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, 2001.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from _______________ to _______________
Commission file number 001-15563
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IPI, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
MINNESOTA 41-1449312
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8091 WALLACE ROAD
EDEN PRAIRIE, MN 55344
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(Address of Principal Executive Offices)
(952) 975-6200
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(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
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(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 5, 2001, there were 4,859,087 Common Shares outstanding.
Page 1 of 13
IPI, INC.
Table of Contents
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of February
28, 2001 and November 30, 2000. 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three Months Ended
February 28, 2001 and February 29, 2000. 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended February 28, 2001 and
February 29, 2000. 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
PART I. FINANCIAL INFORMATION
ITEM 1.
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
February 28, November 30,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,500,000 $ 643,000
Short-term investments 3,975,000 81,000
Marketable equity securities 19,073,000 15,638,000
Trade accounts receivable, net 1,312,000 1,370,000
Current maturities of notes receivables, net of allowance of
$171,000 and $182,000 717,000 707,000
Inventories 215,000 242,000
Prepaid expenses and other 151,000 142,000
Deferred income taxes -- 1,173,000
------------ ------------
Total current assets 30,943,000 19,996,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 2,007,000 1,924,000
Less Accumulated depreciation (1,224,000) (1,148,000)
------------ ------------
Property and equipment, net 783,000 776,000
NOTES RECEIVABLE, net of current maturities and allowance of
$637,000 and $523,000 706,000 753,000
GOODWILL AND OTHER INTANGIBLES, net 3,334,000 3,393,000
------------ ------------
$ 35,766,000 $ 24,918,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 711,000 $ 676,000
Margin loans -- 4,438,000
Accrued compensation 53,000 189,000
Accrued financing liabilities 145,000 145,000
Deferred revenues 167,000 200,000
Income taxes payable 2,781,000 --
Deferred income taxes 2,638,000 --
Other accrued liabilities 812,000 689,000
------------ ------------
Total current liabilities 7,307,000 6,337,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 86,000 105,000
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized:
4,859,000 and 4,859,000 shares issued and outstanding 49,000 49,000
Additional paid-in capital 15,769,000 15,769,000
Retained earnings 7,212,000 3,032,000
Unrealized gain (loss) on marketable securities available for
sale, net of income tax effects 5,343,000 (374,000)
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Total shareholders' equity 28,373,000 18,476,000
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$ 35,766,000 $ 24,918,000
============ ============
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
February 28, February 29,
-----------------------------
2001 2000
-----------------------------
REVENUES:
Insty-Prints royalty and franchise fees $ 905,000 $ 973,000
Printing supplies and services 497,000 681,000
Company-owned print locations 361,000 419,000
Change of Mind Learning royalty fees and other income 15,000 20,000
Other income 78,000 86,000
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Total Revenues 1,856,000 2,179,000
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COSTS AND EXPENSES:
Insty-Prints franchise and printing operations:
Cost of sales--supplies and services 378,000 520,000
Cost of sales--print locations 102,000 138,000
Selling, general and administrative 1,185,000 1,295,000
Amortization of goodwill 48,000 62,000
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1,713,000 2,015,000
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Change of Mind Learning franchise operations:
Selling, general and administrative 387,000 100,000
Amortization of goodwill 12,000 7,000
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399,000 107,000
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OPERATING INCOME (LOSS) (256,000) 57,000
OTHER INCOME (EXPENSE)
Interest and dividends on investments 43,000 216,000
Interest expense on margin loans (57,000) --
Net gain on disposal of securities and other assets 7,236,000 4,000
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7,222,000 220,000
INCOME BEFORE INCOME TAX 6,966,000 277,000
INCOME TAX EXPENSE 2,786,000 111,000
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NET INCOME $ 4,180,000 $ 166,000
============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.86 $ 0.03
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING
- BASIC 4,859,000 4,810,000
============ ============
- DILUTED 4,859,000 4,810,000
============ ============
OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 1):
Net Income $ 4,180,000 $ 166,000
Unrealized gain (loss) on marketable securities available for sale, net of
income tax effects 5,717,000 (63,000)
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Total Comprehensive Income $ 9,897,000 $ 103,000
============ ============
The accompanying notes are an integral part of these consolidated statements.
4
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
February 28, February 29,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,180,000 $ 166,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities-
Depreciation and amortization 117,000 131,000
Realized gain on sale of marketable securities (7,232,000) --
Net change in other operating items:
Trade accounts receivable 60,000 103,000
Inventories 27,000 35,000
Prepaid expenses and other (23,000) (110,000)
Accounts payable, deferred revenues and other accrued
liabilities 2,771,000 (55,000)
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Net cash provided by (used in) operating activities (100,000) 270,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (83,000) (61,000)
Sale (purchases) of short-term investments, net (3,894,000) 1,080,000
Purchase of marketable equity securities -- (1,490,000)
Sale of marketable equity securities 13,325,000 --
Change in notes receivable, net 47,000 50,000
Purchase of Dreamcatcher -- (560,000)
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Net cash provided by (used in) investing activities 9,395,000 (981,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of margin loans (4,438,000) --
Increase (decrease) in cash and cash equivalents 4,857,000 (711,000)
CASH AND CASH EQUIVALENTS, beginning of the period 643,000 2,022,000
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CASH AND CASH EQUIVALENTS, end of period $ 5,500,000 $ 1,311,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ -- $ 38,000
============ ============
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") and Change of Mind Learning Systems,
Inc. (Change of Mind Learning) 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 accounting principles generally accepted in the United
States, 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, 2000 and 1999 and the
notes thereto included in the Company's Form 10-KSB.
In 1999, 2000 and 2001, 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.
The Company closed its Dallas Insty-Prints business that was established in
April of 1999 through the acquisition of Regency. A charge for the
estimated expenses of $840,000 to close the store was recorded effective
November 30, 2000. The expenses relate to losses expected in the sale of
equipment and furniture, the write-off of unamortized goodwill, costs to
settle lease obligations and employee terminations. As of February 28,
2001, the accrued expense balance related to the store closing charge was
approximately $431,000.
The Company is engaged in two business segments -- the franchising and
operating of business printing centers under the trade name of
Insty-Prints(R) and franchising and operating supplemental private learning
centers under the trade name Change of Mind Learning Systems(R) (formerly
Dreamcatcher Franchise Corporation).
Statement of Financial Accounting Standards (SFAS) No. 133 -- "Accounting
for Derivative Instruments and Hedging Activities" was issued during June
1998 and, as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those
instruments at fair value. SFAS No. 133 is effective for the Company
beginning December 1, 2000. The adoption of SFAS No. 133 did not have a
material impact on the Company's consolidated results of operations,
financial position or cash flows.
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 was 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
6
Statement of Operations from the date of acquisition. As noted in Note 1,
this business was closed and a charge of $840,000 has been recognized as of
November 30, 2000 for related expenses.
In January 2000, the Company acquired substantially all the assets of
Dreamcatcher Franchise Corporation and Dreamcatcher Learning Centers, Inc.
(together, Dreamcatcher). The acquisition costs included the assumption of
$395,000 in obligations, legal and other related costs of $40,000, a cash
payment of $125,000, the issuance of 125,000 shares of the Company's stock
with a valuation of $187,000 and a future maximum earn-out provision of
$375,000, based on the achievement of certain levels of operational
franchised learning centers. Through the period ended February 28, 2001, no
earn-out provisions were earned or paid. The acquisition price and costs
exceeded the fair value of assets received by $666,000, which has been
recorded as goodwill that is being amortized on a straight-line basis over
15 years. The assets purchased include furniture, computers, leasehold
improvements and receivables.
Subsequently, the name of the company was changed to Change of Mind
Learning Systems, Inc. Change of Mind Learning 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, study skills, G.E.D. preparation and college preparation.
As of February 28, 2001, there were nine operating franchise locations and
one corporate-owned learning center.
3. SIGNIFICANT INVESTMENT TRANSACTIONS:
Through a series of purchases during the period from April 24, 2000 to
September 25, 2000, the Company acquired 2,175,500 shares of common stock
of Conseco, Inc. (NYSE: CNC), an Indiana based insurance and financial
services company. The Company paid approximately $16,261,000 in total
consideration for the 2,175,500 shares, all but $4,438,000 of which was
financed from the working capital of the Company.
In January 2001, the Company sold 815,100 shares of its holdings in
Conseco, Inc. common stock and realized proceeds of $13,325,000 for a
pre-tax gain of approximately $7,232,000. The after-tax gain was
approximately $4,339,000 or $0.89 per share. Approximately $4,438,000 of
the proceeds from the sale were used to re-pay all margin loans incurred
when shares were purchased. 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.
4. SUBSEQUENT EVENT:
On March 8, 2001, the Company acquired 337,600 shares of common stock of
Conseco, Inc. The Company paid approximately $4,905,000 in consideration
for the 337,600 shares, which was financed from working capital of the
Company. The Company now holds 1,698,000 shares of Conseco common stock at
an approximate cost of $15,074,000 or $8.88 per share.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of February 28, 2001, the Company, through its wholly-owned subsidiary
Insty-Prints, had 220 franchise locations and one Company-owned store 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:
Quarter Ended
February 28, February 29,
---------------------------
2001 2000
---------------------------
Revenues:
Insty-Prints royalty and franchise fees 48.8% 44.7%
Printing supplies and services 26.8 31.3
Company-owned print locations 19.4 19.2
Change of Mind Learning royalty fees and other income 0.8 0.9
Other income 4.2 3.9
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Total revenues 100.0 100.0
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Costs and expenses:
Insty-Prints franchise and printing operations:
Cost of sales--supplies and services 20.4 23.9
Cost of sales--print locations 5.5 6.3
Selling, general and administrative 63.8 59.4
Amortization of goodwill 2.6 2.9
----- -----
92.3 92.5
Change of Mind Learning franchise operations:
Selling, general and administrative 20.9 4.6
Amortization of goodwill 0.6 0.3
----- -----
21.5 4.9
Operating income (loss) (13.8) 2.6
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Other income (expense):
Interest and dividends on investments 2.3 9.9
Interest expense on margin loans (3.1) 0.0
Net gain on disposal of securities and other assets 389.9 0.2
----- -----
389.1 10.1
----- -----
Income before income tax 375.3 12.7
----- -----
Income tax expense 150.1 5.1
----- -----
Net income 225.2% 7.6%
===== =====
Revenues. Total revenues for the three months ended February 28, 2001,
consisting of royalties, sales of printing supplies and services, company-owned
print and learning centers, and other income, totaled $1,856,000, a decrease of
$323,000 or 14.8% compared to the three months ended February 29, 2000.
As expected, Insty-Prints royalty and franchise fees of $905,000 in the
first quarter of 2001 were 7% below the 2000 first quarter of $973,000. The
decrease in royalty and franchise fees was due primarily to a decline in the
number of franchised locations in 2001 compared to 2000.
8
Sales of printing supplies and services for the first quarter of 2001
decreased to $497,000 from $681,000 in 2000 or 27%. The decrease in sales for
2001 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 reduced demand from franchise owners.
Sales at Company-owned Insty-Prints decreased to $361,000 for the first
quarter of 2001, compared to $419,000 for the same quarter a year ago. The
Dallas print business was closed in early February 2001, which reduced sales in
the first quarter of 2001 compared to 2000.
Change of Mind Learning royalties and other income were $15,000 for the
first quarter of 2001, compared to $20,000 for the same period a year ago. This
business began operations in January 2000 and is in its early stage of
development.
Note interest and other income was $78,000 for the quarter ended February
28, 2001, which is a decrease of $8,000 or 9.3% from the same quarter a year
ago. For the first quarter of 2001, note interest and other income was less due
primarily to decreased levels of notes receivable that are outstanding.
Cost of Sales--Printing Supplies and Services. Cost of sales decreased to
$378,000 for the first quarter of 2001 from $520,000 for 2000, a decrease of
27.3% for the quarter. The decrease in the quarter is the result of a related
decrease in product sales, as mentioned previously. Margins on printing supplies
and services for the three months ended February 28, 2001 were 23.9% compared to
23.6% for the same period in 2000.
Cost of Sales--Company-owned Print Locations. Cost of sales decreased to
$102,000 for the first quarter of 2001 compared to $138,000 for the same quarter
a year ago. Cost of sales decreased due to decreased sales in 2001.
Insty-Prints Selling, General and Administrative Expenses. Selling, general
and administrative expenses decreased to $1,185,000 for the first quarter of
2001 from $1,295,000 for the same period in 2000, a decrease of 8.5%. Expenses
decreased primarily due to reduced staffing and allocation of certain expenses
to Change of Mind Learning.
Insty-Prints Amortization of Goodwill. Amortization of goodwill decreased
to $48,000 in the first quarter of 2001 compared to $62,000 in the same quarter
a year ago. The decrease resulted from the closing of a printing business,
effective November 30, 2000, and goodwill related to an intangible asset was
fully amortized in May 2000.
Change of Mind Learning Franchise Operations. Selling, general and
administrative expenses were $387,000 for the first quarter of 2001, reflecting
an increase of $287,000 from the first quarter of 2000. Expenses increased due
to increased developmental efforts in the first quarter of 2001.
Provision for Income Taxes. The Company's effective combined federal and
state income tax rate is estimated to be 40% for 2001 and was 40% for 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended February 28, 2001, the Company used funds of
$100,000 from operating activities, a decrease of $370,000 from $270,000 of
funds provided from operating activities for the first quarter of 2000.
During the three months ended February 28, 2001, investment activities of
the Company included the purchase of $3,894,000 of short-term investments and
the sale of $13,325,000 of marketable equity securities held for sale. Financing
activities for the quarter ended February 28, 2001 included the retirement of
margin loans of $4,438,000.
The Company has no bank debt or credit facility. Operations are funded from
cash generated by the business.
9
Certain franchise owners have financed their equipment purchases through a
$6,000,000 equipment financing facility established with U.S. Bank Business
Finance Corporation by Insty-Prints for the benefit of the franchise owners.
However, future use of this financing program was terminated in April 2000. This
facility is guaranteed by the Company and Insty-Prints, whose contingent
liability under this agreement is the lesser of the outstanding balance or
$2,400,000. A loss reserve of $145,000 is recorded on the balance sheet at
February 28, 2001, representing estimated losses on this guarantee. The
aggregate balance outstanding under this facility as of February 28, 2001 was
$886,000.
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 factors include, but are
not limited to, increased competition from other business printing centers,
reduced demand for printed media, lack of experience in the supplemental private
education market, increased competition from other providers of educational
services, greater start-up costs than expected 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
locations by the Company would be reduced, thus reducing revenue and profits.
The preceding discussion of financial condition and results of operations
should be read in conjunction with the 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
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K Page
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(a) Exhibits.
*11 Statement Re: Computation of per share earnings 13
(b) Reports on Form 8-K.
The Company filed a Form 8-K report on February 7, 2001 related
to the sale of Conseco common stock, which is classified as
marketable equity securities held for sale.
The Company filed a Form 8-K report on March 19, 2001 related to
the purchase of Conseco common stock, which is classified as
marketable equity securities held for sale.
--------------------------
*Filed herewith
11
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 6, 2001 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