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 September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to ________.
Commission File Number: 0-17204
INFINITY, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1070066
- ------------------------------- ----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
211 West 14th Street, Chanute, Kansas 66720
----------------------------------------------------------
Address of Principal Executive Offices, Including Zip Code
(620) 431-6200
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
-----------------------------------------------------
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the regtistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[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 8,185,546 shares of the Registrant's Common Stock outstanding as of
November 18, 2003.
INFINITY, INC.
FORM 10-Q
INDEX
Page
Part I Financial Information Number
Item 1. Financial Statements:
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 of
Financial Condition and Results of Operations ...... 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................ 31
Item 4. Controls and Procedures ............................. 31
Part II: Other Information ................................... 32
Signatures ..................................................... 33
2
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Sept. 30, 2003 Dec. 31, 2002
-------------- -------------
(Unaudited)
Current Assets
Cash $ 1,336,536 $ 867,017
Accounts receivable, less allowance
for doubtful accounts of $25,000 1,889,890 1,493,224
Inventories 381,810 340,217
Prepaid expenses and other 260,867 278,510
Derivative instruments 858,335 -
----------- -----------
Total current assets 4,727,438 2,978,968
Oil and gas properties, using full cost accounting net
of accumulated depreciation, depletion and amortization
Subject to amortization 20,120,384 19,107,427
Not subject to amortization 17,634,409 13,176,850
Property and equipment, at cost, less accumulated
depreciation and impairment 10,450,435 10,315,068
Intangible assets, at cost, less accumulated amortization 4,815,639 5,299,881
Notes receivable, less current portion 1,584,938 1,597,053
Other assets, net 134,855 655,022
----------- -----------
Total assets $59,468,098 $53,130,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt 1,849,339 2,227,195
Accounts payable 1,167,702 2,875,900
Accrued expenses 1,463,062 969,526
----------- -----------
Total current liabilities 4,480,103 6,072,621
Long-term liabilities
Asset retirement obligations 460,226 -
8% subordinated convertible notes payable 2,868,000 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 9,711,299 4,464,156
----------- -----------
Total liabilities 31,349,628 30,319,777
----------- -----------
Stockholders' equity
Common stock, par value $.0001, authorized 300,000,000
shares, issued and outstanding 8,183,046 shares;
7,558,462 shares 818 756
Additional paid-in-capital 32,614,147 22,870,449
Accumulated other comprehensive gain (loss) 858,335 (77,301)
(Accumulated deficit)/retained earnings (5,354,830) 16,588
----------- -----------
Total stockholders' equity 28,118,470 22,810,492
----------- -----------
Total liabilities and stockholders' equity $59,468,098 $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 September 30,
2003 2002
----------- -----------
Revenues
Oil and gas service operations $ 3,678,867 $ 2,398,449
Oil and gas sales 1,562,639 418,552
----------- -----------
Total revenues 5,241,506 2,817,001
----------- -----------
Cost of sales
Oil and gas service operations 1,823,966 1,251,743
Oil and gas production expenses 489,785 373,297
Oil and gas production taxes 163,444 28,774
----------- -----------
Total cost of sales 2,477,195 1,653,814
----------- -----------
Gross profit 2,764,311 1,163,187
----------- -----------
General and administrative expense 1,239,062 1,226,994
Depreciation, depletion and amortization
expense 869,558 271,375
----------- -----------
Total other operating expenses 2,108,620 1,498,369
----------- -----------
Operating income (loss) 655,691 (335,182)
----------- -----------
Other income (expense)
Interest and other income 35,961 59,982
Amortization of non-cash loan costs (4,230,469) -
Amortization of cash loan costs (410,883) -
Interest expense (552,114) (202,388)
Loss on sales of assets (23,392) -
----------- -----------
Total other income (expense) (5,180,897) (142,406)
----------- -----------
Net loss before income taxes (4,525,206) (477,588)
Income tax benefit - 184,000
----------- -----------
Net loss $(4,525,206) $ (293,588)
----------- -----------
Net loss per common share $ (0.55) $ (0.04)
----------- -----------
Net loss per diluted common share $ (0.55) $ (0.04)
----------- -----------
Weighted average basic shares outstanding 8,178,003 7,431,416
Weighted average diluted shares outstanding 8,178,003 7,431,146
See Notes to Consolidated Financial Statements
4
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30,
2003 2002
----------- -----------
Revenues
Oil and gas service operations $ 8,552,827 $ 5,901,636
Oil and gas sales 5,296,729 1,622,274
----------- -----------
Total revenues 13,849,556 7,523,910
----------- -----------
Cost of sales
Oil and gas service operations 4,556,122 3,258,101
Oil and gas production expenses 1,783,065 1,127,504
Oil and gas production taxes 589,793 144,118
----------- -----------
Total cost of sales 6,928,980 4,529,723
----------- -----------
Gross profit 6,920,576 2,994,187
----------- -----------
General and administrative expense 4,028,375 3,231,830
Depreciation, depletion and amortization
expense 1,928,250 930,770
----------- -----------
Total other operating expenses 5,956,625 4,162,600
----------- -----------
Operating income (loss) 963,951 (1,168,413)
----------- -----------
Other income (expense)
Interest and other income 114,737 65,723
Amortization of non-cash loan costs (4,825,913) (36,195)
Amortization of cash loan costs (476,356) (4,474)
Interest expense (1,120,751) (517,093)
Gain (loss) on sales of assets (27,086) 7,998
----------- -----------
Total other (expense) (6,335,369) (484,041)
----------- -----------
Net loss before income taxes (5,371,418) (1,652,454)
Income tax benefit - 636,000
----------- -----------
Net loss $(5,371,418) $(1,016,454)
----------- -----------
Net loss per common share $ (0.67) $ (0.14)
----------- -----------
Net loss per diluted common share $ (0.67) $ (0.14)
----------- -----------
Weighted average basic shares outstanding 7,998,635 7,103,359
Weighted average diluted shares outstanding 7,998,635 7,103,359
See Notes to Consolidated Financial Statements
5
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended September 30 Nine Months Ended September 30
2003 2002 2003 2002
----------- --------- ----------- ----------
Net loss $(4,525,206) $(293,588) $(5,371,418) $(1,016,454)
Other Comprehensive Income:
Unrealized gain on commodity
price swap net of deferred
tax expense of $9,380: 152,159 - 920,651 -
Reclassifications, net of
deferred tax benefit of
$9,380: 14,985 - 14,985 -
----------- --------- ----------- -----------
Total Other Comprehensive
Income 167,144 - 953,636 -
----------- --------- ----------- -----------
Comprehensive Loss $(4,692,350) $(293,588) $(4,435,782) $(1,016,454)
=========== ========= =========== ===========
See Notes to Consolidated Financial Statements
6
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional Other (Accumulated Total
Common Stock Paid-In Comprehensive Deficit) 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 143,669 14 820,468 - - 820,482
Conversion of 7% and 8%
subordinated convertible
notes and accrued interest
into common stock 480,915 48 3,132,511 - - 3,132,559
Options issued in connec-
tion 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
Options issued in connections
with the $3,850,000 Petrobridge
financing - - 1,247,390 - - 1,247,390
Other comprehensive income;
unrealized income on the
commodity price swap, net
of tax effect - - - 935,636 - 935,636
Net loss for period - - - - (5,371,418) (5,371,418)
--------- ---- ----------- -------- ----------- -----------
Balance, September 30, 2003 8,183,046 $818 $32,614,147 $858,335 $(5,354,830) $28,118,470
========= ==== =========== ======== =========== ===========
See notes to Consolidated Financial Statements
7
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2003 2002
----------- -----------
Cash flows from operating activities
Net loss $(5,371,418) $(1,016,454)
Adjustments to reconcile net loss to
net cash provided by/(used in)
operating activities
Depreciation, depletion and amortization 1,928,250 930,770
Amortization of loan costs included in
interest expense 5,302,269 40,669
Deferred income taxes - (636,000)
(Gain)/loss on sale of assets 27,086 (7,998)
(Increase) decrease in operating assets
Accounts receivable (396,666) (66,294)
Inventories (41,593) (14,496)
Prepaid expenses (29,852) (101,159)
Increase (decrease) in operating
liabilities
Accounts payable (1,444,817) (1,269,528)
Accrued expenses 666,788 450,002
----------- -----------
Net cash provided by/(used in) operating
activities 640,047 (1,690,488)
----------- -----------
Cash flows from investing activities
Proceeds from sale of marketable securities - 750,000
Investment in marketable securities - (675,616)
Investment in oil and gas properties (3,551,079) (10,027,540)
Investment in other assets and intangibles (685,545) (1,043,275)
Purchase of property and equipment (447,746) (1,311,654)
Proceeds from sale of oil and gas properties - 180,000
Proceeds from sale of property and equipment 44,211 160,000
Payment(s) on note receivable 11,218 3,529
----------- -----------
Net cash used in investing activities (4,628,941) (11,964,556)
----------- -----------
Cash flows from financing activities
Proceeds from notes payable 11,452,861 2,397,499
Sale of subordinated notes - 12,540,000
Increase in borrowings on long-term debt - 3,821,117
Proceeds from issuance of common stock 820,482 1,663,489
Repayment of long-term debt (7,814,930) (6,139,586)
----------- -----------
Net cash provided by financing activities 4,458,413 14,282,519
----------- -----------
Net increase in cash 469,519 627,475
Cash, beginning of period 867,017 665,898
----------- -----------
Cash, end of period $ 1,336,536 $ 1,293,373
=========== ===========
See notes to Consolidated Financial Statements
8
INFINITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2003 2002
--------- ---------
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts
capitalized $ 897,790 $ 413,271
Non-cash transactions:
Amortization of loan fees - Included in
full cost pool for oil and gas properties 2,714,974 1,806,920
Change in accumulated other comprehensive
income, net of income taxes 935,636 -
Property and equipment acquired through
seller financed debt, net 967,975 -
Stock-based compensation for options
issued with bridge loans recorded as
loan costs 5,790,719 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 3,132,559 2,174,070
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
The summary of registrant's significant accounting policies is
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 nine month periods ended September 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
nine months ended September 30, 2003, Infinity had consolidated losses of
approximately $5.4 million, and working capital at September 30, 2003 of
approximately $0.2 million.
Infinity also has minimum drilling and development obligations during the
next twelve months of approximately $3.0 million and leasing obligations of
approximately $0.7 million in order to maintain its interest in its present
leasehold positions. In addition, management estimates cash requirements of
$1.6 million for interest on notes and $1.0 million for general corporate
purposes during the next twelve months. Thus, in total, Infinity has current
minimum cash requirements during the next 12 months of approximately $6.3
million at September 30, 2003.
Management believes it will be able to fund its current minimum cash
requirements through its operations. In order to fund any additional 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 nine months ended September 30, 2003, the Company had three
commodity price swap agreements as follows:
10
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
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 nine months ended
September 30, 2003, the Company realized a reduction in revenue of
approximately $24,365 on the three commodity swaps which has 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 September 30, 2003, the Company has a derivative
asset of approximately $858,000 related to the remaining financial hedge.
(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 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
facilities.
(5) Oil and Gas Properties
From inception through September 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:
Nine Months From
Ended September 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
11
(6) Loan Costs
Loan costs are amortized over the term of the related loan. If the loan
is paid off prior to maturity, the costs are fully amortized at that time.
Amortization of loan costs associated with debt obtained in connection with
the exploration and development projects that are not currently subject to
depletion are capitalized to oil and gas properties. All other amortization
of loan costs is reflected in interest expense in the current period.
(7) Notes Payable and Long Term Debt
Effective June 13, 2001 Infinity 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 nine months ended
September 30, 2003, $1,375,000 of the notes were converted into 275,000 shares
of common stock, leaving an outstanding balance on the notes of $2,868,000 at
September 30, 2003. At September 30, 2003, there is unamortized loan cost
associated with the notes of approximately $0.8 million that will be amortized
at the rate of approximately $24,000 per month until the notes are paid in
full.
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. Subsequent to September 30, in
accordance with the 7% Note Indenture, Infinity issued $379,000 in additional
notes, in lieu of a cash payment, in satisfaction of accrued and unpaid
interest. The original notes and the new notes issued in lieu of cash to pay
interest are convertible to one share of common stock at $8.625 per share and
mature on April 15, 2007. During the nine months ended September 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 September 30,
2003. At September 30, 2003 there is unamortized loan cost associated with
the notes of approximately $1.6 million that will be amortized at the rate of
approximately $37,500 per month until the notes are paid in full.
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 1.5%, 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. All loan costs were fully amortized when the
bridge loan was repaid on April 18, 2003.
12
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. The loans were repaid July 7, 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 1.5%,
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. All loan costs were fully amortized when
the notes were repaid on July 7, 2003.
On July 2, 2003, Infinity's wholly owned subsidiary, Infinity Oil & Gas
of Wyoming, Inc., (Infinity-Wyoming) issued 90-Day Bridge Loan Notes for
$3,850,000 to Highbridge/Zwirn Special Opportunities Fund LP. The notes were
secured by a priority security interest in the Pipeline and Labarge
exploration properties. The notes accrued interest at a rate of 12% per
annum. Infinity-Wyoming conveyed a 4% overriding royalty interest in the
existing wells on the properties. The proceeds of the loans were used to
repay the C. E. Unterberg, Towbin 12% Bridge Notes, outstanding payables
related to the development of the gas properties and of Infinity, 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. Infinity used the Black-Scholes pricing method
assuming a five year life, weighted average risk free interest rate of 4%,
expected volatility of 131.96% and no expected dividend yield to calculate the
fair value of $1,247,390 of the options and warrants at the date of grant.
The Company also capitalized $1,250,000 in loan costs related to the estimated
fair market value of the 4% overriding royalty interest in the existing wells
on the Pipeline and Labarge properties at the time of the closing. The notes
were paid September 5, 2003 and all related loan costs were fully amortized at
that time.
On September 4, 2003, Infinity-Wyoming established a Secured Revolving
Borrowing Base Credit Facility ("Facility") whereby U. S. Bank National
Association ("U. S. Bank") is providing debt financing. The Facility provides
for funding of up to $25 million. The $5.5 million borrowed by
Infinity-Wyoming under the Facility was based on the initial borrowing base
determination. 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.
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. 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. Interest on the Facility accrues and is payable monthly at the
rate of the U. S. Bank Prime Rate plus 100 basis points. Interest is
currently 5% per annum on the Facility. The Company incurred $110,000 in loan
costs and approximately $42,000 in legal costs to establish the facility.
These costs were capitalized as loan costs and will be amortized over the
13
three year life of the facility. The initial advance on the Facility was used
to repay the $3.85 million 90-Day Bridge Loan Notes issued to Highbridge/Zwirn
Special Opportunities Fund LP, $750,000 in notes issued in January 2003 (see
below), and initial loan costs and legal fees associated with the negotiation
and closing of the Facility. The remaining proceeds are being used as working
capital and for the development of properties. The remaining unamortized loan
costs of approximately $144,000 will be amortized at approximately $4,000 per
month over the life of the Facility.
(8) Notes Payable and Long Term Debt - Related Party
Effective November 25, 2002 Infinity 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 the May extension, 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 1.5%, 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-Wyoming's Pipeline
and Labarge properties in Wyoming which is subordinated to U.S. Bank. 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 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 1.5%, expected volatility of 131.94% and no expected dividend yield to
calculate the fair value of the options at the date of grant. The remaining
unamortized loan costs at September 30, 2003 of approximately $1.5 million
associated with the notes will be amortized at the rate of approximately
$100,000 per month until the notes are paid.
On January 23, 2003 Infinity 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 were 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 5.25%, expected
volatility of 126.11% and no expected dividend yield to calculate the fair
value of the options at the date of grant. Since the fair value exceeded the
amount of the notes Infinity valued the loan costs at $750,000, or an amount
equal to the related debt. The loan costs were fully amortized September 5,
2003 when the notes were paid.
14
(9) Earnings/(loss) per Share
Basic earnings/(losses) per share were computed by dividing income/(loss)
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
September 30, 2003 and 2002 all potential common shares were anti-dilutive.
(10) Equity - Stock Options
During the nine months ended September 30, 2003, options to purchase
143,669 shares of common stock were exercised resulting in proceeds to
Infinity of $820,482. Options to purchase 35,781 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 stockholders 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 common stock at $8.75 per share when it entered
into a consulting agreement with a stockholder for the stockholder to
facilitate the $3.85 million bridge loan that was obtained July 3, 2003 and
additional financing if necessary. Infinity 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. The remaining unamortized loan costs at September 30, 2003 of
approximately $0.5 million associated with the options will be amortized at
the rate of approximately $36,000 per month until the end of the consulting
agreement in January 2005.
(11) Reclassifications
Certain reclassifications have been made to the balances for the three
month and nine month periods ended September 30, 2002 to make them comparable
to those presented for the three and nine month periods ended September 30,
2003, none of which change the previously reported net losses.
15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995), and information relating to Infinity that is based on beliefs of
management of Infinity, as well as assumptions made by and information
currently available to management of Infinity. When used in this Report, the
words "estimate", "project", "believe", "anticipate", "intend", "expect", and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of Infinity with respect to future events
based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Infinity does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Quarters ended September 30
Infinity, Inc. (Infinity) incurred a net loss after taxes of $4.5
million, or $0.55 per fully diluted share, in the quarter ended September 30,
2003 compared to a net loss after taxes of $0.3 million, or $0.04 per fully
diluted share in the quarter ended September 30, 2002.
Infinity achieved a $1.6 million increase in gross profit to $2.8 million
in the quarter ended September 30, 2003 from $1.2 million for the quarter
ended September 30, 2002. The increase in gross profit during the quarter
ended September 30, 2003 compared to the quarter ended September 30, 2002 was
the result of a $1.3 million, or approximately 53%, increase in oil field
service revenue to $3.7 million from $2.4 million. The increase in revenue was
partially offset by a $0.6 million, or 46%, increase in oil field service cost
of services provided (See OIL FIELD SERVICES discussion below). Oil field
service revenue for the quarter ended September 30, 2002 was reduced by the
elimination of $124,936 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 $1.1
million, or approximately 273%, increase in sales of oil and gas from $0.4
million for the period ended September 30, 2002 to $1.6 million in the period
ended September 30, 2003 with a corresponding increase of $0.1 million in oil
and gas production costs and $0.1 million increase in production taxes in the
2003 quarter (See OIL AND GAS PRODUCTION discussion below).
Operating expenses for the quarter ended September 30, 2003 increased
$0.6 million from $1.5 million in the 2002 period to $2.1 million in the 2003
period. Infinity and its subsidiaries recognized additional depreciation,
depletion and amortization ("DD&A") expense of approximately $0.6 million
during the quarter ended September 30, 2003, an increase to approximately $0.9
16
million for the period compared to DD&A of approximately $0.3 million for the
quarter ended September 30, 2002. The increase in DD&A was due to the
increase in the investment in Consolidated's fleet and the increase in the
depletion rate on the oil and gas producing properties.
Interest expense and finance charges increased by $5.0 million to $5.2
million for the quarter ended September 30, 2003 compared to $0.2 million for
the quarter ended September 30, 2002. The increase was primarily due to the
recognition of $4.2 million of amortization of loan costs associated with non
cash compensation (in the form of options, warrants and an overriding royalty
interest) granted in conjunction with new debt financing and $0.4 million of
amortization of cash loan costs paid when the loans were obtained. Infinity
also experienced a $0.4 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 and a decrease in the amount
of interest that was capitalized to undeveloped properties.
Infinity recognized a deferred income tax benefit of approximately $0.2
million in the quarter ended September 30, 2002. The net operating losses
generated in the third 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
September 30, 2003.
OIL FIELD SERVICES: Sales for the quarter ended September 30, 2003 increased
to $3.7 million from $2.4 million in the quarter ended September 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 $0.6 million in the quarter ended
September 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 118 wells in the quarter ended September
30, 2003 compared to 27 in the comparable period of 2002. Consolidated also
increased revenue in the quarter ended September 30, 2003 by $0.2 million
compared to the quarter ended September 30, 2002 due to increased sales of
fracturing services from its Chanute, Kansas facility. The following table
details the increase in gross revenue in millions of dollars, before
discounts, for the periods based on the number and type of core service jobs
performed (due to rounding the sum of the individual amounts presented may not
equal the totals):
Oil Field Service Statistics
($ in millions, before discounts)
2003 2002 CHANGE
JOB TYPE JOBS REVENUE JOBS REVENUE JOBS REVENUE
- -------- ---- ------- ---- ------- ---- -------
Cementing 536 $1.3 324 $0.8 212 $0.5
Acidizing 256 $0.4 210 $0.3 46 $0.1
Fracturing 374 $2.1 211 $1.2 163 $0.8
17
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 $0.6 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 $0.1 million and an increase in equipment operating
costs and maintenance of approximately $0.1 million. Depreciation on
equipment also increased by approximately $0.2 million to $0.4 million for the
quarter ended September 30, 2003 compared to depreciation of $0.2 million for
the period ended September 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 September 30, 2003
Infinity-Wyoming recorded approximately $0.4 million in revenue on the sale of
14,234 barrels of oil, (85,404 MCF equivalent) and approximately $1.1 million
in revenue on the sale of 254,645 MCF of natural gas from 19 producing wells
on its Pipeline and Labarge projects. Infinity-Wyoming also has an additional
7 wells that are awaiting completion and 10 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 September 30, 2003. The
total production expense, transportation and production taxes of approximately
$0.7 million equates to approximately $1.90 in lifting costs on total MCF
equivalents of 340,049. Infinity-Wyoming also incurred $0.1 million in
general and administrative costs and $0.5 million in DD&A expense, or
approximately $1.82 per MCF equivalent for the period.
During the quarter ended September 30, 2002, Infinity-Wyoming recorded
$0.2 million in revenue on the sale of 5,825 barrels of oil, (34,950 MCF
equivalent) and $0.3 million in revenue on the sale of 144,789 MCF of natural
gas from 14 producing wells on its Pipeline and Labarge projects.
Infinity-Wyoming had an additional 4 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 September 30, 2002. The total
production expense, transportation and production taxes of approximately $0.4
million equates to approximately $2.22 in lifting costs on total MCF
equivalents of 179,739. Infinity-Wyoming also incurred approximately $0.2
million in general and administrative costs and DD&A expense, or approximately
$0.95 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
September 30, 2003 and 2002 (due to rounding and other operating expenses the
sum of the individual amounts presented may not equal the totals):
18
Infinity-Wyoming
Production Statistics
Pipeline Labarge Total
Volumes in 000's: 2003 2002 2003 2002 2003 2002
- ---------------- -------- ------ ------ ------ -------- ------
Oil Sales Volumes (bls) 14.2 5.7 0.0 0.2 14.2 5.8
Gas Sales Volumes (mcf) 246.6 125.0 8.1 19.5 254.7 144.8
MCF Equivalents 332.1 158.9 8.1 20.6 340.0 179.7
Values in 000's:
- ----------------
Oil Revenue $421.8 $168.3 $0.0 $0.0 $421.8 $168.3
Gas Revenue $1,104.6 $226.7 $36.2 $23.6 $1,140.8 $250.2
Production Expense $178.4 $124.4 $126.1 $137.0 $318.1 $281.0
Production Taxes $160.0 $25.6 $3.5 $3.2 $163.4 $28.7
Transportation Expense $159.1 $82.3 $4.2 $7.3 $163.4 $89.7
Per MCF Equivalent:
- ------------------
Revenue $4.60 $2.49 $4.46 $1.14 $4.60 $2.33
Production Expense $0.54 $0.78 $15.53 $6.65 $0.94 $1.56
Production Taxes $0.48 $0.16 $0.43 $0.15 $0.48 $0.15
Transportation Expense $0.48 $0.52 $0.52 $0.36 $0.48 $0.50
CORPORATE ACTIVITIES: Expenses associated with corporate activities
during the quarter ended September 30, 2003 were $0.5 million, which is
comparable to the three month period ended September 30, 2002.
OTHER INCOME AND EXPENSES: Other income and expense was a net expense of
$5.2 million for the three months ended September 30, 2003 compared to $0.1
million for the three months ended September 30, 2002. Infinity recognized
the amortization of loan cost of $4.6 million as interest expense during the
period ended September 30, 2003. Infinity expects to recognize approximately
$207,000 in future monthly amortization expense associated with loan costs
through December 2004. To the extent allowable, amortized loan costs will be
capitalized to undeveloped properties with the remaining amortization
recognized as interest expense in Infinity's consolidated results of
operations.
The following table sets forth the amounts capitalized in association
with issuance of stock options/warrants, the amounts amortized in the quarter
ended September 30, 2003, the remaining unamortized cash and non-cash loan
cost and the anticipated future monthly amortization on the remaining
unamortized loan costs:
19
Option/ Amortization Unamortized
Origination Warrant in Quarter Cash Future
Date of Description Value ended & Non-Cash Monthly
Borrowing of Notes Capitalized 9/30/03 Loan Cost Amortization
- ----------- ----------- ----------- ------------ ------------ ------------
January 2001 Lasalle Bank, NA $ * $ * $ 78,626 $ 5,242
June 2001 8% Notes 924,717 68,793 778,440 23,589
April 2002 7% Notes 1,386,044 71,320 1,576,084 37,525
January 2003 $750,000 Bridge Loan 750,000 406,250 - -
April 2003 C.E.U.T. Bridge Loan 1,000,000 791,667 - -
May 2003 $3,000,000 Loan Addendum 730,130 112,894 570,606 38,507
June 2003 $3,000,000 Loan Ext. 1,120,358 177,117 933,632 62,242
June 2003 Consulting Agreement 642,841 107,140 535,701 35,713
July 2003 PetroBridge 1,250,000 1,250,000 - -
July 2003 PetroBridge 1,247,390 1,245,288 - -
September 2003 US Bank * * 143,515 4,100
---------- ---------- --------
$4,230,469 $4,616,604 $206,918
* No non-cash consideration was given as incentive to enter into these loans.
Infinity also recognized interest expense of $0.6 million in the period
ended September 30, 2003 compared to interest expense of $0.2 million in the
period ended September 30, 2002. The $0.4 million increase was mainly due to
the increase in debt outstanding compared to the third quarter of 2002, higher
interest rates on certain of the newer notes, and the decrease in the amount
of interest capitalized to non-producing properties. Infinity capitalized
approximately $0.1 million in interest to non-producing properties in the
period ended September 30, 2002 and none in the current period.
Year to Date for periods ended September 30
Infinity incurred a net loss of $5.4 million, or $0.67 per fully diluted
share, in the nine month period ended September 30, 2003 compared to a net
loss after taxes of $1.0 million, or $0.14 per fully diluted share in the nine
month period ended September 30, 2002.
Infinity achieved a $3.9 million increase in gross profit to $6.9 million
in the nine month period ended September 30, 2003 from $3.0 million for the
nine month period ended September 30, 2002. The increase in gross profit
during the period ended September 30, 2003 compared to the period ended
September 30, 2002 was the result of a $2.7 million, or approximately 45%,
increase in oil field service revenue to $8.6 million from $5.9 million. The
increase in revenue was partially offset by a $1.3 million, or 40%, increase
20
in oil field service cost of services provided (See OIL FIELD SERVICES
discussion below). Oil field service revenue for the nine months ended
September 30, 2002 was reduced by the elimination of $1.5 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 $3.7 million, or approximately 227%
increase in sales of oil and gas from $1.6 million for the period ended
September 30, 2002 to $5.3 million in the period ended September 30, 2003 with
a corresponding increase of $0.7 million in oil and gas production costs and
$0.4 million increase in production taxes in the 2003 period (See OIL AND GAS
PRODUCTION discussion below).
Operating expenses for the nine month period ended September 30, 2003
increased $0.8 million from $3.2 million in the 2002 period to $4.0 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 $1.0 million during the nine months ended September 30, 2003, an
increase to approximately $1.9 million for the period compared to DD&A of
approximately $0.9 million for the period ended September 30, 2002. The
increase in DD&A was due to the increase in the investment in Consolidated's
fleet and the increase in the depletion rate on the oil and gas producing
properties.
Interest expense and finance charges increased by $5.8 million to $6.4
million for the nine months ended September 30, 2003 compared to $0.6 million
for the nine months ended September 30, 2002. The increase was primarily due
to the recognition of $4.8 million of amortization of loan costs associated
with non cash compensation granted in conjunction with obtaining new debt
financing and the amortization of $0.5 million of cash loan costs paid when
those same loans were obtained. Infinity also experienced a $0.6 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 and a decrease in the amount of interest that was capitalized to
undeveloped properties.
Infinity recognized a deferred income tax benefit of $0.6 million in the
nine month period ended September 30, 2002. The net operating losses
generated in the nine months ended September 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 nine
month period ended September 30, 2003.
OIL FIELD SERVICES: Sales for the nine month period ended September 30, 2003
increased to $8.6 million from $5.9 million, net of inter-company
eliminations, in the nine month period ended September 30, 2002. Infinity
eliminated oil field services sales of $1.5 million from revenues for sales of
services to Infinity-Wyoming during the nine months ended September 30, 2002.
There were no material inter-company sales in 2003. Sales of cementing
services from Consolidated's Bartlesville, Oklahoma camp increased by
approximately $0.5 million and revenue from fracturing services from that camp
increased by approximately $1.3 million in the nine months ended September 30,
2003 compared to the comparable period in 2002. The increase in revenue was
21
primarily due to an increase in development activity during the second and
third quarters of 2003 as customers moved 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
September 30, 2003, revenue from cementing services provided from
Consolidated's Gillette, Wyoming facility increased by approximately $0.3
million, a total increase for the nine month period of $0.6 million due to the
Powder River Basin of Wyoming becoming an active coal bed methane development
play again. Crews from the Gillette facility cemented over 250 wells in the
nine months ended September 30, 2003 compared to 70 in the comparable period
of 2002. The following table details the increase in gross revenue in
millions of dollars, before discounts and inter-company eliminations, for the
periods based on the number and type of core service jobs performed (due to
rounding the sum of the individual amounts presented may not equal the
totals):
Oil Field Service Statistics
($ in millions, before discounts)
2003 2002 CHANGE
JOB TYPE JOBS REVENUE JOBS REVENUE JOBS REVENUE
- -------- ---- ------- ---- ------- ---- -------
Cementing 1,223 $3.1 679 $1.8 544 $1.3
Acidizing 702 $1.0 600 $0.8 102 $0.3
Fracturing 820 $4.8 670 $3.4 150 $1.4
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 nine
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 $1.3 million. The increase in cost of goods sold was due to
the increase in materials of approximately $0.4 million, and an increase in
equipment operating costs and maintenance of approximately $0.2 million.
Infinity eliminated $0.7 million in costs associated with inter-company
services in the period ended September 30, 2003. Depreciation on equipment
also increased approximately $0.5 million to $1.1 million for the nine month
period ended September 30, 2003 compared to depreciation of $0.6 million for
the period ended September 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 nine months ended September 30, 2003
Infinity-Wyoming recorded approximately $1.4 million in revenue on the sale of
47,174 barrels of oil, (283,044 MCF equivalents) and approximately $3.9
million in revenue on the sale of 883,564 MCF from its Pipeline and Labarge
projects. Infinity-Wyoming incurred $1.2 million in lease operating expenses,
$0.6 million in production taxes, and $0.6 million in transportation fees to
22
produce the oil and gas during the nine month period ended September 30, 2003.
The total production expense, transportation and production taxes of
approximately $2.4 million equates to approximately $2.04 in lifting costs on
total MCF equivalents of 1,166,608. Infinity-Wyoming also incurred $0.6
million in general and administrative costs and $0.8 million in DD&A expense,
or approximately $1.18 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 expenses for
Infinity-Wyoming were unchanged when compared to the prior year period. DD&A
costs for the period increased by $0.6 million due to the increased depletion
rate associated with the investment in developed oil and gas properties.
During the nine month period ended September 30, 2002 Infinity-Wyoming
recorded $0.7 million in revenue on the sale of 34,182 barrels of oil,
(205,092 MCF equivalent) and $0.8 million in revenue on the sale of 484,929
MCF of natural gas from its Pipeline and Labarge projects. Infinity-Wyoming
incurred approximately $0.7 million in lease operating expenses, $0.1 million
in production taxes and $0.2 million in transportation fees to produce the oil
and gas during the period ended September 30, 2002. The total production
expense, transportation and production taxes of approximately $1.0 million
equates to $1.55 in lifting costs on total MCF equivalents of 690,021.
Infinity-Wyoming also incurred approximately $0.4 million in general and
administrative costs and $0.2 million in DD&A expense, or approximately $0.82
per MCF equivalent for the period.
The following table provides statistical information by field for
production volumes, revenue and production costs for the nine month period
ended September 30, 2003 and 2002 (due to rounding and other operating
expenses 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) 47.1 34.0 0.1 0.2 47.2 34.2
Gas Sales Volumes (mcf) 861.4 459.8 22.2 24.1 883.6 484.9
MCF Equivalent 1,144.1 664.0 22.9 25.2 1,166.6 690.0
Values in 000's:
- ---------------
Oil Revenue $1,437.4 $657.2 $2.7 $0.0 $1,440.1 $657.2
Gas Revenue $3,760.3 $747.8 $96.3 $32.8 $3,856.6 $780.6
Production Expense $453.3 $378.3 $691.8 $277.4 $1,169.6 $714.3
Production Taxes $579.1 $138.4 $10.7 $4.6 $589.8 $143.0
Transportation Expense $604.4 $200.6 $8.3 $8.6 $612.6 $209.2
23
Per MCF Equivalent:
- ------------------
Revenue $4.54 $2.12 $4.33 $1.30 $4.54 $2.08
Production Expense $0.40 $0.57 $30.27 $10.99 $1.00 $1.04
Production Taxes $0.51 $0.21 $0.47 $0.18 $0.51 $0.21
Transportation Expense $0.53 $0.30 $0.36 $0.34 $0.53 $0.30
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 nine months ended September
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 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'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 been analyzed.
Production at LaBarge continues to be uneconomic. Infinity-Wyoming believes
that this may be due in part to down-hole operational problems. Quantities of
recoverable oil and gas reserves may be substantially less than our previous
estimates at December 31, 2003 if the trends continue. In addition, we will
adjust future estimates of proved reserves to reflect results of exploration
and development, prevailing oil and gas prices and other factors, many of
which are beyond our control.
Infinity-Wyoming is negotiating with an industry service company to
assist in the development of the Labarge project, and anticipates that the 10
existing wells at Labarge will be completed or re-completed in the next few
months. Depending on whether and when the contractual arrangements are
completed, and on the timing and success of completion and re-completion
efforts, Infinity-Wyoming could experience a substantial year-end reduction in
or elimination of reported reserves at Labarge.
Although operations at Pipeline continue to be profitable, production
performance has not met management's expectations. Infinity-Wyoming expects
production and reserves from the 6 wells it plans to complete in the fourth
quarter, or early in the first quarter of 2004, to be comparable to existing
wells. Depending on the success of these completions there could be a
year-end reduction in reported reserves at Pipeline. Taken together, and
depending on the results of Infinity-Wyoming's efforts over the next few
months, year-end reserve reductions could potentially be material and
potentially result in an impairment to oil and gas properties in a future
period.
24
CORPORATE ACTIVITIES: Infinity and its subsidiaries incurred approximately
$1.7 million in expenses associated with corporate activities during the nine
month period ended September 30, 2003 compared to approximately $1.2 million
in the period ended September 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. Infinity also had a $0.1 million increase in corporate salary
expense during the period ending September 31, 2003 when compared to the
period ended September 30, 2002 due to a decrease in the amount capitalized to
projects during the period.
OTHER INCOME AND EXPENSES: Other income and expense was a net expense of
$6.3 million for the nine months ended September 30, 2003 compared to $0.5
million for the nine months ended September 30, 2002. Infinity, Inc.
recognized a $5.9 million increase in interest expense of which $5.3 million
was associated with the amortization of financing costs. Infinity also
experienced a $0.6 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 and a decrease in the amount of
interest that was capitalized to undeveloped properties.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had working capital of $0.2 million
compared to a working capital deficit of $3.1 million at December 31, 2002.
The increase in the working capital was the result of an increase in current
assets of $1.7 million. The increase in current assets was mainly due to an
increase of cash on hand of $0.5 million, an increase of $0.4 million in oil
and gas revenue receivables (see increases in sales of oil and gas above)
during the period, and an increase of $0.9 million in the derivative asset
resulting from the Infinity-Wyoming hedging activity. In addition to the
increase in current assets, Infinity also reduced its current liabilities
through payment of accounts payable which resulted in a net decrease of $1.7
million, repayments of long term debt and refinancing current notes into long
term debt. These decreases in current liabilities were partially offset by a
$0.5 million increase in accrued expenses associated with oil and gas revenues
payable and production and severance taxes payable as production increased.
During the nine month period ended September 30, 2003, cash provided by
operations was $0.6 million compared to cash used in operating activities
during the nine months ended September 30, 2002 of $(1.7) million. The
increase is primarily due to the increase in income/(loss) before non cash
expenses of $2.6 million from a $(0.7) million loss to income of $1.9 million.
The increase was offset by a $0.2 million increase in cash used by 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 $1.2 million due to the change in operating assets and
liabilities in the nine months ended September 30, 2003 compared to using $1.0
million in the comparable 2002 period.
25
During the nine month period ended September 30, 2003 Infinity used $4.6
million in investing activities by investing $3.6 million in developing oil
and gas properties, $0.7 million in other assets and intangibles and $0.4
million in property and equipment. This compares to Infinity investing $10.0
million in oil and gas properties, $0.7 million in marketable securities, $1.3
million in property and equipment, and $1.0 million in other assets and
intangibles during the nine month period ended September 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 $12.0 million in investing
activities during the nine month period ended September 30, 2002.
During the nine month period ended September 30, 2003 Infinity received
$11.5 million from financing activities with which to pay interest on its
convertible notes, outstanding debt and costs incurred in the development of
its oil and gas properties. Infinity paid $7.8 in outstanding debt during the
nine month period ended September 30, 2003.
As of September 30, 2003 Consolidated had borrowings of $1.2 million on
a term loan and $0.4 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 $4.3 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 $46,000 per month. Infinity-Wyoming will also be making
payments of $25,000 per month through January 2004 on a $0.25 million bridge
loan, at which time the loan will be fully paid.
On July 3, 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 gas
wells. These notes were repaid from the proceeds of the U.S. Bank National
Association Facility discussed below.
On September 4, 2003, Infinity Oil and Gas of Wyoming, Inc. established
a Secured Revolving Borrowing Base Credit Facility ("Facility") whereby U. S.
Bank National Association ("U. S. Bank") will provided debt financing The
Facility provides 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 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.
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 rate of the U. S. Bank Prime Rate plus 100 basis points. Interest is
currently 5% per annum on the Facility. The initial advance on the Facility
26
was used to repay the $3.85 million bridge loans issued in July 2003, the
$0.75 million notes issued in January, 2003, initial loan costs and legal fees
associated with the negotiation and closing of the Facility. The remaining
proceeds are available for working capital needs and to develop properties.
Infinity currently has $2.9 million in outstanding 8% subordinated
convertible notes payable. These notes accrue $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.
As of September 30, 2003 Infinity had $10.8 million in 7% subordinated
convertible notes payable outstanding. Interest payments are due in April and
October of each year. Subsequent to September 30, 2003 Infinity issued
$379,000 in additional notes in lieu of cash to pay accrued interest on the
outstanding notes. There are no payment obligations, other than interest, on
the notes until April of 2007. Including the additional $379,000 in notes
issued subsequent to September 30, 2003 interest on these notes accrues at
approximately $65,500 per month.
Infinity received proceeds from the issuance of common stock, upon the
exercise of 143,669 options, of $0.8 million during the nine month period
ended September 30, 2003.
Working capital available as of September 30 was $0.2 million. Infinity
expects to spend approximately $2.7 million meeting its minimum drilling and
completion obligations, $0.3 million on Labarge environmental impact study
obligations, and approximately $0.7 million on lease rental and farm out
agreements during the next year. Infinity will also incur approximately $1.6
million in additional interest on its outstanding notes. Infinity also
expects to incur approximately $1.0 million in corporate cash usage during the
next year.
Consolidated expects to generate approximately $3.5 million in operating
cash flow from the oil field service business through the next twelve months.
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 $3.0 million
in operating cash flow from oil and gas production operations during the same
period. During the third quarter of 2003 management 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. As of November 19, 2003, production has failed to reach
these levels and Infinity-Wyoming has revised its estimates to reflect
production of approximately 3,500 MCF per day through September 2004.
Production has failed to reach the expected levels due to a faster than
expected decline in production levels from existing wells and delays in
drilling and completing additional wells on the Pipeline acreage.
Infinity-Wyoming has a contract in place to sell 3,500 MMBTU per day at $4.71
per MMBTU through March, 2004 and utilized a twelve month Henry Hub futures
price, less $0.30 estimated pricing differential for location and $0.55
27
gathering and transportation fee for calculating the revenue for April 2004
until September 2004. Production expenses are expected to stay fairly steady
during the period.
Recap of Current Minimum Cash Requirements
For the Twelve Months Ending September 30, 2004
(In Millions)
Current working capital $0.2
Property development required to
preserve rights under farm-out agreements $2.7
Interest on notes 1.6
Corporate cash usage 1.0
Lease rental and farm out agreements 0.7
Labarge environmental impact study 0.3
----
Total current requirements ($6.3)
Sources of Cash
Consolidated operations $3.5
Infinity-Wyoming operations 3.0
----
Total sources $6.5
----
Cash available $0.4
====
In addition to its operating needs, Consolidated anticipates it will
incur capital expenditures of approximately $0.7 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
the $0.6 million available credit on its current capital expenditures facility
with LaSalle Bank will be sufficient to meet Consolidated's capital
expenditure needs of approximately $1.0 million.
Infinity-Wyoming could potentially have capital expenditures, subject to
permitting requirements, beyond its development obligations discussed above of
up to approximately $12.6 million. Those additional anticipated expenditures
are as follows: (1) 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; (2) complete ten additional production wells and two disposal wells
and install the related facilities on the LaBarge acreage at a cost of
approximately $5.0 million; (3) drill and complete a horizontal Niobrara well
in the Sand Wash Basin at a cost of $1.8 million; and (4) 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;. Infinity-Wyoming also
anticipates incurring additional costs of approximately $0.3 million for
various land acquisitions to fill in acreage within existing properties. In
order to fund Infinity-Wyoming's potential 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, partnerships or
strategic alliances for the development of its undeveloped acreage or through
28
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.
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 estimated quantities of proved reserves at
December 31, 2002 were prepared by independent petroleum engineers Wells
Chappell and Company, Inc. 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.
OIL AND GAS PROPERTIES, DEPRECIATION AND FULL COST CEILING TEST:
Infinity follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and gas
reserves are capitalized. Such capitalized costs include lease acquisition,
geological and geophysical work, delay rentals, drilling, completing and
equipping oil and gas wells, and salaries, benefits and other internal
salary-related costs directly attributable to these activities. 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'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.
29
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. 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 un-escalated 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. Infinity has not been required to recognize any additional
depletion in accordance with the full cost ceiling test. However, a decline
in prices received for oil and gas sales or an increase in operating costs
subsequent to September 30, 2003 or reductions in estimated economically
recoverable quantities could result in a requirement that Infinity recognize
an impairment to 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 DEPRECIATION: Equipment utilized in the oil
field service business and to support operations on Infinity's oil and gas
properties is 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.
30
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
$2.98 to a monthly high of $5.01 per MCF during the nine months ended
September 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 nine month period ended September 30, 2003, the
effect of Infinity-Wyoming hedging its gas production compared to if it had
sold the gas on the spot market was a reduction in revenue of approximately
$24,000.
ITEM 4.
CONTROLS AND PROCEDURES
As of September 30, 2003, under the supervision and with the
participation of its Principal Executive Officer and the Principal Financial
Officer, management has evaluated the effectiveness of the design and
operation of Infinity's disclosure controls and procedures (as defined in Rule
13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934). Based
on that evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that Infinity's disclosure controls and procedures were
effective as of September 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,
Infinity's internal control over financial reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On July 2, 2003, Infinity Oil & Gas of Wyoming, Inc. issued 90 Day Bridge
Loan Notes for $3,850,000 to Highbridge/Zwirn Special Opportunities Fund LP.
In conjunction with the notes Infinity issued 5 year options to purchase
250,000 shares of Infinity common stock for $8.75 per share. In connection
with these transactions Infinity relied on Section 4(2) of the Securities Act
of 1933.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Form of Warrant Agreement Filed herewith
for 12% Bridge Note electronically
Financing
10.2 Form of Assignment of Filed herewith
Overriding Royalty Interest electronically
for 12% Bridge Note Financing
10.3 Credit agreement dated as Filed herewith
of September 4, 2003 between electronically
Infinity Oil and Gas
of Wyoming, Inc. and
U.S. Bank National Association
31.1 Certification of Principal Filed herewith
Executive Officer Pursuant electronically
to Section 302 of the
Sarbanes-Oxley Act of
2002
31.2 Certification of Principal Filed herewith
Financial Officer Pursuant electronically
to Section 302 of the
Sarbanes-Oxley Act of
2002
32
32.1 Certification of Principal Filed herewith
Executive Officer Pursuant electronically
to 18 U.S.C. Section 1350
32.2 Certification of Principal 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 August 13, 2003 reporting information
under Items 7 and 12 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: November 19, 2003 By:/s/ Stanton E. Ross
Stanton E. Ross, President
Dated: November 19, 2003 By:/s/ Jon D. Klugh
Jon D. Klugh, Chief Financial Officer
33