<PAGE> 1
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 PERIOD ENDED FEBRUARY 28, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-26774
TST/IMPRESO, INC.
(exact name of registrant as specified in its charter)
DELAWARE 75-1517936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
652 SOUTHWESTERN BOULEVARD
COPPELL, TEXAS 75019
(Address of principal executive offices)
TELEPHONE NUMBER (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 issuers' classes of
Common Stock as of the latest practical date.
Class of Common Stock Shares outstanding at April 14, 1999
- ------------------------ ------------------------------------
$0.01 Par Value 5,292,780
<PAGE> 2
TST/IMPRESO, INC. AND SUBSIDIARIES
FORM 10-Q
FEBRUARY 28, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Consolidated Financial Statements:
Interim Consolidated Balance Sheets as of February 28,
1999 (Unaudited) and August 31, 1998 1
Interim Consolidated Statements of Operations for the
Three Months and Six Months Ended February 28, 1999,
and 1998 (Unaudited) 3
Interim Consolidated Statements of Cash Flows for the
Six Months Ended February 28, 1999, and 1998
(Unaudited) 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
TST/IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 110,456 $ 117,840
Trade accounts receivable, net of allowance for doubtful
accounts of $225,295 at February 28, 1999 and $190,000 at
August 31, 1998 5,698,280 6,234,005
Income tax receivable 541,175 479,329
Investments in marketable securities 11,088 11,088
Inventories 12,840,282 9,189,973
Prepaid expenses and other 337,767 294,590
Deferred income tax assets 86,802 64,600
------------ ------------
Total current assets 19,625,850 16,391,425
------------ ------------
Property, plant and equipment, at cost 16,459,473 16,217,627
Less-Accumulated depreciation (9,368,381) (9,117,371)
------------ ------------
Net property, plant and equipment 7,091,092 7,100,256
------------ ------------
Other assets 84,809 28,265
------------ ------------
Total assets $ 26,801,751 $ 23,519,946
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
1
<PAGE> 4
TST/IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS- (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 3,668,484 $ 1,578,938
Accrued liabilities 899,149 1,048,448
Current maturities of long-term debt 29,521 29,095
Line of credit 6,564,046 5,602,601
Prepetition liabilities:
Current maturities of prepetition taxes payable 25,722 25,722
Current maturities of long-term debt 42,230 49,227
------------ ------------
Total current liabilities 11,229,152 8,334,031
------------ ------------
Deferred income tax liability 715,779 689,482
Long-term portion of prepetition debt, net of current maturities 900,210 919,508
Long-term debt, net of current maturities 1,761,553 1,778,004
------------ ------------
Total liabilities 14,606,694 11,721,025
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized; 0 shares
issued and outstanding at February 28, 1999 and
August 31, 1998 -- --
Common Stock, $.01 par value; 15,000,000 shares authorized;
5,292,780 shares issued and outstanding at February 28, 1999
and August 31, 1998 52,928 52,928
Warrants 110 110
Additional paid-in-capital 6,319,572 6,319,572
Retained earnings 5,822,447 5,426,311
------------ ------------
Total stockholders' equity 12,195,057 11,798,921
------------ ------------
Total liabilities and stockholders' equity $ 26,801,751 $ 23,519,946
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE> 5
TST/IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Sales $ 13,750,604 $ 9,484,374 $ 28,022,626 $ 17,276,380
Cost of sales 11,534,725 8,769,450 23,738,102 15,472,213
------------ ------------ ------------ ------------
Gross profit 2,215,879 714,924 4,284,524 1,804,167
Other costs and expenses:
Selling, general and administrative 1,681,162 1,337,185 3,326,098 2,608,947
Interest expense 172,859 90,939 354,592 203,738
Other income, net (36,272) (14,280) (17,051) (45,086)
------------ ------------ ------------ ------------
Total other costs and expenses 1,817,749 1,413,844 3,663,639 2,767,599
Income (loss) before income tax expense 398,130 (698,920) 620,885 (963,432)
Income tax expense (benefit):
Current 136,455 13,583 220,654 18,583
Deferred 2,239 (24,717) 4,095 (111,978)
------------ ------------ ------------ ------------
Total income tax expense (benefit) 138,694 (11,134) 224,749 (93,395)
Net income (loss) $ 259,436 $ (687,786) $ 396,136 $ (870,037)
============ ============ ============ ============
Net income (loss) per common share
(basic and diluted) $ .05 $ (0.13) $ .07 $ (0.16)
============ ============ ============ ============
Weighted average shares outstanding 5,292,780 5,292,780 5,292,780 5,292,780
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
TST/IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
February 28, February 28,
1999 1998
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 396,136 $ (870,037)
Adjustments to reconcile net income to net cash flow provided
by operating activities-
Depreciation and amortization 251,010 144,400
Increase (decrease) in deferred income taxes 4,095 (111,978)
Increase (decrease) in accounts receivable, net 535,725 (2,224,623)
Increase in income tax receivable (61,846) --
Increase (decrease) in investment in marketable securities -- 978,463
Increase in inventory (3,650,309) (1,192,461)
(Increase) decrease in prepaid expenses and other (43,177) 35,889
Increase in accounts payable 2,089,546 1,011,350
Increase (decrease) in accrued liabilities (149,299) 223,003
Increase (decrease) in other assets (56,544) (240,426)
-------------- --------------
Net cash used in operating activities (684,663) (2,246,420)
-------------- --------------
Cash Flows From Investing Activities:
Additions to property, plant, and equipment (252,996) (222,471)
Sales of property, plan and equipment, net 11,150 312
-------------- --------------
Net cash (used in) provided by investing activities (241,846) (222,159)
-------------- --------------
Cash Flows From Financing Activities:
Net borrowing on line of credit 961,445 702,600
Payments on prepetition debt (26,295) (37,313)
Net borrowing (payments) on postpetition debt (16,025) 63,785
-------------- --------------
Net cash provided by financing activities 919,125 729,072
-------------- --------------
Net decrease in cash and cash equivalents (7,384) (1,739,507)
Cash and cash equivalents, beginning of period 117,840 1,766,274
-------------- --------------
Cash and cash equivalents, end of period $ 110,456 $ 26,767
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 7
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
TST/Impreso, Inc., a Delaware corporation, is a manufacturer and distributor to
dealers and other resellers of hard copy imaging products for commercial and
home use in domestic and international markets. The Company'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, adding machine rolls and
large rolls for laser printers. TST/Impreso, Inc. has three wholly owned
subsidiaries: Big Time Paper, Inc., TST/Impreso of California, Inc., and Texas
Stock Tab of West Virginia, Inc. Each subsidiary was formed to support
activities of TST/Impreso, Inc. (referred to collectively with its consolidated
subsidiaries as the "Company").
2. INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the Interim Unaudited Consolidated Financial
Statements of the Company include all adjustments, consisting of any normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of February 28, 1999, and its results of operations for
the three and six months ended February 28, 1999 and 1998. Results of the
Company's operations for the interim period ended February 28, 1999, 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 Interim Unaudited 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, 1998 ("Fiscal
1998"), File Number 0-26774. Accounting policies used in the preparation of the
Interim Unaudited 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.
5
<PAGE> 8
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
3. 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.
Inventory consisted of the following:
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 5,637,012 $ 4,303,003
Raw materials 6,307,125 4,266,114
Supplies 804,474 574,823
Work-in-process 91,671 46,033
--------------- ---------------
Total inventories $ 12,840,282 $ 9,189,973
=============== ===============
</TABLE>
4. LONG -TERM DEBT AND LINE OF CREDIT
The following is a summary of long-term debt and line of credit:
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
---- ----
<S> <C> <C>
Note payable to a commercial financial corporation under a revolving credit line
maturing May 2001, secured by inventories, trade accounts receivable, equipment,
goodwill associated with the Company's trademark IMPRESO (no value on financial
statements), and a personal guarantee by the trustee of a trust which is a
principal shareholder of the Company, interest payable monthly at prime plus
1/2% (8.25%at February 28, 1999). $ 6,564,046 $ 5,602,601
Note payable to commercial financial corporation, secured, payable
in monthly installments, interest rate at prime plus 1.3%. 13,080 15,818
Financing lease payable to a commercial financial corporation,
payable in monthly installments, lease factor at 7.25%. 55,727 62,265
Note payable to a bank, secured by property, payable in monthly installments of
$14,391.22 (including interest at 4.5% above the 11th District Cost of Funds
rate, adjusted every six months), 9.5% at
</TABLE>
6
<PAGE> 9
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
<TABLE>
<S> <C> <C>
February 28, 1999, and August 31, 1998. 1,705,506 1,710,658
Note payable to a commercial financial corporation, secured, payable
in monthly installments, interest rate of 6.7%. 16,761 18,358
Prepetition-
Prepetition taxes payable 25,722 25,722
Note payable to a bank, secured by property, payable in monthly installments of
$4,815 (including interest at 6%) through May 2003,
at which time the remaining balance becomes due and payable. 558,650 570,220
Other notes payable, secured by one or more of the following: a personal
guarantee by the trustee of a trust which is a principal shareholder of the
Company, and certain property, plant, and equipment, maturity
dates to 2023, interest rates ranging from 4% to 8%. 383,790 398,515
--------------- -------------
Total 9,323,282 8,404,157
Less-Current maturities (6,661,519) (5,706,645)
--------------- -------------
Long term debt $ 2,661,763 $ 2,697,512
=============== =============
</TABLE>
In February 1999, the Company entered into an agreement with its existing lender
for a two year revolving line of credit. The facility, which had an initial
maturity in May 1999, was renewed and will now expire in May 2001. The renewed
loan will have more favorable terms, including an increase in the line from $12
million to $13 million, a decreased interest rate ranging from prime plus 1/2%
to prime plus 1/4% based upon financial performance, and an increased percentage
on borrowings based on inventory.
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
February 28,
1999 1998
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $354,592 $203,738
Income taxes $285,632 ---
</TABLE>
7
<PAGE> 10
TST/IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
6. EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS No. 128) in Fiscal 1998. SFAS No. 128 requires the
replacement of primary and fully diluted earnings per share ("EPS") with basic
and diluted earnings per share. The adoption of SFAS No. 128 did not have a
material impact on the earnings per share calculation.
Basic EPS is calculated by dividing net income (loss) attributable to common
stockholders by the weighted average shares of common stock of the Company
("Common Stock"). The calculation of diluted EPS considers the effect of Common
Stock equivalents outstanding during the period. Common Stock equivalents
represent the dilutive effect of the assumed exercise of certain outstanding
stock options and warrants. For the three and six months periods ended February
28, 1999, the assumed exercise of outstanding in-the money stock options and
conversion of warrants were immaterially dilutive. As a result, these shares are
excluded from the final determination of the weighted average shares outstanding
at February 28, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED FEBRUARY 28,1999 AND
FEBRUARY28,1998
Net Sales---Net sales for the three months ended February 28, 1999, ("Second
Quarter") increased $ 4.3 million, or 45.0%, to $13.7 million as compared to
$9.5 million for the corresponding period of the prior year. Net sales for the
six months ended February 28, 1999, increased $10.7 million, or 62.2%, to $28
million as compared to $17.3 million for the corresponding period of the prior
year.
Net sales increased for the three and six month periods ended February 28, 1999,
as a result of expanding distribution of the new branded and specialty imaging
products offered by the Company, and large purchases by a major office
superstore chain of IBM branded and private label products. This one customer
represented a significant portion of the Company's revenues during this time.
There can be no assurance, however, that this increase in sales will continue,
or if continued such sales will have a significant impact on the Company's
profitability.
Gross Profit---Gross profit for the three months ended February 28, 1999,
increased $ 1.5 million or 210%, to $ 2.2 million, as compared to $715,000 for
the corresponding period of the prior year. Gross profit for the six months
ended February 28, 1999, increased $2.5 million, or 137.5% to $ 4.3 million,
8
<PAGE> 11
as compared to $1.8 million for the corresponding period of the prior year.
The Company's gross profit margin was 16.1% for the Second Quarter, as compared
to 7.5% for the corresponding period of the prior year. The Company's increased
gross profit and gross profit margin were due to the shifting of Company sales
from lower margin continuous forms and uncoated cut sheet paper products to
higher margin branded and technical imaging products. There can be no assurance,
however, that gross profits or gross profit margins will be maintained or
continue to increase, or if increased, such sales of higher margin products will
result in a significant impact on the Company's profitability.
Selling, General, and Administrative Expenses---SG&A expenses for the three
months ended February 28, 1999, were $ 1.7 million, or 12.2% of net sales as
compared to $1.3 million, or 14.1% of net sales, for the corresponding period of
the prior year. SG&A expenses for the six months ended February 28, 1999, were $
3.3 million, or 11.9% of net sales, as compared to $2.6 million, or 15.1% of net
sales for the corresponding period of the prior year. The decrease in SG&A as a
percentage of net sales for the three and six months periods resulted primarily
from the increased sales volume without a corresponding increase in SG&A
expenses. SG&A expenses increased as a dollar amount during this period, as
compared to the corresponding period of the prior year, due to increased net
sales of products on which the Company offers promotional rebates.
Interest Expense---Interest expense for the three months ended February 28,
1999, was $173,000 as compared to $ 91,000, an increase of 90.1% from the
corresponding period of the prior year. Interest expense for the six months
ended February 28, 1999, was $355,000 as compared to $204,000, an increase of
74.0% from the corresponding period of the prior year.
The increase in interest expense for the three and six month periods ended
February 28, 1999, as compared to the corresponding periods of the prior year
were primarily attributable to the Company increasing its outstanding borrowings
under its revolving line of credit. The increased borrowings reflected the
Company's increased inventory and accounts receivable for the three and six
month periods ended February 28, 1999. The increase was also attributable to
financing acquisitions, in the second half of the year ended August 31, 1998, of
property and equipment.
Income Taxes---The Company's income tax expense for the Second Quarter was
$139,000, as compared to an income tax benefit for the three months ended
February 28, 1998, of $11,000. The Company's income tax expense for the six
months ended February 28, 1999 was $225,000, as compared to an income tax
benefit of $93,000 for the corresponding period of the prior year.
The income tax expense recorded resulted from reporting net income for the
current year periods as compared to reported losses in the corresponding period
of the prior year.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $ 8.4 million at February 28, 1999, from $8.1
million at August 31, 1998, an increase of 4.2%, primarily attributable to a
39.7% increase in the Company's inventory and was partially offset by a $ 2.1
million increase in accounts payable and $ 1.0 million increase in the company's
line of credit.
In February 1999, the Company entered into an agreement with a bank for a two
year, secured, revolving line of credit, which is secured by, among other
things, inventory, trade receivables, equipment and a personal guarantee of
Marshall Sorokwasz, Chairman of the Board and President of the Company and
Trustee of a trust which is a principal shareholder of the Company. Available
borrowings under this line of credit, which accrues interest at the prime rate
of interest plus 1/2% (8.25% at February 28, 1999), are based upon specified
percentages of eligible accounts receivable and inventories. As of February 28,
1999, there was a $ 6.4 million borrowing capacity remaining under the $13
million revolving line of credit. The revolving credit line, which was to expire
in May 1999, will now expire in May 2001. The renewed loan has more favorable
terms including, an increase in the line from $12 million to $13 million, a
decreased interest rate ranging from prime plus 1/2% to prime plus 1/4% based
upon financial performance, and an increased percentage on borrowings based on
inventory.
The Company believes that the funds available under the revolving credit
facility, cash and cash equivalents, trade credit, and internally generated
funds will be sufficient to satisfy the Company's requirements for working
capital and capital expenditures for at least the next twelve months. Such
belief is based on certain assumptions, including the continuation of current
operations of the Company and no extraordinary adverse events, and there can be
no assurance that such assumptions are correct. In addition, expansion of
Company operations due to demand for the new types and brands of products
manufactured by the Company may require the Company to obtain additional capital
to add new manufacturing facilities. If that should occur, the funds required
for the new facilities would be generated through additional security offerings
or additional debt. There can be no assurance that any additional financing will
be available if needed, or, if available, will be on terms acceptable to the
Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to market risks such as foreign currency exchange
rates, but is exposed to risks such as variable interest rates. Market risk is
the potential loss arising from adverse changes in market prices and rates.
Since the Company does not have supply contracts with any of its foreign
vendors, foreign vendors are paid in U.S. currency, and the Company's
international sales of finished goods is insignificant, there are not sufficient
factors to create a material foreign exchange rate risk, therefore, the Company
does not utilize exchange commitments to minimize the negative impact of foreign
currency fluctuations.
10
<PAGE> 13
The Company has both fixed-rate and variable-rate debts as of February 28, 1999
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 the Company's total long-term fixed rate and
floating rate debt approximates fair value. See Note 4 in Notes to Interim
Consolidated Financial Statements.
As of February 28, 1998 the Company did not own derivative or other financial
instruments for trading or speculative purposes.
Based upon the Company's market risk sensitive debt outstanding at February 28,
1999. there was no material exposure to the Company's financial position or
results of operations.
INVENTORY MANAGEMENT; RAW MATERIALS
The Company believes that it is necessary to maintain an inventory of finished
goods and raw materials to adequately service its customers. As a result of the
Company's manufacturing and distributing new brands and types of products, its
raw material and finished goods inventory requirements have increased;
therefore, in the year ended August 31, 1998, the Company substantially
increased its inventory levels. In the Second Quarter, the Company continued
increasing its inventory levels due to market trends indicating future, higher
raw material costs.
The Company bears the risk of changes in the prices charged by its suppliers and
decreases in the selling prices of its inventory. If prices for raw materials
required by the Company increase and the Company is unable to pass the increase
to its customers, or if prices for raw materials decrease and the Company has a
large inventory, or if prices for products held in the finished goods inventory
of the Company decline, or if new technology is developed that renders products
distributed by the Company and held in inventory obsolete, the Company's
business could be materially adversely affected.
MARKET CONDITIONS
During the second, third and fourth quarters of Fiscal 1998, prices of raw
materials declined for a majority of the products manufactured or distributed by
the Company. When raw material prices decrease, product selling prices can
decrease as a result of over supply and pricing pressures from competitors with
cheaper raw material inventory. In the First Quarter Fiscal 1999, prices for
certain raw materials continued to decrease, which resulted in decreased selling
prices on some of the products manufactured by the Company.
Management believes that raw material paper suppliers reached the bottom of the
break even price curve for their products in the First Quarter. In the Second
Quarter the Company's suppliers began increasing the price of raw materials
resulting in the Company implementing a price increase on its finished goods.
Resistance by customers to the price increase will continue to create downward
11
<PAGE> 14
pressure on finished goods selling prices, which could result in lower profit
margins for the Company in the Third Quarter. If selling prices for products
manufactured by the Company can not increase in relationship to raw material
cost increases, the Company's results of operations could be materially
adversely affected.
SEASONALITY
The Company may be subject to certain seasonal fluctuations in that orders for
products may decline over the summer months. However, the Company does not
believe that such fluctuations have a material adverse effect on its results of
operations.
YEAR 2000
The Company has completed the problem identification phase of its main computer
system's (the "System") software and believes that it will be able to complete
Year 2000 ("Y2K"), compliance of the System through the modification of existing
application software. The Company's management information systems ("MIS")
department is currently implementing the conversion plan for the application
software. The Company has retained an outside consultant to review the plan and
assist MIS in implementing the software conversion. As each phase of conversion
of the software application is completed, it will be operationally tested for
Y2K compatibility. The Company has completed its conversion and operational
testing of database files. In April 1999, the Company will implement the
converted database. All of the conversions of other applications within the
System have begun, and the Company intends that the operational testing phases
for those applications will be completed by July 31,1999.
The Company is in the problem identification phase for its other information
technology equipment, such as independent personal computers ("P.C.'s") and
Electronic Document Interchange ("EDI"), and all non-information technology
equipment, such as the embedded controls in the Company's manufacturing
equipment. The Company has retained another outside consulting firm (the
"Consultants") to conduct an audit on this equipment. The initial review, which
began in September 1998, has been completed for the Coppell headquarters
location. The Consultants indicated that they did not detect any material
problems in the information systems or production equipment at this location. At
the completion of the review for the two remaining manufacturing locations,
which the Company intends to complete by April 1999, management will assess what
equipment of the Company is mission critical and non-compatible. Since there
have not been any material problems identified to date, potential costs of
making this equipment Y2K compliant is unknown; therefore, no estimate has been
included in the total estimated cost of remediation as of this date. If a
corrective action plan is necessary, total estimated costs will be revised in
future filings to reflect additional expenditures associated with implementing
the plan.
Total estimated costs to the Company of remediation of all information and
non-information technology is approximately $250,000. The Company does not
expect the cost of Y2K compliance to be
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<PAGE> 15
material to its future financial condition or results of operations. Although
the Company is utilizing both internal and external resources to implement and
test the Y2K activities to eliminate transition interruptions or failure, there
can be no assurance that these efforts will be successful. The costs of the Y2K
compliance and anticipated dates of completion are based on management's best
estimates, including considerations such as vendor support, no extraordinary
adverse events, and application of theoretical and unproven practices.
In the Second Quarter the Company began surveying the Y2K compliance status of
its primary suppliers and significant customers. Management believes, as a
result of the numerous questionnaires the Company has received and the responses
to its survey, that a significant majority of its customers and suppliers are
actively addressing Y2K problems and intend to be Y2K compliant prior to
December 31, 1999. The Company's survey will assist management in assessing
third party risks, but the Company does not intend to develop a formal
contingency plan If significant third party supplier systems do not work
properly, the Company may experience operation disruptions including temporary
inability to manufacture or ship product, process transactions, communicate with
customers, suppliers and subsidiary locations, and other customary business
activity.
NEW PRODUCT
In May 1999 the Company intends to introduce a new rolled paper product line.
The rolls weigh approximately 500 pounds each and are specifically engineered
for high speed roll fed printing systems.
These rolls are utilized by companies, such as investment banking institutions
and publishing companies, for variable data output applications such as
customized statements and book publishing. The advantage of utilizing high speed
roll fed printing systems for mass production over traditional methods of offset
printing, is lower costs and faster speeds of production without sacrificing
image quality. The Company will manufacture this product line on new and
existing equipment. The existing equipment, which previously manufactured paper
products with declining market shares, will be modified to accommodate the
manufacture of this specially controlled paper.
WEBSITE
The Company's HotSheet(R) web portal at www.Hotsheet.com provides Internet users
with an easy method for finding top web sites by using a quick-loading single
page design. On February 9, 1999, the Company launched a sister site,
Shopsheet(TM) at www.shopsheet.com, which is a shopping web portal.
The Company recently engaged a consulting firm to assist the Company's
marketing of the sites. One of the results of the association with the firm has
been the installation of a new meta-search service: HotSheet Super Search(TM).
The search service is accessed through a form near the top of the HotSheet
directory page. The service performs simultaneous searches of the web's top
websites, usenet forums, or news stories search engines, and presents combined
results ranked by relevance.
The Company is seeking to engage an investment banker for the development of
strategies to
13
<PAGE> 16
maximize the value of the Company's web portals. Three investment bankers have
been consulted, and the Company intends to retain and develop the sights into
valuable corporate assets, or proceed with an initial public offering or the
sale of the sites to an unrelated third party. The Company will continue to
invest in its sites by associating with vendors in the industry which provide
income generating services.
SUBSEQUENT EVENTS
On September 29, 1998, the Company received notice from The Nasdaq Stock Market
that the Company's Common Stock was failing to maintain a market value of public
float greater than or equal to $5 million in accordance with Marketplace Rule
4450(a)(2) under Maintenance Standard 1 for the Nasdaq National Market. The
Company was given approximately three months to regain compliance. The Company
did not meet the required market value of public float within the time frame
provided by Nasdaq and requested an oral hearing from the Nasdaq Stock Market
Hearing Committee for further procedural remedies to stay the delisting. On
February 12, 1999, the Company received notice from Nasdaq that the Company is
currently in compliance with all of the maintenance standard requirements, the
scheduled hearing was canceled and the file closed.
At the Annual Board of Directors meeting, held January 27, 1999, the Board voted
to execute a new five year employment contract with Marshall Sorokwasz, Chairman
of the Board, President, and Chief Executive Officer of the Company. The
employment contract appears as Exhibit 10 (b) in this Form 10- Q.
The Board also granted the President authority to grant five year options at or
below fair market value to employee and non-employee recipients, representing a
maximum aggregate of 250,000 authorized, unissued, and unregistered common
shares of the Company.
The Board of Directors also authorized the President to purchase the Company's
Common Stock on the open market or in private transactions at market price, up
to 5% of the Company's Common Shares outstanding in accordance with the
provisions of Exchange Act safe harbor rule 10b-18. As of April 14, 1999, the
Company had not completed any purchase of shares.
On March 15, 1999, the Company entered into a Letter Agreement with the West
Virginia Economic Development Authority for the partial financing of a 30,000
square foot addition on property adjacent to its West Virginia plant and the
acquisition of new manufacturing equipment.
On March 19, 1999, the Board of Directors rejected an offer to sell in a private
transaction 200,000 unissued, unregistered shares of the Company's Common Stock
at a price of $8.00 per share. The Board rejected the offer based upon present
and anticipated positive growth. The Board concluded that the sale, which was
not in the best interest of the Company at this time, was not in conformity with
the Boards decision to begin a Company stock buyback program. Two of the
original founders and current Directors of the Board, Donald Jett and Richard
Bloom, who recused themselves from voting on this matter, accepted the offer and
sold 200,000 of their issued, unregistered shares.
14
<PAGE> 17
On March 23, 1999, the Company and IBM executed Amendment Number 2 to the
Trademark Licensing Agreement dated, April 30, 1997. This Amendment provides for
an extension of the term from a period of four years with two automatic one year
renewal options to a period of six years with two automatic one year renewal
options. The Amendment also added the following products to the list of licensed
products covered by the Agreement; IBM Adding Machine/Cash Register Rolls, IBM
Ink Jet T-Shirt Transfers, IBM Ink Jet Coated Canvas, and IBM Fine Business
Paper and Envelopes.
INFLATION
Inflation is not expected to have a significant impact on the Company's
business.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results of
Operations and other sections of this Report contain "forward-looking
statements" about the Company's prospects for the future, such as its ability to
generate sufficient working capital, its ability to obtain financing to acquire
new manufacturing facilities, its ability to generate additional sales to meet
business expansion and future market conditions, its ability to continue to
maintain sales to justify capital expenses, its ability to switch its product
mix to meet market conditions, its ability to successfully market its new brands
and types of products, and its ability to identify, evaluate and implement
corrective action for potential Year 2000 problems. Such statements are based on
current expectations, estimates, forecasts and projections about the market
sectors in which the Company operates, management's beliefs, and assumptions
made by management; they are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected, including
availability of raw materials, the cyclical nature of the industry in which the
Company operates, the potential of technological changes which would adversely
affect the need for the Company's products, price fluctuations which could
adversely impact the large inventory required in the Company's business, loss of
any significant customer, and termination of contracts essential to the
Company's business. Parties are cautioned not to rely on any such
forward-looking statements or judgments in making investment decisions.
15
<PAGE> 18
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND ON FORM 8-K
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
a) 10(b) Employment Agreement dated January 27, 1999, between
the Company and Marshall Sorokwasz
10(d)+ Amendment Number 2 to the IBM Brand Paper Trademark
Licensing Agreement, effective as of April 30, 1997,
between the Company and International Business
Machines Corporation*
27 Financial data schedule
b) No reports on Form 8-K were filed during the quarter ended February 28,1999.
+ Confidential Treatment requested for portions of this Exhibit
* To be filed by Amendment
16
<PAGE> 19
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 there unto duly authorized.
Dated: April 14, 1999
TST/ 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
17
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<S> <C>
10(b) Employment Agreement dated January 27, 1999, between
the Company and Marshall Sorokwasz
10(d)+ Amendment Number 2 to the IBM Brand Paper Trademark
Licensing Agreement, effective as of April 30, 1997,
between the Company and International Business
Machines Corporation*
27 Financial data schedule
</TABLE>
+ Confidential Treatment requested for portions of this Exhibit
* To be filed by Amendment
<PAGE> 1
EXHIBIT 10 (b)
EMPLOYMENT AGREEMENT, dated as of January 26, 1999, between
TST\IMPRESO, INC. a Delaware Corporation with offices at 652 Southwestern
Boulevard, Coppell, Texas 75019 (the "Company"), and Marshall D. Sorokwasz,
residing at 118 Cottonwood, Coppell, Texas 75019 (the "Employee").
WHEREAS, the Company desires to engage Employee to perform services for
the Company, any present or future parent, subsidiary, or affiliate thereof,
and, subject to Section 16 hereof, any successor or assign of any of them; and
WHEREAS, Employee desires to perform such services on the terms and
subject to the conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto hereby agree as follows:
1. Term.
The Company agrees to employ Employee, and Employee agrees to provide services
to the Company, on the terms and subject to the conditions set forth in this
Agreement (the "Agreement") for a period of five (5) years to commence on
February 1, 1999 and cease on January 31, 2004, ("Employment Period").
2. Duties and Services.
(a) During the Employment Period, Employee shall be employed in the
business of the Company as Chairman of the Board, Chief Executive Officer,
President and Treasurer thereof, with such executive responsibilities as shall
be determined by the Board of Directors. Employee agrees to his employment as
described in this Section 2(a) and agrees to devote substantially all of his
business time and efforts to the performance of his duties hereunder. Employee
shall be available to travel as the needs of the business of the Company
require. In addition to the foregoing, Employee agrees to serve all, or any
portion of the Employment Period, as an officer and director of any subsidiary
or affiliate of the Company, as the Board of Directors of the Company may
request from time to time, without additional compensation therefor, other than
the compensation set forth in Section 3 hereof.
(b) In connection with the performance of his duties hereunder, Employee
shall not be required to change his principal location of employment from the
metropolitan area, in which Employee resides on the date of execution of this
Agreement.
1
<PAGE> 2
3. Compensation.
(a) The Company and Employee agree that, as full compensation for
Employee's services during the Employment Period, the Company shall compensate
Employee during the Employment Period at an annual rate, a minimum of
$375,000.00, payable in equal installments based upon the then current payment
schedule for executives of the Company.
(b) The Company shall pay all medical and dental expenses of Employee and
Employees immediate family including, but not limited to; insurance premiums,
deductibles, co-pays, and expenditures in excess of policy limits or caps.
(c) Employee may participate in any present or future employee benefit
plans of the Company, participation in which the Board of Directors offers to
Employee.
(d) Employee shall be eligible to receive such further compensation and
benefits as determined by the Board of Directors of the Company.
4. Expenses.
Employee, during the Employment Period, shall be entitled to reimbursement for
reasonable travel and other out-of-pocket expenses necessarily incurred in the
performance of his duties hereunder, upon submission and approval of written
statements and bills in accordance with the procedures of the Company. In
addition to the foregoing, Employee shall be entitled to a $125,000
non-reimbursable annual expense allowance.
5. Non-Competitive.
(a) As Employee's employment hereunder will provide Employee with access
to and knowledge of the customers, trade secrets, and other proprietary
information relating to the business of the Company and its customers and
suppliers, Employee agrees that for a period of two (2) years after Employee
ceases to be employed by the Company under this Agreement ("the Period"), or
otherwise, he will not compete with, be engaged in the same business as, or,
directly or indirectly, for his own benefit, or for, with, or through any other
person, firm, or company, own, manage, operate, control, or participate in the
ownership, management, operation, or control of, or be connected as a director,
officer, employee, partner, consultant, agent, independent contractor, or
otherwise with, or acquiesce in the use of his name, in any other business or
organization, which during such Period competes with, in any geographical area,
the Company's products or services sold, or is engaged in the same business as
the Company.
(b) Notwithstanding the foregoing, the provisions of this Section 5 will
not be deemed breached merely because Employee owns not more than ten (10)
percent of the outstanding
2
<PAGE> 3
common stock or ordinary shares of a company (other than the Company and any
affiliates thereof), if, at the time of its acquisition by Employee, such stock
is listed on a national securities exchange, is reported on the National
Association of Securities Dealers Inc,'s automated quotation system, or is
regularly traded in the over-the-counter market by a member of a national
securities exchange.
(c) Employee will not, directly or indirectly, solicit or interfere with,
or endeavor to entice away from the Company any of its suppliers, customers, or
employees. Employee will not, directly or indirectly, employ any person who, at
any time up to the time Employee ceases to be an employee of the Company (under
this Agreement or otherwise), was an employee of the Company within a period of
one (1) year after such cessation.
(d) Because a breach of the provisions of this Section 5 could not
adequately be compensated by money damages, the Company shall be entitled, in
addition to any other right and remedy available to it, to an injunction,
restraining such breach, or a threatened breach, and in either case, no bond or
other security shall be required in connection therewith, and Employee hereby
consents to the issuance of such injunction. Employee agrees that the provisions
of this Section 5 are necessary and reasonable to protect the Company in the
conduct of its business. If any restriction contained in this Section 5 shall be
deemed to be invalid, illegal, or unenforceable by reason of the extent,
duration, or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent, duration,
geographical scope, or other provisions hereof, and in its reduced form such
restriction shall then be enforceable in the manner contemplated hereby.
(e) Notwithstanding the foregoing, if the Company shall fail to make any
payment to Employee required hereunder, and the Company shall not cure such
default within thirty (30) business days after the receipt, or deemed receipt of
notice thereof from Employee, the provisions of paragraphs (a) and (c) of this
Section 5 shall terminate, and be of no further force and effect. The
termination of paragraphs 5(a) and 5(c) does not effect Employees right to
pursue legal recourse for the Company's Breach of Contract.
6. Patents, Etc.
Any interest in patents, patent applications, inventions, copyrights,
developments, and processes (the "Inventions"), which Employee now or hereafter
during the period he is employed by the Company (under this Agreement or
otherwise), may own or develop relating to the fields in which the Company may
then be engaged shall belong to the Company; and forthwith upon request of the
Company, Employee shall execute all such assignments and other documents, and
take all such other action as the Company may reasonably request in order to
vest in the Company all of his right, title, and interest in and to the
Inventions, free and clear of all liens, charges and encumbrances.
3
<PAGE> 4
7. Confidential Information.
All confidential information which Employee may now possess, may obtain during
or after the Employment Period, or may create prior to the end of the period he
is employed by the Company, relating to the business of the Company, or any
customer or supplier of any of them, shall not be published, disclosed, made
accessible by him to any other person, firm, or company, or used by him, except
during the period during which he is employed by the Company in the business,
and for the benefit of the Company, or with prior written permission of the
Company. Employee shall return all tangible evidence of such confidential
information to the Company prior to the termination of his employment.
8. Life Insurance.
If requested by the Company, Employee shall submit to such physical examinations
and otherwise take such actions and execute and deliver such documents as may be
reasonably necessary to enable the Company, at its expense and for its own
benefit, to maintain the life insurance on the life of Employee in effect on the
date hereof or for any replacements thereof. The Company will furnish an
identical policy to Employee with Employee's named beneficiary at no expense to
Employee.
9. Termination.
Notwithstanding anything herein contained, if on or after the date hereof, and
prior to the end of the Employees employment with the Company during the
Employment Period or otherwise;
(a) (i) Employee shall be physically or mentally incapacitated or
disabled, or otherwise unable to fully discharge his duties hereunder for a
period of 24 (twenty four) months, or
(ii) Employee shall be convicted of a felony involving moral
turpitude, or
(iii) Employee shall commit any act or omit to take any action in bad
faith and to the detriment of the Company, or
(iv) Employee shall breach any material term of this Agreement and
such breach, if curable, is not cured within one hundred thirty (130) days after
notice thereof, then, and in each such case, the Company shall have the right to
give notice of termination of Employee's services hereunder as of a date (not
earlier than ten (10) days from such notice) to be specified in such notice, and
Employee's employment hereunder shall terminate on the date so specified.
4
<PAGE> 5
(b) (i) If Employee is terminated during the term under this Agreement or
otherwise with, or without cause, or; (ii) if control of the Company is changed
during Employees employment so that Employee and other persons who are members
of the Board, prior to change of control, do not constitute a majority of the
Board, and Employee resigns after such change in control, the Company shall pay
Employee each year for a period of five (5) years following the date of
termination or resignation, an amount equal to his annual salary, annual
bonuses, insurance and expense allowances as in effect immediately prior to such
termination or resignation, payable in equal installments based upon the
Employees payment schedule in the year immediately prior to the termination or
resignation.
(c) If Employee shall die, then this Agreement shall terminate on the
date of Employee's death, whereupon the Company shall pay to his widow, if there
be one, and if not, to his estate, at the rate provided in Section 3(a) for a
period of 2 (two) years from the date of Employee's death.
10. Merger, Etc.
In the event of a future disposition of, or including the properties and
business of the Company substantially as an entirety by merger, consolidation,
sale of assets, or otherwise ("a Substantive Merger"), the Company may elect to
assign this Agreement and all of its rights and obligations hereunder to the
acquiring or surviving company; provided that such company shall assume in
writing all of the obligations of the Company hereunder; and provided further
that the Company (in the event and so long as it remains in business as an
independent going enterprise) shall remain liable for the performance of its
obligations hereunder in the event of an unjustified failure of the acquiring
company to perform its obligations under this Agreement. The provisions of this
Section 10 shall not affect the provision of Section 9(b). In the event the
surviving company does not assume the Agreement, all benefits under Section 9
(b) must be paid in full prior to a Substantive Merger.
11. Survival.
The covenants, agreements, representations, and warranties contained in or made
pursuant to this Agreement shall survive Employee's termination of employment,
irrespective of any investigation made by or on behalf of any party so long as
Employee receives the compensation and other payments required to be made to him
hereunder.
12. Modification.
This Agreement sets forth the entire understanding of the parties, with respect
to the subject matter hereof, supersedes all existing agreements between them
concerning such subject matter, and may be modified only by a written instrument
duly executed by each party hereto.
5
<PAGE> 6
13. Notices.
Any notice or other communication required or permitted to be given hereunder
shall be in writing and shall be mailed by certified mail, return receipt
requested (or by the most nearly comparable method of mailing from or to a
location outside the United States), or delivered against receipt to the party
to whom it is to be given at the address of such party set forth in the preamble
to this Agreement (or such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 13). Notice to the
estate of Employee shall be sufficient if addressed to Employee as provided in
this Section 13. Any notice or other communication given by certified mail (or
such comparable method) shall be deemed given at the time of certification
thereof (or comparable act), except for a notice changing a party's address
which shall be deemed given at the time of receipt thereof.
14. Waiver.
Any waiver by either party of a breach of any provision of this Agreement shall
not operate as or be construed to be a waiver of any other breach of such
provision or of any breach of any other provision of this Agreement. The failure
of a party to insist upon strict adherence to any term of this Agreement on one
or more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
Any waiver must be in writing.
15. Binding Effect.
Employee's rights, benefits and obligations under this Agreement shall not be
transferable by assignment or otherwise, such rights shall not be subject to
commutation, encumbrance, or the claims of Employee's creditors, and any attempt
to do any of the foregoing shall be void. The provisions of this Agreement shall
be binding upon and inure to the benefit of Employee and his heirs and personal
representatives and shall be binding upon and inure to the benefit of the
Company and its successors and those who are its assigns under Section 10
hereof.
16. No Third Party Beneficiaries.
This Agreement does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement (except as
provided in Section 15 hereof).
17. Headings.
The headings in this Agreement are solely for convenience of reference and shall
be given no effect in the construction or interpretation of this Agreement.
6
<PAGE> 7
18. Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas, without giving effect to conflict of laws. The parties
consent to jurisdiction in Dallas County, Texas, and waive any permissible or
mandatory rights to venue.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
TST/IMPRESO, INC.
By:
--------------------------------
Richard D. Bloom
Sr. Vice President of Operations
EMPLOYEE
By:
--------------------------------
Marshall D. Sorokwasz
7
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 110,456
<SECURITIES> 0
<RECEIVABLES> 5,698,280
<ALLOWANCES> 225,295
<INVENTORY> 12,840,282
<CURRENT-ASSETS> 19,625,850
<PP&E> 16,459,473
<DEPRECIATION> 9,368,381
<TOTAL-ASSETS> 26,801,751
<CURRENT-LIABILITIES> 11,229,152
<BONDS> 0
0
0
<COMMON> 53,038
<OTHER-SE> 12,142,019
<TOTAL-LIABILITY-AND-EQUITY> 26,801,751
<SALES> 28,022,626
<TOTAL-REVENUES> 28,022,626
<CGS> 23,738,102
<TOTAL-COSTS> 23,738,102
<OTHER-EXPENSES> (17,051)
<LOSS-PROVISION> 225,295
<INTEREST-EXPENSE> 354,592
<INCOME-PRETAX> 620,885
<INCOME-TAX> 224,749
<INCOME-CONTINUING> 396,136
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 396,136
<EPS-PRIMARY> .07
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