UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 Form
10-QSB (Mark One)|X|
  QUARTERLY REPORT UNDER SECTION 13
  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period
  ended:  June 30, 2004|_|
  TRANSITION REPORT UNDER SECTION 13
  OR 15(d) OF THE EXCHANGE ACTFor the transition period from
  __________________ to __________________ Commission file
number 0-30721 IPEC HOLDINGS INC.(Exact name of small business issuer as specified in its charter) Nevada
  
  87-0621339(State or other
  jurisdiction of
  incorporation or organization)
  
  (IRS Employer
  Identification No.) Northgate
Industrial Park, 185 Northgate Circle, P.O. Box 5311
New Castle, Pennsylvania 16105(Address of principal executive offices) (800) 377-4732(Issuers telephone number) (Former name,
former address and former fiscal year, if changed since last report) 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 |_| State the number
of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date:9,972,912 shares of Common Stock, $0.001 par
value, as of
August 1, 2004 Transitional
Small Business Disclosure Format (check one):  
Yes |_| No |X|  TABLE OF
CONTENTS
PART 1
   FINANCIAL INFORMATION
  3ITEM 1.  FINANCIAL STATEMENTS
  3Unaudited Condensed Consolidated
  Balance Sheets
  3Unaudited Condensed Consolidated
  Statements Of Operations
  5Unaudited Condensed Consolidated
  Statements Of Cash Flows
  6Notes To Condensed Consolidated
  Financial Statements
  7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
  13ITEM
  3. CONTROLS AND
  PROCEDURES
  15PART II 
  OTHER INFORMATION
  16ITEM 1.LEGAL PROCEEDINGS
  16ITEM 2. CHANGES IN SECURITIES
  16ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  16ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
  SECURITY HOLDERS
  16ITEM 5. OTHER INFORMATION
  16ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  16SIGNATURES
  182

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IPEC
Holdings Inc.
Condensed Consolidated Balance Sheets
June 30, 2004
  (Unaudited)
  
  December 31,
  2003AssetsCash
  
  $
  262,518
  
  $
  627,916Escrow Deposit
  
  
  227,153
  
  
  Accounts Receivable, less allowance for
  doubtful accounts of $240,000 and $220,000, respectively
  
  
  2,634,013
  
  
  1,873,245Other Trade Related Receivables
  
  
  195,375
  
  
  284,009Inventories
  
  
  2,571,149
  
  
  2,076,847Deferred Tax Asset
  
  
  162,098
  
  
  102,108Prepaid Expenses
  
  
  115,485
  
  
  51,040Current Assets
  
  
  6,167,791
  
  
  5,015,165Land
  
  
  41,040
  
  
  129,297Buildings and Equipment
  
  
  16,505,123
  
  
  18,482,266Construction In Progress
  
  
  948,383
  
  
  401,727Accumulated Depreciation
  
  
  (7,904,391
  )
  
  (7,418,823
  )Property, Plant
  & Equipment, Net
  
  
  9,590,155
  
  
  11,594,467Patents, less accumulated amortization
  of $116,912 and $104,115, respectively
  
  
  274,975
  
  
  287,772Other Assets
  
  
  299,029
  
  
  166,989Other Assets
  
  
  574,004
  
  
  454,761Total Assets
  
  $
  16,331,950
  
  $
  17,064,393The accompanying notes are an integral part of these condensed
consolidated financial statements.
3


IPEC
Holdings Inc.
Condensed Consolidated Balance Sheets
June 30, 2004
  (Unaudited)
  
  December 31, 2003Liabilities and Shareholders EquityAccounts Payable
  
  $
  1,487,257
  
  
  $
  1,788,983Accrued Liabilities
  
  
  639,212
  
  
  
  209,900Income Taxes Payable
  
  
  620,572
  
  
  
  Current Portion of Long-term Debt
  
  
  1,228,742
  
  
  
  1,545,938Bank Line Of Credit
  
  
  1,830,000
  
  
  
  4,380,000Current Portion of Deferred Gain on Plant Sale
  
  
  47,166
  
  
  
  Current Portion of Capital Lease Obligation
  
  
  9,035
  
  
  
  82,833Current Liabilities
  
  
  5,861,984
  
  
  
  8,007,654Deferred Income Taxes
  
  
  505,889
  
  
  
  568,009Capital Lease Obligation
  
  
  31,939
  
  
  
  9,276Long-term Deferred Gain on Plant Sale
  
  
  1,069,003
  
  
  
  Long-term Debt
  
  
  3,730,894
  
  
  
  4,089,348Long-term Liabilities
  
  
  5,337,725
  
  
  
  4,666,633Commitments and ContingenciesPreferred Stock, no par value, 1,000,000 shares
  authorized, no shares issuedCommon Stock, par value $0.001 per share, 100,000,000
  shares authorized, 9,972,912 shares issued and outstanding at June 30, 2004
  and December 31, 2003
  
  
  9,973
  
  
  
  9,973Additional Paid In Capital
  
  
  4,377,994
  
  
  
  4,377,994Retained Earnings
  
  
  744,274
  
  
  
  2,139Shareholders Equity
  
  
  5,132,241
  
  
  
  4,390,106Total Liabilities and Shareholders Equity
  
  $
  16,331,950
  
  
  $
  17,064,393The accompanying notes are an integral part of
these condensed consolidated financial statements.
4


IPEC
Holdings Inc.
Statements of Condensed Consolidated Operations
Three Months Ended
  June 30, 2004
  (Unaudited)
  
  Three Months Ended
  June 30, 2003
  (Unaudited)
  
  Six Months Ended
  June 30, 2004
  (Unaudited)
  
  Six Months Ended
  June 30, 2003
  (Unaudited)Sales
  
  
  $
  6,319,511
  
  
  
  $
  4,613,332
  
  
  
  $
  10,726,202
  
  
  
  $
  7,793,905Operating
  expensesCost of sales
  
  
  
  4,377,949
  
  
  
  
  3,213,350
  
  
  
  
  7,704,868
  
  
  
  
  5,689,414Selling
  
  
  
  348,676
  
  
  
  
  382,347
  
  
  
  
  581,516
  
  
  
  
  705,690General and
  administrative
  
  
  
  473,041
  
  
  
  
  353,873
  
  
  
  
  943,298
  
  
  
  
  771,201Operating
  expenses
  
  
  
  5,199,666
  
  
  
  
  3,949,570
  
  
  
  
  9,229,682
  
  
  
  
  7,166,305Operating income
  
  
  
  1,119,845
  
  
  
  
  663,762
  
  
  
  
  1,496,520
  
  
  
  
  627,600Non-operating
  expenseInterest expense
  
  
  
  116,834
  
  
  
  
  149,660
  
  
  
  
  242,486
  
  
  
  
  300,846Other expense
  (income)
  
  
  
  18,967
  
  
  
  
  (2,383
  )
  
  
  
  17,141
  
  
  
  
  (3,680
  )Non-operating
  expenses
  
  
  
  135,801
  
  
  
  
  147,277
  
  
  
  
  259,627
  
  
  
  
  297,166Income before
  taxes
  
  
  
  984,044
  
  
  
  
  516,485
  
  
  
  
  1,236,893
  
  
  
  
  330,434Income taxes
  
  
  
  393,757
  
  
  
  
  190,250
  
  
  
  
  494,757
  
  
  
  
  128,500Net income
  
  
  $
  590,287
  
  
  
  $
  326,235
  
  
  
  $
  742,136
  
  
  
  $
  201,934Average Shares
  of Common Stock - Basic
  
  
  
  9,972,912
  
  
  
  
  9,972,912
  
  
  
  
  9,972,912
  
  
  
  
  9,972,912Average Shares
  of Common Stock - Diluted
  
  
  
  10,098,205
  
  
  
  
  10,407,492
  
  
  
  
  10,156,354
  
  
  
  
  10,425,158Basic Net Income
  Per Share
  
  
  $
  0.06
  
  
  
  $
  0.03
  
  
  
  $
  0.07
  
  
  
  $
  0.02Diluted Net
  Income Per Share
  
  
  $
  0.06
  
  
  
  $
  0.03
  
  
  
  $
  0.07
  
  
  
  $
  0.02The accompanying notes are an integral part of
these condensed consolidated financial statements.
5


IPEC
Holdings Inc.Statements of Condensed Consolidated Cash
Flows
Six Months Ended
  June 30, 2004
  (Unaudited)
  
  Six Months Ended
  June 30, 2003
  (Unaudited)Cash Flow from
  Operating Activities:Net Income
  
  
  $
  742,136
  
  
  
  $
  201,934Adjustments to
  reconcile net income to net cash used by operating activitiesDepreciation and
  amortization
  
  
  
  875,886
  
  
  
  
  838,913Deferred taxes
  
  
  
  (122,110
  )
  
  
  
  40,000Deferred
  financing cost amortization
  
  
  
  629
  
  
  
  
  Deferred gain
  amortization on plant sale
  
  
  
  (3,810
  )
  
  
  
  Working Capital
  Items:Accounts
  receivable
  
  
  
  (760,768
  )
  
  
  
  (1,117,028
  )Other receivables
  
  
  
  88,634
  
  
  
  
  (27,475
  )Inventory
  
  
  
  (427,577
  )
  
  
  
  (620,600
  )Prepaid expenses
  
  
  
  (64,445
  )
  
  
  
  (129,611
  )Other assets
  
  
  
  90,330
  
  
  
  
  (82,151
  )Accounts payable
  
  
  
  (301,726
  )
  
  
  
  477,405Accrued
  liabilities
  
  
  
  429,312
  
  
  
  
  7,007Income taxes
  payable
  
  
  
  620,572
  
  
  
  
  82,173Net cash provided
  (used) by operating activities
  
  
  
  1,167,063
  
  
  
  
  (329,433
  )Cash Flow from
  Investing Activities:Purchases of
  property, plant and equipment
  
  
  
  (1,240,886
  )
  
  
  
  (1,240,967
  )Payment to escrow
  deposit
  
  
  
  (900,000
  )Release of funds
  from escrow deposit
  
  
  
  672,847Proceeds from
  sale of plant, net of $434,000 in transaction related costs
  
  
  
  3,463,113
  
  
  
  
  Development of
  patents
  
  
  
  
  
  
  
  
  (1,578
  )Net cash provided
  (used) by investing activities
  
  
  
  1,995,074
  
  
  
  
  (1,242,545
  )Cash Flow from
  Financing Activities:Borrowing on bank
  line of credit
  
  
  
  
  
  
  
  
  2,330,000Repayment on bank
  line of credit
  
  
  
  (2,550,000
  )
  
  
  
  Repayment of
  capital lease obligations
  
  
  
  (78,885
  )
  
  
  
  (78,745
  )Repayment of
  long-term debt
  
  
  
  (749,220
  )
  
  
  
  (745,648
  )Proceeds from
  financing of plant, net of $223,000 in transaction related costs
  
  
  
  1,753,923
  
  
  
  
  Payment of
  existing plant debt
  
  
  
  (39,236
  )
  
  
  
  Payment of debt
  from plant sale
  
  
  
  (1,864,117
  )
  
  
  
  Net cash (used)
  provided by financing activities
  
  
  
  (3,527,535
  )
  
  
  
  1,505,607Net decrease
  
  
  
  (365,398
  )
  
  
  
  (66,371
  )Cash - beginning
  of period
  
  
  
  627,916
  
  
  
  
  84,661Cash - end of
  period
  
  
  
  262,518
  
  
  
  
  18,2906


IPEC HOLDINGS,
INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003

1. Description of Business

IPEC
Holdings Inc. (the Company or IPEC) manufactures and sells tamper evident
plastic closures.  These closures are predominantly
used in the bottling of non-carbonated beverages including bottled water, milk,
fruit and sports drinks.  The Company
also designs and manufactures capping equipment for the bottling industry.  IPECs customer base primarily consists of
dairy and bottled water manufacturers both domestically and internationally.
The Companys two principal manufacturing facilities are located in the United
States of America in Pennsylvania and Alabama.

2. Basis of Presentation
The
accompanying unaudited condensed consolidated balance sheets as of June 30,
2004 and December 31, 2003, statements of operations for the three and six
month period ended June 30, 2004 and 2003 and cash flows for the six month
period ended June 30, 2004 and 2003 have been prepared by IPEC Holdings Inc.
(Company) in accordance with the instructions for SEC Form 10-QSB and,
accordingly, do not include all disclosures required by accounting principles
generally accepted in the United States for complete financial statements. The
financial statements at June 30, 2004 and December 31, 2003 include the
accounts of IPEC Holdings Inc. and its wholly-owned subsidiary.  In the opinion of management of the Company,
all adjustments, consisting of normal recurring accruals considered necessary
for a fair presentation, have been included. 
The results of operations for the three and six month periods ended June
30, 2004 are subject to various factors including seasonality and are not
necessarily indicative of the operating results to be expected for the full
fiscal year ending on December 31, 2004.
Interim
unaudited condensed consolidated financial results should be read in
conjunction with the audited financial statements included in the Companys
Annual Report on Form 10-KSB  for the
fiscal year ended December 31, 2003.
3. Recent Accounting Pronouncements
Effective
April 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This statement amends
SFAS No. 133 for certain decisions made by the Board as part of the
Derivatives Implementation Group (DIG) process and further clarifies the
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts and for hedging activities. The provisions
of this statement are to be prospectively applied effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this statement did not
have a material impact on our results of operations or financial condition for
the three or six month period ended June 30, 2004.
4. Supplemental Cash Flow Information



Six months
  Ended June 30,
  2004
  
  Six months
  Ended June 30,
  2003Cash paid for interest net
  of $10,300 and $21,500 for capitalized interest
  
  
  $
  232,000
  
  
  
  $
  294,385Cash paid for income taxes
  
  
  $
  
  
  
  
  $
  6,327Equipment acquired under
  capital leases
  
  
  $
  27,750
  
  
  
  $
  7
IPEC HOLDINGS,
INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003

5. Summary of Significant Accounting Policies

Employee
Stock Option Plans

Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure an Amendment of FASB Statement No. 123,
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), to
require more prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.

The
Company accounts for stock-based awards to employees and directors using the
intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).
Under the intrinsic value method, because the exercise price of the Companys
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Companys
Consolidated Statements of Operations.
The
Company is required under SFAS 123, to disclose pro forma information regarding
option grants made to its employees based on specified valuation techniques
that produce estimated compensation charges. The pro forma information is as
follows:
Three Months
  Ended June 30,
  2004
  
  Three Months
  Ended June 30,
  2003
  
  Six Months
  Ended June 30,
  2004
  
  Six Months
  Ended June 30,
  2004Net Income - as
  reported
  
  
  $
  590,287
  
  
  
  $
  326,235
  
  
  
  $
  742,136
  
  
  
  $
  201,934Compensation
  expense options - net of tax
  
  
  
  (46,628
  )
  
  
  
  (27,082
  )
  
  
  
  (88,861
  )
  
  
  
  (10,616
  )Compensation
  recorded in financial statements - net of tax
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Net Income - pro
  forma
  
  
  $
  543,659
  
  
  
  $
  299,153
  
  
  
  $
  653,275
  
  
  
  $
  191,318Basic net income
  per share - as reported
  
  
  $
  0.06
  
  
  
  $
  0.03
  
  
  
  $
  0.07
  
  
  
  $
  0.02Diluted net
  income per share - as reported
  
  
  $
  0.06
  
  
  
  $
  0.03
  
  
  
  $
  0.07
  
  
  
  $
  0.02Basic net income
  per share - pro forma
  
  
  $
  0.05
  
  
  
  $
  0.03
  
  
  
  $
  0.07
  
  
  
  $
  0.02Diluted net
  income per share - pro forma
  
  
  $
  0.05
  
  
  
  $
  0.03
  
  
  
  $
  0.06
  
  
  
  $
  0.02The
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model.  The
Black-Scholes option pricing model was developed for use in estimating the
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company uses projected data for expected volatility and expected life of its
stock options based upon historical and other economic data trended into future
years. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the estimate, in
managements opinion, the existing valuation models do not provide a reliable measure
of the fair value of the Companys employee stock options.
8

IPEC HOLDINGS,
INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003
Computation of Net Income 
per Share
Basic earnings per share is computed using the weighted
average number of shares outstanding during the period, while diluted earnings
per share is calculated to reflect the potential dilution that occurs related
to issuance of capital stock under stock option and warrant grants. The
difference between basic and diluted earnings per share relates solely to the
effect of capital stock options and warrants.
For
purposes of determining the number of diluted shares outstanding, weighted
average shares outstanding for basic earnings per share calculations were
increased due solely to the dilutive effect of unexercised stock options and
warrants by 125,293 and 434,580 for the three months ended June 30, 2004 and
2003 and by 183,442 and 452,246 for the six months ended June 30, 2004 and
2003.
Revenue
Recognition
The Company follows Staff Accounting Bulletin 101,
Revenue Recognition in Financial Statements, in recognizing revenues within
the Companys financial statements. 
This bulletin requires, among other things, that revenue only be
recognized when title has transferred and risk of loss has passed to the
customer with the capability to pay, and that there are no significant
remaining obligations related to the sale on the part of the Company.
Inventory
Valuation
Inventories are stated at the lower of cost or market.
The Company uses the first-in first-out (FIFO) method for determining the cost
of its inventory. The Company will record an obsolescence reserve based upon
its assessment of customer demand and alternative disposal methods.
Shipping
Amounts
billed to customers for shipping related fees are recorded as revenues.  Shipping charges incurred by the Company are
recorded as cost of sales in the accompanying statements of operations.    For the three months ended June 30, 2004
and 2003, the Company recorded shipping charges of $305,000 and $89,000,
respectively.   For the six months ended
June 30, 2004 and 2003, the Company recorded shipping charges of $479,000 and
$180,000, respectively.
Escrow Deposit

On
May 21, 2004 in connection with its Alabama Plant Financing discussed in Note
9, the Company was required to fund $900,000 into an escrow account.  On May 25, 2004, an amount totaling $673,000
was paid from the escrow deposit to a related party for a construction
project.  The Company has recorded the
unfunded portion as an escrow deposit in the accompanying balance sheet.  Any escrow deposit proceeds not used to fund
the construction project will be returned to the Company and used for general
operations.

Reclassifications
Certain
reclassifications have been made to prior period balances in order to conform
to the current period presentation.  The
reclassification had no effect on net income.
9
IPEC
HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003
6.
Inventory
As
of June 30, 2004 and December 31, 2003, inventories consisted of the following:



June 30,
  2004
  
  December 31,
  2003Raw Materials
  
  $
  726,123
  
  $
  595,180Finished Goods
  
  
  2,005,045
  
  
  1,563,542Reserve for Obsolescence
  
  
  (160,019
  )
  
  (81,875
  )Inventories
  
  $
  2,571,149
  
  $
  2,076,8477. Common Stock and Equity Awards
The following is a
schedule of option and warrant activity from December 31, 2003 to June 30,
2004:




Options
  
  WarrantsDecember
  31, 2003
  
  
  1,415,000
  
  
  200,000Granted
  
  
  5,000
  
  
  Forfeitures
  
  
  
  
  
  Exercised
  
  
  
  
  
  June 30, 2004
  
  
  1,420,000
  
  
  200,000On
June 2, 2004, the Company granted 5,000 vested options with an exercise price of
$1.68 per share to its Board of Directors.
8. Debt and Capital Lease Obligations

The
Company has a $5.5 million formula-based line of credit which is payable upon
demand by the bank and bears interest at 4.00% as of June 30, 2004.

The
following is a maturity schedule as of June 30, 2004 for the Companys debt
components excluding its secured line of credit which is payable upon demand.



Long-term
  Debt
  
  Capital Lease
  Obligations2004 (six months)
  
  $
  718,434
  
  
  $
  4,2142005
  
  
  1,020,616
  
  
  
  9,6422006
  
  
  1,332,278
  
  
  
  11,3812007
  
  
  39,764
  
  
  
  9,0032008
  
  
  42,626
  
  
  
  5,294Thereafter
  
  
  1,805,918
  
  
  
  1,440Total
  
  $
  4,959,636
  
  
  $
  40,974As
of June 30, 2004, the Company had available borrowing capacity of $3,400,000
related to the secured line of credit.
10

IPEC HOLDINGS,
INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003
9. Alabama Plant Financing
In
January 2004, the Company began construction on a 30,000 square foot warehouse
addition to its Alabama Plant. On May 21, 2004, the Company sold its existing
Alabama production facility and as completed warehouse addition for gross
proceeds of $1,977,000.   Concurrent
with the sale, the Company funded $900,000 into an escrow deposit account to
fund construction of the warehouse addition and leased the property back for a
period of 29.5 years and thereafter renewable at market rates at the Companys
option.
As
part of the transaction, the Company was required to obtain a secured letter of
credit in the amount of $1,800,000 to provide collateral for its rental
obligation.   As security for the letter
of credit, the issuer of the letter of credit has required the Company to fund
$400,000 into a reserve fund ratably over the first 60 months of the lease
agreement.  Upon a satisfactory review
of the Companys financial condition by the issuer, the $400,000 is to be
returned to the Company after expiration of the funding term.  As a result of the secured nature of the
letter of credit, the transaction has been recorded as a financing transaction
rather than as a sale and the building, transaction debt and related accounts
will continue to be recognized in the accompanying financial statements.  Accordingly, any rental payments made not
attributable to transaction debt are recorded as interest expense.
In
fiscal 2014, the lease agreement rescinds the requirement to maintain the
letter of credit and the Company expects to record the transaction as a sale at
that time.  The Company has initially
recorded deferred financing costs of $223,000 in other assets in the
accompanying balance sheet to be amortized prospectively as interest expense
under the effective interest rate method.
Annual rental payments under the lease agreement are
based on a combination of a fixed market component subject to agreed upon reset
provisions typically every five years and a variable component indexed to the
3-month LIBOR plus 165 basis points.
10. Intangible Assets

The
Companys intangible assets consist of finite-lived patents and are amortized
over the shorter of their legal or estimated useful lives.  Amortization expense for these intangible
assets was $13,000 for the six months ending June 30, 2004 and 2003,
respectively.  The anticipated annual
amortization expense for these intangible assets is $13,500 for the remainder
of 2004 (six months) and $26,000 for each fiscal year 2005, 2006, 2007, 2008
and 2009.

11. Asset Sale
On
May 21, 2004, the Company sold its Pennsylvania production facility for gross
proceeds of $3,897,000.   Concurrent
with the sale, the Company leased the property back under a non-cancelable
lease for a period of 29.5 years and thereafter renewable at market rates at
the Companys option.  As part of the
transaction, the Company incurred transaction costs of $434,000 and a gain on
the sale of $1,120,000 that was initially deferred to be amortized
prospectively over the term of the lease in proportion to the related gross
rental charged to expense over the lease.
Annual rental payments are based on a combination of
a fixed market component subject to agreed upon reset provisions typically
every five years and a variable component indexed to the 3-month LIBOR plus 165
basis points.
11
IPEC HOLDINGS,
INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004 and 2003
12. Commitments and Contingencies
Purchase Commitments with Suppliers

The Company purchases
components from a variety of suppliers for its products. During the normal
course of business, in order to reduce manufacturing lead times and to help
assure adequate component supply, the Company enters into agreements with
suppliers that either allow them to procure inventory based upon criteria as
defined by the Company or that establish the parameters defining the Companys
requirements. All significant supply agreements allow the Company the option to
cancel, reschedule and adjust the Companys requirements based on its business
needs prior to firm orders being placed. Consequently, the Company does not
report purchase commitments arising from firm, non-cancelable and unconditional
commitments.
Legal Proceedings

The Company is subject to various legal proceedings
and claims arising out of the normal course of business.  Based on the facts currently available,
management believes that the ultimate amount of liability beyond reserves
provided, if any, for any pending actions will not have a material adverse
effect on the Companys financial position or results of operations.  However, the ultimate outcome of any
litigation is uncertain, and either unfavorable or favorable outcomes could
have a material impact on the results of operations or liquidity of the Company
in a particular period.

13. Related Party Transactions
Through
May 25, 2004, the Company had approximately $673,000 owed to Giordano
Construction Co., Inc., (Giordano Construction) which has entered into an
$868,000 construction agreement with the Company to provide overall management
and construction related services for a 30,000 square foot expansion of the
Companys Brewton, Alabama production facility.  One of the Companys principal shareholders is also a principal
owner and founder of Giordano Construction.  
In connection with the Alabama Plant Financing discussed in Note 9, the Company
funded $900,000 into an escrow account. 
On May 25, 2004, funds totaling $673,000 were paid to Giordano
Construction.  The Company has recorded
the unfunded portion as an escrow deposit in the accompanying balance
sheet.  Any escrow account proceeds not
used to fund the construction project will be returned to the Company and used
for general operations.
Two
of the Companys principal shareholders have personally guaranteed all Company
debt and the secured letter of credit associated with the Alabama Plant
Financing discussed in Note 9.
12
ITEM 2. 
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion of our results of operations for the three and six months
ended June 30, 2004 should be read in conjunction with our condensed
consolidated financial statements (unaudited) and related notes included
therein.
Overview

We
are engaged in the manufacture of tamper evident plastic closures and the
design and fabrication of capping equipment.

Results of Operations for the Three and Six Months Ended June
30, 2004 and 2003
Three Months Ended June 30.Operating
income for the three months ended June 30, 2004 increased $456,083 from the
comparable 2003 period.  The increase in
operating income was primarily a function of the Companys increased customer
base, fixed overhead volume efficiencies and the attainment of a relatively
fixed selling, general and administrative infrastructure permitting the margin
from its new customer base to increase overall profitability.  Accordingly, sales for 2004 increased by
$1,706,179 (37.0%) while 2004 operating expenses increased by $1,250,096
(31.7%).  Non-operating expenses
decreased by $11,476 (7.8%) primarily due to lower borrowing rates and a lower
overall outstanding balance.  This resulted
in 2004 income before taxes being $467,559 higher than that of the same period
of the previous year.
Cost
of sales of $4,377,949 was comparable as a percentage of sales (69.3%) with
2003 (69.7%) due to lower resin pricing procured by the Company and fixed
overhead volume efficiencies substantially offset by lower selling prices in
certain of our product lines as a result of intensified market competition and
customer consolidation.
Selling
expenses for 2004 decreased $33,671 (8.8%) reflecting lower costs associated
with start-up tooling for customer conversions.
General
and administrative expenses for 2004 increased $119,168 (33.7%) reflecting the
addition of a new Company executive, routine salary increases, higher
information technology related expenditures associated with the maintenance of
the Companys new financial reporting system and higher professional service
fees.
We
accrued $393,757 for federal and state income taxes in the second quarter of
2004 resulting in an effective rate of approximately 40%.  As a result, net income for the three months
ended June 30, 2004 is $590,287 or $0.06 basic net income per share, as
compared to net income of $326,235 or $0.03 basic income per share for the
three months ended June 30, 2003.
Six Months Ended June 30.Operating
income for the six months ended June 30, 2004 increased $868,920 from the
comparable 2003 period.  The increase in
operating income was primarily a function of the Companys increased customer
base, fixed overhead volume efficiencies and the attainment of a relatively
fixed selling, general and administrative infrastructure permitting the margin
from its new customer base to increase overall profitability.  Accordingly, sales for 2004 increased by $2,932,297
(37.6%) while 2004 operating expenses increased by $2,063,377 (28.8%).  Non-operating expenses decreased by $37,539
(12.6%) primarily due to lower borrowing rates and a lower overall outstanding
balance.  This resulted in 2004 income
before taxes being $906,459 higher than that of the same period of the previous
year.

13

Cost
of sales of $7,704,868 was comparable as a percentage of sales (71.8%) with
2003 (73.0%) due to lower resin pricing procured by the Company and fixed
overhead volume efficiencies substantially offset by lower selling prices in
certain of our product lines as a result of intensified market competition and
customer consolidation.
Selling
expenses for 2004 decreased $124,174 (17.6%) reflecting lower costs associated
with start-up tooling for customer conversions and a decrease in customer bad
expense.
General
and administrative expenses for 2004 increased $172,097 (22.3%) reflecting the
addition of a new Company executive, routine salary increases, higher
information technology related expenditures associated with the maintenance of
the Companys new financial reporting system and higher professional service
fees.
We
accrued $494,757 for federal and state income taxes in the second quarter of
2004 resulting in an effective rate of approximately 40%.  As a result, net income for the six months
ended June 30, 2004 is $742,136 or $0.07 basic net income per share, as
compared to net income of $201,934 or $0.02 basic income per share for the six
months ended June 30, 2004.
Liquidity and Financial Condition
Cash and Cash Equivalents.  At
June 30, 2004, the Company had cash and cash equivalents of $262,518.   In addition, we had a working capital
surplus of $305,807, as compared to a deficiency of $2,992,489 at December 31,
2003 primarily due to a combination of the consummation of the sale leaseback
transaction, increased customer base and new credit arrangements with our
primary resin supplier. Management believes that existing cash and cash
equivalents together with anticipated cash flow from operations will be
adequate to fund the Companys operations, debt service requirements and
capital expenditures throughout fiscal 2004.

In
the future, the Company may require additional funds to support operations and
may seek to raise additional funds through debt financing or other
sources.  There can be no assurance that
additional funding will be available at all, or that if available, such
financing will be obtainable on terms favorably to the Company.

Operating Activities.  Our
operations provided cash of $1,167,063 for the six months ended June 30, 2004,
as compared to the previous year when our operations used cash of
$329,433.  The increase in cash provided
by operations during 2004 was due primarily to an increase in net income, the
results of improved accounts receivable management processes, favorable credit
terms awarded by our primary resin supplier represented by an increase in
accrued liabilities and an increase from income taxes payable offset by an
overall accounts payable decrease.
Investing Activities. 
During the six months ended June 30, 2004, we generated $3,463,113
through the sale of our Pennsylvania manufacturing facility offset by capital
expenditures of $1,240,886 primarily for our Alabama warehouse expansion and
certain machinery as compared to using $1,242,545 during the same period in the
previous year primarily for molds.   In
addition, we paid $900,000 into an escrow deposit to fund construction of our
Alabama warehouse addition of which $672,847 was released for the project.
Financing Activities.  In
2004, we paid down capital lease obligations $78,885, notes payable $749,220,
our Pennsylvania manufacturing facility debt of $1,864,117, $2,550,000 on our
line of credit and retired  a promissory
note totaling $39,236 related to our Alabama facility.  As part of the Alabama Plant Financing
transaction, the Company borrowed $1,753,923 for net cash of $3,527,535 used by
financing activities.   During 2003,
$1,505,607 was provided by financing activities comprised of $2,330,000
borrowed on our line of credit.  We also
paid down $745,648 on our long-term debt and reduced capital lease obligations
by $78,745. A significant portion of funds borrowed on our line of credit were
used to fund the creation of molds for new product lines.
14

Related Party Transactions
The
Company incurs certain related party transactions throughout the course of its
business.  In March 2003, one of the
Companys principal shareholders issued a $605,000 shareholder note payable,
which was repaid during 2003.  As of
June 30, 2004, the Company had set aside approximately $227,000 in escrow
deposit for Giordano Construction Co., Inc., (Giordano Construction) which has
entered into an $868,000 construction agreement with the Company to provide
overall management and construction related services for a 30,000 square foot
warehouse expansion of the Companys Alabama manufacturing facility. As of June
30, 2004, the Company has paid $673,000 to Giordano Construction related to
this project.  One of the Companys
principal shareholders is a principal owner and founder of Giordano
Construction.  Except for those items
listed above, there have been no significant additional related party
transactions from those disclosed in Note 12 to the Consolidated Financial
Statements of the Companys most recent annual report on Form 10-KSB.
Forward-Looking Statements
Under
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 (the PSLRA), we caution readers regarding forward looking statements
found in this report and in any other statement made by, or on our behalf,
whether or not in future filings with the Securities and Exchange
Commission.  Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. Forward
looking statements are necessarily based upon estimates and assumptions that
are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to
change.  These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward looking statements made
by or on our behalf.  We disclaim any
obligation to update forward-looking statements.
ITEM 3. 
CONTROLS AND PROCEDURES

We carried out an evaluation required by the 1934
Act, under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report.  Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports.  It should be noted that
any system of controls is based in part upon certain assumptions designed to
obtain reasonable (and not absolute) assurance as to its effectiveness, and
there can be no assurance that any design will succeed in achieving its stated
goals.

During the most recent fiscal quarter, there has not
occurred any change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
15
PART II OTHER INFORMATION
Item 1. Legal ProceedingsWe are not a party to any
  pending legal proceedings, other than routine litigation deemed incidental to
  our business.Item 2. Changes in SecuritiesNoneItem 3. Defaults Upon Senior SecuritiesNone.Item 4. Submission of Matters to a Vote of
  Security HoldersAt the Companys Annual
  Stockholders Meeting on June 2, 2004, stockholders elected each of the
  director nominees, ratified the selection of our independent auditors, and
  approved the amended and restated 2002 Stock Option Plan.  For all proposals, the number of shares
  voted for were 8,162,469 and the number of shares withheld were 1,810,443.Item 5. Other InformationNone.Item 6. Exhibits and Reports on Form 8-K(a) Exhibits:Regulation
  S-B Number
  
  Exhibit2.1
  
  Share Exchange Agreement
  between Golden Hole, Inc. and International Plastics and Equipment Corp.
  dated January 14, 2002 (1)3.1
  
  Restated Articles of
  Incorporation (2)3.2
  
  Bylaws (2)4.1
  
  Description of Series A
  Convertible Preferred Stock (3)10.1
  
  December 23, 1998 Loan
  Documents with First Western Bank (3)10.2
  
  January 13, 2000 Loan
  Documents with First Western Bank (3)10.3
  
  January 11, 2001 Loan
  Documents with Sky Bank (3)10.4
  
  February 25, 2002 Loan
  Documents with Sky Bank (3)10.5
  
  Series A Convertible
  Preferred Stock Purchase Agreement dated January 1, 2000 (3)10.6
  
  Consulting Agreement dated
  January 1, 2000 with Sherwood LLC (3)10.7
  
  Payment and Severance
  Agreement and Guarantee dated January 2, 2001 (3)10.8
  
  Consulting Agreement dated
  January 1, 2001 with Sherwood LLC (3)16
Regulation
  S-B Number
  
  Exhibit10.9
  
  2002 Stock Option Plan (2)10.10
  
  Lease Agreement dated as
  of May 21, 2004 between CRICIPECPA LP, Lessor and International Plastics and
  Equipment Corp., Lessee10.11
  
  Lease Agreement dated as
  of May 21, 2004 between CRICIPECAL LLC, Lessor and International Plastics and
  Equipment Corp., Lessee10.12
  
  Guaranty of Lease dated
  May 21, 2004 between IPEC Holdings, Inc., Guarantor to and for the benefit of
  CRICIPECPA LP, Lessor10.13
  
  Guaranty of Lease dated
  May 21, 2004 between IPEC Holdings, Inc., Guarantor to and for the benefit of
  CRICIPECAL LLC, Lessor10.14
  
  Letter of Credit and
  Reimbursement Agreement dated as of May 21, 2004 between International
  Plastics and Equipment Corp. and Sky Bank10.15
  
  Letter of Credit Note in
  the amount of $1,800,000 from International Plastics and Equipment Corp. to
  Sky Bank dated May 21, 200410.16
  
  Amended and Restated 2002
  Option Plan16.1
  
  Letter from Baier &
  Williams dated July 24, 2003 (4)21.1
  
  Subsidiaries of the
  registrant (3)31.1
  
  Rule 13a-14(a)
  Certification of Chief Executive Officer31.2
  
  Rule 13a-14(a)
  Certification of Chief Financial Officer32.1
  
  Certification Pursuant to
  18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 200232.2
  
  Certification Pursuant to
  18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002(1)
  Incorporated by reference
  to the exhibits to the registrants current report on Form 8-K dated January
  28, 2002, file number 0-30721.(2)
  Incorporated by reference to
  the exhibits to the registrants current report on Form 8-K dated April 15,
  2002, file number 0-30721.(3)
  Incorporated by reference
  to the exhibits to the registrants annual report on Form 10-KSB for the
  fiscal year ended December 31, 2001, file number 0-30721.(4)
  Incorporated by reference
  to the exhibits to the registrants quarterly report on Form 10-QSB for the
  quarter ended June 30, 2003, file number 0-30721.(b)
  Reports on Form 8-K: 
        None17
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.

IPEC HOLDINGS INC.Date: August 11, 2004
  By:
  /s/ Shawn C. FabryShawn C. Fabry
  Chief Financial Officer18