IMPRESO INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002

OR

Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934

COMMISSION FILE NUMBER 000-29883

IMPRESO, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2849585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

652 SOUTHWESTERN BOULEVARD
COPPELL, TEXAS 75019
(Address of principal executive offices)

(972) 462-0100
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

Yes X No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.

THIS FILING INCLUDES UNAUDITED INTERIM FINANCIAL STATEMENTS THAT HAVE NOT BEEN
REVIEWED BY AN INDEPENDENT PUBLIC ACCOUNTANT BECAUSE THE COMPANY WAS UNABLE TO
OBTAIN SUCH REVIEW FROM ARTHUR ANDERSEN, LLP.

IMPRESO, INC. AND SUBSIDIARIES

FORM 10-Q

MAY 31, 2002

INDEX

IMPRESO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

This filing includes unaudited interim financial statements that have not been
reviewed by an independent public accountant because the Company was unable to
obtain such review from Arthur Andersen, LLP. The Company intends to have the
interim financial statements included herein reviewed in connection with the
audit of its financial statements for the year ending August 31, 2002.

The accompanying notes are an integral part of these
consolidated financial statements.

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IMPRESO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY

This filing includes unaudited interim financial statements that have not been
reviewed by an independent public accountant because the Company was unable to
obtain such review from Arthur Andersen, LLP. The Company intends to have the
interim financial statements included herein reviewed in connection with the
audit of its financial statements for the year ending August 31, 2002.

The accompanying notes are an integral part of these
consolidated financial statements.

2

IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

This filing includes unaudited interim financial statements that have not been
reviewed by an independent public accountant because the Company was unable to
obtain such review from Arthur Andersen, LLP. The Company intends to have the
interim financial statements included herein reviewed in connection with the
audit of its financial statements for the year ending August 31, 2002.

The accompanying notes are an integral part of these
consolidated financial statements.

3

IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

This filing includes unaudited interim financial statements that have not been
reviewed by an independent public accountant because the Company was unable to
obtain such review from Arthur Andersen, LLP. The Company intends to have the
interim financial statements included herein reviewed in connection with the
audit of its financial statements for the year ending August 31, 2002.

The accompanying notes are an integral part of these
consolidated financial statements.

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IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND NATURE OF BUSINESS

Impreso, Inc., (formerly Impreso.com, Inc.) a Delaware corporation (referred to
collectively with its subsidiaries as the "Company"), is the parent holding
company of TST/Impreso, Inc. ("TST"), a manufacturer and distributor to dealers
and other resellers of paper and film products for commercial and home use in
domestic and international markets, and Hotsheet.com, Inc., the owner and
operator of the Hotsheet.com web portal. TST's product line consists of standard
continuous computer stock business forms; thermal facsimile paper; cut sheet
products such as copy paper, ink jet paper, digital photo paper and
transparencies; fine business stationary; point of sale and cash register
machine rolls; high speed laser roll paper; wide format engineering rolls; wide
format ink jet media; and processed laser cut sheets. TST has one wholly owned
subsidiary, TST/Impreso of California, Inc., which was formed to support the
activities of the paper converting segment of the Company's business.

2. ACQUISITION

On March 19, 2002 the Company acquired substantially all of the operating assets
of United Computer Supplies, Inc. and United Computer Supplies-East, Inc.
(collectively "United") for approximately $4.6 million. On April 19, 2002, the
manufacturing facility was purchased from United for $4.1 million. This
acquisition was recorded under the purchase method of accounting and, therefore,
the purchase price has been allocated to assets acquired and liabilities assumed
based on estimated fair values. The results of operations of the acquired
company were included in the consolidated results of the Company as of the
acquisition date. The estimated fair value of assets acquired and liabilities
assumed relating to the acquisition, which is subject to further refinement, is
summarized below.

The components of the purchase price and preliminary allocation are as follows:

Preliminary allocation of purchase price:

Current assets $ 2,461,321
Property, plant and equipment 5,223,312
Other 1,000,000
-----------
8,684,633

As indicated above, some allocations are based on studies and valuations which
are currently being finalized. Management does not believe that the final
purchase price allocation will produce materially different results than those
reflected herein.

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Unaudited pro forma operating results for the Company assuming the acquisition
of United occurred on September 1, 2001 are as follows:

3. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited Interim Consolidated Financial
Statements of the Company include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of May 31, 2002, and its results of operations for the
three and nine months ended May 31, 2002 and May 31, 2001. Results of the
Company's operations for the interim period ended May 31, 2002, may not be
indicative of results for the full fiscal year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations promulgated by the Securities and Exchange
Commission (the "SEC").

The unaudited Interim Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and accompanying
notes of the Company and its subsidiaries, included in the Company's Form 10-K
(the "Company's Form 10-K"), for the fiscal year ended August 31, 2001 ("Fiscal
2001"). Accounting policies used in the preparation of the unaudited Interim
Consolidated Financial Statements are consistent in all material respects with
the accounting policies described in the Notes to Consolidated Financial
Statements in the Company's Form 10-K.

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:

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5. LONG-TERM DEBT AND LINE OF CREDIT

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Notes payable to a commercial financial corporation, secured by real property
and a personal guarantee by the trustee of a trust which is a majority
stockholder of the Company, payable in monthly installments of $21,407
(including interest at 8%), maturing May 2011 2,152,218 2,213,667

Acquisition note payable, unsecured, payable in quarterly installments of $15,000
(including interest at 8%), maturing April 2006 255,000 285,000

Acquisition note payable, secured by equipment, payable in monthly installments
of $16,024, no interest, maturing May 2003 416,242 560,458

Note payable, unsecured, payable in three weekly installments of $200,000
beginning in November 2001 and one final payment of $150,000, no interest,
matured November 2001. -- 750,000

Note payable to a commercial financial corporation, secured by real property and
a personal guarantee by the trustee of a trust which is a majority stockholder
of the Company, payable in monthly installments of $22,827.80 (including a fixed
scheduled for interest, 7%at May 31, 2002), maturing March 2007. 3,195,839 --

Note payable to a commercial financial corporation, secured by equipment,
payable in monthly installments of $17,857.14 (including interest at a variable
rate equal to 30 day Libor plus 350 basis points, 5.26% at May 31, 2002),
maturing February 2009. 1,444,508 --

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 majority
stockholder of the Company, payable in monthly installments of $1,461 (including
interest at 4%), maturing June 2023. 247,051 252,659
------------ -----------
Total 30,685,803 26,048,838

Less-Current maturities (20,346,416) (19,720,384)
------------ -----------
Long-term debt $ 10,339,387 $ 6,328,454
============ ===========

Prepetition amount listed above represents the renegotiated amounts and terms
under the 1993 plan of reorganization.

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As of May 31, 2002, the revolving credit line is limited to the lesser of $25
million or a percentage of eligible trade accounts receivable and inventories,
as defined. On May 31, 2002, the remaining availability under the revolving
credit line was $6.5 million.

The line of credit has restrictive covenants requiring the maintenance of a
minimum tangible net worth and working capital requirements, as defined. One of
the notes payable contains restrictive covenants on current and debt to worth
ratios, and the payment of cash dividends. As of May 31, 2002, the Company was
in compliance with all covenants.

6. SUPPLEMENTAL CASH FLOW INFORMATION

7. STOCK OPTIONS AND WARRANTS

On April 3, 2002, the Company filed a Registration Statement on Form S-3 with
the SEC to register the sale of up to 441,000 shares of Common Stock of the
Company. The shares subject to such registration are 50,000 shares issuable on
exercise of a consultant's Warrant, 191,000 shares issuable on exercise of
options granted to employees outside of a stock option plan, and 200,000 shares
held by certain founders of the Company.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED MAY 31, 2002 AND MAY 31,
2001.

Net Sales---Net sales increased from $23.1 million in the three months ended May
31, 2001, to $33 million in the three months ended May 31, 2002 ("Third
Quarter"), an increase of $9.9 million or 42.8%. Net sales increased from $65.7
million in the nine months ended May 31, 2001, to $84.8 million in the same
period in the year ending August 31, 2002 ("Fiscal 2002"), an increase of $19.1
million, or 29.1%. Net sales increased in the Third Quarter and the nine months
ended May 31, 2002, as a result of increased sales of branded products and the
acquisition of substantially all of the operating assets of United on March 19,
2002.

9

Gross Profit--- Gross profit increased from $3.1 million in the three months
ended May 31, 2001, to $3.7 million in the three months ended May 31, 2002, an
increase of 20.9%. Gross profit increased from $7.8 million in the nine months
ended May 31, 2001, to $9.1 million in the same period in 2002, an increase of
$1.3 million or 16.9%. Gross profit margin for the Third Quarter and for nine
months ended May 31, 2002 decreased to approximately 11.1% from 13.2% and 10.8%
from 11.9%, respectively, from the corresponding periods of the prior year. The
Company's decreased gross profit margin for the three and nine month periods
ended May 31, 2002 was due to the increased freight charges due to our
consolidation of warehouses in the Third Quarter to eliminate duplication caused
by the acquisition of United.

Selling, General, and Administrative Expenses--SG&A expenses increased from $1.9
million in the three months ended May 31, 2001 to $2.5 million in the three
months ended May 31, 2002, but decreased as a percentage of net sales from 8.4%
in the three months ended May 31, 2001 to 7.5% in the three months ended May 31,
2002. SG&A expenses for the nine months ended May 31, 2002 increased to $6.7
million from $5.6 million in the nine months ended May 31, 2001, but decreased
as a percentage of net sales from 8.5% in the nine months ended May 31, 2001 to
7.9% in the nine months ended May 31, 2002. The decreases in SG&A as a
percentage of sales for the three and nine months ended May 31, 2002, are due to
increased net sales without a corresponding increase in the fixed costs of
operations, and the efficiencies achieved with the consolidation of the sales
forces following the acquisition of substantially all of the operating assets of
United.

Interest Expense----Interest expense increased from $410,000 in the three months
ended May 31, 2001, to $423,000 in the same period of Fiscal 2002, an increase
of 3.1%. Interest expense increased from $1.1 million in the nine months ended
May 31, 2001, to $1.3 million in the corresponding period of Fiscal 2002, an
increase of 10%. The increase in interest expense for the three and nine month
periods ended May 31, 2002, was primarily attributable to increased borrowings.
The increased borrowings were due to the acquisition of substantially all of the
operating assets of United.

Other Expense (Income)--On October 16, 2001, TST received approximately $1
million in a United States class action lawsuit involving international and
domestic manufacturers' alleged attempt to fix jumbo roll thermal facsimile
paper prices in the United States. TST was not a named plaintiff and did not
participate in the lawsuit. The plaintiff class settled the six year old suit
with the defendants. The award is reported as other income in First Quarter
2002.

Income Taxes--- Income tax expense decreased from $306,000 for the three months
ended May 31, 2001, to $299,000 in the third quarter of Fiscal 2002 due to a
deferred tax benefit. Income tax expense increased from $487,000 for the nine
months ended May 31, 2001, to $857,000 in the nine months ended May 31, 2002.
The increase in income tax expense for the periods presented is a result of an
increase in taxable income and due to the receipt of a taxable litigation
settlement.

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LIQUIDITY AND CAPITAL RESOURCES

Working capital increased to $11.0 million at May 31, 2002 from $10.5 million at
August 31, 2001. This represented an increase of 4.7%.

In March 2002, TST amended its agreement with a commercial financial corporation
for a two-year renewal of its revolving line of credit. The amended agreement
also increases the line from $22 million to $25 million and the inventory
sub-limit from $17.5 to $21 million. The loan is secured by, among other things,
inventory, trade receivables, equipment and a personal guarantee of Marshall
Sorokwasz, our Chairman of the Board and President, and Trustee of a trust which
is a principal shareholder of our Company.

Available borrowings under this line of credit, which accrues interest at the
prime rate of interest plus .25% (5.0% at May 31, 2002), are based upon
specified percentages of eligible accounts receivable and inventories. As of May
31, 2002, there was a $6.5 million borrowing capacity remaining under the $25
million revolving line of credit. The amended revolving credit line will mature
in May 2004.

On April 19, 2002, we completed the purchase of substantially all of the assets
of United Computer Supplies, Inc. and United Computer Supplies-East, Inc.
(collectively, "United"). The Company paid approximately $4.6 million in cash
for United's operating assets and approximately $4.1 million for United's real
property. The funding of this purchase was accomplished by renewing, extending,
and increasing our revolving line of credit from $22 million to $25 million,
with the increased line collateralized by the inventory acquired in this
acquisition, obtaining a $1 million loan from another commercial financial
institution secured by equipment, and pledging the plant facility acquired in
the real estate transaction to a commercial financial corporation, which
provided $3.2 million in funding of the real property $4.1 million purchase
price.

We believe that the funds available under the loans encumbering our California,
Illinois, Pennsylvania, Texas and West Virginia plants, the revolving credit
facility, cash and cash equivalents, trade credit and internally generated funds
will be sufficient to satisfy our requirements for working capital and capital
expenditures for at least the next twelve months. Such belief is based on
certain assumptions, including the continuation of current operations and no
extraordinary adverse events, and there can be no assurance that such
assumptions are correct. In addition, expansion of our operations due to an
increased demand for products TST manufactures or significant growth of
Hotsheet.com, Inc. may require us to obtain additional capital to add new
operations or manufacturing facilities. If that should occur, we anticipate that
the funds required would be generated through securities offerings or additional
debt. There can be no assurance that any additional financing will be available
if needed, or, if available, will be on acceptable terms.

As of May 31, 2002, 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.

11

INVENTORY MANAGEMENT; RAW MATERIALS OF TST

We believe that it is necessary for TST to maintain a large inventory of
finished goods and raw materials to adequately service its customers. In recent
years inventory levels had been increased to facilitate the introduction of new
brands and expanded product lines. At the beginning of Fiscal 2002, management
implemented a program to reduce inventory. In the first nine months of Fiscal
2002, management has reduced inventory levels of TST. From August 31, 2001 to
May 31, 2002 inventory levels were reduced $5 million. Management intends to
continue reducing inventory levels through the fourth quarter of Fiscal 2002.
However, downward pressures on raw material prices could compress the market for
our existing inventory and have a material adverse effect on the results of
operations of TST, or restrain managements attempts at reducing inventory.

In recent years we have depended primarily on international vendors of raw
materials. U.S. currency devaluation in Asia, South America and Europe, as well
as increased demand for paper in Asia has created supply disruption and a
tighter raw material market for the Company. The Company intends to shift its
supply chain from international to domestic sources, which historically charge
higher prices for raw materials. This shift could have a material adverse effect
on the results of operation by making our finished goods pricing uncompetitive.

TST bears the risk of increases in the prices charged by its suppliers and
decreases in the prices of raw materials held in its inventory. If prices for
products held in its finished goods inventory decline, if prices for raw
materials required by it increase, or if new technology is developed that
renders obsolete products distributed and held in inventory by TST, the
Company's business could be materially adversely affected.

TST purchases raw paper, coated thermal facsimile paper, coated technical paper,
carbon and carbonless paper (consisting of a wide variety of weights, widths,
colors, sizes and qualities), transparency film, packaging and other supplies in
the open market from a number of different companies around the world. We
believe that TST has adequate sources of raw material supplies to meet the
requirements of its business. We believe that TST has a good relationship with
all of its current suppliers.

MARKET CONDITIONS

The primary products produced by United are continuous feed business forms and
small rolls. Our acquisition of United did not change the percentage of business
forms in our product mix from 69%, which is a reduction from the 75% mix after
the acquisition of the Sky Division of Durango-Georgia Converting, LLC ("Sky")
in April 2001. Management believes that the market for business forms, which is
declining in 2002, will continue to decline in 2003.

Management has targeted these acquisitions to assume customer base that will
eventually transition into our other product lines as the business forms format
becomes obsolete.

September 11, 2001's impact on the economy has also impacted the net sales of
TST; however, the exact impact on the results of operations is not
ascertainable. Although net sales in the nine months ended May 31, 2002, as
compared to the nine months ended May 31, 2001, increased 29.1%, the Company
expected net sales to have been significantly higher due to the acquisition of
United in March 2002 and

12

reduction in the market place of competitors of the Company's products.
Management believes that the slowed economy will continue to effect the fourth
quarter 2002 results of operations.

If selling prices for products manufactured by us cannot increase in relation to
raw material cost increases, or if prices for products manufactured by us
decline as a result of market pressures, our results of operations could be
materially adversely affected.

SEASONALITY

TST may be subject to certain seasonal fluctuations in that orders for products
may decline over the summer months. If the market for finished goods decreases,
then the adverse impact of the seasonal fluctuations on the Company will be
greater.

Hotsheet.com revenues are partially generated by retail sales which are
typically stronger during the Christmas holiday season.

SUBSEQUENT EVENTS

On July 12, 2002, the Board of Directors unanimously voted to approve the
engagement of Blackman Kallick Bartelstein, LLP as the independent public
accountants for Impreso, Inc. for the August 31, 2002 audit.

FORWARD-LOOKING STATEMENTS

Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q contain "forward-looking
statements" about our prospects for the future, including but not limited to our
ability to generate sufficient working capital, our ability to continue to
maintain sales to justify capital expenses, and our ability to generate
additional sales to meet business expansion. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected, including availability of raw materials,
availability of thermal facsimile, computer, laser and color ink jet paper, to
the cyclical nature of the industry in which we operate, the potential of
technological changes which would adversely affect the need for our products,
price fluctuations which could adversely impact the large inventory we require,
loss of any significant customer, and termination of contracts essential to our
business. Parties are cautioned not to rely on any such forward-looking
statements or judgments in making investment decisions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are not exposed to market risks such as foreign currency exchange rates, but
are exposed to risks such as variable interest rates. Market risk is the
potential loss arising from adverse changes in market prices and rates. Our
subsidiaries do not have supply contracts with any of their foreign vendors. All
foreign vendors are paid in United States currency. In addition, TST's
international sales of finished goods is insignificant. Accordingly, there are
not sufficient factors to create a material foreign exchange rate risk;
therefore, we do not use exchange commitments to minimize the negative impact of
foreign currency fluctuations.

13

We had both fixed-rate and variable-rate debts as of May 31, 2002. The fair
market value of long-term variable interest rate debt is subject to interest
rate risk. Generally the fair market value of variable interest rate debt will
decrease as interest rates fall and increase as interest rates rise.

The estimated fair value of our total long-term fixed rate and floating rate
debt approximates carrying value. Based upon our market risk sensitive debt
outstanding at May 31, 2002, there was no material exposure to our financial
position or results of operations.

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PART II: OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K AND 8K/A

(a) Exhibits

None

(b) Reports on Form 8-K and 8-K/A

On April 3, 2002, we filed a Current Report on Form 8-K, dated March
19, 2002, to report the acquisition of substantially all of the
operating assets of United Computer Supplies, Inc. and United Computer
Supplies-East, Inc. (collectively "United"). After completion of the
entire transaction, including the purchase of the plant facility on
April 19, 2002, we paid approximately $8.7 million in cash. On June 3,
2002, we filed an amendment to the Current Report on Form 8-K/A, dated
March 19, 2002, to include the financial statements of United, and
certain pro forma financial data. The following exhibits were filed
with the Form 8-K, as amended:

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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 dhereuntodduly authorized.

Dated: July 15, 2002

Impreso, Inc.
(Registrant)

/s/ Marshall Sorokwasz
---------------------------------
Marshall Sorokwasz
Chairman of the Board, Chief
Executive Officer, President,
and Director

/s/ Susan Atkins
---------------------------------
Susan Atkins
Chief Financial Officer
and Vice President

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