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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- ACT OF 1934
For the transition period from__________________to__________________
Commission file number 0-14870
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Quipp, Inc.
-----------
(Exact name of registrant as specified in its charter)
Florida 59-2306191
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4800 NW 157th Street, Miami, Florida 33014
------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (305) 623-8700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K).
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 10, 1998 was approximately $35,804,951. The number of shares
of the Registrant's common stock, $.01 par value, outstanding at March 10, 1999
was 1,655,384.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
---------------------
Portions of the Quipp, Inc. Proxy Statement relating to the 1999 Annual Meeting
of Shareholders (to be filed not later than 120 days after the close of the
fiscal year covered by this report on Form 10-K).
Where Incorporated
------------------
Part III
*Calculated by excluding all shares held by executive officers and directors of
Registrant without conceding that all such person are "affiliates" of Registrant
for purposes of the federal securities laws.
PART I
ITEM I - BUSINESS
- -----------------
Quipp, Inc., (the "Company" or "Quipp"), through its wholly owned subsidiary,
Quipp Systems, Inc., is engaged in the design, manufacture and sale of material
handling equipment for the newspaper industry. The Company's products are
generally designed to accomplish much of the mailroom operations of a newspaper.
The mailroom is an area where newspapers flow from the pressroom in a continuous
stream and are stacked, bundled and moved to the shipping docks. Conveyor
systems are utilized to transport newspapers from the press to stacking
machines. The stacks are bundled and conveyed directly to the shipping docks,
loaded into carts or stored on pallets for further processing at a later time.
The Company's principal products, which are marketed both domestically and
internationally, are basically modular in construction with electronic control
circuitry. The Company's primary products (which comprise the majority of
Quipp's sales) include the following :
Newspaper Stacker - The Series 400 Stacker, the Company's principal product,
counts and batches stacks of newspapers at maximum speeds of 85,000 copies per
hour. The Quipp Sport Stacker (Quipp Sport), aimed at smaller volume newspapers,
performs the same mailroom functions the as larger stacker, but at maximum
speeds of 60,000 copies per hour. These slower speeds are designed for lower
circulation newspapers. `
Bottomwrapper - The Quipp Viper, the Company's bottomwrapper, applies wrapping
paper to the bottom or three sides of a newspaper stack to protect against
product damage. The Viper can be equipped with an inkjet printing device that
enables the newspaper publisher to provide delivery location and copy count
information on the wrapping paper.
Among the company's other products are the following:
Automatic Cart Loading System - This system automatically accumulates and loads
strapped bundles of printed material into transportation carts for transport to
remote distribution centers. Quipp's Automatic Cart Loading System handles
bundles of various shapes and sizes. Upon completion of loading, the full cart
is automatically discharged from the cart loader and ready for the delivery
truck.
Newspaper Conveyor Systems - The Company's conveyor systems, which include the
Quipp Twin-Track and the Quipp Rollerslat, transport newspapers from pressrooms
to various locations throughout the mailroom. These conveyor systems include
both horizontal and vertical conveyor modules, which can be integrated with
directional switches, and special purpose components that can be arranged to
accommodate the layout of the newspaper plant. The Quipp Twin-Track is a
twin-belt newspaper conveyor that transports newspapers in an overlapping stream
with maximum surface speeds of approximately 80,000 newspapers per hour. The
Quipp Rollerslat conveyor employs an array of independently rotating rollers and
is utilized in the processing of newspaper stacks prior to bundling.
Other Products -The Company manufactures a variety of other products for
mailroom operations, including several different types of stream aligners,
centering pacers, fold compressors, newspaper sensors, press production monitors
and other equipment.
The Company's manufacturing activities consist primarily of the assembly of
products from purchased components, the fabrication of some mechanical parts and
the testing of completed products. The Company uses approximately 360 vendors to
supply parts, materials and components for its various products. The Company
believes that alternative sources of supply are available for all required
components. If necessary, certain machine parts could be manufactured in the
Company's in-house machine shop, which is used primarily for custom engineering
and development of prototype parts.
All of the Company's products have at least a one-year warranty, and the Company
provides personnel for both installation and repair from the Miami-based service
department. In addition to the manufacture and sale of its products, the Company
sells spare parts for equipment purchased through the Company. In 1998 and 1997
the sale of spare parts accounted for approximately 7% and 8%, respectively, of
the Company's net sales revenue. Customers are encouraged to stock spare modules
and components.
2
The Company sells most of its products to newspaper publishers in the United
States. The Company's foreign sales accounted for 12%, 18%, and 19% of total
sales in 1998, 1997, and 1996 respectively. The following table indicates the
amount of sales by geographic area during the past three years:
SALES BY GEOGRAPHIC AREA
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
United States $23,969,296 $22,281,825 $17,555,230
Far East 413,883 2,214,009 2,639,972
North America 408,728 1,187,003 314,698
Latin America 1,827,103 611,787 203,949
Africa 0 263,453 0
Other 502,386 460,205 854,024
---------------------------------------------------
$27,121,396 $27,018,282 $21,567,873
===================================================================================================================
As of December 31, 1998, the Company's backlog of sales orders was approximately
$10,566,840, as compared to $5,422,169 on December 31, 1997. The backlog
consists of some OEM products which generally have lower margins. The Company
believes that it will satisfy all orders included in the backlog by end of 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" - General in Item 7.
For the years ended December 31, 1998 and 1997, no single customer accounted for
10% or more of the Company's net sales. In 1996, The New York Times accounted
for approximately 11% of the Company's net sales. Since the Company's equipment
is designed to have an extended life, the Company's largest customers in a given
year are usually different from the largest customers in any other year.
In connection with the installation of equipment, the Company, at the request of
a customer, will resell related mailroom equipment to the customer that is not
manufactured by the Company. Such sales accounted for approximately 3.0%, 2.0%
and 3.0% of the Company's total sales in 1998, 1997, and 1996 respectively.
3
COMPETITION
The newspaper industry has experienced a decrease in size in recent years, as
the number of newspapers in the country has declined. Moreover, in recent years,
there has been consolidation among manufacturers of newspaper material handling
equipment. These developments have increased competition in the industry, and
some of the Company's competitors have much greater financial resources than the
Company. Nevertheless, the Company believes it has been able to compete
successfully in this environment by stressing its engineering expertise and the
quality and reliability of its products.
The Company believes it has two principal competitors for the newspaper mailroom
equipment business in the United States, Heidelberg Finishing Systems, a
domestic subsidiary of Heidelberger Druckmaschinen, a German Company and, GMA, a
domestic subsidiary of Muller-Martini Versand-Systeme AG, a Swiss Company. In
addition, there are several companies that compete with respect to certain of
the Company's products. The Company has experienced competition on the basis of
price with respect to most of its products and anticipates that price
competition will continue.
MARKETING
The Company sells its products domestically through a six person direct sales
staff and internationally through foreign dealers. Domestic marketing efforts
include direct solicitation, trade show participation and a program of national
and regional trade journal advertising. International marketing efforts are
coordinated through the foreign dealers. Some of the foreign dealers are
commissioned, while others purchase the Company's products for resale. Through
the use of computer aided systems, the Company is able to customize the proposal
process, including the design of custom newspaper handling systems tailored to
the specific prospect's requirements.
PATENTS and TRADEMARKS
The Company holds 23 U.S. patents, which expire during the period from 1999 to
2015. The Company has three patents pending and continues to apply for patent
protection when deemed advisable; however, the Company believes that the success
of its products ultimately is dependent upon performance, reliability and
engineering, and that its patents are not material to its business. "Quipp" and
"Quipp Gripp" are registered trademarks and trademarks of the Company.
RESEARCH AND DEVELOPMENT
Research and development expenditures totaled $760,256, $582,839 and $579,580 in
1998, 1997 and 1996, respectively. Research and development expenditures in 1998
were principally devoted to the improvement of the Company's gripper conveyor
and the development of a palletizer. The Company plans to introduce these
products to the market at the annual newspaper exposition (NEXPO) to be held in
June 1999, in Las Vegas, Nevada.
EMPLOYEES
As of December 31, 1998, the Company had 144 full-time employees. None of the
Company's employees are represented by a union, and the Company considers its
employee relations to be good.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, business experience and ages of the executive officers of the Company
are listed below:
Name Business Experience During the Past Five Years Age
---- ---------------------------------------------- ---
Anthony P. Peri Mr. Peri has been President and Chief Executive 56
Officer of Quipp, Inc. and Quipp Systems, Inc., and a director
of both companies since April 1998. From May 1997 to
March 1998 he was President and Chief Operating Officer
of Ctext, Inc. From August 1986 to May 1997, Mr. Peri
served in various capacities at Harris Publishing Systems
Corporation, the most recent of which was Vice President
and General Manager.
Christer A. Sjogren Mr. Sjogren, Executive Vice President of Quipp Systems, Inc. 56
since 1994, has served Quipp Systems, in various capacities
since 1983. He is responsible for the engineering functions
of the Company. Mr. Sjogren has been a Director of
Quipp Systems, Inc. since 1996.
Jeffrey S. Barocas Mr. Barocas has been Chief Financial Officer of Quipp, Inc. 51
since July 1996. On May 12, 1998, Mr. Barocas was elected
to the Board of Directors of Quipp Systems, Inc. Prior to
joining the Company, Mr. Barocas was Chief Financial
Officer of a US subsidiary of London International from 1990.
ITEM 2 - PROPERTIES
- -------------------
The Company operates its business from one site located in Miami, Florida. The
building, which is owned by the Company, contains approximately 63,170 square
feet, of which approximately 48,300 square feet are utilized for the Company's
manufacturing operations, with the remaining 14,870 square feet used for its
administrative functions. The Company owns all of the equipment utilized in its
manufacturing operations. In the opinion of management, the Company's properties
are adequate and suitable for its operations. Although the expansion planned for
1998 was not undertaken the Company continues to explore the feasibility of
expanding its administrative facilities by approximately 3,000 square feet in
1999.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable
5
PART II
ITEM 5 - MARKET FOR THE REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The Company's Common Stock, $.01 par value, is traded on the NASDAQ National
Market under the symbol, "QUIP". The following table sets forth high and low
sales prices of the Common Stock of the Company as reported on the NASDAQ
National Market for each calendar quarter in 1997 and 1998:
-------------------------------------------------------------------------------------------------------------------
1998 1997
High Low High Low
-------------------------------------------------------------------------------------------------------------------
First Quarter $17.00 $14.75 $10.25 $8.25
Second Quarter 19.13 15.50 14.75 9.25
Third Quarter 20.38 15.50 17.50 13.50
Fourth Quarter 19.00 14.50 17.50 14.00
===================================================================================================================
As of March 10, 1999, the Company had approximately 200 record holders of the
Common Stock, including brokers and other nominees. On May 10, 1999 the Company
will pay a special dividend of $7.00 per share to shareholders of record on
April 8, 1999. Based on the number of shares outstanding at March 10,1999 the
Company will distribute $11,587,688. This amount will increase if any
outstanding stock options are exercised on or prior to April 8, 1999.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The selected financial data should be read in conjunction with the financial
statements and notes thereto and also with Management's Discussion and Analysis
of Financial Condition and Results of Operations, which are included elsewhere
in this Annual Report on Form 10-K. The following selected financial data for
each of the years in the five-year period ended December 31, 1998 has been
derived from the audited balance sheets and related statements of income of the
Company.
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Income Statement Information:
Net sales $27,121 $27,018 $21,568 $23,197 $17,035
Gross profit 10,166 9,769 7,864 7,631 4,893
Research and development 760 583 580 219 362
Selling, general and administrative expenses 4,925 4,690 4,205 4,295 3,653
Operating profit 4,481 4,517 3,224 3,117 1,968
Net income 3,348 3,081 2,220 2,096 1,376
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net income per share (basic) 2.05 1.95 1.42 1.34 0.88
Net income per share (diluted) 1.96 1.89 1.42 1.34 0.88
Book value per share 13.67 11.58 9.63 8.21 7.18
Market price per share - high 20.38 17.50 13.50 16.25 8.50
- low 14.50 8.25 8.38 6.75 2.50
- --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Information
Current assets $28,954 $22,882 $19,496 $18,383 $14,482
Total assets 31,278 25,303 22,074 21,267 19,342
Current liabilities 7,834 5,693 5,842 6,855 7,444
Long-term liabilities 950 1,050 1,150 1,550 1,350
Shareholders' equity 22,494 18,560 15,082 12,863 10,548
Weighted average number of equivalent
shares outstanding 1,707,366 1,630,213 1,565,765 1,565,765 1,556,792
================================================================================================================================
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------
Results of Operations
(Note: All dollar amounts are in thousands)
1998 vs. 1997
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 27,121 $ 27,018
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 103
% 0
In 1998 the Company experienced record net sales, principally due to record
sales of its core products, stackers and bottomwrappers.
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 10,166 $ 9,769
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 397
% 4
Percentage of Net Sales 37% 36%
The increase in gross profit was principally the result of an improved sales mix
and continued manufacturing cost control programs. The Company's core products
have a higher gross profit margin than ancillary products such as twin track,
floor equipment or OEM (original equipment manufacturers). The improved gross
profit margin was partially offset by a reclassification of bad debt allowances
of $474,186 to product cost contingencies (contract reserves). Cost
contingencies are anticipated future additional costs that may be incurred after
equipment is shipped and installed, the customer has been invoiced and revenue
is recorded. The Company records cost contingencies to match possible future
expenses with related revenue.
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses $ 4,925 $ 4,690
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 235
% 5
Percentage of Net Sales 18% 17%
The increase in selling, general and administrative expense was principally due
to legal and accounting fees incurred in connection with an aborted business
combination and patent infringement litigation that the Company brought against
another company, which was settled during 1998. The increase was offset in part
by a reclassification of bad debt expense to product cost contingencies, which
is included in cost of goods sold.
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Research and Development $ 760 $ 583
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 177
% 30
Percentage of Net Sales 3% 2%
The increase in research and development expenditures from 1997 to 1998
principally related to improvement of the Company's gripper conveyor and the
development of a palletizer.
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income $ 4,481 $ 4,517
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ (36)
% ( 1)
Percentage of Net Sales 17% 17%
The decrease in the 1998 operating income, as compared to 1997, was principally
a result of increases in research and development and selling, general and
administrative costs, offset by the increase in gross profit. As a percentage of
net sales, operating income remained relatively stable.
7
1998 1997
- ----------------------------------------------------------------------------------------------------------
Other Income and Expense (Net) $ 601 $ 415
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) $ 186
% 45
Percentage of Net Sales 2% 2%
The increase in other income and expense (net) was a result of increases in
interest income resulting from higher interest rates and higher balances of
cash, cash equivalents and securities available for sale.
Results of Operations
(Note: All dollar amounts are in thousands)
1997 vs. 1996
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 27,018 $ 21,568
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 5,450
% 25%
The increase in net sales reflects growth in the domestic market. This increase
was partially offset by a decrease in international sales, caused by a
significant decline in sales to the Far East. Management believes that sales in
the Far East were adversely affected by general economic difficulties in the
region.
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 9,769 $ 7,864
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 1,905
% 24
Percentage of Net Sales 36% 36%
The increase in gross profit was the result of an increase in sales volume. As a
percent of net sales, gross profit remained stable, despite a higher mix of
original equipment manufactured products (which generally have lower margins).
This stability is the result of increased manufacturing efficiencies.
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses $ 4,690 $ 4,205
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 485
% 11
Percentage of Net Sales 17% 19%
The increase in selling, general and administrative expenses resulted from
increases in commissions and in freight, warranty and trade show expenses. These
expenses are generally related to the level of Company sales, and the increase
reflects the higher sales volume.
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Research and Development $ 583 $ 580
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 3
% 1
Percentage of Net Sales 2% 3%
Research and development expenditures remained essentially unchanged. Increased
sales volume led to a decrease in research and development expenditures as a
percentage of net sales.
8
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income $ 4,517 $ 3,224
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 1,293
% 40
Percentage of Net Sales 17% 15%
The increase in operating income resulted from increased gross profit and
economies of scale in connection with expenses that are not significantly
affected by increased sales volume.
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Other Income and Expense (Net) $ 415 $ 284
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 131
% 46
Percentage of Net Sales 2% 1%
The net increase in other income is principally due to an increase in interest
income. Higher cash balances throughout the year had a positive effect on
interest income. In 1997, the Company invested largely in tax-free securities.
Investments in these instruments generally contribute less to income before
income tax than taxable instruments. However, investments in tax-free
instruments contributed more to net income (after tax income) than would taxable
instruments that the Company deemed suitable for investment. Interest
obligations on indebtedness partially offset the increase in the interest
income.
Year 2000 Disclosure
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
The Company has been engaged in an evaluation of its Year 2000 readiness in
connection with its information technology and non-information technology
systems. In addition, the Company has analyzed its products as they relate to
the Year 2000 issue. The Company has also attempted to analyze Year 2000 issues
relating to third parties with whom the Company has a business relationship.
The current status of the Company's efforts is as follows:
Internal Systems and Products
Information Technology Systems - The Company's manufacturing and accounting
software supplier has advised the Company that Year 2000 support of MAPICS was
implemented in 1995 and that the Company's manufacturing and accounting software
is Year 2000 compliant. In addition, the Company's AS400 operating system has
been upgraded and the Company has received correspondence from the vendor that
this software is Year 2000 compliant. To confirm Year 2000 compliance, the
Company began testing of its manufacturing, accounting and operating system
during the fourth quarter of 1998.
The Company's manufacturing department was using a computerized data collection
system to record labor time and attendance. This system was not Year 2000
compliant. The Company replaced the software and related hardware in February
1999 with software and hardware that is certified by the manufacturer to be Year
2000 compliant.
Non-Information Technology Systems - The Company's heating, cooling, ventilation
and alarm systems include microprocessor-based components. The heating, cooling
and ventilation systems providers have advised the Company that these systems
are not date sensitive. The alarm company was unable to provide assurance of
Year 2000 compliance for the alarm. Therefore, the alarm system was replaced in
November 1998 with a system certified by the manufacturer to be compliant.
Products - The Company's products are not materially date sensitive. Moreover,
products currently manufactured that have time and date functions are Year 2000
compliant. Therefore, the Company does not believe it has any material exposure
with regard to its products as a result of the Year 2000 issue.
9
Year 2000 Issues Relating to Third Parties
Vendors - The Company utilizes approximately 360 vendors to supply parts,
materials and components for its various products. The Company has surveyed its
major vendors regarding their Year 2000 status. Several vendors supplied letters
to the Company stating that they are either Year 2000 compliant or that they
will be Year 2000 compliant by December 31, 1998. However, the Company is unable
to verify this information and it is possible that advice received from vendors
may be erroneous. Moreover, certain vendors have not responded to the Company's
request for information and may not be Year 2000 compliant. Nevertheless, the
Company believes alternative sources of supply are available for all required
components. Therefore, absent widespread difficulties effecting several critical
vendors, the Company does not anticipate that vendors' Year 2000 issues would
have a material adverse effect on the Company. In addition, certain machine
parts could be manufactured in the Company's in-house machine shop.
The Company has received verbal verification from several of its freight
providers that they are Year 2000 compliant. However, the Company is not
currently aware of the Year 2000 readiness of certain outside service companies,
such as telecommunications or utility providers. The failure of these providers
to be Year 2000 compliant could have a material adverse effect on the Company,
which is not currently quantifiable. In the worst case, the Company's operations
could be seriously disrupted.
Customers - The Company's customer base typically changes significantly from
year to year. Since the Company's equipment is designed to have an extended
life, significant repeat orders are not received on a regular basis. As a
result, the Company is unable to predict the identity of most of its major
customers in the Year 2000 and thereafter. The Company is unable to make an
inquiry as to whether the customers' computer driven payment or purchasing
processes are Year 2000 compliant. A customer's Year 2000 issues could cause a
delay in receipt of purchase orders or payment. If Year 2000 issues are
widespread among the Company's customers, the Company's sales and cash flow
could be materially adversely affected.
Market Risk
The Company is exposed to various types of market risk, including changes in
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes. Because the Company's cash and investments exceed short and long-term
debt, the exposure to interest rates relates primarily to its investment
portfolios. Due to the short term maturities of Quipp's investments, management
believes that there is no significant risks arising from interest rates
fluctuations. The Company is actively managing the investment portfolios to
increase return on investments, but, in order to ensure liquidity, will only
invest in instruments with credit quality and where a secondary market exists.
The counterparties are major financial institutions and government agencies.
General
The majority of the Company's sales are made on a contract basis. Typically, a
deposit is received upon the execution of the sales contract. Prior to shipment,
additional payments are received, reducing the customer's balance due. Larger
orders are normally received some months in advance of delivery. Therefore,
backlog can be an important, though by no means conclusive, indication of the
Company's short-term revenue stream. The timing of revenues can be affected by
pending orders, the amount of custom engineering required, the timetable for
delivery, and the receipt and nature of new orders. The backlog, as of December
31, 1998, and December 31, 1997, was $10,566,840 and $5,422,169, respectively.
The backlog consists of some OEM products which generally have lower margins.
Management believes all orders in the December 31, 1998 backlog will be
satisfied by the end of 1999.
Liquidity and Capital Resources
On December 31, 1998, cash, cash equivalents and securities available for sale
totaled $20,281,287, as compared to $13,668,457 at December 31, 1997, an
increase of $6,612,830. This increase was principally related to cash provided
by operations, an increase in deferred revenues of $2,096,351 and a reduction of
$540,659 in inventory. Working capital at December 31, 1998 was $21,120,481, an
increase of $3,931,476 from $17,189,005 at December 31, 1997. On May 10, 1999,
the Company will pay a special dividend of $7.00 per share to shareholders of
record on April 8, 1999. Based on the number of shares outstanding on March 10,
1999 the Company will distribute $11,587,688. This amount will increase if any
outstanding stock options are exercised on or prior to April 8, 1999. The
Company believes that the remaining cash, cash equivalents and securities
available for sale together with cash generated from operations will be
sufficient to fund operations at the current level.
10
Inflation
The rate of inflation has not had a material impact on operations.
Forward Looking Statements
The statements contained in this Annual Report on Form 10-K regarding the
shipment of backlog during the next twelve months; the planned introduction of
an improved gripper conveyor and a palletizer; third party statements regarding
Year 2000 readiness of their products, services and systems; consequences of the
failure of the Company's products and systems, and outside parties to be Year
2000 compliant; and other Year 2000 related matters are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. A number of important factors could cause actual results to differ
materially from those in the forward looking statements including, among others,
economic conditions generally and specifically in the newspaper industry, change
in product demand, delays in shipment, cancellation of customer orders,
engineering and production difficulties relating to the gripper conveyor and
palletizer, unanticipated hardware or software problems in connection with
upgrades, unavailability of vendors to replace vendors having Year 2000
difficulties, inability of the Company to internally fabricate necessary machine
parts and unanticipated costs of Year 2000 measures.
ITEM 7A - QUALITATIVE AND QUANTATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" - Market Risk
11
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income For Each of the Years in the Three-Year Period Ended December 31, 1998
Consolidated Statements of Shareholders' Equity for Each of the Years in the Three-Year Period Ended December 31,1998
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998
Notes to Consolidated Financial Statements
12
Independent Auditor's Report
The Board of Directors
Quipp Inc.:
We have audited the accompanying consolidated balance sheets of Quipp,
Inc. and subsidiary (the "Company") as of December 31, 1998, and 1997 and the
related consolidated statements of income, and shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 13, 1998 and 1997 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998 in conformity with generally accepted accounting principles.
/ s / KPMG LLP
Miami, Florida
February 19, 1999
(Except NOTE 13 which is dated March 8, 1999)
13
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,820,956 $ 822,573
Securities available for sale 18,460,331 12,845,884
Accounts receivable, net 4,388,385 4,381,535
Inventories 2,989,950 3,530,609
Deferred tax assets-current 814,899 1,169,119
Prepaid expenses and other receivables 479,761 132,508
---------------------------------
Total current assets 28,954,282 22,882,228
Property, plant and equipment, net 1,837,161 1,825,906
Goodwill 405,861 437,082
Other assets 80,782 110,417
Deferred tax assets - 47,434
---------------------------------
Total Assets $31,278,086 $25,303,067
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,425,757 1,252,375
Accrued salaries and wages 697,136 588,165
Deferred revenues 3,439,314 1,342,963
Income taxes payable 167,704 184,044
Contract contingencies 596,397 323,491
Other accrued liabilities 1,407,493 1,902,185
---------------------------------
Total current liabilities 7,833,801 5,693,223
Long-term debt 950,000 1,050,000
Contingencies (Note 12) -- -
---------------------------------
Total liabilities 8,783,801 6,743,223
Shareholders' Equity:
Common stock - par value $.01 per share, authorized 8,000,000
shares. Issued 1,644,994 in 1998 and 1,636,444 shares in 1997 16,450 16,365
Additional paid-in capital 5,800,581 5,359,845
Retained earnings 16,677,254 13,329,609
Treasury stock, at cost, 1998 - 0 and 1997 - 33,950 shares (145,975)
---------------------------------
Total shareholders' equity 22,494,285 18,559,844
---------------------------------
Total Liabilities and Shareholders' Equity $31,278,086 $25,303,067
=================================
See accompanying notes to the consolidated financial statements.
14
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
Net sales $27,121,396 $27,018,282 $21,567,873
Cost of sales (16,955,430) (17,248,863) (13,703,717)
-----------------------------------------------------
Gross profit 10,165,966 9,769,419 7,864,156
-----------------------------------------------------
Other operating income and (expense) items:
Sale of patent and license rights - 19,865 145,037
Selling, general and administrative expenses (4,924,902) (4,689,557) (4,205,480)
Research and development (760,256) (582,839) (579,580)
-----------------------------------------------------
Operating profit 4,480,808 4,516,888 3,224,133
-------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 646,947 476,430 345,120
Interest expense (45,473) (61,704) (61,032)
-----------------------------------------------------
601,474 414,726 284,088
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,082,282 4,931,614 3,508,221
Income taxes (1,734,637) (1,850,310) (1,288,393)
-----------------------------------------------------
Net income $3,347,645 $3,081,304 $2,219,828
-------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic income per common share $2.05 $1.95 $1.42
Diluted income per common share $1.96 $1.89 $1.42
-----------------------------------------------------
Weighted average number of common
Equivalent shares outstanding 1,707,366 1,630,213 1,565,765
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
15
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
Cash provided by operations:
Net Income $3,347,645 $3,081,304 $2,219,828
--------------------------------------------------
Reconciliation of net income to net cash Provided by (used in)
operations:
Deferred income taxes 401,654 (81,500) 84,720
Depreciation and amortization 337,237 342,845 333,321
Other noncash items - 21,538 -
Changes in operational assets and liabilities:
Accounts receivable, net (6,850) 1,693,757 832,110
Inventories 540,659 64,590 (120,314)
Other assets and prepaid expenses and
other receivables (417,920) 1,616 81,224
Accounts payables and other accrued liabilities (212,339) 690,046 293,910
Contract contingencies 272,906 104,006 (222,050)
Deferred revenues 2,096,352 (481,935) (1,334,604)
Income tax payable (16,340) 139,258 (169,211)
--------------------------------------------------
Net cash provided by operations 6,343,004 5,575,525 1,998,934
--------------------------------------------------
Cash flows from investing activities:
Securities purchased (46,948,510) (54,766,876) (17,406,009)
Securities sold 41,334,062 50,384,823 14,428,616
Capital expenditures (216,969) (193,890) (24,132)
--------------------------------------------------
Net cash used in investing activities (5,831,417) (4,575,943) (3,001,525)
--------------------------------------------------
Cash flows from financing activities:
Repayment of debt (100,000) (700,000) (100,000)
Conversion of stock options 586,796 374,562 -
--------------------------------------------------
Net cash used in financing activities 486,796 (325,438) (100,000)
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 998,383 674,144 (1,102,591)
Cash and cash equivalents at beginning of year 822,573 148,429 1,251,020
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,820,956 $ 822,573 $ 148,429
-------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash payments made for:
Interest $ 45,473 $ 61,704 $ 61,032
Income taxes $1,587,566 $1,375,000 $1,326,000
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
16
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Total
Common Stock Paid-In Retained Treasury Stock Shareholders'
Shares Amount Capital Earnings Shares Amount Equity
- -----------------------------------------------------------------------------------------------------------------
Balances
January 1,1996 1,634,465 $ 16,345 $ 5,113,190 $ 8,028,477 68,700 $ (295,400) $ 12,862,612
Net Income 2,219,828 2,219,828
- -----------------------------------------------------------------------------------------------------------------
Balances
December 31, 1996 1,634,465 16,345 5,113,190 10,248,305 68,700 (295,400) 15,082,440
Net Income 3,081,304 3,081,304
Issuance of shares for
directors' fees 1,979 20 21,518 21,538
Exercise of employee
stock options 225,137 (34,750) 149,425 374,562
- -----------------------------------------------------------------------------------------------------------------
Balances
December 31, 1997 1,636,444 16,365 5,359,845 13,329,609 33,950 (145,975) 18,559,844
Net Income 3,347,645 3,347,645
Exercise of employee
stock options 8,550 85 440,736 (33,950) 145,975 586,796
- -----------------------------------------------------------------------------------------------------------------
Balances
December 31, 1998 1,644,994 $ 16,450 $ 5,800,581 $ 16,677,254 - $ - $ 22,494,285
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
17
QUIPP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying consolidated financial statements
include the accounts of Quipp, Inc. and Quipp Systems, Inc., a wholly owned
subsidiary (collectively the Company). All material intercompany balances and
transactions have been eliminated in consolidation.
Nature of business - The Company designs and manufactures material handling
equipment for the newspaper industry. The products are generally designed to
accomplish much of the mailroom operations of a newspaper. The mailroom is an
area where newspapers flow from the pressroom in a continuous stream and are
stacked, bundled and moved to the shipping docks. Conveyor systems are utilized
to transport newspapers from the press to the stacking machines. The stacks may
be bundled and conveyed directly to the shipping docks, loaded into carts or
stored on pallets for further processing at a later time.
Inventories - Inventories include material, labor and factory overhead, and are
stated at the lower of cost or market. Costs are determined using the first-in,
first-out (FIFO) method.
Accounts receivable/deferred revenues - The majority of the Company's sales are
made on a contract basis, which provides for progress payments. These payments,
as received, are recorded to the customer's accounts receivable balance, and the
revenue related to the contract is deferred. Revenue is recognized upon shipment
of the equipment. If the contract includes installation, the installation
revenue is recognized upon completion of installation at the customer's site.
Accounts receivable is net of an allowance for doubtful accounts of $217,789 for
1998 and $715,275 for 1997, (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Goodwill - Goodwill, resulting from a business acquisition, represents the
excess of purchase price over fair value of net assets acquired, and is
amortized on a straight-line basis over the expected periods to be benefited,
which is 17 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance, over its
remaining life, can be recovered through undiscounted future operating cash
flows. The amount of goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of
goodwill will be affected if estimated future operating cash flows are not
achieved.
Research and development costs - Research and development costs consist of
expenditures incurred for the discovery of new knowledge that will be used in
the development of new products or the significant enhancement of existing
products and/or production processes, and the implementation of such knowledge
through design, testing and construction of prototypes. The Company expenses
research and development costs as they are incurred.
Property, plant and equipment, net - The Company provides for depreciation of
property, plant and equipment, all of which are recorded at cost, by annual
charges to income. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. When assets are retired, or otherwise
disposed of, the costs, and related accumulated depreciation, are removed from
the accounts and any resulting gain or loss is recognized in the period in which
they are related. Repairs and maintenance are expensed as incurred; alterations
and major overhauls, which extend the lives or increase the capacity of plant
assets, are capitalized.
Income taxes - Income taxes are accounted for using an asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and to operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
18
Cash and cash equivalents - Cash and cash equivalents includes all the Company's
operating cash balances, demand deposits and short-term investments with
original maturities of three months or less. The Company classifies investments
with an original maturity of more than three months as securities available for
sale.
Securities available for sale - Securities available for sale include any
securities that are not held for trading or are not intended to be held to
maturity, and are recorded at fair value. Unrealized holding gains or losses,
net of taxes, are excluded from income and recognized as a separate component of
shareholders' equity until realized. Realized gains and losses arising from the
sale of securities are computed using the specific identification method and are
included in net income. Fair value of the securities is determined based upon
market prices or discounted cash flow. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than temporary
would result in a reduction in carrying amounts of the security. This reduction
would be charged to income. Dividend and interest income are recognized when
earned.
Earnings per share - Earnings per share amounts are based upon the
weighted-average number of common and common equivalent shares outstanding
during the year. Common equivalent shares are excluded from the computation in
periods in which they have an anti-dilutive effect. The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), which specifies the computation, presentation and disclosure requirements
for earnings per share (EPS). It replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution, and is
based upon the weighted-average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has restated all previously reported per share
amounts to conform to SFAS 128.
Deferred bond financing cost - Deferred bond financing costs, which were
incurred upon issuance of the industrial revenue bonds (See note 6), are
included in other assets and are amortized using a method which approximates the
effective yield over the term of issue of the bonds.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements. These estimates could affect the reported amounts of revenues and
expenses. Significant items subject to estimates include the allowance for
doubtful accounts, warranty reserves, provision for cost contingencies on
completed contracts and inventory reserves. Actual results could differ from
those estimates.
Contract cost contingencies - Contract cost contingencies are based upon an
estimate of possible additional costs that may be incurred by the Company after
a system is installed, the customer has been invoiced and the revenue has been
recorded. These costs occur when additional efforts are required to assure
compliance with the customers' specifications. The estimate is based on the
Company's past experience, (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Warranty reserve - Warranty reserves are determined based on the Company's
experience with customers' claims arising from the sale of merchandise. The
Company's exposure, based on previous experience, is estimated at 1-1/2% of
contract revenue. Amounts added to these reserves were charged to selling
expense.
Impairment of long-lived assets - The Company determines impairment of
long-lived assets under the requirements that long-lived assets, and certain
identifiable intangibles to be held and used by the Company, be reviewed for
impairment whenever events, or changes in circumstances, indicate that the
carrying amount of the assets may not be fully recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. There was no impairment of long-lived assets in 1998 and 1997.
Stock-Based compensation - The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations, in accounting for its fixed plan stock options. Under APB 25,
compensation expense is recorded on the grant date only if the current market
price of the underlying stock exceeds the exercise price. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123), (See
Note 7).
19
Comprehensive income - In June 1997 the Financial Accounting Standards Board
issued Statements on Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 is effective for fiscal years
beginning after December 15, 1997 and establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 requires all items to be reported
in separate financial statement. The Company did not have unrealized holding
gains or loses during 1998. Therefore, no comprehensive income disclosure was
deemed necessary by management. The Company does not believe that the adoption
of SFAS 130 will have a significant impact on its financial statements.
20
Note 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale, which are recorded at fair value, consist
primarily of federal, state and local government obligations and other
short-term investments. Due to the short-term maturity provisions of these
instruments, the carrying value of securities available for sale approximates
fair value as of December 31, 1998 and 1997. The Company's securities available
for sale at December 31, 1998 and 1997 consisted of the following:
1998 1997
----------------------------------------------------------------------------------------------------------------------
Securities:
Bankers Acceptance $1,190,309 $ -
Commercial Paper 1,000,000 5,000,000
Municipal Securities 7,700,000 4,850,000
Federal Govt. Agency Obligations 6,750,000 3,000,000
Money Market Investments 1,719,527 -
Premium/(discount) on Investments 100,495 (4,116)
----------------------------------------------------------------------------------------------------------------------
Total $18,460,331 $12,845,884
======================================================================================================================
Note 3 - INVENTORIES
Components of inventory as of December 31, 1998 and 1997, were as follows:
1998 1997
-------------------------------------------------------------------------------------------------------------------
Raw Materials $2,616,640 $2,631,602
Work in Process 179,388 731,850
Finished Goods 193,922 167,157
-------------------------------------------------------------------------------------------------------------------
Total $2,989,950 $3,530,609
===================================================================================================================
Note 4 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is as follows:
Current Deferred Total
1998
U.S. Federal $1,321,958 $361,461 $1,683,419
State and local 11,025 40,193 51,218
----------- ---------- -----------
$3,332,983 $401,654 $1,734,637
----------- ---------- -----------
1997
U.S. Federal $1,771,939 ($72,220) $1,697,719
State and local 159,872 (7,281) 152,591
----------- ---------- -----------
$1,931,811 ($81,501) $1,850,310
----------- ---------- -----------
1996
U.S. Federal $1,072,267 $75,471 $1,147,738
State and local 131,406 9,249 140,655
----------- ---------- -----------
$1,203,673 84,720 $1,288,393
=========== ========== ===========
21
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows:
- ---------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Warranty reserve $ 91,914 $ 93,359
Inventory obsolescence 132,041 170,562
Allowance for bad debts 78,401 258,428
Contract reserves 144,121 116,877
Depreciation (29,013) 106,321
Vacation Accrual 72,034 66,634
Unicap 42,970 82,770
Other taxes 162,380 129,461
Other 120,051 192,141
------------------------------------------------------------------
Total gross deferred tax assets $ 814,899 $ 1,216,553
Less valuation allowance - -
------------------------------------------------------------------
Net deferred tax assets $ 814,899 $ 1,216,553
Deferred tax liability - -
------------------------------------------------------------------
Less noncurrent portion
of depreciation - (47,434)
------------------------------------------------------------------
Net noncurrent deferred assets $ 814,899 $ 1,169,119
==================================================================
The following table summarizes the differences between the Company's effective
income tax rate and the statutory federal tax rate for the years ended December
31, 1998, 1997, and 1996:
Year Ending December 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State and Local taxes, net of
Federal income tax benefit 2.0% 2.1% 2.6%
Other (1.9)% 1.4% 0.4%
------------------------------------------------
34.1% 37.5% 37.0%
===============================================
22
Note 5 - PROPERTY, PLANT AND EQUIPMENT, NET
The property, plant and equipment, net balances at December 31, 1998 and 1997
consist of the following:
- ----------------------------------------------------------------------------------------------------------
Estimated
Useful
1998 1997 life
(Years)
- ----------------------------------------------------------------------------------------------------------
Land $500,500 $500,500
Building 1,431,771 1,431,771 31
Building Improvements 385,720 366,930 10
Machinery 720,050 719,130 5
Furniture and Fixtures 201,102 173,151 5
Computer Equipment 660,096 541,481 5
Automobiles 109,433 58,740 5
---------------- ----------------
4,008,672 3,791,703
Less: Accumulated depreciation (2,171,511) (1,965,797)
---------------- ----------------
$1,837,161 $1,825,906
==========================================================================================================
Depreciation expense charged to income was $213,847, $196,651 and $187,128 in
1998, 1997, and 1996, respectively.
Note 6 - LONG-TERM DEBT
Industrial Revenue Bonds - On October 4, 1988, the Company borrowed $2,340,000
by issuing, through Dade County Industrial Development Authority, Variable Rate
Industrial Revenue Bonds with a balance of $1,050,000 at December 31, 1998, of
which $100,000 is classified as current. The Bonds are secured by a letter of
credit from a bank, and bore interest at an average rate of 3.6% and 3.9% for
1998 and 1997, respectively. The bonds are payable in annual installments of
$100,000 from 1999 through 2007 and $150,000 in 2008. The letter of credit
securing the Company's obligation expires on September 16, 2003.
23
Note 7 - STOCK OPTION PLANS
1996 Equity Compensation Plan - In 1996, the Quipp, Inc. 1996 Equity
Compensation Plan (Equity Compensation Plan) was adopted by the Board of
Directors and approved by the shareholders. The Equity Compensation Plan
replaced the Quipp, Inc. 1990 Incentive Stock Option Plan, which was terminated.
The Equity Compensation Plan provides for grants of stock options and
stock-based awards to employees and certain consultants and advisors of the
Company. It also provides for the grant of stock options to non-employee members
of the Company's Board of Directors. Stock options issued in connection with the
Equity Compensation Plan are granted with an exercise price per share equal to
the fair market value of a share of Company common stock at the date of grant.
All stock options have five to ten-year maximum terms and vest, either
immediately, or within four years of grant date. The Equity Compensation Plan
initially authorized 400,000 shares of common stock for issuance. In 1998 the
Equity Compensation Plan was amended to authorize an additional 200,000 shares
of common stock. As a result, the total number of shares of common stock
issuable under the Equity Compensation Plan is 600,000.
At December 31, 1998 and 1997, there were 166,500 and 100,000 shares,
respectively, available for grant under the Equity Compensation Plan; 133,500
and 116,500 shares were granted in 1998 and 1997, respectively. Using the Black
& Scholes option-pricing model, with the following weighted-average assumptions:
an expected dividend yield of zero and expected lives ranging from five to ten
years for both 1998 and 1997, and a risk-free interest rate of 4.65% and 6.3%
for 1998 and 1997, respectively, the per share weighted-average fair value of
stock options granted during 1998 and 1997 ranged from approximately $5.5 to
$8.6 and $11.0 to $11.1, respectively. The Company applies APB 25 in accounting
for its stock options and, accordingly, no compensation expense has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS 123, the Company's net income and net income per common
and common equivalent shares would have been reduced to the pro forma amounts
indicated as follows:
- -----------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
Net Income As reported $3,347,645 $3,081,304
Pro forma $2,747,582 $2,681,076
Net Income per Common and As reported $1.96 $1.89
Common Equivalent Shares Pro forma $1.61 $1.64
- -----------------------------------------------------------------------------------------------------------
The full impact of calculating compensation expense for stock options under SFAS
123 is not reflected in the pro forma net income amounts presented above because
compensation expense is reflected over the options' vesting period, which could
be up to four years. At December 31, 1998 the range of exercise prices and
remaining contractual life of outstanding options was $9 to $17.5, and 2 to 9
years, respectively. At December 31, 1998, the number of options exercisable was
247,250, and the weighted-average exercise price of those options was $11.85.
24
Note 8 - EARNINGS PER SHARE
A reconciliation of the number of shares used in computing basic and diluted EPS
follows:
1998 1997 1996
----------------------------------------------------------------------
Shares
Basic Shares 1,630,706 1,576,556 1,565,765
Common stock
Equivalents from option plan 76,660 53,657 -
----------------------------------------------------------------------
Diluted 1,707,366 1,630,213 1,565,765
----------------------------------------------------------------------
EPS
Basic $ 2.05 $ 1.95 $ 1.42
Diluted $ 1.96 $ 1.89 $ 1.42
=============================================================================================================
Note 9 - MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, no single customer accounted for
10% or more of the Company's net sales. For the year ended December 31, 1996,
The New York Times accounted for approximately 11% of the Company's net sales.
The Company sells a substantial portion of its products to the domestic
newspaper industry; foreign sales accounted for 12%, 18%, and 19% of total net
sales in 1998, 1997 and 1996, respectively.
Note 10 - EMPLOYEE BENEFIT PLAN
The Quipp Systems, Inc. Employee Savings and Investment Plan (the Savings Plan),
is a defined contribution plan which covers substantially all full-time
employees. The Savings Plan permits eligible employees to contribute up to 20%
of annual compensation, subject to the maximum allowable contribution limits of
Sections 415, 401(k) and 404 of the Internal Revenue Code. In 1998, the Board of
Directors approved an increase in the matching contribution to the Savings Plan
of 50%, up to the first 6% of compensation deferred by each participant, up from
4% in prior years. The amount contributed by the Company in 1998, 1997, and
1996, was $66,588, $62,889 and $71,222, respectively. The administrative
expenses of the Savings Plan are paid by the Company as sponsors.
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the following approximate fair value because of the short
maturity of these instruments as of December 31, 1998 and 1997; cash and cash
equivalents, securities available for sale, accounts receivable, prepayments and
other receivables, long-term debt, accounts payable and accrued salaries and
wages.
Note 12 - CONTINGENCIES
In the normal course of business, the Company is exposed to litigation,
including asserted and unasserted claims. In the opinion of management, the
resolution of these matters would not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Note 13 - SUBSEQUENT EVENTS
On May 10, 1999 , the Company will pay a special dividend of $7.00 per share to
shareholders of record on April 8,1999. Based on the numbers of shares
outstanding at March 10, 1999 the Company will distribute $11,587,688. This
amount will increase if any outstanding stock options are exercised on or prior
to April 8, 1999.
25
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
Not applicable.
26
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
This information (other than the information relating to executive officers
included in Part I) will be included in the Company' s Proxy Statement relating
to its Annual Meeting of Shareholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
This information will be included in the Company's Proxy Statement relating to
its Annual Meeting of Shareholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
This information will be included in the Company's Proxy Statement relating to
its Annual Meeting of Shareholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Not applicable
27
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1 Financial Statements - See "Index to Financial Statements" in
Item 8
2 All schedules are omitted because they are inapplicable
3 Exhibits (Note: The file number of all referenced Annual and
Quarterly Reports on Forms 10-K and forms 10-Q, respectively,
is 0-14870.)
Exhibit
No.
3.1 Articles of Incorporation, as amended (Incorporated
by reference to Exhibit 3.3 to the Registrant's
Quarterly Report on Form 10-Q, for the quarter ended
June 30, 1998).
3.2 By-Laws, as amended.
10.2.1 Loan Agreement between Dade County Industrial
Development Authority and Quipp, Inc. dated as of
October 1, 1988 (Incorporated by reference to Exhibit
10.4.2 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.2.2 Indenture of Trust between Dade County Industrial
Development Authority and Mellon Bank, N.A. dated as
of October 31, 1988 (Incorporated by reference to
Exhibit 10.4.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.3 Specimen Bond - Dade County Industrial Development
Authority (Incorporated by reference to Exhibit
10.4.4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.2.4 Copy of Promissory Note, dated as of October 4, 1988,
from Quipp, Inc. to Dade County Industrial
Development Authority (Incorporated by reference to
Exhibit 10.4.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.5 Reimbursement Agreement among NCNB National Bank of
North Carolina, Quipp Systems, Inc. and Quipp, Inc.
dated as of October 4, 1988 (Incorporated by
reference to Exhibit 10.4.6 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10.2.6 Mortgage and Security Agreement from Quipp, Inc. to
NCNB National Bank of North Carolina and Dade County
Industrial Development Authority dated as of October
1, 1988 (Incorporated by reference to Exhibit 10.4.7
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988).
10.2.7 Guaranty Agreement among Quipp Systems, Inc., Quipp
Inc., and Dade County Industrial Development
Authority dated as of October 1, 1988 (Incorporated
by reference to Exhibit 10.4.8 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10.2.8 Guaranty Agreement among Quipp Systems, Inc., Quipp
Inc., and NCNB NationsBank of North Carolina dated as
of October 1, 1988 (Incorporated by reference to
Exhibit 10.4.9 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.9 Letter Agreement dated March 26, 1992 between NCNB
National Bank of North Carolina and the Registrant
dated March 27, 1991 (Incorporated by reference to
Exhibit 10.3.9 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1990).
28
10.2.10 Amendment to Reimbursement Agreement among
NationsBank of North Carolina N.A., Quipp Systems,
Inc. and Quipp, Inc. dated as of March 31, 1994
(Incorporated by reference to Exhibit 10.2.10 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.3 Quipp, Inc. Stock Appreciation Rights Plan
(Incorporated by reference to Exhibit 10.6 10.4 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987).
*10.4 Quipp, Inc. 1996 Equity Compensation Plan
(Incorporated by Reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30th 1998).
*10.5 Quipp Systems, Inc. Employee Savings and Investment
Plan (Incorporated by reference to Exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993).
*10.6 Agreement dated as of July 16, 1996 among Quipp,
Inc., Quipp Systems, Inc. and Ralph M. Branca
(incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1996).
*10.7 Restated employment agreement, dated as of May 1,
1997, among Quipp Inc, Quipp Systems, Inc. and Louis
D. Kipp.
*10.8 Quipp Inc. Management Incentive Plan.
11 Computation of Net Income Per Share.
22 Subsidiary of the Registrant (Incorporated by
reference to Exhibit 22 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987).
23 Consent of KPMG LLP
27 Financial Data Schedule
* Constitutes management contract or
compensatory plan or arrangement required to
be filed as an exhibit to this form.
(b) The Registrant filed no reports on Form 8-K during the last quarter of
the period covered by this report.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
Quipp, Inc.
Date: March 29, 1999 By: /s/ Anthony P. Peri
--------------------------
Anthony P. Peri,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Anthony P. Peri
- --------------------------
ANTHONY P. PERI Chief Executive March 29, 1999
Officer and Director
/s/ Richard H. Campbell
- --------------------------
RICHARD H. CAMPBELL Director March 29, 1999
/s/ Jack D. Finley
- --------------------------
JACK D. FINLEY Director March 29, 1999
/s/ Cristina H. Kepner
- --------------------------
CRISTINA H. KEPNER Director March 29, 1999
/s/ William L. Rose
- --------------------------
WILLIAM L. ROSE Director March 29, 1999
/s/ Ralph M. Branca
- --------------------------
RALPH M. BRANCA Director March 29, 1999
/s/ Louis D. Kipp
- --------------------------
LOUIS D. KIPP Director March 29, 1999
/s/ Jeffrey S. Barocas
- --------------------------
JEFFREY S. BAROCAS Principal Financial and March 29, 1999
Accounting Officer
QUIPP, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
Exhibit
No.
3.1 Articles of Incorporation, as amended (Incorporated
by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q, for the Quarter ended
June 30, 1998).
3.2 By-Laws, as amended.
10.2.1 Loan Agreement between Dade County Industrial
Development Authority and Quipp, Inc. dated as of
October 1, 1988 (Incorporated by reference to Exhibit
10.4.2 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.2.2 Indenture of Trust between Dade County Industrial
Development Authority and Mellon Bank, N.A. dated as
of October 31, 1988 (Incorporated by reference to
Exhibit 10.4.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.3 Specimen Bond - Dade County Industrial Development
Authority (Incorporated by reference to Exhibit
10.4.4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.2.4 Copy of Promissory Note, dated as of October 4, 1988,
from Quipp, Inc. to Dade County Industrial
Development Authority (Incorporated by reference to
Exhibit 10.4.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.5 Reimbursement Agreement among NCNB National Bank of
North Carolina, Quipp Systems, Inc. and Quipp, Inc.
dated as of October 4, 1988 (Incorporated by
reference to Exhibit 10.4.6 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10.2.6 Mortgage and Security Agreement from Quipp, Inc. to
NCNB National Bank of North Carolina and Dade County
Industrial Development Authority dated as of October
1, 1988 (Incorporated by reference to Exhibit 10.4.7
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988).
10.2.7 Guaranty Agreement among Quipp Systems, Inc., Quipp
Inc., and Dade County Industrial Development
Authority dated as of October 1, 1988 (Incorporated
by reference to Exhibit 10.4.8 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10.2.8 Guaranty Agreement among Quipp Systems, Inc., Quipp
Inc., and NCNB NationsBank of North Carolina dated as
of October 1, 1988 (Incorporated by reference to
Exhibit 10.4.9 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1988).
10.2.9 Letter Agreement dated March 26, 1992 between NCNB
National Bank of North Carolina and the Registrant
dated March 27, 1991 (Incorporated by reference to
Exhibit 10.3.9 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1990).
10.2.10 Amendment to Reimbursement Agreement among
NationsBank of North Carolina N.A., Quipp Systems,
Inc. and Quipp, Inc. dated as of March 31, 1994
(Incorporated by reference to Exhibit 10.2.10 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.3 Quipp, Inc. Stock Appreciation Rights Plan
(Incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987).
*10.4 Quipp, Inc. 1996 Equity Compensation Plan
(Incorporated by as amended 1-C to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
*10.5 Quipp Systems, Inc. Employee Savings and Investment
Plan (Incorporated by reference to Exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993).
*10.6 Agreement dated as of July 16, 1996 among Quipp,
Inc., Quipp Systems, Inc. and Ralph M. Branca
(incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1996).
*10.7 Restated employment agreement, dated as of May 1,1997
among Quipp Inc., Quipp Systems I Inc. and Louis D.
Quipp.
*10.8 Quipp Inc. Management Incentive Plan.
11 Computation of Net Income Per Share
22 Subsidiary of the Registrant (Incorporated by
reference to Exhibit 22 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987).
23 Consent of KPMG LLP
27 Financial Data Schedule
* Constitutes management contract or
compensatory plan or arrangement required to
be filed as an exhibit to this form.