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, 1998.
[ ] 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 8, 1998, 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, 1998 and November 30, 1997. 3
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended August 31, 1998 and
August 31, 1997. 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended August 31, 1998 and August 31,
1997. 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, 1998 November 30,
(Unaudited) 1997
----------- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,810,000 $ 1,294,000
Short-term investments 1,440,000 800,000
Marketable equity securities 4,685,000 5,014,000
Trade accounts receivable, net 1,203,000 1,274,000
Current maturities of notes receivables, net of allowance for
doubtful accounts of $163,000 and $163,000 987,000 987,000
Inventories 335,000 315,000
Prepaid expenses and other 183,000 119,000
Deferred income taxes 715,000 593,000
------------ ------------
Total current assets 12,358,000 10,396,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,487,000 1,356,000
Less - Accumulated depreciation (899,000) (790,000)
------------ ------------
Property and equipment, net 588,000 566,000
NOTES RECEIVABLE, net of current maturities and allowance for doubtful
accounts of $814,000 and $522,000 989,000 1,852,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated amortization of
$1,337,000 and $1,164,000 3,214,000 3,388,000
------------ ------------
$ 17,149,000 $ 16,202,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 232,000 $ 417,000
Accrued compensation 267,000 411,000
Accrued financing liabilities 200,000 200,000
Deferred revenues 34,000 52,000
Other accrued liabilities 607,000 563,000
------------ ------------
Total current liabilities 1,340,000 1,643,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 65,000 107,000
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 367,000 (1,132,000)
Unrealized (loss) on marketable securities available for sale,
net of related income tax effects (254,000) (47,000)
------------ ------------
Total shareholders' equity 15,744,000 14,452,000
------------ ------------
$ 17,149,000 $ 16,202,000
============ ============
</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,
----------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Royalty fees $1,146,000 $1,118,000 $3,328,000 $3,284,000
Printing equipment, supplies and services 852,000 1,281,000 2,926,000 3,656,000
Finance and other income 312,000 198,000 991,000 699,000
---------- ---------- ---------- ----------
Total revenues 2,310,000 2,597,000 7,245,000 7,639,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 649,000 1,054,000 2,279,000 3,007,000
Selling, general and administrative expenses 723,000 739,000 2,413,000 2,493,000
Amortization of goodwill 58,000 58,000 173,000 173,000
---------- ---------- ---------- ----------
Total costs and expenses 1,430,000 1,851,000 4,865,000 5,673,000
---------- ---------- ---------- ----------
Income before provision for income taxes 880,000 746,000 2,380,000 1,966,000
PROVISION FOR INCOME TAXES 326,000 276,000 881,000 727,000
---------- ---------- ---------- ----------
NET INCOME $ 554,000 $ 470,000 $1,499,000 $1,239,000
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.12 $ 0.10 $ 0.32 $ 0.26
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.12 $ 0.10 $ 0.32 $ 0.26
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING
-- BASIC 4,734,000 4,734,000 4,734,000 4,734,000
========== ========== ========== ==========
-- DILUTED 4,758,000 4,734,000 4,746,000 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,
----------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,499,000 $ 1,239,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 313,000 294,000
Net change in other operating items:
Trade accounts receivable 71,000 (387,000)
Inventories (20,000) 54,000
Prepaid expenses and other (64,000) 14,000
Accounts payable, accrued liabilities and other (303,000) 278,000
----------- -----------
Net cash provided by operating activities 1,496,000 1,492,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity securities -- (1,606,000)
Purchase of short-term investments, net (640,000) (80,000)
Purchase of property and equipment, net (203,000) (212,000)
Change in notes receivable, net 863,000 458,000
----------- -----------
Net cash provided by (used for) investing activities 20,000 (1,440,000)
----------- -----------
Increase in cash and cash equivalents 1,516,000 52,000
CASH AND CASH EQUIVALENTS, beginning of period 1,294,000 1,257,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,810,000 $ 1,309,000
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 704,000 $ 552,000
=========== ===========
Equipment acquired under capital lease $ -- $ 212,000
=========== ===========
</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, 1997 and 1996 and the notes thereto, included in
the Company's Form 10-KSB.
In August 1997, marketable equity securities were purchased to enhance
returns on cash funds. In accordance with Statement of Financial Accounting
Standards No. 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.
In the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings per
Share," which is effective for interim periods ending after December 15,
1997. As a result, all prior period earnings per share data has been
restated. This adoption of SFAS No. 128 did not have any significant impact
on previously reported earnings per share. Basic earnings per share was
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share was
computed similar to the computation for basic earnings per share, except
that the denominator is increased for the assumed exercise of dilutive
options and other dilutive securities using the treasury stock method.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of August 31, 1998, the Company, through its wholly-owned subsidiary
Insty-Prints, had 255 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,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Royalty fees 49.6% 43.0% 45.9% 43.0%
Printing equipment, supplies and services 36.9 49.4 40.4 47.9
Finance and other income 13.5 7.6 13.7 9.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Costs of sales 28.1 40.6 31.4 39.4
Selling, general and administrative expenses 31.3 28.5 33.3 32.6
Amortization of goodwill 2.5 2.2 2.4 2.3
----- ----- ----- -----
Total costs and expenses 61.9 71.3 67.1 74.3
----- ----- ----- -----
Income before provision for income taxes 38.1 28.7 32.9 25.7
Provision for income taxes 14.1 10.6 12.2 9.5
----- ----- ----- -----
Net income 24.0% 18.1% 20.7% 16.2%
===== ===== ===== =====
</TABLE>
FOR THE QUARTERS AND NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
Revenues. Total revenues for the three months ended August 31, 1998,
consisting of royalties, sales of printing equipment, supplies and services,
franchise fees and finance and other income, totaled $2,310,000, a decrease of
$287,000 or 11.1% compared to the three months ended August 31, 1997. Total
revenues for the nine months ended August 31, 1998, of $7,245,000 were $394,000
or 5.2% below the nine months ended August 31, 1997.
Royalty revenue increased slightly to $1,146,000 in the third quarter of
1998 from $1,118,000 in 1997. For the nine months ended August 31, 1998, royalty
revenue was $3,328,000, an increase of $44,000 or 1.3% over the same period a
year ago. Royalties were essentially flat as the increased royalties paid as a
result of increased sales by existing franchise locations was offset by reduced
royalties resulting from the number of franchised locations decreasing to 255 as
of August 31, 1998 from 277 as of August 31, 1997. Most of the store reductions
were in low-performing locations; however, there was some impact on royalty
revenue.
Sales of printing equipment, supplies and services for the third quarter of
1998 decreased to $852,000 from $1,281,000 for 1997, a decrease of 33.5%. For
the nine months ended August 31, 1998, sales of products were $2,926,000 or 20%
below the sales of $3,656,000 for the same period a year ago. The decrease in
1998 resulted from the elimination of selling certain electronic publishing
equipment, envelopes and inks and reduced sales of printing presses and related
equipment that reflected reduced demand from franchisees.
Finance and other income was $312,000 for the quarter ended August 31,
1998, which is $114,000 or 57.6% greater than the same quarter a year ago. For
the nine months ended August 31, 1998, finance and other income was $991,000 or
41.2% more than the $699,000 for the same period a year ago. For the three and
nine month periods of 1998, the increased revenues were primarily due to
investing in higher yielding investments and an increased level of investments.
Overall, franchise fee revenues are not significant in 1998 or 1997 due to the
Company's emphasis during such periods on increasing existing franchise location
sales and growth through acquisitions.
7
<PAGE>
Cost of Sales. Cost of sales decreased to $649,000 for the third quarter of
1998 from $1,054,000 for 1997, a decrease of 38.4% 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
$2,279,000 in 1998, compared to $3,007,000 in 1997, a decrease of $728,000 or
24.2%, relating primarily to sales decreases. Average margins in products and
services increased to 22.1% for the nine month period of 1998 compared to 17.7%
for the nine month period ended August 31, 1997 due to the elimination of
selling and reduced sales of certain low margin products and generally improved
margins on most other product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $723,000 for the third quarter 1998 compared to
$739,000 for 1997, a decrease of 2.2%. Total expenses for the nine months ended
August 31, 1998 were $2,413,000 compared to $2,493,000 for 1997, representing a
3.2% decrease. The decrease in expenses was due to the elimination of one
executive position and the expiration of a long-term consulting agreement,
effective December 1, 1997, which was offset by general inflationary increases
in other operating expenses.
Provision for Income Tax. The Company's effective combined federal and
state income tax rate is estimated to be 37% for 1998 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, 1998, the Company generated
$1,496,000 from operating activities, a slight increase of $4,000 from
$1,492,000 of funds provided from operating activities for the nine month period
of 1997.
The Company has no bank debt or credit facility. 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 U. S. Bank 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 annually. Accrued financing liabilities of $200,000 are recorded on
the balance sheet at August 31, 1998, representing estimated losses on these
guarantees, net of equipment value. The aggregate balance outstanding under this
facility as of August 31, 1998 was approximately $2,839,000.
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
Not applicable.
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, 1998 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 SUBSIDIARIES
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,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 554 $ 470 $1,499 $1,239
Weighted average number of issued shares
outstanding 4,734 4,734 4,734 4,734
Shares used in computation of basic earnings
per common stock 4,734 4,734 4,734 4,734
====== ====== ====== ======
Dilutive effect of outstanding stock options and
stock warrants after application of treasury
stock method 24 0 12 0
------ ------ ------ ------
Common and common equivalent shares
outstanding-diluted 4,758 4,734 4,746 4,734
====== ====== ====== ======
Basic earnings per common share $ .12 $ .10 $ .32 $ .26
====== ====== ====== ======
Diluted earnings per common share $ .12 $ .10 $ .32 $ .26
====== ====== ====== ======
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 2,810,000
<SECURITIES> 6,125,000
<RECEIVABLES> 2,353,000
<ALLOWANCES> 163,000
<INVENTORY> 335,000
<CURRENT-ASSETS> 12,358,000
<PP&E> 1,487,000
<DEPRECIATION> 899,000
<TOTAL-ASSETS> 17,149,000
<CURRENT-LIABILITIES> 1,340,000
<BONDS> 0
0
0
<COMMON> 47,000
<OTHER-SE> 15,697,000
<TOTAL-LIABILITY-AND-EQUITY> 17,149,000
<SALES> 2,926,000
<TOTAL-REVENUES> 7,245,000
<CGS> 2,279,000
<TOTAL-COSTS> 4,865,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,380,000
<INCOME-TAX> 881,000
<INCOME-CONTINUING> 1,499,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,499,000
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
