1
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, 1998
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 0-26774
----------------------------------------------------
TST/Impreso, Inc.
(Exact name of registrant as specified in its charter)
----------------------------------------------------
Delaware 75-1517936
(State or other jurisdiction of (I.R.S. Employer
or 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 20, 1998, based upon the closing sale price of the
Common Stock as reported on the Nasdaq National Market, was approximately
$2,384,798.
There were 5,292,780 shares of the registrant's Common Stock outstanding as of
November 20, 1998.
List hereunder the documents, all or portions of which are incorporated by
reference herein and the Part of the Form 10-K into which the document is
incorporated: Proxy Statement to be filed with respect to the Registrant's
Annual Meeting of Stockholders to be held on January 26, 1999---Part III.*
* As stated under various items of this Annual Report, only certain specified
portions of such document are incorporated by reference herein.
2
PART 1
ITEM 1. COMPANY OVERVIEW
GENERAL
TST/Impreso, Inc. was founded in 1976 as Texas Stock Tab, Inc., as a Texas
corporation to engage in business as a converter of a continuous stock forms
product, known in the industry as stock tab. In 1990 its product line and
distribution capabilities had expanded and the Company changed its name to
TST/Impreso, Inc. to broaden the name recognition of the Company as a national
supplier of paper products. Now headquartered in the Coppell suburb of Dallas,
TST/Impreso, Inc. and subsidiaries (collectively, the "Company") is 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.
Approximately 98% of the Company's total output is initially sold domestically.
Independent resellers purchase and may further distribute the products
internationally. Through its three manufacturing facilities and 47 public
warehouse locations throughout the United States and in Quebec, Canada, the
Company manufactures and distributes its products under its own label, generic
labels and private labels. In April 1997, the Company entered into a
non-exclusive Trademark Licensing Agreement with IBM involving the manufacture
and distribution of a selected line of paper products (see "Trademark License").
The Company operates in a very competitive industry. The Company has
strategically located its distribution points so as to enable its products to be
delivered to customers in most major cities in the United States within 24
hours. The Company has approximately 3,000 customers ranging in size from small
business forms dealers to large office product wholesalers with multiple offices
and branches. An increasing segment of the customer base has been the large and
medium mass merchants, including computer and office superstores. The Company's
primary method of generating sales contacts is through its own sales force,
manufacturers' sales representatives, extensive marketing programs, referrals
and reputation.
In April 1993, the Company emerged from a Chapter 11 bankruptcy proceeding
instituted by it in November 1992. The filing was primarily due to the Company's
inability to renegotiate its line of credit agreement with its primary lender
regarding amounts owed to the lender under the Company's guarantee of
indebtedness for a subsidiary operating as a business consumable wholesaler in
which the Company had a majority interest. The subsidiary was simultaneously
liquidated in a Chapter 7 bankruptcy. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
On October 12, 1995, the Company closed the offering of 1,100,000 shares of its
common stock to the public at $6.00 per share. On November 14, 1995, the Company
closed the sale of an additional 147,730 shares of its common stock pursuant to
the Underwriters' over-allotment option. The proceeds of the offering were used
for repayment of indebtedness in the approximate amount of $4.9 million and the
remainder was used for general corporate and working capital purposes.
1
3
PRODUCTS
The Company operates in the hard copy supply market, which encompasses those
products used with a hard copy output or "imaging" device. The Company
originally converted stock tab and increased its product line, as technology
changed, to include other paper products such as thermal facsimile paper.
Advances in printer hardware and imaging material technology keeps the hard copy
industry changing. While demand for the stock forms and thermal facsimile paper
segments of the business has been in decline, growth opportunities for other
products, such as cut sheet applications, have significantly increased. In
response to industry trends, in 1997 the Company refocused its manufacturing
strategy by purchasing high volume commodity sheeters to produce sheet products
instead of purchasing precut sheeted products from mills. Sheeting applications
can range from simple cut sheet paper to sophisticated film products. In order
for the Company to be able to manufacture more sophisticated cut sheet products,
it required an environment suitable for the delicate surfaces of the products
and to house speciality surface manufacturing equipment. In the fiscal year
ended August 31, 1998 ("Fiscal 1998"), the Company completed construction at its
Texas facility of a clean room environment and installation of a state of the
art sheeting and packaging system for the conversion of special surface sheeted
products (see "Manufacturing"). The special surface sheeted products that the
Company began to manufacture in Fiscal 1998 includes technical papers and film
imaging materials. Although the Company historically has been a paper products
manufacturer and distributor, the Company believes it has increased its
efficiency and broadened its distribution access by entering the film and
transparency market. The Company also introduced into the market in Fiscal 1998,
a product line manufactured under the IBM trademark (See "Trademark License").
The Company's product line during Fiscal 1998 consisted of the following:
Continuous Computer Stock Business Forms. The Company produces a wide variety of
standard continuous computer stock business forms in various types of papers
(bond, recycled, carbon and carbonless, and groundwood papers), formats
(printing for readability and contrast) and basis weights. Upon request, the
Company occasionally produces customized forms for larger customers.
Thermal Facsimile Paper. The thermal facsimile papers manufactured by the
Company are suitable for use with all original equipment manufacturers' ("OEMs")
machines currently on the market and are warranted against damage that the paper
may cause to a customer's thermal facsimile machine.
Cut Sheet Paper for use in Laser Printers, Copying Machines, and Plain Paper
Facsimile Machines. In prior years the Company purchased cut sheet products
mill-direct. With the purchase of sheeting equipment, the Company has begun
converting its own cut sheet products including IMPRESO(R) Lazer Cut Sheets(R).
Cut Sheet Paper for use in Ink Jet Printers. The Company offers 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. Un-coated ink jet paper is primarily used for traditional
monochrome applications.
Special Surface Sheeted Products. These products, manufactured from paper or
film, have delicate surfaces that are extremely sensitive to scratching or
marring and require state-of-the-art equipment for processing and handling (see
"Manufacturing"). The special surface sheeted products is marketed under one or
both of the TST/Impreso, Inc. and International Business Machines ("IBM") brands
(see "Trademark License"). These products include the following:
2
4
Digital Photo Ink Jet Paper. Prints images from digital cameras, photo CD's,
the Internet, or desk top scanners.
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.
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.
Transparency Film for Ink Jet Printers. Clear film specially coated for
smudge/bleed-free color or black ink jet imaging.
Transparency Film for Copier and Laser Printers. Overhead transparencies can
be created using a plain paper copier and this film.
Transparency Film for Color Laser Printers. Designed specially for color
laser applications, unique coating controls absorption of color, creating
high quality full color overhead transparencies.
T-Shirt Transfers. A computer and ink jet printer can create personalized
designs for applications on various cloth items.
Rolled Paper Products. Rolled paper products such as point-of-sale and adding
machine rolls, in both thermal and plain paper.
Business Stationary Line. Fine business stationary for sale at the retail level.
TRADEMARK LICENSE
The Company entered into a non-exclusive Trademark Licensing Agreement with IBM
on April 30, 1997, involving the manufacture and distribution of a selected line
of paper products within the United States, Canada, and Mexico under the IBM
brand name. The IBM trademark is an instantly recognized symbol denoting quality
and value worldwide. The Company is a participant in a business alliance with
IBM, along with other IBM Licensees, to bring IBM branded paper products into
the marketplace. The stringent manufacturing specifications and quality controls
contractually imposed by IBM on the Company are expected to assure consumers of
premium quality goods, thereby maintaining the integrity and value of the IBM
trademark. Management believes that brand name identification is an effective
tool for penetration of market share and maintenance of profit margins. The
Company began shipping IBM branded products in October 1997. The products the
Company is converting under the IBM brand name are gloss and matte coated ink
jet paper, gloss opaque ink jet film, digital photo ink jet paper, ink jet and
laser transparencies, fanfold computer paper, facsimile paper, and a fine
business stationary line. The Company 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 the Company as a
direct result of participation in the IBM branded paper program.
3
5
MARKETING AND DISTRIBUTION
The Company markets its products to approximately 3,000 customers through its
own sales force and established manufacturers' representatives. The Company's
targeted customers are business consumable and office machine "dealers", and
large and medium mass merchants, including computer and office superstores. The
Company is continually seeking to diversify its customer base and distribution
channels. The incorporation of non-traditional but related product categories in
the Company's expanding product line may facilitate the Company's access to
different distribution channels.
The Company has 50 distribution points (47 public warehouses and three plants),
which enable the Company to deliver products to most major cities in the United
States within 24 hours. The Company'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.
The Company's current customers are comprised of the following:
Business Forms Dealers. Business forms dealers are typically businesses which
primarily buy and resell various types of business forms.
Wholesale Stationers. Wholesale stationers are businesses which supply a large
variety of office products to office product dealers. The wholesale stationers
do not sell directly to the end-user.
Office Products Dealers. Office products dealers are businesses which generally
purchase much of their products from the wholesale stationers, but often
negotiate directly with manufacturers such as the Company.
Paper Merchants. Paper merchants sell all types of papers to printers and
dealers and directly to end-users.
Consumer Electronics Stores. Consumer electronic stores sell retail to the
end-user in a broad spectrum electronics environment.
Mass Merchants. Mass merchants are retail sections of department, grocery or
drug stores that sell computer, copier and facsimile-related supplies.
Computer Superstores. Computer superstores sell computer products, their
accessories and consumables at retail.
Wholesale Clubs/Office Superstores. Wholesale clubs/office superstores, which
comprise the fastest growing segment of the office products market, sell large
volumes of inventory near wholesale prices to end-users and dealers and do not
generally provide the credit, delivery, and other types of services support to
the extent that the wholesale stationers provide their customers.
4
6
Original Equipment Manufacturers (OEMs). These manufacturers make the business
machines in which paper products are used. Many OEMs have their own privately
labeled consumables to market as a secondary sale to their business machines,
such as copiers, printers and facsimile machines.
Catalog Sales. Catalog companies publish their own catalogs and send them to
customers, who then order merchandise by telephone or facsimile and have it
delivered.
Buying Groups. These are 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.
Although the Company 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 the Company and any of
its customers. One single customer, Staples, Inc. ("Staples") was the only
customer of the Company to represent more than 10% of the Company revenues for
Fiscal 1998. Staples represented approximately 34% of the Company's revenues for
Fiscal 1998, as compared to 8.5% of the Company's revenues during the fiscal
year ended August 31, 1997 ("Fiscal 1997"). The increase in sales to Staples
resulted from a promotional program designed and implemented specifically for
Staples. There can be no assurance however, that the purchases by Staples will
remain at significant levels. The Company has derived a significant portion of
its 1998 revenues from Staples and may in the future be dependent on Staples, or
other significant customers. The loss of Staples or any other significant
customer could materially adversely effect the Company's financial position,
results of operations and cash flows.
WEBSITE
The Company's HotSheet(R) web portal at www.hotsheet.com provides Internet users
with an easy method for finding top web sites by using a quick-loading single
page design. The Company has been developing its HotSheet page for more than
three years. The site is now being accessed over a million times per month and
is considered one of the best on the Internet by many of its users. The Company
uses the HotSheet page to build brand identity for its IMPRESO and IBM product
lines. The Company intends to leverage the unique revenue opportunities the
HotSheet page provides. A recent alliance with an online ad management firm has
produced advertising revenue, and the Company is considering other strategic
revenue generating possibilities.
MANUFACTURING
The Company manufactures computer stock forms at each of its three manufacturing
facilities in Coppell, Texas; Fontana, California; and Kearneysville, West
Virginia. The Company's equipment for its continuous computer stock business
forms product line includes rotary presses and collators. The rotary presses
range in size from 22 inch cylinder x 32 inch web to 25.5 inch cylinder x 36
inch web and provide the Company with the ability to produce a broad spectrum of
form sizes. Each piece of machinery requires a skilled operator and, in certain
cases, support personnel are required. The Company's equipment is well-suited to
produce nearly all of the computer business stock forms products required by a
forms distributor or retailer.
5
7
Since 1989, the Company has operated its rewinder slitters used for the
conversion of thermal facsimile paper at the Company's manufacturing facility in
Texas. The thermal facsimile paper was then distributed to the other plants and
public warehouses for further distribution. In Fiscal 1998, the Company added
slitting capabilities at its West Virginia plant.
The Company's high volume commodity sheeters are currently converting product at
the Texas and West Virginia plants. The Company also operates sheet presses
similar to a quick print. Substantially all printing and manufacturing equipment
used in the manufacture of the Company's products is owned by the Company,
subject to liens.
In December 1997, the Company accepted delivery of a state-of-the-art sheeting
and packaging system it designed with the manufacturer to batch sheet and
package products with special surfaces including transparency film, glossy
papers such as digital photo paper, and T-shirt transfers. These products
require machines that do not scratch or mar the surface of the product during
the conversion and packaging process. The construction of a special clean room
was completed at the Texas facility to house the special surface cut sheet
equipment and the Company began operations in Fiscal 1998.
The Company maintains a quality assurance team which participates in the
manufacturing and packaging of all of the Company's products. The Company
continues to monitor any new product requirements of its customers and to assess
what new equipment or equipment modifications may be required to produce such
products.
The Company has postponed applying for the ISO 9001 Certification in Fiscal
1998, due to budget and manpower restraints. The ISO 9001 Certification is a
world wide certification representing the consistent, high quality of the
products produced by a manufacturer.
INVENTORY MANAGEMENT; RAW MATERIALS
The Company believes that it is necessary to maintain an inventory of finished
goods and raw materials to adequately service its customers. As a result of the
Company manufacturing and distributing new brands and types of products, its raw
material and finished goods inventory requirements have increased; therefore the
Company has substantially increased its inventory levels. The Company 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
the finished goods inventory of the Company decline or if prices for raw
materials required by the Company decline, or if new technology is developed
that renders obsolete products distributed by the Company and held in inventory,
the Company's business could be materially adversely affected.
The Company 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. The Company believes that it has adequate sources of supply of raw
materials to meet the requirements of its business. Raw materials represented
46.4% of total inventory at August 31, 1998. The introduction of film products
into the Company's line has made it necessary for the Company to source raw
materials not traditionally purchased by the Company. These raw materials
6
8
are readily available from national and international manufacturers. The Company
believes that the use of raw materials other than paper will make the Company's
profit margins less vulnerable to price fluctuations associated with supply and
demand cycles in the paper industry. The Company has approved two suppliers for
its unconverted film raw materials. The Company believes that these suppliers
are among the top producers of quality film products in the world. The Company
believes that it has a good relationship with all of its current suppliers.
MARKET CONDITIONS
In reaction to a rapid decline in demand from the Company's customers during the
Company's second and third quarters in Fiscal 1997, the Company was compelled to
lower its product selling prices. During the fourth quarter of Fiscal 1997
through the first quarter of Fiscal 1998 demand and prices stabilized.
During the second, third and fourth quarters of Fiscal 1998, prices of raw
materials declined for a majority of the products manufactured or distributed by
the Company. When raw material prices decrease, product selling prices can
decrease as a result of over supply and pricing pressures from competitors with
cheaper raw material inventory. Management believes that raw material selling
prices will not continue on the downward trend in Fiscal 1999. Management
believes that raw material paper suppliers have reached the bottom of the break
even price curve for their products. However, the continuing oversupply of paper
will continue to create downward pressure on finished goods selling prices,
creating a further squeeze on the profit margins of manufacturers such as the
Company. If prices for products manufactured by the Company decline as a result
of market pressures, the Company's results of operations would be materially
adversely affected.
The increased growth of discount retailers, such as office superstores, and the
increase of sales to those retailers as a percentage of the total sales of the
Company have also contributed to the profit pressure, as price wars among these
discount retailers impact their suppliers.
SEASONALITY
The Company may be subject to certain seasonal fluctuations in that orders for
products may decline over the summer months. However, the Company does not
believe that such fluctuations have a material adverse effect on its results of
operations.
BACKLOG
The dollar value of the order backlog as of August 31, 1998 and August 31, 1997,
was estimated to be $2.7 million and $606,000 respectively. The Company'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
the significant increase in sales.
7
9
COMPETITION
The Company is subject to competition from a number of other business
organizations, some of which have substantially greater financial, human and
other resources than the Company. The Company currently competes principally
with paper manufacturers like the Company which 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 the Company, to sell direct and to
dealers. In some cases, this has led to customers of the Company 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 the Company, since parent corporations of competitors of the
Company who are also suppliers of the Company, 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 to convert those business
consumables required by the explosion of computer technology.
With the completion of the special surface sheeting operation, the Company's
response has been to begin conversion of products that are higher margin
technical products. The addition of these higher margin technical products into
the Company's line will also position the Company 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 growth in unit sales.
Since the Company is moving into non-paper products, more sophisticated
technical products, and is looking to penetrate new distribution channels with
its expanding product lines, management believes that its analysis of which
companies it competes with will change in the coming years as the fallout of the
paper industry consolidation creates new hybrid entities. The Company believes
that it 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; a larger number of items
providing customers cost-effective, efficient purchasing and volume discounts;
and by providing high-quality products and customer-oriented services.
YEAR 2000
In November 1997, the Company purchased new hardware for its main computer
system (the "System") utilized in several key areas of the Company's business,
including purchasing, inventory management, shipping and financial reporting.
Even though the hardware upgrade was the Company's initial step in becoming Year
2000 compliant, the Company's purchase was primarily in response to the
Company's need for greater security, capacity, and reliability for these
functions instead of Year 2000 considerations. Equipment not acquired in
reaction to Year 2000 considerations, but purchased in the normal course of
business are not included in the estimate of anticipated total costs. The
Company has completed the problem identification phase of the System's software
and believes that it will be able to complete Year 2000 compliance of the System
through the modification of existing application software. The Company's
management information systems department is currently implementing the
conversion plan for the application software. As each phase of conversion of the
software application is completed, it will be tested for compatibility. All of
the conversion and testing phases are scheduled for completion by July 31, 1999.
The Company intends to complete its conversion of database files by December 31,
1998.
8
10
The Company is in the problem identification phase for its other information
technology equipment, such as independent personal computers ("P.C."s), and all
non-information technology equipment, such as the embedded controls in the
Company's manufacturing equipment. These are being tested for Year 2000
Compliance by an outside consulting firm (the "Consultants"). This review, which
began in September 1998, is scheduled for completion in December1998. The
Consultants have indicated that they have not detected any material problems in
this equipment to date. At the completion of the review, management will
determine with the Consultants if a corrective action plan will be required.
Since there have not been any material problems identified to date, potential
costs of making this equipment compliant is unknown, and because of the opinion
of the Consultants of minimal exposure, no estimate has been included in the
total estimated cost of remediation. If, at the completion of the problem
identification and testing phase, problems are identified by the Consultants,
the total estimated cost will be revised in future filings to reflect these
additional expenditures.
The Consultants have also been retained to review the plan for the software
conversion of the System. Total estimated costs to the Company of remediation of
all information and non-information technology is approximately $150,000. The
Company does not expect the cost of Year 2000 compliance to be material to its
future financial condition or results of operations. Although the Company is
utilizing both internal and external resources to implement and test the Year
2000 activities to eliminate transition interruptions or failure, there can be
no assurance that these efforts will be successful. The costs of the Year 2000
compliance and anticipated dates of completion are based on managements best
estimates, including considerations such as vendor support, no extraordinary
adverse events, and application of theoretical and unproven practices.
The Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers, has not formally assessed
third party risks, and does not have a formal contingency plan. Management
believes, as a result of the numerous questionnaires the Company has received,
that the significant majority of its customers and suppliers are actively
addressing Year 2000 problems. In the opinion of Management, an investigation by
the Company into which of its vendors and customers are nearing compliance, and
consequently assessing the risk of such noncompliance and preparing a
contingency plan will be more accurate and effective if conducted in mid 1999
when sufficient activity has transpired to make the suppliers and customers
responses meaningful. At that time management will still have sufficient
opportunity to implement corrective action or report estimated costs or losses
associated with third party noncompliance. Management anticipates that the worst
case scenario would be a temporary suspension of activities for a few weeks
following the first of the year, which is historically a short seasonal
fluctuation for the Company. A shut down of this nature would adversely impact
revenues for the reporting quarter.
TRADEMARKS
The Company uses the trademark IMPRESO, a Spanish word meaning printed matter,
for certain products the Company manufactures and distributes. The trademark is
registered in the United States, which registration, renewed in August 1995, is
effective until August 2009. The IMPRESO trademark is also registered in Canada,
Great Britain, France, Benelux and Italy. These foreign registrations are
subject to renewal commencing in October 2000. The Company believes that the
IMPRESO trademark has significant name recognition and is important in marketing
and achieving visibility of the Company's products. The goodwill value
associated with the name IMPRESO has been pledged as an asset to the Company's
current primary secured lender under the Company's revolving line of credit.
9
11
The Company also has a trademark registration in the United States for "Lazer
Cut Sheets", which registration is effective until May 2007. The Lazer Cut Sheet
trademark is applied only to one specific product that the Company manufactures.
In Fiscal 1998, the Company obtained a United States service mark on HotSheet,
its proprietary Internet portal. The HotSheet registration is effective until
January 2008.
SERVICE AND SUPPORT
The Company believes that customer service is an important factor in product
sales and customer satisfaction. Service and support include the Company's own
in-house trucking that back-hauls goods for other entities, which reduces
transportation costs and improves customer service. An in-house graphics
department designs and prepares layouts of packaging and produces negatives
which allows the Company speed and flexibility when bringing new products or
packaging into the marketplace. The Company also sells its graphics capabilities
to its customers. The Company's customer services also include a technologically
advanced computer system which sends by facsimile a bill of lading to the
appropriate distributing warehouse and an order acknowledgment to the receiving
customer when an order is entered by a customer service representative. The
Company's computer system automatically monitors and factors inventory levels at
each warehouse, calculates the amount of raw materials the Company must purchase
and identifies which of the Company's plant locations will manufacture an order.
The Company also has a four person collection and credit department. Skilled,
knowledgeable staff evaluate extensions of credit and make written and verbal
requests for payment from those customers whose invoices are not paid within
agreed payment terms. The Company also maintains in-house counsel who assists
the credit department in difficult collections.
The Company offers a 120-day warranty on all of its products. To date, warranty
expense has been minimal.
ENVIRONMENTAL REGULATION
The Company believes that compliance with any environmental regulations that may
be applicable to it will not have a material effect on the Company's capital
expenditures, earnings or competitive position.
EMPLOYEES
At August 31, 1998, the Company had 168 full-time employees. Of these
individuals, 112 were engaged in manufacturing, 25 were engaged in sales and
marketing, and 31 were administrative and clerical personnel, including 6
executives. None of the Company's employees are currently covered by a
collective bargaining agreement. The
10
12
Company considers its employee relations to be good due to an organizational
structure which encourages individual initiative as well as team work.
Approximately 72% of all salaried employees have been with the Company more than
seven years.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are elected annually by the Board of
Directors. The executive officers, their age and positions within the Company at
August 31, 1998, are as follows:
Name Age Position
---- --- --------
Marshall D. Sorokwasz 55 Chairman of the Board, President, Treasurer,
and Chief Executive Officer
Richard D. Bloom 66 Senior Vice President of Operations and Director
Donald E. Jett 54 Secretary and Director
John L. Graves 54 Vice President of Manufacturing
Jeffrey W. Boren 33 Vice President of Sales, Marketing
Susan M. Atkins 49 Vice President of Finance and Chief Financial
Officer
Marshall D. Sorokwasz is one of the founders of the Company and has been its
President, Chief Executive Officer, and a director since its organization in
1976 and Chairman of the Board since 1996.
Richard D. Bloom is one of the founders of the Company and has been its Vice
President and a director since inception.
Donald E. Jett is one of the founders of the Company and has been its Secretary
and a director since inception.
John L. Graves was promoted to Vice President of Manufacturing in June1986.
Prior to being elected Vice President, Mr. Graves was Operations Manager with
the Company since August 1981.
Jeffrey W. Boren has been Vice President of Sales and Marketing since March
1995. From March 1994 to March 1995, he was the National Sales Manager; prior to
that, he held various sales positions within the Company.
Susan M. Atkins has been Vice President of Finance and Chief Financial Officer
of the Company since December 1995. Ms. Atkins was Controller of the Company
prior to her election as Vice President of Finance and Chief Financial Officer.
11
13
ITEM 2. PROPERTIES
As of August 31, 1998, the Company operated three manufacturing plants
encompassing an aggregate of approximately 192,200 square feet of space. The
Company owns its manufacturing plants in Coppell, Texas and Kearneysville, West
Virginia, and prior to 1998, leased its Fontana, California facility. In
July1998, the Company purchased the 31,699 square foot, California building it
was occupying pursuant to a month-to-month tenancy, as well as the 25,357 square
foot building adjacent to it. The West Virginia property is encumbered by
mortgages maturing in 2023. The Company's facilities in Fontana, California are
encumbered by a mortgage maturing in 2008. The Company's executive offices are
located at the Coppell, Texas facility, which is approximately 60,000 square
feet, and is unencumbered.
The Company maintains a regional sales office in Huntington, New York pursuant
to a lease expiring April 30, 2000, and warehouse space in Dallas, Texas
pursuant to a month-to-month tenancy. As of August 31, 1998, the Company
utilized 47 public warehouses. Warehousing costs incurred for the public
warehouses utilized throughout the United States and in Quebec, Canada by the
Company were approximately $506,000 for Fiscal 1998. For Fiscal 1998, annual
mortgage payments, including interest, and minimum lease payments relating to
the Company's facilities were approximately $148,000 and $78,000, respectively.
The Company believes its facilities are in good condition as well as suitable
and adequate for its current business needs. Management estimates that, as of
August 31, 1998, the Company was operating at 45% capacity for all of the
products manufactured by the Company, which will allow the Company to acquire
additional business with no immediate capital investment.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND STOCKHOLDER
MATTERS
TST/Impreso, Inc.'s common stock is quoted on the Nasdaq National Market ("NNM")
under the symbol "TSTI" The high and low closing prices for the Company's common
stock, as reported on the NNM, are as follows:
12
14
Price Range
-----------
High Low
1997 Fiscal Year and Period
---------------------------
First quarter (Sep.- Nov.) $7.875 $5.375
Second quarter (Dec.-Feb.) 9.375 7.625
Third quarter (Mar.-May) 12.750 6.500
Fourth quarter (June-Aug.) 16.625 12.625
Price Range
-----------
High Low
1998 Fiscal Year and Period
---------------------------
First quarter (Sep.- Nov.) $13.50 $8.25
Second quarter (Dec.-Feb.) 12.3125 7.375
Third quarter (Mar.-May) 12.00 4.375
Fourth quarter (June-Aug.) 4.50 2.75
On November 20, 1998, the closing price for the Company's common stock on NNM
was $1.84.
As of November 20, 1998, the Company's common stock was held by approximately
897 stockholders of record, including holdings through nominee or street name
accounts with brokers.
The Company has not paid any dividends on the common stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. 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 financial position of the Company,
general economic conditions, and other pertinent factors.
On September 29, 1998, the Company received notice from The Nasdaq Stock Market
that the Company's common stock was failing to maintain a market value of public
float greater than or equal to $5,000,000 in accordance with Marketplace Rule
4450(a)(2) under Maintenance Standard 1 for the Nasdaq National Market. The
market value of public float is calculated by multiplying the number of shares
of common stock held by non-affiliates times the closing bid price. Compliance
requires that for a minimum of ten consecutive trading days the closing bid
price of the Company's common stock is a multiple sufficient to place the value
of public float greater than $5 million. As of November 20, 1998, that would
require a closing bid price of approximately $3.87. The Company is currently in
compliance with all of the remaining maintenance standard requirements, such as
net tangible assets and minimum bid price. The Company has been provided ninety
(90) days in which to regain compliance. If the Company can not demonstrate
compliance within the time frame provided, the Company's securities may be
delisted on December 28, 1998. The Company intends to seek a hearing from the
Nasdaq Stock Market Hearing Committee for further procedural remedies to stay
the delisting. In addition, management is reviewing various responses to the
situation in order to achieve compliance with Market Place Rule 4450(a)(2).
13
15
If the Company's common stock is delisted from the Nasdaq National Market, the
Company may apply for listing on the Nasdaq Small Cap Market. There can be no
assurance, however, that the Company will qualify for such listing or can remain
in compliance with the Nasdaq Small Cap Market maintenance standards. If the
Company does not qualify for listing on either of the Nasdaq markets, the
Company may apply for listing on the OTC Bulletin Board. The OTC Bulletin Board
is a regulated quotation service that displays real-time information on
over-the-counter (OTC) equity securities. An OTC equity security generally is
any equity that is not listed or traded on Nasdaq or a national securities
exchange. Management has commenced preliminary discussions concerning taking the
Company private with a financial investment partner.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company as of and
for the five years ended August 31, 1998. The historical financial data has been
derived from the audited financial statements of the Company. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements appearing elsewhere in this document.
SELECTED FINANCIAL DATA (a)
Years Ended August 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of
Operations Data:
- ----------------
Net Sales $ 50,666,085 $ 33,634,248 $ 47,722,988 $ 37,036,456 $ 25,924,000
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
before extraordinary item (1,084,509) (476 ,755) 3,005,459 2,480,004 577,695
- --------------------------------------------------------------------------------------------------------------------------
Extraordinary item
(net of taxes) --- --- 296,291(b) 523,326(b) ---
- --------------------------------------------------------------------------------------------------------------------------
Net Income (loss) (1,084,509) (476,755) 3,301,750 3,003,330 577,695
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per
common share:
- -------------
Income (loss) before
extraordinary item (0.20) (0.09) 0.59 0.62 0.14
- --------------------------------------------------------------------------------------------------------------------------
Net Income (loss) (0.20) (0.09) 0.65 0.75 0.14
- --------------------------------------------------------------------------------------------------------------------------
Consolidated
Balance Sheet Data:
- -------------------
Total assets 23,519,946 18,225,900 17,016,740 14,586,211 11,433,934
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt (excluding
current maturities) 2,697,512 1,007,038 1,091,789 3,602,917 5,461,747
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 11,798,921 $ 12,883,430 $ 12,978,058 $ 3,725,825 $ 722,495
- --------------------------------------------------------------------------------------------------------------------------
Notes to Selected Financial Data
14
16
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Early extinguishment of debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
HISTORICAL
From 1978 to 1991, the Company owned a majority interest in Origami, Inc.
("Origami"), a wholesaler of business consumables. In 1989, the Company and
Origami executed a loan agreement with a secured lender which was
cross-collateralized by the assets of both the Company and Origami as security
for revolving loans to each. During most of its existence, Origami operated at a
loss. Origami filed for protection under Chapter 11 of the United Sates
Bankruptcy Code (the "Bankruptcy Code") in June 1991. Such Chapter 11 proceeding
was converted to a liquidation under Chapter 7 of the Bankruptcy Code in August
1991. The liquidation of Origami resulted in a $3 million shortfall to the
Company's lender and an uncollected $5.5 million receivable from Origami to the
Company. The deficiency on the Origami portion of the loans was added to the
Company's borrowing base with such lender, and the resulting losses on a
combined basis far outweighed the borrowing base which the Company's collateral
could support. On November 10, 1992, the Company filed for protection under
Chapter 11 of the Bankruptcy Code, primarily as a result of the Company's
inability to renegotiate its line of credit agreement with its lender and to
settle disputes regarding amounts owed to the lender under the Company's
guarantee of the indebtedness of Origami to the lender. In April 1993, the
Company's Amended Joint Plan of Reorganization (the "Plan of Reorganization")
was confirmed by the United States Bankruptcy Court. The Company has completed
payment of substantially all of its prepetition obligations under the Plan of
Reorganization. The Company has been operating in conformity with and meeting
the remaining payment terms of the Plan of Reorganization.
On October 12, 1995, the Company closed the offering of 1,100,000 shares of its
common stock to the public at $6.00 per share. On November 14, 1995, the Company
closed the sale of an additional 147,730 shares of its common stock pursuant to
the Underwriters' over-allotment option. The proceeds of the offering were used
for repayment of indebtedness in the approximate amount of $4.9 million and the
remainder was used for general corporate and working capital purposes.
RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1998, AS COMPARED TO THE
YEAR ENDED AUGUST 31, 1997
Net Sales--- Net sales for Fiscal 1998, increased $17 million, or 51%, to $50.7
million as compared to $33.6 million for Fiscal 1997, as a result of: the
Company's shift of emphasis from sales of continuous forms, a saturated
declining
15
17
market, to cut sheets, a growing market; the introduction of IBM branded
products; and increased sales to one customer, Staples. Sales of continuous
forms for Fiscal 1998, decreased to 56.4% as a percentage of net sales as
compared to 74.6% of net sales in Fiscal 1997, while cut sheet products
increased to 36.2% in Fiscal 1998, as a percentage of net sales, as compared to
17.1% in Fiscal 1997. The Company also increased its sales to Staples which
represented approximately 34% of sales in Fiscal 1998, as compared to 8.5% of
sales for Fiscal 1997. In Fiscal 1998 the Company recorded its first sales of
IBM branded products. Management believes that the sales of IBM branded products
are not at the expense of existing market share, but have contributed to the
Company's increased revenues in Fiscal 1998.
Gross Profit--- Gross profit for Fiscal 1998, increased $1.3 million, or 36.4%,
to $5.0 million as compared to $3.7 million in Fiscal 1997. The dollar increase
was the result of increased revenues. Costs of sales as a percentage of net
sales remained relatively stable at 90% in Fiscal 1998, as compared to 89% in
Fiscal 1997. Although gross profit and net sales increased, the Company's gross
profit percentage decreased to 10% for Fiscal 1998, as compared to 11% for
Fiscal 1997, as a result of sales of lower margin products, such as plain cut
sheet paper, comprising a significantly larger percentages of net sales for that
period. The decreased gross profit percentage also reflects the continued trend
of declining raw material prices and reduced selling prices of finished goods
below the raw material cost reduction. Management believes that raw material
selling prices will not continue on the downward trend in Fiscal 1999.
Management believes that raw material paper suppliers have reached the bottom of
the break even price curve for their products. However, the continuing
oversupply will still create downward pressure on the finished goods selling
prices, creating a further squeeze on the profit margins of manufacturers such
as the Company. The Company has responded to this trend by construction of the
clean room facility at its Texas Plant in Fiscal 1998, where specialty surface
cut sheets are manufactured. Management believes that these products will be
less vulnerable to commodity paper price fluctuations.
Selling, General and Administrative Expenses--- SG&A expenses for Fiscal 1998,
were $5.9 million, or 11.7% of net sales, as compared to $4.1 million, or 12.2 %
of net sales for Fiscal 1997. SG&A as a percentage of net sales did not decrease
significantly in Fiscal 1998, even though net sales rose over 50%, due to
extensive promotional rebate programs initiated in the Company's second quarter
of Fiscal 1998.
Interest Expense--- Interest Expense increased by $284,000, or 103.2%, to
$559,000 for Fiscal 1998, as compared to $275,000 for Fiscal 1997. This increase
is primarily attributable to increased borrowings under the Company's revolving
line of credit. The increased borrowings reflected the Company's increased
inventory and accounts receivable as of August 31, 1998, as compared to August
31, 1997.
Income Taxes--- The Company recorded a tax benefit of $318,600 for Fiscal 1998,
as compared to a $7,600 tax benefit for Fiscal 1997. The benefits recorded
resulted primarily from losses sustained by the Company for Fiscal 1998.
16
18
RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1997, AS COMPARED TO THE
YEAR ENDED AUGUST 31, 1996
Net Sales--- Net sales for Fiscal 1997, decreased $14.1 million, or 29.5%, to
$33.6 million as compared to $47.7 million for the year ended August 31, 1996,
("Fiscal 1996") as a result of the market adjustment to increased raw material
paper inventories, an unfavorable pricing environment, and the resulting loss of
sales to Staples which represented 22% of sales in Fiscal 1996, as compared to
8.5% of sales for Fiscal 1997. Sales to Staples represented approximately 34% of
the Company's revenues in Fiscal 1998. Sales of continuous forms for Fiscal
1997, decreased by $15 million, or 38%, to $25 million as compared to $40
million for Fiscal 1996, while cut sheet products increased 35%, or $1.5
million, to $5.8 million for Fiscal 1997, as compared to $4.3 million in Fiscal
1996.
Gross Profit--- Gross profit for Fiscal 1997, decreased $5.7 million, or 60.7%,
to $3.7 million as compared to $9.4 million in Fiscal 1996. The decrease was
primarily the result of decreased selling prices due to depressed market
conditions. The Company's gross profit margin for all products in Fiscal 1997,
was 11.0% as compared to 19.8% for Fiscal 1996. The decrease in the gross profit
percentage reflected the decreased selling prices of the Company's finished
goods from the levels of Fiscal 1996. Gross profit margins were further affected
by the Company's transition from continuous form paper products to cut sheet
products, which increased costs as a percentage of sales.
Selling, General and Administrative Expenses--- SG&A expenses for Fiscal 1997,
were $4.1 million, or 12.2% of net sales, as compared to $4.6 million, or 9.5%
of net sales for Fiscal 1996. SG & A expenses as a percentage of net sales
increased during this period, primarily because of reductions in sales,
expansion of Company operations, and costs associated with implementing the sale
of new brands and types of products.
Interest Expense--- Interest Expense decreased by approximately $102,000, or
27.1%, to approximately $275,000 for Fiscal 1997, as compared to $378,000 for
Fiscal 1996. This decrease is primarily attributable to the early extinguishment
of prepetition secured debt.
Extraordinary Gain--- The Company recorded no extraordinary gains for Fiscal
1997, as compared to an extraordinary gain totaling $296,000, net of related
income tax expense of $158,000, for Fiscal 1996. The gain in Fiscal 1996,
resulted from the Company's early payment of prepetition notes payable for a
discounted amount.
Income Taxes--- The Company had a $7,600 benefit from income taxes for Fiscal
1997, as compared to a $1.6 million tax provision for Fiscal 1996. The decrease
was primarily due to decreased pre-tax profits.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $1.6 million, or 93.3%, from $1.8 million in
Fiscal 1997 to $118,000 in Fiscal 1998, primarily due to cash used for operating
activities and the Company paying down its revolving line of credit.
Borrowings under the Company's line of credit increased $2.8 million, or 98%, to
$5.6 million at August 31, 1998, as compared to $2.8 million at August 31, 1997,
primarily as a result of the Company increasing its raw material and finished
goods inventories to prepare for new brand and product introductions, and as a
result of increased accounts receivables.
17
19
Working capital decreased to $8.1 million at August 31, 1998, from $9.9 million
at August 31, 1997, a decrease of $1.8 million or 18.2%. This decrease is
primarily attributable to the increased borrowings on the Company's line of
credit and a decrease in cash and cash equivalents.
In May 1998, the Company entered into an agreement with its existing lender for
a one year revolving line of credit, which is secured by, among other things,
inventory, trade receivables, equipment, goodwill associated with the Company's
trademark IMPRESO, and a personal guarantee of Mr. Sorokwasz, Chairman of the
Board and President of the Company, and Trustee of the Trust which is the
largest single shareholder of the Company. The new agreement provides for a
revolving line of credit of $12 million, interest at prime plus 3/4%, and a
decreased unused line fee. Available borrowings under this line of credit, which
accrues interest at the prime rate of interest plus 3/4% (9.25% at August 31,
1998), are based upon specified percentages of eligible accounts receivable and
inventories. As of August 31, 1998, there was a $2.3 million borrowing capacity
remaining under the $12 million revolving line of credit. The revolving credit
line will mature in May 1999. In February 1999, the Company will explore all
options from its existing and other financial institutions to negotiate
financing on its revolving credit facility. Management believes it will be able
to secure such financing on terms at least as favorable as its existing
revolving line of credit. Its current lender has offered a new financing
agreement for a period of one to two years.
The Company believes that the funds available under the revolving credit line
facility, cash and cash equivalents, trade credit, and internally generated
funds will be sufficient to satisfy the Company's 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 of the Company, no extraordinary adverse events, and the renewal of
the Company's line of credit on favorable terms. There can be no assurance that
such assumptions are correct. In addition, expansion of Company operations due
to demand for the new types and brands of products manufactured by the Company
in Fiscal 1998, may require the Company to obtain additional capital to pursue
an acquisition or for the addition of new manufacturing facilities. If that
should occur, the funds required for the potential acquisition or new facilities
would be generated through additional security offerings or additional debt.
There can be no assurance that any additional financing will be available if
needed, or, if available, will be on terms acceptable to the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of August 31, 1998, the Company did not own market risk sensitive instruments
entered into for trading purposes or entered into for purposes other than
trading. The Company's international sales are not sufficient to create a
material foreign exchange rate risk; therefore the Company does not promulgate
policies for managing such risks.
IMPACT OF INFLATION
Inflation is not expected to have a significant impact on the Company's
business.
18
20
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results of
Operations and other sections of this Annual Report contain "forward-looking
statements" about the Company's prospects for the future, such as its ability to
generate sufficient working capital, its ability to continue to maintain sales
to justify capital expenses, and its ability to generate additional sales to
meet business expansion, and its ability to renew its line of credit on
favorable terms. 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 the Company operates, the potential of technological changes which
would adversely affect the need for the Company's products, price fluctuations
which could adversely impact the large inventory required in the Company's
business, loss of any significant customer, and termination of contracts
essential to the Company's business. Parties are cautioned not to rely on any
such forward-looking statements or judgments in making investment decisions.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL
DATA
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 31, 1998
and 1997 F-3
Consolidated Statements of Operations for the Years
Ended August 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended August 31, 1998, 1997, and 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended August 31, 1998, 1997, and 1996 F-7
Notes to Consolidated Financial Statements F-8
19
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1. Business--Executive Officers
of the Company" of Part I hereof and the table and text under the caption "Name
of Nominee and Certain Biographical Information" in the Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on January
26, 1999, (the "Proxy Statement"), which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the text and table under the caption
"Compensation of Executive Officers" in the Proxy Statement, which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the table and text under the caption
"Information Concerning Certain Shareholders" in the Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the text under the caption "Other
Information Concerning Directors, Officers and Shareholders" in the Proxy
Statement, which information is incorporated herein by reference.
20
22
PART IV
ITEM 14. 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.
(b) Current Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
21
23
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.
TST/Impreso, Inc.
By: /s/Marshall D. Sorokwasz
------------------------
Marshall D. Sorokwasz, President
Dated: November 24, 1998
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.
Signature Title Date
- --------- ----- ----
/s/Marshall D. Sorokwasz Chairman of the Board, November 24, 1998
- ------------------------ President, Principal Executive
Marshall D. Sorokwasz Officer, and Treasurer
/s/Richard D. Bloom Senior Vice President of Operations, November 24, 1998
- ------------------- Director
Richard D. Bloom
/s/Donald E. Jett Secretary, Director November 24, 1998
- -----------------
Donald E. Jett
/s/Susan M. Atkins Vice President of Finance, November 24, 1998
- ------------------ Principal Financial Officer,
Susan M. Atkins Principal Accounting Officer
/s/Jay W. Ungerman Director November 24, 1998
- ------------------
Jay W. Ungerman
/s/Robert F. Troisio Director November 24, 1998
- --------------------
Robert F. Troisio
/s/Bob L. Minyard Director November 24, 1998
- -----------------
Bob L. Minyard
22
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 31, 1998
and 1997 F-3
Consolidated Statements of Operations for the Years
Ended August 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended August 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended August 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
F-1
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of TST/Impreso, Inc.:
We have audited the accompanying consolidated balance sheets of TST/Impreso,
Inc. (a Delaware corporation) and subsidiaries as of August 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended August 31, 1998.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TST/Impreso, Inc. and
subsidiaries as of August 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended August
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 12, 1998
F-2
26
PART ONE: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, August 31,
1998 1997
---------- ----------
Current assets:
Cash and cash equivalents $ 117,840 $ 1,766,274
Trade accounts receivable, net of allowance for doubtful accounts
of $190,000 at August 31, 1998, and $130,000 at August 31, 1997 6,234,005 2,120,168
Income tax receivable 479,329 320,202
Investments in marketable securities 11,088 978,463
Inventories 9,189,973 7,889,949
Prepaid expenses and other 294,590 516,971
Deferred income tax assets 64,600 44,200
------------ ------------
Total current assets 16,391,425 13,636,227
------------ ------------
Property, plant and equipment, at cost 16,217,627 12,923,242
Less-Accumulated depreciation (9,117,371) (8,765,160)
------------ ------------
Net property, plant and equipment 7,100,256 4,158,082
------------ ------------
Other assets 28,265 431,591
------------ ------------
Total assets $ 23,519,946 $ 18,225,900
============ ============
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
27
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS- (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, August 31,
1998 1997
------------ ------------
Current liabilities:
Accounts payable $ 1,578,938 $ 434,331
Accrued liabilities 1,048,448 319,305
Current maturities of long-term debt 29,095 5,383
Line of credit 5,602,601 2,836,184
Prepetition liabilities:
Current maturities of prepetition taxes payable 25,722 25,722
Current maturities of long-term debt 49,227 72,187
------------ ------------
Total current liabilities 8,334,031 3,693,112
Deferred income tax liability 689,482 642,320
Long-term portion of prepetition debt, net of current maturities 919,508 991,221
Long-term debt, net of current maturities 1,778,004 15,817
------------ ------------
Total liabilities 11,721,025 5,342,470
------------ ------------
Commitments and contingencies
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 outstanding 52,928 52,928
Warrants 110 110
Additional paid-in capital 6,319,572 6,319,572
Retained earnings 5,426,311 6,510,820
------------ ------------
Total stockholders' equity 11,798,921 12,883,430
------------ ------------
Total liabilities and stockholders' equity $ 23,519,946 $ 18,225,900
============ ============
The accompanying notes are an integral part of
these consolidated balance sheets.
F-4
28
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31,
----------------------
1998 1997 1996
------- ------- -------
Net sales $ 50,666,085 $ 33,634,248 $ 47,722,988
Cost of sales 45,612,279 29,927,909 38,290,812
------------ ------------ ------------
Gross profit 5,053,806 3,706,339 9,432,176
------------ ------------ ------------
Other costs and expenses:
Selling, general and administrative 5,942,470 4,116,398 4,551,029
Interest expense 558,863 275,057 377,528
Other income, net (44,409) (200,738) (54,047)
------------ ------------ ------------
Total other costs and expenses 6,456,924 4,190,717 4,874,510
------------ ------------ ------------
Income (loss) before income tax expense and
extraordinary gain (1,403,118) (484,378) 4,557,666
Income tax expense (benefit):
Current (345,675) (38,125) 1,475,376
Deferred 27,066 30,502 76,831
------------ ------------ ------------
Total income tax expense (benefit) (318,609) (7,623) 1,552,207
Income (loss) before extraordinary gain (1,084,509) (476,755) 3,005,459
Extraordinary gain from debt reduction and
restructuring due to bankruptcy, net of
tax effect of $157,516 -- -- 296,291
------------ ------------ ------------
Net income (loss) $ (1,084,509) $ (476,755) $ 3,301,750
============ ============ ============
Income (loss) per share (basic and diluted):
Income (loss) before extraordinary gain $ (0.20) $ (0.09) $ 0.59
Extraordinary gain -- -- 0.06
------------ ------------ ------------
Net income (loss) per common share $ (0.20) $ (0.09) $ 0.65
============ ============ ============
Weighted average shares outstanding 5,292,780 5,257,667 5,094,637
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
29
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
$.01 Par Value Paid-In Retained Treasury
Shares Amount Capital Warrants Earnings Stock Total
------ ------ ------- -------- -------- ----- -----
Balance, August 31, 1995 4,000,000 $ 40,000 $ -- $ -- $ 3,685,825 $ -- $ 3,725,825
Warrants -- -- -- 110 -- -- 110
Net income -- -- -- -- 3,301,750 -- 3,301,750
Sale of stock 1,247,730 12,477 5,937,896 -- -- -- 5,950,373
--------- -------- ----------- ------ ----------- ------ ------------
Balance, August 31, 1996 5,247,730 52,477 5,937,896 110 6,987,575 -- 12,978,058
Net loss -- -- -- -- (476,755) -- (476,755)
Stock options exercised
(including tax benefit of
$111,452) 45,050 451 381,676 -- -- -- 382,127
--------- -------- ----------- ------ ----------- ------ ------------
Balance, August 31, 1997 5,292,780 52,928 6,319,572 110 6,510,820 -- 12,883,430
Net Loss -- -- -- -- (1,084,509) -- (1,084,509)
--------- -------- ----------- ------ ----------- ------ ------------
Balance, August 31, 1998 5,292,780 $ 52,928 $ 6,319,572 $ 110 $ 5,426,311 $ -- $ 11,798,921
========= ======== =========== ====== =========== ====== ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
30
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31,
1998 1997 1996
------- ------- -------
Cash Flows From Operating Activities:
Net income (loss) $ (1,084,509) $ (476,755) $ 3,301,750
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Extraordinary gain -- -- (453,807)
Depreciation and amortization 352,211 392,427 369,114
Deferred income taxes 27,066 141,954 76,831
(Increase) decrease in accounts receivable, net (4,113,837) 770,243 642,611
(Increase) decrease in income tax receivable (159,127) (320,202) --
(Increase) decrease in investments in marketable securities 967,375 (728,463) (250,000)
(Increase) decrease in inventories (1,300,024) (1,546,218) 269,773
(Increase) decrease in prepaid expenses and other 222,381 (215,240) (34,701)
Increase (decrease) in accounts payable 1,144,607 (1,129,331) 547,533
Increase (decrease) in accrued liabilities 729,143 10,184 (184,434)
Increase (decrease) in accrued bonuses -- (175,000) (365,539)
Increase (decrease) in other assets 403,326 282,114 (228,833)
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,811,388) (2,994,287) 3,690,298
------------ ------------ ------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (3,294,689) (457,377) (641,967)
Sales of property, plant, and equipment, net -- -- 189
Change in other noncurrent assets, net -- -- (224,766)
------------ ------------ ------------
Net cash used in investing activities (3,294,689) (457,377) (866,544)
------------ ------------ ------------
Cash Flows From Financing Activities:
Borrowings (payments) on line of credit, net 2,766,417 2,697,793 (3,704,692)
Payments on prepetition debt (94,673) (100,047) (2,710,533)
Borrowings (payments) on post petition debt, net 1,785,899 (18,878) (82,697)
Proceeds from exercise of stock options -- 270,675 --
Sale of common stock and warrants -- -- 5,950,482
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,457,643 2,849,543 (547,440)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,648,434) (602,121) 2,276,314
Cash and cash equivalents, beginning of year 1,766,274 2,368,395 92,081
------------ ------------ ------------
Cash and cash equivalents, end of year $ 117,840 $ 1,766,274 $ 2,368,395
------------ ------------ ------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
31
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
TST/Impreso, Inc., a Delaware corporation, is a manufacturer and distributor to
dealers and other resellers of paper and film products for commercial and home
use in domestic and international markets. TST/Impreso, Inc.'s product line
consists of standard continuous computer stock business forms for use in
computer printers; thermal facsimile paper for use in thermal facsimile
machines; and cut sheet paper for use in copying machines, plain paper facsimile
machines, laser printers, and ink-jet printers. TST/Impreso, Inc. has three
wholly owned subsidiaries: Big Time Paper, Inc., TST/Impreso of California,
Inc., and Texas Stock Tab of West Virginia, Inc. Each subsidiary was formed to
support activities of TST/Impreso, Inc. (referred to collectively with its
consolidated subsidiaries as the "Company").
On October 12, 1995, the Company closed the offering of 1,100,000 shares of its
common stock to the public at $6.00 per share. On November 14, 1995, the Company
closed the sale of an additional 147,730 shares of its common stock pursuant to
the Underwriters' over-allotment option. The proceeds of the offering were used
for repayment of indebtedness in the approximate amount of $4.9 million and the
remainder was used for general corporate and working capital purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of TST/Impreso, Inc.
and 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
generally accepted accounting principles 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.
The Company sells its paper products to dealers and other resellers of paper and
film products for commercial and home use. The Company reviews all existing
customers' financial condition periodically and monitors average days
outstanding in accounts receivable. Receivables are generally due 30 days from
sale. There have been no unusual credit losses relating to customers. No
customer accounted for 10% or more of gross sales for the year ended August 31,
1997.
One customer accounted for approximately 34% and 22% of gross sales, and 48% and
5% of accounts receivable for the year ended August 31,1998, and August 31,
1996, respectively.
F-8
32
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
Investments
At August 31, 1997, the Company's investments primarily consisted of common
stock of an unrelated publicly traded company. Historical cost approximates fair
value at August 31, 1997. In accordance with Statement of Financial Accounting
Standards No.115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"), the investment was classified as a trading
security due to the securities' liquidity and the Company's intent to not hold
the securities until maturity. In the fiscal year ending August 31, 1998, this
investment was sold and the related loss of approximately $19,000 was included
in other income, net in the accompanying Consolidated Statement of Operations.
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 which 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 and amortization are computed on the straight-line
basis using the estimated useful lives of the respective assets, which range
from 3 to 30 years.
Revenue Recognition
Sales are generally recorded when products are shipped to customers.
Other Income, Net
Other income, net, consists primarily of gain/loss on sale of property, plant,
and equipment, gain/loss on sale of investments, and interest income.
F-9
33
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Cash Flow Information
Cash paid for interest during the fiscal years 1998, 1997, and 1996, was
$558,863, $275,057, and $377,528, respectively. See Note 3 for discussion of
noncash amounts related to the extraordinary item in 1996. Cash paid for income
taxes during the fiscal years 1998, 1997, and 1996, was $47,295, $101,238 and
$1,813,263, respectively.
Earnings Per Common Share
Earnings per share is based on the weighted average number of common shares
outstanding. Common share equivalents have not been included in the computation
of earnings per share as they are anti-dilutive.
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 investments-
The carrying amount approximates fair value.
Long-term debt-
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair market value of
long-term debt at August 31, 1998, is approximately $8.2 million.
The fair market value of the Company's debt is less than what the Company
will pay. This is the result of the Company obtaining favorable interest
rates on its prepetition debt.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. EXTRAORDINARY ITEM:
During the year ended August 31, 1996, the Company recorded a noncash
extraordinary gain totaling $296,291, net
F-10
34
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
of related income tax expense of $157,516. The extraordinary gain primarily
resulted from the Company's early extinguishment of two notes payable to
financial institutions with an aggregate face amount of approximately $3.1
million for a negotiated discounted amount of approximately $2.6 million.
4. INVENTORIES:
Inventories consisted of the following:
AUGUST 31,
----------
1998 1997
---- ----
Finished goods $ 4,303,003 $ 3,915,325
Raw materials 4,266,114 3,493,589
Supplies 574,823 455,738
Work-in-process 46,033 25,297
----------- -----------
Total $ 9,189,973 $ 7,889,949
=========== ===========
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of the following:
AUGUST 31,
----------
1998 1997
---- ----
Buildings and equipment $ 14,484,171 $ 11,335,852
Furniture, fixtures, and other 1,733,456 1,587,390
------------ ------------
16,217,627 12,923,242
Less-Accumulated depreciation (9,117,371) (8,765,160)
------------ ------------
Net property, plant and equipment $ 7,100,256 $ 4,158,082
============ ============
F-11
35
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
6. LONG-TERM DEBT AND LINE OF CREDIT:
The following is a summary of long-term debt and line of credit:
AUGUST 31,
----------
1998 1997
---- ----
Note payable to a commercial financial corporation under revolving credit
line maturing May 1999, secured by inventories, trade accounts receivable,
equipment, goodwill associated with the Company's trademark IMPRESO (no
value on financial statements) and a personal guarantee by the trustee of a
a trust which is a majority shareholder, interest payable monthly at prime
plus 3/4% (9.25% at August 31,1998). $ 5,602,601 $ 2,836,184
Note payable to commercial financial corporation, secured, payable in
monthly installments, interest rate at 1.3%. 15,818 21,200
Financing lease payable to a commercial financial corporation, payable in
monthly installments, lease factor at 7.25%. 62,265 ---
Note payable to a bank secured by property, payable in monthly installments
of $14,391.22 (including interest at 4.5% above the 11th District Cost of
Funds rate, adjusted every six (6) months) 9.5% at August 31, 1998. 1,710,658 ---
Note payable to a commercial financial corporation, secured, payable in
monthly installments, interest rate of 6.7%. 18,358 ---
Prepetition-
Prepetition taxes payable 25,722 51,444
Note payable to a bank, secured by property, payable in monthly installments
of $4,815 (including interest at 6%) through May 2003, at which time the
remaining balance becomes due and payable. 570,220 590,011
Other notes payable, secured by one or more of the following: a personal
guarantee by the trustee of a trust which is a majority shareholder, and
certain property, plant, and equipment, maturity dates to 2023,
interest rates ranging from 4% to 8%. 398,515 447,675
----------- -----------
Total 8,404,157 3,946,514
Less-current maturities (5,706,645) (2,939,476)
----------- -----------
Long-term debt $ 2,697,512 $ 1,007,038
=========== ===========
F-12
36
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Prepetition amounts listed above represent the renegotiated amounts and terms
under the plan of reorganization.
The revolving credit line is limited to the lesser of $12,000,000 or a
percentage of eligible trade accounts receivable and inventories, as defined.
The availability of the revolving credit line was $2,331,000 as of August 31,
1998. The line of credit, as amended, has restrictive covenants requiring the
maintenance of a minimum tangible net worth and working capital requirements, as
defined. As of August 31, 1998 and 1997, the Company was in compliance with all
covenants.
For purposes of the following future maturities schedule, the line of credit is
shown below as a current maturity as borrowings are limited to accounts
receivable and inventories.
Future maturities of long-term debt and line of credit at august 31, 1998, are
as follows:
1999 $ 5,706,645
2000 65,179
2001 72,231
2002 72,179
2003 496,134
Thereafter 1,991,789
-----------
$ 8,404,157
===========
7. LEASE AGREEMENTS:
The Company is obligated under various operating leases for equipment, which
expire at various dates through 2003. Future annual minimum lease payments as of
August 31, 1998, are as follows:
1999 $ 195,456
2000 190,095
2001 183,776
2002 181,500
2003 170,250
Thereafter 53,000
---------
$ 974,077
=========
F-13
37
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
8. COMMITMENTS AND CONTINGENCIES:
Legal-
In the opinion of management, the Company has no pending legal
proceedings which could have a material adverse effect on the results of
operations or financial position of the Company.
Significant Contract-
In April 1997, the Company entered into a non-exclusive agreement with
International Business Machines ("IBM") to manufacture and to distribute
certain selected products carrying the IBM logo. The Company 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 contract. The contract,
under certain circumstances, may be canceled by either party upon 120
days written notice.
9. INCOME TAXES:
The Company utilizes the Statement of Financial Accounting Standards No.
109,"Accounting for Income Taxes" ("SFAS No. 109"), 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, 1998 and 1997,
were as follows:
AUGUST 31,
----------
1998 1997
---- ----
Deferred income tax assets-current:
Allowance for doubtful accounts receivable $ 64,600 $ 44,200
Deferred income tax liability-long term:
Tax over book depreciation and amortization (689,482) (642,320)
---------- ----------
Net deferred income tax liabilities $ (624,882) $ (598,120)
========== ==========
Substantially all of the net operating loss generated during fiscal year 1998
can be carried back to the 1996 tax reporting year.
F-14
38
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The Company's effective tax rate was different than the statutory federal income
tax rate for the years ended August 31, 1998, 1997, and 1996, as follows
(amounts include effects of extraordinary gain):
1998 1997 1996
---- ---- ----
Federal income taxes at statutory rate $ (467,987) $ (164,689) $ 1,703,901
State taxes, net of federal income tax benefit 9,874 112,613 64,363
Tax effect of nondeductible items 20,810 32,933 12,870
Alternative minimum taxes 118,694 --- ---
AMT credit utilized --- --- (259,545)
Other --- 11,520 188,134
----------- ----------- -----------
Income tax expense (benefit) $ (318,609) $ (7,623) $ 1,709,723
=========== =========== ===========
10. RELATED PARTY TRANSACTIONS:
The Sorokwasz Irrevocable Trust, whose trustee is the president of the Company,
and the senior vice president of the Company own 44.09% and 15.84%,
respectively, of the outstanding common stock as of August 31, 1998.
11. STOCK OPTIONS:
The Company sponsors a stock option plan (the "Plan") for certain employees and
directors. 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 become exercisable ratably at various dates through 2001 at an
exercise price of not less than the fair market value at the grant date. The
options generally expire 10 years after date of grant.
In October 1995, the Financial Accounting Standards Board ("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 for fiscal years beginning after December 15, 1995, 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
F-15
39
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
expense been determined consistent with the fair value method of measuring
compensation expense under SFAS No. 123, the pro forma effect for fiscal 1998,
1997 and 1996 would have been a reduction in the Company's net income, or
increase in net loss of approximately, $193,000, $155,000 and $130,000,
respectively, and a reduction in earnings per share, or increase in net loss per
share of approximately, $.04, $.03 and $.03, 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 1998, 1997 and 1996, respectively: expected volatility of 60%, 48%, and
48%; risk-free interest rate of 5.45%, 6.33%, and 5.84%; expected lives of five
years; and no expected dividends.
At August 31, 1998, the outstanding options of 274,350 shares have exercise
prices ranging from $5.375 to $12.75 (fair market value on dates of grant) and
an average remaining contractual life of 7.2 years. The fair value of options
granted during the years ended August 31, 1998, 1997 and 1996, calculated using
the Black-Scholes option-pricing model, was approximately $7,600 ($5.48 per
share), $96,000 ($3.87 per share) and $795,000 ($2.97 per share), respectively.
Exercisable options total 185,812 shares and are exercisable at a weighted
average exercise price of $6.07.
The following table summarizes stock option activity under the Plan:
Weighted
Available for Average
Reserved Granted for Grant Price
--------------- --------------- --------------- -----------------
August 31, 1995 --- --- 400,000 N/A
Granted --- 295,800 (295,800) $ 6.01
Canceled --- (3,600) 3,600 $ 6.00
--------- -------- --------
August 31, 1996 --- 292,200 107,800 $ 6.01
Exercised --- (45,050) --- $ 6.01
Canceled --- (1,800) 1,800 $ 6.00
Granted --- 27,500 (27,500) $ 7.69
--------- -------- --------
August 31, 1997 --- 272,850 82,100 $ 6.17
Granted --- 1,500 (1,500) $ 9.69
--------- -------- --------
August 31, 1998 --- 274,350 80,600 $ 6.19
========= ======== ========
In connection with the Company's initial public offering ("IPO"), the Company
issued warrants to its underwriters for $.001 per warrant to purchase an
aggregate of 110,000 shares of common stock, which warrants became exercisable
on October 5, 1996, for four years at an exercise price of $7.20 per share. At
the time of the IPO, the Company also issued a warrant to a consultant for
10,000 shares of common stock, which became exercisable October 5, 1996, for a
period of four years, at an exercise price of $6.60 per share, which represents
a price above the fair market value on the date of grant. The Company also
issued a warrant to a consultant for 10,000 shares of common stock, exercisable
for a period of five years from December 1, 1995, at an exercise price of $7.20
per share, which represents a price above the fair market value on the date of
grant.
F-16
40
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
12. EARNINGS PER SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") in Fiscal 1998. SFAS No. 128 requires the
replacement of primary and fully diluted earnings per share ("EPS") with basic
and diluted earnings per share. The adoption of SFAS No. 128 did not have a
material impact on the earnings per share calculation.
Basic EPS is calculated by dividing net income (loss) attributable to common
stockholders by the weighted average shares of common stock of the Company
("Common Stock"). The calculation of diluted EPS considers the effect of Common
Stock equivalents outstanding during the period. Common Stock equivalents
represent the dilutive effect of the assumed exercise of certain outstanding
stock options and warrants. For the fiscal year ended August 31, 1998, the
assumed exercise of outstanding in-the money stock options and conversion of
warrants had an anti-dilutive effect. As a result, these shares are excluded
from the final determination of the weighted average shares outstanding at
August 31, 1998.
13. EMPLOYEE 401 (K) PLAN:
In February 1996, the Company implemented an employee 401(k) plan. The plan is
administered by a national brokerage firm and administrative fees associated
with the plan are funded by the plan. The Company's contribution is
discretionary and currently matches 10% of the first 5% of the participating
employees' contribution to their 401(k) accounts. Contributions by the Company
were $15,639, $14,828, and $9,567 for the years ended August 31, 1998, 1997, and
1996, respectively.
F-17
41
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Independent Public Accountants S-2
Schedule II- Valuation and Qualifying Accounts S-3
S-1
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of TST/Impreso, Inc. and subsidiaries included
in this Form 10-K and have issued our report thereon dated October 12, 1998. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statement schedules is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 12, 1998
S-2
43
SCHEDULE II
TST/IMPRESO, INC. AND SUBSIDIARIES (a)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Additions
Balance at Additions Charged Balance at
Beginning Charged to other End of
of Period to Income Accounts Deductions Period
------------- ------------ ------------ -------------- --------------
August 31, 1998:
Allowance for doubtful accounts $ 130,000 $ 120,000 -- $ (60,000) (b) $ 190,000
--------- --------- --------- ---------- ---------
Total reserves and allowances $ 130,000 $ 120,000 -- $ (60,000) $ 190,000
--------- --------- --------- ---------- ---------
August 31, 1997:
Allowance for doubtful accounts $ 163,633 -- -- $ (33,633) (b) $ 130,000
--------- --------- --------- ---------- ---------
Total reserves and allowances $ 163,633 -- -- $ (33,633) $ 130,000
--------- --------- --------- ---------- ---------
August 31, 1996:
Allowance for doubtful accounts $ 200,000 -- -- $ (36,367) (b) $ 163,633
--------- --------- --------- ---------- ---------
Total reserves and allowances $ 200,000 -- -- $ (36,367) $ 163,633
--------- --------- --------- ---------- ---------
(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
44
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
3(a) Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to Registration Statement on Form
S-1 No. 33-93814)
3(b) By-laws of the Company (incorporated by reference to Exhibit
3.2 to Registration Statement on Form S-1 No. 33-93814)
4 Form of Underwriters' Warrant (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-1 No.
33-93814)
10(a) 1995 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Registration Statement on Form S-1 No. 33-93814)
10(b) Employment Agreement dated September 28,1995, between the
Company and Marshall Sorokwasz (incorporated by reference to
Exhibit 10.2 to Registration Statement on Form S-1 No.
33-93814)
10(c)+ IBM Brand Paper Trademark Licensing Agreement, effective as
of April 30, 1997, between the Company and International
Business Machines Corporation (incorporated by reference to
Exhibit 10-Q/A, dated May 31, 1997)
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to Registration Statement on Form S-1 No.
33-93814)
27 Financial data schedule
+ Confidential Treatment granted for portions of this Exhibit