UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission File Number: 000-30794
INTEGRATED PERFORMANCE SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 11-3042779
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
901 Hensley Lane Wylie, Texas 75098
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(972) 771-1930
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
At March 31, 2005 there were 58,603,230 shares of the issuer's common
shares outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
GENERAL INDEX
Page
Number
- ----------------------------------------------------------------------------
PART I -
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION..................................... 16
ITEM 3. CONTROLS AND PROCEDURES............................... 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................... 19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS ...................................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................... 21
ITEM 5. OTHER INFORMATION..................................... 21
ITEM 6. EXHIBITS.............................................. 21
SIGNATURES...................................................... 21
EXHIBIT INDEX................................................... 22
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED PERFORMANCE SYSTEMS, INC.
Consolidated Balance Sheet
(Unaudited)
============================================================================
January 31,
2005
------------
ASSETS
Current assets:
Cash $ 743,865
Trade accounts receivable, net 4,250,771
Other receivables 19,190
Inventory 1,680,078
Deferred income tax asset 205,948
Income tax receivable 299,090
------------
Total current assets 7,198,942
------------
Property and equipment, net 2,026,142
------------
Other assets:
Goodwill 8,764,536
Customer Base, net of accumulated
amortization of $90,341 4,246,050
Other 100,686
------------
13,111,272
------------
Total assets $ 22,336,356
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,491,421
Accrued expenses 1,437,719
Line of credit 1,860,000
Notes payable, current portion 706,517
Notes payable to related party 3,200,000
------------
Total current liabilities 9,695,657
------------
Noncurrent liabilities:
Notes payable, net of current maturities 19,050
Note payable to related party 1,000,000
Deferred income tax liability 1,749,214
------------
Total long-term liabilities 2,768,264
------------
Contingencies (note 8, note 9, note 12)
Stockholders' equity:
Preferred stock; par value $0.01; 10,000,000
shares authorized
Series F Convertible; $1,000 per share
redemption, 300,000 shares authorized,
193,829 shares issued and outstanding 1,938
Common stock; par value $0.01; 100,000,000 shares
authorized, 66,537,230 shares issued,
57,903,230 outstanding 665,372
Treasury Stock; 8,634,000 shares (949,740)
Additional paid-in capital 6,593,099
Retained Earnings 3,561,766
------------
Total stockholders' equity 9,872,435
------------
Total liabilities and stockholders' equity $ 22,336,356
============
The accompanying notes are an integral part
of this consolidated financial statement.
INTEGRATED PERFORMANCE SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
=============================================================================
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
January 31, January 31, January 31, January 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 7,604,706 $ 5,016,863 $14,356,993 $ 9,632,245
Cost of sales 6,335,748 4,215,670 11,987,158 8,093,975
---------- ---------- ---------- ----------
Gross profit 1,268,958 801,193 2,369,835 1,538,270
---------- ---------- ---------- ----------
General and
administrative expenses 1,146,399 611,046 2,001,116 1,388,803
Amortization of customer
base 90,341 - 90,341 -
---------- ---------- ---------- ----------
1,236,740 611,046 2,091,457 1,388,803
---------- ---------- ---------- ----------
Income from operations 32,218 190,147 278,378 149,467
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (116,136) (6,253) (133,367) (29,745)
Interest income 74 58 156 112
Other income 739 115,074 14,985 130,381
---------- ---------- ---------- ----------
(115,323) 108,879 (118,226) 100,748
---------- ---------- ---------- ----------
Income (loss) before
provision for income taxes (83,105) 299,026 160,152 250,215
Provision for income taxes (21,363) 104,806 71,273 100,194
---------- ---------- ---------- ----------
Net income (loss) $ (61,742) $ 194,220 $ 88,879 $ 150,021
========== ========== ========== ==========
Net income (loss) per share
Basic $ 0.00 $ 0.01 $ 0.00 $ 0.01
========== ========== ========== ==========
Diluted $ 0.00 $ 0.01 $ 0.00 $ 0.01
========== ========== ========== ==========
Weighted average common
shares outstanding
Basic 50,802,749 15,737,492 36,610,619 15,245,166
========== ========== =========== ==========
Diluted 50,802,749 15,737,492 119,503,945 15,245,166
========== ========== =========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
INTEGRATED PERFORMANCE SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
============================================================================
Six Months Ended January 31,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 88,879 $ 150,021
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 484,070 402,324
Deferred tax expense 71,273 100,194
Changes in operating assets and liabilities:
Trade accounts receivable (474,160) (555,551)
Other receivables (19,190) -
Inventory 162,125 (492,506)
Income tax receivable - 57,505
Other assets (13,910) 9,945
Bank overdraft - 127,898
Accounts payable 219,642 80,435
Accrued expenses 104,118 (147,764)
------------ ------------
Net cash provided by (used in)
operating activities 622,847 (267,499)
------------ ------------
Cash flows from investing activities:
Cash acquired through merger 78,762 -
Merger costs (209,805) -
Acquisition of property and equipment (46,386) (159,557)
------------ ------------
Net cash used in investing activities (177,429) (159,557)
------------ ------------
Cash flows from financing activities:
Payments on notes payable (907,525) (204,030)
Net advances from related parties 37,972 200,000
Net borrowing on line of credit 950,000 298,194
------------ ------------
Net cash provided by financing activities 80,447 294,164
------------ ------------
Increase (decrease) in cash 525,865 (132,892)
Cash, beginning of period 218,000 195,319
------------ ------------
Cash, end of period $ 743,865 $ 62,427
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
Integrated Performance Systems, Inc.
Notes to Interim Consolidated Financial Statements
January 31, 2005
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
UNAUDITED FINANCIAL INFORMATION
The unaudited condensed consolidated financial statements have been prepared
by Integrated Performance Systems, Inc. and its subsidiaries (the "Company"
or "IPS"), pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments consisting of normal
recurring entries, which, in the opinion of the Company, are necessary to
present fairly the results for the interim periods. Results of operations
for the six-month period ended January 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending July 31,
2005.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Form 8-K/A dated
November 24, 2004, filed on February 7, 2005.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Inventory
---------
Inventory consists of finished goods, work in process and raw materials and
is priced at lower of cost or market (determined product by product based on
management's knowledge of current market conditions and existing sales
levels). Cost of raw materials is determined on a weighted average basis;
cost of work in process and finished goods is determined using specific
identification. At January 31, 2005, inventory consisted of $727,731 in raw
materials, $849,194 in work in process, and $181,116 in finished goods,
less a valuation allowance of $77,963.
Revenue recognition
-------------------
The Company recognizes revenue as products are shipped.
Stock based compensation
------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, and Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation,
and interpretation of APB Opinion No. 25. Under APB 25, the Company
recognizes no compensation expense related to employee or director stock
options when options are granted with exercise prices at, or in excess of,
the estimated fair value of the stock on the date of grant, as determined by
the Board of Directors.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
Compensation, and Statement of Financial Accounting Standards No. 148 (FAS
148), Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of FASB Statement No. 123. Under the provisions of FAS 123,
compensation expense is recognized based on the fair value of options on the
grant date.
The following tables illustrate the effect on net income (loss) if the
Company had applied the fair value recognition provision of FAS 123 to stock
based compensation:
For the Three Months For the Six Months
Ended January 31, Ended January 31,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
Net income (loss) as reported $ (61,742) $194,220 $ 88,879 $150,021
Less stock based compensation
expense determined under fair
value method (955,733) - (955,733) -
--------------------------------------------
Net income (loss), pro forma $(1,017,475) $194,220 $(866,854) $150,021
============================================
Basic earnings per share -
as reported $0.00 $0.01 $0.00 $0.01
============================================
Basic earnings per share -
pro forma $(0.02) $0.01 $(0.02) $0.01
============================================
Earnings per share
------------------
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share
is computed using the weighted average number of common and, if dilutive,
potential common shares outstanding during the period. Potential common
shares consist of the incremental common shares issuable upon the exercise
of stock options and the conversion of the Company's convertible preferred
stock and notes payable.
The following table sets forth the reconciliation of basic and diluted net
income (loss) per share:
For the Three Months For the Six Months
Ended January 31, Ended January 31,
---------------------------------------------
2005 2004 2005 2004
---------------------------------------------
Net income (loss) $ (61,742) $ 194,220 $ 88,879 $ 150,021
Interest on convertible
notes payable - - 53,333 -
---------------------------------------------
Net income (loss) diluted $ (61,742) $ 194,220 $ 142,212 $ 150,021
=============================================
Weighted average common
shares outstanding - basic 50,802,749 15,737,492 36,610,619 15,245,166
Convertible note payable - - 913,043 -
Convertible notes payable
to related party - - 10,347,826 -
Convertible preferred stock - - 71,632,457 -
----------------------------------------------
Weighted average common shares
outstanding - diluted 50,802,749 15,737,492 119,503,945 15,245,166
==============================================
Basic (loss) income per share $ 0.00 $ 0.01 $ 0.00 $ 0.01
=============================================
Diluted (loss) income per share $ 0.00 $ 0.01 $ 0.00 $ 0.01
=============================================
The effect of conversion of the convertible notes payable and preferred
stock has been excluded from diluted loss per share for the three months
ended January 31, 2005 as their effect would be anti-dilutive.
The Company currently does not have a sufficient number of authorized shares
of common stock to allow for the conversion of all of its outstanding
convertible securities.
Recent Accounting Pronouncements
--------------------------------
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which requires companies to recognize in the statement of operations all
share-based payments to employees, including grants of employee stock
options based on their fair values. Accounting for share-based compensation
transactions using the intrinsic method supplemented by pro forma
disclosures will no longer be permissible. The new statement will be
effective for small public entities in periods beginning after December 15,
2005. The Company has not yet completed its analysis of the impact of
adopting SFAS 123R.
NOTE 3 - CONCENTRATIONS OF RISK
At January 31, 2005, five customers accounted for approximately 52% of the
total accounts receivable and for the three and six months ended January 31,
2005, these customers accounted for approximately 50% of net sales.
NOTE 4 - MERGER WITH BEST CIRCUIT BOARDS, INC.
On November 24, 2004, a wholly owned subsidiary of Integrated Performance
Systems, Inc. merged with Best Circuit Boards, Inc., d/b/a Lone Star
Circuits ("LSC"), resulting in LSC becoming a wholly owned subsidiary of
IPS. The beneficial owner of LSC acquired controlling interest in the
Company and the Company has therefore determined that the transaction should
be accounted for as a reverse merger. The transaction will be treated as if
LSC acquired the Company and, consequently, the historical financial
statements of LSC have become the historical financial statements of the
Company.
IPS is a printed circuit board and electronics component manufacturer
located in Frisco, Texas; LSC is a fabrication services company located in
Wylie, Texas, engaged in time sensitive, high technology prototypes, and
is a manufacturer of complex electronic circuit boards. The Company's
corporate headquarters have been moved to LSC's 101,000 square foot facility
located in Wylie, Texas. See Note 12.
The significant terms of the merger were as follows:
* LSC Asset Acquisition Corp. (a wholly owned subsidiary of LSC) acquired
all of the assets and some, but not all, of the liabilities of three
IPS subsidiaries (North Texas PC Dynamics, Inc. ("NTPCD"), Performance
Application Technologies, Inc. ("PAT"), and Performance Interconnect
Corp. of North Texas, Inc. ("PI"). These three subsidiaries comprised
substantially all of the business operations of IPS prior to merger.
* Immediately subsequent to the asset sales above, the Company sold its
100% ownership interest in NTPCD, PAT, and PI to Integrated Performance
Business Services Corp. ("IPBSC"), an entity controlled by D. Ronald
Allen, former chief executive officer, controlling shareholder and
director of the Company. These entities held liabilities having a book
value of $748,653.
* IPS issued $4.2 million in convertible promissory notes and 193,829
shares of IPS Series F Convertible Preferred Stock, subject to
adjustment to represent 67.25% of the Company's outstanding common
stock, to the beneficial owner of LSC in exchange for 100% of the
outstanding shares of LSC.
* Associates Funding Group and CMLP Group, Ltd., entities controlled by
D. Ronald Allen, agreed to contribute 8,634,000 shares of Company
common stock to the Company.
* D. Ronald Allen entered into a stock escrow and security agreement
whereby 10,851,832 shares of IPS common stock beneficially owned by
him were placed into escrow as security for (1) advances made by LSC
to IPS prior to the closing of the merger, (2) the Company's and Mr.
Allen's indemnification obligations under the merger agreement, and (3)
the convertible promissory notes issued to the beneficial owner of LSC.
The merger agreement provides that the shares used to satisfy those
obligations be valued based on a future equity financing of the Company.
* Brad Jacoby, the beneficial owner of LSC, became the majority
shareholder, Chief Executive Officer, and sole director of the Company.
Series F Convertible Preferred Stock
------------------------------------
The terms of the merger agreement provide for the issuance of 193,829 shares
of Series F Convertible Preferred Stock, subject to adjustment as discussed
below, to the beneficial owner of LSC as part of the consideration for
100% of the outstanding common stock of LSC. The terms of the Series F
Convertible Preferred Stock contain no mandatory redemption provisions. The
liquidation value per share is equal to the value of LSC, divided by the
number of outstanding shares of Series F Convertible Preferred Stock,
payable prior to any distribution to the holders of the Company's common
stock. Holders of the Series F Convertible Preferred Stock have the right to
convert the preferred shares into common shares at the rate of one thousand
shares of common stock for each share of Series F Convertible Preferred
Stock outstanding. Holders of the Series F Convertible Preferred Stock are
entitled to one thousand votes for each share of Series F Convertible
Preferred Stock held. The merger agreement provides for adjustment to the
number of Series F Convertible Preferred Stock issuable to the beneficial
owner of LSC based upon a subsequent determination of the number of
preferred shares necessary to provide the beneficial owner of LSC with the
equivalent of 67.25% of the Company's outstanding common stock, after an
equity financing contemplated by the merger agreement. As of the date of
filing of this report, that equity financing has not occurred.
Convertible Promissory Notes
----------------------------
Other terms of the merger include the issuance of $4.2 million in
convertible promissory notes (the "Notes") to the beneficial owner of LSC as
part of the merger consideration. The Notes are convertible into common
stock at any time at a conversion price of $.15 per share. Notes in the
principal amount of $3.2 million bear 8% interest payable monthly, with the
principal balance originally due February 28, 2005, subsequently renewed and
extended to July 31, 2005. (See Note 8 below regarding subsequent renewal).
A note in the principal amount of $1 million bears 8% interest payable semi-
annually, with the principal balance due in November 2007. All of the Notes
are secured by all assets of the Company and of LSC, by the outstanding
stock of LSC and by the Company capital stock beneficially owned by
D. Ronald Allen. The issuance of the Notes has been accounted for as a
distribution of capital in the amount of $4.2 million.
Employment Agreement
--------------------
Prior to consummating the merger, the Company entered into a consulting
agreement with Mr. Jacoby to manage the Company. This arrangement was
superseded by a three year employment agreement as CEO effective December 1,
2004.
Stock Escrow and Security Agreement
-----------------------------------
In connection with the merger, D. Ronald Allen delivered 10,851,832 shares
of common stock beneficially owned by him into escrow as security for (1)
advances made by LSC to the Company prior to the closing of the merger, (2)
the Company's and Mr. Allen's indemnification obligations under the merger
agreement, and (3) the convertible promissory notes issued to the beneficial
owner of LSC. The term of the stock escrow and security agreement expires
on November 24, 2006. The former beneficial owner of LSC was also granted
the right to vote these shares for the duration of the escrow agreement.
Contribution of Common Shares
-----------------------------
In connection with the merger, entities controlled by D. Ronald Allen
contributed 8,634,000 shares of common stock into the Company's treasury.
The Company recorded the treasury shares at fair value in the amount of
$949,740.
Merger Accounting
-----------------
The acquisition was accounted for using the purchase method of accounting
and LSC has been determined to be the accounting acquirer. Accordingly, a
new basis was established for IPS's assets and liabilities based upon the
fair values thereof. The preliminary purchase price was determined to be
$10,487,993 based upon the fair value of IPS on the transaction measurement
date ($10,278,188) plus acquisition costs totaling $209,805. The measurement
date for the transaction was October 22, 2004, the date a substantially
revised merger agreement was signed and announced. The fair value of IPS
was determined based upon the quoted market price per share times the number
of common shares outstanding on October 22, 2004.
The preliminary purchase price allocation to the fair value of the IPS
assets and liabilities is as follows:
Cash $ 78,763
Accounts receivable 705,736
Inventory 425,143
Property and equipment 607,173
Goodwill 8,764,536
Customer base 4,336,391
Other assets 32,911
-----------
Total assets acquired 14,950,653
Accounts payable and accrued expenses 1,546,897
Deferred income taxes 1,597,618
Notes payable 1,318,145
-----------
Total liabilities assumed 4,462,660
-----------
$ 10,487,993
===========
Customer base was recorded as a result of the acquisition and will be
amortized over a period of eight years. The fair value of customer base was
determined using estimated discounted future cash flows. Estimated future
amortization expense for the years ended July 31, is as follows:
2005 $ 361,366 *
2006 542,049
2007 542,049
2008 542,049
2009 542,049
Thereafter 1,806,829
-----------
Total $ 4,336,391
===========
* Includes the $90,341 expense recorded for the six months ended
January 31, 2005
Pro Forma Results of Operations
-------------------------------
The following unaudited pro forma consolidated results of operations have
been prepared as if the Best Circuit Boards, Inc. merger discussed above had
occurred on August 1, 2003:
For the Three Months For the Six Months
Ended January 31, Ended January 31,
2005 2004 2005 2004
----------------------------------------------------
Revenues
As reported $ 7,604,706 $ 5,016,683 $14,356,993 $ 9,632,245
Pro forma $ 8,111,149 $ 6,228,076 $16,432,911 $12,173,701
Net Income
As reported $ (61,742) $ 194,220 $ 88,879 $ 150,021
Pro forma $ (687,996) $(1,117,806) $(1,158,322) $(2,997,601)
Earnings (loss)
per share - Basic
As reported $0.00 $0.01 $0.00 $0.01
Pro forma $(0.01) $(0.02) $(0.02) $(0.06)
NOTE 5 - INCOME TAXES
The income tax provision for the three and six month periods ended January
31, 2005 consists of the following:
Three Six
Months Months
-------- --------
Deferred expense (benefit) $ (21,363) $ 71,273
======== ========
Significant temporary differences used in the computation of deferred tax
assets and liabilities at January 31, 2005 are as follows:
Deferred tax assets, current
Allowance for bad debts $ 83,950
Accrued vacation 88,087
Other 33,911
----------
$ 205,948
==========
Deferred tax assets (liabilities), non-current
Depreciation of property and equipment $ (252,446)
Other 67,566
Net operating loss carry forwards 6,551,271
Valuation allowance (6,551,271)
Customer base (1,564,334)
----------
$(1,749,214)
==========
At January 31, 2005, the Company had tax net operating loss carry forwards
(NOLs) of approximately $17,782,000 that begin to expire in 2018. The
utilization of these NOLs is limited due to the change in ownership of a
majority of the outstanding shares of IPS. Due to the uncertainty as to
whether these NOLs will ever be utilized, a 100% valuation allowance has
been recorded related to these assets.
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some or all of its deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the existence of, or generation of, taxable income
in the periods in which those temporary differences are deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon historical taxable income and projections of future
taxable income over the periods which the deferred tax assets are
deductible, management does not believe that further valuation allowances
are necessary as of January 31, 2005.
NOTE 6 - LINE OF CREDIT
Effective August 26, 2003, the Company entered into a $2 million line of
credit agreement ("LOC") with a bank, which was due on demand, bore interest
at the bank's prime rate plus 1% (6.25% at January 31, 2005) and matured
October 15, 2004. As of March 17, 2005, the LOC has been renewed and
extended until October 31, 2006. The LOC is subject to certain financial
and other covenants, is collateralized by all of the Company's accounts
receivable and inventory, and is guaranteed by the Company's majority
stockholder, chief executive officer and sole director. At January 31,
2005, $1,860,000 was outstanding under this LOC.
NOTE 7 - NOTES PAYABLE
Long-term debt consists of the following at January 31, 2005:
Note payable to bank, payable in monthly
installments of $17,450 including interest
at 5.75%, matures August 29, 2005, collateralized
by equipment $ 119,833
Note payable to financial institution payable in
monthly installments of $657 at 0% interest, maturing
June 30, 2008, collateralized by a vehicle 26,932
Note payable to individual A, accruing interest at
24%, unsecured, in default as of June 20, 2004 117,858
Note payable to individual B, accruing interest at
24%, unsecured, in default as of August 4, 2004 50,000
Convertible note payable to individual C, accruing interest
at 12%, unsecured, in default as of September 27, 2004 15,000
Note payable to individual D, accruing interest at
24%, unsecured, in default as of April 15, 2005 45,000
Note payable to Company E, accruing interest at
8%, unsecured, maturing December 31, 2005 73,035
Convertible note payable to Company F, accruing interest
at 8%, unsecured, in default as of November 22, 2004
(see below) 277,909
--------
725,567
Less current maturities of long-term debt 706,517
--------
Total long-term debt, less current maturities $ 19,050
========
The convertible note payable to Company F is in default as of November 22,
2004. The original face value of the note was $250,000. On November 22,
2004, under provisions provided in the agreement, the noteholders demanded
payment in the amount of 125% of the outstanding principal balance of
$222,327, bringing the demand amount to $277,909, plus accrued interest
through October 31, 2004 of $15,222.
Under the terms of the agreement, the per diem interest after October 31,
2004, is $49.41 plus an additional $5,000 monthly penalty for the first 90
days, increasing to $10,000 per month thereafter. Additionally, 10,000
shares of common stock are to be issued to the noteholder per the default
provisions. At January 31, 2005, the Company has accrued unpaid interest
and penalties in the amount of $19,545 related to this debt and has not
issued the demanded shares of common stock.
The terms of this note allow for the conversion of the debt, up to the full
principal amount, into common shares at the option of the holder. The
number of common shares into which this debt may be converted is equal to
the dollar amount of the principal being converted multiplied by eleven,
minus the product of the conversion price multiplied by six and two-thirds
times the dollar amount of the principal being converted, and the entire
foregoing result divided by the conversion price. The conversion price is
equal to the lesser of $1.50 or eighty percent of the average of the 5
lowest volume weighted average prices during the twenty trading days prior
to the holder's election to convert.
If the holder elects to convert the debt, the Company will have the right to
prepay the portion of the debt that the holder elected to convert, plus any
accrued and unpaid interest, at 115% of such amount. In that event, the
holder has the right to withdraw its conversion notice.
Management expects to settle this note in cash and a reduced number of
shares of common stock. The dilutive effects of the conversion right have
been considered in the computation of diluted earnings per share, above,
based upon management's estimate of the number of common shares that will be
issued upon final conversion.
NOTE 8 - NOTES PAYABLE TO RELATED PARTY
On November 24, 2004, the Company issued $4.2 million in convertible
promissory notes (the "Notes") to the beneficial owner of LSC as part of the
consideration in the merger. As a result of the merger, Mr. Jacoby became
the majority shareholder, chief executive officer and sole director of the
Company. The Notes are convertible into common stock at any time at a
conversion price of $.15 per share. Notes in the principal amount of $3.2
million bear interest at 8% payable monthly, with the principal balance
originally due February 28, 2005. A note in the principal amount of $1
million bears 8% interest payable semi-annually, with the principal balance
due in November 2007. The Notes are secured by all assets of the Company
and LSC, by the outstanding stock of LSC and by the Company capital stock
owned by D. Ronald Allen. As of April 20, 2005, the $3.2 million notes have
been extended to July 31, 2005. Interest expense related to these notes
totaled $53,333 for the three and six months ended January 31, 2005.
The Company is in the process of negotiating the extension or conversion of
$3.2 million of the Notes. No assurance can be given that the Company will
be successful in negotiating this extension or conversion or that such
extension or conversion would be on terms favorable to the Company. In the
event that the Company is unsuccessful in extending the $3.2 million of
notes or converting the notes into shares of common stock, Mr. Jacoby could
demand payment of the notes and exercise his security interests in
substantially all of our assets. The exercise of these security interests
would leave insufficient assets to continue our operations. These events
would have a material adverse effect on our business, financial condition
and results of operations.
NOTE 9 - RELATED PARTY TRANSACTIONS AND GUARANTEES
The Company leases two of its three operating facilities from JACCO
Investments, an entity owned by the Company's majority shareholder and CEO.
The Company has guaranteed payment of mortgage notes owed by JACCO
Investments to financial institutions. At January 31, 2005, amounts owed by
JACCO Investments under mortgage note arrangements guaranteed by the Company
totaled $5,606,890. In the event that JACCO Investments defaults on any of
these respective loans, the Company would be required to make cash payments
equal to the unpaid principal portion of the mortgage notes plus all
accrued penalties and interest. The guarantees do not contain any recourse
provisions or collateral for the Company in the event that the guarantee
payments are made.
See Note 6 - Line of Credit above.
NOTE 10 - STOCK BASED COMPENSATION
The Company has entered into verbal and written agreements to pay common
stock in lieu of cash for professional services. For the three and six
months ended January 31, 2005, the Company has recorded professional fees in
the amount of $30,000 related to these agreements. On March 22, 2005,
700,000 shares of common stock were issued under these arrangements.
NOTE 11 - STOCK OPTIONS AND WARRANTS
On November 30, 2004, the Company's Chief Executive Officer, sole director
and controlling shareholder issued to certain employees of the Company
options to purchase 40,000,000 shares of common stock issuable to him upon
the conversion of shares of his Series F Preferred Stock. The options have
an exercise price of $.15 per share, vest immediately, and expire November
30, 2014. The Company is not a direct party to the agreement as no new
shares will be issued upon the exercise of the options. For financial
reporting purposes, these options will be accounted for as deemed grants
from the Company. Since the options had no intrinsic value on the date of
grant, no compensation expense has been recorded.
As of January 31, 2005, there were 500,000 outstanding warrants to purchase
common stock held by certain employees. These warrants have an exercise
price of $.75 per share and expire November 5, 2009.
As of January 31, 2005, there were 1,708,333 outstanding warrants to
purchase common stock held by debt holders. These warrants have an exercise
price of $1.50 per share and expire October 24, 2006 and February 8, 2011.
NOTE 12 - CONTINGENCIES
Sale of Subsidiaries
--------------------
In connection with the merger with Best Circuit Boards, Inc. (see Note 4),
on November 24, 2004, the Company sold its 100% ownership interest in three
of its subsidiaries (North Texas PC Dynamics, Inc. ("NTPCD"), Performance
Application Technologies, Inc. ("PAT"), and Performance Interconnect Corp.
of North Texas, Inc. ("PI") to Integrated Performance Business Services
Corp., an entity controlled by D. Ronald Allen, former chief executive
officer, controlling shareholder and director of the Company. On the date
of sale, these entities held liabilities having a book value of $748,653.
On April 23, 2004, the Company sold its 100% ownership interest in
subsidiaries Cadsouth Inc. ("CAD"), PC Dynamics Corporation ("PCD"), PC
Dynamics of Texas, Inc. ("PCDT"), and Integrated Performance Business
Services Corp. ("IPBSC"), including its wholly owned subsidiary, Power
Development, Inc. At the time of the sale these subsidiaries owned no
assets and maintained liabilities with an aggregate carrying value of
approximately $1,477,000. In exchange for the sale, IPS issued to the buyer
678,000 shares of common stock of IPS.
The debts of NTPCD, PAT, PI, CAD, PCD, PCDT, and IPBSC represent contingent
liabilities of the Company. Future enforcement of these debts against the
Company could have a material adverse impact on the cash flow and liquidity
of the Company.
Lease Agreement
---------------
The Company leases a 60,000 sq. ft. manufacturing facility in Frisco, Texas
from C-Gate Construction Company ("C-Gate"), an affiliate of D. Ronald
Allen, the former chief executive officer, controlling shareholder and
director of the Company. Prior to the merger, Mr. Allen executed a lease
modification document which, according to its terms, reduced monthly rents
from $35,000 to $17,000 and reduced the 20-year lease term to a month-to-
month tenancy. The enforceability of the lease modification is currently
being disputed by C-Gate's lender in litigation pending in C-Gate's Chapter
11 bankruptcy proceedings in the U.S. Bankruptcy Court for the Eastern
District of Texas, Sherman Division. The issues in that litigation include
whether (a) C-Gate received approval for the modification from its lender in
accordance with the terms of the mortgage on the property, (b) C-Gate had
the authority to execute a lease modification without the prior approval of
the bankruptcy court, and (c) an attornment agreement that was apparently
previously executed by the Company in favor of the lender, would prevent the
Company from effecting a modification of the lease without the lender's
specific consent. In the pending litigation, the Company has asserted
certain claims against D. Ronald Allen and C-Gate's principal to recover
damages against them should the lease modification document not be
enforceable. The litigation is currently in the preliminary stages and the
ultimate outcome of the claims by and against the Company is uncertain.
Also, the Company is currently in arrears in its rent payments under the
lease and the lender has indicated that it may take action to accelerate
future rent payments under the lease, subject to certain offsets. An
unfavorable decision regarding the effectiveness of lease modification
document or action by the lender to accelerate future rent payments would
have a material adverse effect on the Company. The Company is currently
working to obtain an amicable resolution but no assurance of such can be
provided.
NOTE 13 - SUBSEQUENT EVENT
In March 2005, the Company entered into a $1.2 million operating lease line
to provide financing for the acquisition of manufacturing equipment.
As of April 27, 2005, the Company has used $700,000 of this line.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Forward Looking Statements
This report may contain "Forward Looking Statements," which are our
expectations, plans and projections, including statements concerning
expected income and expenses and the adequacy of our sources of cash to
finance current and future operations, which may or may not materialize and
which are subject to various risks and uncertainties. Factors which could
cause actual results to materially differ from our expectations include the
following: general economic conditions and growth in the high tech
industry; competitive factors and pricing pressures; changes in product mix;
the timely development and acceptance of new products; the effects of the
contingencies described herein; the availability of capital; and the risks
described from time to time in our other filings with the Securities
and Exchange Commission ("SEC"). When used in this report, the words
"may," "will," "plans," "believes," "expects," "projects," "targets,"
"anticipates," "estimates," "continue," "intend" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or change in
our expectations or any change in events, conditions or circumstances on
which any such statement may be based, except as may be otherwise required
by the securities laws.
Overview
On November 24, 2004, a wholly owned subsidiary of Integrated
Performance Systems, Inc. merged with Best Circuit Boards, Inc., d/b/a Lone
Star Circuits ("LSC"), resulting in LSC becoming a wholly owned subsidiary
of the Company. The beneficial owner of LSC acquired controlling interest
in the Company and the Company has therefore determined that the transaction
should be accounted for as a reverse merger. The transaction will be
treated as if LSC acquired the Company and, consequently, the historical
financial statements of LSC have become the historical financial statements
of the Company.
The significant terms of the merger were as follows:
* LSC Asset Acquisition Corp. (a wholly owned subsidiary of LSC) acquired
all of the assets and some, but not all, of the liabilities of three
IPS subsidiaries (North Texas PC Dynamics, Inc. ("NTPCD"), Performance
Application Technologies, Inc. ("PAT"), and Performance Interconnect
Corp. of North Texas, Inc. ("PI"). These three subsidiaries comprised
substantially all of the business operations of IPS prior to the merger.
* Immediately subsequent to the asset sales above, the Company sold its
100% ownership interest in NTPCD, PAT, and PI to Integrated Performance
Business Services Corp. ("IPBSC"), an entity controlled by D. Ronald
Allen, former chief executive officer, controlling shareholder and
director of the Company. These entities held liabilities having a book
value of $748,653.
* IPS issued $4.2 million in convertible promissory notes and 193,829
shares of IPS Series F Convertible Preferred Stock, subject to
adjustment to represent 67.25% of the Company's outstanding common
stock, to the beneficial owner of LSC in exchange for 100% of the
outstanding shares of LSC.
* Associates Funding Group and CMLP Group, Ltd., entities controlled by
D. Ronald Allen, agreed to contribute 8,634,000 shares of Company
common stock to the Company.
* D. Ronald Allen entered into a stock escrow and security agreement
whereby 10,851,832 shares of IPS common stock beneficially owned by
him were placed into escrow as security for (1) advances made by LSC
to IPS prior to the closing of the merger, (2) the Company's and Mr.
Allen's indemnification obligations under the merger agreement, and
(3) the convertible promissory notes issued to the beneficial owner of
LSC. The merger agreement provides that the shares used to satisfy
those obligations be valued based on a future equity financing of the
Company.
* Brad Jacoby, the beneficial owner of LSC, became the majority
shareholder, Chief Executive Officer, and sole director of the Company.
Integrated Performance Systems, Inc. (the "Company") is a contract
manufacturer of high quality, high performance circuit boards located in
Wylie, Texas, just east of Dallas. The Company's products are used in
computers, communication equipment, the aerospace industry, defense
electronics and other applications requiring reliable, high performance
electrical capability.
The following discussion provides information to assist in the
understanding of our financial condition and results of operations for the
three and six months periods ended January 31, 2005 and 2004. It should be
read in conjunction with the financial information for the twelve month
period ended July 31, 2004, appearing in the Form 8-K/A dated November 24,
2004, filed on February 7, 2005.
Results of Operations
Revenues. Net revenues increased to $7,605,000 for the three months
ended January 31, 2005 from $5,017,000 for the same period in 2004, a net
increase of $2,588,000 or 52%. Net revenues increased to $14,357,000 for
the six months ended January 31, 2005 from $9,632,000 for the same period in
2004, a net increase of 4,725,000 or 49%. The increases are attributable to
a continued strengthening of demand for our products driven by our existing
original equipment manufacturer ("OEM") customers, several new customers and
the addition of approximately $500,000 from the acquired business in
December and January.
Gross Profit. Gross profit for the three months ended January 31, 2005
was$1,269,000, versus a gross profit of $801,000 in the same period in 2004.
Gross profit for the six months ended January 31, 2005 was approximately
$2,370,000, versus a gross profit of $1,538,000 for the same period in 2004.
The increases are attributable to the increase in sales resulting in fixed
costs being spread over a larger number of units being produced and higher
demand for premium services, predominately quick turn orders, resulting in
higher gross margins of 17% and 16%, respectively, for the three and six
months ended January 31, 2005.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of the direct charges for
advertising, sales promotion, and marketing, as well as the cost of
executive, administrative and accounting personnel and professional fees.
Selling, general and administrative expense increased to $1,146,000 for the
three months ended January 31, 2005 from $611,000 in 2004, a net increase of
$626,000 or 102%. Selling, general and administrative expense increased to
$2,001,000 for the six months ended January 31, 2005 from $1,389,000 in
2004, a net increase of $702,000 or 51%. The increases were primarily
attributable to increased employee benefits and additional accounting, legal
and other professional fees relating to the ongoing integration of the
merged entities.
Liquidity and Capital Resources
We have generally financed our business from cash generated by
operations, borrowings and in some periods our majority shareholder has
loaned the Company operating capital at prevailing market rates of interest
or has guaranteed our indebtedness.
Cash flows from operations. Net cash provided by operations during the
six months ended January 31, 2005 was approximately $623,000, compared to
$267,000 being used in operations during the same period in 2004. This
change in our cash flows from operations relates to the profitability of the
Company for the period combined with an increase in accounts payable.
Cash used for investing activities. Cash used for investing activities
during the six months ended January 31, 2005 was approximately $177,000,
consisting of cash acquired from the merger of $79,000, merger related costs
of $210,000 and investments in property and equipment of $46,000. Cash used
for investing activities during the same period ending January 31, 2004 was
approximately $160,000. The increase is attributable to cash used in the
merger, offset by cash acquired in the merger and a reduction in the
purchase of property and equipment.
Cash flows from financing activities. Net cash provided by financing
activities during the six months ended January 31, 2005 was $80,000,
consisting primarily of proceeds of $950,000 from our line of credit and
payments of $908,000 on notes payable. Net cash provided by financing
activities during the six months ended January 31, 2004 was $294,000,
consisting primarily of proceeds of $298,000 from our line of credit,
advances of $200,000 from related parties, and payments of $204,000 on long
term debt.
Indebtedness and guarantees. We have a $2 million line of credit
described in Note 6 of our financial statements set forth in Part I, Item 1
above. We have other long-term indebtedness in the amount of approximately
$725,000, some of which was originally incurred by the acquired company, as
described in Note 7 to our financial statements. Approximately $706,000 is
accounted for as current maturities of long-term debt, which includes
certain amounts in default. We are currently attempting to negotiate
resolution of the indebtedness that is in default, however, no assurance can
be given that any such resolution can be reached. We have issued $4.2
million in convertible promissory notes to a related party, as described in
Note 8 to our financial statements. The maturity of these notes has been
extended to July 31, 2005. We have guaranteed certain indebtedness of
related parties, as described in Note 9 to our financial statements.
Contingent Liabilities. We are subject to significant contingent
liabilities, as described in Note 12 to our financial statements set forth
in Part I, Item 1 above.
We are subject to current liabilities substantially in excess of our
current assets and are subject to significant contingent liabilities. We
are in the process of negotiating the extension or conversion of $3.2
million of current notes payable to our majority shareholder and are in the
process of restructuring our notes payable with other lenders. We are in
discussions with our bank to use our manufacturing equipment as collateral
for a midterm loan, the proceeds of which would be used to pay down our line
of credit and to provide working capital. We can provide no assurance
that we will be successful in restructuring, converting or extending our
indebtedness, or that any such transaction would be on terms favorable to
the Company. In the event that we are unsuccessful in extending the $3.2
million notes payable to our majority shareholder or converting the notes
into shares of common stock, such shareholder could demand payment of the
notes and exercise his security interests in substantially all of our
assets. The exercise of these security interests would leave insufficient
assets to continue our operations. These events would have a material
adverse effect on our business, financial condition and results of
operations.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with
the participation of our Chief Executive Officer and Chief Financial
Officer, has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-
15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based on that evaluation, and based on the fact
that this report will be filed past our extension date, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are not effective to ensure that information
required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Our management expects to address and
improve upon the weaknesses in our disclosure controls and procedures in the
near future.
Annual report on internal control over financial reporting. Based upon
the most recent pronouncements of the Securities and Exchange Commission,
our first annual report on internal control over financial reporting is due
for inclusion in our annual report on Form 10-KSB for the twelve month
period ending July 31, 2006. We expect to begin the process in the near
future of identifying a framework to use to evaluate the effectiveness of
our internal control over financial reporting as required by Rule 13a-15(c)
under the Securities Exchange Act of 1934. Although we have not yet begun
the formal evaluation process, we have informally identified certain areas,
such as project job cost accounting, in which we expect to see improvement
in our internal controls as a result of the process.
Changes in internal control over financial reporting. Our management,
with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated whether any change in our internal control over
financial reporting occurred during the last fiscal quarter. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that there have been changes in our internal control over
financial reporting during the period that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting. As a result of the merger with LSC, the internal controls of LSC
have become the internal controls of the Company, including without
limitation the personnel, policies, systems and administrative and
accounting functions of LSC. Management has not had an opportunity to
conduct a detailed comparison of these changes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company leases a 60,000 sq.ft. manufacturing facility in Frisco,
Texas from C-Gate Construction Company ("C-Gate"), an affiliate of D.
Ronald Allen, the former chief executive officer, controlling shareholder
and director of the Company. Prior to the merger, Mr. Allen executed a
lease modification document which, according to its terms, reduced monthly
rents from $35,000 to $17,000 and reduced the 20-year lease term to a month-
to-month tenancy. The enforceability of the lease modification is currently
being disputed by C-Gate's lender, Legacy Bank of Texas, in litigation
pending in C-Gate's Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy
Court for the Eastern District of Texas, Sherman Division initiated by
Legacy Bank of Texas on March 4, 2005. The issues in that litigation
include whether (a) C-Gate received approval for the modification from its
lender, enforceability of the lease modification is currently being disputed
by C-Gate's lender, Legacy Bank of Texas, in accordance with the terms of
the mortgage on the property, (b) C-Gate had the authority to execute a
lease modification without the prior approval of the bankruptcy court, and
(c) an attornment agreement that was apparently previously executed by the
Company in favor of the lender would prevent the Company from effecting a
modification of the lease without the lender's specific consent. In the
pending litigation, the Company has asserted certain claims against D.
Ronald Allen and C-Gate's principal to recover damages against them should
the lease modification document not be enforceable. The litigation is
currently in the preliminary stages and the ultimate outcome of the claims
by and against the Company is uncertain. Also, the Company is currently in
arrears in its rent payments under the lease and Legacy Bank of Texas has
indicated that it may take action to accelerate future rent payments under
the lease, subject to certain offsets. An unfavorable decision regarding
the effectiveness of lease modification document or action by Legacy Bank of
Texas to accelerate future rent payments would have a material adverse
impact on the Company. The Company is currently working to obtain an
amicable resolution but no assurance of such can be provided.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuances of equity securities during the period covered by this report
that were not registered under the Securities Act of 1933 consisted of the
following:
In November 2004 we issued to offshore investors 65,500 shares of our
par value $.01 common stock ("Common Stock"), pursuant to Regulation S under
the Securities Act of 1933, for gross proceeds of approximately $29,750 of
which we received approximately $10,710 and brokers in the United States and
overseas received approximately $19,040 as commissions on the sales. These
issuances were made in connection with a Stock Escrow Agreement dated as of
October 23, 2003 between the Company, Morgan Watts & Associates, Ltd., and
Scott Mayer, concerning private placements of the Company's Common Stock
pursuant to Regulation S.
In November 2004 we issued to related and unrelated parties, at an
average of approximately $.30 per share, an aggregate of 1,617,000 shares of
Common Stock in consideration of forgiveness of aggregate debt and other
financial obligations of the Company of approximately $484,000, as follows:
we issued 68,000 shares to an unrelated trust entity in satisfaction of
$15,000 principal and accrued interest due on a convertible debenture; we
issued 334,000 shares to an unrelated legal advisor in partial payment for
services rendered to the Company valued at $100,000; we issued 367,000
shares in satisfaction of $100,000 principal and accrued interest due on a
debt obligation to a limited partnership related party in which D. Ronald
Allen, the former chief executive officer, controlling shareholder and
director of the Company, served as President of the General Partner and a
25% limited partner; and we issued 848,000 shares to the same limited
partnership in return for the assumption by the limited partnership and
promise to pay on behalf of the Company an outstanding debt obligation of
$200,000 in principal and accrued interest to a unrelated individual. These
issuances were made pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, in that they did not involve a
public offering.
In November 2004 we issued to an unrelated investor 225 shares of
Common Stock to correct a discrepancy in the number of shares issued to this
investor in connection with a reverse merger transaction of the Company in
1999. This issuance was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, in that it did not
involve a public offering.
In November 2004, as a result of conversions of preferred stock of the
Company by the holders of the preferred stock, we issued to related and
unrelated parties an aggregate of 27,164,000 shares of Common Stock, as
follows: we issued to unrelated individuals and various unrelated entities
an aggregate of 8,164,000 shares of Common Stock; and we issued an aggregate
of 19,000,000 shares to various related entities of which D. Ronald Allen,
the former chief executive officer, controlling shareholder and director of
the Company, is an officer and beneficial owner. These issuances were made
pursuant to the exemptions from registration provided by Sections 4(2) and
3(a)(9) of the Securities Act of 1933, in that they did not involve a public
offering and the securities were exchanged by the Company with its existing
security holders exclusively and no commission or other remuneration was
paid or given directly or indirectly for soliciting the exchange.
In November 2004, as a result of conversions of preferred stock of the
Company by the holders of the preferred stock, we issued an aggregate of
1,180,000 shares of Common Stock to unrelated parties consisting of
individuals and various entities, and we issued 162,000 shares of Common
Stock to a related party company in which D. Ronald Allen, the former chief
executive officer, controlling shareholder and director of the Company, was
an officer and a 5% beneficial owner. These issuances were made pursuant to
the exemptions from registration provided by Sections 4(2) and 3(a)(9) of
the Securities Act of 1933, in that they did not involve a public offering
and the securities were exchanged by the issuer with its existing security
holders exclusively and no commission or other remuneration was paid or
given directly or indirectly for soliciting the exchange.
In November 2004 we issued to 41 employees of the Company an aggregate
of 118,546 shares of Common Stock to fulfill a promise made by the Company
to issue these shares to the employees if they would remain with the Company
through the merger with LSC. These issuances were made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
of 1933, in that they did not involve a public offering.
In November 2004 we issued to a consultant 5,000,000 shares of Common
Stock as a finder's fee and for services rendered in connection with the
merger transaction with LSC. This issuance was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
of 1933, in that it did not involve a public offering.
In November 2004 we issued to an employee of the Company 1,000,000
shares of Common Stock in connection with a severance package. This
issuance was made pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, in that it did not involve a
public offering.
In March 2005 we issued to consultants 700,000 shares of Common Stock
in connection with services rendered. These issuances were made pursuant to
the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, in that they did not involve a public offering.
In connection with the merger with LSC, in November 2004, entities
controlled by D. Ronald Allen, our former chief executive officer,
controlling shareholder and director, contributed 8,634,000 shares of common
stock back into the Company's treasury. The Company recorded the treasury
shares at fair value in the amount of $949,740.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For information concerning defaults on our indebtedness, see Note 7 to
our financial statements set forth in Part I, Item 1 above and Management's
Discussion and Analysis or Plan of Operation in Part I, Item 2 above, which
are incorporated herein by reference.
ITEM 5. OTHER INFORMATION
We are currently in arrears in rent payments under the lease for our
Frisco, Texas manufacturing facility. The landlord has indicated that it
may take action to accelerate future rent payments under the lease, subject
to certain offsets. See Note 12 - Contingencies - Lease Agreement to our
financial statements set forth in Part I, Item 1 above, which is
incorporated herein by reference.
Our common stock is listed on the over the counter bulletin board
("OTCBB"). On April 21, 2005, the OTCBB notified us that our common stock
will no longer be eligible for listing on the OTCBB if we fail to file this
Quarterly Report on Form 10-QSB for the quarterly period ended January 31,
2005 on or before April 27, 2005. We anticipate that this report will be
filed on or before that date.
During the period covered by this report, we issued certain equity
securities that were not registered under the Securities Act of 1933. See
Part II, Item 2 above, which is incorporated herein by reference.
ITEM 6. EXHIBITS
Reference is made to the Exhibit Index of this Form 10-QSB for a list
of all exhibits filed with and incorporated by reference in this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INTEGRATED PERFORMANCE SYSTEMS, INC.
(Registrant)
Date: April 27, 2005 By: /s/ BRAD J. PETERS
-------------------------------------------
Brad J. Peters
Vice President and Chief Financial Officer
(On behalf of the registrant and as
principal financial and accounting officer)
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement and Plan of Merger between the Company and Best Circuit
Boards, Inc. dated October 22, 2004 (filed as Exhibit "2.1" to the
Company's Current Report on Form 8-K filed on October 28, 2004 and
incorporated herein by reference.)
2.2 First Addendum to the Agreement and Plan of Merger between the
Company and Best Circuit Boards, Inc. dated November 24, 2004
(filed as Exhibit "2.2" to the Company's Current Report on Form
8-K filed on December 1, 2004 and incorporated herein by
reference.)
2.3 ** Closing Document between the Company and Best Circuit Boards, Inc.
dated November 24, 2004.
2.4 ** Asset Purchase Agreement between Performance Interconnect Corp. of
North Texas, Inc. and LSC Asset Acquisition Corp. dated October
22, 2004.
2.5 ** Asset Purchase Agreement between Performance Application
Technologies Inc. and LSC Asset Acquisition Corp. dated October
22, 2004.
2.6 ** Asset Purchase Agreement between North Texas PC Dynamics Inc.
and LSC Asset Acquisition Corp. dated October 22, 2004.
2.7 ** Stock Purchase Agreement between the Company and Integrated
Performance Business Services Corp. dated November 24, 2004.
4.1 Series F Preferred Stock terms and conditions (filed as Exhibit
"4.1" to the Company's Current Report on Form 8-K/A filed on
February 7, 2005 and incorporated herein by reference.)
4.2 ** Secured Convertible Promissory Note One for $1 million dated
November 24, 2004 between the Company, LSC Merger Corp. and
Brad Jacoby.
4.3 ** Secured Convertible Promissory Note Two for $200,000 dated
November 24, 2004 between the Company, LSC Merger Corp. and
Brad Jacoby.
4.4 ** First Addendum to Secured Convertible Promissory Note Two for
$200,000 dated April 20, 2005 between the Company and Brad Jacoby.
4.5 ** Secured Convertible Promissory Note Three for $3 million dated
November 24, 2004 between the Company, LSC Merger Corp. and Brad
Jacoby.
4.6 ** First Addendum to Secured Convertible Promissory Note Three for $3
million dated April 20, 2005 between the Company and Brad Jacoby.
10.1 Agreement for Management Consulting Services between the Company
and Brad Jacoby dated July 23, 2004 (filed as Exhibit "10.1" to
the Company's Quarterly Report on Form 10-QSB filed on October 20,
2004 and incorporated herein by reference.)
10.2 Stock Escrow and Security Agreement between Ron Allen, the Company
and Brad Jacoby dated September 16, 2004 (filed as Exhibit "10.2"
to the Company's Quarterly Report on Form 10-QSB filed on October
20, 2004 and incorporated herein by reference.)
10.3 ** Addendum to Stock Escrow and Security Agreement between Ron Allen,
the Company and Brad Jacoby dated November 24, 2004.
10.4 ** "Giveback" Agreement between Associates Funding Group, CMLP Group
Ltd. and Best Circuit Boards, Inc. dated November 24, 2004.
10.5 ** Employment Contract with Mr. Brad Jacoby dated November 30, 2004.
10.6 ** Employment Contract with Mr. Brad Peters dated November 30, 2004.
10.7 ** Employment Contract with Mr. Brent Nolan dated November 30, 2004.
10.8 ** Employment Contract with Mr. James B. Nolan dated November 30,
2004.
10.9 ** Form of Stock Option Agreement between Mr. Jacoby and third
parties relating to options to purchase shares of Common Stock
held by Mr. Jacoby.
10.10 ** Employment Contract with Mr. Brett Whitman dated November 30,
2004.
10.11 ** Security Agreement #1 dated November 24, 2004 by the Company,
as debtor, in favor of Brad Jacoby, as secured party, in
connection with that certain Secured Convertible Promissory
Note One in the amount of $1 million.
10.12 ** Security Agreement #2 dated November 24, 2004 by LSC Merger
Corp., as debtor, in favor of Brad Jacoby, as secured party,
in connection with that certain Secured Convertible Promissory
Note One in the amount of $1 million.
10.13 ** Security Agreement #1 dated November 24, 2004 by the Company,
as debtor, in favor of Brad Jacoby, as secured party, in
connection with that certain Secured Convertible Promissory
Note Two in the amount of $200,000.
10.14 ** Security Agreement #2 dated November 24, 2004 by LSC Merger
Corp., as debtor, in favor of Brad Jacoby, as secured party,
in connection with that certain Secured Convertible Promissory
Note Two in the amount of $200,000.
10.15 ** Security Agreement #1 dated November 24, 2004 by the Company,
as debtor, in favor of Brad Jacoby, as secured party, in
connection with that certain Secured Convertible Promissory
Note Three in the amount of $3 million.
10.16 ** Security Agreement #2 dated November 24, 2004 by LSC Merger
Corp., as debtor, in favor of Brad Jacoby, as secured party,
in connection with that certain Secured Convertible Promissory
Note Three in the amount of $3 million.
10.17 ** Compass Bank Letter Loan Agreement dated March 21, 2005
31.1 ** Certification of Brad Jacoby, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) of the Securities and Exchange
Act of 1934.
31.2 ** Certification of Brad J. Peters, Vice President and Chief
Financial Officer, pursuant to Rule 13a-14(a) of the Securities
and Exchange Act of 1934.
32.1 ** Certifications of Brad Jacoby, President and Principal Executive
Officer, and Brad J. Peters, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350.
_______________________
** Filed herewith.