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 April 30, 2006
[ ] 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) (I.R.S. Employer Identification No.)
901 Hensley Lane Wylie, Texas 75098
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 291-1427
Indicate by check mark whether the registrant (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 [ ]
Check whether the issuer is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes [ ] No [X]
At June 1, 2006 there were 61,152,194 shares of the issuer's common
shares outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
GENERAL INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION..................................... 13
ITEM 3. CONTROLS AND PROCEDURES............................... 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................... 15
ITEM 5. OTHER INFORMATION..................................... 16
ITEM 6. EXHIBITS.............................................. 16
SIGNATURES...................................................... 18
INTEGRATED PERFORMANCE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
April 30,
2006
------------
ASSETS
Current assets:
Cash $ 1,769,808
Trade accounts receivable, net of allowance
for doubtful accounts of $26,009 4,992,711
Prepaid expenses and other 302,919
Inventory 1,850,275
Deferred income tax asset 166,092
------------
Total current assets 9,081,805
Property and equipment, net 1,560,299
Other assets:
Goodwill 8,275,034
Customer base, net 3,568,488
------------
11,843,522
------------
Total assets $ 22,485,626
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,862,731
Accrued expenses (including $28,000 interest
to related party) 767,402
Income tax payable 198,176
Notes payable, current portion 389,878
------------
Total current liabilities 4,218,187
Noncurrent liabilities:
Long-term debt, net of current maturities 1,659,197
Note payable to related party 4,200,000
Deferred income tax liability 1,585,633
------------
Total long-term liabilities 7,444,830
Stockholders' equity:
Preferred stock; par value $0.01; 10,000,000
shares authorized
Series F Convertible; 300,000 shares authorized,
193,829 shares issued and outstanding 1,938
Common stock; par value $0.01; 100,000,000 shares
authorized; 61,152,194 shares issued and outstanding 611,522
Additional paid-in capital 17,839,618
Accumulated deficit (7,630,469)
------------
Total stockholders' equity 10,822,609
------------
Total liabilities and stockholders' equity $ 22,485,626
============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
INTEGRATED PERFORMANCE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
=============================================================================
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
April 30, April 30, April 30, April 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 8,880,509 $ 8,615,431 $26,017,314 $22,972,424
Cost of sales 7,050,860 6,859,260 20,885,985 19,055,236
---------- ---------- ---------- ----------
Gross profit 1,829,649 1,756,171 5,131,329 3,917,188
---------- ---------- ---------- ----------
Expenses:
Selling, general and
administrative expenses 1,293,535 1,350,710 3,678,648 10,743,008
Amortization of customer
base 135,513 135,513 406,537 225,854
---------- ---------- ---------- ----------
1,429,048 1,486,223 4,085,185 10,968,862
---------- ---------- ---------- ----------
Income (loss) from
operations 400,601 269,948 1,046,144 (7,051,674)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (35,666) (62,978) (98,746) (143,012)
Interest expense -
related party (83,067) (80,000) (254,800) (4,333,333)
Interest income 3,469 70 4,995 226
Gain (loss) on
extinguishment of debt - - 2,510 -
Other income (expense) 42,177 6,700 76,643 21,685
---------- ---------- ---------- ----------
(73,087) (136,208) (269,398) (4,454,434)
---------- ---------- ---------- ----------
Income (loss) before
provision for income taxes 327,514 133,740 776,746 (11,506,108)
Provision for income taxes 127,431 39,293 284,057 110,566
---------- ---------- ---------- -----------
Net income (loss) $ 200,083 $ 94,447 $ 492,689 $(11,616,674)
========== ========== ========== ===========
Net income (loss) per share
Basic $ .00 $ .00 $ .01 $ (.35)
========== ========== ========== ==========
Diluted $ .00 $ .00 $ .00 $ (.35)
========== ========== ========== ==========
Weighted average common
shares
Basic 61,152,194 58,209,972 61,152,194 33,399,660
=========== =========== =========== ==========
Diluted 282,981,194 282,438,972 282,981,194 33,399,660
=========== =========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements
INTEGRATED PERFORMANCE SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended April 30,
---------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 492,689 $ (11,616,674)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 818,363 808,663
Stock based compensation - 7,689,000
Non-cash interest expense
from beneficial conversion feature - 4,200,000
Deferred tax expense 2,292 58,613
Disposal of property and equipment 98,250 -
Changes in operating assets and liabilities:
Trade accounts receivable (868,610) (641,351)
Inventory 230,155 (79,173)
Other receivables 20,957 (7,311)
Prepaid expenses and other (227,576) (50,387)
Income tax payable 930,194 -
Accounts payable 346,606 565,455
Accrued expenses (8,277) 362,773
------------ ------------
Net cash provided by operating activities 1,835,043 1,289,608
------------ ------------
Cash flows from investing activities:
Merger costs - (209,805)
Cash acquired through merger. - 78,763
Acquisition of property and equipment (148,379) (199,451)
------------ ------------
Net cash used in investing activities (148,379) (330,493)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit (1,455,560) 945,560
Payments on long-term debt (530,563) (967,191)
Interest paid to related party (453,599) -
Borrowing on new term note 2,250,000 -
Collections on advances to related parties - 37,972
------------ ------------
Net cash provided (used) by financing
activities (189,722) 16,341
------------ ------------
Net increase in cash 1,496,942 975,456
Cash, beginning of period 272,866 218,000
------------ ------------
Cash, end of period $ 1,769,808 $ 1,193,456
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Integrated Performance Systems, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
April 30, 2006
(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 periods presented are not necessarily indicative of the results to
be expected for the year ending July 31, 2006.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's annual report on
Form 10-KSB for the year ended July 31, 2005, filed on January 5, 2006.
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. A valuation allowance is established and adjusted
periodically to provide for estimated obsolescence based upon the aging of
inventory and market trends. At April 30, 2006, inventory consisted of
$865,540 in raw materials, $618,345 in work in process, and $366,390 in
finished goods.
In November 2004 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs-an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage,
double freight and rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as stated in
ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is effective for fiscal
years beginning after June 15, 2005. As of August 1, 2005, the Company
adopted SFAS 151. The adoption did not have a material impact on the
Company's consolidated financial condition and results of operations.
Revenue Recognition
-------------------
The Company generates revenue from custom built printed circuit boards, made
to order using engineering and designs provided by the customer. All orders
are manufactured to specific industry standards. The Company recognizes
revenues when persuasive evidence of a sales arrangement exists, the sales
terms are fixed and determinable, title and risk of loss have transferred,
and collectibility is reasonably assured, generally when products are
shipped to the customer.
The Company does not give rebates to any of its customers. The Company does
not have customer acceptance provisions; the Company does, however, provide
customers a limited right of return for defective products. Because all
orders are manufactured to specific industry standards and are electrically
tested to insure compliance with such standards prior to shipment, returns
have historically been minimal and the amount of returns has been
immaterial.
Stock Based Employee Compensation
---------------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an 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 fair value of the stock on the date of grant.
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-
an amendment of FASB Statement No. 123". Under the provisions of SFAS 123,
compensation expense is recognized based on the fair value of options on the
grant date.
The following table illustrates the effect on net income (loss) if the
Company had applied the fair value recognition provision of SFAS 123 to
stock based employee compensation.
For the Three Months For the Nine Months
Ended April 30, Ended April 30,
------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net income (loss) $ 200,083 $ 94,447 $ 492,689 $(11,616,674)
Add stock based employee
compensation expense
included in reported net
income (loss) - - - 7,600,000
Less stock based
employee compensation
expense determined under
fair-value method - - - (9,176,887)
-------- -------- -------- ----------
Net income (loss),
pro forma $ 200,083 $ 94,447 $ 492,689 $(13,193,561)
======== ======== ======== ==========
Average Shares
outstanding - basic 61,152,194 58,209,972 61,152,194 33,399,660
---------- ---------- ---------- ----------
Basic earnings per
share - as reported $ 0.00 $ 0.00 $ 0.01 $ (0.35)
======== ======== ======== ==========
Basic earnings per
share - pro forma $ 0.00 $ 0.00 $ 0.01 $ (0.40)
======== ======== ======== ==========
Recent Accounting Pronouncements
--------------------------------
In December 2004 FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") 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. In April 2005 the SEC issued a ruling that SFAS
123(R) is now effective for annual, rather than interim, periods that begin
for small pubic entities after December 15, 2005. The Company has not yet
completed its analysis of the impact of adopting SFAS 123(R).
Earnings Per Share
------------------
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings 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 computation of basic and diluted net
income per share:
For the Three Months For the Nine Months
Ended April 30, Ended April 30,
--------------------------------------------
2006 2005 2006 2005
--------------------------------------------
Numerator
Numerator for basic earnings
per share - net income
(loss) $ 200,083 $ 94,447 $ 492,689 $(11,616,674)
Effect of dilutive securities
on net income 83,067 80,000 254,800 -
-------- -------- -------- -----------
Numerator for diluted earnings
per share $ 283,150 $ 174,447 $ 747,489 $(11,616,674)
======== ======== ======== ===========
Denominator
Denominator for basic
earnings per share 61,152,194 58,209,972 61,152,194 33,399,660
Convertible note payable - 2,400,000 - -
Effect of dilutive securities 28,000,000 28,000,000 28,000,000 -
Convertible preferred stock 193,829,000 193,829,000 193,829,000 -
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share 282,981,194 282,438,972 282,981,194 33,399,660
=========== =========== =========== ===========
Basic earnings per share $ 0.00 $ 0.00 $ 0.01 $ (0.35)
======== ======== ======== ========
Diluted earnings per share $ 0.00 $ 0.00 $ 0.00 $ (0.35)
======== ======== ======== ========
Warrants to purchase a total of 531,667 shares of common stock were excluded
from the calculation of diluted earnings per share because the exercise
prices were greater than the average market prices and the effect would be
antidilutive. Options to purchase 40,000,000 shares of common stock were
not considered as potentially dilutive securities because no new shares will
be issued upon exercise of the options. Also see Note 10.
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.
NOTE 3 - CONCENTRATIONS OF RISK
At April 30, 2006, four customers accounted for approximately 47% of the
total accounts receivable. For the three and nine months ended April 30,
2006, respectively, these customers accounted for approximately 58% and 57%
of net sales respectively. For the three and nine months ended April 30,
2005, these customers accounted for approximately 50% and 51% of net sales,
respectively.
NOTE 4 - MERGER
On November 24, 2004 a wholly owned subsidiary of the Company merged with
Best Circuit Boards, Inc., d/b/a Lone Star Circuits "LSC"), and LSC became
a wholly owned subsidiary of the Company. Brad Jacoby ("Jacoby"), the
beneficial owner of LSC, acquired a controlling interest in the Company. The
transaction has been accounted for as a reverse merger (the transaction
being referred to in this quarterly report as the "Merger"). This means the
Merger has been treated as if LSC acquired the Company and, consequently,
the historical financial statements of LSC became the historical financial
statements of the Company for all periods presented.
NOTE 5 - INCOME TAXES
The income tax provision for the three and nine month periods ended April
30, 2006 consists of the following:
For the three months For the nine months
ended April 30 ended April 30
--------------------------------------------
2006 2005 2006 2005
--------------------------------------------
Current expense $ 251,443 $ 51,953 $ 281,766 $ 51,953
Deferred expense $(124,012) $ (12,660) $ 2,291 $ 58,613
-------- -------- -------- --------
$ 127,431 $ 39,293 $ 284,057 $ 110,566
======== ======== ======== ========
Significant temporary differences used in the computation of deferred tax
assets and liabilities at April 30, 2006 are as follows:
Deferred tax assets, current
Allowance for bad debts $ 9,615
Accrued vacation 94,986
Accrued bonus 51,139
Accrued Interest 10,352
----------
$ 166,092
==========
Deferred tax assets (liabilities), non-current
Depreciation of property and equipment $ (266,363)
Net operating loss carry forwards 2,957,682
Valuation allowance (2,957,682)
Customer base (1,319,270)
----------
$(1,585,633)
==========
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some or all of the 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 in which the deferred tax assets are
deductible, management does not believe that additional valuation allowances
are necessary as of April 30, 2006.
At April 30, 2006, the Company had tax net operating loss carry forwards
("NOLs") of approximately $7,998,588 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 the Company on November 24, 2004.
During the three and nine months ended April 30, 2006, the Company utilized
NOLs totaling $471,960, resulting in a decrease in the valuation allowance
in the amount of $173,880. The decrease to the valuation allowance was
recorded as an adjustment to goodwill as the allowance was originally
recorded in connection with the Merger.
NOTE 6 - LINE OF CREDIT
The Company has a $2 million line of credit agreement ("LOC") with a bank,
which is due on demand, bears interest at the bank's prime rate (6.98% at
April 2006) and matures 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 subject to a guarantee by Jacoby
in an event of default under the security agreement. On October 28, 2005,
the Company entered into a credit facility with a bank for a $2,250,000
five-year term loan (the "Term Loan"). The security arrangement for the Term
Loan was also written to encompass the LOC. Under the terms of the security
agreement the Term Loan is collateralized by all of the Company's equipment
and the LOC is collateralized by the Company's inventory and accounts
receivable. The Term Loan bears interest at LIBOR + 2.15%, provides for
monthly principal payments of $37,500 plus accrued interest, and matures on
October 31, 2010. Both the Term Loan and the LOC are subject to certain
financial and other covenants. An event of default under the security
agreement will trigger a $2,000,000 personal guarantee of Jacoby. The
Company received the cash proceeds from the Term Loan on November 4, 2005.
The proceeds were used to pay down the outstanding balance on the LOC and,
coupled with the LOC, will fund working capital.
NOTE 7 - NOTES PAYABLE
Long-term debt consists of the following at April 30, 2006:
Note payable to financial institution payable in monthly
installments of $37,500 including interest at Libor + 2.15%,
matures October 31, 2010, collateralized by equipment $ 2,025,000
Other 24,075
----------
2,049,075
Less current maturities of long-term debt (389,878)
----------
Total long-term debt, less current maturities $ 1,659,197
==========
NOTE 8 - NOTES PAYABLE TO RELATED PARTY
On November 24, 2004, the Company issued convertible promissory notes in the
principal amounts of $1 million and $3.2 million (collectively, the "Notes")
to Jacoby in conjunction with the Merger. The Notes bore interest at 8% and
were convertible into common stock at any time at a conversion price of
$0.15 per share. Interest on the $1 million note was payable semi-annually,
and the principal balance was due November 30, 2007. Interest on the $3.2
million notes was payable monthly, and the principal was originally due
February 28, 2005, and later extended to July 31, 2005. The Notes were
secured by all assets of the Company and LSC, by the outstanding stock of
LSC and by the Company common stock owned by D. Ronald Allen ("Allen"),
former chief executive officer, controlling shareholder and director of the
Company. On October 28, 2005, both the Notes were refinanced and combined
into a single note (the "New Note"), bearing interest at 8% payable semi-
annually, with the principal due September 30, 2008. The New Note is
convertible under the same terms and secured by the same assets as the
Notes.
NOTE 9 - RELATED PARTY TRANSACTIONS AND GUARANTEES
The Company leases both of its operating facilities from JACCO Investments,
Inc. ("JACCO") an entity majority owned by Mr. Jacoby and his wife. For the
three and nine months ended April 30, 2006 and 2005, the Company incurred
lease expense totaling $225,000 for the three month and $675,000 for the
nine month periods, respectively, related to these operating leases. LSC
began leasing its operating facilities from JACCO in 2001. The terms of the
leases are for fifteen and ten year periods ending in 2010 and 2017. LSC
has guaranteed payment of mortgage notes owed by JACCO to financial
institutions. At April 30, 2006, amounts owed by JACCO under mortgage note
arrangements guaranteed by the Company and by Jacoby individually totaled
approximately $4,800,000. In the event that JACCO defaults on any of these
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 terms of the guarantees run concurrent with the notes and
expire February 2010 and January 2017. The guarantees do not contain any
recourse provisions or collateral for the Company in the event that the
guarantee payments are made. The current carrying amount of the liability
is $0.
Primarily because of the common control between the Company and JACCO, the
guarantee of the indebtedness on the leased JACCO property and the pledging
of personal assets of Jacoby and his wife as collateral for the debt of
JACCO, the Company is exposed to the risk that it may be required to
subsidize losses of JACCO. The mortgages guaranteed by the Company are
secured by the leased real estate having an estimated fair value of
approximately $7 million. The maximum exposure for the Company would be the
carrying amount of the variable-rate bank loan of JACCO, however the
Company's normal monthly lease payments under the lease agreement discussed
above are sufficient to cover the principal amounts guaranteed by the
Company.
NOTE 10 - STOCK OPTIONS AND WARRANTS
As of April 30, 2006, there were 500,000 outstanding warrants to purchase
common stock held by certain employees. These warrants have an exercise
price of $0.75 per share and expire November 5, 2009.
As of April 30, 2006, there were 31,667 outstanding warrants to purchase
common stock held by debt holders. These warrants have an exercise price of
$1.50 per share and expire February 8, 2011.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Litigation
----------
The Company is party to the various legal proceedings noted below. The
Company believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect
on its financial position or overall trends in results of operations,
litigation is subject to inherent uncertainties. If an unfavorable ruling
were to occur, there exists the possibility of a material adverse impact on
(1) net income in the period in which the ruling occurs and (2) business and
financial conditions.
On December 5, 2005, IPS and LSC sued D. Ronald Allen and several entities
affiliated with Allen in the 116th Judicial District Court of Dallas County,
Texas. IPS and LSC assert claims against Allen for, among other things,
fraud, breach of contract and indemnity arising out of the Merger Agreement.
LSC seeks indemnity from Allen for approximately $573,000 pursuant to the
Merger Agreement, which amount represents the settlement payment made to
Legacy Bank and the attorneys' fees incurred in the C-Gate lawsuit. LSC also
seeks indemnity for other as-yet unliquidated claims for potential
indemnifiable costs. IPS and LSC assert claims for constructive trusts
against the entity defendants regarding the IPS common stock held by those
entities as of the date of the closing of the Merger Agreement. IPS and LSC
assert that some or all of the common stock held by these entities was
required to be tendered into escrow in order to satisfy claims from
indemnifiable costs under the Merger Agreement. The parties are currently
conducting discovery, and the trial in the case is set for January 8, 2007.
On July 8, 2005, The Law Offices of Gregory W. Mitchell, P.L.L.C. (the "Law
Firm") and Gregory W. Mitchell, (individually "Mitchell," and collectively
with the Law Firm, the "Mitchell Plaintiffs"), the sole member of the Law
Firm, sued IPS in the 160th Judicial District Court of Dallas County, Texas.
The Mitchell Plaintiffs allege that IPS entered into a fee agreement under
which the Law Firm was to provide all legal services for IPS in exchange for
which IPS was to pay the Law Firm, each month for two years, $10,000 cash
plus IPS common stock with a current value of $15,000. The Mitchell
Plaintiffs allege that, after several months, IPS repudiated the fee
agreement without cause. The Law Firm seeks to recover the remaining fees
due under the fee agreement, approximately $200,000 in cash and $315,000 in
Common Stock, plus attorneys' fees. IPS disputes the claims and plans to
vigorously defend the lawsuit. The Company has asserted counterclaims
against the Mitchell Plaintiffs for breach of fiduciary duty seeking
rescission of the fee agreement, professional negligence, and breach of the
fee agreement. The trial in the case is set for July 31, 2006.
On November 18, 2003, Gehan Properties II, Ltd. ("Gehan") sued IPS, Allen,
and several former IPS subsidiaries in the 95th Judicial District Court of
Dallas County, Texas. Gehan alleges fraudulent transfer claims and is
seeking $259,652 plus attorneys' fees and interest. Gehan alleges that IPS's
former subsidiary Performance Interconnect Corp. fraudulently transferred
its stock in two entities. PC Dynamics of Texas, Inc. and Varga
Investments, Inc., to IPS in December 1999. IPS disputes the claims and
plans to vigorously defend the lawsuit. Among other things, IPS asserts that
the stock transferred to IPS was worthless at the time of the transfers and
therefore the transfers do not constitute fraudulent transfers. The parties
are currently conducting discovery and the trial in the case is scheduled
for October 9, 2006.
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. These expectations, plans and
projections may or may not materialize and 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; loss of key suppliers, significant
customers or key management personnel; payment defaults by our customers;
changes in our business strategy or development plans; 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," "believe," "expect," "project," "anticipate," "estimate,"
"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, and we have based our forward-looking statements
on our current assumptions and expectations about future events. We have
expressed our assumptions and expectations in good faith, and we believe
there is a reasonable basis for them. However, we cannot assure you that
our assumptions and expectations will prove to be accurate. 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
IPS, through its wholly owned subsidiary LSC, designs, engineers and
manufactures technologically advanced printed circuit boards. Our customers
are generally high-end commercial companies, the military and military
suppliers. The commercial markets are typically characterized by time-
sensitive, high technology prototypes and short product life cycles. The
military markets require special certifications and are characterized by
high reliability and advanced technology and in many cases are formalized by
long-term contracts.
Our principal products are complex multi-layer printed circuit boards,
including antenna and metalback radio frequency circuit boards. Printed
circuit boards serve as the basis and foundation for electronic equipment.
The circuit boards we produce are sold through direct sales people and
manufacturer's representatives to a variety of commercial and military
markets. The commercial markets and their applications include power
systems, telecommunications, computer hardware, consumer electronics,
instrumentation and controls. The military applications for our products
include satellite communications, avionics, missiles, smart bombs, defense
systems, radar detection and test equipment.
We can satisfy all stages of manufacturing for our customers,
from prototype to volume production. We offer our customers design and
engineering assistance in the early stage of their design to ensure the most
efficient and cost-effective production and output. We offer quick-turn
production, which can mean the manufacture of a custom-designed circuit
board in significantly compressed lead times, from as little as 24 hours to
10 days. We can also manufacture small quantities of printed circuit boards
to assist our customers in the design and testing of their new products. As
the product moves through its development life cycle, we can ramp up to
volume production.
On November 24, 2004 a wholly owned subsidiary of the Company merged
with Best Circuit Boards, Inc., d/b/a Lone Star Circuits ("Lone Star
Circuits" or "LSC"), and LSC became a wholly owned subsidiary of the
Company. Brad Jacoby ("Jacoby"), the beneficial owner of LSC, acquired a
controlling interest in the Company. The transaction has been accounted for
as a reverse merger (the transaction being referred to in this quarterly
report as the "Merger"). This means the Merger has been treated as if LSC
acquired the Company and, consequently, the historical financial statements
of LSC became the historical financial statements of the Company for all
periods presented.
The following discussion provides information to assist in the
understanding of our financial condition and results of operations for the
three and nine months ended April 30, 2006 and 2005. It should be read in
conjunction with the financial information for the year ended July 31, 2005,
appearing in the Company's annual Form 10-KSB filed on January 5, 2006.
Results of Operations
Revenues. Net sales increased to $8,880,509 for the three months ended
April 30, 2006, from $8,615,431 for the same period in 2005, a net increase
of $265,078 or 3.1%. Net sales increased to $26,017,314 for the nine months
ended April 30, 2006 from $22,972,424 for the same period in 2005, a net
increase of $3,044,890 or 13.3%. We continue to see strong demand for our
products from our existing original equipment manufacturer ("OEM")
customers. Sales to our top ten customers increased by 10.1% and 21.3% for
the three and nine months ended April 30, 2006 respectively compared to the
same period in 2005.
Gross Profit. Gross profit for the three months ended April 30, 2006
was $1,829,649 compared to $1,756,171 for the same period in 2005, an
increase of $73,478 or 4.2%. Gross profit for the nine months ended April
30, 2006 was $5,131,329, versus a gross profit of $3,917,188 for the same
period in 2005. Gross margin improved to 21% and 20% for the three and nine
months ended April 30, 2006 from 20% and 17%, respectively, for the same
period in 2005. The increase in gross margin is due to (1) an increase in
sales resulting in fixed costs being spread over a larger number of units
produced, and (2) consistent demand for premium services, which typically
command a higher margin.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses consist primarily of direct charges for
sales promotion and marketing, as well as the cost of executive,
administrative and accounting personnel, and related expenses and
professional fees. SG&A expense decreased to $1,293,535 for the three
months ended April 30, 2006, from $1,350,710 for the same period in 2005, a
decrease of $57,175 or 4.2%, and decreased from $10,743,008 to $3,678,648
for the nine months ended April 30, 2005 and 2006, respectively. For the
nine months ended April 30, 2006 the decrease is primarily a result of the
recording of a non-cash compensation expense of $7,600,000 in 2005 related
to stock options that is not recurring during the period ended April 30,
2006 offset by an increased number of administrative and accounting
personnel, increased employee benefits and insurance expenses, and
additional accounting, legal and other professional fees relating to (1) the
ongoing integration of the merged entities and (2) filing and reporting as a
public entity. The decrease in recurring SG&A expense for the three months
ended April 30, 2006 is primarily attributable to the closure of the
operating facility in Frisco offset by an increased number of administrative
personnel, increased employee benefits expenses, increasing utilities and
property tax expense.
Amortization of Customer Base. The customer base was recorded as a
result of the Merger on November 24, 2004 and accordingly, amortization in
the amount of $135,513 and $225,854 was recorded during the three and nine
months ended April 30, 2005. Amortization expense increased to $406,539 for
the nine months ended April 30, 2006, as a result of a full nine months of
amortization in 2006.
Other Income (Expense), Net. Other income (expense), net, includes
interest expense on notes payable and notes payable to related parties, as
well as income from reclaiming scrap material. Other (expense), was
($136,208) and ($4,454,434) for the three and nine months ended April 30,
2005 and included $4,200,000 in non-cash interest expense related to the
beneficial conversion feature of the notes payable to related party that
were issued in November 2004 in connection with the merger. Other (expense)
decreased to ($73,087) and ($269,398) for the three and nine months ended
April 30, 2006 and is a result of interest expense offset by income from
scrap reclaimation.
Income Tax Provision. The income tax provision increased to $284,057
for the nine months ended April 30, 2006, from $110,566 for the same period
in the prior year. The increase in the provision is due to the increase in
pre-tax income.
Liquidity and Capital Resources
We have generally financed our business from cash generated by
operations and borrowings, and in prior periods our majority shareholder has
loaned the Company operating capital at prevailing market rates of interest
or has guaranteed our indebtedness. Our principal uses of cash have been to
fund working capital, meet debt service requirements, fund capital
expenditures and, during the prior fiscal year, to fund Merger costs. We
expect that these uses, with the exception of funding Merger costs, will
continue to be the principal demands on our cash in the future.
We have current assets substantially in excess of current liabilities.
Based on our current level of operations, we believe that cash provided by
operations along with funds available under our new five-year term loan (see
"Indebtedness and guarantees" below) will be sufficient to fund our working
capital needs, finance capital expenditures and service our debt for the
next twelve months and beyond. Capital expenditures planned for the next
twelve months consist of normal equipment purchases necessary to maintain
current operating capacity and replace equipment that may have reached the
end of its useful life. During the current fiscal quarter, our capital
expenditures included manufacturing equipment that will allow us to improve
the throughput and increase the level of technology required to keep up with
the complex products our customers design. We have historically also been
able to obtain financing for equipment acquisitions under operating leases
with provisions for installment purchases at the end of the lease terms. We
anticipate that we will continue to be able to obtain this type of financing
for future equipment needs.
Cash flows from operations. Net cash of $1,835,043 provided by
operations during the nine months ended April 30, 2006 consisted of
$1,500,038 provided by net income as adjusted from non-cash items and
$335,005 provided by working capital. This compares to net cash provided by
operations of $1,289,608 during the same period in the prior year, which
consisted of $1,139,602 provided by net income as adjusted from non-cash
items, partially offset by $150,006 used in working capital.
Cash used for investing activities. Net cash of $148,379 used for
investing activities during the nine months ended April 30, 2006 consisted
of purchases of equipment. Net cash of $330,493 used for investing
activities during the same period in the prior year included $209,805 to
fund Merger-related costs, $78,762 cash acquired through the Merger, and
$199,451 for the purchase of property and equipment.
Cash flows from financing activities. Net cash used by financing
activities during the nine months ended April 30, 2006 was $189,722 and
consisted of net payments of $453,599 on related party interest, payments of
$530,563 on long-term debt and net increase in borrowings of $794,440 on the
new bank note. Net cash provided by financing activities during the same
period in the prior year included net borrowings on our line of credit of
$945,560 and collections of $37,972 on advances to related parties,
partially offset by payments of $967,191 on long-term debt.
Indebtedness and guarantees. We have a $2 million line of credit (the
"LOC") described in Note 6 of our financial statements set forth in Part I,
Item 1 above.
We have other indebtedness in the amount of $2,049,075, some of which
was originally incurred by IPS prior to the Merger. Current maturities are
$389,878. Additionally, we issued $4.2 million in convertible promissory
notes to Brad Jacoby in conjunction with the Merger in November 2004. These
notes were refinanced on October 28, 2005, and now bear 8% interest payable
semiannually, with the principal due September 30, 2008.
On October 28, 2005 we entered into a credit facility with a bank for a
$2,250,000 five-year term loan (the "Term Loan"). The Term Loan bears
interest at LIBOR + 2.15%, provides for monthly principal payments of
$37,500 plus accrued interest, and matures on October 31, 2010. The Term
Loan is collateralized by all of the Company's equipment and the LOC is
collateralized by the Company's inventory and accounts receivable. Both the
Term Loan and the LOC are subject to certain financial and other covenants.
An event of default under the security agreement will trigger a $2,000,000
personal guarantee of Jacoby. The Company received the cash proceeds from
the Term Loan on November 4, 2005. The proceeds were used to pay down the
outstanding balance on the LOC and, coupled with the LOC, will fund working
capital in the future.
We expect that cash generated from operations will be sufficient to
fund payments on our indebtedness as it becomes due, or that we will be able
to refinance the debt under similar terms.
We have guaranteed certain indebtedness of related parties, as
described in Note 9 to our financial statements.
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. Management has concluded that our disclosure
controls and procedures are effective in ensuring that material information
is timely communicated to appropriate management personnel, including the
Chief Executive Officer and Chief Financial Officer, to enable such
personnel to evaluate information and determine the information required to
be included in our periodic SEC reports.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 5, 2005, IPS and LSC sued D. Ronald Allen and several entities
affiliated with Allen in the 116th Judicial District Court of Dallas County,
Texas. IPS and LSC assert claims against Allen for, among other things,
fraud, breach of contract and indemnity arising out of the Merger Agreement.
LSC seeks indemnity from Allen for approximately $573,000 pursuant to the
Merger Agreement, which amount represents the settlement payment made to
Legacy Bank and the attorneys' fees incurred in the C-Gate lawsuit. LSC also
seeks indemnity for other as-yet unliquidated claims for potential
indemnifiable costs. IPS and LSC assert claims for constructive trusts
against the entity defendants regarding the IPS common stock held by those
entities as of the date of the closing of the Merger Agreement. IPS and LSC
assert that some or all of the common stock held by these entities was
required to be tendered into escrow in order to satisfy claims from
indemnifiable costs under the Merger Agreement. The parties are currently
conducting discovery, and the trial in the case is set for January 8, 2007.
On July 8, 2005, The Law Offices of Gregory W. Mitchell, P.L.L.C. (the "Law
Firm") and Gregory W. Mitchell, (individually "Mitchell," and collectively
with the Law Firm, the "Mitchell Plaintiffs"), the sole member of the Law
Firm, sued IPS in the 160th Judicial District Court of Dallas County, Texas.
The Mitchell Plaintiffs allege that IPS entered into a fee agreement under
which the Law Firm was to provide all legal services for IPS in exchange for
which IPS was to pay the Law Firm, each month for two years, $10,000 cash
plus IPS common stock with a current value of $15,000. The Mitchell
Plaintiffs allege that, after several months, IPS repudiated the fee
agreement without cause. The Law Firm seeks to recover the remaining fees
due under the fee agreement, approximately $200,000 in cash and $315,000 in
Common Stock, plus attorneys' fees. IPS disputes the claims and plans to
vigorously defend the lawsuit. The Company has asserted counterclaims
against the Mitchell Plaintiffs for breach of fiduciary duty seeking
rescission of the fee agreement, professional negligence, and breach of the
fee agreement. The trial in the case is set for July 31, 2006.
On November 18, 2003, Gehan Properties II, Ltd. ("Gehan") sued IPS, Allen,
and several former IPS subsidiaries in the 95th Judicial District Court of
Dallas County, Texas. Gehan alleges fraudulent transfer claims and is
seeking $259,652 plus attorneys' fees and interest. Gehan alleges that IPS's
former subsidiary Performance Interconnect Corp. fraudulently transferred
its stock in two entities. PC Dynamics of Texas, Inc. and Varga Investments,
Inc., to IPS in December 1999. IPS disputes the claims and plans to
vigorously defend the lawsuit. Among other things, IPS asserts that the
stock transferred to IPS was worthless at the time of the transfers and
therefore the transfers do not constitute fraudulent transfers. The parties
are currently conducting discovery and the trial in the case is scheduled
for October 9, 2006.
ITEM 5. OTHER INFORMATION
Our Common Stock was traded over-the-counter through December 21, 2005 on
the OTC Bulletin BoardR (OTCBB) under the symbol "IPFS.OB" and was
subsequently moved to the Pink Sheets, trading under the symbol "IPFS.PK",
for failure to timely file the annual report on Form 10-KSB. The annual
report on Form 10-KSB was filed on January 5, 2006. The Company is now
current in its filings with the SEC and is eligible for trading on the
OTCBB.
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3.1* Certificate of Incorporation of Espo's, Inc. filed with the New
York Secretary of State, November 29, 1990 (filed as Exhibit 3.1
to the Company's Registration Statement on Form 10-SB (File No.
000-30794), filed on April 12, 2000).
3.2* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, July 17,
1998 (filed as Exhibit 3.2 to the Company's Registration
Statement on Form 10-SB (File No. 000-30794), filed on April 12,
2000).
3.3* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, October 27,
1998 (filed as Exhibit 3.3 to the Company's Registration
Statement on Form 10-SB (File No. 000-30794), filed on April 12,
2000).
3.4* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, March 20,
2000 (filed as Exhibit 3.4 to the Company's Registration
Statement on Form 10-SB (File No. 000-30794), filed on April 12,
2000).
3.5* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, April 4,
2001 (filed as Exhibit 3.6 to the Company's Current Report on
Form 8-K filed April 27, 2001).
3.6* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, August 12,
2002 (filed as Exhibit 3.7 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended November 30, 2003, filed
April 19, 2004).
3.7* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, February 10,
2003 (filed as Exhibit 3.8 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended November 30, 2003, filed
April 19, 2004).
3.8* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, May 30, 2003
(filed as Exhibit 3.9 to the Company's Annual Report on Form 10-
KSB for the fiscal year ended November 30, 2003, filed April 19,
2004).
3.9* Certificate of Amendment of Certificate of Incorporation of the
Company filed with the New York Secretary of State, December 28,
2004 (filed as Exhibit 4.1 to the Company's Amendment to Current
Report on Form 8-K/A filed February 7, 2005).
3.10* Bylaws of the Company (filed as Exhibit 3.5 to the Company's
Registration Statement on Form 10-SB (File No. 000-30794), filed
on April 12, 2000).
31.1** Certification of Brad Jacoby, President and Chief Executive
Officer, pursuant to Rules 13-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Brad J. Peters, Vice President and Chief
Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32** Certifications of Brad Jacoby, President and Chief Executive
Officer, and Brad J. Peters, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated herein by reference to the respective filings identified
above.
** Filed herewith.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED PERFORMANCE SYSTEMS, INC.
(Registrant)
Date: June 12, 2006 By: /s/ BRAD J. PETERS
Brad J. Peters
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)