition. The shares issued to the officer were
issued in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Act"). With
respect to the Company's reliance on Section 4(2), the sale did not in
involve a public offering of securities and the shares issued to the
officer were legended with respect to restrictions on transfer.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On October 14, 1998, Infinite Graphics Incorporated (the "Company")
held an annual meeting of shareholders, and the persons nominated by
management as listed in the Company's proxy statement dated October 3,
1998 (Clifford F. Stritch, Jr., Edwin F. Snyder, Durwood L. Airhart and
Michael J. Evers) were elected to the Company's Board of Directors in a
solicitation of proxies in accordance with Regulation 14A under the
Securities Exchange Act of 1934. There was no solicitation in
opposition. No other matters were voted upon at the annual meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 - Financial Data Schedule (for SEC use only)
b) No reports on Form 8-K were filed during the quarter ended
October 31, 1998.
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INFINITE GRAPHICS INCORPORATED
December 15, 1998 by
--------------------------
Clifford F. Stritch, Jr.
Chief Executive Officer
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 355,342
<SECURITIES> 0
<RECEIVABLES> 763,251
<ALLOWANCES> (73,575)
<INVENTORY> 326,377
<CURRENT-ASSETS> 1,851,490
<PP&E> 6,558,291
<DEPRECIATION> (4,477,842)
<TOTAL-ASSETS> 3,961,548
<CURRENT-LIABILITIES> 1,128,649
<BONDS> 0
<COMMON> 4,167,635
0
0
<OTHER-SE> (2,814,100)
<TOTAL-LIABILITY-AND-EQUITY> 3,961,548
<SALES> 2,146,966
<TOTAL-REVENUES> 2,146,966
<CGS> 1,434,895
<TOTAL-COSTS> 1,434,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,328
<INCOME-PRETAX> 163,674
<INCOME-TAX> 0
<INCOME-CONTINUING> 163,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,674
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
