10-Q 1 quipp-10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2005. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-14870 QUIPP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Florida 59-2306191 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4800 N.W. 157th Street, Miami, Florida 33014 -------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (305) 623-8700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] The number of shares of the registrant's common stock, $.01 par value, outstanding at November 8, 2005 was 1,423,775. QUIPP, INC. INDEX

2 PART 1 - FINANCIAL INFORMATION ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS QUIPP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to the unaudited condensed consolidated financial statements 3 QUIPP INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to the unaudited condensed consolidated financial statements. 4 QUIPP INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30,

See accompanying notes to the unaudited condensed consolidated financial statements. 5 QUIPP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Quipp, Inc. and its wholly owned subsidiaries, Quipp Systems, Inc. and Newstec, Inc. All significant intercompany transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with that used as of and for the year ended December 31, 2004 and, in the opinion of management, reflect all adjustments (principally consisting of normal recurring accruals) considered necessary to present fairly the financial position of Quipp, Inc. and subsidiaries as of September 30, 2005 and the results of its operations and cash flows for the nine months ended September 30, 2005. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. The unaudited condensed consolidated balance sheet at December 31, 2004 was derived from audited financial statements, but, as permitted by S-X is not accompanied by all disclosures required by generally accepted accounting principles. NOTE 2 - INVENTORIES Inventories include material, labor and factory overhead and are stated at the lower of cost or market. Inventory also includes equipment requiring complex installation services that has been shipped to customers but for which the sale has not been recognized. Cost is determined using the first-in, first-out (FIFO) method. The composition of inventories at September 30, 2005 and December 31, 2004 is as follows: SEPTEMBER 30, 2005 December 31, 2004 ----------------------------------------------------------------------- Raw materials $ 2,964,244 $ 1,844,297 Work in process 896,020 1,024,104 Finished goods 133,521 162,497 ---------------------------------------- Subtotal 3,993,785 3,030,898 Shipped, not recognized 644,541 1,845,779 ---------------------------------------- $ 4,638,326 $ 4,876,677 ---------------------------------------- NOTE 3- REVENUE RECOGNITION Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting accounts receivable is reasonably assured. Revenue from the sale of standard stand-alone equipment without installation service is recognized upon delivery according to contractual terms and is recorded net of discounts. Revenue from multiple-element arrangements such as the sale of standard equipment and basic installation services is recognized in accordance with EITF 00-21 "Revenue Arrangements with Multiple Deliverables." 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 SOP 81-1 in accordance with contractual terms and is recorded net of discounts. Cost and profitability estimates are revised periodically based on changes in circumstances. Estimated losses on such contracts are recognized immediately. 6 NOTE 4 - INCOME PER SHARE Basic income per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding in the period presented. Dilutive common equivalent shares assume the exercise of options, calculated under the treasury stock method, using the average stock market prices during the periods. For the nine months ending September 30, 2004, the dilutive income per share calculation includes 2,300 common share equivalents resulting from the Company's equity compensation plan. NOTE 5 - STOCK-BASED COMPENSATION Prior to 2003, the company accounted for its equity compensation plan under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Effective January 1, 2003, the company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," prospectively to all employee awards granted, modified, or settled after December 31, 2002. Awards under the company's plans vest over periods ranging from three to five years. The following table illustrates the effect on net income and income per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

The per share average fair value of stock options granted during 2002 ranged from $14.60 to $14.98. The fair value of the options granted was estimated as of the grant date using the Black-Scholes option-pricing model. The following weighted-average assumptions were used in calculating fair value: 2002 ------------ Expected Life 5 - 10 years Dividends None Risk-free interest rate 2.65% Expected volatility 30.68% Options issued after December 31, 2002 resulted in stock-based compensation expense totaling $15,825 and $5,227 for the nine months ended September 30, 2005 and 2004, respectively. Restricted shares issued under the plan resulted in a stock-based compensation expense totaling $12,453 and $0 for the nine months ended September 30, 2005 and 2004, respectively. 7 NOTE 6 - ACQUISITION On August 10, 2005, the Company purchased the outstanding stock of Newstec, Inc. (Newstec), a privately-held company located in Walpole, Massachusetts. Newstec manufactures and sells high-speed inserting equipment and controls designed to handle inserting requirements for the newspaper and commercial printing markets. The Company acquired Newstec to enhance its product offering and expand new product development capabilities. The Company paid to the shareholders of Newstec (the "Sellers") $4,025,000 in cash and provided the Sellers an opportunity to receive additional consideration totaling $650,000 in Quipp, Inc. stock based upon criteria specified in the agreement. The purchase price was determined by arms-length negotiations between the parties. The cash portion of the purchase price was paid out of the Company's cash and securities on hand. To date, the total paid and accrued acquisition costs for the stock purchase amounted to $4,622,672 (inclusive of direct legal fees, consulting costs, accounting fees, investment banking fees, employee severance costs and other acquisition expenses). The acquisition was treated as a purchase transaction and the purchase price was allocated to the acquired assets and assumed liabilities based on the estimated fair value on the acquisition date. The Company has hired an independent appraisal organization to assist with the valuation of intangible assets, which has not been finalized as of the date this report is filed. The preliminary purchase price was allocated as follows: Cash Paid $ 4,372,672 Accrued acquisition costs 250,000 Liabilities assumed: Current 4,347,517 Long term 26,786 ------------ $ 8,996,975 ------------ Fair Value of Tangible Assets: Current assets $ 3,947,568 Fixed assets 40,602 Intangible assets: Non-competition agreement 2,000,000 Customer lists 820,000 Trade names 286,000 Goodwill 1,902,805 ------------ $ 8,996,975 ------------ Of the total purchase price, $2,820,000 was allocated to amortizable intangible assets including customer lists and non-competition agreements. Customer lists represent Newstec's relationships with its installed base of customers. The Company entered into a non-competition agreement with the former principals of Newstec, Inc. for a minimum term ending two years after the date the former principals of Newstec cease to be employed by the Company, subject to a minimum five year term. 8 Details of the amortizable intangibles follow: FAIR INTANGIBLE ASSET VALUE LIFE ------------------------- --------- -------- Customer Relationship 820,000 10 Years Non-competition Agreement 2,000,000 7 Years The unaudited condensed consolidated statement of operations for the period ended September 30, 2005, include the operating results of Newstec from the date of acquisition. The following unaudited pro forma results of operation of the Company for the period ended September 30, 2005 assume the acquisition occurred as of January 1, 2004. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations that would have actually occurred had the acquisition been completed on the dates indicated. SEPTEMBER 30, 2005 September 30, 2004 -------------------------------------------------------------------------------- Net Sales $ 27,307,071 $ 23,945,221 Net Income 781,682 360,990 Basic income per common share $ 0.55 $ 0.25 Diluted income per common share $ 0.55 $ 0.25 Basic average number of common shares outstanding 1,423,775 1,423,775 Diluted average number of common shares outstanding 1,423,775 1,426,075 NOTE 6 - RECLASSIFICATIONS Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 financial statement presentation. NOTE 7 - RECENT PRONOUNCEMENTS In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Shared-based Payment" ("SFAS 123R"). This statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. The Company is required to adopt SFAS 123R in the first quarter of 2006. SFAS 123R requires that the fair value of all stock option awards issued to employees be recorded as an expense over the related vesting period. The Statement also requires the recognition of compensation expense for fair value of any unvested stock option awards outstanding at the date of adoption. The Company is evaluating this statement, but expects no material impact upon adoption. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4, "Inventory Pricing," to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material should be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS 151 effective January 1, 2006. The Company is evaluating this statement, but expects no material impact upon adoption. 9 In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143," (FIN 47) which clarifies the term "conditional asset retirement obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations," and addresses when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company is required to adopt FIN 47 no later than December 31, 2005. The Company is evaluating this interpretation, but expects no material impact upon adoption. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. The Company is required to adopt SFAS 154 beginning January 1, 2006 and expects no material impact upon adoption. 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: THE FOLLOWING TABLE PRESENTS STATEMENTS OF OPERATIONS EXPRESSED AS A PERCENTAGE OF NET SALES FOR THE PERIODS INDICATED:

THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 ---------------------------------------------- NET SALES for the three months ended September 30, 2005 were $7,068,730, an increase of $1,760,242 (33.2%) compared to net sales of $5,308,488 for the corresponding period in 2004. The increase in net sales is entirely attributable to $1,817,000 of revenue recognized by our newly acquired subsidiary, Newstec, Inc. (Newstec) following our acquisition of Newstec on August 10, 2005. Newstec manufactures and sells high-speed inserting equipment and controls designed to handle inserting requirements for the newspaper and commercial printing markets. GROSS PROFIT for the three months ended September 30, 2005 was $1,618,492, an increase of $463,396 (40.1%), as compared to $1,155,096 for the corresponding period in 2004. Gross profit as a percentage of net sales was reduced in the quarter ending September 30, 2005 due to the purchase accounting write-up of Newstec's inventory on the date of acquisition, resulting in higher cost-of-sales of approximately $187,000. SELLING, GENERAL AND ADMINISTRATIVE expenses for the three months ended September 30, 2005 were $1,271,342 an increase of $107,242 (9.2%) as compared to $1,164,100 for the corresponding period in 2004. The increase resulted primarily from Newstec selling, general and administrative expenses incurred since the date of acquisition offset in part by an adjustment to accrued liabilities. During the quarter, we 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 settlement with the Export-Import Bank of the United States was less than the cost estimated and accrued, and, as a result, we recorded a $235,000 credit to selling, general and administrative expenses. RESEARCH AND DEVELOPMENT expenses for the three months ended September 30, 2005 were $77,733, a decrease of $6,364 (7.6%) as compared to $84,097 for the same period in 2004. For the three months ended September 30, 2005, our research and development costs consisted mostly of developing and testing the In-Line-C inserting/collating system with poly-wrapping capabilities. During the corresponding period in 2004, our research and development efforts related to software development and testing of the Quipp Packman packaging system, redesign of the gripper conveyor and product development for the In-Line-C. 11 OTHER INCOME AND EXPENSE (NET) for the three months ended September 30, 2005 were $36,564 as compared to $48,641 for the corresponding period in 2004. Interest income increased by $14,550 to $44,880 for the three months ended September 30, 2005 compared to $30,330 for the same period in 2004. Interest income was higher primarily due to improved interest rates offset in part by lower average balances of cash and cash equivalents and securities. Royalty income relating to our patented automatic cart loading system technology used by another supplier of post-press material handling equipment was $0 in the third quarter of 2005 compared to $20,000 during the same period in 2004. Interest expense was greater for the three months ended September 30, 2005 primarily due to amortization of loan costs associated with our line of credit described below under "Liquidity." INCOME TAX EXPENSE for the three months ended September 30, 2005 was reduced by $250,000 as we adjusted current and deferred state tax liabilities because we settled tax obligations for amounts that were less than estimated and accrued. NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 --------------------------------------------- SALES for the nine months ended September 30, 2005 were $20,784,069, an increase of $2,389,719 (13.0%) compared to net sales of $18,394,350 in the same period in 2004. Net sales for the first nine months of 2005 include $1,817,000 of revenue recognized by Newstec. GROSS PROFIT for the nine months ended September 30, 2005 was $5,154,277, an increase of $566,143 (12.3%) as compared to $4,588,134 for the corresponding period in 2004. Gross profit as a percentage of sales for the nine months ended September 30, 2005 decreased to 24.8% compared to 24.9% for the corresponding period in 2004. Gross profit as a percentage of net sales was slightly lower than the corresponding period last year mostly due to a low margin contract completed in the first quarter of 2005 and the purchase accounting write-up of Newstec inventory described above in the discussion of results of operations for the three months ended September 30, 2005 and 2004. We generated only a nominal profit margin on revenue of approximately $2,700,000 for a complex system during the quarter ending March 31, 2005. The order for the system was negotiated in 2003 when our market was just beginning to show signs of recovery. We expected lower margins on this order due to competitive pricing pressures and because it included a high content of equipment manufactured by others and involved installation services that historically produce lower gross profit margins. SELLING, GENERAL AND ADMINISTRATIVE expenses for the nine months ended September 30, 2005 were $4,254,969, an increase of $186,555 (4.6%) as compared to $4,068,414 for the same period in 2004. The increase resulted primarily from consulting and other expenses related to compliance requirements of the Sarbanes-Oxley Act of 2002 and from Newstec's selling, general and administrative expenses incurred since the date of acquisition offset in part by an adjustment to accrued liabilities described above in the discussion of results of operations for the three months ended September 30, 2005 and 2004. RESEARCH AND DEVELOPMENT expenses for the nine months ended September 30, 2005 were $270,543, a decrease of $160,851 (37.3%) as compared to $431,394 for the same period in 2004. For the nine months ended September 30, 2005, our research and development costs pertained mostly to the continued development and testing of our In-Line-C inserting/collating system with poly-wrapping capabilities. During the corresponding period in 2004, our research and development efforts related to software development and testing of the Quipp Packman packaging system, redesign of the gripper conveyor and product development for the In-Line-C. OTHER INCOME AND EXPENSE (NET) for the nine months ended September 30, 2005 were $151,448 as compared to $253,389 for the corresponding period in 2004. For the nine months ended September 30, 2004, we recognized interest income related to repayment of a note from an international customer who previously was delinquent in making payment. Additionally, royalty income relating to our patented automatic cart loading system technology used by another supplier of post-press material handling equipment was $25,000 for the nine month period in 2005 compared to $100,000 during the same period in 2004. Interest expense was greater for the nine months ended September 30, 2005 primarily due to amortization of loan costs associated with our line of credit. 12 INCOME TAX EXPENSE for the nine months ended September 30, 2005 was reduced by $250,000 as we adjusted current and deferred state tax liabilities because we settled tax obligations for amounts that were less than estimated and accrued. GENERAL Our backlog as of September 30, 2005 was $9,732,000 including Newstec backlog of 4,298,000, compared to $8,631,000 at December 31, 2004 and $7,119,000 at September 30, 2004. We expect to ship all items in our backlog during the next twelve months. Orders for the nine months ended September 30, 2005 were $16,923,000 including Newstec orders of $1,486,000 since the acquisition date, compared to orders of $12,291,000 during the nine months ending September 30, 2004. LIQUIDITY On September 30, 2005, cash and cash equivalents and securities available for sale totaled $5,165,974 as compared to $8,739,207 at December 31, 2004, a decrease of $3,573,233. Working capital on September 30, 2005 was $5,771,966, a decrease of $4,045,837 from $9,817,803 at December 31, 2004. The reduction of cash and cash equivalents and securities available for sale and the reduction in working capital are due primarily to the cash paid for the acquisition of Newstec and related expenses. We anticipate that, during the next six months we will purchase new computer hardware. We estimate that the cost of such equipment will be approximately $500,000. On March 25, 2005, we entered into a line of credit agreement with Merrill Lynch Business Financial Services, Inc. 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%. The Agreement expires on April 30, 2006 and is subject to renewal in accordance with terms specified in the agreement. As of the date of this report, we have not drawn on the line of credit. The Company believes that its cash, cash equivalents and securities available for sale together with cash generated from operations will be sufficient to fund operations at the current level. FORWARD LOOKING STATEMENTS -------------------------- This quarterly report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to shipment of backlog orders, new computer hardware purchases and adequacy of available resources. A number of important factors could cause actual results to differ materially from those in the forward looking statements including, but not limited to, economic conditions generally and specifically in the newspaper industry, demand and market acceptance for new and existing products, the impact of competitive products and pricing, manufacturing capacity, delays in shipment, cancellation of customer orders, unanticipated expenses and engineering and production difficulties and unanticipated difficulties in replacing our computer hardware. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK We are exposed to various types of market risk, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices such as interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Because our cash and investments exceed short and long-term debt, the exposure to interest rates relates primarily to our investment portfolio. Due to the short-term maturities of our investments, we believe there is no significant risk arising from interest rate fluctuations. To ensure safety and liquidity, we only invest in instruments with credit quality and which are traded in a secondary market. The counterparties are major financial institutions and government agencies. 13 ITEM 4 CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and principal financial officer concluded that, due to the material weakness described under "Change in Internal Control over Financial Reporting" below, our disclosure controls and procedures as of the end of the period covered by this report were not functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Change in Internal Control over Financial Reporting Management has identified a material weakness in our internal control over financial reporting as of the end of the period covered by this report based on its determination that we lacked effective controls over the processes and procedures involved in the calculation of current and deferred income tax liabilities for interim quarterly financial reporting. Specifically, we did not correctly compute adjustments to our current and deferred income taxes to appropriately address the effect of certain state income tax settlements. The error was identified by our independent auditors as part of their review of the financial statements included in this report. As a result, we recorded adjustments in the condensed consolidated financial statements for the three and nine months ended September 30, 2005 to current and deferred tax liabilities. The adjustment related to the third quarter of 2005 and did not affect prior periods. Effective the 4th quarter of 2005, we have determined to expand the scope of our existing engagement with our tax accountants (who are not our independent auditors) to include the preparation and conduct an in depth review of quarterly tax calculations with the Company. 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. PART II - OTHER INFORMATION ITEM 6 EXHIBITS The following exhibits are filed with this report: 31.1 Certificate of the Chief Executive Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2 Certificate of the principal financial officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.1 Certificate of the Chief Executive Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934. 32.2 Certificate of the principal financial officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUIPP, INC. Date: November 18, 2005 By: /S/ Michael S. Kady ------------------------------------- Michael S. Kady President and Chief Executive Officer By: /S/ Eric Bello ------------------------------------- Eric Bello Treasurer (Principal financial and accounting officer) 15

QUIPP INC 10-Q