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, 2002
-----------------
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
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
--------------
Securities registered pursuant to Section 12(g) of the Act;
Common Stock, $.01 par value
----------------------------
(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 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on June 28, 2002 was approximately $17,568,812*. The number of shares
of the Registrant's common stock, $.01 par value, outstanding at March 10, 2003
was 1,423,775.
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...........14
Item 8. Financial Statements and Supplementary Data..........................15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................32
PART III
Item 10. Directors and Executive Officers of the Registrant...................33
Item 11. Executive Compensation...............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................33
Item 13. Certain Relationships and Related Transactions.......................33
Item 14. Controls and Procedures..............................................33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....34
2
PART I
ITEM I - BUSINESS
- -----------------
Through our wholly owned subsidiary, Quipp Systems, Inc., we design,
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 truck.
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 500 Stacker counts and batches stacks of
newspapers at maximum speeds of 85,000 copies per hour. The Series 500C Stacker
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 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, automated waste handling systems, 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 2002, 2001 and 2000, spare parts sales accounted for approximately
12%, 9%, 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 6%, 5% and 13% of total sales in 2002, 2001, and
2000, respectively. The following table indicates the amount of sales by
geographic area during the past three years:
SALES BY GEOGRAPHIC AREA
2002 2001 2000
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United States $15,336,675 $20,638,351 $30,905,022
Far East 151,290 69,577 785,934
Canada 342,122 126,593 1,360,731
Latin America 61,866 469,237 2,125,993
Other 371,697 365,084 174,067
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$16,263,650 $21,668,842 $35,351,747
=======================================================
As of December 31, 2002, our backlog of orders was approximately $4,686,000, as
compared to $6,611,000 on December 31, 2001. Orders booked in 2002 were
$14,019,000 as compared to $17,569,000 in 2001. We believe that the slowdown in
the U.S. economy and, specifically, a reduction in capital spending by newspaper
publishers resulted in lower incoming orders. If incoming orders remain at 2002
levels or decrease, our financial results in 2003 could be further adversely
affected. We expect to ship all orders included in our backlog within the next
15 months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General" in Item 7.
For the years ended December 31, 2002, 2001 and 2000, no single newspaper
customer 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 16% and 13% of our net sales in 2002 and 2001,
respectively. Newspapers owned by Gannett Co, Inc. and Knight-Ridder, Inc.
accounted for 18% and 12%, respectively, of our net sales in 2000. 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 4.1%, 3.5% and 12.6% of our total sales in
2002, 2001, and 2000, 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
In North America, we sell our products through 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.
PATENTS AND TRADEMARKS
We hold 30 U.S. and foreign patents, which expire during the period from 2005 to
2017. We have two patents 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.
4
RESEARCH AND DEVELOPMENT
Research and development costs totaled $458,387, $379,437 and $669,855 in 2002,
2001 and 2000 respectively. In 2002, we focused much of our engineering and
technical efforts on the development of our 500 Stacker, high-resolution ink-jet
printer for our bottomwrapper product and, more recently, a new and not yet
introduced product.
EMPLOYEES
As of December 31, 2002, we had 98 full-time employees. None of our employees
are represented by a union and we consider our employee relations to be good.
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 53
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 60
Quipp Systems, Inc. since 1994, has served
Quipp or Quipp Systems in various capacities
since 1983. He is currently responsible for
our research and development activities.
DAVID SWITALSKI Mr. Switalski, Vice President of Operations 43
of Quipp Systems, Inc. since July 2000, has
served Quipp or Quipp Systems in various
capacities since 1984.
ANGEL ARRABAL Mr. Arrabal, Vice President of Sales of Quipp 43
Systems, Inc since 1997, has served Quipp or
Quipp Systems in various capacities since
1986. He is currently responsible for
worldwide sales and marketing.
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 REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------
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 2002 and 2001:
---------------------------------------------------------------------
2002 2001
HIGH LOW High Low
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FIRST QUARTER $15.10 $13.50 $26.44 $20.75
SECOND QUARTER 14.00 12.91 21.75 16.13
THIRD QUARTER 13.50 8.82 17.34 13.94
FOURTH QUARTER 13.01 8.25 15.45 12.31
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We did not pay any dividends in 2001 or 2002.
7
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The selected consolidated financial data for each of the years in the five-year
period ended December 31, 2002 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 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATION INFORMATION:
Net sales $16,264 $21,669 $35,352 $31,632 $27,121
Gross profit 4,142 5,250 13,219 11,483 10,166
Selling, general and administrative expenses 4,153 5,061 5,623 5,693 4,925
Research and development 458 379 670 743 760
Operating (loss) profit (469) (191) 6,926 5,047 4,481
Other income (expense), net 289 461 793 531 601
- --------------------------------------------------------------------------------------------------------------------------------
Net (loss) income (106) 190 5,013 3,673 3,348
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS:
Net (loss) income per share (basic) (.07) .12 2.65 2.02 2.05
Net (loss) income per share (diluted) (.07) .11 2.57 1.97 1.96
Book value per share 7.91 8.00 11.28 8.55 13.67
Market price per share (unaudited) - high 15.10 26.44 26.06 24.00 20.38
- low 8.25 12.31 14.50 12.50 14.50
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET INFORMATION
Current assets $14,723 $15,029 $28,970 $21,972 $28,954
Total assets 16,902 17,839 31,477 24,435 31,278
Current liabilities 5,139 5,854 9,381 7,454 7,834
Long-term liabilities 550 650 750 850 950
Shareholders' equity 11,212 11,336 21,345 16,131 22,494
Weighted average number of equivalent
shares outstanding 1,417,682 1,658,296 1,948,956 1,862,116 1,707,366
- --------------------------------------------------------------------------------------------------------------------------------
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.
8
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
(Note: All dollar amounts are in thousands)
2002 vs. 2001
2002 2001
- --------------------------------------------------------------------------------
NET SALES $ 16,264 $ 21,669
- --------------------------------------------------------------------------------
Increase (Decrease) $ (5,405)
% (25)
We believe that our net sales were adversely affected by the slowdown in the
U.S. economy and specifically a reduction in post-press capital spending by
newspaper industry publishers.
2002 2001
- --------------------------------------------------------------------------------
GROSS PROFIT $ 4,142 $ 5,250
- --------------------------------------------------------------------------------
Increase (Decrease) $ (1,108)
% (21)
Percentage of Net Sales 25% 24%
The decrease in gross profit is primarily due to lower net sales. Additionally,
our gross profit was affected by a higher percentage of fixed manufacturing
overhead costs related to lower shipment volumes and cost overruns resulting
from higher than expected production and installation costs on some larger
custom orders; these cost overruns declined during the course of 2002. The costs
adversely affecting gross profit were offset in part by cost cutting measures
including workforce reductions, a two-week plant shutdown, and four-day work
weeks from January 2002 to August 2002.
2002 2001
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE $ 4,153 $ 5,061
- --------------------------------------------------------------------------------
Increase (Decrease) $ (908)
% (18)
Percentage of Net Sales 26% 23%
The decrease in selling, general and administrative expenses reflects
non-recurring costs generated in 2001, changes to our allowance for doubtful
accounts, and reduction in variable expenses offset in part by the write-off of
impaired goodwill. During 2001, we recorded non-recurring charges of $402,000
with respect to efforts by the Special Committee of our Board of Directors to
evaluate strategic alternatives for the Company and with respect to compensation
charges relating to our payment to several non-executive employees of an amount
equal to the excess of market value over the exercise price of options
surrendered by the employees. Additionally, in 2001, we recorded a net increase
in our allowance for doubtful accounts of $110,000 based on our assessment of
the collectability of customer accounts and the aging of our accounts
receivable. In contrast, we reduced our allowance for doubtful accounts by
$155,000 during 2002, because we collected customer receivable balances that
were previously reserved. The decrease in selling, general and administrative
expenses was also affected by workforce reductions and lower variable selling
expenses.
The reduction in selling, general and administrative expenses was partially
offset by the write-off of goodwill. In 2001, we amortized our goodwill asset by
approximately $31,000. In 2002, we adopted Statement of Financial Accounting
Standards 142, "Goodwill and Other Intangible Assets," which requires that
goodwill no longer be amortized, but instead tested for impairment at least
annually. Our test of goodwill impairment included comparing the value of
goodwill to projected discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds. As a result of our goodwill
impairment test, we wrote off approximately $137,000 of goodwill in 2002.
9
2002 2001
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT $ 458 $ 379
- --------------------------------------------------------------------------------
Increase (Decrease) $ 79
% 21
Percentage of Net Sales 3% 2%
The majority of our 2002 research and development costs represented expenditures
for the development of our 500 Stacker, high-resolution ink-jet printer for our
bottomwrapper product line and, more recently, a new and not yet introduced
product. 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. Costs related to
these activities are charged to cost of goods sold as incurred.
2002 2001
- --------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE (NET) $ 289 $ 462
- --------------------------------------------------------------------------------
Increase (Decrease) $ (173)
% (37)
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 interest
rates and lower average balances of cash and cash equivalents and securities
available for sale. The decrease was offset in part by gains on the sale of
securities and an increase in royalty income relating to our automatic cart
loading system technology.
10
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 $ 5,061 $ 5,623
- --------------------------------------------------------------------------------
Increase (Decrease) $ (562)
% (10)
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 $402,000 with respect
to efforts by the Special Committee of our Board of Directors to evaluate
strategic alternatives for the Company and with respect to compensation charges
relating to our payment to several non-executive employees of an amount equal to
the excess of market value over the exercise price of options surrendered by the
employees. Additionally, in 2001, we recorded a net increase in our allowance
for doubtful accounts of $110,000 based on our assessment of the collectability
of customer accounts and the aging of our accounts receivable.
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. Costs related to
these activities are charged to cost of goods sold as incurred.
11
2001 2000
- --------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE (NET) $ 462 $ 793
- --------------------------------------------------------------------------------
Increase (Decrease) $ (331)
% (42)
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.
12
GENERAL
Most 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, 2002 and
December 31, 2001, was $4,686,000 and $6,611,000, respectively. Orders booked in
2002 were $14,019,000 as compared to $17,569,000 in 2001. As a result of
continued uncertainties regarding capital spending by newspaper publishers, we
remain cautious as to market conditions in 2003 and believe that, even if market
conditions improve, there will be no noticeable effect on Quipp's financial
results until late 2003 at best.
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
$13,196,008 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, our
operating results in 2002 and 2001 were well below the levels of recent years,
our cash flow was not adversely affected. Our cash, cash equivalents and
securities available for sale increased by $874,895 in 2002 and increased by
$2,223,818 in 2001, without giving effect to cash used in connection with the
tender offer. While our cash, cash equivalents and marketable securities may
decline in 2003 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, 2002, the balance due on the bonds was
$650,000, of which $100,000 is classified as a current liability on our balance
sheet. During 2002, the bonds bore interest at an average rate of 1.6%.
On December 31, 2002, cash, cash equivalents and securities available for sale
totaled $8,626,072, as compared to $7,751,177 at December 31, 2001, an increase
of $874,895. The increase was primarily due to cash provided by operations.
Working capital at December 31, 2002 was $9,583,369, an increase of $407,799
from $9,175,570 at December 31, 2001. 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.
The following table provides information relating to our material contractual
obligations at December 31, 2002.
PAYMENTS DUE BY PERIOD
----------------------
- --------------------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- --------------------------------------------------------------------------------
Long Term Debt $ 650,000 $100,000 $200,000 $200,000 $150,000
- --------------------------------------------------------------------------------
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,
revenues and expenses. These estimates are most significant in connection with
our critical accounting policies, 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 critical accounting policies relate to (1) revenue
recognition involving complex installations, (2) allowance for doubtful
accounts, (3) contract contingencies and (4) warranty reserves.
13
Revenue recognition involving complex installations
- ---------------------------------------------------
Our revenue recognition policy with regard to equipment sales involving complex
installations 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 often must 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.
Allowance for doubtful accounts
- -------------------------------
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 not exceeded 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. On the other hand, our operating results in 2002 benefited
from a $155,000 reduction in our allowance for doubtful accounts because we
collected customer receivable balances that were previously reserved.
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.
Warranty reserves
- -----------------
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. We
could also be affected by competitive pressures that force us to extend the
warranty period for our products. Additionally, we do not have extensive
warranty claims experience with recently introduced products. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 17 in the Notes to Consolidated Financial Statements for recent
accounting pronouncements.
FORWARD LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K, including
statements concerning shipment of backlog orders, the effect of an improvement
in market conditions on our financial results, 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.
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk."
14
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
- ---------------------------------------------------- ----
Independent Auditors' Report 16
Financial Statements:
Consolidated Balance Sheets as of December 31, 2002 and 2001 17
Consolidated Statements of Operations
for each of the years in the three-year period ended
December 31, 2002 18
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 2002 19
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended
December 31, 2002 20
Notes to Consolidated Financial Statements 21
15
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, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2002. 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, 2002 as listed in item 15(a)2 of the
Company's 2002 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, 2002 and 2001 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2002, 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
January 31, 2003
16
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,769,545 $ 1,627,937
Securities available for sale 6,856,527 6,123,240
Accounts receivable, net 2,872,617 3,382,105
Inventories, net 1,963,104 2,498,935
Current deferred tax asset 724,358 837,448
Prepaid expenses and other current assets 297,651 320,475
Current portion of notes receivable 238,940 238,940
----------------------------
TOTAL CURRENT ASSETS 14,722,742 15,029,080
Property, plant and equipment, net 1,766,966 1,959,258
Notes receivable, net 183,388 477,882
Goodwill 174,822 312,201
Other assets 53,900 60,620
----------------------------
TOTAL ASSETS $ 16,901,818 $ 17,839,041
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 841,095 1,113,510
Accrued salaries and wages 466,517 433,359
Deferred revenues 2,081,031 2,275,351
Contract contingencies 200,131 522,976
Other accrued liabilities 1,450,599 1,408,314
----------------------------
TOTAL CURRENT LIABILITIES 5,139,373 5,853,510
Long-term debt 550,000 650,000
----------------------------
TOTAL LIABILITIES 5,689,373 6,503,510
Contingencies (Note 16)
Shareholders' Equity:
Common stock - par value $.01 per share, authorized 8,000,000
shares, issued 1,426,025 shares in 2002 and 2001 14,260 14,260
Treasury Stock, at cost (9,250 shares in 2002 and 2001) (148,375) (148,375)
Retained earnings 11,307,955 11,414,178
Other comprehensive income 38,605 55,468
----------------------------
11,212,445 11,335,531
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,901,818 $ 17,839,041
============================
See accompanying notes to the consolidated financial statements.
17
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Net sales $ 16,263,650 $ 21,668,842 $ 35,351,747
Cost of sales (12,121,658) (16,418,908) (22,132,564)
--------------------------------------------
GROSS PROFIT 4,141,992 5,249,934 13,219,183
--------------------------------------------
Operating expenses:
Selling, general and administrative expenses (4,152,638) (5,061,171) (5,623,178)
Research and development (458,387) (379,437) (669,855)
--------------------------------------------
OPERATING (LOSS) PROFIT (469,033) (190,674) 6,926,150
- ------------------------------------------------------------------------------------------------------
Other income (expense):
Miscellaneous income (expense) 100,864 8,587 --
Interest income 199,789 479,427 833,933
Interest expense (11,691) (26,266) (40,957)
--------------------------------------------
288,962 461,748 792,976
- ------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (180,071) 271,074 7,719,126
Income tax benefit (expense) 73,848 (81,173) (2,706,452)
--------------------------------------------
NET (LOSS) INCOME $ (106,223) $ 189,901 $ 5,012,674
============================================
- ------------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS:
Basic income per common share ($ 0.07) $ 0.12 $ 2.65
Diluted income per common share ($ 0.07) $ 0.11 $ 2.57
Basic average number common shares 1,417,682 1,626,787 1,891,928
Outstanding
Diluted average number of common and
common equivalent shares outstanding 1,417,682 1,658,296 1,948,956
======================================================================================================
See accompanying notes to the consolidated financial statements
18
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------ ------------ ------------ ------------
Balances on
January 1, 2000 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
Net Loss -- -- -- (106,223)
Reduction of unrealized gain on
securities held for sale, net of
taxes -- -- -- --
------------ ------------ ------------ ------------
BALANCES ON
DECEMBER 31, 2002 1,426,025 $ 14,260 $ -- $ 1,307,955
============ ============ ============ ============
[RESTUBBED]
OTHER TOTAL
TREASURY STOCK COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT INCOME EQUITY
------------ ------------ ------------ ------------
Balances on
January 1, 2000 -- $ -- $ -- $ 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
Net Loss -- -- -- (106,223)
Reduction of unrealized gain on
securities held for sale, net of
taxes -- -- (16,863) (16,863)
------------ ------------ ------------ ------------
BALANCES ON
DECEMBER 31, 2002 9,250 $ (148,375) $ 38,605 $ 11,212,445
============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
19
QUIPP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Cash provided by operations:
Net (loss) income $ (106,223) $ 189,901 $ 5,012,674
--------------------------------------------
Reconciliation of net (loss) income to net cash
provided by operations:
Deferred income taxes 113,090 (32,799) 84,070
Depreciation and amortization 268,807 299,926 270,732
Goodwill Impairment 137,379 -- --
Issuance of shares to employees -- 214,475 152,663
Write-off of fixed assets -- -- 52,970
Accounts and notes receivable bad debt allowance (154,806) 110,756 63,576
Changes in operational assets and liabilities:
Accounts receivable 664,294 3,454,669 (1,881,047)
Inventories 535,831 1,273,871 (1,155,165)
Other assets, prepaid expenses, other receivables 29,544 271,687 (39,233)
Notes receivable from customers 294,494 (846,228) --
Accounts payable and other accrued liabilities (196,972) (2,128,424) 1,405,952
Contract contingencies (322,845) 467,703 (507,919)
Deferred revenues (194,320) (1,625,194) 381,538
Income taxes payable -- (167,820) 246,177
--------------------------------------------
NET CASH PROVIDED BY OPERATIONS 1,068,273 1,482,523 4,086,988
--------------------------------------------
Cash flows from investing activities:
Securities purchased (7,706,378) (10,149,882) (22,165,717)
Securities sold 6,956,228 19,984,504 16,734,377
Capital expenditures (76,515) (131,736) (374,560)
--------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (826,665) 9,702,886 (5,805,900)
--------------------------------------------
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
Purchase treasury stock -- (110,250) (38,125)
--------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (100,000) (10,643,573) (63,249)
--------------------------------------------
Increase (Decrease) in cash and cash equivalents 141,608 541,836 (1,782,161)
Cash and cash equivalents, beginning of year 1,627,937 1,086,101 2,868,262
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,769,545 $ 1,627,937 $ 1,086,101
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Tax benefit of exercised stock options $ -- $ 73,988 $ 11,851
Unrealized gain on securities available for sale $ 16,863 $ 55,468 $ --
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest $ 11,691 $ 26,266 $ 40,957
Income taxes $ 1,931 $ 465,515 $ 2,276,205
====================================================================================================
See accompanying notes to the consolidated financial statements.
20
QUIPP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF 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 truck.
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 $165,000 for 2002 and
$320,000 for 2001.
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 $714,039 and $600,000 at December 31, 2002
and 2001, respectively, for products that shipped but require complex
installation services or have receivable balances that are not reasonably
assured. Pending the completion of installation or collection of the outstanding
receivable, the $714,039 and $600,000 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 - Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets", as of January 1, 2002. Goodwill and intangible assets acquired in a
business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. Prior to the adoption of SFAS No. 142,
goodwill was amortized on a straight-line basis over the expected periods to be
benefited, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be recovered
through undiscounted future operating cash flows of the acquired operation.
Goodwill impairment, if any, was measured based on projected discounted future
operating cash flows.
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.
21
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.
INCOME TAXES - Income taxes are accounted for using the asset and liability
method under the provisions of 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 7) 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.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted SFAS No. 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" on January 1, 2002. 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. Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. There was no
impairment of long-lived assets in 2002 and 2001.
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.
22
STOCK-BASED COMPENSATION - In 2002, the Company used 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 (note 8). 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. In 2002, as allowed by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the Company has elected
to continue applying the intrinsic value-based method of accounting described
above, and has provided the disclosures required by SFAS No. 123. The following
table illustrates the effect on net (loss) income if the fair-value-based method
had been applied to all outstanding and unvested awards in each period.
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Net (loss) income as reported $ (106,223) $ 189,901 $ 5,012,674
Deduct total stock-based employee compensation expense determined under
fair-value-based method for all rewards, net of tax $ (24,056) $ (341,094) $ (168,369)
Pro forma net (loss) income $ (130,279) $ (151,193) $ 4,844,305
EARNINGS PER SHARE:
Basic - as reported $ (0.07) $ 0.12 $ 2.65
Basic - pro forma $ (0.09) $ (0.09) $ 2.56
Diluted - as reported $ (0.07) $ 0.11 $ 2.57
Diluted - pro forma $ (0.09) $ (0.09) $ 2.49
- ---------------------------------------------------------------------------------------------------------------------
The per share average fair value of stock options granted during 2002 ranged
from $14.60 to $14.98. The fair value of the options granted were estimated on
the grant date using the Black-Scholes option-pricing model. 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, stock
price volatility of 30.68%, and a risk-free interest rate of 2.65%. No options
were granted in 2001 or 2000.
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 $38,605 and
$55,468 at December 31, 2002 and 2001, respectively.
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.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2001
financial statements to conform to the 2002 financial statement presentation.
23
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, 2002 and 2001, the amortized cost of securities
available for sale approximates fair value. Securities available for sale at
December 31, 2002 and 2001 consisted of the following:
- ---------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Securities:
Municipal Securities $ 2,125,000 $ 5,945,000
Federal Government Agency Securities 4,600,000 --
Money Market Investments 60,877 420
Premium on Investments 32,045 122,352
Unrealized Holding Gain 38,605 55,468
-------------------------------------------------
Total $ 6,856,527 $ 6,123,240
-------------------------------------------------
NOTE 3 - INVENTORIES
Components of inventory as of December 31, 2002 and 2001 were as follows:
- ---------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Raw Materials $ 1,283,250 $ 1,553,020
Work in Process 199,853 497,214
Finished Goods 48,978 109,745
------------------------------------------------
Subtotal 1,532,081 2,159,979
Shipped to Customers 431,023 338,956
------------------------------------------------
Total $ 1,963,104 $ 2,498,935
------------------------------------------------
Inventory obsolescence reserves total $304,000 and $315,000 in 2002 and 2001,
respectively. Inventory includes balances totaling $431,023 and $338,956 at
December 31, 2002 and 2001, respectively, 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 or the outstanding
receivable is collected.
NOTE 4 - NOTES RECEIVABLE
Notes receivable consisted of the following as of December 31, 2002 and 2001:
- ---------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
Notes receivable $ 551,735 $ 846,229
Allowance for doubtful accounts (129,407) (129,407)
-------------------------------------------
422,328 716,822
Less: current portion (238,940) (238,940)
-------------------------------------------
Long term notes receivable $ 183,388 $ 477,882
-------------------------------------------
24
NOTE 5 - INCOME TAXES
Income tax benefit (expense) for the years ended December 31, 2002, 2001 and
2000 is as follows:
CURRENT DEFERRED TOTAL
----------- ----------- -----------
2002
U.S. FEDERAL $ 177,965 $ (101,026) $ 76,939
STATE AND LOCAL 8,973 (12,064) (3,091)
----------- ----------- -----------
$ 186,938 $ (113,090) $ 73,848
----------- ----------- -----------
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)
----------- ----------- -----------
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2002 and
2001 are as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Warranty reserve $ 81,504 $ 86,706
Inventory obsolescence 171,994 156,024
Allowance for bad debts 109,094 118,572
Contract reserves 198,295 304,024
Vacation Accrual 78,971 54,352
Unicap 26,197 40,427
Other taxes 48,763 25,987
Other 12,847 107,456
--------------------------
Total deferred tax assets $ 727,665 $ 893,548
Deferred Tax Liability:
Depreciation (3,307) (56,100)
--------- ---------
Total gross deferred tax liabilities (3,307) (56,100)
--------------------------
Net current deferred tax assets $ 724,358 837,448
==========================
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.
25
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, 2002, 2001, and 2000:
Year Ended December 31,
-----------------------------------------
2002 2001 2000
-----------------------------------------
Statutory federal income tax rate $ 61,224 $ (92,165) $(2,613,141)
Increase (decrease) resulting from:
State and Local taxes, net of
Federal income tax benefit (2,040) (59,734) (283,410)
Tax exempt interest 37,777 104,743 159,667
Other (23,113) (34,017) 30,432
-----------------------------------------
$ 73,848 $ (81,173) $(2,706,452)
=========================================
The Company's effective tax rate was 41.0%, 29.9% and 35.0% in 2002, 2001, and
2000, respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
The property, plant and equipment at December 31, 2002 and 2000 consist of the
following:
- --------------------------------------------------------------------------------
ESTIMATED
USEFUL
LIFE
2002 2001 (YEARS)
- --------------------------------------------------------------------------------
LAND $ 500,500 $ 500,500 --
BUILDING 1,431,771 1,431,771 31
BUILDING IMPROVEMENTS 561,813 559,640 10
MACHINERY 801,322 798,127 5
FURNITURE AND FIXTURES 220,413 219,813 5
COMPUTER EQUIPMENT 1,259,112 1,188,565 5
AUTOMOBILES 66,859 66,859 5
----------- -----------
4,841,790 4,765,275
Less: Accumulated depreciation (3,074,824) (2,806,017)
----------- -----------
$ 1,766,966 $ 1,959,258
==============================================================================
Depreciation expense charged to income was $268,807, $268,706, and $239,512 in
2002, 2001, and 2000, 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 $650,000 and
$750,000 at December 31, 2002 and 2001, 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 1.6% and 3.4% during 2002 and 2001,
respectively. The bonds are payable in annual installments of $100,000 in years
2003 through 2007 and $150,000 in 2008. The letter of credit securing the
Company's obligation expires on September 16, 2003.
26
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, 2002, 2001 and 2000 there were
54,514, 42,014 and 29,683 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, 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
===========================================
Issued 6,000 14.60 5,000 14.98
Cancellations (24,500) 15.61 -- --
-------------------------------------------
Balance at December 31, 2002 95,875 $ 15.39 45,000 $ 14.85
===========================================
At December 31, 2002, the range of exercise prices and remaining contractual
life of outstanding options was $14.00 to $17.50, and 1 to 9 years. At December
31, 2002, the number of options exercisable was 132,500, as indicated in the
table below.
Remaining
Range Options Options Contractual
Exercise Prices Outstanding Exercisable Life
- --------------- ----------- ----------- -----------
$14.00 - 17.50 140,875 132,500 1 to 9 years
------- -------
140,875 132,500
======= =======
The weighted-average exercise price of options outstanding at December 31, 2002
was $15.21.
27
NOTE 9 - EARNINGS PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income
(numerator) by the weighted average number of shares of common stock outstanding
(denominator) during the period. Diluted net (loss) income per share gives
effect to stock options considered to be potential common shares, if dilutive,
computed using the treasury stock method. The following table presents the
calculation for the number of shares used in the basic and diluted net (loss)
income per share computations:
2002 2001 2000
--------------------------------------------
NET (LOSS) INCOME $ (106,223) $ 189,901 $ 5,012,674
SHARES
Basic Shares 1,417,682 1,626,787 1,891,928
Common stock equivalents
from option plan -- 31,509 57,028
--------------------------------------------
Diluted 1,417,682 1,658,296 1,948,956
============================================
EPS
Basic $ (.07) $ .12 $ 2.65
Diluted $ (.07) $ .11 $ 2.57
============================================================================
NOTE 10 - MAJOR CUSTOMERS
For the years ended December 31, 2002, 2001 and 2000, no single newspaper
customer 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 16% and 13% of the Company's
net sales in 2002 and 2001, respectively. Newspapers owned by Gannett Co, Inc.
and Knight-Ridder, Inc. accounted for 18% and 12%, respectively, of the
Company's net sales in 2000. The Company sells a substantial portion of its
products to the domestic newspaper industry; foreign sales accounted for 6%, 5%,
and 13% of total net sales in 2002, 2001 and 2000, 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. The amount
contributed by the Company in 2002, 2001, and 2000, was $110,655, $143,845 and
$137,117, respectively. The Company, as sponsor, pays the administrative
expenses of the Savings Plan.
28
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,
- --------------------------------------------------------------------------------------------
2002
Net Sales $ 3,704 $ 4,471 $ 3,702 $ 4,387
Operating (Loss) Profit (327) (37) (171) 66
Net (Loss) Income (129) 29 (71) 65
Basic (loss) income per common share ($ 0.09) $ 0.02 ($ 0.05) $ 0.05
Diluted (loss) income per common share ($ 0.09) $ 0.02 ($ 0.05) $ 0.05
2001
Net Sales $ 6,101 $ 6,493 $ 3,970 $ 5,105
Operating Profit (Loss) 510 510 (1,053) (158)
Net Income (Loss) 433 410 (643) (10)
Basic (loss) income per common share $ 0.23 $ 0.23 ($ 0.45) ($ 0.01)
Diluted (loss) income per common share $ 0.22 $ 0.23 ($ 0.45) ($ 0.01)
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.
29
NOTE 14 - GOODWILL
The changes in the carrying value of goodwill for the year ended December 31,
2002 are as follows:
Balance as of January 1, 2002 $ 312,201
Impairment loss (137,379)
---------
Balance as of December 31, 2002 $ 174,822
---------
The Company's goodwill resulted from the purchase of certain assets of Hall
Processing Systems in 1994. The Company reviews the operating profit and cash
flow expected from these assets quarterly. During 2002, we recognized an
impairment loss of $137,379 since the carrying amount of the assets was greater
than the fair value of the assets, as determined using the expected present
value of future cash flows. The impairment write-off was charged to selling,
general and administrative expenses.
The Company adopted SFAS 142 on January 1, 2002. The following table represents
the pro forma effect of SFAS 142 for the three years ending December 31, 2002,
2001, and 2000.
- -----------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------
Net (loss) income as reported $ (106,223) $ 189,901 $ 5,012,674
Add back goodwill amortization, net of taxes -- 21,885 20,293
----------------------------------------------
Pro forma net (loss) income $ (106,223) $ 211,786 $ 5,032,967
EARNINGS PER SHARE:
Basic - as reported $ (0.07) $ 0.12 $ 2.65
Goodwill amortization -- 0.01 0.01
Basic - pro forma $ (0.07) $ 0.13 $ 2.66
Diluted - as reported $ (0.07) $ 0.11 $ 2.57
Goodwill amortization -- 0.01 0.01
Diluted - pro forma $ (0.07) $ 0.12 $ 2.58
- -----------------------------------------------------------------------------------------------
NOTE 15 - RECENT DEVELOPMENTS
Effective January 1, 2003, the Company has adopted the fair value based method
of accounting for stock option grants in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and has
elected the prospective method under Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
All future employee stock option grants will be expensed over the stock option
vesting period based on the fair value at the date the options are granted.
On March 3, 2003, the Company announced that its Board of Directors adopted a
shareholder rights plan and declared a dividend of one right for each share of
Quipp common stock held by shareholders of record as of the close of business on
March 13, 2003. The rights plan is designed to deter coercive takeover tactics
and to prevent an acquirer from gaining control of Quipp without offering a fair
and adequate price and terms to all of Quipp shareholders. The rights generally
will become exercisable only if a person or group (other than certain
institutional investment managers and certain existing shareholders who already
beneficially own greater than 10 percent of the outstanding Quipp common stock,
provided that such existing shareholders do not acquire any additional shares)
acquires beneficial ownership of 10 percent or more of Quipp common stock or
commences a tender or exchange offer for 10 percent or more of Quipp common
stock. The rights will be subject to redemption by the Board of Directors for
$0.01 per right and, unless redeemed earlier by the Board of Directors, will
expire on March 2, 2006.
30
In March 2003, the Company completed the acquisition of certain assets of USA
Leader, Inc., a Missouri corporation (the "Seller"), pursuant to an Asset
Purchase Agreement (the "Purchase Agreement"), The assets acquired pursuant to
the Purchase Agreement included the Seller's patent, know-how, drawings,
tooling, customer list, other intellectual property, inventory, furniture,
equipment and supplies. The Seller manufactured and sold proprietary inserting
and collating equipment and stacking systems (the "Products") for the newspaper
and commercial printing markets.
Under the terms of the Purchase Agreement, the aggregate consideration payable
by the Company to the Seller is approximately $390,000 in cash, subject to
adjustment based on the closing date value of certain assets and liabilities,
and 6,000 shares of common stock, $0.01 par value per share, of the Company.
Quipp Systems will also pay additional amounts consisting of a percentage of
sales of the Products during the next three years. The purchase price was
determined by arms-length negotiations between the parties. The cash portion of
the purchase price was paid out of the Company's cash on hand.
NOTE 16 - 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.
NOTE 17 - RECENT PRONOUNCEMENTS
In June 2001, the FASB issued SFAS 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. The adoption of this standard had no effect
on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections"
(SFAS 145). SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt, " SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" and amends SFAS No. 13, "Accounting for Leases." This
statement updates, clarifies, and simplifies existing accounting pronouncements.
The adoption of this standard had no effect on the consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002 with early application encouraged. The Company does not expect
that the adoption of the statement will have an impact on its financial position
and results of operations.
During November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 00-21, Multiple-Deliverable Revenue Arrangements, which
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets. The
final consensus will be applicable to agreements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted. The Company does
not expect that the adoption of EITF Issue 00-21 will have an impact on its
financial position and results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have an effect on the Company's financial statements. The disclosure
requirements are effective for fiscal years ending after December 31, 2002.
31
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. As discussed in note 15, the Company has
adopted the fair value based method of accounting for stock option grants in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," and has
elected the prospective method under Statement of Financial Accounting Standards
No. 148.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
32
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 AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
The following table provides information, as of December 31, 2002, regarding
securities issuable under our 1996 Equity Compensation Plan, which is our only
equity compensation plan currently in effect and was approved by our
shareholders.
EQUITY COMPENSATION PLAN INFORMATION
- -----------------------------------------------------------------------------------------------
NUMBER OF
NUMBER OF SECURITIES
SECURITIES TO WEIGHTED- REMAINING
BE ISSUED AVERAGE AVAILABLE FOR
UPON EXERCISE FUTURE ISSUANCE
EXERCISE OF PRICE OF UNDER EQUITY
OUTSTANDING OUTSTANDING COMPENSATION
PLAN CATEGORY OPTIONS OPTIONS PLANS
- -----------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 140,875 $ 15.21 54,514
- -----------------------------------------------------------------------------------------------
Equity compensation plans not approved
by security holders -- $ -- --
- -----------------------------------------------------------------------------------------------
TOTAL 140,875 $ 15.21 54,514
- -----------------------------------------------------------------------------------------------
Other information required to be disclosed in this section 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 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Not applicable
ITEM 14 - CONTROLS AND PROCEDURES
- ---------------------------------
An evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days prior to the filing date of this report
was carried out by us under the supervision and with the participation of our
management, including our Chief Executive Officer and principal financial
officer. Based on that evaluation, the Chief Executive Officer and principal
financial officer concluded that our disclosure controls and procedures are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. A controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. Subsequent to the date of the most
recent evaluation, there were no significant changes in our internal controls or
in other factors that could significantly affect the internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
33
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1 Financial Statements - See "Index to Financial Statements" in Item 8
2 Schedule II - Valuation and Qualifying Accounts. All other 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 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, among
Quipp, Inc., Quipp Systems, 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). Identical
agreements, also dated as of December 23, 2000, were entered into with
David Switalski and Angel Arrabal. In accordance with Instruction 2 of
Item 601 of Regulation S-K, those agreements need not be filed with
this report.
*10.5 Change of control agreement dated as of June 25, 2002 among Quipp,
Inc., Quipp Systems, Inc and Michael S Kady (incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002.
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.
99.1 Certificate of the Chief Executive Officer of Quipp, Inc. pursuant to
Title 18, section 1350 of the United States Code.
99.2 Certificate of the Principal Financial Officer of Quipp, Inc. pursuant
to Title 18, Section 1350 of the United States Code.
* 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.
34
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 14, 2003 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 14, 2003
/ s / Ralph M. Branca
- --------------------------
RALPH M. BRANCA Director March 14, 2003
/ s / Richard H. Campbell
- --------------------------
RICHARD H. CAMPBELL Director March 14, 2003
/ s / Lawrence J. Gibson
- --------------------------
LAWRENCE J GIBSON Director March 14, 2003
/ s / Cristina H. Kepner
- --------------------------
CRISTINA H. KEPNER Director March 14, 2003
/ s / Louis D. Kipp
- --------------------------
LOUIS D. KIPP Director March 14, 2003
/ s / Eric Bello
- --------------------------
ERIC BELLO Director of Finance and March 14, 2003
Treasurer (Principal Financial
and Accounting Officer)
35
QUIPP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
(a)
Balance, Charged Balance,
beginning to (b) end
of year Expenses Write-offs of year
------------- ------------- -------------- -------------
Year ended December 31, 2002:
Allowance for doubtful
accounts 320,000 (154,806) (194) 165,000
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
(a) Charges to expense result from increases or decreases to our allowance
for doubtful accounts due to the assessment of the collectability of
customer accounts and the aging of our accounts receivable.
(b) We write-off trade accounts when we have exhausted all reasonable
efforts to collect outstanding receivable balances.
36
CERTIFICATIONS
I, Michael S. Kady certify that:
1. I have reviewed this Annual report on Form 10-K of Quipp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael S. Kady
- -----------------------
Michael S. Kady
Chief Executive Officer
Date: March 14, 2003
37
I, Eric Bello certify that:
1. I have reviewed this Annual report on Form 10-K of Quipp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Eric Bello
- ---------------
Eric Bello
Treasurer (principal financial officer)
Date: March 14, 2003
38
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, among
Quipp, Inc., Quipp Systems, 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). Identical agreements
also dated as of December 23, 2000 were entered into with David
Switalski and Angel Arrabal. In accordance with Instruction 2 of Item
601 of Regulation S-K, those agreements need not be filed with this
report.
*10.5 Change of control agreement dated as of June 25, 2002 among Quipp,
Inc., Quipp Systems, Inc and Michael S Kady (incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2002.
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
99.1 Certificate of the Chief Executive Officer of Quipp, Inc. pursuant to
Title 18, section 1350 of the United States Code.
99.2 Certificate of the Principal Financial Officer of Quipp, Inc. pursuant
to Title 18, Section 1350 of the United States Code.
* Constitutes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form.
39