U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from _______________ to _______________
Commission file number 0-23902
IPI, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
MINNESOTA 41-1449312
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
15155 TECHNOLOGY DRIVE
EDEN PRAIRIE, MN 55344
(Address of Principal Executive Offices)
(612) 975-6200
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
As of October 9, 1997, there were 4,734,087 Common Shares outstanding.
Page 1 of 12
<PAGE>
IPI, INC.
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of August 31,
1997 and November 30, 1996. 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended August 31, 1997 and
August 31, 1996. 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended August 31, 1997 and August 31,
1996. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports of Form 8-K 9
Signatures 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
IPI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1997 November 30,
(Unaudited) 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,309,000 $ 1,257,000
Short-term investments 3,260,000 3,180,000
Marketable equity securities 4,161,000 --
Trade accounts receivable 1,685,000 1,298,000
Current maturities of notes receivables, net of allowance for
doubtful accounts of $187,000 and $187,000 917,000 917,000
Inventories 344,000 398,000
Prepaid expenses and other 153,000 167,000
Deferred income taxes 556,000 585,000
------------ ------------
Total current assets 12,385,000 7,802,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,126,000 914,000
Less - Accumulated depreciation (703,000) (582,000)
------------ ------------
Property and equipment, net 423,000 332,000
NOTES RECEIVABLE, net of current maturities and allowance for
doubtful accounts of $725,000 and $607,000 1,994,000 2,452,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization of $1,106,000 and $933,000 3,446,000 3,619,000
------------ ------------
$ 18,248,000 $ 14,205,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 542,000 $ 429,000
Accrued compensation 266,000 296,000
Accrued financing liabilities 200,000 200,000
Deferred revenues 136,000 91,000
Margin account due 2,477,000 --
Other accrued liabilities 559,000 409,000
------------ ------------
Total current liabilities 4,180,000 1,425,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized:
4,734,087 shares issued and outstanding 47,000 47,000
Additional paid-in capital 15,584,000 15,584,000
Accumulated deficit (1,612,000) (2,851,000)
Unrealized gain on securities 49,000 --
------------ ------------
Total shareholders' equity 14,068,000 12,780,000
------------ ------------
$ 18,248,000 $ 14,205,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
IPI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Royalty fees $1,118,000 $1,046,000 $3,284,000 $3,051,000
Printing equipment, supplies and services 1,281,000 1,498,000 3,656,000 4,047,000
Finance and other income 198,000 242,000 699,000 766,000
---------- ---------- ---------- ----------
Total revenues 2,597,000 2,786,000 7,639,000 7,864,000
COSTS AND EXPENSES:
Cost of sales 1,054,000 1,270,000 3,007,000 3,385,000
Selling, general and administrative expenses 739,000 793,000 2,493,000 2,495,000
Amortization of goodwill 58,000 58,000 173,000 173,000
---------- ---------- ---------- ----------
Total costs and expenses 1,851,000 2,121,000 5,673,000 6,053,000
---------- ---------- ---------- ----------
Income before provision for income 746,000 665,000 1,966,000 1,811,000
taxes
PROVISION FOR INCOME TAXES 276,000 246,000 727,000 670,000
---------- ---------- ---------- ----------
NET INCOME $ 470,000 $ 419,000 $1,239,000 $1,141,000
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $ 0.10 $ 0.09 $ 0.26 $ 0.24
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING 4,734,000 4,734,000 4,734,000 4,734,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
IPI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,239,000 $ 1,141,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 294,000 242,000
Net change in other operating items:
Trade accounts receivable (387,000) (164,000)
Inventories 54,000 (129,000)
Prepaid expenses and other 14,000 47,000
Accounts payable, accrued liabilities and other 278,000 (186,000)
----------- -----------
Net cash provided by operating activities 1,492,000 951,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity securities (1,606,000) --
Short-term investments, net (80,000) (100,000)
Purchase of property and equipment, net (212,000) (221,000)
Change in notes receivable, net 458,000 (207,000)
----------- -----------
Net cash (used for) investing activities (1,440,000) (528,000)
----------- -----------
Increase in cash and cash equivalents 52,000 423,000
CASH AND CASH EQUIVALENTS, beginning of year 1,257,000 575,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,309,000 $ 998,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 552,000 $ 606,000
=========== ===========
Sale of partnership interests for note receivable $ -- $ 124,000
=========== ===========
Marketable securities purchased on margin $ 2,477,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
IPI, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
IPI, Inc. ("IPI" or the "Company") and its wholly owned subsidiary,
Insty-Prints, Inc. ("Insty-Prints"), are unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial statements have been reflected in the interim periods presented.
Such adjustments consisted only of normal recurring items and all
intercompany transactions have been eliminated in consolidation. The
significant accounting policies, certain financial information and footnote
disclosures which are normally included in financial statements prepared in
accordance with generally accepted accounting principles, but which are not
required for interim reporting purposes, have been condensed or omitted.
The operating results for the interim periods presented are not necessarily
indications of the operating results to be expected for the full fiscal
year. The accompanying financial statements of the Company should be read
in conjunction with the Company's audited financial statements for the
years ended November 30, 1996 and 1995 and the notes thereto, included in
the Company's Form 10-KSB.
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards 128 (FAS 128) "Earnings Per
Share," which is effective for fiscal years ending after December 15, 1997.
When adopted, FAS 128 will require the restatement of prior periods
earnings per share. The Company will adopt FAS 128 the quarter ending
February 28, 1998 and does not anticipate that its adoption will have a
significant effect on earnings per share.
In August 1997, marketable equity securities were purchased to enhance
returns on cash funds. In accordance with FAS 115, Accounting for Certain
Investments in Debt and Equity Securities, these securities are shown on
the balance sheet at market value and unrealized gains (losses) are
reflected as a separate component of shareholders equity, net of related
income taxes.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of August 31, 1997, the Company, through its wholly-owned subsidiary
Insty-Prints, had 277 franchise locations and one Company-owned store.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
August 31, August 31,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Royalty fees 43.0% 37.5% 43.0% 38.8%
Printing equipment, supplies and services 49.4 53.8 47.9 51.5
Finance and other income 7.6 8.7 9.1 9.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Costs of sales 40.6 45.6 39.4 43.1
Selling, general and administrative 28.5 28.4 32.6 31.7
expenses
Amortization of goodwill 2.2 2.1 2.3 2.2
----- ----- ----- -----
Total costs and expenses 71.3 76.1 74.3 77.0
----- ----- ----- -----
Income before provision for income taxes 28.7 23.9 25.7 23.0
Provision for income taxes 10.6 8.8 9.5 8.5
----- ----- ----- -----
Net income 18.1% 15.1% 16.2% 14.5%
===== ===== ===== =====
</TABLE>
FOR THE QUARTERS AND NINE MONTHS ENDED AUGUST 31, 1997 AND 1996
Revenues. Total revenues for the three months ended August 31, 1997,
consisting of royalties, sales of printing equipment, supplies and services,
franchise fees and finance and other income, totaled $2,597,000, a decrease of
$189,000 or 6.8% below the three months ended August 31, 1996. Total revenues
for the nine months ended August 31, 1997, of $7,639,000 were $225,000 or 2.9%
below the nine months ended August 31, 1996.
Royalty revenue increased to $1,118,000 in the third quarter of 1997 from
$1,046,000 in 1996, an increase of 6.9%. For the nine months ended August 31,
1997, royalty revenue was $3,284,000, an increase of 7.6% or $233,000 over the
same period a year ago. Royalties increased primarily as a result of the
increased sales by existing franchise locations. While the number of franchised
locations decreased to 277 as of August 31, 1997 from 307 as of August 31, 1996,
the reductions were primarily in low-performing locations and thus royalty
revenue was minimally impacted.
Sales of printing equipment, supplies and services for the third quarter of
1997 decreased to $1,281,000 from $1,498,000 for 1996, a decrease of 14.5%. For
the nine months ended August 31, 1997, sales of products were $3,656,000 or 9.7%
below the sales of $4,047,000 for the same period a year ago. The decrease in
1997 was primarily the result of decreased sales of printing related equipment
and electronic publishing equipment. The drop in printing related equipment
reflects store owner needs and the decrease in electronic publishing equipment
results from discontinuing the selling of computers and certain related
equipment.
Finance and other income was $198,000 for the quarter ended August 31,
1997, which is $44,000 or 18.2% less than the same quarter a year ago. For the
nine months ended August 31, 1997, finance and other income was $699,000 or 8.7%
less than the $766,000 for the same period a year ago. For the three and nine
month periods of 1997, the decreased revenues were primarily a result of
decreased franchise fee income. Overall,
7
<PAGE>
franchise fee revenues are not significant in 1997 or 1996 due to the Company's
emphasis during such periods on increasing existing franchise location sales and
growth through acquisitions.
Cost of Sales. Cost of sales decreased to $1,054,000 for the third quarter
of 1997 from $1,270,000 for 1996, a decrease of 17.0% for the quarter. The
decrease in the third quarter is the result of a related decrease in sales of
printing and electronic publishing equipment. Nine month cost of sales amounts
totaled $3,007,000 in 1997, compared to $3,385,000 in 1996, a decrease of
$378,000 or 11.1%, relating primarily to sales decreases. Average margins in
products and services increased slightly to 17.7% for the nine month period of
1997 compared to 16.3% for the nine month period ended August 31, 1996,
primarily due to a change in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $739,000 for the third quarter 1997 compared to
$793,000 for 1996, a decrease of 6.8%. Total expenses for the nine months ended
August 31, 1997 were $2,493,000 compared to $2,495,000 for 1996.
Provision for Income Tax. The Company's effective combined federal and
state income tax rate is estimated to be 37% for 1997 due primarily to the
effect of state income taxes, non-taxable income on municipal securities and
non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ending August 31, 1997, the Company generated
$1,492,000 from operating activities, an increase of $541,000 from $951,000 of
funds provided from operating activities for the nine month period of 1996. The
increase in funds provided from operating activities was primarily attributable
to an increase in net income, reduced inventories and increased accounts payable
and other, offset by an increase in trade accounts receivable.
The Company has no bank debt or credit facility; however, incurred a
short-term obligation during the quarter ended August 31, 1997 for a margin
account on the purchase of equity securities. Subsequent to quarter end, the
margin account was paid off through the retirement of short-term investments.
Operations are funded from cash generated by the business.
Franchise owners may finance their equipment purchases through a $6,000,000
equipment financing facility established with First Bank Systems by Insty-Prints
for the benefit of the franchise owners. This facility is guaranteed by IPI and
Insty-Prints, whose contingent liability under this agreement is capped at
$2,400,000. A loss reserve of $200,000 is recorded on the balance sheet at
August 31, 1997, representing estimated losses on these guarantees, net of
equipment value. The aggregate balance outstanding under this facility as of
August 31, 1997 was approximately $3,386,000.
The Insty-Prints' franchise business is not highly seasonal, and franchise
owners' sales generally follow overall economic trends. The business is not
impacted materially by inflation.
8
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiary are involved in various legal
proceedings arising in the normal course of business, none of which is
expected to result in any material loss to the Company or its
subsidiary.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
In August 1997, proxy statements were mailed to the holders of record
of 4,734,087 shares of common stock to solicit proxies in connection
with two Special Shareholders Meetings held on August 26, 1997. A
proposal was submitted at each meeting to a vote of shareholders, as
follows:
(1) "RESOLVED, that pursuant to Section 302A.671, Subd. 4a, of the
Minnesota Business Corporation Act, full voting rights are hereby
granted to all shares of common stock, par value $.01 ("Common
Stock"), of IPI, Inc. (the "Company") that are, or become,
beneficially owned by Marshall Financial Group, Inc. ("MFG"),
regardless of whether such shares were or are acquired in a control
share acquisition, as defined in Section 302A.011, Subd. 38, or
otherwise, provided that this resolution shall not give MFG authority
to exercise in excess of 50% of the total voting power of the shares
of the Company, regardless of the number of shares that MFG shall
beneficially own, without further compliance with Section 302A.671 if
such compliance is required at the time of such further acquisition."
This matter was approved by a vote of the shareholders with 2,016,695
voting yes; 1,000 voting no; and zero shares withheld. Shares totaling
1,944,687 were deemed to be "interested shares" and were not entitled
to vote on this matter.
(2) "RESOLVED, that Article 4 of the Amended and Restated Articles of
Incorporation of IPI, Inc., as amended to date, be amended by adding
Article 4.4 to read in its entirety as follows:
Article 4.4. Control Share Acquisitions. Minn. Stat. ss.302A.671 (the
"Control Share Acquisition Provisions") shall not apply to any
"control share acquisition" (as defined in Minn. Stat. ss.302A.011) of
shares of Common Stock of the Corporation, and any and all shares
acquired by any "acquiring person" (as defined in Minn. Stat.
ss.302A.011) shall have full and equal voting rights notwithstanding
such Control Share Acquisition Provisions." This matter was approved
by a vote of the shareholders with 3,627,095 voting yes; 2,100 voting
no; and zero shares withheld.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K Page
(a) Exhibits.
*11 Statement Re: Computation of per share earnings 11
*27 Financial Data Schedule 12
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is filed.
*Filed herewith
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 9, 1997 IPI, Inc.
By: /S/ Robert J. Sutter
--------------------------------------------
Robert J. Sutter
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ David M. Engel
--------------------------------------------
David M. Engel
Chief Financial Officer
(Principal Financial and Accounting Officer)
10
EXHIBIT 11
IPI, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary and fully diluted earnings per share
Weighted average number of issued shares
outstanding 4,734 4,734 4,734 4,734
Effect of:
1994 Long-Term Incentive Plan -- -- -- --
1994 Non-Employee Directors' Stock
Option Plan -- -- -- --
------ ------ ------ ------
Shares outstanding used to compute primary and
fully diluted earnings per share 4,734 4,734 4,734 4,734
====== ====== ====== ======
Net Income $ 470 $ 419 $1,239 $1,141
====== ====== ====== ======
Primary and fully diluted earnings per share $ 0.10 $ 0.09 $ 0.26 $ 0.24
====== ====== ====== ======
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 1,309,000
<SECURITIES> 7,421,000
<RECEIVABLES> 2,789,000
<ALLOWANCES> 187,000
<INVENTORY> 344,000
<CURRENT-ASSETS> 12,385,000
<PP&E> 1,126,000
<DEPRECIATION> 703,000
<TOTAL-ASSETS> 18,248,000
<CURRENT-LIABILITIES> 4,180,000
<BONDS> 0
0
0
<COMMON> 47,000
<OTHER-SE> 14,021,000
<TOTAL-LIABILITY-AND-EQUITY> 18,248,000
<SALES> 3,656,000
<TOTAL-REVENUES> 7,639,000
<CGS> 3,007,000
<TOTAL-COSTS> 5,673,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,966,000
<INCOME-TAX> 727,000
<INCOME-CONTINUING> 1,239,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,239,000
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
