UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the quarterly period ended May 31, 2006
or
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period
to
Commission File Number 000-29883
Impreso, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2849585
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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652 Southwestern Boulevard
Coppell, Texas 75019
(Address of principal executive offices)
(972) 462-0100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of Common Stock as of the
latest practicable date: Class of Common Stock, $0.01 Par Value, shares outstanding at July 14,
2006: 5,278,780.
IMPRESO, INC. AND SUBSIDIARIES
FORM 10-Q
May 31, 2006
INDEX
IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
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|
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|
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May 31,
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August 31,
|
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|
|
2006
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|
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2005
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|
Current assets:
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net of allowance for doubtful accounts of
$1,026,941 May 31, 2006 and $1,414,042 as of August 31, 2005
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|
$
|
8,556,439
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|
|
$
|
8,996,319
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|
Receivable, IRS
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|
|
1,221,532
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|
|
|
1,255,294
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|
Inventories, net of reserves
|
|
|
15,163,853
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|
|
|
16,753,921
|
|
Prepaid expenses and other
|
|
|
360,044
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|
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|
217,183
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|
Assets held for sale
|
|
|
1,278,872
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|
|
|
1,278,872
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|
Deferred income tax assets
|
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|
674,456
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|
|
|
828,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
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27,255,196
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|
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29,329,681
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|
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Property, plant and equipment, at cost
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27,198,509
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27,174,188
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Less-Accumulated depreciation
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|
(15,779,800
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)
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(14,784,634
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)
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|
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|
|
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Net property, plant and equipment
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11,418,709
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12,389,554
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Noncurrent assets
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Other assets
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70,671
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74,183
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Deferred income tax assets
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|
351,813
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|
0
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Total noncurrent assets
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422,484
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74,183
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|
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|
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Total assets
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$
|
39,096,389
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$
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41,793,418
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|
|
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|
The accompanying notes are an integral part of the condensed consolidated financial statements
1
IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS EQUITY
(Unaudited)
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|
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May 31,
|
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August 31,
|
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|
|
2006
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2005
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Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Accounts payable
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$
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8,475,657
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$
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8,182,928
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Accrued liabilities
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876,402
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|
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796,834
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Accrued commissions
|
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1,002,255
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|
|
|
954,231
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Current maturities of long-term debt
|
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1,103,187
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1,718,028
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Line of credit
|
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6,029,632
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6,306,354
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Current maturities of prepetition debt
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8,909
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8,684
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total current liabilities
|
|
|
17,496,042
|
|
|
|
17,967,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Deferred income tax liability
|
|
|
0
|
|
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295,016
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Deferred gain
|
|
|
483,770
|
|
|
|
611,826
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Long-term debt, net of current maturities
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|
6,772,959
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|
7,562,876
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|
Long-term portion of prepetition debt, net of current maturities
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202,045
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|
211,485
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Total liabilities
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24,954,816
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26,648,262
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Stockholders equity:
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Preferred stock, $.01 par value; 5,000,000 shares authorized;
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0
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0
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0 shares issued and outstanding
|
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|
|
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Common stock, $.01 par value; 15,000,000 shares authorized;
|
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52,928
|
|
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|
52,928
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|
5,292,780 issued and 5,278,780 outstanding
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Treasury stock (14,000 shares, at cost)
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(38,892
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)
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|
|
(38,892
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)
|
Additional paid-in capital
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6,353,656
|
|
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6,353,656
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Retained earnings
|
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|
7,773,881
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8,777,464
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
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|
14,141,573
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|
|
|
15,145,156
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
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$
|
39,096,389
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|
|
$
|
41,793,418
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|
|
|
|
|
|
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|
The accompanying notes are an integral part of the condensed consolidated financial statements
2
IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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|
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|
|
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Three Months Ended
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Nine Months Ended
|
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May 31,
|
|
|
May 31,
|
|
|
May 31,
|
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May 31,
|
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|
|
2006
|
|
|
2005
|
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|
2006
|
|
|
2005
|
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|
|
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Net sales
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|
$
|
17,842,095
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|
$
|
19,829,734
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$
|
51,801,515
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$
|
58,435,505
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|
Cost of sales
|
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|
15,741,361
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|
|
|
18,733,138
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|
46,855,162
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|
|
|
55,782,864
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Gross profit
|
|
|
2,100,734
|
|
|
|
1,096,596
|
|
|
|
4,946,353
|
|
|
|
2,652,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
(40,866
|
)
|
|
|
(42,685
|
)
|
|
|
(136,350
|
)
|
|
|
(142,285
|
)
|
Embezzlement recovery
|
|
|
0
|
|
|
|
0
|
|
|
|
(50
|
)
|
|
|
(290,840
|
)
|
Selling, general and administrative expense
|
|
|
1,878,242
|
|
|
|
2,220,005
|
|
|
|
5,624,900
|
|
|
|
6,728,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
263,358
|
|
|
|
(1,080,724
|
)
|
|
|
(542,147
|
)
|
|
|
(3,642,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
281,220
|
|
|
|
322,641
|
|
|
|
860,987
|
|
|
|
900,903
|
|
Extinguishment of debt
|
|
|
0
|
|
|
|
(489,645
|
)
|
|
|
0
|
|
|
|
(489,645
|
)
|
Other expense
(income), net
|
|
|
49,352
|
|
|
|
(65,384
|
)
|
|
|
70,642
|
|
|
|
(285,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
330,572
|
|
|
|
(232,388
|
)
|
|
|
931,629
|
|
|
|
125,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(67,214
|
)
|
|
|
(848,336
|
)
|
|
|
(1,473,776
|
)
|
|
|
(3,768,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
10,500
|
|
|
|
(407,828
|
)
|
|
|
23,000
|
|
|
|
(1,629,201
|
)
|
Deferred
|
|
|
(25,168
|
)
|
|
|
133,138
|
|
|
|
(493,193
|
)
|
|
|
403,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
|
(14,668
|
)
|
|
|
(274,690
|
)
|
|
|
(470,193
|
)
|
|
|
(1,225,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(52,546
|
)
|
|
$
|
(573,646
|
)
|
|
$
|
(1,003,583
|
)
|
|
$
|
(2,542,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
(basic and diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(basic and diluted)
|
|
|
5,278,780
|
|
|
|
5,278,780
|
|
|
|
5,278,780
|
|
|
|
5,278,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IMPRESO, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
($1,003,583
|
)
|
|
|
($2,542,702
|
)
|
Adjustments to reconcile net loss to net cash
provided by operating activities-
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,084,320
|
|
|
|
1,116,483
|
|
Decrease in provision for bad debt expense
|
|
|
679,564
|
|
|
|
(64,917
|
)
|
(Decrease) increase in provision for losses of inventory
|
|
|
(13,277
|
)
|
|
|
99,906
|
|
Gain on sale of property, plant and equipment
|
|
|
(8,294
|
)
|
|
|
0
|
|
Change in deferred gain on sale of property
|
|
|
(128,056
|
)
|
|
|
(142,284
|
)
|
(Increase) decrease in deferred income tax (assets) liabilities
|
|
|
(493,193
|
)
|
|
|
403,890
|
|
Extinguishment of Debt
|
|
|
0
|
|
|
|
489,645
|
|
Decrease in
trade accounts receivable
|
|
|
1,119,444
|
|
|
|
4,997,994
|
|
Decrease (increase) in income tax receivable
|
|
|
33,762
|
|
|
|
(1,746,880
|
)
|
Decrease in inventory
|
|
|
1,603,345
|
|
|
|
1,586,139
|
|
Increase in prepaid expenses and other
|
|
|
(142,861
|
)
|
|
|
(467,656
|
)
|
Decrease in non current assets
|
|
|
3,512
|
|
|
|
6,424
|
|
Increase (decrease) in accounts payable
|
|
|
292,729
|
|
|
|
(3,374,896
|
)
|
Increase (decrease) in accrued liabilities
|
|
|
127,592
|
|
|
|
(536,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating
activities
|
|
|
3,155,004
|
|
|
|
(175,690
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property, plant, and equipment
|
|
|
(125,681
|
)
|
|
|
(927,195
|
)
|
Proceeds from sale of property, plant & equipment
|
|
|
20,500
|
|
|
|
40,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(105,181
|
)
|
|
|
(887,050
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net (payments) borrowings on line of credit
|
|
|
(276,722
|
)
|
|
|
1,395,025
|
|
Principal payments on prepetition debt
|
|
|
(9,215
|
)
|
|
|
(7,899
|
)
|
Principal (payments) borrowings on postpetition debt
|
|
|
(1,404,758
|
)
|
|
|
130,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities
|
|
|
(1,690,695
|
)
|
|
|
1,517,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,359,128
|
|
|
|
455,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
0
|
|
|
|
173,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,359,128
|
|
|
$
|
628,506
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IMPRESO, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION AND NATURE OF BUSINESS
Impreso, Inc., a Delaware corporation (referred to collectively with its subsidiaries as the
Company), is the parent holding company of: two wholly owned subsidiaries 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 Alexa Springs, Inc. a
natural spring water bottler; and Hotsheet.com, Inc., the owner and operator of the Hotsheet.com
web portal. Currently, 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 Companys 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 Companys financial position as of May 31, 2006, and its results of
operations for the three and nine months ended May 31, 2006 and May 31, 2005. The consolidated
financial statements include Impreso, Inc. and the accounts of its subsidiaries. All significant
intercompany accounts and transactions with its consolidated subsidiaries have been eliminated in
consolidation. Results of the Companys operations for the interim period ended May 31, 2006, may
not be indicative of results for the full fiscal year. The following unaudited Interim Condensed
Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and regulations,
although the company believes that the disclosures made are adequate to make the information not
misleading.
It is suggested that these unaudited Interim Condensed Consolidated Financial Statements be read in
conjunction with the audited Consolidated Financial Statements and notes thereto of the Company and
its subsidiaries, included in the Companys Form 10-K, (the Form 10-K), for the year ended August
31, 2005 (Fiscal 2005). Accounting policies used in the preparation of the unaudited Interim
Condensed Consolidated Financial Statements are consistent in all material respects with the
accounting policies described in the Notes to Consolidated Financial Statements in the Companys
Form 10-K.
3.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment (SFAS 123R). Under this new standard, companies will no longer be able to
account for
share-based compensation transactions using the intrinsic method in accordance with APB 25.
Instead, companies will be required to account for such transactions using a fair-value based
method and to recognize the expense over the service period. The Company has adopted SFAS 123R for
its fiscal year ended August 31, 2006. Adopting this standard does not result in a material impact
on the consolidated financial position, results of operations or cash flows of the Company.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), an amendment of ARB
No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense,
5
freight, handling costs and wasted material. SFAS 151 is effective for inventory costs
incurred during our fiscal year ending August 31, 2006. The adoption of SFAS 151 did not have a
material effect on the Companys consolidated financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assetsan amendment of
APB Opinion No. 29 (FAS 153). SFAS 153 is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005. The guidance in APB Opinion No. 29, Accounting for
Non-monetary Transactions (APB 29) , is based on the principle that exchanges of non-monetary
assets should be measured based on the fair value of the assets exchanged. However, the guidance
in APB 29 included certain exceptions to that principle. FAS 153 amends APB 29 to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. The adoption of FAS 153 in the year ended
August 31, 2005, did not have a material impact on the Companys consolidated financial statements.
On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107) regarding the Staffs interpretation of SFAS 123(R). This interpretation
expresses the views of the Staff regarding the interaction between SFAS 123(R) and certain SEC
rules and regulations and provides the Staffs views regarding the valuation of share-based payment
arrangements by public companies. In particular, this SAB provides guidance related to share-based
payment transactions with non-employees, the transition from nonpublic to public entity status,
valuation methods, the accounting for certain redeemable financial instruments issued under
share-based payment arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS 123(R) in an interim period, capitalization of compensation
cost related to share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share
options prior to adoption of SFAS 123(R) and disclosures in Managements Discussion and Analysis
subsequent to adoption of SFAS 123(R). The Company has adopted SAB 107 in connection with its
adoption of SFAS 123(R).
4.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
5.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market and include
material, labor and factory overhead.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2006
|
|
August 31, 2005
|
Finished goods
|
|
$
|
8,530,154
|
|
|
$
|
9,408,114
|
|
Raw materials
|
|
|
5,997,962
|
|
|
|
6,327,885
|
|
Supplies
|
|
|
981,431
|
|
|
|
1,385,293
|
|
Work-in-process
|
|
|
103,633
|
|
|
|
95,233
|
|
Allowance for obsolete inventory
|
|
|
(449,327
|
)
|
|
|
(462,604
|
)
|
|
|
|
Total
|
|
$
|
15,163,853
|
|
|
$
|
16,753,921
|
|
|
|
|
6
6.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 2004, the Company began a lease with an unrelated party for a 414,000 square foot
warehouse and manufacturing facility in Chambersburg, Pennsylvania to consolidate east coast
operations. In July 2004, the Company exited and no longer utilized company owned buildings located
in Kearneysville, West Virginia.
In the quarter ended November 30, 2004, the Company ceased depreciating the Kearneysville buildings
and building improvements and reclassified the net book value of the land, building and building
improvements in the amount of $1.3 million to assets held for sale. A contract for sale with a
closing date of August 31, 2005, was terminated by the buyer in August 2005 after in-depth analysis
revealed incompatibility with their required building configurations.
On June 29, 2006, the Company received a letter of Intent to purchase the property and replied with
a counter offer for the sale of the facility.
The Company has determined the plan of sale criteria in the statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets has been met.
Accordingly, the assets held for sale are classified as current and are carried at the lower of
their carrying or fair value, less costs to sell.
7.
LONG-TERM DEBT AND LINE OF CREDIT
:
The following is a summary of long-term debt and line of credit:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
August 31,
|
|
|
2006
|
|
2005
|
Line of Credit with a commercial financial corporation under
revolving credit line, Maturing November 2007, secured by
inventories, trade accounts receivable, equipment, and goodwill
associated with TSTs trademark IMPRESO (no value on
financial statements), interest payable monthly at prime plus
0.25% (8.0% and 6.50%, as of May 31, 2006 and August 31, 2005,
respectively).
|
|
$
|
6,029,632
|
|
|
$
|
6,306,354
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
real property and equipment, payable in monthly installments of
$4,457 (including interest at 7.25%), maturing November 2008.
|
|
|
160,001
|
|
|
|
184,645
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
real property and equipment, payable in monthly installments of
$10,843 (including interest at 8.50%), maturing July 2010.
Revolving lenders blanket lien subordinated to notes
collateral.
|
|
|
454,202
|
|
|
|
511,580
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
real property, payable in monthly installments of $2,834
(including interest at 5.5%), maturing October 2010.
|
|
|
131,633
|
|
|
|
149,972
|
|
|
|
|
|
|
|
|
|
|
Notes payable to various commercial financial corporations,
secured by equipment, interest rates ranging from 0% to 7.897%,
maturing at various dates from June 2006 through July 2008.
|
|
|
62,720
|
|
|
|
96,428
|
|
7
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
August 31,
|
|
|
2006
|
|
2005
|
Notes payable to a commercial financial corporation, secured by
real property and a personal guarantee by the trustee of a
trust which is a principal stockholder of the Company, payable
in monthly installments of $13,761 (including interest at 8%),
maturing March 2011.
|
|
|
1,134,273
|
|
|
|
1,182,378
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
real property, payable in monthly installments of $40,454.51,
including interest at prime plus 1.125% with a cap of 7.5%
(7.5% and 7.375%, respectively as of May 31, 2006 and August
31, 2005) maturing September 2009.
|
|
|
4,208,470
|
|
|
|
4,318,812
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
equipment, payable in monthly installments of $17,857 including
interest at a variable rate equal to 30-day LIBOR plus 350
basis points, (8.11% and 6.7%, respectively as of May 31, 2006
and August 31, 2005), maturing February 2009.
|
|
|
589,286
|
|
|
|
767,857
|
|
|
|
|
|
|
|
|
|
|
Acquisition notes payable, unsecured, payable in monthly
installments of $16,666, no interest, maturing February 2007.
|
|
|
217,593
|
|
|
|
296,463
|
|
|
|
|
|
|
|
|
|
|
Capital lease payable to a commercial financial corporation,
secured by equipment, payable in monthly installments of
$17,910, including interest at 8.5%, maturing October 2011. In
October 2005, a portion of the collateral, a letter of credit,
was applied to the lease to reduce the principal balance.
|
|
|
917,968
|
|
|
|
1,772,769
|
|
|
|
|
|
|
|
|
|
|
Prepetition-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a commercial financial corporation, secured by
real property and equipment and a personal guarantee by the
trustee of a trust which is a principal stockholder of the
Company, payable in monthly installments of $1,461 (including
interest at 4%), maturing April 2008.
|
|
|
210,954
|
|
|
|
220,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,116,732
|
|
|
$
|
15,807,427
|
|
|
|
|
|
|
|
|
|
|
Less Current Maturities
|
|
|
(7,141,728
|
)
|
|
|
(8,033,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
$
|
6,975,004
|
|
|
$
|
7,774,361
|
|
|
|
|
Prepetition amount listed above represents the renegotiated amounts and terms under the 1993 plan
of reorganization.
In June 2005, TST amended its revolving line of credit to extend the maturity date to November
2007. TSTs amended revolving credit line is limited to the lesser of $15 million or a percentage
of eligible trade accounts
receivable and inventories, as defined in the agreement. The remaining availability under the
revolving credit line was $3.1 million as of May 31, 2006.
The line of credit, as amended, has a restrictive covenant requiring the maintenance of a minimum
tangible net worth, as defined in the agreement. One of the notes payable contains restrictive
covenants on current and debt to worth ratio, and the payment of cash dividends. As of May 31,
2005, the Company was in compliance with all covenants.
8
8.
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
May 31,
|
|
May 31,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
281,220
|
|
|
$
|
318,030
|
|
|
$
|
860,987
|
|
|
$
|
885,386
|
|
Income taxes
|
|
$
|
21,638
|
|
|
$
|
50,724
|
|
|
$
|
24,843
|
|
|
$
|
120,724
|
|
During the three months ended November 30, 2004, the Company reclassified $2,141,289 of property,
plant and equipment to assets held for sale. In the fourth quarter of Fiscal 2005, some of the
property was sold reducing assets held for sale to $1.3 million. The proceeds from the sale were
applied to reduce the line of credit. $1.7 million relating to the financing of water bottling
equipment was received in the three month period ended November 30, 2004, and was applied to reduce
the line of credit.
9.
LEGAL MATTERS
On September 18, 2002, TST filed a lawsuit against a vendor in the United States District Court for
the Northern District of Texas Dallas Division. TSTs general claim is that the vendor breached a
Distributor Agreement entered into with TST in several material respects, including the vendors
late delivery of paper products, the vendors delivery of defective product, and the vendors
failure to properly credit TSTs accounts based upon these and other alleged breaches. The vendor
responded by generally denying TSTs claims and asserting a counterclaim seeking to recover
disputed accounts receivable and damages related to TSTs alleged interference with the vendors
relationship with its lender. The Trial is set for October 2006.
On November 5, 2003, the Company discovered the Companys payroll administrator was fraudulently
diverting Company funds into her personal bank accounts. In November 2004, the Company and the
insurer at the time the loss was discovered executed a partial settlement without waiving each
partys rights to proceed to suit or defend on the balance of the Companys losses. Management
believes recent legal developments could be persuasive in litigating different interpretations of
defined terms within the policy, and therefore recovering the balance of up to $500,000 of the
Companys claim as filed with the Insurer. The fraudulently diverted funds were recorded in the
Registrants consolidated financial statements for fiscal years ended August 31, 2001, 2002 and
2003, as salary expense. Partial reimbursement from the insurance company and the embezzler is
recorded as a separate line item under operating income, embezzlement recovery, for the three and
nine months ended May 31, 2005. In August 2005, we filed suit in Dallas County to pursue our claims
against potentially liable parties for losses incurred. The parties are currently conducting
discovery. TST and the insurer have filed cross motions for summary judgment on TSTs claim against
the insurance company. Arguments on the motions will be heard by the Court on July 17, 2006.
In April 2004, TST filed a lawsuit in the 68th judicial district Dallas County against a former
outside representative, alleging breach of fiduciary duty, tortuous interference with existing and
prospective business
relations, and civil conspiracy. The lawsuit seeks to enforce the duties of loyalty owed to TST by
its sales agent. The defendant filed a counter claim alleging business disparagement and tortious
interference with existing and prospective business relations. Trial is set for August 2006.
The Companys Corporate Income Tax Returns for the fiscal years ending August 31, 2004 are
currently under examination by the Internal Revenue Service (IRS).
9
On January 19, 2006, Impreso, Inc. (the Company) was served with a shareholder derivative
lawsuit. This action, is one in which one of the Companys shareholders (the plaintiff
shareholder) is asserting rights derived from the Company. The shareholder derivative action does
not seek the recovery of damages from the Company, but rather asks that the Company recover damages
in an unspecified amount from five of six members of the Companys Board of Directors during a time
period relevant to the petitions allegations. The sixth, unnamed member of the Board of Directors
during the relevant time period was appointed at the request of the plaintiff shareholder and voted
in favor of the transactions about which the petition complains; the structure of the Companys
water bottling division, the Chief Executive Officers compensation package, and the Company
conducting business with a company owned by the spouse of the Chief Executive Officer The parties
are conducting discovery. Trial is reset for March 2007.
Item 2. Managements 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
consolidated financial statements. These policies require the application of significant judgment
by management in selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, the Companys 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 managements evaluation of existing economic conditions. Significant changes in
customer profitability or general economic conditions may have a significant effect on the
Companys allowance for doubtful accounts.
Revenue Recognition
TST records sales of hard copy imaging and bottled water products when products are shipped to
customers. Our revenue recognition policy complies with the required four revenue recognition
criteria: Our customers purchase orders or on line authorizations and our order acknowledgments
include the terms of the sale and are binding on the customer, persuasive evidence that a
transaction exists; Delivery has occurred, as risk of loss of the product has passed to the
customer; The purchase orders, on line authorizations and order acknowledgments make our price to
our customer fixed and determinable; Finally, we assess the likelihood of collecting credit
accounts prior to revenue recognition and are reasonably assured the sales are collectible due to
our credit policies and collection methods. The Company reserves against doubtful accounts based
upon historical experience and managements evaluation of existing economic conditions. Consistent
monitoring of the accounts receivable allows us to determine if an accounts collection is becoming
compromised. We reinvestigate delinquent customers to see if there may be a slow pay trend or
economic condition affecting this customer. Subsequent to this inquiry, we evaluate our doubtful
account reserve and if the information reflects additional exposure, we increase our reserve
accordingly. Hotsheet.com, Inc. generates its revenue by click through fee advertising revenues and
commissions earned. Click through fees are generated when traffic is sent from the Hotsheet.com
website, via a link, to a vendors website. Commissions are generated when the linked traffic makes
purchases. The revenue is recognized upon receipt, which at this time does not differ significantly
from accrual basis.
10
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 analysis of inventories on hand. The Company
evaluates, and if necessary, adjusts reserves quarterly.
Managements estimate of the allowance for inventory obsolescence is based upon a detailed analysis
of slow-moving inventory. This analysis includes an item by item review of the slow moving
inventory detail to specifically identify items for which a reserve should be established. In
addition to the specific reserve, the company establishes an additional reserve, based on its
judgment about the nature of the remaining items and market conditions in general.
Typically, returns are not material, therefore, generally, we record reductions in revenue when
products are returned and they are not accrued for with sales reduced to reflect estimated returns.
On occasion a customer may request authorization for an extraordinary return of product. Such
request is analyzed and if material, accrued for with the estimated return applied as a reduction
of sales.
Our return policy is to accept product back for full credit if the product was shipped in error or
for product that fails to meet acceptable quality standards. Returns of this nature must comply
with the following: return authorization is valid for 30 days only; claims must be submitted to
customer service within one week of product being delivered; We will not accept collect shipments
on product being returned; and samples of defective product must be sent to the Customer Service
Returns Coordinator for evaluation and disposition of product.
We will also accept hard copy imaging product back for credit subject to a restocking charge (20%
on Impreso brand; 30% on IBM brand) for product that was, for example, ordered in error by the
customer and is in re-saleable condition, returned within 4 months of original purchase and has not
been discontinued from the product line. Products with a shorter shelf-life, such as carbonless
paper and thermal products must be returned within 3 months of original purchase. Once a return has
been authorized and the product returned to our warehouse or plant, the customer is issued a
credit, according to the type of return, against their account. This credit is then booked to the
returns and allowances account and a reduction in revenue is taken.
Rebates, Advertising Allowances, and Independent Sales Commissions
The Company accrues for rebates and advertising allowances paid to certain customers; and
commissions paid to independent sales representatives, based on specific contractual agreements.
These accruals are calculated based upon the volume of purchases by customers and sales by
independent sales representatives, which are adjusted monthly to reflect increases and
decreases. Advertising allowances provided to our customers must be used for advertising
of our products and services and can not be used for any other purposes.
For the three months ended May 31, 2005 and May 31, 2006, we recorded customer rebates in the
amount of
$1.3 million and $1.2 million, respectively. For the nine months ended May 31, 2005 and May 31,
2006, we recorded customer rebates in the amount of $3.6 million and $3.3 million, respectively.
The customer rebates are recorded as a decrease to sales.
For the three months ended May 31, 2005 and May 31, 2006, we recorded advertising allowances in the
amount of $267,000 and $240,000, respectively. For the nine months ended May 31, 2005 and May 31,
2006, we recorded advertising allowances in the amount of $791,000 and $696,000, respectively. The
advertising
11
allowances are recorded as an SG&A expense.
For the three months ended May 31, 2005 and May 31, 2006, we recorded independent sales commissions
in the amount of $195,000 and $24,000, respectively. For the nine months ended May 31, 2005 and May
31, 2006, we recorded independent sales commissions in the amount of $325,000 and $76,000,
respectively. The independent sales commissions are recorded as an SG&A expense.
Contingent liabilities.
The Company is subject to lawsuits, investigations and other claims related to wage and hour/labor,
securities, environmental, product and other matters, and is required to assess the likelihood of
any adverse judgments or outcomes to these matters as well as potential ranges of probable losses.
A determination of the amount of reserves required, if any, for these contingencies is made when
losses are determined to be probable and after considerable analysis of each individual issue.
These reserves may change in the future due to changes in the Companys assumptions, the
effectiveness of strategies, or other factors beyond the Companys control.
SEGMENT ANALYSIS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes
standards for reporting information about operating segments. Our operations are segregated into
operating segments according to product category. Under this standard, as of May 31, 2006, we had
two reportable operating segments: hardcopy imaging products and natural spring bottled water
products. We evaluate the performance of each segment using pre-tax income or loss from continuing
operations. The table below presents information as to our net sales, operating earnings and total
assets for all reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2006
|
|
Nine Months Ended May 31, 2005
|
|
|
AMOUNT
|
|
PERCENT
|
|
AMOUNT
|
|
PERCENT
|
NET SALES BY INDUSTRY SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardcopy imaging products
|
|
$
|
51,314,686
|
|
|
|
99.06
|
%
|
|
$
|
58,435,505
|
|
|
|
100.00
|
%
|
Bottled water
|
|
|
486,829
|
|
|
|
0.94
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
Total
|
|
|
51,801,515
|
|
|
|
100.00
|
|
|
|
58,435,505
|
|
|
|
100.00
|
|
|
|
|
PRE TAX (LOSS) PROFIT FROM
CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardcopy imaging products
|
|
|
(1,140,435
|
)
|
|
|
77.38
|
|
|
|
(3,768,013
|
)
|
|
|
100.00
|
|
Bottled water
|
|
|
(333,341
|
)
|
|
|
22.62
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
Total
|
|
|
(1,473,776
|
)
|
|
|
100.00
|
|
|
|
(3,768,013
|
)
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,2006
|
|
Three Months Ended May 31,2005
|
|
|
AMOUNT
|
|
PERCENT
|
|
AMOUNT
|
|
PERCENT
|
NET SALES BY INDUSTRY SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardcopy imaging products
|
|
|
17,704,937
|
|
|
|
99.23
|
|
|
|
19,829,734
|
|
|
|
100.00
|
|
Bottled water
|
|
|
137,158
|
|
|
|
0.77
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
Total
|
|
|
17,842,095
|
|
|
|
100.00
|
|
|
|
19,829,734
|
|
|
|
100.00
|
|
|
|
|
PRE TAX (LOSS) PROFIT FROM
CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardcopy imaging products
|
|
|
(7,631
|
)
|
|
|
11.35
|
|
|
|
(848,336
|
)
|
|
|
100.00
|
|
Bottled water
|
|
|
(59,583
|
)
|
|
|
88.65
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
Total
|
|
|
(67,214
|
)
|
|
|
100.00
|
|
|
|
(848,336
|
)
|
|
|
100.00
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of May 31, 2006
|
|
|
As Of August 31, 2005
|
|
TOTAL ASSETS BY INDUSTRY
SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardcopy imaging products
|
|
|
36,648,617
|
|
|
|
93.74
|
|
|
|
39,043,670
|
|
|
|
93.42
|
|
Bottled water
|
|
|
2,447,772
|
|
|
|
6.26
|
|
|
|
2,749,748
|
|
|
|
6.58
|
|
|
|
|
Total
|
|
$
|
39,096,389
|
|
|
|
100.00
|
%
|
|
$
|
41,793,418
|
|
|
|
100.00
|
%
|
Results of Operations for the Interim Periods Ended May 31, 2006 and May 31, 2005.
Net SalesNet sales decreased from $20 million in the three months ended May 31, 2005 to $18
million in the three months ended May 31, 2006 (Third Quarter 2006), a decrease of $2 million or
10%. Net sales decreased from $58 million in the nine months ended May 31, 2005, to $52 million
in the nine months ended May 31, 2006, a decrease of $7 million or 11.4%. Net sales decreased in
the three and nine month periods ended May 31, 2006, as compared to the corresponding periods of
the prior year, due to a shrinking market in the continuous business forms segment of our industry
and loss of customers resulting from our increased finished goods pricing.
Gross
Profit- Gross profit increased from $1.1 million in the three months ended May 31, 2005, to
$2.1 million in the Third Quarter 2006, an increase of 91.6%. Gross profit increased from $2.7
million in the nine months ended May 31, 2005, to $4.9 million in the nine months ended May 31,
2006, an increase of 86.5%. Gross profit margin for the Third Quarter 2006 increased to 11.8% as
compared to 5.5 % for the three month period ended May 31, 2005. Gross profit margin for the nine
month period ended May 31, 2006, increased to 9.5% as compared to 4.5% for the nine month period
ended May 31, 2005. The increases in gross profit and gross profit margin for the three and nine
month periods ended May 31, 2006, resulted from increased finished goods pricing.
Selling, General, and Administrative ExpensesSG&A expenses decreased from $2.2 million in the
three months ended May 31, 2005 to $1.9 million in the Third Quarter 2006. SG&A expenses decreased
from $6.7 million in the nine months ended May 31, 2005 to $5.6 million in the nine months ended
May 31, 2006. In the three and nine month periods ended May 31, 2006, the decrease in SG&A
expenses resulted from reductions in employee benefits, and decreased travel and entertainment.
SG&A expenses as a percentage of net sales decreased from 11.2 % in the three months ended May 31,
2005, to 10.5 % in the Third Quarter 2006. SG&A expenses as a percentage of net sales decreased
from 11.5 % in the nine months ended May 31, 2005, to 10.8 % in the nine months ended May 31, 2006.
The decrease in SG&A as a percentage of sales for three and nine month periods ended May 31, 2006,
as compared to prior year periods, resulted from reductions in employee benefits, and decreased
travel and entertainment.
Interest ExpenseInterest expense decreased from $323,000 in the three months ended May 31,
2005, to $281,000, or 12.8%, in Third Quarter 2006. Interest expense decreased from $901,000 in the
nine months ended May 31, 2005, to $861,000 or 4.4 %, in the nine months ended May 31, 2006. The
decrease of Interest Expense for the three and nine month periods ended May 31, 2006, as compared
to the prior year periods resulted from using a lower interest rate letter of credit to pay down
the principal on a higher rate financing lease, and lower borrowings on the line of credit.
Income Taxes- Income tax benefit decreased from $275,000 for the three months ended May 31, 2005,
to $15,000 in Third Quarter 2006. Income tax benefit decreased from $1.2 million for the nine
months ended May 31, 2005, to $470,000 in the nine months ended
May 31, 2006. The decreases in
income tax benefit for Third Quarter 2006 and the nine month period ended May 31, 2006, as compared
to the corresponding periods of the prior year, is due to a reduction in the deferred asset
resulting from NOL carry forwards.
13
Liquidity and Capital Resources
The decline in the continuous feed business forms market is materially impacting our net sales and
revenues, and adversely affecting our liquidity, capital resources and results of operations. Since
January 2005, the Company has materially reduced operating costs by reducing the workforce and
employee benefits, selling and subleasing real estate, and implementing revised pricing policies
which includes an energy surcharge.
In January 2006, the Company leased a portion of its Chambersburg facility to a subtenant for a
period of one year, at an annual rental rate of $206,000. In the quarter ended May 31, 2006, the
Company leased an additional 24,000 square feet to the same subtenant on a month to month basis at
a monthly rental rate of $6,700. On April 1, 2006, the Company leased a portion of its Chambersburg
facility to a second subtenant for a period of three years, at an annual rental rate of $252,000.
The Company has also agreed to provide storage services in our Itasca, Illinois facility to a local
business, which began in February 2006. The Company anticipates income from these services of
approximately $6,000 to $10,000 per month.
Management has partially compensated for the maturity and decline of the continuous feed business
forms segment of our sales by branching into other hard copy imaging products such as cut sheet,
value added, and add roll products to replace the lost revenue from the sales of continuous feed
products. However, the increase in revenue attributable to these categories has not increased in
proportion to the decline of the continuous feed business forms sales. Our diversification into
another product category, bottled spring water, started generating sales in Fiscal 2005. Bottled
spring water did not utilize our existing equipment and during the start up phase necessitated the
acquisition of new facilities and equipment, thereby depleting capital resources and reducing
liquidity. This, combined with other events, collectively adversely impacted operations. However,
the long term investment in this product category will maximize the efficiency of our selling
force, administration, and distribution infrastructure due to opposite seasonal cycles of
consumption. Whereas in the summer months, hard copy imaging products may slow, the bottled water
business is at its peak.
We define liquidity as the ability to generate adequate funds to meet our operating and capital
needs. Our cash requirements are primarily for working capital, capital expenditures, and interest
and principal payments on our debt and capital lease obligations. Historically, these needs for
cash have been met by cash flows from operations and borrowings under our revolving credit
facility.
Effective June 8, 2005, TST amended its loan agreement with a commercial financial corporation to
extend the maturity date to November 17, 2007. The amended agreement provides for a $15 million
line of credit and an inventory sub-limit of $12 million. The amended loan is secured by, among
other things, inventory, trade receivables, and equipment.
Available borrowings under this line of credit, which accrued interest at prime plus .25% (8.0 % as
of May 31, 2006), are based upon specified percentages of eligible accounts receivable and
inventories. As of May 31, 2006, there was a sufficient borrowing capacity remaining under the $15
million revolving line of credit. A portion of the net proceeds from the sale of our facility located in Kearneysville, West Virginia
will be applied to reduce the outstanding borrowings on this line (See Footnote 6).
Borrowings under our line of credit decreased from $6.3 million at August 31, 2005, to $6 million
at May 31, 2006, a decrease of $300,000 or 4.8%. A reduction of inventory primarily contributed to
our decreased borrowing.
Working capital decreased to $9.8 million as of May 31, 2006, from $11.4 million at August 31,
2005. This represented a decrease of 14%. This decrease is primarily attributable to the $1.6
million decrease in inventory.
14
Net Cash Provided by/Used in Operating, Investing, and Financing Activities
Our operating activities provided $1.8 million of cash in the nine month period ended May 31, 2006
and used $176,000, in the nine month period ended May 31, 2005. Operating cash flows for the nine
month period ended May 31, 2005 was used primarily for reductions in accounts payable. Cash
provided by operations for the nine month period ended May 31, 2006, was primarily the result of
reductions in inventory and accounts receivable.
Cash used in investing activities was $105,000 for the nine month period ended May 31, 2006. Cash
used in investing activities was $887,000 for the nine month period ended May 31, 2005. Cash used
in investing activities for the nine month period ended May 31, 2005, was due to expenditures for
property, plant and equipment associated with the spring water bottling facility, partially offset
by proceeds from asset dispositions.
Cash used in financing activities was $1.7 million for the nine month period ended May 31, 2006.
Cash provided by financing activities was $1.5 million for the nine month period ended May 31,
2005. Cash provided by financing activities for the nine month period ended May 31, 2005, was due
to increased borrowings on our line of credit and financed expenditures associated with our new
bottled spring water operations. Cash used in financing activities for the nine month period ended
May 31, 2006, was primarily used to pay down long term debt, the line of credit, and a letter of
credit which was collateral on the water bottling equipment lease.
Capital Expenditures
During the nine month period ended May 31, 2006, we incurred $126,000 in capital expenditures:
$33,000 in upgrading equipment for our water bottling operations, and $93,000 on upgrades to
building and plant equipment. During the nine month period ended May 31, 2005, we spent $784,000 on
capital expenditures consisting of equipment purchases associated with our new bottled spring water
operations. We plan to make total capital expenditures of approximately $300,000 during Fiscal
2006.
Future Liquidity
Escalating freight, fuel, and certain material costs which were not fully passed through to our
customers adversely impacted our liquidity and capital resources in the First Quarter 2006.
Management addressed these issues and believes these costs are now being adequately captured. We
were not fully utilizing all of the real estate of our owned and leased facilities and in early
2006, two subtenants executed leases to occupy material portions of our Chambersburg, Pennsylvania
plant. Our West Virginia facility remains empty and on the market to be sold. As of the date of
filing this Form 10-Q, a letter of intent has been received and a counter offer extended, but no
definitive agreement for sale has been reached on this facility. Management has engaged a broker to
sell another owned facility, with a possible lease-back or move to another less expensive location.
The water bottling facility is operating and May 2006 reflected a 75% increase in our bottled water
sales from April 2006.
Based upon current levels of operations and planned improvements in our operating performance,
management believes that cash flow from operations together with our tax refund, the potential sale
of our buildings, rent income and available borrowings under our revolving line of credit should be
adequate to meet our anticipated requirements for working capital and debt service through the next
twelve months. Such belief is based on certain assumptions, including the continuation of the state
of current operations, and there can be no assurance that such assumptions are correct. The
expansion of our operations into diversified
15
products may require us to obtain additional capital.
We anticipate that the funds required will be generated through an increase in our revolving line
of credit.
Our current level of profitability affects our ability to obtain additional financing or react
quickly to changes in our industry. We will continue to assess our liquidity position and potential
sources of supplemental liquidity in light of our operating performance and other relevant
circumstances. Should we determine, at anytime, that it is necessary to seek additional short-term
liquidity, we will evaluate our alternatives and take appropriate steps to obtain sufficient
additional funds. There can be no assurance that any additional financing will be available if
needed, or, if available, will be on acceptable terms. We have not identified any sources of long
term liquidity.
As of May 31, 2006, we did not own derivative or other financial instruments for trading or
speculative purposes. We do not use financial instruments and, therefore, the implementation of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities did not have a material impact on our financial position or results of
operations.
SUPPLY AND INVENTORY: HARDCOPY IMAGING PRODUCTS
Over the past decade domestic mills have been consolidating and working at curtailing supply by
closing their older, less efficient production facilities. In the past nine months the mills have
been affected by the same increases we have experienced, such as increased energy costs to operate
and higher costs in fuel for transportation. Most of the mills in the Untied States are on
allocation or reserve system, unable to meet current demand. Backlogs at the mills are
approximately 30 to 45 days. Certain mills have stopped manufacturing certain grades of paper,
focusing resources on the most profitable items. In addition to these events, recent weakness of
the U.S. dollar and increased demand for paper in other countries has impacted and reduced the
amount of foreign paper being imported into the United States. In January and March of 2006,
increases in pricing on raw paper materials were implemented by the domestic mills. The Company in
response, implemented finished goods pricing immediately subsequent to those increases.
It is necessary for TST to maintain a sufficient inventory of finished goods and raw materials to
adequately service its customers with just-in-time delivery. Our inability to pass along raw
material and component increases could materially adversely effect our financial position and
results of operation. We believe that paper stock raw material and component prices may continue to
increase during the remainder of Fiscal 2006.
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, or if prices for raw materials required increase, or if new technology is
developed that renders obsolete products distributed and held in inventory by TST, the Companys
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 we have a good relationship with all of our
current suppliers.
SUPPLY AND INVENTORY: NATURAL SPRING BOTTLED WATER
The shelf life of water is shorter than the other products we carry, therefore our bottled water
inventory requires more frequent inventory turns than hardcopy imaging products. In addition, we do
not store bottled water products at public warehouses. In Fiscal 2005, Hurricanes Katrina and Rita
created a large demand for our water products and substantially depleted our inventory. We spent
the winter months rebuilding our
16
bottled water inventory for summer 2006, the high demand season in
the bottled water product cycle. Currently the Alexa Springs are producing substantially more
spring water than we are bottling and selling.
Bottling and distribution costs, including plastic, fuel, and freight charges which increased in
the First Quarter 2006, remained stable in the second and third quarters of 2006. While not all of
these increases were effectively passed through to our customers in First Quarter 2006, we were
successful in getting these increases through to a majority of our customers in the second and
third quarters of 2006. Although we were successful in getting these increased costs through to a
majority of our customers in the three months ended May 31, 2006, there can be no assurance that we
will be able to increase finished goods pricing at the same pace as these component categories
increase. Our inability to increase finished goods pricing that includes all of the manufacturing
increased costs, could materially adversely effect our financial position and results of operation.
We believe that bottling and distribution costs, including plastic, fuel, and freight charges will
remain stable for the remainder of Fiscal 2006.
MARKET CONDITIONS OF TST
In the three months ended May 31, 2006, we experienced a significant increase in raw paper material
costs in our hard copy imaging segment of our business. Substantially most of the raw paper
material and component increased costs are successfully being passed through to a majority of our
customers. The finished goods pricing increase has contributed to a reduction of sales, but it also
contributed to an increased gross profit margin.
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.
We have targeted the small to mid range size private label market as the niche for us to gain
market share in the bottled water industry. The size and configuration of our operations
accommodates smaller batch runs of individualized labels, which may be economically disadvantageous
for larger companies. We have also widened our channels of distribution, by soliciting advertising
specialties, retailers, wholesalers, and food and beverage companies. We expanded our product line
by introducing new packaging options for our 16.9 oz. bottle size. Our original flat cap and light
weight bottle was developed to promote ecology friendly packaging. The new options are sports cap
tops and heavier bottles, which offer a wider range of use and convenience for certain end users.
We have received a material increase in orders and revenue has increased 100% in bottled water
sales in the three months ended May 31, 2006, as compared to the three months ended February 28,
2006. We are also seeing an increase of repeat orders which are more profitable. We have produced
approximately 300 private label projects in the twelve months prior to June 1, 2006. In calendar
year 2006, the industry predicts bottled water sales may increase approximately 10-14%. Private
labeled bottled water expected growth for calendar year 2006, the fastest growing segment in the
bottled water industry category, is expected to be approximately 29%. It is predicted by the
industry that bottled water consumption will surpass soft drinks in
2008.
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.
17
Hotsheet.com revenues are partially generated by retail sales which are typically stronger during
the Christmas holiday season.
The bottled water business is subject to seasonal fluctuations with its demand cycle greatest in
summer months.
Forward-Looking Statements
This Form 10-Q may contain forward looking statements. Many of these forward looking statements
can be identified by use of words such as may, will, expect, anticipate, estimate, assume,
continue, project, plan, and similar words and phrases. The Companys actual results and future
financial condition may differ materially from those expressed in any such forward looking
statements as a result of many factors that may be outside the Companys control. Such factors
include, without limitation: general economic conditions, availability of raw materials, the
cyclical nature of the industries 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 inventory we require, loss of any significant customer and termination of contracts essential
to our business, competition from existing and potential competitors; competition from other
channels of distribution; and pricing pressures The Company does not undertake any obligation to
update its forward looking statements.
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,
TSTs international sales of finished goods are insignificant. Accordingly, there are not
sufficient factors to create a material foreign exchange rate risk; therefore, we do not use
exchange commitments to minimize the negative impact of foreign currency fluctuations.
We had both fixed-rate and variable-rate debts as of May 31, 2006. The fair market value of
long-term variable interest rate debt is subject to interest rate risk. Our exposure to interest
risks is not material. 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, 2006, there was
no material exposure to our financial position or results of operations.
Item 4. Controls and Procedures
The conclusions of the Companys Chief Executive Officer and Chief Financial Officer concerning the
effectiveness of the Companys disclosure controls and procedures and changes in internal controls
as of May 31, 2006 are as follows:
a) They have concluded that the Companys disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC.
b) There were no changes in the Companys internal controls during the quarter ended May 31, 2006
that
18
have materially affected or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 10 to condensed consolidated financial statements contained in Part I, Item 1 of this
report, which is incorporated by reference in this Part II, as its Item 1.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
|
|
|
Exhibit No.
|
|
Description of Exhibits
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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 thereunto duly authorized.
Dated: July 17, 2006
|
|
|
|
|
|
|
Impreso, Inc.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
/s/ Marshall D. Sorokwasz
Marshall D. Sorokwasz
|
|
|
|
|
Chairman of the Board, Chief
Executive Officer, President,
and Director
|
|
|
|
|
|
|
|
|
|
/s/ Susan M. Atkins
Susan M. Atkins
|
|
|
|
|
Chief Financial Officer
and Vice President
|
|
|
20