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 FEBRUARY 28, 1999.
[ ] 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 April 6, 1999, there were 4,734,087 Common Shares outstanding.
Page 1 of 13
<PAGE>
IPI, INC.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 1999 and November 30, 1998. 3
Condensed Consolidated Statements of Operations
and Comprehensive Income for the Three Months
Ended February 28, 1999 and February 28, 1998. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended February 28, 1999
and February 28, 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports of Form 8-K 10
Signatures 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
IPI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
February 28, November 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,597,000 $ 3,828,000
Short-term investments 2,690,000 1,340,000
Marketable equity securities 5,502,000 4,631,000
Trade accounts receivable 1,204,000 1,225,000
Current maturities of notes receivables, net of allowance for
doubtful accounts of $174,000 and $205,000 777,000 746,000
Inventories 314,000 393,000
Prepaid expenses and other 145,000 92,000
Deferred income taxes 998,000 789,000
------------ ------------
Total current assets 13,227,000 13,044,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,543,000 1,522,000
Less - Accumulated depreciation (1,030,000) (961,000)
------------ ------------
Property and equipment, net 513,000 561,000
NOTES RECEIVABLE, net of current maturities and allowance for
doubtful accounts of $648,000 and $648,000 1,014,000 1,139,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization of $1,453,000 and $1,395,000 3,099,000 3,157,000
------------ ------------
$ 17,853,000 $ 17,901,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 611,000 $ 534,000
Accrued compensation 57,000 296,000
Accrued financing liabilities 200,000 200,000
Deferred revenues 10,000 14,000
Other accrued liabilities 607,000 564,000
------------ ------------
Total current liabilities 1,485,000 1,608,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 33,000 51,000
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
Retained earnings 1,274,000 900,000
Unrealized loss on marketable securities available for sale, net
of related income tax effects (570,000) (289,000)
------------ ------------
Total shareholders' equity 16,335,000 16,242,000
------------ ------------
$ 17,853,000 $ 17,901,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
IPI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
February 28,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Royalty fees $ 954,000 $ 987,000
Printing equipment, supplies and services 877,000 1,062,000
Finance and other income 262,000 245,000
----------- -----------
Total Revenues 2,093,000 2,294,000
----------- -----------
COSTS AND EXPENSES:
Cost of sales 656,000 833,000
Selling, general and administrative expenses 756,000 787,000
Amortization of goodwill 58,000 58,000
----------- -----------
Total costs and expenses 1,470,000 1,678,000
----------- -----------
Income before provision for income taxes 623,000 616,000
PROVISION FOR INCOME TAXES 249,000 228,000
----------- -----------
NET INCOME $ 374,000 $ 388,000
=========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.08 $ 0.08
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING
- BASIC 4,734,000 4,734,000
=========== ===========
- DILUTED 4,734,000 4,742,000
=========== ===========
OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 1):
Net Income $ 374,000 $ 388,000
Unrealized gain (loss) on marketable securities available for sale, net
of related income tax effects (281,000) 345,000
----------- -----------
Total Comprehensive Income $ 93,000 $ 733,000
=========== ===========
</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>
Three Months Ended
February 28,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 374,000 $ 388,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 109,000 82,000
Net change in other operating items:
Trade accounts receivable 22,000 (51,000)
Inventories 79,000 44,000
Prepaid expenses and other (53,000) (78,000)
Accounts payable, deferred revenues
and other accrued liabilities (123,000) (217,000)
----------- -----------
Net cash provided by operating activities 408,000 168,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) Sale of property and equipment, net (21,000) 1,000
Purchase of short-term investments (1,350,000) (670,000)
Purchase of marketable equity securities (1,362,000) --
Change in notes receivable, net 94,000 455,000
----------- -----------
Net cash used in investing activities (2,639,000) (214,000)
----------- -----------
Decrease in cash and cash equivalents (2,231,000) (46,000)
CASH AND CASH EQUIVALENTS, beginning of the period 3,828,000 1,294,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,597,000 $ 1,248,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 178,000 $ 53,000
=========== ===========
</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, 1998 and 1997 and the notes
thereto, included in the Company's Form 10-KSB.
In August 1997 and February 1999, 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 March 1997, the Financial Accounting Standards Board issues SFAS No.
128 "Earnings per Share," which changes the way companies calculate their
earnings per share (EPS). SFAS No. 128 replaces primary EPS with basic EPS
and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing
reported gain by the weighted average shares outstanding, excluding
potentially dilutive securities while diluted EPS includes the dilutive
securities. The Company adopted SFAS No. 128 in the first quarter of 1998
and all prior periods EPS data has been restated.
In fiscal year 1999, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which establishes new rules for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company's comprehensive income is comprised of
net income and unrealized gains (losses) on marketable securities held for
resale. The adoption of SFAS No. 130 had no impact on the Company's net
income or total shareholders' equity. Prior to the adoption of SFAS No.
130, unrealized gains (losses) on marketable securities held for resale
were reported separately in the statement of shareholders' equity. The
comprehensive income amounts in the prior fiscal years' financial
statements have been reclassified to conform to SFAS No. 130.
The Company is principally engaged in one business segment--the
franchising and servicing of business printing centers under the trade
name of Insty-Prints(R).
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of February 28, 1999, the Company, through its wholly-owned subsidiary
Insty-Prints, had 250 franchise locations and one Company-owned store.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of sales for the periods indicated:
Quarter Ended
February 28,
---------------------
1999 1998
---- ----
Revenues:
Royalty fees 45.6% 43.0%
Printing equipment, supplies and services 41.9 46.3
Finance and other income 12.5 10.7
----- -----
Total revenues 100.0 100.0
----- -----
Costs and expenses:
Cost of sales 31.3 36.3
Selling, general and administrative expenses 36.1 34.3
Amortization of goodwill 2.8 2.5
----- -----
Total costs and expenses 70.2 73.1
----- -----
Income before provision for income taxes 29.8 26.9
Provision for income taxes 11.9 10.0
----- -----
Net income 17.9% 16.9%
===== =====
FOR THE QUARTERS ENDED FEBRUARY 28, 1999 AND 1998
Revenues. Total revenues for the three months ended February 28, 1999,
consisting of royalties, sales of printing equipment, supplies and services,
franchise fees and finance and other income, totaled $2,093,000, a decrease of
$201,000 or 8.8% compared to the three months ended February 28, 1998.
Royalty revenue decreased to $954,000 in the first quarter of 1999 from
$987,000 in 1998, a decrease of 3.3%. Royalties decreased primarily as a result
of a reduced number of franchise locations in 1999 versus 1998, which was offset
by increased same store sales by existing franchise locations.
Sales of printing equipment, supplies and services for the first quarter
of 1999 decreased to $877,000 from $1,062,000 in 1998, a decrease of 17.4%. The
decrease in sales for 1999 resulted primarily from reduced demand from franchise
owners for printing equipment and direct mail services.
Finance and other income was $262,000 for the quarter ended February 28,
1999, which is an increase of $17,000 or 6.9% from the same quarter a year ago.
For the first quarter of 1999, finance and other income was greater due
primarily to the increased level of investments, which was offset by reduced
note interest. Note interest was lower due to decreased levels of outstanding
notes to franchise owners.
7
<PAGE>
Cost of Sales. Cost of sales decreased to $656,000 for the first quarter
of 1999 from $833,000 for 1998, a decrease of 21.2% for the quarter. The
decrease in the quarter is the result of a related decrease in product sales, as
mentioned previously. Margins on equipment, supplies and services increased to
25.1% in the three months ended February 28, 1999 from 21.6% for the same period
in 1998, which is primarily due to sales mix and increased margins on certain
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $756,000 for the first quarter of 1999 from
$787,000 for the same period in 1998, a decrease of 3.9%. Expenses decreased due
to reduced equipment and general administrative expenses and improvements in
corporate owned store results.
Provision for Income Taxes. The Company's effective combined federal and
state income tax rate is estimated to be 40% for 1999 compared to 37% for 1998
due primarily to increases in state income tax obligations.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended February 28, 1999, the Company generated
$408,000 from operating activities, an increase of $240,000 from $168,000 of
funds provided from operating activities for the first quarter of 1998. The
increase in funds provided from operating activities was primarily attributable
to increased depreciation expense in the 1999 period, net decreases in prepaid
and other assets and increased accounts payable and other liabilities.
During the three months ended February 28, 1999, the Company purchased
$1,350,000 of short-term investments and $1,362,000 of marketable equity
securities held for resale. All marketable equity securities reflected on the
balance sheet as of February 28, 1999 are common shares of stock in a Real
Estate Investment Trust, which have been purchased to improve yields on invested
funds. As reflected in the equity section of the balance sheet and in
Comprehensive Income, unrealized gains or losses for changes in the market value
of the stock are shown.
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 (formerly
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, annually. A loss reserve of
$200,000 is recorded on the balance sheet at February 28, 1999, representing
estimated losses on these guarantees, net of equipment value. The aggregate
balance outstanding under this facility as of February 28, 1999 was
approximately $2,581,000.
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.
YEAR 2000 COMPLIANCE
The Company has adopted a plan to achieve Year 2000 compliance and an
assessment of its internal systems has essentially been completed. Most desktop
computers are Macintosh-based and are Year 2000 compliant, as well as the
software utilized. Those desktop systems not compliant will be upgraded to new
systems that are Year 2000 compliant by the third quarter of 1999. Software
updates to the Company's mainframe systems are substantially complete and
expected to be finalized by the end of the second quarter of 1999. The vendor
supplying the Point of Sale system used by most franchisees has verified that
the system is Year 2000 compliant. The Company has completed an analysis of its
vendor relationships in which the risk of each vendor's non-compliance with Year
2000 was assessed. Survey letters were sent to major vendors in
8
<PAGE>
mid-year 1998 to ascertain the status of each vendor's Year 2000 compliance. The
survey process of vendors has essentially been completed and will be monitored
on an ongoing basis. Total costs associated with the Year 2000 compliance
project are expected to be less than $50,000.
The Company provided its franchisees an assessment guide in October 1998,
which serves as a step-by-step planning document for their use addressing Year
2000 compliance. Most of the primary equipment used by franchisees is not date
sensitive nor does it contain embedded chips.
The Company does not have vendor or customer relationships in which
critical data is exchanged electronically. The Company would suffer if a service
provider such as a telecommunications or utility vendor was not Year 2000
compliant and their respective service was interrupted or terminated. In such a
case, the Company would be required to revert to its disaster recovery plan for
the specific issue. If a large number of vendors that provide product to our
franchisees were not compliant and unable to provide our franchisees products,
it is likely that the Company would recognize a material reduction of royalties
from the franchisees' lost sales.
To date, the Company has not identified any suppliers who do not plan to
be Year 2000 compliant; this analysis is ongoing. If non-compliant vendors are
identified, the Company intends to develop appropriate contingency plans.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, the Year 2000 readiness of the Company's suppliers and
business partners may lag behind the Company's efforts. Although the Company
does not believe that the Year 2000 matters discussed above will have a material
impact on its business, financial condition and results of operations, it is
uncertain as to what extent the Company may be affected by such matters.
FORWARD LOOKING STATEMENTS
Except for historical financial information , the information contained in
this quarterly report constitute forward-looking statements and are based on
management's goals, estimates, assumptions and projections. Important factors
could cause results to differ materially from those expected by management. Some
of these factors, such as increased competition from other business printing
centers or reduced demand for printed media could decrease sales by franchised
locations and decrease sales of products to franchisees by the Company. This
would reduce royalty revenue from franchised locations and sales of products to
such locations by the Company, thus reducing revenues and profits.
Due to factors noted above and elsewhere in this quarterly report, the
Company's future earnings and Common Stock price may be subject to volatility.
Any shortfall in revenue or earnings from anticipated levels could have a
significant effect on the trading price of the Company's Common Stock in any
given period.
9
<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
On approximately April 5, 1999, proxy statements were mailed to the
holders of record of 4,734,087 shares of common stock to solicit
proxies in connection with the Annual Meeting of Shareholders on May
10, 1999. Two proposals were submitted to a vote of shareholders, as
follows:
(a) Election of Directors--all current directors (Robert J.
Sutter, Dennis M. Mathisen, Irwin L. Jacobs, Daniel T.
Lindsay, Dr. Kenneth J. Roering and Howard Grodnick) were up
for re-election to terms of one year.
(b) Ratification and Appointment of Independent Auditors--Arthur
Andersen LLP.
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 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
10
<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: April 7, 1999 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)
11
EXHIBIT 11
IPI, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
February 28,
------------------
1999 1998
------- -------
<S> <C> <C>
Net Income $ 374 $ 388
======= =======
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
Dilutive effect of outstanding stock options and stock warrants after
application of treasury stock method 0 8
------- -------
Common and common equivalent shares outstanding-diluted 4,734 4,742
======= =======
Basic and diluted earnings per common share $ .08 $ .08
======= =======
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,597,000
<SECURITIES> 8,192,000
<RECEIVABLES> 2,155,000
<ALLOWANCES> (174,000)
<INVENTORY> 314,000
<CURRENT-ASSETS> 13,227,000
<PP&E> 1,543,000
<DEPRECIATION> (1,030,000)
<TOTAL-ASSETS> 17,853,000
<CURRENT-LIABILITIES> 1,485,000
<BONDS> 0
0
0
<COMMON> 47,000
<OTHER-SE> 16,288,000
<TOTAL-LIABILITY-AND-EQUITY> 17,853,000
<SALES> 877,000
<TOTAL-REVENUES> 2,093,000
<CGS> 656,000
<TOTAL-COSTS> 1,470,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 623,000
<INCOME-TAX> 249,000
<INCOME-CONTINUING> 374,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
