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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-17204
INFINITY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1070066
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
211 West 14th Street, Chanute, Kansas 66720
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (316) 431-6200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of June 18, 1997, 10,160,939 Shares of the Registrant's $.0001 Par Value
Common Stock were outstanding. The aggregate market value of voting stock
held by nonaffiliates of the Registrant was approximately $18,116,000.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: $5,035,338.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Infinity, Inc. (the "Company") was organized as a Colorado corporation
on April 2, 1987, for the purpose of searching for and acquiring a business
combination candidate.
On August 17, 1988, the Company completed a public offering of Units
consisting of stock and warrants, for net proceeds of approximately $369,716.
On March 10, 1992, the Company acquired all of the outstanding stock of
Infinity Research and Development, Inc. ("IRD"), formerly named Phoenix
Research & Development Corporation, in exchange for the issuance of shares of
the Company's Common and Preferred Stock. IRD was incorporated under the laws
of the State of Missouri on December 18, 1991, for the purpose of acquiring
the rights to a technology to remove contaminants from waste-water, and to
manufacture and market products using this technology.
On December 15, 1993, the Company acquired all of the outstanding stock
of L.D.C. Food Systems, Inc. ("LDC"), a New Jersey corporation, in exchange
for the issuance of shares of the Company's Common Stock. LDC holds the
rights to patents relating to a poultry carcass chiller system for purifying
contaminated waste water from poultry processing operations. During the year
ended March 31, 1995, the Company obtained orders for two systems
incorporating this technology. During the year ended March 31, 1996 this
prototype system was sold to The BOC Group, Inc. ("BOC") in conjunction with a
licensing agreement under which BOC will complete the pursuit of necessary
government approvals and market the systems internationally to the food
industry.
On January 21, 1994, Consolidated Industrial Services, Inc.
("Consolidated"), a newly-formed, wholly-owned subsidiary of the Company,
acquired substantially all of the assets and operations, and assumed certain
liabilities, of Consolidated Oil Well Services, Inc. ("COWS") pursuant to an
Asset Purchase Agreement dated January 7, 1994 ("Agreement"), among the
Company, Consolidated, COWS and Edsel E. Noland, the President and sole
shareholder of COWS, for consideration valued at $5,000,000. The
consideration consisted of $1,000,000 in cash, 555,556 shares of the Company's
authorized but previously unissued Common Stock, and promissory notes from
Consolidated totaling $2,000,000. During the 3 months ended March 31, 1994,
$600,000 was paid toward the $2,000,000 in notes. During the year ended March
31, 1995, the remainder of the $2,000,000 in notes was settled.
COWS was established in 1957 by Edsel E. Noland, and has been engaged in
providing services to the oil and gas well industry in Kansas and portions of
surrounding states. This business has included providing fracturing,
cementing, acidizing, and nitrogen services as well as trucking of fluids. As
a result of the acquisition, Consolidated now operates approximately 130
pieces of oil field equipment, and employs approximately 70 people.
Consolidated continued the oil field services business acquired and expanded
such services to include on-site hazardous and non-hazardous waste
stabilization services for private industry and government agencies.
Consolidated uses some of the trucks acquired from COWS to haul waste water
from customers' sites to a 20,000 gallon per day waste water treatment
facility constructed on COWS' 17.5 acre site in Chanute, Kansas. This
facility is the first centralized waste water treatment facility in Kansas.
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Consolidated also built a waste water and brine water treatment plant in
the Silo oil field near Cheyenne, Wyoming. This plant treats nonhazardous
industrial waste water and the brine water which is a by-product of a
producing oil field to meet standards necessary for surface discharge.
During October 1996, the Company entered into a management and lease
agreement with an environmental services company which operates both the
Chanute, Kansas and the Cheyenne, Wyoming water treatment facilities.
In September 1995, Infinity Oil & Gas, Inc. ("IOG") was created to
pursue exploration and development opportunities in the oil and gas industry.
The Company owned 55% of the common shares of IOG for which it paid $550 and
during the year ended March 31, 1996, invested $120,000 in Preferred Stock.
From April 1, 1996 through February 1997, the Company invested an additional
$59,000 in preferred stock.
During February 1997, the Company and IOG agreed to the cancellation of
the Company's Preferred Stock and a portion of its Common Stock, reducing the
Company's ownership in IOG to 10% of its Common Stock. In exchange for such
cancellation, the Company received a promissory note in the amount of $50,000
due in full in February 2000 and bearing interest at 12% per annum, secured by
stock held in IOG's treasury. In addition, the Company will receive an
overriding royalty on certain oil and gas leases held by IOG known as the
"Redstone Project." The amount of the overriding royalty will be based on the
terms of the sale of the Redstone Project by IOG.
In November 1995, CIS Oil and Gas, Inc. ("COG"), a wholly-owned
subsidiary, was created to acquire mineral rights and to develop and operate
properties. During the year ended March 31, 1996 COG acquired rights to
approximately 24,000 acres of land in the Raton Basin in Southeastern
Colorado, and drilled fifteen wells to produce coal methane gas from this
property. During the year ended March 31, 1997, the Company drilled an
additional five wells and built a pipeline system on the property to connect
the wells to the Colorado Interstate Gas pipeline. The Company anticipates
increasing gas production from these wells and four preexisting wells during
the coming year while it continues to develop the property.
In January 1997, Consolidated Pipeline, Inc. ("CPI"), a wholly-owned
subsidiary, was reorganized to operate the Company's gas gathering pipeline
system constructed to connect the wells on the Raton property to the Colorado
Interstate Gas pipeline.
Unless the context otherwise requires, Infinity, Inc. and its
subsidiaries, Consolidated, IRD, LDC, COG and CPI are referred to herein
collectively as the "Company."
On November 30, 1993, the Company effected a 1 for 12 reverse split of
its outstanding Common Stock. All financial information and share data in
this Report give retroactive effect to this reverse split.
THE COMPANY
Infinity, Inc. (the "Company"), through its subsidiaries, is engaged in
providing oil field services, and in developing and operating oil and gas
properties. The Company also leases and licenses water treatment facilities
and technologies which it previously developed and operated.
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The Company's CIS Oil & Gas, Inc. ("COG") subsidiary leases mineral
rights to approximately 24,000 acres of land in the Raton Basin area of
Southeastern Colorado, and has drilled twenty (20) wells on this property.
COG will continue to develop and operate this property while seeking
additional properties to develop. The Company's Consolidated Pipeline, Inc.
("CPI") subsidiary operates the pipeline used to transport gas produced in the
Company's Raton Basin property from the wells to the interstate carrier.
The Company's Consolidated Industrial Services, Inc. ("Consolidated")
subsidiary provides services associated with drilling and completion of oil
and gas wells, including cementing, acidizing, fracturing, nitrogen pumping
and water hauling. Consolidated previously provided on-site remediation
services for hazardous and non-hazardous waste, and operated a centralized
water treatment facility and facilities to treat brine water produced by oil
and gas wells. These facilities are now leased to and operated by an
unrelated environmental services company.
The Company's Infinity Research and Development, Inc. ("IRD") and LDC
Food Systems, Inc. ("LDC") subsidiaries have developed two specialized water
treatment technologies: (1) thin film electrocoagulation and (2) chiller loop
filtration and ozone sanitation (or "chiller loop technology"). These
technologies are being used by the Company to custom design and install custom
water treatment equipment. The Company believes that these technologies are
adaptable for use in the food processing, garment, textile, gas pipeline,
metal finishing and paint manufacturing industries. The Company developed,
manufactured and installed one system with the Company's chiller loop
technology, which was installed at a major poultry processing plant and
obtained final approval by the United States Department of Agriculture (USDA).
The Company sold this operating system to The BOC Group, Inc. ("BOC") in
February 1996 in conjunction with a licensing and marketing agreement under
which BOC will pursue final regulatory approvals and will market the chiller
loop technology to the food industry both nationally and internationally.
BUSINESS OF COG AND CPI
COG identifies and pursues development, exploration and operating
opportunities in the oil and gas industry. CPI operates the internal pipeline
which transports produced gas from each well on the Raton Basin property to
the interstate carrier.
RATON BASIN
The Company has acquired through lease the mineral rights to
approximately 24,000 acres of land in the Raton Basin of Southeastern
Colorado. This area has seen significant growth in activity in recent years
as several major companies in the energy exploration industry have started
development work. This activity was spurred by the completion through the
area of the Colorado Interstate Gas ("CIG") pipeline which provides a means to
sell gas produced in the area to eastern markets where prices are generally
higher than in the Rocky Mountain area.
The property leased by the Company is over several strata of known coal
deposits at depths of less than 1,200 feet. This allows the Company to drill
to these shallow levels to retrieve the coal methane gas using techniques
developed over many years in the coal fields of Southeastern Kansas where
available resources were relatively small. These techniques applied to these
shallow wells in Colorado provide the Company with significant cost advantages
over other companies whose techniques are based on deeper wells and larger
resources.
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The Company has drilled twenty wells on this property and has connected
19 of the 20 wells to the CIG pipeline. Production on all 19 wells had
started by June 30, 1997.
The Company anticipates drilling no fewer than ten additional wells in
1997 and no fewer than ten additional wells each year through the year 2000 to
maintain rights to develop the entire property.
Under current regulations this property could support more than 130
wells, so the Company anticipates that development will occur faster than
these minimum levels.
CURRENT DRILLING OPERATIONS
The Company has drilled twenty coal methane gas wells in the Raton Basin
in Southeastern Colorado. Fifteen of these wells were drilled during February
1996 and five were drilled during December 1996.
The Company completed these wells and related gathering systems and
commenced production in April 1997. The Company intends to drill a minimum of
an additional ten wells in this area by December 31, 1997.
The Company owned no oil or gas properties and had no drilling or
production activities prior to the drilling of the fifteen wells during the
year ended March 31, 1996. All twenty of the development wells which the
Company has drilled thus far were completed and nineteen are hooked up and are
producing gas.
OIL AND GAS INTERESTS IN LEASEHOLD ACREAGE
The Company holds oil and gas interests in the Raton Basin in
Southeastern Colorado as of March 31, 1997 as follows:
Undeveloped Acreage
Gross 20,160
Net 20,160
Developed Acreage
Gross 3,840
Net 2,880
GAS WELLS
At March 31, 1997, the Company had both gross and net interests in
twenty gas wells based on working interests currently in effect.
The group which assigned the leases on this property to the Company has
an option to obtain a twenty-five percent working interest in these wells
within six months of the completion of twenty wells. This option, if
exercised, would reduce the number of net wells to 15. In addition, the
Company will receive a seventy-five percent working interest in four existing
wells when the wells are connected to the pipeline and begin production. If
all twenty-four existing wells are connected to the pipeline and begin
production and the twenty-five percent back-in option is exercised, the
Company will have 24 gross gas wells and 18 net gas wells.
PRODUCTION, PRICE AND COST DATA
The Company began acquisition and development activities relating to oil
and gas properties in January 1996. During the years ended March 31, 1996 and
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March 31, 1997, no oil or gas had been produced by the Company, and average
selling prices and average production costs had not been established.
During the year ended March 31, 1997, the Company incurred no operating
expenses in conjunction with oil and gas production activities. Information
concerning the Company's reserves appears as Unaudited Supplemental
Information Pursuant to Oil and Gas Activities following the notes to
financial statements. Information regarding the Company's oil and gas
reserves was determined by Fairchild, Ansell & Wells, Inc., petroleum and
environmental consultants.
The Company presently has no agreements or commitments to provide
quantities of oil or gas in the future. The Company has not reported
information on oil or gas reserves to any federal agency or authority.
OTHER PROPERTIES
The Company continues to evaluate opportunities of both developed and
undeveloped properties where the experienced employees and specialized
equipment of Consolidated can enhance the value of the property. Potential
properties may be relatively shallow deposits to be recovered or could be
neglected fields which will benefit from some form of enhancement.
BUSINESS OF CONSOLIDATED
The Company's Consolidated subsidiary, based in Chanute, Kansas, has
been organized into two divisions: Oil field Services and Waste Treatment
Services, including On-site Remediation, Wastewater Treatment and Brine Water
Treatment. In October 1996, operation of the waste treatment services
division was transferred to an environmental services company under a
management and lease agreement.
OIL FIELD SERVICES
The Oil Field Services Division is based on the business and operations
acquired from Consolidated Oil Well Services, Inc. in January 1994. This
division provides a number of services relating to the drilling and completion
of oil and gas wells, including cementing, acidizing, fracturing, nitrogen
pumping, and water hauling. Consolidated provides these services out of
service facilities located in Chanute and Ottawa, Kansas; Bartlesville,
Oklahoma; and Trinidad, Colorado, using a fleet of approximately 130 vehicles.
Consolidated also provides services and expertise to the Company's COG
and CPI subsidiaries in support of the exploration, development and operation
activities of these subsidiaries.
WASTE TREATMENT SERVICES
The On-site Remediation Services Division offered environmental
remediation services to companies which generate hazardous and non-hazardous
waste. The waste water treatment facility in Chanute, Kansas accepted non-
hazardous waste waters from industrial generators for treatment and disposal.
The brine water treatment facility near Cheyenne, Wyoming accepted non-
hazardous oilfield and industrial waste waters for treatment and disposal.
Each of these activities used technologies developed by the company in
addition to traditional methods.
In October 1996, in an effort to focus the Company on the oilfield
services and oil and gas production activities, the Company entered into a
management and lease agreement with Great Plains Environmental, Inc., an
environmental services company, to operate these water treatment divisions.
The initial term of the
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agreement is for five years and with minimum lease payments to be received of
$80,000 per year. In addition, the lease calls for percentage rents at 4-1/2%
of revenues above a base level and includes options to extend the
agreement for additional two and seven year terms.
BUSINESS OF IRD AND LDC
IRD and LDC developed water treatment systems which utilize two
specialized water treatment technologies in combination with conventional
water treatment equipment. Each of these technologies have been leased or
licensed to other companies to pursue additional development.
THIN FILM ELECTROCOAGULATION
Prior to the acquisition of LDC, IRD developed a thin film
electrocoagulation ("TFEC") wastewater treatment technology that accomplishes
the removal of suspended as well as soluble pollutants using sound
electrochemical and physical chemistry principles. This technology was
included in the management and lease agreements involving the water treatment
divisions.
CHILLER LOOP (OZONE SANITATION) TECHNOLOGY
LDC holds the rights to patent processes for use in treating
poultry industry waste water to allow for the reuse of the waste water. The
Company believes that the chiller loop technology offers the following
benefits:
1. Large poultry processing plants would be able to reuse a
greater portion of the water they use. Currently, such plants often use over
2 million gallons of water per day.
2. Waste products can be removed from waste water more
economically than the systems presently used in the industry.
3. The amount of biological contamination which occurs in the
processing of poultry is reduced.
The Company obtained a purchase order for one of these chiller
loop filtration and ozone sanitation systems. This first system was
fabricated and installed in a poultry processing facility in Gainesville,
Georgia. The Company sold this operating system to BOC Group, Inc. ("BOC") in
February 1996 in connection with the license agreement described below, and
BOC will pursue the final approvals of the United States governmental
regulatory agencies and this customer.
LICENSE AGREEMENT WITH BOC GROUP, INC.
In January 1996, the Company entered into an Exclusive License
Agreement with BOC Group, Inc. ("BOC") pursuant to which BOC received the
exclusive right to make, use and sell products using technology based on a
patent and a patent application owned by the Company for the Chiller Loop
technology in the food and animal processing industry. In exchange for this
license, the Company will receive royalties on the sale of licensed products
using the patent and/or patent application technologies. Subsequently, the
license agreement was amended to expand the exclusive rights of BOC to include
all industries. The royalties will be from $8,000 to $15,000 per product,
depending on the technologies used, until 1998, and $5,000 to $10,000 per
product thereafter. In order to keep the license exclusive, BOC will be
required to sell at least ten licensed products per year with the year
starting when the first product is sold. As of June 30, 1997, BOC had not
sold any products. If less than ten licensed
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products are sold in a year, BOC may make minimum royalty payments of $80,000
per year to keep the license exclusive.
The Company retained the rights to make and sell products using
the technologies in the licensed fields to companies related to Seymour, Inc.,
an affiliate of the Company.
ENVIRONMENTAL REGULATION
The waste water treatment services and systems operated by the Company's
licensee are designed to assist industrial, commercial and other entities in
complying with complex sets of federal and local environmental regulations.
These regulations are monitored by several levels of government including the
EPA, state regulatory agencies, and municipal authorities. Although the EPA
establishes maximum limits for discharge of pollutants into surface waters,
some states have more stringent requirements. There can be no assurance that
the Company's services or systems will be able to meet all of the standards
now or hereafter set by every regulatory authority.
In addition, demand for water treatment products is driven in part by
the increasingly stringent requirements for the discharge of pollutants. If
regulatory authorities decided to reverse the trend and reduce those
requirements, the Company's business could be adversely affected.
COMPETITION
In the oil field services division the Company has only limited
competition in southeastern Kansas, whereas in northeastern Oklahoma and
Colorado the Company competes with Halliburton Services, a major oil field
services company, and two small local companies. If conditions in the
industry improve, it is likely that other companies could enter the markets
where the Company operates. When compared to Halliburton Services which is a
well established company with substantial financial resources, the Company may
be at a competitive disadvantage.
There are many companies in the waste water treatment industry, many of
which possess far greater financial resources, name recognition, manufacturing
capabilities and marketing experience than the Company. The Company intends
to compete with these companies through its management and lease agreement
with the environmental services company and through its licensing and
marketing agreement with BOC.
There are several other companies, universities and research
organizations which actively engage in the research and development of
products which may be competitive with those of the Company. All of these
potential competitors, in the future, may offer products which by reason of
price or effectiveness may be superior to any of the Company's existing or
future products.
MAJOR CUSTOMERS
During the fiscal year ended March 31, 1996, the Company had no
individual customer which accounted for more than 10% of the Company's net
sales. During the fiscal year ended March 31, 1997, the Company billed Stroud
Oil Properties $646,488 which represents 13% of the Company's net sales.
PATENTS, TRADEMARKS AND PROPRIETARY PROTECTION
The Company, through its LDC subsidiary, owns the rights to two patents
issued by United States Patent and Trademark Office which name Louis D.
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Caracciolo, Jr. as inventor. The patents are entitled "Carcass Chiller and
Sterilizer" (U.S. Patent No. 4,827,727 issued May 9, 1989) and "Ozonation of
Containers" (U.S. Patent No. 4,874,435, issued October 17, 1989). The
duration of these patents is seventeen years from the date of issuance. In
addition, the Company has pursued additional patent applications in the
current year.
There can be no assurance that the patents held by the Company or
recently applied for are enforceable, particularly in view of the high cost of
patent litigation, nor can there be any assurance that the Company will derive
any competitive advantages therefrom. The patents may be insufficient to
prevent competitors from essentially duplicating the product by designing
around the patent aspects. In addition, there can be no assurance that the
Company's products will not infringe on patents owned by others, license to
which may not be available to the Company, nor that competitors will not
develop functionally similar products outside the protection of any patents
the Company has or may obtain. The Company has obtained no patent
infringement abatement insurance policies on its patents.
The Company does not presently hold any patents on the thin-film
electrocoagulation technology used in its waste-water treatment system. The
Company does not believe that this technology violates any patents held by
others, but there can be no assurance that claims of patent infringement will
not be asserted against the Company in the future. The Company presently does
not carry insurance which would provide coverage for defense against such
claims.
EMPLOYEES
The Company and its subsidiaries currently have approximately 55
employees. The Company intends to hire additional employees as the
development of its business requires.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters is located in leased facilities at 211 West
14th Street, Chanute, Kansas 66720, along with operating facilities of
Consolidated's oil field services division.
The Company leases facilities in Chanute and Ottawa, Kansas, and
Bartlesville, Oklahoma, pursuant to a lease from Consolidated Oil Well
Services, Inc., a shareholder of the Company. The monthly rent is $3,534,
and the Company also pays all insurance, taxes and operating expenses of these
facilities. The lease expires on January 6, 2001. The lease provides the
Company with the option to extend the lease for one additional five year
period and to purchase these facilities for $496,135 during the term of the
lease. In the event the Company exercises this option, all rent paid under
the lease will be applied to the purchase price.
The Company leases facilities in Trinidad, Colorado. The monthly rent
is $1,000. The lease began in October 1994, currently expires in October
1997, and contains the option to extend the lease for seven additional
one-year periods and to purchase the facility during the term of the lease.
In the event the Company exercises this option, all rent paid under the lease
will be applied to the purchase price up to a maximum of $60,000.
The Company also leases property near Cheyenne, Wyoming, which is the
site of the brine water treatment facility. Rent on this land lease is $1,000
per year for a term of twenty-five years beginning July 1994. This rent is
reimbursed under the management and lease agreement for the water treatment
facilities.
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From May 20, 1994 until June 1996, the Company leased office space in
Lenexa, Kansas for which it paid $2,105 per month in base rent, and paid a
proportionate share of the taxes, insurance and common area charges of the
building. The lease expired in June 1996 and was not renewed.
During the year ended March 31, 1996, the Company acquired direct
interests in oil and gas leases on approximately 24,000 acres of land in the
Raton Basin in Southeastern Colorado. The Company believes it has
satisfactory title to this property based upon generally accepted industry
standards. Prior to the commencement of drilling, however, a thorough
examination is conducted and material defects, if any, are corrected before
proceeding with operations.
These properties acquired by the Company are leases which require
certain drilling activity to retain the Company's interest in the lease. The
Company must drill ten additional wells before December 31, 1997, and it must
drill ten additional wells during each of the subsequent three years in order
to earn the right to develop the entire acreage.
ITEM 3. LEGAL PROCEEDINGS.
A former employee of Consolidated Oil Well Services, Inc. and
Consolidated Industrial Services, Inc. has alleged that he was unfairly
discharged in 1995, when the Company consolidated operations and closed one
location and has claimed damages in excess of $10,000. The Company is
contesting this claim and expects to be successful in its defense.
There are no other pending legal proceedings to which the Company is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. The Company's Common Stock began
trading on the Nasdaq Small-Cap Market on June 29, 1994, under the symbol
"IFNY." Prior to that time, the Company's Common Stock was traded on the
over-the-counter market and was quoted on the NASD's OTC Bulletin Board. The
following table sets forth the high and low sale prices for the Company's
securities as reported by the Nasdaq Stock Market.
QUARTER ENDED HIGH LOW
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June 30, 1995 $2.625 $1.781
September 30, 1995 $2.625 $1.453
December 31, 1995 $2.00 $0.50
March 31, 1996 $1.969 $0.594
June 30, 1996 $1.687 $0.875
September 30, 1996 $1.25 $0.75
December 31, 1996 $1.875 $1.125
March 31, 1997 $2.375 $1.25
(b) Approximate Number of Holders of Common Stock. The number of
record holders of the Company's $.0001 par value common stock at June 17,
1997, was 264 and the Company has over 350 beneficial owners of such stock.
(c) Dividends. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No
dividends have been paid with respect to the Company's common stock and no
dividends are anticipated to be paid in the foreseeable future. Pursuant to
the terms of the Loan Agreement with Seymour, Inc., the Company is prohibited
from paying any dividends, without the prior written consent of Seymour, Inc.,
until all principal and interest under the $2,500,000 loan have been paid.
(See "Item 6. - Liquidity and Capital Resources.")
(d) Sale of Unregistered Securities. During the fiscal year ended
March 31, 1997, the Company issued securities which were not registered under
the Securities Act of 1933, as amended, as follows:
In October 1996, the Company issued 200,000 shares of its Common Stock
to an investor upon the exercise of an option, for a total of $187,500 in
cash.
In March 1997, the Company issued 200,000 shares of its Common Stock to
Irving Strickstein, a beneficial owner of over 5% of the Company's Common
Stock, upon the exercise of an option, for a total of $120,000 in cash.
In connection with the above issuances, the Company relied on Section
4(2) of the Securities Act of 1933, as amended. The shares were offered for
investment only and not for the purpose of resale or distribution, and the
transfer thereof was appropriately restricted by the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The Company was organized as a Colorado corporation on April 2, 1987,
for the purpose of searching for and acquiring a business combination
candidate. On March 10, 1992, the Company acquired Infinity Research &
Development, Inc., then named Phoenix Research & Development Corporation
("PRD"). This acquisition was
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accounted for as a reverse acquisition. Accordingly, the financial statements
reflect the historical financial statements of PRD from its inception on
December 18, 1991, through March 10, 1992, and the consolidated financial
statements since that date.
On December 15, 1993, the Company acquired all of the outstanding stock
of LDC Food Systems, Inc. ("LDC"). This acquisition was accounted for as a
pooling of interests and the financial statements included in this Report
reflect the historical statements of LDC from its inception on April 20, 1990,
through December 15, 1993, and the consolidated financial statements since
that date
On January 21, 1994, Consolidated Industrial Services, Inc. ("CIS")
(incorporated in November 1993 as a wholly-owned subsidiary of the Company),
acquired substantially all of the assets except for real estate holdings and
advances receivable, and assumed certain liabilities of Consolidated Oil Well
Services, Inc. This acquisition was accounted for as a purchase and the
financial statements subsequent to January 1, 1994, include the results of
operations of the acquired entity from that date. The total consideration
given for this purchase was $1,000,000 in cash, 555,556 shares of the
Company's common stock and promissory notes totaling $2,000,000. Prior to
March 31, 1994, $600,000 of the $2,000,000 amount had been paid, leaving
$1,400,000 still owed. During December 1994, the Company reached an agreement
with Consolidated Oil Well Services, Inc. ("COWS") whereby COWS accepted a
reduced payment of $850,000 in full settlement of the remaining $1,400,000
promissory note. The balance was paid $750,000 in cash and $100,000 in
deferred future oil well services. Accordingly, the financial statements at
March 31, 1994, were restated to reflect the amount of this reduction of the
promissory note payment as a reduction in the purchase price of depreciable
equipment. Related depreciation expense and interest expense items were also
restated at March 31, 1994.
Upon further examination of the transactions, the Company determined
that the discount on the note payable did not meet the specific criteria of a
pre-acquisition contingency and should have been recorded as a gain from
extinguishment of debt. Accordingly, the consolidated financial statements
for the years ended March 31, 1995 and 1994 have been retroactively restated
to correct this accounting treatment. The cost of depreciable equipment
acquired has been restored to the original purchase price and related
depreciation expense and interest expense items have been restated accordingly
at March 31, 1995.
In September 1995 and November 1995 the Company created Infinity Oil and
Gas Inc. and CIS Oil and Gas, Inc., respectively, as newly-formed
subsidiaries. Results of operations of these subsidiaries are included in the
consolidated financial statements since their respective inception dates.
In January 1997, the Company reorganized Consolidated Pipeline, Inc. as
a subsidiary. Results of operations of this subsidiary have been included in
the consolidated financial statements since the date of inception.
In February 1997, the Company's interest in Infinity Oil & Gas, Inc. was
reduced to ten percent of the outstanding common shares with the remaining
common shares owned by the officers of the former subsidiary. Results of
operations after the date of this transaction have been excluded from the
consolidated financial statements and the remaining investment in this former
subsidiary is carried as an investment on the cost basis.
The following discussion relates to the financial statements included in
this Report.
-12-
RESULTS OF OPERATIONS
The oil field services segment of the Company generated $4,688,793 in
revenues and $2,480,130 in cost of sales during the year ended March 31, 1997,
compared to $3,814,456 in revenues and $2,123,195 in cost of sales for the
year ended March 31, 1996. The operating expenses incurred by the oil field
services segment of the Company were $1,515,883 for the year ended March 31,
1997, and $1,641,931 for the year ended March 31, 1996. Net operating income
for this segment improved to a profit of $692,780 for the year ended March
31, 1997, as compared to a profit of $49,330 for the year ended March 31,
1996. The improved results are attributed to the Company being able to
significantly increase sales primarily in Colorado and Oklahoma while
continuing measures to control costs. Depreciation and amortization expense
included in operating expenses for the oil field services division was
$496,147 for the year ended March 31, 1997, and $490,517 for the year ended
March 31, 1996.
The environmental services segment of the Company which includes all
water treatment activities, generated $346,545 in revenues and $190,215 in
cost of sales during the year ended March 31, 1997, compared to $1,092,614 in
revenues and $1,204,543 in cost of sales for the year ended March 31, 1996.
Operating expenses incurred by the environmental services division were
$292,539 for the year ended March 31, 1997, and $839,868 for the year ended
March 31, 1996, including depreciation and amortization expense of $171,500
for the year ended March 31, 1997 and $157,539 for the year ended March 31,
1996. The significant drop in revenue, cost of sales and operating expenses
resulted from the reduction in water research and treatment activities
culminating in the license agreement with BOC Gases in January 1996 and the
management and lease agreement with the environmental services company in
October 1996. Since completion of these agreements, these activities have
operated to collect royalties and rent payments and maintain patent rights and
have incurred negligible expense other than depreciation and amortization.
The oil and gas production segment of the Company was involved in the
development of the Raton Basin gas property during the year ended March 31,
1997, and incurred negligible operating expenses. Costs incurred in the
development of the wells and the related gathering system were capitalized and
will be deducted in future years as gas is produced and sold. Operating
expenses of $100,604 were incurred by this segment during the year ended March
31, 1996.
Expenses incurred in corporate activities were $274,291 for the year
ended March 31, 1997, and $435,447 for the year ended March 31, 1996. This
reduction was substantially achieved in the area of consulting fees and
professional services, and by closing the corporate office in Lenexa, Kansas.
Operating income for the Company improved to $282,280 for the year ended
March 31, 1997, from an operating loss of $(1,438,518) for the year ended
March 31, 1996. This improvement was due to strong growth in the oilfield
segment of the Company and the reduction in water treatment and research and
development activities. Combined sales grew nominally to $5,035,338 for the
year ended March 31, 1997, from $4,907,070 for the year ended March 31, 1996,
but cost of sales and operating expenses dropped to $2,670,345 and $2,082,713,
respectively, from $3,327,738 and $3,017,850, respectively, for the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had a working capital deficit of
$(1,285,105) compared to a deficit of $(321,979) at March 31, 1996. The
reduction in working capital is primarily due to the use of Company resources
to
-13-
develop the gas properties including accounts payable at March 31, 1997, which
included development costs totaling $461,255. Production from all 19 wells
had started by June 30, 1997. In May 1997, the Company received $450,000 from
the sale of common stock.
During the year ended March 31, 1997, cash generated by operating
activities was $892,989 compared to cash used of $(713,140) for the year ended
March 31, 1996. The primary reason for the improvement was the fact that the
Company had net income of $219,847 in the year ended March 31, 1997, as
compared to a net loss of $1,826,439 for the year ended March 31, 1996.
Net cash provided by the operation of the oil field services segment was
$1,188,927. Net cash generated by the operation of the environmental
technology segment was $104,942. Net cash used by the operation of corporate
activities was $(262,202) plus $104,942 of interest expense paid.
Cash used in investing activities during the year ended March 31, 1997,
was $1,800,988 as compared to $749,172 for the year ended March 31, 1996. The
majority of cash used in investing activities for both years was used to
develop the coal methane gas production in the Raton Basin in Southeastern
Colorado and to replace and upgrade equipment for oil field services. An
additional $57,140 was spent to pursue patent filings and financing and lease
transactions. These expenditures were offset by proceeds of selling surplus
equipment of $70,378.
During the year ended March 31, 1997, the Company received $812,500 from
the sale of common stock, through exercise of warrants and options and drew
$284,000 on a bank line of credit.
The Company presently has outstanding publicly-held warrants to purchase
shares of common stock, which if all were to be exercised, could result in
gross proceeds of approximately $2,800,000. (This does not include the
warrants to purchase 1,250,000 shares held by Seymour, Inc.) The Company
intends to file a registration statement relating to the warrants in an effort
to obtain the exercise of these warrants. However, there is no assurance that
the Company will be successful in obtaining the exercise of any of the
warrants.
At March 31, 1997, the Company's CIS subsidiary held a $300,000
revolving line of credit with a maturity date of August 1997, and the interest
rate of 2% over the lender's base corporate rate. The line of credit is
secured by a first lien on certain vehicles owned by CIS and accounts
receivable.
On May 31, 1995, the Company obtained $2,500,000 of long-term financing
from Seymour, Inc., a manufacturer of equipment for the food processing
industry. This note payable requires monthly payments of interest at an
annual rate of 10% and monthly installments of principal beginning January 1,
1996. The remaining principal balance matures June 1, 1998. This note
payable is secured by a first lien on substantially all equipment and vehicles
of the Company's CIS subsidiary. Seymour, Inc. also holds a warrant which
allows it to purchase up to 1,250,000 shares of the Company's common stock at
a price of $2.00 per share. This warrant is exercisable until ninety days
after the promissory note is fully paid.
The Company does not have any material commitments for capital
expenditures as of the filing of this Report. However, the Company is
required to drill a number of gas wells in its Raton Basin property in order
to retain its rights to further develop this leased property. The Company
intends to drill an additional ten gas wells in southeastern Colorado prior to
December 31, 1997, and at least ten additional wells during each of the next
three years. This pace of development will meet lease requirements to allow
the Company to continue to develop the property. Financing for this future
development will be necessary
-14-
and is expected to be obtained by borrowing based on the production and
reserves of the existing wells or by preselling the gas produced by these
wells. However, there is no assurance that the Company will be successful in
obtaining such financing.
Management believes that the revenues being generated by gas sales
together with the proceeds from the sale of common stock will provide
sufficient liquidity to meet the Company's working capital needs for the
remainder of the fiscal year ended March 31, 1998. Additional gas wells will
be drilled and completed only when additional financing is obtained
specifically for that purpose.
ITEM 7. FINANCIAL STATEMENTS.
Please see pages F-1 through F-21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
-15-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITIONS HELD
---- --- --------------
Stanton E. Ross 35 President, Treasurer and Director
Don W. Appleby 44 President of Subsidiary and Director
John C. Garrison 45 Secretary and Director
STANTON E. ROSS. Mr. Ross has been President, Treasurer and a Director
of the Company since March 1992, and serves as an officer and director of each
of the Company's subsidiaries. From 1991 until March 1992, he also founded
and served as President of Midwest Financial, a financial services corporation
involved in mergers, acquisitions and financing for corporations in the
Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc.,
an investment banking firm in Overland Park, Kansas, where he primarily worked
in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus
& Co., a member of the New York Stock Exchange, where he was an investment
executive. From 1987 to 1989, Mr. Ross was self-employed as a business
consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas
Microwave, Inc. which developed a radar detector product. From 1981 to 1985,
he was employed by Birdview Satellite Communications, Inc. which manufactured
and marketed home satellite television systems, initially as a salesman and
later as National Sales Manager.
DON W. APPLEBY. Mr. Appleby has served as President of the Company's
IRD subsidiary and as a Director of the Company since August 1995. He has
served as President of Seymour, Inc. since October 1992, and served as
Operations Manager for Seymour, Inc.'s equipment division from 1990 to 1992.
Seymour, Inc. is a 100 year old company which manufactures equipment for the
food processing industry. From 1989 to 1990, he was Vice President (with
responsibilities in finance and administration) of George E. Failing Company
which was engaged in the manufacture of drilling equipment. From 1987 until
1989, Mr. Appleby was Vice President and Chief Financial Officer for
Speedstar/AMCA International in Enid, Oklahoma, which was engaged in the
manufacture of drilling equipment. From 1975 to 1986, he was a Division
Manager for Parker Drilling Company, a large oil well drilling company. Mr.
Appleby received a BS/BA degree in Accounting/Finance from the University of
Tulsa in 1975. Mr. Appleby devotes approximately 25% of his time to the
business of the Company.
JOHN C. GARRISON. Mr. Garrison has served as Secretary of the Company
since August 1994, and as a Director since May 1995. He has been a Certified
Public Accountant in public practice providing financial management and
accounting services to a variety of businesses for over twenty years. Mr.
Garrison holds a Bachelor degree in Accounting from Kansas State University.
He devotes over 50% of his time to the business of the Company.
The Company's Directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified.
The Officers of the Company are elected by the Board of Directors at the
first meeting after each annual meeting of the Company's shareholders, and
hold
-16-
office until their death, or until they shall resign or have been removed from
office.
The Company has no audit, compensation or nominating committee.
The date of the next annual meeting of the Company will be determined by
the Company's Board of Directors in accordance with Colorado law.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, the following persons who
were either a director, officer or beneficial owner of more than 10% of the
Company's common stock, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year:
NUMBER OF NUMBER OF TRANSACTIONS FORMS REQUIRED
NAME LATE REPORTS NOT REPORTED TIMELY BUT NOT FILED
---- ------------ ---------------------- --------------
Don W. Appleby 2 2 0
John Garrison 2 2 0
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth information regarding executive
compensation for the Company's President and Chief Executive Officer. No
executive officer received compensation in excess of $100,000 for any of the
years ended March 31, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- ----------------- -------
SECURI-
TIES
RE- UNDERLY-
OTHER STRICT- ING ALL
ANNUAL ED OPTIONS OTHER
NAME AND PRINCIPAL COMPEN- STOCK /SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------ ----- ------ -------- -------- ------- ------
Stanton E. Ross, 1997 $60,000 -0- $7,800* -0- 150,000 -0- $-0-
President and 1996 $60,000 -0- $7,800* -0- -0- -0- -0-
Chief Execu- 1995 $60,000 -0- $7,800* -0- -0- -0- -0-
- --------------------
* Represents an automobile allowance.
-17-
OPTION/SAR GRANTS IN FISCAL YEAR ENDED MARCH 31, 1997
PERCENT OF
TOTAL OPTIONS/
OPTIONS/ SARs GRANTED EXERCISE
SARs TO EMPLOYEES OR BASE EXPIRATION
NAME (NUMBER) IN FISCAL YEAR PRICE ($/SH) DATE
---- -------- -------------- ------------ ----------
Stanton E. Ross 150,000 35.7% $1.31 2001
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES
UNDERLYING VALUE OF UNEXER-
SHARES UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- ---------------
Stanton E. Ross -0- -0- 166,668 / 0 $123,231 / $0
Effective February 1, 1992, Stanton E. Ross, the Company's President,
entered into an employment agreement with the Company's subsidiary which
provides for a base salary of $60,000 per year, plus commissions based on
installations of the Company's products which result from the efforts of Mr.
Ross. Commissions of up to 10% of the sales price may be earned by Mr. Ross
under these arrangements. The term of this employment agreement was through
February 1, 1994, but may be automatically extended for additional one year
periods unless either party notifies the other at least 30 days prior to the
expiration date.
Effective May 31, 1995, the Company entered into a consulting agreement
with Don W. Appleby who is now a Director of the Company and President of a
subsidiary. The agreement was for a period of two years. Mr. Appleby
receives $1,500 per month for his services. Mr. Appleby also received certain
stock options in connection with this agreement. Mr. Appleby is now working
for the Company on a month-to-month basis. (See "-- Stock Option Plan"
below.)
STOCK OPTION PLAN
In February 1992, the Board of Directors adopted a Stock Option Plan
(the "Plan") which was approved by the Company's shareholders in March 1992.
The Plan allows the Board to grant stock options from time to time to
employees, officers and directors of the Company and consultants to the
Company. The Board has the power to determine at the time the option is
granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. However, Incentive Stock Options will
only be granted to persons who are employees or officers of the Company.
Vesting provisions are determined by the Board at the time options are
granted. The total number of shares of Common Stock subject to options under
the Plan may not exceed 833,334, subject to adjustment in the event of certain
recapitalizations, reorganizations and so forth. The option price must be
satisfied by the payment of cash. The Board of Directors may amend the Plan
at any time, provided that the Board may not amend the Plan to materially
increase the benefits accruing to participants under the Plan, or materially
change the eligible classes of participants without shareholder approval.
-18-
In April 1995, the Board of Directors granted Incentive Stock Options to
John C. Garrison, Secretary and Director of the Company, to purchase 100,000
shares at $2.00 per share. The options vest as to 25,000 shares on July
15,1995; 25,000 shares on October 24, 1995; 25,000 shares on April 24,1996;
and 25,000 shares upon certain events, which have now occurred. The options
expire five years from the date of vesting.
In August 1995, the Board of Directors granted Non-Qualified Stock
Options to Don W. Appleby, a Director of the Company and President of the
Company's IRD subsidiary, to purchase up to 100,000 shares of Common Stock at
$2.00 per share. The options vested as to 12,500 shares immediately and as to
an additional 12,500 shares every three months after the date of grant. The
options expire five years from the date of grant.
In November 1996, the Board of Directors granted stock options to Don
Appleby and John Garrison to each purchase 100,000 shares of common stock at a
price of $0.93 per share. These options were fully vested and were exercised
during the year.
In January 1997, the Board of Directors granted stock options to Stanton
Ross, Don Appleby and John Garrison to purchase up to 150,000, 25,000 and
25,000 shares, respectively, of common stock at $1.31 per share. The options
for Mr. Ross vested immediately and the options for Messrs. Appleby and
Garrison vest at a rate of 25% each quarter from the date of grant and expire
five years from the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 19, 1996, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each Officer and Director individually
and all Directors and Officers of the Company as a group. Each person listed
holds sole voting and investment power with respect to the shares shown,
except as noted.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------- --------------------- --------
Stanton E. Ross 1,802,285 17.5%
211 West 14th Street
Chanute, KS 66720
John C. Garrison 112,500 1.1%
7211 High Drive
Prairie Village, KS 66208
Irving Strickstein 534,000 5.2%
2267 Shankin Drive
Walled Lake, MI 48390
Seymour, Inc. 1,250,000 11.0%
4225 S.W. Kirklawn
Topeka, KS 66609
Don W. Appleby 112,500 1.1%
3701 S.W. 36th
Topeka, KS 66614
-19-
Gaines, Berland Inc. 900,000 8.1%
6900 Jericho Turnpike
Syosset, NY 11791
All Directors and 2,027,285 19.2%
Executive Officers as
a Group (3 persons)
- ---------------------
* Less than 1%.
Includes 166,668 shares which may be purchased within 60 days under stock
options held by Mr. Ross.
Represents 112,500 shares which may be purchased within 60 days under stock
options held by Mr. Garrison.
Includes 200,000 shares which may be purchased within 60 days under stock
options held by Mr. Strickstein.
Represents shares underlying warrants to purchase 1,250,000 shares of common
stock.
Represents 112,500 shares which may be purchased within 60 days under stock
options held by Mr. Appleby. Does not include 1,250,000 shares of common
stock underlying warrants held by Seymour, Inc. of which Mr. Appleby is
President.
Represents shares underlying warrants to purchase 900,000 shares of common
stock.
There are no known agreements, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Stanton E. Ross, President, Treasurer and a Director of the Company, has
made loans to the Company to provide working capital. As of March 31, 1997,
these amounts totaled $309,968. The notes bear interest at 9%. One note with
a principal amount of $9,968 was due in April 1996 and the other note with a
principal amount of $300,000 is due in June 1998. The notes are subordinated
to the Seymour, Inc. note. The $9,968 note has not been repaid at this date.
On April 24, 1995, the Company issued a total of 202,000 shares of its
common stock to three persons for services rendered during the last fiscal
year which were valued at a total of $386,200. These services include
assisting the Company develop its business plan, advice regarding allocation
of funds between the Company's two primary business segments, and
miscellaneous ongoing consulting services. Included among the persons
receiving stock were two 5% shareholders of the Company: Joe Conner who
received 84,000 shares, and Irving Strickstein who received 34,000 shares.
On April 24, 1995, the Company's Board of Directors also approved
granting 800,000 options to three persons who have agreed to serve as an
informal advisory board for the Company. The options are exercisable at $2.00
per share. The persons receiving the options were as follows:
Irving Strickstein 400,000(1)
Joe Conner 200,000
Mitch Fazekas 200,000
-20-
- ----------
(1) During the year ended March 31, 1997, the exercise price on 200,000 of
these options was reduced for a short time and Mr. Strickstein transferred
200,000 options to a non-affiliated person who exercised them at a price of
$.9375 per share.
On May 31, 1995, the Company closed on a Loan Agreement with Seymour,
Inc. ("Seymour") pursuant to which Seymour loaned the Company $2,500,000 to be
repaid over three years in accordance with the terms of a promissory note.
The promissory note requires interest only payments for the first six months
of the loan. Commencing January 1, 1996, and for the following thirty (30)
months, the Company must pay $41,503 per month assuming a 10% interest rate.
All unpaid principal and interest will be due on June 1, 1998, and this amount
is expected to be approximately $1,825,100. The promissory note is secured by
certain property, equipment and machinery described in the Security Agreement.
In connection with the loan financing, the Company issued to Seymour
warrants to purchase up to 1,250,000 shares of the Company's common stock at
an exercise price of $2.00 per share. The warrants expire 90 days after the
payment of all principal and interest on the promissory note. As a result of
its ownership of the warrants, Seymour is deemed to be a principal shareholder
of the Company. Don W. Appleby, who became a Director of the Company and a
President of a subsidiary of the Company in August 1995, is President of
Seymour.
-21-
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3 Articles of Incorporation Incorporated by reference to
and Bylaws Exhibit No. 3 to the Registrant's
Registration Statement (No.
33-17416-D)
3.1 Articles of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit No. 3.1 to the Registrant's
Annual Report on Form 10-K for
the fiscal year ended March 31,
1992 (File No. 33-17416-D)
10.1 Stock Option Plan Incorporated by reference to
Exhibit No. 10.1 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.2 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Exhibit No. 10 to Registrant's
Report on Form 8-K dated March
10, 1992
10.4 Employment Agreement Incorporated by reference to
with Stanton E. Ross Exhibit No. 10.4 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.5 Settlement Agreement Incorporated by reference to
and Mutual Release Exhibit No. 10.5 to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1992
(File No. 33-17416-D)
10.6 Asset Purchase Agreement Incorporated by reference to
dated January 7, 1994, Registrant's Current Report on
among Infinity, Inc., Con- Form 8-K dated January 21, 1994
solidated Industrial Ser-
vices, Inc., Consolidated
Oil Well Services,
Inc. and Edsel E. Noland
10.7 Employment Agreement with Incorporated by reference to
Thomas G. Holzbaur Exhibit 10.7 to the Registrant's
Annual Report on Form 10-KSB
for the fiscal year ended March 31,
1994
-22-
10.8 Employment Agreement with Incorporated by reference to
Maitland DuBois Exhibit 10.8 to the Registrant's
Annual Report on Form 10-KSB for
the fiscal year ended March 31,
1994
10.9 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Registrant's Current Report on
with L.D.C. Food Systems, Form 8-K dated December 15, 1993
Inc., et al.
10.10 Employment Agreement with Incorporated by reference to
Louis D. Caracciolo, Jr. Registrant's Current Report on
Form 8-K dated December 15, 1993
10.11 Sublease Agreement on Incorporated by reference to
Lenexa, Kansas facility Exhibit 10.11 to the Registrant's
Annual Report on Form 10-KSB for
the fiscal year ended March 31,
1994
10.12 Loan Agreement dated May 25, Incorporated by reference to
1995, between the Company Exhibit 10.1 to Registrant's
and Seymour, Inc. Current Report on Form 8-K dated
May 31, 1995
10.13 Promissory Note dated Incorporated by reference to
May 25, 1995, payable to Exhibit 10.2 to Registrant's
Seymour, Inc. Current Report on Form 8-K dated
May 31, 1995
10.14 Security Agreement dated Incorporated by reference to
May 25, 1995 Exhibit 10.3 to Registrant's
Current Report on Form 8-K dated
May 31, 1995
10.15 Exclusive License Agreement Incorporated by reference to
with BOC Group, Inc. Exhibit 10.15 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1996
10.16 Consulting Agreement with Incorporated by reference to
Don Appleby Exhibit 10.16 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1996
10.17 Agreement with H. Huffman Incorporated by reference to
& Co., et al. Exhibit 10.17 to Registrant's
Annual Report on Form 10-K
for the fiscal year ended
March 31, 1996
10.18 Operating Lease with Great Filed herewith electronically
Plains Environmental, Inc.
-23-
10.19 Amendment to Exchange Filed herewith electronically
License Agreement with
BOC Group, Inc.
21 Subsidiaries of Registrant Filed herewith electronically
22 Consent of Mayer Hoffman Filed herewith electronically
McCann L.C.
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. For the last quarter of the period covered
by this Report, the Company filed one Report on Form 8-K dated January 22,
1997, reporting information under Item 9 - Sales of Equity Securities Pursuant
to Regulation S.
-24-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
INFINITY, INC.
We have audited the consolidated balance sheet of Infinity, Inc. and
Subsidiaries as of March 31, 1997 and the consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
March 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Infinity,
Inc. and Subsidiaries, as of March 31, 1997, and the results of their
operations and their cash flows for the years ended March 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
/s/ Mayer Hoffman McCann L.C.
Kansas City, Missouri
May 22, 1997, except for Note (17) for
which the date is May 28, 1997
F-1
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1997
A S S E T S
CURRENT ASSETS
Cash $ 52,725
Accounts receivable, less allowance of $89,755
for doubtful accounts 400,274
Inventories 197,731
Other current assets 18,220
----------
TOTAL CURRENT ASSETS 688,950
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 4,192,684
OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION,
using the full cost method 2,638,126
INTANGIBLE ASSETS, at cost, less accumulated amortization 246,856
OTHER ASSETS 82,545
----------
TOTAL ASSETS $7,829,161
L I A B I L I T I E S
CURRENT LIABILITIES
Accounts payable $ 988,026
Accrued expenses 303,386
Short-term borrowings 284,000
Current portion of long-term debt 318,643
Current portion of deferred revenue 60,000
----------
TOTAL CURRENT LIABILITIES 1,954,055
LONG-TERM LIABILITIES
Long-term debt, less current portion above 1,897,280
Notes payable, related party 309,968
Deferred revenue, less current portion above 167,936
----------
TOTAL LIABILITIES $4,329,239
S T O C K H O L D E R S' E Q U I T Y
CAPITAL CONTRIBUTED
Common stock, par value $.0001, authorized 300,000,000
shares issued and outstanding 9,860,564 shares $ 986
Additional paid-in-capital 7,927,855
----------
TOTAL CAPITAL CONTRIBUTED 7,928,841
RETAINED EARNINGS (DEFICIT) (4,428,919)
----------
TOTAL STOCKHOLDERS' EQUITY 3,499,922
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,829,161
See Notes to Financial Statements.
F-2
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1997 and 1996
1997 1996
---------- ----------
NET SALES $5,035,338 $ 4,907,070
COST OF SALES 2,670,345 3,327,738
---------- -----------
GROSS PROFIT 2,364,993 1,579,332
OPERATING EXPENSES 2,082,713 3,017,850
---------- -----------
OPERATING INCOME (LOSS) 282,280 (1,438,518)
OTHER INCOME (EXPENSE)
Interest income and finance charges 7,405 9,541
Interest expense (135,419) (266,303)
Gain (loss) on disposal of assets 24,786 (131,159)
Rent income 40,795 --
---------- -----------
TOTAL OTHER INCOME (EXPENSE) (62,433) (387,921)
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 219,847 (1,826,439)
INCOME TAXES -- --
---------- -----------
NET INCOME (LOSS) $ 219,847 $(1,826,439)
PER SHARE DATA
Net income (loss) $ 0.02 $ (0.23)
---------- -----------
Average shares outstanding 8,915,163 8,028,589
See Notes to Financial Statements
F-3
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1997 and 1996
COMMON STOCK
------------------ ADDITIONAL RETAINED TOTAL
SHARES PAID-IN EARNINGS STOCKHOLDERS'
ISSUED AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- ------------ ------------
Balance, March 31,
1995 7,625,226 $ 763 $6,187,952 $(2,822,327) $ 3,366,388
Issuance of common
stock 1,106,169 110 927,516 -- 927,626
Net loss -- -- -- (1,826,439) (1,826,439)
--------- ----- ---------- ----------- -----------
Balance, March 31,
1996 8,731,395 873 7,115,468 (4,648,766) 2,467,575
Issuance of common
stock 1,129,169 113 812,387 -- 812,500
--------- ----- ---------- ----------- -----------
Net income -- -- -- 219,847 219,847
--------- ----- ---------- ----------- -----------
Balance, March 31,
1997 9,860,564 $ 986 $7,927,855 $(4,428,919) $ 3,499,922
See Notes to Financial Statements.
F-4
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1997 and 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 219,847 $(1,826,439)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation 599,079 587,753
Amortization 80,657 72,907
(Gain) loss on sale of property and
equipment (24,786) 131,159
Decrease (increase) in operating assets
Accounts receivable 65,864 (71,813)
Inventories 11,248 (47,911)
Equipment held for sale -- 294,252
Other current assets 5,665 14,860
Other non-current assets -- 3,887
Increase (decrease) in operating liabilities
Accounts payable 12,607 163,700
Accrued expenses (38,910) (5,686)
Deferred revenue (38,272) (29,809)
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 892,989 (713,140)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (259,423) (264,235)
Proceeds from sale of property and equipment 70,378 157,292
Investment in oil and gas properties (1,554,803) (616,755)
Investment in intangible assets (57,140) (25,474)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,800,988) (749,172)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of related party advances -- (28,632)
Proceeds from issuance of common stock 812,500 537,626
Net change in short-term borrowings 284,000 --
Proceeds from long-term debt -- 2,500,000
Repayment of long-term debt (319,178) (1,593,563)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 777,322 1,415,431
----------- -----------
NET DECREASE IN CASH (130,677) (46,881)
CASH, BEGINNING OF YEAR 183,402 230,283
----------- -----------
CASH, END OF YEAR $ 52,725 $ 183,402
See Notes to Financial Statements.
F-5
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1997 and 1996
(Continued)
1997 1996
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest, net of amounts
capitalized $ 104,942 $ 340,278
Noncash investing and financing
activities:
Notes payable issued in exchange for
property and equipment $ -- $ 121,721
Common stock issued in payment of
accrued expenses $ -- $ 390,000
Note payable assumed by lessee of
water treatment facilities $ 14,870 $ --
Equity investment in unconsolidated
subsidiary $ 82,545 $ --
Investment in oil and gas properties
through trade accounts payable $ 461,255 $ 82,681
See Notes to Financial Statements.
F-6
INFINITY, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary of significant accounting policies
Nature of operations - The Company and its subsidiaries are engaged in
providing waste water treatment services, oil and gas production enhancement
services and oil and gas exploration, development and production activities.
The consolidated financial statements include the accounts of Infinity, Inc.
and its majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Revenue producing activities are conducted primarily in Kansas, Oklahoma,
Wyoming and Colorado. The Company grants credit to all qualified customers
which potentially subjects the Company to credit risk resulting from, among
other factors, adverse changes in the industries in which the Company operates
and the financial condition of its customers. However, management regularly
monitors its credit relationships and provides adequate allowances for
potential losses.
Revenue recognition - Generally, sales are recognized when products are
delivered or services are rendered.
Environmental costs - The Company expenses, on a current basis, recurring
costs associated with managing hazardous substances and pollution in ongoing
operations. The Company also accrues for costs associated with the remediation
of environmental pollution when it becomes probable that a liability has been
incurred and its proportionate share of the amount can be reasonably
estimated.
Management estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that may be particularly sensitive to changes in the near term
relate to the determination of oil and gas reserve quantities used for
purposes of depreciating and depleting costs associated with the development
of oil and gas properties. While management uses available information and
techniques to estimate oil and gas reserve quantities, inherent uncertainties
in, and the limited nature of, the data base upon which the estimates are
based may cause these estimates to change materially in the near term.
Inventory valuation - Inventories, consisting primarily of cement mix, sand,
fuel and chemicals, are stated at the lower of cost or market. Cost has been
determined on the first-in, first-out method. Market is based upon realizable
value less allowance for selling and distribution expenses and normal gross
profit.
Oil and gas properties - The Company follows the full cost method of
accounting for oil and gas properties. Accordingly, all costs associated with
acquisition, exploration and development of oil and gas reserves, including
directly related overhead costs, are capitalized.
F-7
All capitalized costs of oil and gas properties are to be amortized on the
unit-of-production method using estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower
of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas, in which case the gain or loss is recognized
in income. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
Capitalized interest - The Company capitalizes interest on expenditures made
in connection with exploration and development projects that are not subject
to current amortization. Interest is capitalized only for the period that
activities are in progress to bring these projects to their intended use.
Total interest incurred for the years ended March 31, 1997 and 1996 was
$272,869 and $266,303, respectively. Interest costs capitalized was $137,450
and $ 0, respectively.
Depreciation and amortization - Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
Assets Useful Lives
------ ------------
Site improvements 15 years
Machinery, equipment and vehicles 5 - 10 years
Office furniture and equipment 5 - 10 years
Technical data and rights 5 years
Organization and merger costs 5 years
Non-compete agreement 5 years
Loan costs Loan term
Goodwill 20 years
Intangible assets - Technical data and rights consist of certain legal fees
incurred in connection with the Company's "Thin Film Electrocoagulation"
technology to be used in the treatment of waste water, and "Chiller Loop"
technology to be used in the food processing industry. The carrying values of
these assets are periodically reviewed by the Company and impairments are
recognized when the expected future operating cash flows derived from such
intangible assets is less than their carrying value.
Organization and merger costs consist of costs incurred in connection with
acquisitions accounted for as a purchase. Costs incurred in connection with
acquisitions accounted for as pooling-of-interests have been expensed.
F-8
Public offering costs - Costs and expenses incurred in connection with a
public offering of securities are deferred until the offering is complete, at
which time, such costs are charged against the proceeds of the offering as a
reduction of stockholders' equity. Costs incurred in connection with failed
public offerings are charged to operations.
Deferred revenue - Deferred revenue represents credits for future oil well
services granted to a stockholder of the Company in connection with an
acquisition. Revenues from these services are recognized when the services
are performed. The credits are scheduled to expire in March 1999 if not used
prior to that date.
Research and development costs - Research and development costs incurred in
connection with the Company's development of environmental control products
and services are expensed as incurred. Research and development expense
totaled $ 0 and $51,152 for the years ended March 31, 1997 and 1996,
respectively.
Per share information - The computation of income (loss) per share in each
year is based on the weighted average number of common shares outstanding.
Common stock equivalents are not included in the computation because their
inclusion would be anti-dilutive.
Cash - For purposes of reporting cash flows, cash generally consists of cash
on hand and demand deposits with financial institutions.
Reclassifications - Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
(2) Accounting changes
Accounting for impairment of long-lived assets - The Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets." This Statement, which was effective for the Company on
April 1, 1996, established accounting standards for the impairment of
long-lived assets, certain intangibles, and goodwill related to those assets.
This Statement did not have a material effect on the consolidated financial
statements.
Accounting for stock-based compensation - Effective for the Company on April
1, 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," requires
increased disclosure of compensation expense arising from both fixed and
performance stock compensation plans. Compensation is measured as the fair
value of the award at the date it is granted using an option-pricing model
that takes into account the exercise price and expected term of the option,
the current price of the underlying stock, its expected volatility, expected
dividends on the stock and the expected risk-free rate of return during the
term of the option. The compensation cost is recognized over the service
period, usually the period from the grant date to the vesting date. SFAS No.
123 encourages, rather than requires, companies to adopt a new method that
accounts for stock compensation awards based on their estimated fair value at
the date they are granted. Companies are permitted, however, to continue
accounting under APB Opinion 25, which requires compensation cost for
stock-based employee compensation plans be recognized based on the difference,
if any, between the quoted market price of the stock and the amount an
employee must pay to acquire the stock. The Company continues to apply APB
Opinion No. 25 in its financial statements and discloses proforma net income
and earnings per share in a footnote to the financial statements, determined
as if the Company applied the new method.
F-9
(3) Property and equipment
Cost
Site improvements $ 2,100,217
Machinery, equipment and vehicles 3,697,915
Office furniture and equipment 102,204
-----------
Total cost 5,900,336
Accumulated depreciation (1,707,652)
-----------
Net property and equipment $ 4,192,684
The cost of property and equipment leased to others under operating leases at
March 31, 1997 totaled $1,318,569. Accumulated depreciation on such equipment
was $297,453 at March 31, 1997.
(4) Oil and gas properties not subject to amortization
The Company is currently conducting gas exploration and development activities
on acreage in Southeastern Colorado. At March 31, 1997, the Company had not
generated revenue from its gas producing properties proved reserves.
Consequently, the related acquisition and development costs are not subject to
amortization. The Company will begin to amortize these costs when oil and gas
production begins, which is currently estimated to be during the year ending
March 31, 1998. Costs incurred in connection with the Company's oil and gas
activities at March 31, 1997 consist of the following:
Acquisition costs $ 150,000
Development costs 2,350,676
Capitalized interest 137,450
----------
Total $2,638,126
The lease agreement requires certain drilling activity to retain the Company's
interest in the lease. The Company is committed to drill ten wells before
December 31, 1997 and ten additional wells during each of the subsequent three
years to earn the right to develop the entire acreage. As of March 31, 1997,
twenty production wells had been drilled.
Recovery of the above acquisition and development costs is dependent on a
variety of factors, including actual production results and market conditions.
(5) Intangible assets
Cost
Technical data and rights $ 67,919
Organization and merger costs 74,603
Non-compete agreement 300,000
Loan costs 28,532
Goodwill 25,000
----------
Total cost 496,054
Accumulated amortization (249,198)
----------
Net intangible assets $ 246,856
F-10
(6) Other assets
At March 31, 1996 the Company owned a 55% equity interest in Infinity Oil and
Gas, Inc. (IOG) which is engaged in the exploration and development of oil and
gas properties. During the year ended March 31, 1997, the Company exchanged
45% of its equity interest in IOG for a 12%, $50,000 note receivable. Monthly
interest payments are to begin February 15, 1998 with the face amount due at
maturity, February 2000.
The Company's remaining 10% equity interest in IOG is valued on the cost basis
which approximates fair value. The Company's equity interest and note
receivable are included in other assets on the accompanying balance sheet as
follows:
Note receivable $ 50,000
10% Equity investment 32,545
----------
Total other assets $ 82,545
(7) Short-term borrowings
At March 31, 1997, the Company's subsidiary, Consolidated Industrial Services,
Inc. (CIS), had a $300,000 line of credit available which expires August 1997.
The line of credit is collateralized by accounts receivable and certain
equipment with interest at 2% above the lender's corporate base rate.
(8) Long-term debt
10% note; payable in monthly installments
of $41,503 until maturity, June 1998; col-
lateralized by substantially all of the
assets of the Company's wholly owned sub-
sidiary, Consolidated Industrial Services,
Inc. The loan agreement contains, among other
items, certain restrictive covenants with
respect to dividends, acquisitions and capital
expenditures. In connection with the loan
agreement, the Company issued a warrant to the
lender to purchase up to 1,250,000 shares of the
Company's common stock at $2.00 per share. The
warrant expires 90 days after payment of all
principal and interest due on the note. $ 2,171,200
9.5% fixed rate note, payable in monthly in-
stallments of principal and interest until
maturity, January 2001; collateralized by a
company vehicle. 26,181
3% fixed rate note, payable to the Federal
Highway Administration in settlement of
Company violations of Department of
Transportation regulations; payable in monthly
installments of $3,116, including interest,
through maturity, September 1997. 18,542
-----------
Total long-term debt 2,215,923
Less: Current portion (318,643)
Non-current portion $ 1,897,280
-----------
F-11
Maturities for long-term debt are as follows:
Years Ending March 31, Total
1998 $ 318,643
1999 1,883,577
2000 7,180
2001 6,523
-----------
Total long-term debt $ 2,215,923
(9) Operating Leases
The Company leases operating facilities under operating leases. The future
minimum rental payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year are as follows:
Years Ending March 31, Total
1998 $ 54,408
1999 54,708
2000 56,508
2001 51,540
2002 29,400
Later Years 40,500
-----------
Total $ 287,064
Total rent expense for all operating leases was $63,329 and $103,388 for the
years ended March 31, 1997 and 1996, respectively.
The Company is a lessor of its water treatment facilities under an operating
lease which expires in 2001 with options to extend for additional two and
seven year periods. Additionally, the lessee has the right to exercise a
purchase option at the end of the initial five year period or at the end of
each of the two extension periods. Minimum rentals receivable under existing
leases as of March 31, 1997 are as follows:
Years Ending March 31, Total
1998 $ 66,667
1999 80,000
2000 80,000
2001 80,000
2002 60,000
-----------
Total $ 366,667
Total rental income was $40,795 and $ 0 for the years ended March 31, 1997 and
1996, respectively.
F-12
(10) Common stock
Warrants - The Company, in conjunction with a 1988 public stock offering,
issued Class A, Class B and underwriter warrants to purchase 851,834 shares of
Infinity common stock. Under the terms of the warrant agreements, the Class A
warrants are subject to redemption by the Company, upon thirty days notice, at
a price of $.01 per warrant. The Class B warrants are subject to redemption by
the Company, upon thirty days notice, at a price of $.02 per warrant. The
Class A and B warrants expire September 30, 1997 and the underwriter warrants
expire September 22, 1997.
The Company issued warrants in conjunction with the 1995 10% financing (see
Note (8)), to purchase 1,250,000 shares of common stock (Seymour warrants).
The warrants expire 90 days after payment of all principal and interest due on
the 10% note.
The Company issued Class C warrants to purchase 766,668 shares of Infinity
common stock in conjunction with stock issuances during the year ended March
31, 1996. During the year ended March 31, 1997 725,001 warrants were
exercised. The remaining warrants expire on November 30, 1997.
During the year ended March 31, 1997 the Company issued warrants to purchase
900,000 shares of Infinity common stock (1997 warrants). The warrants expire
August 1, 2001.
At March 31, 1997, the following warrants were outstanding.
Number Number Exercise
Class of Warrants of Shares Price
----- ----------- --------- --------
A 4,868,000 405,667 $ 1.80
B 4,868,000 405,667 $ 3.00
C 41,667 41,667 $ 0.60
Underwriters warrants 486,000 40,500 $ 1.44
Seymour warrants 1,250,000 1,250,000 $ 2.00
1997 warrants 900,000 900,000 $ 0.88
Options - In 1992, the Company adopted a stock option plan containing both
incentive and nonstatutory stock options. All options allow for the purchase
of common stock at prices not less than the fair market value of such stock at
the date of grant. The option price under the incentive stock option
provisions of the plan if the optionee owns more than 10% of the total
combined voting power of all classes of the Company's stock will not be less
than 110% of the fair market value of such stock at the date of grant.
Options granted under the plan become exercisable immediately or as directed
by the Board of Directors and generally expire ten years after the date of
grant, unless the employee owns more than 10% of the total combined voting
power of all classes of the Company's stock, in which case they must be
exercised within five years of the date of grant. Pursuant to the plan, an
aggregate of 833,333 shares of common stock is available for issuance upon the
exercise of such options. At March 31, 1997, options to purchase 4,990 shares
were available for grant under the plan. A summary of stock option activity
is as follows:
F-13
Weighted
Number of Option Price Average Price
Shares Per Share Per Share
----------- ------------ -------------
Outstanding, March 31, 1995 691,680 $0.60-$7.00 $ 2.19
Granted 1,300,000 0.85- 2.00 1.96
Canceled (16,666) 7.00 7.00
Exercised (137,507) 0.60- 1.20 0.78
--------- ----------- ------
Outstanding, March 31, 1996 1,837,507 $0.60-$6.00 $ 2.09
Granted 420,000 0.94- 1.31 1.13
Canceled (166,670) 1.20- 6.00 3.60
Exercised (404,167) 0.60- 2.00 1.46
--------- ----------- ------
Outstanding, March 31, 1997 1,686,670 $0.66-$3.84 $ 1.85
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/97 Life Price at 3/31/97 Price
- ---------- ----------- ----------- -------- ----------- --------
$2.88 8,334 1 year $ 2.88 8,334 $ 2.88
0.66-3.84 1,208,336 2 years 1.96 1,208,336 1.96
0.85-2.00 250,000 4 years 1.77 205,000 1.97
1.31 220,000 5 years 1.31 55,000 1.31
--------- ---------
1,686,670 1,476,670
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for the stock
option plan. Had compensation costs for the Company's plan been determined
based upon the fair value at the grant date for awards under the plan
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earning (loss) per share would have been
respectively, $833 and $ 0 for the year ended March 31, 1997 and ($1,955,733)
and $(0.24) for the year ended March 31, 1996.
For options granted during the year ended March 31, 1997, the estimated fair
value of the options granted utilizing the Black-Scholes pricing model under
the Company's plan was based on a weighted average risk-free interest rate of
6.75%, expected option life of 3.68 years, expected volatility of 48.25% and
no expected dividend yield. For options granted during the year ended March
31, 1996, the estimated fair value of options granted under the Company's plan
was based on a weighted average risk-free interest rate of 6.03%, expected
option life of 4.38 years, expected volatility of 57.19% and no expected
dividend yield.
Employee stock bonus plan - The Company may award shares of common stock to
employees at the discretion of the Board of Directors. Pursuant to the plan,
an aggregate of 50,000 shares of common stock were initially available for
issuance. As of March 31, 1997, 40,000 shares of common stock were available
for issuance to employees.
F-14
(11) Income taxes
The provision for income taxes for the years ended March 31, 1997 and 1996
consists of the following:
1997 1996
---------- ----------
Current income tax expense $ -- $ --
Deferred income tax expense (benefit) 85,409 (623,230)
Change in deferred tax asset valuation
allowance (85,409) 623,230
-------- ---------
Total income taxes $ -- $ --
The effective income tax rate varies from the statutory federal income tax
rate as follows:
1997 1996
---------- ----------
Federal income tax rate 34% 34%
Net operating losses for which no
tax benefit is currently available (34%) (34%)
--- ---
Effective tax rate --% --%
The significant temporary differences and carryforwards and their related
deferred tax asset (liability) and deferred tax asset valuation allowance
balances as of March 31, 1997 are as follows:
Deferred tax
Accounts receivable $ 30,517
Net operating loss carryforward 2,379,206
----------
Gross deferred tax debits 2,409,723
Deferred tax credits:
Property and equipment (463,609)
Intangible drilling costs (426,445)
----------
Gross deferred tax credits (890,054)
----------
Deferred tax asset valuation allowance (1,519,669)
----------
Total deferred taxes $ --
No deferred income taxes have been recognized in the accompanying financial
statements due to uncertainties in connection with the realization of the
potential tax benefits associated with the net operating loss carryforwards.
For Federal income tax purposes, the Company has tax carryforwards expiring in
the following manner:
F-15
Net operating
losses expiring
March 31,
---------------
2004 $ 48,737
2005 36,931
2006 111,341
2007 20,382
2008 331,374
2009 852,463
2010 2,193,217
2011 2,225,708
2012 1,177,511
----------
Total $6,997,664
The availability of the net operating loss carryforwards for Federal income
tax purposes may be limited pursuant to provisions of the Internal Revenue
Code as amended by the Tax Reform Act of 1986. The potential limitation is
dependent on changes in stock ownership while a net operating loss exists, the
fair market value of the Company's stock at the date of stock ownership
changes and certain other factors.
(12) Retirement plan
The Company's wholly-owned subsidiary, Consolidated Industrial Services, Inc.,
has a 401(k) plan covering substantially all of its employees. There were no
Company contributions made to the plan during the years ended March 31, 1997
and 1996.
(13) Related party transactions
The Company had unsecured notes payable to an officer and stockholder of the
Company totaling $309,968 at March 31, 1997 and 1996, respectively. The notes
bear interest at 9% and are due June 1998; however, the notes are subordinated
to the 10% note described in Note (8). Interest expense of $27,897 was
recognized on these notes during the years ended March 31, 1997 and 1996,
respectively.
Consolidated Oil Well Services, Inc. (COWS) is owned by a minority stockholder
of Infinity, Inc. In connection with the Company's acquisition of COWS assets
in 1994, the Company is obligated to provide certain oil well services to this
stockholder. During the years ended March 31, 1997 and 1996, the fair value
of such services provided to the stockholder was $35,507 and $29,809,
respectively.
The Company leases certain real estate from COWS. The related amount charged
to operations for the years ended March 31, 1997 and 1996 was $42,408 and
$42,408, respectively.
(14) Industry segments
The Company's operations have been classified into three industry segments:
(i) Oil Field Services which includes operations in Kansas, Oklahoma and
Colorado directed at maintaining and enhancing production obtained from oil
and gas wells; (ii) Oil and Gas Production which includes exploration,
development and production of oil and gas reserves in Colorado; and (iii)
Environmental
F-16
Technology which includes development and application of wastewater treatment
technologies including "electrocoagulation" and "chiller loop" technologies
and disposal of solid waste byproducts. Operations are conducted primarily
in Wyoming and Kansas. Operating income (loss) represents net sales less
direct costs and operating expenses before interest and finance charges.
Identifiable assets consist of assets specifically used in the operations of
each industry segment. Information concerning the Company's industry segments
in fiscal 1997 and 1996 is as follows:
Environ-
Oil Field Oil & Gas mental
Services Production Technology Corporate Consolidated
--------- ---------- ---------- --------- ------------
Net Sales
1997 $4,688,793 $ - $ 346,545 $ - $ 5,035,338
1996 3,814,456 - 1,092,614 - 4,907,070
Operating Income
(Loss)
1997 692,780 - (136,209) (274,291) 282,280
1996 49,330 (100,604) (951,797) (435,447) (1,438,518)
Identifiable
Assets, Net
1997 3,878,901 2,771,718 1,144,982 33,560 7,829,161
1996 4,389,490 718,319 1,245,749 96,624 6,450,178
Capital
Expenditures
1997 256,695 2,007,697 2,728 - 2,267,120
1996 249,290 704,936 125,321 5,845 1,085,392
Depreciation and
Amortization
1997 496,147 - 171,500 12,089 679,736
1996 490,517 1,125 157,539 11,479 660,660
15) Significant customers
During the year ended March 31, 1997, the Company provided services to Stroud
Oil Properties resulting in revenues of $646,488 which represents 13% of the
Company's net sales. Receivables outstanding from these sales were not
material at March 31, 1997. There were no significant concentrations of sales
to customers for the year ended March 31, 1996.
(16) Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure about the fair value of
financial instruments for which it is practicable to estimate fair value. The
following assumptions were used to estimating the fair value of the Company's
financial instruments.
The carrying amount of the Company's cash balances represent fair value as of
March 31, 1997. The fair value of the Company's long-term debt is estimated
based on the present value of estimated future cash flows using a discount
rate commensurate with the risks involved. However, the estimated fair value
was not materially different from the carrying amount at March 31, 1997.
F-17
It was not practicable to estimate the fair value of the Company's related
party notes payable due to the lack of adequate "market" information with
which to base estimates of fair value for this financial instrument.
Information regarding the carrying amount, interest rate, repayment terms and
maturity is included in footnote (13).
(17) Subsequent event
On May 28, 1997, the Company raised $450,000 of equity through the sale of its
stock in a private offering to three investors.
F-18
INFINITY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORAMTION (UNAUDITED)
Year Ended March 31, 1997
Capitalized Costs Relating to Oil and
Gas Producing Activities at March 31, 1997
Unproved oil and gas properties $ -
Proved oil and gas properties 1,914,860
Support equipment and facilities 723,266
----------
Total Capitalized Costs 2,638,126
Less accumulated depreciation, depletion and
amortization -
----------
Net capitalized costs $2,638,126
Costs Incurred in Oil and Gas Producing
Activities for the Year Ended March 31, 1997
Property acquisition costs
Proved $ -
Unproved -
Exploration costs -
Development costs 2,007,697
Results of Operations for Oil and
Gas Producing Activities for the
Year Ended March 31, 1997
The Company is currently conducting oil and gas exploration and development
activities in Southeastern Colorado. At March 31, 1997, the Company had not
commenced production from its oil and gas properties.
Reserve information
The following estimates of proved and proved developed reserve quantities and
related standardized measures of discounted net cash flow are estimates only,
and do not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise. Accordingly, these estimates are expected to change as
future information becomes available. All of the Company's reserves are
located in the United States.
Proved reserves are estimated reserves of methane gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment, and operating methods.
F-19
The standardized measure of discounted future net cash flows is computed by
applying year-end prices (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on year-end
statutory tax rates, with consideration for future tax rates already
legislated) to be incurred on pretax net cash flows less tax basis of the
properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10 percent a year to reflect the estimated timing of the
future cash flows.
Proved Developed and Undeveloped Reserves Gas (MMCF)
Beginning of year 4,409.526
Revisions of previous estimates 11,114.021
Extensions and discoveries 18,400.518
Production -
-----------
End of year 33,924.065
Proved Developed Reserves
Beginning of year 4,409.526
End of year 19,199.035
Standardized Measure of Discounted
Future Net Cash Flows at March 31, 1997
Future cash inflows $ 54,956,992
Future production costs including production
taxes (24,177,147)
Future development costs (1,860,000)
-----------
Future Net Cash Flows 28,919,845
10% annual discount for estimated timing of
cash flows (17,043,643)
-----------
Standardized Measures of Discounted
Future Net Cash Flows Relating to
Proved Oil and Gas Reserves $ 11,876,202
F-20
The following reconciles the change in the standardized measure of discounted
future net cash flow during the year ended March 31, 1997:
Beginning of year $ 3,275,970
Sales of gas produced, net of production costs -
Net changes in prices and production costs (929,112)
Extensions, discoveries, and improved recovery,
less related costs 16,475,861
Development costs incurred during the year
which were previously estimated 160,000
Net change in esti mated future development costs (1,850,000)
Revisions of previous quantity estimates 10,312,310
Net change from purchases and sales of minerals
in place -
Accretion of discount (15,568,827)
Net change in income taxes -
Other -
-----------
End of year $11,876,202
F-21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFINITY, INC.
Dated: July 14, 1997 By:/s/ Stanton E. Ross
Stanton E. Ross, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
company and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Stanton E. Ross President, Treasurer, July 14, 1997
Stanton E. Ross (Principal Financial
Officer) and Director
/s/ Don W. Appleby Director July 14, 1997
Don W. Appleby
/s/ John C. Garrison Secretary (Principal July 14, 1997
John C. Garrison Accounting Officer)
and Director