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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, 2004.
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
QUIPP, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2306191
------- ----------
(State or other jurisdiction (I.R.S. Employer
of 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 2, 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
June 30, 2004 and December 31, 2003
Unaudited Condensed Consolidated Statements of Income - 4
Three and six months ended June 30, 2004 and 2003
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Six months ended June 30, 2004 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of 10
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 4 - Submission of Matters to a Vote of Security Holders 15
Item 6 - Exhibits 16
2
PART 1 - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,391,156 $ 7,490,814
Securities available for sale 6,476,230 2,392,580
Accounts receivable, net 4,146,659 2,472,766
Inventories 5,619,103 3,692,386
Deferred tax asset-current 666,337 666,337
Prepaid expenses and other receivables 142,440 239,791
Current portion of notes receivable -- 154,565
------------ ------------
TOTAL CURRENT ASSETS $ 18,441,925 $ 17,109,239
Other assets:
Property, plant and equipment, net 1,759,160 1,765,079
Goodwill and Intangible assets, net 796,408 871,698
Other assets 43,820 47,179
------------ ------------
$ 21,041,313 $ 19,793,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,837,584 1,324,004
Accrued salaries & wages 611,557 491,919
Deferred revenues 4,211,438 4,174,113
Other accrued liabilities 2,156,320 1,803,652
------------ ------------
TOTAL CURRENT LIABILITIES 8,916,899 7,893,688
Long-term debt, excluding current portion 450,000 450,000
------------ ------------
TOTAL LIABILITIES 9,366,899 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
Additional paid-in capital 74,899 72,487
Treasury stock, at cost (9,250 shares in 2004 and 2003) (148,375) (148,375)
Retained earnings 11,749,963 11,509,149
Other comprehensive income (16,403) 1,916
------------ ------------
11,674,414 11,449,507
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,041,313 $ 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 FOR THE SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------------------------------------------------------------
Net sales $ 7,086,461 $ 5,023,801 $ 12,727,834 $ 8,329,092
Cost of sales (5,254,042) (3,425,337) (9,316,281) (5,775,823)
------------------------------------------------------------------
GROSS PROFIT 1,832,419 1,598,464 3,411,553 2,553,269
------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses (1,547,984) (1,376,660) (2,882,829) (2,531,499)
Research and development (230,719) (178,909) (347,297) (362,994)
------------------------------------------------------------------
OPERATING PROFIT (LOSS) 53,716 42,895 181,427 (341,224)
- -----------------------------------------------------------------------------------------------------------------------
Other income (expense):
Miscellaneous income 80,000 15,019 80,000 15,019
Interest income 108,037 36,356 128,036 79,553
Interest expense (1,672) (2,223) (3,288) (4,300)
------------------------------------------------------------------
186,365 49,152 204,748 90,272
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 240,081 92,047 386,175 (250,952)
Income tax (expense) benefit (90,576) (44,263) (145,361) 75,087
------------------------------------------------------------------
NET INCOME (LOSS) $ 149,505 $ 47,784 $ 240,814 $ (175,865)
- -----------------------------------------------------------------------------------------------------------------------
Per share amounts:
Basic income (loss) per common share $ 0.11 $ 0.03 $ 0.17 $ (0.12)
Diluted income (loss) per common share $ 0.10 $ 0.03 $ 0.17 $ (0.12)
Basic average number of common and
common equivalent shares outstanding 1,423,775 1,423,775 1,423,775 1,421,620
Diluted average number of common and
common equivalent shares outstanding 1,428,060 1,423,775 1,427,076 1,421,620
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,
2004 2003
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operations:
Net income $ 240,814 $ (175,865)
Reconciliation of net income to net cash (used in) provided by operations:
Depreciation 136,226 130,452
Intangible amortization and goodwill impairment 75,290 67,797
Stock-based compensation 2,412 14,777
Changes in operational assets and liabilities net of effect of acquisition:
Accounts receivable (1,673,893) 678,844
Inventories (1,926,717) (1,236,328)
Prepaid expenses and other assets 100,710 --
Notes Receivable 154,565 --
Accounts payable and other accrued liabilities 985,886 61,965
Deferred revenues 37,325 865,469
----------------------------
NET CASH (USED IN) PROVIDED BY OPERATIONS (1,867,382) 407,111
----------------------------
Cash flow from investing activities:
Securities purchased (4,491,969) (5,000,750)
Securities sold or redeemed 390,000 4,156,696
Capital expenditures (130,307) (113,187)
----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,232,276) (957,241)
----------------------------
Increase (decrease) in cash and cash equivalents (6,099,658) (550,130)
Cash and cash equivalents, beginning of the year 7,490,814 1,769,545
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the quarter $ 1,391,156 $ 1,219,415
============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest $ 3,288 $ 4,300
============================================================================================================
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, 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 June
30, 2004 and the results of its operations and cash flows for the six months
ended June 30, 2004. The results of operations for the six months ended June 30,
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 in the United States of America for complete financial
statements. The unaudited condensed consolidated balance sheet at December 31,
2003 was derived from audited financial statements, but is not accompanied by
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 has been shipped to customers for which the sale has
not been recognized. Cost is determined using the first-in, first-out (FIFO)
method. The composition of inventories at June 30, 2004 and December 31, 2003 is
as follows:
JUNE 30, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Raw materials $1,753,165 $1,865,971
Work in process 1,591,583 1,153,058
Finished goods 262,691 199,466
-----------------------------
Subtotal 3,607,439 3,218,495
Shipped to customers 2,011,664 473,891
-----------------------------
Total $5,619,103 $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 collection of the
resulting accounts receivable is reasonably assured and is recorded net of
discounts.
6
NOTE 4 - INCOME (LOSS) 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 and six months ending June 30, 2004, the dilutive income per share
calculation includes 4,285 and 3,319 common share equivalents resulting from the
Company's stock option plan. For the three and six months ending June 30, 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 stock options granted under its equity
compensation plan using 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 Statement of Financial Accounting Standards (SFAS) 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 $2,412
for the six months ending June 30, 2004. No options were issued in 2003. The
following table illustrates the effect on net income (loss) and income (loss)
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period.
- ----------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2004 June 30, 2003
- ----------------------------------------------------------------------------------------
Net income as reported $ 240,814 ($175,865)
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all
rewards issued prior to
January 1, 2003, net of tax $ (7,311) $ (21,226)
Pro forma net income (loss) $ 233,503 $(197,091)
Loss Per Share:
Basic and diluted income (loss) per share $ 0.16 $ (0.14)
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%
7
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.
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 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, 2004, if the sum of the $402,734 total consideration
paid as of June 30, 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 (277,302)
Accrued contingent consideration (67,898)
----------
(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 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
$57,597 for the period ending June 30, 2004.
8
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
The unaudited condensed consolidated statement of operations for the period
ended June 30, 2004 include the operating results of the purchased assets. The
following unaudited pro forma results of operation of the Company for the period
ended June 30, 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.
JUNE 30, 2003
-------------------
Net Sales $8,638,749
Net Loss (132,503)
Basic and diluted loss per common share (0.09)
Basic and diluted average number of
common shares outstanding 1,423,775
NOTE 7 - RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 financial statement presentation.
NOTE 8 - 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.
9
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,
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT 25.9% 31.8% 26.8% 30.7%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 21.8% 27.4% 22.6% 30.4%
RESEARCH AND DEVELOPMENT 3.3% 3.6% 2.7% 4.4%
OTHER INCOME, NET 2.6% 1.0% 1.6% 1.1%
NET INCOME 2.1% 1.0% 1.9% (2.1%)
THREE MONTHS ENDED JUNE 30, 2004
- --------------------------------
NET SALES for the three months ended June 30, 2004 were $7,086,461, an increase
of $2,062,660 (41.1%) from net sales of $5,023,801 for the corresponding period
in 2003. Improved net sales are due mostly to the higher level of order bookings
in the second half of 2003 and the resulting strong backlog entering into the
second quarter of 2004.
GROSS PROFIT for the three months ended June 30, 2004 was $1,832,419, an
increase of $233,955 (14.6%), as compared to $1,598,464 for the corresponding
period in 2003. Gross profit as a percentage of sales for the three months ended
June 30, 2004 decreased to 25.9% compared to 31.8% for the corresponding period
in 2003. The decrease in gross profit margin is mainly due to product mix and
the comparatively higher costs associated with larger systems orders. Costs of
production and installation with respect to In-Line inserters and waste handling
systems exceeded expectations but should decline as our familiarity with these
new products increases. Also, we embarked on a redesign of our gripper conveyor
to enhance the performance of the product in certain applications. Costs
associated with the rework of a recent gripper conveyor installation had an
adverse affect on gross profit.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended June 30,
2004 were $1,547,984, an increase of $171,324 (12.4%) as compared to $1,376,660
for the corresponding period in 2003. The increase is due primarily to higher
variable selling and administrative costs and increased marketing efforts,
offset in part by the absence of non-recurring charges that were incurred in
2003, as described below.
In the second quarter of 2004, we incurred higher variable selling and
administrative costs such as commissions, warranty, and bonus accruals due to
improved sales and profits. In addition, our advertising and trade show costs
increased to promote our recently introduced In-Line "C" inserting/collating
system with poly-wrapping capabilities, In-Line inserter and Packman product
lines.
In the second quarter of 2003, we incurred 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.
We expect that our selling, general and administrative expenses will increase in
the second half of 2004 and in 2005 due to expenses related to compliance
requirements of the Sarbanes-Oxley Act of 2002 and related regulations.
10
RESEARCH AND DEVELOPMENT expenses for the three months ended June 30, 2004 were
$230,719, an increase of $51,810 (29.0%) as compared to $178,909 for the same
period in 2003. For the three months ended June 30, 2004, we devoted much of our
research and development resources to our new In-Line "C" inserting/collating
system with poly-wrapping capabilities. The Quipp In-Line "C" is designed to be
used in collating or inserting operations and includes poly-wrap bagging
capabilities to maintain the integrity of collated or inserted products. The
In-Line "C" was recently introduced to customers through trade magazines and
mailings, and was featured by the NEXPO trade show. For the same period in
2003, we focused much of our engineering and technical efforts to develop the
Packman packaging system.
OTHER INCOME AND EXPENSE (NET) for the three months ended June 30, 2004 was
$186,365 as compared to $49,152 for the same period in 2003. Our interest income
for the three months ended June 30, 2004 increased to $108,037 from $36,356 in
2003 as a result of our collection of the final installment of an outstanding
note receivable from an international customer. All prior payments on the note
receivable had previously been applied only to the principal balance due to
uncertainties regarding collectability of the note. Interest relating to the
note was recognized upon receipt of the final installment. Additionally, we
received $80,000 of royalty income relating to our patented automatic cart
loading system technology used by another supplier of post-press material
handling equipment. We received $15,000 of royalty income during the same period
in 2003.
SIX MONTHS ENDED JUNE 30, 2004
- ------------------------------
SALES for the six months ended June 30, 2004 were $12,727,834, an increase of
$4,398,742 (52.8%) compared to net sales of $8,329,092 in the same period in
2003. Improved net sales are due mostly to the higher level of order bookings in
the second half of 2003 and the resulting strong backlog entering into 2004.
GROSS PROFIT for the six months ended June 30, 2004 was $3,411,553, an increase
of $858,284 (33.6%) as compared to $2,553,269 for the corresponding period in
2003. Gross profit as a percentage of sales for the six months ended June 30,
2004 decreased to 26.8% compared to 30.7% for the corresponding period in 2003.
The decrease in gross profit margin is mainly due to increased discounts,
product mix, and higher costs on larger systems orders, offset in part by the
allocation of fixed manufacturing overhead costs over increased production
volumes. Certain of the increased discounts resulted from quotations submitted
to customers in the latter part of 2002 and in 2003 during the economic downturn
and affected some orders shipped in the first quarter of 2004. Additionally,
during the six months ended June 30, 2004, costs of production and installation
with respect to In-Line inserters and waste handling systems exceeded
expectations, and rework costs were incurred to enhance the performance of a
recent gripper conveyor installation.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the six months ended June 30,
2004 were $2,882,829, an increase of $351,330 (13.9%) as compared to $2,531,499
for the same period in 2003. The increase is due primarily to higher variable
selling and administrative costs and increased marketing efforts, offset in part
by reduced charges to the allowance for doubtful accounts as well as the absence
of non-recurring charges that were incurred in 2003, as described below.
In the second quarter of 2004, we incurred higher variable selling and
administrative costs such as commissions, warranty, and bonus accrual due to
improved sales and profits. In addition, our advertising and trade show costs
increased to promote our recently introduced In-line "C" inserting/collating
system with poly-wrapping capabilities, In-Line inserter and Packman product
lines.
During the six months ending June 30, 2003, we incurred higher charges to our
allowance for doubtful accounts due to deterioration of the financial condition
of one of our distributors. Additionally, we incurred 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 six months ended June 30, 2004 were
$347,297, a decrease of $15,697 (4.3%) as compared to $362,994 for the same
period in 2003. For the six months ended June 30, 2004, we devoted much of our
research and development resources to our new In-Line "C" inserting/collating
system with poly-wrapping capabilities. For the same period in 2003, we focused
much of our engineering and technical efforts on the development of the Packman
packaging system.
OTHER INCOME AND EXPENSE (NET) for the six months ended June 30, 2004 was
$204,748 as compared to $90,272 for the same period in 2003. Interest income for
the six months ended June 30, 2004 increased to $128,036 from $79,553 mostly due
to the collection the final installment of an outstanding note receivable from
an international customer offset in part by lower interest rates on our cash and
cash equivalents and securities available for sale. All principal and interest
payments on the note receivable had previously been applied only to the
principal balance due to uncertainties regarding collectability of the note.
Interest relating to the note was recognized upon receipt of the final
installment. Additionally, we received $80,000 of royalty income relating to our
patented automatic cart loading system technology used by another supplier of
post-press material handling equipment. We received $15,000 of royalty income
during the same period in 2003.
GENERAL
The Company's backlog as of June 30, 2004 was $8,305,000 compared to $12,725,000
at December 31, 2003 and $7,021,000 at June 30, 2003. Orders for the six months
ended June 30, 2004 were $8,308,000, compared to orders of $10,635,000 for the
same period last year.
LIQUIDITY
On June 30, 2004, cash and cash equivalents and securities available for sale
totaled $7,867,386 as compared to $9,883,394 at December 31, 2003, a decrease of
$2,016,008. The reduction in cash and cash equivalents and securities available
for sale results principally from the need to use funds to increase inventory
and carry receivables from the sale of large and complex orders that require a
longer period of time to design, manufacture and install. As these systems are
installed and accepted by our customers, the Company expects to complete the
order cycle by recognizing revenue and cost of sales and collecting the
installments that are contractually due upon installation and acceptance. The
Company believes that the remaining cash, cash equivalents and securities
available for sale together with cash generated from operations will be
sufficient to fund operations at the current level.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, management is required to make estimates
and assumptions that, among other things, affect the reported amounts of assets
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.
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.
12
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.
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 the acquired 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 expenses related to compliance
requirements of the Sarbanes-Oxley Act of 2002 and related regulations, cost of
production and installation with respect to In-Line inserters and waste handling
systems, effects of installation and acceptance of large and complex orders,
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, regulatory developments, 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 and
installation, cancellation of customer orders, engineering and production
difficulties, and extraordinary movements in interest rates.
13
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, we
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.
14
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2004, we held our annual meeting of shareholders (the "Annual
Meeting"). At the Annual Meeting, the shareholders voted on the election of two
directors, a proposal to amend our Articles of Incorporation to eliminate the
classification of the Board of Directors and a proposal to ratify the
appointment of KPMG LLP as our independent accountants for 2004.
The voting results at the Annual Meeting were as follows:
1. Election of Directors
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Cristina H. Kepner 1,345,901 135
Arthur J. Rawl 1,344,901 1,135
The terms of office of Ralph M. Branca, Lawrence J. Gibson, and Michael S. Kady
as directors continued after the Annual Meeting.
2. Amendment to Quipp's Articles of Incorporation to eliminate classification of
the Board of Directors.
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
1,343,686 1,010 1,340 0
3. Ratification of the Appointment of KPMG LLP as our independent public
accountants for 2004.
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
1,345,876 0 160 0
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ITEM 6 EXHIBITS
(a) The following exhibits are filed with this report:
3.1 Articles of Amendment to Articles of Incorporation.
3.2 Articles of Incorporation, as amended.
3.3 Bylaws, as amended.
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
We did not file any reports on Form 8-K during the quarter for which this report
is filed.
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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, 2004 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)
17