10-K 1 quipp10k.htm ANNUAL REPORT UNITED STATES


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-K

———————

(MARK ONE)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 incorporation or organization)

(IRS Employer Identification No.)


4800 NW 157th Street, Miami, Florida

33014

(Address of principal executive offices)

(Zip code)

Registrant's telephone number, including area code  (305) 623-8700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of exchange on which registered

Common Stock, $.01 par value

The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No ý

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 ý    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   

Large accelerated filer  ¨     Accelerated filer ¨     Non-accelerated filer   ¨      Smaller Reporting Company  ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ¨    No ý

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2007 was approximately $7,830,795*. The number of shares of the Registrant's common stock, $.01 par value, outstanding at March 5, 2008 was 1,477,746.

DOCUMENTS INCORPORATED BY REFERENCE

Document Incorporated

Portions of the Quipp, Inc. Proxy Statement relating to the 2007 Annual Meeting of Shareholders (if filed not later than 120 days after the close of the fiscal year covered by this report on Form 10-K).

Where Incorporated

Part III

*Calculated by excluding all shares held by executive officers, directors of registrant, and holders of more than 10 percent of the registrant’s outstanding common stocks without conceding that all such persons are "affiliates" of registrant for purposes of the federal securities laws.


 

 




QUIPP, INC.

TABLE OF CONTENTS


Page

PART I

Item 1.         Business

1

Item 1A.      Risk Factors

5

Item 1B.      Unresolved Staff Comments

6

Item 2.         Properties

6

Item 3.         Legal Proceedings

6

Item 4.         Submission of Matters to a Vote of Security Holders

6

PART II

Item 5.         Market For The Registrant’s Common Equity And Related Stockholder Matters

8

Item 6.         Selected Financial Data

8

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

Item 7A.      Qualitative and Quantitative Disclosures About Market Risk

15

Item 8.         Financial Statements and Supplementary Data

15

Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

34

Item 9A.      Controls and Procedures

34

Item 9B.      Other Information

34

PART III

Item 10.      Directors, And Executive Officers And Corporate Governance

35

Item 11.      Executive Compensation

35

Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

35

Item 13.      Certain Relationships and Related Transactions, and Director Independence

35

Item 14.      Principal Accounting Firm Fees and Services

35

PART IV

Item 15.      Exhibits And Financial Statement Schedules

36

 






i



PART I

Item 1.

Business

Through our wholly owned subsidiary, Quipp Systems, Inc. (“Quipp Systems”), we design, manufacture, sell, and install material handling equipment and systems that automate the post-press production process for newspaper publishers. In the post-press stage of newspaper operations, newspapers move from the pressroom in a continuous stream and are assembled, stacked, bundled and transferred to shipping docks, from which they are loaded into delivery trucks, or loaded into carts or stored on pallets for further distribution. Our equipment and control systems facilitate the automated movement of newspapers from the printing press to the delivery truck.

Recent Developments

On March 26, 2008, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Illinois Tool Works Inc. (“ITW”) and Headliner Acquisition Corporation, a wholly-owned subsidiary of ITW (“Merger Sub”). Under the Merger Agreement, Merger Sub will merge with and into our company, we will become a wholly-owned subsidiary of ITW, and all outstanding shares of our common stock (other than shares held by persons who have properly exercised their dissenters’ rights) will be converted into the right to receive an amount per share in cash of $4.30 to $5.65. The definitive price per share will be determined based on adjustments relating to the amount of our cash and cash equivalents and specified indebtedness prior to consummation of the transaction. The Company will not proceed with the transaction if the adjusted price would be less than $4.30 per share.

Our Products

Our product line includes the following equipment, which we sell individually or as part of integrated post-press system installations that include several of our products and, in some instances, products of other manufacturers.

Newspaper Stackers – The Series 500 Stacker counts and batches stacks of newspapers at maximum speeds of 85,000 copies per hour. The Series 500C Stacker can be adjusted to count and stack a variety of newspaper sizes. The Quipp Off-Press counter stacker, marketed to smaller volume newspapers, counts and batches stacks of newspapers at maximum speeds of 30,000 copies per hour.

Viper Bottomwrapper – The Quipp Viper applies wrapping paper to the bottom or three sides of a newspaper bundle to protect against product damage. The Viper can be equipped with an inkjet printing device that provides delivery location and copy count information on the wrapping paper.

Packman Packaging System – The Quipp Packman packaging system combines a stacker, bottomwrapper, ink-jet printer and a strapping unit into one integrated machine. The Quipp Packman can be used in press and insert applications and can stack, wrap, strap and provide text messages on each bundle of newspapers at a rate of up to 40 bundles per minute.

In-Line Inserter – The Quipp In-Line inserting system automates the process of inserting sections of newspapers or advertisements into the main section of the newspaper. The In-Line inserting system has been designed to handle inserting requirements primarily for small to medium sized newspaper operations and can insert documents ranging from 3” x 5” cards or coupon books to full broadsheets at a machine speed up to 12,000 copies per hour.

Quipp-Newstec High Speed Inserter – With maximum machine speeds up to 25,000 copies per hour, the Quipp-Newstec High Speed Inserter is designed to handle inserting requirements for medium and large newspaper operations.

Automatic Cart Loading System – This system loads strapped bundles of newspapers into carts for transportation to remote distribution centers. Quipp’s Automatic Cart Loading System handles bundles of various shapes and sizes. Upon completion of loading, the cart is discharged from the cart loader and placed in a truck for delivery to the distribution site.



1



NewsCom® 6  – NewsCom® 6 is an inserter control software system that enables an inserter to process insert packages for special zoning requirements; track missed inserts, double inserts and unopened jackets; and repair insert packages. This control system is sold with our Quipp-Newstec High Speed Inserter or separately as an upgrade to enhance our customers’ existing inserter capabilities.

Automatic Palletizer System – The palletizer system receives newspaper bundles from conveyors, stacks the bundles onto a pallet and places stretch wrap film around the pallet and newspapers to prevent movement during transportation to a distribution site.

Newspaper Conveyor Systems – Our conveyor systems, including the Quipp-Gripp III, Quipp Twin-Trak, Quipp Matte Top and Quipp Rollerslat, transport newspapers from pressrooms to various locations throughout the post-press operation. The conveyor systems include both horizontal and vertical conveyor modules, which can be integrated with directional switches and special purpose components to accommodate the layout of the newspaper plant. The Quipp-Gripp III uses a series of grippers mounted on an articulating chain to pick up and transport newspapers. Each Quipp-Gripp III gripper carries a single copy of the product. The Quipp Twin-Trak is a twin-belt newspaper conveyor that transports newspapers in an overlapping stream with maximum surface speeds of approximately 80,000 newspapers per hour. The Quipp Rollerslat conveyor employs an array of independently rotating rollers and is used in the processing of newspaper stacks prior to bundling. The Quipp Matte Top conveyor is ideally suited for bundle distribution systems and other special applications, due to its low coefficient of friction.

Other Products – We manufacture other products for post-press operations, including stream aligners, centering pacers, fold compressors, newspaper sensors, press production monitors, automated waste handling systems and other equipment.

Aftermarket Spare Parts and Service – We provide spare and repair parts and services for our products.

Original Equipment Manufacturers’ (OEM) EquipmentWe also sell OEM products to complement our product line.

Our primary market includes newspaper publishers with circulation exceeding 25,000 copies daily. We offer complete systems to meet the needs of most post-press applications and provide our customers a single source for integrated post-press material handling systems.

Our equipment prices range from $5,000 to $1,500,000, and post-press systems, which usually include an integration of equipment, software, and controls, can involve higher prices. Equipment and basic system orders normally require a lead-time from six to 13 weeks from order date to installation date. Complex systems may require lead-times of up to 26 weeks.

Our manufacturing activities consist primarily of the assembly of purchased components, the fabrication of machine and conveyor frames and the testing of completed products. We use approximately 300 vendors to supply parts, materials and components for our various products. We believe that alternative sources of supply are available for all required components. If necessary, certain parts could be manufactured in our in-house machine shop, which is used primarily for custom engineering and development of prototype equipment.

We market, install and service our products both domestically and internationally. All of our manufactured products have a minimum one-year warranty, and our staff of technicians or outside vendors provide installation and repair services. In addition to the manufacture and sale of products, we sell spare parts for our equipment. In 2007, 2006 and 2005, spare parts sales accounted for approximately 12%, 11%, and 10% of our net sales, respectively.



2



We sell most of our products to newspaper publishers in the United States. Our foreign sales accounted for 15%, 7%, and 7% of total sales in 2007, 2006 and 2005, respectively. The following table indicates the amount of sales by geographic area during the past three years:

 

 

2007

 

2006

 

2005

 

Sales By Geographic Area                      

     

 

 

     

 

 

     

 

 

 

United States

 

$

20,993,645

 

$

24,549,637

 

$

24,096,107

 

Canada

 

 

1,612,224

 

 

562,435

 

 

564,362

 

Latin America

 

 

1,877,580

 

 

1,161,598

 

 

613,421

 

Europe

 

 

73,925

 

 

16,214

 

 

1,354

 

Other

 

 

59,228

 

 

123,797

 

 

507,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

24,616,602

 

$

26,413,681

 

$

25,782,879

 

As of December 31, 2007, our backlog of orders was approximately $6,457,000 as compared to $8,909,000 on December 31, 2006. In addition to orders in process at our production facility, our backlog includes orders that have been shipped to customers but, in accordance with our revenue recognition policy, are not yet reflected in net sales (see note 1 to the consolidated financial statements included in this report). We expect to ship all orders included in our December 31, 2007 backlog within the following 15 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Overview” in Item 7.

For the years ended December 31, 2007, 2006 and 2005, no single newspaper customer accounted for ten percent or more of our net sales. A number of our newspaper customers are part of large newspaper chains, including newspaper chains that are part of larger media groups. Management believes that purchase decisions regarding individual pieces of equipment are made by the individual newspapers, while decisions regarding the purchase of complex systems involve input from the corporate office of the newspaper chain or media group. Newspapers owned by Gannett Co, Inc. accounted for 11% of our net sales in 2007. Newspapers owned by Gannett Co, Inc. accounted for 10% of our net sales in 2006. Newspapers owned by Gannett Co, Inc. and The New York Times Company each accounted for 11% of our net sales in 2005. Since our equipment is designed to have an extended life, our largest individual newspaper customers usually change from year to year.

OEM sales accounted for approximately 4.5%, 4.5%, and 6.3% of our total sales in 2007, 2006 and 2005 respectively.

Competition

The newspaper industry has experienced a decrease in size in recent years, as the number of newspapers in the country has declined and ownership of newspapers has been consolidated. Moreover, in recent years, there has been consolidation among manufacturers of newspaper material handling equipment, as well as new entrants into the market. These developments have increased competition in the industry, and some of our competitors have much greater financial resources than ours.

We believe we have two principal competitors for the newspaper post-press system business in the United States: the post-press division of Goss International Corporation, a U.S. company, and Muller-Martini Mailroom Systems (formerly Graphic Management Associates, Inc. (GMA)), a domestic subsidiary of Muller-Martini Holding, AG, a Swiss company. In addition, there are several companies that compete with respect to certain of our products. We have experienced competition on the basis of price with respect to most of our products and anticipate that price competition will continue, although product performance and customer service are also important competitive factors.

Marketing

In North America, we sell our products through direct sales representatives. We use international dealers to market and sell our products in the rest of the world. Domestically, we market products by direct solicitation, trade shows and national and regional trade journal advertising. International marketing efforts are coordinated through foreign dealers. Some of the international dealers are commissioned, while others purchase our products for resale. Advertising costs totaled $34,812, $60,282 and $75,495 in 2007, 2006 and 2005, respectively.



3



Patents And Trademarks

We hold 32 U.S. and foreign patents, which expire during the period from 2009 to 2023. We do not have any patents pending at the date of this report, but we will continue to apply for patent protection when deemed advisable. We believe that the success of our products ultimately is dependent upon performance, reliability and engineering, and that our patents are not material to our business. “Quipp” is a registered trademark of Quipp, Inc. and “NewsCom” is a registered trademark of Quipp Systems, Inc.

Research and Development

Research and development costs totaled $298,207, $477,010 and $393,600 in 2007, 2006 and 2005, respectively. During 2007 and 2006, we devoted most our development resources to hardware and software enhancements on the Quipp-Newstec inserter product line. In 2005, we continued to develop and test our In-Line-C inserting/collating system with poly-wrapping capabilities and commenced development of new controls for some of our equipment

Employees

As of December 31, 2007 we had 91 full-time employees. None of our employees are represented by a union, and we consider our employee relations to be good.



4



Item 1A.

Risk Factors

Our operations are largely dependent on the newspaper industry; adverse conditions in the newspaper industry have adversely affected our business.

Virtually all of our sales are to newspapers or to other companies serving the newspaper industry. We believe that capital spending decisions by newspapers are affected by their operating performance. In periods of decline in the newspaper industry, we have experienced a decline in orders, which has adversely affected our sales and net income.

The newspaper industry is very mature, and has been experiencing reductions in circulation in recent years, thus presenting a challenge for newspapers to maintain or increase advertising revenues. As a result of conditions generally in the newspaper industry over the past several years, we have been unable to approach the level of net sales and net income we realized in 2000. We believe that the reported decline in newspaper advertising revenues in 2006 and 2007 have contributed to the decline in our operating results the past two years. The acquisition of Newstec Inc. in 2005 significantly enhanced Quipp’s post-press offering, but this acquisition has not contributed as much to our net sales as we expected.

We face formidable competition from a number of companies, some of which have much greater resources than we have.

We confront aggressive competition in the sale of post-press equipment. Our two largest competitors are the post press division of Goss International Corporation, a U.S. company, and Muller-Martini Mailroom Systems (formerly Graphic Management Associates, Inc. (GMA)), a domestic subsidiary of Muller-Martini Holding, AG, a Swiss company. The corporate organizations of which these competitors are a part are far larger than we are and have much greater financial and marketing resources than we have. We also compete with some smaller companies, usually when projects involve the sale of individual machines rather than systems. Price competition has intensified in recent years, which has adversely affected our revenues and in some cases has caused us to lose potential orders. Our inability to successfully compete in the post-press equipment market would harm our business.

Consolidation in the newspaper industry could have a significant negative impact on our business if a newspaper group determines to terminate the relationship of its newspapers with us.

In the past several years, there has been a good deal of consolidation in the newspaper industry. While decision making with regard to capital equipment traditionally has been made at the individual newspaper level, we are experiencing a greater degree of centralized control from media groups in connection with larger post-press system orders. Therefore, if a newspaper chain were to determine to curtail the business relationship between us and its newspapers, our business would be harmed.

We have increasingly been subject to order volatility, which has caused our operating results to be less stable.

Our order flow in recent years has become increasingly volatile, and we have experienced periods where a healthy order flow in one quarter has been followed by a relatively low level of orders in the next quarter. Among the causes for the irregular order flow are decisions of media groups that own a variety of communications outlets other than newspapers to divert capital resources elsewhere (for example, to online media) or decisions of newspaper chains or media groups simply to reduce or defer capital spending for newspapers. Larger system installation orders also to contribute to order flow volatility. An order involving a large system can result in a spike in our order flow that is typically followed by an order flow decline because we do not receive such orders on a consistent basis. The variability in our order flow has, at times, impaired our ability to absorb fixed overhead costs and fully utilize our engineering and other resources. As a result, our operating results may fluctuate markedly from quarter to quarter.

If we are unable to achieve continued enhancement of our software development capabilities, our ability to compete effectively will be impaired.

Our manufacturing and marketing efforts are increasingly focused on our being a systems supplier rather than a supplier of discrete post-press components. The manufacture of post-press systems requires the development of sophisticated control software that facilitates the efficient assembly, stacking, bundling and movement of newspapers for shipment. We have focused on improving our software capabilities internally and through the use of third party consultants. In addition, our acquisition of Newstec enabled us to acquire additional software



5



development capabilities. Nevertheless, our ability to compete effectively, especially with regard to the sale of inserters and post-press systems, will be dependent, to a considerable degree, on our ability to continue to upgrade our control software. We have, in the past, relied on third party software consultants when our internal capabilities were not sufficient to handle development requirements. While we anticipate that third party consulting assistance will be available to augment our internal development capabilities when necessary, we must be able to correctly gauge the need for such assistance sufficiently in advance to be able to supply upgrades on a timely basis. If we are unable to effectively upgrade software to meet customer requirements, our business will suffer.

Trading in our common stock has been sporadic, and our stock price could potentially be subject to substantial fluctuations.

Our common stock is listed on the Nasdaq Capital Market, but generally is not actively traded. Our stock price could be affected substantially by a relatively modest volume of transactions.

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties

Our headquarters and operations are located in Miami, Florida, where we own a 63,170 square foot facility, of which approximately 48,300 square feet are utilized for manufacturing operations and 14,870 square feet are used for administrative functions. We also lease a 6,020 square foot facility in Miami, Florida to warehouse used and trade-in equipment that will be refurbished and sold to customers. The lease expires in 2009. We believe our properties are adequate and suitable for current operations.

Item 3.

Legal Proceedings

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

On December 11, 2007, we held our annual meeting of shareholders (the “Annual Meeting”). At the Annual Meeting, the shareholders voted on the election of seven directors and a proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for 2007.

The voting results at the Annual Meeting were as follows:

1.

Election of Directors

Name Of Nominee

 

For

 

Withheld

William A. Dambrackas

               

984,060

               

217,803

Lawrence J. Gibson

 

984,060

 

217,803

Michael S. Kady

 

982,443

 

219,420

Cristina H. Kepner

 

982,961

 

218,902

John D. Lori

 

1,127,580

 

 74,283

Arthur J. Rawl

 

984,578

 

217,285

Robert C. Strandberg

 

984,060

 

217,803

2.

Ratification of the Appointment of KPMG LLP as our independent registered public accounting firm for 2007.

 

For

 

Against

 

Abstain

 

Broker

Non-Votes

 

               

1,156,703

 

44,780

 

380

 

0

               





6



Executive Officers of the Registrant

The names, business experience and ages of the executive officers of Quipp are listed below:

Name

 

Business Experience During the Past Five Years

 

Age

Michael S. Kady

     

Mr. Kady became President and Chief Executive Officer of Quipp in February 2002 and President of Quipp Systems in March 2002. Prior to joining Quipp, Mr. Kady was President and Chief Operating Officer of three privately-held companies engaged in the design, manufacture, and sales of engineered components, capital equipment, and automated material handling systems. Earlier, he held a variety of engineering, financial, operations, and general management positions with FMC Corporation and Cooper Industries.

     

  58  

 

 

 

 

 

John (Skip) Connors

 

Mr. Connors has been Quipp’s Vice President of Corporate Development since August 2005. Mr. Connors was President of Newstec from August 1998 until December 2006, when Newstec merged with Quipp Systems. Prior to his involvement with Newstec, Mr. Connors served in a variety of sales and marketing positions with Graphic Management Associates, Inc., or GMA, a manufacturer of inserting and material handling equipment for the newspaper industry. GMA is now known as Muller-Martini Mailroom Systems.

 

46

 

 

 

 

 

Christer A. Sjogren

 

Mr. Sjogren, Executive Vice President of Quipp Systems since 1994, has served Quipp or Quipp Systems in various capacities since 1983. He is currently responsible for our engineering and research and development activities.

 

65

 

 

 

 

 

David Switalski

 

Mr. Switalski, Vice President of Operations of Quipp Systems since July 2000, has served Quipp or Quipp Systems since July 2000, has served Quipp or Quipp Systems in various capacities since 1984. He is currently responsible for production and information systems.

 

48

 

 

 

 

 

Angel Arrabal

 

Mr. Arrabal, Vice President of Sales and Marketing of Quipp Systems since 2003, has served Quipp or Quipp Systems in various capacities since 1986. He is currently responsible for worldwide sales and marketing.

 

48

 

 

 

 

 

Mohammed Jamil

 

Mr. Jamil, Vice President of Customer Service of Quipp Systems since 2001, has served Quipp or Quipp Systems in various capacities since 1984. He is currently responsible for preparation of quotations, product testing, installations, customer support and project management.

 

55

 

 

 

 

 

Eric Bello

 

Mr. Bello has been Vice President of Finance and CFO of Quipp since August 2006 and Vice President of Finance and CFO of Quipp Systems since February 2005. He has served Quipp and Quipp Systems in various capacities since 1999. Prior to joining Quipp, he served as Corporate Controller of Med-Waste, Inc., a company involved in medical waste management; Controller of Nature's Products, Inc., a vitamin manufacturer; and Controller of the U.S. Division of Althin Medical, Inc., a medical device manufacturer. Mr. Bello, who is a Certified Public Accountant, also was on the auditing staff of KPMG Peat Marwick (now KPMG LLP).

 

44




7



PART II

Item 5.

Market For The Registrant’s Common Equity And Related Stockholder Matters

Our Common Stock, $.01 par value, is traded on the Nasdaq Capital Market under the symbol, “QUIP.” The following table sets forth the high and low sales prices of our Common Stock as reported by Nasdaq for each calendar quarter in 2007 and 2006:

 

 

 

2007

 

 

2006

 

 

 

High

     

Low

     

High

     

Low

 

 

 

 

          

 

 

         

 

 

         

 

 

         

 

First Quarter

     

$

8.14

     

$

6.37

     

$

12.31

     

$

10.18

 

Second Quarter

 

 

8.50

 

 

5.80

 

 

11.08

 

 

8.71

 

Third Quarter

 

 

7.48

 

 

4.30

 

 

9.09

 

 

7.42

 

Fourth Quarter                            

 

 

5.72

 

 

3.06

 

 

8.09

 

 

7.06

 

We paid four dividends totaling $0.20 per share ($0.05 each quarter) in each of 2007 and 2006.

Item 6.

Selected Financial Data

The selected consolidated financial data for each of the years in the five-year period ended December 31, 2007 are derived from the audited financial statements of the Company. The following data should be read in conjunction with the financial statements and related notes and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Annual Report on Form 10-K.

Selected Financial Data

(In thousands, except per share and share data)

 

 

Year Ended

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Statement of Operation Information:

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net sales

 

$

24,617

 

$

26,414

 

$

25,783

 

$

24,690

 

$

19,521

 

Gross profit

 

 

5,005

 

 

6,825

 

 

6,271

 

 

6,437

 

 

5,579

 

Goodwill impairment

 

 

 

 

2,591

 

 

 

 

30

 

 

77

 

Intangible asset impairment

 

 

1,090

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

6,572

 

 

6,618

 

 

6,000

 

 

5,271

 

 

4,832

 

Research and development

 

 

298

 

 

477

 

 

394

 

 

707

 

 

581

 

Operating (loss) profit

 

 

(2,955

)

 

(2,861

)

 

(122

)

 

459

 

 

166

 

Other income (expense), net

 

 

174

 

 

168

 

 

174

 

 

307

 

 

141

 

Net (loss) income

 

 

(2,706

)

 

(3,294

)

 

254

 

 

486

 

 

201

 

Per Share Amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share (basic)

 

 

(1.83

)

 

(2.26

)

 

.18

 

 

.34

 

 

.14

 

Net income (loss) per share (diluted)

 

 

(1.83

)

 

(2.26

)

 

.18

 

 

.34

 

 

.14

 

Book value per share

 

 

4.18

 

 

6.26

 

 

8.50

 

 

8.38

 

 

8.04

 

Market price per share (unaudited) – high

 

 

8.50

 

 

12.31

 

 

18.49

 

 

19.49

 

 

13.36

 

 – low 

 

 

3.06

 

 

7.06

 

 

9.62

 

 

11.50

 

 

9.00

 

Balance Sheet Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

10,395

 

$

11,003

 

$

15,885

 

$

18,441

 

$

17,109

 

Total assets

 

 

13,320

 

 

16,062

 

 

23,099

 

 

20,901

 

 

19,793

 

Current liabilities

 

 

7,146

 

 

6,780

 

 

10,675

 

 

8,623

 

 

7,894

 

Long-term liabilities

 

 

 

 

155

 

 

264

 

 

350

 

 

450

 

Shareholders’ equity

 

 

6,175

 

 

9,127

 

 

12,161

 

 

11,928

 

 

11,450

 

Weighted average number of equivalent shares outstanding

 

 

1,477,746

 

 

1,455,710

 

 

1,429,929

 

 

1,425,497

 

 

1,422,707

 

In August 2005, we acquired 100% of the stock of Newstec, Inc., a company formerly located in Walpole, Massachusetts that manufactured and sold inserters and software controls to newspaper publishers and companies that service newspaper publishers. Our 2005 selected financial data reflects Newstec operations from the date of the acquisition.



8



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Newspaper Industry Considerations

Our financial performance reflects, to a meaningful extent, conditions in the newspaper industry. We believe that our customers’ spending for capital investment, and therefore, demand for our equipment, is affected by fluctuations in advertising revenue and newsprint cost. Specifically, we believe the growth in our business is somewhat reflective of the growth in newspaper advertising revenues, but may be tempered by any increases in newsprint costs. Similarly, we believe that a decline or a very weak growth pattern in advertising revenues generally will cause restricted capital equipment spending by newspapers and, as a result, will adversely affect our financial performance. In this regard, we believe that reported declines in newspapers’ advertising revenues in 2006 and 2007 have adversely affected our business.

On a longer-term basis, we believe that capital investment patterns have been, and will continue to be, affected by reduction in newspaper circulation and industry consolidation. According to published reports, daily newspaper circulation in the United States has decreased by an average of approximately 1% each year from 1987 to 2004. Circulation declines, however, have been accelerating in recent years. According to statistics from the Audit Bureau of Circulation, daily newspaper circulation decreased approximately 2.1% for the six months ending March 31, 2007, and 2.5% for the six months ended September 30, 2007, compared to the same periods in 2006. We expect the trend of decreasing circulation to continue as newspapers compete with other media, including the Internet, direct mail, television and radio.

While reduced circulation could negatively affect demand for our products, we believe the consolidation of newspaper ownership in recent years has had a positive impact on our business. In many cases, when large newspaper and media groups have acquired small newspapers and newspaper chains, the acquiring groups centralize the production and distribution of multiple newspapers located in a geographic area to one or a few sites. The operation of centralized production and distribution facilities typically requires the purchase of additional automated equipment. Therefore, consolidation could enhance demand for our products.

Based on published financial reports and discussions with our customers, we believe that major newspaper chains generally derive over 70% of their revenues from advertising. Statistics obtained from the Newspaper Association of America (NAA) indicate that newspaper print advertising revenue decreased 8.6% during the nine months ended September 30, 2007 (most current data available) compared to the same period in 2006. Also, print ad revenues for the full year 2006 declined 1.7% from 2005. Management believes that, while the current sharp decline in newspaper print advertising is cyclical (largely due to reduced real estate and employment advertising), the pressure on newspaper advertising revenues will continue due to competition for advertising dollars by other media. Nevertheless, statistics available from NAA indicate that newspapers still attract more advertising dollars than broadcast television, cable television, radio, magazines or the Internet. The newspaper industry remains very large and, we believe, financially sound.

Based on public filings of newspaper chains, newsprint represents a significant operating expense for newspaper publishers. Monthly average newsprint prices increased steadily from 2002, reaching a peak in 2006. During 2007, newsprint costs declined significantly during the first ten months due to reduced demand related to declining circulation and the growing trend toward newspapers with smaller dimensions. However, during the few months preceding the filing of this report, newsprint prices have reversed the downward trend and are again moving higher. The increased cost of paper may add pressure to newspaper capital spending plans for 2008.

Effect of Contract Terms on Cash Generation, Revenue Recognition

Most of our sales are made on a contract basis. A typical sales contract requires a customer to pay for its purchase in installments as follows: 30% due at the time of the order; 30% due 60 days prior to shipment; 30% due 30 days prior to shipment; 5% due upon installation and 5% due upon acceptance. Contract payment terms vary for some orders and may be based on our achievement of agreed upon milestones. While cash is collected throughout the order process, revenue is recognized only when all significant contract obligations are satisfied and collection of outstanding receivables are reasonably assured in accordance with our revenue recognition policy (see note 1 to the consolidated financial statements included in this report).



9



We normally receive larger orders several months in advance of delivery. Therefore, backlog can be an important, though by no means conclusive, indication of our short-term revenue stream. The timing of revenues can be affected by pending orders, the amount of custom engineering required, the timetable for delivery, the time required to complete installation and the receipt of new orders. Our backlog, as of December 31, 2007 and December 31, 2006 was $6,457,000 and $8,909,000, respectively. We expect to ship all orders in our December 31, 2007 backlog within 15 months.

Results of Operations

2007 vs. 2006

Net Sales

Net sales were $24,616,602 in 2007, a decrease of $1,797,079 (6.8%) compared to 2006 net sales of $26,413,681. Published reports indicate that U.S. newspapers and media groups have experienced a drop in print advertising revenue in 2006 and 2007. Additionally, reduction in newspaper circulation has accelerated since 2004. We believe these developments have resulted in lower capital spending on post-press newspaper manufacturing equipment, which has adversely affected our incoming orders and net sales.

Sales to foreign customers were $3,622,957 in 2007 compared to $1,864,044 in 2006. Most of our foreign sales are made to customers located in countries where post-press equipment specifications are similar to those in the U.S, principally newspapers in Canada, Central America and South America. Because opportunities to sell our equipment overseas are not consistent, sales to foreign customers can fluctuate significantly from year to year. Nevertheless, since all international orders are paid in U.S. dollars, we believe the favorable U.S. dollar exchange rate compared to foreign currencies has provided us a competitive advantage with some foreign customers.

Gross Profit

Gross profit in 2007 was $5,005,285, a decrease of $1,819,320 (26.7%) as compared to $6,824,605 in 2006. Gross profit as a percentage of net sales decreased to 20.3% in 2007 from 25.8% in 2006. We experienced considerable material cost increases in 2007 as our suppliers passed along inflationary cost increases that we believe are related largely to rising energy costs. Because we also experienced price competition for a reduced volume of available orders, we could not pass along all of these material cost increases to our customers. Additionally, in the second half of 2007, we experienced higher production costs due to a significant increase in customer delivery requirements. We increased production personnel in the third and fourth quarter by approximately 65%, using temporary labor. We incurred inefficiencies as these employees were trained and gained experience with new job responsibilities.

Intangible Asset Impairment and Goodwill Impairment

In 2007, pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), we recorded an impairment charge against our intangible assets totaling $1,090,000. In 2006, pursuant to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we recorded a goodwill impairment charge of $2,590,847.

Selling, General and Administrative Expenses

Our 2007 selling, general and administrative expenses were $6,571,765, a decrease of $46,247(0.7%) compared to $6,618,012 in 2006. We incurred lower costs associated with our participation in the annual NEXPO exhibition sponsored by The Newspaper Association of America, lower variable selling expenses related to the reduction in net sales, and cost reductions, resulting from the closing of the former Newstec manufacturing facilities in Massachusetts during the first quarter of 2006. These reductions were offset in part by costs associated with our evaluation of strategic alternatives and higher intangible amortization costs related to a change in an accounting estimate that accelerated the amortization of certain intangible assets (see note 6 to the Consolidated Financial Statements).



10



Research and Development

Research and development expenses for 2007 were $298,207, a decrease of $178,803 (37.5%) as compared to $477,010 for the same period in 2006. During 2007, we focused most of research and development resources to enhancements of our Quipp-Newstec inserter product line.

Other Income and Expense (Net)

Net other income in 2007 was $174,134 as compared to $167,883 for the same period in 2006. Royalty income relating to our patented automatic cart loading system technology used by another supplier of post-press material handling equipment was $10,000 in 2007 compared to $20,000 during the same period in 2006. Interest expense was lower in 2007 due to a lower balance of debt and reduced loan costs.

Income tax (benefit) expense

Our effective tax rate continues to be impacted by a valuation allowance on substantially all our deferred tax assets. See note 4 to the consolidated financial statements included in this report. As a result of recent losses, we reduced our estimated liability related to tax obligations with several states by $74,779 in 2007.

Results of Operations

2006 vs. 2005

Net Sales

Of the $26,413,681 in 2006 net sales, we generated $3,873,025 from our inserter product line acquired with the purchase of Newstec in August 2005. Of the $25,782,879 in 2005 net sales, we generated $2,456,965 from our Newstec inserter product line.

The balance of $22,540,656 in 2006 net sales decreased $785,258 (3.4%) compared to the balance of 2005 net sales of $23,325,914. Published reports indicate that U.S. newspaper publishers and media groups have recently been experiencing lower profits in their newspaper divisions due to declining circulation, flat or reduced print advertising revenue and higher costs. We believe these developments have resulted in lower capital spending on post-press newspaper manufacturing equipment, which has adversely affected our incoming orders and net sales.

Sales to foreign customers were $1,864,044 in 2006 compared to $1,686,772 in 2005. Most of our foreign sales are made to customers located in countries where post-press equipment specifications are similar to those in the U.S, principally newspapers in Canada, Central America and South America. Because opportunities to sell our equipment overseas are not consistent, sales to foreign customers can fluctuate significantly from year to year.

Gross Profit

Gross profit for 2006 was $6,824,605, an increase of $553,496 (8.8%) as compared to $6,271,109 for the corresponding period in 2005. Gross profit as a percentage of net sales increased to 25.8% in 2006 from 24.3% in 2005. In 2005, our profit as a percentage of net sales was adversely affected by a nominal profit earned on revenue of approximately $2,700,000 for a complex system project. Additionally, our 2005 gross profit percentage was negatively affected by low manufacturing volumes at our Newstec Massachusetts production facility from August 10, 2005 to December 31, 2005, resulting in unfavorable overhead absorption. The 2005 profit margin percentage was also adversely affected by the purchase accounting write-up of Newstec inventory on the date of acquisition. The inventory was written up to fair value on the date that we acquired Newstec, resulting in increased cost of sales of approximately $187,000 in 2005 upon recognition of the related revenue.

Goodwill Impairment

Pursuant to SFAS No 142, we tested goodwill in the fourth quarter of 2006 and determined that the fair value of Quipp was less than the carrying value. Therefore, we calculated the implied fair value of the Company’s goodwill, which resulted in an impairment charge of $2,590,847.

Selling, General and Administrative Expenses

Our 2006 selling, general and administrative expenses were $6,618,012, an increase of $618,057 (10.3%), compared to $5,999,955 for the same period in 2005. Selling, general and administrative costs related to the inserter



11



product line we acquired from Newstec were approximately $1,128,000 (including $407,000 of intangible amortization expense) compared to $747,000 (including $158,000 of intangible amortization expense) from August 10, 2005 through December 31, 2005. Additionally, we incurred higher marketing costs in 2006 for our annual NEXPO show. These higher costs were offset in part by lower costs for activities related to compliance requirements of the Sarbanes-Oxley Act of 2002 and related regulations. In 2005 we also settled a matter with the Export-Import Bank of the United States related to a dispute arising from the sale of equipment to a foreign customer in 2000. The amount of the settlement was less than the cost that was estimated and accrued, and, as a result, we recorded an adjustment of $235,000 as a reduction to selling, general and administrative expenses in 2005.

Research and Development

Research and development expenses for 2006 were $477,010, an increase of $83,410 (21.2%) as compared to $393,600 for the same period in 2005. During 2006, we focused most of our research and development resources to hardware and software enhancements to our Quipp-Newstec inserter product line. In 2005, we completed the testing of the Quipp Packman packaging system and our In-Line C inserting/collating system with poly-wrapping capabilities and we commenced development of software controls for both Quipp and Newstec products.

Other Income and Expense (Net)

Net other income in 2006 was $167,883 as compared to $173,636 of income for the same period in 2005. Royalty income relating to our patented automatic cart loading system technology used by another supplier of post-press material handling equipment was $20,000 in 2006 compared to $25,000 during the same period in 2005. Interest income increased to $184,666 in 2006 from $172,123 in 2005. Our interest income was greater in 2006 principally due to higher interest rates offset, in part, by lower balances of cash, cash equivalents and securities available for sale. Interest expense was greater in 2006 due to higher interest rates and the amortization of loan costs related to our line of credit, which was available for the full year in 2006 compared to seven months in 2005.

Income tax (benefit) expense

Our 2006 income tax expense reflects a deferred tax valuation allowance of $1,734,093. See note 4 to the consolidated financial statements included in this report. In 2005, we generated a $250,000 tax benefit due to an adjustment in current and deferred state tax liabilities as a result of settlements of tax obligations with several states for amounts that were less than estimated and accrued.

Liquidity and Capital Resources

Our cash, cash equivalents and securities available for sale decreased by $1,533,779 at December 31, 2007 compared to the same date in the previous year. The reduction in cash, cash equivalents and securities available for sale relates to the net loss in 2007 and reduced level of installment payment collections resulting from a lower volume of incoming orders. In addition, we paid dividends totaling $293,594 in 2007.

We currently have a line of credit agreement with Merrill Lynch Business Financial Services, Inc. (Merrill Lynch). As of the date of this report, we have no balance outstanding on the line of credit. Under the terms of the agreement, we can borrow up to $3,000,000 subject to a limit based on eligible accounts receivable and inventory. Borrowings are secured by all accounts receivable, inventory, intangibles and contract rights as well as securities with value of no less than $1,000,000. Interest is payable monthly at a rate equal to the one-month LIBOR rate plus 2.4%. At December 31, 2007, we did not meet the debt covenants required by the Agreement and received a waiver from Merrill Lynch through the Agreement expiration date, April 30, 2008. The line of credit is subject to renewal based on terms in the Agreement. While we plan to renegotiate the facility, there is no assurance that we will be able to retain the line of credit or maintain the same terms as in the current agreement.

Our debt consists primarily of obligations under variable rate industrial revenue bonds that were issued through the Dade County Industrial Development Authority in 1988. At December 31, 2007, the balance due on the bonds was $150,000, which is payable in full on October 1, 2008. During 2007, the bonds bore interest at an average rate of 3.8%.

Working capital at December 31, 2007 was $3,248,957, a decrease of $973,639 from $4,222,596 at December 31, 2006. The reduction in working capital is principally due to losses we incurred in 2007.



12



We believe that our cash, cash equivalents and securities available for sale, together with future cash generated from operations, will be sufficient to fund operations at the current levels.

Critical Accounting Estimates

In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, revenues and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. We discuss below the more significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our senior management has discussed the application of these estimates with our Audit Committee.

Revenue recognition

Revenue from contracts that include multiple-element arrangements, such as a sale of standard equipment and basic installation services, is recognized as each element is earned based on the relative fair value of each element. Revenue on standard equipment is recognized upon delivery in accordance with contractual terms, net of discounts. The fair value of installation services is deferred until the installation is completed. Management reviews objective evidence such as prices charged when each element is sold separately and selling prices on similar elements sold by competitors in making judgment as to the fair value for each element of the contract.

Revenue from long-term system arrangements, such as a sale of complex equipment integrated with controls and software is recognized using the percentage of completion method measured based on units delivered. On such contracts relating to long-term system arrangements, management makes judgments regarding costs and profitability estimates measuring progress toward completion. These judgments are subject to some degree of uncertainty, and unanticipated efforts necessary to complete a complex system could adversely affect operating results in future periods. At December 31, 2007, 2006, and 2005, there were no long-term system arrangements accounted for using the percentage of completion method based on units delivered.

Allowance for doubtful accounts

We 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. Nevertheless, there is a risk that credit losses in the future will exceed our expectations, in which case our operating results would be adversely affected for the period or periods in which the credit losses occur.

Warranty reserves

We record a warranty reserve based on our actual historical 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. 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 occur.

Valuation allowance for deferred income taxes

SFAS 109 “Accounting for Income Taxes” requires us to use our best judgment to determine the realizability of our deferred tax asset. As part of this process, we are required to estimate future book taxable income and possible tax planning strategies. These estimates require us to exercise judgment about our future results and feasibility of tax planning strategies. As further discussed in Note 4 to the Consolidated Financial Statement, we determined that, as of December 31, 2007 and 2006, we required a full income tax valuation allowance to offset our deferred tax assets.

Impairment of assets held for use

SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” requires us to assess the recoverability of the carrying value of long-lived assets when an event of impairment has occurred. A long-lived asset is tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We must exercise judgment in assessing whether an event of impairment has occurred. For



13



purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in assessing the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

Due to recent challenging business conditions, in the fourth quarter of 2007, we determined it necessary to test the recoverability of our amortizable intangible assets and determined that the fair value of the underlying assets was $1,090,000 less than the carrying value. We recorded this impairment as a charge to selling general and administrative expenses (see note 6 to the Consolidated Financial Statements). If acquired products fail to achieve estimated volume and price levels and market conditions unfavorably change, we may be required to recognize additional impairment charges in the future.

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 there is no significant risk arising from interest rate fluctuations. To ensure safety and liquidity, we only invest in instruments with credit quality that are traded in a secondary market. The counterparties are major financial institutions and government agencies.

Inflation

Inflationary material costs increases have exceeded our expectations in 2007. Due to the highly competitive conditions in the newspaper industry, all of these cost increases could not be passed along to our customers. This contributed to a lower gross profit in 2007 compared to 2006.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest (sometimes called minority interest) and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years that start after December 15, 2008 and prohibits early adoption.

In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations, a revision of SFAS No. 141.” SFAS No. 141 (R) establishes principles and requirements as to how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141 (R) is effective for financial statements issued for fiscal years beginning after December 15, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits, but does not require, companies to report at fair value the majority of recognized financial assets, financial liabilities and firm commitments. Under this standard, unrealized gains and losses on items for which the fair value option is elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that starts after November 15, 2007. The Company has concluded that SFAS No. 159 will have no impact on the Company’s financial position, results of operations or cash flows in 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value in accordance with GAAP, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements; however, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective as of the beginning of an entity’s first fiscal year that starts after November 15, 2007. SFAS 157 will have no impact on the Company’s financial position, results of operations or cash flows in 2008.




14



Forward Looking Statements

The statements contained in this Annual Report on Form 10-K, including statements concerning shipment of backlog orders; the effect of changes in newspaper advertising revenue and newsprint costs on newspapers’ capital spending and on orders for our products; newspaper circulation trends; the effect of decreasing circulation and newspaper industry consolidation on demand for our products; adequacy of cash, cash equivalents and securities available for sale; and other disclosures that are not statements of historical fact, 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; the result of the strategic evaluation described in this report; unanticipated business developments; delay in transition of newspapers to smaller web widths; acceleration of the decline in newspaper circulation; capital spending reductions by newspaper publishers; demand and market acceptance for new and existing products; the impact of competitive products and pricing; delays in shipment; cancellation of customer orders; engineering and production difficulties; unanticipated customer demand for additional work in connection with large and complex orders; and payment delays.

Item 7A.

Qualitative and Quantitative Disclosures About Market Risk

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk.”

Item 8.

Financial Statements and Supplementary Data

 

 

    Page    

 

Management’s Report on Internal Control Over Financial Reporting

     

16

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

17

 

 

 

 

 

Financial Statements:

 

 

 

Consolidated Balance Sheets as of December 31, 2007 and 2006

 

18

 

 

 

 

 

Consolidated Statements of Operations and Other Comprehensive (Loss) Income for
each of the years in the three-year period ended December 31, 2007

 

19

 

 

 

 

 

Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 2007

 

20

 

 

 

 

 

Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 2007

 

21

 

 

 

 

 

Notes to Consolidated Financial Statements.

 

22

 

 

 

 

 




15



MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Management of Quipp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.


/s/ MICHAEL S. KADY

 

/s/ERIC BELLO

President and Chief Executive Officer

                                           

Treasurer and Chief Financial Officer

March 31, 2008




16



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Shareholders of Quipp, Inc.:

We have audited the accompanying consolidated balance sheets of Quipp, Inc. and subsidiary (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations and other comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presents fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.


/ s / KPMG LLP        

March 31, 2008

Miami, FL

Certified Public Accountants




17



QUIPP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

 

 

2007

 

2006

 

ASSETS

     

 

 

     

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,391,100

 

$

864,879

 

Restricted securities and cash equivalents

 

 

1,000,000

 

 

1,000,000

 

Securities available for sale

 

 

 

 

2,060,000

 

Accounts receivable, net of allowances of $179,568 and $112,625
in 2007 and 2006

 

 

3,641,206

 

 

2,930,873

 

Inventories

 

 

3,941,964

 

 

3,498,655

 

Prepaid expenses and other current assets

 

 

420,282

 

 

648,235

 

Total current assets

 

 

10,394,552

 

 

11,002,642

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,810,506

 

 

2,161,131

 

Intangible assets, net of accumulated amortization of $1,921,486 and
$1,235,959 in 2007 and 2006

 

 

1,088,613

 

 

2,864,140

 

Other assets

 

 

26,586

 

 

33,727

 

Total Assets

 

$

13,320,257

 

$

16,061,640

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

154,162

 

$

109,654

 

Accounts payable

 

 

1,867,197

 

 

927,642

 

Accrued salaries and wages

 

 

516,196

 

 

557,046

 

Accrued professional fees

 

 

367,750

 

 

225,000

 

Deferred revenues

 

 

3,348,764

 

 

4,068,758

 

Other accrued liabilities

 

 

891,526

 

 

891,946

 

Total current liabilities

 

 

7,145,595

 

 

6,780,046

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

 

 

155,012

 

Total liabilities

 

 

7,145,595

 

 

6,935,058

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

Common stock – par value $.01 per share, authorized 8,000,000
shares, issued and outstanding 1,477,746 and 1,458,189 shares in
2007 and 2006

 

 

14,778

 

 

14,582

 

Paid-in capital

 

 

518,960

 

 

321,708

 

Common stock subscribed (19,557 shares in 2006)

 

 

 

 

150,000

 

Retained earnings

 

 

5,640,924

 

 

8,640,292

 

 

 

 

6,174,662

 

 

9,126,582

 

Total Liabilities and Shareholders' Equity

 

$

13,320,257

 

$

16,061,640

 





See accompanying notes to the consolidated financial statements.


18



QUIPP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE (LOSS) INCOME

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

     

$

24,616,602

      

$

26,413,681

      

$

25,782,879

 

Cost of sales

 

 

(19,611,317

)

 

(19,589,076

)

 

(19,511,770

)

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

5,005,285

 

 

6,824,605

 

 

6,271,109

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Intangible asset impairment

 

 

(1,090,000

)

 

 

 

 

Goodwill Impairment

 

 

 

 

(2,590,847

)

 

 

Selling, general and administrative expenses

 

 

(6,571,765

)

 

(6,618,012

)

 

(5,999,955

)

Research and development

 

 

(298,207

)

 

(477,010

)

 

(393,600

)

 

 

 

 

 

 

 

 

 

 

 

Operating (loss)

 

 

(2,954,687

)

 

(2,861,264

)

 

(122,446

)

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Miscellaneous income

 

 

10,000

 

 

20,000

 

 

25,000

 

Interest income

 

 

183,255

 

 

184,666

 

 

172,123

 

Interest expense

 

 

(19,121

)

 

(36,783

)

 

(23,487

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

174,134

 

 

167,883

 

 

173,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(2,780,553

)

 

(2,693,381

)

 

51,190

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

74,779

 

 

(600,981

)

 

202,714

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,705,774

)

$

(3,294,362

)

$

253,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of taxes:

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities held for sale

 

 

 

 

7,153

 

 

9,223

 

Comprehensive (loss) income

 

$

(2,705,774

)

$

(3,287,209

)

$

263,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) income per common share

 

$

(1.83

)

$

(2.26

)

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number common
shares outstanding

 

 

1,477,746

 

 

1,455,710

 

 


1,429,929

 




See accompanying notes to the consolidated financial statements.


19



QUIPP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 

 

 

 

 

 

Additional
Paid-In
Capital

 

Retirement
Earnings

 

Shares

 

Amount

 

Other
Comprehensive
Income
(Loss)

 

Subscribed

 

Total
Shareholders’
Equity

 

Common Stock

Shares

 

Amount

Balances on
December 31, 2004

     

 

1,433,025

     

 

14,330

     

 

83,825

     

 

11,994,935

     

 

9,250

     

 

(148,375

)     

 

(16,376

)     

 

 

     

 

11,928,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based
compensation

 

 

 

 

 

 

40,441

 

 

 

 

 

 

 

 

 

 

 

 

40,441

 

Unrealized gain on
securities held for
sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,223

 

 

 

 

9,223

 

Retirement of treasury
stock

 

 

(9,250

)

 

(92

)

 

(124,266

)

 

(24,017

)

 

(9,250

)

 

148,375

 

 

 

 

 

 

 

Dividend declared
on common stock
($.05 per share)

 

 

 

 

 

 

 

 

(71,190

)

 

 

 

 

 

 

 

 

 

(71,190

)

Net income

 

 

 

 

 

 

 

 

253,904

 

 

 

 

 

 

 

 

 

 

253,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances on
December 31, 2005

 

 

1,423,775

 

 

14,238

 

 

 

 

12,153,632

 

 

 

 

 

 

(7,153

)

 

 

 

 

12,160,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based
compensation

 

 

10,000

 

 

100

 

 

71,952

 

 

 

 

 

 

 

 

 

 

 

 

72,052

 

Shares issued as
additional consideration pursuant to the acquisition of Newstec, Inc.

 

 

24,414

 

 

244

 

 

249,756

 

 

 

 

 

 

 

 

 

 

 

 

250,000

 

Dividend declared on
common stock ($.15
per share)

 

 

 

 

 

 

 

 

(218,978

)

 

 

 

 

 

 

 

 

 

(218,978

)

Common stock subscribed
as consideration
relating to the
acquisition of
Newstec, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150,000

 

 

150,000

 

Unrealized gain on
securities held for
sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,153

 

 

 

 

7,153

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,294,362

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,294,362

)

Balances on
December 31, 2006

 

 

1,458,189

 

$

14,582

 

$

321,708

 

$

8,640,292

 

$

 

$

 

$

 

$

150,000

 

 

$ 9,126,582

 

Stock-based
compensation

 

 

 

 

 

 

47,448

 

 

 

 

 

 

 

 

 

 

 

 

47,448

 

Issuance of common
stock

 

 

19,557

 

 

196

 

 

149,804

 

 

 

 

 

 

 

 

 

 

(150,000

)

 

 

Dividend declared on
common stock ($.20
per share)

 

 

 

 

 

 

 

 

(293,594

)

 

 

 

 

 

 

 

 

 

(293,594

)

Net loss

 

 

 

 

 

 

 

 

(2,705,774

)

 

 

 

 

 

 

 

 

 

(2,705,774

)

Balances on
December 31, 2007

 

 

1,477,746

 

$

14,778

 

$

518,960

 

$

5,640,924

 

$

 

$

 

$

 

$

 

$

6,174,662

 





See accompanying notes to the consolidated financial statements.


20



QUIPP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005

 

 

2007

 

2006

 

2005

 

Cash (used in) provided by operations:

     

 

 

      

 

 

      

 

 

 

Net (loss) income

 

$

(2,705,774

)

$

(3,294,362

)

$

253,904

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income to net cash

 

 

 

 

 

 

 

 

 

 

(used in) provided by operations:

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

 

 

609,848

 

 

(78,259

)

Depreciation and amortization

 

 

458,990

 

 

450,009

 

 

238,759

 

Intangible amortization

 

 

685,527

 

 

522,436

 

 

272,836

 

Intangible asset impairment

 

 

1,090,000

 

 

 

 

 

Goodwill Impairment

 

 

 

 

2,590,847

 

 

 

Stock-based compensation

 

 

47,448

 

 

72,052

 

 

40,441

 

Charged to (recovery from) bad debt expense

 

 

50,181

 

 

(7,797

)

 

(16,545

)

 

 

 

 

 

 

 

 

 

 

 

Changes in operational assets and liabilities net of effect
of acquisitions:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(760,514

)

 

1,163,815

 

 

645,553

 

Inventories

 

 

(443,309

)

 

745,678

 

 

2,668,482

 

Prepaid expenses and other assets

 

 

235,094

 

 

(127,590

)

 

169,531

 

Accounts payable and accrued liabilities

 

 

1,041,035

 

 

(1,179,208

)

 

(1,294,145

)

Deferred revenues

 

 

(719,994

)

 

(2,644,626

)

 

(1,095,507

)

Net cash (used in) provided by operations

 

 

(1,021,316

)

 

(1,098,898

)

 

1,805,050

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

 

 

Securities purchased

 

 

(2,000,000

)

 

(4,435,000

)

 

(7,152,723

)

Securities sold or matured

 

 

4,060,000

 

 

4,417,548

 

 

7,103,247

 

Capital expenditures

 

 

(108,365

)

 

(449,419

)

 

(107,694

)

Purchase of Newstec and related expenses,
net of cash acquired

 

 

 

 

 

 

(4,477,455

)

Net cash provided by (used in) investing activities

 

 

1,951,635

 

 

(466,871

)

 

(4,634,625

)

 

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

 

 

Dividends paid to shareholders

 

 

(293,594

)

 

(290,168

)

 

 

Repayment of debt

 

 

(110,504

)

 

(108,430

)

 

(103,690

)

Net cash used in financing activities

 

 

(404,098

)

 

(398,598

)

 

(103,690

)

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

526,221

 

 

(1,964,367

)

 

(2,933,265

)

Cash and cash equivalents, beginning of year

 

 

864,879

 

 

2,829,246

 

 

5,762,511

 

Cash and cash equivalents, end of year

 

 

1,391,100

 

 

864,879

 

 

2,829,246

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non cash information:

 

 

 

 

 

 

 

 

 

 

Shares issued and issuable as additional consideration
for Newstec, Inc.

 

 

 

$

400,000

 

 

 

Leased inventory reclassified to fixed asset

 

 

 

$

558,680

 

 

 

Cash received with acquisition of Newstec

 

 

 

 

 

$

145,217

 

Retirement of treasury stock

 

 

 

 

 

$

148,375

 

Dividend declared

 

 

 

 

 

$

71,190

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash payments:

 

 

 

 

 

 

 

 

 

 

Interest

 

$

19,121

 

$

36,783

 

$

23,487

 

Income Taxes

 

 

 

$

110,501

 

$

279,492

 




See accompanying notes to the consolidated financial statements.


21



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business – Through our wholly owned subsidiary, Quipp Systems, Inc. (Quipp Systems), we design, manufacture, sell and install post-press material handling equipment and systems to newspaper publishers. In the post-press stage of newspaper operations, newspapers move from the pressroom in a continuous stream and are assembled, stacked, bundled and transferred to the shipping docks, from which they are loaded into delivery trucks, or loaded into carts or stored on pallets for further distribution. Our equipment and control systems facilitate the automated movement of newspapers from the printing press to the delivery truck.

Principles of consolidation The accompanying consolidated financial statements include the accounts of Quipp, Inc. and Quipp Systems (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. On December 31, 2006, we merged our Newstec, Inc. subsidiary (Newstec) into Quipp Systems. The purpose of this merger was to simplify administration and reduce costs.

Accounts Receivable and Deferred Revenue – Most of the Company's sales are made on a contract basis and require customers to make progress payments. Progress payments are recorded as deferred revenue when received. Accounts receivable is presented net of an allowance for doubtful accounts of $179,568 and $112,625 for 2007 and 2006, respectively.

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 Emerging Issues Task Force (EITF) Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables”. Revenue from the standard equipment is recognized upon delivery according to contractual terms and is recorded net of discounts. The fair value of the revenue related to the installation service is deferred until installation services are provided. Fair value is determined by the price charged to other customers when services are sold separately and is supported by competitive market data. Revenue from long-term complex equipment or installation arrangements is recognized using the unit of delivery method under AICPA Statement of Position (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.

Inventories – Inventories include material, labor and factory overhead, and are stated at the lower of cost or market. Costs are determined using the first-in, first-out (FIFO) method. Inventories determined not likely to be sold during the product lifecycle are written down to net realizable value based on the Company’s experience in recovering value from similar products.

Long-Lived Assets - In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. As discussed further in note 6, in the fourth quarter 2007, the Company determined that the carrying value of its intangible assets exceeded the fair value, which resulted in an impairment charge of $1,090,000 to selling, general and administrative expenses. There was no impairment of long-lived assets in 2006 and 2005.

Property, plant and equipment, net – Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are expensed as incurred; alterations and major overhauls that improve an asset or extend the useful lives are capitalized.



22



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash and cash equivalents – Cash and cash equivalents include all of the Company’s operating cash balances, demand deposits and short-term investments with original maturities of three months or less. The Company classifies investments with an original maturity of more than three months as securities available for sale.

Research and development costs Research and development costs include expenditures for the development of new products, significant enhancements of existing products or production processes, and the design, testing and construction of prototypes. The Company expenses research and development costs as they are incurred.

Income taxes – Income taxes are accounted for using the asset and liability method under the provisions of SFAS No. 109, “Accounting for Income Taxes.” (“SFAS 109”) Deferred tax assets and liabilities are identified based on temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using tax rates that are expected to apply to taxable income in the year the temporary difference is expected to recover or settle. Tax rate changes are recognized in the period in which the change occurs.

(Loss) Income per share – Basic (loss) income per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted (loss) income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding in the periods 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.

Warranty reserve Warranty reserves are made at the time the products are sold using historical experience as a prediction of expected future costs. Reserves are adjusted when experience indicates that expected cost will differ from initial estimates. The provision for warranty costs is included in other accrued liabilities.

Securities available for sale Securities available for sale include investments that are not held for trading or not intended to be held to maturity. These instruments are recorded at their fair value. Unrealized holding gains or losses, net of the related tax effect, are included as a separate component of shareholders’ equity. Realized gains and losses, arising from the sale of securities, are computed using the specific identification method and included in other income. Fair value of the securities is determined based upon market prices. A decrease in the market value below cost, determined to be other than temporary, would result in a reduction in carrying amount to fair value. This reduction would be charged to income. Premiums and discounts are amortized or accreted using a method that approximates the effective yield over the life of the security. Dividend and interest income is recognized when earned. The Company invests in short term and variable rate long-term securities and believes there is no significant risk arising from interest rate fluctuations. In order to ensure liquidity, the Company will only invest in instruments with high credit quality that are traded in a secondary market.

Deferred bond-financing cost – Deferred bond financing costs were incurred upon the issuance of industrial revenue bonds (see note 7) and are included in other assets. These costs are amortized using the effective yield over the term of the bonds.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates could affect the reported amounts of revenues and expenses. Significant items subject to estimates include the allowance for doubtful accounts, warranty reserves, useful lives of intangible assets, deferred taxes and inventory valuation. Actual results could differ from those estimates.

Other comprehensive income (loss) – The Company had unrealized gains on securities available for sale totaling $0 and $0, and $7,153 at December 31, 2007, 2006 and 2005 respectively.



23



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Segment Reporting - SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” applies a “management approach” in which reportable segments are defined by the internal reporting that is used by management for making operational decisions and evaluating performance. The Company operates in one segment for financial reporting purposes.

Advertising costs – The Company expenses advertising costs as incurred. Advertising costs totaled $34,812, $60,282 and $75,495 in 2007, 2006 and 2005, respectively.

Stock-Based compensation – As of January 1, 2006, the Company adopted Statement of Accounting Standards SFAS No. 123R “Share Based Payments” (“SFAS 123R”) using the modified prospective transition method. Under the SFAS 123R modified prospective transition method, the Company is required to expense the grant date fair value of stock options and other stock compensation over the requisite service period for stock awards granted after January 1, 2006, awards that are modified, repurchased or canceled after January 1, 2006 and the portion of awards issued from December 15, 1994 to December 31, 2005 that have not yet vested. Financial statements for prior periods are not restated. The primary impact of the adoption of SFAS 123R was on the financial statement disclosures and certain calculations involving forfeitures. The Company previously recorded compensation expense for stock awards under SFAS No. 123,”Accounting for Stock Based Compensation”. Since the Company estimated forfeitures on stock option grants issued in previous periods, the Company did not recognize a cumulative effect of a change in accounting principle upon the adoption of SFAS 123R.

The Quipp, Inc. Equity Compensation Plan (Equity Compensation Plan) provides for grants of stock options and stock-based awards to employees, directors, consultants and advisors of the Company. Stock options issued in connection with the Equity Compensation Plan are granted with an exercise price per share equal to the fair market value of a share of Company common stock at the date of grant. All stock options have five to ten-year maximum terms and vest, either immediately, or within four years of grant date. The total number of shares of common stock issuable under the Equity Compensation Plan is 600,000. At December 31, 2007, there were 140,389 shares available for grant under the Equity Compensation Plan.

The Company recognized stock-based compensation expense totaling $47,448, $72,052 and $40,441, and for the year ended December 31, 2007, 2006 and 2005 respectively. Components of stock-based compensation expense follow:

 

 

2007

 

2006

 

2005

 

Stock Options

     

$

7,992

     

$

38,641

     

$

22,650

 

Restricted Stock Awards

 

 

    39,456

 

 

    33,411

 

 

    17,791

 

Total stock-based compensation expense included in selling,
general and administrative expenses

 

$

47,448

 

$

72,052

 

$

40,441

 

During the years ended 2007, 2006 and 2005, no stock options were exercised. The fair value of each option granted was estimated at the date of grant using the Black-Scholes option pricing model. No stock options were granted in 2007 and 2005.The following weighted average assumptions were used for the 2006 grants:

 

 

2006

Volatility

 

  25%

Risk free interest rate

 

3.64%

Dividend yield

 

2.5%

Expected term (years)

 

10  




24



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED

The following stock option activity occurred during the periods ended 2005, 2006, and 2007:

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (years)

 

Aggregate
Intrinsic
Value

 

Options outstanding at December 31, 2004

     

 

117,625

     

 

15.17

     

 

 

     

 

 

 

Forfeited or expired

 

 

(34,125

)

 

17.50

 

 

 

 

 

 

 

Options outstanding at December 31, 2005

 

 

83,500

 

 

14.22

 

 

 

 

 

 

 

Granted

 

 

10,000

 

 

7.46

 

 

 

 

 

 

 

Forfeited or expired

 

 

(37,500

)

 

14.00

 

 

 

 

 

 

 

Options outstanding at December 31, 2006

 

 

56,000

 

 

13.16

 

 

 

 

 

 

 

Forfeited or expired

 

 

(11,000

)

 

11.46

 

 

 

 

 

 

 

Options outstanding at December 31, 2007

 

 

45,000

 

 

13.57

 

 

4.57

 

$

         —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercisable at December 31, 2007

 

 

42,500

 

$

     13.57

 

 

4.65

 

$

 

As of December 31, 2007, approximately $1,000 of unrecognized compensation costs related to non-vested stock options is expected to be recognized in 2008.

The following table summarizes restricted stock award activity for the periods ended 2005, 2006, and 2007:

 

 

Restricted
Shares

 

Weighted
Average
Grant Date
Fair Price

 

Non-vested stock awards as of December 31, 2004

     

 

     

 

 

Granted

 

 

5,000

 

$

12.80

 

Vested

 

 

 

 

 

Forfeited

 

 

 

 

 

Non-vested stock awards as of December 31, 2005

 

 

5,000

 

$

12.80

 

Granted

 

 

5,000

 

$

10.87

 

Vested

 

 

 

 

 

Forfeited

 

 

 

 

 

Non-vested stock awards as of December 31, 2006

 

 

10,000

 

$

11.84

 

Granted

 

 

 

 

 

Vested

 

 

 

 

 

Forfeited

 

 

 

 

 

Non-vested stock awards as of December 31, 2007

 

 

10,000

 

$

11.84

 

As of December 31, 2007, approximately $27,000 of unrecognized compensation costs related to non-vested restricted stock awards is expected to be recognized over the next sixteen months.



25



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

From January 1, 2003 until December 31, 2005, the Company used the fair value recognition provisions of SFAS 123, prospectively for all employee awards granted, modified, or settled after December 31, 2002. Prior to 2003, the Company accounted for grants of equity compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company’s pro forma net income and earnings per share for the year ended December 31, 2005, determined as if the company adopted SFAS 123R for these periods, are as follows:

 

 

2005

 

Net income as reported

 

$

253,904

 

Deduct total stock-based employee compensation expense determined
under fair-value-based method for all awards, net of tax

     

$

(13,426

)

 

 

 

 

 

Pro forma net income

 

$

240,478

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

Basic and diluted - as reported

 

$

0.18

 

Basic and diluted - pro forma

 

$

0.17

 

NOTE 2 - SECURITIES AVAILABLE FOR SALE AND RESTRICTED SECURITIES

Securities available for sale are recorded at fair value and consist primarily of federal, state and local government obligations and other short-term investments. As of December 31, 2007 and 2006, the amortized cost of securities available for sale approximated fair value. Securities available for sale at December 31, 2007 and 2006 consisted of the following:

 

 

2007

 

 

 

Amortized

Cost

 

Unrealized

Gain

 

Unrealized

Loss

 

Fair

Value

 

Government Agency Securities - restricted

     

$

335,000

     

$

     

$

     

$

335,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

Amortized

Cos

 

Unrealized

Gain

 

Unrealized

Loss

 

Fair

Value

 

Government Agency Securities - restricted

 

$

1,000,000

 

$

 

$

 

$

1,000,000

 

Government Agency Securities

 

$

2,060,000

 

$

 

$

 

$

2,060,000

 

No gains or losses were realized in 2007, 2006, or 2005.

As discussed in note 7, the Company’s line of credit is collateralized by cash, cash equivalents and securities with value of no less than $1,000,000.



26



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 3 - INVENTORIES

Inventory includes, in addition to raw materials, work in process, finished goods and equipment shipped to customers but not yet recognized as a sale because either risk of loss has not transferred to the customer or the equipment requires complex installation services. The Company will recognize the sales and cost of sales for this equipment when the risk of loss transfers to the customer or when installation services are complete and collection of the resulting receivable is reasonably assured. Components of inventory as of December 31, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

Raw Materials

     

$

2,841,432

     

$

2,476,687

 

Work in Process

 

 

276,733

 

 

270,220

 

Finished Goods

 

 

 

 

56,360

 

Subtotal

 

 

3,118,165

 

 

2,803,267

 

Finished goods shipped, not recognized as revenue       

 

 

823,799

 

 

695,388

 

Total

 

$

3,941,964

 

$

3,498,655

 

Equipment made available to prospective customers for evaluation is included in finished goods inventory at the lower of cost or market.

NOTE 4 - INCOME TAXES

Income tax benefit (expense) for the years ended December 31, 2007, 2006, and 2005 is as follows:

 

 

Current

 

Deferred

 

Total

 

2007

 

 

 

 

 

 

 

 

 

 

U.S. Federal

     

$

(34,776

)     

 

      

 

(34,776

)

State and local                                              

 

 

109,555

 

 

 

 

109,555

 

 

 

 

74,779

 

 

 

 

74,779

 

2006

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

 

46,226

 

 

(533,307

)

 

(487,081

)

State and local

 

 

(37,359

)

 

(76,541

)

 

(113,900

)

 

 

 

8,867

 

 

(609,848

)

 

(600,981

)

2005

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

$

(35,100

)

$

54,436

 

$

19,336

 

State and local

 

 

159,555

 

 

23,823

 

 

183,378

 

 

 

$

124,455

 

$

78,259

 

$

202,714

 

The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2007 and 2006 are as follows:

 

 

2007

 

2006

 

Deferred Tax Assets:

     

 

 

     

 

 

 

Amortization

 

 

1,629,304

 

 

1,138,352

 

Depreciation

 

 

39,991

 

 

14,231

 

Inventory

 

 

381,534

 

 

258,634

 

Compensation accruals

 

 

64,298

 

 

82,402

 

Other accruals and reserves

 

 

211,838

 

 

201,240

 

Net operating loss carry forward and credits                     

 

 

453,353

 

 

39,234

 

Total deferred tax assets

 

 

2,780,318

 

 

1,734,093

 

 

 

 

 

 

 

 

 

Valuation Allowance

 

 

(2,780,318

)

 

(1,734,093

)

Net current deferred tax assets

 

 

 

 

 



27



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 4 - INCOME TAXES (CONTINUED)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Recent trends in the newspaper publishing industry, including reduced advertising revenue growth and consolidation of newspaper publishers, make it difficult for Management to forecast future income with a high degree of certainty. As a result, Management has concluded that it is necessary to provide a full valuation allowance against the Company’s deferred tax assets. The Company will maintain the valuation allowance until an appropriate level of profitability is sustained, or there are tax planning strategies that would enable the Company to determine that, in accordance with SFAS 109, additional deferred tax benefits will be realized. The valuation allowance against the Company’s deferred tax assets is $2,780,318 and $1,734,093 as of December 31, 2007 and 2006, respectively. The increase in the valuation allowance of $1,046,225 at December 31, 2007 is comprised of a federal and state (reported in the state and local taxes) increase of $941,120 and $105,105, respectively. The increase in the valuation allowance of $1,734,093 at December 31, 2006 is comprised of a federal and state (reported in the state and local taxes) increase of $1,558,459 and $175,634, respectively.

The following table summarizes the differences between the Company's effective income tax (expense) benefit and the statutory federal tax (expense) benefit for the years ended December 31, 2007, 2006, and 2005:

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Statutory federal income tax benefit (expense)             

     

 

945,388

     

 

915,750

     

 

(17,405

)

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local taxes, net of

 

 

 

 

 

 

 

 

 

 

Federal income tax benefit (expense)

 

 

74,779

 

 

(86,913

)

 

    236,004

 

Employee tax credit

 

 

 

 

21,960

 

 

 

Permanent differences

 

 

(10,862

)

 

(22,350

)

 

(22,564

)

Other

 

 

6,594

 

 

129,031

 

 

6,679

 

Change in valuation allowance

 

 

(941,120

)

 

(1,558,459

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,779

 

 

(600,981

)

 

202,714

 

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. Previously, the Company provided for tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.”

A reconciliation of the beginning and ending amount of the liability for uncertain tax positions is as follows:

Liability for uncertain tax positions balance at January 1, 2007

     

$

158,966

 

Gross increases for tax positions of prior years

 

 

 

Gross decreases for tax positions of prior years

 

 

(76,520

)

Settlements

 

 

(4,000

)

Lapse of statute of limitations

 

 

 

Liability for uncertain tax positions balance at December 31, 2007

 

$

78,446

 

The Company had no change to its liability for uncertain tax positions as a result of adopting FIN 48 on January 1, 2007. During the twelve months ended December 31, 2007, the Company’s liability for uncertain tax positions decreased by approximately $4,000 due to settlements with state tax authorities and decreased by $76,520 as a result of recent losses. The Company also accrues both penalties and interest related to the liability for uncertain



28



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 4 - INCOME TAXES (CONTINUED)

tax positions and are charged to income tax expense. As of January 1, 2007 and December 31, 2007, the Company had accrued approximately $75,000 and $34,000, respectively for the payment of interest and penalties, which is included as a component of the liability for uncertain tax positions noted above. As of December 31, 2007, the Company’s liability for uncertain tax positions totaled $78,446, all of which, if recognized, would impact the effective rate.

The liability for uncertain tax positions and related penalties and interest is included in other accrued liabilities.

The Company is subject to income taxes in U.S. federal and various state jurisdictions, and is subject to ongoing examinations by certain tax authorities in these jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the related tax laws, and regulations and require significant judgment to apply. Company management believes the Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2004. In addition, in state and local jurisdictions in which the Company files income tax returns, Company management believes the Company is no longer subject to tax examinations by tax authorities for the years before 2003.

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment at December 31, 2007 and 2006 consist of the following:

 

 

2007

 

2006

 

 

Estimated
Useful life
(Years)

Land

     

$

500,500

     

$

500,500

     

 

 

Building

 

 

1,431,771

 

 

1,431,771

 

 

 

31

Building Improvements

 

 

547,858

 

 

547,858

 

 

 

10

Machinery

 

 

355,272

 

 

284,996

 

 

 

5

Furniture and Fixtures

 

 

218,754

 

 

218,754

 

 

 

5

Computer Equipment

 

 

1,442,470

 

 

1,404,381

 

 

 

5

Automobiles

 

 

44,357

 

 

44,357

 

 

 

5

Leased Equipment

 

 

558,680

 

 

558,680

 

 

 

3

 

 

 

5,099,662

 

 

4,991,297

 

 

 

 

Less: Accumulated depreciation and amortization

 

 

(3,289,156

)

 

(2,830,166

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,810,506

 

$

2,161,131

 

 

 

 

Included in property, plant and equipment is post-press equipment that was manufactured by the Company and leased to a customer for a period of 26 months (also see Note 8). At the end of the lease term, the lessee has an option to purchase the equipment or return it to the Company.

Depreciation expense charged to income was $280,339, $269,261, and $238,759 in 2007, 2006 and 2005, respectively. Amortization of the leased equipment charged to cost of sales amounted to 178,651, $180,748, and $0 in 2007, 2006 and 2005, respectively.



29



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess cost over the amounts assigned to assets acquired and liabilities assumed in a business combination. The changes in the carrying value of goodwill for the years ended December 31, 2007, 2006 and 2005 are as follows:

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1

     

$

            —

     

$

2,190,847

      

$

 

 

 

 

 

 

 

 

 

 

 

 

Consideration paid for the

 

 

 

 

 

 

 

 

 

 

Newstec, Inc. Stock Acquisition                      

 

 

 

 

400,000

 

 

2,190,847

 

Impairment loss

 

 

 

 

(2,590,847

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31

 

$

 

$

 

$

2,190,847

 

In 2005, the Company acquired Newstec, Inc. The amount of the purchase price assigned to goodwill from this purchase was $2,522,686. Prior to the Newstec acquisition, the Company’s goodwill resulted from the purchase of certain assets of Hall Processing Systems in 1994. The Company tested goodwill in the fourth quarter of 2006, and determined that the fair value of Quipp was less than the carrying value. Therefore, the Company calculated the implied fair value of its goodwill, in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets,” which resulted in an impairment charge of $2,590,847 to selling, general and administrative expenses.

Due to recent challenging business conditions, in the fourth quarter of 2007, the Company determined it necessary to test the recoverability of its amortizable intangible assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). The Company determined the fair value of the intangible asset group using the expected present value of future cash flows that are directly associated with the intangible assets. The Company used estimates, judgments and assumptions that management believes were appropriate in the circumstances. The Company calculated that the present value of future cash flows was less than the carrying value of the intangible asset group and recorded an impairment charge of $1,090,000 to selling, general and administrative expenses.

As of December 31, 2007, the carrying amount and remaining estimated life of amortizable intangible assets follows:

 

 

Gross

Carrying

Value

 

Accumulated

Amortization

 

Net

Value

 

Remaining

Estimated

Life

 

Patent

     

 

366,994

     

 

(294,981

)      

 

72,013

     

12.3 years

 

Acquired Technology

 

 

419,592

 

 

(339,286

)

 

80,306

 

  2.3 years

 

Customer Relationship

 

 

163,290

 

 

(68,700

)

 

94,590

 

  2.6 years

 

Tradename

 

 

156,635

 

 

(60,394

)

 

96,241

 

  7.6 years

 

Non-Competition Agreement

 

 

1,903,588

 

 

(1,158,125

)

 

745,463

 

  2.6 years

 

 

 

$

3,010,099

 

$

(1,921,486

)

$

1,088,613

 

 

 

During the second quarter of 2007, the Company determined that it was necessary to accelerate the amortization for the Newstec non-competition intangible asset, reducing the original life from seven to five years. During the fourth quarter 2007, the Company determined that it was necessary to accelerate the amortization of the Newstec customer relationship intangible asset, reducing the original life from ten to five years.



30



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 6 – GOODWILL AND INTANGIBLE ASSETS (CONTINUED

Expected amortization expense for the remaining life of the intangible assets follow:

2008

            

$

380,645

2009

 

 

376,645

2010

 

 

219,252

2011

 

 

18,533

Thereafter

 

 

93,538

 

 

$

1,088,613

NOTE 7 - DEBT

On March 25, 2005, the Company entered into a line of credit agreement. Under the terms of the agreement, the Company can borrow up to $3,000,000, subject to a limit based on eligible accounts receivable and inventory. Borrowings are secured by all accounts receivable, inventory, intangibles and contract rights, as well as securities with value of no less than $1,000,000. Interest is payable monthly at a rate equal to the one-month LIBOR rate plus 2.4%. At December 31, 2007, we did not meet the debt covenants required by the Agreement and received a waiver through the Agreement expiration date, April 30, 2008. The line of credit is subject to renewal based on terms in the Agreement. There is no assurance the Company will be able to retain the line of credit or maintain the same terms as in the current Agreement. As of the December 31, 2007, there was no balance on the line of credit.

Long-term debt consisted of the following at December 31, 2007 and 2006:

 

 

2007

 

2006

 

$2,340,000 Variable Rate Industrial Revenue Bond secured by a letter of
credit payable in annual installments of $100,000 in 2007 and $150,000
in 2008. The bonds bore interest at 3.8%in 2007 and 2006

     

$

150,000

     

$

250,000

 

 

 

 

 

 

 

 

 

4.99% automobile loan, principal and interest of $848 due
monthly through 2008

 

 

4,162

 

 

14,666

 

 

 

 

 

 

 

 

 

Less: current portion

 

 

154,162

 

 

(109,654

)

Long term debt, net of current portion

 

$

 

$

155,012

 

NOTE 8 - LEASES

The Company leases certain premises and phone equipment under operating leases. At December 31, 2007, the minimum future lease obligation under its long term leases is as follows:

2008

            

 

61,728

2009

 

 

15,152

2010

 

 

2,727

 

 

$

79,608

Rent expense was $59,308, $84,807 and $66,725 in 2007, 2006, and 2005 respectively.

Beginning in 2006, the Company leased post-press equipment to a customer under an operating lease arrangement. Under the equipment lease agreement, as amended, the lessee leases the equipment from the Company for a term of 26 months and has an option to purchase the equipment at the end of the lease term (April 30, 2008). The Company will receive minimum future rentals of $80,000 in 2008 under the lease.



31



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9 – (LOSS) EARNINGS PER SHARE

Basic net (loss) income per share is computed by dividing net (loss) income (numerator) by the weighted average number of shares of common stock outstanding (denominator) during the period. Diluted net (loss) income per share gives effect to stock options considered to be potential common shares, if dilutive, computed using the treasury stock method. The Company had 56 and 58 common stock equivalents in 2007 and 2006, respectively, that were not included in the earnings per share because the effect is antidilutive. The following table presents the calculation for the number of shares used in the basic and diluted net (loss) income per share computations:

 

 

2007

 

2006

 

2005

 

Net (loss) income

Shares

 

$

(2,705,774

)

$

(3,294,362

)

$

253,904

 

Basic weighted average number of shares          

     

 

1,477,746

      

 

1,455,710

     

 

1,429,929

 

 

 

 

 

 

 

 

 

 

 

 

Common stock equivalents
from option plan

 

 

 

 

 

 

 

Diluted Basic average number of shares

 

 

1,477,746

 

 

1,455,710

 

 

1,429,929

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss)

 

 

 

 

 

 

 

 

 

 

income per share

 

$

(1.83

)

$

(2.26

)

$

.18

 


NOTE 10 - MAJOR CUSTOMERS AND SALES BY GEOGRAPHIC AREA

For the years ended December 31, 2007, 2006, and 2005, no single newspaper customer accounted for ten percent or more of our net sales. A number of our newspaper customers are part of large newspaper chains, including newspaper chains that are part of larger media groups. Management believes that purchase decisions regarding individual pieces of equipment are made by the individual newspapers, while decisions regarding the purchase of complex systems involve input from the corporate office of the newspaper chain or media group. Newspapers owned by Gannett Co, Inc. accounted for 11% of our net sales in 2007. Newspapers owned by Gannett Co, Inc. accounted for 10% of our net sales in 2006. Newspapers owned by Gannett Co, Inc. and The New York Times Company each accounted for 11% of our net sales in 2005. Since our equipment is designed to have an extended life, our largest individual newspaper customers usually change from year to year.

We sell most of our products to newspaper publishers in the United States. Our foreign sales accounted for 15%, 7%, and 7% of total sales in 2007, 2006, and 2005, respectively. The following table indicates the amount of sales by geographic area during the past three years:

 

 

2007

 

2006

 

2005

 

SALES BY GEOGRAPHIC AREA                      

 

 

 

 

 

 

 

 

 

 

United States

     

 

20,993,645

     

$

24,549,637

     

$

24,096,107

 

Canada

 

 

1,612,224

 

 

562,435

 

 

564,362

 

Latin America

 

 

1,877,580

 

 

1,161,598

 

 

613,421

 

Europe

 

 

73,925

 

 

16,214

 

 

1,354

 

Other

 

 

59,228

 

 

123,797

 

 

507,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

24,616,602

 

$

26,413,681

 

$

25,782,879

 




32



QUIPP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 11 - EMPLOYEE BENEFIT PLAN

The Quipp Systems, Inc. Employee Savings and Investment Plan (the Savings Plan), is a defined contribution plan that covers substantially all full-time employees. The Savings Plan permits eligible employees to contribute up to 20% of annual compensation, subject to the maximum allowable contribution limits of Sections 415, 401(k) and 404 of the Internal Revenue Code. Beginning January 1, 2007, the Company matches employee contributions at the rate of 100% for the first 3% of employee compensation deferred by a participant and 50% of additional contributions, until an aggregate maximum of 7% of employee compensation has been deferred. Prior to 2007, the Company matched employee contributions at the rate of 60% for the first 8% of compensation deferred by each participant. The amount contributed by the Company in 2007, 2006, and 2005, was $207,521, $197,858 and $182,417, respectively.

Beginning January 1, 2005, the Company implemented a Supplemental Executive Retirement Program (the “SERP”) for certain Company employees. The SERP provides for three-year performance periods, and the Company will make common stock allocations to participant accounts following the end of each performance period. The total amount of allocations following the end of each performance period will be equal to five percent of the Company’s net income during the three years in the performance period, as reported in the Company’s annual reports on Form 10-K, up to a maximum dollar amount specified by the Corporate Governance and Compensation Committee of the Company’s Board of Directors. There was no liability related to the SERP at the end of 2007 or 2006.

NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, securities available for sale, accounts receivable, other assets, prepaid expenses and other current assets, long-term debt, accounts payable, accrued salaries and wages and other accrued liabilities approximate fair value based on their short term maturities.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

The Company has employment agreements with three employees that expire in 2008. The obligation under these contracts total $427,500. In the normal course of business, the Company is exposed to litigation and other asserted and unasserted claims. In the opinion of management, the resolution of these matters would not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

NOTE 14 – SUBSEQUENT EVENTS

On March 26, 2008, the Company, Illinois Tool Works Inc. (“ITW”) and Headliner Acquisition Corporation, a wholly-owned subsidiary of ITW(“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Merger Sub will merge with and into the Company, the Company will become a wholly-owned subsidiary of ITW, and all outstanding shares of common stock of the Company (other than shares held by the shareholders who have properly exercised their dissenters’ rights)will be converted into the right to receive an amount per share in cash of $4.30 to $5.65. The definitive price per share will be determined based on adjustments relating to the amount of the Company’s cash and cash equivalents and specified indebtedness prior to consummation of the transaction. The Company will not proceed with the transaction if the adjusted price would be less than $4.30 per share. All outstanding stock options will be cancelled under separate agreements.

The Company declared and paid a dividend of $.05 per common share totaling $73,887 in the first quarter of 2008.




33





Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief 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 Chief 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.

Management’s Annual Report on Internal Control Over Financial Reporting

The report of management on our internal control over financial reporting appears in Item 8 and is incorporated herein by reference

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.

Item 9B.

Other Information

Not applicable.




34





PART III

Item 10.

Directors, and Executive Officers and Corporate Governance

This information (other than the information relating to executive officers included in Part I) will be included in our Proxy Statement relating to our Annual Meeting of Shareholders or in an amendment to this report, which will be filed within 120 days after the close of our fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement.

Item 11.

Executive Compensation

This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders or in an amendment to this report, which will be filed within 120 days after the close of our fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table provides information, as of December 31, 2007, regarding securities issuable under our Equity Compensation Plan, which is our only equity compensation plan currently in effect and was approved by our shareholders.

Equity Compensation Plan Information

Plan Category

 

Number of

securities to

be issued

Upon

exercise of

Outstanding

options

 

Weighted-

average

exercise

price of

outstanding

 

Number of

securities

remaining

available for

future issuance

under equity

compensation

 

Equity compensation plans approved by

     

 

 

     

 

 

     

 

 

 

security holders

 

 

45,000

 

$

13.57

 

 

140,389

 

Equity compensation plans not approved            

 

 

 

 

 

 

 

 

 

 

by security holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

45,000

 

$

13.57

 

 

140,389

 

Other information required to be disclosed in this Item will be included in our proxy statement relating to our Annual Meeting of Shareholders or in an amendment to this report, which will be filed within 120 days after the close of our fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement

Item 13.

Certain Relationships and Related Transactions, and Director Independence

This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders or in an amendment to this report, which will be filed within 120 days after the close of our fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement.

Item 14.

Principal Accounting Firm Fees and Services

This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders or in an amendment to this report, which will be filed within 120 days after the close of our fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement.



35





PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)

1

Financial Statements - See "Index to Financial Statements" in Item 8

2

Schedule II – Valuation and Qualifying Accounts. All other schedules are omitted because they are inapplicable.

3.

Exhibits (Note: The file number of all referenced reports and registration statements, is 0-14870.)

Exhibit
No.

 

Description

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 99.1 to Registrants’ Current Report on Form 8-K, filed March 5, 2007).

*10.1

 

Quipp, Inc. Equity Compensation Plan, as amended (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement relating to the Registrant’s 2005 Annual Meeting of Stockholders).

*10.2

 

Quipp, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005).

*10.3

 

Quipp Inc. Management Incentive Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K.for the fiscal year ended December 31, 1998)

*10.4

 

Change of Control Agreement, dated as of December 23, 2000, among the Registrant, Quipp Systems, Inc. and Christer Sjogren. (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). Identical agreements, also dated as of December 23, 2000, were entered into with David Switalski, Angel Arrabal and Mohammed Jamil. In accordance with Instruction 2 of Item 601 of Regulation S-K, those agreements need not be filed with this report.

*10.5

 

Change of Control Agreement, dated as of October 28, 2005, among the Registrant, Quipp Systems, Inc. and Eric Bello (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005)

*10.6

 

Employment Agreement, dated October 25, 2005, between the Registrant and Michael S. Kady (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005).

*10.7

 

Employment Agreement, dated August 10, 2005, between the Registrant and John F. Connors III (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed August 16, 2005).

*10.8

 

Summary of Directors’ Compensation

10.9

 

Share Purchase Agreement, dated August 10, 2005, among the Registrant, John F. Connors III and Terence B Connors (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed August 16, 2005).

10.10

 

Agreement, dated as of October 19, 2006, by and among the Company and JDL Capital, LLC, JDL Partners, L.P., John D. Lori, David S. Dillmeier, Mark A. Goodman, Sean McCarthy, Edward McCoyd and Michael McGee (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed October 20, 2006).

21

 

Subsidiaries of the Registrant.




36






Exhibit
No.

 

Description

23

 

Consent of KPMG LLP.

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 Chief 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 and U.S.C. Section 1350.

32.2

 

Certificate of the Chief Financial Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and U.S.C. Section 1350.

———————

*

Constitutes management contract or compensatory plan or arrangement required to be  filed as an exhibit to this form.



37





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:  March 31, 2008                                  

By:

/s/ MICHAEL S. KADY

 

 

MICHAEL S. KADY

 

 

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in behalf of the registrant and in the capacities and on the dates indicated:

Signature

 

Title

 

Date

  

 

 

 

 

/ s / MICHAEL S. KADY

     

Chief Executive

     

March 31, 2008

MICHAEL S. KADY

 

Officer and Director

 

 

  

 

 

 

 

/ s / WILLIAM A. DAMBRACKAS

 

Director

 

March 31, 2008

WILLIAM A. DAMBRACKAS

 

 

 

 

  

 

 

 

 

/ s / LAWRENCE J. GIBSON

 

Director

 

March 31, 2008

LAWRENCE J. GIBSON

 

 

 

 

  

 

 

 

 

/ s / CRISTINA H. KEPNER

 

Director

 

March 31, 2008

CRISTINA H. KEPNER

 

 

 

 

  

 

 

 

 

/ s / ARTHUR J. RAWL

 

Director

 

March 31, 2008

ARTHUR J. RAWL

 

 

 

 

  

 

 

 

 

/ s / ROBERT C. STRANDBERG

 

Director

 

March 31, 2008

ROBERT C. STRANDBERG

 

 

 

 

  

 

 

 

 

/ s / JOHN D. LORI

 

Director

 

March 31, 2008

JOHN D. LORI

 

 

 

 

  

 

 

 

 

/ s / ERIC BELLO

 

Chief Financial Officer and

 

March 31, 2008

ERIC BELLO

 

Treasurer (Principal Financial

 

 

 

 

and Accounting Officer)

 

 




38





QUIPP, INC.

ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

Exhibit
No.

 

Description

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 99.1 to Registrants’ Current Report on Form 8-K, filed March 5, 2007).

*10.1

 

Quipp, Inc. Equity Compensation Plan, as amended (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement relating to the Registrant’s 2005 Annual Meeting of Stockholders).

*10.2

 

Quipp, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005).

*10.3

 

Quipp Inc. Management Incentive Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K.for the fiscal year ended December 31, 1998)

*10.4

 

Change of Control Agreement, dated as of December 23, 2000, among the Registrant, Quipp Systems, Inc. and Christer Sjogren. (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). Identical agreements, also dated as of December 23, 2000, were entered into with David Switalski, Angel Arrabal and Mohammed Jamil. In accordance with Instruction 2 of Item 601 of Regulation S-K, those agreements need not be filed with this report.

*10.5

 

Change of Control Agreement, dated as of October 28, 2005, among the Registrant, Quipp Systems, Inc. and Eric Bello (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005)

*10.6

 

Employment Agreement, dated October 25, 2005, between the Registrant and Michael S. Kady (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed October 31, 2005).

*10.7

 

Employment Agreement, dated August 10, 2005, between the Registrant and John F. Connors III (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed August 16, 2005).

*10.8

 

Summary of Directors’ Compensation

10.9

 

Share Purchase Agreement, dated August 10, 2005, among the Registrant, John F. Connors III and Terence B Connors (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed August 16, 2005).


 

 

10.10

 

Agreement, dated as of October 19, 2006, by and among the Company and JDL Capital, LLC, JDL Partners, L.P., John D. Lori, David S. Dillmeier, Mark A. Goodman, Sean McCarthy, Edward McCoyd and Michael McGee (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed October 20, 2006).

21

 

Subsidiaries of the Registrant.

23

 

Consent of KPMG LLP.

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 Chief 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 and U.S.C. Section 1350.

32.2

 

Certificate of the Chief Financial Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and U.S.C. Section 1350.

———————

*

Constitutes management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.









QUIPP, INC. AND SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2007, 2006, and 2005

 

 

Balance,

beginning

of year

 

(a)

Charged

to

Expenses

 

(b)

Recoveries

and

(Write-offs)

 

(c)

Newstec

Acquisition

 

Balance,

End

of year

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Year ended December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

112,625

 

 

66,943

 

 

 

 

 

 

 

179,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

147,840

 

 

(7,797

)

 

(27,418

)

 

 

 

112,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

167,705

 

 

(16,545

)

 

(30,126

)

 

26,806

 

 

 147,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance,

beginning

of year

 

Accrued

warranty

costs

 

(d)

Payments

in kind

 

(c)

Newstec

Acquisition

 

Balance,

End

of year

 

Year ended December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued warranty

 

 

224,934

 

 

180,900

 

 

(196,643

)

 

 

 

 

209,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued warranty

 

 

263,119

 

 

267,354

 

 

(305,539

)

 

 

 

224,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued warranty

 

 

231,857

 

 

104,232

 

 

(157,136

)

 

84,166

 

 

263,119

 

———————

(a)

Charges to expense result from increases or decreases to our allowance for doubtful accounts due to the assessment of the collectability of customer accounts and the aging of our accounts receivable.

(b)

 We write-off trade accounts when we have exhausted all reasonable efforts to collect outstanding receivable balances. Recoveries are recorded when we collect accounts that were previously written off.

(c)

Changes in valuation account resulting from acquisition of Newstec in August 2005.

(d)

Payments in kind represent cost to repair or replace defective items.