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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, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14870
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QUIPP, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-2306191
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 N.W. 157th Street, Miami, Florida 33014
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(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, 2004 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, 2004 and December 31, 2003
Unaudited Condensed Consolidated Statements of Operations - 4
Three months ended March 31, 2004 and 2003
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Three months ended March 31, 2004 and 2003
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 6 - Exhibits and Reports on Form 8-K 14
2
PART 1 - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 500,340 $ 1,227,665
Securities 7,564,765 8,655,729
Accounts receivable, net 3,256,793 2,472,766
Inventories 5,507,165 3,692,386
Deferred tax asset-current 666,337 666,337
Prepaid expenses and other receivables 286,139 239,791
Current portion note receivable 32,374 154,565
------------------------------
Total current assets 17,813,913 $ 17,109,239
Property, plant and equipment, net 1,765,275 1,765,079
Goodwill and Intangible assets, net 831,656 871,698
Other assets 45,499 47,179
------------------------------
Total assets $ 20,456,343 $ 19,793,195
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 2,305,568 1,324,004
Accrued salaries and wages 701,383 491,919
Deferred revenues 3,430,653 4,174,113
Other accrued liabilities 1,925,210 1,803,652
------------------------------
Total current liabilities 8,462,814 7,893,688
Long-term debt 450,000 450,000
------------------------------
Total liabilities 8,912,814 8,343,688
Shareholders' equity:
Common stock - par value $.01 per share, authorized
8,000,000 shares, issued 1,433,025 in 2004 and 2003) 14,330 14,330
Additonal paid-in capital 73,693 72,487
Treasury stock, at cost (9,250 shares in 2004 and 2003) (148,375) (148,375)
Retained earnings 11,600,458 11,509,149
Other comprehensive income 3,423 1,916
------------------------------
11,543,529 11,449,507
------------------------------
Total liabilities and shareholders' equity $ 20,456,343 $ 19,793,195
==============================
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, 2004 March 31, 2003
- ----------------------------------------------------------------------------------------
Net sales $ 5,641,373 $ 3,305,291
Cost of sales (4,062,239) (2,350,486)
----------------------------
Gross profit 1,579,134 954,805
Operating expenses:
Selling, general and
administrative expenses (1,334,845) (1,154,839)
Research and development (116,578) (184,085)
----------------------------
Operating profit (loss) 127,711 (384,119)
- --------------------------------------------------------------------------------------
Other income (expense):
Miscellaneous income -- --
Interest income 19,999 43,197
Interest expense (1,616) (2,077)
----------------------------
18,383 41,120
- --------------------------------------------------------------------------------------
Income (loss) before income taxes 146,094 (342,999)
Income tax (expense) benefit (54,785) 119,350
----------------------------
Net income (loss) $ 91,309 $ (223,649)
============================
Per share amounts:
Basic income per common share 0.06 (0.16)
Diluted income per common share 0.06 (0.16)
Basic average number of common
and common equivalent shares outstanding 1,423,775 1,419,442
Diluted average number of common
and common equivalent shares outstanding 1,426,092 1,419,442
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, 2004 March 31, 2003
- -------------------------------------------------------------------------------------------------------------
Cash provided by operations:
Net income (loss) $ 91,309 $ (223,649)
Reconciliation of net income (loss) to net cash
provided by operations:
Depreciation 67,608 64,332
Intangible amortization and goodwill impairment 40,042 19,499
Stock-based compensation 1,206 14,777
Changes in operational assets and liabilities net of effect of acquisition:
Accounts and notes receivable (661,836) 472,499
Inventories (1,814,779) (817,410)
Prepaid and other assets (44,668) (174,641)
Accounts payable and other accrued liabilities 1,312,586 363,269
Deferred revenues (743,460) (82,136)
----------------------------
Net cash used in operations (1,751,992) (363,460)
----------------------------
Cash flow from investing activities:
Securities purchased (508,186) (3,771,300)
Securities sold 1,600,657 3,112,211
Capital expenditures (67,804) (51,244)
Purchse of assets from USA Leader, Inc. -- (188,951)
----------------------------
Net cash provided (used in) investing activities 1,024,667 (899,284)
----------------------------
Decrease in cash and cash equivalents (727,325) (1,262,744)
Cash and cash equivalents at beginning of year 1,227,665 1,769,545
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of quarter $ 500,340 $ 506,801
============================================================================================================
Supplemental disclosure of noncash information:
Unrealized loss on securities available for sales, net of taxes $ (1,507) $ (6,341)
Issuance of shares to purchase the assets of USA Leader Inc. $ -- $ 57,780
Supplemental disclosure of cash payments:
Interest $ 1,616 $ 2,077
- ------------------------------------------------------------------------------------------------------------
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
(the Company). 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, 2003 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 March
31, 2004 and the results of their operations and cash flows for the three months
ended March 31, 2004. The results of operations for the three months ended March
31, 2004 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2004. 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, 2003 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, 2004 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 has been shipped to customers but
has not yet been recognized as a sale. The Company will recognize the sales and
cost of sales relating to 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, 2004 and December 31, 2003 is as follows:
MARCH 31, 2004 December 31, 2003
--------------------------------------------------------------------------
Raw materials $1,757,836 $1,865,971
Work in process 1,540,280 1,153,058
Finished goods 157,598 199,466
----------------------------
Subtotal 3,455,714 3,218,495
Shipped, not recognized 2,051,451 473,891
----------------------------
$5,507,165 $3,692,386
----------------------------
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.
In October 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104, "Revenue Recognition," ("SAB No. 104") which was effective as
of December 31, 2003. The Company's revenue recognition policies comply with SAB
No. 104.
6
NOTE 4 - INCOME PER SHARE
Basic income (loss) per share is based on 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 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, the dilutive income per share calculation
includes 2,317 common share equivalents resulting from the Company's stock
option plan. For the three months ending March 31, 2003, the exercise of options
was not assumed since the effect is antidilutive.
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. 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.
Options issued in 2004 resulted in a stock-based compensation expense totaling
$1,206 for the three months ending March 31, 2004. 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, 2004 March 31, 2003
--------------------------------------------------------------------------------------
Net income (loss) as reported $ 91,309 ($223,649)
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all
awards, net of tax ($ 7,521) ($ 10,246)
Pro forma net income (loss) $ 83,788 ($233,895)
Income (Loss) Per Share:
Basic and diluted income (loss) per share $ 0.06 ($ 0.16)
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 was estimated as of
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.
Also, the Company pays 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 March 31, 2004, total
consideration for the asset purchase amounted to $428,916, which includes
$26,182 of Additional Consideration.
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, 2004, if the sum of the $428, 916 total consideration
paid as of March 31, 2004 and Additional Consideration that is paid subsequent
to that date exceeds the estimated fair value of net tangible assets and
intangible assets, such excess amounts will be recorded as goodwill.
The purchase price is allocated as follows:
Net liabilities $(112,066)
Less: Acquisition costs (216,090)
Accrued acquisition costs (13,765)
Accrued contingent consideration (89,163)
---------
(431,084)
Amortizable Intangible Assets:
Non-compete Agreement 150,000
Customer List 10,000
Patent 200,000
Acquired Technology 500,000
-------
860,000
--------
428,916
========
As noted above, $860,000 of the purchase price 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. Amortization expense charged to income was
$28,798 for the period ending March 31, 2004.
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 March 31, 2004 include the operating results of the purchased assets. The
following unaudited pro forma results of operation of the Company for the period
ended March 31, 2003 assume the acquisition occurred as of January 1, 2003. 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 date indicated.
MARCH 31, 2003
---------------
Net Sales 3,614,948
Net Loss (183,257)
Basic and diluted loss per common share (0.13)
Basic and diluted average number of
common shares outstanding 1,423,775
NOTE 7 - RECENT PRONOUNCEMENTS
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 November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others," an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002. The Company does not have guarantees falling under the
requirements of FIN No. 45 and, as a result, the adoption of this interpretation
did not have an impact on the Company's consolidated financial statements.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"),
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 ("ARB 51")," which addresses how a business enterprise
should evaluate whether it has a controlling interest in an entity through means
other than voting rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46 ("FIN 46"), which was issued in January
2003. Before concluding that it is appropriate to apply the ARB 51 voting
interest consolidation model to an entity, an enterprise must first determine
that the entity is not a variable interest entity. As of the effective date of
FIN 46R, an enterprise must evaluate its involvement with all entities or legal
structures created before February 1, 2003 to determine whether Consolidation
requirements of FIN 46R apply to those entities. The adoption of FIN 46 did not
have an impact on the Company's consolidated financial position and results of
operations.
9
In March 2004, the FASB issued a proposed Statement, Share-Based Payment, that
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for (a) equity instruments of the company
or (b) liabilities that are based on the fair value of the company's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and generally would require instead that such transactions be
accounted for using a fair-value based method. The proposed Statement is
effective for awards granted, modified, or settled in fiscal years beginning
after December 15, 2004, for public entitles that used the fair-value based
method of accounting under the original provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," for recognition or pro forma disclosure purposes.
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. The proposed Statement should not have an impact on the Company's
consolidated financial position, cash flows and results of operations.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06,
"Participating Securities and the Two-Class Method Under FASB Statement No. 128,
Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company has evaluated the effect of adopting EITF 03-06 and believes
that it will not have an effect on its consolidated financial position, cash
flows and results of operations.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
- --------
Net sales in the quarter ending March 31, 2004 were bolstered by the increased
order activity in the third and fourth quarter of 2003 and a strong backlog
entering into 2004. New order bookings slowed in the first quarter 2004 to
$3,773,000 compared to $8,578,000 and $7,908,000 in the third and fourth
quarters of 2003. Although we previously disclosed our expectation that incoming
orders would weaken in the first quarter 2004, the decline was greater than
anticipated. However, general U.S. economic conditions are improving, and many
of our newspaper customers have reported increases in advertising revenues
during the first three months of 2004. Since historically there has been a
correlation between advertising revenue and newspaper capital spending, we are
hopeful that our incoming order volume will improve during the remainder of
2004.
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,
2004 2003
(UNAUDITED) (Unaudited)
---------------------------------------------------------------------
NET SALES 100.0% 100.0%
GROSS PROFIT 28.0% 28.9%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 23.7% 34.9%
RESEARCH AND DEVELOPMENT 2.1% 5.6%
OTHER INCOME, NET 0.3% 1.2%
NET INCOME 1.6% (6.8)%
NET SALES for the three months ended March 31, 2004 were $5,641,373, an increase
of $2,336,082 (70.7%) compared to net sales of $3,305,291 for the corresponding
period in 2003. Improved net sales reflect increased order bookings in the
second half of 2003 and a strong backlog entering into 2004.
GROSS PROFIT for the three months ended March 31, 2004 was $1,579,134, an
increase of $624,329 (65.4%) as compared to $954,805 for the corresponding
period in 2003. Gross profit as a percentage of sales for the three months ended
March 31, 2004 decreased to 28.0% compared to 28.9% for the corresponding period
in 2003. The decrease in gross profit margin is mainly due to product mix and
increased discounts and trade-in allowances, offset in part by the allocation of
fixed manufacturing overhead costs over higher production volumes. Some of the
increased discounts and trade-in allowances were offered during the economic
downturn and, although they related to orders shipped in the first quarter of
2004, quotations for these orders were submitted to customers in the latter part
of 2002 and in early 2003.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended March
31, 2004 were $1,334,845, an increase of $180,006 (15.6%) as compared to
$1,154,839 for the corresponding period in 2003. The increase is due primarily
to an increase in sales, marketing and intangible amortization costs offset in
part by reduced charges to the allowance for doubtful accounts as well as the
absence of non-recurring charges we incurred in 2003, as described below.
Our selling and marketing costs increased as we added additional staff to
support our new product lines and greater sales volume. In addition, selling and
marketing costs reflect higher variable selling expenses such as commissions,
and warranty expense. Higher intangible amortization costs relate to the assets
acquired from USA Leader, Inc. in March 2003.
During the three months ending March 31, 2003, we incurred higher charges to our
allowance for doubtful accounts due to deterioration of the financial condition
of one of our distributors. Additionally, in the first quarter of 2003, we
incurred non-recurring costs related to the implementation of a shareholder
rights plan as well as a special meeting of shareholders held in response to the
demand by a shareholder.
11
RESEARCH AND DEVELOPMENT expenses for the three months ended March 31, 2004 were
$116,578, a decrease of $67,507 (37.0%) as compared to $184,085 for the same
period in 2003. During the three months ended March 31, 2004, we substantially
completed the testing of the Quipp Packman packaging system and initiated a new
product development project. For the three months ended March 31, 2003, our
research and development resources were dedicated to the development of the
Quipp Packman packaging system.
OTHER INCOME AND EXPENSE (NET) for the three months ended March 31, 2004 were
$18,383 as compared to $41,120 for the corresponding period in 2003. Interest
income decreased by $23,179 to $19,999 for the three months ending March 31,
2004 compared to $43,177 for the same period in 2003 due to reduced interest
rates on securities available for sale.
GENERAL
Our backlog as of March 31, 2004 was $10,857,000 compared to $12,725,000 at
December 31, 2003 and $6,440,000 at March 31, 2003. We expect to ship all items
in our backlog during the next twelve months. Orders for the three months ended
March 31, 2004 were $3,773,000 compared to orders of $5,064,848 during the three
months ending March 31, 2003.
LIQUIDITY
On March 31, 2004, cash and cash equivalents and securities available for sale
totaled $8,065,105 as compared to $9,883,394 at December 31, 2003, a decrease of
$1,818,289. Working capital on March 31, 2004 was $9,351,099, an increase of
$135,548 from $9,215,551 at December 31, 2003. The reduction in cash and cash
equivalents and securities available for sale is principally due to the increase
in inventory to accommodate scheduled shipments in the first and second quarter
of 2004. 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 ESTIMATES
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 and assumptions are most significant
where they involve levels of subjectivity and judgment necessary to account for
highly uncertain matters or matters susceptible to change, and where they can
have a material impact on our financial condition and operating performance. We
discuss below the more significant estimates and related assumptions used in the
preparation of our consolidated financial statements. If actual results were to
differ materially from the estimates made, the reported results could be
materially affected. Our senior management has discussed the application of
these estimates with our Audit Committee.
Revenue recognition
- -------------------
Our revenue recognition policy with regard to equipment sales requiring complex
installation services calls for recognition when installation is complete and
collection of the resulting accounts receivable is reasonably assured. 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. Nevertheless, there
is a risk that credit losses in the future will exceed our expectations, in
which case our operating results would be adversely affected.
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.
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 estimated, 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.
FORWARD LOOKING STATEMENTS
The quarterly report on Form 10-Q contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to incoming order volume for the remainder of 2004, shipment
of backlog orders and adequacy of available resources. 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. To ensure safety and liquidity, we 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
Our management, with the participation of the our Chief Executive Officer and
principal financial officer, evaluated the effectiveness of our 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 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 our internal control over financial reporting occurred during our
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our 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 March 1, 2004, we furnished a report on Form 8-K providing
information responsive to item 12 in connection with a press release,
issued on February 27, 2004, announcing earnings for the quarter and
year ended December 31, 2003.
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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: May 13, 2004
By: /s/ Michael S. Kady
-----------------------
Michael S. Kady
President and Chief Executive Officer
By: /s/ Eric Bello
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Eric Bello Treasurer (Principal financial
and accounting officer)
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