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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 June 30, 2003.
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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
incorporation or organization) Identification No.)
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 August 1, 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
June 30, 2003 and December 31, 2002
Unaudited Condensed Consolidated Statements of Operations - 4
Three and six months ended June 30, 2003 and 2002
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Six months ended June 30, 2003 and 2002
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 14
Item 4 - Controls and Procedures 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
2
PART 1 - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 760,240 $ 1,769,545
Securities available for sale 7,677,477 6,856,527
Accounts receivable, net 2,193,773 2,872,617
Inventories 3,326,431 1,963,104
Deferred tax asset-current 724,358 724,358
Prepaid expenses and other receivables 465,169 297,651
Current portion of notes receivable 238,940 238,940
------------ ------------
TOTAL CURRENT ASSETS $ 15,386,388 $ 14,722,742
Other assets:
Property, plant and equipment, net 1,766,701 1,766,966
Intangible assets, net 831,202 --
Goodwill 135,823 174,822
Notes receivable 183,388 183,388
Other assets 50,538 53,900
------------ ------------
$ 18,354,040 $ 16,901,818
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,015,578 841,095
Accrued salaries & wages 417,540 466,517
Deferred revenues 3,242,500 2,081,031
Contract contingencies 144,755 200,131
Accrued acquisition costs 185,236 --
Other accrued liabilities 1,612,398 1,450,599
------------ ------------
TOTAL CURRENT LIABILITIES 6,718,007 5,139,373
Long-term debt 550,000 550,000
------------ ------------
TOTAL LIABILITIES 7,268,007 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
Additional paid-in capital 72,487 --
Treasury stock, at cost (9,250 shares) (148,375) (148,375)
Retained earnings 11,132,090 11,307,955
Other comprehensive income 15,501 38,605
------------ ------------
11,086,033 11,212,445
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,354,040 $ 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 FOR THE SIX MONTHS ENDED
JUNE 30, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002
=================================================================================================================================
Net sales $ 5,023,801 $ 4,470,885 $ 8,329,092 $ 8,175,368
Cost of sales (3,425,337) (3,221,666) (5,775,823) (6,116,609)
----------------------------- ----------------------------
GROSS PROFIT 1,598,464 1,249,219 2,553,269 2,058,759
Operating expenses:
Selling, general and
administrative expenses (1,376,660) (1,166,617) (2,531,499) (2,254,362)
Research and development (178,909) (119,697) (362,994) (168,606)
----------------------------- ----------------------------
OPERATING PROFIT (LOSS) 42,895 (37,095) (341,224) (364,209)
----------------------------- ----------------------------
Other income, net:
Miscellaneous income, net 15,019 1,413 15,019 73,471
Interest income 36,356 49,438 79,553 109,043
Interest expense (2,223) (3,116) (4,300) (5,922)
----------------------------- ----------------------------
Other income, net 49,152 47,735 90,272 176,592
Income (loss) before
income tax (expense) benefit 92,047 10,640 (250,952) (187,617)
Income tax (expense) benefit (44,263) 18,471 75,087 87,846
----------------------------- ----------------------------
NET INCOME (LOSS) $ 47,784 $ 29,111 $ (175,865) $ (99,771)
- -----------------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic and diluted income (loss) per common share 0.03 0.02 (0.12) (0.07)
Basic and diluted average number of common
and common equivalent shares outstanding 1,423,775 1,417,775 1,421,620 1,417,587
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2003 2002
=========================================================================================================
Cash provided by (used in) operations:
Net loss $ (175,865) $ (99,771)
Reconciliation of net income to net cash
provided by (used in) operations:
Depreciation 130,452 138,054
Intangible amortization 28,798 --
Goodwill impairment 38,999 31,200
Stock-based compensation 14,777 --
Changes in operational assets and liabilities net
of effect of asset purchase from USA Leader, Inc.:
Accounts receivable, net 678,844 348,629
Inventories (1,236,328) (197,662)
Other assets, prepaid expenses and
other receivables (114,221) (34,117)
Notes Receivable -- 147,247
Accounts payable and accrued liabilities 117,341 (49,033)
Contract contingencies (55,376) (141,864)
Deferred revenues 865,469 (681,590)
-----------------------------
Net cash provided by (used in) operations 292,890 (538,907)
-----------------------------
Cash flow from investing activities:
Securities purchased (5,000,750) (2,927,591)
Securities sold 4,156,696 3,283,484
Payments related to asset purchase (344,954) --
Capital expenditures (113,187) (36,513)
-----------------------------
Net cash (used in) provided by investing activities (1,302,195) 319,380
-----------------------------
Decrease in cash and cash equivalents (1,009,305) (219,527)
Cash and cash equivalents at the beginning of the year 1,769,545 1,627,937
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the quarter $ 760,240 $ 1,408,410
=========================================================================================================
Supplemental disclosure of noncash information:
Unrealized (loss) gain on securities available for sales, net of taxes $ (23,104) $ 2,286
Issuance of shares to purchase the assets of USA Leader Inc. $ 57,780 $ --
Supplemental disclosure of cash payments:
Interest $ 4,300 $ 5,922
=========================================================================================================
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 unaudited 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 subsidiary as of June
30, 2003 and the results of its operations and cash flows for the six months
ended June 30, 2003. The results of operations for the six months ended June 30,
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 in the United States of America for complete financial
statements. The unaudited 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 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 June 30, 2003 and
December 31, 2002 is as follows:
JUNE 30, 2003 December 31, 2002
- ----------------------------------------------------------------
Raw materials $1,436,384 $1,283,250
Work in process 691,651 199,853
Finished goods 289,649 48,978
--------------------------------
Subtotal 2,417,684 1,532,081
Shipped to customers 908,747 431,023
--------------------------------
Total $3,326,431 $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 - INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding during the periods presented. Diluted income (loss)
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding in the periods presented. Diluted 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 and six months ended June 30, 2003 and June 30, 2002, common stock
equivalents were not considered because their 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
issued prior to January 1, 2003.
------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2003 June 30, 2002
------------------------------------------------------------------------------------------------------------
Net loss as reported ($175,865) ($99,771)
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all rewards, net of tax ($21,226) ($21,951)
Pro forma net loss ($197,091) ($121,722)
Loss Per Share:
Basic and diluted loss per share ($0.14) ($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:
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 under 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.
7
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
June 30, 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 June 30, 2003, Additional Consideration paid in excess of the
estimated fair value of net tangible assets and intangible assets will be
recorded as goodwill.
The consolidated operations for the six month period ended June 30, 2003
includes the operating results of the asset purchase from the date of
acquisition.
The 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-competition 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 acquired
technology. The customer list represents USA Leader's relationships within its
installed base of customers. The non-competition agreement refers to a 5-year
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-competition 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 six month
period ended June 30, 2003 includes operating results relating to assets
acquired in the Asset Purchase from the date of acquisition. The following
unaudited pro forma results of operation of the Company for the periods ended
June 30, 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 for the six months ended follows:
JUNE 30, 2003 June 30, 2002
------------- -------------
Net Sales 8,638,749 8,192,868
Net Loss (132,503) (140,556)
Basic and diluted loss per common share (0.09) (0.10)
Basic and diluted average number of
common shares outstanding 1,423,775 1,423,587
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 six months ended
June 30, 2003 and 2002, the Company recognized an impairment loss of $38,999 and
$31,200, 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-competition agreements, customer list and patent and technology acquired in
the asset purchase from USA Leader, Inc. During the six months ended June 30,
2003 and 2002, the Company recognized amortization expense of $28,798 and $0,
respectively. Amortization was charged to selling, general and administrative
expenses.
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 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.
9
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.
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 May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this standard had no
effect on the unaudited condensed consolidated financial statements.
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
EXPRESSED AS A PERCENTAGE OF NET SALES FOR THE PERIODS INDICATED:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
(UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT 31.8% 27.9% 30.7% 25.2%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 27.4% 26.1% 30.4% 27.6%
RESEARCH AND DEVELOPMENT 3.6% 2.7% 4.4% 2.1%
OTHER INCOME, NET 1.0% 1.1% 1.1% 2.2%
NET INCOME 1.0% 0.7% (2.1%) (1.2%)
THREE MONTHS ENDED JUNE 30, 2003
- --------------------------------
NET SALES for the three months ended June 30, 2003 were $5,023,801, an increase
of $552,916 (12.4%) from net sales of $4,470,885 for the corresponding period in
2002. The improvement largely reflects orders that were rescheduled by our
customers from the first to the second quarter of 2003.
GROSS PROFIT for the three months ended June 30, 2003 was $1,598,464, an
increase of $349,245 (28.0%) as compared to $1,249,219 for the corresponding
period in 2002. Gross profit as a percentage of sales for the three months ended
June 30, 2003 increased to 31.8% compared to 27.9% for the corresponding period
in 2002. Our gross profit percentage improved primarily due to the allocation of
fixed manufacturing overhead costs to a greater volume of production and
shipments and due to a reduction in our labor force that was effective in August
2002. Additionally, as a result of product mix and improved project management
efforts, we incurred lower custom design, production and installation costs.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended June 30,
2003 were $1,376,660, an increase of $210,043 (18.0%) as compared to $1,166,617
for the corresponding period in 2002. The increase was primarily due to initial
marketing costs related to new product introductions, the NEXPO trade show in
June and unanticipated corporate expenses associated with a special meeting of
shareholders held in response to the demand by a shareholder. Also, we
recognized amortization expense relating to identifiable intangible assets from
the USA Leader acquisition and incurred higher variable warranty and commission
expense.
RESEARCH AND DEVELOPMENT expenses for the three months ended June 30, 2003 were
$178,909, an increase of $59,212 (49.5%) as compared to $119,697 for the same
period in 2002. For the three months ended June 30, 2003, we devoted engineering
and technical resources to develop the Quipp Packman Packaging System
("Packman"). Packman provides newspaper publishers with the ability to stack,
wrap, print and strap newspapers in one operation. This product was recently
introduced to customers through trade magazines and mailings, and was featured
by us at the NEXPO trade show.
OTHER INCOME AND EXPENSE (NET) for the three months ended June 30, 2003 was
$49,152 as compared to $47,735 for the same period in 2002. Our interest income
for the three months ended June 30, 2003 decreased to $36,356 from $49,438, due
primarily to lower interest rates on our securities held for sale. We also
received $15,000 of royalty income relating to our automatic cart loading
system, which is classified as miscellaneous income.
11
SIX MONTHS ENDED JUNE 30, 2003
- ------------------------------
SALES for the six months ended June 30, 2003 were $8,329,092, an increase of
$153,724 (1.9%) over net sales of $8,175,368 in the same period in 2002. We
continue to operate in a challenging environment, despite slow but inconsistent
improvement in economic conditions. We believe our sales reflect this
environment as our customers have reported mixed financial results and have
communicated to us that they remain cautious with regard to capital investment.
GROSS PROFIT for the six months ended June 30, 2003 was $2,553,269, an increase
of $494,510 (24.0%) as compared to $2,058,759 for the corresponding period in
2002. Gross profit as a percentage of sales for the six months ended June 30,
2003 increased to 30.7% compared to 25.2% for the corresponding period in 2002.
Our gross profit percentage improved primarily due to improved overhead
absorption from the allocation of fixed manufacturing overhead costs to higher
production volumes and due to a reduction in our labor force compared to the
same period last year. Additionally, as a result of product mix and improved
project management efforts, we incurred lower custom design, production and
installation costs.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the six months ended June 30,
2003 were $2,531,499, an increase of $277,137 (12.3%) as compared to $2,254,362
for the same period in 2002. We incurred professional fees associated with the
implementation of a shareholder rights plan and a special meeting of
shareholders held in response to the demand by a shareholder. Additionally, we
increased our allowance for doubtful accounts due to deterioration of the
financial condition of one of our distributors and recognized amortization
expense from the USA Leader acquisition.
RESEARCH AND DEVELOPMENT expenses for the six months ended June 30, 2003 were
$362,994, an increase of $194,388 (115.3%) as compared to $168,606 for the same
period in 2002. For the six months ended June 30, 2003, we devoted engineering
and technical efforts to develop Packman. 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 six months ended June 30, 2003 was
$90,272 as compared to $176,592 for the same period in 2002. The decrease is
primarily due to lower royalty income relating to our automatic cart loading
system and lower interest rates on our securities available for sale.
GENERAL
The Company's backlog as of June 30, 2003 was $7,021,000 compared to $4,686,000
at December 31, 2002 and $3,224,000 at June 30, 2002. Orders for the three and
six months ended June 30, 2003 were $5,570,000 and $10,635,000 respectively,
compared to orders of $2,614,000 and $4,500,000 for the three and six months
ended June 30, 2002.
LIQUIDITY
On June 30, 2003, cash and cash equivalents and securities available for sale
totaled $8,437,717 as compared to $8,626,072 at December 31, 2002, a decrease of
$188,355 or 2.2%. This decrease was due to the acquisition of certain assets of
USA Leader, Inc. and capital expenditures, offset in part by increased cash
provided by operations. Working capital on June 30, 2003 was $8,668,381, a
decrease of $914,988 from $9,583,369 at December 31, 2002. The decreased working
capital is due primarily to 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 current levels.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, management is required to make estimates
and assumptions that, among other things, affect the reported amounts of assets
and liabilities and reported amounts of revenues and expenses. These estimates
are most significant in connection with our critical accounting 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.
12
We believe that our most critical accounting policies relate to (1) revenue
recognition involving complex installation services, (2) allowance for doubtful
accounts, (3) contract contingencies, (4) warranty reserves, and (5) intangible
assets.
Revenue recognition
- -------------------
Our revenue recognition policy with regard to equipment sales requiring complex
installation services calls for recognition when installation is complete.
Because complex installations often require ongoing customer consultation even
after a product is installed and is running, management must often make a
judgment as to when an installation may be considered complete. We believe that
an installation generally is complete when our customers can use the equipment
in their daily operations and collection of the resulting accounts receivable is
reasonably assured. Nevertheless, there is a degree of subjectivity involved in
making this determination, which can affect the timing of recognition of
revenues and the related cost of sales.
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 generally been within our expectations and the provisions
established, there is a risk that credit losses in the future will exceed those
that have occurred in the past, in which case our operating results would be
adversely affected.
Contract contingencies
- ----------------------
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 generally been
within our expectations and the provisions established, future returns or repair
costs could be in excess of our warranty reserves. 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.
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
statements concerning, adequacy of available resources to support operations and
risk of interest rate fluctuations 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, engineering and production difficulties, and extraordinary
movements in interest rates.
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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 we bear no significant risk arising
from interest rate fluctuations. We are 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
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and principal financial officer, evaluated the effectiveness
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and principal financial officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are functioning
effectively to provide reasonable assurance that the information required to be
disclosed by the Company 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.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting occurred
during the Company's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).
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).
31.1 Certificate of the Chief Executive Officer of the Registrant required
by Rule 13a-14(b) under the Securities Exchange Act of 1934.
31.2 Certificate of the principal financial officer of the Registrant
required by Rule 13a-14(b) under the Securities Exchange Act of 1934
32.1 Certificate of the Chief Executive Officer of the Registrant required
by Rule 13a-14(b) under the Securities Exchange Act of 1934.
32.2 Certificate of the principal financial officer of the Registrant
required by Rule 13a-14(b) under the Securities Exchange Act of 1934.
(b) Reports on Form 8-K
On June 4, 2003, we filed a report on Form 8-K/A amending
information previously reported on March 6, 2003 regarding Items 2
in connection with the Registrant's acquisition of certain assets
of USA Leader, Inc.
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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: August 12, 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)
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