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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number 000-29883

Impreso, Inc.

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:

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o            No x

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

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IMPRESO, INC. AND SUBSIDIARIES
FORM 10-Q
November 30, 2003

INDEX

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IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

ASSETS
(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements

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IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ EQUITY
(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements

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IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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IMPRESO, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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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 November 30, 2003, and its results of operations for the three months ended November 30, 2003 and November 30, 2002. Results of the Company’s operations for the interim period ended November 30, 2003, may not be indicative of results for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”).

The unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Condensed Consolidated Financial Statements and accompanying notes of the Company and its subsidiaries, included in the Company’s Form 10-K, as amended (the “Company’s Form 10-K”), for the fiscal year ended August 31, 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 Condensed 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

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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 Fiscal 2004.

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:

5.

LONG-TERM DEBT AND LINE OF CREDIT:

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

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In April 2002, TST amended its revolving line of credit to increase the line from $22 million to $25 million. The amended revolving credit line is limited to the lesser of $25 million or a percentage of eligible trade accounts receivable and inventories, as defined. The remaining availability under the revolving credit line was $6.9 million as of November 30, 2003.

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 is locked until April 4, 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 November 30, 2003, the Company was in compliance with all covenants.

6.

SUPPLEMENTAL CASH FLOW INFORMATION

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.

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8.

Legal Matters

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 business cut card products infringed on patents and pending patents owned by Avery. The parties have executed a standstill agreement while TST investigates the claim and the parties negotiate settlement. If the products do infringe on Avery’s patents, TST, under the Uniform Commercial Code, will file a lawsuit against its suppliers for selling products that infringed on a patent. The Company also filed a claim with its insurance carrier requesting coverage. The insurance company has reserved their decision pending their own investigation.

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 Company’s bank’s internal investigator. The investigation by the FBI, the bank and the Company to date has revealed an approximate loss of $580,000 over a period starting in September 2000 until October 2003. The investigation is not complete. The Company has notified its insurance Company of the loss under its employee theft coverage and management believes that a majority of the losses will be reimbursed by insurance. Management has recently hired a full time internal audit specialist to lead its efforts to evaluate and improve its internal accounting controls and this individual will be heading up the company’s efforts to establish more effective internal controls over the payroll processing function. The Company is cooperating with the FBI in its investigation and prosecution of the Company’s former employee.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES

The accounting policies described below are those the Company considers critical in preparing its condensed consolidated financial statements . These policies require the application of significant judgement by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgements are subject to an inherent degree of uncertainty. These judgements are based on historical experience, the Company’s observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate and available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies.

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

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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 quarterly to reflect increases and decreases in each customer’s sales and payments of commissions and rebates.

Results of Operations for the Interim Periods Ended November 30, 2003 and November 30, 2002.

Net Sales—Net sales decreased from $31.8 million in the three months ended November 30, 2002, to $28.2 million in the three months ended November 30, 2003 (“First Quarter 2004”), a decrease of $3.6 million or 11.5%. Net sales decreased in First Quarter 2004, as compared to the corresponding period of the prior year, as a result of decreased sales of branded products and the slowed economy. The sales decreased due to new manufacturers in the marketplace of identical branded products.

Gross Profit— Gross profit increased from $3.2 million in the three months ended November 30, 2002, to $3.4 million in the First Quarter 2004, an increase of 4.2%. Gross profit margin for the three month period ended November 30, 2003, increased to 12.0 % as compared to 10.2% for the three month period ended November 30, 2002.The increase in gross profit margin for First Quarter 2004, is a result of lower raw material costs.

Selling, General, and Administrative Expenses—SG&A expenses decreased from $2.4 million in the three months ended November 30, 2002 to $2.3 million in First Quarter 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 7.4% in the three months ended November 30, 2002, to 8.1% in the First Quarter 2004. The increase in SG&A as a percentage of sales for First Quarter 2004, is due to the decrease in net sales.

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Interest Expense—Interest expense decreased from $484,000 in the three months ended November 30, 2002, to $335,000 in First Quarter 2004. The decrease of 30.7% is due to the reduction of inventories which reduced our borrowings under our line of credit.

Income Taxes— Income tax expense increased from $193,000 for the three months ended November 30, 2002, to $286,000 in First Quarter 2004. The increase in income tax expense for First Quarter, as compared to the corresponding period of the prior year is a result of the increase in taxable income.

Liquidity and Capital Resources

Working capital increased to $13.3 million as of November 30, 2003, from $12.7 million at August 31, 2003. This represented an increase of 4.8%.

Effective October 28, 2002, TST entered into an amended and restated loan agreement with a commercial financial corporation, which matures in May 2004. The agreement provides for a $25 million line of credit and an inventory sub-limit of $21 million. The loan is secured by, among other things, inventory, trade receivables, equipment and a personal guarantee of Marshall Sorokwasz, our Chairman of the Board and President, and Trustee of a trust which is a principal shareholder of our Company. A new provision in the amended and restated loan agreement allows the Company to elect the application of a Eurodollar interest rate plus 2.75% for 30, 60 or 90 day periods to specified amounts of the loan.

Available borrowings under this line of credit, which accrued interest from July 8, 2003 to October 6, 2003, on $12 million and from October 6, 2003 to January 5, 2004, on $10 million, at LIBOR plus 2.75% (3.9 % as of November 30, 2003), balance at prime plus .25% (4.25 % as of November 30, 2003) are based upon specified percentages of eligible accounts receivable and inventories. As of November 30, 2003, we have adequate capital available to us to operate our business.

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 is locked until April 4, 2004.

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 believe that the funds available under the loans encumbering our California, 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. 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.

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As of November 30, 2003, we did not own derivative or other financial instruments for trading or speculative purposes. The implementation of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” does not have a material impact on our financial position or results of operations.

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 recent years inventory levels had been increased to facilitate the introduction of new brands and expanded product lines. At the beginning of Fiscal 2002, we implemented a program to reduce inventory. From September 1, 2001 to August 31, 2002, TST inventory levels were reduced by over $4.3 million. This is in addition to the depletion of $3 million of inventory acquired in the purchase of the assets of United in March 2002. We reduced inventory levels in the fiscal year ending August 31, 2003 (“Fiscal 2003”) by $5.6 million. In the first quarter of Fiscal 2004 Inventory was reduced another $5 million. Management intends to continue reducing inventory through the year ending August 31, 2004 (“Fiscal 2004”); 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 our attempts at further reducing inventory.

For the six month period ended February 28, 2003, the price of raw materials had remained relatively stable. During the third and fourth quarter of Fiscal 2003, the price of raw materials rapidly dropped. Prices continued to decrease through the first quarter of Fiscal 2004, but we believe they will stabilize in the second quarter.

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 2003, will continue to decline in 2004. Management believes that the slowed economy had a significant impact on First Quarter 2004 results of operation, but believes the economy is improving and it will not significantly affect the other three quarters of Fiscal 2004 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.

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.

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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 is insignificant. Accordingly, there are not sufficient factors to create a material foreign exchange rate risk; therefore, we do not use exchange commitments to minimize the negative impact of foreign currency fluctuations.

We had both fixed-rate and variable-rate debts as of November 30, 2003. The fair market value of long-term variable interest rate debt is subject to interest rate risk. Generally the fair market value of variable interest rate debt will decrease as interest rates fall and increase as interest rates rise.

The estimated fair value of our total long-term fixed rate and floating rate debt approximates carrying value. Based upon our market risk sensitive debt outstanding at November 30, 2003, there was no material exposure to our financial position or results of operations.

Item 4. Controls and Procedures

     Evaluation of controls and procedures

Subsequent to November 5, 2003, and 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.

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     Changes in internal controls.

The Company has implemented the following new controls and procedures:

The accounting software system is being modified to facilitate improved control over all credit memo requests through ultimate approval or denial and in conjunction with procedural modifications, to assure the timely review and resolution of all credit memo requests. Therefore, assuring that inventory returns can not be entered into the perpetual inventory without a corresponding credit memo.

Unauthorized discount credits taken by customers are reviewed and controlled through collection of the amounts due and improvement in the communication with customers as to discount terms.

Receivables aging internal procedures have been strengthened to improve the accuracy of cash receipts posting and for follow-up reviews to assure proper application is made. Additionally, the accounting software system and related procedures are being modified to allow for properly approved recording of adjusting entries.

Procedures related to reporting of shipments from outside warehouses is under review in an effort to identify and implement changes which would improve the timeliness of recording sales for month end cut-off and for invoicing to the customers.

A log has been initiated to account for write-offs of uncollectible trade account receivables. Procedures requiring management review of write-offs and credit memos is being implemented to aid in preventing unauthorized write-offs.

Procedures are being reviewed to determine the propriety of maintaining separate divisional balances of account receivable in the financial records.

Procedures have been modified to prevent customer checks from being accessible to individuals who record cash receipts and credit memos to customer accounts.

The Company has implemented a new procedure so an individual who does not have the ability to record cash disbursements into the general ledger is responsible for setting up new vendors within the computer system. Also a member of the management team shall periodically review a listing of new vendors investigating any unusual or suspicious entries.

A check register will be included with checks forwarded to the check signer to allow the check signer to verify the completeness of the check population and reduce the likelihood of unauthorized checks.

The beginning and ending check numbers of voided and issued checks will be listed on a log. This log is reviewed by a member of the management team along with the check signing procedure. Voided checks are cancelled (voided) by writing and with the signature block removed by the data processing department at each check run.

A procedural review is currently under investigation to improve the timeliness and accuracy of major general ledger account balance reconciliations and analysis.

The Company has implemented the following new controls and procedures in response to the payroll fraud:

A member of the financial department, on a surprise basis, will physically distribute paychecks/pay stubs to the employees.

Payroll journal entries will be derived from the actual payroll registers, not from a payroll summary or other similar document prepared by the payroll clerk.

A person independent of the payroll function approves transfers to payroll disbursement accounts, comparing amount transferred to actual payroll registers.

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Periodically, a detail of “ACH” transfers (direct deposit transfers) will be reviewed for employee bank accounts that have more than the appropriate number of direct deposits being deposited into the account.

Periodically, management will test a pay period to ensure that the sum of ACH transfers plus actual checks written agrees to the net payroll number per the payroll register.

Employees in the payroll position will be required to take earned vacation, and someone else will perform the payroll function in that person’s absence.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

     See notes to condensed consolidated financial statements

Item 2. Changes in 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

     None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits to Part 1.

(b)

Reports on Form 8-K and 8-K /A

     None

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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.

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Exhibits