UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
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
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Address of Principal Executive Offices, Including Zip Code
(620) 431-6200
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
There were 8,008,766 shares of the Registrant's Common Stock outstanding as of
May 14, 2003.
INFINITY, INC.
FORM 10-Q
INDEX
Page
Part I Financial Information Number
Item 1. Financial Information:
Consolidated Balance Sheets .......................... 3
Consolidated Statements of Operations (Unaudited) .... 4
Consolidated Statements of Comprehensive Loss
(Unaudited) .......................................... 5
Consolidated Statements of Cash Flows (Unaudited) .... 6
Notes to Consolidated Financial Statements
(Unaudited) .......................................... 8
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations ................. 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .......................................... 17
Item 4. Controls and Procedures .............................. 17
Part II: Other Information .................................... 17
Signatures ...................................................... 18
Certifications ................................................... 18
2
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2003 Dec. 31, 2002
-------------- -------------
(Unaudited)
CURRENT ASSETS
Cash $ 264,624 $ 867,017
Accounts Receivable, less allowance for doubtful
accounts of $25,000 1,700,113 1,493,224
Inventories 265,991 340,217
Prepaid expenses and other 322,692 278,510
----------- -----------
Total current assets 2,553,420 2,978,968
Property and equipment, at cost, less accumulated
depreciation and impairment 10,987,490 10,315,068
Oil and gas properties, using full cost accounting net
of accumulated depreciation, depletion and amortization
Subject to amortization 21,902,807 19,107,427
Not subject to amortization 13,752,862 13,176,850
Intangible assets, at cost, less accumulated amortization 5,179,615 5,299,881
Note receivable, less current portion 1,593,385 1,597,053
Other assets, net 800,374 655,022
----------- -----------
Total assets $56,769,953 $53,130,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 1,000,000 $ --
Current portion of long-term debt 5,227,255 2,227,195
Accounts Payable 3,252,250 2,875,900
Accrued Expenses 1,452,117 969,526
----------- -----------
Total Current Liabilities 10,931,622 6,072,621
Long-term Liabilities
7% subordinated convertible notes payable 12,040,000 12,540,000
8% subordinated convertible notes payable 3,128,000 4,243,000
Long-term debt, less current portion above 4,997,960 7,464,156
Asset retirement obligations 451,578 --
----------- -----------
Total Liabilities 31,549,160 30,319,777
Stockholders' Equity
Common stock, par value $.0001, authorized 300,000,000
shares, issued and outstanding 7,942,244 shares;
7,558,462 shares 794 756
Additional paid-in-capital 25,931,274 22,870,449
Accumulated other comprehensive loss (105,841) (77,301)
(Accumulated Deficit)/Retained Earnings (605,434) 16,588
----------- -----------
Total stockholders' equity 25,220,793 22,810,492
----------- -----------
Total Liabilities and stockholders' equity $56,769,953 $53,130,269
=========== ===========
The consolidated balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date.
See Notes to Consolidated Financial Statements
3
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
Revenues
Oil and Gas Service Operations $1,867,307 $1,459,853
Oil and Gas Sales 1,738,136 666,140
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Total Revenue 3,605,443 2,125,993
Cost of sales
Oil and Gas Service Operations 1,204,947 904,335
Oil and Gas Production Expenses and Taxes 950,323 413,815
---------- ----------
Total cost of sales 2,155,270 1,318,150
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Gross profit 1,450,173 807,843
Operating expenses 1,102,233 953,345
Depreciation, depletion and amortization 721,650 358,318
---------- ----------
Operating loss (373,710) (503,820)
---------- ----------
Other income (expense)
Interest Income & Other Income 40,800 1,095
Interest Expense & Finance (289,112) (6,049)
Gain on sales of assets and marketable
securities -- 7,998
---------- ----------
Total other income (expense) (248,312) 3,044
---------- ----------
Net loss before income taxes (622,022) (500,776)
Income tax benefit -- 193,000
---------- ----------
Net loss $ (622,022) $ (307,776)
---------- ----------
Net loss per common share $ (0.08) $ (0.05)
---------- ----------
Net loss per diluted common share $ (0.08) $ (0.05)
---------- ----------
Weighted Average Basic Shares Outstanding 7,751,819 6,761,024
Weighted Average Diluted Shares Outstanding 7,751,819 6,761,024
See Notes to Consolidated Financial Statements
4
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
Net Loss $ (622,022) $ (307,776)
Other Comprehensive loss:
Unrealized loss on commodity
price swap, net of tax benefit of
$75,426 for the three months ended
3/31/2003: (120,484) --
Reclassifications, net of tax expense of
($57,559) for the three months ended
3/31/2003: 91,944 --
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Total Other Comprehensive Loss (28,540) --
---------- ----------
Comprehensive Loss $ (650,562) $ (307,776)
========== ==========
See Notes to Consolidated Financial Statements
5
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
Cash flows from operating activities
Net loss $ (622,022) $ (307,776)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation, depletion and amortization 721,650 358,317
Deferred income taxes -- (193,000)
Gain on sale of assets -- 7,998
(Increase) decrease in operating assets
Accounts receivable (206,889) (495,316)
Inventories 74,226 (6,415)
Prepaid expenses (26,315) (90,362)
Increase (decrease) in operating liabilities
Accounts payable 376,350 1,867,019
Accrued expenses 467,656 23,892
---------- ----------
Net cash provided by operating activities 784,656 1,164,357
---------- ----------
Cash flows from investing activities
Proceeds from sale of marketable securities -- 750,000
Investment in oil and gas properties (2,360,565) (4,473,412)
Investment in other assets and intangibles (145,352) (161,223)
Purchase of property and equipment (115,080) (519,699)
Payments on note receivable 3,668 --
---------- ----------
Net cash used in investing activities (2,617,329) (4,404,334)
---------- ----------
Cash flows from financing activities
Proceeds from notes payable 1,000,000 2,000,000
Proceeds from borrowings on long-term debt 176,787 3,625,309
Proceeds from issuance of common stock 664,391 533,308
Repayment of long-term debt (610,898) (3,208,255)
---------- ----------
Net cash provided by financing activities 1,230,280 2,950,362
---------- ----------
Net decrease in cash (602,393) (289,615)
Cash, beginning of period 867,017 665,898
---------- ----------
Cash, end of period $ 264,624 $ 376,283
========== ==========
See Notes to Consolidated Financial Statements
6
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
Supplemental cash flow disclosures:
Cash paid for interest, net of
Amounts capitalized 4,853 6,049
Non-cash transactions:
Non-cash investment in oil and gas properties 684,466 435,340
Change in Accumulated other Comprehensive
Income, net of Income Taxes 28,540 --
Property and equipment acquired through
seller financed debt, net 967,975 --
Stock-based compensation for options
issued with bridge loans recorded as
loan costs 750,000 1,347,728
Conversion of Subordinated Debt and accrued
interest to common stock 1,646,472 941,861
Non-cash investment in retirement obligation
on long-lived assets 447,357 --
See Notes to Consolidated Financial Statements
7
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
Summary of issuer's significant accounting policies are incorporated by
reference to the annual report on Form 10-KSB at December 31, 2002 of
Infinity, Inc. ("Infinity").
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 consolidated 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 period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003.
(2) Going Concern
Infinity's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. During the
three months ended March 31, 2003, Infinity had consolidated losses from
operations of approximately $0.6 million, and a working capital deficit at
March 31, 2003 of approximately $8.4 million.
Infinity also has minimum drilling obligations during the remainder of
2003 of approximately $2.8 million in order to maintain its interest in its
present leasehold positions. In addition, management estimates cash
requirements of $0.7 million for interest on notes and $1.0 million for
general corporate usage. Thus, in total, Infinity has current minimum cash
requirements in the remainder of 2003 of approximately $12.9 million including
the working capital deficit at March 31, 2003.
Management believes it will be able to fund approximately $8.3 million of
its current minimum cash requirements through its operations and through the
exercise of stock options. In order to fund the additional minimum
requirements and any other capital expenditures, Infinity will be required to
pursue additional funding through potential conventional bank financing, the
forward sale of its oil and gas production, or through the public or private
equity or debt markets. The ability of the Company to achieve the required
operating results and additional funding cannot be assured. Subsequent to
March 31, 2003, Infinity realized proceeds of $0.1 million from the exercise
of stock options and $1.0 million from bridge loans.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should
Infinity be unable to continue as a going concern.
(3) Asset Retirement Obligations
Effective January 1, 2003, Infinity adopted the provisions of Financial
Accounting Standard No. 143 (SFAS 143) "Accounting for Asset Retirement
Obligations". SFAS 143 requires Infinity to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, Infinity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted each period toward its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
8
Upon settlement of the liability, Infinity will report a gain or loss upon
settlement to the extent the actual costs differ from the recorded liability.
Upon adoption of SFAS 143, Infinity recorded a discounted liability of $.5
million for future retirement obligations and increased net oil and gas
properties by $.5 million. The adoption of SFAS 143 had no material effect on
earnings. The majority of the asset retirement obligation to be recognized
relates to the projected costs to plug and abandon oil and gas wells.
Liabilities are also recorded for compressor and field facilities.
(4) Oil and Gas Properties
From inception through March 31, 2003, Infinity has capitalized the
following financing costs related to properties not subject to amortization.
As these projects are developed, the costs are transferred to properties
subject to amortization:
Beneficial conversion feature related to the 8%
subordinated convertible notes $1,165,500
Capitalized Interest $2,060,930
Capitalized amortization of loan costs $2,855,076
----------
$6,081,506
==========
(5) Long Term Debt
Effective June 13, 2001 Infinity, Inc. sold $6,475,000 in 8% Subordinated
Convertible Notes in a private placement in which C. E. Unterberg, Towbin
acted as the placement agent. Interest on the notes accrues at a rate of 8%
per annum and is payable in arrears on each December 15 and June 15 commencing
December 15, 2001. The notes are convertible to one share of common stock at
$5.00 per share and mature on June 13, 2006. During the three months ended
March 31, 2003, $1,115,000 of the notes were converted into 223,000 shares of
common stock leaving an outstanding balance on the notes of $3,120,000 at
March 31, 2003.
Effective April 17, 2002 Infinity, Inc. sold $12,540,000 in 7%
Subordinated Convertible Notes in a private placement in which C. E.
Unterberg, Towbin acted as the placement agent. Interest on the notes accrues
at a rate of 7% per annum and is payable in arrears on each April 15 and
October 15 commencing October 15, 2002. The notes are convertible to one
share of common stock at $8.625 per share and mature on April 15, 2007.
During the three months ended March 31, 2003, $500,000 of the notes were
converted into 57,971 shares of common stock leaving an outstanding balance on
the notes of $12,040,000 at March 31, 2003.
On January 23, 2003 Infinity, Inc. issued five-year options to purchase
150,000 shares of Infinity, Inc. common stock at $8.75 per share when it
obtained $750,000 in bridge loans from stockholders with an annual interest
rate of 5.25% in order to pay outstanding payables associated with the
development of its coal bed methane properties. Infinity, Inc. capitalized
loan costs of $750,000 related to the fair value of the options. Infinity
used the Black-Scholes pricing method assuming a five year life, weighted
average risk-free interest rate of 5.25%, expected volatility of 126.11% and
no expected dividend yield to calculate the fair value of the options at the
date of grant. Since the fair value exceeded the amount of the notes Infinity
valued the loan costs at $750,000, or an amount equal to the related debt.
The loans are due January 5, 2004.
9
Subsequent to March 31, 2003, Infinity, Inc. issued five-year options to
purchase 51,000 shares of Infinity, Inc. common stock at $8.75 per share when
it obtained $300,000 in 30 day bridge loans from stockholders with an annual
interest rate of 2% per month (if the loans aren't repaid within the 30 day
term) in order to pay interest due on its outstanding 7% subordinated
convertible notes. The loans were repaid without interest on April 18, 2003.
Subsequent to March 31, 2003, Infinity, Inc. issued five-year options to
C. E. Unterberg, Towbin to purchase 52,500 shares of Infinity, Inc. common
stock at $8.75 per share when it issued $1,000,000 in 12% unsecured notes due
April 16, 2004. In conjunction with the notes the note holders also received
warrants to purchase 160,000 shares of Infinity, Inc. common stock at $8.75
per share. The proceeds from the notes were used to pay off the 30 day bridge
loans and to pay outstanding payables of Infinity.
(6) Earnings per Share
Basic earnings per share were computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the periods. Diluted earnings per share reflect the potential
dilutions that could occur if convertible notes, stock options and warrants
were converted into common stock under the treasury stock method. At March
31, 2003 and 2002 all potential common shares are anti-dilutive.
(7) Equity - Stock Options
During the three months ended March 31, 2003, options to purchase 97,650
shares of common stock were exercised resulting in proceeds to Infinity, Inc.
of $664,391. Options to purchase 14,000 shares were forfeited under a
termination clause in the Option Plans.
On June 6, 2002 the Infinity, Inc. board of directors approved the grant
of incentive and non-qualified options to purchase 344,000 shares of common
stock at $8.70 per share under the 2003 Stock Option Plan. The options
granted under the 2003 Stock Option Plan will be issued upon approval of the
plan at the Annual Meeting of Shareholders on June 5, 2003.
(8) Reclassifications
Certain reclassifications have been made to the balances for the three
months ended March 31, 2002 to make them comparable to those presented for the
three months ended March 31, 2003, none of which change the previously
reported net loss.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995), and information relating to Infinity that is based on beliefs of
management of Infinity, as well as assumptions made by and information
currently available to management of Infinity. When used in this Report, the
words "estimate", "project", "believe", "anticipate", "intend", "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of Infinity with respect to future events
based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Infinity does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Infinity incurred a net loss after taxes of $(0.6) million, or $(0.08)
per fully diluted share, in the quarter ended March 31, 2003 compared to a net
loss after taxes of $($0.3) million, or $(0.05) per fully diluted share in the
quarter ended March 31, 2002.
Infinity experienced a $0.7 million increase in gross profit to $1.5
million in the quarter ended March 31, 2003 from $0.8 million for the quarter
ended March 31, 2002. The increase in gross profit during the quarter ended
March 31, 2003 compared to the quarter ended March 31, 2002 was the result of
a $1.0 million, or 143%, increase in oil and gas sales revenue to $1.7 million
from $0.7 million and a $0.4 million, or 27%, increase in oil field service
revenue from $1.5 million to $1.9 million. The increase in revenue was
partially offset by a $0.3 million, or 33%, increase in oil field service cost
of services provided (See OIL FIELD SERVICES discussion below) and a $0.6
million, or 150% increase, in oil and gas production expenses and taxes (See
OIL AND GAS PRODUCTION discussion below).
Operating expenses for the quarter ended March 31, 2003, increased $0.1
million from $1.0 million in 2002 to $1.1 million in 2003. Infinity and its
subsidiaries incurred approximately a $0.1 million in internal costs
associated locating potential merger and acquisition candidates and/or
financing agreements for continued development of the properties. External
costs such as legal, reproduction, and engineering consultant costs have been
capitalized until the final outcome of the process has been completed.
For the period ended March 31, 2003, Infinity recognized $0.7 million in
depreciation, depletion and amortization expense compared to $0.4 million in
the period ended March 31, 2002. The $0.3 million, or 75% increase was the
result of a $0.2 million increase in depreciation associated with oil field
service equipment and a $0.2 million increase in amortization of loan costs.
During the period ended March 31, 2003, Infinity capitalized $0.7 million of
loan cost amortization and $0.2 million of interest expense to oil and gas
properties not subject to amortization.
11
Infinity recognized a deferred income tax benefit of $0.2 million in the
quarter ended March 31, 2002. The net operating losses generated in the first
quarter of 2003 increased Infinity's net deferred tax asset. Due to
uncertainty as to the ultimate utilization of the net operating losses, the
net deferred tax asset has been fully impaired. Therefore, Infinity has
reflected no net tax expense or benefit for the quarter ended March 31, 2003.
OIL FIELD SERVICES: Consolidated Oil Well Services, Inc.
("Consolidated") recorded sales of $1.9 million and cost of sales of $1.2
million for the quarter ended March 31, 2003 compared to sales of $1.5 million
and cost of sales of $0.9 million for the comparable period ended March 31,
2002. Sales of cementing and fracturing services from Consolidated's
Bartlesville, Oklahoma camp increased by approximately $0.4 million in the
period ended March 31, 2003 compared to the period ended March 31, 2002 due to
better weather conditions and increased capacity due to new fracturing and
cementing equipment being deployed to that location. Consolidated experienced
a $0.1 million increase in sales from its Ottawa, Kansas camp due to increased
activity on coal bed methane pilot projects and a $0.1 million decrease in
sales from its Chanute, Kansas facility due to a decrease in activity by a
major customer served from that facility during the period ended March 31,
2003 compared to the 2002 period. Consolidated also saw a slight increase in
sales from the Gillette Wyoming facility with the completion of the Powder
River Environmental Impact Study and the issuance of drilling permits to
customers. Consolidated believes that sales from the Gillette facility will
increase significantly in the second quarter of the current year due to the
increased drilling activity in the Powder River Basin with the completion of
the environmental impact study and the issuance of new drilling permits by
regulatory agencies.
OIL AND GAS PRODUCTION: During the quarter ended March 31, 2003
Infinity-Wyoming recorded approximately $0.6 million in revenue on the sale of
20,020 barrels of oil compared to approximately $0.3 million in revenue on the
sale of 12,635 barrels of oil in the three month period ended March 31, 2002.
Infinity-Wyoming also recorded approximately $1.2 million in revenue on the
sale of 366,970 MCF of gas compared to $0.2 million in revenue on the sale of
141,295 MCF of natural gas during the period ended March 31, 2002. The
increase in number of producing wells from five in the first quarter of 2002
to twenty-three in the first quarter of 2003 resulted in an 125% increase in
oil and gas production on an MCF equivalent basis. The prices that
Infinity-Wyoming received for its products also increased by approximately 53%
from $2.34 per MCFE in the period ended March 31, 2002 to $3.57 per MCFE for
the period ended March 31, 2003. The increase in production and the number
of wells operated resulted in Infinity-Wyoming incurring $1.0 million in lease
operating expenses, production taxes, and transportation fees to produce the
oil and gas during the period ended March 31, 2002 compared to $0.3 million in
the period ended March 31, 2002.
Infinity Oil and Gas of Kansas, Inc. (Infinity-Kansas) recorded net
revenue of $0.2 million from the sale of 8,370 barrels of oil from its Kansas
properties and operating expenses of $0.1 million in the three months ended
March 31, 2002. Infinity-Kansas sold these properties in May, 2002 and did
not record any revenue or expenses in the current period.
OPERATING EXPENSES: During the period ended March 31, 2003 Infinity
recognized approximately $1.8 million in corporate operating expenses compared
to approximately $1.3 million in the period ended March 31, 2002. The $0.5
million increase in corporate expenses was mainly due to $0.1 million expense
associated with the internal cost related to potential merger and acquisition
and/or financing activities, a $0.2 million increase in depreciation of
property and equipment, and a $0.2 million increase in amortization of the
capitalized financing costs associated with the subordinated note offerings,
bridge loan financing and bank debt.
12
OTHER INCOME AND EXPENSES: During the period ended March 31, 2003 other
income and expenses increased to approximately $0.2 million due to
approximately $0.2 million in interest expense associated with the increase in
outstanding debt. Due to largely undeveloped leases in prior years compared
to the current year, Infinity capitalized a more substantial portion of its
interest expense to the properties in 2002. However, as properties are
developed, more of the interest is expensed.
During the period ended March 31, 2002 Infinity recognized $0.2 million
in income tax benefit. The net operating losses generated in the first
quarter of 2003 increased Infinity's net deferred tax asset. Due to
uncertainty as to the ultimate utilization of the net operating losses, the
net deferred tax asset has been fully impaired. Therefore, Infinity has
reflected no net tax expense or benefit for the quarter ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had a working capital deficit of $8.4
million compared to a working capital deficit of $3.1 million at December 31,
2002. The increase in the working capital deficit was the result of the
reclassification of $3.0 million of long term debt to current debt, the
borrowing of an additional $1.2 million in current debt, and increases in
trade payables and accrued expenses of $0.8 million. A significant portion of
the increase in accrued expenses is due to interest accrued on the 7% and 8%
convertible notes not due until April 15 and June 15, respectively.
During the quarter ended March 31, 2003 cash provided by operations was
$0.8 million compared to cash provided by operating activities during the
quarter ended March 31, 2002 of $1.2 million. During the period ended March
31, 2003 Infinity used $2.6 million in investing activities by investing $2.4
million in oil and gas properties, $0.1 million in other assets and $0.1
million in property and equipment. This compares to Infinity investing $4.5
million in oil and gas properties, and $0.5 million in property and equipment
during the period ended March 31, 2002. Infinity also invested $0.2 million
in other assets and received proceeds of $.8 million from the sale of
marketable securities resulting in Infinity using a total of $4.4 million in
investing activities during the period ended March 31, 2002.
During the period ended March 31, 2003 Infinity borrowed $1.0 million
with which to pay costs incurred in the development of its oil and gas
properties. This compares to borrowing $2.0 million with which to pay
outstanding payables associated with the development of the coal bed methane
properties during the period ended March 31, 2002. During January, 2003
Infinity borrowed $0.75 million from stockholders with principal and interest
of 5.25 % due January 4, 2004. Infinity-Wyoming also borrowed $0.25 million
from a local bank in order to pay outstanding balances related to the
development of its coal bed methane properties. This loan is payable in ten
payments of $25,000, two of which have already been made, plus interest of
6.75%. As of March 31, 2003 Consolidated had borrowings of $0.2 million on a
revolving credit line, $1.7 million on a term loan and $0.5 million on a
capital expenditures line. Consolidated will make monthly payments of $80,626
plus interest and $15,000 plus interest on the term note and capital
expenditures line, respectively until December 31, 2004 at which time the
remaining principal and interest will be due.
Infinity and its subsidiaries owe approximately $5.0 million for real
estate and equipment loans secured by assets of Infinity and its subsidiaries.
These notes mature in one to eighteen years and have current payments of
approximately $58,000 per month.
13
Infinity received proceeds from the issuance of common stock, upon the
exercise of 97,650 options, of $0.7 million during the period ended March 31,
2003.
Subsequent to March 31, 2003 Infinity borrowed $1.0 million to pay
interest on the 7% subordinated convertible notes and outstanding payables
from unrelated parties with the issuance of 12% unsecured notes due April 16,
2004. In conjunction with the issuance of the notes Infinity issued warrants
to purchase 212,500 shares of Infinity, Inc. common stock at $8.75 per share.
The warrants expire five years from the issuance date.
The working capital deficit as of March 31, 2003 was $8.4 million.
Infinity expects to spend approximately $2.8 million meeting its drilling and
completion, pipeline installation and environmental impact study obligations
during the next year and incur approximately $0.7 million in additional
interest on its outstanding notes. Infinity also expects to incur
approximately $1.0 million in corporate cash usage during the next year.
Consolidated expects to generate approximately $2.5 million in operating
cash flow from the oil field service business during the remainder of 2003 and
the first quarter of 2004. The cash flow from this business segment is
expected to be driven by an increase in business in the Powder River Basin of
Wyoming as drilling activity increases as a result of the completion of the
Powder River environmental impact study and an increase in oil field service
operations in Eastern Kansas and Northeastern Oklahoma as customers move
forward with development activities on leases that will be expiring within the
next two years. Infinity-Wyoming is also expected to generate approximately
$5.7 million in operating cash flow from oil and gas production operations
during the remainder of 2003 and the first quarter of 2004. Management
anticipates production from the wells on the Pipeline project to increase to
approximately 6,500 MCF per day due to additional compression capabilities
being installed during the second quarter of the current year and by bringing
additional wells on line during the year. In addition to the increase in
production, Infinity-Wyoming has contracts in place to sell 3,500 MMBTU per
day at $4.71 and 1,000 MMBTU per day at $3.00 per MMBTU through March, 2004
and November, 2003 respectively. Production expenses are expected to stay
fairly steady during the period. Infinity also received $0.1 million in
proceeds from the exercise of employee stock options subsequent to March 31,
2003.
Recap of Current Minimum Cash Requirements
(In Millions)
Current deficit $ 8.4
Property development requirements 2.8
Interest on notes 0.7
Corporate cash usage 1.0
------
Total current requirements $ 12.9
------
Sources of Cash
Consolidated operations $ 2.5
Infinity-Wyoming operations 5.7
Exercise of options 0.1
------
Total sources 8.3
------
Current minimum cash requirement deficit $ 4.6
======
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In order to fund the additional minimum cash requirements, Infinity will
be required to pursue additional funding through potential conventional bank
financing, the forward sale of its oil and gas production, or through the
public or private equity or debt markets. The ability of the Company to
achieve the required operating results and additional funding cannot be
assured.
In addition to its operating needs, Consolidated anticipates it will
incur capital expenditures of approximately $0.8 million over the next year
related to vehicle acquisitions and equipment fabrication and approximately
$0.3 million of facilities capital maintenance. Management believes that
credit available to Consolidated through local sources, vendors and through
its current capital expenditures facility with LaSalle Bank will be sufficient
to meet Consolidated's capital expenditure needs of approximately $1.1
million.
Infinity-Wyoming anticipates having capital expenditures, subject to
permitting requirements, beyond its development obligations discussed above of
approximately $15.7 million. Those additional anticipated expenditures are as
follows: (1) Infinity-Wyoming plans to drill and complete ten additional
production wells and two disposal wells and install the related facilities on
the LaBarge acreage at a cost of approximately $8.1 million; (2) drill and
complete five production wells and one disposal well and the related
facilities on the Antelope acreage at a cost of $3.5 million; (3) drill and
complete five wells in addition to the wells required to meet leasehold
obligations in the Pipeline field at a cost of $2.0 million; and (4) drill and
complete a horizontal Niobrara well in the Sand Wash Basin at a cost of $1.8
million. Infinity-Wyoming also anticipates incurring additional costs of
approximately $0.3 million for various land acquisitions to fill in acreage
within existing properties. In order to fund Infinity-Wyoming's current
working capital deficit and anticipated additional capital expenditures.
Infinity-Wyoming will be required to pursue funding through conventional bank
financing, the forward sale of its oil and gas production or through the
public or private equity or debt market pursued by the parent. Any proceeds
from these potential sources will first be applied to the $4.6 million current
minimum cash requirement deficit discussed above. The amount of progress that
Infinity-Wyoming will be able to make on the development of its properties
will be dependent upon its ability to obtain the proper permits for the
development and to fund the development. Obtaining permits and sufficient
funding to meet these additional capital expenditures cannot be guaranteed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Infinity believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements.
RESERVE ESTIMATES Infinity's estimates of oil and natural gas reserves,
by necessity, are projections based on geologic and engineering data, and
there are uncertainties inherent in the interpretation of such data as well as
the projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulation of oil and natural gas that are difficult to measure.
The accuracy of any reserve estimate is a function of the quality of available
data, engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash
flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from
other producing areas, the assumed effects of regulations by governmental
agencies and assumptions governing future oil and natural gas prices, future
15
operating costs, severance, ad-valorem and excise taxes, development costs and
work-over and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected there from may vary
substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves, which could affect
the carrying value of Infinity's oil and gas properties and the rate of
depletion of the oil and gas properties. Actual production, revenues and
expenditures with respect to Infinity's reserves will likely vary from
estimates, and such variances may be material.
Infinity's estimated quantities of proved reserves at December 31, 2002
were prepared by independent petroleum engineers Wells Chappell and Company,
Inc.
PROPERTY, EQUIPMENT AND DEPRECIATION: Infinity follows the full-cost
method of accounting for oil and gas properties. Under this method, all
productive and nonproductive costs incurred in connection with the exploration
for and development of oil and gas reserves are capitalized. Such capitalized
costs include lease acquisition, geological and geophysical work, delay
rentals, drilling, completing and equipping oil and gas wells, and salaries,
benefits and other internal salary-related costs directly attributable to
these activities. Costs associated with production and general corporate
activities are expensed in the period incurred. Interest costs related to
unproved properties and properties under development are also capitalized to
oil and gas properties. If the net investment in oil and gas properties
exceeds an amount equal to the sum of (1) the standardized measure of
discounted future net cash flows from proved reserves and (2) the lower of
cost or fair market value of properties in process of development and
unexplored acreage, the excess is charged to expense as additional depletion.
Normal dispositions of oil and gas properties are accounted for as adjustments
of capitalized costs, with no gain or loss recognized.
Equipment utilized in the oil field service business and to support
operations on Infinity's oil and gas properties are stated at cost. This
equipment is depreciated using the straight-line method over the estimated
useful lives of the assets of three to 30 years.
Infinity is required to review the carrying value of its oil and gas
properties each quarter under the full cost accounting rules of the Securities
and Exchange Commission. Under these rules, capitalized costs of proved oil
and gas properties may not exceed the present value of estimated future net
revenues from proved reserves, discounted at 10%. Application of the ceiling
test generally requires pricing future revenue at the unescalated prices in
effect as of the last day of the quarter and requires a write-down for
accounting purposes if the ceiling is exceeded. Unproved oil and gas
properties are not amortized, but are assessed for impairment either
individually or on an aggregated basis using a comparison of the carrying
values of the unproved properties to net future cash flows.
16
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Infinity's major market risk exposure is in the pricing applicable to its
oil and gas production. Realized pricing is primarily driven by the
prevailing price for crude oil and spot prices applicable to Infinity's United
States crude oil and natural gas production. Historically, prices received
for gas production have been volatile and unpredictable. Pricing volatility
is expected to continue. Gas price realizations ranged from a monthly low of
$3.14 to a monthly high of $5.01 per MCF during the quarter ended March 31,
2003. Oil price realizations ranged from a monthly low of $32.21 per barrel
to a monthly high of $35.08 per barrel during the period.
Infinity-Wyoming periodically enters into hedging activities on a portion
of its projected natural gas production in accordance with its Energy Risk
Management Policy. These activities are intended to support cash flow at
certain levels in order to manage Infinity-Wyoming's cash flow by reducing the
exposure to gas price fluctuations. Realized gains or losses from
Infinity-Wyoming's cash flow risk management activities are recognized in gas
production revenues. In the quarter ended March 31, 2003, Infinity-Wyoming
recognized a net reduction in revenue of $0.1 million by hedging its gas
production compared to if it had sold the gas on the spot market.
ITEM 4.
CONTROLS AND PROCEDURES
The chief executive officer and the chief financial officer have
conducted an evaluation of the effectiveness of the design and operation of
Infinity's disclosure controls and procedures within 90 days of the filing
date of this quarterly report. Based upon the results of this evaluation,
Infinity believes that they maintain proper procedures for gathering,
analyzing and disclosing all information in a timely fashion that is required
to be disclosed in its Exchange Act reports. There have been no significant
changes in Infinity's controls subsequent to the evaluation date.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities
On January 23, 2003, Infinity received $0.75 million from four investors
as short-term bridge loans. The bridge loans are due January 4, 2004, In
connection with these loans, Infinity issued five-year options to the
investors to purchase up to an aggregate of 150,000 shares of Infinity's
Common Stock at $8.75 per share. In connection with these transactions
Infinity relied on Section 4(2) of the Securities Act of 1933. The investors
were sophisticated investors who were given complete information concerning
Infinity.
Item 3. Defaults Upon Senior Securities
Not Applicable
17
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of Chief Filed herewith
Executive Officer Pursuant electronically
to 18 U.S.C. Section 1350
99.2 Certification of Chief Filed herewith
Financial Officer Pursuant electronically
to 18 U.S.C. Section 1350
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
this period.
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: May 15, 2003 By:/s/ Stanton E. Ross
Stanton E. Ross, President
Dated: May 15, 2003 By:/s/ Jon D. Klugh
Jon D. Klugh, Chief Financial Officer
CERTIFICATION
I, Stanton E. Ross, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinity, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
18
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Stanton E. Ross
Stanton E. Ross
Chief Executive Officer
CERTIFICATION
I, Jon D. Klugh, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinity, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
19
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Jon D. Klugh
Jon D. Klugh
Chief Financial Officer
20