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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 September 30, 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 November 3, 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
September 30, 2003 and December 31, 2002
Unaudited Condensed Consolidated Statements of Operations - 4
Three and nine months ended September 30, 2003 and 2002
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Nine months ended September 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 SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,299,170 $ 1,769,545
Securities 6,905,418 6,856,527
Accounts receivable, net 3,621,871 2,872,617
Inventories 3,514,322 1,963,104
Deferred tax asset-current 724,358 724,358
Prepaid expenses and other receivables 542,261 297,651
Current portion of notes receivable 154,565 238,940
------------ ------------
TOTAL CURRENT ASSETS 16,761,965 14,722,742
Other assets:
Property, plant and equipment, net 1,746,072 1,766,966
Intangible assets, net 802,403 --
Goodwill 116,323 174,822
Notes receivable -- 183,388
Other assets 48,859 53,900
------------ ------------
$ 19,475,622 $ 16,901,818
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable and accrued expenses 1,188,011 841,095
Accrued salaries & wages 527,289 466,517
Deferred revenues 4,079,517 2,081,031
Contract contingencies 96,837 200,131
Accrued acquisition costs 146,602 --
Other accrued Liabilities 1,653,889 1,450,599
------------ ------------
TOTAL CURRENT LIABILITIES 7,792,145 5,139,373
Long-term debt 550,000 550,000
------------ ------------
TOTAL LIABILITIES 8,342,145 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 11,186,788 11,307,955
Other comprehensive income 8,247 38,605
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 11,133,477 11,212,445
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,475,622 $ 16,901,818
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
QUIPP INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 September 30, 2002 SEPTEMBER 30, 2003 September 30, 2002
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 4,815,792 $ 3,702,487 $ 13,144,884 $ 11,877,855
Cost of sales (3,534,806) (2,899,663) (9,310,629) (9,016,272)
------------ ------------ ------------ ------------
GROSS PROFIT 1,280,986 802,824 3,834,255 2,861,583
Operating expenses:
Selling , general and
administrative expenses (1,092,266) (841,258) (3,623,765) (3,095,620)
Research and development (129,496) (132,689) (492,490) (301,295)
------------ ------------ ------------ ------------
OPERATING PROFIT (LOSS) 59,224 (171,123) (282,000) (535,332)
------------ ------------ ------------ ------------
Other income (expense):
Miscellaneous income -- 27,393 15,019 100,864
Interest income 23,554 48,384 103,107 157,427
Interest expense (1,750) (2,808) (6,050) (8,730)
------------ ------------ ------------ ------------
21,804 72,969 112,076 249,561
------------ ------------ ------------ ------------
Income (loss) before income taxes 81,028 (98,154) (169,924) (285,771)
Income tax expense (benefit) 26,330 (26,789) (48,757) (114,635)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 54,698 $ (71,365) $ (121,167) $ (171,136)
- ----------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic and diluted income (loss) per 0.04 (0.05) (0.09) (0.12)
common share
Basic and diluted average number of 1,423,775 1,417,775 1,422,346 1,417,650
common shares outstanding
======================================================================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
QUIPP INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
2003 2002
- ---------------------------------------------------------------------------------------------------------
Cash provided by operations:
Net loss $ (121,167) $ (171,136)
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 197,300 205,509
Intangible amortization 57,597 --
Goodwill Impairment 58,499 46,800
Stock-based compensation 14,777 --
Changes in operational assets and liabilities (net of asset
purchase from USA Leader, Inc.)
Accounts receivable, net (749,254) 538,025
Inventories (1,424,219) 372,845
Other assets, prepaid expenses and other receivables (189,634) (86,227)
Notes receivable 267,763 294,494
Accounts payable and other accrued liabilities 610,978 (107,554)
Accrued acquisition costs (208,598) --
Contract contingencies (103,294) (296,281)
Deferred revenues 1,702,486 (238,204)
----------- -----------
NET CASH PROVIDED BY OPERATIONS 113,234 558,271
----------- -----------
Cash flow from investing activities:
Securities purchased (7,793,930) (6,106,378)
Securities sold 7,714,681 5,309,073
Payments related to asset purchase (344,954) --
Capital expenditures (159,406) (58,218)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (583,609) (855,523)
----------- -----------
Decrease in cash and cash equivalents (470,375) (297,252)
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 $ 1,299,170 $ 1,330,685
=========================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Unrealized (loss) gain on securities available for sales, net of taxes $ (30,358) 12,202
Issuance of shares to purchase assets of USA Leader. Inc. $ 57,780 --
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS :
Interest $ 6,050 $ 8,730
Income Taxes $ -- $ 1,931
=========================================================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
5
QUIPP, INC. AND SUBSIDIARIES
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. as of September 30, 2003
and the results of its operations for the three and nine months ended September
30, 2003 and cash flows for the nine months ended September 30, 2003. The
results of operations for the nine months ended September 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 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 September 30, 2003 include material, labor and factory overhead
and are stated at the lower of cost or market. Inventory also includes equipment
shipped to customers but not yet recognized as a sale because either risk of
loss has not transferred to the customer or the equipment requires complex
installation services. The Company will recognize the sales and cost of sales
for this equipment when the risk of loss transfers to the customer or 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 September 30, 2003 and December 31,
2002 is as follows:
SEPTEMBER 30, 2003 December 31, 2002
------------------ -----------------
Raw Materials $1,738,726 $1,283,250
Work in Process 725,263 199,853
Finished Goods 204,946 48,978
---------- ----------
Subtotal 2,668,935
1,532,081
Shipped to customers, not yet recognized as a sale 845,387 431,023
---------- ----------
Total 3,514,322 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 nine months ended September 30, 2003 and 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 the grant of stock options under its
1996 Equity Compensation Plan using 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 related to stock
options is reflected in 2003 net income, as all options granted under the plan
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 1996 Equity
Compensation Plan 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.
- -----------------------------------------------------------------------------------------------------
SEPTEMBER 30, September 30,
2003 2002
- -----------------------------------------------------------------------------------------------------
Net loss as reported $(121,167) $ 171,136)
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of tax $ (28,364) $ (35,867)
Pro forma net loss $(149,531) $(207,003)
Loss Per Share:
Basic and diluted loss per share $ (0.11) $ (0.15)
The per share average fair value of stock options granted during 2002 ranged
from $14.60 to $14.98. The fair values 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 (the "Asset Purchase") 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.
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 three years following the date of
purchase. 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 September 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 September 30, 2003, additional consideration to be 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 period ended September 30, 2003 includes the
operating results of the Asset Purchase from the date of acquisition.
The purchase price was preliminarily 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 as part of the asset purchase from USA Leader, Inc. Customer list
represents USA Leader's relationships within its installed base of customers.
The non-competition agreements were entered into 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 of 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 period
ended September 30, 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 September 30, 2003 and 2002
assume the acquisition occurred as of January 1, 2002. The unaudited 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.
SEPTEMBER 30, 2003 September 30, 2002
------------------ ------------------
Net Sales $ 13,454,541 $ 12,436,660
Net Loss (75,703) (63,609)
Basic and diluted loss per common share (0.05) (0.04)
Basic and diluted average number of
common shares outstanding 1,422,346 1,423,650
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
September 30, 2003 and 2002, the Company recognized an impairment loss of
$58,499 and $46,800, 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.
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 unaudited 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 unaudited 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. 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. The adoption of EITF Issue 00-21 had no impact on
the unaudited condensed consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
established standard or 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.
In January 2003, the FASB issued FASB interpretation No. 46 "Consolidation of
Variable Interest Entities," ("FIN 46"). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46, as amended, is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003. The adoption of FIN 46 is not expected to
have an 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 income items
expressed as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
(UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited)
- -----------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT 26.6% 21.7% 29.2% 24.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 22.7% 22.7% 27.6% 26.1%
RESEARCH AND DEVELOPMENT 2.7% 3.6% 3.7% 2.5%
OTHER INCOME .5% 2.0% .9% 2.1%
NET INCOME (LOSS) 1.1% (1.9%) (.9%) (1.4%)
THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------
NET SALES for the three months ended September 30, 2003 were $4,815,792, an
increase of $1,113,305 (30.1%) from net sales of $3,702,487 for the
corresponding period in 2002. The increase is due in part to increased sales of
core products such as stackers and bottomwrapers resulting from modestly
improved economic conditions. Additionally, we recognized sales totaling
$524,000 from our new inserter product line obtained through our acquisition of
assets from USA Leader, Inc.
GROSS PROFIT for the three months ended September 30, 2003 was $1,280,986, an
increase of $478,162 (59.6%) as compared to gross profit of $802,824 for the
corresponding period in 2002. Gross profit as a percentage of sales for the
three months ended September 30, 2003 was 26.6% compared to 21.7% 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.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended
September 30, 2003 were $1,092,266, an increase of $251,032 (29.8%) as compared
to $841,258 for the corresponding period in 2002. The increase was due primarily
to changes in allowance for doubtful accounts, increase in selling and marketing
costs, and increase in amortization costs. While we reduced our allowance for
doubtful accounts by $75,000 during the three month period ending September 30,
2003 due to collection of customer balances that were previously reserved, the
reduction during the same period last year was $113,000. We incurred additional
marketing costs related to our new inserter and Packman product lines. Also
contributing to the increase of selling, general and administrative expenses
were amortization expense relating to identifiable intangible assets from USA
Leader acquisition and higher variable selling expenses.
RESEARCH AND DEVELOPMENT expenses for the three months ended September 30, 2003
were $129,496, a decrease of $3,193 (2.4%) as compared to $132,689 the same
period in 2002. Substantially all research and development efforts during the
three months ended September 30, 2003 were devoted to completing and testing the
Quipp Packman packaging system.
OTHER INCOME AND EXPENSE (NET) for the three months ended September 30, 2003 was
$21,804 as compared to $72,969 for the same period in 2002. Interest income for
the three months ended September 30, 2003 decreased to $23,554 from $48,384 due
primarily to lower interest rates on securities held for sale. Additionally,
during the three months ending September 2002 we realized a gain on the sale of
securities totaling $27,393.
11
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------
NET SALES for the nine months ended September 30, 2003 were $13,144,884, an
increase of $1,267,029 (10.7%) from net sales of $11,877,855 for the same period
in 2002. The increase is due in part to increased sales of core products such as
stackers and bottomwrapers resulting from modestly improved economic conditions.
Additionally, we recognized sales totaling $524,000 from our new inserter
product line obtained through our acquisition of assets from USA Leader, Inc.
GROSS PROFIT for the nine months ended September 30, 2003 was $3,834,255, an
increase of $972,672 (34.0%) as compared to $2,861,583 for the corresponding
period in 2002. Gross profit as a percentage of sales for the nine months ended
September 30, 2003 increased to 29.2% compared to 24.1% 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, as well as 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 nine months ended September
30, 2003 were $3,623,765, an increase of $ 528,145 (17.1%) as compared to
$3,095,620 for the same period in 2002. The increase was due primarily to
changes in allowance for doubtful accounts, incurrence of non-recurring costs,
and increase in selling, marketing and amortization costs. We increased our
allowance for doubtful accounts $65,000 net for the nine months ending September
30, 2003 compared to an $113,000 reduction in allowance for doubtful accounts
for the corresponding period in 2002. In 2003, we had a net increase in our
allowance for doubtful accounts due to the deterioration of the financial
condition of one of our customers offset in part by collection of old accounts
receivable balances that were previously reserved. The reduction in the accounts
receivable reserve in 2002 resulted from our collecting customer receivable
balances that were previously reserved. Non-recurring costs of approximately
$160,000 related to 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. The remaining increase in selling, general and
administrative costs relate to marketing costs for our inserter and Packman
product lines, amortization expense relating to identifiable intangible assets
from USA Leader acquisition and higher variable selling expenses.
RESEARCH AND DEVELOPMENT expenses for the nine months ended September 30, 2003
were $492,490, an increase of $191,195 (63.5%) as compared to $301,295 for the
same period in 2002. For the nine months ended September 30, 2003 we devoted
engineering and technical efforts to develop the Quipp Packman packaging system.
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
custom design and production activities were charged to cost of goods sold.
OTHER INCOME AND EXPENSE (NET) for the nine months ended September 30, 2003 was
$112,076 as compared to $249,561 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.
Additionally, for the nine months ending September 30, 2002, we realized gains
of $49,287 on the sale of securities.
GENERAL
Our backlog as of September 30, 2003 was approximately $10,783,000 compared to
approximately $4,686,000 at December 31, 2002 and $4,504,000 at September 30,
2002. We expect to ship all backlog items within the next twelve months. Orders
booked for the three and nine months ended September 30, 2003 were approximately
$8,578,000 and $19,213,000 compared to orders of approximately $4,899,000 and
$9,399,000 for the three and nine months ended September 30, 2002. Our increase
in third quarter orders resulted from a single order from a major U.S. newspaper
for palletizer, conveyors and ancillary equipment.
LIQUIDITY
On September 30, 2003, cash and cash equivalents and securities available for
sale totaled $8,204,588 as compared to $8,626,072 at December 31, 2002, a
decrease of $421,484 or 4.9%. This decrease was primarily 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 September 30, 2003
was $8,969,820, a decrease of $613,549 from $9,583,369 at December 31, 2002. The
deceased working capital is due primarily to acquisition costs related to the
purchase of assets from USA Leader, Inc. We believe that our cash, cash
equivalents and securities available for sale together with cash generated from
operations is sufficient to fund operations at the current levels.
12
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 portrayal of our
financial condition and results and require management's most difficult,
subjective or complex judgments. These judgments often result from the need to
make estimates about the effects of matters that are inherently uncertain.
We believe that our most critical accounting policies relate to (1) revenue
recognition involving complex installation services, (2) allowance for doubtful
accounts, (3) contract contingencies, (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 amount of the impairment to
selling, general and administrative expenses.
13
FORWARD LOOKING STATEMENTS
The statements contained in this quarterly report on Form 10-Q, including
statements concerning anticipated timing of shipments and, 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.
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
of 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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PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
31.1 Certificate of the Chief Executive Officer of the Registrant required
by Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certificate of the principal financial officer of the Registrant
required by Rule 13a-14(a) 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 July 25, 2003, we furnished a report on Form 8-K providing
information responsive to item 12 in connection with a press release,
issued on July 25, 2003, announcing earnings for the quarter ended June
30, 2003 and including additional financial information.
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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: November 13, 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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