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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number: 0-17204
INFINITY, INC.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1070066
- - ------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
211 West 14th Street, Chanute, Kansas 66720
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Address of Principal Executive Offices, Including Zip Code
(316) 431-6200
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Not Applicable
----------------------------------------------------
(former Name, Former Address, and Former Fiscal Year
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
X Yes No
There were 11,916,862 shares of the Registrant's Common Stock outstanding as
of September 30, 1998.
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INFINITY, INC.
FORM 10-QSB
INDEX
Page
Part I Financial Information Number
Item 1. Financial Information:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 9
Part II: Other Information 12
2
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (Note)
Sept. 30, 1998 March 31, 1998
CURRENT ASSETS -------------- --------------
Cash $ 120,326 $ 238,135
Accounts Receivable, less
allowance for doubtful accounts 1,616,284 281,330
Inventories 187,678 188,576
Prepaid Expenses 98,989 74,258
----------- -----------
TOTAL CURRENT ASSETS 2,023,277 782,299
PROPERTY AND EQUIPMENT, at cost,
less accumulated depreciation 3,286,886 4,040,268
OIL AND GAS PROPERTIES, using the full cost
method, less accumulated depletion 4,391,865 4,527,768
INTANGIBLE ASSETS, at cost, less
accumulated amortization 201,964 235,129
----------- -----------
TOTAL ASSETS 9,903,992 9,585,464
LIABILITIES
CURRENT LIABILITIES
Accounts Payable 836,441 730,664
Accrued Expenses 307,261 237,195
Current portion of deferred revenue 30,000 90,000
Current portion of long-term debt 934,488 657,204
----------- -----------
TOTAL CURRENT LIABILITIES 2,108,190 1,715,063
LONG-TERM LIABILITIES
Long-term debt, less current portion above 2,191,061 2,439,990
----------- -----------
TOTAL LIABILITIES 4,299,251 4,155,053
STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTED
Common stock, par value $.0001, authorized
300,000,000 shares, issued and outstanding
11,916,862 shares; shares; 11,313,396 shares 1,191 1,131
Additional paid-in-capital 10,602,733 9,768,231
----------- -----------
TOTAL CAPITAL CONTRIBUTED 10,603,924 9,769,362
RETAINED EARNINGS (DEFICIT) (4,999,183) (4,338,951)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,604,741 5,430,411
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,903,992 $ 9,585,464
----------- -----------
The consolidated balance sheet at March 31, 1998 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
3
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Sept. 30,
----------------------------
1998 1997
---- ----
NET SALES $ 1,380,945 $ 1,463,372
COST OF GOODS SOLD 799,885 719,363
------------ ------------
GROSS PROFIT 581,060 744,009
OPERATING EXPENSES
Salaries 132,481 105,761
Taxes 51,773 57,292
Consulting fees 2,862 625
Professional Services 19,767 8,508
Travel & Entertainment 15,257 7,473
Insurance 37,755 38,079
Advertising 2,510 559
Office Supplies & Expense 11,332 7,299
Telephone 21,922 22,199
Rent & Utilities 29,190 38,051
Depreciation & Amortization 189,825 185,616
Other Expenses 20,468 13,151
------------ ------------
TOTAL OPERATING EXPENSES 535,142 484,613
OPERATING INCOME 45,918 259,396
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income & Finance Charges 2,897 (1,520)
Interest Expense (61,308) (52,716)
Rent and Other Income 6,666 28,430
Impairment of Asset Value (585,000) -
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (636,745) (25,806)
------------ ------------
NET INCOME (LOSS) $ (590,827) $ 233,590
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 0.02
------------ ------------
Weighted Average Basic
Shares Outstanding 11,799,674 10,191,373
See Notes to Financial Statements
4
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended Sept. 30,
--------------------------
1998 1997
---- ----
NET SALES $ 2,709,372 $ 2,632,064
COST OF GOODS SOLD 1,653,507 1,205,205
------------ ------------
GROSS PROFIT 1,055,865 1,426,859
OPERATING EXPENSES
Salaries 234,807 192,970
Taxes 101,042 114,230
Consulting fees 4,283 1,470
Professional Services 35,574 26,885
Travel & Entertainment 28,116 13,653
Insurance 69,741 84,215
Advertising 7,184 3,558
Office Supplies & Expense 21,793 16,120
Telephone 43,674 40,648
Rent & Utilities 58,772 65,860
Depreciation & Amortization 399,966 354,051
Other Expenses 29,924 22,624
------------ ------------
TOTAL OPERATING EXPENSES 1,034,876 936,284
OPERATING INCOME 20,989 490,575
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income & Finance Charges 3,234 825
Interest Expense (128,121) (64,445)
Rent and Other Income 28,666 64,640
Impairment of Asset Value (585,000) -
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (681,221) 1,020
------------ ------------
NET INCOME (LOSS) $ (660,232) $ 491,595
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.06) $ 0.05
Weighted Average Basic
Shares Outstanding 11,599,394 10,089,270
See Notes to Financial Statements
5
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended Sept. 30,
--------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (660,232) $ 491,595
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 399,966 354,051
Loss on sale of assets - 42,978
Impairment of asset value 585,000 -
(Increase) decrease in operating assets
Accounts Receivable (334,954) 34,270
Inventories 898 45
Prepaid Expenses (24,731) (7,344)
Increase (decrease) in operating liabilities
Accounts Payable 105,777 (70,703)
Accrued Expenses 70,066 11,603
Deferred revenue (60,000) (25,015)
------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 81,790 831,480
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (145,845) (227,453)
Investment in oil and gas properties (350,195) (951,375)
Investment in intangible assets (20,976) (13,574)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (517,016) (1,192,402)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable - (126,442)
Increase in long-term debt 339,650 193,795
Proceeds from issuance of common stock 289,062 525,497
Repayment of long-term debt (311,295) (176,830)
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 317,417 416,020
------------- -----------
NET INCREASE (DECREASE) IN CASH (117,809) 55,098
CASH, BEGINNING OF PERIOD 238,135 52,725
------------- -----------
CASH, END OF PERIOD $ 120,326 $ 107,823
------------- -----------
See Notes to Financial Statements
6
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INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Summary of significant accounting policies
------------------------------------------
Organization - Infinity, Inc. (Infinity) was organized under the laws of the
State of Colorado on April 2, 1987, primarily for the purpose of engaging in
any lawful business, but intending to acquire business opportunities.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the following companies:
Parent Company
- - --------------
Infinity, Inc.
Wholly-Owned Subsidiaries
- - -------------------------
Infinity Research and Development, Inc.
Consolidated Industrial Services, Inc.
(incorporated during the year ended March 31, 1994)
L.D.C. Food Systems, Inc.
(acquired during the year ended March 31, 1994)
CIS Oil and Gas, Inc.
(incorporated during the year ended March 31, 1996)
Consolidated Pipeline, Inc.
(incorporated during the year ended March 31, 1996)
(2) Earning (loss) per share
------------------------
Earnings or loss per share is based on the weighted average number of shares
outstanding. The number of shares used in the calculation was 11,599,394 and
10,089,270 for the six month periods ended September 30, 1998 and 1997,
respectively. Common stock equivalents are not included in the computation
because their inclusion would be anti-dilutive.
7
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INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(3) Long-Term Debt
--------------
On February 6, 1998, the Company obtained a $4,000,000 credit facility from
The CIT Group/Credit Finance, Inc. (CIT). This facility is secured by
substantially all of the assets of its wholly-owned subsidiary, Consolidated
Industrial Services, Inc. and is partially guaranteed by the Company's
president. The loan requires monthly interest payments at a rate per annum of
two percent over a bank prime rate. The facility was originally funded with
$2,700,000 which will be repaid in monthly principal payments of $45,000
through February 2001. Also available to the Company is a revolving line of
credit based on eighty percent of trade accounts receivable and a line of
credit of $1,000,000 based on the value of equipment purchased in the future.
Proceeds of this facility were used to refinance existing long-term debt, bank
lines of credit and certain other equipment loans and will provide working
capital for the Company.
In connection with the agreement, the Company issued a warrant to The CIT
Group to purchase up to 150,000 shares of the Company's common stock at an
exercise price of $2.50 per share for the three years from the date of the
agreement. A warrant allowing the previous lender to purchase 1,250,000
shares of common stock at an exercise price of $2.00 per share expired
unexercised as a result of this refinancing.
(5) Impairment of Asset Value
-------------------------
In October 1996, the Company entered into a five year renewable agreement to
lease wastewater treatment facilities in Chanute, Kansas and Cheyenne, Wyoming
to an outside party. During August, 1998, these properties were abandoned by
the outside party and operating responsibility was returned to the Company.
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of",
requires that long-lived assets held and used by a Company must be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based on circumstances at
the time of the review. For purposes of assessing impairment under this
standard, assets are required to be grouped at the lowest level for which
there are separately identifiable cash flows. Based on information available
at the time of the abandonment, the Company determined that currently expected
future cash flows from the Wyoming facility indicated that an impairment
existed. As a result, the Company recorded a non-cash charge of $585,000
which is reflected as a reduction in the net carrying value of property and
equipment.
(6) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included.
8
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Item 2. Management's Discussion and Analysis or Plan of Operations
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Results of Operations
- - ---------------------
The oilfield services segment of the Company generated $1,282,593 in revenues
and $730,992 in cost of sales during the three months ended September 30,
1998, compared to $1,312,154 in revenues and $612,351 in cost of sales during
the three months ended September 30, 1997. The operating expenses incurred by
the oilfield services segment of the Company were $422,129 for the three
months ended September 30, 1998 and $365,137 for the three months ended
September 30, 1997. Net operating income declined to a profit of $129,472 for
the three months ended September 30, 1998 from a profit of $334,666 for the
three months ended September 30, 1997. For the six months ended September 30,
1998, this segment generated $2,539,082 in revenues and $1,413,328 in cost of
sales, compared to $2,480,847 in revenues and $1,076,840 in cost of sales for
the six months ended September 30, 1997. The operating expenses incurred were
$793,286 for the six months ended September 30, 1998 compared to $714,757 for
the six months ended September 30, 1997. Net operating income declined to a
profit of $332,468 for the six months ended September 30, 1998 from a profit
of $689,250 for the six months ended September 30, 1997. The reduced results
are attributed to the Company's effort to maintain revenues by accepting
contract work at reduced margins, the effect of depressed oil prices and
reduced activity in Colorado. Depreciation and amortization expense included
in operating expenses for the oilfield services division was $290,758 for the
six months ended September 30, 1998 and $248,072 for the six months ended
September 30, 1997.
The environmental services segment of the Company recorded $28,666 of rental
income and generated $40,001 in revenue and $17,666 in cost of sales during
the six month period ending September 30, 1998. This segment recorded
operating expenses of $76,468, including depreciation and amortization expense
of $72,785 during the same period. During the six months ended September 30,
1997, the Company reported $48,400 in rental income and $95,000 in revenue
from settlement of a licensing agreement with BOC Gases regarding certain
patents and patent applications. This revenue was offset by depreciation and
amortization expense of $78,084 and the unamortized cost of the patents and
applications of $42,654.
In October 1996, the Company entered into a five year renewable management and
lease agreement that transferred operating responsibility for this segment to
an outside party. During August 1998, the outside party abandoned this
management and lease agreement and operating responsibility for this segment
was returned to the Company. As a result, in accordance with Statement of
accounting Standards No. 121, the Company recorded a non-cash charge of
$585,000 to reflect an impairment of value of the long-lived assets. This
charge reduces the carrying value of property and equipment but does not
affect the liquidity of the Company.
The oil and gas production segment of the Company recorded net revenue from
gas sales of $58,351 and operating expenses of $46,853 during the three months
and net revenue of $130,289 and operating expenses of $256,040 during the six
months ending September 30, 1998, including $31,598 of depletion and
depreciation expense. The oil and gas production segment of the Company
recorded net revenue from gas sales of $56,217 and operating expenses of
$112,602 during the three months and six months ending September 30, 1997,
9
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including $17,181 of depletion and depreciation expense. The Company first
recorded revenues from these properties in July 1997 and the properties remain
under development. During the last three years, this segment invested
$5,468,030 to acquire property rights to a total of 41,000 acres, drill and
complete thirty gas wells and construct the related pipeline system to
connect to the interstate transportation system. The Company has been
troubled by weather, pipeline and compressor problems which have limited
production of gas from the twenty completed wells. During August 1998, the
Company entered into an agreement with Evergreen Resources, Inc. under which
Evergreen purchased the gathering system, acquired an interest in the property
and assumed responsibility to manage, operate and develop the properties and
market and transport the produced gas.
Expenses incurred in corporate activities were $131,593 for the six months
ended September 30, 1998, compared to $111,882 for the six months ended
September 30, 1997.
Liquidity and Capital Resources
- - -------------------------------
As of September 30, 1998, the Company had a working capital deficit of $84,913
compared to a working capital deficit of $932,764 at March 31, 1998. The
reduction in the working capital deficit is primarily due to the inclusion in
accounts receivable of the proceeds of the sale of the gas gathering system to
Evergreen Resources, Inc. under the August 1998 agreement.
During the six months ended September 30, 1998, cash generated by operating
activities was $81,790 compared to cash generated of $831,480 for the six
months ended September 30, 1997. The reduction in the amount of cash
generated was primarily due to the reduced profitability of the oilfield
service activities and the production problems experienced in the operation of
the oil and gas segment. Cash generated by operations was reduced by an
additional $190,000 representing the amount that increases in accounts
receivable and prepaid expenses exceeded increases in accounts payable and
accrued expenses.
Net cash provided by operation of the oilfield services segment was $623,226
for the six months ended September 30, 1998. Net cash provided by the
operation of the environmental services segment was $18,652 after resumption
of operating activities in August 1998. Net cash used by operation of the oil
and gas segment was $94,153. Net cash used by corporate activities was
$126,768 for the six month period ended September 30, 1998.
Cash used by investing activities during the six months ended September 30,
1998, were $517,016 compared to $1,192,402 for the comparable period of 1997.
The decrease is primarily due to reduced development activity on gas
production properties.
The Company obtained $339,650 in long-term debt on its equipment and
receivable facilities and obtained $289,062 from issuance of common stock in
the exercise of warrants and options during the six months ended September 30,
1998. This cash received from financing activities was reduced by the
repayment of $311,295 of long term debt. In addition, the Company issued
324,299 shares of common stock, valued at $545,500 to pay consulting fees and
acquire production property.
On February 6, 1998, the Company obtained a $4,000,000 long-term financing
facility from The CIT Group/Credit Finance collateralized by substantially all
10
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of the tangible property and equipment and accounts receivable of its
wholly-owned subsidiary, Consolidated Industrial Services, Inc. This note
requires monthly payments of interest at two percent over the bank prime rate
and monthly payments of principal in the amount of $45,000 until maturity,
February 2001. The agreement also contains certain restrictive covenants with
respect to dividends, acquisitions and capital expenditures. This note is
further secured by the personal guarantee of the Company's president.
Proceeds from the note were used to refinance $2,500,000 in short-term
borrowings and provide additional working capital for the Company. This
refinancing also allowed warrants representing 1,250,000 shares of common
stock to expire unexercised on May 6, 1998.
Effective August 7, 1998, the Company entered into a joint business venture
with Evergreen Resources, Inc. to fully develop the gas production properties
in southeastern Colorado. Under this agreement, Evergreen will purchase a
working interest in all existing wells, as well as participate in new wells to
be drilled. Evergreen will also act as operator and provide its local sources
to drill and complete new wells on behalf of the two companies. In addition,
Primero Gas Marketing Company (a subsidiary of Evergreen) will purchase the
existing gathering and trunkline system from the Company and will purchase the
produced gas. Primero will be responsible for all costs to enhance and
operate the existing gathering system and to construct and operate all
additional gathering, trunkline, dehydration and compression facilities which
may be required.
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 properties in order to retain its
rights to further develop these leased properties. As part of the venture
with Evergreen, the Company intends to participate in the drilling of the ten
additional gas wells required to be drilled in southeastern Colorado prior to
December 31, 1998, and intends to participate in the drilling of at least
twenty-five additional wells during each of the next three years. This pace
of development will meet the requirements of all leases and allow the Company
to continue to develop the 41,000 acres covered by leases on the properties.
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. The Company has received a commitment from Hibernia National Bank to
provide a credit line of $2,500,000 to support the first phase of this
development activity.
The Company presently has outstanding publicly traded warrants to purchase
shares of Common Stock that, if all were to be exercised, could result in
gross proceeds of approximately $1,400,000. There is no assurance that the
Company will be successful in obtaining the exercise of these warrants.
Management believes that the revenues being generated by gas sales, together
with the proceeds of additional development financing will provide sufficient
liquidity to meet the Company's 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
- - ------------------
The Company 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
11
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circumstance. Along with third party providers, the Company performed an
evaluation of its computer hardware and software and determined that recent
enhancements and upgrades have brought its systems significantly into
compliance and existing support agreements are adequate to handle remaining
minor issues and any exceptions which may arise. Based on equipment analysis
and evaluations, the Company does not believe that significant operational
equipment modifications are necessary. The Company is communicating with
customers, vendors and business partners and anticipates that they will be
compliant by the year 2000 resulting in no material impact to the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceeding.
None
Item 2. Changes in Securities
During the quarter ended September 30, 1998, the Company issued securities in
private transactions as follows:
In August 1998, the Company issued 188,000 shares of its Common Stock to 14
persons as a portion of the consideration paid to these persons in connection
with the termination of an agreement between such persons and a subsidiary of
the Company.
In September, 1998, the Company issued 136,299 shares of Common Stock to Oak
Creek Capital in exchange for financial advisory services rendered to the
Company.
With respect to these transactions, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. The investors were given complete
information concerning the Company. The investors represented that they were
purchasing the shares for investment only and not for the purpose of resale or
distribution. The appropriate restrictive legend was placed on the
certificates and stop transfer instructions were issued to the transfer agent.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Exhibit 27 Financial Data Schedule Filed Herewith
Electronically
(b) Reports on Form 8-K. None
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
INFINITY, INC.
Dated: November 16, 1998 By /s/ Stanton E. Ross
Stanton E. Ross, President
13
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statements of operations found on pages 3 and 4 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 120,326
<SECURITIES> 0
<RECEIVABLES> 1,713,047
<ALLOWANCES> 96,763
<INVENTORY> 187,678
<CURRENT-ASSETS> 2,023,277
<PP&E> 10,374,096
<DEPRECIATION> 2,695,345
<TOTAL-ASSETS> 9,903,992
<CURRENT-LIABILITIES> 2,108,190
<BONDS> 0
<COMMON> 1,191
0
0
<OTHER-SE> 5,604,741
<TOTAL-LIABILITY-AND-EQUITY> 9,903,992
<SALES> 2,709,372
<TOTAL-REVENUES> 2,709,372
<CGS> 1,653,507
<TOTAL-COSTS> 1,653,507
<OTHER-EXPENSES> 1,034,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,121
<INCOME-PRETAX> (660,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (660,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (660,232)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
