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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14870
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QUIPP, INC.
-----------
(Exact name of registrant as specified in its charter)
Florida 59-2306191
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 N.W. 157th Street, Miami, Florida 33014
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (305) 623-8700
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's common stock, $.01 par value,
outstanding at May 5, 2003 was 1,423,775.
QUIPP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets - 3
March 31, 2003 and December 31, 2002
Unaudited Condensed Consolidated Statements of Operations - 4
Three months ended March 31, 2003 and 2002
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Three months ended March 31, 2003 and 2002
Notes to unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 13
Item 4 - Controls and Procedures 13
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 15
2
PART 1 - UNAUDITED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 506,801 $ 1,769,545
Securities 7,509,275 6,856,527
Accounts receivable, net 2,400,118 2,872,617
Inventories 2,907,513 1,963,104
Deferred tax asset-current 724,358 724,358
Prepaid expenses and other receivables 523,908 297,651
Current portion note receivable 238,940 238,940
------------ ------------
Total current assets 14,810,913 $ 14,722,742
Other assets:
Property, plant and equipment, net 1,770,878 1,766,966
Notes Receivable 183,388 183,388
Goodwill 155,323 174,822
Intangible assets, net 860,000 --
Other assets 52,219 53,900
------------ ------------
Total assets $ 17,832,721 $ 16,901,818
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,207,206 841,095
Accrued salaries and wages 478,075 466,517
Deferred revenues 2,294,895 2,081,031
Contract contingencies 183,974 200,131
Accrued acquisition costs 451,805 --
Other accrued liabilities 1,511,754 1,450,599
------------ ------------
Total current liabilities 6,227,709 5,139,373
Long-term debt 550,000 550,000
------------ ------------
Total liabilities 6,777,709 5,689,373
Shareholders' equity:
Common stock - par value $.01 per share, authorized
8,000,000 shares, issued 1,433,025 in 2003 and
1,426,025 shares in 2002 14,330 14,260
Additonal paid-in capital 72,487 --
Treasury stock, at cost (9,250 shares) (148,375) (148,375)
Retained earnings 11,084,306 11,307,955
Other comprehensive income 32,264 38,605
------------ ------------
11,055,012 11,212,445
------------ ------------
Total liabilities and shareholders' equity $ 17,832,721 $ 16,901,818
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended
March 31, 2003 March 31, 2002
- --------------------------------------------------------------------------------
Net sales $ 3,305,291 $ 3,704,483
Cost of sales (2,350,486) (2,894,943)
----------- -----------
Gross profit 954,805 809,540
Operating expenses:
Selling, general and
administrative expenses (1,154,839) (1,087,745)
Research and development (184,085) (48,909)
----------- -----------
Operating loss (384,119) (327,114)
----------- -----------
Other income (expense):
Miscellaneous income -- 72,058
Interest income 43,197 59,605
Interest expense (2,077) (2,806)
----------- -----------
Other income, net 41,120 128,857
----------- -----------
Loss before income tax benefit (342,999) (198,257)
Income tax benefit 119,350 69,375
----------- -----------
Net loss $ (223,649) $ (128,882)
----------- -----------
Per share amounts:
Basic and diluted loss per common share (0.16) (0.09)
Basic and diluted average number of common
and common equivalent shares outstanding 1,419,442 1,417,397
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
March 31, 2003 March 31, 2002
- -----------------------------------------------------------------------------------------------
Cash provided by operations:
Net loss $ (223,649) $ (128,882)
Reconciliation of net income to net cash
(used in) provided by operations net of
effect from asset purchase:
Depreciation 64,332 69,178
Goodwill Impairment 19,499 15,600
Issuance of shares to employees 14,777 --
Changes in operational assets and liabilities net
of effect of asset purchase from USA Leader, Inc.:
Accounts receivable, net 472,499 554,648
Inventories, net (817,410) (610,492)
Other assets and prepaid expenses and
other receivables (174,641) (73,073)
Notes Receivable -- 147,247
Accounts payable and other accrued liabilities 428,824 138,462
Contracts contingencies (16,157) (114,515)
Accrued acquisition costs (49,398) --
Deferred revenues (82,136) 332,896
----------- -----------
Net cash (used in) provided by operations (363,460) 331,069
----------- -----------
Cash flow from investing activities:
Securities purchased (3,771,300) (2,018,148)
Securities sold 3,112,211 1,865,847
Payment related to asset purchase (188,951) --
Capital expenditures (51,244) (9,125)
----------- -----------
Net cash used in investing activities (899,284) (161,426)
----------- -----------
(Decrease) increase in cash and cash equivalents (1,262,744) 169,643
Cash and cash equivalents at beginning of year 1,769,545 1,627,937
----------- -----------
Cash and cash equivalents at end of quarter $ 506,801 $ 1,797,580
=========== ===========
Supplemental disclosure of noncash information:
Unrealized loss on securities available for sales, net of taxes $ (6,341) $ (53,062)
Issuance of shares to purchase the assets of USA Leader Inc. $ 57,780 $ --
Supplemental disclosure of cash payments:
Interest $ 2,077 $ 2,806
=========== ===========
See accompanying notes to the unaudited condensed consolidated financial
statements.
5
QUIPP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Quipp, Inc. and its wholly owned subsidiary, Quipp Systems, Inc.
All significant intercompany transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared
on a basis consistent with that used as of and for the year ended December 31,
2002 and, in the opinion of management, reflect all adjustments (principally
consisting of normal recurring accruals) considered necessary to present fairly
the financial position of Quipp, Inc. and subsidiaries as of March 31, 2003 and
the results of their operations and cash flows for the three months ended March
31, 2003. The results of operations for the three months ended March 31, 2003
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2003. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
balance sheet at December 31, 2002 was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
NOTE 2 - INVENTORIES
Inventories at March 31, 2003 include material, labor and factory overhead and
are stated at the lower of cost or market. Inventory also includes equipment
requiring complex installation services that have shipped to customers but not
yet recognized as a sale. The Company will recognize the sales and cost of sales
for this equipment when installation services are complete and collection of the
resulting receivable is reasonably assured. Cost is determined using the
first-in, first-out (FIFO) method. The composition of inventories at March 31,
2003 and December 31, 2002 is as follows:
March 31, 2003 December 31, 2002
------------------------------------------------------------------------
Raw materials $1,411,534 $1,283,250
Work in process 913,228 199,853
Finished goods 153,088 48,978
------------------------------------------
Subtotal 2,477,850 1,532,081
Shipped to customers 429,663 431,023
------------------------------------------
$2,907,513 $1,963,104
------------------------------------------
NOTE 3 - 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 the installation
services are complete according to contractual terms and is recorded net of
discounts and allowances.
NOTE 4 - LOSS PER SHARE
Basic loss per share is based on the weighted average number of common shares
outstanding during the periods presented. Diluted loss per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding in the period 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. For the three months
ending March 31, 2003 and 2002, the exercise of options was not assumed since
the effect is antidilutive.
6
NOTE 5 - STOCK-BASED COMPENSATION
Prior to 2003, the company accounted for its stock option plan under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in 2002 net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. Effective January 1, 2003, the company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock Based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Awards under the company's
plans vest over periods ranging from three to five years. No options were issued
in 2003. The following table illustrates the effect on net loss and loss
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period.
------------------------------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
------------------------------------------------------------------------------------------------------------
Net loss as reported ($223,649) ($128,882)
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax ($10,246) ($14,226)
Pro forma net loss ($233,895) ($143,108)
Loss Per Share:
Basic and diluted loss per share ($0.16) ($0.09)
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:
2002
-------------------
Expected Life 5 - 10 years
Dividends None
Risk-free interest rate 2.65%
Expected volatility 30.68%
NOTE 6 - ASSET PURCHASE
On March 6, 2003, pursuant to an Asset Purchase Agreement (the "Purchase
Agreement"), the Company through its subsidiary Quipp Systems, Inc. ("Quipp
Systems") completed the acquisition of certain assets of USA Leader, Inc., a
Missouri corporation (the "Seller"). 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. In the newspaper industry, the Seller historically focused on
small to intermediate sized publications, a market that has not been a
traditional focus of the Company. The Company has continued the sale of the
Products following the Acquisition.
As consideration for the Asset Purchase, the Company paid the Seller $344,954
and 6,000 shares of common stock, $0.01 par value per share, of the Company. The
Company will pay additional amounts ("Additional Consideration") 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. As of
March 31, 2003, the total consideration for the asset purchase amounted to
$402,734.
The asset purchase was treated as a purchase transaction and the acquisition
price was allocated to the acquired assets and assumed liabilities based on the
estimated fair value as of the acquisition date. While there was no goodwill
recorded as of March 31, 2003, Additional Consideration paid in excess of the
estimated fair value of net tangible assets and intangible assets will be
recorded as goodwill.
7
The consolidated operations for the period ended March 31, 2003 includes the
operating results of the asset purchase from the date of acquisition.
The preliminary purchase price was allocated as follows:
Net liabilities (112,066)
Less: Accrued acquisition costs (283,000)
Accrued contingent consideration (62,200)
---------
(457,266)
Amortizable Intangible Assets:
Non-compete Agreement 150,000
Customer List 10,000
Patent 200,000
Acquired Technology 500,000
-------
860,000
---------
402,734
=========
As noted above, $860,000 was allocated to amortizable intangible assets
including a customer list, non-competition agreements and patent and technology
acquired with the asset purchase from USA Leader, Inc. Customer list represents
USA Leader's relationships within its installed base of customers. The Company
entered into a 5-year non-competition agreement with the former principals of
USA Leader, Inc. Acquired technology and patent represents a combination of USA
Leader's intellectual property, processes, patent, and trade secrets developed
through experience in design and development relating to the product lines
acquired in the asset purchase.
Details of the amortizable intangibles follow:
FAIR
INTANGIBLE ASSET VALUE LIFE
------------------------------ ------------- --------------
Customer List 10,000 5 Years
Non-compete Agreement 150,000 5 Years
Patent 200,000 17 Years
Acquired Technology 500,000 7 Years
8
The unaudited condensed consolidated statement of operations for the period
ended March 31, 2003 included the operating results of the Asset Purchase from
the date of acquisition. The following unaudited pro forma results of operation
of the Company for the periods ended March 31, 2003 and 2002 assume the
acquisition occurred as of January 1, 2002. The pro forma results have been
prepared for comparative purposes only and do not purport to indicate the
results of operations that would have actually occurred had the acquisition of
assets occurred on the dates indicated. The unaudited pro forma results of
operations are as follows:
MARCH 31, 2003 March 31, 2002
------------------ ------------------
Net Sales
3,614,948 3,721,983
Net Loss (183,257) (150,550)
Basic and diluted income per common share (0.13) (0.11)
Basic and diluted average number of
common shares outstanding 1,423,775 1,423,397
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
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.
The Company's goodwill resulted from the purchase of certain assets of Hall
Processing Systems in 1994 and 1995. The Company reviews the operating profit
and cash flow expected from these assets quarterly. During the periods ending
March 31, 2003 and 2002, the Company recognized an impairment loss of $19,499
and $15,600, respectively, 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's other intangible assets represent the fair value of non-competion
agreements, customer list and patent and technology acquired in the asset
purchase from USA Leader, Inc.
NOTE 8 - RECENT PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 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 condensed 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 condensed 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 adoption of this
standard had no effect on the condensed consolidated financial statements.
9
During November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 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 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. As discussed
in note 5, 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.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: The following table presents statements of operations
items expressed as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
2003 2002
(UNAUDITED) (Unaudited)
- --------------------------------------------------------------------------------
NET SALES 100.0% 100.0%
GROSS PROFIT 28.9% 21.9%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 34.9% 29.4%
RESEARCH AND DEVELOPMENT 5.6% 1.3%
OTHER INCOME, NET 1.2% 3.5%
NET LOSS (6.8%) (3.5%)
NET SALES for the three months ended March 31, 2003 were $3,305,291, a decrease
of $399,192 (10.8%) compared to net sales of $3,704,483 for the corresponding
period in 2002. Our net sales continue to reflect a struggling US economy and
slowdown in capital spending by our customers. Our backlog at the beginning of
the quarter included a low volume of orders scheduled to ship during the first
quarter. Additionally, some customers rescheduled their orders to the second
quarter, which further adversely affected net sales.
GROSS PROFIT for the three months ended March 31, 2003 was $954,805, an increase
of $145,265 (17.9%) as compared to $809,540 for the corresponding period in
2002. Gross profit as a percentage of sales for the three months ended March 31,
2003 increased to 28.9% compared to 21.9% for the corresponding period in 2002.
The increase in gross profit margin is mainly due to lower custom design,
production and installation costs primarily reflecting a reduction in cost
overruns. In addition, gross profit increased due to a reduction in
manufacturing overhead costs, primarily due to a reduction in our labor force.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended March
31, 2003 were $1,154,839, an increase of $67,094 (6.2%) as compared to
$1,087,745 for the corresponding period in 2002. During the three months ending
March 31, 2003 we increased our allowance for doubtful accounts due to
deterioration of the financial condition of one of our distributors.
Additionally, we incurred professional fees associated with the implementation
of a shareholder rights plan and a special meeting of shareholders that was
called as a result of a demand by a person and two related entities who have
disclosed in filings with the Securities and Exchange Commission that they
beneficially own more than ten percent of the outstanding shares of common
stock. These additional costs were offset in part by lower variable selling
expenses such as commissions and warranty expense and reduced marketing costs.
RESEARCH AND DEVELOPMENT expenses for the three months ended March 31, 2003 were
$184,085, an increase of $135,176 (276.3%) as compared to $48,909 for the same
period in 2002. For the three months ended March 31, 2003, we invested greater
resources in a new product development project. For the same period in 2002, we
focused much of our engineering and technical efforts on the custom design and
production of customer orders. Costs related to these activities were charged to
cost of goods sold.
OTHER INCOME AND EXPENSE (NET) for the three months ended March 31, 2003 were
$41,120 as compared to $128,857 for the corresponding period in 2002. For the
three months ended March 31, 2003, interest income decreased $16,408 to $43,197
from $59,605 for the same period in 2002 due primarily to lower interest rates.
Additionally, for the three months ended March 31, 2002 we generated gains on
the sale of securities and received royalty income relating to our automatic
cart loading system, which is classified as miscellaneous income.
GENERAL
Our backlog as of March 31, 2003 was $6,440,000 compared to $4,686,000 at
December 31, 2002 and $4,973,000 at March 31, 2002. We expect to ship all items
in our backlog during the next eighteen months. Orders for the three months
ended March 31, 2003 were $5,064,848 compared to orders of $1,886,407 during the
three months ending March 31, 2002.
11
LIQUIDITY
On March 31, 2003, cash and cash equivalents and securities available for sale
totaled $8,016,076 as compared to $8,626,072 at December 31, 2002, a decrease of
$609,996 or 7.1%. This decrease was due to the acquisition of certain assets of
USA Leader, Inc. and cash used to fund operations. In this regard, our
inventories increased by $817,410 during the quarter ended March 31, 2003,
reflecting the second quarter 2003 delivery schedule and new orders. Working
capital on March 31, 2003 was $8,583,204, a decrease of $1,000,165 from
$9,583,369 at December 31, 2002. The decreased working capital is due in part to
the decreased cash and cash equivalents and securities available for sales and
in part due to accrued acquisition costs related to the purchase of assets from
USA Leader, Inc. The Company believes that the remaining cash, cash equivalents
and securities available for sale together with cash generated from operations
will be sufficient to fund operations at the current level.
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 installation services, (2) allowance for doubtful
accounts, (3) contract contingencies, (4) warranty reserves and (5) intangible
assets.
Revenue recognition
- -------------------
Our revenue recognition policy with regard to equipment sales involving complex
installation services calls for recognition when installation is complete.
Because complex installations often require ongoing customer consultation even
after a product is installed and is running, management 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 for 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.
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.
12
Intangible assets
- -----------------
In connection with our acquisition of certain assets of USA Leader, Inc., we
estimated the value of that company's patent, other technology and customer
list, as well as non-competition agreements we obtained as a part of this
transaction. Because the value of these assets is not certain, there is a degree
of subjectivity in allocating fair value to the assets. The determination of
fair value of the assets can have an impact on depreciation and amortization
expense, because the useful lives of such assets vary from 5 years to 17 years.
Moreover, in the event that the value of such assets are deemed to be impaired
in the future, we would be required to charge the impairment to selling, general
and administrative expenses.
FORWARD LOOKING STATEMENTS
The statements contained in this quarterly report on Form 10-Q, including
shipment of backlog orders 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, manufacturing capacity, delays in shipment,
cancellation of customer orders, unanticipated expenses and engineering and
production difficulties.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
ITEM 4 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.
13
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders
On April 29, 2003, we held our annual meeting of shareholders (the "Annual
Meeting") and a special meeting of shareholders (the "Special Meeting"). At the
Annual Meeting, the shareholders voted on the election of two directors to serve
until the 2005 annual meeting of shareholders, a proposal to amend our Articles
of Incorporation to include procedures regarding special meetings of
shareholders and a proposal to ratify the appointment of KPMG LLP as our
independent accountants for 2003. At the Special Meeting the shareholders voted
on shareholder proposals to recommend that our Board of Directors resolve to
amend the articles of incorporation to eliminate classification of the Board of
Directors and to recommend that our Board of Directors amend the bylaws to
provide that each director hold office until the next annual meeting of
shareholders.
The voting results at the Annual Meeting were as follows:
Election of Directors
NAME OF NOMINEE FOR WITHHELD BROKER NON-VOTES
Ralph M. Branca 1,109,441 90,599 0
Louis D. Kipp 1,112,706 87,334 0
The terms of office of Richard H. Campbell, Lawrence J. Gibson, Michael S. Kady
and Cristina H. Kepner as directors continued after the Annual Meeting.
Amendment to Quipp's Articles of Incorporation to Include Procedures Regarding
Special Meetings of Shareholders
FOR AGAINST ABSTAIN BROKER NON-VOTES
588,599 220,677 870 389,894
Ratification of the Appointment of KPMG LLP As Our Independent Public
Accountants for 2003
FOR AGAINST ABSTAIN BROKER NON-VOTES
1,192,268 7,287 490 0
The voting results at the Special Meeting were as follows:
1. Recommendation that our Board of Directors resolve to amend the Articles of
Incorporation to eliminate classification of the Board of Directors.
FOR AGAINST ABSTAIN BROKER NON-VOTES
810,632 272,403 746 0
2. Recommendation that our Board of Directors amend the bylaws to provide that
each director hold office until the next annual meeting of shareholders.
FOR AGAINST ABSTAIN BROKER NON-VOTES
622,931 306,051 154,068 0
14
ITEM 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
3.1 Articles of Amendment to Articles of Incorporation and Articles of
Incorporation, as amended.
3.2 Bylaws as amended (incorporated by reference to Exhibit 99.1 to the
Registrant's current report on Form 8-K, dated March 1, 2002).
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.
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, we filed the following reports
on Form 8-K:
1. A report filed on March 3, 2003, amended on March 5,
2003 and dated March 3, 2003, providing information
responsive to Items 5 and 7 in connection with our
adoption of a shareholder rights plan.
2. A report filed on March 11, 2003 and dated March 6,
2003, providing information responsive to Items 2 and
7 in connection with the Registrant's acquisition of
certain assets of USA Leader, Inc.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUIPP, INC.
Date: May 15, 2003
By: /s/ Michael S. Kady
-----------------------
Michael S. Kady
President and Chief Executive Officer
By: /s/ Eric Bello
-----------------------
Eric Bello Treasurer (Principal financial and
accounting officer)
16
CERTIFICATIONS
I, Michael S. Kady certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quipp, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
quarterly 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: May 15, 2003
17
I, Eric Bello certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quipp, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
quarterly 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: May 15, 2003
18