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, 1998.
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 Identification No.)
incorporation or organization)
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 [ ]
The number of shares of the registrant's common stock, $.01 par value,
outstanding at September 30, 1998 was 1,644,994.
1
<PAGE>
QUIPP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets - 3
September 30, 1998 and December 31, 1997
Consolidated Statements of Income - 4
Three months ended September 30, 1998 and 1997
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows - 5
Nine months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 10
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
QUIPP INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 378,358 $ 822,573
Securities available for sale - current 16,561,909 12,845,884
Accounts receivable, net 4,857,479 4,381,535
Inventories 3,188,086 3,530,609
Deferred tax asset - current 1,169,119 1,169,119
Prepaid expenses and other receivables 327,914 132,508
------------ ------------
TOTAL CURRENT ASSETS 26,482,865 22,882,228
Other assets:
Property, plant and equipment, net 1,783,957 1,825,906
Goodwill 413,666 437,082
Other assets 82,462 110,417
Deferred tax asset - long term 47,434 47,434
------------ ------------
TOTAL ASSETS $ 28,810,384 $ 25,303,067
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 100,000 $ 100,000
Accounts payable 1,307,230 1,252,375
Accrued salaries and wages 667,574 588,165
Deferred revenues 1,652,654 1,342,963
Income tax payable 571,401 184,044
Other accrued liabilities 2,164,010 2,225,676
------------ ------------
TOTAL CURRENT LIABILITIES 6,462,869 5,693,223
Noncurrent liabilities:
Long term debt 1,050,000 1,050,000
------------ ------------
TOTAL LIABILITIES 7,512,869 6,743,223
Shareholders' equity:
Common stock - par value $.01 per share,
8,000,000 shares authorized. 1,644,994
and 1,636,444 shares issued, respectively
September 30, 1998 and December 31, 1997 16,450 16,365
Additional paid-in capital 5,657,035 5,359,845
Retained earnings 15,624,030 13,329,609
Treasury stock, at cost, 0 and 33,950 shares
respectively September 30, 1998 and
December 31, 1997 -- (145,975)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 21,297,515 18,559,844
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,810,384 $ 25,303,067
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
QUIPP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------------------- ----------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $ 7,147,024 $ 7,005,395 $19,981,746 $19,409,642
Cost of sales 4,358,496 4,452,201 12,289,661 12,464,472
----------- ----------- ----------- -----------
Gross profit 2,788,528 2,553,194 7,692,085 6,945,170
Other operating income and expense items:
Selling, general and administrative expenses 1,410,404 1,043,891 4,097,727 3,389,489
Research and developments expense 158,568 261,073 509,486 392,648
----------- ----------- ----------- -----------
Operating profit 1,219,556 1,248,230 3,084,872 3,163,033
----------- ----------- ----------- -----------
Other income and expense:
Interest income 163,892 103,980 456,856 315,007
Interest expense 14,028 12,333 36,174 36,599
----------- ----------- ----------- -----------
149,864 91,647 420,682 278,408
----------- ----------- ----------- -----------
Income before income taxes 1,369,420 1,339,877 3,505,554 3,441,441
Income tax 475,021 495,815 1,211,134 1,273,392
----------- ----------- ----------- -----------
Net income $ 894,399 $ 844,062 $ 2,294,420 $ 2,168,049
=========== =========== =========== ===========
Per share amounts:
Basic income per common share 0.54 0.54 1.41 1.38
Diluted income per common share 0.52 0.51 1.34 1.35
Weighted average number of common
equivalent shares outstanding 1,720,905 1,656,828 1,709,066 1,610,384
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
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<TABLE>
<CAPTION>
QUIPP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Cash provided by operations:
Net income $ 2,294,420 $ 2,168,048
Reconciliation of net income to net cash
(used in) provided by operations:
Depreciation and amortization 276,413 253,538
Other noncash items -- --
Changes in operational assets and liabilities:
Accounts receivable, net (475,943) 1,601,287
Inventories 342,524 (585,692)
Other assets, prepaid expenses and other
receivables (266,074) (29,410)
Accounts payable and other accrued liabilities 72,599 592,032
Deferred revenues 309,691 264,079
Income tax payable 387,357 120,804
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATIONS 2,940,987 4,384,686
----------- -----------
Cash flow from investing activities:
Securities available for sale (3,716,026) (2,973,362)
Capital expenditures (112,426) (95,705)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (3,828,452) (3,069,067)
----------- -----------
Cash flow from financing activities:
Repayment of debt -- (300,000)
Conversion of stock options 443,250 172,937
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 443,250 (127,063)
----------- -----------
Increase (decrease) in cash and cash equivalents (444,214) 1,188,556
Cash and cash equivalents at the beginning of
the year 822,573 148,429
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF SEPTEMBER $ 378,360 $ 1,336,985
=========== ===========
Supplemental disclosure of cash payments made for:
Interest $ 32,688 $ 37,223
----------- -----------
Income Taxes $ 1,160,566 $ 1,145,000
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
QUIPP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Quipp, Inc. and Quipp Systems, Inc. (a wholly owned subsidiary). All
significant intercompany transactions have been eliminated in consolidation. The
accompanying consolidated financial statements have been prepared on a basis
consistent with that used as of and for the year ended December 31, 1997 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. as of September 30, 1998 and the results of its
operations and cash flows for the nine months ended September 30, 1998. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 1998. 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, 1997 was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
Certain previously reported amounts have been reclassified to conform to the
current period's presentation.
NOTE 2 - INVENTORIES
Inventories at September 30, 1998 include material, labor and factory overhead
and are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method. The composition of inventories at September
30, 1998 and December 31, 1997 is as follows:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Raw materials $1,914,329 $2,631,602
Work in process 1,048,110 731,850
Finished goods 225,647 167,157
---------- ----------
$3,188,086 $3,530,609
NOTE 3 - EARNINGS PER SHARE
Earnings per share amounts are based upon the weighted average number of common
and common equivalent shares outstanding during the year. Common equivalent
shares are excluded from the computation in periods in which they have an
anti-dilutive effect. Basic EPS excludes all dilution, and is based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that would occur if options, warrants,
convertible securities or other contracts to issue common stock were exercised
or converted into common stock. The Company has restated all previously reported
per share amounts to conform to the new presentation.
6
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NOTE 4 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. It does not, however, specify when to
recognize or how to measure items that make up comprehensive income. SFAS 130
was issued to address the concerns over the practice of reporting elements of
comprehensive income directly in equity. Adoption of this statement did not have
a material impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS: The following table presents statements of income items
expressed as a percentage of net sales for the periods indicated:
PERCENTAGE OF NET SALES
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT 39.0% 36.4% 38.5% 35.8%
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 19.7% 14.9% 20.5% 17.5%
RESEARCH AND DEVELOPMENT 2.2% 3.7% 2.5% 2.0%
INTEREST INCOME 2.3% 1.5% 2.3% 1.6%
NET INCOME 12.5% 12.0% 11.5% 11.2%
NET SALES for the three and nine months ended September 30, 1998 were $7,147,024
and $19,981,746, respectively, an increase of $141,629 (2.0%) and $572,104
(2.9%) over net sales of $7,005,395 and $19,409,642 for the corresponding
periods in 1997. The increase in net sales was due to stronger domestic and
international sales.
GROSS PROFIT for the three and nine months ended September 30, 1998 was
$2,788,528 and $7,692,085, respectively, an increase of $235,334 (9.2%) and
$746,915 (10.8%) as compared to $2,553,194 and $6,945,170 for the corresponding
periods in 1997. The increase in gross profit as a percentage of net sales was
due to a more favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE expenses for the three and nine months ended
September 30, 1998 were $1,410,404 and $4,097,727, respectively, an increase of
$366,513 (35.1%) and $708,238 (20.9%) as compared to $1,043,891 and $3,389,489
for the corresponding periods of 1997. The increase was mainly attributable to
expenses relating to the evaluation of a potential business combination
transaction that the Company determined not to pursue. The increase in the three
months ended September 30, 1998 was partially offset by the reimbursement of
certain legal fees incurred earlier in the year in connection with a lawsuit
brought by the Company to enforce one of its patents. The reimbursement was paid
pursuant to the settlement of the lawsuit.
7
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RESEARCH AND DEVELOPMENT expenses for the three and nine months ended September
30, 1998 were $158,568 and $509,486, respectively, a decrease of 39.3% and an
increase of 29.8% as compared to $261,073 and $392,648 for the same periods in
1997. The increase for the nine months ended September 30, 1998 was mainly
attributable to product enhancements for the Company's core products in addition
to the reengineering of the single gripper conveyer and the development of a new
palletizer for the newspaper industry.
INTEREST INCOME for the three and nine months ended September 30, 1998 was
$163,892 and $456,856, respectively, as compared to $103,980 and $315,007 for
the same periods in 1997. The increase in interest income was mainly
attributable to higher balances in cash and cash equivalents and securities
available for sale during 1998.
GENERAL
The Company's backlog as of September 30, 1998 was $6,487,503 compared to
approximately $7,048,489 at September 30, 1997. However the backlog as of
October 31, 1998 was $8,992,725 as compared to $7,258,821 on October 31, 1997.
The Company expects to ship all backlog items within the next twelve months.
LIQUIDITY
At September 30, 1998 cash, cash equivalents and securities available for sale
were $16,940,267 as compared to $13,668,457 at December 31, 1997, an increase of
$3,271,810 or 23.9%. This increase was primarily due to an increase in cash
provided by operations offset to some extent by an increase of $475,943 in
accounts receivable reflecting an unusually large sales volume in September
1998, and an increase of $266,074 in prepaid expenses and deposits reflecting
prepayments for insurance and the NEXPO trade show in 1999. The Company believes
that its cash, cash equivalents and securities available for sale are adequate
to support the Company's operations at its current level.
YEAR 2000
Year 2000 Disclosure - The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
In other words, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company has been engaged in an evaluation of its Year 2000 readiness in
connection with its information technology and non-information technology
systems. In addition, the Company has analyzed its products as they relate to
the Year 2000 issue. The Company has also attempted to analyze Year 2000 issues
relating to third parties with whom the Company has a business relationship. The
current status of the Company's efforts is as follows:
INTERNAL SYSTEMS AND PRODUCTS
Information Technology Systems - The Company's manufacturing and accounting
software supplier has advised the Company that Year 2000 support was implemented
in 1995 and that the Company's manufacturing and accounting software is Year
2000 compliant. In addition, the Company's AS/400 operating system has been
upgraded and the Company has received correspondence from the software vendor
that this software is Year 2000 compliant. To confirm Year 2000 compliance, the
Company intends to begin testing of its manufacturing and accounting and
operating system software during the fourth quarter of 1998.
The Company's manufacturing department uses a computerized data collection
system to record labor time and attendance. This system is not Year 2000
compliant. The Company has purchased replacement software and related hardware,
which it plans to install during the forth quarter of 1998. Testing and
debugging are scheduled to be completed prior to March 31, 1999. The Company
currently estimates costs relating to the new hardware and software will be
approximately $35,000. However, the Company is unable to assure that the new
system will be Year 2000 compliant on a timely bases or that costs may not be
higher in the event of unanticipated difficulties. The Company does not
anticipate that the failure to be Year 2000 compliant with respect to labor time
and attendance data would have a material adverse effect on the Company, since
the necessary information could be entered manually rather than under the
currently employed bar code scanning method.
Non-Information Technology Systems - The Company's heating, cooling, ventilation
and alarm systems include microprocessor-based components. The heating, cooling
and ventilation systems providers have advised the Company that these systems
are not date sensitive. The alarm company was unable to provide assurance of
Year
8
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2000 compliance for the alarm. Therefore, the alarm system is being replaced
with a system certified to be compliant. This installation will be completed
prior to December 31, 1998.
PRODUCTS - The Company's products are not materially date sensitive. Moreover,
products currently manufactured that have time and date functions are Year 2000
compliant. Therefore, the Company does not believe it has any material exposure
with regard to its products as a result of the Year 2000 issue.
YEAR 2000 ISSUES RELATING TO THIRD PARTIES
Vendors - The Company utilizes approximately 360 vendors to supply parts,
materials and components for its various products. The Company has surveyed all
of its major vendors regarding their Year 2000 status. Several vendors have
supplied letters to the Company stating that they are either Year 2000 compliant
or that they will be Year 2000 compliant by December 31, 1998. However, the
Company is unable to verify this information, and it is possible that advice
received from vendors may be erroneous. Moreover, certain vendors have not
responded to the Company's request for information, and may not be Year 2000
compliant. Nevertheless, the Company believes alternative sources of supply are
available for all required components. Therefore, absent widespread difficulties
affecting several critical vendors, the Company does not anticipate that
vendors' Year 2000 issues would have a material adverse effect on the Company.
In addition, certain machine parts could be manufactured in the Company's
in-house machine shop.
The Company has received verbal verification from several of its freight
providers that they are Year 2000 compliant. However, the Company is unable to
verify this information and is not currently aware of the Year 2000 readiness of
certain other outside service companies, such as telecommunications or utility
providers. The failure of these providers to be Year 2000 compliant could have a
material adverse effect on the Company, which is not currently quantifiable. In
the worst case, the Company's operations could be seriously disrupted.
Customers - The Company's customer base typically changes significantly from
year to year. Since the Company's equipment is designed to have an extended
life, significant repeat orders are not received on a regular basis. As a
result, the Company is unable to predict the identity of most of its major
customers in the Year 2000 and thereafter. Accordingly, the Company is unable to
make an inquiry as to whether the customers' computer driven payment or
purchasing processes are Year 2000 compliant. A customer's Year 2000 issues
could cause a delay in receipt of purchase orders or in payment. If Year 2000
issues are widespread among the Company's customers, the Company's sales and
cash flow could be materially adversely affected.
FORWARD LOOKING STATEMENTS
The statements contained above regarding the shipment of backlog during the next
twelve months; anticipated measures to address the Year 2000 issue (including,
without limitation, installation, testing and inspection of hardware and
software); third party statements regarding Year 2000 readiness of their
products, services and systems; costs of Year 2000 measures; consequences of the
failure of Company products and systems, and outside parties to be Year 2000
compliant: and other Year 2000 related matters 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, among others, economic
conditions generally and in the newspaper industry, change in product demand,
delays in shipment and cancellation of customer orders, unanticipated hardware
or software problems in connection with Year 2000 upgrades, unanticipated costs
in manual entry of labor time and attendance data, delay of the installation of
the Company's alarm system, unavailability of vendors to replace vendors having
Year 2000 difficulties, inability of the Company to internally fabricate
necessary machine parts and unanticipated costs of Year 2000 measures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
10
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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 13, 1998 By: \s\ ANTHONY P. PERI
-----------------------------------------
Anthony P. Peri
President and Chief Executive Officer
By: \s\ JEFFREY S. BAROCAS
-----------------------------------------
Jeffrey S. Barocas
Chief Financial Officer and Treasurer
11
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
in its entirety by reference to such Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 378,358
<SECURITIES> 16,561,909
<RECEIVABLES> 5,549,454
<ALLOWANCES> 691,975
<INVENTORY> 3,188,086
<CURRENT-ASSETS> 26,482,865
<PP&E> 3,904,129
<DEPRECIATION> 2,120,172
<TOTAL-ASSETS> 28,810,384
<CURRENT-LIABILITIES> 6,462,869
<BONDS> 1,050,000
0
0
<COMMON> 16,450
<OTHER-SE> 21,281,065
<TOTAL-LIABILITY-AND-EQUITY> 28,810,384
<SALES> 19,981,746
<TOTAL-REVENUES> 19,981,746
<CGS> 12,289,661
<TOTAL-COSTS> 16,896,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,174
<INCOME-PRETAX> 3,505,554
<INCOME-TAX> 1,211,134
<INCOME-CONTINUING> 2,294,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,294,420
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.34
</TABLE>
