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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For the quarterly period ended May 31, 2004
 OR o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For the transition period _____________to __________________
 Commission File Number 000-29883 Impreso, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    75-2849585
(I.R.S. Employer
Identification No.)
 652 Southwestern Boulevard
Coppell, Texas 75019
(Address of principal executive offices) (972) 462-0100
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of
Common Stock as of the latest practicable date. Class of Common Stock
    
    Shares outstanding at July 13, 2004$0.01 Par Value
    
    5,278,780




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IMPRESO, INC. AND SUBSIDIARIES
FORM 10-Q
May 31, 2004 INDEX PART I.FINANCIAL INFORMATION
    
    Page NumberItem 1. Condensed Consolidated Financial Statements:Interim Condensed Consolidated Balance Sheets as of May 31, 2004
(Unaudited) and August 31, 2003
    
    
    1Interim Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended May 31, 2004 and May 31, 2003
(Unaudited)
    
    
    3Interim Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended May 31, 2004 and May 31, 2003
(Unaudited)
    
    
    4Notes to Interim Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16PART II.OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    16Item 3. Defaults upon Senior Securities
    
    
    16Item 4. Submission of Matters to a vote of Security Holders
    
    
    16Item 5. Other Information
    
    
    16Item 6. Exhibits and Report on Form 8-K
    
    
    16SIGNATURES
    
    
    17INDEX TO EXHIBITS
    
    
    18Certification Pursuant to Section 302-CEOCertification Pursuant to Section 302-CFOCertification Pursuant to Section 906-CEOCertification Pursuant to Section 906-CFO




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##### Table of Contents



IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED BALANCE SHEETS ASSETS
(Unaudited) May 31,
    
    August 31,2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    305,962
    
    
    $
    95,129Trade accounts receivable, net of allowance for doubtful accounts
of $911,162 at May 31, 2004 and $630,916 as of August 31, 2003
    
    
    11,975,011
    
    
    
    12,144,735Inventories
    
    
    20,999,761
    
    
    
    28,462,091Prepaid expenses and other
    
    
    767,030
    
    
    
    141,729Deferred income tax assets
    
    
    827,936
    
    
    
    574,924Total current assets
    
    
    34,875,700
    
    
    
    41,418,608Property, plant and equipment, at cost
    
    
    26,915,564
    
    
    
    28,030,124Less-Accumulated depreciation
    
    
    (13,948,416
    )
    
    
    (13,196,099
    )Net property, plant and equipment
    
    
    12,967,148
    
    
    
    14,834,025Other assets
    
    
    863,777
    
    
    
    83,667Total assets
    
    $
    48,706,625
    
    
    $
    56,336,300
 The accompanying notes are an integral part of the condensed consolidated financial statements 1




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##### Table of Contents



IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS EQUITY
(Unaudited) May 31,
    
    August 31,2004
    
    2003Current liabilities:Accounts payable
    
    $
    10,178,737
    
    
    $
    11,102,673Accrued liabilities
    
    
    936,091
    
    
    
    1,041,657Accrued commissions
    
    
    2,239,816
    
    
    
    851,029Current maturities of long-term debt
    
    
    1,427,475
    
    
    
    1,343,231Line of credit
    
    
    5,538,922
    
    
    
    14,355,445Current maturities of prepetition debt
    
    
    8,159
    
    
    
    8,084Total current liabilities
    
    
    20,329,200
    
    
    
    28,702,119Deferred income tax liability
    
    
    1,086,739
    
    
    
    1,021,357Deferred gain
    
    
    839,482
    
    
    
    Long-term debt, net of current maturities
    
    
    8,094,835
    
    
    
    9,342,784Long-term portion of prepetition debt, net of current maturities
    
    
    222,972
    
    
    
    229,150Total liabilities
    
    
    30,573,228
    
    
    
    39,295,410Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
0 shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 15,000,000 shares authorized;
5,292,780 issued and 5,278,780 outstanding
    
    
    52,928
    
    
    
    52,928Treasury stock (14,000 shares, at cost)
    
    
    (38,892
    )
    
    
    (38,892
    )Additional paid-in capital
    
    
    6,353,656
    
    
    
    6,353,656Retained earnings
    
    
    11,765,705
    
    
    
    10,673,198Total stockholders equity
    
    
    18,133,397
    
    
    
    17,040,890Total liabilities and stockholders equity
    
    $
    48,706,625
    
    
    $
    56,336,300
 The accompanying notes are an integral part of the condensed consolidated financial statements 2




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IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended
    
    Nine Months EndedMay 31
    
    May 31,
    
    May 31
    
    May 31,2004
    
    2003
    
    2004
    
    2003Net Sales
    
    $
    26,786,252
    
    
    $
    28,872,753
    
    
    $
    81,716,107
    
    
    $
    92,384,516Cost of sales
    
    
    23,591,784
    
    
    
    25,624,297
    
    
    
    72,133,020
    
    
    
    82,686,722Gross profit
    
    
    3,194,468
    
    
    
    3,248,456
    
    
    
    9,583,087
    
    
    
    9,697,794Selling, General and administrative expense
    
    
    2,304,573
    
    
    
    2,339,476
    
    
    
    6,851,825
    
    
    
    7,124,124Operating income
    
    
    889,895
    
    
    
    908,980
    
    
    
    2,731,262
    
    
    
    2,573,670Other (income) expenses:Interest expense
    
    
    243,988
    
    
    
    425,199
    
    
    
    876,085
    
    
    
    1,382,937Miscellaneous (income) expenses
    
    
    91,292
    
    
    
    (57,683
    )
    
    
    85,140
    
    
    
    (214,777
    )Income before income tax expense
    
    
    554,615
    
    
    
    541,464
    
    
    
    1,770,037
    
    
    
    1,405,510Income tax expense:Current
    
    
    324,915
    
    
    
    111,692
    
    
    
    865,160
    
    
    
    445,193Deferred
    
    
    (118,351
    )
    
    
    105,257
    
    
    
    (187,630
    )
    
    
    114,787Total Income Tax Expense
    
    
    206,564
    
    
    
    216,949
    
    
    
    677,530
    
    
    
    559,980Net income
    
    
    348,051
    
    
    $
    324,515
    
    
    
    1,092,507
    
    
    $
    845,530Net income per common share
(basic and diluted)
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.16Weighted average shares outstanding
    
    
    5,278,780
    
    
    
    5,278,780
    
    
    
    5,278,780
    
    
    
    5,278,780(basic and diluted)
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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IMPRESO, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months EndedMay 31,
    
    May 31,2004
    
    2003Cash Flows From Operating ActivitiesNet income
    
    $
    1,092,507
    
    
    $
    845,530Adjustments to reconcile net income to net cash
used in operating activities-Depreciation and amortization
    
    
    1,072,416
    
    
    
    1,078,864Deferred income tax (benefit) expense
    
    
    (187,630
    )
    
    
    114,787Decrease in accounts receivable, net
    
    
    169,724
    
    
    
    2,172,993Decrease in inventories
    
    
    7,462,330
    
    
    
    2,486,538Increase in prepaid expenses and other
    
    
    (625,301
    )
    
    
    (78,448
    )(Increase) decrease in non current assets
    
    
    (780,110
    )
    
    
    19,450(Decrease) in accounts payable
    
    
    (923,936
    )
    
    
    (5,445,907
    )Increase (Decrease) in accrued liabilities
    
    
    1,283,221
    
    
    
    (492,647
    )Net cash provided by operating activities
    
    
    8,563,221
    
    
    
    701,160Cash Flows From Investing Activities:Additions to property, plant, and equipment
    
    
    (1,258,945
    )
    
    
    (277,198
    )Proceeds from sale of property, plant & equipment
    
    
    2,892,888
    
    
    
    Net Cash provided by (used in) investing activities
    
    
    1,633,943
    
    
    
    (277,198
    )Cash Flows From Financing Activities:Net (payments) borrowings on line of credit
    
    
    (8,816,523
    )
    
    
    157,563Payments on prepetition debt
    
    
    (6,103
    )
    
    
    (5,889
    )Net payments on postpetition debt, net
    
    
    (1,163,705
    )
    
    
    (612,633
    )Warrants issued
    
    
    
    
    
    
    6,447Net cash used in financing activities
    
    
    (9,986,331
    )
    
    
    (454,512
    )Net increase (decrease) in cash and cash equivalents
    
    
    210,833
    
    
    
    (30,550
    )Cash and cash equivalents, beginning of period
    
    
    95,129
    
    
    
    202,809Cash and cash equivalents, end of period
    
    $
    305,962
    
    
    $
    172,259
 The accompanying notes are an integral part of these consolidated financial statements. 4




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IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 1. ORGANIZATION AND NATURE OF BUSINESS Impreso, Inc., (formerly Impreso.com, Inc.) a Delaware corporation (referred to
collectively with its subsidiaries as the Company), is the parent holding
company of TST/Impreso, Inc. (TST), a manufacturer and distributor to dealers
and other resellers of paper and film products for commercial and home use in
domestic and international markets, and Hotsheet.com, Inc., the owner and
operator of the Hotsheet.com web portal. TSTs product line consists of
standard continuous computer stock business forms; thermal facsimile paper;
cut sheet products such as copy paper, ink jet paper, digital photo paper and
transparencies; fine business stationary; point of sale and cash register
machine rolls; high speed laser roll paper; wide format engineering rolls;
wide format ink jet media; and processed laser cut sheets. TST has one wholly
owned subsidiary, TST/Impreso of California, Inc., which was formed to support
the activities of the paper converting segment of the Companys business. 2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited Interim Condensed Consolidated
Financial Statements of the Company include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Companys financial position as of May 31, 2004, and its results of operations
for the three and nine months ended May 31, 2004 and May 31, 2003. Results of
the Companys operations for the interim period ended May 31, 2004, may not be
indicative of results for the full fiscal year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations promulgated by the Securities and
Exchange Commission (the SEC). The unaudited Interim Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements and
accompanying notes of the Company and its subsidiaries, included in the
Companys Form 10-K, (the Companys Form 10-K), for the fiscal year ended
August 31, 2003 (Fiscal 2003). Accounting policies used in the preparation of
the unaudited Interim Condensed Consolidated Financial Statements are
consistent in all material respects with the accounting policies described in
the Notes to Consolidated Financial Statements in the Companys Form 10-K. 3. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment to SFAS No. 123".This
statement provides alternative methods of transition for companies that elect
to voluntarily change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company currently does not intend to change to the fair value
based method of accounting for stock-based compensation, but will adhere to the
disclosure requirements of the Statement. The Company has adopted the
disclosure requirements for the year ending August 31, 2004 (Fiscal 2004). 5




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In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46). FIN No. 46 requires companies with a
variable interest in a variable interest entity to apply this guidance
immediately to such entities created after January 31, 2003, and in the first
year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The application of the guidance could result in the
consolidation of a variable interest entity. The company is currently
evaluating whether Alexia Springs Water Company is a variable interest entity,
whether the company is the primary beneficiary (as defined in FIN No. 46) and,
if so, the impact of this interpretation on the financial position and the
results of operations. 4. INVENTORIES Inventories are stated at the lower of cost (principally on a first-in,
first-out basis) or market and include material, labor and factory overhead. Inventories consisted of the following: May 31, 2004
    
    August 31,2003Finished goods
    
    $
    12,459,190
    
    
    $
    15,409,606Raw materials
    
    
    7,769,162
    
    
    
    12,345,769Supplies
    
    
    915,905
    
    
    
    1,008,103Work-in-process
    
    
    107,086
    
    
    
    86,731Allowance for obsolete inventory
    
    
    (251,582
    )
    
    
    (388,118
    )Total
    
    $
    20,999,761
    
    
    $
    28,462,091
 5. LONG-TERM DEBT AND LINE OF CREDIT: The following is a summary of long-term debt and line of credit: May 31,
    
    August 31,2004
    
    2003Line of Credit with a commercial financial corporation under
revolving credit line, maturing May 2004, secured by
inventories, trade accounts receivable, equipment, goodwill
associated with TSTs trademark IMPRESO (no value on
financial statements), and a personal guarantee by the trustee
of a trust which is a principal stockholder of the Company
which was released on May 26, 2004, interest payable monthly on
$5 million from January 5, 2004 to April 5, 2004, at LIBOR plus
2.75% (3.902 % as of April 5, 2004), balance at prime plus
..25%, and from April 6, 2004 to May 31, 2004, at prime plus
..25% on entire balance (4 % as of May 31, 2004). As of May 6,
2004, the line of credit was amended and extended to November
17, 2005. See page 13.
    
    $
    5,538,922
    
    
    $
    14,355,445
 6




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May 31,
    
    August 31,2004
    
    2003Note payable to a commercial financial corporation, secured by
real property, payable in monthly installments of $15,151
(including interest at 7.75%, or 4.5% above the 11th District
cost of funds rate, whichever is greater; 7.75% as of April 5,
2004), maturing June 2008. Paid in full on April 5, 2004.
    
    
    -0-
    
    
    
    1,638,448Note payable to a commercial financial corporation, secured by
real property and equipment, payable in monthly installments of
$4,457 (including interest at 8.50%), maturing November 2009.
    
    
    231,418
    
    
    
    257,641Note payable to a commercial financial corporation, secured by
real property and equipment, payable in monthly installments of
$10,843 (including interest at 8.50%), maturing July 2010.
Revolving lenders blanket lien subordinated to notes
collateral.
    
    
    621,757
    
    
    
    682,876Note payable to a commercial financial corporation, secured by
real property, payable in monthly installments of $2,834
(including interest at 5.5%), maturing October 2010.
    
    
    181,988
    
    
    
    199,531Notes payable to various commercial financial corporations,
secured by equipment, interest rates ranging from 5.25 % to
11.016 %, maturing at various dates from September 2004 through
July 2008.
    
    
    183,896
    
    
    
    308,323Notes payable to a commercial financial corporation, secured by
real property and a personal guarantee by the trustee of a
trust which is a principal stockholder of the Company, payable
in monthly installments of $21,407 (including interest at 8%),
maturing March 2011.
    
    
    1,969,380
    
    
    
    2,041,453Acquisition note payable, unsecured, payable in quarterly
installments of $15,000 (including interest at 8%), maturing
April 2006. See Legal Matters, Footnote 8
    
    
    225,000
    
    
    
    225,000Acquisition note payable, secured by equipment, payable in
monthly installments of $16,024, no interest, matured May 2003.
See Legal Matters, Footnote 8.
    
    
    352,145
    
    
    
    352,145Note payable to a commercial financial corporation, secured by
real property and a personal guarantee by the trustee of a
trust which is a principal stockholder of the Company, payable
in monthly installments of $22,827 (including a fixed scheduled
for interest, 7.25 % at May 31, 2004), maturing April 2007.
    
    
    3,097,730
    
    
    
    3,135,614Note payable to a commercial financial corporation, secured by
equipment, payable in monthly installments of $17,857 including
interest at a variable rate equal to 30 day LIBOR plus 350
basis points, 4.49% at May 31, 2004), maturing February 2009.
    
    
    1,035,714
    
    
    
    1,196,429Acquisition notes payable, unsecured, payable in monthly
installments of 16,666, maturing February 2007.
    
    
    520,625
    
    
    
    648,556
 7




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May 31,
    
    August 31,2004
    
    2003Construction note payable to a commercial financial
corporation, secured by real property, payable in monthly
installments of interest only, at 6%, to be consolidated into
new loan combined with balance of existing mortgage on the real
property. Interest rate on the new combined loan will be prime
plus 1.125%, capped at 7.50%, maturing 5 years from date of
execution.
    
    
    1,102,657
    
    
    
    -0-Prepetition-Note payable to a commercial financial corporation, secured by
real property and equipment and a personal guarantee by the
trustee of a trust which is a principal stockholder of theCompany, payable in monthly installments of $1,461 (including
interest at 4%), maturing May 2023.
    
    
    231,131
    
    
    
    237,234Total
    
    
    15,292,363
    
    
    
    25,278,694Less Current Maturities
    
    
    (6,974,556
    )
    
    
    (15,706,760
    )Long-Term Debt
    
    $
    8,317,807
    
    
    $
    9,571,934
 Prepetition amount listed above represents the renegotiated amounts and terms
under the 1993 plan of reorganization. On January 5, 2004, TST elected to implement the euro dollar interest rate of
1.152 % plus 2.75%, to $5,000,000 of the Companys outstanding line of credit
balance. This rate was locked until April 5, 2004, after which the entire line
reverted to prime plus .25%. On May 6, 2004, TST amended its revolving line of credit to decrease the line
from $25 million to $10 million. The amended revolving credit line is limited
to the lesser of $10 million or a percentage of eligible trade accounts
receivable and inventories, as defined. The remaining availability under the
revolving credit line was $5.2 million as of May 31, 2004. The line of credit, as amended, has a restrictive covenant requiring the
maintenance of a minimum tangible net worth, as defined in the agreement. One
of the notes payable contains restrictive covenants on current and debt to
worth ratio, and the payment of cash dividends. As of May 31, 2004, the
Company was in compliance with all covenants. 6. SUPPLEMENTAL CASH FLOW INFORMATION Three Months ended
    
    May 31, 2004
    
    May 31, 2003Cash paid during the period for:Interest
    
    $
    234,961
    
    
    $
    415,893Income taxes
    
    $
    500,000
    
    
    $
    167,870
 8




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Nine Months ended
    
    May 31, 2004
    
    May 31, 2003Cash paid during the period for:Interest
    
    $
    852,211
    
    
    $
    1,354,635Income taxes
    
    $
    1,010,639
    
    
    $
    736,184Noncash Investing Activities:Issuance of Warrant to Vendor
    
    $
    
    
    
    $
    6,447
 7. STOCK OPTIONS The Company accounts for the Incentive Stock Option Plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based compensation costs
are reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation. Three months ended
    
    Nine Months EndedMay 31, 2004
    
    May 31, 2003
    
    May 31,2004
    
    May 31,2003Pro forma impact of fair value methodReported net income
    
    
    348,051
    
    
    
    324,515
    
    
    
    1,092,507
    
    
    
    845,530Less: fair value impact of employee
stock options
    
    
    1,200
    
    
    
    9,000
    
    
    
    3,600
    
    
    
    32,000Pro Forma net income
    
    
    346,851
    
    
    
    315,515
    
    
    
    1,088,907
    
    
    
    813,530Earnings per common shareBasic-as reported
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.16Diluted-as reported
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.16Basic-pro forma
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.15Diluted-pro forma
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.15Weighted average Black-Scholes fair
value assumptionsRisk free interest rate
    
    
    3.27
    
    
    
    3.27
    
    
    
    3.27
    
    
    
    3.27Expected life
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Expected volatility
    
    
    57
    %
    
    
    57
    %
    
    
    57
    %
    
    
    57
    %Expected dividend yield
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
 8. Legal Matters TST is a defendant in a suit filed in Fiscal 2003 for the collection of sums
due under two promissory notes. These liabilities are included on the
Companys balance sheet. TST recently prevailed in its motion to stay the
adversary proceeding and to compel arbitration in Dallas, Texas under the terms
of the parties purchase agreement. TST asserts that liability does not exist
because of fraud and contractual breaches in connection with the agreements. 9




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On October 9, 2003, in the United States District Court Central District of
California Southern Division, Avery Dennison Office Products Company and Avery
Dennison Corporation (Avery) filed a patent infringement lawsuit against TST
claiming TSTs corporate cut business card products infringed on patents and
pending patents owned by Avery. On March 11, 2004, the parties executed a
confidential settlement agreement, which includes TSTs agreement to
discontinue selling corporate cut business card products. Management believes
that the discontinuation of the sale of these products will not have a material
impact on our financial position or results of operations. On January 14, 2004,
the Company filed suit against two vendors of the infringing products claiming
breach of UCC warranties for selling to TST/Impreso, Inc. patent infringing
goods. The Company also filed a claim with its insurance carrier requesting
coverage. The insurance companies have determined the policies in effect during
the relevant time frame do not cover these types of claims. On November 5, 2003, the Company discovered the Companys payroll
administrator was
fraudulently diverting Company funds into her personal bank account. The
payroll administrator
admitted guilt to the FBI and the internal investigator of the Companys bank.
The investigation by
the FBI, the bank and the Company revealed a loss of approximately $628,000
over a period
starting in September 2000 until October 2003. The investigation is complete.
The Company has
notified its insurance companies of the loss under its employee theft coverage.
The current insurer
offered a $258,000 claim adjustment for the entire loss. The company has
engaged counsel, and a
demand has been made on the insurer to cover the entire loss, as a result of
recent legal
developments which could be persuasive in litigating different interpretations
of defined terms
within the policy. The FBI has notified the Company that the employee plead on
information and
will be incarcerated as a result of the embezzlement. In December 2003, TST/Impreso, Inc. entered into a settlement agreement with
a customer due to a dispute concerning catalog fees. The settlement requires TST to issue a credit
memo for the benefit of the customer in the amounts of $50,000, $25,000 and
$25,000 on December 31, 2004, June 30, 2005, and December 31, 2005,
respectively. In April 2004, TST filed a lawsuit in the 68th judicial district Dallas
County against two former
outside sales representatives and a competitor, alleging breach of fiduciary
duty, tortious
interference with existing and prospective business relations, and civil
conspiracy. The lawsuit
seeks to enforce the duties of loyalty owed to TST by its sales agents, and
also protect TST from any
unfair business practices of TSTs competitors. The competitor filed a counter
claim alleging
business disparagement and tortious interference with existing and prospective
business relations. 9. Subsequent Events In June 2004, the Company exited its leased Elk Grove, Illinois plant,
moving all production into the
substantially completed Itasca, Illinois 34,500 square foot expansion. In July
2004, the Company will
complete its exit of the West Virginia facility, moving all production into the
Companys newly
renovated Chambersburg, Pennsylvania location. The Company intends to exit the
Greencastle,
Pennsylvania building and move all operations into the Chambersburg facility by
September 2004.
The West Virginia and Greencastle buildings are currently up for sale. No
contracts have been
executed as of the date of this filing. On July 9, 2004, we received a demand from the trustee of a bankrupt
customer in the
amount of $1.2 million. This demand is a gross preference demand and we believe
subsequent to a full preference analysis and the companys utilization of
various defenses,
any liability should be lowered to a materially reduced amount. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations CRITICAL ACCOUNTING POLICIES The accounting policies described below is those the Company considers critical
in preparing its condensed consolidated financial statements. These policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, the Companys observation of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate and available at the time
the estimates are made. However, as described below, these estimates could
change materially if different information or assumptions were used. The
Company believes that of its significant accounting policies, the following may
involve a higher degree of judgment or estimation than other accounting
policies. Accounts Receivable (doubtful accounts) Reserves The Company provides for losses on accounts receivable based upon their current
status, historical experience and managements evaluation of existing economic
conditions. Significant changes in customer profitability or general economic
conditions may have a significant effect on the Companys allowance for
doubtful accounts. Revenue Recognition TSTs sales are recorded when products are shipped to customers. TST is
reasonably assured a majority of the sales are collectible upon shipment due to
its credit policies and collection methods. For those accounts TST is not
reasonably assured of collection the Company reserves against doubtful accounts
based upon historical experience and managements evaluation of existing
economic conditions. Hotsheet.com, Inc. generates its revenue by click through
fee advertising revenues and commissions earned. Click through fees are
generated when traffic is sent from the Hotsheet.com website, via a link, to a
vendors website. Commissions are generated when the linked traffic makes
purchases. The revenue is recognized upon receipt. Inventories Inventories are valued at the lower of cost or market, cost being determined on
the first-in, first-out method. Reserves for slow moving, obsolete products, or
bad (damaged) products are based on historical experience, acquisition
activities, and secured lender policies. The Company evaluates, and if
necessary, adjusts reserves quarterly. Historically, the Company has not reserved for slow moving, obsolete or bad
inventories. Substantially all of the slow moving products can be repackaged
into different formats or labels. Demand for products that are associated with
obsolete technology slowly decline as sales of new hardware requiring new or
different consumables increase. The reduced demand for products which are
becoming obsolete is easily monitored and scheduled production of these items
is adjusted accordingly. If damage is caused to a product it is most often
minor in value and expensed as damage occurs. The Company records reductions in revenue when products are returned. Returns
and allowances are monitored based on a historical percentage of sales. All
returns must be approved by the Company prior to the product being returned,
and in some instances a restocking fee is charged to the customer. The Company
also monitors reasons for return, such as quality, shipping errors or ordering
errors. Commissions and Rebates The Company reserves commissions and rebates paid to certain customers based on
specific contractual agreements. These reserves are calculated based upon
sales by customer, and adjusted monthly to reflect increases and decreases in
each customers sales and payments of commissions and rebates. 11




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Results of Operations for the Interim Periods Ended May 31, 2004 and May 31, 2003. Net SalesNet sales decreased from $ 28.9 million in the three months ended
May 31, 2003, to $26.8 million in the three months ended May 31, 2004 (Third
Quarter 2004), a decrease of $ 2.1 million or 7.2%. Net sales decreased from
$92.4 million in the nine months ended May 31, 2003, to $ 81.7 million in the
nine months ended May 31, 2004, a decrease of $ 10.7 million or 11.6%. Net
sales decreased in the three month period ended May 31, 2004, as compared to
the corresponding period of the prior year, as a result of the loss of sales to
a large customer in April 2004. Net sales decreased in the nine month period
ended May 31, 2004, as compared to the corresponding period of the prior year,
as a result of new IBM licensees starting to manufacture the same IBM products
the Company manufactures, and comparative lower finished goods pricing. Gross Profit- Gross profit remained stable at $3.2 million for the three
months ended May 31, 2003 and May 31, 2004. Gross profit decreased from $9.7
million in the nine months ended May 31, 2003, to $9.6 million in the nine
months ended May 31, 2004, a decrease of 1.2%. Gross profit margin for the
three month period ended May 31, 2004, increased to 11.9%, as compared to
11.25% for the corresponding period of the prior year. Gross profit margin for
the nine month period ended May 31, 2004, increased to 11.7% as compared to
10.5% for the nine month period ended May 31, 2003. The contrast of the
decrease in gross profit and the increase in gross profit margin for three and
nine month periods ended May 31, 2004, resulted from lower overhead and raw
material costs. Selling, General, and Administrative ExpensesSG&A expenses remained stable at
$ 2.3 million in the three months ended May 31, 2003 and May 31, 2004. SG&A
expenses decreased from $ 7.1 million in the nine months ended May 31, 2003 to
$ 6.9 million in the nine months ended May 31, 2004. This decrease was
primarily the result of the elimination of overtime, reduction in workforce and
employee benefits. SG&A expenses as a percentage of net sales increased from
8.1% in the three months ended May 31, 2003, to 8.6% in the Third Quarter 2004.
SG&A expenses as a percentage of net sales increased from 7.7% in the nine
months ended May 31, 2003, to 8.4% in the nine months ended May 31, 2004. The
increase in SG&A as a percentage of sales for three and nine months ended May
31, 2004, is due to the decrease in net sales. Interest ExpenseInterest expense decreased from $ 425,000 in the three
months ended May 31, 2003, to $ 244,000 in Third Quarter 2004. Interest expense
decreased from $ 1.4 million in the nine months ended May 31, 2003, to $
876,000 in the nine months ended May 31, 2004. The decrease of 42.6% in the
three months ended May 31, 2004, and the decrease of 36.7% in the nine months
ended May 31, 2004, is due to the reduction of inventories which reduced our
borrowings under our line of credit and decreased interest rates from
implementation of the Eurodollar rate on our floating lines of credit. Income Taxes- Income tax expense decreased from $ 217,000 for the three
months ended May 31, 2003, to $ 207,000 in Third Quarter 2004. Income tax
expense increased from $560,000 for the nine months ended May 31, 2003, to
$678,000 in the nine months ended May 31, 2004.The increase in income tax
expense for Third Quarter, as compared to the corresponding period of the prior
year is a result of the taxable gain on the sale of our California buildings. 12




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Liquidity and Capital Resources Working capital increased to $14.5 million as of May 31, 2004, from $12.7
million at August 31, 2003. This represented an increase of 14.4%. Effective May 6, 2004, TST amended its loan agreement with a commercial
financial corporation to mature on November 17, 2005. The amended agreement
provides for a $10 million line of credit and an inventory sub-limit of $10
million. The amended loan is secured by, among other things, inventory, trade
receivables, and equipment. The personal guarantee of Marshall Sorokwasz, our
Chairman of the Board and President, and Trustee of a trust which is a
principal shareholder of our Company was released. The amended loan agreement
allows the Company to elect the application of a Eurodollar interest rate plus
2.25% if excess availability is $10 million or more, 2.50% if excess
availability is between $5 to $10 million and 2.75% if excess availability is
below $5 million. The Libor rate can be elected for 30, 60 or 90 day periods to
specified amounts of the loan. On January 5, 2004, TST elected to implement the euro dollar interest rate of
1.152 % plus 2.75%, to $5,000,000 of the Companys outstanding loan balance.
This rate was locked until April 5, 2004, after which the entire line reverted
to prime plus .25%. Available borrowings under this line of credit, which accrued interest from
January 5, 2004 to April 5, 2004, on $5 million, at LIBOR plus 2.75% (3.902 %
as of April 5, 2004), balance at prime plus .25% (4 % as of May 31, 2004), are
based upon specified percentages of eligible accounts receivable and
inventories. As of May 31, 2004, we have adequate capital available to operate
our business. On April 22, 2003, we executed a one-year, $1.4 million construction loan with
the current mortgagee of the Itasca, Illinois building to expand the building
an additional 34, 500 square feet. We expect the expansion to be completed by
July 2004. As a result, the Mortgagee agreed to a second extension of the
construction loan to September 22, 2004, when the existing mortgage and the
construction loan will be combined into one note. On April 5, 2004, the Company sold and simultaneously executed a five year
lease for its
two California buildings. The current monthly rental is $21,385. The total
sales price for the two buildings was $2.903 million. After paying off the
$1.660 million mortgage, the net proceeds before tax of the sale were
approximately $1.127 million. The net book gain of approximately $857,000 will
be amortized over the five year lease period. We believe that the funds available under the loans encumbering our Texas,
Pennsylvania, Illinois and West Virginia plants, the construction loan for the
expansion at the Itasca facility, the revolving credit facility, cash and cash
equivalents, trade credit and internally generated funds will be sufficient to
satisfy our requirements for working capital and capital expenditures for at
least the next twelve months. Such belief is based on certain assumptions,
including the continuation of current operations and no extraordinary adverse
events, and there can be no assurance that such assumptions are correct. In
addition, expansion of our operations due to an increased demand for products
TST manufactures or significant growth of Hotsheet.com, Inc., or Alexa Springs,
Inc., our water bottling subsidiary, may require us to obtain additional
capital to add new operations or manufacturing facilities. If that should
occur, we anticipate that the funds required would be generated through
securities offerings or additional debt. There can be no assurance that any
additional financing will be available if needed, or, if available, will be on
acceptable terms. As of May 31, 2004, we did not own derivative or other financial instruments
for trading or speculative purposes. The implementation of Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities does not have a material impact on our financial
position or results of operations. 13




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Alexa Springs, Inc. bottled water subsidiary In January 2004, TST announced it was entering the bottled water business. In
March 2004, the Company submitted approximately $1.9 million in orders to
manufacturers for the water processing equipment, with an expected delivery
date of July 2004. In July 2004, Alexa Springs, Inc was incorporated in the
state of Texas. Alexa Springs, Inc. will be the wholly owned subsidiary of
Impreso, Inc. and will operate the bottled water business. Alexa Springs, Inc.
will lease a building and purchase its spring water from Alexa Springs Water
Company, an entity owned by Marshall Sorokwasz and Richard Bloom, President and
Vice President of the Company. As of May 31, 2004 TST/Impreso, Inc. had
advanced out of operating funds $766,000 to equipment manufacturers on behalf
of Alexa Springs, Inc. As of June 30, 2004, that amount increased to $1.7
million. Inventory Management; Raw Materials of TST We believe that it is necessary for TST to maintain a sufficient inventory of
finished goods and raw materials to adequately service its customers. In the
past inventory levels had been increased to facilitate the introduction of new
brands and expanded product lines. At the beginning of Fiscal 2002, we
implemented a program to reduce inventory. From September 1, 2001 to May 31,
2004, TST inventory levels were reduced from $38,459,817 to $20,999,761, or
approximately 45.4%. This is in addition to the depletion of $3 million of
inventory acquired in the purchase of the assets of United in March 2002.
Management does not intend to continue reducing inventory through Fiscal 2004,
as a result of the tightening paper supply market. During the third and fourth quarter of Fiscal 2003, the price of raw materials
dropped rapidly. Prices continued to decrease through the first quarter of
Fiscal 2004, but in the second quarter of Fiscal 2004, stabilized and started
an upward trend. On March 1, 2004 and May 1, 2004 price increases on raw
materials were announced by the mills, which were effectively passed through to
a majority of our customers by the end of the Third Quarter. Another increase
has been announced for July 1, 2004. We believe that prices will continue to
increase in the remaining quarter of Fiscal 2004 and into the year ending
August 31, 2005. TST bears the risk of increases in the prices charged by its suppliers and
decreases in the prices of raw materials held in its inventory. If prices for
products held in its finished goods inventory decline, if prices for raw
materials required by it increase, or if new technology is developed that
renders obsolete products distributed and held in inventory by TST, the
Companys business could be materially adversely affected. TST purchases raw paper, coated thermal facsimile paper, coated technical
paper, carbon and carbonless paper (consisting of a wide variety of weights,
widths, colors, sizes and qualities), transparency film, packaging and other
supplies in the open market from a number of different companies around the
world. We believe that TST has adequate sources of raw material supplies to
meet the requirements of its business. We believe that TST has a good
relationship with all of its current suppliers. Market Conditions The primary product produced by the Company is continuous feed business forms.
Management believes that the market for business forms, which declined in
Fiscal 2004, will continue to decline in Fiscal 2005. In addition, competitors
in the marketplace have aggressively solicited existing TST customers. On April
9, 2004, TST declined to counter offer a competitors proposal on a particular
product to a significant customer. This product comprised a majority of our
sales to this customer. The customer has decided to move their business on this
product to the competitor. The transition will take place over the Fourth
Quarter of Fiscal 2004. The lost business, which is approximately 20% of net
sales in Fiscal 2003, will be partially offset by the addition of new customers
and the increased sale of other products to this customer in existing and new
territories. 14




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If selling prices for products manufactured by us cannot increase in relation
to raw material cost increases, or if prices for products manufactured by us
decline as a result of market pressures, our results of operations could be
materially adversely affected. Although TST has specialized in select markets and has emphasized service and
long-term relationships to meet customer needs more effectively, there are no
long-term contractual relationships between it and any of its customers.
There can be no assurance that purchases by these customers will remain at
significant levels. TST may in the future be dependent on these or other
significant customers. The loss of any other significant customer could
materially adversely affect our financial position, results of operations and
cash flows. Seasonality TST may be subject to certain seasonal fluctuations in that orders for products
may decline over the summer months. If the market for finished goods
decreases, then the adverse impact of the seasonal fluctuations on the Company
will be greater. Hotsheet.com revenues are partially generated by retail sales which are
typically stronger during the Christmas holiday season. Forward-Looking Statements Managements Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q contain forward-looking
statements about our prospects for the future, including but not limited to
our ability to generate sufficient working capital, our ability to continue to
maintain sales to justify capital expenses, and our ability to generate
additional sales to meet business expansion. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected, including availability of raw materials,
availability of thermal facsimile, computer, laser and color ink jet paper, to
the cyclical nature of the industry in which we operate, the potential of
technological changes which would adversely affect the need for our products,
price fluctuations which could adversely impact the large inventory we require,
loss of any significant customer, and termination of contracts essential to
our business. Parties are cautioned not to rely on any such forward-looking
statements or judgments in making investment decisions. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk We are not exposed to market risks such as foreign currency exchange rates, but
are exposed to risks such as variable interest rates. Market risk is the
potential loss arising from adverse changes in market prices and rates. Our
subsidiaries do not have supply contracts with any of their foreign vendors.
All foreign vendors are paid in United States currency. In addition, TSTs
international sales of finished goods are insignificant. Accordingly, there
are not sufficient factors to create a material foreign exchange rate risk;
therefore, we do not use exchange commitments to minimize the negative impact
of foreign currency fluctuations. We had both fixed-rate and variable-rate debts as of May 31, 2004. The fair
market value of long-term variable interest rate debt is subject to interest
rate risk. Generally the fair market value of variable interest rate debt will
decrease as interest rates fall and increase as interest rates rise. The estimated fair value of our total long-term fixed rate and floating rate
debt approximates carrying value. Based upon our market risk sensitive debt
outstanding at May 31, 2004, there was no material exposure to our financial
position or results of operations. 15




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Item 4. Controls and Procedures Evaluation of controls and procedures Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys amendments to its disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic SEC filings. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings. See note 8 to condensed consolidated financial statements contained in
Part I, Item 1 of this report, which is incorporated by reference in
this Part II, as its Item 1. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None 
 Item 3. Defaults upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. In the second quarter of Fiscal 2004, the Company received notice from
the Internal Revenue Service that the Fiscal 2002 year was to be
audited. The Company engaged KPMG, LLP to help the Company manage the
audit process. As of the date of this filing the audit was concluded,
but the IRS report had not been received. 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits to Part 1. Exhibit No.
    
    Description of Exhibits31.1
    
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K None 16




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Dated: July 15, 2004 Impreso, Inc.
(Registrant)/s/ Marshall D. SorokwaszMarshall D. SorokwaszChairman of the Board, Chief
Executive Officer, President,
and Director /s/Susan M. AtkinsSusan M. AtkinsChief Financial Officer
and Vice President 17




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Exhibits Exhibit No.
    
    Description of Exhibits31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 18