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, 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) 8091 WALLACE ROAD EDEN PRAIRIE, MN 55344 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (952) 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 6, 2000, there were 4,859,087 Common Shares outstanding. Page 1 of 13 IPI, INC. Table of Contents Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of August 31, 2000 and November 30, 1999. 3 Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended August 31, 2000 and August 31, 1999. 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2000 and August 31, 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 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 11 Item 6. Exhibits and Reports of Form 8-K 11 Signatures 11 2 PART I. FINANCIAL INFORMATION ITEM 1. IPI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS August 31, 2000 November 30, (Unaudited) 1999 --------------- ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 1,187,000 $ 2,022,000 Short-term investments 1,452,000 2,590,000 Marketable equity securities 17,075,000 6,504,000 Trade accounts receivable, net 1,290,000 1,371,000 Current maturities of notes receivable, net of allowance of $129,000 and $145,000 997,000 964,000 Inventories 212,000 271,000 Prepaid expenses and other 104,000 107,000 Deferred income taxes -- 930,000 ------------ ------------ Total current assets 22,317,000 14,759,000 ------------ ------------ PROPERTY AND EQUIPMENT: Property and equipment 2,407,000 2,226,000 Less - Accumulated depreciation (1,268,000) (980,000) ------------ ------------ Property and equipment, net 1,139,000 1,246,000 NOTES RECEIVABLE, net of current maturities and allowance of $596,000 and $656,000 648,000 860,000 GOODWILL AND OTHER INTANGIBLES, net 3,666,000 3,151,000 ------------ ------------ $ 27,770,000 $ 20,016,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 680,000 $ 485,000 Short-term borrowings 4,181,000 -- Accrued compensation 125,000 296,000 Accrued financing liabilities 150,000 150,000 Deferred revenues 193,000 264,000 Income taxes payable 126,000 126,000 Deferred income tax liabilities 523,000 -- Other accrued liabilities 387,000 432,000 ------------ ------------ Total current liabilities 6,365,000 1,753,000 ------------ ------------ LONG-TERM CAPITAL LEASE OBLIGATIONS 222,000 319,000 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 3,554,000 2,682,000 Unrealized gain (loss) on marketable securities available for sale, net of income tax effects 1,811,000 (369,000) ------------ ------------ Total shareholders' equity 21,183,000 17,944,000 ------------ ------------ $ 27,770,000 $ 20,016,000 ============ ============ The accompanying notes are an integral part of these consolidated balance sheets. 3 IPI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended August 31, August 31, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- REVENUES: Royalty fees $ 1,117,000 $ 1,227,000 $ 3,291,000 $ 3,422,000 Sales of printing equipment, supplies and services 620,000 692,000 1,979,000 2,543,000 Sales by company-owned Insty-Prints locations 408,000 513,000 1,291,000 1,317,000 Dreamcatcher royalties and fees 55,000 -- 92,000 -- Finance and other income 271,000 323,000 783,000 1,053,000 ----------- ----------- ----------- ----------- Total revenues 2,471,000 2,755,000 7,436,000 8,335,000 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Cost of sales--printing equipment, supplies and services 488,000 511,000 1,497,000 1,920,000 Cost of sales--company-owned Insty-Prints locations 128,000 158,000 387,000 403,000 Selling, general & administrative expenses 1,545,000 1,268,000 4,366,000 3,566,000 Amortization of goodwill 63,000 61,000 207,000 178,000 ----------- ----------- ----------- ----------- Total costs and expenses 2,224,000 1,998,000 6,457,000 6,067,000 ----------- ----------- ----------- ----------- OPERATING INCOME 247,000 757,000 979,000 2,268,000 Net gain on sale of securities -- -- 461,000 -- Net gain on disposal of assets 4,000 5,000 13,000 25,000 ----------- ----------- ----------- ----------- Income before income taxes 251,000 762,000 1,453,000 2,293,000 Income tax expense 100,000 305,000 581,000 917,000 NET INCOME $ 151,000 $ 457,000 $ 872,000 $ 1,376,000 =========== =========== =========== =========== BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.03 $ 0.10 $ 0.18 $ 0.29 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON & COMMON SHARE EQUIVALENTS OUTSTANDING - BASIC 4,859,000 4,734,000 4,843,000 4,734,000 =========== =========== =========== =========== - DILUTED 4,859,000 4,734,000 4,843,000 4,734,000 =========== =========== =========== =========== OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 1): Net Income 151,000 457,000 872,000 $ 1,376,000 Unrealized gain (loss) on marketable securities available for sale, net of income tax effects 1,819,000 (292,000) 2,180,000 (440,000) ----------- ----------- ----------- ----------- Total Comprehensive Income $ 1,970,000 $ 165,000 $ 3,052,000 $ 936,000 =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. 4 IPI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended August 31, --------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 872,000 $ 1,376,000 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 399,000 321,000 Net change in other operating items: Trade accounts receivable 92,000 5,000 Inventories 72,000 109,000 Prepaid expenses and other (51,000) (17,000) Accounts payable, accrued liabilities and other accrued liabilities (92,000) 124,000 ----------- ----------- Net cash provided by operating activities 1,292,000 1,918,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Short-term borrowings, net 4,181,000 -- Purchase of property and equipment, net (125,000) (218,000) Sale (purchase) of short-term investments, net 1,138,000 (1,255,000) Purchase of marketable equity securities (6,939,000) (2,029,000) Change in notes receivable, net 178,000 (64,000) Purchase of business assets of Regency Printing -- (431,000) Purchase of Dreamcatcher (560,000) -- ----------- ----------- Net cash used for investing activities (2,127,000) (3,997,000) ----------- ----------- Decrease in cash and cash equivalents (835,000) (2,079,000) ----------- ----------- CASH AND CASH EQUIVALENTS, beginning of period 2,022,000 3,828,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 1,187,000 $ 1,749,000 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid $ 545,000 $ 1,153,000 =========== =========== Equipment acquired under a capital lease $ -- $ 255,000 =========== =========== The accompanying notes are an integral part of these consolidated statements. 5 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 1999 and 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. 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 one corporate location, 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 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 6 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. 3. SIGNIFICANT INVESTMENTS Through a series of purchases during the period from April 24, 2000 to August 30, 2000, IPI, Inc. (the "Company") acquired 1,915,500 shares of common stock of Conseco, Inc. (NYSE: CNC), an Indiana based insurance and financial services company. The Company paid approximately $14,057,000 in total consideration for the 1,915,500 shares, all but $4,181,000 of which was financed from the working capital of the Company. The Company's total holdings in Conseco, Inc. constitute less than 1% of the approximately 325,264,000 outstanding shares of common stock of Conseco, Inc. The shares were purchased for investment purposes only and the Company has no relationship to Conseco, Inc. other than that of shareholder. All shares were purchased in open market transactions. From time to time, the Company has invested and may invest in other businesses or companies other than its core businesses of franchising and operating fast turnaround business printing operations and franchising learning centers. Although the Company has invested in other businesses or companies, the Company does not intend to become an investment company and intends to remain primarily an operating company. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW As of August 31, 2000, the Company, through its wholly owned subsidiary, Insty-Prints, had 223 franchise locations and operated two Company-owned print businesses and, through Dreamcatcher, had nine franchise locations and one Company-owned location. RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of sales for the periods indicated: Quarter Ended Nine Months Ended August 31, August 31, -------------- ----------------- 2000 1999 2000 1998 ---- ---- ---- ---- Revenues: Royalty fees--Insty-Prints 45.2% 44.5% 44.3% 41.1% Sales of printing equipment, supplies & services 25.1 25.1 26.6 30.5 Sales by company-owned Insty-Prints locations 16.5 18.6 17.4 15.8 Dreamcatcher--Royalties and fees 2.2 0.0 1.2 0.0 Finance and other income 11.0 11.8 10.5 12.6 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Costs and expenses: Costs of sales--Printing equipment, supplies & services 19.7 18.6 20.1 23.0 Cost of sales--Company-owned Insty-Prints 5.2 5.7 5.2 4.8 Selling, general and administrative expenses 62.6 46.0 58.7 42.8 Amortization of goodwill 2.5 2.2 2.8 2.2 ----- ----- ----- ----- 90.0 72.5 86.8 72.8 Operating Income 10.0 27.5 13.2 27.2 Other income (expense): Net gain on sale of securities 0.0 0.0 6.2 0.0 Net gain on disposal of assets 0.2 0.2 0.2 0.3 Income before income taxes 10.2 27.7 19.6 27.5 Income tax expense 4.0 11.1 7.8 11.0 ----- ----- ----- ----- Net income 6.2% 16.6% 11.8% 16.5% ===== ===== ===== ===== FOR THE QUARTERS AND NINE MONTHS ENDED AUGUST 31, 2000 AND 1999 Revenues. Total revenues for the three months ended August 31, 2000, consisting of royalties, sales of printing equipment, supplies and services, franchise fees and finance and other income, totaled $2,471,000, a decrease of $284,000 or 10.3% compared to the three months ended August 31, 1999. Total revenues for the nine months ended August 31, 2000, of $7,436,000 were $899,000 or 10.8% below the nine months ended August 31, 1999. Royalty revenue decreased to $1,117,000 in the third quarter of 2000 from $1,227,000 in 1999. For the nine months ended August 31, 2000, royalty revenue was $3,291,000, a decrease of $131,000 or 3.8% over the same 8 period a year ago. As expected, royalty revenues decreased in both periods of 2000 compared to 1999, due to reduced royalties resulting from the number of franchised locations decreasing to 223 as of August 31, 2000 from 236 as of August 31, 1999. However, this was offset by increased royalties due to increased sales by existing franchise locations. Sales of printing equipment, supplies and services for the third quarter of 2000 decreased to $620,000 from $692,000 for 1999, a decrease of 10.4%. For the nine months ended August 31, 2000, sales of products were $1,979,000 or 22.1% below the sales of $2,543,000 for the same period a year ago. The decrease in 2000 resulted primarily from reduced sales of copier supplies due to such products now being packaged with equipment lease agreements and reduced sales of printing equipment and direct mail services resulting from decreased demand from franchise owners. Finance and other income was $271,000 for the quarter ended August 31, 2000, which is $52,000 or 16.1% less than the same quarter a year ago. For the nine months ended August 31, 2000, finance and other income was $783,000 or 25.6% less than the $1,053,000 for the same period a year ago. For the three and nine month periods of 2000, the decreased revenues were primarily due to the sale in April 2000 of higher yielding investments of REIT stock and the reinvestments of $9.9 million of liquid funds in a non-dividend paying common stock. Overall, franchise fee revenues are not significant in 2000 or 1999 due to the Company's emphasis during such periods on increasing existing franchise location sales and growth through acquisitions. Cost of Sales--Printing Equipment, Supplies and Services. Cost of sales decreased to $488,000 for the third quarter of 2000 from $511,000 for 1999, a decrease of 4.5% for the quarter. Nine month cost of sales amounts totaled $1,497,000 in 2000, compared to $1,920,000 in 1999, a decrease of $423,000 or 22%. The decrease for both periods of 2000 compared to 1999 is directly related to decreased sales of equipment, copier supplies and direct mail services. Average margins in products and services remained level at 24.4% for the nine month period of 2000 compared to 24.5% for the nine month period ended August 31, 1999. Cost of Sales--Company-owned Insty-Prints Locations. The cost of sales stayed relatively flat for the two periods of 2000 compared to 1999 measured as a percentage of sales costs. For the three month period ended August 31, 2000, the cost of sales were 31.4% of sales compared to 30.8% for the same period of 1999 and for the nine month period ended August 31, 2000 were 30% compared to 30.6% for the same period of 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,545,000 for the third quarter 2000 compared to $1,268,000 for 1999, an increase of 21.8%. Total expenses for the nine months ended August 31, 2000 were $4,366,000 compared to $3,566,000 for 1999, representing a 22.4% increase. Expenses increased due to the investment in new equipment, facilities and staff in company-owned Insty-Prints locations in latter 1999 and Dreamcatcher in January 2000. Amortization of Goodwill. Amortization of goodwill increased to $63,000 for the three months ended August 31, 2000 compared to $61,000 for the same period a year ago. For the nine months ended August 31, 2000, amortization of goodwill increased to $207,000 compared to $178,000 for the same period a year ago. The increases for both periods resulted from the acquisition of a printing business in April 1999 and Dreamcatcher in January 2000. Net Gain on Sale of Securities. During the nine month period ended August 31, 2000, securities held for resale that were originally purchased in 1997 and 1999 were sold at a gain of $461,000. This sale occurred in the second quarter of 2000. In the nine months ended August 31, 1999, there were no security sales. Provision for Income Tax. 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 nine months ending August 31, 2000, the Company generated $1,292,000 from operating activities, a decrease of $626,000 from $1,918,000 of funds provided from operating activities for the nine month period of 1999. The decrease in funds provided from operating activities was primarily attributable to decreased net income, 9 reductions in accounts payable and accrued expenses, an increase in prepaids and other, offset by reduced trade accounts receivable. The Company has no bank debt or credit facility, however, during the quarter ended August 31, 2000, incurred margin debt of $4,181,000 to support an equity investment (see Note 1). Operations are funded from cash generated by the business. Franchise owners have been able to finance their equipment purchases through a $6,000,000 equipment financing facility established with U. S. Bank (formerly First Bank Systems) by the Company 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 at August 31, 2000, representing estimated losses on these guarantees, net of equipment value. The aggregate balance outstanding under this facility as of August 31, 2000 was approximately $1,256,000. Effective in the quarter ended August 31, 2000, this credit facility was closed to new transactions. 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. CORPORATE STRUCTURE From time to time, the Company has invested and may invest in other businesses or companies other than its core businesses of franchising and operating fast turnaround business printing operations and franchising learning centers. Although the Company has invested in other businesses or companies, the Company does not intend to become an investment company and intends to remain primarily an operating company. YEAR 2000 COMPLIANCE The Company believes its efforts adequately addressed Year 2000 concerns and, as of August 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 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 12 *27 Financial Data Schedule 13 (b) Reports on Form 8-K. On July 17, 2000, Form 8-K was filed related to a material purchase of common stock of Conseco, Inc. (NYSE:CNC), which was done for investment purposes only. ---------------------------- *Filed herewith 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, 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) 11