10-Q 1 d07465e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2003 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period _____________to __________________ COMMISSION FILE NUMBER 000-29883 IMPRESO, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2849585 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 652 SOUTHWESTERN BOULEVARD COPPELL, TEXAS 75019 (Address of principal executive offices) (972) 462-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date. Class of Common Stock Shares outstanding at July 14, 2003 --------------------- ----------------------------------- $0.01 Par Value 5,278,780 IMPRESO, INC. AND SUBSIDIARIES FORM 10-Q MAY 31, 2003 INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER ----------- Item 1. Consolidated Financial Statements: Interim Consolidated Balance Sheets at May 31, 2003 (Unaudited) and August 31, 2002 1 Interim Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 2003 and 2002 (Unaudited) 3 Interim Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 2003 and 2002 (Unaudited) 4 Notes to Interim Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K and 8-K/A 16 SIGNATURES 17 INDEX TO EXHIBITS
IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED BALANCE SHEETS ASSETS
May 31, August 31, 2003 2002 ------------ ------------ (Unaudited) Current assets: Cash and cash equivalents $ 172,259 $ 202,809 Trade accounts receivable, net of allowance for doubtful accounts of $289,328 at May 31, 2003 and $515,010 at August 31, 2002 13,690,556 15,863,549 Inventories 31,624,477 34,111,015 Prepaid expenses and other 304,513 226,065 Deferred income tax assets 450,701 513,950 ------------ ------------ Total current assets 46,242,506 50,917,388 ------------ ------------ Property, plant and equipment, at cost 27,990,192 27,712,994 Less-Accumulated depreciation (12,852,759) (11,773,895) ------------ ------------ Net property, plant and equipment 15,137,433 15,939,099 ------------ ------------ Other assets 95,927 115,377 ------------ ------------ Total assets $ 61,475,866 $ 66,971,864 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 1 IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, August 31, 2003 2002 ------------ ------------ (Unaudited) Current liabilities: Accounts payable $ 10,855,894 $ 16,301,801 Accrued liabilities 3,210,191 3,702,838 Current maturities of long-term debt 1,136,266 1,122,614 Line of credit 18,019,387 17,861,824 Current maturities of prepetition debt 7,784 7,784 ------------ ------------ Total current liabilities 33,229,522 38,996,861 Deferred income tax liability 1,000,139 948,601 Long-term debt, net of current maturities 9,746,189 10,372,474 Long-term portion of prepetition debt, net of current maturities 231,427 237,316 ------------ ------------ Total liabilities 44,207,277 50,555,252 ------------ ------------ Stockholders' equity: Preferred Stock, $.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding -- -- Common Stock, $.01 par value; 15,000,000 shares authorized; 5,292,780 shares issued and 5,278,780 shares outstanding at May 31, 2003 and August 31, 2002 52,928 52,928 Treasury Stock (14,000 shares, at cost) (38,892) (38,892) Additional paid-in capital 6,353,656 6,347,209 Retained earnings 10,900,897 10,055,367 ------------ ------------ Total stockholders' equity 17,268,589 16,416,612 ------------ ------------ Total liabilities and stockholders' equity $ 61,475,866 $ 66,971,864 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 2 IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended May 31, May 31, May 31, May 31. 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net Sales $ 28,872,753 $ 33,050,470 $ 92,384,516 $ 84,846,921 Cost of sales 25,624,297 29,342,219 82,686,722 75,665,209 ------------ ------------ ------------ ------------ Gross profit 3,248,456 3,708,251 9,697,794 9,181,712 Selling, General and administrative expense 2,339,476 2,474,356 7,124,124 6,695,957 ------------ ------------ ------------ ------------ Operating income 908,980 1,233,895 2,573,670 2,485,755 Other (income) expenses: Interest expense 425,199 431,980 1,382,937 1,263,052 Miscellaneous (income) (57,683) (11,087) (214,777) (1,077,001) ------------ ------------ ------------ ------------ Total other expenses 367,516 420,893 1,168,160 186,051 Income before income tax expense 541,464 813,002 1,405,510 2,299,704 Income tax expense: Current 111,692 359,985 445,193 915,706 Deferred 105,257 (60,713) 114,787 (58,670) ------------ ------------ ------------ ------------ Total Income Tax Expense 216,949 299,272 559,980 857,036 Net income $ 324,515 $ 513,730 $ 845,530 $ 1,442,668 ============ ============ ============ ============ Net income per common share (basic and diluted) $ 0.06 $ 0.10 $ 0.16 $ 0.27 ============ ============ ============ ============ Weighted average shares outstanding 5,278,780 5,278,780 5,278,780 5,278,780 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended May 31, May 31, 2003 2002 ----------- ----------- Cash Flows From Operating Activities Net income $ 845,530 $ 1,442,668 Adjustments to reconcile net income to net cash used in operating activities- Depreciation and amortization 1,078,864 898,817 Deferred income taxes 114,787 (58,670) Increase (Decrease) in accounts receivable, net 2,172,993 (2,269,798) Decrease in inventories 2,486,538 6,716,000 Increase in prepaid expenses and other (78,448) (89,457) Decrease (Increase) in non current assets 19,450 (27,304) Decrease in accounts payable (5,445,907) (6,796,449) (Decrease) Increase in accrued liabilities (492,647) 508,643 ----------- ----------- Net cash provided by operating activities 701,160 324,450 ----------- ----------- Cash Flows From Investing Activities: Additions to property, plant, and equipment (277,198) (645,420) Proceeds from sale of property, plant and equipment, net -- 832 Acquisition of United Assets -- (5,302,015) ----------- ----------- Net cash used in investing activities (277,198) (5,946,603) ----------- ----------- Cash Flows From Financing Activities: Net borrowings on line of credit 157,563 1,216,075 Payments on prepetition debt (5,889) (5,607) Net (payments) borrowing on postpetition debt (612,633) 4,277,893 Warrants issued 6,447 27,527 ----------- ----------- Net cash (used in) provided by financing activities (454,512) 5,515,888 ----------- ----------- Net decrease in cash and cash equivalents (30,550) (106,265) Cash and cash equivalents, beginning of period 202,809 211,352 ----------- ----------- Cash and cash equivalents, end of period $ 172,259 $ 105,087 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 IMPRESO, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND NATURE OF BUSINESS Impreso, Inc., (formerly Impreso.com, Inc.) a Delaware corporation (referred to collectively with its subsidiaries as the "Company"), is the parent holding company of TST/Impreso, Inc. ("TST"), a manufacturer and distributor to dealers and other resellers of paper and film products for commercial and home use in domestic and international markets, and Hotsheet.com, Inc., the owner and operator of the Hotsheet.com web portal. TST's product line consists of standard continuous computer stock business forms; thermal facsimile paper; cut sheet products such as copy paper, ink jet paper, digital photo paper and transparencies; fine business stationary; point of sale and cash register machine rolls; high speed laser roll paper; wide format engineering rolls; wide format ink jet media; and processed laser cut sheets. TST has one wholly owned subsidiary, TST/Impreso of California, Inc., which was formed to support the activities of the paper converting segment of the Company's business. 2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited Interim Consolidated Financial Statements of the Company include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position as of May 31, 2003, and its results of operations for the three and nine months ended May 31, 2003 and May 31, 2002. Results of the Company's operations for the interim period ended May 31, 2003, may not be indicative of results for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). The unaudited Interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes of the Company and its subsidiaries, included in the Company's Form 10-K, as amended (the "Company's Form 10-K"), for the fiscal year ended August 31, 2002 ("Fiscal 2002"). Accounting policies used in the preparation of the unaudited Interim Consolidated Financial Statements are consistent in all material respects with the accounting policies described in the Notes to Consolidated Financial Statements in the Company's Form 10-K. 3. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This Statement, which is effective for the years ending after December 15, 2003 amends Statement No. 123 "Accounting for Stock-Based Compensation" and provides 5 alternative methods of transition for voluntary change to the fair value-based method of accounting for stock based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 regardless of the accounting method used to account for stock based compensation. The Company has chosen to continue to account for stock based compensation of employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 24 "Accounting for Stock Issued to Employees" and related interpretations. However, the enhanced disclosure provisions as defined in SFAS No. 148 are effective for the fiscal quarter ended May 31, 2003, and have been adopted by the Company. 4. INVENTORIES Inventories are stated at the lower of cost (principally on a first-in, first-out basis) or market and include material, labor and factory overhead. Inventories consisted of the following:
May 31, 2003 August 31, 2002 ------------ --------------- Finished goods $ 17,208,288 $ 19,059,199 Raw materials 13,959,026 14,684,869 Supplies 1,043,948 1,011,967 Work-in-process 81,561 108,695 Allowance for obsolete (668,346) (753,715) ------------ ------------ Total inventories $ 31,624,477 $ 34,111,015 ============ ============
5. LONG-TERM DEBT AND LINE OF CREDIT The following is a summary of long-term debt and line of credit:
May 31, August 31, 2003 2002 ----------- ------------ Line of Credit with a commercial financial corporation under revolving credit line, maturing May 2004, secured by inventories, trade accounts receivable, equipment, goodwill associated with TST's trademark "IMPRESO" (no value on financial statements), and a personal guarantee by the trustee of a trust which is a principal stockholder of the Company, interest payable monthly at prime plus .25% (4.5% at May 31, 2003). Line of Credit includes option to elect Eurodollar interest rate for certain portions of the loan for specified periods. $18,019,387 $ 17,861,824
6
May 31, August 31, 2003 2002 ----------- ------------ Note payable to a commercial financial corporation, secured by real property, payable in monthly installments of $15,151 (including interest at 7.75%, or 4.5% above the 11th District cost of funds rate, whichever is greater; 7.75%at May 31, 2003), maturing August 2008. 1,642,098 1,657,436 Note payable to a commercial financial corporation, secured by real property and equipment, payable in monthly installments of $4,457 (including interest at 8.50%), maturing December 2009. 262,356 284,546 Note payable to a commercial financial corporation, secured by real property and equipment, payable in monthly installments of $10,843 (including interest at 8.50%), maturing August 2010. Revolving lender's blanket lien subordinated to note's collateral. 699,421 749,987 Note payable to a commercial financial corporation, secured by real property, payable in monthly installments of $2,834 (including interest at 5.5%), maturing November 2010. 205,598 222,213 Notes payable to various commercial financial corporations, secured by equipment, interest rates ranging from 1.9% to 11.17%, maturing at various dates from December 2002 through July 2005. 331,734 449,858 Notes payable to a commercial financial corporation, secured by real property and a personal guarantee by the trustee of a trust which is a principal stockholder of the Company, payable in monthly installments of $21,407 (including interest at 8%), maturing May 2011. 2,064,356 2,130,905 Acquisition balloon note payable, unsecured, payable in quarterly installments of $15,000 (including interest at 8%), maturing April 2006. Payments suspended as of October 2002. 225,000 225,000 Acquisition note payable, secured by equipment, payable in monthly installments of $16,024, no interest, maturing May 2003. Payments suspended as of September 2002. 352,145 368,169 Note payable to a commercial financial corporation, secured by real property and a personal guarantee by the trustee of a trust which is a principal stockholder of the Company, payable in monthly installments of $22,827 (including a fixed schedule for interest, 7.0% at May 31, 2003), maturing March 2007. 3,147,372 3,184,468 Note payable to a commercial financial corporation, secured by equipment, payable in monthly installments of $17,857 (including interest at a variable rate equal to 30 day Commercial Paper plus 350 basis points, 4.71% at May 31, 2003, maturing February 2009. 1,262,240 1,410,714 Acquisition notes payable, unsecured, payable in monthly installments of $16,666, maturing February 2007. 690,135 811,792
7
May 31, August 31, 2003 2002 ------------ ------------ Prepetition- Note payable to a commercial financial corporation, secured by real property and equipment and a personal guarantee by the trustee of a trust which is a principal stockholder of the Company, payable in monthly installments of $1,461 (including interest at 4%), maturing June 2023. 239,211 245,100 ------------ ------------ Total 29,141,053 29,602,012 ------------ ------------ Less Current Maturities (19,163,437) (18,992,222) ------------ ------------ Long-Term Debt $ 9,977,616 $ 10,609,790 ============ ============
Prepetition amount listed above represents the renegotiated amounts and terms under the 1993 plan of reorganization. As of May 31, 2003, the revolving credit line is limited to the lesser of $25 million or a percentage of eligible trade accounts receivable and inventories, as defined. The line of credit has restrictive covenants requiring the maintenance of a minimum tangible net worth and working capital requirements, as defined. On May 31, 2003, the remaining availability under the revolving credit line was $7 million. As of May 31, 2003, the Company was in compliance with all covenants. One of the notes payable contains restrictive covenants on current and debt to worth ratios, and the payment of cash dividends. Two of the notes payable are indebtedness of the Company resulting from a seller financing an acquisition the Company completed in 2001. Payments on these notes were suspended as a result of a breach by seller of an ancillary supply agreement entered into as part of the acquisition. On November 20, 2003, the seller filed for bankruptcy. The Company continues to record these obligations, while the related disputes are resolved. 6. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED May 31, 2003 May 31, 2002 ------------ ------------ Cash paid during the period for: Interest $1,354,635 $1,234,081 Income taxes $ 736,184 $ 770,590 Noncash Investing Activities: Issuance of Warrant to Vendor $ 6,447 $ 27,527
7. STOCK OPTIONS As of May 31, 2003, the Company maintains an Incentive Stock Option Plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, 8 "Accounting for Stock Issued to Employees," and related Interpretations No stock-based compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
Nine Months Ended May 31, 2003 2002 --------- ----------- Net earnings As reported $ 845,530 $ 1,442,668 Pro forma $ 814,609 $ 1,380,926 Net earnings per common and Common equivalent share: Basic - as reported 0.16 0.27 Diluted - as reported 0.16 0.27 Basic - pro forma 0.15 0.26 Diluted - pro forma 0.15 0.26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The accounting policies described below are those the Company considers critical in preparing its consolidated financial statements . These policies require the application of significant judgement by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgements are subject to an inherent degree of uncertainty. These judgements are based on historical experience, the Company's observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate and available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies. The descriptions below are summarized, have been simplified for clarity, and should be read in conjunction with the notes to the Consolidated Financial Statements in the Company's Form 10-K for Fiscal 2002. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided for financial reporting purposes using the straight-line method over estimated useful lives ranging from 5 to 7 years for furniture, fixtures and equipment and up to 30 years for facilities. These estimates require assumptions that are believed to be reasonable. Long-lived assets are evaluated for impairment annually and when an event occurs that indicates an impairment may exist. Accounts Receivable (doubtful accounts) Reserves The Company provides for losses on accounts receivable based upon their current status, historical experience and management's evaluation of existing economic conditions. Significant changes 9 in customer profitability or general economic conditions may have a significant effect on the Company's allowance for doubtful accounts. Revenue Recognition TST's sales are recorded when products are shipped to customers. TST is reasonably assured a majority of the sales are collectible upon shipment due to it's credit policies and collection methods. For those accounts TST is not reasonablely assured of collection the Company reserves against doubtful accounts based upon historical experience and management's evaluation of existing economic conditions. Hotsheet.com, Inc. generates its revenue by click through fee advertising revenues and commissions earned. Click through fees are generated when traffic is sent from the Hotsheet.com website, via a link, to a vendors website. Commissions are generated when the linked traffic makes purchases. The revenue is recognized upon receipt. Inventories Inventories are valued at the lower of cost or market, cost being determined on the first-in, first-out method. Reserves for slow moving, obsolete products, or bad (damaged) products are based on historical experience, acquisition activities, and secured lender policies. The Company evaluates, and if necessary, adjusts reserves quarterly. Historically, the Company has not reserved for slow moving, obsolete or bad inventories. Substantially all of the slow moving products can be repackaged into different formats or labels. Demand for products that are associated with obsolete technology slowly decline as sales of new hardware requiring new or different consumables increase. The reduced demand for products which are becoming obsolete is easily monitored and scheduled production of these items is adjusted accordingly. If damage is caused to a product it is most often minor in value and expensed as damage occurs. Deferred Taxes The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized based on differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates. Returns and Allowances The Company records reductions in revenue when product are returned. Returns and allowances are monitored based on a historical percentage of sales. All returns must be approved by the Company prior to the product being returned, and in some instances a restocking fee is charged to the customer. The Company also monitors reasons for return, such as quality, shipping errors or ordering errors. Commissions and Rebates The Company reserves commissions and rebates paid to certain customers based on specific contractual agreements. These reserves are calculated based upon sales by customer, and adjusted quarterly to reflect increases and decreases in each customer's sales and payments of commissions and rebates. 10 RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED MAY 31, 2003 AND MAY 31, 2002. Net Sales --- Net sales decreased from $33.1 million in the three months ended May 31, 2002, to $28.9 million in the three months ended May 31, 2003 ("Third Quarter"), a decrease of $ 4.2 million or 12.6%. Net sales increased from $84.8 million in the nine months ended May 31, 2002, to $92.4 million in the same period in the year ending August 31, 2003 ("Fiscal 2003"), an increase of $7.5 million, or 8.9%. Net sales decreased in the Third Quarter, as compared to the corresponding period of the prior year, as a result of decreased sales of branded products and the slowed economy. The sales decreased due to new manufacturers in the marketplace of identical branded products. Net sales increased in the nine months ended May 31, 2003, due to the inclusion of a full nine months of sales from our acquisition on March 19, 2002, as compared to only 2.5 months in the corresponding period of the prior year. Gross Profit --- Gross profit decreased from $3.7 million in the three months ended May 31, 2002, to $3.2 million in the three months ended May 31, 2003, a decrease of 12.4%. Gross profit increased from $9.2 million in the nine months ended May 31, 2002, to $9.7 million in the same period in 2003, an increase of $516,000 or 5.6%. Gross profit margin for the three and nine month periods ended May 31, 2002 and May 31, 2003, remained stable at 11%. The decrease and increase in Gross Profit for the three and nine month periods ended May 31, 2003, corresponded to the decrease and increase, respectively, of net sales for those periods. Selling, General, and Administrative Expenses --- SG&A expenses decreased from $2.5 million in the three months ended May 31, 2002 to $2.3 million in the three months ended May 31, 2003. This decrease was primarily the result of lower travel and entertainment expenses which were higher in 2002 due to travel associated with the United acquisition. SG&A as a percent of net sales increased from 7.5% in the three months ended May 31, 2002, to 8.1% in the three months ended May 31, 2003 due to the decrease in sales. SG&A expenses for the nine months ended May 31, 2003 increased to $7.1 million from $6.7 million in the nine months ended May 31, 2002, but decreased as a percentage of net sales from 7.9% in the nine months ended May 31, 2002, to 7.7% in the nine months ended May 31, 2003. The decrease in SG&A as a percentage of sales for the nine months ended May 31, 2003, are due to the efficiencies achieved with the consolidation of the sales forces following the acquisition of substantially all of the operating assets of United Computer Supplies, Inc. and subsidiary ("United"). Interest Expense --- Interest expense decreased from $432,000 in the three months ended May 31, 2002, to $425,000 in the same period of Fiscal 2003. The decrease of 1.6% is due to the decrease in the prime interest rate on which our Line of Credit is based. Interest expense increased from $1.3 million in the nine months ended May 31, 2002, to $1.4 million in the corresponding period of Fiscal 2003, an increase of 9.5%. This increase was primarily attributable to increased borrowings due to the acquisition of substantially all of the operating assets of United. Income Taxes --- Income tax expense decreased from $299,000 for the three months ended May 31, 2002, to $217,000 in the Third Quarter. Income tax expense decreased from $857,000 for the nine months ended May 31, 2002, to $560,000 in the nine months ended May 31, 2003. The decrease in income tax expense for the three and nine 11 month periods ended May 31, 2003, as compared to the corresponding periods of the prior year is a result of decrease in taxable income. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $13 million at May 31, 2003, from $12 million at August 31, 2002. This represented an increase of 9.3%. Effective October 28, 2002, TST entered into an amended and restated loan agreement with a commercial financial corporation, which matures in May 2004. The agreement provides for a $25 million line of credit and an inventory sub-limit of $21 million. The loan is secured by, among other things, inventory, trade receivables, equipment and a personal guarantee of Marshall Sorokwasz, our Chairman of the Board and President, and Trustee of a trust which is a principal shareholder of our Company. A new provision in the amended and restated loan agreement allows the Company to elect the application of a Eurodollar interest rate plus 2.75% for 90 day periods to specified amounts of the loan. Available borrowings under this line of credit, which accrued interest at the prime rate of interest plus .25% (4.5% at May 31, 2003), are based upon specified percentages of eligible accounts receivable and inventories. As of May 31, 2003, there was a $7 million borrowing capacity remaining under the $25 million revolving line of credit. On July 7, 2003, we elected to implement the Eurodollar interest rate, currently 1.110% plus 2.75%, to $12,000,000 of our outstanding loan balance. This rate is locked for 90 days. On April 22, 2003, we executed a one-year, $1.4 million construction loan with the current mortgagee of the Itasca, Illinios building to expand the building an additional 34, 500 square feet. We believe that the funds available under the loans encumbering our California, Illinois, Pennsylvania, Texas and West Virginia plants, the revolving credit facility, cash and cash equivalents, trade credit and internally generated funds will be sufficient to satisfy our requirements for working capital and capital expenditures for at least the next twelve months. Such belief is based on certain assumptions, including the continuation of current operations and no extraordinary adverse events, and there can be no assurance that such assumptions are correct. In addition, expansion of our operations due to an increased demand for products TST manufactures or significant growth of Hotsheet.com, Inc. may require us to obtain additional capital to add new operations or manufacturing facilities. If that should occur, we anticipate that the funds required would be generated through securities offerings or additional debt. There can be no assurance that any additional financing will be available if needed, or, if available, will be on acceptable terms. As of May 31, 2003, we did not own derivative or other financial instruments for trading or speculative purposes. The implementation of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" does not have a material impact on our financial position or results of operations. 12 INVENTORY MANAGEMENT; RAW MATERIALS OF TST We believe that it is necessary for TST to maintain a large inventory of finished goods and raw materials to adequately service its customers. In recent years inventory levels had been increased to facilitate the introduction of new brands and expanded product lines. At the beginning of Fiscal 2002, we implemented a program to reduce inventory. From August 31, 2001 to August 31, 2002, TST inventory levels were reduced by over $4.3 million. This is in addition to the depletion of $3 million of inventory acquired in the purchase of the assets of United in March 2002. In the nine months ended May 31, 2003, inventories decreased an additional $2.5 million. Management intends to continue reducing inventory through the remainder of Fiscal 2003, however, downward pressures on raw material prices could compress the market for our existing inventory and have a material adverse effect on the results of operations of TST or restrain management's attempts at reducing inventory. For the six month period ended February 28, 2003, the price of raw materials had remained relatively stable. During the Third Quarter, the price of raw materials started to rapidly drop. Management believes that prices will continue to decrease through the end of our 2003 fiscal year and the first three months of the fiscal year ending August 31, 2004. TST bears the risk of increases in the prices charged by its suppliers and decreases in the prices of raw materials held in its inventory. If prices for products held in its finished goods inventory decline, if prices for raw materials required by it increase, or if new technology is developed that renders obsolete products distributed and held in inventory by TST, the Company's business could be materially adversely affected. TST purchases raw paper, coated thermal facsimile paper, coated technical paper, carbon and carbonless paper (consisting of a wide variety of weights, widths, colors, sizes and qualities), transparency film, packaging and other supplies in the open market from a number of different companies around the world. We believe that TST has adequate sources of raw material supplies to meet the requirements of its business. We believe that TST has a good relationship with all of its current suppliers. MARKET CONDITIONS The primary product produced by the Company is continuous feed business forms. Management believes that the market for business forms, which declined in 2002, will continue to decline in 2003 although it will be partially offset by fewer competitors in the market place. Management believes that the slowed economy had a significant impact on Third Quarter results of operation, and will continue to affect the Fiscal 2003 results of operations. The slowed economy has resulted in an increase in bad debt. One of our larger customers filed a Chapter 11 bankruptcy on May 7, 2003, owing us approximately $450,000. Of this amount, $219,000 has been written off as bad debt expense this quarter, the remainder has been reserved for in our bad debt reserve. Although the Company has not been served with any notice of a preference action, we could be subject to a preference action of approximately $1 million by the debtor's bankruptcy trustee. Due to the range of remittance dates by the debtor before and during the preference period, we believe we will prevail in any litigation by the trustee of the bankruptcy for this alleged preference with the ordinary course of business defense available under the Bankruptcy Code. 13 If selling prices for products manufactured by us cannot increase in relation to raw material cost increases, or if prices for products manufactured by us decline as a result of market pressures, our results of operations could be materially adversely affected. Although TST has specialized in select markets and has emphasized service and long-term relationships to meet customer needs more effectively, there are no long-term contractual relationships between it and any of its customers. There can be no assurance that purchases by these customers will remain at significant levels. TST may in the future be dependent on these or other significant customers. The loss of any other significant customer could materially adversely affect our financial position, results of operations and cash flows. SEASONALITY TST may be subject to certain seasonal fluctuations in that orders for products may decline over the summer months. If the market for finished goods decreases, then the adverse impact of the seasonal fluctuations on the Company will be greater. Hotsheet.com revenues are partially generated by retail sales which are typically stronger during the Christmas holiday season. SUBSEQUENT EVENTS In the third quarter fiscal 2003, TST sought approval from the Village of Itasca for its construction plan on a 34,500 square foot expansion of the Itasca, Illinois facility. TST believes it will receive such approval on July 17, 2003. TST has executed a construction and takeout loan with the current lender on the building. The cost of construction is currently estimated to be approximately $1.37 million. FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain "forward-looking statements" about our prospects for the future, including but not limited to our ability to generate sufficient working capital, our ability to continue to maintain sales to justify capital expenses, and our ability to generate additional sales to meet business expansion. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including availability of raw materials, availability of thermal facsimile, computer, laser and color ink jet paper, to the cyclical nature of the industry in which we operate, the potential of technological changes which would adversely affect the need for our products, price fluctuations which could adversely impact the large inventory we require, loss of any significant customer, and termination of contracts essential to our business. Parties are cautioned not to rely on any such forward-looking statements or judgments in making investment decisions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not exposed to market risks such as foreign currency exchange rates, but are exposed to risks such as variable interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates. Our subsidiaries do not have supply contracts with any of their foreign vendors. All foreign vendors are paid in United States currency. In addition, TST's international sales of finished goods is insignificant. Accordingly, there are not sufficient factors to create a material foreign exchange rate risk; therefore, we do not use exchange commitments to minimize the negative impact of foreign currency fluctuations. 14 We had both fixed-rate and variable-rate debts as of May 31, 2003. The fair market value of long-term variable interest rate debt is subject to interest rate risk. Generally the fair market value of variable interest rate debt will decrease as interest rates fall and increase as interest rates rise. The estimated fair value of our total long-term fixed rate and floating rate debt approximates carrying value. Based upon our market risk sensitive debt outstanding at May 31, 2003, there was no material exposure to our financial position or results of operations. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 15 PART II: OTHER INFORMATION (a) Exhibits Exhibit No. Description of Exhibits ----------- ----------------------- 99 Certification of Chief Executive Officer 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. (b) Reports on Form 8-K and 8-K/A None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: July 15, 2003 Impreso, Inc. (Registrant) /s/ Marshall Sorokwasz -------------------------------- Marshall Sorokwasz Chairman of the Board, Chief Executive Officer, President, and Director /s/ Susan Atkins -------------------------------- Susan Atkins Chief Financial Officer and Vice President 17 CERTIFICATION Pursuant to Rule 13a-14(b) and 15d-14 I, Marshall D. Sorokwasz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Impreso, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 Signature: /s/ Marshall D. Sorokwasz -------------------------------------- Marshall D. Sorokwasz Chief Executive Officer 18 CERTIFICATION Pursuant to Rule 13a-14(b) and 15d-14 I, Susan M. Atkins, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Impreso, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and, (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 Signature: /s/Susan M. Atkins ----------------------------------- Susan M. Atkins Chief Financial Officer 19 INDEX TO EXHIBITS
Exhibit No. Description of Exhibits ----------- ----------------------- 99 Certification
20