SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended August 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from________ to ___________
Commission File Number 000-29883
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IMPRESO, INC.
(Exact name of registrant as specified in its charter)
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Delaware 75-2849585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
652 Southwestern Blvd., Coppell, Texas 75019
(Address of principal executive offices) (Zip code)
(972) 462-0100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 12, 2002, based upon the closing sale price of the
Common Stock as reported on the Nasdaq SmallCap Market, was approximately
$3,149,950.
There were 5,278,780 shares of the registrant's Common Stock outstanding as of
November 12, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form 10-K
portions of its definitive Proxy Statement for its Annual Meeting of
Shareholders to be filed within 120 days after the end of the fiscal year (the
"Proxy Statement"). Except with respect to information specifically incorporated
by reference into this Form 10-K, the Proxy Statement is not deemed to be filed
as a part hereof.
PART I
ITEM 1. BUSINESS
GENERAL
Impreso, Inc. is the holding company of TST/Impreso, Inc. ("TST"), a
manufacturer and distributor to dealers and other resellers of various paper and
film products for commercial and home use in domestic and international markets,
and Hotsheet.com, Inc., the owner of Hotsheet.com(R), an online web reference
directory.
The primary operating company, TST, was founded in 1976. TST operates in the
hard copy supply market, which encompasses those products used with a hard copy
output or "imaging" device. Approximately 98% of TST's total output is initially
sold domestically. Independent resellers purchase and may further distribute the
products internationally. On March 19, 2002, TST purchased substantially all of
the operating assets of United Computer Supplies, Inc. and United Computer
Supplies-East, Inc. ("United"). On April 18, 2002, TST closed the real estate
transaction of United's Itasca, Illinois manufacturing facility. TST's
occupation of United's leased manufacturing facility in Elk Grove, Illinois
increased the number of the Company's plants to six. Through its six
manufacturing facilities and 54 public warehouse locations throughout the United
States and in Quebec, Canada, TST manufactures and distributes its products
under its own IMPRESO(R) label, generic labels and private labels. In April
1997, TST entered into a non-exclusive Trademark Licensing Agreement with
International Business Machines Corporation ("IBM") for the manufacture and
distribution of a selected line of paper products. In 1999, this agreement was
extended and new products were added.
In February 2002, TST entered into a trademark licensing agreement with Binney &
Smith Properties, Inc. ("Binney"), owner of the Crayola trademark. The agreement
provides for TST to manufacture and distribute a select line of Crayola(R)
imaging products such as Laser and Ink Jet paper, card stock, post cards,
magnets, and t-shirt transfers within the United States, Canada and Mexico.
The hard copy imaging business is a very competitive industry. Advances in
hardware and imaging material technology have accelerated business and public
consumption of new types of products and are changing the industry's customers,
products and channels of distribution. TST has strategically located its
distribution points so that it can deliver its products to customers in most
major cities in the United States within 24 hours. TST has approximately 4,000
customers, ranging in size from small business forms dealers to large office
product wholesalers with multiple offices and branches. An increasing segment of
our customer base has been large and medium size mass merchants, including
computer and office superstores. Our primary method of generating sales contacts
is through our own sales force, manufacturers' sales representatives, extensive
marketing programs, referrals and reputation.
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Our other subsidiary, Hotsheet.com, Inc., owns and operates the Hotsheet.com web
portal. Hotsheet(R) is an internet website directory, or portal, specializing in
listing popular and useful web destinations utilized by a wide general audience.
The 14 primary categories provide over 500 links to premier sites. Hotsheet is
unique due to the single-page presentation of the main directory.
Services provided by Hotsheet.com include My Hotsheet, a unique method of
bookmark management that lets users create their own personalized page of
categorized favorite links and Hotsheet Super Search, a "meta-search" that
combines results from multiple web search engines and ranks them by relevance.
TST'S PRODUCTS
The product line during the fiscal year ended August 31, 2001 ("Fiscal 2001")
consisted of the following:
o Continuous Computer Stock Business Forms. We maintain a wide variety of
standard continuous computer stock business forms in various types of
papers, formats for readability and contrast, and basis weights. Upon
request, we occasionally produce customized forms for larger customers.
o Thermal Facsimile Paper. Our thermal facsimile papers are suitable for
use with all original equipment manufacturers' (OEM's) machines currently
on the market and are warranted against damage that the paper may cause
to a customer's thermal facsimile machine.
o Cut Sheet Paper for use in Laser Printers, Copying Machines and Plain
Paper Facsimile Machines. We convert cut sheet products, including
IMPRESO Lazer Cut Sheets(R).
o Cut Sheet Paper for use in Ink Jet Printers. We manufacture two types of
ink jet paper, coated and un-coated. Coated ink jet paper, in both glossy
and matte, is designed for superior high resolution color graphics and
photographic reproductions. Uncoated ink jet paper is primarily used for
traditional monochrome applications.
o Digital Photo Ink Jet Paper. Used for printing images from digital
cameras, photo CD's, the Internet, or desktop scanners.
o Gloss Coated Ink Jet Paper. Gloss coated on one side for brilliant,
high-contrast color images with photographic detail and matte on the
reverse side for text and graphics.
o Gloss Opaque Ink Jet Film. A stable and long-lasting film for printing
any ink-generated image. Its high gloss finish prints brilliant color
images and its matte side prints text and graphics.
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o Ink Jet Coated Canvas. A textured product which creates the illusion of a
painted surface.
o Transparency Film for Ink Jet Printers. Clear film specially coated for
smudge/bleed-free color or black ink jet imaging.
o Transparency Film for Copier and Laser Printers. Overhead transparencies
can be created using a plain paper copier and this film.
o Transparency Film for Color Laser Printers. Designed specially for color
laser applications; the unique coating controls absorption of color,
creating high quality full color overhead transparencies.
o T-Shirt Transfers. A computer and ink jet printer can create personalized
designs for applications on various cotton materials.
o Point of Sale and Cash Register Machine Rolls. Available in both thermal
and plain paper.
o Fine Cotton Business Stationery Line. Fine cotton business stationery for
sale at the retail level.
o High Speed Laser Roll Paper. High speed laser roll paper is specifically
engineered for high speed roll fed printing systems, such as IBM's
Infoprint(R) family of continuous-feed printing systems like the
Infoprint 3000, Infoprint 4000, and Infoprint 4100. In addition, this
paper can be used in Xerox(R) or OCE(R) systems. These rolls are used by
companies, such as investment banking institutions and publishing
companies, for variable data output applications, such as customized
statements and book publishing. The advantages of using high speed roll
fed printing systems for mass production over traditional methods of
offset printing are lower costs and faster speeds of production without
sacrificing image quality.
o Wide Format Engineering Rolls. Available in three different grades of
paper, bond, vellum and translucent bond, and in a variety of widths and
lengths. These products are used with wide format printing and copying
equipment, such as those used by architectural and engineering firms for
design plans and renderings. The introduction of engineering rolls
represents our entry into the rapidly growing wide format printing
market. This product category also opened a new channel of distribution
through computer-aided design (CAD) supply dealers.
o Wide Format Ink Jet Media. Available in a wide variety of coated papers
and films used for full color graphic signage and display.
o Processed Laser Cut Sheets. Laser cut sheets are micro-perforated and/or
pre-punched cut sheets used in copiers, laser printers and ink jet
printers for applications such as
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return/reply promotional materials, billing and remittance statements, or
coupons. Users can keep printing projects in-house by eliminating the use
of outside sources for custom forms.
o Ink Jet Greeting Cards. Pre-scored white card stock in matte and glossy
finishes, packaged with matching envelopes.
o Ink Jet Bumper Stickers. Coated vinyl bumper sticker material for use in
ink jet printers to create personalized bumper stickers.
o Photo Quality Business Card Size Magnets. Photo quality, magnet stock is
die cut into business card size pieces. Excellent for producing business
card size magnets, magnets with important phone numbers and photo
magnets. Magnets can be affixed to all metal surfaces including
refrigerators, lockers, etc.
o Bulk Bin Packaging of Wide Format Engineering Rolls. Packaged for large
users to buy in bulk and conveniently store.
o Expanded Line of Wide Format Ink Jet Media. Additional SKU's with
expanded widths and lengths to accommodate new printer capabilities
within the market.
o Outdoor Banner Material. Part of our Wide Format line of products,
specially designed surface for use by retail signage shops and in-house
sign production.
o Complete Line of ATM Rolls. Expansion of our Point of Sale products for
automated teller machines servicing the financial market.
o CD/DVD Sleeves. Die cut sheeted paper with adhesive strips for printing
and assembling customized CD/DVD protective sheaths.
o CD/DVD Labels. Pre-formatted, die cut, adhesive paper for printing CD/DVD
labels.
o Ink Jet Address Labels. Pre-formatted, die cut, adhesive paper for
printing ink jet address labels.
o Two sided Glossy Coated Ink Jet Paper. Gloss coated on both sides for
brilliant, high-contrast color images with photographic detail.
o Professional Grade Ultimate Glossy Photo Paper. Designed for ink jet
printers, this ultra-bright, 100-plus whiteness paper creates a "true
photograph" look and feel for high-end applications.
o File Folders. Manilla folders available in letter and legal size.
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o Rolodex and Index cards.
o 99 Brite Ultimate InkJet and Ultimate Laser Paper. Twenty-four pound
ultra-bright paper for laser, ink jet, and multi-functional equipment.
o Recycled Computer Paper Line. Three recycled grades introduced with
varying brightnesses, including an 84 bright, 30% post-consumer waste
product which meets governmental agencies' recycled requirements.
PRODUCTS INTRODUCED BY TST IN FISCAL 2002
o Custom Printed Point of Sale/Add Rolls (Company logo, return policy,
etc.).
o Crayola Brand "Print & Color" Specialty Fun Papers: Includes Crayola
T-Shirt Transfers, Crayola Greeting Cards with Envelopes, Crayola Glossy
Photo Paper, Crayola Classic Colors, Crayola Assorted Brights and
Pastels, Crayola Cling Art, Crayola Stardust Magnets and Stickers,
Crayola Stardust Paper and Crayola Repositional Stickers.
TST'S TRADEMARK LICENSE
In April 1997, TST entered into a non-exclusive Trademark Licensing Agreement
with IBM. Under this agreement TST manufactures and distributes a selected line
of paper products within the United States, Canada and Mexico under the IBM
brand name. In March 1999, TST extended the agreement with IBM from a four-year
contract with two one-year automatic renewals, to a six-year contract with two
one-year automatic renewals. The amended agreement also expanded the list of
authorized products. In October 2002, the agreement was amended again to exclude
the sales of point of sale add rolls to three accounts. TST began shipping IBM
branded products in fiscal 1998. Substantially all of the products manufactured
by TST are also marketed under the IBM Brand Paper Program. TST has been
actively soliciting distributors, dealers and retail accounts into the IBM
program and has established a solid base for creating additional sales
opportunities to existing accounts, as well as initial sales to new customers
who are now purchasing from us as a direct result of their participation in the
IBM Brand Paper Program.
In February 2002, TST entered into a trademark licensing agreement with Binney,
owner of the Crayola Trademark. The agreement provides for TST to manufacture
and distribute a select line of Crayola(R) imaging products such as Laser and
Ink Jet paper, card stock, post cards, magnets, and t-shirt transfers within the
United States, Canada and Mexico. TST began shipping Crayola branded products in
March 2002. The addition of the Crayola brand has helped the Company diversify
its position in the retail segment through mass merchant and food and drug store
channels by attracting new end-users such as teachers, children and parents.
Management believes that brand name identification is an effective tool for
penetration of the paper industry's market and maintenance of profit margins.
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TST'S MARKETING AND DISTRIBUTION
TST markets its products to approximately 4,000 customers through its own sales
force and established manufacturers' representatives. TST's targeted customers
are business consumable and office machine dealers and large and medium size
mass merchants, including computer and office superstores. We are continually
seeking to diversify our customer base and distribution channels. The
incorporation of non-traditional but related product categories into our
expanding product line may facilitate our access to different distribution
channels. In Fiscal 2002, we began supplying engineering rolls and wide format
inkjet products through new channels of distribution, reprographic houses and
architectural supply companies.
TST has 60 distribution points (54 public warehouses and six manufacturing
locations), which enable it to deliver products to most major cities in the
United States within 24 hours. TST's primary method of generating revenue is
through its own sales force. The members of this sales force generally seek
business within specific geographic territories. Manufacturers' representatives
serve as an important supplementary source of sales and marketing. Their
territories are identified by specific accounts or prospects, primarily those of
a retail nature.
TST sells to the following types of customers:
o Business Forms Dealers - Businesses that primarily buy and resell various
types of business forms. Examples include Standard Forms, American Business
Forms and Better Business Forms.
o Wholesale Stationers - Businesses that supply a large variety of office
products to office product dealers. Wholesale stationers generally do not
sell directly to the end user. Examples include United Stationers, SP
Richards, and Daisytek.
o Office Products Dealers - Businesses that generally purchase a majority of
their products from wholesale stationers, but often negotiate directly with
manufacturers. Examples include Navrat's Office Products and Crest Office
Supply.
o Paper Merchants - Businesses that sell all types of papers to printers and
dealers and directly to end users. Examples include Unisource, Xpedx and
Ris Paper.
o Consumer Electronics Stores - Businesses that sell retail to the end user
in a broad spectrum electronics environment. Examples include Frye's, Best
Buy and CompUSA.
o Mass Merchants - Discount department stores with retail sections that sell
computer, copier and facsimile related supplies. Examples include Kmart and
Army and Air Force Exchange Service.
o Grocery and Drug Store Chains - Businesses that sell computer consumables
as a convenience to its customer and secondary sale to its primary target
product. Examples include Walgreen's, Kroger
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and Rite-Aid.
o Wholesale Clubs/Office Superstores - Businesses that sell large quantities
of inventory at or near wholesale prices to end users and dealers. These
stores generally do not provide the credit, delivery and other types of
services and support to the extent that wholesale stationers provide their
customers. Examples include Staples, Costco and BJ's.
o Buying Groups - Groups of dealers, ranging from ten to 400 members, that
combine their buying power to receive, among other things, volume discount
pricing and rebate incentives from manufacturers. Examples include
Independent Stationers and Association of Independent Printing Paper
Merchants.
o Computer Aided Design (CAD) Supply Dealers - Dealers that typically sell
wide format supplies and papers to architects and engineers. Examples
include CAD Supply Specialty and IMPACO.
o Contract Stationers - Companies that offer a complete catalog of office and
business supplies generally to large corporations. In many cases, various
types of products are bundled and sold under contract. Examples include
Corporate Express, Boise Cascade Office Products and Staples.
o Cash Register Dealers - Dealers that sell cash register systems and point
of sale supplies to businesses such as restaurants and retail vendors.
Examples include Impact Paper, USA Paper and Columbia Paper & Ribbon.
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. Two
customers, Staples, Inc. ("Staples") and Xpedx, each accounted for more than 10%
of TST's sales in the years ended August 31, 2002, 2001 and 2000. There can be
no assurance that purchases by these customers will remain at significant
levels. TST may in the future be dependent on Staples, Xpedx, or other
significant customers. The loss of Staples, Xpedx or any other significant
customer could materially adversely affect our financial position, results of
operations and cash flows.
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, management
implemented a program to reduce inventory. From August 31, 2001 to August 31,
2002, TST reduced its inventory levels by $4.35 million. This is in addition to
the depletion of $3 million of inventory acquired in the purchase of the assets
of United. Although Inventories rose in September and October 2002, management
intends to continue reducing inventory levels through the fiscal year ending
August 31, 2003 ("Fiscal 2003"). However, downward pressures on raw material
prices could compress
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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.
In recent years we have depended primarily on international vendors of raw
materials. One of the largest vendors from Asia has suffered a financial crisis
and this has created supply disruption and a tighter raw material market for the
Company. The Company in recent months has shifted its supply chain from
international to domestic sources, which historically charge higher prices for
raw materials. This shift could have a material adverse effect on the results of
operation by making our finished goods pricing uncompetitive.
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 OF TST
The primary products produced by United are continuous feed business forms and
small rolls. Our acquisition of United did not change the percentage of business
forms in our product mix from 67%. Management believes that the market for
business forms, which declined in 2002, will continue to decline in 2003.
Management has targeted these acquisitions to assume customer base that we will
attempt to transition into our other product lines as the business forms format
continues to decline.
September 11, 2001's impact on the economy also impacted the net sales of TST;
however, the exact impact on the results of operations is not ascertainable.
Although net sales in Fiscal 2002, as compared to Fiscal 2001, increased
approximately 28%, the Company expected net sales to have been significantly
higher due to the acquisition of United in March 2002 and reduction in the
market place of competing distributors of the Company's products. Management
believes that the slowed economy will continue to effect the Fiscal 2003 results
of operations.
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
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results of operations could be materially adversely affected.
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.
TST'S BACKLOG
The dollar value of TST's order backlog as of August 31, 2002 and 2001, was
approximately $3.7 million and $2.9 million, respectively. TST's ability to fill
orders is directly impacted by the general cyclical pattern of the paper
industry and its ability to purchase the raw materials and finished goods
necessary to fill customer orders. The increase in backlog is related to TST's
increased net sales.
TST'S COMPETITION
TST competes with a number of other business organizations within the paper
industry, some of which have substantially greater financial, human and other
resources. TST currently competes principally with manufacturers that distribute
their products through dealers, resellers and/or retailers and, to a lesser
extent, manufacturers who distribute their own products directly to end-users.
Weak industry conditions in the past few years have caused the major
direct-selling companies, which are much larger than TST, to sell direct and to
dealers. In some cases, this has led to TST's customers reducing their selling
prices to compete with these dealers. This has also caused increased competition
among companies selling products through dealers. In addition, vertical
consolidation among entities in the paper industry has created tougher
conditions for TST, because certain of TST's suppliers have subsidiaries that
compete with TST and these suppliers generally support the efforts of their
subsidiaries. Finally, in the changing environment of the hard copy supply
industry, advancing technology has contributed to the competition as companies
must commit resources to obtain new equipment in order to convert the evolving
types of business consumables required by the advancement of technology, to
expand facilities to house the increasing number of types of products available
and for just-in-time inventory purchasing practices of customers.
TST has remained competitive by incorporating the manufacture and distribution
of technical and high recognition branded paper products into its line. The
addition of technical products into our line has positioned TST as a supplier of
business consumables at the initial growth stages of the technology's
introduction into the market and, therefore, at the greatest opportunity for
strong profit margins and growth in unit sales. Sales of branded products
benefit from brand loyalty and name recognition. Since TST began the manufacture
and distribution of technical and trademark licensed branded products,
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and has penetrated new distribution channels with its expanding product lines,
management believes that in the future the companies TST will compete with will
change as the consolidation within the paper industry causes competitors to
branch into other categories of products that may not compete with the lines we
offer.
Over the past 10 years, the number of national producers of stock computer forms
has decreased from 19 to two through consolidation and business closures.
Continuing consolidation within the paper industry of regional suppliers is
creating opportunities for TST to expand its customer base and increase its
market share. The acquisition of United in Fiscal 2002 resulted in a substantial
number of new customers which were captured without compromise to the Company's
profit margins or substantial increases in selling, general and administrative
expenses as a percentage of net sales.
We believe that TST effectively competes on the basis of the following: its
nationwide distribution network, which enables products to be delivered to its
customers in most major cities in the United States within 24 hours; its larger
number of inventory items providing customers cost-effective, efficient
purchasing and volume discounts; and by providing high-quality products and
customer-oriented services.
TRADEMARKS
TST uses the trademark IMPRESO, a Spanish word meaning "printed matter", on
certain products it manufactures and distributes. The trademark and service mark
is registered in the United States. These registrations are effective until
August 2009 and May 2010, respectively. The IMPRESO trademark is also registered
in Canada and Great Britain. These foreign registrations are effective until
July 2007 and October 2007. The foreign registration renewal for the IMPRESO
trademark in Italy has been submitted, but we have not received the certificate
from the Italian administration. An application to register the IMPRESO
trademark under the new European Community Trademark regulations, which was
filed July 19, 2000, was denied and subsequently abandoned due to the generic
meaning of the word "impreso" in Spain and Portugal. Management believes that
the IMPRESO trademark has significant name recognition and is important in
marketing and achieving visibility of TST's products. The goodwill value
associated with the name IMPRESO has been pledged as an asset to TST's current
primary secured lender under TST's revolving line of credit.
TST also has a trademark registration in the United States for "Lazer Cut
Sheets(R)" and "Lazer Bond(R)", effective until May 2007. Each of the Lazer Cut
Sheet and Lazer Bond trademarks are applied only to one specific product that
TST manufactures.
The United States service mark registration obtained on Hotsheet, our
subsidiary's proprietary Internet portal, is effective until January 2008. The
European Community Trademark registration for Hotsheet.com is effective until
February 2010. The United States service mark registration for Shopsheet(R), a
subportal of Hotsheet.com, is effective until February 2010.
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The acquisition of United's assets in March 2002 included one United States
trademark: Computer Paper, Computer Paper, which registration is effective until
December 2003.
SERVICE AND SUPPORT
We believe that customer service is an important factor in product sales and
customer satisfaction. Service and support include TST's own in-house trucking
that back-hauls goods for other entities, which reduces transportation costs and
improves customer service. Our in-house graphics department can design and
prepare layouts of packaging and can produce negatives, which allows TST speed
and flexibility when bringing new products or packaging into the marketplace.
TST also sells its graphics capabilities to its customers. TST's customer
service department can expedite service because its computer system sends a bill
of lading by facsimile to the appropriate distributing warehouse and an order
acknowledgment to the receiving customer when an order is entered by a customer
service representative. TST's computer system automatically calculates inventory
levels at each warehouse and the amount of raw materials it must purchase, and
identifies which of its plant locations will manufacture an order.
TST also has a collection and credit department. The staff evaluates extensions
of credit and makes written and verbal requests for payment from those customers
whose invoices are not paid within agreed payment terms. In-house counsel is
available to assist the credit department in difficult collections.
TST offers a 120-day warranty on all of its products. To date, warranty expense
has been minimal.
ENVIRONMENTAL REGULATION
We believe that compliance with any environmental regulations that may be
applicable to us will not have a material adverse effect on our capital
expenditures, earnings or competitive position.
EMPLOYEES
We had 311 full-time employees at August 31, 2002 of whom approximately 69% are
engaged in manufacturing TST's products. None of our employees are currently
covered by a collective bargaining agreement. We consider our employee relations
to be good as a result of an organizational structure which encourages
individual initiative as well as team work.
ITEM 2. PROPERTIES
TST operates six manufacturing plants encompassing an aggregate of approximately
419,067 square feet of space. The Coppell, Texas, facility, where our executive
offices are located, is approximately 75,000 square feet. TST owns five of its
manufacturing plants, which are located in Coppell, Texas; Kearneysville, West
Virginia; Fontana, California; Greencastle, Pennsylvania; and Itasca, Illinois.
The
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facilities in Fontana, California, are encumbered by a mortgage maturing in
2008. The Coppell and Greencastle plants are encumbered by mortgages maturing in
2011. The West Virginia property is encumbered by mortgages maturing in 2023.
The Itasca, Illinois facility's mortgage matures in April 2012. TST maintains a
manufacturing facility in Elk Grove, Illinois; a warehouse space in Dallas,
Texas; and a regional sales office in Reading, Pennsylvania under month to month
leases. TST also has a regional sales office in Huntington, New York, under a
lease which expires in May 2003. Annual mortgage payments and minimum lease
payments relating to these facilities were approximately $998,409 in Fiscal 2002
and $656,711 in Fiscal 2001. Costs incurred for the 54 public warehouses TST
utilizes throughout the United States and in Quebec, Canada was approximately
$1.7 million for Fiscal 2002.
Our Hotsheet operation is currently operating from our headquarters at the
Coppell , Texas facility and through its internet service providers located in
Dallas, Texas and Providence, Rhode Island.
We believe the current facilities are in good condition, and are suitable and
adequate for current business needs. We estimate that, as of August 31, 2002,
TST was operating at approximately 70% capacity for all of the products it
manufactures, which will allow it to increase production to meet increased
demand, if any, with no immediate capital investment.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 2002, TST filed a lawsuit against a vendor in the United States
District Court for the Northern District of Texas - Dallas Division.
Simultaneously with the initiation of the lawsuit, TST requested that its
disputes with the vendor be submitted to arbitration through the American
Arbitration Association's Dallas, Texas office. TST's general claim is that the
vendor breached a Distributor Agreement entered into with TST in several
material respects, including the vendor's late delivery of paper products, the
vendor's delivery of defective product, and the vendor's failure to properly
credit TST's accounts based upon these and other alleged breaches. The vendor
responded to TST's demand for arbitration by generally denying TST's claims and
asserting a counterclaim seeking to recover disputed accounts receivable and
damages related to TST's alleged interference with the vendor's relationship
with its lender. No date has yet been set for arbitration or litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From September 1, 2000 to May 24, 2001, our stock was reported on the Nasdaq
National Market ("NNM") under the symbol ZCOM. On May 25, 2001, our common stock
began trading on the Nasdaq SmallCap Market ("NSCM") under the symbol ZCOM. The
high and low closing prices for the common stock, as reported on the NNM and
NSCM in the respective time frames, are as follows:
<Table>
<Caption>
Price Range
------------------------
High Low
-------- --------
2002 Fiscal Year
First Quarter (Sept. - Nov. ) $ 2.490 $ 1.120
Second Quarter (Dec. - Feb.) 4.350 2.300
Third Quarter (Mar. - May) 3.350 2.500
Fourth Quarter (June - Aug.) 3.200 1.820
2001 Fiscal Year
First Quarter (Sept. - Nov. ) $ 3.969 $ 2.125
Second Quarter (Dec. - Feb.) 3.313 1.750
Third Quarter (Mar. - May) 2.313 1.600
Fourth Quarter (June - Aug.) 2.090 1.600
</Table>
On November 12, 2002, the closing price for the common stock on the NSCM was $
2.05 and the common stock was held by approximately 750 stockholders of record,
including holdings through nominee or street name accounts with brokers.
We have not paid any dividends on our common stock since inception, and we do
not intend to pay dividends to our stockholders in the foreseeable future. Any
such dividends will be declared in compliance with the restrictive covenants of
our subsidiary's lender that no cash dividends paid during any one calendar year
shall exceed current year's net profit. We also intend to reinvest earnings, if
any, in the development and expansion of our businesses. The declaration of
dividends in the future will be at the discretion of the Board of Directors and
will depend upon the earnings, capital requirements and our financial position,
general economic conditions and other pertinent factors.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of our selected financial data as of and for the five
years ended August 31, 2002 ("Fiscal 2002"). The historical financial data has
been derived from our audited financial statements. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements appearing
elsewhere in this document.
13
SELECTED FINANCIAL DATA(a)
Years Ended August 31,
<Table>
<Caption>
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
Operations Data:
Net Sales $ 52,202,834 $ 61,506,207 $ 74,117,661 $ 96,208,411 $123,065,514
Net Income (loss) (1,084,509) 774,352 931,317 1,246,945 1,676,442
------------ ------------ ------------ ------------ ------------
Earnings (loss) per common share:
Net Income (loss) (0.20) 0.15 0.18 .24 .32
------------ ------------ ------------ ------------ ------------
Consolidated
Balance Sheet Data:
Total assets 23,519,946 33,084,378 39,383,548 62,202,597 66,971,864
Long-term debt
(excluding current maturities) 2,697,512 2,629,272 3,782,079 6,328,454 10,609,790
Stockholders' Equity $ 11,798,921 $ 12,573,273 $ 13,504,590 $ 14,712,643 $ 16,416,612
------------ ------------ ------------ ------------ ------------
</Table>
(a) This schedule should be read in conjunction with our audited
Consolidated Financial Statements and related notes thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2002, AS COMPARED TO THE
YEAR ENDED AUGUST 31, 2001
Net Sales--- Net sales increased from $96.2 million in Fiscal 2001 to $123.1
million in Fiscal 2002, an increase of $26.9 million or 27.9%, due primarily to
the acquisition of United and fewer competitors in the marketplace.
Gross Profit--- Gross profit increased from $11.5 million in Fiscal 2001 to
$12.6 million in Fiscal 2002, an increase of $1.2 million or 10.1%. Our gross
profit percentage decreased from 11.9% for Fiscal 2001 to 10.3% for Fiscal 2002.
The gross profit percentage decrease was primarily the result of increased fixed
costs from the acquisition of United and higher transportation costs.
Selling, General and Administrative Expenses--- SG&A expenses for Fiscal 2002
were $9.3 million, or 7.6% of net sales, as compared to $7.9 million, or 8.2% of
net sales for Fiscal 2001. SG&A decreased as a percentage of net sales in Fiscal
2002, due to our acquisition of United's customers, elimination of duplicate
marketing personnel and leveraging existing fixed costs.
14
Interest Expense--- Interest expense increased from $1.6 million for Fiscal 2001
to $1.7 million for Fiscal 2002, an increase of $112,000 or 6.9%. This increase
is attributable to increased financing of plants and equipment.
Income Taxes--- Income tax expense was $777,000 for Fiscal 2001, as compared to
$1.1 million for Fiscal 2002. The increase in tax expense resulted primarily
from increased profits for Fiscal 2002.
RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2001, AS COMPARED TO THE
YEAR ENDED AUGUST 31, 2000
Net Sales--- Net sales increased from $74.1 million in Fiscal 2000 to $96.2 in
Fiscal 2001, an increase of $22.1 million or 29.8%, due to the acquisition of
the Sky Division of Durango-Georgia Converting, LLC and fewer competitors in the
marketplace.
Gross Profit--- Gross profit increased from $9.5 million in Fiscal 2000 to $11.5
in Fiscal 2001, an increase of $2.0 million or 20.7%. Our gross profit
percentage decreased from 12.8% for Fiscal 2000 to 11.9% for Fiscal 2001. Costs
of sales as a percentage of net sales slightly increased from 87.2% in Fiscal
2000 to 88.1% in Fiscal 2001. The gross profit increase was primarily the result
of increased sales. The slight decrease in gross profit percentage and increase
of cost of sales as a percentage of net sales was due to increased fixed costs
from the acquisition of Sky and higher transportation costs.
Selling, General and Administrative Expenses--- SG&A expenses for Fiscal 2001
were $7.9 million, or 8.2% of net sales, as compared to $6.8 million, or 9.2% of
net sales for Fiscal 2000. SG&A decreased as a percentage of net sales in Fiscal
2001, due to our acquisition of Sky's customers, elimination of duplicate
marketing personnel and leveraging existing fixed costs.
Interest Expense--- Interest expense increased from $1.3 million for Fiscal 2000
to $1.6 for Fiscal 2001, an increase of $328,000 or 25%. This increase is
attributable to increased borrowings under TST's revolving line of credit and
increased financing of plants and equipment. The increased borrowings were
incurred to finance TST's acquisition of Sky.
Income Taxes--- Income tax expense was $557,000 for Fiscal 2000, as compared to
$777,000 for Fiscal 2001. The increase in tax expense resulted primarily from
increased profits for Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents remained relatively constant at $211,000 at August 31,
2001, and $203,000 at August 31, 2002.
Borrowings under TST's line of credit decreased from $18.3 million at August 31,
2001 to $17.9 million at August 31, 2002, a decrease of $447,000, or 2.4%. The
decreased borrowing primarily resulted from TST's decreasing its raw material
inventory.
15
Working capital increased to $11.3 million at August 31, 2002, from $10.5
million at August 31, 2001, an increase of $800,000 or 7.6%. This increase is
primarily attributable to a decrease in TST's Accounts Payable of $1.4 million,
and a decrease in borrowings under its line of credit of $447,000.
In April 2002, TST entered into an agreement with a bank for a two-year renewal
of its revolving line of credit. The new agreement increases the line from $22
million to $25 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. Available borrowings under this line of credit,
which accrues interest at the prime rate of interest plus .25% (5.0% at August
31, 2002), are based upon specified percentages of eligible accounts receivable
and inventories. As of August 31, 2002, there was a $8.6 million borrowing
capacity remaining under the $25 million revolving line of credit. The revolving
credit line will mature in May 2004.
On April 18, 2002, TST entered into a loan agreement with a commercial financial
corporation to fund the purchase of the Itasca facility. The mortgage on this
property is approximately $3.2 million, maturing in 2012.
We believe that the funds available under the loans encumbering our California,
Texas, Pennsylvania, Illinois 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 August 31, 2002, we did not own derivative or other financial instruments
for trading or speculative purposes. We do not use financial instruments and,
therefore, the implementation of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" did not have
a material impact on our financial position or results operations.
IMPACT OF INFLATION
Inflation is not expected to have a significant impact on our business.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results of
Operations and other
16
sections of this Form 10-K 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 7A. 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.
We had both fixed-rate and variable-rate debts as of August 31, 2002. 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. See Note 2 to Consolidated Financial
Statements. Based upon our market risk sensitive debt outstanding at August 31,
2002, there was no material exposure to our financial position or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<Table>
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years
Ended August 31, 2002, 2001 and 2000 F-5
</Table>
17
<Table>
Consolidated Statements of Stockholders' Equity
for the Years Ended August 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years
Ended August 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
</Table>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
PART III
The information required by Items 10 through 13 of Part III is incorporated
herein by reference from the Company's definitive proxy statement for its annual
meeting of stockholders to be held on January 28, 2003 (the "Proxy Statement").
Only those sections of the Proxy Statement that specifically address the items
set forth herein are incorporated by reference. Such incorporation by reference
does not include the Compensation Committee Report or the Stock Performance
Graph, included in the Proxy Statement.
ITEM 14. 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements of the Company filed in this Annual
Report on Form 10-K are listed in Item 8.
2. Financial Statement Schedules:
The financial statement schedules of the Company filed in this
Annual Report on Form 10-K are listed in the attached Index to
Financial Statement Schedules.
3. Exhibits:
The exhibits required to be filed as part of this Annual
Report on Form 10-K are listed in the attached Index to
Exhibits.
19
(b) Current Reports on Form 8-K
On July 19, 2002, we filed a Current Report on Form 8-K, dated July 12, 2002, to
report a change in accountants from Arthur Andersen LLP to Blackman Kallick
Bartelstein LLP.
20
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit No. Description of Exhibits
- ----------- -----------------------
2.1 Plan and Agreement of Merger, dated as of December 1, 1999, among
TST/Impreso, Inc., Impreso, Inc. and TST Merger Corp.
(incorporated by reference to Appendix A of the Company's
Registration Statement on Form S-4, No. 333-92381)
2.2(a) Asset Purchase Agreement by and between TST/Impreso, Inc. and
Durango Georgia Converting LLC dated as of April 5, 2001
(incorporated by reference to Exhibit 2.1 of the Company's
Quarterly Report on Form 10-Q, for the quarter ended May 31,
2001)
2.2(b) Asset Purchase Agreement by and between TST/Impreso, Inc. and
Bank of America, N.A. and consented to by United Computer
Supplies, Inc., United Computer Supplies-East, Inc. and John R.
Zimmerman dated as of March 19, 2002 (incorporated by reference
to Exhibit 2.1 of the Company's Quarterly Report on Form 10-Q,
for the quarter ended May 31, 2002)
2.2(c) Real Estate Purchase and Sale Agreement by and between United
Computer Supplies, Inc. and TST/Impreso, Inc. dated as of March
15, 2002 (incorporated by reference to Exhibit 2.21 of the
Company's Quarterly Report on Form 10-Q, for the quarter ended
May 31, 2002)
3(a) Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Registration Statement
on Form S-4, No. 333-92381)
3(b) By-laws of the Company (incorporated by reference to Exhibit 3(b)
to the Company's Registration Statement on Form S-4, No.
333-92381)
4.1 Form of Underwriters' Warrant (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
No. 33-93814)
10(a) 1995 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1, No.
33-93814)
10(b) Employment Agreement dated January 27, 1999, between the Company
and Marshall Sorokwasz (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1, No.
33-93814)
10(c) IBM Brand Paper Trademark Licensing Agreement, effective as of
April 30, 1997 and Amendment No. 1 thereto, between TST/Impreso,
Inc. and International Business Machines Corporation
(incorporated by reference to Exhibit 10(c) of the Company's
Quarterly Report on Form 10-Q/A, dated July 15, 1997)
[Confidential treatment has been granted for certain portions of
this Exhibit]
</Table>
21
<Table>
<Caption>
Exhibit No. Description of Exhibits
- ----------- -----------------------
10(d) Amendment Number 2 to the IBM Brand Paper Trademark Licensing
Agreement, dated March 5, 1999, between TST/Impreso, Inc. and
International Business Machines Corporation (incorporated by
reference to Exhibit 10(d) of the Company's amended Quarterly
Report on Form 10-Q/A, dated June 17, 1999) [Confidential
treatment has been granted for certain portions of this Exhibit]
10(e) Crayola License Agreement made as of February 6, 2002, with an
effective date of March 1, 2002, by and between Binney & Smith
Properties, Inc. and TST/Impreso, Inc. (incorporated by reference
to Exhibit 10(e) of the Company's amended Quarterly Report on
Form 10-Q/A dated May 1, 2002) [Confidential treatment has been
granted for certain portions of this Exhibit]
21 Subsidiaries of the Registrant
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 31, 2002
and 2001 F-3
Consolidated Statements of Operations for the Years
Ended August 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended August 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years
Ended August 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
</Table>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Impreso, Inc.:
We have audited the accompanying consolidated balance sheet of Impreso, Inc. (a
Delaware corporation) and subsidiaries as of August 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements as of August
31, 2001 and 2000 were audited by other auditors whose report dated October 19,
2001 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of Impreso, Inc. and
subsidiaries as of August 31, 2002 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
October 18, 2002
F-2
IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<Table>
<Caption>
August 31, August 31,
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 202,809 $ 211,352
Trade accounts receivable, net of allowance for doubtful accounts
of $515,010 at August 31, 2002 and $342,780 at August 31, 2001 15,863,549 11,748,088
Inventories 34,111,015 38,459,817
Prepaid expenses and other 226,065 234,411
Deferred income tax assets 513,950 116,545
------------ ------------
Total current assets 50,917,388 50,770,213
------------ ------------
Property, plant and equipment, at cost 27,712,994 21,725,088
Less--Accumulated depreciation (11,773,895) (10,511,892)
------------ ------------
Net property, plant and equipment 15,939,099 11,213,196
------------ ------------
Other assets 115,377 219,188
------------ ------------
Total assets $ 66,971,864 $ 62,202,597
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
August 31, August 31,
2002 2001
------------ ------------
Current liabilities:
Accounts payable $ 16,301,801 $ 18,572,200
Accrued liabilities 3,702,838 1,942,241
Current maturities of long-term debt 1,122,614 1,404,562
Line of credit 17,861,824 18,308,338
Current maturities of prepetition debt 7,784 7,484
------------ ------------
Total current liabilities 38,996,861 40,234,825
Deferred income tax liability 948,601 926,675
Long-term debt, net of current maturities 10,372,474 6,083,279
Long-term portion of prepetition debt, net of current maturities 237,316 245,175
------------ ------------
Total liabilities 50,555,252 47,489,954
------------ ------------
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 issued and 5,278,780 outstanding 52,928 52,928
Treasury Stock (14,000 shares, at cost) (38,892) (38,892)
Additional paid-in capital 6,347,209 6,319,682
Retained earnings 10,055,367 8,378,925
------------ ------------
Total stockholders' equity 16,416,612 14,712,643
------------ ------------
Total liabilities and stockholders' equity $ 66,971,864 $ 62,202,597
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Years Ended August 31,
2002 2001 2000
------------- ------------- -------------
Net sales $ 123,065,514 $ 96,208,411 $ 74,117,661
Cost of sales 110,447,664 84,752,004 64,624,852
------------- ------------- -------------
Gross profit 12,617,850 11,456,407 9,492,809
------------- ------------- -------------
Other expenses and income:
Selling, general and administrative 9,332,038 7,872,633 6,837,737
Interest expense 1,744,774 1,632,581 1,304,369
Litigation Settlement (1,005,452) -- --
Other income, net (183,348) (72,259) (137,791)
------------- ------------- -------------
Total other expense and income 9,888,012 9,432,955 8,004,315
------------- ------------- -------------
Income before income tax expense 2,729,838 2,023,452 1,488,494
------------- ------------- -------------
Income tax expense:
Current 1,428,875 725,560 534,273
Deferred (375,479) 50,947 22,904
------------- ------------- -------------
Total income tax expense 1,053,396 776,507 557,177
------------- ------------- -------------
Net income $ 1,676,442 $ 1,246,945 $ 931,317
============= ============= =============
Net income per share (basic and diluted) $ 0.32 $ 0.24 $ 0.18
============= ============= =============
Weighted average shares outstanding 5,278,780 5,281,583 5,292,780
============= ============= =============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
Common Stock Additional
$.01 Par Value Paid-In Retained Treasury
Shares Amount Capital Warrants Earnings Stock Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 1999 5,292,780 $ 52,928 $ 6,319,572 $ 110 $ 6,200,663 $ -- $12,529,273
Net Income -- -- -- -- 931,317 -- 931,317
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2000 5,292,780 52,928 6,319,572 110 7,131,980 -- 13,504,590
Expired Warrants -- -- 110 (110) -- -- --
Purchased Treasury Stk (38,892) (38,892)
Net Income -- -- -- -- 1,246,945 -- 1,246,945
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2001 5,292,780 52,928 6,319,682 -- 8,378,925 (38,892) 14,712,643
Other -- -- 27,527 -- -- -- 27,527
Net Income -- -- -- -- 1,676,442 -- 1,676,442
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2002 5,292,780 $ 52,928 $ 6,347,209 $ -- $10,055,367 $ (38,892) $16,416,612
=========== =========== =========== =========== =========== =========== ===========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Years Ended August 31,
2002 2001 2000
------------ ------------ ------------
Cash Flows From Operating Activities:
Net income $ 1,676,442 $ 1,246,945 $ 931,317
Adjustments to reconcile net income to net
cash used in operating activities-
Depreciation and amortization 1,262,003 873,976 688,698
Provision for Losses of Receivables 258,100 174,149 38,234
Provision for Losses of Inventory 430,651 363,064 --
Loss (Gain) on sale of property, plant and equipment -- 20,062 (17,019)
(Decrease) increase in Deferred income taxes (375,479) 50,947 22,904
(Increase) Decrease in trade accounts receivable, net (4,373,561) 1,073,309 (2,656,348)
Decrease in income tax receivable -- -- 478,909
Decrease (increase) in inventory 6,933,246 (8,555,387) (2,431,848)
Decrease (increase) in prepaid expenses and other 112,157 54,210 (29,745)
(Decrease) increase in accounts payable (2,270,399) 10,407,363 (2,430,131)
Increase (Decrease) in accrued liabilities 1,788,124 (762,450) 306,090
------------ ------------ ------------
Net cash provided by (used in) operating activities 5,441,284 4,946,188 (5,098,939)
Cash Flows From Investing Activities:
Additions to property, plant and equipment (1,540,505) (1,200,101) (2,296,553)
Proceeds from sale of property, plant and equipment -- 14,742 66,400
Acquisition of United, Sky Assets (3,377,496) (12,357,031) --
------------ ------------ ------------
Net cash used in investing activities (4,918,001) (13,542,390) (2,230,153)
Cash Flows From Financing Activities:
Net (payments) borrowing on line of credit (446,514) 5,838,948 6,111,603
Principal payments on prepetition debt (7,559) (7,262) (660,097)
Principal payments on post-petition debt (1,577,753) 2,865,233 2,004,484
Purchase of Treasury Stock -- (38,892) --
Proceeds from Issuance of Long-Term Debt 1,500,000 -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities (531,826) 8,658,027 7,455,990
------------ ------------ ------------
Net (decrease) Increase in cash and cash equivalents (8,543) 61,825 126,898
Cash and cash equivalents, beginning of year 211,352 149,527 22,629
------------ ------------ ------------
Cash and cash equivalents, end of year $ 202,809 $ 211,352 $ 149,527
============ ============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
Impreso, 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. Currently, 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include Impreso, Inc. and the accounts of
its wholly owned subsidiaries. All significant intercompany accounts and
transactions with its consolidated subsidiaries have been eliminated.
Use of Estimates and Concentration of Credit
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
TST sells its paper and film products to dealers and resellers for commercial
and home use. TST reviews all existing customers' financial condition
periodically and monitors average days outstanding in accounts receivable.
Receivables are generally due 30 days from the date of sale. There have been no
unusual credit losses relating to TST's customers.
One TST customer accounted for approximate 20%, 28% and 28% of gross sales, and
16%, 26% and 32% of accounts receivable as of, or for the years ended August 31,
2002, 2001 and 2000, respectively. Another customer represented approximately
11%, 11% and 11% of gross sales and 9%, 13% and 8% of accounts receivable as of,
or for the years ended August 31, 2002, 2001 and 2000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
F-8
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Property, Plant and Equipment
Property, plant and equipment are stated at acquisition or construction cost.
Expenditures for maintenance, repairs and improvements that do not extend the
useful lives of assets are charged to appropriate expense accounts in the year
incurred. Upon disposition of an asset, cost and accumulated depreciation are
removed from the accounts, and any gain or loss is included in the results of
operations. Depreciation is computed on the straight-line basis using the
estimated useful lives of the respective assets, five years for furniture and
fixtures, seven years for equipment and thirty years for buildings.
Revenue Recognition
TST's sales are recorded when products are shipped to customers. Hotsheet.com,
Inc. generates its revenue through advertising revenues and commissions earned.
It is recognized upon receipt.
Advertising
Advertising costs are expensed as incurred. Advertising costs were approximately
$1.1 million, $1.2 million and $874,000 for the years ended August 31, 2002,
2001 and 2000, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated financial statements.
Other Income, Net
Other income, net, consists primarily of interest income and due to its
insignificance, net income from Hotsheet.com.
Litigation Settlement
In a United States class action lawsuit involving international and domestic
manufacturers' attempt to fix jumbo roll thermal facsimile paper prices in the
United States, Impreso, Inc. was awarded over $1 million in November 2001. The
plaintiff class settled with the defendants for over $16 million. Impreso, Inc.
did not participate in the ongoing litigation, but was awarded over $1 million
as its share of the settlement by the courts. The award was reported as other
income in the first quarter of the Fiscal 2002.
Cash Flow Information
Cash paid for interest during fiscal years 2002, 2001 and 2000 was $1.7 million,
$1.6 million and $1.3 million, respectively.
F-9
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash paid for income taxes during fiscal years 2002, 2001 and 2000 was
$1,224,802, $677,650 and $495,477, respectively.
Net Income Per Share
Basic net income per share is based on the weighted-average number of common
shares outstanding. Common share equivalents have not been included in the
computation of diluted net income per share to the extent that they are
anti-dilutive. Excluded from the computation of diluted net income per share are
options to purchase 379,400, 379,400 and 266,900 shares of common stock as of
August 31, 2002, 2001 and 2000, respectively. These options were excluded
because the option exercise price was greater than the average market price of
the common stock. Dilutive common share equivalents did not have a material
effect on the income per share calculation.
Disclosures about Fair Value of Financial Instruments
In accordance with SFAS No.107, "Disclosures About Fair Value of Financial
Instruments," the following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents, accounts receivable, investments, accounts payable
and long-term debt - the carrying amount approximates fair value.
New Financial Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
became effective for all acquisitions initiated after June 30, 2001. The Company
adopted SFAS No. 141 on June 30, 2001 as required. The Company does not expect
the implementation of SFAS No. 141 for future acquisitions to have a material
impact on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which will become effective for fiscal years beginning after December
15, 2001. The Company does not expect the implementation of SFAS No. 142 to have
a material impact on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 144 requires long-lived assets be measured at the lower of selling
amount or fair value less cost to sell, whether reported in continuing
operations or discontinued operations. SFAS No. 144 also broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for consolidated
financial statements issued for financial years beginning after December 15,
2001. The Company does not expect that the adoption of SFAS No. 144 will have a
material impact on the Company's financial statements.
F-10
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. INVENTORIES:
Inventories consisted of the following:
<Table>
<Caption>
August 31,
------------------------------
2002 2001
------------ ------------
Finished goods $ 19,059,199 $ 20,900,657
Raw materials 14,684,869 17,405,968
Supplies 1,011,967 464,679
Work-in-process 108,695 51,577
Allowance for obsolete inventory (753,715) (363,064)
------------ ------------
Total $ 34,111,015 $ 38,459,817
============ ============
</Table>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of the following:
<Table>
<Caption>
August 31,
------------------------------
2002 2001
------------ ------------
Buildings and equipment $ 25,491,412 $ 19,566,436
Furniture, fixtures and other 2,221,582 2,158,652
------------ ------------
27,712,994 21,725,088
Less--Accumulated depreciation (11,773,895) (10,511,892)
------------ ------------
Net property, plant and equipment equipment $ 15,939,099 $ 11,213,196
============ ============
</Table>
5. LONG-TERM DEBT AND LINE OF CREDIT:
<Table>
<Caption>
The following is a summary of long-term debt and line of credit: August 31, August 31,
2002 2001
------------ ------------
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% (5% at August 31, 2002). $ 17,861,824 $ 18,308,338
</Table>
F-11
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
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
August 31, 2002), maturing August 2008. 1,657,436 1,672,731
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. 284,546 311,942
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. 749,987 812,436
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. 222,213 243,318
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. 449,858 638,289
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. 2,130,905 2,213,667
Acquisition note payable, unsecured, payable in quarterly installments of $15,000
(including interest at 8%), maturing April 2006. 225,000 285,000
Acquisition note payable, secured by equipment, payable in monthly installments of
$16,024, no interest, maturing May 2003. 368,169 560,458
Note payable, unsecured, payable in three weekly installments of $200,000
beginning in November 2001 and one final payment of $150,000, no interest,
matured November 2001. -- 750,000
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
scheduled for interest, 7.0% at August 31, 2002), maturing March 2007. 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, 5.24% at August 31,
2002), maturing February 2009. 1,410,714 --
</Table>
F-12
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
Acquisition notes payable, unsecured, payable in monthly installments of 16,666,
maturing February 2007. 811,792 --
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.
245,100 252,659
------------ ------------
Total 29,602,012 26,048,838
Less Current Maturities (18,992,222) (19,720,384)
------------ ------------
Long-Term Debt $ 10,609,790 $ 6,328,454
============ ============
</Table>
Prepetition amount listed above represents the renegotiated amounts and terms
under the 1993 plan of reorganization.
In April 2002, TST amended its revolving line of credit to increase the line
from $22 million to $25 million. The amended revolving credit line is limited to
the lesser of $25 million or a percentage of eligible trade accounts receivable
and inventories, as defined. The remaining availability under the revolving
credit line was $8.6 million as of August 31, 2002.
The line of credit, as amended, has restrictive covenants requiring the
maintenance of a minimum tangible net worth and working capital requirements, as
defined in the agreement. One of the notes payable contains restrictive
covenants on current and debt to worth ratios, and the payment of cash
dividends. As of August 31, 2002, the Company was in compliance with all
covenants. Future maturities of long-term debt and under the line of credit at
August 31, 2002, are as follows:
<Table>
2003 $ 18,992,222
2004 1,125,019
2005 879,704
2006 842,477
2007 719,873
Thereafter $ 7,042,717
--------------
$ 29,602,012
==============
</Table>
6. ACQUISITION:
On April 26, 2001, the Company, through its main operating subsidiary
TST/Impreso, Inc., acquired substantially all of the assets of the Sky Division
of Durango Georgia Converting LLC, a forms manufacturer, for an aggregate
acquisition cost of $13.3 million. The acquisition cost consists of
F-13
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$12.2 million paid in cash, $941,000 in notes payable to the seller, and
$198,000 in expenses attributable to the acquisition. The acquisition was
accounted for under the purchase method. Based on current estimates, there was
no excess consideration paid over the estimated fair value of tangible net
assets acquired.
The Company's consolidated financial statements have incorporated Sky's
operating results from the effective date of the acquisition (April 26, 2001).
The following unaudited pro forma financial information combines the results of
operations of the Company and Sky as if the acquisition had taken place as of
September 1, 1999. These results are not intended to be a projection of future
results.
<Table>
<Caption>
Twelve Months Ended
August 31,
----------------------------
2001 2000
------------- ------------
Net Sales $ 125,126,000 $114,970,000
Net Income 1,025,000 93,000
Net Income per share - Basic and Diluted $ .19 $ .02
------------- ------------
</Table>
In conjunction with the acquisition, liabilities were assumed as follows:
<Table>
Fair value of assets acquired $ 15,400,000
Net cash paid and notes issued 13,300,000
------------
Liabilities assumed $ 2,100,000
============
</Table>
On March 19, 2002, the Company, through its main operating subsidiary
TST/Impreso, Inc., acquired substantially all of the operating assets of the
United Computer Supplies, Inc. and United Computer Supplies-East, Inc., a forms
manufacturer, for an aggregate acquisition cost of $4.5 million. The acquisition
cost consists of $3.6 million paid in cash and $900,000 notes payable to
sellers. The acquisition was accounted for under the purchase method. Based on
current estimates, there was no excess consideration paid over the estimated
fair value of tangible net assets acquired. The Company's consolidated financial
statements have incorporated United's operating results from the effective date
of the acquisition (March 19, 2002). The following unaudited pro forma financial
information combines the results of operations of the Company and United as if
the acquisition had taken place as of September 1, 2000. These results are not
intended to be a projection of future results.
<Table>
<Caption>
Twelve Months Ended
August 31,
---------------------------------------
2002 2001
------------ -------------
Net Sales $141,151,266 $ 129,829,170
Net Income 457,332 (1,633,813)
Net Income per share - Basic and Diluted $ .09 $ (.31)
</Table>
In addition, on April 19, 2002, the manufacturing facility was purchased for
$4.1 million.
7. TST'S EQUIPMENT LEASE AGREEMENTS:
TST is obligated under various operating leases for equipment, which expire at
various dates through 2005. Rental expenses under these operating leases were
$211,581, $367,697 and $295,098 for the years ended August 31, 2002, 2001 and
2000, respectively. Future annual minimum lease payments as of August 31, 2002,
are as follows:
<Table>
2003 $ 192,932
2004 35,610
2005 9,686
----------
$ 238,228
==========
</Table>
F-14
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Legal-
On September 18, 2002, TST filed a lawsuit against a vendor in the United States
District Court for the Northern District of Texas - Dallas Division.
Simultaneously with the initiation of the lawsuit, TST requested that its
disputes with the vendor be submitted to arbitration through the American
Arbitration Association's Dallas, Texas office. TST's general claim is that the
vendor breached a Distributor Agreement entered into with TST in several
material respects, including the vendor's late delivery of paper products, the
vendor's delivery of defective product, and the vendor's failure to properly
credit TST's accounts based upon these and other alleged breaches. The vendor
responded to TST's demand for arbitration by generally denying TST's claims and
asserting a counterclaim seeking to recover disputed accounts receivable and
damages related to TST's alleged interference with the vendor's relationship
with its lender. No date has yet been set for arbitration or litigation.
TST's Significant Contracts-
In April 1997, TST entered into a non-exclusive Trademark Licensing Agreement
with International Business Machines Corporation ("IBM") to manufacture and
distribute certain selected products carrying the IBM logo. In March 1999, the
Company extended its agreement with IBM from a four year contract with two
one-year automatic renewals, to a six year contract with two one-year automatic
renewals. TST is required to pay participation fees based upon a percentage of
net profits of these products (as defined by the agreement) and maintain certain
sales volumes and quality standards as required by the agreement. The agreement,
under certain circumstances, may be canceled by either party upon 120 days
written notice.
In February 2002, TST entered into a trademark licensing agreement with Binney &
Smith Properties, Inc., the owner of the Crayola trademark. The agreement
provides for TST to manufacture and distribute a select line of Crayola(R)
imaging products such as Laser and Ink Jet paper, card stock, post cards,
magnets, and t-shirt transfers within the United States, Canada and Mexico
through specified channels of distribution.
9. INCOME TAXES:
The Company utilizes SFAS No. 109, "Accounting for Income Taxes", which requires
among other things, an asset and liability approach for financial accounting and
reporting of income taxes.
Significant components of deferred income taxes at August 31, 2002 and 2001,
were as follows:
<Table>
<Caption>
August 31,
---------------------------
2002 2001
------------ ------------
Deferred income tax assets-current:
Allowance for doubtful accounts receivable $ 175,103 $ 116,545
Allowance for obsolete inventory 301,487 ---
</Table>
F-15
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
Other 37,360 --
Deferred income tax liability-long term:
Tax over book depreciation and amortization (948,601) (926,675)
---------- ---------
Net deferred income tax liabilities $ (434,651) $(810,130)
========== =========
</Table>
The Company's effective tax rate was different than the statutory federal income
tax rate for the years ended August 31, 2002, 2001 and 2000, as follows:
<Table>
<Caption>
2002 2001 2000
----------- ----------- -----------
Federal income taxes at statutory rate (34%) $ 941,590 $ 687,974 $ 506,088
State taxes, net of federal income tax benefit 73,830 56,100 28,072
Tax effect of nondeductible items 46,326 32,433 27,772
Other (8,350) -- (4,755)
----------- ----------- -----------
Income tax expense $ 1,053,396 $ 776,507 $ 557,177
=========== =========== ===========
</Table>
10. RELATED PARTIES:
The Sorokwasz Irrevocable Trust, whose trustee is Marshall Sorokwasz, the
President of the Company, and the Senior Vice President of the Company own 44.2%
and 14.9%, respectively, of the outstanding shares of common stock as of August
31, 2002 and 2001.
A company controlled by the spouse of the Company's President serves as both a
customer of and vendor to the Company. Sales to this related company were
$1,183,902, $1,040,325 and $431,743 for the years ended August 31, 2002, 2001,
and 2000 respectively. Purchases from the related company totaled $419,568,
$376,694 and $387,649 for the years ended August 31, 2002, 2001 and 2000,
respectively. In the opinion of management, these transactions were consummated
on terms equivalent to those that would prevail in arms-length transactions.
Accounts receivable balances as of year-end related to this company were
$80,778, $47,434 and $72,216 for 2002, 2001 and 2000, respectively. For the
years ended 2002, 2001 and 2000, the accounts payable balances to the related
company were $7,251, $9,430 and $0, respectively.
11. STOCK OPTIONS:
The Company sponsors a stock option plan (the "Plan") for certain employees and
directors of the Company. There are 400,000 shares of common stock reserved for
grants of options under the Plan. Options are granted at the sole discretion of
the Stock Option Committee of the Board of Directors of the Company. The
outstanding options generally vest ratably at various dates through 2012 at an
exercise price of not less than the fair market value at the grant date. The
options expire 10 years after the grant date.
In addition, the Company granted outside of the Plan 156,000 options to
employees during the fiscal
F-16
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
year ended August 31, 2001. These options vest ratably over two years at various
dates through 2003 at an exercise price of not less than fair market value at
the grant date. These options expire five years after the grant date.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. Under the fair value method, compensation expense is
measured at the grant date based on the fair value of the award. Under the
intrinsic value method, compensation is equal to the excess, if any, of the
quoted market price of the stock at the grant date over the amount the employee
must pay to acquire the stock. Entities electing to measure compensation costs
using the intrinsic value method must make pro forma disclosures of net income
and earnings per share as if the fair value method had been applied.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, stock options do not represent compensation expense in the
determination of net income in the consolidated statements of operations. Had
stock option compensation expense been determined consistent with the fair value
method of measuring compensation expense under SFAS No. 123, the pro forma
effect for Fiscal 2002, 2001 and 2000 would have been a reduction in the
Company's net income, of approximately $135,000, $72,000 and $42,000,
respectively, and a reduction in net income per share, of approximately, $.03,
$.02 and $.01, respectively.
In determining the pro forma stock compensation expense, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
Fiscal 2002, 2001 and 2000, respectively: expected volatility of 86.2%, 86.2%
and 77.6%; risk-free interest rate of 4.32%, 5.16% and 6.23%; expected lives of
five years; and no expected dividends.
The following tables summarize information about stock options outstanding at
August 31, 2002.
Options Outstanding
<Table>
<Caption>
Weighted Average Weighted Average
Range of Number Remaining Contractual Exercisable Price
Exercise Prices Outstanding Life (Years) Per Share
--------------- ----------- --------------------- -----------------
$1.70-2.13 90,000 4.0 $ 1.71
$2.94-3.63 114,000 3.1 $ 3.00
$5.38-6.75 250,900 3.2 $ 5.96
$8.38-10.38 9,500 4.7 $ 9.88
$12.75-12.75 3,000 4.7 $ 12.75
</Table>
F-17
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
Total 467,400 3.4 $ 4.55
=======
</Table>
Options Exercisable
<Table>
<Caption>
Weighted Average
Range of Number Exercisable Price
Exercise Prices Exercisable Per Share
--------------- ----------- -----------------
$1.70-2.13 45,000 $ 1.71
$2.94-3.63 76,250 $ 3.01
$5.38-6.75 249,900 $ 5.96
$8.38-10.38 9,500 $ 9.88
$12.75-12.75 3,000 $12.75
------- ------
Total 383,650 $ 5.03
======= ======
</Table>
The fair value of options granted during the years ended August 31, 2002, 2001
and 2000, calculated using the Black-Scholes option-pricing model, was
approximately $ 6,500 ($ 2.35 per share), $233,000 ($1.58 per share) and $25,000
($2.94 per share), respectively. Exercisable options total 383,650, 304,650 and
280,025 shares as of August 31, 2002, 2001 and 2000, respectively. These options
are exercisable at a weighted-average exercise price of $5.03, $5.78 and $5.93
for the years ended August 31, 2002, 2001 and 2000, respectively.
The following table summarizes stock option activity:
<Table>
<Caption>
Weighted
Available Average
Granted for Grant Price
-------- --------- --------
August 31, 1999 304,300 85,650 $5.78
Canceled (2,400) 2,400 $4.83
Granted 9,500 (9,500) $4.84
------- ------ -----
August 31, 2000 311,400 78,550 $5.76
Made available -- 156,000 N/A
Canceled 0 0 N/A
Granted 159,000 (159,000) $2.24
------- -------- -----
</Table>
F-18
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
Weighted
Available Average
Granted for Grant Price
-------- --------- --------
August 31, 2001 470,400 75,550 $4.57
Canceled (6,000) 6,000 $5.50
Granted 3,000 (3,000) $3.35
-------- -------- -----
August 31, 2002 467,400 78,550 $4.55
======== ======== =====
</Table>
12. EMPLOYEE 401(k) PLAN:
TST has an employee 401(k) plan (the "Plan") that is administered by a national
brokerage firm and administrative fees associated with the Plan are funded by
the Plan. TST's contribution is discretionary and currently matches 10% of the
first 5% of the participating employees' contributions to their Plan accounts.
Contributions by TST were $32,319, $21,746 and $17,154 for the years ended
August 31, 2002, 2001, and 2000, respectively.
13. NON CASH ACTIVITY:
During 2002 the Company financed the purchase of a building by issuing debt in
the amount of $3,200,000.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following tabulation presents selected results of operations for the years
ended August 31, 2002 and 2001:
<Table>
<Caption>
Quarters Ended
-----------------------------------------------------------
November 30 February 28 May 31 August 31
----------- ----------- ----------- -----------
2002
Net sales $25,401,360 $26,342,394 $33,025,115 $38,296,645
Gross Profit $ 2,598,618 $ 2,829,913 $ 3,689,471 $ 3,499,848
Net income $ 765,929 $ 163,009 $ 513,730 $ 233,774
Basic and diluted earnings per share $ 0.15 $ 0.03 $ 0.10 $ 0.04
2001
Net Sales $21,250,206 $21,289,448 $23,120,706 $30,548,051
Gross profit $ 2,296,077 $ 2,448,572 $ 3,052,241 $ 3,659,517
Net income $ 127,164 $ 162,818 $ 456,481 $ 500,482
Basic and diluted earnings per share $ 0.02 $ 0.03 $ 0.09 $ 0.09
</Table>
F-19
INDEX TO FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
Page
----
Report of Independent Public Accountants S-2
Schedule II - Valuation and Qualifying Accounts S-3
</Table>
S-1
INDEPENDENT PUBLIC ACCOUNTANT'S REPORT ON SUPPLEMENTAL INFORMATION
To the Stockholders of Impreso, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Impreso, Inc. and
subsidiaries as of August 31, 2002, which are included in this Form 10-K and
have issued our report thereon dated October 18, 2002. Our audit was made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole of Impreso, Inc. and subsidiaries for the year ended August 31,
2002. The 2002 information listed in the index to financial statement schedules
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic 2002
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
The 2001 and 2000 information listed in the index to financial statement
schedules was subjected to audit procedures by other auditors whose report,
dated October 19, 2001, stated that such information was fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
October 18, 2002
S-2
SCHEDULE II
IMPRESO, INC. AND SUBSIDIARIES(a)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
<Table>
<Caption>
Additions
Balance at Additions Charged Balance at
Beginning Charged to other End of
of Period to Income Accounts Deductions Period
---------- ---------- --------- ---------- ----------
August 31, 2002:
Allowance for doubtful accounts $ 342,780 $ 258,100 -- $ (85,870)(b) $ 515,010
Inventory Reserves -- 753,715 -- 753,715
---------- ---------- -------- ---------- ----------
Total reserves and allowances $ 342,780 $1,011,815 -- $ (85,870) $1,268,725
========== ========== ======== ========== ==========
August 31, 2001:
Allowance for doubtful accounts $ 168,631 $ 304,980 -- $ (130,831)(b) $ 342,780
---------- ---------- -------- ---------- ----------
Total reserves and allowances $ 168,631 $ 304,980 -- $ (130,831) $ 342,780
========== ========== ======== ========== ==========
August 31, 2000:
Allowance for doubtful accounts $ 130,397 $ 160,795 -- $ (122,561)(b) $ 168,631
---------- ---------- -------- ---------- ----------
Total reserves and allowances $ 130,397 $ 160,795 -- $ (122,561) $ 168,631
========== ========== ======== ========== ==========
</Table>
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write-off of uncollectible receivables.
S-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Impreso, Inc.
By: /s/ Marshall D. Sorokwasz
-------------------------
Marshall D. Sorokwasz, President
Dated: November 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<Table>
<Caption>
Signature Title Date
- --------- ----- ----
/s/ Marshall D. Sorokwasz Chairman of the Board, November 27, 2002
- ----------------------------- President, Principal Executive
Marshall D. Sorokwasz Officer and Treasurer
/s/ Richard D. Bloom Senior Vice President of Operations, November 27, 2002
- ----------------------------- Director
Richard D. Bloom
/s/ Donald E. Jett Secretary, Director November 27, 2002
- -----------------------------
Donald E. Jett
/s/ Susan M. Atkins Vice President of Finance, November 27, 2002
- ----------------------------- Principal Financial Officer,
Susan M. Atkins Principal Accounting Officer
/s/ Jay W. Ungerman Director November 27, 2002
- -----------------------------
Jay W. Ungerman
/s/ Robert F. Troisio Director November 27, 2002
- -----------------------------
Robert F. Troisio
/s/ Nickolas S. Kokoron Director November 27, 2002
- -----------------------------
Nickolas S. Kokoron
</Table>
CERTIFICATION
PURSUANT TO RULE 13a-14(b) AND 15d-14
I, Marshall D. Sorokwasz, certify that:
1. I have reviewed this annual report on Form 10-K of Impreso, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
(c) presented in this annual 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 annual
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: November 27, 2002 Signature: /s/ Marshall D. Sorokwasz
----------------- -------------------------
Marshall D. Sorokwasz
Chief Executive Officer
CERTIFICATION
PURSUANT TO RULE 13a-14(b) AND 15d-14
I, Susan Atkins, certify that:
1. I have reviewed this annual report on Form 10-K of Impreso, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
(c) presented in this annual 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 annual
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: November 27, 2002 Signature: /s/ Susan Atkins
----------------- -------------------------
Susan Atkins
Chief Financial Officer
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit No. Description of Exhibits
- ----------- -----------------------
2.1 Plan and Agreement of Merger, dated as of December 1, 1999, among
TST/Impreso, Inc., Impreso, Inc. and TST Merger Corp.
(incorporated by reference to Appendix A of the Company's
Registration Statement on Form S-4, No. 333-92381)
2.2(a) Asset Purchase Agreement by and between TST/Impreso, Inc. and
Durango Georgia Converting LLC dated as of April 5, 2001
(incorporated by reference to Exhibit 2.1 of the Company's
Quarterly Report on Form 10-Q, for the quarter ended May 31,
2001)
2.2(b) Asset Purchase Agreement by and between TST/Impreso, Inc. and
Bank of America, N.A. and consented to by United Computer
Supplies, Inc., United Computer Supplies-East, Inc. and John R.
Zimmerman dated as of March 19, 2002 (incorporated by reference
to Exhibit 2.1 of the Company's Quarterly Report on Form 10-Q,
for the quarter ended May 31, 2002)
2.2(c) Real Estate Purchase and Sale Agreement by and between United
Computer Supplies, Inc. and TST/Impreso, Inc. dated as of March
15, 2002 (incorporated by reference to Exhibit 2.21 of the
Company's Quarterly Report on Form 10-Q, for the quarter ended
May 31, 2002)
3(a) Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Registration Statement
on Form S-4, No. 333-92381)
3(b) By-laws of the Company (incorporated by reference to Exhibit 3(b)
to the Company's Registration Statement on Form S-4, No.
333-92381)
4.1 Form of Underwriters' Warrant (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
No. 33-93814)
10(a) 1995 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1, No.
33-93814)
10(b) Employment Agreement dated January 27, 1999, between the Company
and Marshall Sorokwasz (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1, No.
33-93814)
10(c) IBM Brand Paper Trademark Licensing Agreement, effective as of
April 30, 1997 and Amendment No. 1 thereto, between TST/Impreso,
Inc. and International Business Machines Corporation
(incorporated by reference to Exhibit 10(c) of the Company's
Quarterly Report on Form 10-Q/A, dated July 15, 1997)
[Confidential treatment has been granted for certain portions of
this Exhibit]
10(d) Amendment Number 2 to the IBM Brand Paper Trademark Licensing
Agreement, dated March 5, 1999, between TST/Impreso, Inc. and
International Business Machines Corporation (incorporated by
reference to Exhibit 10(d) of the Company's amended Quarterly
Report on Form 10-Q/A, dated June 17, 1999) [Confidential
treatment has been granted for certain portions of this Exhibit]
</Table>
<Table>
10(e) Crayola License Agreement made as of February 6, 2002, with an
effective date of March 1, 2002, by and between Binney & Smith
Properties, Inc. and TST/Impreso, Inc. (incorporated by reference
to Exhibit 10(e) of the Company's amended Quarterly Report on
Form 10-Q/A dated May 1, 2002) [Confidential treatment has been
granted for certain portions of this Exhibit]
21 Subsidiaries of the Registrant
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>