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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, 2000
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.
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 81-1070066
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
211 West 14th Street, Chanute, Kansas 66720
(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 Section13 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 [ ]
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. [ ]
State Issuer's revenues for its most recent fiscal year: $5,172,798
As of June 1, 2000, 2,953,561 Shares of the Registrant's $0.0001 Par Value
Common Stock were outstanding. The aggregate market value of voting stock held
by nonaffiliates of the Registrant was approximately $15,469,000.
Documents incorporated by reference: Proxy statement for the Annual Meeting of
Shareholders to be held on July 20, 2000.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Infinity, Inc. ("Infinity" or the "Company") was organized as a Colorado
corporation on April 2, 1987.
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.
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.
In September 1995, Infinity Oil and 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 of
IOG. From April 1, 1996 through February 1997, the Company invested an
additional $59,000 in IOG's 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
that was subsequently repaid. 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 bed 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. During the summer of 1998, the
Company entered into joint venture agreements with Evergreen Resources, Inc.
("Evergreen") concerning the development of these properties, and then,
effective December 31, 1998, the Company sold all of its interest in these
properties to Evergreen. As a result of this sale, COG is now inactive.
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
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Interstate Gas pipeline. The pipeline system was sold to Evergreen during
1998. As a result, this subsidiary is now also inactive.
At the close of business on March 24, 1999, the Company effected a
1-for-4 reverse split of its outstanding Common Stock. All share numbers and
per share amounts in this report give effect to this reverse split.
Effective August 16, 1999 CIS and Infinity acquired Powder River
Cementers, LLC, a well cementing company located in Gillette, Wyoming for
$394,638 including acquisition costs, and 100,000 shares of Infinity common
stock were placed in escrow contingent on certain performance levels being
reached by the business that was acquired. On March 20, 2000 as final
settlement on the acquisition, the Company paid an additional $200,000 to the
former owners of Powder River Cementers, LLC. With this payment, the Company
settled all outstanding issues related to receivables and payables associated
with the acquisition and the shares in escrow were returned to the Company.
Assets of this company included a cement pump truck, bulk cement truck and a
bulk cement blending and storage facility. In addition to the physical assets,
the Company acquired the rights to an agreement to provide cementing services
for up to 1,000 wells being drilled by a major operator in the basin.
Infinity Oil and Gas of Kansas, Inc. ("IOG-KS"), a recently incorporated
wholly owned subsidiary of the Company acquired a working interest in the
Cherokee Basin of Eastern Kansas through the signing of a joint venture with
Verde Oil Company ("Verde") during the fiscal year ended March 31, 2000.
IOG-KS acquired a 100% working interest until payout, 80% net revenue
interest, in an 80-acre lease to be developed as an enhanced oil recovery
project. IOG-KS, with Verde as the operator, has drilled 33 wells and
currently has production flowing from fourteen of the wells. Sixteen of the
wells will be utilized as injection wells for a polymer injection enhanced oil
recovery project, 16 utilized as producers, with the remaining well being a
water supply well for the injection facility. IOG-KS also has the option to
drill 88 additional and recomplete 83 existing wells on offsetting acreage in
conjunction with the project. A 50% working interest, 40% net revenue interest
in the property, will revert to Verde when the costs of project development
have been recovered. Reserve reports prepared by independent petroleum
engineers show proved reserves of 110,500 barrels of oil with a discounted
future net cash flow of $1,684,144 for the conventional water flood
development that is in place. The Company anticipates the potential of a much
greater volume of oil being recovered when it initiates the polymer injection.
Infinity Oil and Gas of Wyoming, Inc. ("IOG-WY"), a recently incorporated
wholly owned subsidiary of the Company acquired a working interest in a coal
bed methane property that contains 24,500 gross acres in the Green River Basin
of Wyoming. The lease on approximately 19,500 acres of the property is subject
to 30% participation election by the original lessor of the acreage. If the
party chooses not to participate in the drilling and completion of a well,
then the 100% working interest and the approximately 80% associated revenue
interest is retained by IOG-WY until the individual well has generated
earnings to recover the cost of the well plus the 300% non-consent penalty.
The Company has acquired a 100% working interest, with no working interest
provisions, and an approximate 80% net revenue interest on the remaining 5,000
acres of the property. IOG-WY has drilled one coal bed methane gas well and
expects to drill four additional wells as soon as permitting can be completed.
Reserve reports prepared by independent petroleum engineers show total proved
undeveloped reserves of 699 Billion cubic feet ("BCF") of gas, 559 BCF net to
the Company's interest, with discounted (10%) future net cash flows before
income taxes of $374,407,259.
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On October 31, 1999, CIS-Oklahoma, Inc. ("CIS-OK"), a wholly owned
subsidiary of the Company acquired the real property and facilities that the
Company was leasing and occupying in Chanute and Ottawa, Kansas and
Bartlesville, Oklahoma from Consolidated Oil Well Services, Inc. ("COWS") for
$210,000. COWS is the former owner of the oil and gas well service assets
purchased by Consolidated Industrial Services, Inc. ("CIS") in January of
1994.
Unless the context otherwise requires, Infinity, Inc. and its
subsidiaries, CIS, IOG-KS, IOG-WY, CIS-OK and the inactive subsidiaries;
Infinity Research and Development, Inc. ("IRD"), L.D.C. Food Systems, Inc.
("LDC"), COG, and CPI are referred to herein collectively as the "Company".
BUSINESS ACTIVITIES
The Company is primarily engaged in providing oil and gas well services
through CIS and in the identification, acquisition, and development of oil and
gas properties through IOG-KS and IOG-WY. The Company also operates a
wastewater treatment facility on a limited basis.
The Company's CIS 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. In 1996, these facilities were
leased to and operated by an unrelated environmental services company. In
August 1998, the environmental services company abandoned these facilities
(See "Legal Proceedings") and the Company resumed operations. The Company
immediately shut down the facility in Chanute, Kansas and is in the process of
dismantling that facility. The Company estimates the cost to dismantle the
facility will be approximately the same as the value of the equipment that
will be salvaged. As a result, the Company has not accrued any additional
liability associated with this issue. The Cheyenne, Wyoming facility operates
on a limited basis.
The Company's IOG-KS and IOG-WY subsidiaries are engaged in the
acquisition and development of oil and gas properties. The activities of these
companies focus on the acquisition of interests that allow the Company to
utilize its experience gained and assets owned as the largest oil and gas well
service provider in Eastern Kansas and Northeastern Oklahoma. IOG-KS current
interest focuses on the production of oil from an enhanced oil recovery
project in the Cherokee Basin of Eastern Kansas. IOG-WY has acquired an
interest in the Green River Basin of South West Wyoming for the purpose of
producing Coal Bed Methane Gas. For a complete description of the properties
and the activities related to these properties see "Item 2. Description of
Property - Oil and Gas Interest in Leasehold Acreage".
COMPETITION
In the oil field services division the Company has limited competition in
Eastern Kansas. In Northeastern Oklahoma the Company competes with
Halliburton, a major oil field service company, and several small local
companies. In both of these areas, the recent downturn in the industry
resulted in well service equipment becoming available as companies exited the
industry. Some of the Company's customers have acquired this equipment and are
attempting to service their own wells. The Company's bulk materials
facilities, experienced work force, and well maintained fleet of service
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vehicles puts it at an advantage and the Company expects to see revenues to
continue to recover in these locations as conditions in the industry improve.
The Company continues to see competition from 3 major service companies:
Halliburton, BJ Services, and Dowell; and multiple smaller cementing companies
in Northeastern Wyoming. The Company may be at a competitive disadvantage when
compared to the major companies that are well established with substantial
financial resources. These companies can redirect assets and manpower, much
like CIS has done, to insure that resources to meet the growing demand are
available. Some of the exploration and development companies in this area also
have the resources available to develop their own service providers. The
Company's ability to provide cementing services that meet the market demand in
a timely manner while providing quality service to the wells will be crucial
to the Company's ability to compete in this extremely active market.
Infinity's growth strategy includes the acquisition of oil and gas
properties. There can be no assurance, however, that the Company will be able
to successfully acquire identified targets, or have the financing available
for the acquisitions. Many companies are now focusing on the same types of
acquisitions that IOG-KS and IOG-WY are trying to make and many of these
companies have more financial resources available for acquiring the
properties.
MAJOR CUSTOMERS
CIS provided services to over 150 customers during the fiscal year ended
March 31, 2000. CIS billed Pennaco Energy approximately $630,000 and Black
Rain/Spartain approximately $620,000 for services accounting for approximately
12% each of the total revenues generated by the Company. During the fiscal
year ended March 31, 1999 the Company billed Thermal Energy Corporation
$1,141,000, which represented 24% of the Company's net sales.
EMPLOYEES
The Company and its subsidiaries currently have approximately 62
employees. The Company intends to hire additional employees as the development
of its business require.
ITEM 2. DESCRIPTION OF PROPERTY
BUSINESS PROPERTIES
The Company's headquarters is located at 211 West 14th Street, Chanute,
Kansas 66720, along with operating facilities of CIS's oil well services
business. This facility was originally leased from Consolidated Oil Well
Services, Inc. ("COWS"), the former owner of the business of CIS, but was
purchased from COWS in November of 1999. Funds for the acquisition were
obtained through a loan from a local bank, secured by the properties
themselves.
CIS is based on the business and operations acquired from COWS in January
of 1994 and Powder River Cementers, LLC in August of 1999. This subsidiary
provides numerous services associated with drilling and completion of oil and
gas wells, including cementing, acidizing, fracturing, nitrogen pumping and
water hauling. CIS provides these services out of service facilities it owns
in Chanute and Ottawa, Kansas; Bartlesville, Oklahoma; and Gillette, Wyoming
utilizing a fleet of approximately 130 vehicles. These vehicles were
specifically designed to provide service to oil and gas well operators working
at depths ranging from 100 to 4,000 feet as is usually the case in Eastern
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Kansas, Northeastern Oklahoma, and the coal bed methane development of the
Powder River and Green River Basins of Wyoming.
The Company 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 up to twenty-five years beginning July, 1994.
OIL AND GAS INTEREST IN LEASEHOLD ACREAGE
COG held oil and gas interests in the Raton Basin in Southeastern
Colorado as of March 31, 1998. COG sold all of its interest in this acreage in
December of 1998.
IOG-KS acquired, through a joint venture with Verde Oil Company
("Verde"), a 100% working interest before payout in an 80-acre, Verde operated
lease in Southeast Kansas known as the Manson Lease. As a 100% working
interest owner, IOG-KS is responsible for all costs associated with the
development of the property as a polymer augmented water flood project. Total
capital costs of this enhanced oil recovery project are expected to be
$900,000 for the drilling of 16 injection wells, 16 producing wells and 1
water supply well, installation of oil gathering facilities, and installation
of the injection facilities on the property. As of March 31, the Company had
incurred approximately $404,000 of the development costs. Part of this cost
will be offset by revenue generated in the service business by performing all
of the completion and stimulation work needed during the development.
The working interest acquired by IOG-KS is subject to a 20% royalty on
revenue generated and 50% working interest back-in provision held by Verde.
The joint venture agreement will allow IOG-KS to recover 100% of its
development costs prior to Verde regaining a 50% working interest in the
property. After payout, IOG-KS will have a 50% working interest and a 40% net
revenue interest. With the acquisition of the Manson Lease, IOG-KS also
received options to drill an additional 88 wells and rework 83 wells on
offsetting properties under the same working interest provisions as were
utilized for the Manson Lease. Verde, as operator of the property, will also
market IOG-KS's share of the oil production.
IOG-WY acquired a working interest in approximately 24,500 acres of Coal
Bed Methane mineral leases in the Green River Basin of South Central Wyoming.
IOG-WY acquired the leasehold for $1.1 million, or approximately $45.50 per
acre and has spent $331,000 drilling the first well on the property. The lease
on approximately 19,500 acres of the property is subject to 30% participation
election by the original lessor of the acreage. If the party chooses not to
participate in the drilling and completion of a well, then the 100% working
interest and the approximately 80% associated revenue interest is retained by
IOG-WY until the individual well has generated earnings to recover the cost of
the well plus a 300% non-consent penalty. The Company acquired a 100% working
interest, with no working interest provisions, and an approximate 80% net
revenue interest on the remaining 5,000 acres of the property.
The following table set forth the Company's oil and gas lease acreage and
the number of wells producing and drilled as of March 31 of each year:
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1998 1999 2000
-------------- ----------- ---------------
Gross Net Gross Net Gross Net
------ ------ ----- --- ------ ------
Raton Undeveloped 35,560 27,648 - - - -
Raton Developed 5,440 5,440 - - - -
Raton Producing Wells 30 30 - - - -
Exploratory Wells Drilled - - - - - -
Development wells drilled 10 10 - - - -
Green River Undeveloped - - - - 24,500 24,500
Green River Developed - - - - - -
Green River Producing Wells - - - - - -
Exploratory Wells Drilled - - - - 1 1
Development wells drilled - - - - - -
Cherokee Undeveloped - - - - - -
Cherokee Developed - - - - 80 80
Cherokee Producing Wells - - - - 2 2
Exploratory wells drilled - - - - - -
Development wells drilled - - - - 17 17
OIL AND GAS RESERVES
The table below sets forth the Company's quantities of proved reserves as
determined by independent petroleum engineers Fairchild and Wells, Inc. All of
these proved reserves were located in the continental U.S., and the present
value of estimated future net revenues from these reserves is on a
non-escalated basis discounted at 10 percent per year as of period indicated.
There has been no major discovery or other favorable or adverse event that is
believed to have caused a significant change in estimated proved reserves
subsequent to March 31, 2000. The Company had no proved reserves at the end of
its prior fiscal year.
March 31, 2000
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Estimated proved Gas Reserves (MCF) 558,953,000
Estimated Proved Oil Reserves (BLS) 110,500
Present Value of Future Net Revenues
(before future income tax expense) $376,091,403
Reference should be made to Note 16 (Supplemental Oil and Gas Information -
Unaudited) to the consolidated financial statements for additional information
pertaining to the Company's proved oil and gas reserves. During the fiscal
year ended March 31, 2000, the Company did not file any reports that include
estimates of total proved net oil or gas reserves with any federal agency.
PRODUCTION, PRICE AND COST DATA
The Company began acquisition and development activities relating to the
Green River Basin and Cherokee Basin in the fiscal year ended March 31, 2000.
Prior to yearend, insufficient operating activities and production had
occurred for the Company to determine average production costs and average
selling prices for the year from the Cherokee Basin Property.
During the year ended March 31, 1999, prior to the sale of the Company's
gas properties, the Company received an average selling price of $1.12 per Mcf
of gas sold. During the year ended March 31, 1998, the Company received an
average selling price of $1.32 per Mcf of gas sold.
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During the year ended March 31, 1999, prior to the sale of the Company's
gas properties, the Company incurred operating expenses of $174,160 or $1.63
per Mcf of gas sold in conjunction with oil and gas production activities.
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.
DELIVERY COMMITMENTS
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.
ITEM 3. LEGAL PROCEEDINGS
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 bed methane gas
project in the Raton Basin of Colorado. Alpha was 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. A basic agreement to settle
was reached in February 1999 and the District Court issued an order dismissing
the case with prejudice on April 23, 1999. Evergreen Resources, Inc. agreed to
assume all responsibility for whatever monies COG owed Alpha through the
Purchase and Sale Agreement between COG and Evergreen Resources, Inc. executed
in January 1999.
Great Plains Environmental, Inc. Lawsuit
On November 4, 1998, the Company's CIS subsidiary filed a lawsuit in the
District Court of Neosho County, Kansas against Great Plains Environmental,
Inc. ("GPE") and its principals in connection with the termination of GPE's
lease of CIS' wastewater treatment facilities in Cheyenne, Wyoming and
Chanute, Kansas. CIS was seeking damages in excess of $500,000 for unpaid
rent, costs related to CIS regaining control of the facilities, missing
equipment and tools, and attorneys' fees. CIS was also seeking damages from
certain principals of GPE under personal guarantees from such persons, and for
other reasons.
In January 1999, GPE and the other defendants filed an answer generally
denying the claims of CIS, and filed a counter-claim alleging that CIS had
locked GPE out of the facilities and misrepresented the condition of the
equipment at these facilities. GPE was seeking damages in excess of $500,000
from CIS.
The court ordered that all claims and defenses in this case be handled
through arbitration. Prior to the arbitration trial, CIS was notified that GPE
had filed bankruptcy in the state of Colorado. The case was presented to
arbitration in March of 2000. When the defendants failed to appear at the
arbitration trial and present evidence the claims against CIS were dismissed
by the arbitrator. The arbitrator ruled in favor of CIS on its claims and in
April of 2000 awarded CIS claims and damages of $890,000. Subsequent to the
arbitration ruling the principals of GPE also filed for Bankruptcy protection
in the State of Colorado. The Company does not believe it will collect any
claims or damages related to this lawsuit.
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Blue Green Corporation of the Rockies Lawsuit
In March 1999, Bluegreen Corporation of the Rockies ("Bluegreen") filed a
complaint against the Company's subsidiary, COG and H. Huffman and Company
("Huffman") in the U. S. District Court for the District of Colorado. The
subsidiary was served on June 29, 1999. The gas development property that the
Company sold effective December 31, 1998 was subleased from Huffman who had
leased the property from Bluegreen. Bluegreen alleges breaches by Huffman and
COG under this lease and claims damages and other relief. COG answered the
complaint and filed counterclaims against Bluegreen for damages related to
breaches of the same lease. COG also filed a third party complaint for
indemnification against Evergreen Resources, Inc. based upon their assumptions
of rights and responsibilities under this lease pursuant to the sale agreement
effective December 31, 1998. The case was dismissed without prejudice by
consent of all parties in October 1999. In order to eliminate the statute of
limitations associated with these claims, the parties have put in place a
tolling agreement and any party may re-file their claims at any time. However,
the Company believes that it still has no liability in relation to the claims
and that the claims will not have an impact on the liquidity of the Company.
Weatherford Enterra Compression Co. Lawsuit
Weatherford Enterra Compression Co. ("Weatherford") filed a complaint
against the Company's COG subsidiary in the Nueces County (Texas) County
Court. The subsidiary was served with a copy of the Texas lawsuit in January
1999. According to documents received from the Company's legal counsel,
Weatherford is seeking damages of between $100,000 and $135,000 in rental
payments and reimbursement for interest, court costs and attorney fees. COG
contracted with Weatherford to rent a natural gas compressor as part of its
natural gas gathering system in the Raton Basin of Colorado. The compressor
broke down frequently and a dispute arose as to the amounts due Weatherford
under the lease. Potential damages are not covered by insurance. But, in a
purchase and Sale Agreement between COG and Evergreen executed in January
1999, Evergreen assumed all responsibility for resolving all claims made by
Weatherford. The Company believes it has no liability in relation to the
claims and that the claims will not have an impact on the liquidity of the
Company.
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
No Matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered in this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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." The
following table sets forth the high and low closing sale prices for the
Company's securities as reported by the Nasdaq Stock Market. The prices shown
give retroactive effect to the 1-for-4 reverse stock split which became
effective at the close of business on March 24, 1999.
Quarter Ended High Low
------------- ---- ---
June 30, 1998 $9.50 $6.75
September 30, 1998 $8.75 $4.00
December 31, 1998 $5.00 $2.50
March 31, 1999 $3.50 $1.00
June 30, 1999 $3.38 $1.06
September 30, 1999 $2.69 $1.56
December 31, 1999 $2.69 $1.63
March 31, 2000 $8.56 $1.63
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
holders of the Company's $0.0001 par value common stock at June 1, 2000, was
218 and the Company has over 1,470 beneficial owners of such stock.
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 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")
SALES OF UNREGISTERED SECURITIES. During the quarter ended March 31,
2000, the Company did not issue any securities that were not registered under
the Securities Act of 1933, as amended.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Infinity and its subsidiaries IOG-WY, IOG-KS and CIS are engaged in
identifying and acquiring oil and gas acreage, exploring and developing
acquired acreage, and providing oil and gas well services. The Company's
acquisition strategy focuses on acreage or strategic alliances that allow the
Company to utilize its service equipment and the experience gained as the
Company became the largest oilfield service company in Eastern Kansas and
Northeast Oklahoma while developing the acreage. Infinity's primary focus is
on the development of its coal bed methane properties located on 24,500 gross
acres in the Green River Basin of Wyoming, the development of an enhanced oil
recovery project located on 80 acres in the Cherokee Basin of Eastern Kansas
and on providing oil and gas well service in Eastern Kansas, Northeast
Oklahoma, and in the Powder River Basin of Wyoming. The Company's involvement
in the wastewater disposal industry through its wastewater division has been
scaled back significantly with only limited operations occurring at the
Cheyenne, Wyoming facility.
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RESULTS OF OPERATIONS
The oil field services segment of the Company generated $5,122,404 in
revenues and $3,026,821 in cost of sales during the year ended March 31, 2000
compared to $4,291,226 in revenues and $2,578,695 in cost of sales for the
year ended March 31, 1999. The increase in revenues in the year ended March
31, 2000, was due to $900,157 in sales generated by the Gillette, Wyoming
("Gillette") operations, which were partially offset by a $208,278 decrease in
sales due to the elimination of the Colorado operations. Revenue from all of
the other service facilities increased $139,299 in the year ended March 31,
2000 compared to the year ended March 31, 1999. The cost of sales increased by
$656,307 in the year ended March 31, 2000 when compared to the year ended
March 31, 1999 due to the addition of the Gillette operations and by $123,908
due to purchase of nitrogen for use in the fracturing operations. This
increase in cost of sales was partially offset by the elimination of the
$142,860 in cost of sales associated with the Colorado operations in the year
ended March 31, 1999. The Company incurred approximately $105,000 in
non-recurring travel, housing and meal expenses associated with the temporary
staffing, reallocation of equipment, and integration of Powder River
Cementers, LLC. into the service operations. The operating expenses incurred
by the oil field services segment of the Company were $1,928,219 for the year
ended March 31, 2000 and $1,552,180 for the year ended March 31, 1999. The
$202,271 increase in operating expenses due to the addition of the Gillette
operations in the year ended March 31, 2000 was partially offset by the
elimination of $97,816 in operating expenses associated with the discontinued
Colorado operations in the year ended March 31, 1999. Depreciation and
Amortization costs for the oil field service segment in the year ended March
31, 2000 were $697,957 compared to $578,742 in the year ended March 31, 1999.
The increase in depreciation was mainly related to the addition of the
equipment purchased in the Powder River, LLC acquisition and equipment
purchased and put into service in the other operating areas. Net operating
income for this segment increased to a profit of $167,364 for the year ended
March 31, 2000, as compared to net operating income of $160,351 for the year
ended March 31, 1999.
The environmental services segment of the Company, which includes all
water treatment activities, generated $42,838 in revenue while incurring
$79,271 in cost of goods sold during the year ended March 31, 2000 compared to
$389,662 in revenue and $185,300 of cost of goods sold in the year ended March
31, 1999. Operating expenses incurred by the division were $142,197 in the
year ended March 31, 2000 and $243,115 in the year ended March 31, 1999
including $63,767 and $113,342 in depreciation for each year respectively. The
facilities associated with this business segment, located in Chanute, Kansas
and Cheyenne, Wyoming, had been leased to an environmental service company
under a five-year management and lease agreement in 1996. During August of
1998, the environmental service company abandoned the facilities 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 reduced the carrying value of property and
equipment but did not affect the liquidity of the company. The Company is
currently operating the Cheyenne facility on a limited basis and is in the
process of dismantling the Chanute facility. The Company estimates the cost to
dismantle the facility will be approximately the same as the value of the
equipment that will be salvaged. As a result, the Company has not accrued any
additional liability associated with this issue.
11
<PAGE>
During the year ended March 31, 1999 the oil and gas production segment
of the Company recorded revenue of $171,316 and expenses of $298,079,
including $48,054 of depreciation and depletion prior to the sale of the oil
and gas properties in December of 1998. During the year ended March 31, 2000
the Company incurred legal expenses of $77,607 associated with issues that
occurred prior to the sale of the properties. The Company also had $7,556 of
revenue from oil sales and $23,323 in operating expenses, including $16,357 in
depreciation, associated with oil and gas production operations during the
year ended March 31, 2000.
Expenses incurred in corporate activities were $846,811 in the year ended
March 31, 2000 compared to $373,101 for the year ended March 31, 1999. Travel
expenses increased to $230,451 in the year ended March 31, 2000 from $64,868
in the year ended March 31, 1999. These additional expenses were incurred in
relation to the identification of potential acquisition candidates and during
the negotiations associated with acquiring oil and gas properties and Powder
River Cementers, LLC. The Company also incurred $222,254 in expenses
associated with shareholder matters in the year ended March 31, 2000 compared
to $46,790 incurred in the year ended March 31, 1999. The increase in expense
for the year ended March 31, 2000, was due to an increase in activities to
attract new, outside directors and improve communications with shareholders
compared to the expense incurred in the year ended March 31, 1999.
During the fiscal year ended March 31, 2000 the Company experienced a net
loss before taxes of ($1,393,362) compared to net income before taxes of
$1,840,889 during the fiscal year ended March 31, 1999. This decrease in net
income before taxes was mainly the result of a decrease in gain on sale of
fixed assets from $3,044,094 in the year ended March 31, 1999, which included
the sale of the Raton Basin leasehold and producing properties, to $27,899 in
the year ended March 31, 2000. The significant gain on the sale of assets in
the year ended March 31, 1999 was partially offset by the ($585,000)
write-down of wastewater treatment assets. In the year ended March 31, 2000
interest expense increased by $258,677 as a result of the increase in debt
that was secured by 325,000 shares of the Evergreen Stock and corporate
expenses increased by $473,710 compared to the previous year, as previously
discussed.
The net loss after taxes was ($752,598) in the year ended March 31, 2000
compared to net income after taxes of $2,357,264 for the prior fiscal year.
Tax credits applied to the net loss for the fiscal year ended March 31, 2000
were $640,764 compared to $516,375 applied to the net income for the year
ended March 31, 1999. The increase in tax credits is related to the
appreciation of the value of the Evergreen stock held for sale in the fiscal
year ended March 31, 2000 compared to the appreciation of the value during the
year ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had a working capital deficit of
$1,111,106 compared to a working capital deficit of $877,643 at March 31,
1999. The increase in the working capital deficit when compared to the prior
year is mainly due to the increase in the current portion of the CIT financing
that is due within one year. The Company will continue to pay its current
principal and interest payments on this loan and a determination will be made
during the third quarter of the fiscal year ended March 31, 2001 on whether to
refinance the balance.
12
<PAGE>
During the year ended March 31, 2000, cash used by operating activities
was $995,878 compared to cash generated by operating activity of $176,020 for
the year ended March 31, 1999. The primary reason for the reduction in
operating cash flow was the net loss of $752,598 during the year ended March
31, 2000.
Direct net cash provided by the operation of the oilfield services
segment of the Company was $865,321 for the year ended March 31, 2000. Net
cash used in the operation of the environmental services segment, oil and gas
segment, and corporate activities was $114,863, $78,011 and $843,870,
respectively during this same period.
Cash used in investing activities during the year ended March 31, 2000
was $3,690,751 compared to $636,565 used in the year ended March 31, 1999. The
increase in cash used in investing activities during the year ended March 31,
2000 was the result of the several major acquisitions. The Company acquired an
interest in 24,500 acres of leasehold in the Green River Basin of Wyoming and
drilled one test well for a total cost of $1,445,423. The Company expects to
drill an additional 4 wells on the acreage, equip the 5 wells for production,
and install gathering and water disposal facilities associated with operating
the properties during the first half of fiscal year 2000 at an estimated
additional cost of $2,000,000.
The Company also acquired an interest in the Manson Lease in the Cherokee
Basin of Eastern Kansas through a joint venture agreement with Verde. Capital
costs incurred with this acquisition were $150,000 associated with the lease
acreage and $254,163 in development costs. Subsequent to March 31, 2000 the
joint venture operator has completed drilling the 16 production wells, 16
injection wells, a water supply well and is completing the installation of the
associated production, gathering, and injection facilities. The Company
estimates it will incur total costs of approximately $900,000 on this project.
An additional major acquisition made by the Company in the year ended
March 31, 2000 was the purchase of Powder River Cementers, LLC for $525,000.
In addition, the Company paid $306,268 for operating facilities including real
property and furnishings used to house employees on temporary assignment in
Gillette. Subsequent to March 31, 2000 the crew quarters and furnishings were
sold to an unrelated third party.
During December 1999, the Company acquired, for a cost of $210,000, the
operating facilities that it occupies in Chanute and Ottawa, Kansas and
Bartlesville, Oklahoma through a buy- out of the remaining lease commitment it
had on the properties. These properties had originally been leased from the
former owner of CIS. The Company also made $42,220 in capital improvements on
the facilities during the year.
The Company also acquired approximately $570,000 in other oil field
service equipment during the year ended March 31, 2000 and invested
approximately $130,000 in other assets.
During the year ended March 31, 1999 a $459,019 of the cash used in
investment activities was used in the development of the coal bed methane
properties in the Raton Basin. The additional cash used was used for the
purchase of other oilfield service assets.
The Company obtained $2,270,160 in short term financing, repaid $300,000
in bank debt and obtained $4,102,070 in long-term debt on its equipment and
receivables facility and through credit facilities secured by shares of its
Evergreen stock during the year ended March 31, 2000. The $2,270,160 was
refinanced in April 2000 with a two-year note and was then reclassified to
Long Term Debt. The cash received from financing activities was reduced by the
13
<PAGE>
repayment of $677,491 in long-term debt and by $27,275 used to repurchase
14,950 shares of Company stock. In addition, the Company issued 12,500 shares
of common stock, valued at $18,750 to pay consulting fees.
On February 6, 1998, the Company's CIS subsidiary obtained a credit
facility for a total of $4,000,000. This facility provided $2,7000,000 of
immediate equipment financing requiring payments of $45,000 per month until
maturity at February 6, 2001. In addition, the facility provides $1,000,000
availability for additional equipment purchases and a revolving credit line
based on 80% of current accounts receivable. The Company took an advance of
$100,000 on this availability during the year ended March 31, 2000. The
proceeds from this advance were used to finance a portion of the Powder River
Cementers, LLC acquisition. Interest on this facility 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 secured by the
pledge of a portion of the President's stock in the Company.
In April 1999, the Company entered into a financing agreement
collateralized by 125,000 shares of the Evergreen stock held by it with a fair
value of $2,500,000 at that time. Under the agreement, the Company borrowed
$2,035,950 with borrowings due April 2000. The Company was obligated to pay
back an amount equal to $2,181,250 so long as the Evergreen stock was trading
between $17.25 and $22.59 per share. This equates to an approximate 7%
effective interest rate and the Company recorded $141,980 in interest expense
related to these borrowings during the year ended March 31, 2000. Subsequent
to March 31, 2000, on the closing date of the financing agreement, the Company
entered into a new financing agreement secured by the same 125,000 shares of
Evergreen stock to fund the payment of the original note. Due to the $24.50
price of the Evergreen stock on the April 13 settlement date the Company was
obligated to pay back $2,420,547 which was funded by the proceeds of the new
financing agreement and with $70,393 of cash on hand. The additional cost
associated with the settlement of the original financing was $238,750. The
company had accrued $132,270 in additional expense associated with this issue
in the year ended March 31, 2000. The $106,480 in additional settlement costs
will be recognized as interest expense in the future period. Under the terms
of the new financing agreement with an effective date of April 18, 2000 the
Company received $2,350,154 that was used to settle the original financing
agreement. The Company is obligated to pay back $2,742,500 on the termination
date of April 15, 2002 as long as the price of the Evergreen stock is between
a floor price of $21.94 and a ceiling price of $32.91 per share. If the price
of the stock is less than the floor price of $21.94 on the termination date
then the Company will only be obligated to pay back an amount equal to the
price of the stock multiplied by the number of shares. If the price of the
stock exceeds the ceiling price of $32.91 per share on the termination dte
then the company will incur additional costs in the settlement by the amount
that the price exceeds the ceiling price multiplied by the number of shares.
Effective November 12, 1999 the Company entered into a financing
agreement collateralized by 100,000 shares of the Evergreen stock held by it
with a fair value of $1,950,000 at that time. Under the agreement, the Company
borrowed $1,652,596 with borrowings due November 7, 2001. The Company was
obligated to pay back an amount equal to $1,904,000 so long as the Evergreen
stock is trading between $19.04 and $27.51 per share. This equates to an
approximate 7.5% effective interest rate and the Company recorded $48,692 in
interest expense related to these borrowings during the year ended March 31,
2000.
14
<PAGE>
Effective March 7, 2000 the Company entered into a financing agreement
collateralized by 100,000 shares of the Evergreen stock held by it with a fair
value of $2,450,000 at that time. Under the agreement, the Company borrowed
$1,713,454 with borrowings due March 4, 2001. The Company was obligated to pay
back an amount equal to $2,021,000 so long as the Evergreen stock is trading
between $20.21 and $30.31 per share. This equates to an approximate 7.0%
effective interest rate and the Company recorded $9,331 in interest expense
related to these borrowings during the year ended March 31, 2000.
During the year ended March 31, 2000, the Company entered into an
agreement to purchase the facilities that it currently occupies in Chanute and
Ottawa, Kansas and Bartlesville, Oklahoma for $210,000. The Company also
entered into an agreement to purchase additional facilities in Gillette,
Wyoming for $140,000. Financing for the purchases was arranged through local
sources at a rate of 8.5% for 84 months and closings on the purchases occurred
on November 15th and November 18th respectively.
The Company is committed to drill 4 additional wells on the Labarge
property in the Green River Basin of Wyoming under the terms of its lease.
Including the cost of drilling and equipping the wells for production and
installing production and water disposal facilities, the Company expects
capital expenditures to be approximately $2,000,000. As of June 1, 2000 the
Company has contributed $535,745 to the development of the Manson lease in the
Cherokee Basin of Eastern Kansas. The Company expects to incur additional
capital costs of approximately $365,000 to complete the development of the
property as a polymer augmented enhanced oil recovery project. The Company has
no other commitments for material capital expenditures.
Management believes that the cash flow generated by the increase in oil
field service sales, through borrowings secured by Company assets, or through
the sale of shares of Evergreen stock held by the Company will provide
sufficient liquidity to meet the Company's needs for the remainder of the
fiscal year ended March 31, 2001. Subsequent to March 31, 2000 the Company
sold 125,000 shares of Evergreen Stock for approximately $3,400,000, resulting
in a gain on the sale of securities of approximately $1,323,000. The ability
of the Company to finance future projects will be dependent on Company's
ability to successfully develop the Cherokee Basin property and generate
revenue through oil sales, attract a partner to participate in the development
of the Green River Basin properties, and generate positive cash flow from its
oilfield service segment.
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.
15
<PAGE>
PART III
ITEM 9, 10, 11, 12. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) FO THE EXCHANGE ACT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held July 20, 2000.
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 and 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 1999 Stock Option Plan Filed electronically herewith
10.3 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 Asset Purchase Agreement Incorporated by reference to
dated January 7, 1994, Exhibit No. 2 to the Registrant's
among Infinity, Inc. Con- Current Report on Form 8-K dated
solidated Industrial Ser- January 21, 1994
vices, Inc., Consolidated
Oil Well Services, Inc.
and Edsel E. Noland
16
<PAGE>
10.6 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
10.7 Purchase and Sale Agreement Incorporated by reference to
dated January 12, 1999, Exhibit 10.1 to Registrant's
between Evergreen Resources, Current Report on Form 8-K
Inc. and CIS Oil & Gas, Inc. dated January 13, 1999
10.8 Assignment of Participation Filed electronically herewith
Agreement, Conveyance, and
Bill of Sale between
Infinity Oil and Gas, Inc.
and Infinity Oil and Gas of
Wyoming, Inc.
10.9 Participation Agreement Filed electronically herewith
between Wold Oil Properties,
Inc. and Infinity Oil and Gas,
Inc.
10.10 Assignment of Oil and Gas Filed electronically herewith
Leases, Operating Rights
and Record Title, Conveyance
and Bill of Sale between
Infinity Oil and Gas, Inc.
and Infinity Oil and Gas of
Wyoming, Inc.
10.11 Operating Agreement, Filed electronically herewith
Manson Lease, between
Verde Oil Company and
Infinity Oil and Gas of
Kansas, Inc.
10.12 Option Agreements between Filed electronically herewith
Verde Oil Company and
Infinity, Inc.
21 Subsidiaries of the Filed electronically herewith
22 Consent of Sartain Filed electronically herewith
Fischbein & Co.
27 Financial Data Schedule Filed electronically herewity
(b) REPORTS ON FORM 8-K. None.
17
<PAGE>
INFINITY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Independent Auditors' Report ............................. F-2
Financial Statements:
Consolidated Balance Sheet - March 31, 2000............. F-3
Consolidated Statements of Operations - Years Ended
March 31, 2000 and 1999 ................................ F-4
Consolidated Statements Changes in Stockholders'
Equity-Years Ended March 31, 2000 and 1999 ............. F-5
Consolidated Statements of Cash Flows - Years
Ended March 31, 2000 and 1999 .......................... F-6 - F-7
Notes to Consolidated Financial Statements ............. F-8 - F-23
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Infinity, Inc.
We have audited the consolidated balance sheet of Infinity, Inc. and
Subsidiaries as of March 31, 2000 and the consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
March 31, 2000 and 1999. 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 audit 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, 2000, and the results of their
operations and their cash flows for the years ended March 31, 2000 and 1999,
in conformity with generally accepted accounting principles.
/s/ Sartain Fischbein & Co.
May 31, 2000
Tulsa, Oklahoma
F-2
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 716,309
Accounts Receivable, less allowance
for doubtful accounts of $10,000 587,909
Inventories 203,998
Prepaid Expenses 366,281
-----------
TOTAL CURRENT ASSETS 1,874,497
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and impairment 4,230,556
INVESTMENT SECURITIES 10,884,600
OIL AND GAS PROPERTIES, using full cost accounting
net of accumulated depreciation, depletion,
and amortization 1,958,648
INTANGIBLE ASSETS, at cost, less
accumulated amortization 298,287
OTHER ASSETS 132,722
-----------
TOTAL ASSETS $19,379,310
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,174,066
Accounts Payable 510,337
Accrued Expenses 301,200
-----------
TOTAL CURRENT LIABILITIES 2,985,603
LONG-TERM LIABILITIES
Long-term debt, less current portion 6,411,381
-----------
TOTAL LIABILITIES 9,396,984
STOCKHOLDERS' EQUITY
Common stock, par value $.0001, authorized 300,000,000
shares, issued and outstanding 2,950,561 shares 295
Additional paid-in-capital 10,470,105
Accumulated other comprehensive income:
Unrealized gain on securities available for sale,
net of deferred income taxes of $1,157,139 2,246,211
Accumulated deficit (2,734,285)
-----------
TOTAL STOCKHOLDERS' EQUITY 9,982,326
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,379,310
===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
2000 1999
---------- ----------
REVENUES:
Oil and Gas Service Operations $5,122,404 $4,291,226
Waste Water Treatment 42,838 389,662
Oil and Gas Sales 7,556 171,316
---------- ----------
TOTAL REVENUES $5,172,798 $4,852,204
COST OF SALES:
Oil and Gas Service Operations 3,026,821 2,578,696
Waste Water Treatment Facilities 79,271 185,300
Oil and Gas Production Expenses and Taxes 6,966 248,054
---------- ----------
COST OF SALES 3,113,058 3,012,050
---------- ----------
GROSS PROFIT 2,059,740 1,840,154
OPERATING EXPENSES 3,012,184 2,237,482
---------- ----------
OPERATING LOSS (952,444) (397,328)
---------- ----------
OTHER INCOME (EXPENSE)
Interest Income & Other Charges 48,336 37,599
Interest Expense (517,153) (258,476)
Gain on Sale of Assets 27,899 3,044,094
Impairment of water treatment facility
assets -- (585,000)
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (440,918) 2,238,217
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES (1,393,362) 1,840,889
INCOME TAX BENEFIT 640,764 516,375
---------- ----------
NET INCOME (LOSS) $ (752,598) $2,357,264
========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.25) $ 0.81
========== ==========
Weighted Average Basic and Diluted
Shares Outstanding 2,954,474 2,919,098
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Additional Compre- Compre- Stock-
Shares Paid-in Accumulated hensive hensive holders'
Issued Amount Capital Deficit Income Income Equity
--------- ------ ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1998 2,828,427 $283 $ 9,769,079 $(4,338,951) $ - $ 5,430,411
Issuance of Common
Stock for Cash 43,751 4 164,059 - - 164,063
Stock Issued for
investment in Oil
and Gas Properties
and Services,
recorded at market
value 80,833 8 545,492 - - 545,500
Comprehensive Income
Net Income 2,357,264 $2,357,264 - 2,357,264
Other comprehensive
income; unrealized
holding gains on
securities during
period, net of
income taxes of
$516,375 in 1999 - - - - 1,002,375 1,002,375 1,002,375
Comprehensive ----------
Income - - - - $3,359,639 - -
--------- ---- ----------- ----------- ========== ---------- -----------
Balance,
March 31, 1999 2,953,011 295 10,478,630 (1,981,687) 1,002,375 9,499,613
Issuance of Common
Stock for services
at $1.50 per share 12,500 1 18,749 18,750
Repurchase and
cancelation
of Common Stock (14,950) (1) (27,274) (27,275)
Comprehensive Income
Net Income - - - (752,598) $ (752,598) - (752,598)
Other Comprehensive
income; unrealized
holding gains on
securities during
period, net of
income taxes of
$640,764 in 2000 - - - - 1,243,836 1,243,836 1,243,836
Comprehensive ----------
Income - - - - $ 491,238 -
--------- ---- ----------- ----------- ========== ---------- -----------
Balance,
March 31, 2000 2,950,561 $295 $10,470,105 $(2,734,285) $2,246,211 $ 9,982,326
========= ==== =========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (752,598) $ 2,357,264
Adjustments to reconcile net income/(loss)
to net cash
Provided by/(used in) operating activities
Depreciation, depletion and amortization 781,023 744,538
Stock issued for services 18,750
Deferred income taxes (640,764) (516,375)
Impairment of water facility assets - 585,000
Gain on sale of assets (27,899) (3,044,094)
(Increase) decrease in assets
Accounts receivable (39,153) (267,426)
Inventories (59,904) 44,482
Prepaid expenses (285,925) (36,098)
Increase (decrease) in liabilities
Accounts payable (3,354) 348,670
Accrued expenses 13,946 50,059
Deferred revenue - (90,000)
---------- -----------
NET CASH PROVIDED BY/(USED IN) OPERATING
ACTIVITIES (995,878) 176,020
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and
intangibles (1,738,577) (427,546)
Proceeds from sale of assets 30,134 250,000
Investment in oil and gas properties (1,849,586) (459,019)
Increase in other assets (132,722) -
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,690,751) (636,565)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 2,270,160 300,000
Payments on notes payable (300,000) -
Increase in borrowings on long-term debt 4,102,070 408,320
Sale (Repurchase) of Common Stock (27,275) 164,063
Repayment of long-term debt (677,491) (614,499)
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,367,464 257,884
---------- -----------
NET INCREASE (DECREASE) IN CASH 680,835 (202,661)
CASH, BEGINNING OF PERIOD 35,474 238,135
---------- -----------
CASH, END OF PERIOD $ 716,309 $ 35,474
========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended March 31,
2000 1999
---------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest, net of amounts
capitalized $302,787 $258,476
Investment in oil and gas properties
and services performed in exchange
for the issuance of common stock - 545,500
Prepaid costs reclassed to Oil and
Gas Property 30,000 -
Property and equipment acquired
through Capital Leases 239,692 -
Property and equipment exchanged
for settlement of debt 4,959 -
Notes Payable refinanced into long
term debt 2,270,160 -
Other Comprehensive Income net of
Income Taxes 1,243,836 1,002,375
During the year ended March 31, 1999, the Company sold its investment in oil
and gas properties for stock, cash and assumption of debt. The transaction was
as follows:
Basis of oil and gas properties sold $ 5,487,839
Sales Proceeds: -----------
Cash proceeds 250,000
Assumptions of debt 800,683
Investment securities received at
fair value 7,481,250
-----------
Total Sales Proceeds 8,531,933
-----------
Gain on sale $ 3,044,094
===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(1) ORGANIZATION
The Company and its subsidiaries are engaged in providing oil and gas
production enhancement services in Northeastern Oklahoma, Eastern Kansas, and
the Powder River Basin of Wyoming and in oil and gas exploration, development
and production activities in Southeast Kansas and South Central Wyoming.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Infinity,
Inc. and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Accounts Receivable
Revenue producing activities are conducted primarily in Kansas, Oklahoma,
and Wyoming. 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
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 consolidated 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
consolidated financial statements, and the reported accounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
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.
F-8
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Assets Useful Lives
------ ------------
Buildings 30 years
Site improvements 15 years
Machinery, equipment and vehicles 5 - 10 years
Office furniture and equipment 5 - 10 years
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.
All capitalized costs of oil and bas 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.
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
costs incurred for the year ended March 31, 2000 an 1999 was $602,350 and
$258,476, respectively. Interest costs capitalized were $85,197 and $0 in
fiscal year 2000 and 1999, respectively.
F-9
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-lived Assets
Long-lived assets to be held and used in the Company's business are
reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may not be recoverable. When required,
impairment losses on assets to be held and used are recognized based on the
fair value of the assets. As a result of the Company's review of long lived
assets in August 1998, a $585,000 impairment to the water treatment facility
assets was recorded.
Intangible Assets
The excess of the purchase price over net assets acquired for businesses
purchased by the Company from unrelated third parties is recorded as goodwill
and is amortized over 20 years.
Other intangibles are recorded at cost and are amortized on the straight
line basis over the contractual or estimated useful life of the asset.
Per Share Information
The computation of earnings per share in each year is based on the
weighted average number of common shares outstanding. All potential common
shares are anti-dilutive.
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.
Investment Securities
Investment securities that are held for short-term resale are classified
as trading securities and carried at fair value. Debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost, adjusted for amortization of premium and
accretion of discounts using methods approximating the interest method. Other
marketable securities are classified as available-for-sale and are carried at
fair value, based on quoted market prices. Unrealized gains and losses on
securities available-for-sale are reported as a component of comprehensive
income, net of applicable income taxes. Cost of securities sold is recognized
using the specific identification method.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the consolidated financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the
tax and financial basis of available-for-sale securities, property and
equipment and other assets, and net operating loss carryforwards.
F-10
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
Recently Issued Accounting Pronouncements
In June of 1999 the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 addresses the accounting for
derivative instruments embedded in other contracts and hedging activities.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 shall be as
of the beginning of an entity's fiscal quarter, on that date, hedging
relationships shall be designated and documented under the provisions of this
statement. This statement currently has no impact on the financial statements
of the Company, as the Company does not hold any derivative instruments or
participate in any hedging activities.
Reclassifications
Certain reclassifications have been made to the March 31, 1999
consolidated financial information in order to conform to the 2000
presentation. The reclassification had no effect on the March 31, 1999 net
income.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Cost:
Site cost improvements $1,602,270
Machinery, equipment and vehicles 6,670,915
Office furniture and equipment 189,748
----------
Total cost 8,462,933
Less accumulated depreciation (4,232,377)
----------
Net property and equipment $4,230,556
==========
F-11
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(4) INVESTMENT IN SECURITIES
The Company received 450,000 shares of common stock in Evergreen
Resources, Inc. as part of the payment for the sale of gas production
properties effective December 31, 1998. This stock is carried on the balance
sheet as an available for sale security at its current market value. When the
transaction was completed the value of this stock was approximately $7.5
million, at March 31, 1999, the value was approximately $9.0 million and at
March 31, 2000 the value was approximately $10.9 million. This change in
market value, net of income taxes, is reflected in Stockholders' equity as
accumulated other comprehensive income. Gain or loss on this stock will be
reflected in the Statement of Operations when the stock is sold. Subsequent to
fiscal year ending March 31, 2000 the Company sold 125,000 shares of Evergreen
stock at an average price of $27.21 per share. The Company will recognize a
pretax gain on the sale of securities of approximately $1.3 million during the
quarter ending June 30, 2000.
March 31, 2000
--------------
Marketable equity securities, at cost $ 7,481,250
Unrealized holding gain 3,403,350
-----------
Investment Securities $10,884,600
===========
(5) OIL AND GAS PROPERTIES
Oil and gas properties consist of the following:
Acquisition costs $ 1,294,518
Development costs 361,829
Exploration costs 330,905
-----------
Total cost 1,987,252
Less accumulated depreciation,
amortization, depletion and
impairment (28,604)
-----------
$ 1,958,648
===========
One of the lease agreements requires certain drilling activity to retain the
Company's interest in the lease. Under this lease, the Company is committed to
drill five wells before August 15, 2000 (providing permitting, equipment and
other force majeure issues are not invoked) and three and four wells,
respectively in each of the next two years to earn the right to develop the
entire acreage. As of March 31, 2000, the Company had drilled one well and
contracted to drill the other four wells. In addition, after the completion of
the initial five wells, the Company can elect to participate in the gas
gathering system. In connection with the Company's interest in the Manson
lease in Kansas, the Company has the option to lease additional acreage for
$300,000 on which it could drill an additional 88 wells and rework 83 others
as part of the polymer augmented waterflood. The Company has a joint venture
with an oil company in which a Director is partner and operations manager.
The oil company acts as operator for the Manson property. The Company paid
the oil company $150,000 for the lease rights and $254,163 in development
costs through March 31, 2000.
F-12
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(5) OIL AND GAS PROPERTIES (CONTINUED)
Recovery of the above acquisition and development costs is dependent on a
variety of factors including actual production results and market conditions.
(6) LONG TERM DEBT
In April 1999, the Company entered into a financing agreement,
collateralized by marketable equity securities with a fair value of
$2,500,000. Under the agreement, the Company borrowed $2,035,950. Borrowings
were due April 2000. Under the terms of the agreement, the Company was
obligated to pay back an amount equal to $2,270,160. However, in April, 2000,
the Company refinanced the note into a two year note due April of 2002.
Therefore, the balance is recorded as long-term debt in the accompanying
consolidated balance sheet. Under the new agreement, the Company is obligated
to pay back an amount equal to $2,742,500 so long as the collateralized
marketable equity securities are trading between $21.94 and $32.91 per share
at maturity. This equates to an approximate 7.8% effective interest rate.
Should the marketable equity securities price fall below $21.94, the Company
will repay the loan at the collateral's trading price times the 125,000
collateral shares. If the price exceeds $32.91, the price per share in excess
of $32.91 times the 125,000 collateralized shares will be an additional cost.
During the year ended March 31, 2000 the Company entered into two
additional financing agreements, collateralized by marketable equity
securities with a fair value of $4,525,000. Under the agreements, the Company
may borrow up to $3,366,050. Borrowings are due November of 2001 and March of
2002. The Company is obligated to pay back an amount equal to $1,904,000 and
$2,021,000 respectively so long as the collateralized marketable equity
securities are trading between $19.04 and $27.51 and $20.21 and $30.31 per
share respectively. These equate to an approximate 7.1% and 8.3% effective
interest rate, respectively. Should the marketable equity securities price
fall below $19.04 or $20.21, respectively, the Company will repay the loan at
the collateral's trading price times the 200,000 collateral shares. If the
price exceed $27.51 and $30.31, respectively, the price per share in excess of
$27.51 and $30.31 respectively, times the 200,000 collateralized shares will
be an additional cost.
Long-term obligations consist of the following:
Financing agreements noted above with individual
payments including interest due between November 2001
and April 2002; collateralized by 325,000 shares of
Evergreen stock with effective interest rates between
7.0% and 8.3% depending on the price of the Evergreen
Stock at the maturity date $5,701,563
F-13
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(6) LONG TERM DEBT (CONTINUED)
Term note; payable in monthly principal installments
of $45,000 plus interest of 2% above prime (9.0% at
March 31, 2000) until maturity, February 2001;
collateralized by substantially all of the assets of
the oilfield service division and is partially guaranteed
by an officer of the Company. In connection with the loan
agreement, the Company issued a three-year warrant to the
lender to purchase up to 37,500 shares of the Company's
common stock at $10.00 per share. Additionally, the
lender made available a $1,000,000 credit facility for
future equipment purchases. 1,666,708
Various fixed rate notes collateralized by vehicles and
equipment with interest rates ranging from 8.75% to
15.5%; payable in monthly installments of principal
and interest, with final payments due between January
2001 and March 2005 370,046
Note payable to a bank with interest of 8.5%; payable
in monthly installments of $5,543 including interest
through November 2006; collateralized by the real
property 334,058
Revolving credit note collateralized by eligible
accounts receivable, equipment and capital
expenditures. Interest is payable monthly at 2%
above prime(9.0% at March 31, 2000), with principal
due February 2001 299,972
Various capital leases, with monthly installments
totaling $4,338, including interest and expiring
through November 2004 213,100
----------
Total long-term obligations 8,585,447
Less current portion (2,174,066)
----------
$6,411,381
==========
F-14
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(6) LONG TERM DEBT (CONTINUED)
Maturities of long-term obligations are as follows:
Long-Term Capital
Years Ending March 31, Debt Leases Total
---------------------- --------- -------- -----
2001 $2,122,215 $ 51,851 $2,174,066
2002 3,577,608 52,056 3,629,664
2003 2,415,008 52,056 2,467,064
2004 101,134 52,056 153,190
2005 55,574 29,780 85,354
Thereafter 100,808 - 100,808
---------- --------- ----------
8,372,347 237,799 8,610,146
Less amount representing
interest - (24,699) (24,699)
---------- --------- ----------
Total principal 8,372,347 213,100 8,585,447
Less current portion 2,122,215 51,851 2,174,066
---------- --------- ----------
$6,250,132 $ 161,249 $6,411,381
========== ========= ==========
Included in equipment in the accompanying consolidated balance sheet are
assets held under capital leases in the amount of $239,692 net of accumulated
amortization of $11,985.
(7) OPERATING LEASES
Through December 1999, the Company leased operating facilities under
operating leases. During December 1999 the Company acquired the facilities for
$210,000. Total rent expense for all operating leases was approximately
$48,000 and $72,000 for the years ended March 31, 2000 and 1999 respectively.
(8) PROPERTY ACQUISITIONS
Effective August 16, 1999 the Company acquired the net operating assets
of Powder River Cementers, LLC ("Powder River"), a well cementing company
located in Gillette, Wyoming for $394,638,including acquisition costs. In
addition, the Company was required to place 100,000 shares of its common stock
in escrow to be issued to the seller upon the Company obtaining certain
operating results with Powder River. In March 2000, in order to complete the
acquisition, the Company paid an additional $200,000 to the seller. The
100,000 shares of common stock in escrow were returned to the Company.
F-15
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(9) COMMON STOCK
Warrants - The Company, in conjunction with a public stock offering,
issued Class A, Class B and underwriter warrants to purchase 212,959 shares of
common stock. Under the term of the warrant agreements, the Class A warrants
and underwriter warrants were to be exercised or would have expired prior to
the beginning of the fiscal year ended March 31, 2000. The Class B warrants
that had an original expiration date of September 30, 1999 were extended until
September 30, 2000. These warrants are subject to redemption by the Company,
upon thirty days notice, at a price of $.08 per warrant. As of March 31, 2000
there were 101,211 Class B warrants outstanding.
The Company issued warrants to purchase 225,000 shares of Infinity common
stock during the year ended March 31, 1997 (1997 Warrants). During the years
ended March 31, 1999 and 1998, 37,500 and 175,000 warrants were exercised,
respectively. The remaining 12,500 warrants outstanding under this issue
expire August 1, 2001.
During the year ended March 31, 1998, in conjunction with a 1998
financing, the Company issued warrants to purchase 37,500 shares of Infinity
common stock. The warrants, none of which have been exercised, expire on
December 15, 2000.
Options - In 1992 and 1999, the Company adopted stock option plans
containing both incentive and non-statutory 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 plans, 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 plans become exercisable immediately or as
directed by the Board of Directors and generally expire five or 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
plans, an aggregate of 488,333 shares of common stock are available for
issuance upon the exercise of such options. At March 31, 2000, options to
purchase 9,500 shares were available for grant under the plans.
F-16
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(9) COMMON STOCK (CONTINUED)
A summary of stock option and warrant activity is as follows:
Option/Warrant Weighted
Number of Price Average Price
Shares Per Share Per Share
--------- -------------- -------------
Outstanding, March 31, 1998 1,038,793 $2.40-$15.36 $8.15
Granted - - -
Canceled or Forfeited (383,485) 8.00- 10.00 8.37
Exercised (43,750) 3.52- 5.24 3.77
---------- ------------ -----
Outstanding, March 31, 1999 611,558 2.40- 15.36* 8.26
Granted 299,000 3.00 3.00
Canceled or Forfeited (118,378) 2.40- 11.52 7.09
Exercised - - -
---------- ------------ -----
Outstanding, March 31, 2000 792,180 $3.00-$15.36 $6.50
========== ============ =====
* In May 1999, the exercise price of 175,000 options was reduced from $8.00
per share to $3.00 per share.
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices March 31, 2000 Life Price March 31, 2000 Price
------------ -------------- ----------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$3.40-$15.36 409,302 1 year $8.91 406,152 $8.95
3.52- 10.00 89,877 2 years 6.99 89,427 7.00
3.00 20,000 4 years 3.00 20,000 3.00
3.00 273,000 5 years 3.00 137,750 3.00
</TABLE>
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," there
would have been no effect on net income or earnings per share for the year
ended March 31, 1999 as no options or warrants were granted during the year.
F-17
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(9) COMMON STOCK (CONTINUED)
However, the Company's net income and earnings per share would have been
as follows for the year ended March 31, 2000:
Net loss as reported $ (752,598)
===========
Proforma net loss $(1,350,259)
===========
Basic and diluted loss per share
as reported $ (.25)
Basic and diluted loss per
share-proforma $ (.46)
For Options granted during the year ended March 31, 2000, 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 9.5%, expected option life of 4.87 years, expected volatility of
100.85% and no expected dividends.
Stock issued - During the year ended March 31, 1999, the Company issued
80,833 shares of common stock in conjunction with the perfection of an
interest in oil and gas properties and consulting services at a fair value of
$6.75 per share. The resulting $545,500 was capitalized into oil and gas
properties and was a component of the Company's basis in the property for
calculating gain/loss when the properties were sold.
During the year ended March 31, 2000, the Company issued 12,500 shares of
common stock with a fair value of $18,750 for service. In addition, the
Company acquired and cancelled 14,950 shares of common stock for $27,275,
(10) INCOME TAXES
The provision for income taxes for the years ended March 31, 2000 and
1999 consists of the following:
2000 1999
---------- ---------
Current income tax expense, net of benefit
from net operating losses of $0 and
$1,600,000 in 2000 and 1999, respectively $ - $ -
Deferred income tax expense (benefit) (456,012) 629,478
Change in deferred tax asset valuation
allowance (184,752) (1,145,853)
---------- -----------
Total income tax (benefit) $ (640,764) $ (516,375)
========== ===========
The effective income tax rate varies from the statutory federal income tax
rate as follows:
2000 1999
---------- ---------
Federal income tax rate 34% 34 %
Change in valuation allowance 12% (62)%
--- -----
Effective tax rate 46% (28)%
=== =====
F-18
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(10) INCOME TAXES (CONTINUED)
The significant temporary differences and carryforwards and their related
deferred tax asset (liability) and deferred tax asset valuation allowance
balances as of March 31, 2000 are as follows:
Deferred tax assets:
Accruals and impairment $ 224,000
Net operating loss carryforward 1,838,000
Other 4,000
-----------
Gross deferred tax assets 2,066,000
-----------
Deferred tax liabilities:
Intangible drilling costs (160,000)
Property and equipment (603,000)
Unrealized holding gains on
available for sale securities (1,157,000)
-----------
Gross deferred tax liabilities (1,920,000)
-----------
Deferred tax asset valuation allowance (146,000)
-----------
Net deferred taxes $ -
===========
No deferred income tax assets have been recognized in the accompanying
consolidated financial statements due to uncertainties in connection with the
realization of the potential tax benefits associated with remaining net
operating loss carrforwards.
For income tax purposes, the Company has approximately $5,400,000 of net
operating loss tax carryforwards expiring in various years through 2014.
The availability of the net operating loss carrforwards 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.
(11) RETIREMENT PLAN
The Company has a 401(k) plan covering substantially all of the employees
of the oil and gas production enhancement service division. There were no
Company contributions made to the plan during the years ended March 31, 2000
and 1999.
(12) INDUSTRY SEGMENTS
The Company reports segment information in accordance with Financial
Accounting Standards Board Statement No. 131. This Statement requires
disclosure of information related to certain operating segments of the Company
and also requires restatement of segment information for prior periods.
F-19
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(12) INDUSTRY SEGMENTS (CONTINUED)
The Company's operations have been classified into three industry
segments: (i) Oil Field Services; (ii) Oil and Gas Production; and, (iii)
Environmental Services. The Oil Field Services segment of the Company is
directed at maintaining and enhancing production obtained from oil and gas
wells and currently has operations in Kansas, Oklahoma, and Wyoming, and has
had operations in Colorado. The Colorado facilities were shut down when the
Company sold its Coal Bed Methane production in the Raton Basin during the
year ended March 31, 1999. The Oil and Gas Production segment of the Company
has acquired interest in producing properties in Kansas and undeveloped
leasehold in Wyoming. The Environmental Services segment of the Company was
established to develop wastewater treatment technologies and apply them to the
treatment of industrial wastewater and disposal of solid waste byproducts.
This segment of the Company has mothballed facilities in Kansas and facilities
with limited operations in Wyoming.
Environ-
Oil Field Oil & Gas mental
Services Production Services Corporate Consolidated
--------- ---------- -------- ----------- ------------
Net Sales:
2000 $5,122,404 $ 7,556 $ 42,838 $ - $ 5,172,798
1999 4,291,226 171,316 389,662 - 4,852,204
Depreciation, Amortization, and Depletion:
2000 697,957 16,357 63,767 2,941 781,023
1999 578,742 48,054 113,342 4,400 744,538
Operating Income (Loss):
2000 167,364 (94,367) (178,631) (846,810) (952,444)
1999 160,351 (126,763) (57,815) (373,101) (397,328)
Identifiable Assets, Net:
2000 5,346,668 2,257,304 41,016 11,734,320 19,379,308
1999 4,040,302 - 100,549 9,115,682 13,256,533
Capital Expenditures:
2000 1,727,317 1,849,586 - 11,260 3,588,163
1999 427,546 459,019 - - 886,565
(13) SIGNIFICANT CUSTOMERS
During the year ended March 31, 2000, the Company had sales to two
unrelated third parties of approximately $1,250,000, representing
approximately 24% of net sales. During the year ended March 31, 1999, the
Company had sales to a different unrelated third party of approximately
$1,141,000 representing approximately 24% of net sales. Receivables
outstanding from these sales were approximately $43,000 and $90,000
respectively.
F-20
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following assumptions were used in estimating the fair value of the
Company's financial instruments:
The carrying value of the Company's cash balance represents the fair
value of the accounts as of March 31, 2000. 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, 2000.
(15) LITIGATION
The Company is involved in several legal matters that have arisen during
the normal course of the Company's business, and 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 consolidated financial statements.
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Proved Oil and Gas Reserves (Unaudited)
The following information was developed from reserve reports as of May 1,
2000 which were prepared by independent reserve engineers:
Natural Gas Crude Oil
(MCF) (BARRELS)
----------- ----------
Proved Reserves as of March 31, 1999 -- --
Extensions, discoveries and other additions 558,953,000 110,500
----------- -------
Proved Reserves as of March 31, 2000 558,953,000 110,500
=========== =======
Proved reserves are estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves. Oil and gas reserve engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
precisely measured, and estimates of engineers other than the Company's might
differ materially from the estimates set forth herein. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered.
F-21
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
Costs Incurred in Oil and Gas Activities
Costs incurred in connection with the Company's oil and gas acquisition,
exploration and development activities during the year ended March 31, 2000
are shown below.
Green River Cherokee
----------- --------
Property acquisition costs: $1,114,518 $150,000
Exploration costs 330,905 --
Development costs -- 254,163
---------- --------
Total costs $1,445,423 $404,163
========== ========
Aggregate Capitalized Costs
Aggregate capitalized costs relating to the Company's oil and gas
producing activities, and related accumulated DD&A, as of March 31, 2000:
Unproved oil and gas properties $ 30,000
Proved oil and gas properties 1,957,252
-----------
Total 1,987,252
Less-Accumulated depreciation, depletion,
amortization and impairment (28,604)
-----------
Net capitalized costs $ 1,958,648
===========
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (Unaudited)
The following information is based on the Company's best estimate of the
required data for the Standardized Measure of Discounted Future Net Cash Flows
as of March 31, 2000 as required by Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 69. The Standard requires the
use of a 10 percent discount rate. This information is not the fair market
value nor does it represent the expected present value of future cash flows of
the Company's proved oil and gas reserves.
Future cash inflows $1,506,692,108
Future production and development costs (734,944,794)
Future Income Tax Expense (262,707,256)
--------------
Future Net cash flows 509,040,058
10% annual discount for estimated timing
on cash flows (262,539,904)
Standardized measure of discounted future --------------
cash flows $ 246,500,154
==============
F-22
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2000 AND 1999
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
The following reconciles the change in the standardized measure of
discounted future net cash flow during the year ended March 31, 2000:
Beginning of year $ -
Extensions, discoveries and other
additions 246,500,154
------------
End of the year $246,500,154
============
Future cash inflows are computed by applying a May 1, 2000 spot gas price
of $2.69 per mcf of gas and $28.13 per bbl of oil to the May 1, 2000 estimated
quantities of the reserves. Future production and development costs are
computed by estimating the expenditures to be incurred in developing and
producing the Company's proved oil and gas reserves at May 1, assuming
continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate
year-end statutory tax rates to the future pretax net cash flow relating to
the Company's proved oil and gas reserves, less the tax basis of the
properties involved. Tax depreciation is calculated on the capitalization of
approximately 40% of the development costs of the Green River Basin leasehold
and approximately 60% of the development costs of the Cherokee Basin property
as tangible investment and uses MACRS depreciation for a 7 year life. The
future income tax expenses do not give effect to tax credits, allowances, or
the impact of general and administrative costs of ongoing operations relating
to the Company's proved oil and gas reserves.
F-23
<PAGE>
SIGNATURES
In accordance with 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: June 22, 2000 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, 6/22/2000
Stanton E. Ross (Principal Financial
Officer) and Director
/s/ Jon D. Klugh Chief Financial Officer 6/22/2000
Jon D. Klugh and Secretary
/s/ Jeffrey L. Dale Director 6/22/2000
Jeffrey L. Dale
/s/ George R. Jones Director 6/22/2000
George R. Jones
/s/ Leroy C. Richie Director 6/22/2000
Leroy C. Richie
