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, 1999.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from _______________ to _______________
Commission file number 0-23902
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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)
15155 TECHNOLOGY DRIVE
EDEN PRAIRIE, MN 55344
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(Address of Principal Executive Offices)
(612) 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 October 5, 1999, there were 4,734,087 Common Shares outstanding.
Page 1 of 12
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 August
31, 1999 and November 30, 1998. 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Nine Months
Ended August 31, 1999 and August 31, 1998. 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended August 31, 1999 and August
31, 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 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports of Form 8-K 10
Signatures 10
2
PART I. FINANCIAL INFORMATION
ITEM 1.
IPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 1999 November 30,
(Unaudited) 1998
--------------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,749,000 $ 3,828,000
Short-term investments 2,595,000 1,340,000
Marketable equity securities 6,384,000 4,631,000
Trade accounts receivable 1,220,000 1,225,000
Current maturities of notes receivables, net of allowance for
doubtful accounts of $159,000 and $205,000 791,000 746,000
Inventories 296,000 393,000
Prepaid expenses and other 119,000 92,000
Deferred income taxes 913,000 789,000
------------ ------------
Total current assets 14,067,000 13,044,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,967,000 1,522,000
Less - Accumulated depreciation (1,005,000) (961,000)
------------ ------------
Property and equipment, net 962,000 561,000
NOTES RECEIVABLE, net of current maturities and allowance for
doubtful accounts of $630,000 and $648,000 1,158,000 1,139,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization of $1,573,000 and $1,395,000 3,213,000 3,157,000
------------ ------------
$ 19,400,000 $ 17,901,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 611,000 $ 534,000
Accrued compensation 228,000 296,000
Accrued financing liabilities 200,000 200,000
Deferred revenues 305,000 14,000
Other accrued liabilities 444,000 564,000
------------ ------------
Total current liabilities 1,788,000 1,608,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 145,000 51,000
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized:
4,734,087 shares issued and outstanding 47,000 47,000
Additional paid-in capital 15,584,000 15,584,000
Retained earnings 2,276,000 900,000
Unrealized (loss) on marketable securities available for sale, net
of related income tax effects (440,000) (289,000)
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Total shareholders' equity 17,467,000 16,242,000
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$ 19,400,000 $ 17,901,000
============ ============
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,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES:
Royalty fees $ 1,227,000 $ 1,146,000 $ 3,422,000 $ 3,328,000
Printing equipment, supplies and services 693,000 852,000 2,543,000 2,926,000
Finance and other income 323,000 312,000 1,053,000 991,000
----------- ----------- ----------- -----------
Total revenues 2,243,000 2,310,000 7,018,000 7,245,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 511,000 649,000 1,920,000 2,279,000
Selling, general and administrative expenses 909,000 723,000 2,627,000 2,413,000
Amortization of goodwill 61,000 58,000 178,000 173,000
----------- ----------- ----------- -----------
Total costs and expenses 1,481,000 1,430,000 4,725,000 4,865,000
----------- ----------- ----------- -----------
Income before provision for income taxes 762,000 880,000 2,293,000 2,380,000
PROVISION FOR INCOME TAXES 305,000 326,000 917,000 881,000
----------- ----------- ----------- -----------
NET INCOME $ 457,000 $ 554,000 $ 1,376,000 $ 1,499,000
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 0.10 $ 0.12 $ 0.29 $ 0.32
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING
- BASIC 4,734,000 4,734,000 4,734,000 4,734,000
=========== =========== =========== ===========
- DILUTED 4,734,000 4,758,000 4,734,000 4,746,000
=========== =========== =========== ===========
OTHER COMPREHENSIVE INCOME, NET
OF TAX (NOTE 1):
Net Income $ 457,000 $ 554,000 $ 1,376,000 $ 1,499,000
Unrealized gain (loss) on marketable
securities available for sale, net of
related income tax effects (440,000) (254,000) (440,000) (254,000)
----------- ----------- ----------- -----------
Total Comprehensive Income $ 17,000 $ 300,000 $ 936,000 $ 1,245,000
=========== =========== =========== ===========
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,
---------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,376,000 $ 1,499,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 321,000 313,000
Net change in other operating items:
Trade accounts receivable 5,000 71,000
Inventories 109,000 (20,000)
Prepaid expenses and other (17,000) (64,000)
Accounts payable, accrued liabilities and other 124,000 (303,000)
----------- -----------
Net cash provided by operating activities 1,918,000 1,496,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business assets of Regency Printing (431,000) --
Purchase of marketable equity securities (2,029,000) --
Purchase of short-term investments, net (1,255,000) (640,000)
Purchase of property and equipment, net (218,000) (203,000)
Change in notes receivable, net (64,000) 863,000
----------- -----------
Net cash provided by (used for) investing activities (3,997,000) 20,000
----------- -----------
Increase (decrease)in cash and cash equivalents (2,079,000) 1,516,000
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 3,828,000 1,294,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,749,000 $ 2,810,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 1,153,000 $ 704,000
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Equipment acquired under a capital lease $ 255,000 $ --
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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 IPI Holdings, LLC and Texas IPI,
L.P., 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 in February and April 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 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).
2. ACQUISITION
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
cash purchase includes $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.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of August 31, 1999, the Company operated two Company-owned print
businesses and through its wholly-owned subsidiary, Insty-Prints, had 236
franchise locations.
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,
---------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Royalty fees 54.7% 49.6% 48.8% 45.9%
Printing equipment, supplies and services 30.9 36.9 36.2 40.4
Finance and other income 14.4 13.5 15.0 13.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
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Costs and expenses:
Costs of sales 22.8 28.1 27.4 31.4
Selling, general and administrative expenses 40.5 31.3 37.4 33.3
Amortization of goodwill 2.7 2.5 2.5 2.4
----- ----- ----- -----
Total costs and expenses 66.0 61.9 67.3 67.1
----- ----- ----- -----
Income before provision for income taxes 34.0 38.1 32.7 32.9
Provision for income taxes 13.6 14.1 13.1 12.2
----- ----- ----- -----
Net income 20.4% 24.0% 19.6% 20.7%
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FOR THE QUARTERS AND NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
Revenues. Total revenues for the three months ended August 31, 1999,
consisting of royalties, sales of printing equipment, supplies and services,
franchise fees and finance and other income, totaled $2,243,000, a decrease of
$67,000 or 2.9% compared to the three months ended August 31, 1998. Total
revenues for the nine months ended August 31, 1999, of $7,018,000 were $227,000
or 3.1% below the nine months ended August 31, 1998.
Royalty revenue increased to $1,227,000 in the third quarter of 1999 from
$1,146,000 in 1998. For the nine months ended August 31, 1999, royalty revenue
was $3,422,000, an increase of $94,000 or 2.8% over the same period a year ago.
Royalty revenues would have decreased slightly in the third quarter and nine
month period of 1999 compared to 1998, except for a large collection of
royalties in May 1999 related to a franchisee's prior years unreported sales and
large payments received on delinquent royalties in the third quarter. However,
the increase of royalties on increased sales by existing franchise locations was
offset by reduced royalties resulting from the number of franchised locations
decreasing to 236 as of August 31, 1999 from 254 as of August 31, 1998. Most of
the store reductions were in low-performing locations; however, there was some
impact on royalty revenue.
Sales of printing equipment, supplies and services for the third quarter of
1999 decreased to $693,000 from $852,000 for 1998, a decrease of 18.7%. For the
nine months ended August 31, 1999, sales of products were $2,543,000 or 13.1%
below the sales of $2,926,000 for the same period a year ago. The decrease in
1999 resulted primarily from reduction in sales of equipment, copy supplies and
the direct mail program. Sales decreased as a result of a reduced number of
franchise locations and increased competition.
7
Finance and other income was $323,000 for the quarter ended August 31,
1999, which is $11,000 or 3.5% greater than the same quarter a year ago. For the
nine months ended August 31, 1999, finance and other income was $1,053,000 or
6.3% more than the $991,000 for the same period a year ago. For the three and
nine month periods of 1999, the increased revenues were primarily due to
investing in higher yielding investments and an increased level of invested
funds. Overall, franchise fee revenues are not significant in 1999 or 1998 due
to the Company's emphasis during such periods on increasing existing franchise
location sales and growth through acquisitions.
Cost of Sales. Cost of sales decreased to $511,000 for the third quarter of
1999 from $649,000 for 1998, a decrease of 21.3% for the quarter. The decrease
in the third quarter is the result of a related decrease in sales of printing
and electronic publishing equipment. Nine month cost of sales amounts totaled
$1,920,000 in 1999, compared to $2,279,000 in 1998, a decrease of $359,000 or
15.8%, relating primarily to sales decreases. Average margins in products and
services increased to 24.5% for the nine month period of 1999 compared to 22.1%
for the nine month period ended August 31, 1998 due to the elimination or
reduction in sales of lower margin products and generally improved margins on a
number of other product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $909,000 for the third quarter of 1999 compared to
$723,000 for 1998, an increase of 25.7%. Total expenses for the nine months
ended August 31, 1999 were $2,627,000 compared to $2,413,000 for 1998,
representing a 8.9% increase. Expenses increased in both periods of 1999
compared to 1998 due to the expenses and losses associated with corporate store
operations and due to general inflationary increases.
Provision for Income Tax. 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 nine months ending August 31, 1999, the Company generated
$1,918,000 from operating activities, an increase of $422,000 from $1,496,000 of
funds provided from operating activities for the nine month period of 1998. The
increase in funds provided from operating activities was primarily attributable
to an increase in accounts payable and a decrease in inventories, offset by a
decrease in net income.
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 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 $200,000 is
recorded on the balance sheet at August 31, 1999, representing estimated losses
on these guarantees, net of equipment value. The aggregate balance outstanding
under this facility as of August 31, 1999 was approximately $2,172,000.
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 mid-year 1998 to
ascertain the status of each vendor's
8
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 constitutes 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.
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
No applicable.
Item 5. Other Information
Not applicable.
9
Item 6. Exhibits and Reports on Form 8-K Page
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(a) Exhibits.
*11 Statement Re: Computation of per share earnings 11
*27 Financial Data Schedule 12
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
-----------------------------
*Filed herewith
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 5, 1999 IPI, Inc.
By: /S/ Robert J. Sutter
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Robert J. Sutter
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ David M. Engel
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David M. Engel
Chief Financial Officer
(Principal Financial and Accounting Officer)
10