-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PvqKH3iUATfHBfAmYPR5RTDarXc2xr5hHyieozZfQnQyLqgaMu69Md4aPZ7xX+KW 0v2qSX1pX5pRnws9n0B00g== 0001116502-03-001453.txt : 20030813 0001116502-03-001453.hdr.sgml : 20030813 20030812173411 ACCESSION NUMBER: 0001116502-03-001453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUIPP INC CENTRAL INDEX KEY: 0000796577 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 592306191 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14870 FILM NUMBER: 03838547 BUSINESS ADDRESS: STREET 1: 4800 N W 157TH STRRET CITY: MIAMI STATE: FL ZIP: 33014 BUSINESS PHONE: 3056238700 MAIL ADDRESS: STREET 1: 4800 NW 157 STREET CITY: MIAMI STATE: FL ZIP: 33014 10-Q 1 quipp-10q.txt QUARTERLY REPORT ENDED JUNE 30, 2003 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, 2003. -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to __________________ Commission file number 0-14870 ------- QUIPP, INC. ------------------------------------------------------ (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 August 1, 2003 was 1,423,775. QUIPP, INC. INDEX PART I - FINANCIAL INFORMATION PAGE Item 1 - Unaudited Condensed Consolidated Financial Statements Unaudited Condensed Consolidated Balance Sheets - 3 June 30, 2003 and December 31, 2002 Unaudited Condensed Consolidated Statements of Operations - 4 Three and six months ended June 30, 2003 and 2002 Unaudited Condensed Consolidated Statements of Cash Flows - 5 Six months ended June 30, 2003 and 2002 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of 11 Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosure about Market Risk 14 Item 4 - Controls and Procedures 14 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 15
2 PART 1 - FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements QUIPP, INC. AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002 - --------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 760,240 $ 1,769,545 Securities available for sale 7,677,477 6,856,527 Accounts receivable, net 2,193,773 2,872,617 Inventories 3,326,431 1,963,104 Deferred tax asset-current 724,358 724,358 Prepaid expenses and other receivables 465,169 297,651 Current portion of notes receivable 238,940 238,940 ------------ ------------ TOTAL CURRENT ASSETS $ 15,386,388 $ 14,722,742 Other assets: Property, plant and equipment, net 1,766,701 1,766,966 Intangible assets, net 831,202 -- Goodwill 135,823 174,822 Notes receivable 183,388 183,388 Other assets 50,538 53,900 ------------ ------------ $ 18,354,040 $ 16,901,818 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 100,000 $ 100,000 Accounts payable 1,015,578 841,095 Accrued salaries & wages 417,540 466,517 Deferred revenues 3,242,500 2,081,031 Contract contingencies 144,755 200,131 Accrued acquisition costs 185,236 -- Other accrued liabilities 1,612,398 1,450,599 ------------ ------------ TOTAL CURRENT LIABILITIES 6,718,007 5,139,373 Long-term debt 550,000 550,000 ------------ ------------ TOTAL LIABILITIES 7,268,007 5,689,373 Shareholders' equity: Common stock - par value $.01 per share, authorized 8,000,000 shares, issued 1,433,025 in 2003 and 1,426,025 shares in 2002 14,330 14,260 Additional paid-in capital 72,487 -- Treasury stock, at cost (9,250 shares) (148,375) (148,375) Retained earnings 11,132,090 11,307,955 Other comprehensive income 15,501 38,605 ------------ ------------ 11,086,033 11,212,445 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,354,040 $ 16,901,818 ============ ============
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, 2003 June 30, 2002 JUNE 30, 2003 June 30, 2002 ================================================================================================================================= Net sales $ 5,023,801 $ 4,470,885 $ 8,329,092 $ 8,175,368 Cost of sales (3,425,337) (3,221,666) (5,775,823) (6,116,609) ----------------------------- ---------------------------- GROSS PROFIT 1,598,464 1,249,219 2,553,269 2,058,759 Operating expenses: Selling, general and administrative expenses (1,376,660) (1,166,617) (2,531,499) (2,254,362) Research and development (178,909) (119,697) (362,994) (168,606) ----------------------------- ---------------------------- OPERATING PROFIT (LOSS) 42,895 (37,095) (341,224) (364,209) ----------------------------- ---------------------------- Other income, net: Miscellaneous income, net 15,019 1,413 15,019 73,471 Interest income 36,356 49,438 79,553 109,043 Interest expense (2,223) (3,116) (4,300) (5,922) ----------------------------- ---------------------------- Other income, net 49,152 47,735 90,272 176,592 Income (loss) before income tax (expense) benefit 92,047 10,640 (250,952) (187,617) Income tax (expense) benefit (44,263) 18,471 75,087 87,846 ----------------------------- ---------------------------- NET INCOME (LOSS) $ 47,784 $ 29,111 $ (175,865) $ (99,771) - ----------------------------------------------------------------------------------------------------------------------------- Per share amounts: Basic and diluted income (loss) per common share 0.03 0.02 (0.12) (0.07) Basic and diluted average number of common and common equivalent shares outstanding 1,423,775 1,417,775 1,421,620 1,417,587
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,
2003 2002 ========================================================================================================= Cash provided by (used in) operations: Net loss $ (175,865) $ (99,771) Reconciliation of net income to net cash provided by (used in) operations: Depreciation 130,452 138,054 Intangible amortization 28,798 -- Goodwill impairment 38,999 31,200 Stock-based compensation 14,777 -- Changes in operational assets and liabilities net of effect of asset purchase from USA Leader, Inc.: Accounts receivable, net 678,844 348,629 Inventories (1,236,328) (197,662) Other assets, prepaid expenses and other receivables (114,221) (34,117) Notes Receivable -- 147,247 Accounts payable and accrued liabilities 117,341 (49,033) Contract contingencies (55,376) (141,864) Deferred revenues 865,469 (681,590) ----------------------------- Net cash provided by (used in) operations 292,890 (538,907) ----------------------------- Cash flow from investing activities: Securities purchased (5,000,750) (2,927,591) Securities sold 4,156,696 3,283,484 Payments related to asset purchase (344,954) -- Capital expenditures (113,187) (36,513) ----------------------------- Net cash (used in) provided by investing activities (1,302,195) 319,380 ----------------------------- Decrease in cash and cash equivalents (1,009,305) (219,527) Cash and cash equivalents at the beginning of the year 1,769,545 1,627,937 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of the quarter $ 760,240 $ 1,408,410 ========================================================================================================= Supplemental disclosure of noncash information: Unrealized (loss) gain on securities available for sales, net of taxes $ (23,104) $ 2,286 Issuance of shares to purchase the assets of USA Leader Inc. $ 57,780 $ -- Supplemental disclosure of cash payments: Interest $ 4,300 $ 5,922 =========================================================================================================
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, 2002 and, in the opinion of management, reflect all adjustments (principally consisting of normal recurring accruals) considered necessary to present fairly the financial position of Quipp, Inc. and subsidiary as of June 30, 2003 and the results of its operations and cash flows for the six months ended June 30, 2003. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ending December 31, 2003. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. The unaudited consolidated balance sheet at December 31, 2002 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. NOTE 2 - INVENTORIES Inventories 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 have shipped to customers but not yet recognized as a sale. The Company will recognize the sales and cost of sales for 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 June 30, 2003 and December 31, 2002 is as follows: JUNE 30, 2003 December 31, 2002 - ---------------------------------------------------------------- Raw materials $1,436,384 $1,283,250 Work in process 691,651 199,853 Finished goods 289,649 48,978 -------------------------------- Subtotal 2,417,684 1,532,081 Shipped to customers 908,747 431,023 -------------------------------- Total $3,326,431 $1,963,104 -------------------------------- NOTE 3- REVENUE RECOGNITION Revenue is generally recognized when all significant contractual obligations have been satisfied and collection of the resulting accounts receivable is reasonably assured. Revenue from equipment sales requiring basic installation services is recognized at the time of delivery according to contractual terms and is recorded net of discounts and allowances. Revenue from equipment sales requiring complex installation services is recognized when the installation services are complete according to contractual terms and is recorded net of discounts and allowances. NOTE 4 - INCOME (LOSS) PER SHARE Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding in the periods presented. Diluted common equivalent shares assume the exercise of options, calculated under the treasury stock method, using the average stock market prices during the periods. For the three and six months ended June 30, 2003 and June 30, 2002, common stock equivalents were not considered because their effect is antidilutive. 6 NOTE 5 - STOCK-BASED COMPENSATION Prior to 2003, the Company accounted for its stock option plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in 2002 net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under the company's plans vest over periods ranging from three to five years. No options were issued in 2003. The following table illustrates the effect on net loss and loss per share if the fair value based method had been applied to all outstanding and unvested awards issued prior to January 1, 2003.
------------------------------------------------------------------------------------------------------------ FOR THE SIX MONTHS ENDED JUNE 30, 2003 June 30, 2002 ------------------------------------------------------------------------------------------------------------ Net loss as reported ($175,865) ($99,771) Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax ($21,226) ($21,951) Pro forma net loss ($197,091) ($121,722) Loss Per Share: Basic and diluted loss per share ($0.14) ($0.09)
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% 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 of USA Leader, Inc., a Missouri corporation (the "Seller"). The assets acquired under the Purchase Agreement included the Seller's patent, know-how, drawings, tooling, customer list, other intellectual property, inventory, furniture, equipment and supplies. The Seller manufactured and sold proprietary inserting and collating equipment and stacking systems (the "Products") for the newspaper and commercial printing markets. In the newspaper industry, the Seller historically focused on small to intermediate sized publications, a market that has not been a traditional focus of the Company. The Company has continued the sale of the Products following the Acquisition. 7 As consideration for the Asset Purchase, the Company paid the Seller $344,954 and 6,000 shares of common stock, $0.01 par value per share, of the Company. The Company will pay additional amounts ("Additional Consideration") consisting of a percentage of sales of the Products during the next three years. The purchase price was determined by arms-length negotiations between the parties. The cash portion of the purchase price was paid out of the Company's cash on hand. As of June 30, 2003, the total consideration for the asset purchase amounted to $402,734. The asset purchase was treated as a purchase transaction and the acquisition price was allocated to the acquired assets and assumed liabilities based on the estimated fair value as of the acquisition date. While there was no goodwill recorded as of June 30, 2003, Additional Consideration paid in excess of the estimated fair value of net tangible assets and intangible assets will be recorded as goodwill. The consolidated operations for the six month period ended June 30, 2003 includes the operating results of the asset purchase from the date of acquisition. The purchase price was allocated as follows: Net liabilities (112,066) Less: Accrued acquisition costs (283,000) Accrued contingent consideration (62,200) ---------- (457,266) Amortizable Intangible Assets: Non-competition Agreement 150,000 Customer List 10,000 Patent 200,000 Acquired Technology 500,000 ---------- 860,000 ---------- 402,734 ========== As noted above, $860,000 was allocated to amortizable intangible assets, including a customer list, non-competition agreements and patent and acquired technology. The customer list represents USA Leader's relationships within its installed base of customers. The non-competition agreement refers to a 5-year agreement 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 relating to the product lines acquired in the asset purchase. Details of the amortizable intangibles follow: FAIR INTANGIBLE ASSET VALUE LIFE ------------------------- ------- ------ Customer List 10,000 5 Years Non-competition Agreement 150,000 5 Years Patent 200,000 17 Years Acquired Technology 500,000 7 Years 8 The unaudited condensed consolidated statement of operations for the six month period ended June 30, 2003 includes operating results relating to assets acquired in the Asset Purchase from the date of acquisition. The following unaudited pro forma results of operation of the Company for the periods ended June 30, 2003 and 2002 assume the acquisition occurred as of January 1, 2002. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations that would have actually occurred had the acquisition of assets occurred on the dates indicated. The unaudited pro forma results of operations for the six months ended follows: JUNE 30, 2003 June 30, 2002 ------------- ------------- Net Sales 8,638,749 8,192,868 Net Loss (132,503) (140,556) Basic and diluted loss per common share (0.09) (0.10) Basic and diluted average number of common shares outstanding 1,423,775 1,423,587 NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company's goodwill resulted from the purchase of certain assets of Hall Processing Systems in 1994 and 1995. The Company reviews the operating profit and cash flow expected from these assets quarterly. During the six months ended June 30, 2003 and 2002, the Company recognized an impairment loss of $38,999 and $31,200, respectively, since the carrying amount of the assets was greater than the fair value of the assets, as determined using the expected present value of future cash flows. The impairment write-off was charged to selling, general and administrative expenses. The Company's other intangible assets represent the fair value of non-competition agreements, customer list and patent and technology acquired in the asset purchase from USA Leader, Inc. During the six months ended June 30, 2003 and 2002, the Company recognized amortization expense of $28,798 and $0, respectively. Amortization was charged to selling, general and administrative expenses. NOTE 8 - RECENT PRONOUNCEMENTS In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143 " Accounting for Asset Retirement Obligations." This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this standard had no effect on the condensed consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections"). SFAS 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 In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The adoption of this standard had no effect on the condensed consolidated financial statements. During November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 00-21, "Multiple-Deliverable Revenue Arrangements", which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets." The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company does not expect that the adoption of EITF Issue 00-21 will have an impact on its financial position and results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard had no effect on the unaudited condensed consolidated financial statements. 10 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, 2003 2002 2003 2002 (UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited) - ------------------------------------------------------------------------------------------------------------------- NET SALES 100.0% 100.0% 100.0% 100.0% GROSS PROFIT 31.8% 27.9% 30.7% 25.2% SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 27.4% 26.1% 30.4% 27.6% RESEARCH AND DEVELOPMENT 3.6% 2.7% 4.4% 2.1% OTHER INCOME, NET 1.0% 1.1% 1.1% 2.2% NET INCOME 1.0% 0.7% (2.1%) (1.2%)
THREE MONTHS ENDED JUNE 30, 2003 - -------------------------------- NET SALES for the three months ended June 30, 2003 were $5,023,801, an increase of $552,916 (12.4%) from net sales of $4,470,885 for the corresponding period in 2002. The improvement largely reflects orders that were rescheduled by our customers from the first to the second quarter of 2003. GROSS PROFIT for the three months ended June 30, 2003 was $1,598,464, an increase of $349,245 (28.0%) as compared to $1,249,219 for the corresponding period in 2002. Gross profit as a percentage of sales for the three months ended June 30, 2003 increased to 31.8% compared to 27.9% for the corresponding period in 2002. Our gross profit percentage improved primarily due to the allocation of fixed manufacturing overhead costs to a greater volume of production and shipments and due to a reduction in our labor force that was effective in August 2002. Additionally, as a result of product mix and improved project management efforts, we incurred lower custom design, production and installation costs. SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended June 30, 2003 were $1,376,660, an increase of $210,043 (18.0%) as compared to $1,166,617 for the corresponding period in 2002. The increase was primarily due to initial marketing costs related to new product introductions, the NEXPO trade show in June and unanticipated corporate expenses associated with a special meeting of shareholders held in response to the demand by a shareholder. Also, we recognized amortization expense relating to identifiable intangible assets from the USA Leader acquisition and incurred higher variable warranty and commission expense. RESEARCH AND DEVELOPMENT expenses for the three months ended June 30, 2003 were $178,909, an increase of $59,212 (49.5%) as compared to $119,697 for the same period in 2002. For the three months ended June 30, 2003, we devoted engineering and technical resources to develop the Quipp Packman Packaging System ("Packman"). Packman provides newspaper publishers with the ability to stack, wrap, print and strap newspapers in one operation. This product was recently introduced to customers through trade magazines and mailings, and was featured by us at the NEXPO trade show. OTHER INCOME AND EXPENSE (NET) for the three months ended June 30, 2003 was $49,152 as compared to $47,735 for the same period in 2002. Our interest income for the three months ended June 30, 2003 decreased to $36,356 from $49,438, due primarily to lower interest rates on our securities held for sale. We also received $15,000 of royalty income relating to our automatic cart loading system, which is classified as miscellaneous income. 11 SIX MONTHS ENDED JUNE 30, 2003 - ------------------------------ SALES for the six months ended June 30, 2003 were $8,329,092, an increase of $153,724 (1.9%) over net sales of $8,175,368 in the same period in 2002. We continue to operate in a challenging environment, despite slow but inconsistent improvement in economic conditions. We believe our sales reflect this environment as our customers have reported mixed financial results and have communicated to us that they remain cautious with regard to capital investment. GROSS PROFIT for the six months ended June 30, 2003 was $2,553,269, an increase of $494,510 (24.0%) as compared to $2,058,759 for the corresponding period in 2002. Gross profit as a percentage of sales for the six months ended June 30, 2003 increased to 30.7% compared to 25.2% for the corresponding period in 2002. Our gross profit percentage improved primarily due to improved overhead absorption from the allocation of fixed manufacturing overhead costs to higher production volumes and due to a reduction in our labor force compared to the same period last year. Additionally, as a result of product mix and improved project management efforts, we incurred lower custom design, production and installation costs. SELLING, GENERAL AND ADMINISTRATIVE expenses for the six months ended June 30, 2003 were $2,531,499, an increase of $277,137 (12.3%) as compared to $2,254,362 for the same period in 2002. We incurred 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. Additionally, we increased our allowance for doubtful accounts due to deterioration of the financial condition of one of our distributors and recognized amortization expense from the USA Leader acquisition. RESEARCH AND DEVELOPMENT expenses for the six months ended June 30, 2003 were $362,994, an increase of $194,388 (115.3%) as compared to $168,606 for the same period in 2002. For the six months ended June 30, 2003, we devoted engineering and technical efforts to develop Packman. For the same period in 2002, we focused much of our engineering and technical efforts on the custom design and production of customer orders. Costs related to these activities were charged to cost of goods sold. OTHER INCOME AND EXPENSE (NET) for the six months ended June 30, 2003 was $90,272 as compared to $176,592 for the same period in 2002. The decrease is primarily due to lower royalty income relating to our automatic cart loading system and lower interest rates on our securities available for sale. GENERAL The Company's backlog as of June 30, 2003 was $7,021,000 compared to $4,686,000 at December 31, 2002 and $3,224,000 at June 30, 2002. Orders for the three and six months ended June 30, 2003 were $5,570,000 and $10,635,000 respectively, compared to orders of $2,614,000 and $4,500,000 for the three and six months ended June 30, 2002. LIQUIDITY On June 30, 2003, cash and cash equivalents and securities available for sale totaled $8,437,717 as compared to $8,626,072 at December 31, 2002, a decrease of $188,355 or 2.2%. This decrease was due to the acquisition of certain assets of USA Leader, Inc. and capital expenditures, offset in part by increased cash provided by operations. Working capital on June 30, 2003 was $8,668,381, a decrease of $914,988 from $9,583,369 at December 31, 2002. The decreased working capital is due primarily to acquisition costs related to the purchase of assets from USA Leader, Inc. 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 current levels. 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. 12 We believe that our most critical accounting policies relate to (1) revenue recognition involving complex installation services, (2) allowance for doubtful accounts, (3) contract contingencies, (4) warranty reserves, and (5) intangible assets. Revenue recognition - ------------------- Our revenue recognition policy with regard to equipment sales requiring complex installation services calls for recognition when installation is complete. Because complex installations often require ongoing customer consultation even after a product is installed and is running, management must often make a judgment as to when an installation may be considered complete. We believe that an installation generally is complete when our customers can use the equipment in their daily operations and collection of the resulting accounts receivable is reasonably assured. Nevertheless, there is a degree of subjectivity involved in making this determination, which can affect the timing of recognition of revenues and the related cost of sales. Allowance for doubtful accounts - ------------------------------- We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have generally been within our expectations and the provisions established, there is a risk that credit losses in the future will exceed those that have occurred in the past, in which case our operating results would be adversely affected. Contract contingencies - ---------------------- Contract contingencies involve estimates of additional expenses that may be incurred after installation is complete. These expenses occur when additional efforts are required to assure customer satisfaction. Warranty reserves - ----------------- We record a warranty reserve based on our actual historical return rates and repair costs at the time of sale. While our warranty costs have generally been within our expectations and the provisions established, future returns or repair costs could be in excess of our warranty reserves. Additionally, we do not have extensive warranty claims experience with recently introduced products. A significant increase in product return rates or a significant increase in the costs to repair our products would adversely affect our operating results for the period or periods in which such returns or additional costs materialize. Intangible assets - ----------------- In connection with our acquisition of certain assets of USA Leader, Inc., we estimated the value of that company's patent, other technology and customer list, as well as non-competition agreements we obtained as a part of this transaction. Because the value of these assets is not certain, there is a degree of subjectivity in allocating fair value to the assets. The determination of fair value of the assets can have an impact on depreciation and amortization expense, because the useful lives of such assets vary from 5 years to 17 years. Moreover, in the event that the value of such assets are deemed to be impaired in the future, we would be required to charge the impairment to selling, general and administrative expenses. FORWARD LOOKING STATEMENTS The statements contained in this quarterly report on Form 10-Q, including statements concerning, adequacy of available resources to support operations and risk of interest rate fluctuations are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of important factors could cause actual results to differ materially from those in the forward looking statements including, but not limited to, economic conditions generally and specifically in the newspaper industry, demand and market acceptance for new and existing products, the impact of competitive products and pricing, manufacturing capacity, delays in shipment, cancellation of customer orders, engineering and production difficulties, and extraordinary movements in interest rates. 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, 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 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report: 3.1 Articles of Incorporation, as amended (incorporated by reference to exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). 3.2 Bylaws as amended (incorporated by reference to Exhibit 99.1 to the Registrant's current report on Form 8-K, dated March 1, 2002). 31.1 Certificate of the Chief Executive Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934. 31.2 Certificate of the principal financial officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934 32.1 Certificate of the Chief Executive Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934. 32.2 Certificate of the principal financial officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934. (b) Reports on Form 8-K On June 4, 2003, we filed a report on Form 8-K/A amending information previously reported on March 6, 2003 regarding Items 2 in connection with the Registrant's acquisition of certain assets of USA Leader, Inc. 15 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, 2003 By: /S/ Michael S. Kady ------------------- Michael S. Kady President and Chief Executive Officer By: /S/ Eric Bello -------------- Eric Bello Treasurer (Principal financial and accounting officer) 16 EX-31.1 3 cert-kady.txt CERTIFICATION-KADY EXHIBIT 31.1 CERTIFICATION I, Michael S. Kady certify that: 1. I have reviewed this quarterly report on Form 10-Q of Quipp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael S. Kady - ------------------- Michael S. Kady Chief Executive Officer Date: August 12, 2003 EX-31.2 4 cert-bello.txt CERTIFICATION-BELLO EXHIBIT 31.2 CERTIFICATION I, Eric Bello certify that: 1. I have reviewed this quarterly report on Form 10-Q of Quipp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Eric Bello - -------------- Eric Bello Treasurer (Principal financial officer) Date: August 12, 2003 EX-32.1 5 cert-ceo.txt CERT-CEO EXHIBIT 32.1 QUIPP, INC. CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- I, Michael S. Kady, Chief Executive Officer of Quipp, Inc., a Florida corporation (the "Company"), hereby certify that, based on my knowledge: (1) The Company's periodic report on Form 10-Q for the period ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Michael S. Kady - ------------------- Michael S. Kady Chief Executive Officer Date: August 12, 2003 EX-32.2 6 cert-pfo.txt CERT-PFO EXHIBIT 32.2 CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER REQUIRED BY RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- I, Eric Bello, Treasurer (principal financial officer) of Quipp, Inc., a Florida corporation (the "Company"), hereby certify that, based on my knowledge: (1) The Company's periodic report on Form 10-Q for the period ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Eric Bello - -------------- Eric Bello Treasurer (principal financial officer) Date: August 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----