The following information should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in the this Form 10-K. Infinity follows the full-cost method of accounting for oil and gas properties. See "Organization“Organization and Summary of Significant Accounting Policies,"” included in Note 1 to the Consolidated Financial Statements.
Consolidated continued to develop its business relationships as the largest oil fieldoilfield service provider in easternEastern Kansas and northeasternNortheast Oklahoma by servicing over 400serving approximately 475 customers during the year ended December 31, 2003.2004. The continued strong price of natural gas and crude oil and the focus on development of the coal bed methane
Infinity incurred a net loss after taxes of $9.9 million, or $1.23 per fully diluted share, in the year ended December 31, 2003 compared to a net loss after taxes of $1.6 million, or $0.22 per fully diluted share in the year ended
December 31, 2002.
Interest expense and finance charges increased by $7.0 million to $7.8 million for the year ended December 31, 2003 compared to $0.8 million for the
year ended December 31, 2002. The increase was primarily due to the recognition of $5.6 million of amortization of loan costs associated with the value of warrants and options granted in conjunction with obtaining new debt financing and the amortization of $0.6 million of cash loan costs paid when those same loans were obtained. Infinity also experienced a $0.9 million increase in interest expense in the 2003 period compared to the 2002 period due to the increase in debt outstanding, higher interest rates on certain of the new notes issued in 2003 and a decrease in the amount of interest that was capitalized to undeveloped properties as Infinity experienced a period of development inactivity during a significant portion of 2003.
The increase in production was primarily a result of the increased production time for wells in each period. Several wells began production in the third and fourth quarters of 2002. These wells produced for all of 2003 while producing for only a short period and at lower volumes during 2002.
Infinity-Kansas recorded net revenue of $0.2 million from its Kansas properties and operating expenses and production taxes of $0.2 million during
the year ended December 31, 2002. Effective May 1, 2002 Infinity-Kansas sold its interest in the Owl Creek and Manson properties to West Central Oil, LLC for cash and a note receivable. Under the full cost method of accounting for oil and gas properties, Infinity and its subsidiaries did not recognize a gain or loss on the sale of its oil and gas properties since the sale did not have a material impact on the relationship between the oil and gas property values and the value of the reserves associated with those properties. Infinity reduced its investment in the remaining oil and gas properties by approximately $244,000 on the sale of the property.
During 2003, production, oil and gas prices, operating expenses and development expenditures for Infinity-Wyoming'sInfinity-Wyoming’s Labarge and Pipeline projects
have varied from those estimated in reserve reports at December 31, 2002 and additional geological, geophysical, and engineering data has becomebecame available and beenwas analyzed. Production at Labarge continuescontinued to be uneconomic.
Infinity-Wyoming believes that this may beuneconomic, possibly due in part to down-hole operational problems and as a result in December 2003, Infinity-Wyoming entered into an
agreement with Schlumberger and Red Oak for the further evaluation and
development of the Labarge acreage. Additional information about that agreement
was discussed in the "Overview of Oil and Gas Production Activity" section of
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."problems. Quantities of proved oil and gas reserves as evaluated by Netherland Sewell and Associates at December 31, 2003 were substantially less than our previous estimates which in turn resulted in a higher depletion rate for the last part of 2003.
Infinity-Wyoming experienced a $0.3 million increase in administrative expenses in the year ended December 31, 2003 compared to the year ended December
31, 2002. This increase in administrative expense was primarily legal, accounting, and consulting fees associated with the detailed negotiations relating to a potential merger, which negotiations were terminated in May 2003, and the process leading up to those negotiations in which Infinity solicited and reviewed strategic alternatives.
Infinity and its subsidiaries incurred approximately $2.1 million in expenses associated with corporate activities during the year ended December 31,
2003 compared to approximately $1.9 million in the period ended December 31, 2002. Included in the $0.2 million increase was approximately $0.3 million in legal, accounting, and consulting fees associated with the detailed negotiations relating to a potential merger, which negotiations were terminated in May 2003, and the process leading up to those negotiations in which Infinity solicited and reviewed strategic alternatives.
gain on the sale of the Evergreen Resources stock was partially offset by $1.8
million in interest expense on the loans that were secured by the securities in
the none-month transition period. Costs of $1.0 million were also incurred for
unwinding the financing agreements secured by the Evergreen Resources common
stock, which were capitalized to undeveloped properties of Infinity-Wyoming.
Infinity recognized a deferred income tax benefit of $1.1 million, or 42.4%
of the pre-tax loss, in the year ended December 31, 2002 compared to an income
tax expense of $1.6 million, or 38.5% of the pre-tax income, in the nine-month
transition period ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Infinity's Infinity’s primary sources of liquidity are cash provided by operations and debt financing, and the equity market. Infinity'sfinancing. Infinity’s primary needs for cash are for the operation, development, production, exploration and acquisition of oil and gas properties, for fulfillment of working capital obligations, and for the operation and development through acquisitions of the oil fieldoilfield service business.businesses.
As of December 31, 2003,2004, the Company had a working capital deficit of $2.2$0.3 million, compared to a working capital deficit of $3.0$2.2 million at December 31, 2002. The increase in the working2003. Working capital was the result ofincreased by approximately $2.5 million due to an approximate $5.9 million increase in current assets due primarily to (i) a $2.3 million increase in cash; (ii) a $1.7 million increase in net accounts receivable; and (iii) an approximate $1.6 million increase in the current portion of $0.2a note receivable, offset by an approximate $3.4 million and a decreaseincrease in current liabilities of $0.3
million. Thedue to (i) a $1.5 million increase in current assets was mainly due to an increase of $0.2
million in oil field service receivables and an increase of $0.1 million in oil
and gas revenue receivables during the period. These increases in receivables
were partially offset by a reduction in cash of approximately $0.1 million from
December 31, 2003 to December 31, 2002. In addition to the increase in current
assets, Infinity also reduced its current liabilities through payment of
accounts payable which resulted inand (ii) a net decrease of $0.2 million, repayments of
long term debt and refinancing current notes into long term debt which resulted
in a reduction in current liabilities of approximately $0.5 million. These
decreases in current liabilities were partially offset by a $0.4$3.5 million increase in accrued expenses associated with oil and gas revenues payable and
production and severance taxes payable as production increased.liabilities; offset by (iii) a $1.4 million decrease in current portion of long-term debt.
During the year ended December 31, 2003, cash provided by operations was
$2.8 million compared to2004, cash provided by operating activities during the year
ended December 31, 2002 of $0.1 million.was $5.5 million, compared to $2.8 million in 2003. The increase isin cash provided by operating activities of $2.7 million was primarily due to the $5.3 million decrease in net loss.
During 2004, Infinity used $9.9 million in investing activities, compared to $6.9 million used in 2003. The increase in income/(loss) before non-cash expensescash used in investing activities of $3.0 million was primarily attributable to a $6.0 million increase in exploration and production capital expenditures and a $1.7 million increase in oilfield services capital expenditures, partially offset by a $4.6 million increase in proceeds of sale of fixed assets.
During 2004, Infinity financing activities provided $6.8 million, compared to $3.9 million from financing activities during 2003. The increase in cash provided by financing activities of $2.9 million was due to an $8.5 million increase in proceeds from equity issuances, net of issuance costs, offset by a loss
before non-cash expenses of $0.7 million in 2002 to income of $2.3 million in
2003. There was also a $0.2$5.3 million decrease in the amount of cash provided asproceeds from borrowings and a result of the changes$0.3 million increase in operating assets (accounts receivable, inventories and
prepaid expenses) and operating liabilities (accounts payable and accrued
expenses) during the 2003 period compared to the 2002 period.debt repayments.
Effective June 13, 2001, Infinity utilized
cash of approximately $0.5 million due to the changesold $6,475,000 in operating assets and
liabilities8% Subordinated Convertible Notes in the year ended December 31, 2003 compared to generating $0.8
million in the comparable 2002 period.a private placement. During the year ended December 31, 2003,2004, $308,276 of the notes and interest accrued on those notes was converted into 63,179 shares of common stock, leaving an outstanding balance on the notes of $2,493,000 at December 31, 2004. The remaining notes and accrued interest were converted in their entirety by February 28, 2005 into 517,296 shares of the Company’s common stock.
Effective April 17, 2002, Infinity used $6.9 millionsold $12,540,000 in investing activities by investing $5.7 million7% Subordinated Convertible Notes in developing oila private placement. Infinity issued $391,000 in additional notes for the payment of accrued interest due April 15, 2004 and gas
properties, $1.1 million$404,000 in property and equipment, and $0.2 million in other
assets and intangibles. This compares to Infinity investing $14.4 million in oil
and gas properties, $2.7 million in property and equipment, and $0.1 million in
other assets and intangiblesadditional notes for the payment of accrued interest due October 15, 2004. In addition, during
42
the year ended December 31, 2002. Offsetting2004, $487,472 of the usenotes and interest accrued on notes were converted into 62,685 shares of common stock, leaving an outstanding balance on the notes of $11,516,698 at December 31, 2004. During 2005, through March 23, the holders of $5,950,538 of 7% have converted the debt and accrued interest into 783,779 shares of the Company’s common stock. The remaining notes are currently subject to redemption by Infinity on April 22, 2005 and the outstanding balance of the notes on March 23, 2005 was approximately $5.6 million. Infinity has cash available to redeem the remaining 7% notes should they not be presented for conversion prior to the redemption date.
Effective November 25, 2002, Infinity issued $3,000,000 in investing activitiesnotes to a stockholder. These notes were secured with a first or second priority security interest in 2002 wascertain gas properties and accrued interest at 7% per annum. On January 15, 2004, Infinity issued 125,000 shares of common stock valued at $4.00 per share and paid $750,000 in cash, as partial payment on the receipt of $0.8 million
from the sale of marketable securities and $0.2 million from the sale of
property and equipment and oil and gas properties.$3,000,000 bridge note. As a result Infinity used a
total of $16.2 million in investing activities during the year ended December
31, 2002.
Infinity received $11.5 million from financing activities and $0.8 million
from the exercise of options which was used to pay $8.4 million in outstanding
debt, to pay interest on convertible notes, and development costs related to its
oil and gas properties during the year ended December 31, 2003. During the
comparable period of 2002, Infinity received $21.7 million from financing
activities (including the sale of the 7% convertible notes) and $1.9 million
fromprivate placement of common stock on November 15, 2004, the exercise of options whichnote was used to pay $7.4 million on outstanding
debt and development exploration and development costs on its oil and gas
properties.repaid in full during November 2004.
In January 2002, Consolidated established a
three year term loan collateralized by substantially all of its
oil fieldoilfield service equipment, a revolving line of credit secured by the eligible receivables of Consolidated and a $1.0 million capital expenditures line of credit with LaSalle Bank, N.A.
The
notes bear interest at 1% over the prime rate with the notes due January, 2005.
At December 31, 2003(“LaSalle Bank”). Effective July 9, 2004, Consolidated
owed $1.4borrowed $5.4 million
on the notes to LaSalle
34
Bank. Principal payments of $80,626 and $15,626 are made monthly on the term
loan and capital expenditures loan respectively. Consolidated expects to utilize
the excess equity in its equipment that securesunder this loan to expand its
borrowing base in order to fund future equipment needs and to provide working
capital to the parent and affiliates.
On July 3, 2003 Infinity borrowed $3.85 million to pay outstanding
payables, $1.0 million outstanding on the 12% bridge loan notes that were
issued in April 2003, and to pay for completion work on existing gas wells.
These notes were repaid from the proceedsfacility. As a result of the U.S. Bank National Associationclosing of the Senior Secured Notes Facility, discussed below.
Onthe indebtedness under the LaSalle facility was repaid in full on January 13, 2005. In September
4, 2003, Infinity-Wyoming established a Secured Revolving Borrowing Base Credit Facility
("Facility") wherebywith U.S. Bank National Association
("(“U.S.
Bank"Bank”)
will provided debt financing.. The
Facility providesfacility provided for funding of up to $25.0
million. The total amount made available to
Infinity-Wyoming under the Facility was based on an initial borrowing base
determination which was in turn based on the volume of oil and gas production
expected, the term and price of hedging contracts in place,million, and the
costs
associated with producing the oil and gas and associated general and
administrative expense. The facility is subject to semi-annual borrowing base
determinations based on the same criteria as the original determination.
Infinity-Wyoming and U.S. Bank will each have the option to request one
additional re-determination during each calendar year. U.S. Bank has the sole
discretion on increasing the borrowing base if the semi-annual determination
indicates that there is additional borrowing base available. The initial amount made available under the facility and drawn by the Company was $5.5 million.
Interest on the Facility accrues and is payable monthly at the rateAt December 31, 2004 $5.0 million of
debt under the U.S. Bank
Prime Rate plus 100 basis points. Interestfacility is
currently 5% per annum on the
Facility. The initial advance on the Facilityreflected as long-term debt as it was
used to repay $3.85 million in
bridge loans issued in July 2003, $0.75 million notes issued in January, 2003,
initial loan costs and legal fees associated with the negotiation and closing of
the Facility, property development costs, and working capital. Subsequent to
December 31, 2003 Infinity-Wyoming re-paid $0.4 million of the debt associated
with this facility and requested a $0.3 million letter of credit to secure our
gas marketing contracts. The loan is subject to various restrictive and
financial covenants. At December 31, 2003, the Company was in violation of the
working capital covenant. Subsequent to December 31, 2003, the Company was
granted a waiver of the violation as of December 31, 2003 and through April 30,
2004 at which time management believes it will be in compliance and remain in
compliance for the remainder of the year. Infinity's anticipated cash needs for
2004 do not contemplate any acceleration of all or part of the payment of the
outstanding balance due to a future violation, if any.
At December 31, 2003, Infinity had $2.8 million of 8% Subordinated
Convertible Notes outstanding. During the year ended December 31, 2003 the
holders of approximately $1.5 million of the notes, which are due in June 2006,
converted their notes to common stock. Subsequent to December 31, 2003 an
additional $0.1 million of the notes were converted, leaving approximately $2.7
million in notes outstanding at March 31, 2004. These notes accrue approximately
$19,000 in interest monthly which is payable in June and December. There are no
payment obligations, other than interest, on the notes until June 2006.
Subsequent to December 31, 2003, in accordance with the provisions of the notes,
the conversion price of the notes was adjusted to $4.88 per share of common
stock. The original conversion price of $5.00 per share was adjusted in
accordance with anti-dilution provisions of the note agreement upon the private
placement of 1,000,000 shares of Infinity common stock for $4.00 per share.
As of December 31, 2003 Infinity had $11.2 million in 7% Subordinated
Convertible Notes Payable outstanding. Infinity issued $379,000 in additional
notes in lieu of cash to pay accrued interest on the outstanding notes on
October 15, 2003. There are no payment obligations, other than interest, on the
notes until April of 2007. Including the additional $379,000 in notes issued on
October 15, 2003, interest on these notes accrues at approximately $65,500 per
month and is due in April and October. Due to current cash constraints, Infinity
expects that it will issue additional notes in lieu of a cash interest payment
on April 15, 2004. Subsequent to December 31, 2003 in accordance with the
provisions of the notes, the conversion price of the notes was adjusted to
$8.067 per share of common stock. The original conversion price of $8.625 per
share was adjusted in accordance with anti-dilution provisions of the note
agreement upon the private placement of 1,000,000 shares of Infinity common
stock for $4.00 per share.
In November 2002, Infinity borrowed $3.0 million from a stockholder in
order to pay current payables. The bridge loan, which was originally due January
5, 2004 and had a 5.25% interest rate, was extended until January 30, 2005 and
the interest rate was adjusted to 7% in September 2003. Subsequent to December
31, 2003, Infinity repaid
$1,250,000 of this loan with $750,000 in cash and
125,000 shares of Infinity common stock valued at $4.00 per share. Interest on
the loan is paid monthly with current payments being approximately $10,000 per
month. In conjunction with the amendments to extend the due date, waive rights
to early payment and subordinate to other lenders, Infinity issued options to
purchase 375,000 shares of Infinity, Inc. common stock at $8.75 per share for
five years during 2003.
35
Infinity, Inc. and its subsidiaries owe approximately $4.0 million for real
estate and equipment loans secured by assets of Infinity and its subsidiaries.
These notes mature in one to eighteen years and bear interest from 6.0% to 9.50%
and have monthly payments of approximately $34,800. One of the notes requires a
payment of 5% of the outstanding loan balance each January which resulted in a
payment of approximately $123,000 in January of 2004.
Infinity received proceeds from the issuance of common stock, upon the
exercise of 146,169 options, of $0.8 million during the year ended December 31,
2003.
Beginning in June of 2001 with the issuance of the 8% Subordinated
Convertible Notes, Infinity has utilized stock options and warrants as an
inducement to lenders to lend money to Infinity and its subsidiaries. The
options and warrants are non-cash compensation and are valued using the Black-Scholes valuation model. The value is recorded as capitalized loan costs
and amortized as interest expense using the effective interest method. When a
loan is repaid, the loan costs associated with that loan are fully amortized in
that period. Infinity has capitalized $7.0 million, $5.0 million, and $0.9
million of non-cash compensation during the years ended December 31, 2003 and
2002, and the nine month period ended December 31, 2001, respectively. In
addition to the non-cash compensation, Infinity has capitalized $0.5 million,
$1.0 million, and $0.7 million in cash loan costs in the respective periods
which are also amortized to interest expense using the effective interest
method. During the period ended December 31, 2003, Infinity recognized interest
expense for the amortization of non-cash loan costs of $5.4 million and of cash
loan costs of $0.6 million. Infinity also capitalized $2.7 million in
amortization to undeveloped oil and gas properties as capitalized interest.
Subsequent to December 31, 2003, Infinity repaid $1.25 million, or 42%, of
$3.0 million loans due January 5, 2005.long-term credit facility. As a result of the partial payment,
Infinity will amortize 42%, or $0.7 million,closing of the remaining unamortized loan
costs, as interest expenseSenior Secured Notes Facility, the indebtedness under the U.S. Bank facility was repaid in full on January 2004. The remaining unamortized loan
costs will be amortized using the effective interest method.13, 2005. Infinity expects to
recognize approximately $0.2 million per month in interest expense during 2004
in association with amortization of capitalized loan costs based on loans
currently outstanding.
In the first quarter of 2004, Infinity-Wyoming completed six wells drilled
during the fourth quarter of 2003 and acquired an additional 49% working
interest in two existing wells and 960 acres of undeveloped leasehold adjacent
to the Pipeline project at a cost of approximately $1.0 million. With the
acquisition, Infinity-Wyoming assumed operations of the wells.
In the first quarter of 2004, Schlumberger began re-completion activities
on two of the original Riley Ridge wells on the Labarge project by perforating
additional areas of the well bore and re-fracing the wells. Schlumberger also
began completion activities on one of the wells on the Thompson acreage that had
been drilled in the fourth quarter of 2002. Depending on the results of these
activities, Infinity-Wyoming, through the agreement, could drill an additional
five to six wells on the Thompson acreage during 2004. Infinity-Wyoming also
expects to complete the Environmental Impact Study ("EIS") on the Labarge
acreage during the fourth quarter of 2004 or early in 2005. Management believes
that it will require between $4.0 million and $4.5 million in capital to pay for
the un-risked services for the drilling and completion work on wells drilled in
2004, if any, and the completion of the EIS.
Infinity anticipates it will incur approximately $1.6 million in interest
on its current outstanding notes, incur $1.0 million in other corporate usage,
and an additional $0.8 million related to the Nicaragua leases (when finalized)
during 2004.
Infinity, Inc. issued 1,000,000 shares of common stock in January of 2004 in a private placement for which it received net proceeds after offering costs of approximately $3.9 million. The net proceeds of this offering, after making a $750,000 payment on notes, are beingwere used to pay costs associated with the completion of the Pipeline Field wells drilled in the fourth quarter of 2003, to pay for the un-risked services associated with the Labarge Field well completion activities, and for working capital.
Consolidated expects
Infinity issued 1,027,000 shares of common stock in November 2004 in a private placement for which it received net proceeds after offering costs of approximately $4.9 million. The net proceeds of this offering, after making a $1,750,000 payment on notes, were used to generate approximately $3.6 million in operating
cash flow frompay costs associated with the oil field service business throughinitial drilling of the next twelve months.
The cash flow from this business segment is expected to be driven by an increase
in businessFort Worth Basin wells drilled in the Powder River Basinfourth quarter of Wyoming as2004 and for working capital.
Depending on the availability of capital resources, the availability of third party contractors for drilling activity increases
as a resultand completion services, and satisfaction of regulatory activities, Infinity could incur capital expenditures of approximately $42 million during 2005. Capital expenditures by operating entity would be approximately $30 million by Infinity-Texas; $10 million by Infinity-Wyoming; and $2 million by Consolidated. The Company could also make capital expenditures for acquisitions in excess of these amounts should appropriate opportunities arise.
Following the sale of the
completionSenior Secured Notes and Warrants to Buyers in January 2005, Infinity used approximately $9.2 million of the
Powder River environmental impact studyproceeds to repay all amounts outstanding pursuant to the Loan and
an increase in oil field service operations in eastern KansasSecurity Agreement between LaSalle Bank N.A. and
northeastern
Oklahoma as customers move forwardConsolidated, the Credit Agreement with
development activitiesU.S. Bank National Association and Infinity-Wyoming, and certain other secured lending agreements, and those credit agreements have been terminated. No principal on
leases that
will be expiring within the
next two years.
36
Infinity-WyomingNotes is also expected to generatedue until 2009. Following the repayment of debt and transaction expenses of approximately $4.0 to $5.0$2.3 million, in operating cash flow fromInfinity had approximately $18.5 million available for oil and gas production operationsexploration and development expenditures. In addition, at quarterly intervals and over a three year period, commencing in the third quarter of 2005, Infinity has the option to sell additional notes, along with warrants, in amounts up to $15 million in any rolling twelve-month period. The ability to issue 43
Additional Notes will depend upon a maximum Notes balance calculated quarterly based generally upon a combination of financial performance of Consolidated and the SEC after-tax PV-10% value of our proved reserves. Management of the Company is of the opinion that it is reasonably likely that the Company will be eligible to sell $15 million in additional Notes and Warrants during the same period. Infinity-Wyoming estimates production to be approximately 3,500 MCF
per daysecond half of gas and approximately 120 barrels2005.
In January 2005, Infinity called for the redemption of oil per day through December
2004. Infinity-Wyoming has a contract in place to sell the first 3,500 MMBTU per
day at $4.71 per MMBTU through March, 2004, 2,000 MMBTU per day for $4.40 per
MMBTU through March 2005, and 2,000 MMBTU per day through March 2006. The
volumes represented by these contracts are subject to a $0.55 per MCF gathering
and transportation fee. Infinity utilized a Henry Hub futures price of $5.67remaining 8% Subordinated Convertible Notes due 2006 outstanding on February 28, 2005. All $2.5 million outstanding on the date8% notes converted into common stock prior to the redemption date.
In February 2005, Infinity has called for redemption of its estimatethe remaining 7% Subordinated Convertible Notes due 2007 outstanding on April 22, 2005. Approximately $5.6 million of expected 2004 operatingprincipal remains outstanding as of March 23, 2005. The Company has cash flow, less $0.70
estimated pricing differential for location and $0.55 gathering and
transportation fee for calculating the revenue for April 2004 until December
2004 on estimated volumesdeposit in excess of the contracted volumes. Infinity-Wyoming
also used an averageamount outstanding at March 23, 2005, should the remaining 7% notes not be presented for conversion prior to the redemption date.
Depending on the market price for crude oil priceand natural gas during 2005, production levels from wells not yet placed on line, and continued demand for and acceptance of $34.42 based on a NYMEX strip price lessour oilfield service operations in the $0.75 contract differential. Production expensesgeographic areas we serve, Infinity would expect to generate at least $10 million from operating activities during 2005.
Through March 23, 2005, Infinity has received approximately $4 million in proceeds from the exercise of options and overhead are expectedwarrants. Management expects to comparablereceive proceeds from additional exercises during 2005, but is unable to predict the amount or timing of such proceeds.
In summary, Infinity believes that it will have approximately $47.5 million available to it in
2004 to what was experienced in 2003.
The following amounts represent management's current estimates2005 from the net proceeds from the sale of
certain
expenses and sourcesNotes ($18.5 million), the sale of
Additional Notes ($15.0 million), cash from
which actual expendituresoperating activities (at least $10.0 million), and
cash may vary
materially. There can be no assurance that Infinity will not be requiredproceeds from the exercise of options and warrants (at least $4.0 million), to
obtain additional external financing in 2004. It does not include the Nicaragua
lease which is not currently completed, nor acquisitions, capital expenditures,
or other development and exploration activities that are not currently
completed:
Recap of Expected Minimum Cash Requirements
For the Year Ending December 31, 2004
(In millions)
Current working capital deficit $ 2.2
Pipeline development and acquisition 1.0
Labarge development and exploration 3.7
Labarge environmental impact study 0.3
Interest on notes 1.6
Corporate cash usage 1.3
Lease rental and farm out agreement 0.1
--------
Total requirements 10.2
Sources of Cash
Consolidated operations 3.6
Infinity-Wyoming operations 4.0
Anticipated issuance of notes in lieu of
cash payment of interest 0.8
Proceeds available from equity placement
net of costs and payment of long-term debt 3.2
--------
Total sources $ 11.6
--------
Potential Surplus $ 1.4
========
Depending onfund its
success in negotiations and the availability of
acquisition candidates, Consolidated anticipates making strategic acquisitions
of approximately $1.2 million to $2.0 million over the next year and havingplanned capital expenditures of approximately
$1.0$42 million
relatedand redeem the 7% notes should none of the balance outstanding at March 23, 2005 be presented for conversion. Should Infinity identify acquisition opportunities, or if it wishes to
equipmentaccelerate the exploration and
facilities. Management is also negotiating to increasedevelopment of its
borrowings through
its existing facility with LaSalle Bankoil and gas properties beyond that currently anticipated, or
a new facility with LaSalle Bank.
Consolidated believes it will be able to borrow an additional $1.5 million on
this facility, which, along with credit available to Consolidated through local
sources and vendors will be sufficient to meet Consolidated's anticipated
capital expenditure needs, including acquisitions, of approximately $3.0
million.
37
In addition to the acquisition in 2004 discussed above, Infinity-Wyoming
expects to drill two wells on the newly acquired acreage during 2004 at a cost
of approximately $0.5 million. To the extent the potential surplusif cash flow from operationsoperating activities is not available,at levels anticipated, or if Infinity will be requiredis unable to obtainsell additional debt
or equity financing to complete these wells.
Infinity-Wyoming could potentially have capital expenditures, subject to
permitting requirements, of up to approximately $10.6 million as follows:
- drillnotes and complete eight wells inwarrants under the Pipeline field for the
development of reserves at a cost of $3.8 million;
- complete five additional production wells and two disposal wells
and install the related facilities on the Labarge acreage at a
cost of approximately $4.2 million;
- drill and complete an exploratory well and one disposal well and
the related facilities on the Sand Wash Basin at a cost of $1.6
million;
- drill and complete an exploratory well and one disposal well and
the related facilities on the Antelope acreage at a cost of $1.0
million.
In order to fund Infinity-Wyoming's potential additional capital
expenditures of $10.6 million, Infinity-Wyoming will be required to pursue
funding through the increase of the borrowing base on the U.S. BankSenior Secured Notes Facility, or
other conventional bank financing,Infinity may seek the forward sale of its oil and gas production, partnerships or strategic alliances for the development of its undeveloped acreage, or through the public or private offering of common or preferred equity or subordinated debt, market
pursued by the parent. The amount of progress that Infinity-Wyoming will be
able to make on the development of its properties will be dependent upon its
ability to obtain the proper permits for the development andasset sales, or other joint interest or joint venture opportunities to fund the
development. Obtaining permits and sufficient funding to meet these additional
capital expenditures cannot be assured.
CRITICAL ACCOUNTING POLICIES AND ESTIMATESany cash shortfalls. | |
| Critical Accounting Policies and Estimates |
Infinity believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Reserve Estimates
Infinity's
Infinity’s estimated quantities of proved reserves at December 31, 2004 and 2003 were prepared by independent petroleum engineers Netherland, Sewell and Associates, Inc. and at December 31, 2002 and 2001 were prepared by independent petroleum engineers Wells Chappell and Company, Inc. Infinity'sInfinity’s estimates of oil and natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulation of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and natural gas prices, future operating costs, severance, ad-valoremad valorem and excise taxes, development costs and work-over and remedial costs, all of which may in fact vary
44
considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of
Infinity'sInfinity’s oil and gas properties and the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to
Infinity'sInfinity’s reserves will likely vary from estimates, and such variances may be material.
38
| |
| Oil and Gas Properties, Depreciation and Full Cost Ceiling Test |
Infinity follows the full-costfull cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, and salaries, benefits and other internal salary-relatedsalary related costs directly attributable to these activities. The capitalized costs are amortized over the life of the reserves associated with the assets with the amortization being expensed as depletion in the period that the reserves are produced. This depletion expense is calculated by dividing the period'speriod’s production volumes by the estimated volume of reserves associated with the investment and multiplying the calculated percentage by the capitalized investment. Costs associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties.
If the net investment in oil and gas properties less asset retirement obligations, exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves including the effect of cash flow hedges, and (2) the lower of cost or fair market value of properties in process of development and unexplored acreage, the excess is charged to expense as additional depletion. Infinity is required to review the carrying value of its oil and gas properties each quarter under the full cost accounting rules of the Securities and Exchange Commission. Under these rules, capitalized costs of proved oil and gas properties, lessexcluding the future cash outflows associated with settling asset retirement obligations that have been accrued in the full cost pool, less accumulated amortization and related deferred taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of the ceiling test generally requires pricing future revenue at the un-escalated prices in effect as of the last day of the quarter, including the effects of cash flow hedges, and requires a write-downwrite down for accounting purposes if the ceiling is exceeded. Unproved oil and gas properties are not amortized, but are assessed for impairment either individually or on an aggregated basis using a comparison of the carrying values of the unproved properties to net future cash flows. Infinity recognized
At December 31, 2004, the carrying amount of oil and gas properties subject to amortization exceeded the full cost ceiling limitation by approximately $8,900,000 based upon a natural gas price of approximately $6.07 per Mcf and an oil price of approximately $40.25 per barrel in effect at that date. However, due to significant subsequent price increases to approximately $6.53 per Mcf of gas and $54.55 per barrel of oil at the March 15, 2005 measurement date, the Company was only required to record a ceiling write downwritedown of $2,975,000 during 2003.$4,100,000 in the quarter and year ended December 31, 2004. In 2003, the Company recorded a ceiling writedown of $2,975,000.
A decline in prices received for oil and gas sales or an increase in operating costs subsequent to December 31,
2003the measurement date or reductions in estimated economically recoverable quantities could result in a requirement that Infinity recognize an additional ceiling write-down of oil and gas properties in a future period. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.
Property, Equipment And
45
| |
| Property, Equipment and Depreciation |
Equipment utilized in the oil fieldoilfield service business and to support operations on Infinity'sInfinity’s oil and gas properties is stated at cost. This equipment is depreciated using the straight-linestraight line method over the estimated useful lives of the assets of three to 30 years.
The deferred tax assets and liabilities represent the future tax return consequences of those temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized based on available evidence that is more likely than not to be realized in the form of a deferred tax valuations allowance.
OFF-BALANCE SHEET ARRANGEMENTS
| |
| Off-Balance Sheet Arrangements |
Infinity has no material off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
Infinity's
Infinity’s contractual obligations, including those of its consolidated subsidiaries, include long-term debt, equipment and operating leases and other non-current obligations. The following table lists
Infinity'sInfinity’s significant contractual obligations at December 31,
2003.
- -------------------------------------------------------------------------------------------------
Payments Due by Period
- -------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years After
1 year 5 years
- -------------------------------------------------------------------------------------------------
(in thousands)
- -------------------------------------------------------------------------------------------------
7% and 8% subordinated convertible notes $13,977 $ - $ 2,793 $ 11,184 $ -
- -------------------------------------------------------------------------------------------------
Revolving credit facilities 5,596 96 5,500 - -
- -------------------------------------------------------------------------------------------------
Term loans 5,215 1,619 1,224 451 1,921
- -------------------------------------------------------------------------------------------------
Note payable - related party 3,000 - 3,000 - -
- -------------------------------------------------------------------------------------------------
Asset retirement obligations 521 - - - 521
- -------------------------------------------------------------------------------------------------
Office lease 334 89 184 61 -
- -------------------------------------------------------------------------------------------------
Equipment leases 232 61 171 - -
- -------------------------------------------------------------------------------------------------
Non-current production and property taxes 230 230 - - -
------- ---------- ---------- ----------- --------
- -------------------------------------------------------------------------------------------------
Total contractual obligations $29,105 $ 2,095 $ 12,872 $ 11,696 $ 2,442
======= ========== ========== =========== ========
- -------------------------------------------------------------------------------------------------
2004. | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | |
| | Total | | | <1 Year | | | 1-3 Years | | | 3-5 Years | | | >5 Years | |
| | | | | | | | | | | | | | | |
| | (In thousands) | |
8% subordinated convertible notes | | $ | 2,493 | | | $ | — | | | $ | 2,493 | | | $ | — | | | $ | — | |
7% subordinated convertible notes | | | 11,517 | | | | — | | | | 11,517 | | | | — | | | | — | |
Revolving credit facilities and term loans | | | 9,288 | | | | 3,150 | | | | 5,980 | | | | 103 | | | | 55 | |
Note payable to seller | | | 2,326 | | | | 124 | | | | 216 | | | | 194 | | | | 1,792 | |
Asset retirement obligations | | | 635 | | | | — | | | | — | | | | — | | | | 635 | |
Office lease | | | 355 | | | | 122 | | | | 200 | | | | 33 | | | | — | |
Non-current production and property taxes | | | 469 | | | | 469 | | | | — | | | | — | | | | — | |
Total contractual obligations | | $ | 27,083 | | | $ | 3,865 | | | $ | 20,406 | | | $ | 330 | | | $ | 2,482 | |
For purposes of this table, Infinity is assuming that the holders of the 7% and 8% subordinated convertible notes will not exercise the conversion feature. In addition periodic interest payments required under the credit facilities and the 7% and 8% subordinated convertible notes are not reflected in the table. In January 2005, the Company repaid the revolving credit facility and term loans using proceeds from the Senior Secured Notes facility. However, the table above reflects the original maturity of the debt.
This table does not reflect the obligations associated with the gas gathering contract that Infinity-Wyoming has related to itsthe Pipeline property. That contract is subject to certain delivery commitments that Infinity-Wyoming has not met. However, the gas gatherer has also not been able to supply the additional system capacity to allow Infinity-Wyoming to meet its delivery obligations and, therefore, discussions are under way to amendInfinity-Wyoming expects that the contract will be amended to volumesreflect volume requirements that are consistent with deliveries.
Recently Issued Accounting Pronouncements
Proposed
| |
| Recently Issued Accounting Pronouncements |
In December 2004, the FASB Staff Positions ("FSP") No. FAS 141-a and FAS 142-a were
recently issued with a comment deadline of April 16, 2004. These proposed FSPs
would amend SFAS No. 141, "Business Combinations"123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) is effective for public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employee’s,” and amends SFAS No. 142, "Goodwill95, “Statement of Cash Flows.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual
46
period after June 15, 2005, with early adoption encouraged. The pro forma disclosures, previously permitted under SFAS No. 123, no longer will be an alternative to financial statement recognition. SFAS No. 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may serve to reduce the Company’s future cash provided by operating activities and Intangible Assets"increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in orderthe future.
The Company is required to resolve a recent reporting issue. There is an
inconsistency betweenadopt SFAS No. 123(R) in its third quarter of fiscal 2005, beginning July 1, 2005. Under SFAS No. 123(R), Infinity must determine the recent Financial Accounting Standards Board ("FASB")
consensus that such mineral rights shouldappropriate fair value model to be considered tangible assetsused for accounting purposesvaluing share-based payments, the amortization method for compensation cost, and the characterizationtransition method to be used at date of mineral rightsadoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as intangibleof the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R); the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. Infinity is evaluating the requirements of SFAS No. 123(R), and expects that the adoption of SFAS No. 123(R) will not have a material impact on consolidated results of operations and earnings per share as all outstanding options are fully vested.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 141 and No. 142. Under153 specifies that a nonmonetary exchange has commercial substance if the proposed FSPs, mineral rights
would continue to be considered tangible assets for accounting purposes with
disclosurefuture cash flows of the amountentity are expected to change significantly as a result of the mineral rights disclosed on the balance sheet or
in the notes to the consolidated financial statements.
Assuming that the proposed FSPs are finalized, the guidance would beexchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on consolidated results of operations and financial condition but does not expect it to have a material impact.
Staff Accounting Bulletin (“SAB”) 106 was released in September 2004. SAB 106 expresses the SEC staff’s views on the interaction of SFAS No. 143 and the full cost method and provides guidance on computing the full cost ceiling as well as depreciation, depletion and amortization. SAB 106 also requires additional disclosures regarding how the application of SFAS No. 143 has affected the ceiling test and depreciation, depletion and amortization. The Company adopted SAB 106 during the fourth quarter
ended June 30,of 2004 and
prior period amounts would
also need to be disclosed in the consolidated financial statements. At December
31, 2003 and 2002, the Company has included $9,500,000 and $7,500,000, including
capitalized interest, in oil and gas properties in the accompanying consolidated
balance sheets of which approximately $3,972,000 and $684,000 respectively are
subject to amortization.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Infinity'sexperienced no significant impact on its depletion or ceiling test calculation. | |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Infinity’s major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing price for crude oil and spot prices applicable to Infinity's United StatesInfinity’s crude oil and natural gas production. Historically, prices received for gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations ranged from a low of $3.27$4.17 to a high of $5.51$6.98 per MCFMcf during the year ended December 31, 2003.2004. Oil price realizations ranged from a low of $27.37$33.35 per barrel to a high of $35.08$52.58 per barrel during the period.
Infinity-Wyoming
Infinity periodically enters into fixed price contracts or hedging activities on a portion of its projected natural gas production in accordance with its Energy Risk Management Policy. These activities are intended to support cash flow at certain levels in order to manage Infinity-Wyoming's cash flow by reducing the exposure to oil and gas price fluctuations. Realized gains or losses from Infinity-Wyoming'sInfinity’s cash flow risk management activities are recognized in gas production revenues. In the year ended December 31, 2003,2004, the effect of Infinity-Wyoming hedging its gas production compared to if it had sold the gas on the spot market was an increasea decrease in revenue of approximately $133,000. At$0.6 million.
The Securities Purchase Agreement dated as of January 13, 2005 by and among Infinity and the Buyers of the Notes includes a covenant that at each date that is the end of a quarterly or annual period covered by a quarterly report on Form 10-Q or annual report on Form 10-K (a “Determination Date”), at least 20% of the Company’s estimate of its oil and gas production for the 12-month period commencing immediately after such
47
Determination Date shall be protected from price fluctuations using derivatives, fixed price agreements and/or volumetric production payments. It is the opinion of management that the Company would have been in compliance with this hedging requirement at December 31, 2003 Infinity-Wyoming2004, had a derivative asset of approximately $97,000.
the Notes been issued and outstanding on that date.
| |
ITEM 8. | FINANCIAL STATEMENTS. |
The consolidated financial statements and supplementary information filed as part of this Item 8 are listed under Part IV, Item 15, "Exhibits,“Exhibits, Financial Statement Schedules, and Reports on Form 8-K"8-K” and contained in this Form 10-K at page F-1.
ITEM 9. CHANGE IN INDEPENDENT ACCOUNTANTS
Infinity's previous auditor, Sartain Fischbein & Co., was dismissed as
our independent auditor on January 24, 2002.
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
The
reports on Infinity's financial
statements for the fiscal years ended March 31, 2001 and 2000 prepared by
Sartain Fischbein & Co. did not contain any adverse opinion or disclaimer of
opinion nor were they qualified as to audit scope or accounting principles. In
connection with the prior audits for the fiscal years ended March 31, 2001 and
2000, and from March 31, 2001 to January 25, 2002, there were no disagreements
with Sartain Fischbein & Co. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. The
decision to change accountants was not considered separately by Infinity's Audit
Committee but each member of the Audit Committee approved the decision.
Effective January 24, 2002, Ehrhardt Keefe Steiner & Hottman P.C. was engaged as
the Company's independent auditor.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation ofCompany maintains disclosure controls and procedures
Infinity's Chief Executive Officer andthat are designed to ensure that information required to be disclosed in the
Chief Financial Officer
evaluated the effectiveness of Infinity's disclosure controls and procedures as
of December 31, 2003 in accordance with Rule 13a-15reports under the
Securities Exchange
Act.
Based on their evaluation, the Chief Executive OfficerAct of 1934, as amended (“Exchange Act”) are communicated, processed, summarized and
Chief Financial
Officer concluded that Infinity's disclosure controls and procedures enable
Infinity to:
- record, process, summarize and reportreported within the time periods specified in the
Security and Exchange Commission'sSEC’s rules and
forms,
informationforms. At the end of the Company’s fourth quarter of 2004, as required
to be disclosed by
Infinity inRules 13a-15 and 15d-15 of the
reports it
files or submitsExchange Act, an evaluation was carried out under the
Exchange Act;supervision and
- accumulatewith the participation of the Company’s management, including the Chief Executive Officer and
communicate to management, as appropriate to allow
timely decisions regarding requiredPrincipal Financial and Accounting Officer, of the effectiveness of the design and operation of disclosure
information required
to be disclosed by Infinity in the reports that it files or submits
under the Exchange Act.
40
Changes in internal control over financial reporting
There were no changes in Infinity's internal control over financial
reportingcontrols and procedures (as defined in Rule 13a-15(f)13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Principal Financial and Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective as of that date. No changes in internal controls over financial reporting identified in connection with its evaluation (as required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act) occurred during the fourth quarter ended December 31, 2003of 2004 that have materially affected, or arewere reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
41
Although the evaluation did not detect any material weaknesses or significant deficiencies in the Company’s system of internal accounting controls over financial reporting, management has identified certain deficiencies in its reconciliation procedures, level of staffing, and inherent limitations in its electronic data processing software. The Company has added additional accounting staff during the first quarter of 2005 and intends to add additional accounting personnel during the second quarter of 2005 to address these deficiencies. The Company will also assess the viability of replacing or enhancing its electronic data processing software in 2005.
48
PART III
ITEM 10:
| |
ITEM 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information regarding directors of Infinity is incorporated by reference to the section entitled "Election“Election of Directors"Directors” in our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2004 annual meeting of shareholders (the "Proxy
Statement"“Proxy Statement”).
ITEM 11:
| |
ITEM 11: | EXECUTIVE COMPENSATION |
Reference is made to the information set forth under the caption "Executive“Executive Compensation and Other Information"Information” in our proxy statement,the Proxy Statement, which information (except for the report of the board of directors on executive compensation and the performance graph) is incorporated by reference in this report on Form 10-K.
ITEM 12:
| |
ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
Reference is made to the information set forth under the caption "Security“Security Ownership of Principal Shareholders and Management"Management” in our proxy statement,the Proxy Statement, which information is incorporated by reference in this report on Form 10-K.
ITEM 13:
| |
ITEM 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Reference is made to the information contained under the caption "Certain
Transactions"“Certain Transactions” contained in our proxy statement,the Proxy Statement, which information is incorporated by reference in this report on Form 10-K.
ITEM 14:
| |
ITEM 14: | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Reference is made to the information contained under the caption
"Appointment“Appointment of Independent
Accountant"Accountant” contained in
our proxy statement,the Proxy Statement, which information is incorporated by reference in this report on Form 10-K.
42
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
| |
ITEM 15: | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report on Form 10-K or incorporated by reference.
(1) Our consolidated financial statements are listed on the "index to
Financial Statements" on Page F-1 to this report.
(2) Financial Statement Schedules (omitted because not applicable or
not required. Information is disclosed in the notes to the
financial statements).
(3) The following exhibits are filed with this report on Form 10-K or
incorporated by reference.
| |
| (1) Our consolidated financial statements are listed on the “Index to Consolidated Financial Statements” on Page F-1 to this report. |
|
| (2) Financial Statement Schedules (omitted because not applicable or not required. Information is disclosed in the notes to the financial statements). |
|
| (3) The following exhibits are filed with this report on Form 10-K or incorporated by reference. |
49
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------------------------------------------------------
3.1 Articles of Incorporation and Bylaws (1)
3.2 Articles and Amendment to Articles of Incorporation (1)
4.1 Form of 8% Convertible Subordinated Note (1)
4.2 Form of Trust Indenture for 8% Convertible Subordinated Notes with the
Wilmington Trust Company (3)
4.3 Form of Placement Agent Warrant in connection with 8% Convertible
Subordinated Notes (1)
4.4 Trust Indenture for 7% Convertible Subordinated Notes with Wilmington
Trust Company (1)
4.5 Form of Placement Agent Warrants in connection with 7% Convertible
Subordinated Notes (4)
4.6 Form of Warrant Agreement for 12% Bridge Note Financing (1)
10.1 Stock Option Plan (1)
10.2 1999 Stock Option Plan (2)
10.3 Assignment of Participation Agreement, Assignment of Participation
Agreement, Conveyance, and Bill of Sale between Infinity Oil and Gas,
Inc. and Infinity Oil and Gas of Wyoming, Inc. (2)
10.4 Participation Agreement between Wold Oil Properties, Inc. And
Infinity Oil and Gas, Inc. (2)
10.5 Assignment of Oil and Gas Leases, Operating Rights and Record Title,
Conveyance and Bill of Sale between Infinity Oil and Gas, Inc. And
Infinity Oil and Gas of Wyoming, Inc. (2)
10.6 Joint Operating Agreement, Manson Lease, between Verde Oil Company
and Infinity Oil and Gas of Kansas, Inc. (2)
10.7 2000 Stock Option Plan (1)
10.8 2001 Stock Option Plan (6)
10.9 Purchase and Sale Agreement dated November 3, 2000 between Antelope
Energy Company, LLC, Coyote Exploration Company and Melange
Associates, Inc. and Infinity Oil and Gas of Wyoming, Inc. (6)
10.10 Loan and Security Agreement between LaSalle Bank N.A. and
Consolidated Oil Well Services, Inc. and related guaranties (1)
10.11 2002 Stock Option Plan (7)
10.12 2003 Stock Option Plan (8)
10.13 Form of Assignment of Overriding Royalty Interest for 12% Bridge
Note Financing (5)
10.14 Credit agreement dated as of September 4, 2003 between Infinity
Oil and Gas of Wyoming, Inc. and U.S. Bank National Association (5)
10.15 Joint Value Enhancement Agreement dated December 3, 2003 among
Infinity Oil and Gas of Wyoming, Inc., Schlumberger Technology
Corporation and Red Oak Capital Management LLC*
21 Subsidiaries of the Registrant
23.1 Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C.
23.2 Consent of Netherland Sewell and Associates, Inc.
31.1 Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a_14(a) and Rule 15d-14(a) (Section 302 of the
Sarbanes-Oxley act of 2002).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302
of the Sarbanes-Oxley act of 2002).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
43
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
____________________
(1) Incorporated by reference to our Registration Statement (No. 33-17416-D)
(2) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2000.
(3) Incorporated by reference to our Registration Statement on Form S-3 (File
No. 333-69292).
(4) Incorporated by reference to our Registration Statement on Form S-3 (File
No. 333-96671).
(5) Incorporated by reference to our Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2003.
(6) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2001.
(7) Incorporated by reference to our Annual Report on Form 10-KSB for the
transition period ended December 31, 2001.
(8) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002.
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(b) Reports on form 8-K.
Infinity filed a report on Form 8-K dated December 10, 2003 in
which Infinity reported under Item 5 an agreement with Schlumberger
Technology Corporation and Red Oak Capital Management LP to develop
Infinity's Labarge Property.
Infinity filed a report on Form 8-K dated November 14, 2003 in
which Infinity reported under Item 7 and Item 12 the financial
results for the third quarter of 2003.
44
| | | | |
Exhibit | | |
Number | | Description of Exhibits |
| | |
| 3.1 | | | Articles of Incorporation and Bylaws(1) |
| 3.2 | | | Articles and Amendment to Articles of Incorporation(1) |
| 3.3 | | | Articles of Amendment to Articles of Incorporation(2) |
| 4.1 | | | Form of 8% Convertible Subordinated Note(1) |
| 4.2 | | | Form of Trust Indenture for 8% Convertible Subordinated Notes with the Wilmington Trust Company(3) |
| 4.3 | | | Form of Placement Agent Warrant in connection with 8% Convertible Subordinated Notes(1) |
| 4.4 | | | Trust Indenture for 7% Convertible Subordinated Notes with Wilmington Trust Company(1) |
| 4.5 | | | Form of Placement Agent Warrants in connection with 7% Convertible Subordinated Notes(4) |
| 4.6 | | | Form of Warrant Agreement for 12% Bridge Note Financing(1) |
| 4.7 | | | Form of Common Stock Purchase Agreement for January 2004 private placement(5) |
| 4.8 | | | Form of Registration Rights Agreement in connection with January 2004 private placement(5) |
| 4.9 | | | Form of Common Stock Purchase Agreement for November 2004 private placement(6) |
| 4.10 | | | Form of Registration Rights Agreement for November 2004 private placement(6) |
| 4.11 | | | Securities Purchase Agreement for Senior Secured Notes with Promethean Asset Management LLC(7) |
| 4.12 | | | Form of Initial Note for Senior Secured Notes (7) |
| 4.13 | | | Form of Additional Note for Senior Secured Notes(7) |
| 4.14 | | | Registration Rights Agreement in connection with Senior Secured Notes(7) |
| 4.15 | | | Form of Warrant in connection with Senior Secured Notes(7) |
| 4.16 | | | Form of Security Agreement for Senior Secured Notes(7) |
| 4.17 | | | Form of Guaranty for Senior Secured Notes(7) |
| 4.18 | | | Form of Mortgage for Senior Secured Notes(7) |
| 10.1 | | | Stock Option Plan (1); 1999 Stock Option Plan (2); 2000 Stock Option Plan (1); 2001 Stock Option Plan (8); 2002 Stock Option Plan (9); 2003 Stock Option Plan (10); 2004 Stock Option Plan(11) |
| 10.2 | | | Loan and Security Agreement between LaSalle Bank N.A. and Consolidated Oil Well Services, Inc. and related guaranties (1); Third Amendment to Loan and Security Agreement with LaSalle Bank N.A. (12); Fourth Amendment to Loan and Security Agreement with LaSalle Bank N.A.(13) |
| 10.3 | | | Credit agreement dated as of September 4, 2003 between Infinity Oil and Gas of Wyoming, Inc. and U.S. Bank National Association (14); First Amendment of Credit Agreement with U.S. Bank(13) |
| 10.4 | | | Promissory Note to Stanton E. Ross, dated June 11, 2004(13) |
| 21 | | | Subsidiaries of the Registrant |
| 23.1 | | | Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C. |
| 23.2 | | | Consent of Netherland Sewell and Associates, Inc. |
| 31.1 | | | Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302 of the Sarbanes-Oxley act of 2002). |
| 31.2 | | | Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302 of the Sarbanes-Oxley act of 2002). |
| 32.1 | | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) |
| 32.2 | | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) |
50
| |
(1) | Incorporated by reference to our Registration Statement (No. 33-17416-D). |
|
(2) | Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000. |
|
(3) | Incorporated by reference to our Registration Statement on Form S-3 (File No. 333-69292). |
|
(4) | Incorporated by reference to our Registration Statement on Form S-3 (File No. 333-96671). |
|
(5) | Incorporated by reference to our Current Report on Form 8-K, filed with the SEC on January 21, 2004. |
|
(6) | Incorporated by reference to our Current Report on Form 8-K, filed with the SEC on November 16, 2004. |
|
(7) | Incorporated by reference to our Current Report on Form 8-K, filed with the SEC on January 14, 2005. |
|
(8) | Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2001. |
|
(9) | Incorporated by reference to our Annual Report on Form 10-KSB for the transition period ended December 31, 2001. |
| |
(10) | Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. |
|
(11) | Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-117390). |
|
(12) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. |
|
(13) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
|
(14) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. |
51
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Infinity has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
INFINITY, INC.
| |
| |
| Stanton E. Ross |
| President and Chief Executive Officer |
Dated: April 14, 2004 By: /s/ Stanton E. Ross
-------------------------------
Stanton E. Ross, PresidentMarch 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Infinity and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Stanton E. Ross President, Treasurer April 14, 2004
- --------------------------- (Principal Executive
Stanton E. Ross Officer) and Director
/s/ Jon D. Klugh Chief Financial April 14, 2004
- --------------------------- Officer and Secretary
Jon D. Klugh (Principal Financial and
Accounting Officer)
/s/ Robert O. Lorenz Director April 14, 2004
- ---------------------------
Robert O. Lorenz
/s/ Leroy C. Richie Director April 14, 2004
- ---------------------------
Leroy C. Richie
/s/ O. Lee Tawes Director April 14, 2004
- ---------------------------
O. Lee Tawes
45
TABLE | | | | | | |
Signature | | Capacity | | Date |
| | | | |
|
/s/Stanton E. Ross Stanton E. Ross | | President and Chief Executive Officer (Principal Executive Officer) and Director | | March 30, 2005 |
|
/s/James A. Tuell James A. Tuell | | Executive Vice President (Principal Financial and Accounting Officer) | | March 30, 2005 |
|
/s/Elliot M. Kaplan Elliot M. Kaplan | | Director | | March 30, 2005 |
|
/s/Robert O. Lorenz Robert O. Lorenz | | Director | | March 29, 2005 |
|
/s/Leroy C. Richie Leroy C. Richie | | Director | | March 30, 2005 |
|
O. Lee Tawes | | Director | | March , 2005 |
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | Page | |
| | | |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
Consolidated Financial Statements: | | | | |
| Consolidated Balance Sheets — December 31, 2004 and 2003 | | | F-3 | |
| Consolidated Statements of Operations — For the Years Ended December 31, 2004, 2003 and 2002 | | | F-4 | |
| Consolidated Statements of Changes in Stockholders’ Equity — For the Years Ended December 31, 2004, 2003 and 2002 | | | F-5 | |
| Consolidated Statements of Cash Flows — For the Years Ended December 31, 2004, 2003 and 2002 | | | F-7 | |
Notes to Consolidated Financial Statements | | | F-9 | |
F-1
REPORT OF CONTENTS
-----------------
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheets - December 31, 2003 and 2002. . . . . F-3
Consolidated Statements of Operations - For the Years Ended
December 31, 2003 and 2002 and the Nine Months Ended December 31,
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements Changes in Stockholders' Equity - For the
Years Ended December 31, 2003 and 2002 and the Nine Months
Ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2003 and 2002 and the Nine Months Ended
December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . F-9
F-1
INDEPENDENT AUDITORS' REPORT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Infinity, Inc. and Subsidiaries
Chanute, Kansas
We have audited the consolidated balance sheets of Infinity, Inc. and Subsidiaries as of December 31, 20032004 and 20022003 and the consolidated statements of operations, changes in stockholders'stockholders’ equity and cash flows for the years ended December 31, 2004, 2003 and 2002 and the nine months ended December 31, 2001.2002. These consolidated financial statements are the responsibility of the Company'sCompany’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 auditing standards generally accepted
inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 condition of Infinity, Inc. and Subsidiaries, as of December 31, 20032004 and 2002,2003, and the results of their operations and their cash flows for the years ended December 31, 2004, 2003 and 2002,
and the nine months ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for asset retirement obligationsobligations.
| |
| /s/ Ehrhardt Keefe Steiner & Hottman PC |
March 13, 2005, except for Notes 7, 8 and effective April 1, 2001, the Company changed its
method16
which are as of accounting for derivative instruments.
Ehrhardt Keefe Steiner & Hottman PC
April 8, 2004
March 23, 2005
Denver, Colorado
F-2
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 727,134 $ 867,017
Accounts receivable, less allowance for doubtful
accounts of $80,000 (2003) and $25,000 (2002) 1,766,642 1,514,159
Inventories 351,197 340,217
Prepaid expenses and other 222,625 257,575
Derivative asset 97,624 -
------------ ------------
Total current assets 3,165,222 2,978,968
Property and equipment, at cost, less accumulated depreciation 10,169,159 10,315,068
Oil and gas properties, using full cost accounting
net of accumulated depreciation, depletion,
amortization and write-down
Subject to amortization 23,446,343 19,107,427
Not subject to amortization 12,815,834 13,176,850
Intangible assets, at cost, less accumulated amortization 3,952,989 5,299,881
Note receivable, less current portion 1,580,742 1,597,053
Other assets, net 135,989 655,022
------------ ------------
Total assets $55,266,278 $53,130,269
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,762,777 $ 2,227,195
Accounts payable 2,645,277 2,875,900
Accrued expenses 966,769 889,894
------------ ------------
Total current liabilities 5,374,823 5,992,989
Long-term liabilities
Production taxes payable 229,889 79,632
Asset retirement obligations 520,638 -
Long-term debt, less current portion 9,252,872 4,464,156
8% subordinated convertible notes payable 2,793,000 4,243,000
7% subordinated convertible notes payable 11,184,000 12,540,000
Note payable - related party 3,000,000 3,000,000
------------ ------------
Total liabilities 32,355,222 30,319,777
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, par value $.0001, authorized
300,000,000 shares, issued and outstanding
8,204,032 (2003) and 7,558,462 (2002) shares 820 756
Additional paid-in-capital 32,720,904 22,870,449
Accumulated other comprehensive income (loss) 97,624 (77,301)
(Accumulated deficit) retained earnings (9,908,292) 16,588
------------ ------------
Total stockholders' equity 22,911,056 22,810,492
------------ ------------
Total liabilities and stockholders' equity $55,266,278 $53,130,269
============ ============
See notes to consolidated financial statements.
F-3
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended For the Nine
December 31, Months Ended
-------------------------- December 31,
2003 2002 2001
------------ ------------ ------------
Revenue
Oil and gas service operations $11,634,457 $ 8,570,631 $ 9,853,624
Oil and gas sales 6,589,281 2,367,713 1,759,095
------------ ------------ ------------
Total revenue 18,223,738 10,938,344 11,612,719
Cost of revenue
Oil and gas service operations 6,222,919 4,620,663 5,154,495
Oil and gas production expenses 2,161,666 1,582,816 1,074,460
Oil and gas production taxes 758,827 237,876 66,290
------------ ------------ ------------
Total cost of revenue 9,143,412 6,441,355 6,295,245
------------ ------------ ------------
Gross profit 9,080,326 4,496,989 5,317,474
Operating expenses 5,311,080 4,647,062 2,789,026
Depreciation, depletion and
amortization 3,074,247 1,782,586 1,010,811
Ceiling write-down of oil and gas properties 2,975,000 - -
------------ ------------ ------------
11,360,327 6,429,648 3,799,837
------------ ------------ ------------
Operating (loss) income (2,280,001) (1,932,659) 1,517,637
Other (expense) income
Interest and other income 129,599 102,460 81,212
Amortization of loan costs (6,200,633) (234,680) (52,832)
Interest expense (1,593,765) (602,350) (1,866,155)
Impairment of other assets - - (600,050)
Gain on sale of investments - - 5,128,280
Gain (loss) on sale of other assets 19,920 (33,665) (77,641)
------------ ------------ ------------
Total other (expense) income (7,644,879) (768,235) 2,612,814
------------ ------------ ------------
(Loss) income before income taxes (9,924,880) (2,700,894) 4,130,451
Income tax benefit (expense) - 1,144,028 (1,590,056)
------------ ------------ ------------
Net (loss) income $(9,924,880) $(1,556,866) $ 2,540,395
============ ============ ============
Basic (loss) earnings per share $ (1.23) $ (.22) $ .39
============ ============ ============
Diluted (loss) earnings per share $ (1.23) $ (.22) $ .37
============ ============ ============
Weighted average basic shares
outstanding 8,047,688 7,202,844 6,501,104
============ ============ ============
Weighted average diluted shares outstanding 8,047,688 7,202,844 6,965,922
============ ============ ============
See notes to consolidated financial statements.
F-4
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE NINE MONTHS ENDED DECEMBER 31, 2001
Accumulated
(Accumulated Total Other
Common Stock Additional Deficit) Compre- Compre-
------------------ Paid-in Retained hensive hensive Stockholders'
Shares Amount Capital Earnings Loss Income(Loss) Equity
--------- ------- ----------- ------------ ------------ ------------- ------------
Balance, March 31, 2001 6,449,874 $ 644 $11,416,720 $ (966,941) $ 3,145,975 $13,596,398
Issuance of common stock for cash
upon the exercise of options 65,350 8 126,062 - - 126,070
Warrants granted in connection with
8% subordinated convertible notes - - 924,717 - - 924,717
Beneficial conversion feature - - 1,165,500 - - 1,165,500
Comprehensive loss:
Net income - - - 2,540,395 $ 2,540,395 - 2,540,395
Embedded derivative liability - - - - - (1,793,426) (1,793,426)
Other comprehensive income;
unrealized holding gains in
securities during the period, net
of income taxes of $123,587 - - - - 238,690 238,690 238,690
Reclassification gains on sales of
securities, net of taxes of
$1,743,615 - - - - (3,384,665) (3,384,665) (3,384,665)
Embedded derivative liability
reclassified to earnings - - - - - 1,793,426 1,793,426
--------- ------- ----------- ------------ ------------ ------------- ------------
Comprehensive loss $ (605,580)
============
Balance, December 31, 2001 6,515,224 652 13,632,999 1,573,454 - 15,207,105
Issuance of common stock for cash
upon the exercise of options and
warrants 588,264 58 1,947,147 - - 1,947,205
Conversion of 8% subordinated
convertible notes and accrued
interest into common stock 454,974 46 2,274,813 - - 2,274,859
Warrants granted in connection with
$2,000,000 bridge loan - - 1,347,728 - - 1,347,728
Warrants granted in connection with
7% subordinated convertible notes - - 1,386,044 - - 1,386,044
Warrants granted in connection with
$3,000,000 bridge loan - - 2,281,718 - - 2,281,718
Comprehensive loss:
Net loss - - - (1,556,866) $(1,556,866) - (1,556,866)
Change in fair value of
fixed price delivery contract,
net of tax benefit of $60,712 - - - - (96,981) (96,981) (96,981)
Reclassifications, net of income
tax expense of $12,320 - - - - 19,680 19,680 19,680
--------- ------- ----------- ------------ ------------ ------------- ------------
Comprehensive loss $(1,634,167)
============
Balance, December 31, 2002 7,558,462 756 22,870,449 16,588 (77,301) 22,810,492
Issuance of common stock upon the
exercise of options and warrants 146,169 15 824,219 - - 824,234
See notes to consolidated financial statements.
F-5
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND THE NINE MONTHS ENDED DECEMBER 31, 2001
Accumulated
(Accumulated Total Other
Common Stock Additional Deficit) Compre- Compre-
------------------ Paid-in Retained hensive hensive Stockholders'
Shares Amount Capital Earnings Loss (Loss) Equity
--------- ------- ----------- ------------ ------------ --------- -------------
Conversion of 8% subordinated
convertible notes and accrued
interest into common stock 295,689 29 1,478,521 - - 1,478,550
Conversion of 7% subordinated
convertible notes and accrued
interest into common stock 203,712 20 1,756,996 - - 1,757,016
Options granted in connection with
$1,050,000 of new bridge loans - - 1,050,000 - - 1,050,000
Options granted in connection with
amendments and agreements
related to a $3,000,000
bridge loan - - 2,493,329 - - 2,493,329
Warrants granted in connection with
$4,850,000 of bridge loans - - 2,247,390 - - 2,247,390
Comprehensive loss:
Net loss - - - (9,924,880) $(9,924,880) - (9,924,880)
Change in fair value of fixed
price delivery contract,
net of tax expense of
$151,573 - - - - 256,500 256,500 256,500
Reclassifications net of income
tax benefit of $51,068 - - - - (81,575) (81,575) (81,575)
--------- ------- ----------- ------------ ------------ --------- -------------
Comprehensive loss $(9,749,955)
============
Balance, December 31, 2003 8,204,032 $ 820 $32,720,904 $(9,908,292) $ 97,624 $(22,911,056)
========= ======= =========== ============ ========= =============
See notes to consolidated financial statements.
F-6
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended For the Nine
December 31, Months Ended
--------------------------- December 31,
2003 2002 2001
------------ ------------- ------------
Cash flows from operating activities
Net (loss) income $(9,924,880) $ (1,556,866) $ 2,540,395
------------ ------------- ------------
Adjustments to reconcile net (loss) income
to net cash provided by operating activities
Depreciation, depletion, amortization,
impairment and ceiling write-down 6,049,247 1,782,586 1,610,861
Amortization of loan costs included
in interest expense 6,200,633 234,680 52,832
Deferred income taxes - (1,144,028) 1,590,056
Gain on sale of investments - - (5,128,280)
(Gain) loss on sale of other assets (19,920) 33,665 77,641
Change in assets and liabilities
(Increase) decrease in accounts receivable (252,483) 85,724 (111,393)
(Increase) decrease in inventories (10,980) 9,999 (85,967)
(Increase) decrease in prepaid expenses and other (12,234) (89,985) 4,541
Increase in accounts payable 32,758 284,657 712,671
Increase in accrued expenses 782,391 495,383 97,564
------------ ------------- ------------
12,769,412 1,692,681 (1,179,474)
------------ ------------- ------------
Net cash provided by operating activities 2,844,532 135,815 1,360,921
------------ ------------- ------------
Cash flows from investing activities
Purchase of property, equipment, and intangibles (1,089,863) (2,695,382) (3,432,959)
Proceeds from the sale of investments
and marketable securities - 750,000 8,871,017
Purchase of marketable securities - - (750,000)
Proceeds from sale of property and
equipment, oil and gas properties and other assets 104,911 235,000 143,808
Investment in oil and gas properties (5,743,649) (14,426,524) (7,845,918)
Payments on note receivable 15,103 7,844 -
Increase in other assets (188,093) (88,547) (217,459)
------------ ------------- ------------
Net cash used in investing activities (6,901,591) (16,217,609) (3,231,511)
------------ ------------- ------------
Cash flows from financing activities
Proceeds from borrowings on long-term debt 11,452,861 21,749,993 7,393,047
Sale of common stock 824,234 1,947,205 126,070
Principal payments on long-term debt (8,359,919) (7,414,285) (5,137,987)
------------ ------------- ------------
Net cash provided by financing activities 3,917,176 16,282,913 2,381,130
------------ ------------- ------------
Net (decrease) increase in cash and cash equivalents (139,883) 201,119 510,540
Cash and cash equivalents, beginning of period 867,017 665,898 155,358
------------ ------------- ------------
Cash and cash equivalents, end of period $ 727,134 $ 867,017 $ 665,898
============ ============= ============
See notes to consolidated financial statements.
F-7
INFINITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental cash flow disclosures:
For the Years Ended For the Nine
December 31, Months Ended
---------------------- December 31,
2003 2002 2001
---------- ---------- ----------
Cash paid for interest, net of amounts capitalized $1,589,606 $ 383,449 $2,171,029
========== ========== ==========
Non-cash transactions:
Non-cash costs, including amortization of loan costs
included in full cost pool for oil and gas properties $2,714,974 $2,056,283 $1,570,377
========== ========== ==========
Property and equipment acquired through
capital leases or seller financed debt $ 967,975 $ - $2,437,138
========== ========== ==========
Oil and gas properties acquired through
seller financed debt $ 263,381 $ 607,236 $ -
========== ========== ==========
Stock-based compensation for options and warrants
granted in connection with debt, recorded as loan costs $5,790,719 $5,015,490 $ 924,717
========== ========== ==========
Conversion of 8% subordinated convertible
notes and accrued interest to common stock $1,478,550 $2,274,859 $ -
========== ========== ==========
Conversion of 7% subordinated convertible
notes and accrued interest to common stock $1,757,016 $ - $ -
========== ========== ==========
Issuance of additional notes in lieu of cash interest
payment on 7% subordinated convertible notes $ 379,000 $ - $ -
========== ========== ==========
Sale of oil and gas property for note receivable $ - $1,620,000 $ -
========== ========== ==========
Change in accumulated other
comprehensive loss, net of income taxes $ 174,925 $ 77,301 $3,145,975
========== ========== ==========
Reclassify other assets to oil and
gas properties not subject to amortization $ 707,126 $ - $ -
========== ========== ==========
Asset retirement obligation upon adoption $ 503,365 $ - $ -
========== ========== ==========
See notes to consolidated financial statements.
F-8
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| | December 31, 2004 | | | December 31, 2003 | |
| | | | | | |
ASSETS |
Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 3,051,986 | | | $ | 727,134 | |
| Accounts receivable, less allowance for doubtful accounts of $85,476 (2004) and $80,000 (2003) | | | 3,493,448 | | | | 1,766,642 | |
| Current portion of note receivable | | | 1,580,742 | | | | 16,311 | |
| Inventories | | | 286,365 | | | | 351,197 | |
| Prepaid expenses and other | | | 654,107 | | | | 206,314 | |
| Derivative asset | | | — | | | | 97,624 | |
| | | | | | |
| | | Total current assets | | | 9,066,648 | | | | 3,165,222 | |
Property and equipment, at cost, less accumulated depreciation | | | 8,764,327 | | | | 10,043,828 | |
Oil and gas properties, using full cost accounting net of accumulated depreciation, depletion, amortization and ceiling write-down | | | | | | | | |
| | Subject to amortization | | | 28,791,880 | | | | 23,446,343 | |
| | Not subject to amortization | | | 15,595,508 | | | | 12,715,834 | |
Intangible assets, at cost, less accumulated amortization | | | 1,497,076 | | | | 3,952,989 | |
Note receivable, less current portion | | | — | | | | 1,580,742 | |
Other assets, net | | | 332,824 | | | | 361,320 | |
| | | | | | |
Total assets | | $ | 64,048,263 | | | $ | 55,266,278 | |
| | | | | | |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current Liabilities | | | | | | | | |
| Note payable and current portion of long-term debt | | $ | 283,978 | | | $ | 1,762,777 | |
| Accounts payable | | | 4,001,364 | | | | 2,645,277 | |
| Accrued liabilities | | | 4,496,412 | | | | 966,769 | |
| | | | | | |
| | | Total current liabilities | | | 8,781,754 | | | | 5,374,823 | |
Long-term liabilities | | | | | | | | |
| Production taxes payable | | | 469,054 | | | | 229,889 | |
| Asset retirement obligations | | | 635,023 | | | | 520,638 | |
| Long-term debt, less current portion | | | 11,330,438 | | | | 9,252,872 | |
| 8% subordinated convertible notes payable | | | 2,493,000 | | | | 2,793,000 | |
| 7% subordinated convertible notes payable | | | 11,516,698 | | | | 11,184,000 | |
| Note payable — related party | | | — | | | | 3,000,000 | |
| | | | | | |
| | | Total liabilities | | | 35,225,967 | | | | 32,355,222 | |
| | | | | | |
Commitments and contingencies | | | | | | | | |
Stockholders’ equity | | | | | | | | |
| Common stock, par value $.0001, authorized 300,000,000 shares, issued and outstanding 10,628,196 (2004) and 8,204,032 (2003) shares | | | 1,063 | | | | 820 | |
| Additional paid-in-capital | | | 43,362,925 | | | | 32,720,904 | |
| Accumulated other comprehensive income | | | — | | | | 97,624 | |
| Accumulated deficit | | | (14,541,692 | ) | | | (9,908,292 | ) |
| | | | | | |
| | | Total stockholders’ equity | | | 28,822,296 | | | | 22,911,056 | |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 64,048,263 | | | $ | 55,266,278 | |
| | | | | | |
See Notes to Consolidated Financial Statements
F-3
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Revenue | | | | | | | | | | | | |
| Oilfield service operations | | $ | 14,720,979 | | | $ | 11,634,457 | | | $ | 8,570,631 | |
| Exploration and production | | | 6,267,453 | | | | 6,589,281 | | | | 2,367,713 | |
| | | | | | | | | |
| | Total revenue | | | 20,988,432 | | | | 18,223,738 | | | | 10,938,344 | |
Cost of revenue | | | | | | | | | | | | |
| Oilfield service operations | | | 7,890,375 | | | | 6,222,919 | | | | 4,620,663 | |
| Oil and gas production expenses | | | 1,913,735 | | | | 2,161,666 | | | | 1,582,816 | |
| Oil and gas production taxes | | | 722,157 | | | | 758,827 | | | | 237,876 | |
| | | | | | | | | |
| | Total cost of revenue | | | 10,526,267 | | | | 9,143,412 | | | | 6,441,355 | |
| | | | | | | | | |
Gross profit | | | 10,462,165 | | | | 9,080,326 | | | | 4,496,989 | |
General and administrative expenses | | | 5,462,491 | | | | 5,311,080 | | | | 4,647,062 | |
Depreciation, depletion, amortization and accretion | | | 5,197,981 | | | | 3,074,247 | | | | 1,782,586 | |
Ceiling write-down of oil and gas properties | | | 4,100,000 | | | | 2,975,000 | | | | — | |
| | | | | | | | | |
| | | 14,760,472 | | | | 11,360,327 | | | | 6,429,648 | |
| | | | | | | | | |
Operating loss | | | (4,298,307 | ) | | | (2,280,001 | ) | | | (1,932,659 | ) |
Other income (expense) | | | | | | | | | | | | |
| Interest and other income | | | 169,937 | | | | 129,599 | | | | 102,460 | |
| Amortization of loan costs | | | (2,097,329 | ) | | | (6,200,633 | ) | | | (234,680 | ) |
| Interest expense and finance charges | | | (1,231,515 | ) | | | (1,593,765 | ) | | | (602,350 | ) |
| Gain (loss) on sales of other assets | | | 2,823,814 | | | | 19,920 | | | | (33,665 | ) |
| | | | | | | | | |
| | Total other expense | | | (335,093 | ) | | | (7,644,879 | ) | | | (768,235 | ) |
| | | | | | | | | |
Net loss before income taxes | | | (4,633,400 | ) | | | (9,924,880 | ) | | | (2,700,894 | ) |
Income tax benefit | | | — | | | | — | | | | 1,144,028 | |
| | | | | | | | | |
Net loss | | $ | (4,633,400 | ) | | $ | (9,924,880 | ) | | $ | (1,556,866 | ) |
| | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.49 | ) | | $ | (1.23 | ) | | $ | (0.22 | ) |
| | | | | | | | | |
Weighted average shares outstanding (basic and diluted) | | | 9,495,346 | | | | 8,047,688 | | | | 7,202,844 | |
| | | | | | | | | |
See Notes to Consolidated Financial Statements
F-4
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended December 31, 2004, 2003 and 2002
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (Accumulated | | | | | Accumulated | | | |
| | Common Stock | | | Additional | | | Deficit) | | | Total | | | Other | | | |
| | | | | Paid-In | | | Retained | | | Comprehensive | | | Comprehensive | | | Stockholders’ | |
| | Shares | | | Amount | | | Capital | | | Earnings | | | Loss | | | Income (Loss) | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2001 | | | 6,515,224 | | | $ | 652 | | | $ | 13,632,999 | | | $ | 1,573,454 | | | | | | | | — | | | $ | 15,207,105 | |
Issuance of common stock for cash upon the exercise of options and warrants | | | 588,264 | | | | 58 | | | | 1,947,147 | | | | — | | | | | | | | — | | | | 1,947,205 | |
Conversion of 8% subordinated convertible notes and accrued interest into common stock | | | 454,974 | | | | 46 | | | | 2,274,813 | | | | — | | | | | | | | — | | | | 2,274,859 | |
Warrants granted in connection with $2,000,000 bridge loan | | | — | | | | — | | | | 1,347,728 | | | | — | | | | | | | | — | | | | 1,347,728 | |
Warrants granted in connection with 7% subordinated convertible notes | | | — | | | | — | | | | 1,386,044 | | | | — | | | | | | | | — | | | | 1,386,044 | |
Warrants granted in connection with $3,000,000 bridge loan | | | — | | | | — | | | | 2,281,718 | | | | — | | | | | | | | — | | | | 2,281,718 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (1,556,866 | ) | | $ | (1,556,866 | ) | | | — | | | | (1,556,866 | ) |
| Change in fair value of fixed price delivery contract, net of tax benefit of $60,712 | | | — | | | | — | | | | — | | | | — | | | | (96,981 | ) | | $ | (96,981 | ) | | | (96,981 | ) |
| Reclassifications, net of income tax expense of $12,320 | | | — | | | | — | | | | — | | | | — | | | | 19,680 | | | | 19,680 | | | | 19,680 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (1,634,167 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2002 | | | 7,558,462 | | | | 756 | | | | 22,870,449 | | | | 16,588 | | | | | | | | (77,301 | ) | | | 22,810,492 | |
See Notes to Consolidated Financial Statements
F-5
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2004, 2003 and 2002
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (Accumulated | | | | | Accumulated | | | |
| | Common Stock | | | Additional | | | Deficit) | | | Total | | | Other | | | |
| | | | | Paid-In | | | Retained | | | Comprehensive | | | Comprehensive | | | Stockholders’ | |
| | Shares | | | Amount | | | Capital | | | Earnings | | | Loss | | | Income (Loss) | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2002 | | | 7,558,462 | | | $ | 756 | | | $ | 22,870,449 | | | $ | 16,588 | | | | | | | $ | (77,301 | ) | | $ | 22,810,492 | |
Issuance of common stock upon the exercise of options and warrants | | | 146,169 | | | | 15 | | | | 824,219 | | | | — | | | | | | | | — | | | | 824,234 | |
Conversion of 8% subordinated convertible notes and accrued interest into common stock | | | 295,689 | | | | 29 | | | | 1,478,521 | | | | — | | | | | | | | — | | | | 1,478,550 | |
Conversion of 7% subordinated convertible notes and accrued interest into common stock | | | 203,712 | | | | 20 | | | | 1,756,996 | | | | — | | | | | | | | — | | | | 1,757,016 | |
Options granted in connection with $1,050,000 of bridge loans | | | — | | | | — | | | | 1,050,000 | | | | — | | | | | | | | — | | | | 1,050,000 | |
Options granted in connection with amendments and agreements related to a $3,000,000 bridge loan | | | — | | | | — | | | | 2,493,329 | | | | — | | | | | | | | — | | | | 2,493,329 | |
Warrants granted in connection with $4,850,000 of bridge loans | | | — | | | | — | | | | 2,247,390 | | | | — | | | | | | | | — | | | | 2,247,390 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (9,924,880 | ) | | $ | (9,924,880 | ) | | | — | | | | (9,924,880 | ) |
| Change in fair value of fixed price delivery contract, net of tax benefit of $151,573 | | | — | | | | — | | | | — | | | | — | | | | 256,500 | | | | 256,500 | | | | 256,500 | |
| Reclassifications, net of income tax expense of $51,068 | | | — | | | | — | | | | — | | | | — | | | | (81,575 | ) | | | (81,575 | ) | | | (81,575 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | Comprehensive loss | | | | | | | | | | | | | | | | | | $ | (9,749,955 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2003 | | | 8,204,032 | | | | 820 | | | | 32,720,904 | | | | (9,908,292 | ) | | | | | | | 97,624 | | | | 22,911,056 | |
Issuance of common stock in private equity placement financings, net of costs of $319,644 | | | 2,027,000 | | | | 203 | | | | 8,917,853 | | | | — | | | | | | | | — | | | | 8,918,056 | |
Issuance of common stock to partially repay related party debt | | | 125,000 | | | | 13 | | | | 499,987 | | | | — | | | | | | | | — | | | | 500,000 | |
Issuance of common stock upon the exercise of options and warrants | | | 146,300 | | | | 15 | | | | 428,432 | | | | — | | | | | | | | — | | | | 428,447 | |
Conversion of 8% subordinated convertible notes and accrued interest into common stock | | | 63,179 | | | | 6 | | | | 308,276 | | | | — | | | | | | | | — | | | | 308,282 | |
Conversion of 7% subordinated convertible notes and accrued interest into common stock | | | 62,685 | | | | 6 | | | | 487,473 | | | | — | | | | | | | | — | | | | 487,479 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (4,633,400 | ) | | | (4,633,400 | ) | | | — | | | | (4,633,400 | ) |
| Reclassifications, net of income tax expense of $(57,559) | | | — | | | | — | | | | — | | | | — | | | | (97,624 | ) | | | (97,624 | ) | | | (97,624 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | Comprehensive loss | | | | | | | | | | | | | | | | | | $ | (4,731,024 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | | 10,628,196 | | | $ | 1,063 | | | $ | 43,362,925 | | | $ | (14,541,692 | ) | | | | | | $ | — | | | $ | 28,822,296 | |
| | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
F-6
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Cash flows from operating activities | | | | | | | | | | | | |
| Net loss | | $ | (4,633,400 | ) | | $ | (9,924,880 | ) | | $ | (1,556,866 | ) |
| | | | | | | | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
| | Depreciation, depletion, amortization, accretion, impairment and ceiling write-down | | | 9,297,981 | | | | 6,049,247 | | | | 1,782,586 | |
| | Amortization of loan costs included in interest expense | | | 2,097,329 | | | | 6,200,633 | | | | 234,680 | |
| | Deferred income taxes | | | — | | | | — | | | | (1,144,028 | ) |
| | (Gain) loss on sales of other assets | | | (2,823,814 | ) | | | (19,920 | ) | | | 33,665 | |
| Change in assets and liabilities | | | | | | | | | | | | |
| | (Increase) decrease in accounts receivable | | | (1,686,806 | ) | | | (252,483 | ) | | | 85,724 | |
| | (Increase) decrease in inventories | | | 64,832 | | | | (10,980 | ) | | | 9,999 | |
| | (Increase) decrease in prepaid expenses and other | | | (89,160 | ) | | | (12,234 | ) | | | (89,985 | ) |
| | Increase in accounts payable | | | 1,525,618 | | | | 32,758 | | | | 284,657 | |
| | Increase in accrued liabilities | | | 1,709,944 | | | | 782,391 | | | | 495,383 | |
| | | | | | | | | |
| | | Net cash provided by operating activities | | | 5,462,524 | | | | 2,844,532 | | | | 135,815 | |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures — exploration and production | | | (11,714,121 | ) | | | (6,273,692 | ) | | | (15,560,549 | ) |
| Capital expenditures — oilfield services | | | (1,149,093 | ) | | | (459,820 | ) | | | (1,561,357 | ) |
| Proceeds from sale of fixed assets — exploration and production | | | 155,779 | | | | — | | | | — | |
| Proceeds from sale of fixed assets — oilfield services | | | 4,653,771 | | | | 104,911 | | | | 235,000 | |
| Proceeds from sale of investments and marketable securities | | | — | | | | — | | | | 750,000 | |
| Acquisitions — exploration and production, net of cash acquired | | | (516,239 | ) | | | — | | | | — | |
| Acquisitions — oilfield services, net of cash acquired | | | (1,188,469 | ) | | | — | | | | — | |
| Payments on note receivable | | | 16,311 | | | | 15,103 | | | | 7,844 | |
| Increase in other assets | | | (199,813 | ) | | | (288,093 | ) | | | (88,547 | ) |
| | | | | | | | | |
| | | Net cash used in investing activities | | | (9,941,874 | ) | | | (6,901,591 | ) | | | (16,217,609 | ) |
| | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| Proceeds from notes payable | | | 295,000 | | | | — | | | | — | |
| Proceeds from borrowings on long-term debt | | | 5,844,558 | | | | 11,452,861 | | | | 21,749,993 | |
| Proceeds from issuance of common stock | | | 9,666,147 | | | | 824,234 | | | | 1,947,205 | |
| Equity issuance costs | | | (319,644 | ) | | | — | | | | — | |
| Repayment of notes payable | | | (663,540 | ) | | | — | | | | — | |
| Repayment of long-term debt | | | (8,018,319 | ) | | | (8,359,919 | ) | | | (7,414,285 | ) |
| | | | | | | | | |
| | | Net cash provided by financing activities | | | 6,804,202 | | | | 3,917,176 | | | | 16,282,913 | |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 2,324,852 | | | | (139,883 | ) | | | 201,119 | |
Cash and cash equivalents, beginning of period | | | 727,134 | | | | 867,017 | | | | 665,898 | |
| | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 3,051,986 | | | $ | 727,134 | | | $ | 867,017 | |
| | | | | | | | | |
See Notes to Consolidated Financial Statements
F-7
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Supplemental cash flow disclosures: | | | | | | | | | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 436,380 | | | $ | 1,589,606 | | | $ | 383,449 | |
Non-cash transactions: | | | | | | | | | | | | |
Non-cash costs capitalized in the full cost pool for oil and gas properties | | | 1,070,065 | | | | 2,714,974 | | | | 2,056,283 | |
Property and equipment acquired through capital lease or assumption of debt | | | 195,000 | | | | 967,975 | | | | — | |
Oil and gas properties acquired through seller financed debt | | | — | | | | 263,381 | | | | 607,236 | |
Stock based compensation for options and warrants granted in connection with debt, recorded as loan costs | | | — | | | | 5,790,719 | | | | 5,015,490 | |
Conversion of 8% subordinated convertible notes and accrued interest to common stock | | | 308,282 | | | | 1,478,550 | | | | 2,274,859 | |
Conversion of 7% subordinated convertible notes and accrued interest to common stack | | | 487,479 | | | | 1,757,016 | | | | — | |
Issuance of common stock to partially repay related party debt | | | 500,000 | | | | — | | | | — | |
Issuance of additional notes in lieu of cash interest payment on 7% subordinated convertible notes | | | 795,000 | | | | 379,000 | | | | — | |
Sale of oil and gas property for note receivable | | | — | | | | — | | | | 1,620,000 | |
Warrants valuation recorded as offering cost | | | 120,000 | | | | — | | | | — | |
See Notes to Consolidated Financial Statements
F-8
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1 - Organization and Summary of Significant Accounting Policies
- --------------------------------------------------------------------
| |
Note 1 — | Organization and Summary of Significant Accounting Policies |
The Company and its subsidiaries are engaged in providing oil and gas production
enhancement services in northeastern Oklahoma, eastern Kansas, and the Powder
River Basin of Wyoming and in oil and gasacquisition, exploration, development and production activitiesof natural gas and crude oil in southeast Kansas, south central Wyoming,the United States and northwestern Colorado.
Effective with the period ended December 31, 2001,also in Nicaragua. In addition, the Company elected to begin
utilizing a December 31 year-end. Therefore,provides oilfield services in the period ended December 31, 2001
represents a nine-month periodMid-Continent region and the years ended December 31, 2002 and 2003
represent twelve-month periods.
Basis of Presentation
- -----------------------in Northeast Wyoming.
The consolidated financial statements include the accounts of Infinity, Inc. and its wholly ownedwholly-owned subsidiaries, Consolidated Oil Well Services, Inc., Infinity Oil and Gas of Wyoming, Inc., Infinity Oil and Gas of Texas, Inc., Infinity Oil and Gas of Kansas, Inc., CIS -— Oklahoma, Inc., Infinity Research and Development, Inc., L.D.C. Food Systems, Inc., Consolidated Pipeline Company, Inc., CIS Oil and Gas, Inc., Infinity Nicaragua, Ltd., and Infinity Nicaragua Offshore, Ltd. Infinity Nicaragua, Ltd., and Infinity Nicaragua Offshore, Ltd. own a 98.2% interest in Rio Grande Resources, SA, which is also consolidated. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
- -----------------
Certain reclassificationsamounts in the accompanying consolidated financial statements for prior periods have been madereclassified to conform to the balances for the nine months
ended December 31, 2001 and thecurrent year ended December 31, 2002 to make them
comparable to those presented for the year ended December 31, 2003, none of
which change the previously reported net income (loss).
Accounts Receivable
- --------------------presentation.
Revenue producing activities are conducted primarily in Kansas, Oklahoma, and Wyoming. The Company grants credit to all qualified customers which potentially subjects the Company to credit risk resulting from, among other factors, adverse changes in the industries in which the Company operates and the financial condition of its customers. However, management regularly monitors its credit
relationshipsWe continuously monitor collections and provides adequate allowancespayments from our customers and maintain an allowance for potential losses.
Hedging Activities
- -------------------doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified.
The Company accounts for derivative instruments or hedging activities under the provisions of Statement of Financial Accounting Standards No 133, "Accounting“Accounting for Derivative Instruments and Hedging Activities" ("Activities” (“SFAS No 133"No. 133”). SFAS NoNo. 133 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings.
The Company periodically enters into fixed price delivery contracts to manage price risk with regard to a portion of its natural gas production. Fixed price
F-9
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) delivery contracts that do not meet certain requirements are accounted for using cash flow hedge accounting. Under this method, realized gains and losses on qualifying hedges are recognized in gas revenues when the associated revenue stream occurs and the resulting cash flows are reported as cash flows from operations. To qualify as a hedge, these contracts must be designated as a cash flow hedge and changes in their value must correlate with changes in the price of anticipated future production such that the Company'sCompany’s exposure to the effects of commodity price is reduced. If the contract is not a hedge, changes in the fair value are recorded in the Company'sCompany’s statement of operations currently. If a derivative financial instrument, such as the contracts discussed above, is settled before the date of the anticipatedF-9
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transaction, the Company carries forward the accumulated change in value of the contract and includes it in the measurement of the related transaction.
During the years ended December 31,
2004, 2003 and 2002, the Company had fixed price delivery contracts that were designated as
cash flow hedges as follows:
MMBTU Amount Per
Effective Dates Per Day MMBTU
- ------------------------------------ ------- -----------
April 1, 2002 - October 31, 2002 1,000 $ 1.80
October 1, 2002 - September 30, 2003 1,000 2.97
November 1, 2002 - March 31, 2003 1,000 3.00
April 1, 2003 - March 31, | | | | | | | | |
| | MMBtu | | | Amount | |
Effective Dates | | Per Day | | | Per MMBtu | |
| | | | | | |
April 1, 2002 — October 31, 2002 | | | 1,000 | | | $ | 1.80 | |
October 1, 2002 — September 30, 2003 | | | 1,000 | | | | 2.97 | |
November 1, 2002 — March 31, 2003 | | | 1,000 | | | | 3.00 | |
April 1, 2003 — March 31, 2004 | | | 3,500 | | | | 4.71 | |
During 2004, 3,500 4.71
During the years ended December 31, 2003 and 2002, the Company reclassified out of other comprehensive income,
income of approximately $155,000, income of approximately $133,000 and losses of approximately $32,000, respectively, on the contracts, which have been included in natural gas revenues in the accompanying consolidated statement of operations and in cash provided by operating activities in the accompanying consolidated statement of cash flows.
At December 31, 2003 and 2002, the Company had a
derivative asset of approximately $98,000 and a derivative liability of
$126,000, respectively, related to the financial hedges. The fair value of the fixed price delivery contracts was calculated using the twelve month forecasted sales price for the Henry Hub gas delivery point less a historical differential for the actual delivery point and the quantities and prices fixed in the contracts.
Upon During 2004, the adoption of SFAS No 133 duringCompany entered into fixed price delivery contracts for 2,000 MMBtu per day from April 1, 2004 until March 31, 2006. The price for the period ended December 31, 2001, the
Company recorded a derivative liability of approximately $1,800,000 related to
certain of the Company's debt obligations which were tied to the market value of
the Company's marketable securities. The adjustment was recorded as a reduction
in accumulated other comprehensive income on April 1, 2001,2004 until March 31, 2005 is $4.40 per MMBtu and the entire
amount was transferred to earningsprice for the period April 1, 2005 until March 31, 2006 is $4.15 per MMBtu. Sales under these fixed price contracts are accounted for as normal sales agreements under the exemption in April 2001, when the related debt
instruments were satisfied.
Revenue Recognition
- --------------------SFAS No. 133.
The Company recognizes sales of oil when the product is delivered and recognizes enhancement service revenue when the services are performed. The Company uses the sales method for recording natural gas sales. This method allows for recognition of revenue which may be more or less than the Company'sCompany’s share of pro-rata production from certain wells. During the years ended December 31,2004, 2003 and 2002, and the nine months ended December 31, 2001, there were no material natural gas imbalances.
Environmental Costs
- --------------------
The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. The Company
F-10
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) also accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and its proportionate share of the amount can be reasonably estimated.
Management Estimates
- --------------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the consolidated financial statements include the estimated carrying value of unproved properties, the estimate of proved oil and gas reserve volumes and the related present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties and the realization of deferred tax assets.
Inventories
- -----------
F-10
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Property and Equipment
- ------------------------
Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
| | | | |
Assets | | Useful Lives
- --------------------------------- ------------
| |
| | | |
Buildings | | | 30 years | |
Site improvements | | | 15 years | |
Machinery, equipment and vehicles | | | 5 - 10– 20 years | |
Office furniture and equipment 5 - | | | 3 – 10 years | |
Oil and Gas Properties
- ------------------------- The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all productivecosts associated with property acquisition, exploration, and non-productivedevelopment activities are capitalized. Exploration and development costs associatedinclude dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, estimated future costs of site restoration, dismantlement and abandonment activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees involved in the acquisition, exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration and development of oil and gas reserves,
including directly related internal costs,activities, are also capitalized. The Company capitalized $652,038, $49,221, $1,444,238 and $684,843$1,444,238 of internal costs during the years
ended December 31,2004, 2003 and 2002, and the nine months ended December 31, 2001, respectively. Costs associated with production and general corporate activities are expensed in the period incurred.
The Company performs an impairment analysis whenever events or changes in circumstances indicate an asset’s carrying amount may not be recoverable. Cash flows used in this impairment analysis are determined based upon estimates of proved oil and gas reserves, current prices, and the costs to extract those reserves. Downward revisions in estimated reserve quantities, increases in future cost estimates, depressed oil and gas prices, or the reclassification of unevaluated costs to costs subject to amortization without a corresponding increase in proved reserves could cause the Company to reduce the carrying amounts of our properties. Under full cost accounting rules, capitalized costs, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued in the full cost pool, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value discounted at ten percent of estimated future net revenue less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. If capitalized costs exceed the limit, the excess must be charged to expense. This is referred to as the “full cost ceiling limitation.” The expense may not be reversed in future periods. At the end of each quarter, a full cost ceiling limitation calculation is made.
At December 31, 2004, the carrying amount of oil and gas properties subject to amortization exceeded the full cost ceiling limitation by approximately $8,900,000 based upon a natural gas price of approximately $6.07 per Mcf and an oil price of approximately $40.25 per barrel in effect at that date. However, due to significant subsequent price increases to approximately $6.53 per Mcf of gas and $54.55 per barrel of oil at the March 15, 2005 measurement date, the Company was only required to record a ceiling writedown of $4,100,000 in the quarter and year ended December 31, 2004. In 2003, the Company recorded a ceiling writedown of $2,975,000.
F-11
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depletion of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on their relative energy content, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserve quantities. The costs of wells in progress and unevaluated properties, including any related capitalized interest, are not being amortized. On a quarterly basis, such costs are evaluated for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments, or reductions in value. To the extent that the evaluation indicates these properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Abandonment of unproved properties are accounted for as an adjustment to capitalized costs related to proved oil and gas properties, with no losses recognized. See Note 17 for additional discussion of unevaluated properties.
Proceeds from the sales of oil and gas properties are accounted for as adjustments to 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. Expenditures for maintenance and repairs are charged to production expense in the period incurred.
The Securities and Exchange
Commission'sCommission’s full cost accounting rules prohibit recognition of income in current operations for services performed
by the Company on oil and natural gas properties in which the Company has an interest, but rather require amounts to be treated as a reimbursement of costs with any excess of fees over costs credited to the full cost pool and recognized through lower cost amortization only as production occurs.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
F-11
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discounted at a 10-percent interest rate of future net revenues from proved
reserves, adjusted for cash flow hedges, net of estimated future income taxes,
based on current economic and operating conditions, plus the lower of cost or
fair market value of unproved properties. For the period ended December 31,
2003 the Company had a ceiling write-down of $2,975,000. For purposes of
calculating the ceiling test, the Company has elected to subtract the fair value
of the estimated asset retirement obligation from the capitalized costs.
Depreciation and depletion of proved oil and gas properties is computed on the
units-of-production method based upon estimates of proved reserves with oil and
gas being converted to a common unit of measure based on their relative energy
content. Unproved oil and gas properties, including any related capitalized
interest expense, are not amortized, but are assessed for impairment either
individually or on an aggregated basis. At December 31, 2003, the Company
reclassified approximately $5,029,000 from unproved oil and gas properties to
oil and gas properties subject to amortization.
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 costs to oil and gas properties on expenditures made in connection with exploration and development projects that are not subject to current depreciation and depletion. Interest is capitalized only for the period that activities are in progress to bring these projects to their intended use. Total interest costs incurred for the years ended December 31,in 2004, 2003 and 2002 were $1,866,104, $1,976,001, and the nine months ended December 31, 2001 were $1,976,001,
$1,612,469, and $2,321,056 (including a $1,793,426 charge to interest expense
upon payoff of certain debt during the nine-month period ended December 31,
2001), respectively. Interest costs capitalized were $634,589, $382,236, and $1,010,119 and
$454,901 for the years ended December 31,2004, 2003 and 2002, and the nine months
ended December 31, 2001, respectively.
Long-Lived Assets
- ------------------
Long-lived assets to be held and used in the Company'sCompany’s business are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When the carrying amountamounts of the long-lived assets exceedsexceed the discounted expected future cash flows, the Company records an impairment. The Company recorded a $600,050 impairment during the
nine months ended December 31, 2001 to write other assets down to estimated net
realizable value. No impairment was recorded during the years ended December
31,2004, 2003 or 2002.
Transportation Costs
- ---------------------
The Company accounts for transportation costs under Emerging Issues Task Force ("EITF"(“EITF”) 00-10, "Accounting“Accounting for Shipping and Handling Fees and Costs,"” whereby amounts paid for transportation costs are classified as an operating expense and not netted against natural gas revenues.
Intangible Assets
- ------------------
The Company
has adopted SFAS
NoNo. 142
"Goodwill“Goodwill and Other Intangible Assets,
"” effective January 1, 2001. As a result, the Company
no longer amortizes
F-12
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)does not amortize goodwill, but instead, reviews goodwill for impairment on at least an annual basis. Amortization costs for the nine months ended December 31, 2001 were
$8,438. Other intangibles are recorded at cost and are amortized on the straight-line basis over the contractual or estimated useful life of the asset, which ranges from one to five years orusing the effective interest method.
F-12
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization of loan costs associated with debt obtained in connection with exploration and development projects that are not subject to current amortization isare capitalized to oil and gas properties. Amortization of loan costs isare capitalized only for the period activities are in progress to bring these projects to their intended use. Total loan amortization costs capitalized for the years ended December 31,2004, 2003 and 2002 were $555,375, $2,714,974, and the nine months ended
December 31, 2001 were $2,714,974, $2,023,373, and $147,239, respectively (See(see Note 54 for total loan costs classified as intangibles).
Per Share Information
- -----------------------
Basic earnings (loss) per common share are computed as net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share isare computed as net income (loss) divided by the weighted average number of common shares and potential common shares, using the treasury stock method, outstanding during the period.
Cash and Cash Equivalents
- ----------------------------
| |
| Cash and Cash Equivalents |
For purposes of reporting cash flows, cash generally consists of cash on hand and demand deposits with financial institutions. At times, the Company maintains deposits in financial institutions in excess of federally insured limits. Management monitors the soundness of the financial institutions and believes the Company'sCompany’s risk is negligible.
The Company considers all highly liquid investments with an original maturity of three months or less to be a cash equivalent.
Investment Securities
- ----------------------
Investment securities that are held for short-term resale are classified as
trading securities and carried at fair value. Debt securities that management
has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost, adjusted for amortization of premium and
accretion of discounts using methods approximating the interest method. Other
marketable securities are classified as available-for-sale and are carried at
fair value, based on quoted market prices. Unrealized gains and losses on
securities available-for-sale are reported as a component of comprehensive
income, net of applicable income taxes. Costs of securities sold are recognized
using the specific identification method.
Stock Options
- --------------
The Company applies Accounting Principles Board Opinion
NoNo. 25,
"Accounting“Accounting for Stock Issued to Employees,
"” and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for options granted to employees under the stock option plans because the fair value of the stock equaled or was less than the option exercise price at the date of grant. Had compensation costs for employee stock options under the
Company'sCompany’s plan been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under SFAS
NoNo. 123,
"Accounting“Accounting for Stock-Based
Compensation"Compensation”, the
Company'sCompany’s net
income (loss)loss and
earnings (loss)loss per share would have been as follows
(See(see Note 10):
F-13
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended For the Nine
December 31, Months Ended
------------------------- December 31,
2003 2002 2001
------------ ------------ -----------
Net (loss) income as reported $(9,924,880) $(1,556,866) $2,540,395
Deduct: Total stock-based employee
compensation expense, determined under
fair value based method for all awards, net of tax (26,244) (2,448,341) (684,265)
------------ ------------ -----------
Pro forma net (loss) income $(9,898,636) $(4,005,207) $1,856,130
============ ============ ===========
Basic (loss) earnings per share as reported $ (1.23) $ (.22) $ .39
Diluted (loss) earnings per share as reported $ (1.23) $ (.22) $ .37
Basic (loss) earnings per share - pro forma $ (1.23) $ (.56) $ .29
Diluted (loss) earnings per share - pro forma $ (1.23) $ (.56) $ .27
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Net loss as reported | | $ | (4,633,400 | ) | | $ | (9,924,880 | ) | | $ | (1,556,866 | ) |
Deduct: Total stock-based employee compensation expense, determined under fair value based method for all awards, net of tax | | | (1,702,904 | ) | | | (26,244 | ) | | | (2,448,341 | ) |
| | | | | | | | | |
Pro forma net loss | | $ | (6,336,304 | ) | | $ | (9,951,124 | ) | | $ | (4,005,207 | ) |
| | | | | | | | | |
Basic and diluted loss per share as reported | | $ | (0.49 | ) | | $ | (1.23 | ) | | $ | (0.22 | ) |
Basic and diluted loss per share-pro forma | | $ | (0.67 | ) | | $ | (1.23 | ) | | $ | (0.56 | ) |
For options granted during the year ended December 31,2004, 2003 and 2002, and the
nine months ended December 31, 2001, the estimated fair value of the options granted utilizing the Black-Scholes pricing model under the Company'sCompany’s plan was based on a weighted average risk-free interest rate of 1.5%, 1.5% and 8.0%,
expected option life of 10 years for 2004 and 5 years for 2003 and 2002, expected volatility of approximately 147%, 131%, 117%
and 83%117%, and no expected dividends.
The Company has adopted the disclosure requirements of SFAS No. 148, "Accounting“Accounting for Stock-Based Compensation Transition Disclosure"Disclosure” in its consolidated financial statements. This statement amends
F-13
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SFAS NoNo. 123, "Accounting“Accounting for Stock-Based Compensation"Compensation” to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the disclosure provision of SFAS No. 123 to require more prominent disclosure about the effects of an entity'sentity’s accounting policy decisions with respect to stock-based employee compensation on reported net income. The Company will continue
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment”, which amends SFAS No. 123 and requires companies to account for stock-based compensation
using the methods detailedrecognize in the stock-basedstatement of operations the grant date fair value of stock options and other equity-based compensation accounting policy as
described earlier.
Comprehensive Income (Loss)
- -----------------------------to employees for fiscal periods after June 15, 2005.
| |
| Comprehensive Income (Loss) |
The Company has elected to report comprehensive income (loss) in the consolidated statement of stockholders'stockholders’ equity. Comprehensive income (loss) is composed of net income (loss) and all changes to stockholders'stockholders’ equity, except those due to investments by stockholders, changes in additional paid-in capital and distributions to stockholders.
Income Taxes
- -------------
Income taxes are provided for the tax effects of the transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to temporary differences between the tax and financial basis of property and equipment and other assets, oil and gas properties, and net operating loss
carry forwardscarry-forwards using enacted tax rates in effect for the year in which the differences are expected to reverse.
F-14
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The deferred tax assets and liabilities represent the future tax return consequences of those temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized based on available evidence that it is more likely than not to be realized in the form of a deferred tax valuations allowance.
Asset Retirement Obligations
- ------------------------------
| |
| Asset Retirement Obligations |
Effective January 1, 2003, the Company adopted the provisions of SFAS
NoNo. 143,
"Accounting“Accounting for Asset Retirement Obligations.
"” SFAS
NoNo. 143 requires the Company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the Company capitalizes cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted each period towards its future value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company
will reportreports a gain or loss upon settlement to the extent the actual costs differ from the recorded liability. Upon adoption of SFAS
NoNo. 143, the Company recorded a discounted liability of approximately
$503,000$447,000 for future retirement obligations and increased net oil and gas properties by
approximately $503,000.the same amount. The adoption of SFAS
NoNo. 143 had no material effect on earnings in all periods presented. The majority of the asset retirement obligation to be recognized relates to the projected costs to plug and abandon oil and gas wells. Liabilities are also recorded for compressor and field facilities.
Recently Issued Accounting Pronouncements
- --------------------------------------------
Proposed FASB Staff Positions ("FSP") No. FAS 141-a and FAS 142-a were recently
issued with a comment deadline of April 16, 2004. These proposed FSPs would
amend SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and
Intangible Assets" in order to resolve a recent reporting issue. There is an
inconsistency between the recent Financial Accounting Standards Board ("FASB")
consensus that such mineral rights should be considered tangible assets for
accounting purposes and the characterization of mineral rights as intangible
assets in SFAS No. 141 and No. 142. Under the proposed FSPs, mineral rights
would continue to be considered tangible assets for accounting purposes with
disclosure of the amount of the mineral rights disclosed on the balance sheet or
in the notes to the consolidated financial statements.
Assuming that the proposed FSPs are finalized, the guidance would be effective
for the quarter ended June 30, 2004 and prior period amounts would also need to
be disclosed in the consolidated financial statements. At December 31, 2003 and
2002, the Company has included $9,500,000 and $7,500,000, including capitalized
interest, in oil and gas properties in the accompanying consolidated balance
sheets of which approximately $3,972,000 and $684,000 respectively are subject
to amortization.
In May 2003, the FASB issued SFAS No 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No 150
establishes standards for how an issuer measures certain financial instruments
with characteristics of both liabilities and equity and requires that an issuer
classify a financial instrument within its scope as a liability (or asset in
some circumstances). SFAS No 150 was effective for financial instruments
entered into or modified after May 31, 2003 and otherwise was effective and
adopted by the Company on July 1, 2003. As the Company has no such instruments,
the adoption of this statement did not have an impact on the Company's financial
condition or results of operations.
F-15
F-14
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Continued Operations— (Continued)
The following table reflects the components of the change in the carrying amount of the asset retirement obligation.
| | | | | | | | |
| | 2004 | | | 2003 | |
| | | | | | |
Asset retirement obligation at January 1 | | $ | 520,638 | | | $ | 447,357 | |
Liabilities incurred in the current period | | | 93,349 | | | | 56,008 | |
Accretion expense | | | 21,036 | | | | 17,273 | |
| | | | | | |
Asset retirement obligation at December 31 | | $ | 635,023 | | | $ | 520,638 | |
| | | | | | |
| |
| Recently Issued Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) is effective for public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employee’s,” and Realizationamends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures, previously permitted under SFAS No. 123, no longer will be an alternative to financial statement recognition. SFAS No. 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may serve to reduce the Company’s future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in the future.
The Company is required to adopt SFAS No. 123(R) in its third quarter of fiscal 2005, beginning July 1, 2005. Under SFAS No. 123(R), Infinity must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R); the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. Infinity is evaluating the requirements of SFAS No. 123(R), and expects that the adoption of SFAS No. 123(R) will not have a material impact on consolidated results of operations and earnings per share as all outstanding options are fully vested.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - -------------------------------------------------------
During 2003,— An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. The Company hadis currently evaluating the effect that the adoption of SFAS No. 153 will have on consolidated losses fromresults of operations and financial condition but does not expect it to have a material impact.
Staff Accounting Bulletin (“SAB”) 106 was released in September 2004. SAB 106 expresses the SEC staff’s views on the interaction of approximately $2,280,000,SFAS No. 143 and a working capital deficit at December 31, 2003the full cost method and provides guidance on computing the full cost ceiling as well as depreciation, depletion and amortization. SAB 106 also requires additional
F-15
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
disclosures regarding how the application of approximately $2,210,000.
Subsequent to December 31, 2003,SFAS No. 143 has affected the ceiling test and depreciation, depletion and amortization. The Company completed six wells drilled on its
Pipeline acreageadopted SAB 106 during the fourth quarter of 20032004 and acquired an additional
49% working interest in two existing wells and 960 acres of undeveloped
leasehold adjacent to the Pipeline acreage. Capital expenditures associated with
the development activities and acquisitions were approximately $1,000,000. The
Company expects capital expenditures for unrisked servicesexperienced no significant impact on the development of
its Labarge property under an agreement with Schlumberger Technology Corporation
("Schlumberger") and Red Oak Capital Management LP ("Red Oak") (See Note 12)
related to the completion or recompletion of five existing wells and the
drilling of five or six new wells to be approximately $3,700,000 to $4,150,000.
The total unrisked services the Company anticipates it will incur is dependent
on the results of the initial rework and drilling activities. Additional costs
associated with the completion of the environmental impact study and leasehold
maintenance on the Labarge property during 2004 are anticipated to be
approximately $300,000. In addition to its capital expenditures requirements,
management estimates requirements of $1,600,000 for interest on notes,
$1,300,000 for general corporate purposes and approximately $100,000 for lease
rentals and farmout expenses. Thus, in total, the Company could have
requirements in 2004 of approximately $10,200,000 including the working capital
deficit at December 31, 2003.
In January 2004, the Company issued 1,000,000 shares of common stock through a
private placement for which it received approximately $3,900,000 in proceeds net
of offering costs (See Note 18). The Company paid approximately $750,000 in long
term debt with proceeds from the offering, leaving approximately $3,150,000
available for meeting its current development and working capital needs. In
addition to these funds, the Company expects to generate approximately
$3,600,000 in cash flow from oil field services and between $4,000,000 and
$5,000,000 in cash flow from oil and gas production activities during 2004.
Management anticipates issuing approximately $800,000 new 7% subordinated
convertible notes in lieu of cash payments due April 15 and October 15, 2004 for
interest due on the 7% subordinated convertible notes. Management believes it
will be able to fund its 2004 minimum requirements through proceeds from the
January 2004 private placement, cash flow from operations and the exercise of
its option to issue additional notes rather than expend cash to satisfy interest
on the 7% subordinated convertible notes.
Due to the timing of development activities on the Company's properties, the
Company may not have the funds available to pay for the operations immediately
and may be required to obtain short term loans to pay for the development
activity. It is expected that these loans would then be repaid with cash flow
from operations later in the year.
The Company is restricted on the amount that can be distributed to it by its
subsidiaries by terms of certain loan agreement. The terms of the loan
agreements for the oil field services subsidiary allow for additional amounts to
be distributed with consent of the lender. The Company believes it will be able
to restructure the terms of this loan agreement to allow additional funds to be
distributed, or obtain the necessary consent to allow the subsidiary to
distribute adequate funds to meet its general corporate needs.
Future reserve reductionsdepletion or ceiling write-downs could hinder the Company's
ability to obtain future financing on terms acceptable to management or could
result in reductions in the borrowing base on existing obligations.
Note 3 - Accounts Receivable
- --------------------------------test calculation.
| |
Note 2 — | Accounts Receivable |
Accounts receivable consists of the following:
F-16
| | | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Accounts receivable oil field services | | $ | 2,739,816 | | | $ | 1,171,886 | |
Revenue receivable oil and gas production | | | 722,372 | | | | 652,401 | |
Other receivables | | | 116,736 | | | | 22,355 | |
| | | | | | |
| Total receivables | | | 3,578,924 | | | | 1,846,642 | |
| Less allowance for doubtful accounts | | | (85,476 | ) | | | (80,000 | ) |
| | | | | | |
| Net receivables | | $ | 3,493,448 | | | $ | 1,766,642 | |
| | | | | | |
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
------------------------
2003 2002
----------- -----------
Accounts receivable oil field services $1,171,886 $ 943,459
Revenue receivable oil | |
Note 3 — | Property and gas production 652,401 504,752
Other receivables 22,355 90,948
----------- -----------
Total receivables 1,846,642 1,539,159
Less allowance for doubtful accounts (80,000) (25,000)
----------- -----------
Net receivables $1,766,642 $1,514,159
=========== ===========
Equipment |
Note 4 - Property and Equipment
- ------------------------------- Property and equipment consists of the following:
| | | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Buildings, site costs and improvements | | $ | 776,517 | | | $ | 2,208,587 | |
Machinery, equipment, vehicles and aircraft | | | 13,779,444 | | | | 15,758,828 | |
Office furniture and equipment | | | 257,253 | | | | 276,135 | |
| | | | | | |
| Total cost | | | 14,813,214 | | | | 18,243,550 | |
| Less accumulated depreciation | | | (6,048,887 | ) | | | (8,199,722 | ) |
| | | | | | |
| Net property and equipment | | $ | 8,764,327 | | | $ | 10,043,828 | |
| | | | | | |
December 31,
--------------------------
2003 2002
------------ ------------
Buildings, site costs and improvements $ 2,208,587 $ 2,207,245
Machinery, equipment, vehicles and aircraft 15,884,159 15,158,783
Office furniture and equipment 276,135 239,058
------------ ------------
Total cost 18,368,881 17,605,086
Less accumulated depreciation (8,199,722) (7,290,018)
------------ ------------
Net property and equipment $10,169,159 $10,315,068
============ ============
| |
Note 4 — | Intangibles |
Note 5 - Intangibles
- ----------------------- Intangibles consist of the following:
December 31,
---------------------------
2003 2002
------------- ------------
Loan costs $ 15,245,263 $ 7,679,249
Non-compete 300,000 300,000
Goodwill 225,000 225,000
Other 55,870 55,871
------------- ------------
15,826,133 8,260,120
Less accumulated amortization (11,873,144) (2,960,239)
------------- ------------
Net intangibles $ 3,952,989 $ 5,299,881
============= ============
| | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Loan costs | | $ | 4,032,489 | | | $ | 8,812,297 | |
Non-compete | | | 300,000 | | | | 300,000 | |
Goodwill | | | 225,000 | | | | 225,000 | |
Other | | | 55,870 | | | | 55,870 | |
| | | | | | |
| | | 4,613,359 | | | | 9,393,167 | |
Less accumulated amortization | | | (3,116,283 | ) | | | (5,440,178 | ) |
| | | | | | |
Net intangibles | | $ | 1,497,076 | | | $ | 3,952,989 | |
| | | | | | |
During the years ended December 31,2004, 2003 and 2002, and the nine months ended
December 31, 2001, the Company recorded amortization expense related to intangibles, excluding amounts capitalized, of $2,100,351, $6,210,738, $241,272 and $75,763$241,272, respectively. Of the total amortization expense
F-16
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related to intangibles, the Company recorded amortization of loan costs of
$2,097,329, $6,200,633,
and $234,680,
and $52,832,
respectively, of which $5,620,300, $204,172 and $38,785 were related to non-cash
loan costs resulting from options, warrants and other non-cash compensation
granted in connection with obtaining financing.
F-17
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)respectively. Loan costs consist of the following at December 31, 2003:
Accumulated
Description of Non-cash Cash Loan Total Loan Amortization Net Book
Notes or Agreement Loan Costs Costs Costs 12/31/2003 Value
- -------------------------- ----------- ---------- ----------- -------------- ----------
8% subordinated
convertible notes $ 1,375,464 $ 51,159 $ 1,426,623 $ (875,070) $ 551,553
Line of credit, term note
and equipment note - 192,572 192,572 (128,754) 63,818
7% subordinated
convertible notes 2,178,944 72,605 2,251,549 (912,771) 1,338,778
$3,000,000 bridge loan
and related amendments
and adjustments 4,775,047 - 4,775,047 (3,132,244) 1,642,803
$25,000,000
development credit
facility - 166,506 166,506 (8,442) 158,064
Bridge loans and other
debt paid in full 5,895,118 537,848 6,432,966 (6,432,966) -
----------- ---------- ----------- -------------- ----------
Total $14,224,573 $1,020,690 $15,245,263 $ (11,490,247) $3,755,016
=========== ========== =========== ============== ==========
F-18
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate future intangible amortization expense is as follows at December 31,
2003:
Other
Years Ending December 31, Loan Costs (1) Intangibles Total
- ------------------------- --------------- ------------ ----------
2004 $ 2,318,385 $ 5,452 $2,323,837
2005 759,196 - 759,196
2006 543,557 - 543,557
2007 133,878 - 133,878
--------------- ------------ ----------
$ 3,755,016 $ 5,452 $3,760,468
=============== ============ ==========
____________________
(1) Includes approximately $685,000 in January 2004 when the Company repaid
$1,250,000, or 42%, of the $3,000,000 bridge loans due January 30, 2005. (See
Notes 9 and 18).
Note 6 - Oil and Gas Properties
- -------------------------------------
Properties Subject to Amortization
- -------------------------------------
Pipeline
In July 2000 (original purchase) and subsequent periods (additional purchases),
the Company acquired 100% working interests and 82.5% net revenue interests in
leaseholds in the Greater Green River Basin of Wyoming ("Pipeline") for
approximately $3,666,000. The Company has incurred approximately $17,925,000 in
exploration and development costs through December 31, 2003 to develop the
Pipeline acreage.
In July 2003, the Company granted a 4% over-riding royalty in the property to a
lender in connection with obtaining bridge financing (See Note 9). The
estimated fair value of the 4% over-riding royalty of approximately $825,000 was
re-classified to loan cost.
The leasehold costs associated with 11,660 net acres of the original 19,150
total net acreage position and all development and exploration costs incurred to
date, totaling approximately $3,144,000 and $17,133,000, respectively, on the
11,660 net acres are subject to amortization.
Labarge
In March 2000 (original purchase) and subsequent periods (additional purchases),
the Company acquired a 100% working interest and 80.0% net revenue interests in
leaseholds in the Greater Green River Basin of Wyoming ("Labarge") for
approximately $2,463,000. The Company has incurred approximately $13,463,000 in
exploration and development costs through December 31, 2003 to develop the
Labarge acreage. The original lessor on a portion of the acreage has a 30%
participation election. If the original lessor chooses not to participate in
the drilling and completion of a well, then the 100% working interest and the
approximately 80% associated net revenue interest will remain with the Company
until the well has generated earnings to recover the well costs plus a 300%
non-consent penalty. In July 2003 the Company granted a 4% over-riding royalty
in the property to a lender in connection with obtaining bridge financing (See
Note 9). The estimated fair value of the 4% over-riding royalty of
approximately $425,000 was re-classified as loan cost. The leasehold costs
F-19
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
associated with 1,763 net acres of the 11,199 total net acreage position and all
development and exploration costs incurred to date, totaling approximately
$223,000 and $5,879,000, respectively, on the 1,763 net acres are subject to
amortization.
The Company is required to perform certain Environmental Impact Study and
Assessments on the Labarge and Pipeline properties. Management believes that the
results of these studies will not have a material adverse impact on the
continued development of these properties.
Sand Wash
During 2002 the Company acquired a working interest in leaseholds in the Sand
Wash Basin of Colorado and Wyoming. The Company has incurred total leasehold
and exploration costs of approximately $1,693,000 at December 31, 2003. The
leases on approximately 57,000 gross acres of the total 161,000 gross acres
expire in 2004 and, therefore, the Company has reclassified approximately
$605,000 in leasehold costs and2004: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | |
| | Non-cash | | | Cash | | | Total | | | Amortization | | | Net | |
Description of Notes or Agreement | | Loan Costs | | | Loan Costs | | | Loan Costs | | | 12/31/2004 | | | Book Value | |
| | | | | | | | | | | | | | | |
8% subordinated convertible notes | | $ | 1,375,464 | | | $ | 51,159 | | | $ | 1,426,623 | | | $ | (1,270,968 | ) | | $ | 155,655 | |
7% subordinated convertible notes | | | 2,178,944 | | | | 72,605 | | | | 2,251,549 | | | | (1,384,924 | ) | | | 866,625 | |
$25,000,000 development credit facility | | | — | | | | 166,506 | | | | 166,506 | | | | (63,944 | ) | | | 102,562 | |
Various other financing arrangements | | | — | | | | 187,811 | | | | 187,811 | | | | (8,333 | ) | | | 179,478 | |
| | | | | | | | | | | | | | | |
Total | | $ | 3,554,408 | | | $ | 478,081 | | | $ | 4,032,489 | | | $ | (2,728,169 | ) | | $ | 1,304,320 | |
| | | | | | | | | | | | | | | |
Substantially all of the explorationnet book value of loan costs totaling
approximately $422,000, associated with that portion of the leaseholds as
subject to amortization at December 31, 2003.
Other Properties
In November 2001, the Company acquired2004 will expensed in 2005 as a 31.25% working interest in an oil and
gas lease in southwest Kansas for approximately $56,000 and has incurred
exploration costsresult of approximately $187,000. The $187,000 in exploration costs
were to drill three wells which resulted in three dry holes and therefore, these
costs are included in oil and gas properties subject to amortization at December
31, 2003.debt repayments or conversion.
Note 5 — Notes Receivable
The Company
also amortizes development and exploration costs of approximately
$98,000 and the asset related to the asset retirement obligation of
approximately $503,000.
Total
In total, the Company has approximately $3,972,000 in leasehold costs and
$24,222,000 in exploration and development costs subject to amortization. At
December 31, 2003 and 2002, the Company had accumulated depreciation, depletion,
amortization and ceiling write-down of approximately $4,748,000 and $304,000,
respectively.
Sales of Proved Oil and Gas Properties
In February 2000, the Company acquired a 100% working interest in a property in
eastern Kansas, through a joint venture with an operator in which a former
director of the Company is a partner and operations manager. The Company's
total investment in the property was approximately $1,100,000. In addition, the
Company had an active oil lease in the Owl Creek Field in Woodson County, Kansas
which was acquired for $510,000. Effective May 1, 2002, the Company sold its
interest in oil and gas properties in eastern Kansas for $180,000 cash and a
$1,620,000 note receivable (See Note 7). The transaction resulted in a gain of
approximately $244,000, which was recorded as a reduction in capitalized oil and
gas property costs under the full cost accounting method.
Ceiling Test
The Company evaluates its properties subject to amortization under the full cost
ceiling test on a quarterly basis. The ceiling test requires the Company to
compare the unamortized capitalized cost plus the lower of cost or fair market
value of the unproved properties, less any related deferred tax liability and
F-20
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
less the fair value of the asset retirement obligations with the ceiling. The
ceiling is calculated using present value, discounted at 10% of future net
revenue to be generated by the properties net of the estimated future income
taxes, plus the lower of cost or fair market value of the unproved properties.
If the capitalized cost of the properties exceeds the ceiling, then the Company
is required to permanently write down the value of the property to the ceiling.
During 2003, the Company experienced geological and geophysical, financial and
other issues which resulted in significant revisions to the year end reserves.
Therefore, during the fourth quarter of the year ended December 31, 2003, the
Company had a ceiling write-down of $2,975,000, which is included in accumulated
depreciation, depletion, amortization and write-down in the accompanying
consolidated balance sheet. There were no ceiling write-downs in the year ended
December 31, 2002 or the nine-month period ended December 31, 2001.
Properties Not Subject to Amortization
- ------------------------------------------
Pipeline
At December 31, 2003, the Company had approximately $4,491,000 in costs
associated with unproved Pipeline property. Options on approximately 8,300 acres
were relinquished on February 29, 2004 and therefore, approximately $4,002,000
previously reflected as not subject to amortization was reclassified to subject
to amortization at December 31, 2003. The Company currently has approximately
$489,000 in undeveloped leasehold costs associated with the Pipeline property
that are not subject to amortization. The development of the acreage and the
reclassification of the associated leasehold costs to properties subject to
amortization will be contingent upon the development of a future drilling plan.
Labarge
The Company has incurred approximately $2,210,000 of leasehold costs on the
Labarge prospects, and approximately $7,188,000 of exploration costs (including
$3,666,000 of capitalized interest and amortization of loan costs) on the
Labarge prospect, which are not subject to amortization, as the Company has not
completed the exploration and evaluation process on the related wells, which is
expected to be completed in the initial phase of the Schlumberger agreement (See
Note 12). The Company entered into an agreement with Schlumberger in December
2003 for the further development of the Labarge prospect. At the conclusion of
the 2004 evaluation and exploration activity a significant portion of the
investment in unproved oil and gas properties will be reclassified to the full
cost pool subject to depletion and the ceiling test. If proved reserves are not
found, or if proved reserves are not significant, the Company could be required
to write-down a portion of the full cost pool of oil and gas properties. A
significant portion of the remaining leasehold costs are anticipated to be
reclassified and subject to amortization during the remaining four years of the
agreement with Schlumberger. Reclassification of the remaining costs to
properties subject to amortization will be contingent on the development of a
future drilling plan.
Sand Wash
The Company has incurred leasehold costs of approximately $1,693,000 and initial
exploration costs of $422,000 on approximately 161,000 gross acres it has in the
Sand Wash Basin. The leases on approximately 57,000 gross acres under lease are
due to expire in 2004 and therefore, the Company has classified approximately
$605,000 in leasehold costs and all of the approximately $422,000 in exploration
costs associated with that portion of the leasehold as subject to amortization
at December 31, 2003. The Company has approximately $1,088,000 of leasehold
costs associated with the Sand Wash leases which are classified as not subject
to amortization.
F-21
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassification of the remaining leasehold to properties subject to
amortization will be contingent upon the development of a future drilling plan.
Other Properties
In November 2000, the Company acquired a 100% working interest in a coal bed
methane property in northwestern Colorado for consideration of approximately
$593,000. The Company has incurred approximately $199,000 of leasehold costs to
acquire additional acreage, bringing the total leasehold costs to approximately
$792,000 and has capitalized exploration costs of approximately $107,000 as of
December 31, 2003. The lease requires the Company to drill a total of 5 wells
before November 20, 2005. No wells have been drilled to date. A portion of the
leasehold costs and the exploration costs associated with the drilling activity
on these five wells is anticipated to be reclassified to properties subject to
amortization in 2005. Reclassification of the remaining costs to properties
subject to amortization will be contingent upon the development of a future
drilling plan.
The Company has additional leasehold costs of approximately $56,000 on an
undeveloped, 5,120 acre river sand prospect in Kansas operated by an unrelated
third party. The Company expects the reclassification of these costs to
properties subject to amortization during 2004.
Infinity was awarded the bid on 24 blocks of acreage, comprised of over one
million acres in 2003, and immediately entered into negotiations with The
Instituto Nicaraguense de Energia ("INE"), the Nicaraguan governmental entity
that regulates oil and gas activities, to finalize the initial exploration plan
for the Tyra and Perlas prospects. The Company has approximately $885,000 in
undeveloped acreage costs associated with these prospects. Reclassification of
the costs incurred to properties subject to amortization will be contingent upon
the development of a future drilling plan after the terms of the lease are
completed.
Total
In total, the Company has approximately $5,520,000 in leasehold costs and
approximately $7,295,000 in exploration costs not subject to amortization.
These properties are not subject to amortization and are being, or will be
developed, completed and put into production when gas is located in apparent
reasonable quantities. The geological structures on the Wyoming and Colorado
properties are such that the amount of reserves cannot be evaluated with the
engineering certainty necessary to be judged proven reserves. As drilling of a
specific well is finished, a determination is made to complete the well and
begin production or treat the well as unsuccessful. Costs of successful wells
are added to the properties subject to amortization when the property is proven.
Costs of unsuccessful wells are added to the properties subject to amortization
when that determination is made.
The Company reviews the carrying value of its properties not subject to
amortization on at least an annual basis. The carrying value of the properties
not subject to amortization may not exceed the fair market value of such
properties. When the book value of an unevaluated property exceeds the fair
market value of the property the excess book value over fair value of the
property is reclassified into the properties subject to amortization.
F-22
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2003 the Company reclassified approximately
$4,002,000 and $1,027,000 of unevaluated property cost to the properties subject
to amortization associated with its Pipeline and Sand Wash properties,
respectively.
No reclassification based on the fair market value review was recorded during
the year ended December 31, 2002 and the nine months ended December 31, 2001.
Any cost related to exploratory dry wells is included in properties subject to
amortization when that determination is made. Any costs associated with
geophysical and geological costs that are not associated with specific
unevaluated properties are included in the properties subject to amortization as
incurred.
The per equivalent MCF amount of depreciation, depletion and amortization
incurred during the years ended December 31, 2003 and 2002 and nine months ended
December 31, 2001 was $0.92, $1.11 and $2.56, respectively.
Recovery of the above acquisition and development costs is dependent on a
variety of factors including actual production results, market conditions, the
success of future exploration and development activities on the properties, and
the availability of future financing on terms acceptable to management.
Capitalized Financing Costs
- -----------------------------
From inception through December 31, 2003, the Company has capitalized the
following financing costs related to properties not subject to amortization. As
these properties are developed, the costs are transferred to properties subject
to amortization:
December 31,
----------------------
2003 2002
---------- ----------
Beneficial conversion feature related to
the 8% subordinated convertible notes $1,165,500 $1,165,500
Capitalized interest 2,246,019 1,863,783
Capitalized amortization of loan costs 4,885,586 2,170,612
---------- ----------
Total capitalized finance costs $8,297,105 $5,199,895
========== ==========
Note 7 - Notes Receivable
- -----------------------------
The Company issuedreceived a three year note for $1,620,000 when it sold its Kansas producing properties in May 2002. The note had an outstanding balance as of December 31, 20032004 and 20022003 of approximately $1,597,000$1,581,000 and $1,612,000,$1,597,000, respectively. Interest accrues on the note at 7.0%8% per annum with quarterly payments, based on a 30 year amortization, of $35,000, including interest, due on the first day of November, February, May and August with a balloon payment due May 1, 2005. The note is collateralized by the oil producing properties that were sold.
F-23
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 - Accrued Expenses
- -----------------------------
Accrued expenses consist of:
December 31,
------------------
2003 2002
-------- --------
Production taxes payable - current $282,752 $103,586
Oil and gas revenue payable to oil
and gas property owners 158,318 86,187
Accrued interest 223,060 218,901
Derivative liability - 125,693
Other accrued expense 302,639 355,527
-------- --------
Total accrued expenses: $966,769 $889,894
======== ========
Note 9 -6 — Accrued Liabilities
Accrued liabilities consist of:
| | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Production taxes payable — current portion | | $ | 235,919 | | | $ | 282,752 | |
Oil and gas revenue payable to oil and gas property owners | | | 130,308 | | | | 158,318 | |
Accrued interest | | | 223,195 | | | | 223,060 | |
Other accrued liabilities, principally accrued drilling costs | | | 3,906,990 | | | | 302,639 | |
| | | | | | |
| | $ | 4,496,412 | | | $ | 966,769 | |
| | | | | | |
F-17
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 7 — Long-Term Debt - ---------------------------and Convertible Notes Payable
Long term debt consists of the following:
December 31,
-------------------------
2003 2002
------------ -----------
8% subordinated convertible notes payable,
convertible into 572,395(1) shares of
Company common stock. Due June 13, 2006. $ 2,793,000 $ 4,243,000
7% subordinated convertible notes payable,
convertible into 1,386,389(1) shares of
Company common stock.
Due April 22, 2007. 11,184,000 12,540,000
25,000,000 development credit facility
with a bank, $5,500,000 borrowing base
at December 31, 2003 to be redetermined
on a semi-annual basis on April 1 and
October 1; accrued interest at the prime
rate plus 1% (totaling 5% at December
31, 2003) is due on a monthly basis with
principal and unpaid interest due June 30,
2006; collateralized by all of the
Company's interest in its Pipeline and
Labarge properties. 5,500,000 -
Bridge loan with related party; interest at 7%
due and payable on January 30, 2005;
collateralized with a second mortgage on
the Company's Pipeline and Sand Wash oil
and gas properties. Subsequent to December
31, 2003, $1,250,000 of this loan was repaid. 3,000,000 3,000,000
Note payable to seller (for a 50% interest in
an airplane), with interest at 7% due on a
quarterly basis. The Company is required
to make annual principal payments equal
to 5% of the current outstanding principal
until paid in full. The seller can call the
note if the bank calls its note for the
original purchase of the airplane. The
note is collateralized by the Company's 50%
interest in the airplane with a net book value
of approximately $2,300,000. 2,326,201 -
2,000,000 revolving credit note with interest
at prime plus 1.0% (totaling 5% at December
31, 2003); due in December 2004. The note
is cross-collateralized by substantially all the
assets of the oil and gas service subsidiary. 96,367 6,506
F-24
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
-------------------------
2003 2002
------------ -----------
2,900,000 term loan with interest at prime
plus 1.0% (totaling 5% at December 31, 2003),
due in monthly installments of $80,626 plus
interest, through December 2004. The note is
cross-collateralized by substantially all the
assets of the oil and gas service subsidiary. 905,138 1,960,651
1,000,000 term loan with interest at prime
plus 1.0% (totaling 5% at December 31, 2003),
due in monthly installments of $15,626 plus
interest, through December 2004. The note
is cross-collateralized by substantially all
the assets of the oil and gas service subsidiary. 390,000 570,000
Various fixed rate notes collateralized by
vehicles and equipment with interest rates
ranging from 6.0% to 9.5%; payable in
monthly installments of principal and interest
totaling $19,203, with payments due
between June 2002 and July 2008. 1,053,022 1,228,519
Note payable to a bank with interest at Wall
Street Prime plus .25% (totaling 4.25% at
December 31, 2003); payable in monthly
installments of $5,635 including interest
through November 2006; collateralized by
real property. 185,383 249,081
Note payable to a bank with interest at 9.25%,
payable in monthly installments of $4,883
including interest through December 2011;
collateralized by real estate. 330,228 335,035
Capital leases, with monthly installments
totaling $5,064, including interest and expiring
through November 2006. 204,310 245,197
Note payable to a bank with interest at 6.25%,
due in monthly principal installments
at $25,000 plus interest through January 2004.
The note was paid in full subsequent to
December 31, 2003. 25,000 -
Note payable to seller (for a 50% interest in
an airplane). The interest in the plane was
forfeited as full satisfaction for the note
in 2003. - 1,489,125
Notes payable to sellers of oil and gas
properties paid in full in 2003. - 607,236
------------ ------------
Total long-term obligations 27,992,649 26,474,351
Less current portion (1,762,777) (2,227,195)
------------ ------------
$26,229,872 $24,247,156
============ ============
____________________
(1) Taking into effect the change in conversion price subsequent to December
31, 2003
F-25
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term obligations are as follows:
Long-Term Debt
Years Ending and Convertible
December 31, Notes Capital Leases Total
- ------------------------ ----------------- ---------------- ------------
2004 $ 1,714,902 $ 60,776 $ 1,775,678
2005 3,731,019 60,776 3,791,795
2006 8,786,228 110,000 8,896,228
2007 11,478,561 - 11,478,561
2008 156,433 - 156,433
Thereafter 1,921,196 - 1,921,196
Less amount
representing interest - (27,242) (27,242)
----------------- ---------------- ------------
Total principal 27,788,339 204,310 27,992,649
Less current portion (1,714,901) (47,876) (1,762,777)
----------------- ---------------- ------------
$ 26,073,438 $ 156,434 $26,229,872
================= ================ ============
Included | | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
8% subordinated convertible notes payable, due June 13, 2006 | | $ | 2,493,000 | | | $ | 2,793,000 | |
7% subordinated convertible notes payable, due April 22, 2007 | | | 11,516,698 | | | | 11,184,000 | |
$25,000,000 development credit facility with U.S. Bank, repaid in full and terminated on January 13, 2005 | | | 5,000,000 | | | | 5,500,000 | |
Bridge loan with related party; interest at 7%, repaid in full during 2004 | | | — | | | | 3,000,000 | |
Note payable to seller (for a 50% interest in an airplane), with interest at 7.25% due on a quarterly basis. The Company is required to make annual principal payments equal to 5% of the current outstanding principal until paid in full. The seller can call the note if the bank calls its note for the original purchase of the airplane. The note is collateralized by the Company’s 50% interest in the airplane with a net book value of $2,167,717 | | | 2,326,201 | | | | 2,326,201 | |
Various revolving credit and term loans with LaSalle Bank with interest at prime plus 1.25%, repaid in full and terminated on January 13, 2005 | | | 3,582,533 | | | | 1,391,505 | |
Various other collateralized notes repaid in full and terminated no later than January 31, 2005 | | | 546,058 | | | | 1,797,943 | |
| | | | | | |
| | $ | 25,464,490 | | | $ | 27,992,649 | |
| | | | | | |
Maturities of long-term debt are as follows:
| | | | |
| | Long-Term Debt | |
Year Ending December 31, | | and Convertible Notes | |
| | | |
2005 | | $ | 124,354 | |
2006 | | | 2,603,495 | |
2007 | | | 11,621,668 | |
2008 | | | 99,721 | |
2009 | | | 9,222,924 | |
Thereafter | | | 1,792,328 | |
| | | |
| | $ | 25,464,490 | |
| | | |
Certain subordinated notes have converted in equipment2005, as discussed below. However, the table above reflects the maturity of the convertible notes and the note payable to seller in accordance with their stated terms. All other borrowings under secured credit facilities and revolving and term loans were paid in full in January 2005 with proceeds from the Senior Secured Notes Facility discussed in Note 16 and the maturities for that debt have been presented in the accompanying consolidated balance sheet asfinancial statements in accordance with the terms of December 31, 2003 and 2002, are assets held under capital leases in the amount
of approximately $297,000 net of accumulated amortization of approximately
$70,000 and $41,000, respectively.
Convertible Subordinated Notes - --------------------------------
due January 13, 2009.
| |
| Convertible Subordinated Notes |
| |
| 8% Convertible Subordinated Notes |
Effective June 13, 2001, the Company sold $6,475,000 in 8% Subordinated Convertible Notes in a private placement in which C.E. Unterberg, Towbin acted as the placement agent. A director of the Company was an officer with C.E. Unterberg, Towbin. Interest on the notes accruesaccrued at a rate of 8% per annum and iswas payable
F-18
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in arrears on each December 15 and June
15 commencing December
15, 2001.15. The notes were originally convertible to one share of common stock at $5 per share and
maturematured on June 13, 2006.
The notes are subordinated to substantially all the Company's other existing or
future notes payable, capital leases, debentures, bonds or other such
securities. In addition, the Company can redeem, at its option, all or a portion
of the notes as follows:
Redemption Price
Percentage of
Year Principal
------------------- -------------
2004 103.2%
2005 and thereafter 101.6%
If at any time the Company's stock price exceeds 300% of the conversion price
for 20 consecutive days, the Company can redeem, at its option, all or a portion
of the notes for the principal balance and accrued interest outstanding. If
there is a change in control of the Company, the Company must redeem the notes
at the rates noted above.
F-26
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company incurred costs of $501,906 associated with the placement, which has been capitalized as loan costs and is being amortized using the effective interest method. The Company also issued warrants to purchase 220,000 shares of common stock at $5.99. The Company capitalized additional loan costs of $924,717 related to the fair value of the warrants as determined using the Black-Scholes pricing model assuming a five year life, weighted average risk-free interest rate of 8%, expected volatility of 80.66% and no expected dividend yield.
Proceeds from the offering were used in the development of the Company's oil and
gas properties.
As the conversion feature of the convertible notes was below the market value of the stock on the date of issue, the Company recorded a discount of $1,165,500 related to the intrinsic value of the beneficial conversion feature. The notes arewere immediately convertible and therefore, the discount was immediately amortized. The Company capitalized the amortization of the beneficial conversion feature into oil and gas properties not subject to amortization as the debt was issued in order to continue exploration and development of projects that were not currently subject to amortization, and was not used for general operating purposes.
During 2004, 2003 and 2002, the holders of $300,000, $1,450,000 and $2,232,000 of 8% subordinated convertible notes converted the debt and accrued interest into 63,179, 295,689 and 454,974 shares of the Company'sCompany’s common stock, respectively.
Subsequent to December 31, 2003,
On January 13, 2005, the Company called for redemption all of the remaining 8% subordinated convertible notes outstanding on February 28, 2005. During January and February 2005, the holders of $130,000all $2,493,000 of 8% subordinated convertible notes converted the debt and accrued interest into 27,059517,296 shares of the Company'sCompany’s common stock.
Subsequent to December 31, 2003, the Company issued 1,000,000 shares of common
stock at $4.00 per share in a private placement (See Note 18). The loan
indenture contains anti-dilution provisions that require the Company to adjust
the conversion price of the notes if stock is sold at a price less than the
conversion price. Therefore, the conversion price was adjusted to $4.88 per
share. In connection with the adjustment of the conversion price, the Company
recorded an approximately $54,000 charge related to the additional shares
issuable at the new conversion price.
| |
| 7% Convertible Subordinated Notes |
Effective April 22, 2002, the Company sold $12,540,000 in 7% Subordinated Convertible Notes in a private placement in which C.E. Unterberg, Towbin acted as the placement agent. A director of the Company
is alsowas an officer with C.E. Unterberg, Towbin. In addition, to the extent a holder of the
Company'sCompany’s 8% Subordinated Convertible Notes converted any of their notes and the accrued interest to stock, and purchased 7% Subordinated Convertible Notes, these parties would be related parties. Interest on the 7% subordinated notes accrues at a rate of 7% per annum and is payable in arrears on each April 15 and October 15. The Company can elect to pay the accrued interest in cash or in the form of additional notes issued in increments of $1,000 with residual interest due in cash. In
December2004 and 2003, the Company issued
$795,000 and $379,000 in new notes as payment for interest
due at that time. The Company expects it will issue additional notes in
April and October 2004 as payment for interest then due. The notes were originally convertible to one share of common stock at $8.625 per share and mature on April 22, 2007.
F-27
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The loan indenture for the 7% notes contains anti-dilution provisions that require the Company to adjust the conversion price of the notes if stock is sold at a price less than the conversion price. At December 31, 2004, the conversion price was $7.766 per share. In connection with the adjustment of the conversion price, the Company recorded a charge of approximately $354,000 related to the additional shares issuable at the new conversion price. The notes are subordinated to substantially all the Company'sCompany’s other existing or future notes payable, capital leases, debentures, bonds or other such securities. In addition, after April 22, 2004, the Company can redeem, at its
option, all or a portion of the notes as follows:
Redemption Price
Percentage of
Year Principal
------------------- -------------
2004 104.2%
2005 102.8%
2006 and thereafter 101.4%
Currently if the Company's stock price exceeds 300% of the conversion price for
20 consecutive days, the Company can redeem, at its option, all or a portion of
the notes for the principal balance and accrued interest outstanding. If there
is a change in control of the Company, the Company must redeem the notes at the
rates noted above if after April 22, 2004 or 101% of principal plus accrued
interest if before April 22, 2004.
The Company incurred costs of $865,505 associated with the issuance of the 7% convertible notes, which have been capitalized as loan costs and are being amortized using the effective interest method. The Company also issued warrants to purchase 200,000 shares of common stock at $9.058. The Company capitalized additional loan costs of $1,386,044 related to the fair value of the warrants as determined using the Black-Scholes pricing model assuming a five year life, weighed average risk-free interest rate of 7%, expected volatility of 98.30% and no expected dividend yield. A portion of the proceeds from the offering was used
in the development of the Company's oil
F-19
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2004 and gas properties. As the conversion
feature of the 7% convertible notes was above the market value of the stock on
the date of issue, the Company did not record a beneficial conversion feature.
During 2003, the holders of $462,302 and $1,735,000 of the 7% subordinated convertible notes converted the debt and accrued interest into 62,685 and 203,712 shares of the Company'sCompany’s common stock.
Subsequent to
On February 25, 2005, the Company called for redemption all of the remaining 7% subordinated convertible notes outstanding on April 22, 2005 at a redemption price of 102.8% plus accrued and unpaid interest. During 2005, through March 23, the holders of $5,950,538 of 7% subordinated convertible notes at December 31, 2003,2004 have converted the Company issued 1,000,000debt and accrued interest into 783,779 shares of the Company’s common stock at $4.00 per share in a private placement (See Note 18). The loan
indenture for the 7% notes contains anti-dilution provisions that require the
Company to adjust the conversion price of the notes if stock is sold at a price
less than the conversion price. Therefore, the conversion price was adjusted to
$8.067 per share. In connection with the adjustment of the conversion price, the
Company recorded an approximately $354,000 charge related to the additional
shares issuable at the new conversion price.
$25,000,000 Development Credit Facility
- ------------------------------------------stock.
| |
| $25,000,000 Development Credit Facility |
In September 2003, the Company established a Secured Revolving Borrowing Base Credit Facility
("Facility"(“Facility”) with a bank.
The Facility provides for funding of
up to $25,000,000 with an initial borrowing base for the facility at $5,500,000.
Borrowing base determinations are based on the volume of oil and gas production
expected, the term and price of hedging contracts in place, and the costs
associated with producing the oil and gas and associated general and
administrative expense. The Facility is subject to semi-annual borrowing base
determinations based on the same criteria as the original determination. The
Company and the bank each have the option to request one additional
F-28
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
re-determination during each calendar year. The bank has the sole discretion
regarding any increase in the borrowing base if the semi-annual determination
indicates that there is additional borrowing base available. Interest on the Facility accrues and is payable monthlyamounts outstanding accrued at prime rate plus 1.0% (totaling 5.0%
at December 31, 2003). The Company incurred $110,000 in loan costs and approximately $57,000 in legal costs to establish the Facility.facility. These costs were capitalized as loan costs and will be amortized using the effective interest method. The initialfacility was repaid in full with proceeds were used to pay initial loan costs, repay $3,850,000 of
new bridge loans obtained during 2003, for development of oil and gas properties
and for working capital. The loan is subject to various restrictive and
financial covenants. At December 31, 2003from the Company wasSenior Secured Notes Facility discussed in violation of the
working capital covenant.
Subsequent to December 31, 2003, the Company was granted a waiver of the
violation as of December 31, 2003, and through April 30, 2004, when management
believes it will be in, and stay in compliance for the remainder of 2004. This
Facility limits the amount of cash distribution from Infinity Oil and Gas of
Wyoming, Inc. ("Infinity-Wyoming") to Infinity, Inc.Note 16 to the pro-rata share of
tax expense generated by the net taxable income of Infinity-WyomingConsolidated Financial Statements and additional cash distributions of $300,000 per fiscal year.
Bridge Loan and Related Agreements - Related Party
- --------------------------------------------------terminated on January 13, 2005. | |
| Bridge Loan and Related Agreements — Related Party |
On November 25, 2002, the Company obtained a $3,000,000 one year bridge loan from a related party with an annual interest rate at Wall Street prime plus 1.0%
in order to pay outstanding payables associated with the development of its oil
and gas properties.. In March 2003, the note was extended to January 2004. In May 2003, the note was amended to extend the maturity to January 30, 2005 and to
place requirements for accelerated payment should the Company raise in excess of
$3,500,000 in debt or equity financing.2005. In June 2003, the loan agreement was amended to waive a portion of the accelerated payment requirements and to increase the interest rate to 7%. The note holder was also granted a first
priority security interest in the Company's Sand Wash property and a
subordinated security interest in the Pipeline property. The Company also entered into a consulting agreement with the related party in June 2003 under which the related party would facilitate a $3,850,000 bridge loan that was obtained and paid offrepaid in 2003 and other future financings, if any.
The table below sets forth information about options that were granted in conjunction with these transactions. All of the options issued were valued using the Black-Scholes pricing model assuming a five year life, weighted average risk free interest rate of 1.5%, expected volatility rates between 125% and 132% and no expected dividend yield. The option value was capitalized as loan costs and
is beingwas amortized using the effective interest method. The amortization is treated as interest in the
Company'sCompany’s consolidated statement of operations with a portion capitalized to the non-producing properties developed with the proceeds of the loan.
F-29
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the options granted in connection with the loan and related agreements:
Date of Options Option Loan
Grant Granted Price Costs
----------------- ------- ------- ----------
November 25, 2002 320,000 $ 8.75 $2,281,718
May 23, 2003 150,000 8.75 730,130
June 18, 2003 125,000 8.75 642,841
June 26, 2003 225,000 8.75 1,120,358
------- ----------
820,000 $4,775,047
======= ==========
Subsequent to December 31, 2003, | | | | | | | | | | | | |
| | Options | | | Option | | | Loan | |
Date of Grant | | Granted | | | Price | | | Costs | |
| | | | | | | | | |
November 25, 2002 | | | 320,000 | | | $ | 8.75 | | | $ | 2,281,718 | |
May 23, 2003 | | | 150,000 | | | | 8.75 | | | | 730,130 | |
June 18, 2003 | | | 125,000 | | | | 8.75 | | | | 642,841 | |
June 26, 2003 | | | 225,000 | | | | 8.75 | | | | 1,120,358 | |
| | | | | | | | | |
| | | 820,000 | | | | | | | $ | 4,775,047 | |
| | | | | | | | | |
During 2004, the Company repaid $1,250,000 of the loan balance outstanding with $750,000$2,500,000 in cash and the issuance of 125,000 shares of common stock valued at $4.00 per share (See Note 19).
Revolving Credit and Term Loans
- -----------------------------------
In January 2002, the Company refinanced a portionshare.
| |
| Revolving Credit and Term Loans |
Effective July 9, 2004, Consolidated borrowed $5,400,000 under an amended credit facility with LaSalle Bank. The amended facility required monthly payments of its long-term debt. The
Company entered into a financing agreement $113,493 plus interest through November 2007,
F-20
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with a bank wherebyfinal payment of the Company
executedremaining balance of the following:
- A $2,000,000 revolving credit note cross-collateralized by
substantially all the Company's assets except oil and gas properties;
with interest at prime plus 1.0%. The note is due December 31, 2004.
- An approximately $2,900,000 term note with2007. Amounts outstanding accrued interest at the prime rate plus 1.0%, due1.25% per annum. The credit facility was repaid in monthly installments of $80,626 plus interest, through
December 2004. The note is cross-collateralized by substantially allfull with proceeds from the assets ofSenior Secured Notes Facility discussed in Note 16 to the Company except oilConsolidated Financial Statements and gas properties.
- A $1,000,000 capital expenditure line with interest at prime plus
1.0%, due in monthly installments of $15,626 plus interest through
December 31, 2004 when unpaid principal and interest are due. The note
is cross-collateralized by substantially all the assets of the Company
except oil and gas properties. The Company borrowed $720,000 under the
line.
The notes require the Company to comply with certain financial and restricted
covenants and are guaranteed by an officer of the Company up to $1,000,000.
This facility limits the amount of distributions that can be made, other than
through the normal course of business, to Infinity, Inc. and affiliated
companies to $250,000 per fiscal year without the prior consent of the lender.
2003 Debt Paid in Full
- --------------------------terminated on January 13, 2005.
In 2003, the Company issued 201,000 five year options and 462,500 five year warrants to purchase common stock at $8.75 per share and granted a 4% over-riding royalty in certain producing properties when it obtained three bridge loans totaling $5,900,000 with interest rates ranging from 2% per month to 12% per year. The Company capitalized loan costs of $3,297,390 for the options and warrants and $1,250,000 based on the estimated fair value for the 4% over-riding royalty conveyed. The Company used the Black-Scholes pricing model assuming a five year life, weighted average risk-free interest rates of 1.5% to 4%, expected volatility between
126.11 %126.11% and
131.96 %131.96% and no expected
F-30
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS dividend yield to calculate the fair value of the options and warrants at the date of grant. The Company repaid all of the loans during 2003 and all of the loan costs were fully amortized during the year.
2002 Debt Paid in Full
- --------------------------
In March 2002, the Company issued five-year options to purchase 250,000 shares
of common stock at $7.34 per share when it obtained a $2,000,000, bridge loan
from a related party, with an annual interest rate of 8%, in order to pay
outstanding payables associated with the development of its oil and gas
properties. The Company capitalized loan costs of $1,347,728 related to the
fair value of the options as determined using the Black-Scholes pricing model
assuming a five year life, weighted average risk-free interest rate of 8%,
expected volatility of 89.55% and no expected dividend yield. The loans were
repaid in full in April 2002 with proceeds from the sale of the 7% subordinated
convertible notes.
Note 10 - Stockholder's8 — Stockholders’ Equity
- ------------------------------
Stock Split
- ------------
In May 2002, the Company effected a 2:1 stock split effective May 13, 2002. All shares and per share amounts have been restated to give effect to the stock split.
Warrants and Options to Non-Employees
- -----------------------------------------
| |
| Private Institutional Placements of Equity |
In January 2004, the Company issued 1,000,000 shares of common stock in exchange for $4,000,000. In November 2004, the Company issued 1,027,000 shares of common stock in exchange for $5,237,700. Costs associated with the issuances totaled $319,644.
| |
| Warrants and Options to Non-Employees |
The Company, in conjunction with a public stock offering in September 1988, issued Class A and Class B warrants to purchase 425,918 shares of common stock. The 223,496 Class A warrants have expired. During 2002, 163,264 shares of common stock were issued upon the exercise of Class B warrants for proceeds of $977,911. The remaining 39,158 Class B warrants expired in June 2002.
During 2001, in connection with the sale of $6,475,000 8% subordinated convertible notes,notes; the Company granted 220,000 warrants to purchase the Company'sCompany’s common stock at $5.99 per share. TheDuring February 2005, all of these warrants expire in June 2006
(See Note 9).were exercised.
During 2002, in connection with the sale of $12,540,000, 7% subordinated convertible notes,notes; the Company granted 200,000 warrants to purchase the Company'sCompany’s common stock at $9.058 per share. The warrants expire in April 2007 (See(see Note 9)7).
In connection with obtaining $5,000,000 of bridge loans in March and November 2002, the Company granted 570,000, five year options to purchase the Company'sCompany’s common stockstock; 250,000 at $7.34 (250,000and 320,000 at $8.75 per share (see Note 7). Subsequent to December 31, 2004 and through March 23, 2005, 77,850 of the options) or$7.34 options and 191,000 of $8.75 (320,000 of the options)
per share (See Note 9).options were exercised.
During 2003, in connection with the issuance of $1,000,000 of bridge notes, which were paid in full in 2003, the Company granted 212,500 warrants to purchase the Company'sCompany’s common stock at $8.75 per share. The warrants expire in April 2008 (See(see Note 9)7). During February 2005, warrants on 8,000 shares were exercised under cashless exercise provisions resulting in the issuance of 2,257 shares of common stock.
F-21
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2003, in connection with the issuance of $3,850,000 in bridge notes which were paid in full in 2003, the Company granted 250,000 warrants to purchase the
Company'sCompany’s common stock at $8.75 per share.
Subsequent to December 31, 2003, the
Company issued 1,000,000 shares of common stock at $4.00 per share in a private
placement. (See Note 18). The warrant agreement contains anti-dilution provisions that require the Company to adjust the exercise price and change the number of warrants outstanding if the Company sells stock at less than the exercise price.
Therefore, inDuring January
and November 2004, the warrants
F-31
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS were increased by 17,500 warrants27,746, to 267,500277,746 warrants with an exercise price of $8.18$7.88 per share.share and the associated value of approximately $120,000 was recorded as offering costs. The warrants expire July 2, 2008 (See(see Note 9)7). In connection with obtaining $1,050,000 of bridge loans in January and April of 2003 (which were paid in full during 2003), the amendments of an existing $3,000,000 loan agreement, and a consulting contract to assist with the facilitation of a $3,850,000 loan agreement, the Company granted options to purchase the Company'sCompany’s common shares at $8.75 per share (See(see Note 9)7).
A summary of warrant and option activity with non-employees is as follows:
Warrant/Option Price Weighted Average
Number of Shares Per Share Price Per Share
----------------- -------------------- -----------------
Outstanding, March 31, 2001 269,922 $ 1.75 - $6.00 $ 5.16
Granted 220,000 5.99 5.99
Canceled or forfeited (25,000) 1.75 1.75
Exercised (2,500) 2.63 2.63
----------------- -------------------- -----------------
Outstanding, December 31, 2001 462,422 3.22 - 6.00 5.75
Granted 770,000 7.34 - 9.06 8.37
Canceled or forfeited (39,158) 6.00 6.00
Exercised (163,264) 6.00 6.00
----------------- -------------------- -----------------
Outstanding, December 31, 2002 1,030,000 3.22 - 9.06 7.66
Granted 1,163,500 8.75 8.75
Exercised (83,350) 7.34 7.34
----------------- -------------------- -----------------
Outstanding, December 31, 2003 2,110,150 $ 3.22 - $9.06 $ 8.27
================= ==================== =================
Number Weighted Number
Outstanding at Average Weighted Exercisable at Weighted
Range of Exercise December 31, Remaining Average December 31, Average
Prices 2003 Contractual Life Exercise Price 2003 Exercise Price
- ------------------ -------------- ---------------- --------------- -------------- --------------
$3.22 40,000 2 years $ 3.22 40,000 $ 3.22
$5.99 220,000 3 years $ 5.99 220,000 $ 5.99
$7.34 - 9.06 686,650 4 years $ 9.06 686,650 $ 8.50
$8.75 1,163,500 5 years $ 8.75 1,163,000 $ 8.75
-------------- --------------
2,110,150 2,110,150
============== ==============
| | | | | | | | | | |
| | | | Warrant/Option | | Weighted Average | |
| | Number of Shares | | | Price Per Share | | Price Per Share | |
| | | | | | | | |
Outstanding, December 31, 2001 | | | 462,422 | | | $3.22 - $6.00 | | $ | 5.75 | |
Granted | | | 770,000 | | | 7.34 - 9.06 | | | 8.37 | |
Canceled or forfeited | | | (39,158 | ) | | 6.00 | | | 6.00 | |
Exercised | | | (163,264 | ) | | 6.00 | | | 6.00 | |
| | | | | | | | |
Outstanding, December 31, 2002 | | | 1,030,000 | | | 3.22 - 9.06 | | | 7.66 | |
Granted | | | 1,163,500 | | | 8.75 | | | 8.75 | |
Exercised | | | (83,350 | ) | | 7.34 | | | 7.34 | |
| | | | | | | | |
Outstanding, December 31, 2003 | | | 2,110,150 | | | 3.22 - 9.06 | | | 8.27 | |
Granted | | | 47,746 | | | 7.88 - 8.75 | | | 8.24 | |
| | | | | | | | |
Outstanding, December 31, 2004 | | | 2,157,896 | | | $3.22 - $9.06 | | $ | 8.17 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Number | | | Weighted Average | | | | | Number | | | |
Range of | | Outstanding at | | | Remaining | | | Weighted Average | | | Exercisable at | | | Weighted Average | |
Exercise Prices | | December 31, 2004 | | | Contractual Life | | | Exercise Price | | | December 31, 2004 | | | Exercise Price | |
| | | | | | | | | | | | | | | |
$3.22 | | | 40,000 | | | | 1 years | | | $ | 3.22 | | | | 40,000 | | | $ | 3.22 | |
$5.99 | | | 220,000 | | | | 2 years | | | $ | 5.99 | | | | 220,000 | | | $ | 5.99 | |
$7.34 - 9.06 | | | 686,650 | | | | 3 years | | | $ | 8.50 | | | | 686,650 | | | $ | 8.50 | |
$7.88 - 8.75 | | | 1,191,246 | | | | 4 years | | | $ | 8.55 | | | | 1,191,246 | | | $ | 8.55 | |
$8.75 | | | 20,000 | | | | 5 years | | | $ | 8.75 | | | | 20,000 | | | $ | 8.75 | |
| | | | | | | | | | | | | | | |
| | | 2,157,896 | | | | | | | | | | | | 2,157,896 | | | | | |
| | | | | | | | | | | | | | | |
The following is the weighted average fair value of warrants and options granted to non-employees:
| | | | |
| | Weighted Average | |
Period Ending December 31, | | Fair Value | |
| | | |
2002 | | $ | 6.51 | |
2003 | | $ | 4.98 | |
2004 | | $ | 4.80 | |
Period Ending December 31, Weighted Average Fair Value
-------------------------- ---------------------------
2001 (nine months) $ 9.50
2002 $ 6.51
2003 $ 4.98
| |
| Options Under Employee Option Plans |
F-32
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Under Employee Option Plans
- --------------------------------------- The Company has adopted stock option plans containing both incentive and non-statutory stock options. All options allow for the purchase of common stock at prices not less than the fair market value of such stock
F-22
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
at the date of grant. If the optionee owns more than 10% of the total combined voting power of all classes of the Company'sCompany’s stock, the exercise price can not be less than 110% of the fair market value of such stock at the date of grant.
Options granted under the plans become exercisable immediately or as directed by the Board of Directors and generally expire five or ten years after the date of grant, unless the employee owns more than 10% of the total combined voting power of all classes of the Company'sCompany’s stock, in which case they must be exercised within five years of the date of grant. Pursuant to the plans, an aggregate of 1,928,0472,338,047 options were available for grant. The Company granted 403,750, 10,000, 345,000,
and 330,000345,000 options to employees under the Plans during the years ended December
31,2004, 2003 and 2002, and the nine months ended December 31, 2001, respectively. At December 31, 2003,2004, there were 95,720195,881 shares remaining available under the plans. During February 2005, the Company granted ten-year options on 165,000 shares at an exercise price of $8.50 per share.
A summary of stock option activity is as follows:
Option Price Weighted Average
Number of Shares Per Share Price Per Share
----------------- -------------- -----------------
Outstanding, March 31, 2001 789,750 $1.50 - $5.25 $ 2.48
Granted 330,000 5.00 5.00
Canceled or forfeited (7,300) 3.82 3.82
Exercised (62,850) 1.50 - 5.25 1.93
----------------- --------------- -----------------
Outstanding, December 31, 2001 1,049,600 1.50 - 5.00 3.30
Granted 345,000 7.00 - 8.70 8.70
Canceled or forfeited (6,200) 3.00 - 5.00 3.59
Exercised (247,500) 1.50 - 5.00 1.93
----------------- --------------- -----------------
Outstanding, December 31, 2002 1,140,900 1.50 - 8.70 5.23
Granted 10,000 8.75 8.75
Canceled or forfeited (61,781) 3.82 - 8.70 7.28
Exercised (62,819) 1.50 - 5.00 3.38
----------------- --------------- -----------------
Outstanding, December 31, 2003 1,026,300 $1.50 - $8.75 $ 5.25
================= =============== =================
F-33
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable at Average
Range of at December Contractual Exercise December 31, Exercise
Exercise Prices 31, 2003 Life Price 2003 Price
---------------- ----------- ----------- --------- -------------- ---------
$ 1.50 62,000 1 year $ 1.50 62,000 $ 1.50
$ 1.50 119,500 2 years $ 1.50 119,000 $ 1.50
$ 3.00-3.82 219,800 2 years $ 3.80 219,800 $ 3.80
$ 5.00 304,000 3 years $ 5.00 304,000 $ 5.00
$ 5.00 8,000 4 years $ 5.00 8,000 $ 5.00
$ 8.70 303,000 4 years $ 8.70 303,000 $ 8.70
$ 8.75 10,000 5 years $ 8.75 5,000 $ 8.75
----------- --------------
1,026,300 1,021,300
=========== ==============
| | | | | | | | | | |
| | | | Option Price | | Weighted Average | |
| | Number of Shares | | | Per Share | | Price Per Share | |
| | | | | | | | |
Outstanding, December 31, 2001 | | | 1,049,600 | | | $1.50 - $5.00 | | $ | 3.30 | |
Granted | | | 345,000 | | | 7.00 - 8.70 | | | 8.70 | |
Canceled or forfeited | | | (6,200 | ) | | 3.00 - 5.00 | | | 3.59 | |
Exercised | | | (247,500 | ) | | 1.50 - 5.00 | | | 1.93 | |
| | | | | | | | |
Outstanding, December 31, 2002 | | | 1,140,900 | | | 1.50 - 8.70 | | | 5.23 | |
Granted | | | 10,000 | | | 8.75 | | | 8.75 | |
Canceled or forfeited | | | (61,781 | ) | | 3.82 - 8.70 | | | 7.28 | |
Exercised | | | (62,819 | ) | | 1.50 - 5.00 | | | 3.38 | |
| | | | | | | | |
Outstanding, December 31, 2003 | | | 1,026,300 | | | 1.50 - 8.75 | | | 5.25 | |
Granted | | | 403,750 | | | 4.26 | | | 4.26 | |
Canceled or forfeited | | | (118,500 | ) | | 3.00 - 8.75 | | | 7.22 | |
Exercised | | | (146,300 | ) | | 1.50 - 5.00 | | | 2.92 | |
| | | | | | | | |
Outstanding, December 31, 2004 | | | 1,165,250 | | | $1.50 - $8.70 | | $ | 5.00 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Number | | | Weighted Average | | | | | Number | | | |
Range of | | Outstanding at | | | Remaining | | | Weighted Average | | | Exercisable at | | | Weighted Average | |
Exercise Prices | | December 31, 2004 | | | Contractual Life | | | Exercise Price | | | December 31, 2004 | | | Exercise Price | |
| | | | | | | | | | | | | | | |
$1.50 | | | 111,000 | | | | 1 year | | | $ | 1.50 | | | | 111,000 | | | $ | 1.50 | |
$3.00-3.82 | | | 183,000 | | | | 1 year | | | $ | 3.81 | | | | 183,000 | | | $ | 3.81 | |
$5.00 | | | 264,000 | | | | 2 years | | | $ | 5.00 | | | | 264,000 | | | $ | 5.00 | |
$5.00 | | | 6,000 | | | | 3 years | | | $ | 5.00 | | | | 6,000 | | | $ | 5.00 | |
$8.70 | | | 237,500 | | | | 3 years | | | $ | 8.70 | | | | 237,500 | | | $ | 8.70 | |
$4.26 | | | 10,000 | | | | 5 years | | | $ | 4.26 | | | | 10,000 | | | $ | 4.26 | |
$4.26 | | | 353,750 | | | | 10 years | | | $ | 4.26 | | | | 353,750 | | | $ | 4.26 | |
| | | | | | | | | | | | | | | |
| | | 1,165,250 | | | | | | | | | | | | 1,165,250 | | | | | |
| | | | | | | | | | | | | | | |
F-23
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is the weighted average fair value of warrants and options granted from stock
option plans:
Period Ending December 31, Weighted Average Fair Value
--------------------------- -----------------------------
2001 (nine months) $3.37
2002 $7.10
2003 $5.25to employees:
| | | | |
| | Weighted Average | |
Period Ending December 31, | | Fair Value | |
| | | |
2002 | | $ | 7.10 | |
2003 | | $ | 5.25 | |
2004 | | $ | 4.22 | |
Subsequent to December 31, 2003, 40,0002004, and through March 23, 2005, options on 62,700 shares were exercised for proceeds of approximately $60,000.
Options
- -------$222,000.
The Company granted 177,500 options to employees outside its stock option plans prior to March 31, 2001 with exercise prices ranging from $1.55 to $4.00 and a weighted average price per share of $2.76. These options were exercised during 2002.
At December 31, 2003, the Company had no options to employees outside of the
stock option plans.
F-34
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11-9 — Income Taxes
- ------------------------
The provision for income taxes consists of the following:
For the Years Ended For the Nine
December 31, Months Ended
-------------------------- December 31,
2003 2002 2001
------------ ------------ -------------
Current income tax expense $ - $ - $ -
Deferred income tax (benefit) expense (4,003,321) (1,226,874) 1,590,056
Change in deferred tax asset valuation
allowance 4,003,321 82,846 -
------------ ------------ -------------
Total income tax (benefit) expense $ - $(1,144,028) $ 1,590,056
============ ============ =============
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Current income tax expense | | $ | — | | | $ | — | | | $ | — | |
Deferred income tax benefit | | | (1,784,000 | ) | | | (4,003,321 | ) | | | (1,226,874 | ) |
Change in valuation allowance and other | | | 1,784,000 | | | | 4,003,321 | | | | 82,846 | |
| | | | | | | | | |
Total income tax benefit | | $ | — | | | $ | — | | | $ | (1,144,028 | ) |
| | | | | | | | | |
The effective income tax rate varies from the statutory federal income tax rate as follows:
For the Year Ended For the Nine
December 31, Months Ended
---------------------- December 31,
2003 2002 2001
---------- ---------- -------------
Federal income tax rate (34)% (34)% 34%
State income tax rate (6) (6) 6
Other temporary and permanent
differences - 1 (1)
Change in valuation allowance 40 (3) -
---------- ---------- -------------
Effective tax rate 0% (42)% 39%
========== ========== =============
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Federal income tax rate | | | (34 | )% | | | (34 | )% | | | (34 | )% |
State income tax rate | | | (6 | ) | | | (6 | ) | | | (6 | ) |
Other temporary and permanent differences | | | — | | | | — | | | | 1 | |
Change in valuation allowance and other | | | 40 | | | | 40 | | | | (3 | ) |
| | | | | | | | | |
Effective tax rate | | | 0 | % | | | 0 | % | | | (42 | )% |
| | | | | | | | | |
F-24
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The significant temporary differences and
carry forwardscarry-forwards and their related deferred tax asset (liability) and deferred tax asset valuation allowance balances are as follows:
December 31,
--------------------------
2003 2002
------------ ------------
Deferred tax assets
Accruals and impairment $ 257,000 $ 252,000
Net operating loss carry-forward 9,551,000 4,601,000
Permanent differences 366,000 202,000
Other 118,000 18,000
------------ ------------
Gross deferred tax assets 10,292,000 5,073,000
------------ ------------
Deferred tax liabilities
Intangible drilling costs 4,190,000 3,191,000
Property and equipment 682,000 682,000
------------ ------------
Gross deferred tax liabilities 4,872,000 3,873,000
------------ ------------
Net deferred tax asset 5,420,000 1,200,000
Less valuation allowance (5,420,000) (1,200,000)
------------ ------------
Deferred tax asset $ - $ -
============ ============
F-35
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | |
| | December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Deferred tax assets | | | | | | | | |
| Accruals and other | | $ | 132,000 | | | $ | 741,000 | |
| Net operating loss carry-forward | | | 10,387,000 | | | | 9,551,000 | |
| | | | | | |
| Gross deferred tax assets | | | 10,519,000 | | | | 10,292,000 | |
| | | | | | |
Deferred tax liabilities | | | | | | | | |
| Property and equipment | | | 4,694,000 | | | | 4,872,000 | |
| | | | | | |
| Gross deferred tax liabilities | | | 4,694,000 | | | | 4,872,000 | |
| | | | | | |
| Net deferred tax asset | | | 5,825,000 | | | | 5,420,000 | |
| | Less valuation allowance | | | (5,825,000 | ) | | | (5,420,000 | ) |
| | | | | | |
| Deferred tax asset | | $ | — | | | $ | — | |
| | | | | | |
For income tax purposes, the Company has approximately $24,807,000$26,979,000 of net operating loss carry-forwards expiring from 2015 through 2023.2024.
During 2004, 2003 and 2002, the Company realized certain tax benefits related to stock option plans in the amounts of $172,000, $164,000 and $232,000, respectively. Such benefits were recorded as a deferred tax asset as they increased the Company'sCompany’s net operating losses and an increase in additional paid in capital. The recognition of the valuation allowance offset the impact of this benefit.
The Company has provided for a valuation allowance of $5,420,000$5,825,000 due to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
Note 12 -10 — Commitments and Contingencies
- ---------------------------------------
Gas Gathering Contract
- ------------------------
In June 2001, the Company entered into a long-term gas gathering contract, which expires in December 2008. This contract was amended April 4, 2003. Under the amended contract, the Company will pay gas gathering fees per thousand cubic feet ("MCF"(“Mcf”) delivered. The Company is obligated to pay a fee of $.40 per MCFMcf on the first 7,500,000 MCFMcf and $.25 per MCFMcf thereafter. Additionally, the Company has an annual volume commitment for the first 3 yearscommitments starting September 1, 2001. The Company'sCompany’s minimum volume for the first three years is (i) Year one 600,000 MCF,Mcf, (ii) Year two 1,600,000 MCF,Mcf, (iii) Year three 2,000,000 MCF,Mcf, (iv) Year four 1,800,000 MCF,Mcf, and (v) Year five 1,500,000 MCF.Mcf. If the Company exceeds the minimum in any year, the excess reduces the following year'syear’s commitment. If the Company does not meet the minimum in any year, the shortfall is added to the following years and at the end of the three years, the Company haswas to pay additional costs for theany shortfall. Through December 31, 2003,2004, the Company had delivered approximately 2,060,000 MCF.3,137,000 Mcf. While the Company has failed to deliver the volumes required under the contract, the pipeline operator has also not provided the compression and gathering capabilities it was required to provide under the contract. Management has received a verbal commitment from the operator that the volume commitments will be adjusted and management does not believe there will be a contract shortfall under the renegotiated volumes and therefore, anticipates no additional costs under the contract.
Financial Consulting Agreement
- --------------------------------
F-25
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have certain lease agreements for the use of office space. The terms of the various leases extend through September 2009. The following is a schedule by year of future minimum lease obligations under operating lease arrangements at December 31, 2004:
| | | | |
Year Ending December 31, | | |
| | |
2005 | | $ | 122,413 | |
2006 | | | 111,795 | |
2007 | | | 87,743 | |
2008 | | | 18,675 | |
2009 | | | 14,175 | |
| | | |
| | $ | 354,801 | |
| | | |
Rental expense for these and other leases was $133,524, $142,926 and $103,824 for the years ended December 31, 2004, 2003 and 2002, respectively.
| |
| Financial Consulting Agreement |
In July 2003 the Company entered into aan eighteen month financial consulting agreement with a related party. The Company issued options to purchase 125,000 shares of common stock that were valued at approximately $1,094,000 using the Black-Scholes valuation model, as compensation for entering into the agreement.
(Seeagreement (see Note 9)7.) The related party helped facilitate the $3,850,000 bridge loan that was obtained in July 2003.
Labarge Evaluation and Development Agreement
- ------------------------------------------------
In December 2003, the Company entered into an agreement with both Schlumberger
Technology Corporation and Red Oak Capital Management LLC to develop its Labarge
coal bed methane project.
The
agreement provides for the completion or
recompletion of five to ten of the Company's existing well bores, the
anticipated drilling of ten new wells in 2004, and the anticipated drilling of
twenty wells in each of the years 2005 through 2008.
F-36
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the success of the initial completion program, and after each yearly
development phase, the project will be evaluated for continuation. Work on the
existing well bores began in January 2004 and is expected to be completed in the
second quarter of 2004.
Schlumberger has the exclusive right to provide completion services and supplies
for each development phase and Red Oak has the exclusive right to finance a
portion of the cost of wells drilled in the 2004, 2005 and 2006 drilling phases.
The Company will be required to finance approximately 50% of the drilling and
other costs for each phase.
Payment for the services provided by Schlumberger and Red Oak will be made from
net proceeds, after operating costs from the wells completed or re-completed in
each development phase. This method of payment for the services provided
results in a substantial portion of the net profits from the wells included in
each bundle being paid to Schlumberger and Red Oak until the obligation on each
bundle is satisfied. The agreement is secured by a pledge of the wells
completed or recompleted, and does not burden the ownership of or profits from
any other assets of the Company.
The Company has approximately $9,399,000 invested in unproved oil and gas
properties not subject to amortization on the Labarge project and expects to
incur approximately an additional $3,600,000 in costs during 2004 under the
agreement to evaluate and explore the property. At the conclusion of the 2004
evaluation and exploration activity, a significant portion of the investment in
unproved oil and gas properties will be reclassified to the full cost pool
subject to depletion and the ceiling test. If proved reserves are not found or
if reserves are not significant, the Company could be required to write-down a
portion of the full cost pool of oil and gas properties.
Regulations
- -----------
The Company'sCompany’s oil and gas operations are subject to various Federal, state and local laws and regulations. The Company could incur significant expense to comply with new or existing laws and non-compliance could have a material adverse effect on the Company'sCompany’s operations.
Environmental
- ------------- The Company uses injection wells to dispose of water into underground rock formations. If future wells produce water of lesser quality than allowed under state laws or if water is produced at rates greater than can be injected, the Company could incur additional costs to dispose of its water.
| |
| Fixed Price Delivery Contracts |
The Company entered into fixed price delivery contracts for natural gas from April 1, 2004 through March 31, 2006. See Note 13 -1.
Note 11 — Retirement Plan
- -------------------------
The Company has a 401(k) plan covering substantially all of the employees of the oil field services subsidiary. There were no Company contributions made to the plan during the year ended December 31, 2003 and 2002 and the nine months ended
December 31, 2001.2002. Effective January 1, 2004, the Company began matching, dollar for dollar, employee contributions up to 4% of their gross pay. At the current
rateThe Company expensed $111,739 of participation, this benefit will cost the Company approximately $105,000such contributions during 2004.
F-26
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 14 -12 — Industry Segments
- ---------------------------
The Company reports segment information in accordance with SFAS NoNo. 131, “Disclosures about Segments of an Enterprise and Related Information”, which requires disclosure of information related to certain operating segments of the Company.
The Company'sCompany’s operations have been classified into two industry segments: (i) Oil Field Services; and (ii) Oil and Gas Production. The Oil Field Services segment of the Company is directed at maintainingservices associated with the drilling and enhancing production
obtained fromcompletion of oil and gas wells, including cementing, acidizing, fracturing, nitrogen pumping and currentlywater hauling and has operations in Kansas, Oklahoma, and Wyoming. The Oil and Gas Production segment of the Company has
acquired interestsis engaged in undeveloped leaseholdsthe acquisition, exploration, development and production of natural gas and crude oil in Wyoming, Colorado, Texas and KansasWyoming.
The Oil Field Services segment had eliminated inter-company sales of
which a portion have been developed into producing properties.
F-37
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil Field Oil & Gas Corporate and
Services Production Other Total
----------- ------------- --------------- ------------
Revenue
December 31, 2001 (nine months) $ 9,853,624 $ 1,759,095 $ - $11,612,719
December 31, 2002 8,570,631 2,367,713 - 10,938,344
December 31, 2003 11,634,457 6,589,281 - 18,223,738
Depreciation, amortization, depletion
and impairment (1)
December 31, 2001 (nine months) 842,694 136,649 631,518 1,610,861
December 31, 2002 1,485,495 273,936 223,155 1,782,586
December 31, 2003 1,420,952 1,561,247 92,048 6,049,247
Ceiling write-down
December 31, 2001 (nine months) - - - -
December 31, 2002 - - - -
December 31, 2003 - 2,975,000 - 2,975,000
Operating income (loss)
December 31, 2001 (nine months) 2,163,119 143,118 (841,432) 1,464,805
December 31, 2002 37,285 (299,079) (1,670,865) (1,932,659)
December 31, 2003 1,411,218 (1,629,866) (2,061,353) (2,280,001)
Total assets, net
December 31, 2002 9,967,770 35,566,847 7,595,652 53,130,269
December 31, 2003 9,069,144 40,220,115 5,977,019 55,266,278
Capital expenditures
December 31, 2001 (nine months) 2,524,719 7,982,573 7,710 10,515,002
December 31, 2002 1,561,357 14,695,044 865,505 17,121,906
December 31, 2003 459,820 6,175,325 197,567 6,832,712
____________________
(1) Excludes amortization of loan costs included in interest expense in the
accompanying consolidated statements of operations.
approximately $2,100,000 in 2002 and less than $20,000 during 2003. There were no such sales in 2004. | | | | | | | | | | | | | | | | |
| | Oil Field | | | Oil & Gas | | | Corporate and | | | |
| | Services | | | Production | | | Other | | | Total | |
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | |
December 31, 2002 | | $ | 8,570,631 | | | $ | 2,367,713 | | | $ | — | | | $ | 10,938,344 | |
December 31, 2003 | | | 11,634,457 | | | | 6,589,281 | | | | — | | | | 18,223,738 | |
December 31, 2004 | | | 14,720,979 | | | | 6,267,453 | | | | — | | | | 20,988,432 | |
Depreciation, depletion, amortization and accretion | | | | | | | | | | | | | | | | |
December 31, 2002 | | | 1,485,495 | | | | 273,936 | | | | 23,155 | | | | 1,782,586 | |
December 31, 2003 | | | 1,420,952 | | | | 1,561,247 | | | | 92,048 | | | | 3,074,247 | |
December 31, 2004 | | | 1,450,450 | | | | 3,611,056 | | | | 136,475 | | | | 5,197,981 | |
Ceiling write-down | | | | | | | | | | | | | | | | |
December 31, 2002 | | | — | | | | — | | | | — | | | | — | |
December 31, 2003 | | | — | | | | 2,975,000 | | | | — | | | | 2,975,000 | |
December 31, 2004 | | | — | | | | 4,100,000 | | | | — | | | | 4,100,000 | |
Operating income (loss) | | | | | | | | | | | | | | | | |
December 31, 2002 | | | 37,285 | | | | (299,079 | ) | | | (1,670,865 | ) | | | (1,932,659 | ) |
December 31, 2003 | | | 1,411,218 | | | | (1,629,866 | ) | | | (2,061,353 | ) | | | (2,280,001 | ) |
December 31, 2004 | | | 2,669,319 | | | | (4,823,147 | ) | | | (2,144,479 | ) | | | (4,298,307 | ) |
Total assets, net | | | | | | | | | | | | | | | | |
December 31, 2003 | | | 9,069,144 | | | | 40,220,115 | | | | 5,977,019 | | | | 55,266,278 | |
December 31, 2004 | | | 10,972,094 | | | | 48,001,256 | | | | 5,074,913 | | | | 64,048,263 | |
Capital expenditures | | | | | | | | | | | | | | | | |
December 31, 2002 | | | 1,561,357 | | | | 14,695,044 | | | | 865,505 | | | | 17,121,906 | |
December 31, 2003 | | | 459,820 | | | | 6,076,125 | | | | 197,567 | | | | 6,733,512 | |
December 31, 2004 | | | 2,246,622 | | | | 15,652,421 | | | | 52,921 | | | | 17,951,964 | |
Note 15 -13 — Significant Customers
- -------------------------------
During the nine months ended December 31, 2001,2004, the Company had oil field service sales to twothree unrelated third parties of approximately $2,640,000,$4,980,000, representing approximately 23% of net sales. During the year ended December 31,
2002, the Company had oil field service sales to one unrelated third party of
approximately $1,569,000, representing approximately 14%34% of net sales. In addition, during 2002,2004, the Company sold 89%approximately $6,209,000 or 99% of its oil and gas revenue to threetwo unrelated companies.customers.
F-27
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended December 31, 2003, the Company had oil field service sales to one unrelated third party of approximately $1,150,000, representing approximately 10% of net sales. In addition, during 2003, the Company sold approximately $6,453,000 or 98% of its oil and gas revenue, to two unrelated customers.
During 2002, the Company had oil field service sales to one unrelated third party of approximately $1,569,000, representing approximately 14% of net sales. In addition, during 2002, the Company sold approximately $2,107,000 or 89% of its oil and gas revenue to three unrelated companies.
Receivables outstanding
from theat December 31,
2004 and 2003
and 2002from significant customer sales were approximately
$1,879,000 and $529,000,
or 53% and
$586,000,30% of total accounts receivable at such date, respectively.
F-38
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Fair Value of Financial Instruments
- --------------------------------------------- | |
Note 14 — | Fair Value of Financial Instruments |
The carrying value of the Company'sCompany’s cash balance, accounts receivable, accounts payable and accrued expensesliabilities represents the fair value of the accounts as of
December 31, 2003 and 2002.accounts. The fair value of the Company'sCompany’s long-term debt with financial institutions and equipment financing companies approximates the carrying value because (i) interest rates are variable or (ii) the debt instruments were executed at rates comparable to current rates for similar notes. The fair value of the Company'sCompany’s other long-term debt obligations cannot be determined due to the nature of the transactions which created the debt, and comparable market value information is not readily determinable without incurring excessive costs. See Note 97 for the terms of the long-term debt obligations.
Note 17 - Earnings Per Share
- ----------------------------
At
| |
Note 15 — | Earnings Per Share |
For the years ended December 31,
2004, 2003 and 2002, all potential Company shares of common stock are anti-dilutive.
At December 31, 2001, the following shows the amounts used in
computing earnings per share and the effects on income and the weighted average
number of shares of dilutive potential common stock:
Weighted Average
Income Common Shares Earnings Per
Numerator Denominator Share
------------ ---------------- -------------
Basic earnings per share (December 31, 2001)
Income available to common stockholders $2,540,395 6,501,104 $ .39
=============
Plus: Impact of assumed conversion of warrants and
options - 455,816
Impact of assumed conversion of 8%
subordinated convertible notes -* 9,002
---------- ----------------
Diluted earnings per share $2,540,395 6,965,922 $ .37
========== ================ =============
____________________
* Interest on 8% subordinated convertible notes was capitalized.
As of December 31, 2004, 2003, 2002 and 2001,2002, the impact of 5,320,892, 4,991,746, 4,473,413 and 344,090,4,473,413, respectively, of potential shares of common stock were not included because their effect was anti-dilutive.
See Note 18- Subsequent Events
- --------------------------
In8 and Note 16 regarding options and warrants issued in 2005.
| |
Note 16 — | Subsequent Event |
| |
| Senior Secured Notes Facility |
On January 2004,13, 2005, the Company issued 1,000,000entered into a securities purchase agreement (the “Senior Secured Notes Facility”) with affiliates of Promethean Asset Management, LLC and Angelo, Gordon & Co., L.P. (collectively, the “Buyers”), pursuant to which Infinity sold, and the Buyers purchased, $30 million aggregate principal amount of senior secured notes (the “Notes”) due January 13, 2009 and five-year warrants to purchase 924,194 shares of common stock at $4.00an exercise price of $9.09 per share and 732,046 shares of common stock at an exercise price of $11.06 per share (collectively, the “Warrants”). The Notes have an initial maturity of 48 months subject to extension for an additional twelve months upon the mutual agreement of Infinity and the Buyers. The Notes bear interest at 3-month LIBOR (London Interbank Offered Rate) plus 675 basis points, adjusted the first business day of each calendar quarter. The Notes are secured by essentially all of the assets of Infinity and its subsidiaries and are guaranteed by each of Infinity’s active subsidiaries. The Notes are redeemable by Infinity for cash at any time during the first year at 105% of par value, declining by 1% per year thereafter (101% during any extended maturity period), together with any accrued and unpaid interest. Under certain circumstances, Infinity has the option to repay the Notes with direct issuances of shares of registered common stock in lieu of cash.
At quarterly intervals and over a private placement.three-year period, commencing in the third quarter of 2005, Infinity has the option to sell additional notes (the “Additional Notes”), along with additional warrants, in amounts of up to $15 million in any rolling twelve-month period and up to a maximum of $45 million. The CompanyAdditional Notes would have an initial maturity of 42 months (54 months if the maturity of the initial Notes is extended). The
F-28
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
issuance of Additional Notes is subject to Infinity’s future satisfaction of various closing conditions. The ability to issue Additional Notes or the requirement to prepay Notes prior to maturity will depend upon a maximum Notes balance calculated quarterly based generally upon a combination of the financial performance of Consolidated Oil Well Services, Inc. and the SEC after-tax PV-10% value of the Company’s proved reserves.
In connection with the issuance of the Notes and Warrants, Infinity also entered into a registrations rights agreement with the Buyers pursuant to which Infinity agreed to file a shelf registration statement covering resales of the ordinary shares issuable upon exercise of the Warrants.
The Securities Purchase Agreement dated as of January 13, 2005 by and among Infinity and the Buyers of the Notes includes a covenant that at each date that is the end of a quarterly or annual period covered by a quarterly report on Form 10-Q or annual report on Form 10-K (a “Determination Date”), at least 20% of the Company’s estimate of its oil and gas production for the 12-month period commencing immediately after such Determination Date shall be protected from price fluctuations using derivatives, fixed price agreements and/or volumetric production payments.
Infinity used
$750,000approximately $9.2 million of the proceeds from the
private placement, plus 125,000 sharessale of
common stock valued at $4.00 per
sharethe Notes and Warrants to repay all amounts outstanding pursuant to a Loan and Security Agreement between LaSalle Bank N.A. and Consolidated, a Credit Agreement between U.S. Bank National Association and Infinity-Wyoming, and certain other secured lending agreements, and those credit agreements have been terminated. See Note 7 to the Consolidated Financial Statements. Infinity is using the remainder of the proceeds to pay
down a portioncosts and expenses related to the sale of the
$3,000,000 bridge loan (See Note 9).
In February 2004, the Company entered into a $250,000 note agreement with a
bank. The proceeds of the loan were usedNotes and Warrants and to
pay outstanding payables. The note
bears interest at 6.25%fund its oil and
is due in 10 monthly installments of $25,000 plus
interest. In addition, the Company financed $169,532 of 2003gas exploration and
2004 payables
related to drilling wells at Pipeline, into a 1-year note payable. The note
bears interest at 6.5% and is due in monthly installments of $14,623, including
interest through February 2005.
During 2004, the Company entered into fixed price delivery contracts for 2,000
MMBTU per day from April 1, 2004 until March 31, 2006. The price for the period
April 1, 2004 until March 31, 2005 is $4.40 per MMBTU and the price for the
period April 1, 2005 until March 31, 2006 is $4.15 per MMBTU.
F-39
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to obtaining the new contracts, the Company was required to obtain a
$300,000 letter-of-credit with a bank. The Company paid back $400,000 on the
$5,500,000 outstanding on its bank credit facility in order to allow for the
letter-of-credit under the current borrowing base.
In March, 2004 the Company acquired an additional working interest in two
partner operated wells and 960 gross acres of leasehold immediately offsetting
the Pipeline field. The purchase increased the Company's working interest in
the wells to 50% from an approximate 1.5% interest at December 31, 2003 and the
Company assumed operations on the properties.
Note 19 - Supplemental Oil and Gas Information (Unaudited)
- ----------------------------------------------------------
Proved Oil and Gas Reserves (Unaudited)
- --------------------------------------------development activities. | |
Note 17 — | Supplemental Oil and Gas Information |
| |
| Proved Oil and Gas Reserves (Unaudited) |
The following information was developed from reserve reports prepared by independent reserve engineers:
Natural Gas Crude Oil
(MCF) (Barrels)
------------ ----------
Proved reserves as of March 31, 2001 9,144,761 444,573
Revisions of previous estimates 208,837 (277,120)
Production (128,998) (29,289)
------------ ----------
Proved reserves as of December 31, 2001 9,224,600 138,164
Sales or other deletions - (128,788)
Revisions of previous estimates (2,042,255) 85,277
Extension, discoveries and other additions 84,284,734 14,169
Production (676,879) (53,122)
------------ ----------
Proved reserves as of December 31, 2002 95,790,200 182,700
Revisions of previous estimates (90,374,776) 1,990
Extension, discoveries and other additions 3,175,927 66,102
Production (1,080,456) (57,684)
------------ ----------
Proved reserves as of December 31, 2003 7,510,895 193,138
============ ==========
| | | | | | | | |
| | Natural Gas | | | Crude Oil | |
| | (Mcf) | | | (Barrels) | |
| | | | | | |
Proved reserves as of December 31, 2001 | | | 9,224,600 | | | | 138,164 | |
Sales or other deletions | | | — | | | | (128,788 | ) |
Revisions of previous estimates | | | (2,042,255 | ) | | | 85,277 | |
Extension, discoveries and other additions | | | 89,284,734 | | | | 141,169 | |
Production | | | (676,879 | ) | | | (53,122 | ) |
| | | | | | |
Proved reserves as of December 31, 2002 | | | 95,790,200 | | | | 182,700 | |
Revisions of previous estimates | | | (90,374,776 | ) | | | 1,991 | |
Extension, discoveries and other additions | | | 3,175,927 | | | | 66,102 | |
Production | | | (1,080,456 | ) | | | (57,654 | ) |
| | | | | | |
Proved reserves as of December 31, 2003 | | | 7,510,895 | | | | 193,139 | |
Purchases of reserves in place | | | 1,476,067 | | | | — | |
Revisions of previous estimates | | | (1,230,288 | ) | | | 16,535 | |
Extension, discoveries and other additions | | | 1,239,700 | | | | 17,571 | |
Production | | | (953,428 | ) | | | (33,668 | ) |
| | | | | | |
Proved reserves as of December 31, 2004 | | | 8,042,946 | | | | 193,577 | |
| | | | | | |
F-29
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The 2003 revision to the previous estimate of reserves is due primarily to the following factors:
- operational issues at the existing Labarge wells;
- a lack of financial resources to rectify the operational issues on a
timely basis or to complete exploration on other wells; and
-
| | |
| • | operational issues at the existing Labarge wells; |
|
| • | a lack of financial resources to rectify the operational issues on a timely basis or to complete exploration on other wells; and |
|
| • | geological studies that indicate the producing Pipeline wells were producing from the sands rather than the coals thus leading the Company to change the classification of Pipeline from a coal play to a sand play. |
Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
There are uncertainties inherent in estimating quantities of proved oil and gas reserves, projecting future production rates, and timing of development expenditures. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered.
All proved reserves are located in the United States.
F-40
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proved Developed Oil and Gas Reserves
- ------------------------------------------ | |
| Proved Developed Oil and Gas Reserves (Unaudited) |
The following information sets forth the estimated quantities of proved developed oil and gas reserves of the Company as of the end of each year.
| | | | | | | | |
| | | | Crude Oil and | |
| | Natural Gas | | | Condensate | |
Proved Developed Reserves | | (Mcf) | | | (Barrels) | |
| | | | | | |
December 31, 2002 | | | 38,590,600 | | | | 182,700 | |
December 31, 2003 | | | 4,724,523 | | | | 124,968 | |
December 31, 2004 | | | 3,773,033 | | | | 117,031 | |
--------------
Crude | |
| Costs Incurred in Oil and Natural Gas Condensate
(MCF) (Barrels)
------------ --------------
Proved Developed Reserves
-------------------------
December 31, 2001 4,112,300 138,864
December 31, 2002 38,590,600 182,700
December 31, 2003 4,724,523 124,968
Activities |
Costs Incurred in Oil and Gas Activities
- ---------------------------------------------- Costs incurred in connection with the
Company'sCompany’s oil and gas acquisition, exploration and development activities are shown below.
For the Nine
For the Years Ended Months Ended
December 31, December 31,
----------------------- -------------
2003 2002 2001
---------- ----------- -------------
Property acquisition costs
Proved $1,099,120 $ 72,383 $ 223,319
Unproved 661,224 2,279,587 1,291,126
---------- ----------- -------------
Total property acquisition costs 1,760,344 2,351,970 1,514,445
Development costs 3,167,700 786,095 721,760
Exploration costs 3,491,953 11,955,351 6,957,735
---------- ----------- -------------
Total costs $8,419,997 $15,093,416 $ 9,193,940
========== =========== =============
F-41
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Property acquisition costs | | | | | | | | | | | | |
| Proved | | $ | 516,239 | | | $ | 1,099,120 | | | $ | 72,383 | |
| Unproved | | | 3,717,280 | | | | 661,224 | | | | 2,279,587 | |
| | | | | | | | | |
| | Total property acquisition costs | | | 4,233,519 | | | | 1,760,344 | | | | 2,351,970 | |
Development costs | | | 6,156,131 | | | | 3,167,700 | | | | 786,095 | |
Exploration costs | | | 5,294,148 | | | | 3,491,953 | | | | 11,955,351 | |
| | | | | | | | | |
Total costs | | $ | 15,683,798 | | | $ | 8,419,997 | | | $ | 15,093,416 | |
| | | | | | | | | |
F-30
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Aggregate Capitalized Costs
- -----------------------------— (Continued)
| |
| Aggregate Capitalized Costs |
Aggregate capitalized costs relating to the Company'sCompany’s oil and gas producing activities, and related accumulated depreciation, depletion, amortization and ceiling write-down are as follows:
| | | | | | | | | |
| | As of December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Proved oil and gas properties | | $ | 41,210,195 | | | $ | 28,194,858 | |
Unproved oil and gas properties | | | 15,595,508 | | | | 12,715,834 | |
| | | | | | |
| Total | | | 56,805,703 | | | | 40,910,692 | |
Less accumulated depreciation, depletion, and amortization and ceiling write-down | | | (12,418,315 | ) | | | (4,748,515 | ) |
| | | | | | |
Net capitalized costs | | $ | 44,387,388 | | | $ | 36,162,177 | |
| | | | | | |
For the Nine
For the Years Ended Months Ended
December 31, December 31,
------------ ------------ --------------
2003 2002 2001
------------ ------------ --------------
Proved oil and gas properties $28,194,858 $19,411,845 $ 5,009,661
Unproved oil and gas properties (1) 12,815,834 $13,176,850 12,404,906
------------ ------------ --------------
Total 41,010,692 32,588,645 17,414,567
Less accumulated depreciation,
depletion, amortization and
ceiling write-down (4,748,515) (304,418) (223,706)
------------ ------------ --------------
Net capitalized costs $36,262,177 $32,284,277 $ 17,190,861
============ ============ ==============
| |
| Costs Not Being Amortized |
(1) 2003 includes approximately $885,000 in unproved oil Oil and gas propertiesproperty costs not being amortized at December 31, 2004, by year that the costs were incurred are as follows:
| | | | |
Year Ended December 31, | | |
| | |
2004 | | $ | 6,700,461 | |
2003 | | | 1,644,654 | |
2002 and prior | | | 7,250,393 | |
| | | |
Total costs not being amortized | | $ | 15,595,508 | |
| | | |
Unevaluated costs include $6,063,000 relating to our prospect in the Fort Worth Basin of North Central Texas. During 2004, the Company acquired interests in approximately 32,000 acres in the Fort Worth Basin of North Central Texas. In October 2004, the Company commenced the drilling of several exploratory gas wells. Approximately $3,600,000 associated with wells in progress is expected to be classified as evaluated during 2005.
Unevaluated costs include $6,933,000 relating to our Labarge prospect in Southwest Wyoming. Substantially all of the acreage in the prospect is subject to an ongoing Bureau of Land Management environmental impact statement (“EIS”). The EIS must be completed before the Company can continue development. Approximately $2,100,000 associated with wells in progress is expected to be classified as evaluated during 2005.
Unevaluated costs include approximately $925,000 relating to our concessions offshore Nicaragua. The Company expects to execute a definitive exploration and production contract covering the approximate 1,400,000 acres during 2005.
F-31
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Capitalized Financing Costs |
From inception through December 31, 2003,2004 the Company has capitalized the following financing costs related to properties not subject to amortization. As these properties are developed, the costs are transferred to properties subject to amortization:
| | | | | | | | |
| | As of December 31, | |
| | | |
| | 2004 | | | 2003 | |
| | | | | | |
Beneficial conversion feature related to the 8% subordinated convertible notes | | $ | 1,165,500 | | | $ | 1,165,500 | |
Capitalized interest | | | 2,880,608 | | | | 2,246,019 | |
Capitalized amortization of loan costs | | | 5,440,961 | | | | 4,885,586 | |
| | | | | | |
Total capitalized finance costs | | $ | 9,487,069 | | | $ | 8,297,105 | |
| | | | | | |
December 31,
----------------------
2003 2002
---------- ----------
Beneficial conversion feature related to the
8% subordinated convertible notes $1,165,500 $1,165,500
Capitalized interest 2,246,019 1,863,783
Capitalized amortization of loan costs 4,885,586 2,170,612
---------- ----------
Total capitalized finance costs $8,297,105 $5,199,895
========== ==========
| |
| Oil and Gas Operations |
Oil and Gas Operations
- ------------------------- Aggregate results of operations in connection with the
Company'sCompany’s oil producing activities are shown below:
For the Years Ended For the Nine
-------------------------- Months Ended
December 31, December 31,
-------------------------- --------------
2003 2002 2001
------------ ------------ --------------
Revenue $ 6,589,281 $ 2,367,713 $ 1,759,095
Production costs and taxes 2,920,493 (1,820,692) (1,140,750)
Depreciation, depletion,
amortization and ceiling write-down (4,442,097) (196,627) (130,232)
------------ ------------ --------------
Results of operations from producing
activities (excluding corporate
overhead and interest costs) $ (773,309) $ 350,394 $ 488,113
============ ============ ==============
F-42
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Revenue | | $ | 6,267,453 | | | $ | 6,589,281 | | | $ | 2,367,713 | |
Production costs and taxes | | | (2,635,892 | ) | | | (2,920,493 | ) | | | (1,820,692 | ) |
Depreciation, depletion, amortization, accretion and ceiling write-down | | | (7,677,968 | ) | | | (4,442,097 | ) | | | (196,627 | ) |
| | | | | | | | | |
Results of operations from producing activities (excluding corporate overhead and interest costs) | | $ | (4,046,407 | ) | | $ | (773,309 | ) | | $ | 350,394 | |
| | | | | | | | | |
Depletion per Mcf equivalent | | $ | 3.06 | | | $ | 0.92 | | | $ | 1.11 | |
| | | | | | | | | |
F-32
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
- --------------------------------------------------------------------------------
and Gas Reserves (Unaudited)
- -------------------------------— (Continued)
| |
| Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited) |
The following information is based on the
Company'sCompany’s best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of December 31,
2004, 2003,
2002 and
20012002, as required by SFAS
NoNo. 69. The Statement requires the use of a 10 percent discount rate. This information
isdoes not
represent the fair market value nor
does it represent the expected present value of future cash flows of the
Company'sCompany’s proved oil and gas reserves.
As of December 31,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
Future cash inflows $ 51,591,800 $ 303,392,537 $ 27,499,212
Future production costs (16,204,800) (109,060,912) (11,493,932)
Future development costs (2,912,800) (16,424,600) (500,000)
Future income tax expense (2,765,267) (59,269,174) (5,969,531)
------------- -------------- -------------
Future net cash flows 29,708,938 118,637,851 9,535,749
10% annual discount for
estimated timing on cash flows (8,887,283) (63,585,181) (3,913,266)
------------- -------------- -------------
Standardized measure of
discounted future cash flows $ 20,821,655 $ 55,052,670 $ 5,622,483
============= ============== =============
| | | | | | | | | | | | |
| | As of December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Future cash inflows | | $ | 56,584,600 | | | $ | 51,591,800 | | | $ | 303,392,537 | |
Future production costs | | | (18,552,100 | ) | | | (16,204,800 | ) | | | (109,060,912 | ) |
Future development costs | | | (3,450,000 | ) | | | (2,912,800 | ) | | | (16,424,600 | ) |
Future income tax expense | | | (399,302 | ) | | | (2,765,262 | ) | | | (59,269,174 | ) |
| | | | | | | | | |
Future net cash flows | | | 34,183,198 | | | | 29,708,938 | | | | 118,637,851 | |
10% annual discount for estimated timing on cash flows | | | (10,470,718 | ) | | | (8,887,283 | ) | | | (63,585,181 | ) |
| | | | | | | | | |
Standardized measure of discounted future cash flows | | $ | 23,712,480 | | | $ | 20,821,655 | | | $ | 55,052,670 | |
| | | | | | | | | |
Future cash inflows are computed by applying a
year end weighted averageyear-end spot market gas price and oil price for the areas of production. The following table shows the prices that have been used for each
of the periods:
As of December 31,
------------------------
2003 2002 2001
------ ------ --------
Weighted average gas price per MCF $ 6.06 $ 3.11 $ 2.74
Weighted average oil price per barrel $31.34 $31.20 $ 16.71
period: | | | | | | | | | | | | |
| | As of December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Weighted average gas price per Mcf | | $ | 6.07 | | | $ | 6.06 | | | $ | 3.11 | |
Weighted average oil price per barrel | | $ | 40.25 | | | $ | 31.34 | | | $ | 31.20 | |
A subsequent decline in prices received for oil and gas sales from those used to compute cash inflows ($6.53 per Mcf and $54.55 per barrel at March 15, 2005) could result in a requirement that the Company recognize a ceiling write-down to oil and gas properties in a future period. See also Note 1 to the Consolidated Financial Statements.
Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the
Company'sCompany’s proved oil and gas reserves at December 31,
2004, 2003
2002 and
20012002 assuming continuation of existing economic conditions.
F-43
F-33
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following reconciles the change in the standardized measure of discounted future net cash flow:
For the Nine
For the Years Ended Months Ended
December 31, December 31,
----------------------------- --------------
2003 2002 2001
-------------- ------------- --------------
Beginning of period $ 55,052,670 $ 5,622,483 $ 13,009,222
Extensions, discoveries and other
additions 9,004,500 77,054,495 -
Sales and transfers - (547,245) -
Net change in sales and transfer
prices, net of production costs 76,822,907 371,265 (7,315,638)
Revision of previous quantity
estimates (170,455,255) (1,590,027) (753,656)
Development costs incurred during
the period 976,462 786,095 -
Sales of oil and gas, net of
production costs and taxes (3,678,788) (547,021) (618,345)
Changes in future development costs 13,143,811 (252,092) -
Net change in income taxes 26,834,091 (25,423,023) -
Changes in production rates and
other 4,718,632 (1,337,938) -
Accretion of discount 8,392,625 915,698 1,300,900
-------------- ------------- --------------
End of period $ 20,821,655 $ 55,052,670 $ 5,622,483
============== ============= ==============
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | | |
| | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | |
Beginning of period | | $ | 20,821,655 | | | $ | 55,052,670 | | | $ | 5,622,483 | |
Extensions, discoveries and other additions | | | 2,911,800 | | | | 9,004,500 | | | | 77,054,495 | |
Purchases of reserves in place | | | 2,839,535 | | | | — | | | | — | |
Sales and transfers | | | — | | | | — | | | | (547,245 | ) |
Net change in sales and transfer prices, net of production costs | | | (4,117,528 | ) | | | 76,822,907 | | | | 371,265 | |
Revision of previous quantity estimates | | | 241,269 | | | | (170,455,255 | ) | | | (1,590,027 | ) |
Development costs incurred during the period | | | 5,023,365 | | | | 976,462 | | | | 786,095 | |
Sales of oil and gas, net of production costs and taxes | | | (3,631,561 | ) | | | (3,678,788 | ) | | | (547,021 | ) |
Changes in future development costs | | | (3,025,685 | ) | | | 13,143,811 | | | | (252,092 | ) |
Net change in income taxes | | | 1,816,525 | | | | 26,834,091 | | | | (25,423,043 | ) |
Changes in production rates and other | | | (1,461,405 | ) | | | 4,718,632 | | | | (1,337,938 | ) |
Accretion of discount | | | 2,294,510 | | | | 8,402,625 | | | | 915,698 | |
| | | | | | | | | |
End of period | | $ | 23,712,480 | | | $ | 20,821,655 | | | $ | 55,052,670 | |
| | | | | | | | | |
Future income tax expenses are computed by applying the appropriate period-end statutory tax rates to the future pretax net cash flow relating to the
Company'sCompany’s proved oil and gas reserves, less the tax basis of the properties involved. The future income tax expenses do not give effect to tax credits, allowances, or the impact of general and administrative costs of ongoing operations relating to the
Company'sCompany’s proved oil and gas reserves.
F-44
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 -18 — Quarterly Consolidated Financial Information (Unaudited)
- ------------------------------------------------------------------
The following table provides selected quarterly consolidated financial results for the years ended December 31,
20032004 and
2002:
Quarter
----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
($ in thousands, except per share information)
2003
- ----
Total revenue $ 3,605 $ 5,003 $ 5,241 $ 4,375
Gross profit $ 1,450 $ 2,706 $ 2,764 $ 2,160
Net (loss) income $ (622) $ (224) $ (4,525) $ (4,554)
(Loss) earning per share $ (0.08) $ (0.03) $ (0.55) $ (0.57)
(Loss) earning per fully diluted share $ (0.08) $ (0.03) $ (0.55) $ (0.57)
2002
- ----
Total revenue (1) $ 2,126 $ 2,580 $ 2,817 $ 3,415
Gross profit (1) $ 808 $ 1,023 $ 1,163 $ 1,503
Net (loss) income $ (308) $ (415) $ (294) $ (540)
(Loss) earning per share $ (0.05) $ (0.06) $ (0.04) $ (0.07)
(Loss) earning per fully diluted share $ (0.05) $ (0.06) $ (0.04) $ (0.07)
========== ========== ========== ==========
- -------------------
(1) Includes the following reclassifications of other revenue and other costs
of revenue to interest and other income as reflected in the following
table:
Quarter
---------------------------------------------
First Second Third Fourth
--------- ---------- ---------- ----------
($ in thousands, except per share information)
Total 2002 revenue as previously reported $ 2,126 $ 2,583 $ 2,822 $ 3,420
Reclassifications $ - $ (3) $ (5) $ (5)
--------- ---------- ---------- -----------
Total 2002 revenue $ 2,126 $ 2,580 $ 2,817 $ 3,415
========= ========== ========== ===========
2002 Gross profits as previously reported $ 800 $ 1,016 $ 1,156 $ 1,504
Reclassifications $ 8 $ 7 $ 7 $ (1)
--------- ---------- ---------- -----------
2002 Gross profit $ 808 $ 1,023 $ 1,163 $ 1,503
========= ========== ========== ===========
F-45
2003. | | | | | | | | | | | | | | | | |
| | Quarter | |
| | | |
| | First | | | Second | | | Third | | | Fourth | |
| | | | | | | | | | | | |
| | ($ in thousands, except per share information) | |
2004 | | | | | | | | | | | | | | | | |
Total revenue | | $ | 3,567 | | | $ | 5,045 | | | $ | 6,606 | | | $ | 5,770 | |
Gross profit | | $ | 1,628 | | | $ | 2,518 | | | $ | 3,542 | | | $ | 2,774 | |
Net (loss) income | | $ | (1,765 | ) | | $ | (1,102 | ) | | $ | 3,121 | | | $ | (4,887 | ) |
(Loss) earning per share | | $ | (0.19 | ) | | $ | (0.12 | ) | | $ | 0.33 | | | $ | (0.49 | ) |
(Loss) earning per diluted share | | $ | (0.19 | ) | | $ | (0.12 | ) | | $ | 0.29 | | | $ | (0.49 | ) |
2003 | | | | | | | | | | | | | | | | |
Total revenue | | $ | 3,605 | | | $ | 5,003 | | | $ | 5,241 | | | $ | 4,375 | |
Gross profit | | $ | 1,450 | | | $ | 2,706 | | | $ | 2,764 | | | $ | 2,160 | |
Net (loss) income | | $ | (622 | ) | | $ | (224 | ) | | $ | (4,525 | ) | | $ | (4,554 | ) |
(Loss) earning per share | | $ | (0.08 | ) | | $ | (0.03 | ) | | $ | (0.55 | ) | | $ | (0.57 | ) |
(Loss) earning per diluted share | | $ | (0.08 | ) | | $ | (0.03 | ) | | $ | (0.55 | ) | | $ | (0.57 | ) |
F-34
INFINITY, INCINC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recorded full cost ceiling writedowns during the fourth quarters of 2004 and 2003, of $4,100,000 and $2,975,000, respectively.
Note 21 -19 — Schedule of Condensed Financial Information
- -----------------------------------------------------
The oil and gas production subsidiary of the Company that owns more than 25% of the net assets of the Company iswas restricted from distributing more than $300,000 to the parent at December 31, 20032004 under the $25,000,000 development credit facility executed in September 2003. However as such credit facility was repaid in full and terminated on January 13, 2005; the restriction is no longer applicable. Accordingly, the condensed balance sheet, statement of operations and cash flow statement for the parent are beinghave not been provided as of and for the period ended December 31, 2003. There were no
restrictions on the distribution of dividends to the parent by the subsidiary in
the prior two periods.
2004.
F-35
EXHIBIT INDEX
INFINITY, INC. CONDENSED BALANCE SHEET
December 31, 2003
ASSETS
Current assets
Cash | | | | |
Exhibit | | | |
Number | | | Description of Exhibits |
| | | |
| 21 | | | Subsidiaries of the Registrant |
| 23.1 | | | Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C. |
| 23.2 | | | Consent of Netherland Sewell and cash equivalents $ 22,019
Prepaid expensesAssociates, Inc. |
| 31.1 | | | Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a_14(a) and other 40,839
-------------
Total current assets $ 62,858
PropertyRule 15d-14(a) (Section 302 of the Sarbanes-Oxley act of 2002). |
| 31.2 | | | Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a_14(a) and equipment, at cost, less accumulated depreciationRule 15d-14(a) (Section 302 of $179,825 2,293,881
Oil and gas properties, not subjectthe Sarbanes-Oxley act of 2002). |
| 32.1 | | | Certification of Chief Executive Officer Pursuant to amortization 884,790
Intangible assets, at cost less accumulated amortization18 U.S.C. Section 1350 (Section 906 of $9,716,459 3,534,449
Other assets 135,989
Cumulative investment in or advancesthe Sarbanes-Oxley Act of 2002) |
| 32.2 | | | Certification of Chief Financial Officer Pursuant to subsidiaries 29,009,328
-------------
Total assets $ 35,921,295
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion18 U.S.C. Section 1350 (Section 906 of long-term debt $ 122,855
Accounts payable 371,867
Accrued expenses 240,187
-------------
Total current liabilities 734,909
Long-term liabilities
Long-term debt, less current portion 2,203,346
8% subordinated convertible notes payable 2,793,000
7% subordinated convertible notes payable 11,184,000
Note payable - related party 3,000,000
-------------
Total liabilities $ 19,915,255
-------------
Commitments and contingencies
Stockholders' equity
Common stock, par value $.0001, authorized 300,000.000
shares, issued and outstanding 8,204,032 820
Additional paid-in-capital 32,720,904
Accumulated deficit (16,715,684)
-------------
Total stockholders' equity $ 16,006,040
-------------
Total liabilities and stockholders' equity $ 35,921,295
=============
|
F-46
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFINITY, INC. CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 2003
Operating expenses $ 1,945,134
Depreciation, depletion and
Amortization 378,034
------------
2,323,168
------------
Operating loss (2,323,168)
Other (expense) income
Interest income 522
Amortizationthe Sarbanes-Oxley Act of loan costs (5,856,442)
Interest expense (868,718)
------------
Total other (expense) income (6,724,638)
------------
Loss before income taxes (9,047,806)
Income tax benefit -
------------
Net loss $(9,047,806)
============
Basic loss per share $ (1.12)
============
Diluted loss per share $ (1.12)
============
Weighted average basic shares
outstanding 8,047,688
============
Weighted average diluted shares
outstanding 8,047,688
============
2002)
F-47
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFINITY, INC. CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 2003
Cash flows from operating activities
Net loss $(9,047,806)
------------
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation, depletion and amortization 105,983
Amortization of loan costs included in interest expense 5,888,393
Change in assets and liabilities
Increase in prepaid expenses and other (16,980)
Increase in accounts payable 339,855
Increase in accrued expenses 425,238
------------
6,742,489
------------
Net cash used by operating activities (2,305,317)
------------
Cash flows from investing activities
Purchase of property, equipment, and intangibles (139,857)
Investment in oil and gas properties (177,664)
Increase in other assets (5,000)
Decrease in investment in and advances to subsidiaries 1,861,176
------------
Net cash provided by investing activities 1,538,655
------------
Cash flows from financing activities
Proceeds from borrowings on long-term debt 824,234
Principal payments on long-term debt (130,899)
------------
Net cash provided by financing activities 693,335
------------
Net decrease in cash and cash equivalents (73,327)
Cash and cash equivalents, beginning of period 95,346
------------
Cash and cash equivalents, end of period 22,019
============
F-48
INFINITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFINITY, INC. CONDENSED STATEMENT OF CASH FLOWS (CONTINUED)
Year ended December 31, 2003
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts capitalized $ 578,248
=============
Non-cash transactions:
Property and equipment acquired through capital leases or seller financed debt $ 967,975
=============
Stock-based compensation for options and warrants granted in connection with
debt, recorded as loan costs $ 5,790,719
=============
Conversion of 8% subordinated convertible notes and accrued interest to
common stock $ 1,478,550
=============
Conversion of 7% subordinated convertible notes and accrued interest to
common stock $ 1,757,016
=============
Issuance of additional notes in lieu of cash interest payment or 7% subordinated
convertible notes $ 379,000
=============
Reclassify other assets to oil and gas properties not subject ot amortization $ 707,126
=============
The debt of the parent at December 31, 2003 consisted of the following:
8% subordinated convertible notes $ 2,793,000
7% subordinated convertible notes 11,184,000
Note payable to a related party 3,000,000
Note payable to seller (airplane) 2,326,201
-----------
Total Debt $19,303,201
===========
For additional information related to the terms of individual notes, see Note 9.
During the period ended December 31, 2003, subsidiaries of the parent
distributed approximately $1,861,000 to the parent. Distributions exceed the
amounts allowed under debt agreement during 2003 as prior to September 2003,
when the loan was executed, the subsidiary had no restrictions on cash
distributions to the parent. The proceeds from these distributions were used to
pay interest on outstanding debt and for working capital purposes.
The parent also provides a corporate guarantee on the revolving credit and term
notes held by oil well service subsidiary and the $25,000,000 development credit
facility obtained by the oil and gas production subsidiary.
F-49