UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________, 19___ to ___________, 19___.
Commission File Number: 0-17204
INFINITY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1070066
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
211 West 14th Street
Chanute, Kansas 66720
-----------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(620) 431-6200
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [x] No
There were 8,174,706 shares of the Registrant's Common Stock outstanding as of
August 11, 2003.
INFINITY, INC.
FORM 10-Q
INDEX
Page
Part I Financial Information Number
Item 1. Financial Information:
Consolidated Balance Sheets........................ 3
Consolidated Statements of Operations ............. 4
Consolidated Statements of Comprehensive
Income (Loss) ..................................... 6
Consolidated Statement of Changes in
Stockholder's Equity .............................. 7
Consolidated Statements of Cash Flows ............. 8
Notes to Consolidated Financial Statements ........ 10
Item 2. Management's Discussion and Analysis
or Plan of Operations ............................. 15
Item 3. Quantitative and Qualitative Disclosure
About Market Risk ................................. 27
Item 4. Controls and Procedures ........................... 27
Part II: Other Information ................................. 28
Signatures ................................................... 30
2
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2003 Dec. 31, 2002
------------- -------------
(Unaudited)
Current Assets
Cash $ 765,005 $ 867,017
Accounts receivable, less allowance for doubtful
accounts of $25,000 2,553,368 1,493,224
Inventories 323,025 340,217
Prepaid expenses and other 125,400 278,510
Derivative instrument 691,191 ---
------------ ------------
Total current assets 4,457,989 2,978,968
Oil and gas properties, using full cost accounting
net of accumulated depreciation, depletion and
amortization
Subject to amortization 21,679,483 19,107,427
Not subject to amortization 17,143,493 13,176,850
Property and equipment, at cost, less accumulated
depreciation and impairment 10,554,825 10,315,068
Intangible assets, at cost, less accumulated
amortization 6,623,653 5,299,881
Notes receivable, less current portion 1,589,646 1,597,053
Other assets, net 133,267 655,022
------------ ------------
Total assets $ 62,182,356 $ 53,130,269
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, related party $ 750,000 $ ---
Notes payable 1,220,617 ---
Current portion of long-term debt 2,767,582 2,227,195
Accounts payable 3,157,562 2,875,900
Accrued expenses 1,375,442 969,526
------------ ------------
Total current liabilities 9,271,203 6,072,621
Long-term liabilities
Asset retirement obligations 456,050 ---
8% subordinated convertible notes payable 2,903,000 4,243,000
7% subordinated convertible notes payable 10,830,000 12,540,000
Long-term debt, related party 3,000,000 3,000,000
Long-term debt, less current portion 4,533,233 4,464,156
------------ ------------
Total liabilities 30,993,486 30,319,777
Stockholders' equity
Common stock, par value $.0001, authorized
300,000,000 shares, issued and outstanding
8,174,706 shares; 7,558,462 shares 817 756
Additional paid-in-capital 31,326,488 22,870,449
Accumulated other comprehensive gain (loss) 691,191 (77,301)
(Accumulated deficit)/retained earnings (829,626) 16,588
------------ ------------
Total stockholders' equity 31,188,870 22,810,492
------------ ------------
Total liabilities and stockholders' equity $ 62,182,356 $ 53,130,269
============ ============
The consolidated balance sheet at December 31, 2002 has been derived from the
consolidated audited financial statements at that date.
See Notes to Consolidated Financial Statements
3
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30,
---------------------------
2003 2002
------------- -------------
Revenues
Oil and gas service operations $ 3,006,653 $ 2,043,334
Oil and gas sales 1,995,954 536,719
------------- -------------
Total revenues 5,002,607 2,580,053
------------- -------------
Cost of sales
Oil and gas service operations 1,527,209 1,102,023
Oil and gas production expenses 554,198 407,096
Oil and gas production taxes 215,107 47,776
------------- -------------
Total cost of sales 2,296,514 1,556,895
------------- -------------
Gross profit 2,706,092 1,023,158
------------- -------------
General and administrative expense 1,687,080 1,051,492
Depreciation, depletion and amortization
expense 523,236 324,190
------------- -------------
Total other operating expenses 2,210,316 1,375,682
------------- -------------
Operating income (loss) 495,776 (352,524)
Other income (expense)
Interest income & other income 37,976 4,647
Interest expense & finance (754,248) (326,212)
Loss on sales of assets (3,694) ---
------------- -------------
Total other income (expense) (719,966) (321,565)
------------- -------------
Net loss before income taxes (224,190) (674,089)
Income tax benefit --- 259,000
------------- -------------
Net loss $ (224,190) $ (415,089)
------------- -------------
Net loss per common share $ (0.03) $ (0.06)
------------- -------------
Net loss per diluted common share $ (0.03) $ (0.06)
------------- -------------
Weighted average basic shares outstanding 8,061,396 7,110,258
Weighted average diluted shares outstanding 8,061,396 7,110,258
See Notes to Consolidated Financial Statements
4
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended June 30,
---------------------------
2003 2002
------------- -------------
Revenues
Oil and gas service operations $ 4,873,960 $ 3,503,187
Oil and gas sales 3,734,090 1,203,722
------------- -------------
Total revenues 8,608,050 4,706,909
------------- -------------
Cost of sales
Oil and gas service operations 2,732,156 2,006,358
Oil and gas production expenses 1,293,280 754,207
Oil and gas production taxes 426,349 115,344
------------- -------------
Total cost of sales 4,451,785 2,875,909
------------- -------------
Gross profit 4,156,265 1,831,000
------------- -------------
General and administrative expense 2,768,480 2,004,836
Depreciation, depletion and amortization
expense 1,079,527 669,565
------------- -------------
Total other operating expenses 3,848,007 2,674,401
------------- -------------
Operating income (loss) 308,258 (843,401)
------------- -------------
Other income (expense)
Interest income & other income 78,776 5,742
Interest expense & finance (1,229,554) (345,204)
Gain (loss) on sales of assets (3,694) 7,998
------------- -------------
Total other (expense) (1,154,472) (331,464)
------------- -------------
Net loss before income taxes (846,214) (1,174,865)
Income tax benefit --- 452,000
------------- -------------
Net loss $ (846,214) $ (722,865)
------------- -------------
Net loss per common share $ (0.11) $ (0.10)
------------- -------------
Net loss per diluted common share $ (0.11) $ (0.10)
------------- -------------
Weighted average basic shares outstanding 7,907,466 6,936,605
Weighted average diluted shares outstanding 7,907,466 6,936,605
See Notes to Consolidated Financial Statements
5
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss $(224,190) $(415,089) $(846,214) $(722,865)
Other Comprehensive Income:
Unrealized gain on commodity
price swap net of deferred
tax expense of $75,426 for
the three months ended
6/30/2003: 888,976 --- 768,492 ---
Reclassifications, net of
deferred tax benefit of
$57,559 for the three
months ended 6/30/2003: (91,944) --- --- ---
--------- --------- --------- ---------
Total Other Comprehensive
Income 797,032 --- 768,492 ---
--------- --------- --------- ---------
Comprehensive Income (Loss) $ 572,842 $(415,089) $ (77,722) $(722,865)
========= ========= ========= =========
See Notes to Consolidated Financial Statements
6
IMFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumu-
lated
Additional Other Deficit) Total
Common Stock Paid-In Comprehensive Retained Stockholders'
Shares Amount Capital Income (Loss) Earnings Equity
--------- ------ ----------- ------------- -------- -------------
Balance, December 31, 2002 7,558,462 $756 $22,870,449 $(77,301) $ 16,588 $22,810,492
Issuance of common stock
for cash upon the
exercise of options 142,450 14 815,805 - - 815,819
Conversion of 7% and
8% subordinated
convertible notes and
accrued interest
into common stock 473,794 47 3,096,905 - - 3,096,952
Options issued in
connection with
$750,000 bridge loans - - 750,000 - - 750,000
Options issued in
connection with
$300,000 bridge loans - - 300,000 - - 300,000
Options and warrants
issued in connection
with $1,000,000 bridge loans - - 1,000,000 - - 1,000,000
Options issued in
connection with the
extension of the $3,000,000
bridge loans - - 730,130 - - 730,130
Options issued in
connection with
a consulting agreement - - 642,841 - - 642,841
Options issued in
connection with the
revision of the terms of
the $3,000,000
bridge loans - - 1,120,358 - - 1,120,358
Other comprehensive
income; unrealized
income on the commodity
price swap, net
of tax effect - - - 768,492 - 768,492
Net loss for period - - - - (846,214) (846,214)
--------- ---- ----------- -------- --------- -----------
Balance, June 30, 2003 8,174,706 $817 $31,326,488 $691,191 $(829,626) $31,188,870
See notes to Consolidated Financial Statements
7
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
---------------------------
2003 2002
------------- -------------
Cash flows from operating activities
Net loss $ (846,214) $ (722,865)
Adjustments to reconcile net loss to
net cash provided by/(used in)
operating activities
Depreciation, depletion and amortization 1,079,527 669,565
Amortization of loan costs included in
interest expense 644,124 30,499
Deferred income taxes --- (452,000)
(Gain)/Loss on sale of assets 3,694 (7,998)
(Increase) decrease in operating assets
Accounts receivable (1,060,144) (837,766)
Inventories 17,192 (26,474)
Prepaid expenses 104,718 3,575
Increase (decrease) in operating
liabilities
Accounts payable 281,662 (1,022,588)
Accrued expenses 578,561 (303,058)
------------- -------------
Net cash provided by/(used in) operating
activities 803,120 (2,669,110)
------------- -------------
Cash flows from investing activities
Proceeds from sale of marketable securities --- 750,000
Investment in marketable securities --- (4,015,835)
Investment in oil and gas properties (2,908,614) (7,010,352)
Investment in other assets and intangibles (335,001) (864,398)
Purchase of property and equipment (139,759) (1,073,546)
Proceeds from sale of oil and gas properties --- 180,000
Proceeds from sale of property and equipment 42,911 160,000
Payment on Notes Receivable 7,407 ---
------------- -------------
Net cash used in investing activities (3,333,056) (11,874,131)
Cash flows from financing activities
Proceeds from notes payable 2,263,381 2,397,499
Sale of subordinated notes --- 12,540,000
Increase in borrowings on long-term debt 853,714 3,625,309
Proceeds from issuance of common stock 815,819 1,649,357
Repayment of long-term debt (1,504,990) (5,622,902)
------------- -------------
Net cash provided by financing activities 2,427,924 14,589,263
------------- -------------
Net increase/(decrease) in cash (102,012) 46,022
Cash, beginning of period 867,017 665,898
------------- -------------
Cash, end of period $ 765,005 $ 711,920
============= =============
See notes to Consolidated Financial Statements
8
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
---------------------------
2003 2002
------------- -------------
Supplemental cash flow disclosures:
Cash paid for interest, net of
amounts capitalized $572,832 $314,705
Non-cash transactions:
Amortization of loan fees - Included in
full cost pool for oil and gas properties 2,714,974 1,610,326
Change in accumulated other comprehensive
income, net of income taxes 768,492 ---
Property and equipment acquired through
seller financed debt, net 967,975 ---
Stock-based compensation for options
issued with bridge loans recorded as
loan costs 4,543,329 1,347,728
Stock-based compensation for options
issued with, and beneficial conversion
feature on senior subordinated notes
issued --- 1,386,044
Conversion of subordinated debt and
accrued interest to common stock 3,096,952 2,051,910
Sale of oil and gas property in
exchange for note receivable --- 1,620,000
Increase in asset retirement obligations 447,357 ---
See Notes to Consolidated Financial Statements
9
INFINITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
Summary of issuer's significant accounting policies are incorporated by
reference to the annual report on Form 10-KSB at December 31, 2002 of
Infinity, Inc. ("Infinity").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
and six month periods ended June 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003.
(2) Going Concern
Infinity's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. During the six
months ended June 30, 2003, Infinity had consolidated losses from operations
of approximately $0.8 million, and a working capital deficit at June 30, 2003
of approximately $4.8 million.
Infinity also has minimum drilling obligations during the next twelve
months of approximately $2.8 million in order to maintain its interest in its
present leasehold positions. In addition, management estimates cash
requirements of $1.7 million for interest on notes and $1.0 million for
general corporate usage during the next twelve months. Thus, in total,
Infinity has current minimum cash requirements during the next 12 months of
approximately $10.3 million including the working capital deficit at June 30,
2003.
Management believes it will be able to fund its current minimum cash
requirements through its operations and from the proceeds of the U.S. Bank
facility discussed in Note 6. In order to fund any other capital
expenditures, Infinity will be required to pursue additional funding from the
U.S. Bank facility after a borrowing base re-determination, through additional
conventional bank financing, the forward sale of its oil and gas production,
or through the public or private equity or debt markets. The ability of the
Company to achieve the required operating results and additional funding
cannot be assured.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should
Infinity be unable to continue as a going concern.
(3) Derivative Instruments
During the six months ended June 30, 2003, the Company had three
commodity price swap agreements as follows:
MMBTU Per Amount Per
Effective Dates Day MMBTU
--------------- --------- ----------
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
10
The contracts called for the Company to receive or make payments based
upon the differential between the hedge price and the market gas price, as
defined in the contracts, for the notional quantity. During the six months
ended June 30, 2003, the Company realized approximately $332 in revenue on the
three commodity swaps 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 June 30, 2003, the Company has a approximately $691,000 derivative asset
related to the financial hedges.
(4) Asset Retirement Obligations
Effective January 1, 2003, Infinity adopted the provisions of Financial
Accounting Standard No. 143 (SFAS 143) "Accounting for Asset Retirement
Obligations". SFAS 143 requires Infinity to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, Infinity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted each period towards its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, Infinity will report a gain or loss upon
settlement to the extent the actual costs differ from the recorded liability.
Upon adoption of SFAS 143, Infinity recorded a discounted liability of $0.5
million for future retirement obligations and increased net oil and gas
properties by $0.5 million. The adoption of SFAS 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
facilties.
(5) Oil and Gas Properties
From inception through June 30, 2003, Infinity has capitalized the
following financing costs related to properties not subject to amortization.
As these projects are developed, the costs are transferred to properties
subject to amortization:
Six Months From
Ended June 30 Inception
------------- ---------
Beneficial conversion feature related to
the 8% subordinated convertible notes $ --- $1,165,500
Capitalized interest $ 382,236 $2,246,019
Capitalized amortization of loan costs $2,714,974 $4,885,586
(6) Notes Payable and Long Term Debt
Effective June 13, 2001 Infinity, Inc. sold $6,475,000 in 8% Subordinated
Convertible Notes in a private placement in which C. E. Unterberg, Towbin
acted as the placement agent. Interest on the notes accrues at a rate of 8%
per annum and is payable in arrears on each December 15 and June 15 commencing
December 15, 2001. The notes are convertible to one share of common stock at
$5.00 per share and mature on June 13, 2006. During the six months ended June
30, 2003, $1,340,000 of the notes were converted into 268,000 shares of common
stock leaving an outstanding balance on the notes of $2,903,000 at June 30,
2003.
11
Effective April 17, 2002 Infinity, Inc. sold $12,540,000 in 7%
Subordinated Convertible Notes in a private placement in which C. E.
Unterberg, Towbin acted as the placement agent. Interest on the notes accrues
at a rate of 7% per annum and is payable in arrears on each April 15 and
October 15 commencing October 15, 2002. The notes are convertible to one
share of common stock at $8.625 per share and mature on April 15, 2007.
During the six months ended June 30, 2003, $1,710,000 of the notes were
converted into 198,261 shares of common stock leaving an outstanding balance
on the notes of $10,830,000 at June 30, 2003.
On April 15, 2003, Infinity, Inc. issued five-year options to purchase
51,000 shares of Infinity, Inc. common stock at $8.75 per share when it
obtained $300,000 in 30 day bridge loans from stockholders with an annual
interest rate of 2% per month (if the loans weren't repaid within the 30 day
term) in order to pay interest due on its outstanding 7% subordinated
convertible notes. The loans were repaid without interest on April 18, 2003.
Infinity, Inc. capitalized loan costs of $300,000 related to the fair value of
the options. Infinity used the Black-Scholes pricing method assuming a five
year life, weighted average risk free interest rate of 1 1/2%, expected
volatility of 127.63% and no expected dividend yield to calculate the fair
value of the options at the date of grant. Since the fair value exceeded the
amount of the notes Infinity valued the loan costs at $300,000, or an amount
equal to the related debt.
On April 17, 2003, Infinity, Inc. issued five-year warrants to C. E.
Unterberg, Towbin to purchase 52,500 shares of Infinity, Inc. common stock at
$8.75 per share when it issued $1,000,000 in 12% bridge notes due April 16,
2004. In conjunction with the notes the note holders also received warrants
to purchase 160,000 shares of Infinity, Inc. common stock at $8.75 per share.
The proceeds from the notes were used to pay off the 30 day bridge loans and
to pay outstanding payables of Infinity, Inc. The loans were repaid
subsequent to June 30, 2003. Infinity, Inc. capitalized loan costs of
$1,000,000 related to the fair value of the options and warrants. Infinity
used the Black-Scholes pricing method assuming a five year life, weighted
average risk free interest rate of 1 1/2%, expected volatility of 127.63% and
no expected dividend yield to calculate the fair value of the options at the
date of grant. Since the fair value exceeded the amount of the notes Infinity
valued the loan costs at $1,000,000, or an amount equal to the related debt.
Subsequent to June 30, 2003, Infinity Oil and Gas of Wyoming, Inc. issued
90 Day Bridge Loan Notes for $3,850,000 to Highbridge/Zwirn Special
Opportunities Fund LP. The notes are secured by a priority security interest
in the Pipeline and Labarge exploration properties. The notes accrue interest
at a rate of 12% per annum. Infinity, Inc. also conveyed a 4% overriding
royalty interest in the existing wells on the properties. The proceeds of the
loans were used to pay the C. E. Unterberg, Towbin 12% Bridge Notes,
outstanding payables of Infinity, Inc. and related to the development of the
properties, and for additional development work on the properties. In
conjunction with the notes Infinity issued 5 year options to purchase 250,000
shares of Infinity common stock for $8.75 per share.
On August 18, 2003, Infinity Oil and Gas of Wyoming, Inc. received a
commitment letter from U.S. Bank National Association ("U.S. Bank") to provide
debt financing pursuant to a Secured Revolving Borrowing Base Credit Facility
("Facility"). The closing of the Facility is subject to a number of
conditions, including, among others, U.S. Bank's satisfaction with the results
of their due diligence investigation, credit approvals, and the negotiation
and execution of mutually acceptable loan documentation. If U.S. Bank elects
to provide funding on the terms set forth in the commitment letter, management
expects the closing on the Facility to occur on or about August 31, 2003.
Although the commitment letter provides for funding of up to $25,000,000, the
12
total amount made available to Infinity-Wyoming under the Facility is subject
to an initial and semi-annual borrowing base determination, which
determinations are dependent upon 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. Infinity Oil and Gas of Wyoming, Inc. and U.S. Bank
will each have the option to request one additional re-determination during
each calendar year. It is currently contemplated that the initial amount made
available would be $5,500,000.
The initial advance on the Facility, if obtained, will be used to repay
the 90 Day Bridge Loan Notes issued to Highbridge/Zwirn Special Opportunities
Fund LP and the $750,000 notes issued in January, 2003, initial loan costs of
approximately $110,000, and legal fees associated with the negotiation and
closing of the Facility.
It is currently contemplated that interest on the Facility would accrued
and be due and payable monthly at the rate of the U.S. Bank Prime Rate plus
100 basis points. As of August 18, 2003, that interest rate would be 5% per
annum.
(7) Notes Payable and Long Term Debt Related Party
Effective November 25, 2002 Infinity, Inc. issued $3,000,000 in unsecured
notes to a stockholder. The notes were originally due November 25, 2003.
Interest on the notes accrued at 5-1/2% per annum and was due monthly
beginning December 22, 2002. On March 17, 2003 the notes were extended to
January 5, 2004. No consideration was given for the extension. On May 23,
2003, the notes were amended a second time to extend the term of the notes
until January 5, 2005. In consideration for extending the term of the notes
Infinity granted options to purchase 150,000 shares of common stock at the
price of $8.75 per share. Infinity, Inc. capitalized loan costs of $730,130
related to the fair value of the options. Infinity used the Black-Scholes
pricing method assuming a five year life, weighted average risk free interest
rate of 1 1/2%, expected volatility of 130.95% and no expected dividend yield
to calculate the fair value of the options at the date of grant. On June 26,
2003 the terms of the notes were amended a third time in order to grant
Infinity the right to not pay the notes from the proceeds of the bridge loan
facility then being negotiated or from the proceeds of any replacement
facility or any borrowing to fund development costs. In consideration for
amending the notes the lender was granted a first priority security interest
in the Sand Wash exploration property in Colorado and a security interest in
Infinity's Pipeline property in Wyoming subordinated to the bridge lenders,
the interest rate on the notes was adjusted to 7% per annum, and the lender
was granted the option to purchase 225,000 shares of common stock at a
purchase price of $8.75 per share. Infinity, Inc. capitalized loan costs of
$1,120,358 related to the fair value of the options. Infinity used the Black-
Scholes pricing method assuming a five year life, weighted average risk free
interest rate of 1 1/2%, expected volatility of 131.94% and no expected
dividend yield to calculate the fair value of the options at the date of
grant.
On January 23, 2003 Infinity, Inc. issued five year options to purchase
150,000 shares of Infinity, Inc. common stock at $8.75 per share when it
obtained $750,000 in bridge loans from stockholders with an annual interest
rate of 5.25% in order to pay outstanding payable associated with the
development of its coal bed methane properties. These loans are due January
5, 2004. Infinity, Inc. capitalized loan costs of $750,000 related to the
fair value of the options. Infinity used the Black-Scholes pricing method
assuming a five year life, weighted average risk free interest rate of 5
1/4%, expected volatility of 126.11% and no expected dividend yield to
calculate the fair value of the options at the date of grant. Since the fair
value exceeded the amount of the notes Infinity valued the loan costs at
$750,000, or an amount equal to the related debt.
13
(8) Earnings per Share
Basic earnings per share were computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the periods. Diluted earnings per share reflect the potential
dilutions that could occur if convertible notes, stock options and warrants
were converted into common stock under the treasury stock method. At June 30,
2003 and 2002 all potential common shares are anti-dilutive.
(9) Equity - Stock Options
During the six months ended June 30, 2003, options to purchase 142,450
shares of common stock were exercised resulting in proceeds to Infinity, Inc.
of $815,819. Options to purchase 31,500 shares were forfeited under a
termination clause in the Option Plans.
On June 6, 2002 the Infinity board of directors approved the grant of
incentive and non-qualified options to purchase 344,000 shares of common stock
at $8.70 per share under the 2003 Stock Option Plan. The options granted
under the 2003 Plan were approved at the Annual Meeting of Shareholders on
June 5, 2003 and shares of common stock included in the 2003 Plan were
registered in an S-8 registration statement on August 11, 2003.
On June 18, 2003, Infinity, Inc. issued five-year options to purchase
125,000 shares of Infinity, Inc. common stock at $8.75 per share when it
entered into a consulting agreement with a shareholder for the shareholder to
facilitate the $3.85 million bridge loan that was obtained July 3, 2003.
Infinity, Inc. capitalized loan costs of $642,841 related to the fair value of
the options. Infinity used the Black-Scholes pricing method assuming a five
year life, weighted average risk free interest rate of 1 1/2%, expected
volatility of 131.87% and no expected dividend yield to calculate the fair
value of the options at the date of grant.
(10) Reclassifications
Certain reclassifications have been made to the balances for the three
month and six month periods ended June 30, 2002 to make them comparable to
those presented for the three and six month periods ended June 30, 2003, none
of which change the previously reported net losses.
14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITINS AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995), and information relating to Infinity that is based on beliefs of
management of Infinity, as well as assumptions made by and information
currently available to management of Infinity. When used in this Report, the
words "estimate", "project", "believe", "anticipate", "intend", "expect", and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of Infinity with respect to future events
based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Infinity does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Quarters ended June 30
Infinity, Inc. (Infinity) incurred a net loss after taxes of $(0.2)
million, or $(0.03) per fully diluted share, in the quarter ended June 30,
2003 compared to a net loss after taxes of $(0.4) million, or $(0.06) per
fully diluted share in the quarter ended June 30, 2002
Infinity experienced a $1.7 million increase in gross profit to $2.7
million in the quarter ended June 30, 2003 from $1.0 million for the quarter
ended June 30, 2002. The increase in gross profit during the quarter ended
June 30, 2003 compared to the quarter ended June 30, 2002 was the result of a
$1.0 million, or approximately 50%, increase in oil field service revenue to
$3.0 million from $2.0 million. The increase in revenue was partially offset
by a $0.4 million, or 39%, increase in oil field service cost of services
provided (See OIL FIELD SERVICES discussion below). Oil field service revenue
for the quarter ended June 30, 2002 was reduced by the elimination of $31,250
of oil field service sales that were provided to Infinity Oil and Gas of
Wyoming, Inc. (Infinity-Wyoming) by Consolidated Oil Well Services, Inc.
(Consolidated) for the development of its coal-bed methane properties.
Additionally, gross profit comparisons were affected by a $1.5 million, or
approximately 300% increase in sales of oil and gas from $0.5 million for the
period ended June 30, 2002 to $2.0 million in the period ended June 30, 2003
with a corresponding increase of $0.1 million in oil and gas production costs
and $0.2 million increase in production taxes in the 2003 quarter (See OIL AND
GAS PRODUCTION discussion below).
Operating expenses for the quarter ended June 30, 2003 increased $0.6
from $1.1 million in the 2002 period to $1.7 million in the 2003 period.
Infinity incurred approximately $0.5 million in expenses 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. These costs
were capitalized until the merger negotiations were terminated in May 2003
when they were then expensed. Infinity and its subsidiaries also recognized
additional depreciation, depletion and amortization ("DD&A") expense of
approximately $0.2 million during the quarter ended June 30, 2003, an increase
15
to approximately $0.5 million for the period compared to DD&A of approximately
$0.3 million for the quarter ended June 30, 2002. The increase in DD&A was
due to the increase in the investment in Consolidated's fleet.
Interest Expense and Finance charges increased by $0.5 million to $0.8
million for the quarter ended June 30, 2003 compared to $0.3 million for the
quarter ended June 30, 2002. The increase was primarily due to increased
amortization of loan costs associated with options and warrants issued in
conjunction with new debt financing. Infinity recognized approximately $0.5
million in amortization of loan costs in the period ended June 30, 2003
compared to $12,943 for the comparable 2002 period.
Infinity recognized a deferred income tax benefit of approximately $0.3
million in the quarter ended June 30, 2002. The net operating losses
generated in the second quarter of 2003 increased Infinity's net deferred tax
asset. Due to uncertainty as to the ultimate utilization of the net operating
losses, the net deferred tax asset has been fully impaired. Therefore,
Infinity has reflected no net tax expense or benefit for the quarter ended
June 30, 2003.
OIL FIELD SERVICES: Sales for the quarter ended June 30, 2003 increased
to $3.0 million from $2.0 million in the quarter ended June 30, 2002. Sales
of cementing services from Consolidated's Bartlesville, Oklahoma camp
increased by approximately $0.2 million and revenue from fracturing services
from that camp increased by approximately $0.5 million in the quarter ended
June 30, 2003 compared to the same period in 2002. The increase in revenue
was primarily due to an increase in development activity as customers move
from the evaluation of prospects to the full scale development of their
prospects in areas serviced from the Bartlesville facility. Revenue from
cementing services provided from Consolidated's Gillette, Wyoming facility
increased by approximately $0.3 million due to the Powder River Basin of
Wyoming becoming an active coal bed methane development play again. Crews
from the Gillette facility cemented over 120 wells in the quarter ended June
30, 2003 compared to 20 in the comparable period of 2002. The following table
details the increase in gross revenue in millions of dollars, before
discounts, for the periods based on the number and type of jobs performed:
Oil Field Service Statistics
($ in millions)
2003 2002 CHANGE
---------------- ---------------- ----------------
JOB TYPE JOBS REVENUE JOBS REVENUE JOBS REVENUE
- ---------- ---- ------- ---- ------- ---- -------
Cementing 448 $1.1 182 $0.6 266 $0.5
Acidizing 288 $0.4 236 $0.3 52 $0.1
Fracturing 285 $1.7 270 $1.3 15 $0.4
The increase in the number of cementing jobs performed reflects an
increase in the number of wells being drilled in eastern Kansas and
northeastern Oklahoma as well as in Wyoming. As well testing is completed on
the newly drilled wells in the Kansas and Oklahoma service areas, completion
and stimulation activities such as acidizing and fracturing should increase.
Management believes that the increase in the number of wells cemented during
the quarter is a good indicator of future increases in acidizing and
fracturing activities as well.
The additional activity also led to an increase in the cost of goods sold
of approximately $0.4 million. The increase in cost of goods sold was due to
the increase in materials of approximately $0.2 million, an increase in labor
costs of approximately $0.1 million and an increase in equipment operating
16
costs and maintenance of approximately $0.1 million. Depreciation on
equipment also increased approximately $0.2 million to $0.4 million for the
quarter ended June 30, 2003 compared to depreciation of $0.2 million for the
period ended June 30, 2002. The increase in depreciation was mainly due to
the increase in value of depreciable equipment due to recent investments in
Consolidated's fleet. General and administrative expenses for oil field
services for 2003 were comparable to the same period in 2002.
OIL AND GAS PRODUCTION: During the quarter ended June 30, 2003
Infinity-Wyoming recorded approximately $0.5 million in revenue on the sale of
18,916 barrels of oil, 16,070 barrels net to Infinity-Wyoming's interest
(96,420 MCF equivalent), and approximately $1.5 million in revenue on the sale
of 372,794 MCF of natural gas, 316,700 MCF net to Infinity-Wyoming's interest
from 24 producing wells on its Pipeline and Labarge projects.
Infinity-Wyoming also has an additional 6 wells that are awaiting completion
and 5 wells that are shut in. Infinity-Wyoming incurred $0.3 million in lease
operating expenses, $0.2 million in production taxes, and $0.2 million in
transportation fees to produce the oil and gas during the quarter ended June
30, 2003. The total production expense, transportation and production taxes
of approximately $0.7 million equates to $1.86 in lifting costs on total MCF
equivalents of 413,120. Infinity-Wyoming also incurred $0.2 million in
general and administrative costs and $0.1 million in DD&A expense, or
approximately $0.93 per MCF equivalent for the period.
During the quarter ended June 30, 2002 Infinity-Wyoming recorded $0.2
million in revenue on the sale of 10,685 barrels of oil, 8,814 barrels net to
Infinity-Wyoming's interest (52,884 MCF equivalent), and $0.3 million in
revenue on the sale of 160,687 MCF of natural gas, 132,556 MCF net to
Infinity-Wyoming's interest, from 14 wells on its Pipeline and Labarge
projects. Infinity-Wyoming had an additional 3 wells that were awaiting
completion and 5 that were shut in. Infinity-Wyoming incurred $0.3 million in
lease operating expenses, $0.1 million in production taxes and transportation
fees to produce the oil and gas during the period ended June 30, 2002. The
total production expense, transportation and production taxes of approximately
$0.4 million equates to $2.15 in lifting costs on total MCF equivalents of
185,440. Infinity-Wyoming also incurred approximately $0.2 million in general
and administrative costs and $0.1 million in DD&A expense, or approximately
$1.26 per MCF equivalent for the period.
The following table provides statistical information by field for
production volumes, revenue and production costs for the quarter ended June
30, 2003 and 2002 (due to rounding the sum of the individual amounts presented
may not equal the totals):
Infinity-Wyoming
Production Statistics
Pipeline Labarge Total
------------- -------------- -------------
Volumes in 000's: 2003 2002 2003 2002 2003 2002
- ----------------- ---- ---- ---- ---- ---- ----
Oil Sales Volumes (bls) 15.9 8.8 0.2 0.0 16.1 8.8
Gas Sales Volumes (mcf) 308.4 128.4 8.3 4.2 316.7 160.7
MCF Equivalents 403.8 181.2 9.3 4.2 413.1 185.4
Values in 000's:
- ----------------
Oil Revenue $452.1 $227.4 $3.2 $0.0 $455.3 $227.4
Gas Revenue $1,490.5 $275.4 $50.1 $9.2 $1,540.6 $284.6
Production Expense $100.8 $158.5 $214.6 $132.8 $315.4 $291.3
Production Taxes $209.1 $46.1 $6.0 $1.4 $215.1 $47.5
Transportation Expense $232.1 $61.7 $6.6 $1.3 $238.7 $63.0
17
Per MCF Equivalent:
- -------------------
Revenue $4.81 $2.84 $5.73 $2.19 $4.83 $2.76
Production Expense $0.24 $0.90 $23.05 $31.63 $0.76 $1.57
Production Taxes $0.52 $0.26 $0.64 $0.34 $0.52 $0.25
Transportation Expense $0.57 $0.35 $0.70 $0.31 $0.58 $0.34
Infinity Oil and Gas of Kansas, Inc. (Infinity-Kansas) recorded net
revenue of $24,663 from its Kansas properties, operating expenses of $52,870
and production taxes of $267 during the quarter ended June 30, 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 notes 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.
CORPORATE ACTIVITIES: Infinity and its subsidiaries incurred
approximately $0.8 million in expenses associated with corporate activities
during the quarter ended June 30, 2003 compared to approximately $0.3 million
in the quarter ended June 30, 2002. Included in the $0.5 million increase was
approximately $0.3 million in legal, accounting and consulting fees 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 also
allocated a greater percentage of internal costs to the merger activity so a
smaller percentage of salaries were allocated to property development than
occurred in the quarter ended June 30, 2002.
OTHER INCOME AND EXPENSES: Other income and expense was a net expense of
$0.7 million for the three months ended June 30, 2003 compared to $0.3 million
for the three months ended June 30, 2002. Infinity, Inc. recognized a $0.5
million increase in interest expense associated with the amortization of
financing costs. Infinity classifies the amortization as interest since the
assets being amortized are associated with the recognition of loan costs
incurred in obtaining financing.
Year to Date for periods ended June 30
Infinity incurred a net loss of $(0.8) million, or $(0.11) per fully
diluted share, in the six month period ended June 30, 2003 compared to a net
loss after taxes of $(0.7) million, or $(0.10) per fully diluted share in the
six month period ended June 30, 2002.
Infinity experienced a $2.4 million increase in gross profit to $4.2
million in the six month period ended June 30, 2003 from $1.8 million for the
six month period ended June 30, 2002. The increase in gross profit during the
period ended June 30, 2003 compared to the period ended June 30, 2002 was the
result of a $1.4 million, or approximately 40%, increase in oil field service
revenue to $4.9 million from $3.5 million. The increase in revenue was
partially offset by a $0.7 million, or 35%, increase in oil field service cost
of services provided (See OIL FIELD SERVICES discussion below). Oil field
service revenue for the six months ended June 30, 2002 was reduced by the
elimination of $1.4 million of oil field service sales that were provided to
Infinity-Wyoming by Consolidated for the development of its coal-bed methane
properties. Additionally, gross profit comparisons were affected by a $2.5
million, or approximately 210% increase in sales of oil and gas from $1.2
million for the period ended June 30, 2002 to $3.7 million in the period ended
18
June 30, 2003 with a corresponding increase of $0.5 million in oil and gas
production costs and $0.3 million increase in production taxes in the 2003
period (See OIL AND GAS PRODUCTION discussion below).
Operating expenses for the six month period ended June 30, 2003 increased
$0.8 from $2.0 million in the 2002 period to $2.8 million in the 2003 period.
In 2003 Infinity incurred approximately $0.6 million in expenses 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 also recognized additional depreciation,
depletion and amortization ("DD&A") expense of approximately $0.4 million
during the six months ended June 30, 2003, an increase to approximately $1.1
million for the period compared to DD&A of approximately $0.7 million for the
period ended June 30, 2002. The increase in DD&A was due to the increase in
the investment in Consolidated's fleet.
Interest expense and finance charges increased by $0.9 million to $1.2
million for the six months ended June 30, 2003 compared to $0.3 million for
the six month period ended June 30, 2002. The increase was primarily due to
an increase in outstanding debt in 2003 compared to 2002 and increased
amortization of loan costs associated with options and warrants issued in
conjunction with new debt financing. Infinity recognized approximately $0.7
million in amortization expense associated with these loan costs in the period
ended June 30, 2003 compared to $30,499 for the comparable 2002 period. The
remaining $0.2 million increase was due to additional interest incurred during
the six months.
Infinity recognized a deferred income tax benefit of $0.5 million in the
six month period ended June 30, 2002. The net operating losses generated in
the six months ended June 30, 2003 increased Infinity's net deferred tax
asset. Due to uncertainty as to the ultimate utilization of the net operating
losses, the net deferred tax asset has been fully impaired. Therefore,
Infinity has reflected no net tax expense or benefit for the six month period
ended June 30, 2003.
OIL FIELD SERVICES: Sales for the six month period ended June 30, 2003
increased to $4.9 million from $3.5 million in the six month period ended June
30, 2002. Sales of cementing services from Consolidated's Bartlesville,
Oklahoma camp increased by approximately $0.3 million and revenue from
fracturing services from that camp increased by approximately $0.7 million in
the six months ended June 30, 2003 compared to the comparable period in 2002.
The increase in revenue was primarily due to an increase in development
activity during the second quarter of 2003 as customers move from the
evaluation of prospects to the full scale development of their prospects in
areas serviced from the Bartlesville facility. As was discussed in the
results of the quarter ended June 30, 2003 revenue from cementing services
provided from Consolidated's Gillette, Wyoming facility increased by
approximately $0.3 million due the Powder River Basin of Wyoming becoming an
active coal bed methane development play again. Crews from the Gillette
facility cemented over 130 wells in the six months ended June 30, 2003
compared to 43 in the comparable period of 2002. The following table details
the increase in gross revenue in millions of dollars, before discounts, for
the periods based on the number and type of jobs performed:
19
Oil Field Service Statistics
($ in millions)
2003 2002 CHANGE
---------------- ---------------- ----------------
JOB TYPE JOBS REVENUE JOBS REVENUE JOBS REVENUE
- ---------- ---- ------- ---- ------- ---- -------
Cementing 687 $1.7 331 $1.0 356 $0.7
Acidizing 446 $0.6 390 $0.5 56 $0.1
Fracturing 446 $2.8 396 $2.2 50 $0.6
The increase in the number of cementing jobs performed reflects the
increase in the number of wells being drilled in eastern Kansas and
northeastern Oklahoma as well as in Wyoming. As well testing is completed on
the newly drilled wells, completion and stimulation activities such as
acidizing and fracturing should increase. Management believes that the
increase in the number of wells cemented by Consolidated during the six months
is a good indicator of future increases in its acidizing and fracturing
activities as well.
The additional activity also led to an increase in the cost of goods sold
of approximately $0.7 million. The increase in cost of goods sold was due to
the increase in materials of approximately $0.3 million, an increase in labor
costs of approximately $0.2 million and an increase in equipment operating
costs and maintenance of approximately $0.2 million. Depreciation on
equipment also increased approximately $0.3 million to $0.7 million for the
six month period ended June 30, 2003 compared to depreciation of $0.4 million
for the period ended June 30, 2002. The increase in depreciation was mainly
due to the increase in value of depreciable equipment due to recent
investments in Consolidated's fleet. General and administrative expenses for
oil field services for 2003 were comparable to the same period in 2002.
OIL AND GAS PRODUCTION: During the six months ended June 30, 2003
Infinity-Wyoming recorded approximately $1.0 million in revenue on the sale of
38,936 barrels net to Infinity-Wyoming's interest (197,706 MCF equivalents),
and approximately $2.7 million in revenue on the sale of 739,110 MCF of
natural gas, 625,503 MCF net to Infinity-Wyoming's interest, from its Pipeline
and Labarge projects. Infinity-Wyoming incurred $0.8 million in lease
operating expenses, $0.4 million in production taxes, and $0.4 million in
transportation fees to produce the oil and gas during the six month period
ended June 30, 2003. The total production expense, transportation and
production taxes of approximately $1.6 million equates to $2.09 in lifting
costs on total MCF equivalents of 823,209. Infinity-Wyoming also incurred
$0.5 million in general and administrative costs and $0.3 million in DD&A
expense, or approximately $0.93 per MCF equivalent for the period. The
general and administrative expense included approximately $0.2 million in
costs 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. Excluding these costs general and administrative
costs for Infinity-Wyoming were unchanged when compared to the prior year
period.
During the six month period ended June 30, 2002 Infinity-Wyoming recorded
$0.5 million in revenue on the sale of 25,771 barrels of oil, 21,261 barrels
net to Infinity-Wyoming's interest (127,566 MCF equivalent), and $0.5 million
in revenue on the sale of 301,982 MCF of natural gas, 225,901 MCF net to
Infinity-Wyoming's interest, from its Pipeline and Labarge projects.
Infinity-Wyoming incurred approximately $0.4 million in lease operating
expenses, $0.1 million in production taxes and $0.1 million in transportation
fees to produce the oil and gas during the period ended June 30, 2002. The
total production expense, transportation and production taxes of approximately
$0.6 million equates to $2.09 in lifting costs on total MCF equivalents of
20
383,467. Infinity-Wyoming also incurred approximately $0.3 million in general
and administrative costs and $0.1 million in DD&A expense, or approximately
$1.11 per MCF equivalent for the period.
The following table provides statistical information by field for
production volumes, revenue and production costs for the six month period
ended June 30, 2003 and 2002 (due to rounding the sum of the individual
amounts presented may not equal the totals:
Infinity-Wyoming
Production Statistics
Pipeline Labarge Total
------------- -------------- -------------
Volumes in 000's: 2003 2002 2003 2002 2003 2002
- ----------------- ---- ---- ---- ---- ---- ----
Oil Sales Volumes (bls) 32.8 21.2 0.2 0.0 33.0 21.2
Gas Sales Volumes (mcf) 614.8 251.7 10.7 4.2 625.5 255.9
MCF Equivalent 811.9 379.3 11.3 4.2 823.2 383.5
Values in 000's:
- ----------------
Oil Revenue $1,015.6 $488.9 $2.7 $0.0 $1,018.3 $488.9
Gas Revenue $2,655.7 $521.1 $60.1 $9.2 $2,715.8 $530.3
Production Expense $275.0 $253.9 $568.7 $186.8 $843.7 $440.7
Production Taxes $419.2 $112.8 $7.1 $1.4 $426.3 $114.2
Transportation Expense $445.3 $118.2 $4.0 $1.3 $449.3 $119.5
Per MCF Equivalent:
- -------------------
Revenue $4.52 $2.70 $5.55 $2.19 $4.53 $2.69
Production Expense $0.33 $0.85 $50.26 $31.63 $1.02 $1.52
Production Taxes $0.52 $0.25 $0.63 $0.34 $0.52 $0.25
Transportation Expense $0.55 $0.34 $0.35 $0.31 $0.55 $0.32
The increase in production was primarily a result of the increased number
of wells producing in each period as discussed in the results of operations
for the three month period.
Infinity Oil and Gas of Kansas, Inc. (Infinity-Kansas) recorded net
revenue of $0.2 million from its Kansas properties, operating expenses of $0.2
million and production taxes of $1,130 during the six months ended June 30,
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 notes
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.
CORPORATE ACTIVITIES: Infinity and its subsidiaries incurred
approximately $1.2 million in expenses associated with corporate activities
during the six month period ended June 30, 2003 compared to approximately $0.7
million in the period ended June 30, 2002. Included in the $0.5 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.
21
OTHER INCOME AND EXPENSES: Other income and expense was a net expense of
$1.2 million for the six months ended June 30, 2003 compared to $0.3 million
for the six months ended June 30, 2002. Infinity, Inc. recognized a $0.9
million increase in interest expense of which $0.7 million was associated with
the amortization of financing costs. Infinity classifies the amortization as
interest since the assets being amortized are associated with the recognition
of loan costs incurred in obtaining financing.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Company had a working capital deficit of $4.8
million compared to a working capital deficit of $3.1 million at December 31,
2002. The increase in the working capital deficit was the result of borrowing
an additional $2.2 million in current debt, the reclassification of
approximately $0.3 million from long term to current debt and increases in
trade payables and accrued expenses of $0.7 million. A significant portion of
the increase in accrued expenses is due to revenue and taxes payable
concurrent with the increase in oil and gas production. The increases in
current liabilities were offset by a $0.4 million increase in revenue
receivable for oil and gas production and a $0.7 million increase in trade
receivables associated with oil and gas services provided.
During the six month period ended June 30, 2003 cash provided by
operations was $0.8 million compared to cash used in operating activities
during the six months ended June 30, 2002 of $(2.7) million. The increase is
primarily due to the increase in non cash expenses of $1.7 million and a $2.1
million reduction in the change 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.
Infinity utilized cash of approximately $0.1 million due to the change in
operating assets and liabilities in the six months ended June 30, 2003
compared to using $2.2 million in the comparable 2002 period.
During the period ended June 30, 2003 Infinity used $3.3 million in
developing investing activities by investing $3.0 million in oil and gas
properties, $0.3 million in other assets and intangibles and $0.1 million in
property and equipment. This compares to Infinity investing $7.0 million in
oil and gas properties, $4.0 million in marketable securities, $1.1 million in
property and equipment, and $0.9 million in other assets and intangibles
during the period ended June 30, 2002. Offsetting the use of cash in
investing activities in 2002 was the receipt of $0.8 million from the sale of
marketable securities, $0.2 million from the sale of property and equipment
and $0.2 million from the sale of oil and gas properties resulting in Infinity
using a total of $11.9 million in investing activities during the period ended
June 30, 2002.
During the period ended June 30, 2003 Infinity borrowed $3.1 million with
which to pay interest on its convertible notes and costs incurred in the
development of its oil and gas properties. During January, 2003 Infinity
borrowed $0.75 million from stockholders with principal and interest of 5.25 %
due January 4, 2004. Infinity-Wyoming also borrowed $0.25 million from a
local bank in order to pay outstanding balances related to the development of
its coal bed methane properties. This loan is payable in ten payments of
$25,000, four of which have already been made, plus interest of 6.75%. On
April 18, 2003 Infinity issued $1.0 million in 12% Bridge Notes due April 16,
2004. The proceeds from these notes were used to pay current payables and a
short term bridge note Infinity had issued a few days earlier. In June 2003
Infinity-Wyoming also converted a trade payable to a vendor for development
activities on oil and gas properties to a one year note. Subsequent to June
30 this note and the $1.0 million in 12 % Bridge Notes were paid in full from
the proceeds of the $3.85 million bridge loan discussed below.
22
As of June 30, 2003 Consolidated had borrowings of $0.9 million on a
revolving credit line, $1.5 million on a term loan and $0.5 million on a
capital expenditures line. Consolidated will make monthly payments of $80,626
plus interest and $15,000 plus interest on the term note and capital
expenditures line, respectively until December 31, 2004, at which time the
remaining principal and interest will be due. Infinity and its subsidiaries
owe approximately $4.2 million for real estate and equipment loans secured by
assets of Infinity and its subsidiaries. These notes mature in one to
eighteen years and have current payments of approximately $58,000 per month.
Infinity received proceeds from the issuance of common stock, upon the
exercise of 142,450 options, of $0.8 million during the period ended June 30,
2003.
Subsequent to June 30, 2003 Infinity borrowed $3.85 million to pay
outstanding payables, and the $1.0 million outstanding on the 12% Bridge Loan
Notes that were issued in April 2003, and to pay for completion work on
existing oil and gas wells. The new notes are secured by a priority interest
in the Pipeline and Labarge properties and accrue interest at the rate of 12%
per annum. The notes are due October 3, 2003. The lender also received a 4%
Overriding Royalty Interest in Infinity-Wyoming's existing wells on the
Labarge and Pipeline properties.
On August 18, 2003, Infinity Oil and Gas of Wyoming, Inc. received a
commitment letter from U.S. Bank National Association ("U.S. Bank") to provide
debt financing pursuant to a Secured Revolving Borrowing Base Credit Facility
("Facility"). The closing of the Facility is subject to a number of
conditions, including, among others, U.S. Bank's satisfaction with the results
of their due diligence investigation, credit approvals, and the negotiation
and execution of mutually acceptable loan documentation. If U.S. Bank elects
to provide funding on the terms set forth in the commitment letter, management
expects the closing on the Facility to occur on or about August 31, 2003.
Although the commitment letter provides for funding of up to $25,000,000, the
total amount made available to Infinity-Wyoming under the Facility is subject
to an initial and semi-annual borrowing base determinations, which
determinations are dependent upon 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. Infinity Oil and Gas of Wyoming, Inc. and U.S. Bank
will each have the option to request one additional re-determination during
each calendar year. It is currently contemplated that the initial amount made
available would be $5,500,000.
The initial advance on the Facility, if obtained, will be used to repay
the 90 Day Bridge Loan Notes issued to Highbridge/Zwirn Special Opportunities
Fund LP and the $750,000 notes issued in January, 2003, initial loan costs of
approximately $110,000, and legal fees associated with the negotiation and
closing of the Facility.
It is currently contemplated that interest on the Facility would accrue
and be due and payable monthly at the rate of the U.S. Bank Prime Rate plus
100 basis points. As of August 18, 2003, that interest rate would be 5% per
annum.
The working capital deficit as of June 30 was $4.8 million. Infinity
expects to spend approximately $2.8 million meeting its minimum drilling and
completion, pipeline installation and environmental impact study obligations
during the next year and incur approximately $0.7 million in additional
interest on its outstanding notes. Infinity also expects to incur
approximately $1.0 million in corporate cash usage during the next year.
23
Consolidated expects to generate approximately $3.8 million in operating
cash flow from the oil field service business during the remainder of 2003 and
the first half of 2004. The cash flow from this business segment is expected
to be driven by an increase in business in the Powder River Basin of Wyoming
as drilling activity increases as a result of the completion of the Powder
River environmental impact study and an increase in oil field service
operations in Eastern Kansas and Northeastern Oklahoma as customers move
forward with development activities on leases that will be expiring within the
next two years. Infinity-Wyoming is also expected to generate approximately
$4.6 million in operating cash flow from oil and gas production operations
during the remainder of 2003 and the first half of 2004. Management has
revised its estimate of future production from the wells on the Pipeline
project to increase to approximately 5,000 MCF per day due to additional wells
being added to compression capabilities during July, 2003 and by bringing
additional wells on line during the year. In addition to the increase in
production, Infinity-Wyoming has contracts in place to sell 3,500 MMBTU per
day at $4.71 and 1,000 MMBTU per day at $3.00 per MMBTU through March, 2004
and November, 2003 respectively. Production expenses are expected to stay
fairly steady during the period.
Recap of Current Minimum Cash Requirements
(In Millions)
Current working capital deficit $ 4.8
Property development requirements 2.8
Interest on notes 0.7
Corporate cash usage 1.0
------
Total current requirements $ 10.3
Sources of Cash
Consolidated operations $ 3.8
Infinity-Wyoming operations 4.6
U.S. Bank Facility, net of
loan costs 5.4
------
Total sources $ 13.8
------
Cash available $ 3.5
======
In addition to its operating needs, Consolidated anticipates it will
incur capital expenditures of approximately $0.8 million over the next year
related to vehicle acquisitions and equipment fabrication and approximately
$0.3 million of facilities capital maintenance. Management believes that
credit available to Consolidated through local sources, vendors and through
its current capital expenditures facility with LaSalle Bank will be sufficient
to meet Consolidated's capital expenditure needs of approximately $1.1
million.
Infinity-Wyoming could have capital expenditures, subject to permitting
requirements, beyond its development obligations discussed above of up to
approximately $15.7 million. Those additional anticipated expenditures are as
follows: (1) drill and complete ten additional production wells and two
disposal wells and install the related facilities on the LaBarge acreage at a
cost of approximately $8.1 million; (2) drill and complete five production
wells and one disposal well and the related facilities on the Antelope acreage
at a cost of $3.5 million; (3) drill and complete five wells in addition to
the wells required to meet leasehold obligations in the Pipeline field at a
cost of $2.0 million; and (4) drill and complete a horizontal Niobrara well in
the Sand Wash Basin at a cost of $1.8 million. Infinity-Wyoming also
anticipates incurring additional costs of approximately $0.3 million for
24
various land acquisitions to fill in acreage within existing properties. In
order to fund Infinity-Wyoming's anticipated additional capital expenditures,
Infinity-Wyoming will be required to pursue funding through the increase of
the borrowing base on the U.S. Bank Facility or other conventional bank
financing, the forward sale of its oil and gas production or through the
public or private equity or debt market pursued by the parent. The amount of
progress that Infinity-Wyoming will be able to make on the development of its
properties will be dependent upon its ability to obtain the proper permits for
the development and to fund the development. Obtaining permits and sufficient
funding to meet these additional capital expenditures cannot be assured.
Non-Cash Charges
- ----------------
Upon the anticipated payoff of short-term financings in the third quarter
of 2003, amortization of non-cash loan costs associated with obtaining that
debt will be accelerated. Infinity anticipates it will have a material charge
to interest expense in the third quarter related to a portion of the
amortization of the loan costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Infinity believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
RESERVE ESTIMATES: Infinity's estimates of oil and natural gas reserves,
by necessity, are projections based on geologic and engineering data, and
there are uncertainties inherent in the interpretation of such data as well as
the projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulation of oil and natural gas that are difficult to measure.
The accuracy of any reserve estimate is a function of the quality of available
data, engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash
flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from
other producing areas, the assumed effects of regulations by governmental
agencies and assumptions governing future oil and natural gas prices, future
operating costs, severance, ad-valorem and excise taxes, development costs and
work-over and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected there from may vary
substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves, which could affect
the carrying value of Infinity's oil and gas properties and the rate of
depletion of the oil and gas properties. Actual production, revenues and
expenditures with respect to Infinity's reserves will likely vary from
estimates, and such variances may be material.
Infinity's estimated quantities of proved reserves at December 31, 2002
were prepared by independent petroleum engineers Wells Chappell and Company,
Inc.
PROPERTY, EQUIPMENT AND DEPRECIATION: Infinity follows the full-cost
method of accounting for oil and gas properties. Under this method, all
productive and nonproductive costs incurred in connection with the exploration
for and development of oil and gas reserves are capitalized. Such capitalized
costs include lease acquisition, geological and geophysical work, delay
rentals, drilling, completing and equipping oil and gas wells, and salaries,
25
benefits and other internal salary-related costs directly attributable to
these activities. Costs associated with production and general corporate
activities are expensed in the period incurred. Interest costs related to
unproved properties and properties under development are also capitalized to
oil and gas properties. If the net investment in oil and gas properties
exceeds an amount equal to the sum of (1) the standardized measure of
discounted future net cash flows from proved reserves and (2) the lower of
cost or fair market value of properties in process of development and
unexplored acreage, the excess is charged to expense as additional depletion.
Normal dispositions of oil and gas properties are accounted for as adjustments
of capitalized costs, with no gain or loss recognized.
Equipment utilized in the oil field service business and to support
operations on Infinity's oil and gas properties are stated at cost. This
equipment is depreciated using the straight-line method over the estimated
useful lives of the assets of three to 30 years.
Infinity is required to review the carrying value of its oil and gas
properties each quarter under the full cost accounting rules of the Securities
and Exchange Commission. Under these rules, capitalized costs of proved oil
and gas properties may not exceed the present value of estimated future net
revenues from proved reserves, discounted at 10%. Application of the ceiling
test generally requires pricing future revenue at the unescalated prices in
effect as of the last day of the quarter and requires a write-down for
accounting purposes if the ceiling is exceeded. Unproved oil and gas
properties are not amortized, but are assessed for impairment either
individually or on an aggregated basis using a comparison of the carrying
values of the unproved properties to net future cash flows.
26
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Infinity's major market risk exposure is in the pricing applicable to its
oil and gas production. Realized pricing is primarily driven by the
prevailing price for crude oil and spot prices applicable to Infinity's United
States crude oil and natural gas production. Historically, prices received
for gas production have been volatile and unpredictable. Pricing volatility
is expected to continue. Gas price realizations ranged from a monthly low of
$3.04 to a monthly high of $5.01 per MCF during the six months ended June 30,
2003. Oil price realizations ranged from a monthly low of $27.37 per barrel
to a monthly high of $35.08 per barrel during the period.
Infinity-Wyoming periodically enters into hedging activities on a portion
of its projected natural gas production in accordance with its Energy Risk
Management Policy. These activities are intended to support cash flow at
certain levels in order to manage Infinity-Wyoming's cash flow by reducing the
exposure to gas price fluctuations. Realized gains or losses from
Infinity-Wyoming's cash flow risk management activities are recognized in gas
production revenues. In the six month period ended June 30, 2003, the effect
of Infinity-Wyoming hedging its gas production compared to if it had sold the
gas on the spot market was insignificant.
ITEM 4.
CONTROLS AND PROCEDURES
As of June 30, 2003, under the supervision and with the participation of
the Company's Chief Executive Officer and the Chief Financial Officer,
management has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30,
2003. There were no changes in internal control over financial reporting that
occurred during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities
On January 23, 2003, Infinity received $0.75 million from four investors
as short-term bridge loans. The bridge loans are due January 4, 2004, In
connection with these loans, Infinity issued five-year options to the
investors to purchase up to an aggregate of 150,000 shares of Infinity's
Common Stock at $8.75 per share. In connection with these transactions
Infinity relied on Section 4(2) of the Securities Act of 1933. The investors
were sophisticated investors who were given complete information concerning
Infinity.
On April 15, 2003, Infinity received $0.3 million from two investors as
short-term bridge loans. The bridge loans, which were due June 15, 2003 were
repaid on April 21, 2003. In connection with these loans, Infinity issued
five-year options to the investors to purchase up to an aggregate of 51,000
shares of Infinity's Common Stock at $8.75 per share. In connection with
these transactions Infinity relied on Section 4(2) of the Securities Act of
1933. The investors were sophisticated investors who were given complete
information concerning Infinity.
On April 17, 2003, Infinity received $1.0 million from an unrelated party
when it issued 12% Senior Unsecured Bridge Notes. The notes were due April
16, 2004 and were repaid July 7, 2003. In connection with these loans,
Infinity issued five year warrants to purchase up to an aggregate of 212,500
shares of Infinity's Common Stock at $8.75 per share. In connection with
these transactions Infinity relied on Section 4(2) of the Securities Act of
1933. The investors were sophisticated investors who were given complete
information concerning Infinity.
On May 23, 2003 Infinity issued five year options to purchase up to an
aggregate of 150,000 shares of Infinity's common stock at $8.75 per share as
incentive for the lender of the $3,000,000 bridge loan to extend the term of
the loan until January 30, 2005. In connection with these transactions
Infinity relied on Section 4(2) of the Securities Act of 1933. The investors
were sophisticated investors who were given complete information concerning
Infinity.
On June 18, 2003 Infinity issued five year options to purchase up to an
aggregate of 125,000 shares of Infinity's common stock at $8.75 per share as
incentive to a shareholder to facilitate a bridge loan. In connection with
this transaction Infinity relied on Section 4(2) of the Securities Act of
1933. The investor is a sophisticated investors who was given complete
information concerning Infinity.
On June 26, 2003 Infinity issued five year options to purchase up to an
aggregate of 225,000 shares of Infinity's common stock at $8.75 per share as
an incentive for the lender to amend the terms of the $3,000,000 bridge loan.
In connection with these transactions Infinity relied on Section 4(2) of the
Securities Act of 1933. The investors were sophisticated investors who were
given complete information concerning Infinity.
Item 3. Defaults Upon Senior Securities
Not Applicable
28
Item 4. Submission of Matters to a Vote of Security Holders
Three issues were presented to Stockholders of the Infinity, Inc. for
consideration at the Annual Stockholders Meeting that was held June 5, 2003 at
Infinity's headquarters in Chanute, Kansas. These issues, all of which were
approved at the annual Stockholders meeting, were:
(a) The election of four (4) Directors of the Company to serve
until the next annual Meeting of Shareholders and until their
successors have been duly elected and qualified;
(b) The ratification of the appointment of Ehrhardt Keefe Steiner &
Hottman P. C., as Infinity's independent auditors;
(c) The approval of the Company's 2003 Stock Option Plan;
The following sets forth the votes cast for, against or withheld, as well
as the number of abstentions and any broker non-votes, as to each of the
matters presented at the meeting:
Election of Directors:
Nominee For Withheld
------- --- --------
George R. Jones 6,697,629 184,685
Leroy C. Richie 6,697,629 184,685
Stanton E. Ross 6,697,629 184,685
O. Lee Tawes 6,685,629 196,685
Appointment of Ehrhardt Keefe Steiner & Hottman:
For Against Abstain
--- ------- -------
6,807,146 56,495 18,673
Approval of 2002 Stock Option Plan:
For Against Abstain
--- ------- -------
6,023,397 665,779 193,138
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Filed herewith
Executive Officer Pursuant electronically
To Section 302 of the
Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Filed herewith
Financial Officer Pursuant electronically
to Section 302 of the
Sarbanes-Oxley Act of
2002.
29
32.1 Certification of Chief Filed herewith
Executive Officer Pursuant electronically
to 18 U.S.C. Section 1350
32.2 Certification of Chief Filed herewith
Financial Officer Pursuant electronically
to 18 U.S.C. Section 1350
(b) Reports on Form 8-K:
Infinity filed one Form 8-K dated May 15, 2003 reporting information
under Items 7 and 9 of that Form.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
INFINITY, INC.
Dated: August 19, 2003 By:/s/ Stanton E. Ross
Stanton E. Ross, President
Dated: August 19, 2003 By:/s/ Jon D. Klugh
Jon D. Klugh, Chief Financial Officer
30