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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, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from to
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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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (305) 623-8700
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Securities registered pursuant to Section 12(g) of the Act;
Common Stock, $.01 par value
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(Title of Class)
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 since 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 February 5, 2002 was approximately $19,227,000*. The number of
shares of the Registrant's common stock, $.01 par value, outstanding at February
5, 2002 was 1,417,775.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
---------------------
Portions of the Quipp, Inc. Proxy Statement relating to the 2002 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 persons are "affiliates" of
Registrant for purposes of the federal securities laws.
QUIPP, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 6
Item 3. Legal Proceedings........................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......................................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 7
Item 6. Selected Financial Data..................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 12
Item 8. Financial Statements and Supplementary Data................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 28
Item 11. Executive Compensation...................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 28
Item 13. Certain Relationships and Related Transactions.............................................. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 29
2
PART I
ITEM I - BUSINESS
- -----------------
Through our wholly owned subsidiary, Quipp Systems, Inc., we manufacture, sell
and install post-press material handling equipment to newspaper publishers. In
the post-press stage of newspaper operations, newspapers move from the pressroom
in a continuous stream and are stacked, bundled, transferred to the shipping
docks and loaded into carts or stored on pallets for further distribution. Our
equipment and computerized control systems facilitate the automated movement of
newspapers from the printing press to the delivery trucks.
Our product line includes the following equipment, which we sell individually or
as part of integrated post-press system installations that include several of
our products and, in some instances, products of other manufacturers.
Newspaper Stackers - The Series 400 Stacker counts and batches stacks of
newspapers at maximum speeds of 85,000 copies per hour. The newly developed
Series 400C Stacker is a versatile product that can be adjusted to count and
stack a variety of newspaper sizes. The Quipp Sport Stacker, marketed to smaller
volume newspapers, counts and batches stacks of newspapers at maximum speeds of
60,000 copies per hour.
Bottomwrapper - The Quipp Viper, our bottomwrapper, applies wrapping paper to
the bottom or three sides of a newspaper bundle to protect against product
damage. The Viper can be equipped with an inkjet printing device that provides
delivery location and copy count information on the wrapping paper.
Automatic Cart Loading System - This system loads strapped bundles of newspapers
into carts for transportation to remote distribution centers. Quipp's Automatic
Cart Loading System handles bundles of various shapes and sizes. Upon completion
of loading, the cart is discharged from the cart loader and placed in a truck
for delivery to the distribution site.
Newspaper Conveyor Systems - Our conveyor systems, including the Quipp-Gripp II
(TM), Quipp Twin-Trak and Quipp Rollerslat, transport newspapers from pressrooms
to various locations throughout the post-press operation. The conveyor systems
include both horizontal and vertical conveyor modules, which can be integrated
with directional switches and special purpose components to accommodate the
layout of the newspaper plant. The Quipp-Gripp II uses a series of grippers
mounted on an articulating chain to pick up and transport newspapers. Each
Quipp-Gripp II gripper carries a single copy of the product. The Quipp Twin-Trak
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 used in the processing of newspaper stacks prior to bundling.
Automatic Palletizer System -The palletizer system receives newspaper bundles
from conveyors, stacks the bundles onto a pallet and places stretch wrap film
around the pallet and newspapers to prevent movement during transportation to a
distribution site.
Other Products - We manufacture other products for post-press operations,
including stream aligners, centering pacers, fold compressors, newspaper
sensors, press production monitors and other equipment.
Original Equipment Manufacturers (OEM) Equipment - We sell OEM products to
compliment our product line and provide our customers a single source for
integrated post-press material handling systems.
Our manufacturing activities consist primarily of the assembly of purchased
components, the fabrication of mechanical parts and the testing of completed
products. We use approximately 350 vendors to supply parts, materials and
components for our various products. We believe that alternative sources of
supply are available for all required components. If necessary, certain parts
could be manufactured in our in-house machine shop, which is used primarily for
custom engineering and development of prototype equipment.
We market, install and service our products both domestically and
internationally. All of our products have a minimum one-year warranty, and we
have a staff of technicians that provide installation and repair services. In
addition to the manufacture and sale of products, we sell spare parts for our
equipment. In 2001, 2000 and 1999, spare parts sales accounted for approximately
9%, 7%, and 7% of our net sales revenue, respectively.
3
We sell most of our products to newspaper publishers in the United States. Our
foreign sales accounted for 5%, 13% and 6% of total sales in 2001, 2000, and
1999, respectively. The following table indicates the amount of sales by
geographic area during the past three years:
SALES BY GEOGRAPHIC AREA
2001 2000 1999
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United States $20,638,351 $30,905,022 $29,835,263
Far East 69,577 785,934 441,194
Canada 126,593 1,360,731 354,246
Latin America 469,237 2,125,993 849,239
Other 365,084 174,067 151,889
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$21,668,842 $35,351,747 $31,631,831
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As of December 31, 2001, our backlog of orders was approximately $6,611,000, as
compared to $11,457,000 on December 31, 2000. Orders booked in 2001 were
$15,704,000 as compared to $30,647,000 in 2000. It has been widely reported that
newspapers curtailed or delayed spending for capital equipment in 2001 due to
negative economic developments, including a decline in advertising revenue. We
believe that the reported decline in newspaper industry conditions principally
caused our incoming orders to decline to the lowest level since 1994. If
incoming orders remain at 2001 levels or decrease, our financial results in 2002
could be further adversely affected. We expect to ship all orders included in
our backlog within the next 12 months. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - General" in Item 7.
For the years ended December 31, 2001, 2000 and 1999, no single newspaper
accounted for ten percent or more of our net sales. A number of our newspaper
customers are part of large newspaper chains, but management believes that
purchase decisions are made by the individual newspapers. Newspapers owned by
Gannett Co, Inc. accounted for 13% of our net sales in 2001. Newspapers owned by
Gannett Co, Inc. and Knight-Ridder, Inc. accounted for 18% and 12% of our net
sales in 2000, respectively. Since our equipment is designed to have an extended
life, our largest individual newspaper customers in a given year are usually
different from the largest customers in any other year.
OEM sales accounted for approximately 3.5%, 12.6% and 9.6% of our total sales in
2001, 2000, and 1999, respectively.
COMPETITION
The newspaper industry has experienced a decrease in size in recent years, as
the number of newspapers in the country has declined and ownership of newspapers
has been consolidated. Moreover, in recent years, there has been consolidation
among manufacturers of newspaper material handling equipment, as well as new
entrants into the market. These developments have increased competition in the
industry, and some of our competitors have much greater financial resources than
ours.
We believe we have two principal competitors for the newspaper post-press
equipment business in the United States, Heidelberg Finishing Systems, a
domestic subsidiary of Heidelberger Druckmaschinen AG, 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 our products. We have experienced competition on the basis of price
with respect to most of our products and anticipate that price competition will
continue.
MARKETING
We have 13 employees on our sales support and direct sales staff. In North
America, we sell our products through five direct sales representatives. We use
international dealers to market and sell our products in the rest of the world.
Domestically, we market products by direct solicitation, trade shows and
national and regional trade journal advertising. International marketing efforts
are coordinated through the foreign dealers. Some of the international dealers
are commissioned, while others purchase our products for resale.
4
PATENTS AND TRADEMARKS
We hold 30 U.S. and foreign patents, which expire during the period from 2005 to
2017. We have one patent pending and continue to apply for patent protection
when deemed advisable; however, we believe that the success of our products
ultimately is dependent upon performance, reliability and engineering, and that
our patents are not material to our business. "Quipp" and "Quipp Gripp" are
registered trademarks of Quipp, Inc.
RESEARCH AND DEVELOPMENT
Research and development costs totaled $379,437, $669,855 and $742,865 in 2001,
2000 and 1999 respectively. The majority of our 2001 research and development
costs represented expenditures for improvements to the automatic palletizer
system and development of the Quipp-Gripp II. In 2001, we focused much of our
engineering and technical efforts on the custom design and production of
customer orders. Cost related to these activities are charged to cost of goods
sold as incurred rather than to research and development.
EMPLOYEES
As of December 31, 2001, we had 119 full-time employees. None of our employees
are represented by a union and we consider our employee relations to be good.
OTHER DEVELOPMENTS
As previously announced by the Company, in late 2000 and early 2001, we were
engaged in negotiations with a potential buyer for a transaction that would
result in the potential buyer's purchase of our Company. However, as
negotiations proceeded through February and March 2001, we were advised that the
tightening of the credit market and developments affecting the economy and the
newspaper industry generally, and the Company specifically, among other factors,
impaired the purchaser's ability to obtain financing to complete the acquisition
on the proposed terms. Therefore, we terminated negotiations.
In April 2001, we commenced a modified "Dutch auction" tender offer. Upon
completion of the offer in May 2001, we purchased 550,000 shares of our common
stock at a purchase price of $20 per share.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, business experience and ages of the executive officers of Quipp are
listed below:
Name Business Experience During the Past Five Years Age
---- ---------------------------------------------- ---
Michael S.Kady Mr. Kady became President and Chief Executive 52
Officer Quipp, Inc. in February 2002. Mr. Kady was
President of GMP Metal Products, a manufacturer of
components supplied to major original equipment
manufacturers in the agricultural equipment, construction
machinery and transportation equipment markets, from January
2000 to January 2001. From May 1999 to January 2000,
Mr. Kady was a private consultant engaged in strategy
development for privately held companies. From May 1996
to May 1999, he was President and Chief Operating Officer
of Shuttleworth, Inc., a designer and builder of automated
material handling systems and equipment for the electronics,
automotive, food and beverage and printing industries.
Christer A. Sjogren Mr. Sjogren, Executive Vice President of Quipp Systems, Inc. 59
since 1994, has served Quipp or Quipp
Systems in various capacities since 1983. He
is responsible for our research, development
and engineering functions.
David Switalski Mr. Switalski, Vice President of Operations of Quipp 43
Systems, Inc. since July 2000, has served Quipp or Quipp
Systems in various capacities since 1984.
Eric Bello Mr. Bello, became Director of Finance and Treasurer of 38
Quipp, Inc. in March 2002 and was Quipp's Controller from
October 1999 until March 2002. Mr. Bello served as
Corporate Controller of Med-Waste, Inc., a company
involved in medical waste management, from February
1999 to October 1999. He was Controller of Nature's
Products, Inc., a vitamin manufacturer from October 1998
to February 1999. He worked in various capacities, including
Controller for the U.S. Division of Althin Medical, Inc., a medical
device manufacturer from March 1994 to October 1999.
ITEM 2 - PROPERTIES
- -------------------
We operate our business from one facility, located in Miami, Florida. We own the
property, and our facility contains approximately 63,170 square feet, of which
approximately 48,300 square feet are utilized for manufacturing operations, and
14,870 square feet are used for administrative functions. We own all of the
equipment used in our manufacturing operations. In the opinion of management,
our properties are adequate and suitable for current operations.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable
6
PART II
ITEM 5 - MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
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Our Common Stock, $.01 par value, is traded on the NASDAQ National Market under
the symbol, "QUIP." The following table sets forth the high and low sales prices
of our Common Stock as reported on the NASDAQ National Market for each calendar
quarter in 2001 and 2000:
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2001 2000
High Low High Low
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First Quarter $26.44 $20.75 $16.00 $14.50
Second Quarter 21.75 16.13 19.63 15.06
Third Quarter 17.34 13.94 26.00 18.63
Fourth Quarter 15.45 12.31 26.06 22.25
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We did not pay any dividends in 2000 or 2001.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The selected consolidated financial data for each of the years in the five-year
period ended December 31, 2001 are derived from the audited financial statements
of the Company. The following data should be read in conjunction with the
financial statements and related notes 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.
Selected Financial Data
(In thousands, except per share and share data)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Income Statement Information:
Net sales $21,669 $35,352 $31,632 $27,121 $27,018
Gross profit 5,250 13,219 11,483 10,166 9,769
Selling, general and administrative expenses 5,019 5,623 5,693 4,925 4,690
Research and development 379 670 743 760 583
Operating (loss) profit (149) 6,926 5,047 4,481 4,517
Other income (expense), net 420 793 531 601 415
- --------------------------------------------------------------------------------------------------------------------------------
Net income 190 5,013 3,673 3,348 3,081
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net income per share (basic) .12 2.65 2.02 2.05 1.95
Net income per share (diluted) .11 2.57 1.97 1.96 1.89
Book value per share 8.00 11.28 8.55 13.67 11.58
Market price per share (unaudited) - high 26.44 26.06 24.00 20.38 17.50
- low 12.31 14.50 12.50 14.50 8.25
- --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Information
Current assets $15,029 $28,970 $21,972 $28,954 $22,882
Total assets 17,839 31,477 24,435 31,278 25,303
Current liabilities 5,854 9,381 7,454 7,834 5,693
Long-term liabilities 650 750 850 950 1,050
Shareholders' equity 11,336 21,345 16,131 22,494 18,560
Weighted average number of equivalent
shares outstanding 1,658,296 1,948,956 1,862,116 1,707,366 1,630,213
- --------------------------------------------------------------------------------------------------------------------------------
In May 2001, we purchased 550,000 shares of our common stock for $11,000,000 in
a modified "Dutch auction" tender offer. We also incurred $461,136 in related
fees and expenses. In May 1999, we paid a special dividend of $7.00 per share,
totaling $13,196,008, to shareholders. The reduction in shareholders' equity in
2001 and 1999 reflects these transactions.
7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
(Note: All dollar amounts are in thousands)
2001 vs. 2000
2001 2000
- --------------------------------------------------------------------------------
Net Sales $ 21,669 $ 35,352
- --------------------------------------------------------------------------------
Increase (Decrease) $ (13,683)
% % (39)
We believe the decrease in sales is due to a slowdown in the U.S. and Latin
American economies and specifically a reduction in capital spending by newspaper
publishers. The decline in newspaper advertising revenue has been widely
reported, and we believe that the sale of our products have been affected as a
result.
2001 2000
- --------------------------------------------------------------------------------
Gross Profit $ 5,250 $ 13,219
- --------------------------------------------------------------------------------
Increase (Decrease) $ (7,969)
% (60)
Percentage of Net Sales 24% 37%
The decrease in gross profit as a percentage of sales is due primarily to shifts
in product mix, a higher percentage of fixed manufacturing overhead costs due to
lower production volumes, and higher production and installation costs for our
new products. We have incurred higher production and installation costs for two
new products, the automatic palletizer and gripper conveyor system, as compared
to other products that we sell. Historically, the initial production and
installation of new products generate lower margins when they are introduced.
Nevertheless, costs with regard to installation of the palletizer and the Quipp
Gripp II, our gripper conveyor, exceeded management's expectations and have had
a more pronounced effect on our gross margins than management initially
anticipated. We successfully completed several gripper conveyor and palletizer
installations during 2001 and anticipate that the experience we have gained will
enable us to better gauge pricing and costs in connection with new orders for
these products.
2001 2000
- --------------------------------------------------------------------------------
Selling, General and Administrative Expense $ 5,019 $ 5,623
- --------------------------------------------------------------------------------
Increase (Decrease) $ (604)
% (11)
Percentage of Net Sales 23% 16%
Selling, General and Administrative Expense expenses decreased primarily due to
reduced variable expenses, including bonuses, commissions, and warranty costs.
The reduced expenses were offset in part by approximately $180,000 in costs
associated with efforts by the Special Committee of our Board of Directors to
evaluate strategic alternatives for the Company, including fees and expenses
relating to a proposed transaction that was not consummated; approximately
$110,000 net increase to allowance for doubtful accounts; approximately $100,000
of nonrecurring professional fees for tax planning; and a compensation charge of
$70,000 relating to our payment to several non-executive employees of an amount
equal to the excess of market value over exercise price of options surrendered
by the employees.
2001 2000
- --------------------------------------------------------------------------------
Research and Development $ 379 $ 670
- --------------------------------------------------------------------------------
Increase (Decrease) $ (291)
% (43)
Percentage of Net Sales 2% 2%
The majority of our 2001 research and development costs represented expenditures
for improvements to the automatic palletizer system and development of the
Quipp-Gripp II. In 2001, we focused much of our engineering and technical
efforts on the custom design and production of customer orders. Cost related to
these activities are charged to cost of goods sold as incurred.
8
2001 2000
- --------------------------------------------------------------------------------
Other Income and Expense (Net) $ 420 $ 793
- --------------------------------------------------------------------------------
Increase (Decrease) $ (373)
% (47)
Percentage of Net Sales 2% 2%
The decrease in other income and expense (net) is primarily due to the decrease
in interest income. The decrease in interest income resulted from lower average
balances of cash and cash equivalents and securities available for sale. In May
2001, we purchased 550,000 shares of common stock in a tender offer for
$11,000,000 and also incurred $461,136 in related fees and expenses.
Results of Operations
(Note: All dollar amounts are in thousands)
2000 vs. 1999
2000 1999
- --------------------------------------------------------------------------------
Net Sales $ 35,352 $ 31,632
- --------------------------------------------------------------------------------
Increase (Decrease) $ 3,720
% 12
Our sales growth was primarily due to improved international sales. The increase
in international sales reflects our increased sales efforts, including the
hiring of a sales representative and additional sales support staff in 1999.
Sales for our core product lines, stackers and bottomwrappers, remained strong.
The 2000 sales growth also included increased sales of original equipment
manufacturers (OEM) equipment as well as increased installation and service
fees. We sell OEM products to offer our customers a single source solution for
integrated post-press material handling systems.
2000 1999
- --------------------------------------------------------------------------------
Gross Profit $ 13,219 $ 11,483
- --------------------------------------------------------------------------------
Increase (Decrease) $ 1,736
% 15
Percentage of Net Sales 37% 36%
The increase in gross profit as a percentage of net sales was due in part to
improved gross profit on OEM equipment sales. Additionally, our gross profit
percentage improved due to lower fixed overhead costs as a percentage of net
sales. Our fixed overhead costs remained stable in 2000 compared to 1999 while
net sales increased by 12%.
2000 1999
- --------------------------------------------------------------------------------
Selling, General and Administrative Expense $ 5,623 $ 5,693
- --------------------------------------------------------------------------------
Increase (Decrease) $ (70)
% (1)
Percentage of Net Sales 16% 18%
The decrease in selling, general and administrative expenses was primarily
attributable to lower marketing expenses offset in part by higher direct sales
costs and professional fees. The decreased marketing expenses reflect reduced
spending on trade shows and advertising. In 1999, we incurred higher trade show
and advertising costs related to the introduction and promotion of two new
product lines. Direct selling costs, such as travel and commission expense,
increased in 2000 principally due to our increased international sales efforts.
Professional fees increased in 2000 primarily due to costs associated with
evaluating strategic alternatives to maximize shareholder value.
2000 1999
- --------------------------------------------------------------------------------
Research and Development $ 670 $ 743
- --------------------------------------------------------------------------------
Increase (Decrease) $ (73)
% (10)
Percentage of Net Sales 2% 2%
Research and development decreased primarily due to the substantial completion
of our automatic palletizer product line offset in part by additional costs
incurred in the development of our Quipp-Gripp II gripper conveyor system.
2000 1999
- --------------------------------------------------------------------------------
Other Income and Expense (Net) $ 793 $ 531
- --------------------------------------------------------------------------------
Increase (Decrease) $ 262
% 49
Percentage of Net Sales 2% 2%
The increase in other income and expense (net) was primarily due to the increase
in interest income. This increase resulted from higher interest rates on our
securities available for sale and higher average balances of cash and cash
equivalents and securities available for sale (see "Liquidity and Capital
Resources" below).
9
General
The majority of our sales are made on a contract basis. Typically, we receive a
deposit upon the execution of the sales contract. Prior to shipment, we receive
additional installment payments. We normally receive larger orders several
months in advance of delivery. Therefore, backlog can be an important, though by
no means conclusive, indication of our short-term revenue stream. The timing of
revenues can be affected by pending orders, the amount of custom engineering
required, the timetable for delivery, the completion of the installation, and
the receipt and nature of new orders. Our backlog, as of December 31, 2001 and
December 31, 2000, was $6,611,000 and $11,457,000, respectively. Orders booked
in 2001 were $15,704,000 as compared to $30,647,000 in 2000. It has been widely
reported that newspapers curtailed or delayed spending for capital equipment in
2001. We believe that the reported decline in newspaper industry conditions
principally caused our incoming orders to fall to the lowest level since 1994.
Liquidity and Capital Resources
Over the past several years, we have been able to generate sufficient cash to
support our operations, pay a special dividend to shareholders in 1999 totaling
$13,339,318 and purchase 550,000 shares of our common stock in a tender offer in
2001 for an aggregate of $11,000,000, plus $461,136 in expenses. Although, as
described above, our operating results in 2001 were well below the levels of
recent years, our cash flow was not adversely affected by operations. After
adjusting 2000 year end cash, cash equivalents and securities available for sale
to give effect to the tender offer, our cash, cash equivalents and securities
available for sale increased by $2,223,818 in 2001. While our cash, cash
equivalents and marketable securities may decline in 2002 if adverse economic
conditions continue, we do not anticipate that we will be required to seek
external funding.
Our long-term debt consists solely of obligations under variable rate industrial
revenue bonds that were issued through the Dade County Industrial Development
Authority in 1988. At December 31, 2001, the balance due on the bonds was
$750,000, of which $100,000 is classified as a current liability on our balance
sheet. During 2001, the bonds bore interest at an average rate of 3.4%.
On December 31, 2001, cash, cash equivalents and securities available for sale
totaled $7,751,177, as compared to $16,988,495 at December 31, 2000, a decrease
of $9,237,318. As noted above, this decrease was primarily due to our purchase,
for $11,000,000, of 550,000 shares of our common stock in our "modified Dutch
auction" tender offer in May 2001. In addition, we paid $461,136 in related fees
and expenses. These amounts did not affect the statement of operations but
reduced our shareholders' equity. The decrease was offset in part by cash
provided by operations. Working capital at December 31, 2001 was $9,175,570, a
decrease of $10,412,713 from $19,588,283 at December 31, 2000. The decrease in
working capital was due primarily to our purchase of our common stock in the
tender offer. We believe that our cash, cash equivalents and securities
available for sale together with cash generated from operations will be
sufficient to fund operations at the current level.
Critical Accounting Policies
In preparing our financial statements, management is required to make estimates
and assumptions that, among other things, affect the reported amounts of assets
and liabilities and reported amounts of revenues and expenses. These estimates
are most significant in connection with our critical accounting polices, namely
those of our accounting policies that are most important to the representation
of our financial condition and results and require management's most difficult,
subjective or complex judgments. These judgments often result from the need to
make estimates about the effects of matters that are inherently uncertain.
We believe that our most critical accounting policies relate to (1) revenue
recognition involving complex installation services, (2) allowance for doubtful
accounts, (3) contract contingencies, and (4) warranty reserves.
Our revenue recognition policy with regard to equipment sales requiring complex
installation services calls for recognition when installation is complete.
Because complex installations often require ongoing customer consultation even
after a product is installed and is running, management must often make a
judgment as to when an installation may be considered complete. We believe that
an installation generally is complete when our customers can use the equipment
in their daily operations and collection of the resulting accounts receivable is
reasonably assured. Nevertheless, there is a degree of subjectivity involved in
making this determination, which can affect the timing of recognition of
revenues and the related cost of sales.
10
We continuously monitor collections and payments from our customers and maintain
an allowance for doubtful accounts based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the provisions
established, there is a risk that credit losses in the future will exceed those
that have occurred in the past, in which case our operating results would be
adversely affected.
Contract contingencies involve estimates of additional expenses that may be
incurred after installation is complete. These expenses occur when additional
efforts are required to assure customer satisfaction.
We record a warranty reserve based on our actual historical return rates and
repair costs at the time of sale. While our warranty costs have historically
been within our expectations and the provisions established, future warranty
return rates or repair costs could be in excess of our warranty reserves. A
significant increase in product return rates or a significant increase in the
costs to repair our products would adversely affect our operating results for
the period or periods in which such returns or additional costs materialize.
Market Risk
We are 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. We do not enter into derivatives or
other financial instruments for trading or speculative purposes. Because our
cash and investments exceed short and long-term debt, the exposure to interest
rates relates primarily to our investment portfolio. Due to the short-term
maturities of our investments, we believe there is no significant risk arising
from interest rate fluctuations. We are actively managing our investment
portfolios to increase return on investments, but, in order to ensure safety and
liquidity, will only invest in instruments with credit quality and which are
traded in a secondary market. The counterparties are major financial
institutions and government agencies.
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, including
statements concerning shipment of backlog orders, possible decline in cash, cash
equivalents and marketable securities, and adequacy of available resources, 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, but not limited to, economic conditions generally and specifically in
the newspaper industry, demand and market acceptance for new and existing
products, the impact of competitive products and pricing, delays in shipment,
cancellation of customer orders, and engineering and production difficulties.
11
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk."
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
Page
----
Independent Auditors' Report 13
Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and 2000 14
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2001 15
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period
ended December 31, 2001 16
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2001 17
Notes to Consolidated Financial Statements. 18
12
Independent Auditors' 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, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule for each of the years in the
three-year period ended December 31, 2001 as listed in item 14(a)2 of the
Company's 2001 Annual Report on Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 31, 2001 and 2000 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/ s / KPMG LLP
Ft. Lauderdale, Florida
February 5, 2002
<
13
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,627,937 $ 1,086,101
Securities available for sale 6,123,240 15,902,394
Accounts receivable, net 3,382,105 6,818,124
Inventories 2,498,935 3,772,806
Deferred tax assets-current 837,448 804,649
Prepaid expenses and other current assets 320,475 585,442
Current portion of notes receivable 238,940 --
------------------------------------
Total current assets 15,029,080 28,969,516
Property, plant and equipment, net 1,959,258 2,096,228
Notes receivable 477,882 --
Goodwill 312,201 343,421
Other assets 60,620 67,340
------------------------------------
Total Assets $ 17,839,041 $ 31,476,505
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,113,510 1,773,107
Accrued salaries and wages 433,359 1,235,524
Deferred revenues 2,275,351 3,900,545
Income taxes payable -- 241,808
Contract contingencies 857,976 390,273
Other accrued liabilities 1,073,314 1,739,976
------------------------------------
Total current liabilities 5,853,510 9,381,233
Long-term debt 650,000 750,000
------------------------------------
Total liabilities 6,503,510 10,131,233
Contingencies (Note 15)
Shareholders' Equity:
Common stock - par value $.01 per share, authorized 8,000,000
shares, issued 1,426,025 shares in 2001 and 1,898,251 14,260 18,982
shares in 2000
Additional paid-in capital -- 9,197,806
Treasury Stock, at cost (9,250 shares in 2001,
2,500 shares in 2000) (148,375) (38,125)
Retained earnings 11,414,178 12,166,609
Other comprehensive income 55,468 --
------------------------------------
11,335,531 21,345,272
------------------------------------
Total Liabilities and Shareholders' Equity $ 17,839,041 $ 31,476,505
====================================
See accompanying notes to the consolidated financial statements.
14
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 21,668,842 $ 35,351,747 $ 31,631,832
Cost of sales (16,418,908) (22,132,564) (20,148,851)
--------------------------------------------------------
Gross profit 5,249,934 13,219,183 11,482,981
--------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses (5,019,168) (5,623,178) (5,693,523)
Research and development (379,437) (669,855) (742,865)
--------------------------------------------------------
Operating (loss) profit (148,671) 6,926,150 5,046,593
- -----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 446,011 833,933 566,489
Interest expense (26,266) (40,957) (35,745)
--------------------------------------------------------
419,745 792,976 530,744
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 271,074 7,719,126 5,577,337
Income tax expense (81,173) (2,706,452) (1,904,648)
--------------------------------------------------------
Net income $ 189,901 $ 5,012,674 $ 3,672,689
========================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic income per common share $ 0.12 $ 2.65 $ 2.02
Diluted income per common share $ 0.11 $ 2.57 $ 1.97
Basic average number common shares 1,626,787 1,891,928 1,822,783
outstanding
Diluted average number of common and
common equivalent shares outstanding 1,658,296 1,948,956 1,862,116
===================================================================================================================================
See accompanying notes to the consolidated financial statements.
15
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------
Balances on
January 1, 1999 1,644,994 16,450 5,800,581 16,677,254
Net income -- -- -- 3,672,689
Issuance of shares to
employees 1,400 14 28,662 --
Special dividend -- -- -- (13,196,008)
Exercise of stock options
(includes tax benefit of
$326,191 238,750 2,387 3,129,304 --
- ------------------------------------------------------------------------------------------
Balances on
December 31, 1999 1,885,144 18,851 8,958,547 7,153,935
Net income -- -- -- 5,012,674
Issuance of shares to
employees 8,357 83 152,580 --
Purchase of treasury Stock -- -- -- --
Exercise of stock options
(includes tax benefit of
$11,851 4,750 48 86,679 --
- ------------------------------------------------------------------------------------------
Balances on
December 31, 2000 1,898,251 18,982 9,197,806 12,166,609
Net income -- -- -- 189,901
Issuance of shares to
employees 9,149 92 214,383 --
Unrealized gain on securities
held for sale, net of taxes -- -- -- --
Purchase of treasury Stock -- -- -- --
Exercise of stock options
(includes tax benefit of
$73,988) 68,625 686 1,101,115 --
Purchase stock in "modified
Dutch auction" tender offer (550,000) (5,500) (10,513,304) (942,332)
- ------------------------------------------------------------------------------------------
Balances on
December 31, 2001 1,426,025 14,260 -- 11,414,178
==========================================================
[RESTUBBED]
Other Total
Treasury Stock Comprehensive Shareholders'
Shares Amount Income Equity
- ---------------------------------------------------------------------------------------------
Balances on
January 1, 1999 -- -- -- 22,494,285
Net income -- -- -- 3,672,689
Issuance of shares to
employees -- -- -- 28,676
Special dividend -- -- -- (13,196,008)
Exercise of stock options
(includes tax benefit of
$326,191 -- -- -- 3,131,691
- ------------------------------------------------------------------------------------------
Balances on
December 31, 1999 -- -- -- 16,131,333
Net income -- -- -- 5,012,674
Issuance of shares to
employees -- -- -- 152,663
Purchase of treasury Stock 2,500 (38,125) -- (38,125)
Exercise of stock options
(includes tax benefit of
$11,851 -- -- -- 86,727
- ------------------------------------------------------------------------------------------
Balances on
December 31, 2000 2,500 (38,125) -- 21,345,272
Net income -- -- -- 189,901
Issuance of shares to
employees -- -- -- 214,475
Unrealized gain on securities
held for sale, net of taxes -- -- 55,468 55,468
Purchase of treasury Stock 6,750 (110,250) -- (110,250)
Exercise of stock options
(includes tax benefit of
$73,988) -- -- -- 1,101,801
Purchase stock in "modified
Dutch auction" tender offer -- -- -- (11,461,136)
- ------------------------------------------------------------------------------------------
Balances on
December 31, 2001 9,250 (148,375) 55,468 11,335,531
==========================================================
See accompanying notes to the consolidated financial statements.
16
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations:
Net Income $ 189,901 $ 5,012,674 $ 3,672,689
--------------------------------------------------
Reconciliation of net income to net cash provided by operations:
Deferred income taxes (32,799) 84,070 (73,820)
Depreciation and amortization 299,926 270,732 235,318
Issuance of shares to employees 214,475 152,663 28,676
Write-off of fixed assets -- 52,970 --
Accounts and notes receivable bad debt allowance 110,756 63,576 88,635
Changes in operational assets and liabilities:
Accounts receivable 3,454,669 (1,881,047) (287,240)
Inventories 1,273,871 (1,155,165) 372,309
Other assets, prepaid expenses, other receivables 271,687 (39,233) (53,006)
Issued notes receivable to customers (846,228) -- --
Accounts payables and other accrued liabilities (2,128,424) 1,405,952 (187,731)
Contract contingencies 467,703 (507,919) 301,795
Deferred revenues (1,625,194) 381,538 (333,970)
Income taxes payable (167,820) 246,177 165,969
--------------------------------------------------
Net cash provided by operations 1,482,523 4,086,988 3,929,624
--------------------------------------------------
Cash flows from investing activities:
Securities purchased (10,149,882) (22,165,717) (25,184,169)
Securities sold 19,984,504 16,734,377 33,173,444
Capital expenditures (131,736) (374,560) (381,085)
--------------------------------------------------
Net cash provided by (used in) investing activities 9,702,886 (5,805,900) 7,608,190
--------------------------------------------------
Cash flows from financing activities:
Repayment of debt (100,000) (100,000) (100,000)
Tender offer and related fees and expenses (11,461,136) -- --
Exercise of stock options 1,027,813 74,876 2,805,500
Purchase treasury stock (110,250) (38,125) --
Special dividend -- -- (13,196,508)
--------------------------------------------------
Net cash (used) in financing activities (10,643,573) (63,249) (10,490,508)
--------------------------------------------------
Increase (Decrease) in cash and cash equivalents 541,836 (1,782,161) 1,047,306
Cash and cash equivalents, beginning of year 1,086,101 2,868,262 1,820,956
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,627,937 $ 1,086,101 $ 2,868,262
===================================================================================================================================
Supplemental disclosure of noncash Information:
Tax benefit of exercised stock options $ 73,988 $ 11,851 $ 326,191
Unrealized gain on securities available for sale,
net of taxes $ 55,468 -- --
Supplemental disclosure of cash payments:
Interest $ 26,266 $ 40,957 $ 35,745
Income taxes $ 465,515 $ 2,276,205 $ 1,812,500
===================================================================================================================================
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
Nature of business - The Company designs, manufactures, installs, services and
markets post-press material handling equipment to newspaper publishers. In the
post-press stage of newspaper operations, newspapers move from the pressroom in
a continuous stream and are stacked, bundled, conveyed to the shipping docks and
loaded into carts or stored on pallets for further distribution.
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.
Accounts Receivable and Deferred Revenue - Most of the Company's sales are made
on a contract basis and require customers to make progress payments. Progress
payments are recorded as deferred revenue when received. Accounts receivable is
presented net of an allowance for doubtful accounts of $320,000 for 2001 and
$370,000 for 2000.
Revenue Recognition - Revenue is generally recognized when all significant
contractual obligations have been satisfied and collection of the resulting
accounts receivable is reasonably assured. Revenue from equipment sales
requiring basic installation services is recognized at the time of delivery
according to contractual terms and is recorded net of discounts and allowances.
Revenue from equipment sales requiring complex installation services is
recognized when installation is complete and is recorded net of discounts and
allowances.
The Company deferred sales totaling $600,000 and $328,000 at December 31, 2001
and 2000, respectively, for products that shipped but require complex
installation services. Pending the completion of installation, the $600,000 and
$328,000 balances are included in our balance sheet as deferred revenue. The
related cost of these products is included in inventory.
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.
Notes receivable - Notes receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management considers a note to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the agreement. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense.
Goodwill - The excess of cost over the fair value of net assets of a purchased
business is recorded as goodwill and amortized using the straight-line method
over 17 years. The Company reviews the carrying value of goodwill for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. 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 reevaluated if estimated future
operating cash flows are not achieved. There was no impairment of goodwill in
2001 and 2000.
Research and development costs - Research and development costs include
expenditures for the development of new products, significant enhancements of
existing products or production processes, and the design, testing and
construction of prototypes. The Company expenses research and development costs
as they are incurred.
Property, plant and equipment, net - Property, plant and equipment is recorded
at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Repairs and maintenance are expensed as
incurred; alterations and major overhauls that improve an asset or extend the
useful lives are capitalized.
Cash and cash equivalents - Cash and cash equivalents include 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.
18
Income taxes - Income taxes are accounted for using the asset and liability
method under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting For Income Taxes." Deferred tax assets and
liabilities are identified based on temporary differences between the financial
statements and the tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using tax rates that are expected to apply to taxable
income in the year the temporary difference is expected to recover or settle.
Tax rate changes are recognized in the period in which the change occurs.
Income per share - Basic income per share is based on the weighted average
number of common shares outstanding during the periods presented. Diluted income
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding in the periods presented. Dilutive common
equivalent shares assume the exercise of options, calculated under the treasury
stock method, using the average stock market prices during the periods.
Warranty reserve - Warranty reserves are calculated based on the Company's
previous experience with customers' claims arising from the sale of merchandise.
The reserve is computed at 1 1/2% of contract revenue. Additions to this reserve
are charged to selling expense. Warranty reserve is included in other accrued
liabilities.
Securities available for sale - Securities available for sale include
investments that are not held for trading or not intended to be held to
maturity. These instruments are recorded at their fair value. Unrealized holding
gains or losses, net of the related tax effect, are included as a separate
component of shareholders' equity. Realized gains and losses, arising from the
sale of securities, are computed using the specific identification method and
included in other income. Fair value of the securities is determined based upon
market prices or discounted cash flow. A decrease in the market value below
cost, determined to be other than temporary, would result in a reduction in
carrying amount to fair value. This reduction would be charged to income.
Premiums and discounts are amortized or accreted using a method that
approximates the effective yield over the life of the security. Dividend and
interest income is recognized when earned. The Company invests in short term and
variable rate long-term securities and believes there is no significant risk
arising from interest rate fluctuations. The Company actively manages its
investment portfolios to increase return on investments, but, in order to ensure
liquidity, will only invest in instruments with credit quality and which are
traded in a secondary market.
Deferred bond-financing cost - Deferred bond financing costs were incurred upon
the issuance of industrial revenue bonds (see note 6) and are included in other
assets. These costs are amortized using a method that approximates the effective
yield over the term of the bonds.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 contract contingencies on completed contracts and inventory
reserves. Actual results could differ from those estimates.
Contract contingencies - Contract contingencies involve estimates of additional
expenses that may be incurred after installation is complete. These expenses
occur when additional efforts are required to assure customer satisfaction.
Additions to contract contingencies are charged to cost of sales.
Impairment of long-lived assets - The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be 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
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. There was no impairment of
long-lived assets in 2001 and 2000.
Stock-Based compensation -The Company uses the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option grants. Under APB 25, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation, "established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has provided the
disclosures required by SFAS No. 123 (see note 8).
19
Comprehensive income - In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, "Reporting Comprehensive Income". 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. The adoption of SFAS 130
has had no significant impact on the Company's financial statements. The Company
had unrealized gains on securities available for sale totaling $55,468 (net of
taxes) at December 31, 2001.
Segment Reporting - In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS
No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 applies a "management approach" in which the internal
reporting that is used by management for making operational decisions and
evaluating performance is the source for the Company's segment reporting. The
adoption of SFAS No. 131 did not affect the results of operations or financial
position. The Company currently operates in one segment for management reporting
purposes.
20
Note 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale are recorded at fair value and consist primarily
of federal, state and local government obligations and other short-term
investments. As of December 31, 2001 and 2000, the amortized cost of securities
available for sale approximates fair value. Securities available for sale at
December 31, 2001 and 2000 consisted of the following:
- -----------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------
Securities:
Municipal Securities $ 5,945,000 $ 10,925,000
Federal Government Agency Securities -- 4,910,000
Money Market Investments 420 12,375
Premium on Investments 122,352 55,019
Unrealized Holding Gain 55,468 --
------------------------------------------
Total $ 6,123,240 15,902,394
------------------------------------------
Note 3 - INVENTORIES
Components of inventory as of December 31, 2001 and 2000 were as follows:
- ----------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------
Raw Materials $ 1,553,020 $ 2,648,884
Work in Process 497,214 723,547
Finished Goods 109,745 72,375
------------------------------------------
Subtotal 2,159,979 3,444,806
Shipped to Customers 338,956 328,000
------------------------------------------
Total $ 2,498,935 $ 3,772,806
------------------------------------------
Inventory includes balances totaling $338,956 and $328,000 for equipment shipped
to customers but not recognized as a sale. The Company will recognize the sales
and cost of sales for this equipment when installation services are complete.
Note 4 - NOTES RECEIVABLE
Notes receivable consisted of the following as of December 31, 2001:
- ---------------------------------------------------------------------
2001
- ---------------------------------------------------------------------
Notes receivable 846,229
Allowance for Impairment (129,407)
------------
716,822
Less: current portion (238,940)
------------
Long term notes receivable 477,882
============
21
Note 5 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2001, 2000 and
1999 is as follows:
Current Deferred Total
----------- ----------- -----------
2001
U.S. Federal $ 47 $ (9,380) $ (9,333)
State and local 113,925 (23,419) 90,506
----------- ----------- -----------
$ 113,972 $ (32,799) $ 81,173
----------- ----------- -----------
2000
U.S. Federal $ 2,186,588 $ 90,455 $ 2,277,043
State and local 435,794 (6,385) $ 429,409
----------- ----------- -----------
$ 2,622,382 $ 84,070 $ 2,706,452
----------- ----------- -----------
1999
U.S. Federal $ 1,801,560 ($ 67,609) $ 1,733,951
State and local 176,908 (6,211) $ 170,697
----------- ----------- -----------
$ 1,978,468 ($ 73,820) $ 1,904,648
----------- ----------- -----------
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2001 and
2000 are as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Warranty reserve $ 86,706 $ 111,137
Inventory obsolescence 156,024 105,632
Allowance for bad debts 118,572 134,771
Contract reserves 304,024 225,933
Vacation Accrual 54,352 169,226
Unicap 40,427 58,113
Other taxes 25,987 12,033
Other 107,456 50,994
--------------------------
Total deferred tax assets $ 893,548 $ 867,839
Deferred Tax Liability:
Depreciation (56,100) (51,018)
Other -- (12,172)
--------------------------
Total gross deferred tax liabilities (56,100) (63,190)
Net current deferred tax assets $ 837,448 $ 804,649
===========================
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
asset 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. Based upon the level of
historical taxable income and projections for future taxable income over the
periods that the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
22
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, 2001, 2000, and 1999:
Year Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Statutory federal income tax rate $ 92,165 $ 2,613,141 $ 1,896,295
Increase (decrease) resulting from:
State and Local taxes, net of
Federal income tax benefit 59,734 283,410 112,660
Tax exempt interest (104,743) (159,667) (99,167)
Other 34,017 (30,432) (5,140)
-----------------------------------------
$ 81,173 $ 2,706,452 $ 1,904,648
=========================================
The Company's effective tax rate was 29.9%, 35.0% and 34.1% in 2001, 2000, and
1999, respectively.
Note 6 - PROPERTY, PLANT AND EQUIPMENT, NET
The property, plant and equipment at December 31, 2001 and 2000 consist of the
following:
- --------------------------------------------------------------------------------
Estimated
Useful
2001 2000 life (Years)
- --------------------------------------------------------------------------------
Land $ 500,500 $ 500,500 --
Building 1,431,771 1,431,771 31
Building Improvements 559,640 510,554 10
Machinery 798,127 795,681 5
Furniture and Fixtures 219,813 211,525 5
Computer Equipment 1,188,565 1,110,995 5
Automobiles 66,859 90,957 5
----------- -----------
4,765,275 4,651,983
Less: Accumulated depreciation (2,806,017) (2,555,755)
----------- -----------
$ 1,959,258 $ 2,096,228
================================================================================
Depreciation expense charged to income was $268,706, $239,512 and $204,098 in
2001, 2000 and 1999, respectively.
Note 7 - 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. The remaining balances of the bonds were $750,000 and
$850,000 at December 31, 2001 and 2000, respectively, 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 3.4% and 4.4% during 2001 and 2000,
respectively. The bonds are payable in annual installments of $100,000 in years
2000 through 2007 and $150,000 in 2008. The letter of credit securing the
Company's obligation expires on September 16, 2003.
23
Note 8 - STOCK OPTION PLANS
1996 Equity Compensation Plan - The Quipp, Inc. 1996 Equity Compensation Plan
(Equity Compensation Plan) provides for grants of stock options and stock-based
awards to employees, directors, consultants and advisors of the Company. 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 total number of shares of common stock issuable under the Equity
Compensation Plan is 600,000. At December 31, 2001, 2000 and 1999 there were
42,014, 29,683, and 36,000 shares available for grant under the Equity
Compensation Plan.
Stock option activity during the periods indicated is as follows:
Incentive Stock
Options Nonqualified Options
------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------- -------------------
Balance at December 31, 1998 274,750 13.20 80,000 13.44
Granted 98,000 14.00 35,000 14.00
Exercised (176,750) 11.20 (62,000) 13.32
Cancellations (1,000) 14.00 -- --
-------------------- -------------------
Balance at December 31, 1999 195,000 15.26 53,000 14.80
Exercised (4,750) 15.76 -- --
-------------------- -------------------
Balance at December 31, 2000 190,250 $ 15.25 53,000 $ 14.80
==================== ===================
Exercised (55,625) 15.04 (13,000) 14.71
Cancellations (20,250) 14.52 -- --
-------------------- -------------------
Balance at December 31, 2001 114,375 $ 15.53 40,000 $ 14.83
==================== ===================
Using the Black Scholes option-pricing model, the per share average fair value
of stock options granted during 1999 ranged from approximately $7.40 to $10.25.
The following weighted-average assumptions were used in calculating fair value:
an expected dividend yield of zero, expected lives ranging from five to ten
years and a risk-free interest rate of 5.80% for 1999.
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:
- ---------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net Income As reported $ 189,901 $ 5,012,674 $ 3,672,689
Pro forma $ (151,193) $ 4,844,305 $ 2,419,832
Basic Income per Common As reported $ .12 $ 2.65 $ 2.02
Share Pro forma $ (.09) $ 2.56 $ 1.33
Diluted Income per Common and As reported $ .11 $ 2.57 $ 1.97
Common Equivalent Shares Pro forma $ (.09) $ 2.49 $ 1.30
- ---------------------------------------------------------------------------------------------------------------------------
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, 2001, the range of exercise prices and
24
remaining contractual life of outstanding options was $9.00 to $17.50, and .5 to
7.5 years, respectively. At December 31, 2001, the number of options exercisable
was 110,250, as indicated in the table below.
Range of Options Options Contractual
Exercise Prices Outstanding Exercisable Life
- --------------- ----------- ----------- ----
$9.00 500 500 .5 years
$14.00 - 17.50 153,875 109,750 2.5 to 7.5 years
-------- --------
154,375 110,250
The weighted-average exercise price of options outstanding at December 31, 2001
was $15.34.
Note 9 - EARNINGS PER SHARE
A reconciliation of the number of shares used in computing basic and diluted EPS
follows:
2001 2000 1999
--------------------------------------
Net Income $ 189,901 $5,012,674 $3,672,689
Shares
Basic Shares 1,626,787 1,891,928 1,822,783
Common stock
Equivalents from option plan 31,509 57,028 39,333
--------------------------------------
Diluted 1,658,296 1,948,956 1,862,116
======================================
EPS
Basic $ .12 $ 2.65 $ 2.02
Diluted $ .11 $ 2.57 $ 1.97
========================================================================--------
Note 10 - MAJOR CUSTOMERS
For the years ended December 31, 2001, 2000 and 1999, no single newspaper
accounted for ten percent or more of the Company's net sales. A number of the
Company's newspaper customers are part of large newspaper chains, but management
believes that the individual newspapers make purchase decisions. Newspapers
owned by Gannett Co, Inc. accounted for 13% of the Company's net sales in 2001.
Newspapers owned by Gannett Co, Inc. and Knight-Ridder, Inc. accounted for 18%
and 12% of the Company's net sales in 2000, respectively. The Company sells a
substantial portion of its products to the domestic newspaper industry; foreign
sales accounted for 5%, 13%, and 6% of total net sales in 2001, 2000 and 1999,
respectively.
Note 11 - EMPLOYEE BENEFIT PLAN
The Quipp Systems, Inc. Employee Savings and Investment Plan (the Savings Plan),
is a defined contribution plan that 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 2000, the Board of
Directors approved an increase in the matching contribution to the Savings Plan
to 60% of the first 8% of compensation deferred by each participant. In 1999,
the Board of Directors approved an increase in the matching contribution to the
Savings Plan to 50% of the first 8% of compensation deferred by each
participant. The amount contributed by the Company in 2001, 2000, and 1999, was
$143,845, $137,117 and $118,755, respectively. The Company, as sponsor, pays the
administrative expenses of the Savings Plan.
25
Note 12 - QUARTERLY SUMMARY OF KEY FINANCIAL DATA
Quarterly Summary
(In thousands, except per share amounts)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------
2001
Net Sales $ 6,101 $ 6,493 $ 3,970 $ 5,105
Operating Profit (Loss) 510 510 (1,053) (115)
Net Income (Loss) 433 410 (643) (10)
Basic income per common share $ 0.23 $ 0.23 $ (0.45) $ (0.01)
Diluted income per common share $ 0.22 $ 0.23 $ (0.45) $ (0.01)
2000
Net Sales $ 7,496 $ 9,168 $ 9,109 $ 9,579
Operating Profit 1,109 2,089 1,528 2,200
Net Income 803 1,480 1,158 1,572
Basic income per common share $ 0.43 $ 0.78 $ 0.61 $ 0.83
Diluted income per common share $ 0.42 $ 0.77 $ 0.59 $ 0.79
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, securities available for sale, accounts receivable, other
assets, prepaid expenses and other receivables, long-term debt, accounts
payable, accrued salaries and wages and other accrued liabilities approximate
fair value.
Note 14 - OTHER DEVELOPMENTS
In April 2001, we commenced a modified "Dutch auction" tender offer. Upon
completion of the offer in May 2001, we purchased 550,000 shares of our common
stock at a purchase price of $20 per share or $11,000,000 and incurred $461,136
in related expenses.
Note 15 - CONTINGENCIES
In the normal course of business, the Company is exposed to litigation, and
other 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.
26
Note 16 - RECENT PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board(FASB) issued Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS 141") and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations completed after June 30, 2001.
SFAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually. SFAS 141 is effective immediately, except with regard to business
combinations initiated prior to July 1, 2001 and SFAS 142 is effective January
1, 2002. The Company does not expect the adoption of these standards to have a
material impact on the consolidated financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards 143,
"Accounting for Asset Retirement Obligations." This statement addresses the
diverse accounting practices for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We plan to
adopt this standard on June 1, 2002. The Company does not expect the adoption of
this standard to have a material effect on the consolidated financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement is effective for fiscal years beginning after December 15,
2001. This statement supersedes SFAS 121, while retaining many of the
requirements of such statement. Under SFAS 144, assets held for sale will be
included in discontinued operations if the operations and cash flows will be or
have been eliminated from the ongoing operations of the entity and the entity
will not have any significant continuing involvement in the operations. The
Company does not expect the adoption of this standard to have a material effect
on the consolidated financial statements.
27
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
Not applicable.
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 our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our 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 our Proxy Statement relating to our Annual
Meeting of Shareholders, which will be filed within 120 days after the close of
our 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 our Proxy Statement relating to our 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
28
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 except
for:
Schedule II - Valuation and Qualifying Accounts
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 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
3.2 By-Laws, as amended (Incorporated by reference to
Exhibit 99.1 to Registrants Current Report on Form
8-K, dated March 1, 2002).
*10.1 Quipp, Inc. 1996 Equity Compensation Plan, as amended
*10.2 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).
*10.3 Quipp Inc. Management Incentive Plan (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10K for the fiscal year ended December
31, 1998).
*10.4 Change of Control Agreement, dated as of December 23,
2000, between Quipp, Inc. and Christer Sjogren.
(Incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
*10.5 Letter agreement between Quipp, Inc. and Michael S
Kady.
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
* 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 25, 2002 By: / s / Michael S. Kady
--------------------------
MICHAEL S. KADY
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 / Michael S. Kady
- -----------------------
MICHAEL S. KADY Chief Executive
Officer and Director March 25, 2002
/ s / Ralph M. Branca
- -------------------------------
RALPH M. BRANCA Director March 25, 2002
/ s / Richard H. Campbell
- -------------------------------
RICHARD H. CAMPBELL Director March 25, 2002
/ s / Lawrence Gibson
LAWRENCE GIBSON Director March 25, 2002
/ s / Cristina H. Kepner
- -------------------------------
CRISTINA H. KEPNER Director March 25, 2002
/ s / Louis D. Kipp
- -------------------------------
LOUIS D. KIPP Director March 25, 2002
/ s / William L. Rose
- -------------------------------
WILLIAM L. ROSE Director March 25, 2002
/ s / Eric Bello
- -------------------------------
ERIC BELLO Principal Financial March 25, 2002
and Accounting Officer
30
QUIPP, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
Exhibit
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 (Incorporated by reference to Exhibit 99.1 to
Registrants Current Report on Form 8-K, dated March 1, 2002).
*10.1 Quipp, Inc. 1996 Equity Compensation Plan, as amended
*10.2 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).
*10.3 Quipp Inc. Management Incentive Plan (Incorporated by reference to
Exhibit 10.8 to the Registrant's Annual Report on Form 10K for the
fiscal year ended December 31, 1998).
*10.4 Change of Control Agreement, dated as of December 23, 2000, between
Quipp, Inc. and Christer Sjogren. (Incorporated by reference to Exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)
*10.5 Letter agreement between Quipp, Inc. and Michael S Kady.
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
* Constitutes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form.
31
QUIPP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
Balance, Charged Balance,
beginning to Write- end
of year Expenses offs of year
------- -------- ---- -------
Year ended December 31, 2001:
Allowance for doubtful
accounts 370,000 (18,651) (31,349) 320,000
Year ended December 31, 2000:
Allowance for doubtful
accounts 306,424 63,576 -- 370,000
Year ended December 31, 1999:
Allowance for doubtful
accounts 217,789 88,635 -- 306,424
32