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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-17204
INFINITY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1070066
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
211 West 14th Street, Chanute, Kansas 66720
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (316) 431-6200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
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 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 [ ]
As of July 8, 1998, 11,592,563 Shares of the Registrant's $.0001 Par Value
Common Stock were outstanding. The aggregate market value of voting stock
held by nonaffiliates of the Registrant was approximately $19,901,000.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $4,805,506.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Infinity, Inc. (the "Company") was organized as a Colorado corporation on
April 2, 1987, for the purpose of searching for and acquiring a business
combination candidate.
On August 17, 1988, the Company completed a public offering of Units
consisting of stock and warrants, for net proceeds of approximately $369,716.
On March 10, 1992, the Company acquired all of the outstanding stock of
Infinity Research and Development, Inc. ("IRD"), formerly named Phoenix
Research & Development Corporation, in exchange for the issuance of shares of
the Company's Common and Preferred Stock. IRD was incorporated under the laws
of the State of Missouri on December 18, 1991, for the purpose of acquiring
the rights to a technology to remove contaminants from waste-water, and to
manufacture and market products using this technology.
On December 15, 1993, the Company acquired all of the outstanding stock
of L.D.C. Food Systems, Inc. ("LDC"), a New Jersey corporation, in exchange
for the issuance of shares of the Company's Common Stock. LDC holds the
rights to patents relating to a poultry carcass chiller system for purifying
contaminated waste water from poultry processing operations. During the year
ended March 31, 1995, the Company obtained orders for two systems
incorporating this technology. During the year ended March 31, 1996 this
prototype system was sold to The BOC Group, Inc. ("BOC") in conjunction with a
licensing agreement under which BOC will complete the pursuit of necessary
government approvals and market the systems internationally to the food
industry. Remaining rights under this technology were sold to BOC in
September 1997.
On January 21, 1994, Consolidated Industrial Services, Inc.
("Consolidated"), a newly-formed, wholly-owned subsidiary of the Company,
acquired substantially all of the assets and operations, and assumed certain
liabilities, of Consolidated Oil Well Services, Inc. ("COWS") pursuant to an
Asset Purchase Agreement dated January 7, 1994 ("Agreement"), among the
Company, Consolidated, COWS and Edsel E. Noland, the President and sole
shareholder of COWS, for consideration valued at $5,000,000. The
consideration consisted of $1,000,000 in cash, 555,556 shares of the Company's
authorized but previously unissued Common Stock, and promissory notes from
Consolidated totaling $2,000,000. During the 3 months ended March 31, 1994,
$600,000 was paid toward the $2,000,000 in notes. During the year ended March
31, 1995, the remainder of the $2,000,000 in notes was settled.
COWS was established in 1957 by Edsel E. Noland, and has been engaged in
providing services to the oil and gas well industry in Kansas and portions of
surrounding states. This business has included providing fracturing,
cementing, acidizing, and nitrogen services as well as trucking of fluids. As
a result of the acquisition, Consolidated now operates approximately 130
pieces of oil field equipment, and employs approximately 55 people.
Consolidated continued the oil field services business and acquired and
expanded such services to include on-site hazardous and non-hazardous waste
stabilization services for private industry and government agencies.
Consolidated uses some of the trucks acquired from COWS to haul waste water
from customers' sites to a 20,000 gallon per day waste water treatment
facility constructed on COWS' 17.5 acre site in Chanute, Kansas. This
facility is the first centralized waste water treatment facility in Kansas.
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Consolidated also built a waste water and brine water treatment plant in
the Silo oil field near Cheyenne, Wyoming. This plant treats nonhazardous
industrial waste water and the brine water which is a by-product of a
producing oil field to meet standards necessary for surface discharge.
During October 1996, the Company entered into a management and lease
agreement with an environmental services company which operates both the
Chanute, Kansas and the Cheyenne, Wyoming water treatment facilities.
In September 1995, Infinity Oil & Gas, Inc. ("IOG") was created to pursue
exploration and development opportunities in the oil and gas industry. The
Company owned 55% of the common shares of IOG for which it paid $550 and
during the year ended March 31, 1996, invested $120,000 in Preferred Stock.
From April 1, 1996 through February 1997, the Company invested an additional
$59,000 in preferred stock.
During February 1997, the Company and IOG agreed to the cancellation of
the Company's Preferred Stock and a portion of its Common Stock, reducing the
Company's ownership in IOG to 10% of its Common Stock. In exchange for such
cancellation, the Company received a promissory note in the amount of $50,000
due in full in February 2000 and bearing interest at 12% per annum, secured by
stock held in IOG's treasury. In addition, the Company will receive an
overriding royalty on certain oil and gas leases held by IOG known as the
"Redstone Project." The amount of the overriding royalty will be based on the
terms of the sale of the Redstone Project by IOG. During July 1997, the
Company agreed to cancel the remaining 10% common stock interest in IOG in
conjunction with the acquisition of a gas development property.
In November 1995, CIS Oil and Gas, Inc. ("COG"), a wholly-owned
subsidiary, was created to acquire mineral rights and to develop and operate
properties. During the year ended March 31, 1996 COG acquired rights to
approximately 24,000 acres of land in the Raton Basin in Southeastern
Colorado, and drilled fifteen wells to produce coal methane gas from this
property. During the year ended March 31, 1997, the Company drilled an
additional five wells and built a pipeline system on the property to connect
the wells to the Colorado Interstate Gas pipeline. During the year ended
March 31, 1998, the Company drilled an additional ten wells and began
commercial gas production, and also acquired development rights to
approximately 17,000 additional acres of land in the Raton Basin. The Company
anticipates increasing gas production from these wells and four preexisting
wells during the coming year while it continues to develop both properties.
In January 1997, Consolidated Pipeline, Inc. ("CPI"), a wholly-owned
subsidiary, was reorganized to operate the Company's gas gathering pipeline
system constructed to connect the wells on the Raton property to the Colorado
Interstate Gas pipeline.
Unless the context otherwise requires, Infinity, Inc. and its
subsidiaries, Consolidated, IRD, LDC, COG and CPI are referred to herein
collectively as the "Company."
THE COMPANY
Infinity, Inc. (the "Company"), through its subsidiaries, is engaged in
providing oil field services, and in developing and operating oil and gas
properties. The Company also leases and licenses water treatment facilities
and technologies which it previously developed and operated.
The Company's CIS Oil & Gas, Inc. ("COG") subsidiary leases mineral
rights to approximately 41,000 acres of land in the Raton Basin area of
Southeastern Colorado, and has drilled thirty (30) wells on this property.
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COG will continue to develop and operate this property while seeking
additional properties to develop. The Company's Consolidated Pipeline, Inc.
("CPI") subsidiary operates the pipeline used to transport gas produced in the
Company's Raton Basin property from the wells to the interstate carrier.
The Company's Consolidated Industrial Services, Inc. ("Consolidated")
subsidiary provides services associated with drilling and completion of oil
and gas wells, including cementing, acidizing, fracturing, nitrogen pumping
and water hauling. Consolidated previously provided on-site remediation
services for hazardous and non-hazardous waste, and operated a centralized
water treatment facility and facilities to treat brine water produced by oil
and gas wells. These facilities are now leased to and operated by an
unrelated environmental services company.
The Company's Infinity Research and Development, Inc. ("IRD") and LDC
Food Systems, Inc. ("LDC") subsidiaries developed two specialized water
treatment technologies: (1) thin film electrocoagulation and (2) chiller loop
filtration and ozone sanitation (or "chiller loop technology"). These
technologies were used by the Company to custom design and install custom
water treatment equipment. The Company sold this operating system to The BOC
Group, Inc. ("BOC") in February 1996 in conjunction with a licensing and
marketing agreement under which BOC was to pursue final regulatory approvals
and market the chiller loop technology to the food industry both nationally
and internationally. The license agreement ended with the sale of this
technology to BOC in September 1997.
BUSINESS OF COG AND CPI
COG identifies and pursues development, exploration and operating
opportunities in the oil and gas industry. CPI operates the internal pipeline
which transports produced gas from each well on the Raton Basin property to
the interstate carrier.
RATON BASIN
The Company has acquired through lease the mineral rights to
approximately 41,000 acres of land in the Raton Basin of Southeastern
Colorado. This area has seen significant growth in activity in recent years
as several major companies in the energy exploration industry have started
development work. This activity was spurred by the completion through the
area of the Colorado Interstate Gas ("CIG") pipeline which provides a means to
sell gas produced in the area to eastern markets where prices are generally
higher than in the Rocky Mountain area.
The property leased by the Company is over several strata of known coal
deposits at depths of less than 1,200 feet. This allows the Company to drill
to these shallow levels to retrieve the coal methane gas using techniques
developed over many years in the coal fields of Southeastern Kansas where
available resources were relatively small. These techniques applied to these
shallow wells in Colorado provide the Company with significant cost advantages
over other companies whose techniques are based on deeper wells and larger
resources.
The Company has drilled 30 wells on this property and has connected 19 of
the 30 wells to the CIG pipeline. Production on all 19 wells had started by
June 30, 1997.
The Company anticipates drilling no fewer than ten additional wells in
1998 and no fewer than ten additional wells each year through the year 2000 to
maintain rights to develop the entire property.
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Under current regulations this property could support more than 210
wells, so the Company anticipates that development may occur faster than these
minimum levels.
On July 31, 1997, the Company acquired the rights to a lease of 53.46% of
the mineral rights on approximately 17,000 acres near the 24,000 acre block on
which the Company had previously held mineral rights under lease. This
property is known as the Lorencito Property. The rights to the Lorencito
Property were acquired from Infinity Oil & Gas, Inc. ("IOG") which is no
longer affiliated with the Company. The Company paid $50,000 as an advance on
the landowner royalty of 15% and granted IOG a 3% overriding royalty. The
Company also agreed to cancel its 10% stock ownership in IOG in connection
with this transaction. The lease presently requires that the Company drill at
least 15 wells on the property during each one-year period commencing June 22,
1998, to maintain the rights to develop the property during the subsequent
one-year period. If the Company has drilled at least 75 wells prior to June
22, 2002, the lease will be extended through June 22, 2004; if at least 90
wells are drilled prior to June 22, 2002, the lease will be extended through
June 22, 2005; and if at least 100 wells are drilled prior to June 22, 2002,
the lease will be extended through June 22, 2006. There are currently four
gas wells on the property owned by Amoco which are not operating. If the
Company acquires these wells and sustains production from them, the four wells
will count toward the fifteen wells required to be drilled in the first year.
The Company's development of the 17,000 acre block may be adversely
impacted by the fact that another party holds the rights to the remaining
46.54% of the mineral rights. The Company will use its best efforts to work
with the other interest holder, but there can be no assurance that the Company
will be successful in doing so. If the Company is unable to satisfactorily
obtain such cooperation, the Company may be required to apply to the Colorado
Oil and Gas Conservation Commission to request a forced pooling of the
property. If such an order were to be granted, the Company would be required
to pay all costs of drilling and completion of the wells and only pay the
other interest holder a one-eighth royalty on production until the Company
recovers its cost plus 200%, after which the other party would also receive a
46.54% working interest in the property.
Effective June 24, 1998, the Company entered into a Development Agreement
with Evergreen Resources, Inc. ("Evergreen") pursuant to which Evergreen paid
the Company $62,500 and received a 35% interest in the Company's leases on the
17,000 acre Lorencito Property. Evergreen will pay 35% of the costs of
drilling wells on this property and act as operator. Evergreen has also
agreed to guaranty a credit facility for the Company's benefit to be used
solely for drilling, completing and equipping of wells on this development.
CURRENT DRILLING OPERATIONS
The Company has drilled thirty coal methane gas wells in the Raton Basin
in Southeastern Colorado. Fifteen of these wells were drilled during February
1996, five were drilled during December 1996, and ten more were drilled in
November 1997.
The Company completed twenty wells and related gathering systems and
commenced production in April 1997. The Company intends to connect the
remaining ten wells to the gathering system and to drill a minimum of an
additional ten wells in this area by December 31, 1998.
The Company owned no oil or gas properties and had no drilling or
production activities prior to the drilling of the fifteen wells during the
year ended March 31, 1996. All 30 of the development wells which the Company
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has drilled thus far were completed and nineteen are hooked up and are
producing gas.
OIL AND GAS INTERESTS IN LEASEHOLD ACREAGE
The Company holds oil and gas interests in the Raton Basin in
Southeastern Colorado as of March 31, 1997 and 1998 as follows:
1997 1998
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Undeveloped Acreage
Gross 20,160 35,560
Net 20,160 27,648
Developed Acreage
Gross 3,840 5,440
Net 3,840 5,440
GAS WELLS
At March 31, 1998, the Company had interests in 30 gross and 30 net gas
wells based on working interests in effect on that date.
The group which assigned the leases on this property to the Company has
an option to obtain a twenty-five percent working interest in these wells
within six months of the completion of groups of 20 wells. This option, if
exercised, would reduce the number of net wells to 22.5. In addition, the
Company will receive a seventy-five percent working interest in four existing
wells when the wells are connected to the pipeline and begin production. If
all 30 existing wells are connected to the pipeline and begin production and
the twenty-five percent back-in option is exercised, the Company will have 34
gross gas wells and 25.5 net gas wells.
PRODUCTION, PRICE AND COST DATA
The Company began acquisition and development activities relating to oil
and gas properties in January 1996. During the year ended March 31, 1997, no
oil or gas had been produced by the Company, and average selling prices and
average production costs had not been established.
During the year ended March 31, 1998, the Company received an average
selling price of $1.32 per Mcf of gas sold and incurred average production
costs of $1.63 per Mcf of gas sold.
During the year ended March 31, 1998, the Company incurred operating
expenses of $170,841 or $.83 per Mcf of gas sold in conjunction with oil and
gas production activities. During the year ended March 31, 1997, the Company
incurred no operating expenses in conjunction with oil and gas production
activities. Information concerning the Company's reserves appears as
Unaudited Supplemental Information Pursuant to Oil and Gas Activities
following the notes to financial statements. Information regarding the
Company's oil and gas reserves was determined by Fairchild, Ancell & Wells,
Inc., petroleum and environmental consultants.
The Company presently has no agreements or commitments to provide
quantities of oil or gas in the future. The Company has not reported
information on oil or gas reserves to any federal agency or authority.
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OTHER PROPERTIES
The Company continues to evaluate opportunities of both developed and
undeveloped properties where the experienced employees and specialized
equipment of Consolidated can enhance the value of the property. Potential
properties may be relatively shallow deposits to be recovered or could be
neglected fields which will benefit from some form of enhancement.
BUSINESS OF CONSOLIDATED
The Company's Consolidated subsidiary, based in Chanute, Kansas, has been
organized into two divisions: Oil field Services and Waste Treatment
Services, including On-site Remediation, Wastewater Treatment and Brine Water
Treatment. In October 1996, operation of the waste treatment services
division was transferred to an environmental services company under a
management and lease agreement.
OIL FIELD SERVICES
The Oil Field Services Division is based on the business and operations
acquired from Consolidated Oil Well Services, Inc. in January 1994. This
division provides a number of services relating to the drilling and completion
of oil and gas wells, including cementing, acidizing, fracturing, nitrogen
pumping, and water hauling. Consolidated provides these services out of
service facilities located in Chanute and Ottawa, Kansas; Bartlesville,
Oklahoma; and Trinidad, Colorado, using a fleet of approximately 130 vehicles.
Consolidated also provides services and expertise to the Company's COG
and CPI subsidiaries in support of the exploration, development and operation
activities of these subsidiaries.
WASTE TREATMENT SERVICES
The On-site Remediation Services Division offered environmental
remediation services to companies which generate hazardous and non-hazardous
waste. The waste water treatment facility in Chanute, Kansas accepted
non-hazardous waste waters from industrial generators for treatment and
disposal. The brine water treatment facility near Cheyenne, Wyoming accepted
non-hazardous oilfield and industrial waste waters for treatment and disposal.
Each of these activities used technologies developed by the company in
addition to traditional methods.
In October 1996, in an effort to focus the Company on the oilfield
services and oil and gas production activities, the Company entered into a
management and lease agreement with Great Plains Environmental, Inc., an
environmental services company, to operate these water treatment divisions.
The initial term of the agreement is for five years and with minimum lease
payments to be received of $80,000 per year. In addition, the lease calls
for percentage rents at 4-1/2% of revenues above a base level and includes
options to extend the agreement for additional two and seven year terms.
BUSINESS OF IRD AND LDC
IRD and LDC developed water treatment systems which utilize two
specialized water treatment technologies in combination with conventional
water treatment equipment. These are known as the "thin film
electrocoagulation" and the "chiller loop" technologies. Both of these
technologies were leased or licensed to other companies to pursue additional
development, and the chiller loop technology was sold in September 1997.
Prior to the acquisition of LDC, IRD developed a thin film
electrocoagulation ("TFEC") wastewater treatment technology that accomplishes
the removal of suspended as well as soluble pollutants using sound
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electrochemical and physical chemistry principles. This technology was
included in the management and lease agreements involving the water treatment
divisions.
ENVIRONMENTAL REGULATION
The waste water treatment services and systems operated by the Company's
licensee are designed to assist industrial, commercial and other entities in
complying with complex sets of federal and local environmental regulations.
These regulations are monitored by several levels of government including the
EPA, state regulatory agencies, and municipal authorities. Although the EPA
establishes maximum limits for discharge of pollutants into surface waters,
some states have more stringent requirements. There can be no assurance that
the Company's services or systems will be able to meet all of the standards
now or hereafter set by every regulatory authority.
In addition, demand for water treatment products is driven in part by the
increasingly stringent requirements for the discharge of pollutants. If
regulatory authorities decided to reverse the trend and reduce those
requirements, the Company's business could be adversely affected.
COMPETITION
In the oil field services division the Company has only limited
competition in southeastern Kansas, whereas in northeastern Oklahoma and
Colorado the Company competes with Halliburton Services, a major oil field
services company, and two small local companies. If conditions in the
industry improve, it is likely that other companies could enter the markets
where the Company operates. When compared to Halliburton Services which is a
well established company with substantial financial resources, the Company may
be at a competitive disadvantage.
There are many companies in the waste water treatment industry, many of
which possess far greater financial resources, name recognition, manufacturing
capabilities and marketing experience than the Company. The Company intends
to compete with these companies through its management and lease agreement
with the environmental services company.
There are several other companies, universities and research
organizations which actively engage in the research and development of
products which may be competitive with those of the Company. All of these
potential competitors, in the future, may offer products which by reason of
price or effectiveness may be superior to any of the Company's existing or
future products.
MAJOR CUSTOMERS
During the fiscal year ended March 31, 1998, the Company billed Stroud
Oil Properties $501,134, which represented 10% of the Company's net sales.
During the fiscal year ended March 31, 1997, the Company billed Stroud Oil
Properties $646,488 which represented 13% of the Company's net sales.
PATENTS, TRADEMARKS AND PROPRIETARY PROTECTION
The Company, through its LDC subsidiary, owned the rights to two patents
issued by United States Patent and Trademark Office which name Louis D.
Caracciolo, Jr. as inventor. These patents were sold in September 1997.
The Company does not presently hold any patents on the thin-film
electrocoagulation technology used in its waste-water treatment system. The
Company does not believe that this technology violates any patents held by
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others, but there can be no assurance that claims of patent infringement will
not be asserted against the Company in the future. The Company presently does
not carry insurance which would provide coverage for defense against such
claims.
EMPLOYEES
The Company and its subsidiaries currently have approximately 55
employees. The Company intends to hire additional employees as the
development of its business requires.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters is located in leased facilities at 211 West
14th Street, Chanute, Kansas 66720, along with operating facilities of
Consolidated's oil field services division.
The Company leases facilities in Chanute and Ottawa, Kansas, and
Bartlesville, Oklahoma, pursuant to a lease from Consolidated Oil Well
Services, Inc., a shareholder of the Company. The monthly rent is $3,534,
and the Company also pays all insurance, taxes and operating expenses of these
facilities. The lease expires on January 6, 2001. The lease provides the
Company with the option to extend the lease for one additional five year
period and to purchase these facilities for $496,135 during the term of the
lease. In the event the Company exercises this option, all rent paid under
the lease will be applied to the purchase price.
The Company leases facilities in Trinidad, Colorado. The monthly rent is
$1,000. The lease began in October 1994, currently expires in October 1998,
and contains the option to extend the lease for six additional one-year
periods and to purchase the facility during the term of the lease. In the
event the Company exercises this option, all rent paid under the lease will be
applied to the purchase price up to a maximum of $60,000.
The Company also leases property near Cheyenne, Wyoming, which is the
site of the brine water treatment facility. Rent on this land lease is $1,000
per year for a term of twenty-five years beginning July 1994. This rent is
reimbursed under the management and lease agreement for the water treatment
facilities.
From May 20, 1994 until June 1996, the Company leased office space in
Lenexa, Kansas for which it paid $2,105 per month in base rent, and paid a
proportionate share of the taxes, insurance and common area charges of the
building. The lease expired in June 1996 and was not renewed.
During the year ended March 31, 1996, the Company acquired direct
interests in oil and gas leases on approximately 24,000 acres of land in the
Raton Basin in Southeastern Colorado. During the year ended March 31, 1998,
the Company acquired interests in an additional 17,000 acres. The Company
believes it has satisfactory title to this property based upon generally
accepted industry standards. Prior to the commencement of drilling, however,
a thorough examination is conducted and material defects, if any, are
corrected before proceeding with operations.
These properties acquired by the Company are leases which require certain
drilling activity to retain the Company's interest in the lease. The Company
must drill ten additional wells before December 31, 1998, and it must drill
ten additional wells during each of the subsequent two years in order to earn
the right to develop the entire 24,000 acre property and it must drill fifteen
wells by June 22, 1999, and an additional fifteen wells during each of the
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three subsequent years to earn the right to continue to develop the 17,000
acre property.
ITEM 3. LEGAL PROCEEDINGS.
WILLIS BROTHERS ENERGY, L.L.C. LAWSUITS
In December 1997, the Company's COG subsidiary was named as a defendant
in a lawsuit filed by Willis Brothers Energy, L.L.C. ("Willis Brothers") in
the District Court of Las Animas County, Colorado. Also in December 1997, the
Company's COG subsidiary filed a lawsuit against Willis Brothers and others in
the District Court of Neosho County, Kansas. These lawsuits involve claims
and counterclaims relating to certain tasks Willis Brothers had contracted to
perform on COG's coal methane gas development project in the Raton Basin in
Colorado. In June 1998, COG entered into a settlement agreement with Willis
Brothers which provides that COG will pay Willis Brothers $85,000 to settle
this dispute.
ALPHA ENERGY, INC. LAWSUIT
In February 1998, Alpha Energy, Inc. ("Alpha") filed a lawsuit in the
District Court of Las Animas County, Colorado, against COG and others in
connection with a contract dispute involving COG's coal methane gas project in
the Raton Basin in Colorado. Alpha is seeking to foreclose on a lien on the
project and receive damages from COG of $256,000 plus interest for breach of
contract and unjust enrichment. COG filed a counterclaim against Alpha for
breach of contract and negligent design. No trial date has been set. COG is
currently involved in settlement discussions with Alpha concerning this
lawsuit.
There are no other pending material legal proceedings to which the
Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. The Company's Common Stock began
trading on the Nasdaq Small-Cap Market on June 29, 1994, under the symbol
"IFNY." Prior to that time, the Company's Common Stock was traded on the
over-the-counter market and was quoted on the NASD's OTC Bulletin Board. The
following table sets forth the high and low sale prices for the Company's
securities as reported by the Nasdaq Stock Market.
QUARTER ENDED HIGH LOW
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June 30, 1996 $1.687 $0.875
September 30, 1996 $1.25 $0.75
December 31, 1996 $1.875 $1.125
March 31, 1997 $2.375 $1.25
June 30, 1997 $2.28125 $1.625
September 30, 1997 $2.50 $2.125
December 31, 1997 $3.75 $2.09375
March 31, 1998 $2.71875 $1.875
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
holders of the Company's $.0001 par value common stock at July 8, 1998, was
238 and the Company has over 350 beneficial owners of such stock.
(c) DIVIDENDS. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No
dividends have been paid with respect to the Company's common stock and no
dividends are anticipated to be paid in the foreseeable future. Pursuant to
the terms of the Loan Agreement with CIT Group/Credit Finance, Inc., the
Company's CIS subsidiary is prohibited from paying any dividends to the
Company during the term of that agreement. (See "ITEM 6. - LIQUIDITY AND
CAPITAL RESOURCES.")
(d) SALE OF UNREGISTERED SECURITIES. During the quarter ended March 31,
1998, the Company did not issue any securities which were not registered under
the Securities Act of 1933, as amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The Company was organized as a Colorado corporation on April 2, 1987, for
the purpose of searching for and acquiring a business combination candidate.
On March 10, 1992, the Company acquired Infinity Research & Development, Inc.,
then named Phoenix Research & Development Corporation ("PRD"). This
acquisition was accounted for as a reverse acquisition. Accordingly, the
financial statements reflect the historical financial statements of PRD from
its inception on December 18, 1991, through March 10, 1992, and the
consolidated financial statements since that date.
On December 15, 1993, the Company acquired all of the outstanding stock
of LDC Food Systems, Inc. ("LDC"). This acquisition was accounted for as a
pooling of interests and the financial statements included in this Report
reflect the historical statements of LDC from its inception on April 20, 1990,
through December 15, 1993, and the consolidated financial statements since
that date.
On January 21, 1994, Consolidated Industrial Services, Inc. ("CIS")
(incorporated in November 1993 as a wholly-owned subsidiary of the Company),
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acquired substantially all of the assets except for real estate holdings and
advances receivable, and assumed certain liabilities of Consolidated Oil Well
Services, Inc. This acquisition was accounted for as a purchase and the
financial statements subsequent to January 1, 1994, include the results of
operations of the acquired entity from that date. The total consideration
given for this purchase was $1,000,000 in cash, 555,556 shares of the
Company's common stock and promissory notes totaling $2,000,000. Prior to
March 31, 1994, $600,000 of the $2,000,000 amount had been paid, leaving
$1,400,000 still owed. During December 1994, the Company reached an agreement
with Consolidated Oil Well Services, Inc. ("COWS") whereby COWS accepted a
reduced payment of $850,000 in full settlement of the remaining $1,400,000
promissory note. The balance was paid $750,000 in cash and $100,000 in
deferred future oil well services.
In September 1995 and November 1995 the Company created Infinity Oil and
Gas Inc. and CIS Oil and Gas, Inc., respectively, as newly-formed
subsidiaries. Results of operations of these subsidiaries are included in the
consolidated financial statements since their respective inception dates.
In January 1997, the Company reorganized Consolidated Pipeline, Inc. as a
subsidiary. Results of operations of this subsidiary have been included in
the consolidated financial statements since the date of inception.
In February 1997, the Company's interest in Infinity Oil & Gas, Inc. was
reduced to ten percent of the outstanding common shares with the remaining
common shares owned by the officers of the former subsidiary. Results of
operations after the date of this transaction have been excluded from the
consolidated financial statements and the remaining investment in this former
subsidiary is carried as an investment on the cost basis.
In July 1997, the Company's final ten percent interest in Infinity Oil &
Gas, Inc. was canceled in conjunction with the Company's acquisition of
additional gas development properties.
The following discussion relates to the financial statements included in
this Report.
RESULTS OF OPERATIONS
The oil field services segment of the Company generated $4,411,131 in
revenues and $2,171,648 in cost of sales during the year ended March 31, 1998,
compared to $4,688,793 in revenues and $2,480,130 in cost of sales for the
year ended March 31, 1997. The operating expenses incurred by the oil field
services segment of the Company were $1,497,439 for the year ended March 31,
1998, and $1,515,883 for the year ended March 31, 1997. Net operating income
for this segment improved to a profit of $742,044 for the year ended March
31, 1998, as compared to a profit of $692,780 for the year ended March 31,
1997. The improved results are attributed to the Company being able to
continue measures to control costs. Depreciation and amortization expense
included in operating expenses for the oil field services division was
$543,570 for the year ended March 31, 1998, and $496,147 for the year ended
March 31, 1997.
The environmental services segment of the Company which includes all
water treatment activities, generated $92,243 in rental income and $95,000
revenue from the sale of patents during the year ended March 31, 1998,
compared to $346,545 in revenues and $190,215 in cost of sales for the year
ended March 31, 1997. Operating expenses incurred by the environmental
services division were $173,165 for the year ended March 31, 1998, and
$292,539 for the year ended March 31, 1997, including depreciation and
amortization expense of $168,629 for the year ended March 31, 1998 and
<PAGE>
$171,500 for the year ended March 31, 1997. The significant drop in revenue,
cost of sales and operating expenses resulted from the reduction in water
research and treatment activities culminating in the license agreement with
BOC Gases in January 1996, the management and lease agreement with the
environmental services company in October 1996, and the sale of patents to BOC
Gases in September 1997. Since completion of these agreements, these
activities have operated to collect royalties and rent payments and maintain
patent rights and have incurred negligible expense other than depreciation and
amortization.
The oil and gas production segment of the Company began commercial
production of coal methane gas in July 1997 and recorded revenue of $299,375
and expenses of $505,119 for the year ended March 31, 1998, while continuing
development of the property. Included in these expenses were $49,099 of
depreciation and depletion expense.
Expenses incurred in corporate activities were $259,369 for the year
ended March 31, 1998, and $274,291 for the year ended March 31, 1997. This
reduction was substantially achieved by closing the corporate office in
Lenexa, Kansas.
Operating income for the Company declined to $156,112 for the year ended
March 31, 1998, from an operating income of $282,280 for the year ended March
31, 1997. This decline was due to startup and production costs in the oil and
gas segment which offset continued strong performance in the oilfield segment.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a working capital deficit of
$(932,764) compared to a deficit of $(1,285,105) at March 31, 1997. The
improvement in working capital is primarily due to the reduction of accounts
payable enabled by the completion of long-term refinancing in February 1998.
During the year ended March 31, 1998, cash generated by operating
activities was $467,316 compared to cash generated of $892,989 for the year
ended March 31, 1997. The primary reason for the reduction was the decrease
in current liabilities and accounts payable and operating losses of the oil
and gas segment.
Net cash provided by the operation of the oil field services segment was
$1,285,614. Net cash generated by the operation of the environmental
technology segment was $187,243. Net cash used by the operation of corporate
activities was $(247,280) plus $164,162 of interest expense paid. Net cash
used by the operation of the oil and gas segment was $(156,645).
Cash used in investing activities during the year ended March 31, 1998
was $1,994,948 as compared to $1,800,988 for the year ended March 31, 1997.
The majority of cash used in investing activities for both years was used to
develop the coal methane gas production in the Raton Basin in Southeastern
Colorado and to replace and upgrade equipment for oil field services. An
additional $73,798 was spent to pursue financing and lease transactions.
During the year ended March 31, 1998, the Company received $1,840,521
from the sale of common stock, primarily through exercise of warrants and
options and completed refinancing of long-term debt totaling $2,700,000.
The Company presently has outstanding publicly-held warrants to purchase
shares of common stock, which if all were to be exercised, could result in
gross proceeds of approximately $1,790,502. (This does not include the
warrants to purchase 1,250,000 shares held by Seymour, Inc. which expired May
<PAGE>
6, 1998). However, there is no assurance that the Company will be successful
in obtaining the exercise of any of the warrants.
On February 6, 1998, the Company's CIS subsidiary obtained a credit
facility for a total of $4,000,000. This facility provided $2,700,000 of
immediate equipment financing which will be amortized at a rate of $45,000 per
month until maturity at February 6, 2001. In addition, the facility provides
$1,000,000 available for additional equipment purchases and a revolving credit
line based on 80% of current accounts receivable. Interest is payable monthly
at a rate of prime plus 2%. This facility is secured by substantially all
oilfield service equipment and other assets of the CIS subsidiary. Further
security is provided by the personal guaranty of the Company's President which
guaranty is secured by the pledge of a portion of the President's stock in the
Company.
On May 31, 1995, the Company obtained $2,500,000 of long-term financing
from Seymour, Inc., a manufacturer of equipment for the food processing
industry. This note required monthly payments of interest at an annual rate
of 10% and monthly installments of principal beginning January 1, 1996. The
remaining principal balance was to mature on June 1, 1998, but was paid in
full in February 1998. Seymour, Inc. also held a warrant which allowed it to
purchase up to 1,250,000 shares of the Company's common stock at a price of
$2.00 per share. This warrant expired unexercised on May 6, 1998.
The Company does not have any material commitments for capital
expenditures as of the filing of this Report. However, the Company is
required to drill a number of gas wells in its Raton Basin property in order
to retain its rights to further develop this leased property. The Company
intends to drill an additional ten gas wells in southeastern Colorado prior to
December 31, 1998, and at least twenty-five additional wells during each of
the next three years. This pace of development will meet lease requirements
to allow the Company to continue to develop the property. Financing for this
future development will be necessary and is expected to be obtained by
borrowing based on the production and reserves of the existing wells or by
preselling the gas produced by these wells. However, there is no assurance
that the Company will be successful in obtaining such financing.
Management believes that the revenues being generated by gas sales
together with the proceeds from the sale of common stock will provide
sufficient liquidity to meet the Company's working capital needs for the
remainder of the fiscal year ended March 31, 1999. Additional gas wells will
be drilled and completed only when additional financing is obtained
specifically for that purpose.
YEAR 2000 CONCERNS
Management has addressed the concerns of potential year 2000 computing
problems, both internally and with external parties, and believes that
significant additional costs will not be incurred because of this
circumstance.
ITEM 7. FINANCIAL STATEMENTS.
Please see pages F-1 through F-23.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITIONS HELD
---- --- --------------
Stanton E. Ross 36 President, Treasurer and Director
John C. Garrison 46 Secretary and Director
Don W. Appleby 45 Director
Stephen J. Skaggs 47 Director
Jeffrey L. Dale 36 Director
STANTON E. ROSS. Mr. Ross has been President, Treasurer and a Director
of the Company since March 1992, and serves as an officer and director of each
of the Company's subsidiaries. From 1991 until March 1992, he also founded
and served as President of Midwest Financial, a financial services corporation
involved in mergers, acquisitions and financing for corporations in the
Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc.,
an investment banking firm in Overland Park, Kansas, where he primarily worked
in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus
& Co., a member of the New York Stock Exchange, where he was an investment
executive. From 1987 to 1989, Mr. Ross was self-employed as a business
consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas
Microwave, Inc. which developed a radar detector product. From 1981 to 1985,
he was employed by Birdview Satellite Communications, Inc. which manufactured
and marketed home satellite television systems, initially as a salesman and
later as National Sales Manager.
JOHN C. GARRISON. Mr. Garrison has served as Secretary of the Company
since August 1994, and as a Director since May 1995. He has been a Certified
Public Accountant in public practice providing financial management and
accounting services to a variety of businesses for over twenty years. Mr.
Garrison holds a Bachelor degree in Accounting from Kansas State University.
He devotes over 50% of his time to the business of the Company.
DON W. APPLEBY. Mr. Appleby is Chief Operating Officer of Whiteman
Industries, a construction equipment manufacturer in Boise, Idaho. He has
served as a Director of the Company since August 1995. From August 1995 to
December 1997, he served as President of the Company's IRD subsidiary. He
also served as President of Seymour, Inc. from October 1992 until August 1997,
and served as Operations Manager for Seymour, Inc.'s equipment division from
1990 to 1992. Seymour, Inc. manufactures equipment for the food processing
industry. From 1989 to 1990, he was Vice President (with responsibilities in
finance and administration) of George E. Failing Company which was engaged in
the manufacture of drilling equipment. From 1987 until 1989, Mr. Appleby was
Vice President and Chief Financial Officer for Speedstar/AMCA International in
Enid, Oklahoma, which was engaged in the manufacture of drilling equipment.
From 1975 to 1986, he was a Division Manager for Parker Drilling Company, a
large oil well drilling company. Mr. Appleby received a BS/BA degree in
Accounting/Finance from the University of Tulsa in 1975.
STEPHEN J. SKAGGS. Mr. Skaggs has been a Director of the Company since
February 23, 1998. He has been employed by the Company's CIS subsidiary in
<PAGE>
various capacities including nitrogen superintendent, fracturing foreman and
sales representative, for over 12 years. From 1980 to 1985, Mr. Skaggs was
employed by Dowell Schlumberger as a service supervisor for fracturing,
nitrogen and cementing of oil and gas wells.
JEFFREY L. DALE. Mr. Dale has been a Director of the Company since
February 23, 1998. He is currently the Geologist and Operations Manager for
the operations of Verde Oil Company ("Verde") in the State of Kansas. Mr.
Dale has been employed by Verde since 1986 and has supervised the drilling and
completion of 76 wells for that company. He is currently responsible for
operating 346 wells for Verde. Mr. Dale received a B.S. Degree in Geology
from the University of North Dakota in 1986.
The Company's Directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified.
The Officers of the Company are elected by the Board of Directors at the
first meeting after each annual meeting of the Company's shareholders, and
hold office until their death, or until they shall resign or have been removed
from office.
The Company has no compensation or nominating committee, but does have an
audit committee which consists of Jeffrey L. Dale and Don W. Appleby.
The date of the next annual meeting of the Company will be determined by
the Company's Board of Directors in accordance with Colorado law.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's common
stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth information regarding executive
compensation for the Company's President and Chief Executive Officer. No
executive officer received compensation in excess of $100,000 for any of the
years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- ----------------- -------
SECURI-
TIES
RE- UNDERLY-
OTHER STRICT- ING ALL
ANNUAL ED OPTIONS OTHER
NAME AND PRINCIPAL COMPEN- STOCK /SARs LTIP
COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------ ----- ------ -------- -------- ------- ------
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stanton E. Ross, 1998 $70,000 -0- $7,800* -0- 35,000 -0- $-0-
President and 1997 $60,000 -0- $7,800* -0- 150,000 -0- $-0-
Chief Executive 1996 $60,000 -0- $7,800* -0- -0- -0- -0-
Officer
- -----------------
* Represents an automobile allowance.
</TABLE>
OPTION/SAR GRANTS IN FISCAL YEAR ENDED MARCH 31, 1998
PERCENT OF
TOTAL OPTIONS/
OPTIONS/ SARs GRANTED EXERCISE
SARs TO EMPLOYEES OR BASE EXPIRATION
NAME (NUMBER) IN FISCAL YEAR PRICE ($/SH) DATE
---- -------- -------------- ------------ ----------
Stanton E. Ross 35,000 13.8% $2.50 3/8/03
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES
UNDERLYING VALUE OF UNEXER-
SHARES UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- ---------------
Stanton E. Ross -0- -0- 166,668/35,000 $135,877 / $0
Effective February 1, 1992, Stanton E. Ross, the Company's President,
entered into an employment agreement with the Company's subsidiary which
provides for a base salary of $60,000 per year, plus commissions based on
installations of the Company's products which result from the efforts of Mr.
Ross. Commissions of up to 10% of the sales price may be earned by Mr. Ross
under these arrangements. The term of this employment agreement was through
February 1, 1994, but may be automatically extended for additional one year
periods unless either party notifies the other at least 30 days prior to the
expiration date.
Effective May 31, 1995, the Company entered into a consulting agreement
with Don W. Appleby who is now a Director of the Company and served as
President of a subsidiary. The agreement was for a period of two years. This
agreement terminated on December 31, 1997. Mr. Appleby also received certain
stock options in connection with this agreement.
1992 STOCK OPTION PLAN
In February 1992, the Board of Directors adopted a Stock Option Plan (the
"1992 Plan") which was approved by the Company's shareholders in March 1992.
The 1992 Plan allows the Board to grant stock options from time to time to
employees, officers and directors of the Company and consultants to the
Company. The Board has the power to determine at the time the option is
granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. However, Incentive Stock Options will
only be granted to persons who are employees or officers of the Company.
Vesting provisions are determined by the Board at the time options are
<PAGE>
granted. The total number of shares of Common Stock subject to options under
the 1992 Plan may not exceed 833,334, subject to adjustment in the event of
certain recapitalizations, reorganizations and so forth. The option price
must be satisfied by the payment of cash. The Board of Directors may amend
the 1992 Plan at any time, provided that the Board may not amend the 1992 Plan
to materially increase the benefits accruing to participants under the 1992
Plan, or materially change the eligible classes of participants without
shareholder approval.
In April 1995, the Board of Directors granted Incentive Stock Options to
John C. Garrison, Secretary and Director of the Company, to purchase 100,000
shares at $2.00 per share. The options vest as to 25,000 shares on July
15,1995; 25,000 shares on October 24, 1995; 25,000 shares on April 24,1996;
and 25,000 shares upon certain events, which have now occurred. The options
expire five years from the date of vesting.
In August 1995, the Board of Directors granted Non-Qualified Stock
Options to Don W. Appleby, a Director of the Company and former President of
the Company's IRD subsidiary, to purchase up to 100,000 shares of Common Stock
at $2.00 per share. The options vested as to 12,500 shares immediately and as
to an additional 12,500 shares every three months after the date of grant.
The options expire five years from the date of grant.
In November 1996, the Board of Directors granted stock options to Don
Appleby and John Garrison to each purchase 100,000 shares of common stock at a
price of $0.93 per share. These options were fully vested and were exercised
during the year.
In January 1997, the Board of Directors granted stock options to Stanton
Ross, Don Appleby and John Garrison to purchase up to 150,000, 25,000 and
25,000 shares, respectively, of common stock at $1.31 per share. The options
for Mr. Ross vested immediately and the options for Messrs. Appleby and
Garrison vest at a rate of 25% each quarter from the date of grant and expire
five years from the date of grant.
1998 STOCK OPTION PLAN
On March 9, 1998, the Board of Directors adopted the 1998 Stock Option
Plan (the "1998 Plan") which has not yet been approved by the Company's
shareholders. The 1998 Plan allows the Board to grant stock options from time
to time to employees, officers and directors of the Company and consultants to
the Company. The Board has the power to determine at the time the option is
granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. However, Incentive Stock Options will
only be granted to persons who are employees or officers of the Company.
Vesting provisions are determined by the Board at the time options are
granted. The total number of shares of Common Stock subject to options under
the 1998 Plan may not exceed 1,000,000, subject to the adjustment in the event
of certain recapitalizations, reorganizations and so forth. The option price
may be paid in cash, or, at the sole discretion of the Board of Directors, by
other means such as the cancellation of indebtedness and the surrender of
securities of the Company. The Board of Directors may amend the 1998 Plan at
any time, provided that the Board may not amend the 1998 Plan to materially
increase the benefits accruing to participants under the Plan, or materially
change the eligible class of participants without shareholder approval.
On March 9, 1998, the Board of Directors granted options covering an
aggregate of 284,000 shares of Common Stock to employees, officers, directors
and a consultant to the Company. Once the 1998 Plan is approved by the
shareholders, the options will be exercisable at $2.50 and will expire five
<PAGE>
years after the date of grant. Included in these options are non-qualified
options to purchase 10,000 shares each which were granted to Stanton E. Ross,
John C. Garrison, Donald W. Appleby, Jeffrey L. Dale and Stephen J. Skaggs of
which 50% will be fully vested and 50% will vest on March 9, 1999. In
addition, incentive stock options were granted to Stanton E. Ross and John C.
Garrison each to purchase 25,000 shares, and to Stephen J. Skaggs to purchase
10,000 shares. The incentive stock options will vest as to 10% of the shares
on March 9, 1999; as to an additional 20% of the shares on March 9, 2000; as
to an additional 30% of the shares on March 9, 2001; and be fully vested on
March 9, 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of July 10, 1999, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each Officer and Director individually
and all Directors and Officers of the Company as a group. Each person listed
holds sole voting and investment power with respect to the shares shown,
except as noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------- --------------------- --------
<S> <C> <C>
Stanton E. Ross 1,803,285<FN1> 15.3%
211 West 14th Street
Chanute, KS 66720
John C. Garrison 130,000<FN2> 1.1%
7211 High Drive
Prairie Village, KS 66208
Don W. Appleby 100,000<FN3> 0.9%
3701 S.W. 36th
Topeka, KS 66614
Stephen J. Skaggs 842<FN4> --
211 West 14th Street
Chanute, KS 66720
Jeffrey L. Dale -0- --
1027 West 5th
Chanute, KS 66720
All Directors and 2,034,127 17.0%
Executive Officers as
a Group (5 persons)
- ---------------------
<FN>
* Less than 1%.
<FN1>
Includes 166,668 shares which may be purchased within 60 days under stock
options held by Mr. Ross.
<FN2>
Includes 125,000 shares which may be purchased within 60 days under stock
options held by Mr. Garrison.
<FN3>
Represents 100,000 shares which may be purchased within 60 days under stock
options held by Mr. Appleby.
<FN4>
<PAGE>
Includes 600 shares which may be purchased within 60 days under stock options
held by Mr. Skaggs.
</FN>
</TABLE>
There are no known agreements, the operation of which may at a subsequent
date result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Stanton E. Ross, President, Treasurer and a Director of the Company, has
made loans to the Company to provide working capital. As of March 31, 1997,
these amounts totaled $309,968. The notes bear interest at 9%. One note with
a principal amount of $9,968 was due in April 1996 and the other note with a
principal amount of $300,000 is due in June 1998. These loans were repaid in
conjunction with the Company's refinancing of its loans in February 1998.
On April 24, 1995, the Company issued a total of 202,000 shares of its
common stock to three persons for services rendered during the last fiscal
year which were valued at a total of $386,200. These services include
assisting the Company develop its business plan, advice regarding allocation
of funds between the Company's two primary business segments, and
miscellaneous ongoing consulting services. Included among the persons
receiving stock were two 5% shareholders of the Company: Joe Conner who
received 84,000 shares, and Irving Strickstein who received 34,000 shares.
On April 24, 1995, the Company's Board of Directors also approved
granting 800,000 options to three persons who have agreed to serve as an
informal advisory board for the Company. The options are exercisable at $2.00
per share. The persons receiving the options were as follows:
Irving Strickstein 400,000(1)
Joe Conner 200,000
Mitch Fazekas 200,000
- ----------
(1) During the year ended March 31, 1997, the exercise price on 200,000 of
these options was reduced for a short time and Mr. Strickstein transferred
200,000 options to a non-affiliated person who exercised them at a price of
$.9375 per share.
On May 31, 1995, the Company closed on a Loan Agreement with Seymour,
Inc. ("Seymour") pursuant to which Seymour loaned the Company $2,500,000 to be
repaid over three years in accordance with the terms of a promissory note.
The promissory note requires interest only payments for the first six months
of the loan. Commencing January 1, 1996, and for the following thirty (30)
months, the Company must pay $41,503 per month assuming a 10% interest rate.
All unpaid principal and interest will be due on June 1, 1998, and this amount
is expected to be approximately $1,825,100. The promissory note is secured by
certain property, equipment and machinery described in the Security Agreement.
This loan was repaid on February 6, 1998.
In connection with the loan financing, the Company issued to Seymour
warrants to purchase up to 1,250,000 shares of the Company's common stock at
an exercise price of $2.00 per share. The warrants expire 90 days after the
payment of all principal and interest on the promissory note. As a result of
its ownership of the warrants, Seymour is deemed to be a principal shareholder
of the Company. Don W. Appleby, who became a Director of the Company and a
President of a subsidiary of the Company in August 1995, was President of
Seymour until 1997. These warrants expired unexercised on May 6, 1998.
<PAGE>
On February 6, 1998, the Company's CIS subsidiary obtained credit
facility for a total of $4,000,000. This facility provided $2,700,000 of
immediate equipment financing which will be amortized at a rate of $45,000 per
month until maturity at February 6, 2001. In addition, the facility provides
$1,000,000 available for additional equipment purchases and a revolving credit
line based on 80% of current accounts receivable. Interest is payable monthly
at a rate of prime plus 2%. This facility is secured by substantially all
oilfield service equipment and other assets of the CIS subsidiary. Further
security is provided by the personal guaranty of Stanton E. Ross, the
Company's President, of up to $1,000,000, which guaranty is secured by the
pledge of 400,000 shares of the Company's Common Stock held by Mr. Ross.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3 Articles of Incorporation Incorporated by reference to
and Bylaws Exhibit No. 3 to the Registrant's
Registration Statement (No.
33-17416-D)
3.1 Articles of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit No. 3.1 to the Registrant's
Annual Report on Form 10-K for
the fiscal year ended March 31,
1992 (File No. 33-17416-D)
10.1 Stock Option Plan Incorporated by reference to
Exhibit No. 10.1 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.2 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Exhibit No. 10 to Registrant's
Report on Form 8-K dated March
10, 1992
10.4 Employment Agreement Incorporated by reference to
with Stanton E. Ross Exhibit No. 10.4 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.5 Settlement Agreement Incorporated by reference to
and Mutual Release Exhibit No. 10.5 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.6 Asset Purchase Agreement Incorporated by reference to
dated January 7, 1994, Registrant's Current Report on
among Infinity, Inc., Con- Form 8-K dated January 21, 1994
solidated Industrial Ser-
vices, Inc., Consolidated
Oil Well Services,
Inc. and Edsel E. Noland
10.7 Employment Agreement with Incorporated by reference to
Thomas G. Holzbaur Exhibit 10.7 to the Registrant's
Annual Report on Form 10-KSB
for the fiscal year ended March 31,
1994
10.8 Employment Agreement with Incorporated by reference to
Maitland DuBois Exhibit 10.8 to the Registrant's
Annual Report on Form 10-KSB for
<PAGE>
the fiscal year ended March 31,
1994
10.9 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Registrant's Current Report on
with L.D.C. Food Systems, Form 8-K dated December 15, 1993
Inc., et al.
10.10 Employment Agreement with Incorporated by reference to
Louis D. Caracciolo, Jr. Registrant's Current Report on
Form 8-K dated December 15, 1993
10.11 Sublease Agreement on Incorporated by reference to
Lenexa, Kansas facility Exhibit 10.11 to the Registrant's
Annual Report on Form 10-KSB for
the fiscal year ended March 31,
1994
10.12 Loan Agreement dated May 25, Incorporated by reference to
1995, between the Company Exhibit 10.1 to Registrant's
and Seymour, Inc. Current Report on Form 8-K dated
May 31, 1995
10.13 Promissory Note dated Incorporated by reference to
May 25, 1995, payable to Exhibit 10.2 to Registrant's
Seymour, Inc. Current Report on Form 8-K dated
May 31, 1995
10.14 Security Agreement dated Incorporated by reference to
May 25, 1995 Exhibit 10.3 to Registrant's
Current Report on Form 8-K dated
May 31, 1995
10.15 Consulting Agreement with Incorporated by reference to
Don Appleby Exhibit 10.16 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1996
10.16 Agreement with H. Huffman Incorporated by reference to
& Co., et al. Exhibit 10.17 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1996
10.17 Operating Lease with Great Incorporated by reference to
Plains Environmental, Inc. Exhibit 10.17 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1997
10.18 1998 Stock Option Plan Filed herewith electronically
21 Subsidiaries of Registrant Incorporated by reference to
Exhibit 10.17 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1997
22 Consent of Mayer Hoffman Filed herewith electronically
McCann L.C.
<PAGE>
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. None.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
INFINITY, INC.
We have audited the consolidated balance sheet of Infinity, Inc. and
Subsidiaries as of March 31, 1998 and the consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
March 31, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Infinity,
Inc. and Subsidiaries, as of March 31, 1998, and the results of their
operations and their cash flows for the years ended March 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
/s/ Mayer Hoffman McCann L.C.
Kansas City, Missouri
May 1, 1998
F-1
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1998
A S S E T S
CURRENT ASSETS
Cash $ 238,135
Accounts receivable, less allowance for doubtful
accounts, $96,363 281,330
Inventories 188,576
Other current assets 74,258
----------
TOTAL CURRENT ASSETS 782,299
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 4,040,268
OIL AND GAS PROPERTIES, using the full cost method,
less accumulated depreciation, amortization and depletion 4,527,768
INTANGIBLE ASSETS, at cost, less accumulated amortization 235,129
----------
TOTAL ASSETS $9,585,464
==========
L I A B I L I T I E S
CURRENT LIABILITIES
Accounts payable $ 730,664
Accrued expenses 237,195
Current portion of long-term obligations 657,204
Current portion of deferred revenue 90,000
----------
TOTAL CURRENT LIABILITIES 1,715,063
LONG-TERM OBLIGATIONS, less current portion above 2,439,990
----------
TOTAL LIABILITIES 4,155,053
----------
S T O C K H O L D E R S' E Q U I T Y
CAPITAL CONTRIBUTED
Common stock, par value $.0001, authorized 300,000,000
shares, issued and outstanding 11,313,396 shares 1,131
Additional paid-in-capital 9,768,231
----------
TOTAL CAPITAL CONTRIBUTED 9,769,362
RETAINED EARNINGS (DEFICIT) (4,338,951)
----------
TOTAL STOCKHOLDERS' EQUITY 5,430,411
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,585,464
==========
See Notes to Financial Statements.
F-2
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1998 and 1997
1998 1997
---------- ----------
NET SALES $4,805,506 $5,035,338
COST OF SALES 2,645,014 2,670,345
---------- ----------
GROSS PROFIT 2,160,492 2,364,993
OPERATING EXPENSES 2,004,380 2,082,713
---------- ----------
OPERATING INCOME 156,112 282,280
---------- ----------
OTHER INCOME (EXPENSE)
Interest income and finance charges 5,775 7,405
Interest expense (164,162) (135,419)
Gain on disposal of assets -- 24,786
Rent income 92,243 40,795
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (66,144) (62,433)
---------- ----------
INCOME BEFORE INCOME TAXES 89,968 219,847
INCOME TAXES -- --
---------- ----------
NET INCOME $ 89,968 $ 219,847
========== ==========
BASIC EARNINGS PER SHARE $ 0.01 $ 0.02
========== ==========
DILUTED EARNINGS PER SHARE $ 0.01 $ 0.02
========== ==========
See Notes to Financial Statements.
F-3
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED TOTAL
SHARES PAID-IN EARNINGS STOCKHOLDERS'
ISSUED AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31,
1996 8,731,395 $ 873 $7,115,468 $(4,648,766) $2,467,575
Issuance of common
stock 1,129,169 113 812,387 -- 812,500
Net income -- -- -- 219,847 219,847
---------- ------ ---------- ----------- -----------
Balance, March 31,
1997 9,860,564 986 7,927,855 (4,428,919) 3,499,922
Issuance of common
stock 1,452,832 145 1,840,376 -- 1,840,521
Net income -- -- -- 89,968 89,968
---------- ------ ---------- ----------- -----------
Balance, March 31,
1998 11,313,396 $1,131 $9,768,231 $(4,338,951) $ 5,430,411
========== ====== ========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998 and 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 89,968 $ 219,847
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation 638,863 599,079
Amortization 85,425 80,657
Depletion 49,099 --
(Gain) loss on sale of property and
equipment -- (24,786)
Decrease (increase) in operating assets
Accounts receivable 118,944 65,864
Inventories 9,155 11,248
Other current assets (56,038) 5,665
Increase (decrease) in operating liabilities
Accounts payable (263,973) 12,607
Accrued expenses (66,191) (38,910)
Deferred revenue (137,936) (38,272)
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 467,316 892,989
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (367,796) (259,423)
Proceeds from sale of property and equipment -- 70,378
Investment in oil and gas properties (1,553,454) (1,554,803)
Investment in intangible assets (73,698) (57,140)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,994,948) (1,800,988)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of related party note payable (309,968) --
Proceeds from issuance of common stock 1,840,521 812,500
Net change in short-term borrowings (284,000) 284,000
Proceeds from long-term obligations 3,340,837 --
Repayment of long-term obligations (2,874,348) (319,178)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,713,042 777,322
----------- -----------
NET INCREASE (DECREASE) IN CASH 185,410 (130,677)
CASH, BEGINNING OF YEAR 52,725 183,402
----------- -----------
CASH, END OF YEAR $ 238,135 $ 52,725
=========== ===========
See Notes to Financial Statements.
F-5
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998 and 1997
(Continued)
1998 1997
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest, net of amounts
capitalized $ 255,005 $ 104,942
=========== ===========
Noncash investing and financing
activities:
Notes payable issued in exchange for
property and equipment $ 118,651 $ --
=========== ===========
Note payable assumed by lessee of water
treatment facilities $ -- $ 14,870
=========== ===========
Equity investment in unconsolidated
subsidiary $ -- $ 82,545
=========== ===========
Investment in oil and gas properties
through trade accounts payable $ 6,611 $ 461,255
=========== ===========
Investment in oil and gas properties
through transfer of equity invest-
ment in unconsolidated subsidiary $ 82,545 $ --
=========== ===========
Investment in oil and gas properties
acquired with long-term obligations $ 296,131 $ --
=========== ===========
See Notes to Financial Statements.
F-6
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES
NATURE OF OPERATIONS - The Company and its subsidiaries are engaged in
providing oil and gas production enhancement services and oil and gas
exploration, development and production activities, and in leasing water
treatment facilities. The consolidated financial statements include the
accounts of Infinity, Inc. and its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue producing activities are conducted primarily in Kansas, Oklahoma,
Wyoming and Colorado. The Company grants credit to all qualified customers
which potentially subjects the Company to credit risk resulting from, among
other factors, adverse changes in the industries in which the Company operates
and the financial condition of its customers. However, management regularly
monitors its credit relationships and provides adequate allowances for
potential losses.
REVENUE RECOGNITION - Generally, sales are recognized when products are
delivered or services are rendered.
ENVIRONMENTAL COSTS - The Company expenses, on a current basis, recurring
costs associated with managing hazardous substances and pollution in ongoing
operations. The Company also accrues for costs associated with the remediation
of environmental pollution when it becomes probable that a liability has been
incurred and its proportionate share of the amount can be reasonably
estimated.
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that may be particularly sensitive to changes in the near term
relate to the determination of oil and gas reserve quantities used for
purposes of depreciating and depleting costs associated with the development
of oil and gas properties. While management uses available information and
techniques to estimate oil and gas reserve quantities, inherent uncertainties
in, and the limited nature of the data base upon which the estimates are based
may cause these estimates to change materially in the near term.
INVENTORY VALUATION - Inventories, consisting primarily of cement mix, sand,
fuel and chemicals, are stated at the lower of cost or market. Cost has been
determined on the first-in, first-out method. Market is based upon realizable
value less allowance for selling and distribution expenses and normal gross
profit.
OIL AND GAS PROPERTIES - The Company follows the full cost method of
accounting for oil and gas properties. Accordingly, all costs associated with
acquisition, exploration and development of oil and gas reserves, including
directly related overhead costs, are capitalized.
F-7
<PAGE>
<PAGE>
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In addition, the capitalized costs are subject to a ceiling test, which
basically limits such costs to the aggregate of the estimated present value,
discounted at a 10-percent interest rate, of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower
of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas, in which case the gain or loss is recognized
in income. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
GAS GATHERING EQUIPMENT - Gas gathering equipment is stated at cost less
accumulated amortization. Amortization for the gas gathering system is
computed on the unit-of-production method based upon estimated gas production
over a twenty-year life.
CAPITALIZED INTEREST - The Company capitalizes interest on expenditures made
in connection with exploration and development projects that are not subject
to current amortization. Interest is capitalized only for the period that
activities are in progress to bring these projects to their intended use.
Total interest incurred for the years ended March 31, 1998 and 1997 was
$283,189 and $272,869, respectively. Interest costs capitalized were $119,027
and $137,450, respectively.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
Assets Useful Lives
------ ------------
Site improvements 15 years
Machinery, equipment and vehicles 5 - 10 years
Office furniture and equipment 5 - 10 years
Technical data and rights 5 years
Organization and merger costs 5 years
Non-compete agreement 5 years
Loan costs Loan term
Goodwill 20 years
INTANGIBLE ASSETS - Technical data and rights consist of certain legal fees
incurred in connection with the Company's "Thin Film Electrocoagulation"
technology to be used in the treatment of waste water, and "Chiller Loop"
technology to be used in the food processing industry. The carrying values of
these assets are periodically reviewed by the Company and impairments are
recognized when the expected future operating cash flows derived from such
intangible assets is less than their carrying value.
F-8
<PAGE>
<PAGE>
Organization and merger costs consist of costs incurred in connection with
acquisitions accounted for as a purchase. Costs incurred in connection with
acquisitions accounted for as pooling-of-interests have been expensed.
PUBLIC OFFERING COSTS - Costs and expenses incurred in connection with a
public offering of securities are deferred until the offering is complete, at
which time, such costs are charged against the proceeds of the offering as a
reduction of stockholders' equity. Costs incurred in connection with failed
public offerings are charged to operations.
DEFERRED REVENUE - Deferred revenue represents credits for future oil well
services granted to a stockholder of the Company in connection with an
acquisition. Revenues from these services are recognized when the services are
performed. The credits are scheduled to expire in January 1999 if not used
prior to that date.
PER SHARE INFORMATION - The computation of earnings per share in each year is
based on the weighted average number of common shares outstanding.
CASH - For purposes of reporting cash flows, cash generally consists of cash
on hand and demand deposits with financial institutions. At times, the Company
maintains deposits in financial institutions in excess of federally insured
limits. Management monitors the soundness of the financial institutions and
feels the Company's risk is negligible.
INCOME TAXES - The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes" which requires the use of the
"liability method". Accordingly, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
(2) PROPERTY AND EQUIPMENT
Cost
Site improvements $ 2,103,158
Machinery, equipment and vehicles 4,172,681
Office furniture and equipment 110,944
-----------
Total cost 6,386,783
Accumulated depreciation (2,346,515)
-----------
Net property and equipment $ 4,040,268
===========
The cost of property and equipment leased to others under operating leases at
March 31, 1998 totaled $1,318,569. Accumulated depreciation on such equipment
was $429,309 at March 31, 1998.
{3) OIL AND GAS PROPERTIES
Cost
Acquisition costs $ 291,401
Development costs 3,334,285
Gas gathering equipment 951,181
-----------
Total cost 4,576,867
F-9
<PAGE>
<PAGE>
Accumulated depreciation, amortization
and depletion (49,099)
-----------
Net oil and gas properties $ 4,527,768
===========
Included in the oil and gas properties is leased equipment, with a cost of
$294,957 and accumulated depreciation, amortization and depletion of $1,495,
as of March 31, 1998.
The lease agreements require certain drilling activity to retain the Company's
interest in the leases. Under one of the leases, the Company is committed to
drill ten wells before December 31, 1998 and ten additional wells during each
of the subsequent two years to earn the right to develop the entire acreage.
As of March 31, 1998, thirty production wells had been drilled. Under the
second lease, the Company is committed to drill ten wells in each of the first
two years and twenty wells during the third year to maintain the rights to
develop the property.
Recovery of the above acquisition and development costs is dependent on a
variety of factors, including actual production results and market conditions.
(4) INTANGIBLE ASSETS
Cost
Technical data and rights $ 15,883
Organization and merger costs 74,603
Non-compete agreement 300,000
Loan costs 145,208
Goodwill 25,000
-----------
Total cost 560,694
Accumulated amortization (325,565)
-----------
Net intangible assets $ 235,129
===========
(5) LONG-TERM OBLIGATIONS
Term note; payable in monthly principal installments of
$45,000 plus interest of 2% above prime until maturity,
February 2001; collateralized by substantially all of
the assets of the Company's wholly owned subsidiary,
Consolidated Industrial Services, Inc. The loan agreement
contains, among other items, certain restrictive covenants
with respect to dividends, acquisitions and capital expen-
ditures. In connection with the loan agreement, the Com-
pany issued a three-year warrant to the lender to purchase
up to 150,000 shares of the Company's common stock at $2.50
per share. Additionally, the lender has made available a
$1,000,000 credit facility for future equipment purchases. $ 2,655,000
Various fixed rate notes collateralized by Company vehicles
with interest rates ranging from 8.75% to 10.5%. Payable in
monthly installments of principal and interest, with final
payments due between January 2001 and November 2002. 132,738
F-10
<PAGE>
<PAGE>
Revolving credit note collateralized by eligible accounts
receivable, equipment and capital expenditures. Interest
only payable monthly at 2.0% above prime, with principal
due February 2001. 37,185
-----------
Total long-term debt 2,824,923
Capitalized lease obligations described in the following
section. 272,271
-----------
Total long-term obligations 3,097,194
Less Current portion 657,204
-----------
Non-Current portion $ 2,439,990
===========
Maturities for long-term debt are as follows:
Years Ending March 31,
- ----------------------
1999 $ 609,159
2000 575,936
2001 1,610,524
2002 16,673
2003 12,631
----------
Total long-term debt $2,824,923
==========
Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments are as follows:
Years Ending March 31,
- ----------------------
1999 $ 75,620
2000 75,620
2001 75,620
2002 75,620
2003 46,443
----------
Net minimum lease payments 348,923
Less: amount of representing
interest 76,652
----------
Present value of net minimum lease
payments $ 272,271
==========
F-11
<PAGE>
<PAGE>
(6) OPERATING LEASES
The Company leases operating facilities under operating leases. The future
minimum rental payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year are as follows:
Years Ending March 31, Total
- ---------------------- ----------
1999 $ 54,708
2000 56,508
2001 51,540
2002 29,400
2003 16,200
Later Years 24,300
----------
Total $ 232,656
==========
The operating lease for certain real estate provides the Company with the
option to extend the lease for a five-year period and to purchase the leased
properties for $496,135 during the lease term.
Total rent expense for all operating leases was $66,008 and $63,329 for the
years ended March 31, 1998 and 1997, respectively.
The Company is a lessor of its water treatment facilities under an operating
lease which expires in 2001 with options to extend for additional two and
seven year periods. Additionally, the lessee has the right to exercise a
purchase option at the end of the initial five year period or at the end of
each of the two extension periods. Minimum rentals receivable under existing
leases as of March 31, 1998 are as follows:
Years Ending March 31, Total
- ---------------------- ----------
1999 $ 80,000
2000 80,000
2001 80,000
2002 60,000
----------
Total $ 300,000
==========
Total rental income was $92,243 and $40,795 for the years ended March 31, 1998
and 1997, respectively.
(7) COMMON STOCK
WARRANTS - The Company, in conjunction with a 1988 public stock offering,
issued Class A, Class B and underwriter warrants to purchase 851,834 shares of
Infinity common stock. Under the terms of the warrant agreements, the Class A
warrants are subject to redemption by the Company, upon thirty days notice, at
a price of $.01 per warrant. The Class B warrants are subject to redemption by
the Company, upon thirty days notice, at a price of $.02 per warrant. During
F-12
<PAGE>
<PAGE>
the year ended March 31, 1998, 398,400 Class A and underwriter warrants were
exercised and 47,834 expired. Additionally, 833 Class B warrants were
exercised. The remaining Class B warrants expire on September 30, 1998.
The Company issued warrants in conjunction with the 1995 10% financing, to
purchase 1,250,000 shares of common stock (Seymour warrants). The warrants
expired in May 1998, 90 days after repayment of all principal and interest due
on the 10% note.
The Company issued Class C warrants to purchase 766,668 shares of Infinity
common stock in conjunction with stock issuances during the year ended March
31, 1996. During the year ended March 31, 1997, 725,001 warrants were
exercised. The remaining warrants expire on December 31, 1998.
The Company issued warrants to purchase 900,000 shares of Infinity common
stock during the year ended March 31, 1997 (1997 warrants). During the year
ended March 31, 1998, 700,000 warrants were exercised. The remaining warrants
expire August 1, 2001
During the year ended March 31, 1998, in conjunction with the 1998 financing
(see Note (5)), the Company issued warrants to purchase 150,000 shares of
Infinity common stock. The warrants expire on December 15, 2000.
At March 31, 1998, the following warrants were outstanding.
Number Number Exercise
Class of Warrants of Shares Price
- ----- ----------- --------- --------
B 4,858,000 404,834 $3.00
C 41,667 41,667 $0.60
Seymour warrants (expired May
1998 unexercised) 1,250,000 1,250,000 $2.00
1997 Warrants 200,000 200,000 $0.88
1998 Warrants 150,000 150,000 $2.50
OPTIONS - In 1992, the Company adopted a stock option plan containing both
incentive and nonstatutory stock options. All options allow for the purchase
of common stock at prices not less than the fair market value of such stock at
the date of grant. The option price under the incentive stock option
provisions of the plan if the optionee owns more than 10% of the total
combined voting power of all classes of the Company's stock will not be less
than 110% of the fair market value of such stock at the date of grant. Options
granted under the plan become exercisable immediately or as directed by the
Board of Directors and generally expire ten years after the date of grant,
unless the employee owns more than 10% of the total combined voting power of
all classes of the Company's stock, in which case they must be exercised
within five years of the date of grant. Pursuant to the plan, an aggregate of
833,333 shares of common stock is available for issuance upon the exercise of
such options. At March 31, 1998, options to purchase 4,990 shares were
available for grant under the plan. A summary of stock option activity is as
follows:
F-13
<PAGE>
<PAGE>
Weighted
Number of Option Price Average Price
Shares Per Share Per Share
----------- ------------ -------------
Outstanding, March 31, 1996 1,837,507 $0.60-$6.00 $ 2.09
Granted 420,000 0.94- 1.31 1.13
Canceled (166,670) 1.20- 6.00 3.60
Exercised (404,167) 0.60- 2.00 1.46
--------- ----------- ------
Outstanding, March 31, 1997 1,686,670 $0.66-$3.84 $ 1.85
Granted 434,000 2.38- 2.50 2.46
Canceled (8,400) 0.85 0.85
Exercised (3,600) 0.85 0.85
--------- ----------- ------
Outstanding, March 31, 1998 2,108,670 $0.66-$3.84 $ 1.98
========= =========== ======
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/98 Life Price at 3/31/98 Price
- ---------- ----------- ----------- -------- ----------- --------
$0.66-3.84 1,216,670 1 year 1.96 1,216,670 1.96
2.38 150,000 2 years 2.38 150,000 2.38
0.85-2.00 238,000 3 years 1.82 361,400 1.82
1.31 220,000 4 years 1.31 205,000 1.31
2.50 284,000 5 years 2.50 -0- 2.50
--------- ---------
2,108,670 1,783,070
========= =========
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for the stock
option plan. Had compensation costs for the Company's plan been determined
based upon the fair value at the grant date for awards under the plan
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earnings (loss) per share would have been
respectively, $(92,878) and $(0.01) for the year ended March 31, 1998 and $833
and $0 for the year ended March 31, 1997.
For options granted during the year ended March 31, 1998, the estimated fair
value of the options granted utilizing the Black-Scholes pricing model under
the Company's plan was based on a weighted average risk-free interest rate of
5.68%, expected option life of 3.99 years, expected volatility of 34.00% and
no expected dividend yield. For options granted during the year ended March
31, 1997, the estimated fair value of options granted under the Company's plan
was based on a weighted average risk-free interest rate of 6.75%, expected
option life of 3.68 years, expected volatility of 48.25% and no expected
dividend yield.
F-14
<PAGE>
<PAGE>
EMPLOYEE STOCK BONUS PLAN - The Company may award shares of common stock to
employees at the discretion of the Board of Directors. Pursuant to the plan,
an aggregate of 50,000 shares of common stock were initially available for
issuance. As of March 31, 1998, 40,000 shares of common stock were available
for issuance to employees.
(8) INCOME TAXES
The provision for income taxes for the years ended March 31, 1998 and 1997
consists of the following:
1998 1997
--------- ----------
Current income tax expense $ - $ -
Deferred income tax expense (benefit) 42,787 85,409
Change in deferred tax asset valuation
allowance (42,787) (85,409)
--------- ---------
Total income taxes $ - $ -
========= =========
The effective income tax rate varies from the statutory federal income tax
rate as follows:
1998 1997
--------- ----------
Federal income tax rate 34% 34%
Net operating losses for which no
tax benefit is currently available (34%) (34%)
---- ----
Effective tax rate -% -%
==== ====
The significant temporary differences and carryforwards and their related
deferred tax asset (liability) and deferred tax asset valuation allowance
balances as of March 31, 1998 are as follows:
Deferred tax debits:
Accounts receivable $ 32,763
Net operating loss carryforward 2,801,819
-----------
Gross deferred tax debits 2,834,582
-----------
Deferred tax credits:
Property and equipment (500,002)
Intangible drilling costs (857,698)
-----------
Gross deferred tax credits (1,357,700)
-----------
Deferred tax asset valuation allowance (1,476,882)
-----------
Total deferred taxes $ -
===========
No deferred income taxes have been recognized in the accompanying financial
statements due to uncertainties in connection with the realization of the
potential tax benefits associated with the net operating loss carryforwards.
F-15
<PAGE>
<PAGE>
For Federal income tax purposes, the Company has tax carryforwards expiring in
the following manner:
Net operating
losses expiring
March 31,
- ---------------
2004 $ 48,737
2005 36,931
2006 111,341
2007 20,382
2008 331,374
2009 852,463
2010 2,193,217
2011 2,225,708
2012 1,177,511
2013 1,242,981
----------
$8,240,645
==========
The availability of the net operating loss carryforwards for Federal income
tax purposes may be limited pursuant to provisions of the Internal Revenue
Code as amended by the Tax Reform Act of 1986. The potential limitation is
dependent on changes in stock ownership while a net operating loss exists, the
fair market value of the Company's stock at the date of stock ownership
changes and certain other factors.
(9) RETIREMENT PLAN
The Company's wholly-owned subsidiary, Consolidated Industrial Services, Inc.,
has a 401(k) plan covering substantially all of its employees. There were no
Company contributions made to the plan during the years ended March 31, 1998
and 1997.
(10) RELATED PARTY TRANSACTIONS
Consolidated Oil Well Services, Inc. (COWS) is owned by a minority stockholder
of Infinity, Inc. In connection with the Company's acquisition of COWS assets
in 1994, the Company is obligated to provide certain oil well services to this
stockholder. During the years ended March 31, 1998 and 1997, the fair value of
such services provided to the stockholder was $34,543 and $35,507,
respectively.
The Company leases certain real estate from COWS. The related amount charged
to operations for the years ended March 31, 1998 and 1997 was $42,408 and
$42,408, respectively.
During the year ended March 31, 1998, the Company repaid an unsecured note
payable to an officer and stockholder of the Company totaling $309,968.
Concurrent with this repayment, this officer and stockholder guaranteed
$1,000,000 of the Company's current outstanding note payable, which is
collateralized by 400,000 shares of his common stock in the Company.
During the year ended March 31, 1998, the Company exchanged its 10% equity
interest in a related entity and a related note receivable, for well
development costs associated with the oil and gas properties.
F-16
<PAGE>
<PAGE>
(11) INDUSTRY SEGMENTS
The Company's operations have been classified into three industry segments:
(i) Oil Field Services which includes operations in Kansas, Oklahoma and
Colorado directed at maintaining and enhancing production obtained from oil
and gas wells; (ii) Oil and Gas Production which includes exploration,
development and production of oil and gas reserves in Colorado; and (iii)
Environmental Technology which includes development and application of
wastewater treatment technologies including "electrocoagulation" and "chiller
loop" technologies and disposal of solid waste byproducts. Operations are
conducted primarily in Wyoming and Kansas. Operating income (loss) represents
net sales less direct costs and operating expenses before interest and finance
charges. Identifiable assets consist of assets specifically used in the
operations of each industry segment. Information concerning the Company's
industry segments in fiscal 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Environ-
Oil Field Oil & Gas mental
Services Production Technology Corporate Consolidated
--------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales
1998 $4,411,131 $ 299,375 $ 95,000 $ - $ 4,805,506
1997 4,688,793 - 346,545 - 5,035,338
Operating Income
(Loss)
1998 742,044 (205,744) (120,819) (259,369) 156,112
1997 692,780 - (136,209) (274,291) 282,280
Identifiable
Assets, Net
1998 3,891,463 4,553,579 913,925 226,498 9,585,465
1997 3,878,901 2,771,718 1,144,982 33,560 7,829,161
Capital
Expenditures
1998 484,449 1,896,291 - 2,000 2,382,740
1997 256,695 2,007,697 2,728 - 2,267,120
Depreciation and
Amortization
1998 543,570 49,099 168,629 12,089 773,387
1997 496,147 - 171,500 12,089 679,736
</TABLE>
(12) SIGNIFICANT CUSTOMERS
During the years ended March 31, 1998 and 1997, the Company provided services
to Stroud Oil Properties resulting in revenues of $501,134 and $646,488 which
represents 10% and 13% of the Company's net sales, respectively. Receivables
outstanding from these sales were not material at March 31, 1998.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure about the fair value of
financial instruments for which it is practicable to estimate fair value. The
F-17
<PAGE>
<PAGE>
following assumptions were used in estimating the fair value of the Company's
financial instruments.
The carrying amount of the Company's cash balances represent fair value as of
March 31, 1998. The fair value of the Company's long-term debt is estimated
based on the present value of estimated future cash flows using a discount
rate commensurate with the risks involved. However, the estimated fair value
was not materially different from the carrying amount at March 31, 1998.
(14) EARNINGS PER SHARE
Earnings per share has been computed in accordance with Financial Accounting
Standards Board Statement No, 128 (SFAS No. 128). This Statement, which is
effective for periods ending after December 15, 1997, requires disclosure of
basic earnings per share and diluted earnings per share, and also requires
restatement of earnings per share data for prior periods. Basic earnings per
share was computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the periods. Diluted
earnings per share reflects the potential dilution that could occur if stock
options and warrants were converted into common stock under the treasury stock
method.
The following shows the amounts used in computing earnings per share and the
effects on income and the weighted average number of shares of dilutive
potential common stock. The earnings per share information for 1997 has been
restated from the amounts previously reported to comply with SFAS No 128.
Weighted
Average
Common
Income Shares Earnings
1998 Numerator Denominator Per Share
---- --------- ----------- ---------
Basic earnings per share:
Income available to common
shareholders $89,968 10,514,295 $0.01
=====
Plus: Impact of assumed con-
versions of warrants and
options - 729,378
------- ----------
Diluted earnings per share:
Income available to common
shareholders after assumed
conversions of dilutive
securities $89,968 11,243,673 $0.01
=====
F-18
<PAGE>
<PAGE>
Weighted
Average
Common
Income Shares Earnings
1997 Numerator Denominator Per Share
---- --------- ----------- ---------
Basic earnings per share:
Income available to common
shareholders $219,847 8,915,163 $0.02
=====
Plus: Impact of assumed con-
versions of warrants and
options - 450,194
-------- ---------
Diluted earnings per share:
Income available to common
shareholders after assumed
conversions of dilutive
securities $219,847 9,365,357 $0.02
=====
For the years ended March 31, 1998 and 1997, common stock equivalents of
850,669 and 3,357,169 were not included in the computation of diluted earnings
per share because their effect was antidilutive.
(15) LITIGATION
The Company is involved in several legal matters which have arisen during the
normal course of the Company's business, wherein the outcome is not readily
determinable. Management has accrued estimates for these matters and feels
that additional losses, if any, from such matters would not have a material
impact on the Company's financial statements.
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS
No. 131 defines operating segments as components of a company about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
F-19
<PAGE>
<PAGE>
Both SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
they may have on future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
F-20
<PAGE>
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (UNAUDITED)
Year Ended March 31, 1998
Capitalized Costs Relating to Oil and
Gas Producing Activities at March 31, 1998
- ------------------------------------------
Unproved oil and gas properties $ -
Proved oil and gas properties 3,625,686
Support equipment and facilities 951,181
----------
Total Capitalized Costs 4,576,867
Less accumulated depreciation,
depletion and amortization 49,099
----------
Net capitalized costs $4,527,768
==========
Costs Incurred in Oil and Gas Producing
Activities for the Year Ended March 31, 1998
- --------------------------------------------
Property acquisition costs
Proved $ 141,401
Unproved -
Exploration costs -
Development costs 1,754,890
Results of Operations for Oil and
Gas Producing Activities for the
Year Ended March 31, 1998
- ---------------------------------
The Company is currently conducting oil and gas exploration and development
activities in Southeastern Colorado. During the year ended March 31, 1998, the
Company has commenced production from its oil and gas properties.
Reserve Information
- -------------------
The following estimates of proved and proved developed reserve quantities and
related standardized measures of discounted net cash flow are estimates only,
and do not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise. Accordingly, these estimates are expected to change as
future information becomes available. All of the Company's reserves are
located in the United States.
Proved reserves are estimated reserves of methane gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment, and operating methods.
F-21
<PAGE>
<PAGE>
The standardized measure of discounted future net cash flows is computed by
applying year-end prices (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on year-end
statutory tax rates, with consideration for future tax rates already
legislated) to be incurred on pre-tax net cash flows less tax basis of the
properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10 percent a year to reflect the estimated timing of the
future cash flows.
Proved Developed and Undeveloped Reserves Gas (MCF)
- ----------------------------------------- ----------
Beginning of year 33,924,065
Revisions of previous estimates (2,434,619)
Extensions and discoveries 7,790,942
Production (204,989)
----------
End of year 39,075,399
==========
Proved Developed Reserves
- -------------------------
Beginning of year 19,199,035
End of year 24,363,493
Standardized Measure of Discontinued
Future Net Cash Flows at March 31, 1998
- ---------------------------------------
Future cash inflows $67,600,299
Future production costs including production taxes (29,000,173)
Future development costs (4,759,800)
-----------
Future Net Cash Flows 33,840,326
10% annual discount for estimated timing of cash flows (21,454,803)
-----------
Standardized Measures of Discounted
Future Net Cash Flows Relating to
Proved Oil and Gas Reserves $12,385,523
===========
The following reconciles the change in the standardized measure of
discontinued future net cash flow during the year ended March 31, 1998:
Beginning of year $11,876,202
Sales of gas produced, net of production costs -
Net changes in prices and production costs 4,030,124
Extensions, discoveries, and improved recovery,
less related costs 9,659,579
F-22
<PAGE>
<PAGE>
Development costs incurred during the year which
were previously estimated 1,560,000
Net change in estimated future development costs (4,460,000)
Revisions of previous quantity estimates (5,869,548)
Net change from purchases and sales of minerals in
place -
Accretion of discount (4,411,357)
Net change in income taxes -
Other -
-----------
End of year $12,385,000
===========
F-23
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFINITY, INC.
Dated: July 16, 1998 By:/s/ Stanton E. Ross
Stanton E. Ross, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the company
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Stanton E. Ross President, Treasurer, July 16, 1998
Stanton E. Ross (Principal Financial
Officer) and Director
/s/ John C. Garrison Secretary (Principal July 16, 1998
John C. Garrison Accounting Officer)
and Director
______________________________ Director
Don W. Appleby
/s/ Stephen J. Skaggs Director July 16, 1998
Stephen J. Skaggs
/s/ Jeffery L. Dale Director July 16, 1998
Jeffrey L. Dale
EXHIBIT 10.18
INFINITY, INC.
1998 STOCK OPTION PLAN
1,000,000 SHARES
This Stock Option Plan was adopted this 9th day of March 1998, by
Infinity, Inc., a Colorado corporation, upon the following terms and
conditions:
1. Definitions. Except as otherwise expressly provided in this Plan,
the following capitalized terms shall have the respective meanings hereafter
ascribed to them:
(a) "Board" shall mean the Board of Directors of the Corporation;
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended;
(c) "Consultant" shall mean a person who provides services to the
Corporation as an independent contractor;
(d) "Corporation" means Infinity, Inc. and each and all of any
present and future subsidiaries;
(e) "Date of Grant" shall mean, for each participant in the Plan,
the date on which the Board approves the specific grant of stock options to
that participant;
(f) "Employee" shall be an employee of the Corporation or any
subsidiary of the Corporation;
(g) "Grantee" shall mean the recipient of an Incentive Stock Option
or a Non-statutory Option under the Plan;
(h) "Incentive Stock Option" shall refer to a stock option which
qualifies under Section 422 of the Code.
(j) "Non-statutory Option" shall mean an option which is not an
Incentive Stock Option.
(k) "Shares" shall mean the Corporation's common stock, $.0001 par
value;
(l) "Shareholders" shall mean owners of record of any Shares.
2. Purpose. The purpose of this Stock Option Plan (the "Plan") is
two-fold. First, the Plan will further the interests of the Corporation and
its shareholders by providing incentives in the form of stock options to
employees who contribute materially to the success and profitability of the
Corporation. Such stock options will be granted to recognize and reward
outstanding individual performances and contributions and will give selected
employees an interest in the Corporation parallel to that of the shareholders,
thus enhancing their proprietary interest in the Corporation's continued
success and progress. This program also will enable the Corporation to
attract and retain experienced employees. Second, the Plan will provide the
Corporation flexibility and the means to reward directors and consultants who
render valuable contributions to the Corporation.
<PAGE>
3. Administration. This Plan will be administered by the Board. The
Board has the exclusive power to select the participants in this Plan, fix the
awards to each participant, and make all other determinations necessary or
advisable under the Plan, to determine whether the performance of an eligible
employee warrants an award under this Plan, and to determine the amount and
duration of the award. The Board has full and exclusive power to construe and
interpret this Plan, to prescribe, amend and rescind rules and regulations
relating to this Plan, and to take all actions necessary or advisable for this
Plan's administration. The Board shall have full power and authority to
determine, and at the time such option is granted shall clearly set forth,
whether the option shall be an Incentive Stock Option or a Non-statutory
Option. Any such determination made by the Board will be final and binding
on all persons. A member of the Board will not be liable for performing any
act or making any determination required by or pursuant to the Plan, if such
act or determination is made in good faith. The Board has the authority to
set up a committee of directors to administer the Plan and to delegate
whichever of the above powers it determines.
4. Participants. Any employee, officer, director or consultant that the
Board, in its sole discretion, designates is eligible to participate in this
Plan. However, only employees of the Corporation shall be eligible to receive
grants of Incentive Stock Options. The Board's designation of a person as a
participant in any year does not require the Board to designate that person to
receive an award under this Plan in any other year or, if so designated, to
receive the same award as any other participant in any year. The Board may
consider such factors as it deems pertinent in selecting participants and in
determining the amount of their respective awards, including, but without
being limited to: (a) the financial condition of the Corporation; (b) expected
profits for the current or future years; (c) the contributions of a
prospective participant to the profitability and success of the Corporation;
and (d) the adequacy of the prospective participant's other compensation. The
Board, in its discretion, may grant benefits to a participant under this Plan,
even though stock, stock options, stock appreciation rights or other benefits
previously were granted to him under this or another plan of the Corporation,
whether or not the previously granted benefits have been exercised, but the
participant may hold such options only on the terms and subject to the
restrictions hereafter set forth. Subject to the foregoing limitation, a
person who has participated in another benefit plan of the Corporation may
also participate in this Plan.
5. Kinds of Benefits. Awards under this Plan, if any, will be granted
in options to acquire Shares as described below.
6. Options; Expiration; Limitations. Any Incentive Stock Option granted
under this Plan shall automatically expire ten years after the Date of Grant
or at such earlier time as may be described in Article 9 or directed by the
Board in the grant of the option. Notwithstanding the preceding sentence, no
Incentive Stock Option granted to a Shareholder who owns, as of the Date of
Grant, stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Corporation shall, in any event, be
exercisable after the expiration of five years from the Date of Grant. For
the purpose of determining under any provision of this Plan whether a
shareholder owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Corporation, such Shareholder
shall be considered as owning the stock owned, directly or indirectly, by or
for his brothers and sisters (whether by the whole or half blood), spouse,
ancestors and lineal descendants, and stock owned, directly or indirectly, by
or for a corporation, partnership, estate or trust shall be considered as
being owned proportionately by or for its shareholders, partners or
beneficiaries.
<PAGE>
Upon the exercise of an option, the Corporation shall deliver to the
participant certificates representing authorized but unissued Shares. The
cumulative total number of shares which may be subject to options issued and
outstanding pursuant to this Plan is limited to 1,000,000 shares. This amount
automatically will be adjusted in accordance with Article 21 of this Plan. If
an option is terminated, in whole or in part, for any reason other than its
exercise, the Board may reallocate the shares subject to that option (or to
the part thereof so terminated) to one or more other options to be granted
under this Plan.
7. Option Exercise Price. Each option shall state the option price,
which shall be not less than 100% of the fair market value of the Shares on
the Date of Grant or the par value thereof whichever is greater.
Notwithstanding the preceding sentence, in the case of a grant of an Incentive
Stock Option to an employee who, as of the Date of Grant, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation or its Parent or Subsidiaries, the option
price shall not be less than 110% of the fair market value of the Shares on
the Date of Grant or the par value thereof, whichever is greater.
During such time as the Shares are not traded in any securities market,
the fair market value per share shall be determined by a good faith effort of
the Board, using its best efforts and judgment. During such time as the
Shares are traded in a securities market but not listed upon an established
stock exchange, the fair market value per share shall be the highest closing
bid price in the securities market in which it is traded on the Date of Grant,
as reported by the National Association of Securities Dealers, Inc. If the
Shares are listed upon an established stock exchange or exchanges such fair
market value shall be deemed to be the highest closing price on such stock
exchange or exchanges on the Date of Grant, or if no sale of any Shares shall
have been made on any stock exchange on that day, on the next preceding day on
which there was such a sale. Subject to the foregoing, the Board shall have
full authority and discretion in fixing the option price and shall be fully
protected in doing so.
8. Maximum Option Exercise. The aggregate fair market value (determined
as of the Date of Grant) of the stock with respect to which Incentive Stock
Options are exercisable for the first time by a grantee during any calendar
year (under all such plans of the Corporation and its parent or subsidiary, if
any) shall not exceed $100,000. For purposes of this Article 8, the value of
stock acquired through the exercise of Non-statutory Options shall not be
included in the computation of the aggregate fair market value.
9. Exercise of Options.
(a) No stock option granted under this Plan may be exercised before
the Grantee's completion of such period of services as may be specified by the
Board on the Date of Grant. Furthermore, the timing of the exercise of any
option granted under this Plan may be subject to a vesting schedule based upon
years of service or an expiration schedule as may be specified by the Board on
the Date of Grant. Thereafter, or if no such period is specified subject to
the provisions of subsections (c), (d), (e), (f) and (g) of this Article 9,
the Grantee may exercise the option in full or in part at any time until
expiration of the option.
A Grantee cannot exercise an Incentive Stock Option granted under
this Plan unless, at the time of exercise, he has been continuously employed
by the Corporation since the date the option was granted. The Board may
decide in each case to what extent bona fide leaves of absence for illness,
temporary disability, government or military service, or other reasons will
not be deemed to interrupt continuous employment.
<PAGE>
(b) Unless an Option specifically provides to the contrary, all
options granted under this Plan shall immediately become exercisable in full
in the event of the consummation of any of the following transactions:
(i) A merger or acquisition in which the Corporation is not
the surviving entity;
(ii) The sale, transfer or other disposition of all or
substantially all of the assets of the Corporation; or
(iii) Any merger in which the Corporation is the surviving
entity but in which fifty percent (50%) or more of the Corporation's
outstanding voting stock is issued to holders different from those who held
the stock immediately prior to such merger.
(c) Except as provided in subsections (d), (e) and (f) of this
Article 9, a Grantee cannot exercise an Incentive Stock Option after he ceases
to be an employee of the Corporation, unless the Board, in its sole
discretion, grants the recipient an extension of time to exercise the
Incentive Stock Option after cessation of employment. The extension of time
of exercise that may be granted by the Board under this subsection (c) shall
not exceed three months after the date on which the Grantee ceases to be an
employee and in no case shall extend beyond the stated expiration date of the
option.
(d) If the employment of a Grantee is terminated by the Corporation
for a cause as defined in subsection (i) of this Article 9, all rights to any
stock option granted under this Plan shall terminate, including but not
limited to the ability to exercise such stock options.
(e) If a Grantee ceases to be an employee as a result of
retirement, he may exercise the Incentive Stock Option within three months
after the date on which he ceases to be an employee (but no later than the
stated expiration date of the option) to the extent that the Incentive Stock
Option was exercisable when he ceased to be an employee. An employee shall be
regarded as retired if he terminates employment after his sixty-fifth
birthday.
(f) If a Grantee ceases to be an employee because of disability
(within the meaning of Section 105(d)(4) of the Code), or if a Grantee dies,
and if at the time of the Grantee's disability or death he was entitled to
exercise an Incentive Stock Option granted under this Plan, the Incentive
Stock Option can be exercised within 12 months after his death or termination
of employment on account of disability (but no later than the stated
expiration date of the option), by the Grantee in the case of disability or,
in case of death, by his personal representative, estate or the person who
acquired by gift, bequest or inheritance his right to exercise the Incentive
Stock Option. Such options can be exercised only as to the number of shares
for which they could have been exercised at the time the Grantee died or
became disabled.
(g) With respect to Non-statutory Options granted to Board members,
the Board may provide on the Date of the Grant that such options will expire a
specified number of days after such Board member ceases to be a member of the
Board. In the absence of any such provision, the option will expire on the
stated expiration date of the option.
(h) Any stock option granted under the Plan will terminate, as a
whole or in part, to the extent that, in accordance with this Article 9, it no
longer can be exercised.
<PAGE>
(i) For purposes of this Article 9, "cause" shall mean the
following:
(1) Fraud or criminal misconduct;
(2) Gross negligence;
(3) Willful or continuing disregard for the safety or
soundness of the Corporation;
(4) Willful or continuing violation of the published rules of
the Corporation.
10. Exercise of Options.
10.1 Notice. Options may be exercised only by delivery to the
Corporation of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Board (which need not be the same for
each Grantee), stating the number of shares being purchased, the restrictions
imposed on the shares, if any, and such representations and agreements
regarding Grantee's investment intent and access to information, if any, as
may be required by the Corporation to comply with applicable securities laws,
together with payment in full of the exercise price for the number of Shares
being purchased.
10.2 Payment. Payment for the shares may be made in cash (by
check) or, where approved by the Board in its sole discretion and where
permitted by law: (a) by cancellation of indebtedness of the Corporation to
the Grantee; (b) by surrender of shares of common stock of the Corporation
having a Fair Market Value equal to the applicable exercise price of the
Option that have been owned by Grantee for more than six months (and which
have been paid for within the meaning of the Securities and Exchange
Commission ("SEC") Rule 144 and, if such shares were purchased from the
Corporation by use of a promissory note, such note has been fully paid with
respect to such shares), or were obtained by Grantee in the open public
market; (c) by waiver of compensation due or accrued to Grantee for services
rendered; (d) provided that a public market for the Corporation's stock
exists, through a "same day sale" commitment from Grantee and a broker-dealer
that is a member of the National Association of Securities Dealers (an "NASD
Dealer") whereby Grantee irrevocably elects to exercise the Option and to sell
a portion of the shares so purchased to pay for the exercise price and
whereby the NASD Dealer irrevocably commits upon receipt of such shares to
forward the exercise price directly to the Corporation; (e) provided that a
public market for the Corporation's stock exists, through a "margin"
commitment from Grantee and an NASD Dealer whereby Grantee irrevocably elects
to exercise the Option and to pledge the shares so purchased to the NASD
Dealer in a margin account as security for a loan from the NASD Dealer in the
amount of the exercise price, and whereby the NASD Dealer irrevocably commits
upon receipt of such shares to forward the exercise price directly to the
Corporation; or (f) by any combination of the foregoing.
11. Taxes; Compliance with Law; Approval of Regulatory Bodies. The
Corporation, if necessary or desirable, may pay or withhold the amount of any
tax attributable to any amount payable or shares deliverable under this Plan
and the Corporation may defer making payment on delivery until it is
indemnified to its satisfaction for that tax. Stock options are exercisable,
and shares can be delivered under this Plan, only in compliance with all
applicable federal and sate laws and regulations, including, without
limitation, state and federal securities laws, and the rules of all stock
exchanges on which the Corporation's shares are listed at any time. Any
certificate issued pursuant to options granted under this Plan shall bear such
<PAGE>
legends and statements as the Board deems advisable to assure compliance with
federal and state laws and regulations. No option may be exercised, and
shares may not be issued under this Plan, until the Corporation has obtained
the consent or approval of every regulatory body, federal or state, having
jurisdiction over such matters as the Board deems advisable.
Specifically, in the event that the Corporation deems it necessary or
desirable to file a registration statement with the Securities and Exchange
Commission or any State Securities Commission, no option granted under the
Plan may be exercised, and shares may not be issued, until the Corporation has
obtained the consent or approval of such Commission.
In the case of the exercise of an option by a person or estate acquiring
by bequest or inheritance the right to exercise such option, the Board may
require reasonable evidence as to the ownership of the option and may require
such consents and releases of taxing authorities as the Board deems advisable.
12. Assignability. Each option granted under this Plan is not
transferable other than by will or the laws of descent and distribution. Each
option is exercisable during the life of the Grantee only by him.
13. Tenure. A participant's right, if any, to continue to serve the
Corporation as an officer, employee or otherwise, will not be enlarged or
otherwise affected by his designation as a participant under this Plan, and
such designation will not in any way restrict the right of the Corporation to
terminate at any time the employment or affiliation of any participant for
cause or otherwise.
14. Amendment and Termination of Plan. The Board may alter, amend or
terminate this Plan from time to time without approval of the shareholders.
However, without the approval of the shareholders, no amendment will be
effective that:
(a) materially increases the benefits accruing to participants
under the Plan;
(b) increases the cumulative number of shares that may be
delivered upon the exercise of options granted under the Plan or the aggregate
fair market value of options which a participant may exercise in any calendar
year;
(c) materially modifies the eligibility requirements for
participation in the Plan; or
(d) amends the requirements of paragraphs (a)-(c) of this Article
14.
Any amendment, whether with or without the approval of shareholders, that
alters the terms or provisions of an option granted before the amendment will
be effective only with the consent of the participant to whom the option was
granted or the holder currently entitled to exercise it, except for
adjustments expressly authorized by this Plan.
15. Expenses of Plan. The expenses of the Plan will be borne by the
Corporation.
16. Duration of Plan. Options may only be granted under this Plan
during the ten years immediately following the earlier of the adoption of the
Plan or its approval by the Shareholders. Options granted during that ten
year period will remain valid thereafter in accordance with their terms and
the provisions of this Plan.
<PAGE>
17. Other Provisions. The option agreements authorized under the Plan
shall contain such other provisions including, without limitation,
restrictions upon the exercise of the option, as the Board shall deem
advisable. Any such option agreements, which are intended to be "Incentive
Stock Options" shall contain such limitations and restrictions upon the
exercise of the option as shall be necessary in order that such option will be
an "Incentive Stock Option" as defined in Section 422 of the Code.
18. Indemnification of the Board. In addition to such other rights of
indemnification as they may have as directors, the members of the Board shall
be indemnified by the Corporation against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Corporation) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which it shall
be adjudged in such action, suit or proceeding that such director is liable
for negligence or misconduct in the performance of his duties.
19. Application of Funds. The proceeds received by the Corporation from
the sale of stock pursuant to options granted under this Plan will be used for
general corporate purposes.
20. No Obligation to Exercise Option. The granting of an option shall
impose no obligation upon the Grantee to exercise such option.
21. Adjustment Upon Change of Shares. If a reorganization, merger,
consolidation, reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering, or other event affecting
shares of the Corporation occurs, then the number and class of shares to which
options are authorized to be granted under this Plan, the number and class of
shares then subject to options previously granted under this Plan, and the
price per share payable upon exercise of each option outstanding under this
Plan shall be equitably adjusted by the Board to reflect such changes.
22. Number and Gender. Unless otherwise clearly indicated in this Plan,
words in the singular or plural shall include the plural and singular,
respectively, where they would so apply, and words in the masculine or neuter
gender shall include the feminine, masculine or neuter gender where
applicable.
23. Applicable Law. The validity, interpretation and enforcement of
this Plan are governed in all respects by the laws of Colorado.
24. Effective Date of Plan. This Plan shall not take effect until
adopted by the Board. This Plan shall terminate if it is not approved by the
holders of a majority of the outstanding shares of the capital stock of the
Corporation, which approval must occur within the period beginning twelve
months before and ending twelve months after the Plan is adopted by the Board.
INFINITY, INC.
By: /s/ Stanton E. Ross
Stanton E. Ross, President
I hereby certify that the foregoing Stock Option Plan was approved by the
Board of Directors of Infinity, Inc. the 9th day of March 1998.
<PAGE>
/s/ John C. Garrison
John C. Garrison, Secretary
I hereby certify that the foregoing Stock Option Plan was approved by the
Shareholders of Infinity, Inc. the ___ day of __________, 1998.
_______________________________________
John C. Garrison, Secretary
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report dated May 1, 1998,
appearing in the Annual Report of Form 10-KSB of Infinity, Inc. for the fiscal
year ended March 31, 1998 in the following Registration Statements on Form
S-8:
SEC File No. Name of Plan Date of Filing
------------ ------------ --------------
33-82142 Employee Stock Bonus Plan July 28, 1994
33-90878 Stock Option Plan March 31, 1995
/s/ Mayer Hoffman McCann L.C.
Kansas City, Missouri
July 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages F-2 and F-3 of the
Company's Form 10-KSB for the fiscal year ended March 31, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 238,135
<SECURITIES> 0
<RECEIVABLES> 377,693
<ALLOWANCES> 96,363
<INVENTORY> 188,576
<CURRENT-ASSETS> 782,299
<PP&E> 6,386,783
<DEPRECIATION> 2,346,515
<TOTAL-ASSETS> 9,585,464
<CURRENT-LIABILITIES> 1,715,063
<BONDS> 0
0
0
<COMMON> 1,131
<OTHER-SE> 5,429,280
<TOTAL-LIABILITY-AND-EQUITY> 9,585,464
<SALES> 4,805,506
<TOTAL-REVENUES> 4,805,506
<CGS> 2,645,014
<TOTAL-COSTS> 2,645,014
<OTHER-EXPENSES> 2,004,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,162
<INCOME-PRETAX> 89,968
<INCOME-TAX> 0
<INCOME-CONTINUING> 89,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,968
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
