Item 1.
Unaudited Condensed Consolidated Financial Statements
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
2007
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December 31,
2006
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ASSETS
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|
|
|
Current assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
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$
|
1,889,175
|
|
$
|
864,879
|
|
|
Restricted securities
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
Securities available for sale
|
|
|
700,000
|
|
|
2,060,000
|
|
|
Accounts receivable, net of allowances of $125,169
and $112,625 in 2007 and 2006
|
|
|
3,524,651
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|
|
2,930,873
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|
|
Inventories
|
|
|
6,071,852
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|
|
3,498,655
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|
|
Prepaid expenses and other receivables
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549,091
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|
|
648,235
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Total current assets
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$
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13,734,769
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$
|
11,002,642
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|
|
|
|
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|
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Property, plant and equipment, net of accumulated depreciation
of $3,178,309 and $2,830,166 in 2007 and 2006
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1,897,928
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2,161,131
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Intangible assets, net of accumulated amortization of
$1,736,513 and $1,235,959 in 2007 and 2006
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2,363,586
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2,864,140
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Other assets
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28,687
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|
33,727
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Total assets
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$
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18,024,970
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$
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16,061,640
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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106,656
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$
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109,654
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Accounts payable
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2,165,783
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927,642
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Accrued salaries and wages
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|
378,408
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557,046
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Deferred revenues
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7,150,452
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4,068,758
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Other accrued liabilities
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|
1,239,787
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1,116,946
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Total current liabilities
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$
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11,041,086
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$
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6,780,046
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Long-term debt
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150,000
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155,012
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Total liabilities
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$
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11,191,086
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$
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6,935,058
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Shareholders' equity:
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Common stock - par value $.01 per share, authorized 8,000,000
shares, issued and outstanding 1,477,746 in 2007 and
1,458,189 in 2006
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14,778
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14,582
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Additional paid-in capital
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507,098
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321,708
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Common stock subscribed (19,557 shares in 2006)
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—
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150,000
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Retained earnings
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6,312,008
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8,640,292
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6,833,884
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9,126,582
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Total liabilities and shareholders' equity
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$
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18,024,970
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$
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16,061,640
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See accompanying notes to the unaudited condensed consolidated financial statements
3
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the Three Months Ended
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For the Nine Months Ended
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September 30,
2007
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September 30,
2006
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September 30,
2007
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September 30,
2006
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Net sales
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$
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5,683,365
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$
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6,399,790
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$
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14,617,798
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$
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20,285,703
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Cost of sales
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(5,015,092
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)
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(5,056,970
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)
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(12,027,634
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)
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(14,934,629
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)
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Gross profit
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668,273
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1,342,820
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2,590,164
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5,351,074
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Operating expenses:
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Selling, general and administrative expenses
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(1,443,793
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)
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(1,492,394
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)
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(4,613,732
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)
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(5,207,167
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)
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Research and development
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(80,572
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)
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(118,904
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)
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(235,072
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)
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(365,853
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)
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Operating loss
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(856,092
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)
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(268,478
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)
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(2,258,640
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)
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(221,946
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)
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Other income (expense):
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Miscellaneous income
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—
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—
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10,000
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20,000
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Interest income
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50,065
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53,870
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152,843
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140,857
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Interest expense
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(5,725
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)
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(8,539
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)
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(12,780
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)
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(25,273
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)
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44,340
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45,331
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150,063
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135,584
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Loss before income taxes
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(811,752
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)
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(223,147
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)
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(2,108,577
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)
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(86,362
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)
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Income tax expense (benefit)
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—
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36,137
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—
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(26,930
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)
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|
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Net loss
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$
|
(811,752)
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$
|
(187,010)
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$
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(2,108,577)
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$
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(113,292
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)
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Per share amounts:
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Basic and diluted loss per common share
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$
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(0.55
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)
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$
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(0.13
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)
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$
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(1.43
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)
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$
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(0.08)
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Basic and diluted average number of common and common equivalent shares outstanding
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1,477,746
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1,458,189
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1,477,746
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|
1,454,086
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|
See accompanying notes to the unaudited condensed consolidated financial statements
4
QUIPP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2007
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Additional
Paid-In
Capital
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Retained
Earnings
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Common
Stock
Subscribed
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Total
Shareholders'
Equity
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Common Stock
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Shares
|
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Amount
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Balance on December 31, 2006
|
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1,458,189
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|
$
|
14,582
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$
|
321,708
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$
|
8,640,292
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|
$
|
150,000
|
|
$
|
9,126,582
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Stock-based compensation
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—
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—
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35,586
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—
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—
|
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35,586
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|
Dividends declared on common stock ($.15 per share)
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—
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—
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—
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|
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(219,707
|
)
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—
|
|
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(219,707
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)
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|
Issuances of common stock
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19,557
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|
196
|
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149,804
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|
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(150,000
|
)
|
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—
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Net loss
|
|
|
—
|
|
|
—
|
|
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—
|
|
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(2,108,577
|
)
|
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—
|
|
|
(2,108,577
|
)
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|
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|
|
|
|
|
|
|
|
|
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|
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|
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Balance on September 30, 2007
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1,477,746
|
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$
|
14,778
|
|
$
|
507,098
|
|
$
|
6,312,008
|
|
|
—
|
|
$
|
6,833,884
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|
See accompanying notes to the unaudited condensed consolidated financial statements
5
QUIPP INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Nine Months Ended
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|
|
September 30,
2007
|
|
September 30,
2006
|
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|
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Cash used in operations:
|
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|
|
|
|
|
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Net loss
|
|
$
|
(2,108,577
|
)
|
$
|
(113,292
|
)
|
|
|
|
|
|
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|
|
|
|
|
|
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Reconciliation of net income to net cash used in operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
348,143
|
|
|
324,326
|
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|
Intangible amortization
|
|
|
500,554
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|
|
391,827
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Stock-based compensation
|
|
|
35,586
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|
|
31,140
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|
|
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|
|
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Changes in operational assets and liabilities:
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|
|
|
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Accounts receivable
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|
|
(593,778
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)
|
|
95,337
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|
|
Inventories
|
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|
(2,573,197
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)
|
|
(279,816
|
)
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|
Prepaid and other assets
|
|
|
104,184
|
|
|
222,983
|
|
|
Accounts payable and accrued liabilities
|
|
|
1,182,344
|
|
|
(917,338
|
)
|
|
Deferred revenues
|
|
|
3,081,694
|
|
|
(1,734,416
|
)
|
|
Net cash used in operations
|
|
|
(23,047
|
)
|
|
(1,979,249
|
)
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|
|
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|
|
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|
|
Cash flow from investing activities:
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|
|
|
|
|
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Securities purchased
|
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|
(2,000,000
|
)
|
|
(2,785,000
|
)
|
|
Securities sold or matured
|
|
|
3,360,000
|
|
|
2,755,106
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|
Capital expenditures
|
|
|
(84,940
|
)
|
|
(442,561
|
)
|
|
Net cash provided by (used in) investing activities
|
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|
1,275,060
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|
|
(472,455
|
)
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|
|
|
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|
|
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|
|
Cash flow from financing activities:
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|
|
|
|
|
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Repayment of debt
|
|
|
(8,010
|
)
|
|
(5,903
|
)
|
|
Dividends paid to shareholders
|
|
|
(219,707
|
)
|
|
(218,978
|
)
|
|
Net cash used in financing activities
|
|
|
(227,717
|
)
|
|
(224,881
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
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|
1,024,296
|
|
|
(2,676,585
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
864,879
|
|
|
2,829,246
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of quarter
|
|
$
|
1,889,175
|
|
$
|
152,661
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
6
QUIPP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include the accounts of Quipp, Inc. and its wholly owned subsidiary, Quipp Systems, Inc. All significant intercompany transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with that used as of and for the year ended December 31, 2006 and, in the opinion of management, reflect all adjustments (principally consisting of normal recurring accruals) considered necessary to present fairly the financial position of Quipp, Inc. and subsidiary as of September 30, 2007 and the results of its operations and cash flows for the three and nine months ended September 30, 2007 and 2006. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. 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, 2006 was derived from audited financial statements, but, as permitted by Regulation S-X, is not accompanied by all disclosures required by generally accepted accounting principles.
NOTE 2 - INVENTORIES
Inventories at September 30, 2007 and December 31, 2006 include material, labor and factory overhead and are stated at the lower of cost or market. Inventory also includes 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 sale and corresponding cost of sales when risk of loss has transferred to the customer or when installation services are complete and collection of the resulting receivable is reasonably assured. Cost is determined using the first-in, first-out (FIFO) method. The composition of inventories at September 30, 2007 and December 31, 2006 is as follows:
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|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
Raw materials
|
|
$
|
2,559,975
|
|
$
|
2,476,687
|
|
|
Work in process
|
|
|
2,475,227
|
|
|
270,220
|
|
|
Finished goods
|
|
|
70,846
|
|
|
56,360
|
|
|
Subtotal
|
|
|
5,106,048
|
|
|
2,803,267
|
|
|
Shipped, not recognized
|
|
|
965,804
|
|
|
695,388
|
|
|
|
|
$
|
6,071,852
|
|
$
|
3,498,655
|
|
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, if any, on such contracts are recognized immediately.
7
QUIPP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 – LOSS PER SHARE
Basic loss per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted loss 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. For the three and nine months ended September 30, 2007, the Company had 0 and 75 common stock equivalents not included in earnings per share because the effect is antidilutive. For the corresponding periods in 2006, the Company had no common stock equivalents not included in earnings per share because the effect is antidilutive.
NOTE 5 – STOCK-BASED COMPENSATION
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 that can be granted under the Equity Compensation Plan is 600,000. At September 30, 2007, there were 135,389 shares available for grant under the Equity Compensation Plan.
As of January 1, 2006, the Company adopted Statement of Accounting Standards (“SFAS”) No. 123R, “Share Based Payments” 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, 2007, awards that are modified, repurchased or canceled after January 1, 2007 and the portion of awards issued from December 15, 1994 to December 31, 2007 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 123. 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 Company recognized stock-based compensation totaling $35,586 and $21,418 for the nine months ended September 30, 2007 and 2006, respectively. Components of stock-based compensation expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Stock Options
|
|
$
|
5,978
|
|
$
|
5,978
|
|
|
Restricted Stock Awards
|
|
|
29,608
|
|
|
25,062
|
|
|
Total stock based compensation costs included in
selling, general and administrative expenses
|
|
$
|
35,586
|
|
$
|
31,040
|
|
During the nine month period ended September 30, 2007, no stock options were granted or exercised. The following stock option activity occurred during the nine months ending September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2006
|
|
|
56,000
|
|
$
|
13.16
|
|
|
5.50
|
|
|
—
|
|
|
Forfeited or expired
|
|
|
(6,000
|
)
|
|
14.60
|
|
|
—
|
|
|
—
|
|
|
Options outstanding at September 30, 2007
|
|
|
50,000
|
|
$
|
12.98
|
|
|
5.24
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at September 30, 2007
|
|
|
47,500
|
|
$
|
12.95
|
|
|
5.34
|
|
|
—
|
|
8
QUIPP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2007, approximately $3,000 of unrecognized compensation costs related to non-vested stock options is expected to be recognized over a weighted average period of approximately 6 months.
The following table summarizes restricted stock award activity for the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
|
|
|
Weighted
Average
Grant Date
Fair Price
|
|
|
Non-vested stock awards as of December 31, 2006
|
|
|
10,000
|
|
$
|
11.84
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
Vested
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
Non-vested stock awards as of September 30, 2007
|
|
|
10,000
|
|
$
|
11.84
|
|
As of September 30, 2007, approximately $37,000 of unrecognized compensation costs related to non-vested restricted stock awards is expected to be recognized over a weighted average period of approximately 1 year.
NOTE 6 – INCOME TAXES
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 additional deferred tax benefits will be realized.
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 Statement of Accounting Standards No. 5, “Accounting for Contingencies.”
The liability for uncertain tax positions as of December 31, 2006 was approximately $83,000. 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 nine months ended September 30, 2007, the Company had no significant changes in its liability for uncertain tax positions.
The Company also accrues both penalties and interest related to the liability for uncertain tax positions. These amounts are charged to income tax expense. As of December 31, 2006, the Company had accrued approximately $75,000 for the payment of interest and penalties. During the nine months ended September 30, 2007, the Company did not recognize any material changes to interest and penalties charges related to unrecognized tax benefits.
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 2003. Also, 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.
9
QUIPP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - CHANGE IN ACCOUNTING ESTIMATE
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. This change in accounting estimate results in increased intangible amortization expense of approximately $18,000 each month from April 2007 through August 2010.
NOTE 8 - RECENT PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures related to the use of fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurement. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of FAS No. 157 on its consolidated financial statements.
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value, which can be elected on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the impact of this standard on its consolidated financial statements.
NOTE 9 - RECENT EVENTS
On October 22, 2007, the Company’s Board of Directors approved a dividend of $0.05 per share payable on December 3, 2007 to shareholders of record on November 1, 2007.
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,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Gross profit
|
|
|
11.8
|
%
|
|
21.0
|
%
|
|
17.7
|
%
|
|
26.4
|
%
|
|
Selling, general and administrative expenses
|
|
|
25.4
|
%
|
|
23.3
|
%
|
|
31.6
|
%
|
|
25.7
|
%
|
|
Research and development
|
|
|
1.4
|
%
|
|
1.9
|
%
|
|
1.6
|
%
|
|
1.8
|
%
|
|
Other income and expense, net
|
|
|
.8
|
%
|
|
0.7
|
%
|
|
1.0
|
%
|
|
0.7
|
%
|
|
Net loss
|
|
|
(14.3
|
)%
|
|
(2.9
|
)%
|
|
(14.4
|
)%
|
|
(0.6
|
)%
|
THREE MONTHS ENDED SEPTEMBER 30, 2007
Net sales
for the three months ended September 30, 2007 were $5,683,365, a decrease of $716,425 (11.2%) compared to net sales of $6,399,790 for the corresponding period in 2006. Published reports indicate that U.S. newspaper publishers and media groups continue to experience lower profits in their newspaper divisions due to declining circulation and reduced print advertising revenue. We believe these developments have caused inconsistent capital spending on post-press newspaper manufacturing equipment.
Gross profit
for the three months ended September 30, 2007 was $668,273, a decrease of $674,547 (50.2%) as compared to $1,342,820 for the corresponding period in 2006. Gross profit as a percentage of sales for the third quarter of 2007 declined to 11.8% compared to 21.0% for the same period in 2006. As explained in more detail below, the decreased profit margin percentage is partially due to high costs associated with the rapid increase of production levels in response to increased orders, the learning curve relating to inserter production, increased raw material costs and competitive pricing pressures.
Due to increased customer delivery requirements for the remainder of 2007, we increased production personnel in the third quarter by approximately 65%, using temporary labor. We incurred inefficiencies as these employees were trained and gained experience with new job responsibilities. In addition, delays in shipments and revenue recognition related to these inefficiencies, had a significant impact on gross profit for the third quarter.
In 2006, due to low levels of incoming inserter orders, we closed the Newstec Massachusetts facility and moved inserter production to our Miami, Florida factory. During the third quarter of 2007 we had an aggregate of four new and remanufactured inserter orders in various stages of production. As a result of the learning curve at the Miami factory relating to the inserter product line and the relatively high inserter production volume, we incurred higher than normal production costs.
In addition, we have experienced increased raw material, transportation, insurance and electricity costs, as well as competitive pricing pressure.
Selling, general and administrative
expenses for the three months ended September 30, 2007 were $1,443,793, a decrease of $48,601 (3.2%) as compared to $1,492,394 for the corresponding period in 2006. Most of the decrease is due to reduced variable selling expenses resulting from decreased sales, offset in part by higher intangible amortization costs related to a change in an accounting estimate that accelerated the amortization of certain intangible assets (see Note 7 to the Unaudited Condensed Consolidated Financial statements included in this report).
Research and development
expenses for the three months ended September 30, 2007 were $80,572, a decrease of $38,332 (32.2%) as compared to $118,904 for the same period in 2006. During the three months ended September 30, 2007, we continued to devote most of our development resources to enhancements of our Quipp-Newstec inserter product line.
Other income and expense (net)
for the three months ended September 30, 2007 were $44,340, compared to $45,331 for the corresponding period in 2006.
11
NINE MONTHS ENDED SEPTEMBER 30, 2007
Net sales
for the nine months ended September 30, 2007 were $14,617,798, a decrease of $5,667,905 (27.9%) compared to net sales of $20,285,703 for the corresponding period in 2006. Published reports indicate that U.S. newspaper publishers and media groups continue to experience lower profits in their newspaper divisions due to declining circulation and reduced print advertising revenue. We believe these developments have caused inconsistent capital spending on post-press newspaper manufacturing equipment.
Gross profit
for the nine months ended September 30, 2007 was $2,590,164, a decrease of $2,760,910 (51.6%) as compared to $5,351,074 for the corresponding period in 2006. Gross profit as a percentage of sales for the first nine months of 2007 declined to 17.7% compared to 26.4% for the same period in 2006. The decreased profit margin percentage is due to the allocation of fixed manufacturing overhead costs over a lower level of production and shipment volumes in 2007 compared to 2006, higher raw material, transportation, insurance and electricity costs, and competitive pricing pressures. In addition, in the third quarter of 2007, we experienced higher production costs associated with increased production levels and the learning curve relating to inserter production.
Gross profit, both in terms of dollar amount and as a percentage of revenues for the first nine months of 2007 were also adversely affected by the delay in shipments and revenue recognition experienced in the third quarter of 2007.
Selling, general and administrative
expenses for the nine months ended September 30, 2007 were $4,613,732, a decrease of $593,435 (11.4%) as compared to $5,207,167 for the corresponding period in 2006. Most of the decrease is due to reduced costs associated with our participation in the annual NEXPO exhibition sponsored by The Newspaper Association of America, and cost reductions resulting from the closing of the Newstec manufacturing facilities in Massachusetts and the relocation of Newstec operations to our Florida facility during the first quarter of 2006. We also incurred lower variable selling costs resulting from decreased sales.
Research and development
expenses for the nine months ended September 30, 2007 were $235,072, a decrease of $130,781 (35.7%) as compared to $365,853 for the same period in 2006. During the nine months ended September 30, 2007, we focused most of research and development resources to enhancements of our Quipp-Newstec inserter product line.
Other income and expense (net)
for the nine months ended September 30, 2007 were $150,063 as compared to $135,584 for the corresponding period in 2006. Interest income increased by $11,986 due to average higher cash, cash equivalents and securities available for sale as well as increased interest rates. Interest expense was lower for the nine months primarily due to a lower balance of debt and reduced loan costs. Royalty income relating to our patented automatic cart loading system technology used by another supplier of post-press material handling equipment was $10,000 during the first nine months of 2007 compared to $20,000 for the same period in 2006.
GENERAL
Our backlog as of September 30, 2007 was $11,001,000 compared to $8,909,000 at December 31, 2006 and $6,775,000 at September 30, 2006. We expect to ship all items in our backlog during the next 16 months. Orders for the nine months ended September 30, 2007 were $16,370,000 compared to orders of $13,254,000 during the same period in 2006.
LIQUIDITY
On September 30, 2007, cash and cash equivalents, restricted securities and securities available for sale totaled $3,589,175 as compared to $3,924,879 at December 31, 2006, a decrease of $335,704. Working capital on September 30, 2007 was $2,693,913, a decrease of $1,528,733 from $4,222,596 at December 31, 2006. 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.
We are not in compliance with the original debt service coverage ratio and minimum tangible net worth covenants to our line of credit agreement. We have obtained a waiver that amends these debt covenants until the line of credit maturity date of April 30, 2008.
12
Forward Looking Statements
This quarterly report on Form 10-Q contains forward looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements relating to shipment of backlog orders and adequacy of available resources. A number of important factors could cause actual results to differ materially from those in the forward looking statements including, but not limited to, economic conditions generally and 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 and engineering and production difficulties.
Item 3