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 29, 2000.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from _______________ to _______________
Commission file number 001-15563
---------------------------------------------------------
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 10, 2000, there were 4,859,087 Common Shares outstanding.
Page 1 of 14
<PAGE>
IPI, INC.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 29, 2000 and November 30, 1999. 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three Months Ended
February 29, 2000 and February 28, 1999. 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended February 29, 2000 and
February 28, 1999. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports of Form 8-K 11
Signatures 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,311,000 $ 2,022,000
Short-term investments 1,510,000 2,590,000
Marketable equity securities 7,887,000 6,504,000
Trade accounts receivable, net 1,286,000 1,371,000
Current maturities of notes receivables, net of allowance of
$154,000 and $145,000 955,000 964,000
Inventories 249,000 271,000
Prepaid expenses and other 218,000 107,000
Deferred income taxes 973,000 930,000
------------ ------------
Total current assets 14,389,000 14,759,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 2,343,000 2,226,000
Less - Accumulated depreciation (1,073,000) (980,000)
------------ ------------
Property and equipment, net 1,270,000 1,246,000
NOTES RECEIVABLE, net of current maturities and allowance of
$625,000 and $656,000 810,000 860,000
GOODWILL AND OTHER INTANGIBLES, net 3,749,000 3,151,000
------------ ------------
$ 20,218,000 $ 20,016,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 614,000 $ 485,000
Accrued compensation 87,000 296,000
Accrued financing liabilities 150,000 150,000
Deferred revenues 235,000 264,000
Income taxes payable 200,000 126,000
Other accrued liabilities 411,000 432,000
------------ ------------
Total current liabilities 1,697,000 1,753,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 287,000 319,000
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized:
4,859,000 and 4,734,000 shares issued and outstanding 49,000 47,000
Additional paid-in capital 15,769,000 15,584,000
Retained earnings 2,848,000 2,682,000
Unrealized loss on marketable securities available for sale, net
of income tax effects (432,000) (369,000)
------------ ------------
Total shareholders' equity 18,234,000 17,944,000
------------ ------------
$ 20,218,000 $ 20,016,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
REVENUES:
Royalty fees - Insty-Prints $ 959,000 $ 954,000
Printing equipment, supplies and services 681,000 877,000
Sales by company-owned Insty-Prints locations 419,000 410,000
Dreamcatcher - royalties and fees 20,000 --
Finance and other income 315,000 262,000
------------ ------------
Total Revenues 2,394,000 2,503,000
------------ ------------
COSTS AND EXPENSES:
Franchise operations:
Cost of sales - printing equipment, supplies and services 520,000 657,000
Cost of sales - company owned Insty-Prints 138,000 123,000
Selling, general and administrative 1,394,000 1,042,000
Amortization of goodwill and other intangibles 69,000 58,000
------------ ------------
2,121,000 1,880,000
------------ ------------
OPERATING INCOME 273,000 623,000
NET GAIN ON DISPOSAL OF ASSETS 4,000 --
INCOME BEFORE INCOME TAX 277,000 623,000
INCOME TAX EXPENSE 111,000 249,000
------------ ------------
NET INCOME $ 166,000 $ 374,000
============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.03 $ 0.08
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING
- BASIC 4,810,000 4,734,000
============ ============
- DILUTED 4,810,000 4,734,000
============ ============
OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 1):
Net Income $ 166,000 $ 374,000
Unrealized loss on marketable securities available for sale, net of
income tax effects (63,000) (281,000)
------------ ------------
Total Comprehensive Income $ 103,000 $ 93,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 166,000 $ 374,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 131,000 109,000
Net change in other operating items:
Trade accounts receivable 103,000 22,000
Inventories 35,000 79,000
Prepaid expenses and other (110,000) (53,000)
Accounts payable, deferred revenues
and other accrued liabilities (55,000) (123,000)
------------ ------------
Net cash provided by operating activities 270,000 408,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (61,000) (21,000)
Sale (purchases) of short-term investments, net 1,080,000 (1,350,000)
Purchase of marketable equity securities (1,490,000) (1,362,000)
Change in notes receivable, net 50,000 94,000
Purchase of Dreamcatcher (560,000) --
------------ ------------
Net cash used in investing activities (981,000) (2,639,000)
------------ ------------
Decrease in cash and cash equivalents (711,000) (2,231,000)
CASH AND CASH EQUIVALENTS, beginning of the period 2,022,000 3,828,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,311,000 $ 1,597,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 38,000 $ 178,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
IPI, INC. AND SUBSIDIARIES
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 subsidiaries,
Insty-Prints, Inc. ("Insty-Prints"), IPI Holdings, LLC, Texas IPI, L.P. and
Dreamcatcher Franchise Corporation, 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
inter-company transactions have been eliminated in consolidation. The
significant accounting policies, certain financial information and footnote
disclosures that 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, 1999 and 1998 and the notes thereto included in
the Company's Form 10-KSB.
In August 1997 and in February, April and December 1999 and in January
2000, 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 income tax effects.
In fiscal year 1999, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which established 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 SAFS 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.
Through fiscal 1999, the Company has principally been engaged in one
business segment-the franchising and servicing of business printing centers
under the trade name of Insty-Prints(R). As discussed in footnote 2., in
January 2000, the Company acquired assets of a supplemental educational
services business and formed a new subsidiary, Dreamcatcher Franchise
Corporation. Through Dreamcatcher the Company is franchising and servicing
learning centers under the trade name Dreamcatcher(R) Direct Instruction
Center and has nine operating franchised locations and two corporate
locations, all of which were acquired in the asset purchase.
2. ACQUISITIONS
In April 1999, Texas IPI, L.P. purchased the printing related assets and
assumed the facility and printing equipment leases of Regency Plaza
Printing and Office Supplies, Inc. (Regency), located in Dallas, Texas. The
consideration paid of $431,000 exceeded the fair value of assets received
by $234,000 of goodwill that is being amortized on a straight line basis
over fifteen (15) years. The assets purchased include furniture, computers,
leasehold improvements, customer list and various printing equipment items.
Leases assumed were primarily for presses, copiers and related printing
6
<PAGE>
equipment and the business facility. The operations of Texas IPI, L.P. are
included in the IPI Statement of Operations from the date of acquisition.
In January 2000, the Company acquired substantially all the assets of
Dreamcatcher Franchise Corporation and Dreamcatcher Learning Centers, Inc.
The terms of the purchase include the assumption of $395,000 of
obligations, a cash payment of $125,000, the issuance of 125,000 shares of
IPI stock with a valuation of $188,000 and a future maximum earn-out
provision of $375,000, based on the achievement of certain levels of
franchised learning centers that are operating. The acquisition price and
costs exceeded the fair value of assets received by $660,000, which has
been recorded as goodwill that is being amortized on a straight-line basis
over fifteen (15) years. The assets purchased include furniture, computers,
leasehold improvements and receivables. Dreamcatcher Franchise Corporation
franchises the establishment, development and operation of facilities
providing supplemental private education services to people of all ages
using personalized assessments with direct instruction in reading, writing,
spelling, math, algebra, study skills, G.E.D. preparation and college
preparation. The purchase included nine operating franchise locations; 14
contracted, but unopened franchise locations; and two corporate-owned
operating learning centers. The purchase was not material to the financial
position or results of operations of the Company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of February 29, 2000, the Company, through its wholly-owned subsidiary
Insty-Prints, had 235 franchise locations and two Company-owned stores and
through Dreamcatcher had nine franchise locations and two Company-owned
locations.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
February 29, February 28,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Royalties and fees - Insty-Prints 40.1% 38.1%
Printing equipment, supplies and services 28.4 35.0
Sales by Company-owned Insty-Prints locations 17.5 16.4
Dreamcatcher royalties and fees 0.8 --
Finance and other income 13.2 10.5
------ ------
Total revenues 100.0 100.0
------ ------
Costs and expenses:
Cost of sales-printing equipment, supplies & services 21.7 26.3
Cost of sales-company-owned Insty-Prints 5.8 4.9
Selling, general and administrative 58.2 41.6
Amortization of goodwill and other intangibles 2.9 2.3
------ ------
88.6 75.1
Other income (expense):
Net gain on disposal of assets 0.2 0.0
------ ------
Income tax expense 4.6 10.0
------ ------
Net income 7.0% 14.9%
====== ======
</TABLE>
Revenues. Total revenues for the three months ended February 29, 2000,
consisting of royalties, sales of printing equipment, supplies and services,
franchise fees and finance and other income, totaled $2,394,000, a decrease of
$109,000 or 4.4% compared to the three months ended February 28, 1999.
As expected, Insty-Prints Royalty fees were relatively flat at $959,000 in
the first quarter of 2000 compared to $954,000 in 1999.
Sales of printing equipment, supplies and services for the first quarter of
2000 decreased to $681,000 from $877,000 in 1999, a decrease of 22.3%. The
decrease in sales for 2000 resulted primarily from reduced sales of copier
supplies due to such products now being provided for in copier leases.
Additionally, direct mail services sales decreased due to reduce demand from
franchise owners.
Sales at Company-owned Insty-Prints increased slightly to $419,000 for the
first quarter of 2000, compared to $410,000 for the same quarter a year ago.
8
<PAGE>
Dreamcatcher Royalties and fees were $20,000 for the first quarter of 2000,
compared to $0 for the same period a year ago. This business initiated
operations in January 2000 and is in its early stage of development.
Finance and other income was $315,000 for the quarter ended February 29,
2000, which is an increase of $53,000 or 20.2% from the same quarter a year ago.
For the first quarter of 2000, 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.
Cost of Sales--Printing Equipment, Supplies and Services. Cost of sales
decreased to $520,000 for the first quarter of 2000 from $657,000 for 1999, a
decrease of 20.9% 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 decreased to 23.6% in the three months ended
February 29, 2000 from 25.1% for the same period in 1999, which is primarily due
to sales mix and decreased margins on certain products.
Cost of Sales--Company-owned Insty-Prints. Cost of sales increased to
$138,000 for the first quarter of 2000, compared to $123,000 for the same
quarter a year ago. Cost of sales increased due to increased sales and higher
costs incurred in 2000 at one location.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,394,000 for the first quarter of 2000
from $1,042,000 for the same period in 1999, an increase of 33.8%. Expenses
increased primarily due to the investment in new equipment, facilities and staff
in corporate-owned Insty-Prints in latter 1999 and reflects expenses associated
with the operation of Dreamcatcher, which was acquired January 5, 2000.
Amortization of Goodwill. Amortization of goodwill increased to $69,000 in
the first quarter of 2000, compared to $58,000 in the same quarter a year ago.
The increase resulted from the acquisition of a printing business in April 1999
and Dreamcatcher in January 2000.
Provision for Income Taxes. The Company's effective combined federal and
state income tax rate is estimated to be 40% for 2000 and was 40% for 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended February 29, 2000, the Company generated
$270,000 from operating activities, a decrease of $138,000 from $408,000 of
funds provided from operating activities for the first quarter of 1999. The
decrease in funds provided from operating activities was primarily attributable
to decreased net income in the first quarter of 2000 compared to the same
quarter a year ago.
During the three months ended February 29, 2000, the Company sold
$1,080,000 of short-term investments and purchased $1,490,000 of marketable
equity securities held for resale. The Company also used funds of $560,000
related to the acquisition of Dreamcatcher in the first quarter of 2000. All
marketable equity securities reflected on the balance sheet as of February 29,
2000 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 $150,000 is
recorded on the balance sheet
9
<PAGE>
at February 29, 2000, representing estimated losses on these guarantees, net of
equipment value. The aggregate balance outstanding under this facility as of
February 29, 2000 was approximately $1,588,000.
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 believes its efforts adequately addressed its Year 2000
concerns and, as of March 31, 2000, has no reason to believe any internal
problems will arise nor does it expect any material Year 2000 problems from its
outside vendors or franchise operations. Although the Company believes that no
significant Year 2000 matters will arise and have a material impact on its
business, financial conditions and results of operations, it cannot assure that
all potential Year 2000 issues that may affect the Company have been resolved.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. With the exception of historical matters, the matters
discussed herein are forward looking statements that involve risks and
uncertainties. These forward-looking statements are based on management's goals,
estimates, assumptions and projections. Actual results and events could differ
materially from those projected, anticipated, or implicit, in the
forward-looking statements as a result of certain risk factors. These include,
but are not limited to, increased competition from other business printing
centers, reduced demand for print media and other factors of which the Company
is unaware at this time. If any of these risks were to materialize, royalty
revenue from franchised locations and sales of products to such location by the
Company would be reduced, thus reducing revenue and profits.
The preceding discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes thereto appearing elsewhere herein.
10
<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 March 27, 2000, proxy statements were mailed to the
holders of record of 4,859,087 shares of common stock to solicit
proxies in connection with the Annual Meeting of Shareholders on April
26, 2000. Three 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 and Howard
Grodnick) were up for re-election to terms of one year.
(b) Approve an Amendment to the 1994 Long-Term Incentive Plan, which
increases the shares from 300,000 to 500,000.
(c) 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 13
*27 Financial Data Schedule 14
(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
11
<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 12, 2000 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)
12
EXHIBIT 11
IPI, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Net Income $ 166 $ 374
====== ======
Weighted average number of issued shares outstanding 4,810 4,734
====== ======
Shares used in computation of basic earnings per common stock 4,810 4,734
Dilutive effect of outstanding stock options and stock warrants after
application of treasury stock method 0 0
------ ------
Common and common equivalent shares outstanding-diluted 4,810 4,734
====== ======
Basic and diluted earnings per common share $ .03 $ .08
====== ======
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-END> FEB-29-2000
<CASH> 1,311,000
<SECURITIES> 9,397,000
<RECEIVABLES> 2,395,000
<ALLOWANCES> (154,000)
<INVENTORY> 249,000
<CURRENT-ASSETS> 14,389,000
<PP&E> 2,343,000
<DEPRECIATION> (1,073,000)
<TOTAL-ASSETS> 20,218,000
<CURRENT-LIABILITIES> 1,697,000
<BONDS> 0
0
0
<COMMON> 49,000
<OTHER-SE> 18,185,000
<TOTAL-LIABILITY-AND-EQUITY> 20,218,000
<SALES> 1,100,000
<TOTAL-REVENUES> 2,394,000
<CGS> 658,000
<TOTAL-COSTS> 2,121,000
<OTHER-EXPENSES> 4,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 277,000
<INCOME-TAX> 111,000
<INCOME-CONTINUING> 166,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,000
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
