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, 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
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QUIPP, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-2306191
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 N.W. 157th Street, Miami, Florida 33014
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (305) 623-8700
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's common stock, $.01 par value,
outstanding at November 3, 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
September 30, 2004 and December 31, 2003
Unaudited Condensed Consolidated Statements of Income - 4
Three and nine months ended September 30, 2004 and 2003
Unaudited Condensed Consolidated Statements of Cash Flows - 5
Nine months ended September 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 13
Item 4 - Controls and Procedures 13
PART II - OTHER INFORMATION
Item 6 - Exhibits 14
2
PART 1 - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 December 31, 2003
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,823,846 $ 7,490,814
Securities available for sale 5,982,940 2,392,580
Accounts receivable, net 2,783,143 2,472,766
Inventories 5,397,706 3,692,386
Deferred tax asset-current 666,337 666,337
Prepaid expenses and other receivables 136,732 239,791
Current portion of notes receivable -- 154,565
------------ ------------
TOTAL CURRENT ASSETS $ 16,790,704 $ 17,109,239
Other assets:
Property, plant and equipment, net 1,723,305 1,765,079
Goodwill and Intangible assets, net 755,371 871,698
Other assets 42,139 47,179
------------ ------------
TOTAL ASSETS $ 19,311,519 $ 19,793,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,223,084 1,324,004
Accrued salaries & wages 534,964 491,919
Deferred revenues 3,299,469 4,174,113
Other accrued liabilities 2,048,951 1,803,652
------------ ------------
TOTAL CURRENT LIABILITIES 7,206,468 7,893,688
Long-term debt, excluding current portion 450,000 450,000
------------ ------------
TOTAL LIABILITIES 7,656,468 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 77,714 72,487
Treasury stock, at cost (9,250 shares in 2004 and 2003) (148,375) (148,375)
Retained earnings 11,721,667 11,509,149
Other comprehensive income (10,285) 1,916
------------ ------------
11,655,051 11,449,507
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,311,519 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 September 30, 2003 SEPTEMBER 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Net sales $ 5,168,889 $ 4,815,792 $ 17,896,723 $ 13,144,884
Cost of sales (3,996,560) (3,534,806) (13,312,841) (9,310,629)
----------- ----------- ------------ ------------
GROSS PROFIT 1,172,329 1,280,986 4,583,882 3,834,255
----------- ----------- ------------ ------------
Operating expenses:
Selling, general and
administrative expenses (1,181,333) (1,092,266) (4,064,162) (3,623,765)
Research and development (84,097) (129,496) (431,394) (492,490)
----------- ----------- ------------ ------------
OPERATING PROFIT (LOSS) (93,101) 59,224 88,326 (282,000)
----------- ----------- ------------ ------------
Other income (expense):
Miscellaneous income 20,000 -- 100,000 15,019
Interest income 30,330 23,554 158,366 103,107
Interest expense (1,689) (1,750) (4,977) (6,050)
----------- ----------- ------------ ------------
48,641 21,804 253,389 112,076
----------- ----------- ------------ ------------
Income (loss) before income taxes (44,460) 81,028 341,715 (169,924)
Income tax benefit (expense) 16,164 (26,330) (129,197) 48,757
----------- ----------- ------------ ------------
NET (LOSS) INCOME $ (28,296) $ 54,698 $ 212,518 $ (121,167)
----------- ----------- ------------ ------------
Per share amounts:
Basic income (loss) per common share $ (0.02) $ 0.04 $ 0.15 $ (0.09)
Diluted income (loss) per common share $ (0.02) $ 0.04 $ 0.15 $ (0.09)
Basic average number of common and
common equivalent shares outstanding 1,423,775 1,423,775 1,423,775 1,422,346
Diluted average number of common and
common equivalent shares outstanding 1,423,775 1,423,775 1,426,075 1,422,346
See accompanying notes to the unaudited condensed consolidated
financial statements.
4
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
----------- -----------
Cash provided by (used in) operating activities:
Net income $ 212,518 $ (121,167)
Reconciliation of net income to net cash
(used in) provided by operations:
Depreciation 205,434 197,300
Intangible amortization and goodwill impairment 116,327 116,096
Stock-based compensation 5,227 14,777
Changes in operational assets and liabilities
net of effect of acquisition:
Accounts receivable (310,377) (749,254)
Inventories (1,705,320) (1,424,219)
Prepaid expenses and other assets 108,099 (189,634)
Notes Receivable 154,565 267,763
Accounts payable and other accrued liabilities 187,425 299,086
Deferred revenues (874,644) 1,702,486
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,900,746) 113,234
----------- -----------
Cash flow from investing activities:
Securities purchased (4,493,138) (7,793,930)
Securities sold or redeemed 890,577 7,714,681
Payments related to asset purchase -- (344,954)
Capital expenditures (163,661) (159,406)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,766,222) (583,609)
----------- -----------
Decrease in cash and cash equivalents (5,666,968) (470,375)
Cash and cash equivalents, beginning of the year 7,490,814 1,769,545
----------- -----------
Cash and cash equivalents, end of the quarter $ 1,823,846 $ 1,299,170
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest $ 4,977 $ 6,050
=========== ===========
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
September 30, 2004 and the results of its operations and cash flows for the nine
months ended September 30, 2004. The results of operations for the nine months
ended September 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 that has been shipped
to customers for which the sale has not been recognized. The Company will
recognize the sales and cost of sales for this equipment in accordance with its
revenue recognition policy (see note 3). Cost is determined using the first-in,
first-out (FIFO) method. The composition of inventories at September 30, 2004
and December 31, 2003 is as follows:
SEPTEMBER 30, 2004 December 31, 2003
------------------ -----------------
Raw materials $1,903,107 $1,865,971
Work in process 1,563,871 1,153,058
Finished goods 188,468 199,466
---------- ----------
Subtotal
Shipped to customers 3,655,446 3,218,495
1,742,260 473,891
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Total $5,397,706 $3,692,386
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NOTE 3- REVENUE RECOGNITION
Revenue is recognized when all significant contractual obligations have been
satisfied and collection of the resulting accounts receivable is reasonably
assured. Revenue from the sale of standard stand-alone equipment without
installation service is recognized upon delivery according to contractual terms
and is recorded net of discounts. Revenue from multiple-element arrangements
such as the sale of standard equipment and basic installation services is
recognized in accordance with EITF 00-21 "Revenue Arrangements with Multiple
Deliverables". Revenue from the standard equipment is recognized upon delivery
according to contractual terms and is recorded net of discounts. The fair value
of the revenue related to the installation service is deferred until
installation services are provided. Fair value is determined by the price
charged to other customers when services are sold separately and is supported
by competitive market data. Revenue from equipment sales requiring complex
installation services is recognized using the unit of delivery method in
accordance with contractual terms 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
nine months ending September 30, 2004, the dilutive income per share calculation
includes 2,300 common share equivalents resulting from the Company's equity
compensation plan. For the three months ending September 30, 2004, the exercise
of options was not assumed since the effect is antidilutive. For the three and
nine months ending September 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 $5,227
for the nine months ended September 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 NINE MONTHS ENDED
SEPT. 30, 2004 Sept. 30, 2003
-------------- --------------
Net income as reported $ 212,518 $(121,167)
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all
awards issued prior to
January 1, 2003, net of tax $ (19,876) $ (28,364)
Pro forma net income (loss) $ 192,642 $(149,531)
Income (Loss) Per Share:
Basic and diluted income (loss) per share $ 0.14 $ (0.11)
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 September 30, 2004, if the sum of the $402,734 total
consideration paid as of September 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
$86,395 for the period ending September 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 September 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 September 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.
SEPT. 30, 2003
--------------
Net Sales $13,454,541
Net Loss (75,703)
Basic and diluted loss per common share (0.05)
Basic and diluted average number of
common shares outstanding 1,422,346
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
(UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited)
----------- ----------- ----------- -----------
NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT 22.7% 26.6% 25.6% 29.2%
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 22.9% 22.7% 22.7% 27.6%
RESEARCH AND DEVELOPMENT 1.6% 2.7% 2.4% 3.7%
OTHER INCOME, NET 0.9% 0.5% 1.4% 0.9%
NET INCOME (LOSS) (0.5%) 1.1% 1.2% (0.9%)
THREE MONTHS ENDED SEPTEMBER 30, 2004
- -------------------------------------
NET SALES for the three months ended September 30, 2004 were $5,168,889, an
increase of $353,097 (7.3%) from net sales of $4,815,792 for the corresponding
period in 2003. During the three months ended September 30, 2004 our sales were
greater primarily due to the higher volume of orders we received during the last
six months of 2003. Some of these orders were long lead-time orders requiring
complex installation services that were shipped in prior periods, but revenue
relating to these orders was not recognized previously because installation
services were not completed.
GROSS PROFIT for the three months ended September 30, 2004 was $1,172,329, a
decrease of $108,657 (8.5%), as compared to $1,280,986 for the corresponding
period in 2003. Gross profit as a percentage of sales for the three months ended
September 30, 2004 decreased to 22.7% compared to 26.6% for the corresponding
period in 2003. The decrease in gross profit margin is mainly due to product
mix, higher than expected costs related to custom software development and
reduced absorption of fixed manufacturing overhead costs related to lower
production levels. Production volume was reduced due to the lower incoming order
rate in the third quarter of 2004 as compared to 2003. As a result, we
implemented a one-week plant shutdown and shortened work-weeks for production
personnel. We also closed operations for two days as a result of local hurricane
conditions.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended
September 30, 2004 were $1,181,333, an increase of $89,067 (8.2%) as compared to
$1,092,266 for the corresponding period in 2003. The increase reflects higher
variable selling expenses and marketing costs such as commissions from higher
net sales. Also, we experienced higher expenses relating to equipment made
available to customers on a trial basis, as a greater number of prospective
customers are evaluating our recently introduced Quipp Packman packaging system.
In addition, selling, general and administrative expenses during the three
months ending September 30, 2003 reflect the reduction of our allowance for
doubtful accounts due to collection of customer balances that were previously
reserved. We expect that our selling, general and administrative expenses will
increase in the fourth quarter of 2004 and in 2005 due to expenses related to
compliance requirements of the Sarbanes-Oxley Act of 2002 and related
regulations.
RESEARCH AND DEVELOPMENT expenses for the three months ended September 30, 2004
were $84,097, a decrease of $45,399 (35.1%) as compared to $129,496 for the same
period in 2003. For the three months ended September 30, 2004, we devoted much
of our research and development resources to redesigning our gripper conveyor to
enhance the performance of the product in certain applications. For the same
period in 2003, we focused much of our engineering and technical efforts to the
Quipp Packman packaging system.
10
OTHER INCOME AND EXPENSE (NET) for the three months ended September 30, 2004 was
$48,641 as compared to $21,804 for the same period in 2003. Our interest income
for the three months ended September 30, 2004 increased to $30,330 from $23,554
in 2003 mostly due to higher interest rates on our cash and cash equivalents and
securities available for sale. Additionally, we received $20,000 of royalty
income relating to our patented automatic cart loading system technology used by
another supplier of post-press material handling equipment. We did not receive
royalty income during the same period in 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004
- ------------------------------------
SALES for the nine months ended September 30, 2004 were $17,896,723, an increase
of $4,751,839 (36.1%) compared to net sales of $13,144,884 in the same period in
2003. Improved net sales are due mostly to the higher volume of orders booked in
the second half of 2003 and the resulting strong backlog entering into 2004.
GROSS PROFIT for the nine months ended September 30, 2004 was $4,583,882, an
increase of $749,627 (19.6%) as compared to $3,834,255 for the corresponding
period in 2003. Gross profit as a percentage of sales for the nine months ended
September 30, 2004 decreased to 25.6% compared to 29.2% for the corresponding
period in 2003. The decrease in gross profit as a percentage of sales is due in
part to product mix and increased discounts resulting from quotations submitted
to customers in the latter part of 2002 and in 2003 during the economic
downturn. These discounts were reflected in some orders shipped in the first
quarter of 2004. Additionally, our costs to produce and install In-Line
inserters and waste handling systems and our custom software development costs
on a palletizer system order were greater than expected. We also incurred
additional costs to enhance the performance of a previously installed gripper
conveyor system.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the nine months ended September
30, 2004 were $4,064,162, an increase of $440,397 (12.2%) as compared to
$3,623,765 for the same period in 2003. We incurred higher variable selling and
administrative costs such as commission and warranty expense due to improved net
sales. 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 Quipp Packman packaging system product lines.
Additionally, we incurred higher test equipment expenses as a greater number of
prospective customers are evaluating the Quipp Packman packaging system. The
remaining increase in selling, general and administrative costs relate to
expenses associated with compliance requirements of the Sarbanes-Oxley Act of
2002.
The increased selling, general and administrative costs for the nine months
ending September 30, 2004 was offset in part because selling, general and
administrative costs in 2003 included costs 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.
RESEARCH AND DEVELOPMENT expenses for the nine months ended September 30, 2004
were $431,394, a decrease of $61,096 (12.4%) as compared to $492,490 for the
same period in 2003. For the nine months ended September 30, 2004, we devoted
much of our research and development resources to our new In-Line "C"
inserting/collating system with poly-wrapping capabilities and to the redesign
of our gripper conveyor to enhance the performance of the product in certain
applications. For the same period in 2003, we focused much of our engineering
and technical efforts on the development of the Quipp Packman packaging system.
OTHER INCOME AND EXPENSE (NET) for the nine months ended September 30, 2004 was
$253,389 as compared to $112,076 for the same period in 2003. Interest income
for the nine months ended September 30, 2004 increased to $158,366 from $103,107
mostly due to the collection of the final installment of an outstanding note
receivable from an international customer. 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 $100,000 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.
11
GENERAL
The Company's backlog as of September 30, 2004 was $7,119,000 compared to
$12,725,000 at December 31, 2003 and $10,783,000 at September 30, 2003. In
addition to orders in process at our production facility, our backlog includes
orders that have been shipped to customers but, in accordance with our revenue
recognition policy, are not yet reflected in net sales (see note 3). Orders
shipped to customers and included in our backlog total $2,287,000 as of
September 30, 2004. The corresponding balance of orders shipped to customers and
included in our backlog was $869,000 as of December 31, 2003 and $1,375,000 as
of September 30, 2003. Orders for the nine months ended September 30, 2004 were
$12,291,000, compared to orders of $19,213,000 for the same period last year.
LIQUIDITY
On September 30, 2004, cash and cash equivalents and securities available for
sale totaled $7,806,786 as compared to $9,883,394 at December 31, 2003, a
decrease of $2,076,608. The reduction in cash and cash equivalents and
securities available for sale results principally from increased inventory and
receivables in connection with the sale of large and complex orders that require
an extended period of time for design, manufacture and installation. As these
systems are completed, the Company expects to recognize revenue and cost of
sales and collect the installments that are contractually due upon installation
and acceptance. The Company believes that its 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.
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.
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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 increased selling, general and administrative expenses
related to compliance requirements of the Sarbanes-Oxley Act of 2002 and related
regulations, 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.
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.
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PART II - OTHER INFORMATION
ITEM 6 EXHIBITS
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.
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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 15, 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)
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