<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________, 19___ to ________, 19___.
Commission File Number: 0-17204
INFINITY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1070066
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
211 West 14th Street, Chanute, Kansas 66720
----------------------------------------------------------
Address of Principal Executive Offices, Including Zip Code
(316) 431-6200
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
X Yes ---- No
There were 3,050,561 shares of the Registrant's Common Stock outstanding as of
December 31, 1999.
<PAGE>
INFINITY, INC.
FORM 10-QSB
INDEX
Page
Part I. Financial Information Number
Item 1. Financial Information:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements
of Operations for three months ended December 31 4
Condensed Consolidated Statements of Operations
for nine months ended December 31 5
Condensed Consolidated Statements of
Comprehensive Income 6
Condensed Consolidated Statements of Cash
Flows 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis
or Plan of Operations 11
Part II: Other Information 18
2
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Dec. 31, 1999 March 31, 1999
(Unaudited)
CURRENT ASSETS
Cash $ 1,349,608 $ 35,474
Accounts Receivable, less
allowance for doubtful accounts 771,186 548,756
Inventories 151,560 144,094
Prepaid Expenses 76,933 110,356
----------- -----------
TOTAL CURRENT ASSETS 2,349,287 838,680
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation 3,945,189 3,281,310
INVESTMENT SECURITIES 8,887,500 9,000,000
OIL AND GAS PROPERTIES, UNDEVELOPED
LEASEHOLD 913,361 --
DEPOSIT ON ASSET PURCHASE 168,760 --
INTANGIBLE ASSETS, at cost, less
accumulated amortization 172,800 136,543
----------- -----------
TOTAL ASSETS $16,436,897 $13,256,533
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 696,113 $ 518,650
Notes Payable 2,358,188 300,000
Accrued Expenses 139,918 287,254
Current portion of long-term debt 587,105 610,419
----------- -----------
TOTAL CURRENT LIABILITIES 3,781,324 1,716,323
LONG-TERM LIABILITIES
Long-term debt, less current portion above 3,958,043 2,040,597
----------- -----------
TOTAL LIABILITIES 7,739,367 3,756,920
STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTED
Common stock, par value $.0001, authorized
300,000,000 shares, issued and outstanding
3,050,561 shares; 2,953,011 shares 305 295
Additional paid-in-capital 10,638,845 10,478,630
----------- -----------
TOTAL CAPITAL CONTRIBUTED 10,639,150 10,478,925
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME 928,125 1,002,375
RETAINED EARNINGS (DEFICIT) (2,869,745) (1,981,687)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,697,530 9,499,613
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,436,897 $13,256,533
=========== ===========
The consolidated balance sheet at March 31, 1999 has been derived from the
audited financial statements at that date.
See Notes to Consolidated Financial Statements
3
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Dec. 31,
1999 1998
----------- -----------
NET SALES $ 1,623,765 $ 1,260,015
COST OF GOODS SOLD 900,494 773,366
----------- -----------
GROSS PROFIT 723,271 486,649
OPERATING EXPENSES 738,905 576,881
----------- -----------
OPERATING INCOME (LOSS) (15,634) (90,232)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Income & Finance Charges 8,824 2,378
Interest Expense (86,015) (60,772)
Rent and Other Income 11,413 2,690
Gain (Loss) on sales of assets 1,249 3,136,807
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (64,529) 3,081,103
----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (80,163) 2,990,871
INCOME TAX BENEFIT (EXPENSE) (659,813) --
----------- -----------
NET INCOME (LOSS) $ (739,976) $ 2,990,871
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE $ (0.24) $ 1.05
----------- -----------
Weighted Average Basic Shares Outstanding 3,054,529 2,849,228
See Notes to Consolidated Financial Statements
4
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended Dec. 31,
1999 1998
----------- -----------
NET SALES $ 3,590,121 $ 3,969,387
COST OF GOODS SOLD 2,061,053 2,426,873
----------- -----------
GROSS PROFIT 1,529,068 1,542,514
OPERATING EXPENSES 2,022,368 1,611,757
----------- -----------
OPERATING INCOME (493,300) (69,243)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Income & Finance Charges 27,788 5,612
Interest Expense (405,457) (188,894)
Rent and Other Income 19,912 31,356
Gain on Sale of Assets 1,249 3,136,807
Impairment of Asset Value -- (585,000)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (356,508) 2,399,881
----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (849,808) 2,330,638
----------- -----------
INCOME TAX BENEFIT (EXPENSE) (38,250) --
----------- -----------
NET INCOME (LOSS) $ (888,058) $ 2,330,638
----------- -----------
NET (LOSS) PER COMMON SHARE $ (0.29) $ 0.82
----------- -----------
Weighted Average Basic and Diluted Shares
Outstanding 3,017,488 2,849,228
See Notes to Consolidated Financial Statements
5
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INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Dec. 31 Nine Months Ended Dec. 31
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (739,976) $ 2,990,871 $ (888,058) $ 2,330,638
Other Comprehensive
Income (Loss):
Unrealized holding losses
on Securities, net of
taxes of $659,813 (three
months ended 12/31/1999)
and $38,250 (nine months
ended 12/31/1999) (1,280,813) -- (74,250) --
Reclassifications, net -- -- -- --
----------- ----------- ---------- -----------
Total Other Comprehensive
Income (Loss) (1,280,813) -- (74,250) --
----------- ----------- ---------- -----------
Comprehensive Income (Loss) $(2,020,789) $ 2,990,871 $ (962,308) $ 2,330,638
=========== =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Dec. 31,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (888,058) $ 2,330,639
Adjustments to reconcile net income/(loss)
to net cash Provided by/(used in)
operating activities
Depreciation and amortization 522,071 578,672
Accrued financing costs 183,871 -
Payment of expense with shares of stock 18,750 -
Deferred Income Taxes 38,250 -
Impairment of asset value - 585,000
(Gain) on Sale of Assets (1,249) (3,136,807)
(Increase) decrease in operating assets
Accounts Receivable (222,430) (338,621)
Inventories (7,466) 17,483
Prepaid Expenses 33,423 (7,889)
Increase (decrease) in operating liabilities
Accounts Payable 177,463 166,850
Accrued Expenses (210,240) 141,678
Deferred Revenue - (90,000)
----------- -----------
NET CASH PROVIDED BY/(USED IN)OPERATING
ACTIVITIES (355,615) 247,005
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,125,236) (245,333)
Investment in oil and gas properties (936,444) (404,784)
Investment in intangible assets (72,639) (20,976)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,134,319) (671,093)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable 1,937,221 -
Increase in borrowings on long-term debt 2,388,831 402,612
Sale/(Repurchase) of Common Stock (27,285) 289,062
Repayment of long-term debt (494,699) (475,409)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,804,068 216,265
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,314,134 (207,823)
CASH, BEGINNING OF PERIOD 35,474 238,135
----------- -----------
CASH, END OF PERIOD $ 1,349,608 $ 30,312
----------- -----------
Additional Cash Flow Information:
Deposit on Asset Purchase through issuance
of Common Stock $ 168,760 -
Other Comprehensive Income net of Income
Taxes 74,250 -
See Notes to Consolidated Financial Statements
7
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
Summary of issuer's significant accounting policies are incorporated by
reference to the Company's annual report on Form 10-KSB at March 31, 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
and nine month periods ended December 31, 1999 are not necessarily indicative
of the results that may be expected for the year ended March 31, 2000.
(2) Current Financing
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. Under the agreement, the Company borrowed $2,035,950. Borrowings
are due April 2000. The Company is obligated to pay back an amount equal to
$2,181,250 so long as the Evergreen stock is trading between $17.25 and $22.59
per share. This equates to an approximate 7% effective interest rate. Should
the market price of the Evergreen stock fall below $17.25 per share, the
Company will repay the loan at the trading price of the Evergreen stock times
the 125,000 collateral shares. If the price exceeds $22.59, the price per
share in excess of $22.59 times the 125,000 collateralized shares will be an
additional cost. As of December 31, 1999 the Company had accrued interest of
$167,211 related to the financing agreement. The Company entered into an
additional financing agreement with regard to additional Evergreen Stock in
November 1999. See Note 4 below.
(3) Investment 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, at June 30, 1999 the value
was approximately $11.3 million, at September 30, 1999 the value was
approximately $10.8 million and at December 31, 1999 the value was
approximately $8.9 million. This change in market value, net of income taxes,
is reflected in Shareholders' 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.
(4) Long Term Debt
The Company borrowed an additional $100,000 on its equipment line of credit
with The CIT Group/Credit Finance, Inc. (CIT). The proceeds from this
additional borrowing were used to finance a portion of the Powder River
Cementers, LLC acquisition.
8
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
An additional $350,000 was borrowed to purchase the facilities that the
company has been leasing and currently occupies in Chanute and Ottawa, Kansas
and Bartlesville, Oklahoma and to purchase additional facilities in Gillette,
Wyoming. Financing for the purchase has been 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.
In November 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 $2,075,000. Under the agreement, the Company borrowed $1,652,596.
Borrowings are due November 2001. The Company is 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 1/2% effective
interest rate. Should the market price of the Evergreen stock fall below
$19.04 per share, the Company will repay the loan at the trading price of the
Evergreen stock times the 100,000 collateral shares. If the price exceeds
$27.51, the price per share in excess of $27.51 times the 100,000
collateralized shares will be an additional cost. As of December 31, 1999 the
Company had accrued interest of $16,660 related to this financing agreement.
During the nine months ended December 31, 1999 the Company also borrowed
$286,235 through other credit facilities for the purchase of other oil field
service equipment and to pay operating costs.
(5) Property Acquisitions
Effective August 16, 1999 the Company 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 valued at
$168,760. Assets of this company included a cement 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.
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 Company
also acquired a working interest in the Cherokee Basin of Eastern Kansas
through the signing of a joint venture with Verde Oil. Capital expenditures,
including acquisition costs, were $678,778 on the Green River Basin acreage
and $150,000 on the Cherokee Basin through December 31, 1999. Both of these
projects will require substantial capital expenditures during the remainder of
fiscal year 2000 and into fiscal year 2001 which the Company expects to
finance through borrowings secured by its Evergreen Stock.
(6) Stock Options
In 1999, the Company adopted a stock option plan which allows the grant of
incentive and non-qualified stock options. Options granted under the plan
become exercisable immediately unless the Board of Directors places vesting
requirements on the options. Options expire ten years after the date of grant
unless an earlier expiration date is set by the Board of Directors. However,
incentive stock options granted to an employee who owns more than 10% of the
total combined power of all classes of the Company's stock must be exercised
within five years of the date of grant. Pursuant to the plan, an aggregate of
9
<PAGE>
INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
140,000 shares of common stock are available for issuance upon the exercise of
such options. The Company has issued 73,250 incentive options and 65,000
non-qualified options under the plan all of which are exercisable at $3.00 per
share. As of February 10, 2000 options to purchase 1,750 shares were
available for grant under the plan and none of the options granted had been
exercised.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
RESULTS OF OPERATIONS
The net loss for the quarter ended December 31, 1999 was $739,976 compared to
net income of $2,990,871 for the 1998 period. During the third quarter of
fiscal year 2000, the Company had a deferred tax expense of approximately
$660,000 related to the change in the fair market value of the Evergreen stock
from approximately $10.8 million at September 30, 1999 to $8.9 million at
December 31, 1999. The result was an unrealized loss for the quarter of
approximately $1.9 million with an effective tax rate of 34%. The third
quarter deferred tax expense offsets the deferred tax benefit of approximately
$622,000 as a result of the increase in fair market value of the Evergreen
stock from approximately $9.0 million at March 31, 1999 to $10.8 million at
September 30, 1999. Net Income for the third quarter of fiscal year 1999
included a $3,136,807 gain on the sale of the Raton Basin Properties. For the
nine-month period ended December 31, 1999, the net loss was $888,058 compared
to net income of $2,330,638 for the comparable period in 1998. The reduction
in net income was primarily a result of the gain on the sale of the Raton
Basin properties in the 1998 period. In addition, the Company had a $410,611
increase in operating expenses and a $216,563 increase in interest expense.
The Company experienced a $236,622 increase in gross profit to $723,271 in the
three months ended December 31, 1999 from $486,649 for the three months ended
December 31, 1998. The increase in gross profit during the quarter was the
result of a $363,750, or 29%, increase in net sales, which was partially
offset by a $127,128, or 16%, increase in cost of goods sold when compared to
same quarter of 1998. The expansion of the service segment through the
acquisition of Powder River Cementers added $356,591 in revenue and $277,503
in cost of goods sold during the quarter. The increase in the cost of goods
sold due to the acquisition of Powder River Cementers was partially offset
with the elimination of $136,628 in contract labor utilized during contract
oil well plugging operations and for operating the waste water treatment
facilities after those operations were returned to the Company.
For the nine months ended December 31, 1999 the Company had $1,529,068 in
gross profit, a $13,446, or 1%, decrease from the $1,542,514 gross profit
recognized in the comparable 1998 period. The decrease in gross profit during
the nine month period was the result of a $379,266, or 10%, decrease in net
sales, which was partially offset by a $365,820, or 15%, decrease in the cost
of goods sold when compared to the nine month period ended December 31, 1998.
Operations in the Powder River Basin contributed $445,712 in revenue and
$308,326 in cost of goods sold during the period. The elimination of contract
labor associated with contract well plugging activity and operation of the
waste water treatment facilities reduced the cost of goods sold by $273,334
for the period ended December 31, 1999 compared to the nine month period ended
December 31, 1998.
Operating expenses for the three months ended December 31, increased $162,024,
or 28%, from $576,881 in the 1998 period to $738,905 in the 1999 period. A
majority of the increase in other operating expenses were associated with:
shareholder matters which increased by $60,498 as a result of expenses
incurred to attract new, outside directors and to improve communications with
shareholders, to $69,472 in the quarter ended December 31, 1999 from $8,974 in
the comparable 1998 period; consulting fees that were $14,895 in the 1999
quarter; and, salaries that increased by $25,426, or 18%, to $169,997 in the
1999 quarter compared to $144,571 in the same period in 1998 as capabilities
were expanded to evaluate opportunities and activities in the environmental
division increased.
11
<PAGE>
For the nine months ended December 31, 1999 other operating expenses increased
$410,611, or 25%, to $2,022,368 from $1,611,757 in the 1998 period. The
increase in other operating expenses was mainly due to: an $145,600 increase
in expenses incurred to attract new outside directors; an increase of $141,530
in legal costs to settle issues related to the sale of the Raton Basin
properties in December of 1998 which were incurred after the sale; a $97,216,
or 26%, increase in salaries due to improved capabilities and the return of
the operation of the environmental segment to the Company; and, a $32,516
increase in travel expenses as new opportunities were pursued. These increases
in other operating expenses were partially offset by a $56,601, or 10%,
decrease in Depreciation, Depletion, and Amortization (DD&A) expense after the
water treatment facility was written down and the gas property was sold.
Interest expense for the quarter ended December 31, 1999 was $86,015 compared
to $60,772 for the comparable period in 1998, a $25,243, or 42% increase. For
the nine-month period ended December 31, 1999 interest expense was $405,457
compared to $188,894 for the same period of 1998, a $216,563, or 115%
increase. The increase in interest expense in each period is primarily due to
the increased debt associated with the financings obtained in April and
November 1999. (See Note 2 and Note 4 to the Consolidated Financial
Statements)
During the quarter and nine month periods ended December 31, 1998 the Company
recorded a gain on the sale of assets of $3,136,807 associated with the sale
of its interest in the gas gathering system and oil and gas properties in the
Raton Basin.
During the period ended December 31, 1998 the Company recognized a $585,000
non-cash expense for impairment of asset value in accordance with Statement of
Accounting Standards No. 121 related to the abandonment by its lessee of the
water treatment facilities. The Company has not recognized any impairment in
the current period.
Deferred income tax expense of $659,813 was recorded in the three month period
ended December 31, 1999 as a result of a change in value of the Evergreen
stock held by the Company. The Company had recorded a deferred tax liability
from unrealized gains in the Evergreen stock through September 30, 1999, which
would be offset by net operating loss carry forwards and therefore resulted in
a deferred tax benefit in the six month statement of operations. The
unrealized gains were reversed in the quarter ended December 31, 1999 due to a
decline in the fair market value of the Evergreen stock, resulting in the
deferred tax expense offsetting the deferred tax benefit previously recorded.
For the nine months ended December 31, 1999 the Company has recognized income
tax expense of $38,250.
OILFIELD SERVICES: The oilfield services segment of the Company generated
$1,617,567 in revenues, and $895,374 in cost of sales during the quarter ended
December 31, 1999 compared to $958,200 in revenues and $623,195 in cost of
sales during the comparable period in 1998. The operating expenses incurred
by the oilfield services segment of the Company were $478,850 for the three
months ended December 31, 1999 and $364,199 for the three months ended
December 31, 1998. Operating income increased to $243,343 for the three
months ended December 31, 1999 from an operating loss of $29,194 for the three
months ended December 31, 1998. The expansion of the oilfield service segment
of the Company, effective August 15th with the acquisition of Powder River
Cementers, into the Gillette, Wyoming area generated $356,591 in revenues and
$277,503 in cost of sales. The Gillette operations also incurred $74,606 in
operating expenses, resulting in the addition of $4,482 in net income for the
quarter ended December 31, 1999. (See Note 5 to the Consolidated Financial
Statements.)
12
<PAGE>
The oilfield services segment of the Company generated $3,550,706 in revenues
and $2,006,237 in cost of sales during the nine months ended December 31,
1999, compared to $3,497,282 in revenues and $2,036,523 in cost of sales
during the nine months ended December 31, 1998. The operating expenses
incurred by the oilfield services segment of the Company were $1,294.395 for
the nine months ended December 31, 1999 and $1,157,485 for the six months
ended December 31, 1998. Operating income declined to $62,513 for the nine
months ended December 31, 1999 from operating income of $303,274 for the nine
months ended December 31, 1998. Extremely wet conditions in the service area
during April and May and depressed oil prices resulted in a greatly reduced
demand for oil field services during the first six months of the period ended
December 31, 1999 compared to the same period ended December 31, 1998.
ENVIRONMENTAL SERVICES: The environmental service segment of the Company
incurred a $2,436 operating loss during the quarter ended December 31, 1999
compared to an operating gain of $86,708 for the same period in 1998. The
Company operates these properties at a minimum level of activity and recorded
no revenue during the three months ended December 31, 1999 compared to
$260,789 in revenue during the comparable period of 1998. In October 1996, the
Company entered into a five-year renewable management and lease agreement that
transferred operating responsibility for this segment to an outside party.
During August 1998, the outside party abandoned this management and lease
agreement and operating responsibility for this segment was returned to the
Company. As a result, in accordance with Statement of Accounting Standards
No. 121, the Company recorded a non-cash charge of $585,000 in the nine month
period ended December 31, 1998 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 environmental services segment of the Company recorded $33,217 in revenue,
$33,826 in cost of sales, and operating expenses of $81,527, resulting in an
$82,136 loss during the nine-month period ended December 31, 1999. For the
comparable period ended December 31, 1998 the segment showed $300,790 in
revenue, $136,442 in cost of sales, and $138,931 in operating expense. This
segment also recorded $28,666 of rental income for a net gain of $54,083
during the nine month period ended December 31, 1998. The 1999 operating
expense included $47,825 in depreciation expense compared to $117,126 of
depreciation recorded in the 1998 expense. The reduction in depreciation was
mainly due to the write-down of the assets in accordance with Statement of
Accounting Standards No. 121 discussed previously.
OIL AND GAS PRODUCTION: The oil and gas production segment of the Company
recorded net revenue from gas sales of $171,316 and operating expenses of
$303,890 during the nine months ending December 31, 1998, including $48,054 of
depletion and depreciation expense. During August 1998, the Company entered
into an agreement with Evergreen Resources, Inc. under which Evergreen
purchased the gathering system, acquired an interest in the property and
assumed responsibility to manage, operate and develop the properties and
market and transport the produced gas. The Company's remaining interest in
the properties was sold to Evergreen Resources, Inc. effective December 31,
1998 so this segment of the Company has recorded no revenue during the
three-month period ended December 31, 1999. The Company has incurred $21,964
in expenses associated with litigation related to operation of the properties
prior to the asset sale. Liability associated with any outstanding litigation
was transferred to the new owner at the time the properties were sold and the
Company expects no liability associated with these issues.
13
<PAGE>
After the sale of its interest in the Raton Basin of Northern New Mexico and
Southeast Colorado, the Company immediately began and continues to search for
new development opportunities. As a result of this search the Company
acquired a working interest in a coal bed methane property that contains
approximately 24,500 gross acres in the Green River Basin of Wyoming. This
acreage has 30 to 90 feet of high volatile coal at depths between 1,500 to
3,800 feet. A five well pilot project was developed and subsequent to
December 31st the Company drilled the first well on the property. Based on
the results of the pilot project, the Company will plan development of the
acreage. The Company is also negotiating the acquisition of, or evaluating
several other prospects in the Green River Basin. Upon the successful
acquisition of additional acreage in the Green River Basin the Company intends
to redirect additional oil field service assets to the area in order to
service the development of the acreage.
The Company has also entered into a joint venture agreement for the
development of an enhanced oil recovery project in the Cherokee Basin of
Eastern Kansas where it acquired a 100% working interest before payout for
$150,000. The Company will drill and complete 32 wells for an estimated cost
of an additional $700,000. The Company will also retain the option to drill
71 wells on the offset leases.
CORPORATE ACTIVITIES: Expenses incurred in corporate activities were $555,468
for the nine months ended December 31, 1999, compared to $201,401 for the nine
months ended December 31, 1998. The $354,067 increase in corporate expenses
was primarily due to an increase of $279,372 in expenses related to
shareholder matters.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had a working capital deficit of
$1,432,037 compared to a working capital deficit of $877,643 at March 31,
1999. The increase in the working capital deficit is due to short term
borrowings of $2,035,950 collateralized by the Evergreen stock, which is a
non-current asset. The funds provided by these borrowings were used for the
acquisition of capital assets and to pay current operating expenses.
During the nine months ended December 31, 1999 the Company incurred a cash
deficit from operating activities of $355,615 compared to cash generated of
$247,005 for the nine months ended December 31, 1998.
Net cash provided by the operation of the oilfield services segment was
$685,993 for the nine months ended December 31, 1999. Net cash used by the
operation of the environmental services segment, oil and gas segment, and
corporate activities was $87,476, $49,540 and $611,784, respectively.
Cash used in investing activities during the nine months ended December 31,
1999, was $2,097,937 compared to $671,093 for the comparable period of 1998.
The 1999 activity included the $678,778 in expenditures related to the
acquisition of the Green River Basin acreage in Wyoming and $150,000 related
to the acquisition of a working interest in the Cherokee Basin property in
Eastern Kansas. The Company also expended $394,638 in costs associated with
the purchase of Powder River Cementers, LLC and startup of operations in the
Powder River Basin of Wyoming and $140,000 for additional facilities in
Gillette, Wyoming. In addition to the facilities acquired in Gillette, the
Company purchased the facilities that it occupies with its corporate offices
in Chanute, Kansas and the facilities that the Oil Field Service Business
occupies in Chanute and Ottawa, Kansas and in Bartlesville, Oklahoma. The
Company had previously leased these facilities and purchased them through the
14
<PAGE>
buy out of the remaining lease for $210,000. The Company also acquired
approximately $364,380 in other oil field service equipment during the
nine-month period in 1999. During the nine month period ended December 31,
1998 the Company invested an additional $350,195 in oil and gas properties
that were sold in December 1998 to Evergreen Resources, Inc. and $145,845 in
oil field service equipment. The Company also invested an additional $72,636
in intangible assets.
The Company obtained $1,937,221 in financing, repaid $170,000 in bank debt and
obtained $2,388,831 in long-term debt on its equipment and receivable
facilities and through a credit facility secured by 100,000 shares of its
Evergreen stock during the nine months ended December 31, 1999. The cash
received from financing activities was reduced by the repayment of $324,699 of
long-term debt and by $27,285 used to repurchase 14,950 shares of Company
stock. The Company will continue to look at opportunities to repurchase
shares of Company stock at favorable prices. In addition, the Company issued
112,500 shares of common stock, valued at $187,510 to pay consulting fees and
acquire Powder River Cementers, LLC.
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. Borrowings are due April 2000. The Company is obligated to pay
back an amount equal to $2,181,250 so long as the Evergreen stock is trading
between $17.25 and $22.59 per share. This equates to an approximate 7%
effective interest rate and the Company has recorded $104,307 in interest
expense related to these borrowings during the nine month period ended
December 31, 1999. Should the market price of the Evergreen stock fall below
$17.25 per share, the Company will repay the loan at the trading price of the
Evergreen stock times the 125,000 collateral shares. If the price exceeds
$22.59, the price per share in excess of $22.59 times the 125,000
collateralized shares will be an additional cost. The total expense
recognized on the Statement of Operations for the nine months ended December
31, 1999 was $167,211.
In November 1999 the Company entered into an additional financing agreement
collateralized by another 100,000 shares of the Evergreen stock that it holds
with a fair value of $2,075,000 at that time. Under this agreement, the
Company borrowed $1,652,596. Borrowings are due November, 2001. The Company
is 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 has recorded
$16,660 in interest expense related to these borrowings during the nine month
period ended December 31, 1999. Should the market price of the Evergreen
stock fall below $19.04 per share, the Company will repay the loan at the
trading price of the Evergreen stock times the 100,000 collateral shares. If
the price exceeds $27.51, the price per share in excess of $27.51 times the
100,000 shares will be an additional cost.
Effective August 16, 1999 the Company acquired Powder River Cementers, LLC, a
well cementing company located in Gillette, Wyoming for $325,000 and 100,000
shares of Infinity common stock valued at $168,760. As a result of this
acquisition the Company began oil field service operations in the coal bed
methane development now taking place in the Powder River Basin of Wyoming.
Assets of this company included a cement truck, bulk cement truck and a bulk
cement blending and storage facility and an agreement to provide cementing
services on up to 1,000 wells for a major drilling operator in the basin. The
Company also incurred another $69,638 associated with establishing operations
in Gillette and $140,000 for additional facilities there.
15
<PAGE>
During the quarter ended December 31, 1999 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 purchase has been 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 acquired a working interest in a coal bed methane property that
contains 24,500 gross acres in the Green River Basin of Wyoming. Capital
expenditures, including acquisition costs, were $678,778 through December 31,
1999. Subsequent to December 31, 1999 the Company drilled the first test well
in the Green River Basin and reopened an existing well bore to be used as a
water disposal well when production begins. The Company is waiting for the
results of the various tests being performed by external consultants to be
completed before announcing estimates of the recoverable reserves. Future
development of the acreage is dependent on the final results of the drilling
evaluation. The company has entered into discussions with several prospective
partners in regards to this development and the cost that will be incurred by
the Company will be dependent on these discussions and the plan of
development.
The Company has also entered into a joint venture agreement for the
development of an enhanced oil recovery project in the Cherokee Basin of
Eastern Kansas where it acquired a 100% working interest before payout for
$150,000. The Company will drill and complete 32 wells for an estimated cost
of an additional $700,000. The Company will also retain the option to drill
71 wells on the offset leases.
The Company has committed to fund a $750,000, 10% convertible debenture if the
authorizing company obtains an oil concession. Management believes that the
likelihood of the authorizing company obtaining the concession is fair and
that funds may need to be available prior to March 31, 2000, the end of the
current fiscal year. In such event, the Company would finance the debenture
with funds from borrowings secured by shares of Evergreen stock or with the
proceeds from the sale of shares of the Evergreen Stock.
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
ending March 31, 2000. The ability of the Company to finance future projects
will be dependent on the success of the pilot project in the Green River Basin
and its attractiveness to potential partners and the ability of the Company to
generate positive cash flow from its oilfield service segment and through
revenues from oil sales with the development of the Cherokee Basin properties
of Eastern Kansas.
YEAR 2000 CONCERNS
The Company has experienced no problems directly or through any of its vendors
or customers related to the year 2000. The Company will continue to monitor
its systems, but does not believe that there will be any adverse affects in
future months.
16
<PAGE>
FORWARD LOOKING STATEMENTS
Statements that are not historical facts included in this Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements address activities, events or
developments that the Company expects, believes, projects, intends or
anticipates will or may occur, including such matters as future capital needs,
debt restructuring, pending legal proceedings, business strategies, expansion
and growth of the Company's operations, and cash flow. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") are
described throughout this Form 10-QSB. Cautionary Disclosures include, among
others: general economic conditions, the Company's ability to find, acquire,
market, develop and produce new properties, the results of debt restructuring
efforts, and pending legal proceedings. All written and oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by the Cautionary Disclosures. The Company disclaims any obligation
to update or revise any forward-looking statement to reflect events or
circumstances occurring hereafter or to reflect the occurrence of anticipated
or unanticipated events.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In March 1999, Bluegreen Corporation of the Rockies (Bluegreen) filed a
complaint against the Company's subsidiary, CIS Oil and Gas, Inc. (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. Subsequent to
September 30, 1999 all claims related to this action have been dismissed
without prejudice. 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 refile their claims at any time. However, the
Company believes that it still has no liability in relation to the claims and
that they will not have an impact on the liquidity of the Company.
On November 4, 1998, the Company's Consolidated Industrial Services, Inc.
("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 is 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 is
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 is seeking damages in excess of $500,000
from CIS.
The court has ordered that all claims and defenses in this case be handled
through arbitration. An arbitrator has been selected and the Company is
finalizing preparations for the arbitration hearing that will occur in March
2000. 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.
Item 2. Changes in Securities
During the three month period ended December 31, 1999, the Company did not
issue any securities that were not registered under the Securities Act of
1933.
Item 3. Defaults Upon Senior Securities
Not Applicable
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Three issues were presented to Stockholders of the Company by proxy for
consideration at the annual Stockholders meeting that was held October 6, 1999
at the Company's headquarters in Chanute, Kansas. These issues, all of which
were approved at the annual Stockholders meeting, were:
(a) The election of four (4) Directors of the Company to serve until
the next Annual Meeting of Shareholders and until their successors have been
duly elected and qualified;
(b) The ratification of the appointment of Sartain Fischbein & Co. as
the Company's independent auditors; and
(c) The approval of the Company's 1999 Stock Option Plan.
The following sets forth the votes cast for, against or withheld, as well as
the number of abstentions and broker non-votes, as to each of the matters
presented at the meeting:
Election of Directors:
Nominees For Withheld
Stanton E. Ross 2,241,273 59,448
Jeffrey L. Dale 2,288,212 12,509
George R. Jones 2,286,962 13,759
Leroy C. Richie 2,288,212 12,509
Appointment of Sartain Fischbein & Co.:
For Against Abstentions
2,287,793 3,825 19,103
Approval of 1999 Stock Option Plan:
For Against Abstentions Not Voted
2,092,131 194,454 14,136 -0-
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(d) Exhibits. The following exhibit is being filed with this report:
Exhibit 27 Financial Data Schedule
(e) Reports on Form 8-K. None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
INFINITY, INC.
Dated: February 11, 2000 By /s/ Stanton E. Ross
Stanton E. Ross, President
By /s/ Jon D. Klugh
Jon D. Klugh, Chief Financial Officer
EXHIBIT
METHOD OF FILING
27. FINANCIAL DATA SCHEDULE Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet found on page 3 and consolidated statement
of operations found on page 5 of the Company's Form 10-QSB for the
year to date, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,349,608
<SECURITIES> 8,887,500
<RECEIVABLES> 771,186
<ALLOWANCES> 0
<INVENTORY> 151,560
<CURRENT-ASSETS> 2,349,287
<PP&E> 8,293,037
<DEPRECIATION> 3,434,488
<TOTAL-ASSETS> 16,436,897
<CURRENT-LIABILITIES> 3,781,324
<BONDS> 0
<COMMON> 305
0
0
<OTHER-SE> 8,697,225
<TOTAL-LIABILITY-AND-EQUITY> 16,436,897
<SALES> 3,590,121
<TOTAL-REVENUES> 3,590,121
<CGS> 2,061,053
<TOTAL-COSTS> 2,061,053
<OTHER-EXPENSES> 2,022,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (405,457)
<INCOME-PRETAX> (849,808)
<INCOME-TAX> 38,250
<INCOME-CONTINUING> (888,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (888,058)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
