-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KHbQGMtLoIq0TjkGJRVEJXa/B0Kw3CXq7AUGGRp1iwBKlc8GYik6U8kLOApLGajd H73KwqRGBJx7qmRNeBWDCQ== 0000897101-97-000913.txt : 19970814 0000897101-97-000913.hdr.sgml : 19970814 ACCESSION NUMBER: 0000897101-97-000913 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINITE GRAPHICS INC CENTRAL INDEX KEY: 0000744500 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MAILING, REPRODUCTION, COMMERCIAL ART & PHOTOGRAPHY [7330] IRS NUMBER: 410956693 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13042 FILM NUMBER: 97659566 BUSINESS ADDRESS: STREET 1: 4611 E LAKE ST CITY: MINNEAPOLIS STATE: MN ZIP: 55406 BUSINESS PHONE: 6127216283 MAIL ADDRESS: STREET 2: 4611 E LAKE STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55406 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended April 30, 1997 Commission File No. 0-13042 INFINITE GRAPHICS INCORPORATED (Exact name of Company as specified in its Charter) Minnesota 41-0956693 (State of Incorporation) (I.R.S. Employer Identification No.) 4611 East Lake Street Minneapolis, Minnesota 55406 (Address of Principal Executive Offices) (612) 721-6283 (Company's Telephone Number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period as Company was required to file such reports) and (2) has been subject to such filing requirements for the past ninety days. Yes _X_ No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of Company was $982,875 at April 30, 1997. The market value is based on $ .6875 per share, which was the average of bid and asked prices on April 30, 1997. For this purpose, shares held by all executive officers and directors have been excluded, but without admitting all such persons are affiliates for other purposes. Number of shares of common stock outstanding as of April 30, 1997, was 2,462,575. Documents incorporated by reference: See item 14 on pages 43-45 of this report. Total number of pages including cover: 46 PART I Item 1. Description of Business. (a) General Development of Business. Infinite Graphics Incorporated (hereinafter referred to as "the Company") was incorporated in Minnesota on November 26, 1969. On September 5, 1984, the Company became a public company as a result of a registered offering of common stock. General. The Company was organized in 1969 to provide reprographic services to architects and engineers. In 1973, the Company expanded its graphic reproduction services primarily into the electronics industry. The precision graphics produced by the Company are often that of an electronic circuit that may be used to produce a printed circuit board, but may also include precision graphics for other products. Prior to 1975, the technique used by the Company for producing precision graphics involved the hand drafting of a large scale model of the graphic image using precision drafting instruments. The drafting image was then photographically reduced to the desired size. In 1975, the Company first began developing computer software programs for artwork generation. Also in 1975 the Company began development of computer-aided design (CAD) equipment that enables faster and more accurate design of precision graphics. These computer software programs enable the Company to more accurately and quickly produce most of its precision graphics products. All of the precision graphics now generated by the Company are produced through the use of CAD or computer-aided manufacturing (CAM) systems. In 1980, the Company acquired substantially all of the assets and equipment of the printed circuit board design division of Data Graph, Inc. It was at this time that the Company commenced designing printed circuit boards as a service for others. In 1981, utilizing experience gained through designing its own CAD/CAM software for its service operations, the Company began development of a desktop CAD/CAM system to meet growing industry demand. In 1984, the IGI Desktop 2100 CAD/CAM system was introduced to the marketplace. In March 1986, the Company acquired a laser photoplotter that allowed the Company to provide same day service to its customers. Due to increased demands, the Company acquired additional laser photoplotters in 1988, 1992, 1995, and 1997. Some of the photoplotters have scanning capability allowing the Company to generate a CAD/CAM database from old hand drafted artwork. In 1993, the Company wrote software for one of its photoplotters that allows the plotter to plot various shades of gray scale and has allowed the Company to plot satellite images and orthophotos for the mapping industry. In 1994, the Company added the capability of plotting for the graphic arts industry. In 1995, the Company added a higher precision 1/16 mil laser photoplotter to its Minneapolis facility. In 1997, the Company added another laser photoplotter to its California facility. Additionally, during fiscal 1988, the Company licensed its ECAM software on an exclusive basis to a Fortune 100 company. The Company maintained the right to market the software to specified customers and maintained its then existing installed base. Subsequently, because certain sales objectives were not attained by the licensee, in 1990 the Company, re-acquired the right to compete in selling the software covered by this license agreement to the precision graphics marketplace. During fiscal 1997, the Company continued its focus into the precision graphics marketplace, increasing its service potential and enhancing its product, ICE, introduced in the spring of 1995, for the analysis and cleanup of digital data from the design and manufacturing of printed circuit boards. (b) Financial Information about Industry Segments. The Company has two distinct but related business segments. The first segment, the Engineering Services Division, designs and produces computer generated precision graphics, normally on a custom basis and primarily for the electronics industry. In addition, this segment produces precision glass products, designs printed circuit boards, and provides CAD/CAM services. The second business segment, the System Software Division, designs, assembles, and markets computer-aided design and manufacturing software systems. These design systems primarily consist of design/manufacturing software for 32 bit micro-computers. The Company occasionally sells third party vendors' software. The Company normally sells software only but will integrate hardware/software when the customers desire a turnkey solution. The percentage and dollar amount of the Company's sales of its Engineering Services Division and System Software Division for the years ended April 30, 1997, 1996, and 1995, are as follows:
Sales for Yr. Ended Sales for Yr. Ended Sales for Yr. Ended April 30, 1997 April 30, 1996 April 30, 1995 ------------------------ ------------------------ ------------------------ Product % Amount % Amount % Amount - ----------- ----- ---------- ----- ---------- ----- ---------- SERVICES DIVISION 69.2% $4,043,174 63.0% $3,204,247 61.3% $2,548,288 SOFTWARE DIVISION 30.8 1,801,585 37.0 1,882,806 38.7 1,608,032 ----- ---------- ----- ---------- ----- ---------- TOTAL 100.0% $5,844,759 100.0% $5,087,053 100.0% $4,156,320 ===== ========== ===== ========== ===== ==========
Reference is made to Note 11 of the Financial Statements for revenues, operating profits and identifiable assets attributable to the Company's two business segments. (c) Business. ENGINEERING SERVICES DIVISION Services. Using the customer's data or design, the Company produces a precision graphic image, in almost all cases, by using a laser plotter. The precision graphic image produced by the Company is generally provided to the customer on film or glass. The film or glass is then used to reproduce the precision graphic image on metal, glass, or plastic material that has been photographically sensitized. Through chemical etching or electroplating processes, metal, glass, or plastic materials are then manufactured by the Company's customer into the desired product, often in a mass production process. The precision graphic images produced are often that of an electronic circuit and are generally used to produce thin copper circuits to be assembled into electronic circuit boards. However, the images may be used to manufacture lead frames for integrated circuit chips, photo chemically etched and plated parts, scales or liquid crystal displays (LCD) and other flat panel displays. Other precision graphic services provided by the Company involve the production of film or glass photographic images or the production of precision graphics on paper or on a magnetic tape or disk. The customer may then use the tape or disk to produce its own film or product. The Company also assembles its precision graphics with other components to supply sub-assemblies. The Company's glass products all involve the generation of precision graphics by the Company. These products include precision rulers and grids, and other items produced to a customer's specifications, such as reticles and glass rings (called encoder disks) used in the assembly of high precision machines such as CAT scanners and laser gyro directional devices. The design of printed circuit boards involves the conversion of the customer's basic design of the circuit and its various electronic components into an exact image of that circuit for a board of pre-established size. The Company uses its computer-aided design systems to supply printed circuit board artwork. During fiscal 1989, the Company instituted a scanning service for its customers. Scanning enables customers to convert old hand drafted artwork and drawings to electronic CAD databases. Scanning is an inexpensive solution for printed circuit board manufacturing houses with tooling changes. The benefits to the customer from scanning are increased precision artwork, repeatability, larger yields of boards, faster turnaround, and a wider range of editing capabilities. The Company purchased additional scanning equipment in fiscal 1990 to increase precision capabilities for its customers. The Company opened a sales and production facility in Salem, New Hampshire, on January 3, 1990. It was established to service the Boston and Northeastern U.S. marketplace. As of May 1, 1994, the Company entered into a letter of intent to form a joint venture. By contributing substantially all of the assets of the Company's New Hampshire operation, the Company owned 50 percent of the equity of the joint venture and a major New Hampshire customer owned the other 50 percent. From May 1, 1994 until November 27, 1996, the New Hampshire operation was operating as a joint venture pursuant to the letter of intent and the Company's investment in the joint venture was recorded using the equity method of accounting. On November 27, 1996 the Company purchased from the joint venture partner a photoplotter and all of the partner's interest in the joint venture. The Company also agreed to assume all the assets and liabilities of the joint venture. The acquisition was accounted for under the purchase method of accounting. The Company's revenues and expenses include the results of operations of the former joint venture beginning December 1, 1996. Prior to December 1, 1996, the operations of the former joint venture were included in equity in income of joint venture in the statements of operations. During fiscal 1997, the New Hampshire facility generated approximately $447,000 in revenue, of which $173,000 were included in the Company's revenue, compared to $500,000 in fiscal 1996 and $544,000 in fiscal 1995. To service the Los Angeles marketplace, the Company acquired the assets of a California precision graphics service company from bankruptcy court on September 13, 1995. The acquisition was accounted for under the purchase method of accounting. The Company included the results of operations of the California precision graphics company beginning September 13, 1995 and revenues were $484,000 and $382,000 for fiscal 1997 and 1996, respectively. Equipment and Production. In order to produce its precision graphics, the Company uses its own IGI software products: ProCADD (also configured as ProFLEX), CAM, EXT, ICE, PAR and CheckMate; equipment manufactured by Racal-Redac, and other software and hardware systems. Using such computer-aided design systems, the circuit or other graphics are designed by the Company's personnel to the customer's specifications. A graphic design produced on the CAD/CAM system can then be stored electronically, and this information is then used to feed a plotting device that draws the design. The plotting device can be a pen and ink plotter, or more often for precision graphics, a photoplotting device. The Company owns or leases a number of photoplotting devices. A photoplotting device is a highly stable platform upon which film or glass is placed. The motion of the light and/or platform is controlled by information stored on the disk produced on the Company's CAM system. These photoplotters include a Gerber 4135 in which the light pen positioning is laser controlled; a Gerber 1434, which is installed in a class 100 clean room; three Cymbolic Science Fire 9000 laser photoplotters, and three Optrotech 5008 imaging systems. The Company also owns photographic equipment used in photo reduction, film processors, step and repeat equipment, custom equipment, and various other photographic, measuring and computer equipment. Customers. The Company's Services Division customers are generally in the business of producing electronic products. During fiscal 1997, sales for the Services division accounted for approximately 69 percent of the Company's total sales. The precision graphic and circuit board design services of the Company are sometimes requested because of the needed precision, or because certain phases of the process necessary to produce the required graphics are not within the customer's capability. However, it is more often the case that some or all phases of such production are within the customer's capability, but that the customer has made a business decision to engage the services of the Company. The Company provided custom precision graphics and circuit board design services to approximately 400 customers during fiscal 1997. During fiscal 1997, no one customer in the Services Division accounted for ten percent or more of the Company's sales. The Company's potential customers include virtually all of the approximately 650 captive and merchant printed circuit board fabrication facilities in the United States. Marketing. During fiscal 1997, the Company continued focusing its marketing activity primarily on printed circuit (PC) designers and captive and merchant printed circuit board (PCB) manufacturers. Market growth and the Company's efforts are focused on high-end phototools for LCD panels, multi-chip modules, flexible wiring boards and photomasks. This approach continues to take advantage of the Company's 20-plus years' experience in dealing with the PCB industry. The distribution channels include a combination of direct Company sales personnel and independent sales agents. These personnel are organized to address specific segments within the general PCB market. Historically, the product responsibility of the Company's marketing efforts at a given account has been split. Since 1992, the Company has combined product responsibilities, first at printed circuit board manufacturing accounts and later at larger Fortune 500 and electronics companies. The sales effort is supported internally by a customer follow-up program involving in-house sales support. The purpose of the follow-up program is to identify the impact that the Company's goods and services are having upon the customers and also to adjust what is being offered to meet current market needs. The service side of the business continues to emphasize phototooling. Coupled with that are two new services for graphic arts and mapping, designed to expand the Company's markets. The Company also continues to offer design capability for the PCB and precision graphics marketplace. SYSTEM SOFTWARE DIVISION Products. The Company markets six software products: CAM, EXT, PAR, ICE, ProCADD (also configured as ProFLEX) and CheckMate. CAM A general product for making tooling for the printed wiring board (PWB) fabricator. EXT Generates electrical net list for graphics and has the capability to compare it to other net lists. It also has full support of netlist for bare board electrical test. PAR "Producibility Analysis Report" analyzes and presents to the user design and manufacturing plans as well as possible design modifications to increase yields and reduce costs. ICE "Interactive Conflict Editor" is used to automatically fix the problems found by PAR. PROCADD IGI's basic CAD package for general 2D applications. PROFLEX IGI's extended CAD package, primarily packaged with special software modules for flex circuit design and chemical milling. CHECKMATE A general product for verifying tooling data generated by PWB designers. Manufacturing. The Company's manufacturing activities related to its CAD systems consist primarily of developing and enhancing software, modifying and assembling the various modules of its software system, and testing of the systems. These manufacturing activities are conducted at the Company's facilities in Minneapolis. Customers. The Company's Software Division customers are generally in the business of designing and manufacturing products for the electronics industry. The Company's customers also generally use CAD/CAM products and are knowledgeable of what the Company's CAD/CAM products provide. During fiscal 1997, sales for the Software Division accounted for approximately 31 percent of the Company's total sales. The Company's Software Division sold products and services to approximately 70 customers during fiscal 1997. No one customer accounted for ten percent or more of total Company sales during fiscal 1997. Marketing and Distribution. The Company has five people involved with the sales of Software Division products as of April 30, 1997. During fiscal 1997, approximately 80 percent of sales of software division products were made by direct sales personnel, and it is anticipated that direct sales personnel, rather than independent representatives or dealers, will continue to be the primary distribution channel for North America. Distributors and dealers are the primary channel for Asia and Europe. Product sales promotion activity in fiscal 1997 involved the use of trade shows, direct contact and direct mail, along with press releases to generate leads for sales follow up. During fiscal 1997, the Company has continued to concentrate its marketing and product development activities on supporting the printed circuit fabrication segment of the electronics industry. Its efforts deal with three types of applications: flex design, printed wiring board manufacturing, and electrical test. SOURCES OF SUPPLY Services. The Company believes nearly all of the supplies and equipment used in its precision graphics business are readily available from a number of sources, except for the following items. During fiscal 1997, the Company continued to receive photosensitive glass from Eastman Kodak. If Eastman Kodak ceases to provide the Company with such glass, the Company would have to pay higher raw material prices for higher quality materials from an alternative source that is available to the Company. In addition, the Company continues to rely upon Gerber Scientific Instruments, Inc., Cymbolic Sciences and Orbotech, Inc. to provide spare parts to repair the photoplotting instruments purchased from them and used by the Company. The Company also relies on limited vendors for its iron oxide and chrome glass blanks. Loss of any source of such supply could adversely affect the Company's business. Software. The Company believes nearly all of the supplies and equipment used in its Software business are available from a number of sources. If the Company is required to change vendors, the Company may have difficulty finding vendors as needed because of high industry demand. COMPETITION Services Division. The precision graphics services that the Company offers through its Services Division, are composed of three main product areas. The first is photoplotting and its associated processes, the second is design, and the third is large area fine line tooling and glass products. In the photoplotting area, there are approximately 100 companies in the U.S. which offer the same general services. The major differences between the Company and the competitors are based on capabilities of photoplotting equipment, programmers dedicated to automating work flows, and partnering with our customers through installation of automation software which increases efficiencies, quality and fast delivery. Based on these differences, the Company can enjoy certain competitive advantages; however, it is possible that several competitors could acquire the same equipment, eliminating the Company's competitive advantage in photoplotting. It is also possible for a competitor to write automation software and install it, which would reduce the Company's advantage. The design services portion of the precision graphics business faces a minimum of 300 competitors nationally, ranging from very small garage-type operations to those that are several times the Company's size. Many of these companies are totally focused on this market and are located near their customers and therefore hold a competitive advantage. The large area fine line tooling and glass products portion of the business has limited competition; however, some of this competition has substantially greater financial resources than the Company. Geographical location is not a competitive factor for this market. The Company must continue to maintain very high levels of service and quality which permit it to differentiate itself from the competitors. Software Division. The Company's software products face strong competition in the CAM marketplace from approximately ten companies. Competitors include Tibor Darvais, Optrotech, Barco, Valor and CSI Inc. All of those companies currently have financial, technical, and marketing resources that are equal or greater than those of the Company. In addition to the existing competitors, any number of smaller companies could enter the marketplace and further dilute the availability of business. The principal method of competition is based on marketing and technical capability. RESEARCH AND DEVELOPMENT The Company spent approximately $328,000 on research and development activities during fiscal 1997, as opposed to $338,000 in fiscal 1996 and $269,000 in fiscal 1995. In 1985, the Company primarily completed its research and development regarding its CAD/CAM software. Since this date, the Company has focused its activity on enhancing the capabilities and features of its CAD/CAM software in an effort to improve the marketability and life of the product. In fiscal 1997, the Company concentrated on providing services and software for the precision graphics marketplace, primarily for the manufacture of electronic products. The Company continues to investigate the possibility of acquiring developed products to complement its current products or to enter into license agreements to market its developed products. ENVIRONMENTAL COMPLIANCE The Company believes it is in compliance with all federal, state and local requirements with regard to air and waste water emissions and has no plans to make significant capital expenditures for environmental control facilities. EMPLOYMENT The Company had 57 full-time and 7 part-time employees as of April 30, 1997. The number of employees is expected to vary during fiscal 1998 depending upon the Company's efforts to automate and expand. None of the Company's employees are covered by a collective bargaining agreement, and the Company believes its relations with employees are good. Item 2. Properties. (a) Real Property. The business of the Company was conducted at the five following locations during fiscal 1997. The Company sold its Plymouth facility in December 1990 and is leasing back approximately 3000 square feet for its micro production (clean room facility) and some storage. The Company substantially utilizes the following facilities and believes they are suitable for its needs. Approx. Square Location Purpose Footage Terms - -------- ------- ------- ----- 4611 East Lake St. Service operations 9,200 (1) Minneapolis, MN 4621 East Lake St. Systems operations 5,000 (2) Minneapolis, MN and administration 12855 Highway 55 Service Operations 3,000 (3) Plymouth, MN 8 Industrial Way Service Operations 2,500 (4) Salem, NH and Systems sales 17332 Von Karman Service Operations Irvine, CA and sales 3,400 (5) (1) Mortgage between the Company and Republic Acceptance Corporation for the 4611 East Lake St. facility. The mortgage is effective as of January 20, 1995. The Company makes monthly principal payments of $4,000 per month plus interest at fourteen percent per annum. The note requires a balloon payment of $100,000 at the maturity date of January 20, 1998. (2) Lease between the Company and Infinite Properties, a partnership of the Company's Chairman of the Board, Clifford F. Stritch, Jr., and Daniel R. Schultz, dated October 31, 1983. The original term of the lease expired on October 31, 1988. The Company exercised its option to renew the lease for an additional five year period. The lease was subsequently amended to extend to April 30, 1997. The Company still occupies these premises and is negotiating a new lease. The rent is currently $2,750 per month. (3) Lease between the Company and Anchor Paper is for space for the Company's clean room housing the Gerber 1434 photoplotter. The rent is $2,043 per month plus $500 for utilities. The current lease terminates December 31, 1997, but is cancelable any time with a ninety-day notice from the Company. (4) Lease between the Company and Harold J. Brooks, a real estate developer who owns the property in which the Company's New Hampshire operation is located. On January 24, 1996 the Company exercised its option to extend the term of the lease for two years. The lease term is from January 1, 1996 through December 31, 1997. The basic rent is $15,000 and $15,625 for the first and last year, respectively. The Company also pays real-estate taxes, utilities and common-area maintenance fees under the terms of this lease. (5) Lease between the Company and Superior Investment Company, L.P., a California limited partnership, for the 17332 Von Karman facility. The commencement date of the lease is September 1, 1995, for a term of 36 months expiring on August 31, 1998. The rent for the first year is $32,400 or $2,700 per month. The rent for the second year is $33,696 or $2,808 per month. The rent for the third year is $34,824 or $2,902 per month. The Company believes all of the above properties have unique characteristics and significant improvements specific to the Company's business and are of diminished value to a general commercial tenant. Identification and development of comparable locations would require a significant investment on the part of the Company. Item 3. Legal Proceedings. There are no material legal proceedings pending to which the Company is currently a party or to which the property of the Company is the subject. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal 1997. PART II Item 5. Market for the Company's Common Stock and Related Security Holder Matters. (a) The Company's Common Stock is quoted in the over-the-counter market. The following table sets forth the range of high- and low-bid quotations for each quarter from May 1995 through April 1997. Fiscal 1997 Fiscal 1996 -------------------------- ----------------------- High Low High Low ------- ------- ------- ----- May-July $ 11/16 $ 7/16 $ 1-1/4 $ 1/2 August-October $ 1 $ 9/16 $ 1 $ 5/8 November-January $ 1-1/8 $ 13/16 $ 3/4 $ 1/2 February-April $ 1 $ 11/16 $ 3/4 $ 1/2 Quotations are from the over-the-counter market and reflect inter-dealer prices without retail markups, markdowns, or commissions and may not represent actual transactions. (b) At April 30, 1997, the number of holders of the Company's Common Stock was approximately 450, consisting of 227 record holders and approximately 223 shareholders whose stock is held by a bank, broker or other nominee. (c) The Company has paid no dividends to date and does not anticipate the payment of dividends in the immediate future, retaining cash to fund future growth. The Company's credit agreement prohibits the payment of dividends. (d) During the fourth quarter of fiscal 1997, the Company made one unregistered sale of securities. On March 3, 1997, Robert Fink, a current shareholder of the Company, exercised outstanding warrants to purchase 80,000 shares of the Company's Common Stock, at the exercise price of $.125 per share. These shares were issued in a private transaction, as were the warrants, and the Company relied on the exemption from registration contained in Section 4(2) of the Securities Act of 1933. Item 6. Selected Financial Data.
Year Ended April 30 ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ----------- ----------- ---------- ----------- Net Sales $ 5,844,759 $ 5,087,053 $ 4,156,320 $ 5,147,349 $ 4,135,989 Income (Loss) Before Extra- ordinary Items $ 208,716 $ 143,565 ($ 384,430) $ 437,533 ($ 375,376) Net Income (Loss) $ 208,716 $ 143,565 ($ 384,430) $ 586,628 $ 481,299 Net Income (Loss) Per Common and Common Equivalent Share $ .08 $ .05 ($ .17) $ .21 $ .21
Net earnings for year ended April 30, 1994, include approximately $149,000 in extraordinary items from the forgiveness of debt, net of income tax effect. Net earnings for year ended April 30, 1993, include $150,000 in write-down of assets and approximately $857,000 in extraordinary items from the forgiveness of debt and benefit of net operating loss carryforwards. April 30 -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- --------- ---------- ---------- ---------- Total Assets $3,333,117 $2,932,565 $2,956,911 $2,639,830 $2,304,126 Long Term Obligations 118,860 196,164 280,364 140,154 365,888 Stockholders' Equity 1,363,323 1,138,607 995,042 1,369,472 695,553 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Securities Litigation Reform Act. Except for the historical information contained herein, the matters discussed in this annual report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission. The financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the Company's balance sheet as of April 30, 1997, the Company's current liabilities exceeded its current assets by $261,000. In fiscal 1997, the Company concentrated on providing services and software for the precision graphics marketplace, primarily for the manufacture of electronic products. The Company focused its software marketing and sales efforts on the CAM line, particularly the successful PAR module and its companion module, ICE, introduced in the spring of 1995. During fiscal 1998, the Company has plans to increase sales approximately the same as that achieved in fiscal 1997. If these sales are not achieved and additional debt and/or equity financing is not obtained, the Company will not be able to implement its growth plans and could be required to reduce software development activity. Net sales were $5,845,000 in fiscal year 1997, versus $5,087,000 in 1996 and $4,156,000 in 1995. Operating profits (before general corporate expenses and interest expenses) were $2,014,000 in fiscal 1997, versus $1,778,000 in fiscal 1996 and $1,360,000 in fiscal 1995. Net income was $209,000 in fiscal year 1997, and $144,000 in fiscal 1996 versus a net loss of $384,000 in fiscal 1995. Results of Operations. The Company has two business segments: Engineering Services Division ("Services") and System Software Division ("Software"). The results of these two segments are discussed in the following discussion and analysis: NET SALES BY DIVISION
1997 1996 1995 ------------------------- ------------------------ ---------------------- $ Percent $ Percent $ Percent Division Thousands of Total Thousands of Total Thousands of Total Services $4,043 69% $3,204 63% $2,548 61% Software 1,802 31 1,883 37 1,608 39 ----------- ------ ---------- ------ ----------- ------ Total Sales $5,845 100% $5,087 100% $4,156 100%
The Company's Engineering Services Division provides precision graphics products primarily to the electronics industry. Sales for fiscal 1997 were $4,043,000, an increase of $839,000 over fiscal 1996, or 26 percent. As a result of the increase in sales, the Engineering Services Division had an operating profit of $1,207,000 in fiscal 1997 versus $869,000 in the prior year. The margins for the Company increased primarily due to increased revenue. The increase in Engineering Services sales is attributable to three factors: 1) a full year of California operations resulting in $102,000 of additional revenue, 2) sales of $173,000 associated with the purchase of the joint venture on November 27, 1996, and 3) an increase in the Company's core business of $564,000. Engineering services revenues in fiscal 1996 of $3,204,000 were 26 percent higher than revenues of $2,548,000 in 1995. The majority of the Company's increase in service sales in fiscal 1996 can be attributed to increased micro product sales and to the acquisition of the California precision graphics service company, which contributed $382,000 of sales. Engineering services represented 69 percent of total revenues in fiscal 1997, up from 63 percent in 1996 and from 61 percent in 1995. The Company entered into a letter of intent on May 1, 1994 with a major customer in New Hampshire pursuant to which that customer acquired a 50-percent ownership of the Company's New Hampshire operation. During fiscal 1997, the Company purchased the joint venture partner's interest. During the first seven months of fiscal 1997 and all of fiscal 1996 and 1995, the New Hampshire operations were recorded using the equity method. From the purchase date forward, the New Hampshire's revenue and expenses are included in the operations of the Company. The New Hampshire operation had sales of $447,000 in fiscal 1997, of which $173,000 were included in revenue, $500,000 in fiscal 1996, and $544,000 in fiscal 1995. The Company acquired the assets of Infinite Technologies of Irvine, California from bankruptcy court on September 13, 1995. Infinite Technologies was a leader in photoplotting technologies in the Los Angeles area for the past seven years The Company's System Software Division continues to focus on phototooling software and services, having eliminated its mechanical software and hardware systems from this market. The Company has enhanced its software with advanced capabilities for the printed circuit market segment and has concentrated its efforts on marketing and customer development in this segment. The Software Division sales were $1,802,000 in 1997, a decrease of $81,000 or 4 percent over fiscal 1996. The Software Division had an operating profit in 1997 of $807,000 versus $909,000 in 1996. The decrease in fiscal 1997 software sales and operating profit is attributable to a lack of large orders when compared to last year. Software sales of $1,883,000 in fiscal 1996 were up 17 percent from revenues of $1,608,000 in the prior year. The Software Division had an operating profit in 1996 of $909,000 versus $752,000 in 1995. The increase in software sales and operating profit was the result of the Company's newly assembled sales force. In fiscal 1997, software sales were 31 percent of total revenues versus 37 percent in 1996 and 39 percent in 1995. OPERATING PROFIT BY DIVISION
1997 1996 1995 ---------------------------- ------------------------------ ------------------------- Percent of Percent of Percent of $ Operating $ Operating $ Operating Thousands Profit Thousands Profit Thousands Profit Services $1,207 60% $ 869 49% $ 608 45% Software $ 807 40% $ 909 51% $ 752 55% Total Operating Profit Before Unallocable Expenses $2,014 100% $1,778 100% $1,360 100% Selling, General & Administrative, and Interest Expenses ($1,820) ($1,654) ($1,803) Net Income (Loss) $ 209 $ 144 ($ 384)
The Company's overall gross margin in fiscal 1997 was 40 percent, compared to 42 percent in fiscal 1996 and 41 percent in fiscal 1995. The $2,358,000 gross profit for fiscal 1997 compares to $2,138,000 for fiscal 1996 and $1,710,000 for fiscal 1995. The Company's total selling, general and administrative (S, G & A) expenses increased by $143,000, or 9%, in fiscal 1997 due to increases in bad debt expense and professional fees. Total S, G & A expenses as a percentage of sales were 30 percent for fiscal 1997, down from 32 percent for fiscal 1996 and 44 percent for fiscal 1995. As revenues increased, S, G & A as a percentage of revenues have decreased, due to the majority of the S, G & A being fixed costs. The Company's research and development costs were $328,000 in fiscal 1997, down from $338,000 in fiscal 1996. Fiscal 1996 research and development costs increased to $338,000 from $269,000 in fiscal 1995, reflecting enhancement and repackaging of technology into new products. In all three years, the Company's research and development expenses were between six and seven percent of sales. The Company's capitalized software development costs decreased $48,000 ($599,000 of additions net of amortization of $647,000) in fiscal 1997, decreased $35,000 ($573,000 of additions net of amortization of $608,000) in fiscal 1996, and increased $242,000 ($795,000 of additions net of amortization of $553,000) in fiscal 1995. The Company's interest expense was $ 143,000 in fiscal 1997, $117,000 in fiscal 1996, and $83,000 in fiscal 1995. The increase in net interest expense during fiscal 1997 when compared to fiscal 1996 is primarily due to the interest expense associated with sales and use tax audits. The increase in net interest expense during fiscal 1996 when compared to fiscal 1995 is primarily due to an increase in overall debt. The Company's share of net income of the joint venture, which was acquired by the Company during fiscal 1997, for the years ended April 30, 1997, 1996, and 1995 was $16,000, $21,000, and $62,000 respectively. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company intends to continue to focus on services and software for the precision graphics marketplace, primarily for the design and manufacture of electronic products. The Company intends to continue to concentrate on customers to which it can provide both software and services, while also expanding its breadth of services to include more high-precision graphics and postscript plotting for the graphics and CAM industry. The Company will focus its software marketing and sales efforts on the CAM line, particularly the successful PAR module and its companion module, ICE, and a new module to be introduced in fiscal year 1998. These software application modules address the PWB manufacturing segment. The Company will also increase its marketing of PAR software for the PWB design segment, based on the successful reworking of this technology into CheckMate, a lower-cost PWB design package. The PWB design market segment is over 30 times larger than the manufacturing segment. The Company will also continue its efforts to increase automation and streamlining of operational support and overhead functions, while maintaining high technical quality and quick service. The automation of operational activities will be extended into such functions as accounting, management information systems and manufacturing resource planning. Liquidity. The Company's cash flow from operations was $843,000 for fiscal 1997. The largest component of cash flow from operations was depreciation and amortization of $928,000. The Company's cash flow from operations was $765,000 for fiscal 1996. The largest component of cash flow from operations was depreciation and amortization of $851,000. The Company's cash flow from operations was $825,000 in fiscal year 1995, consisting primarily of depreciation and amortization of $761,000 and accounts payable accruals and other accrued expenses of $410,000, being partially offset by the net loss of $384,000. In fiscal 1997, the Company invested cash of $762,000 in software and capital equipment. Additional capital equipment was financed through accounts payable and capital leases. Cash provided from planned operations, the obtaining of additional debt and/or equity financing, and availability under the Company's line of credit are estimated to be sufficient to support the Company's expected cash needs for fiscal 1998. The Company is currently completing the approval process for a $700,000 new equipment loan. The tentative term of the new equipment loan is for 7 years at an 8.5% interest rate. Payments would begin one month from the date of the note and the monthly payment would be $11,802. The Company is also currently completing the approval process for a $250,000 mortgage note for the 4611 East Lake Street Facility, of which $116,000 of the proceeds would be used to pay the existing mortgage between the Company and Republic Acceptance Corporation. The Company is currently negotiating the term of the mortgage note and interest rate. The Company expects the approval processes to be finalized in late August or early September of 1997. However, there can be no assurance the loans will be finalized. The Company is exploring additional funding possibilities, it has no agreements to provide additional debt or equity capital and there can be no assurance that additional funds will be available, or if available, available on terms acceptable to the Company. If the Company is unable to obtain additional debt and/or equity financing, it may not be able to expand its investment into new operations, and may also have to reduce its level of software development. As of April 30, 1997, the current liabilities exceed current assets by $261,000. Capital Resources. The Company's capital expenditure for equipment and improvements, including capital leases and accounts payable, was $ 443,000 in fiscal 1997, an increase of $326,000 from capital expenditures of $117,000 in fiscal 1996. The Company invested primarily in equipment and improvements essential for present operations in fiscal 1997, but plans to increase its investment in capital resources for future operations over the next two or three years. The Company's capital expenditures for equipment, automation improvements and new opportunities in fiscal 1998 are expected to be approximately $2,500,000. The Company has no commitments at this time. The Company anticipates that financing for such expenditures will be derived from planned operations, leases and obtaining additional debt and/or equity financing. If the Company does not achieve its operations plan and additional financing is not obtained, it will restrict planned business growth. The Company's cash flow used in investing activities were $815,000, $599,000, and $1,128,000 in fiscal years 1997, 1996, and 1995, respectively. In fiscal 1997 cash used in investing activities consisted primarily of expenditures for capitalized software of $599,000, $163,000 for other capital expenditures, and $53,000 relating to the purchase of the joint venture interest. In fiscal year 1996 it consisted primarily of expenditures for capitalized software of $573,000. In fiscal year 1995 it consisted primarily of expenditures for capitalized software of $795,000 and other capital expenditures of $333,000. The Company's cash flow used in financing activities were $28,000 in fiscal year 1997, consisting primarily of principal payments on long-term debt and capital lease obligations of $207,000, an increase of $163,000 in the revolving credit agreement, and $16,000 from proceeds resulting from the exercise of stock options and warrants. The cash flow used in financing activities was $166,000 in fiscal year 1996, consisting primarily of payments on long-term debt of $148,000. The cash flow provided by financing activities was $190,000 in fiscal year 1995, consisting primarily of the net effect of borrowing and payments under revolving credit agreements of $135,000. Other Items. Inflation has not had any significant impact upon the Company's results of operation. RECENTLY ISSUED ACCOUNTING STANDARDS. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 EARNINGS PER SHARE, which is effective for interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, EARNINGS PER SHARE, and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation for all entities with complex capital structures and provides guidance on other computational changes. The implementation of SFAS No. 128 is expected to change earnings per share by an immaterial amount. Item 8. Financial Statements and Supplementary Data. (a) Financial Statements. INDEX TO FINANCIAL STATEMENTS Description Page - ----------- ---- Independent Auditors' Report 21 Balance Sheets at April 30, 1997 and 1996 22 Statements of Operations for the years ended April 30, 1997, 1996, and 1995 23 Statements of Stockholders' Equity for the years ended April 30, 1997, 1996, and 1995 24 Statements of Cash Flows for the years ended April 30, 1997, 1996, and 1995 25 Notes to Financial Statements for the years ended April 30, 1997, 1996, and 1995 26-36 (b) Supplementary Data. None INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Infinite Graphics Incorporated Minneapolis, Minnesota We have audited the accompanying balance sheets of Infinite Graphics Incorporated (the Company) as of April 30, 1997 and 1996 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended April 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended April 30, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Minneapolis, Minnesota July 25, 1997 INFINITE GRAPHICS INCORPORATED
BALANCE SHEETS APRIL 30, 1997 AND 1996 - ------------------------------------------------------------------------------------------------------------ 1997 1996 ASSETS CURRENT ASSETS: Accounts receivable, less allowance for doubtful accounts of $104,441 and $55,140, respectively $ 1,390,198 $ 974,804 Inventories (Note 3) 162,952 114,483 Prepaid expenses and other 36,312 18,462 -------------- --------------- Total current assets 1,589,462 1,107,749 PROPERTY, PLANT, AND EQUIPMENT, net (Note 4) 691,002 597,896 CAPITALIZED SOFTWARE COSTS, less accumulated amortization of $5,819,399 and $5,172,848, respectively 1,022,628 1,070,280 INVESTMENT IN JOINT VENTURE (Note 5) 133,587 OTHER ASSETS 30,025 23,053 -------------- --------------- $ 3,333,117 $ 2,932,565 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving credit agreement (Note 6) $ 427,291 $ 264,607 Trade accounts payable 317,451 341,393 Accrued salaries, wages, vacations, and employee withholdings 310,962 277,428 Other accrued expenses 317,772 347,555 Deferred revenue 259,308 174,484 Current portion of long-term debt (Note 6) 175,096 162,697 Current portion of capitalized lease obligations (Note 7) 43,054 29,630 -------------- --------------- Total current liabilities 1,850,934 1,597,794 LONG-TERM DEBT, less current portion (Note 6) 7,395 182,784 CAPITALIZED LEASE OBLIGATIONS, less current portion (Note 7) 111,465 13,380 LEASE COMMITMENTS (Note 7) STOCKHOLDERS' EQUITY (Note 8): Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 2,462,575 and 2,350,575 shares, respectively 4,112,947 4,096,947 Accumulated deficit (2,749,624) (2,958,340) -------------- --------------- Total stockholders' equity 1,363,323 1,138,607 -------------- --------------- $ 3,333,117 $ 2,932,565 ============== ===============
See notes to financial statements. INFINITE GRAPHICS INCORPORATED
STATEMENTS OF OPERATIONS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - ---------------------------------------------------------------------------------------------- 1997 1996 1995 REVENUES (Note 11): Net sales $ 5,844,759 $ 5,087,053 $ 4,156,320 Other income 71,313 63,175 44,317 --------------- -------------- -------------- Total revenues 5,916,072 5,150,228 4,200,637 COSTS AND EXPENSES: Cost of products sold 3,486,582 2,949,549 2,446,112 Selling, general, and administrative 1,764,339 1,620,978 1,845,480 Research and development costs 327,814 337,985 268,653 Interest 142,878 117,350 83,210 --------------- -------------- -------------- Total costs and expenses 5,721,613 5,025,862 4,643,455 --------------- -------------- -------------- OPERATING INCOME (LOSS) 194,459 124,366 (442,818) EQUITY IN INCOME OF JOINT VENTURE (Note 5) 16,257 21,199 62,388 --------------- -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES 210,716 145,565 (380,430) INCOME TAXES (Note 9) 2,000 2,000 4,000 --------------- -------------- -------------- NET INCOME (LOSS) $ 208,716 $ 143,565 $ (384,430) =============== ============== ============== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ .08 $ .05 $ (.17) =============== ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,717,006 2,710,259 2,283,945 =============== ============== ==============
See notes to financial statements. INFINITE GRAPHICS INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
COMMON STOCK -------------------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL BALANCES AT APRIL 30, 1994 2,270,575 $ 4,086,947 $ (2,717,475) $ 1,369,472 Warrants exercised 80,000 10,000 10,000 Net loss (384,430) (384,430) ------------- ------------- -------------- -------------- BALANCES AT APRIL 30, 1995 2,350,575 4,096,947 (3,101,905) 995,042 Net income 143,565 143,565 ------------- ------------- ------------- ------------- BALANCES AT APRIL 30, 1996 2,350,575 4,096,947 (2,958,340) 1,138,607 Options exercised 32,000 6,000 6,000 Warrants exercised 80,000 10,000 10,000 Net income 208,716 208,716 ------------- ------------- ------------- ------------- BALANCES AT APRIL 30, 1997 2,462,575 $ 4,112,947 $ (2,749,624) $ 1,363,323 ============= ============= ============= =============
See notes to financial statements. INFINITE GRAPHICS INCORPORATED
STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - -------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 208,716 $ 143,565 $ (384,430) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 927,950 850,723 760,637 Equity in income of joint venture (16,257) (21,199) (62,388) Changes in assets and liabilities: Accounts receivable (384,361) (171,861) 65,122 Inventories (36,182) 20,431 (16,140) Prepaid expenses and other (14,850) (1,002) (6,266) Other assets (3,573) 17,357 (14,009) Accounts payable, accruals, and other accrued expenses 126,886 (8,000) 410,120 Deferred revenue 34,824 (65,088) 72,799 ------------- ------------- -------------- Net cash provided by operating activities 843,153 764,926 825,445 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for capitalized software (598,899) (573,308) (794,626) Other capital expenditures (163,449) (23,562) (332,896) Investment in joint venture (500) Purchase of joint venture interest, net of cash acquired (52,500) Purchase of California precision graphics service company, net of cash acquired (26,500) Proceeds from the sale of property, plant, and equipment 24,594 ------------- ------------- -------------- Net cash used in investing activities (814,848) (598,776) (1,128,022) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 6,151,690 5,536,789 5,245,341 Payments under revolving credit agreement (5,989,006) (5,531,122) (5,110,120) Proceeds from issuance of long-term debt 10,338 244,545 Payments on long-term debt (162,990) (148,492) (160,042) Principal payments under capital lease obligations (43,999) (33,663) (39,395) Proceeds from issuance of common stock 16,000 10,000 ------------- ------------- -------------- Net cash (used in) provided by financing activities (28,305) (166,150) 190,329 ------------- ------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS - - (112,248) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 112,248 ------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ - $ - ============= ============= =============
See notes to financial statements. INFINITE GRAPHICS INCORPORATED NOTES TO FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1997, 1996, AND 1995 - -------------------------------------------------------------------------------- 1. FINANCIAL CONDITION AND MANAGEMENT'S PLAN TO OVERCOME FINANCIAL CHALLENGES The financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in Infinite Graphics Incorporated's (the Company) balance sheet as of April 30, 1997, the Company's current liabilities exceeded its current assets by $261,472. The Company's continuation as a going concern is dependent upon its ability to generate cash flow sufficient to meet its obligations as they become due or continue to extend payment terms of existing obligations; obtain additional debt and/or equity financing; continue to fund required software development efforts; and sustain profitability. The Company has implemented plans to increase sales, pay vendors in accordance with their credit terms, and obtain additional debt and/or equity financing in the near future. Management of the Company believes these plans will be sufficient to fund future operations. However, there can be no assurance that the Company's business will develop as anticipated by management or that additional financing will be available. If management's plans are not achieved, it may not be able to expand operations and may also have to reduce its level of software development. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - The Company designs, assembles, integrates, and markets computer-aided design/computer-aided manufacturing (CAD/CAM) systems and software. The Company produces computer-generated precision graphics on a custom basis primarily for the electronics industry and designs printed circuit boards and produces precision glass products. REVENUE RECOGNITION - Revenue on sales of CAD/CAM systems and precision graphics is recognized when the products are shipped to the customer. If the Company is subject to insignificant obligations on sales of CAD/CAM systems, the costs of performing these insignificant obligations are accrued at the time revenue on the sale of CAD/CAM systems is recognized. Maintenance contract revenues are deferred and recognized as income over the contract period. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of five to twenty-five years for buildings and improvements, five years for leasehold improvements, and three to ten years for equipment. CAPITALIZED SOFTWARE COSTS - The Company capitalizes certain costs incurred in developing and enhancing its software products in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, and amortizes such costs over the remaining economic life of the related products, which is estimated to be three years for its internally developed products ($968,455 and $1,040,616, net of accumulated amortization at April 30, 1997 and 1996, respectively). Certain acquired software technology ($54,173 and $29,664, net of accumulated amortization at April 30, 1997 and 1996, respectively) is being amortized over its estimated remaining useful life of three to five years. Amortization of capitalized software charged to cost of goods sold amounted to $646,551, $608,334 and $556,618 for the years ended April 30, 1997, 1996, and 1995, respectively. RECOVERABILITY OF LONG-LIVED ASSETS - The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value amount of an asset or group of assets may not be recoverable. The Company considers a history of operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows, product lines and geographic location. A product line or geographic location is deemed impaired if a forecast of undiscounted future cash flows directly related to the product line or geographic location, including disposal value, if any, is less than its carrying amount. If a product line or geographic location is determined to be impaired, the loss is measured as the amount by which the carrying amount of the product line or geographic location exceeds its fair value. Fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, and estimates of fair value are based on the best information available, including prices for similar assets or the results of valuation techniques such as discounted estimated future cash flows as if the decision to continue to use the impaired product line or geographic location was a new investment decision. The Company generally measures fair value by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. INCOME TAXES - Income taxes are deferred for all temporary differences between the financial statement and tax basis of assets and liabilities. Deferred taxes are recorded using the enacted tax rates scheduled by tax law to be in effect when the temporary differences are expected to be settled or realized. Deferred tax assets are reduced by a valuation allowance to the extent that the assets may not be realizable. NET INCOME (LOSS) PER SHARE - Net income (loss) per share is based upon the weighted average common and common equivalent shares outstanding. For the years ended April 30, 1997 and 1996, common stock equivalents (stock options and warrants) increased the weighted average common and common equivalent shares outstanding by 336,228 and 359,684 shares, respectively. For the year ended April 30, 1995, common stock equivalents (stock options and warrants) are not included since their effect was antidilutive. STATEMENTS OF CASH FLOWS - Supplemental disclosures of cash flow information for the years ended April 30 are as follows: 1997 1996 1995 Cash paid for interest $ 115,359 $ 120,518 $ 91,427 Cash paid for taxes 4,745 14,823 Noncash investing and financing activities are as follows: On November 27, 1996, the Company purchased from the joint venture partner a photoplotter and all of the partner's interest in the joint venture. In connection with the purchase, the assets acquired, liabilities assumed, and consideration paid were as follows: Asssets acquired: Cash $ 500 Accounts receivable 31,033 Inventories 12,287 Property and equipment 46,513 Other 6,399 Receivable from the Company 85,152 ------------ 181,884 Liabilities assumed: Accounts payable 47,063 Accrued liabilities and compensation 31,821 Deferred revenue 50,000 ------------ 128,884 ------------ Cash paid $ 53,000 ============ The Company acquired the assets of a California precision graphics service company from bankruptcy court on September 13, 1995. The fair value of the assets acquired was $103,500. The Company paid $27,500 in cash and financed the remaining $76,000 with a note payable. Interest on the note is at the prime rate plus 2%. The note requires monthly principal and interest payments of $3,533 until September 1, 1997, at which time the entire remaining balance is due. This note is secured by the assets acquired. The assets acquired and consideration paid are as follows: Cash $ 1,000 Accounts receivable 9,702 Equipment 92,798 ------------ Total assets 103,500 Note issued 76,000 ------------ Cash paid $ 27,500 ============ The acquisitions were accounted for under the purchase method of accounting. The Company included the results of operations of the joint venture beginning December 1, 1996 (prior to the acquisition the Company recorded the joint venture's operations on the equity basis) and the California precision graphics company beginning September 13, 1995. These acquisitions had no material impact on the Company's operations, therefore, no pro forma disclosures are presented. In connection with the formation of a joint venture in fiscal 1995, the following items were contributed by the Company for a 50% equity interest in the joint venture: Assets contributed: Cash $ 500 Accounts receivable 71,855 Inventories 14,531 Property and equipment 19,831 Other 16,400 ------------ 123,117 Liabilities assumed by joint venture: Accounts payable 5,593 Accrued liabilities and compensation 37,428 Payable to the Company 30,096 ------------ 73,117 ------------ Investment in joint venture $ 50,000 ============ Accounts payable includes invoices for equipment purchases of $42,340 and $33,305 at April 30, 1997 and 1996, respectively. In fiscal 1996, the Company entered into an equipment loan to purchase $14,052 of equipment. Capital lease obligations of $156,091, $5,859, and $48,773 were incurred when the Company entered into leases for new equipment in fiscal 1997, 1996, and 1995, respectively. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's business activity is conducted with customers located within the United States. Accounts receivable transactions are generally unsecured. A provision for estimated doubtful accounts is provided for accounts receivable. There are no concentrations of business transacted with a particular customer or supplier nor concentrations of revenue from a particular service or geographic area that could severely impact the Company in the near future. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 EARNINGS PER SHARE, which is effective for interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, EARNINGS PER SHARE, and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation for all entities with complex capital structures and provides guidance on other computational changes. The implementation of SFAS No. 128 is expected to increase basic income per share by $.01 per share for each of the years ended April 30, 1997 and 1996 due to the elimination of common stock equivalents from the calculation. 3. INVENTORIES April 30 ---------------------------- 1997 1996 Raw materials $ 147,252 $ 106,799 Work-in-process and finished goods 15,700 7,684 ------------ ------------ $ 162,952 $ 114,483 ============ ============ 4. PROPERTY, PLANT, AND EQUIPMENT April 30 ---------------------------- 1997 1996 Land $ 20,000 $ 20,000 Buildings and improvements 420,670 415,124 Leasehold improvements 300,672 248,664 Machinery and equipment 3,703,277 3,337,058 Vehicles 42,705 30,628 Furniture and fixtures 172,606 165,394 ------------ ------------ 4,659,930 4,216,868 Less accumulated depreciation and amortization 3,968,928 3,618,972 ------------ ------------ $ 691,002 $ 597,896 ============ ============ The above amounts include equipment under capital leases with a cost of $215,745 and $122,566 and accumulated amortization of $62,246 and $81,879 at April 30, 1997 and 1996, respectively. 5. INVESTMENT IN JOINT VENTURE Effective May 1, 1994, the Company entered into a verbal agreement to form a joint venture in which, upon contribution of substantially all of the net assets of the Company's New Hampshire facility (approximately $50,000), the Company would own 50% of the equity of the new corporation. The assets were transferred at their historical carrying values. The Company purchased from the joint venture partner, on November 27, 1996, a photoplotter and all of the partner's interest in the joint venture. The Company agreed to continue payments totaling $66,000 to the partner due in monthly installments of $5,500 (which includes $3,000 for a monthly service agreement). The final payment is due on November 1, 1997, at which time the partner agrees to transfer ownership of the photoplotter to the Company. The Company also agreed to assume all the assets and liabilities of the joint venture and pay the partner $53,000 in cash and to provide the partner $50,000 of Engineering Services beginning on December 1, 1996 for the partner's interest in the joint venture. The Company assigned a value of approximately $30,000 to the photoplotter, approximately the future principal payments the Company will make. The acquisition was accounted for under the purchase method of accounting. (See Note 2.) Summarized financial information from the unaudited financial statements of the joint venture, accounted for by the equity method, are as follows: April 30 1996 Current assets $ 92,557 Noncurrent assets 246,931 Current liabilities 72,314 Stockholders' equity 267,174 Period from Years Ended April 30 May 1, 1996 to -------------------- November 27, 1996 1996 1995 Net sales $ 273,766 $ 500,486 $ 544,011 Costs and expenses 241,253 458,088 419,235 Net income 32,513 42,398 124,776 The Company's share of net income of the joint venture for the years ended April 30, 1997, 1996, and 1995, was $16,257, $21,199, and $62,388, respectively. 6. REVOLVING CREDIT AGREEMENTS AND NOTES PAYABLE April 30 ------------------------------- 1997 1996 Revolving credit agreements $ 427,291 $ 264,607 ============ =========== Notes payable: Promissory notes $ 149,202 $ 235,488 Term loan 17,670 50,435 Equipment loans 15,619 59,558 ------------ ----------- 182,491 345,481 Less current maturities 175,096 162,697 ------------ ----------- $ 7,395 $ 182,784 ============ =========== The $427,291 and $264,607 payable under the revolving credit agreements (the Agreements) at April 30, 1997 and 1996, respectively, is due on demand. The amount available under the Agreements is at the lender's discretion and is limited to 70% of engineering service and software receivables. The required payments under the Agreements are the Company's daily cash receipts. The Agreements continue in effect until terminated by either party with 30 days prior written notice. Substantially all assets of the Company are pledged as collateral under the Agreements. The terms of the Agreements requires a monthly minimum interest charge of $2,000. The weighted average interest rate was 19.0% and 20.0% for the years ended April 30, 1997 and 1996, respectively, which includes the monthly minimum interest charge. Effective January 20, 1995, the terms of the Agreements were modified to include a reduction in the interest rate from prime plus 10% to prime plus 6% (14.50% at April 30, 1997), with an additional promissory note in the amount of $240,000 at an interest rate of 14%, to be paid back in installments of $4,000 per month plus interest, with a final payment of $100,000 due on January 20, 1998. During fiscal 1996, in connection with the Company's purchase of assets of a California precision graphics service company from bankruptcy court, the Company entered into a promissory note for $76,000 which bears interest at prime plus 2% (10.50% at April 30, 1997 and is payable in twenty-four equal monthly payments). The note is secured by the assets acquired. The balance outstanding at April 30, 1997, of $17,202, is due in fiscal 1998. The term loan bears interest at 8%, is payable in monthly installments of $2,500, and is collateralized by a security interest in the Company's equipment and proceeds and products of such equipment. At April 30, 1997 and 1996, the amount payable under this note is $17,500 of principal plus $170 of future interest and $47,500 of principal plus $2,935 of future interest, of which $17,670 and $32,935, is classified as a current liability, respectively. During fiscal 1996 and 1994 the Company entered into various equipment loans, each of which is collateralized by the equipment purchased. Principal borrowings on these loans as of April 30, 1997 and 1996 total $15,619 and $59,558, respectively, at interest rates of 6.9% to 13%. As of April 30, 1997, the $15,619 consists of one loan that requires future monthly principal and interest payments totaling $16,895 until February 1999. These agreements contain certain covenants, and the Company is restricted from declaring or paying dividends or applying any funds, properties, or assets to the purchase, redemption, or other retirement of any shares of capital stock. Principal maturities on the notes outstanding at April 30, 1997 are payable as follows: Years ending April 30: 1998 $ 175,096 1999 7,395 ------------ $ 182,491 ============ The carrying amounts of notes payable and long-term debt approximate fair market value at April 30, 1997. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt. 7. LEASE COMMITMENTS The Company leases certain of its facilities and equipment under operating leases (see Note 10). Rent expense incurred on these leases was approximately $222,000, $167,000, and $174,000 for the years ended April 30, 1997, 1996, and 1995, respectively. Future minimum lease payments required under operating and capital leases that have initial or remaining noncancelable lease terms in excess of one year at April 30, 1997 are as follows: Capital Operating Years ending April 30: 1998 $ 57,656 $ 98,445 1999 45,350 11,688 2000 35,868 2001 35,868 2002 14,945 ------------ ------------ Total minimum lease payments 189,687 $ 110,133 ============ Less amounts representing interest 35,168 ------------ Present value of net minimum obligations 154,519 Less current portion 43,054 ------------ Long-term obligations at April 30, 1997 $ 111,465 ============ 8. STOCKHOLDERS' EQUITY STOCK OPTIONS - The Company has two Incentive Stock Option Plans (the Plans) for key employees and directors. The Company has reserved 700,000 shares of common stock for the plans. The option exercise price is to be not less than the fair market value of the stock at the date of grant. The options are exercisable over a period not to exceed ten years from the date of grant. The incentive options granted are exercisable as follows: 20% after the first year, 40% after the second year, 60% after the third year, 80% after the fourth year, and 100% after the fifth year. At April 30, 1997, options to purchase 220,000 shares of common stock were exercisable at a weighted average exercise price of $0.31 per share. Activity under the Plans is as follows: Weighted Average Exercise Options Price Excercisable Shares Per Share ------------ ------ --------- Balances at April 30, 1994 181,000 340,000 $.54 Expired (100,000) 1.23 ------------ Balances at April 30, 1995 191,500 240,000 .26 Granted 50,000 .31 ----------- Balances at April 30, 1996 232,000 290,000 .33 Granted 120,000 .88 Exercised (32,000) .19 Expired (8,000) .19 ----------- Balances at April 30, 1997 220,000 370,000 $.52 =========== ==== The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for the Plans. No compensation cost has been recognized for options issued under the Plans when the exercise price of the options granted are at least equal to the fair value of the common stock on the date of the grant. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1997 and 1996, consistent with the provisions of SFAS No. 123, the Company's net income and net income per common share would have changed to the pro forma amounts indicated below: 1997 1996 --------- -------- Net income, as reported $208,176 $143,565 Net income, pro forma $198,281 $131,478 Net income per common share, as reported $ .08 $ .05 Net income per common share, pro forma $ .07 $ .05 The fair value of each option grant during 1997 and 1996 was estimated on the grant date using the Black-Sholes option-pricing model with the following assumptions: 1997 1996 --------- ------ Dividend yield None None Expected volatility 43.94% 125.86% Expected life of option 5 5 Risk free interest rate 6.33% 6.13% Fair value of options on grant date $.42 $.71 The following table summarizes information about stock options outstanding at April 30, 1997:
Options Outstanding Options Exercisable --------------------------------------- --------------------------- Wgtd Avg Remaining Wgtd Avg Wgtd Avg Range of Number Contractural Life Exercise Number Exercise Exercise Prices Outstanding (Years) Price Exercisable Price --------------- ----------- ------- ----- ----------- ----- $.19 50,000 1 $.19 50,000 $.19 $.28-$.31 150,000 1.50 $.30 150,000 $.30 $.69-$.88 170,000 4.61 $.82 20,000 $.69 ------- ------- $.19-$.88 370,000 2.86 $.52 220,000 $.31 ======= ==== ==== ======= ====
WARRANTS - In November 1992, warrants to purchase 350,000 shares of common stock at an exercise price of $.125 per share were issued as part of a debt restructuring. During fiscal 1997 and 1995, warrants to purchase 80,000 shares of common stock were exercised in each year. The remaining warrants (190,000 shares) are currently exercisable and expire November 17, 1997. 9. INCOME TAXES Income tax expense for the years ended April 30, 1997 and 1996 have been primarily offset by a reduction in the valuation allowances for deferred taxes. The income tax benefit for fiscal 1995 has been offset by a valuation allowance because the Company's net operating loss could not be carried back and future realization of the net operating loss carryforward was not expected. Income tax expense for the years ended April 30, 1997, 1996, and 1995 relates to minimum taxes due to various states the Company operates in. For the years ended April 30, the provisions for income taxes differ from the expected income tax based on the federal statutory tax rate as follows:
1997 1996 1995 Federal tax at statutory rate $ 73,000 $ 51,000 $ (133,000) State taxes, net of federal benefit 2,000 2,000 2,000 Change in estimated future tax rates 86,000 Change in valuation allowances (85,000) (91,000) 57,000 Other 12,000 40,000 (8,000) ------------- ------------- ------------- $ 2,000 $ 2,000 $ 4,000 ============= ============= ============
Deferred tax assets and liabilities represent the tax impact of temporary differences between the basis of assets and liabilities for financial reporting purposes and income tax purposes. Deferred taxes as of April 30 consist of the following:
1997 1996 Current deferred tax assets: Allowance for doubtful accounts and other accruals $ 102,000 $ 86,000 Less valuation allowance (102,000) (86,000) -------------- -------------- Net current deferred tax assets $ - $ - ============= ============= Long-term deferred tax (liabilities) assets: Software development costs $ (368,000) $ (395,000) Excess of tax over book depreciation (467,000) (494,000) Tax net operating loss carryforward 1,326,000 1,481,000 General business credit 359,000 359,000 Less valuation allowance (850,000) (951,000) -------------- -------------- Net long-term deferred tax assets (liabilities) $ - $ - ============= =============
The Company has recorded valuation allowances to reduce the recorded net deferred tax assets to zero after considering evidence regarding future realization of the deferred amounts. At April 30, 1997, the Company has income tax net operating loss carryforwards of approximately $3,500,000 for federal and $1,900,000 for Minnesota tax purposes. If not used, these carryforwards will begin to expire in 2000 for federal and 2003 for state. The Company also has federal general business credits of approximately $359,000 which will begin to expire in 2003. 10. RELATED-PARTY TRANSACTIONS The Company leases one of its facilities from a partnership which is 50% owned by the chairman of the board of the Company. Monthly rentals under this lease are $2,750. Rent expense incurred on this lease was $33,000 for each of the years ended April 30, 1997, 1996, and 1995, respectively. The Company leases production equipment from a partnership of which the chairman of the board is a partner. Rent expense incurred on this lease was $38,340 for each of the years ended April 30, 1997, 1996, and 1995. At April 30, 1996, other accrued expenses include $173,378 due to the joint venture in which the Company had an equity interest of 50%. 11. SEGMENT INFORMATION The Company has two business segments: designing and producing precision graphics products (Engineering Services Division) and designing, assembling, and marketing CAD/CAM systems (Systems Software Division). Summarized financial information by business segment as of and for the years ended April 30 is as follows:
1997 1996 1995 Revenues: Engineering services $ 4,043,174 $ 3,204,247 $ 2,548,288 Systems software 1,801,585 1,882,806 1,608,032 Other income 71,313 63,175 44,317 -------------- -------------- --------------- $ 5,916,072 $ 5,150,228 $ 4,200,637 ============== ============== =============== Operating income (loss): Engineering services $ 1,206,715 $ 869,205 $ 608,045 Systems software 807,389 909,124 752,484 General corporate expenses (including unallocable selling expenses) (1,676,767) (1,536,616) (1,724,004) Interest expense (142,878) (117,347) (79,343) --------------- -------------- --------------- $ 194,459 $ 124,366 $ (442,818) ============== ============== ================ Identifiable assets: Engineering services $ 1,464,141 $ 1,185,282 $ 1,178,913 Systems software 1,670,711 1,482,418 1,575,338 General corporate 198,265 264,865 202,740 -------------- -------------- --------------- $ 3,333,117 $ 2,932,565 $ 2,956,991 ============== ============== =============== Capital expenditures: Engineering services $ 308,334 $ 100,014 $ 347,953 Systems software 87,867 13,339 53,231 General corporate 46,861 3,536 33,172 -------------- -------------- --------------- $ 443,062 $ 116,889 $ 434,356 ============== ============== =============== Depreciation and amortization: Engineering services $ 192,914 $ 150,642 $ 55,356 Systems software 684,160 664,956 647,118 General corporate 50,876 35,125 58,163 -------------- -------------- --------------- $ 927,950 $ 850,723 $ 760,637 ============== ============== ===============
12. DEFERRED SAVINGS PLANS The Company has a defined contribution savings plan for employees who have completed 30 days of service and attained the age of 21. The defined contribution savings plan allows for employee compensation deferral contributions under Section 401(k) of the Internal Revenue Code and discretionary contributions by the Company. No such discretionary contributions were made for the years ended April 30, 1997, 1996, or 1995. The Company also has a discretionary cash bonus plan. The Company accrued approximately $52,000, $50,000, and $0 for the years ended April 30, 1997, 1996, and 1995, respectively, relating to the discretionary cash bonus plan. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in or disagreements with the Company's accountants on any accounting or financial disclosure matters. PART III Item 10. Directors and Executive Officers of the Company. (a) The Directors of the Company. The Bylaws of the Company provide that the Board of Directors shall consist of one or more members. Currently, the Board of Directors of the Company consists of two persons, each of whose term expires at the 1997 annual meeting. The Bylaws of the Company provide that the number of members of the Board of Directors to be elected at any meeting of the shareholders shall be determined from time to time by the Board of Directors. If the Board of Directors does not expressly fix the number of directors to be so elected, then the number of directors shall be the number of directors elected at the preceding regular meeting of the shareholders. The Board of Directors has fixed the number of directors to be elected at the 1997 annual meeting at three directors, but has not named nominees for the vacancies that will occur. The current directors of the Company are:
Current Position Principal Occupations Director Name of Director Age With the Company During Past 5 Years Since - ------------------------- --- ---------------- -------------------------- ----- Clifford F. Stritch, Jr. 50 Chairman of the Chairman of the Board, Aug Board, Director, Director, and CEO of 1970 CEO, and CFO the Company. Edwin F. Snyder 54 Director Since October 1996, Sept Director Vice-President of 1990 Marketing and Sales with Wave Crest of Edina, MN. From March 1995 to September 1996, Vice-President of Sales and Marketing with Johnstech International. From Feb- ruary 1992 to March 1995, Vice-President of Marketing with Visu-Com of Baltimore, MD.
(b) The Executive Officers of the Company. Each of the Executive Officers is elected annually by the Board of Directors and holds the office at the will of the Board of Directors. The current executive officer of the Company is:
Principal Occupations Name Age Position with the Company During Past 5 Years - ------------------------- --- ------------------------- ------------------- Clifford F. Stritch, Jr. 50 Chairman of the Board, Chairman of the Board since Chief Executive Officer, 1982, Chief Executive Director, Chief Financial Officer Officer since 1984, Director since 1970, Chief Financial Officer since November 1995.
(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's directors, officers, and persons who own more than ten percent of a registered class of the Company's equity securities to file with the Security and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended April 30, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. Item 11. Executive Compensation. The following table sets forth certain information regarding compensation paid to or accrued for the chief executive officer during the fiscal years indicated. No other executive officer had compensation in excess of $100,000 during any of the fiscal years for which information is provided. SUMMARY COMPENSATION TABLE
Name and Principal Other Annual Position Year Salary Bonus Compensation - -------- ---- ------ ----- ------------ Clifford F. Stritch, Jr. 1997 $142,000 $ 5,000(1) $5,938(2) CEO 1996 $130,000 $15,891(1) $4,546(2) 1995 $130,000 - 0 - $4,765(2)
(1) Bonuses relate to applicable fiscal year but were paid in subsequent years (2) Includes insurance and car allowance OPTIONS GRANTED DURING FISCAL 1997 No options were granted to Mr. Stritch during the Company's 1997 fiscal year. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION/SAR VALUE The following table provides information related to options exercised by Mr. Stritch during fiscal 1997 and the number and value of options held by him at fiscal year-end. The Company does not have any outstanding stock appreciation rights.
Value of Number of Unexercised Unexercised in-the-Money Options/SARs at Options/SARs at Shares Fiscal Year-end Fiscal Year-end Acquired on Value Exercisable / Exercisable/ Name Exercise (#) Realized ($) Unexercisable (#) Unexercisable ($)(1) - ------------------------- ------------ ------------ ----------------- -------------------- Clifford F. Stritch, Jr. 0 0 100,000 / 0 $38,000/ 0
- --------------- (1) Options are "in-the-money" if the fair market value of the underlying shares at fiscal year-end is greater than the exercise price. The amount set forth represents the difference between the fair market value of the Company's Common Stock on April 30, 1997 ($0.69), and the option price multiplied by the number of shares subject to the option. Director Compensation. Each non-employee director of the Company receives $2,500 per quarter. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) Security Ownership of Certain Beneficial Owners. To the best of the Company's knowledge, the only beneficial owners of more than 5% of the Company's outstanding Common Stock, as of April 30, 1997, are listed below. Except as indicated below, the Company believes that each of such persons has the sole (or jointly with spouse) voting and investment powers with respect to such shares. Shares Percent Name of Beneficially of Beneficial Owner Owned Class ---------------- ----- ----- Clifford F. Stritch, Jr. (1) (2) 1,116,050 43.6 % 4611 East Lake Street Minneapolis, Minnesota 55406 Robert Fink (3) 350,000 13.2 % 1850 Arvin Drive Mendota Heights, Minnesota 55118 Heartland Advisors, Inc. 160,000 6.5% 790 North Milwaukee Street Milwaukee, WI 53202 (1) Includes 100,000 shares of Common Stock that Mr. Stritch has the right to acquire by the exercise of currently exercisable options held by Mr. Stritch under the Company's Stock Option Plan. (2) An irrevocable trust of which Mr. Stritch's daughter, Kendra L. Stritch, is the beneficiary is the owner of 23,800 Common Stock of the Company. The Common Stock held in that trust are included in the number of shares set forth above, although Mr. Stritch denies any beneficial interest in those shares. An irrevocable trust of which Mr. Stritch's son, Carter Francis Stritch, is the beneficiary is the owner of 21,500 Common Stock of the Company. The Common Stock held in that trust are included in the number of shares set forth above, although Mr. Stritch denies any beneficial interest in these shares. Mr. Stritch is not a trustee of either trust. (3) Includes 190,000 shares of Common Stock that Mr. Fink has the right to acquire by the exercise of currently exercisable warrants. (b) Security Ownership of Management. The following table sets forth the number of shares of the Company's Common Stock beneficially owned by each director and nominee for director of the Company and by all corporate or executive officers and directors of the Company as a group, as of April 30, 1997. Except as indicated below, the Company believes that each of such persons has the sole (or jointly with spouse) voting and investment powers with respect to such shares. Shares Percent Name of Director Beneficially of or Identity of Group Owned Class -------------------- ----- ----- Clifford F. Stritch, Jr. (1)(2) 1,116,050 43.6 % Edwin F. Snyder (3) 67,889 2.7 % Directors and Executive Officers as a Group (2 persons) (1)(2)(3) 1,183,939 44.9 % - --------------- (1) See note (1) to the preceding table. (2) See note (2) to the preceding table. (3) Includes 50,000 shares of common stock that Mr. Snyder has the right to acquire by exercise of stock options that are currently exercisable. Item 13. Certain Relationships and Related Transactions. During fiscal 1997, the Company leased the properties at 4621 East Lake Street from Infinite Properties, a partnership of the Company's Chairman of the Board, Clifford F. Stritch, Jr., and Daniel R. Schultz. The lease for 4621 East Lake Street is dated October 31, 1983, and had an original term of five years. In 1988, the Company exercised its option to renew this lease for an additional five year term. The lease was subsequently amended to extend to April 30, 1997. The Company still occupies these premises and is negotiating a new lease. The rent is currently $2,750 per month. The Company leased certain production equipment from Precision Imaging, a partnership in which Clifford F. Stritch Jr. is a partner. At April 30, 1997, Mr. Stritch held a 67 percent interest in the partnership. The Company was unable to finance the equipment directly; therefore leased the equipment through Precision Imaging. Under the terms of the lease, the Company pays monthly rent of $3,195. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements. (1) The Financial Statements of the Company, including the Report of the Independent Auditors, are set forth at Item 8 of this Form l0-K. (3) The following Exhibits required by Item 601 of Regulation S-K are filed with this report or incorporated by reference as indicated herein. 3.1 Articles of Incorporation of Infinite Graphics Incorporated, filed as Exhibit 3.1 to the Annual Report on Form 10-K for the year ended April 30, 1989, and incorporated herein by reference. 3.2 Bylaws of Infinite Graphics Incorporated, filed as Exhibit 3.2 to the Annual Report on Form 10-K for the year ended April 30, 1989, and incorporated herein by reference. 4 Form of Certificate for Common Stock of Infinite Graphics Incorporated, filed as Exhibit 4 to the Annual Report on Form 10-K for the year ended April 30, 1989, and incorporated herein by reference. 10.1 Incentive Stock Option Plan of Infinite Graphics Incorporated, filed as Exhibit 10.1 to the Annual Report on Form 10-K for the year ended April 30, 1993, and incorporated herein by reference.* 10.2 Lease between the Company and Infinite Properties, dated October 31, 1983, for property at 4621 East Lake Street, Minneapolis, Minnesota, filed as Exhibit 10.2 to the Annual Report on Form 10-K for the year ended April 30, 1989, and incorporated herein by reference. 10.3 License agreement between the Company and Calos, Inc., dated December 21, 1984, filed as Exhibit 10.5 to the Annual Report on Form 10-K for the year ended April 30, 1989, and incorporated herein by reference. 10.4 Lease between the Company and Harold J. Brooks, dated November 15, 1989, for the property at 8 Industrial Way, Salem, New Hampshire, filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended April 30, 1990, and incorporated herein by reference. 10.5 Amendment to Revolving Credit and Term Loan Agreement between the Company and National City Bank of Minneapolis, dated as of August 31, 1990, filed as Exhibit 10.14 to the Annual Report on Form 10-K for the year ended April 30, 1991, and incorporated herein by reference. 10.6 Amended and Restated Security Agreement between the Company and National City Bank of Minneapolis, dated as of August 31, 1990, filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended April 30, 1991, and incorporated herein by reference. 10.7 Amendment and Restatement of Promissory Note, dated August 31, 1990 (Revolving Loan), filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended April 30, 1991, and incorporated herein by reference. 10.8 Amendment and Restatement of Promissory Note, dated August 31, 1990 (Term Loan), filed as Exhibit 10.17 to the Annual Report on Form 10-K for the year ended April 30, 1991, and incorporated herein by reference. 10.9 Lease between Company and Anchor Paper, dated December 20, 1990, for 3,000 square feet of space in the Plymouth building filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended April 30, 1991, and incorporated herein by reference. 10.10 Settlement agreement between CIT and Company dated April 7, 1992, filed as Exhibit 10.24 to the Annual Report on Form 10-K for the year ended April 30, 1992, and incorporated herein by reference. 10.11 National City Bank financing agreements dated November 17, 1992, filed as Exhibit 10.25 to the Annual Report on Form 10-K for the year ended April 30, 1993, and incorporated herein by reference. 10.12 Robert J. Fink financing agreements dated November 17, 1992, filed as Exhibit 10.26 to the Annual Report on Form 10-K for the year ended April 30, 1993, and incorporated herein by reference. 10.13 Republic Acceptance Corporation financing agreements dated November 17, 1992, filed as Exhibit 10.27 to the Annual Report on Form 10-K for the year ended April 30, 1993, and incorporated herein by reference. 10.14 Amended lease between the Company and Infinite Properties dated November 30, 1993, filed as Exhibit 10.28 to the Annual Report on Form 10-K for the year ended April 30, 1994, and incorporated herein by reference. 10.15 Amended lease between the Company and Anchor Paper Company dated January 1, 1994, filed as Exhibit 10.29 to the Annual Report on Form 10-K for the year ended April 30, 1994, and incorporated herein by reference. 10.16 Extended lease between the Company and Harold J. Brooks dated January 31, 1995, filed as Exhibit 10.30 to the Annual Report on Form 10-K for the year ended April 30, 1995, and incorporated herein by reference. 10.17 Republic Acceptance Corporation first mortgage dated January 20, 1995, filed as Exhibit 10.31 to the Annual Report on Form 10-K for the year ended April 30, 1995, and incorporated herein by reference. 10.32 Amended lease between the Company and Anchor Paper Company dated January 1, 1996, filed as Exhibit 10.32 to the Annual Report on Form 10-K for the year ended April 30, 1996. 10.33 Lease between the Company and Superior Investment Company dated September 1, 1995, filed as Exhibit 10.33 to the Annual Report on form 10-K for the year ended April 30, 1996. 10.34 Amended lease between the Company and Anchor Paper Company dated January 1, 1997.** 27 Financial data schedule.** (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. * Indicates management contracts or compensatory plan or arrangement required to be filed is an exhibit to Form 10-K. ** Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 13, 1997 By: /s/ CLIFFORD F. STRITCH, JR. ------------------------------- Clifford F. Stritch, Jr. Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Date: August 13, 1997 By: /s/ CLIFFORD F. STRITCH, JR. ------------------------------- Clifford F. Stritch, Jr. Chairman of the Board Chief Executive Officer Chief Financial Officer Date: August 13, 1997 By: /s/ EDWIN F. SNYDER ---------------------- Edwin F. Snyder Director INDEX TO EXHIBITS Amended lease between the Company and Anchor Paper Company dated January 1, 1997 Financial data schedule EX-10.34 2 SUBLEASE EXHIBIT 10.34 SUBLEASE THIS SUBLEASE made and entered into this 31st day of December, 1996, between ANCHOR PAPER COMPANY, a Minnesota corporation ("Sublessor"), and INFINITE GRAPHICS INCORPORATED, a Minnesota corporation ("Sublessee"). RECITALS: A. A lease ("Prime Lease") dated December 20, 1990 was made and entered into between Hamel Hartinger and Jeanne Hartinger, as Landlord and Sublessor, as Tenant, pertaining to a one-story office/warehouse building located at 12855 Highway 55, Plymouth, Minnesota containing approximately 30,250 square feet. B. It is the wish of the parties hereto that the Sublessor sublet to the Sublessee and that the Sublessee take from the Sublessor a portion of the premises leased under the Prime Lease (hereinafter referred to as the "sublet Area") comprising approximately 3,000 square feet as cross-hatched on Exhibit A, attached hereto and made a part hereof. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter contained, but subject to the consent thereto by Landlord, the Sublessor does hereby sublet the Sublessee and the Sublessee does hereby rent and take from Sublessor, the Sublet Area together with the non-exclusive right for so long as this Sublease is in effect to the use in common of the parking lot and the lavatory facilities, subject to the following terms and conditions: 1. Subject to the provisions of paragraph 17 below, this Sublease shall commence January 1, 1997 and shall continue thereafter for a term of 12 calendar months to and including December 31, 1997. This lease may be terminated by either party upon 90 days written notice. 2. As rent for the Sublet Area, Sublessee shall pay to the Sublessor $2,042.50 per month, consisting of $1,437.50 (Base rate of $5.75 per square foot) rent plus $605.00 (Base rent $2.42 per square foot) common area maintenance and taxes, payable in advance on the first day of each month during the term of this Sublease, such rent to be paid to the Sublessor at the address set forth below. For any monthly rent payment not actually received by Sublessor by the 5th day of the calendar month, Sublessee shall also be obligated to pay a late charge of $50.00 per day for each day beyond the 5th day of the month. 3. In addition to the monthly rent payable pursuant to paragraph 2 above, Sublessee shall also pay to Sublessor as additional rent hereunder, $500.00 per month in advance on the first day of each calendar month during the term of this Sublease commencing January 1, 1997, such amount to be deemed payment for the electricity consumed by the "clean room" to be operated by Sublessee pursuant to the provisions of this Sublease. At the option of the Sublessor and at its expense, Sublessor may cause the "clean room" to be separately metered in which case Sublessee shall pay the electricity for the "clean room" directly in lieu of the $500.00 per month payments otherwise required pursuant to this paragraph 3. Sublessee shall also pay Sublessor as additional rent hereunder commencing on the first day of 1997 and on the first day of each and every calendar month thereafter during the term of this Sublease the amount, if any, by which 1/12th of the Sublessee's prorata portion of the real estate taxes payable for the calendar year in question for the premises of which the Sublet Area is a part, and any installments of special assessments payable therewith exceeds $342.43. For the purposes hereof, the Sublessee's prorata portion shall be deemed to be 9.92%. 4. The Sublessee may use the Sublet Area for generating photo tools for the electronics industry and for no other purposes whatsoever. 5. The Sublessee will not use the Sublet Area of permit the Sublet Area to be used in violation of any of the terms, covenants or conditions of the Prime Lease. Sublessee will maintain and operate the Sublet Area in compliance with all applicable governmental rules and regulations. Sublessee will keep at its own expense said Sublet Area and the equipment, plumbing, drains, fixtures, appliances and machinery in, upon, serving or appurtenant to said Sublet Area, in good repair and in good sanitary condition during the term of this Sublease. Sublessee shall not release, threaten to release, permit or allow the release or threatened release of pollutants and/or contaminants (including petroleum products or by-products), or hazardous wastes or hazardous substances into the ground water, soils or atmosphere. Sublessee shall not make any undue or unseemly noise or otherwise and shall not do or permit to be done in and about the Sublet Area anything which will be dangerous to life or limb. Sublessee will make no alterations in or additions to the Sublet Area, without first obtaining the prior written consent of the Sublessor and of the Landlord. Sublessee will not use or permit anything upon said Sublet Area that will increase the rate of insurance thereon above the rate being paid by Sublessee when it was the fee owner of the premises of which the Sublet Area is a part. All of Sublessee's employees shall be bonded and shall be subject to the same rules and regulations that are applicable to the employees of Sublessor relative to the use of the premises of which the Sublet Area is a part, including, without limitation, restrictions on access, loud noises, use of lavatory facilities, lighting and cleaning of the Sublet Area. Parking by Sublessee and its employees and invitees shall be limited to the southwest quadrant of the parking lot. Notwithstanding the foregoing, up to four Sublesse's employees shall have the access to the Sublet Area on a 24-hour per day basis. Sublessee shall provide Sublessor with the names of such employees. 6. The Sublessor will keep and perform promptly, each of the terms, covenants and conditions of the Prime Lease except for those provisions thereof which, under the terms of this Sublease, the Sublessee is to keep or perform. 7. Subject to the provisions of paragraph 3 above whereby Sublessee will pay Sublessor $500.00 per month for the electricity consumed by the "clean room", all utilities, including sewer, water, gas and electricity shall be furnished by Sublessor at its expense. 8. Addendum to water service with regard to Section 2 of lease for Sublessee and Sublessor, Sublessee agrees to be responsible for the water used in their clean room and rented area. The water will be tracked by a dedicated water meter on a dedicated waterline that is routed directly to Sublessee's leased area. Sublessee will be billed on a monthly basis and it is to be understood by both Sublessor and Sublessee that these bills will be paid in a timely manner. A reading will be made at the beginning of each month and a bill will be given to Sublessee. The rates will be at the current charges the city uses as the time of the billing. The billing will include usage of water, sewage, and any applicable taxes and/or improvements. 9. On the last day of the term or upon the sooner termination thereof, Sublessee shall peaceably surrender the Sublet Area leaving it in the condition which, by the terms of the Prime Lease, Sublessor is obliged to leave the same. On or before the last day of the term or the sooner termination thereof, Sublessee shall at its own expense remove all of its equipment and other personal property from the Sublet Area, repairing any damage caused thereby, and any property not removed shall be deemed abandoned. In addition, all alterations, additions, fixtures and leasehold improvements made by Sublessee, including the "clean room" shall be removed by Sublessee on or before the last day of the term or the sooner termination thereof, with Sublessee repairing any damage to the Sublet Area caused thereby. 10. Neither Sublessor nor Landlord shall be liable to Sublessee, or those claiming through or under Sublessee, for injury, death or property damage occurring in, on or about the Sublet Area or the building of which the Sublet Area is a part, and appurtenances thereto, and Sublessee shall indemnify Sublessor and Landlord and hold them harmless from any claim or damage arising out of any injury, death or property damage occurring in, on or about the Sublet Area or said building and appurtenances to Sublessee or an employee, customer or invitee of the Sublessee. 11. Without limiting the generality of the immediately preceding paragraph, Sublessee shall, at its expense, maintain public liability insurance during the term of this Sublease as required under Article 10 of the Prime Lease in one or more companies acceptable to Sublessor and Landlord, naming Sublessor, Landlord and Sublessee as insureds, in form and substance reasonably acceptable to Sublessor and Landlord (such insurance to insure performance by Sublessee of its obligations under the immediately preceding paragraph), such insurance to be in those amounts as set forth under Article 10 of the Prime Lease. In addition, Sublessee shall also carry and cause to be in full force and effect fire and extended coverage insurance on the equipment and other property owned, leased to or otherwise in possession of Sublessee. Each policy of insurance hereunder shall contain a provision requiring thirty (30) days' written notice to Sublessor and to Landlord before cancellation of the policy. Sublessor shall carry and cause to be in full force and effect the insurance coverages required to be carried by it pursuant to Article 10 of the Prime Lease, including fire and extended coverage insurance under Article 10(b). Sublessor and Sublessee hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by fire or any of the extended coverage or supplementary contract casualties, even if such fire or other casualty shall have been caused by default or negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only with respect to loss or damage occurring during such times as the releasing party's policy shall contain a clause or endorsement to the effect that any such release would not adversely affect or impair said policy or prejudice the right of the releasing party to recover thereunder. Sublessor and Sublessee agree that they will request their insurance carriers to include in their policies such a clause or endorsement. The parties shall provide the other with evidence of the insurance coverages required to be carried under this paragraph 11 and shall provide the other with at least 15 days' written notice prior to any modification of the terms of coverage. 12. The Landlord shall have no obligations whatsoever to the Sublessee hereunder. 13. The Sublessor and Landlord, their authorized agents or attorneys, may at any reasonable time, enter the Sublet Area to inspect, make repairs, improvements and/or changes in the Sublet Area or other premises in the building of which the Sublet Area is a part as the Sublessor and/or Landlord may deem proper; and there shall be no diminution of rent or liability on the part of the Sublessor or Landlord by reason of any reasonable inconvenience, annoyance, or injury to business. 14. If the Sublessee defaults in the observance or performance of any of the Sublessee's covenants, agreements or obligations hereunder wherein the default can be cured by the expenditure of money, either the Sublessor or the Landlord may, but without obligation and without limiting any other remedies which they may have by reason of such default, cure the default, charge the costs thereof to the Sublessee and the Sublessee shall pay the same forthwith upon demand, together with interest thereon at the highest permissible rate of interest allowed under the usury statues of the State of Minnesota or in case no such maximum rate of interest is provided, at the rate of 12% per annum. 15. If the Sublessee shall default in the payment of any installment of monthly or additional rent and such continues for a period of 10 days or in the observance or performance of any of the Sublessee's covenants, agreements or obligations hereunder and such continues for a period of 30 days after written notice thereof by Sublessor, or if any proceeding is commenced by or against the Sublessee for the purpose of subjecting the assets of the Sublessee to any law relating to bankruptcy or insolvency or for an appointment of a receiver of Sublessee or of any of Sublessee's assets, or if Sublessee makes a general assignment of Sublessee's assets for the benefit of creditors, then, in any such event, the Sublessor may, without process, re-enter immediately into the Sublet Area and remove all persons and property therefrom, and at its option, nullify and cancel this Sublease as to all future rights of the Sublessee and have regain, repossess and enjoy the Sublet Area, anything herein to the contrary notwithstanding, and Sublessee hereby expressly waives the service of any notice in writing of intention to re-enter as aforesaid, and also all right of restoration to possession of the Sublet Area after re-entry or after judgment for possession thereof. Notwithstanding re-entry by Sublessor or forfeiture, termination or cancellation of this Sublease, the liability of Sublessee for the rent and all other sums provided for herein shall continue for a period ending as of the last day of the first full calendar month following such re-entry or forfeiture, termination or cancellation. Sublessee shall be responsible for, in addition to the rentals and other sums agreed to be paid hereunder, the costs of any necessary maintenance, repair, restoration, reletting (including related cost of removal or modification of tenant improvements) or cure as well as reasonable attorney's fees incurred or awarded in any suit or action instituted by Sublessor to enforce the provisions of this Sublease, regain possession of the Sublet Area or the collection of the rentals due Sublessor hereunder. Sublessee agrees to pay interest at the highest permissible rate of interest allowed under the usury statues of the State of Minnesota or in case no such maximum rate of interest is provided, at the rate of 12% per annum on all rentals and other sums due Sublessor hereunder not paid within 10 days from the date the same becomes due and payable. Each right or remedy of Sublessor provided for in the Sublease shall be cumulative and shall be in addition to every other right or remedy provided for in this Sublease now or hereafter existing at law or in equity or by statute or otherwise. 16. The Sublessee shall not have the right to assign this Sublease or sublet all or any part of the Sublet Area without the prior written consent of the Sublessor and of the Landlord. Landlord's right to assign the Prime Lease and Sublessor's right to assign this Sublease are and shall remain unqualified provided Sublessee's right to quiet possession of the Sublet Area shall not be disturbed if Sublessee is not in default under this Sublease and so long as Sublessee shall pay the rent and observe and perform all of the provisions of this Sublease, unless this Sublease is otherwise terminated pursuant to its terms. 17. At any time Sublessee may terminate this Sublease by giving at least ninety (90) days prior written notice to Sublessor to correspond with the calendar month end. 18. It is mutually agreed that this Sublease shall be subordinate to any and all mortgages, including any renewals, modification, consolidations, replacements and extensions thereof now or hereafter imposed on the premises of which the Sublet Area is a part by Landlord. Sublessee's right to quiet possession of the Sublet Area shall not be disturbed if Sublessee is not in default and so long as Sublessee shall pay the rent and observe and perform all of the provisions of this Sublease, unless this Sublease is otherwise terminated pursuant to its terms. In confirmation of such subordination, Sublessee, upon request, shall promptly execute and deliver a subordination, non-disturbance and attornment agreement, as required by Landlord's mortgagee, if any. 19. Any notice provided for herein shall be deemed to be duly given if made in writing and delivered in person to an office of such party or mailed by first class registered or certified mail, postage prepaid, addressed as follows: If to Sublessor: Anchor Paper Company 480 Broadway Street St. Paul, MN 55101 If to Sublessee: Infinite Graphics Incorporated 4611 East Lake Street Minneapolis, MN 55406 or to such other address with respect to either party hereto, as such party shall notify the other party hereto in writing. IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as of the day and year first above written. SUBLESSOR: SUBLESSEE: Anchor Paper Company Infinite Graphics Incorporated By: /s/ JAMES P. KEMMER By: /s/ JAMES F. BELFIORI -------------------- ---------------------- Its CFO Its Finance Manager -------------------- ---------------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 12-MOS APR-30-1997 APR-30-1997 0 0 1,494,639 (104,441) 162,952 1,589,462 4,659,930 (3,968,928) 3,333,117 1,850,934 118,860 0 0 4,112,947 (2,749,624) 3,333,117 5,844,759 5,916,072 3,486,582 3,486,582 0 0 142,878 210,716 2,000 208,716 0 0 0 208,716 .08 .08
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