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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, 2005.
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
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 -
March 31, 2005 and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations -
Three months ended March 31, 2005 and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004 5
Notes to unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 11
Item 4 - Controls and Procedures 11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 DECEMBER 31, 2004
- ----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,777,951 $ 5,762,511
Securities 6,773,524 2,976,696
Accounts receivable, net 2,747,955 4,092,548
Inventories 3,012,775 4,876,677
Deferred tax asset-current 531,589 531,589
Prepaid expenses and other receivables 525,486 200,570
Current portion note receivable -- --
------------ ------------
TOTAL CURRENT ASSETS 16,369,280 $ 18,440,591
Property, plant and equipment, net 1,655,758 1,693,504
Goodwill and Intangible assets, net 697,776 726,574
Other assets 38,778 40,458
------------ ------------
TOTAL ASSETS $ 18,761,592 $ 20,901,127
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 100,000 $ 100,000
Accounts payable 1,775,829 1,260,650
Accrued salaries and wages 566,111 603,617
Deferred revenues 1,862,274 4,633,632
Other accrued liabilities 2,047,358 2,024,889
------------ ------------
TOTAL CURRENT LIABILITIES 6,351,572 8,622,788
Long-term debt 350,000 350,000
------------ ------------
TOTAL LIABILITIES 6,701,572 8,972,788
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 91,244 83,825
Treasury stock, at cost (9,250 shares in 2004 and 2003) (148,375) (148,375)
Retained earnings 12,123,525 11,994,935
Other comprehensive income (20,704) (16,376)
------------ ------------
12,060,020 11,928,339
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,761,592 $ 20,901,127
============ ============
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, 2005 MARCH 31, 2004
- --------------------------------------------------------------------------------
Net sales $ 8,274,764 $ 5,789,360
Cost of sales (6,367,837) (4,218,923)
-------------------------------
GROSS PROFIT 1,906,927 1,570,437
Operating expenses:
Selling, general and
administrative expenses (1,671,596) (1,326,148)
Research and development (59,099) (116,578)
-------------------------------
OPERATING PROFIT (LOSS) 176,232 127,711
- --------------------------------------------------------------------------------
Other income (expense):
Interest income 40,201 19,999
Interest expense (2,115) (1,616)
-------------------------------
38,086 18,383
- --------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 214,318 146,094
Income tax (expense) benefit (85,728) (54,785)
-------------------------------
NET INCOME (LOSS) $ 128,590 $ 91,309
===============================
- --------------------------------------------------------------------------------
PER SHARE AMOUNTS:
Basic income per common share 0.09 0.06
Diluted income per common share 0.09 0.06
Basic average number of common
and common equivalent shares outstanding 1,423,775 1,423,775
Diluted average number of common
and common equivalent shares outstanding 1,423,775 1,426,092
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, 2005 MARCH 31, 2004
- ----------------------------------------------------------------------------------------------------------------------
Cash provided by operations:
Net income $ 128,590 $ 91,309
Reconciliation of net income to net cash provided by operations:
Depreciation 59,452 67,608
Intangible amortization and goodwill impairment 28,798 40,042
Stock-based compensation 7,419 1,206
Changes in operational assets and liabilities net of effect of acquisition:
Accounts and notes receivable 1,344,593 (661,836)
Inventories 1,863,902 (1,814,779)
Prepaid and other assets (323,236) (44,668)
Accounts payable and other accrued liabilities 500,142 1,312,586
Deferred revenues (2,771,358) (743,460)
--------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 838,302 (1,751,992)
--------------------------------------
Cash flow from investing activities:
Securities purchased (3,801,156) (508,186)
Securities sold - 1,600,657
Capital expenditures (21,706) (67,804)
Purchase of assets from USA Leader, Inc. -- --
--------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,822,862) 1,024,667
--------------------------------------
Decrease in cash and cash equivalents (2,984,560) (727,325)
Cash and cash equivalents at beginning of year 5,762,511 1,227,665
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of quarter $ 2,777,951 $ 500,340
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Unrealized loss on securities available for sales, net of taxes $ (4,328) $ (1,507)
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest $ 2,115 $ 1,616
- ----------------------------------------------------------------------------------------------------------------------
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, 2004 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, 2005 and the results of their operations and cash flows for the three months
ended March 31, 2005. The results of operations for the three months ended March
31, 2005 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2005. 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, 2004 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, 2005 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, 2005 and December 31, 2004 is as follows:
MARCH 31, 2005 DECEMBER 31, 2004
---------------------------------------------------------------
Raw materials $1,917,996 $1,844,297
Work in process 662,474 1,024,104
Finished goods 301,212 162,497
-----------------------------------
Subtotal 2,881,682 3,030,898
Shipped, not recognized 131,093 1,845,779
-----------------------------------
$3,012,775 $4,876,677
-----------------------------------
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". In connection with these arrangements, revenue from the standard
equipment is recognized upon delivery according to contractual terms and is
recorded net of discounts, while the fair value of the revenue related to the
installation service is deferred until installation services are provided. Fair
value is determined by reference to the price charged to other customers when
services are sold separately and is supported by competitive market data.
Revenue from long-term complex equipment or installation arrangements is
recognized using the unit of delivery method under SOP 81-1 in accordance with
contractual terms and is recorded net of discounts. Cost and profitability
estimates are revised periodically based on changes in circumstances. Estimated
losses on such contracts are recognized immediately.
6
NOTE 4 - INCOME PER SHARE
Basic income per share is based on the weighted average number of common shares
outstanding during the periods presented. Diluted income 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, 2005, the exercise of options was not assumed since the effect
is antidilutive. For the three months ending March 31, 2004, the dilutive income
per share calculation includes 2,317 common share equivalents resulting from the
Company's stock option plan.
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 December 31, 2002.
Awards under the company's plans vest over periods ranging from three to five
years. 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.
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MARCH 31, 2005 MARCH 31, 2004
---------------------------------------------------------------------------------------------------------
Net income as reported $128,590 $91,309
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of tax ($4,536) ($7,521)
Pro forma net income $124,054 $83,788
Income Per Share:
Basic and diluted income per share $0.09 $0.06
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%
Options issued after December 31, 2002 resulted in a stock-based compensation
expense totaling $5,585 and $1,206 for the three months ending March 31, 2005
and 2004, respectively. Restricted shares issued under the plan resulted in a
stock-based compensation expense totaling $1,834 and $0 for the three months
ending March 31, 2005 and 2004, respectively.
7
NOTE 6 - RECENT PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Shared-based Payment." This statement replaces FASB Statement No. 123 and
supersedes APB Opinion No. 25 . On April 14, 2005, the SEC issued a new rule
that amends the required effective dates for SFAS 123R. As a result of the SEC
amendment, the Company is required to adopt SFAS 123R in the first quarter of
2006. SFAS 123R requires that the fair value of all stock option awards issued
to employees be recorded as an expense over the related vesting period. The
Statement also requires the recognition of compensation expense for fair value
of any unvested stock option awards outstanding at the date of adoption. The
Company is evaluating this statement, but expects no material impact upon
adoption.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143," (FIN 47) which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Company is
required to adopt FIN 47 no later than December 31, 2005. The Company is
evaluating this interpretation, but expects no material impact upon adoption.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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,
2005 2004
(UNAUDITED) (Unaudited)
--------------------------------------------------------------------
NET SALES 100.0% 100.0%
GROSS PROFIT 23.0% 27.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 20.2% 22.9%
RESEARCH AND DEVELOPMENT 0.7% 2.0%
OTHER INCOME, NET 0.5% 0.3%
NET INCOME 1.6% 1.6%
NET SALES for the three months ended March 31, 2005 were $8,274,764, an increase
of $2,485,404 (42.9%) compared to net sales of $5,789,360 for the corresponding
period in 2004. Increased net sales were due mostly to the recognition of
approximately $2,700,000 in revenue relating to a complex system order that was
shipped prior to the quarter.
GROSS PROFIT for the three months ended March 31, 2005 was $1,906,927, an
increase of $336,490 (21.4%) as compared to $1,570,437 for the corresponding
period in 2004. Gross profit as a percentage of sales for the three months ended
March 31, 2005 decreased to 23.0% compared to 27.1% for the corresponding period
in 2004. Gross profit as a percentage of net sales declined mostly because we
recognized only a small profit margin on revenue of approximately $2,700,000 for
the complex system order described above. We recognized a loss on this contract
in prior periods when we determined that our estimated costs would exceed
revenue. In the current quarter, we recognized a small profit when we completed
the remaining services at a cost slightly below our original estimates. This
order was negotiated in 2003 when our market was just beginning to show signs of
recovery. We expected lower margins on this project than we would traditionally
generate for a contract of this type because we were required to respond to
intense price competition and the order included a greater percentage of
equipment manufactured by others that historically have lower profit margins.
Moreover, delays in software development increased project costs. While we did
not generate a profit over the term of this contract, the order contributed
toward coverage of fixed overhead costs and enabled us to retain skilled
personnel whose services have been required during a period of market recovery.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended March
31, 2005 were $1,671,596, an increase of $345,448 (26.0%) as compared to
$1,326,148 for the corresponding period in 2004. The increase is due primarily
to the cost of our annual NEXPO show and expenses related to compliance
requirements of the Sarbanes-Oxley Act of 2002 and related regulations. We
incurred sales and marketing costs related to NEXPO, the largest newspaper trade
show in the first quarter of 2005 because NEXPO was rescheduled from the
traditional June date to March in 2005. Selling, general and administrative
expenses also reflected our hiring of additional personnel and payment of
consulting fees related to compliance with the Sarbanes-Oxley Act of 2002.
RESEARCH AND DEVELOPMENT expenses for the three months ended March 31, 2005 were
$59,099, a decrease of $57,479 (49.3%) as compared to $116,578 for the same
period in 2004. For the three months ended March 31, 2005, we continued product
development and testing on the In-Line-C inserting/collating system with
poly-wrapping capabilities. During the three months ended March 31, 2004, we
substantially completed the software development and testing of the Quipp
Packman packaging system and initiated product development on the In-Line C.
OTHER INCOME AND EXPENSE (NET) for the three months ended March 31, 2005 were
$38,086 as compared to $18,383 for the corresponding period in 2004. Interest
income increased by $20,202 to $40,201 for the three months ending March 31,
2005 compared to $19,999 for the same period in 2004 due to increased interest
rates on securities available for sale.
9
GENERAL
Our backlog as of March 31, 2005 was $4,128,000 compared to $8,631,000 at
December 31, 2004 and $10,857,000 at March 31, 2004. We expect to ship all items
in our backlog during the next twelve months. Orders for the three months ended
March 31, 2005 were $3,690,000 compared to orders of $3,773,000 during the three
months ending March 31, 2004.
LIQUIDITY
On March 31, 2005, cash and cash equivalents and securities available for sale
totaled $9,551,475 as compared to $8,739,207 at December 31, 2004, an increase
of $812,268. Working capital on March 31, 2005 was $10,017,708, an increase of
$199,905 from $9,817,803 at December 31, 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 for the foreseeable future.
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 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 substantially 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, federal
and state governments 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.
(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.
10
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS
(a) The following exhibits are filed with this report:
3.1 Articles of Incorporation, as amended (Incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004)
3.2 By-Laws, as amended (Incorporated by reference to Exhibit 3.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004)
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.
11
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, 2005
By: /s/ Michael S. Kady
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Michael S. Kady
President and Chief Executive Officer
By: /s/ Eric Bello
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Eric Bello Treasurer (Principal financial and
accounting officer)