RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED NOVEMBER 30, 1999, AND 1998
Net Sales-Net sales increased from $14.3 million in the three months ended November 30, 1998, ("First Quarter 1999"), to $16.5 million for the three months ended November 30, 1999 ("First Quarter 2000"), an increase of 15.7%, as a result of the increased sales of branded products.
Gross Profit-Gross profit increased from $1.7 million in the First Quarter 1999 to $1.9 million in the First Quarter 2000, an increase of approximately 10.7%. The increase of gross profit was primarily the result of increased sales. Our gross profit margin decreased to 11.5% for the First Quarter 2000, as compared to 12% for the corresponding period of the prior year. The decreased gross profit margin resulted from increased raw material costs which were not fully passed on to our customers.
Selling, General, and Administrative Expenses- SG&A expenses increased from $1.3 million in the First Quarter 1999, to $1.5 million in the First Quarter 2000, an increase of 14.2%. SG&A as a percentage of net sales remained constant at 9%. SG&A expenses increased as a dollar amount during this period, as compared to the corresponding period of the prior year, due to increased marketing costs, such as slotting fees and entertainment expenses.
Interest Expense-Interest expense increased from $182,000 in the First Quarter 1999 to $243,000 in the First Quarter 2000, an increase of $62,000, or approximately 33.9%. The increase was primarily attributable to financing acquisitions of property and equipment, and an increase in inventory which increased the outstanding borrowing under our line of credit.
Income Taxes-Our income tax expense for the First Quarter 2000 decreased to $51,176, as compared to $86,055 for the corresponding period of the prior year. The decrease in income tax expense was the result of a deferred tax benefit applied to the fiscal year ending August 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $8.8 million at November 30, 1999, from $8.7 million at August 31, 1998. This represented an increase of 1.0%, primarily attributable to a $3.4 million increase in our inventory, partially offset by an approximate $1.4 million increase in accounts payable, and a $ 2.8 million increase in borrowing under our line of credit.
In May 1999, we entered into an agreement with a bank for a two-year renewal of our revolving line of credit. The loan is secured by, among other things, inventory, trade receivables, equipment and a personal guarantee of Marshall Sorokwasz, Chairman of the Board and President of our company and trustee of a trust which is a principal shareholder of our company. Available borrowings under this line of credit, which accrues interest at the prime rate of interest plus 1/4% (8.5% at November 30, 1999), are based upon specified percentages of eligible accounts receivable and inventories. As of November 30, 1999, there was a $3.7 million borrowing capacity remaining under the $13 million line of credit. 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 of borrowing based on inventory.
On November 22, 1999, we entered into a loan agreement with Valley Bank-East, National Association to co-fund the construction of a new building and the refinance of the mortgage of our existing facility in West Virginia. On December 30, 1999, we entered into an agreement with the West Virginia Economic Development Association on the same project. The new building will be constructed on our property adjacent to our West Virginia plant, will be approximately 50,000 square feet, and will be used to store inventory which is currently stored at a public warehouse location. The additional debt we will incur at the conclusion of the construction will be approximately $870,000 at the anticipated completion date of May 2000.
We believe that the funds available under the loan and loan commitment for the addition to our West Virginia facility, the revolving credit facility, cash and cash equivalents, trade credit, and internally generated funds will be sufficient to satisfy our requirements for working capital and capital expenditures for at least the next twelve months. Such belief is based on certain assumptions, including the continuation of current operations and no extraordinary adverse events, and there can be no assurance that such assumptions are correct. In addition, expansion of our operations due to demand for the new types and brands of product we manufacture may require us to obtain additional capital to add new manufacturing facilities. We anticipate if that should occur, the funds required for the new facilities would be generated through securities offerings or additional debt. There can be no assurance that any additional financing will be available if needed, or, if available, will be on acceptable terms.
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. We do not have supply contracts with any of our foreign vendors. All foreign vendors are paid in United States currency. In addition, our 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 November 30, 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 our total long-term fixed rate and floating rate debt approximates fair value.
As of November 30, 1999, we did not own derivative or other financial instruments for trading or speculative purposes.
Based upon our market risk sensitive debt outstanding at November 30, 1999, there was no material exposure to our financial position or results of operations.
INVENTORY MANAGEMENT; RAW MATERIALS
We believe that it is necessary to maintain a large inventory of finished goods and raw materials to adequately service our customers. Because we are currently manufacturing and distributing new brands and types of products, our raw material and finished goods inventory requirements have increased over prior years. Therefore, we have substantially increased our inventory levels. In addition, increasing international sourcing of raw materials has impacted delivery cycles resulting in our expanding inventory to accommodate less frequent, larger shipments. We bear the risk of increases in the prices charged by our suppliers and decreases in the prices of raw materials held in our inventory. If prices for products held in our finished goods inventory decline or if prices for raw materials required by us decline, or if new technology is developed that renders obsolete products distributed by us and held in inventory, our business could be materially adversely affected.
MARKET CONDITIONS
During the third quarter of fiscal 1999, our suppliers began increasing the price of raw materials resulting in our implementing a price increase for our finished goods. As a result of another price increase by our suppliers in the First Quarter 2000, we began the implementation of another price increase on finished goods.
Management believes that raw material paper costs will continue to increase into the second quarter of fiscal 2000 and then stabilize. Although the finished goods price increase in the third quarter of fiscal 1999 was successfully implemented, resistance by customers to finished goods price increases in the First Quarter 2000 has created downward pressure on finished goods selling prices, which has resulted in lower profit margins. If selling prices for products manufactured by us cannot increase in relationship to raw material cost increases, or if prices for products manufactured by us decline as a result of market pressures, our results of operations could be materially adversely affected.
SEASONALITY
We may be subject to certain seasonal fluctuations in that orders for products may decline over the summer months. However, we do not believe that such fluctuations have a material adverse effect on our results of operations.
YEAR 2000
Total costs of remediation of all information and non-information technology was approximately $180,000. No adverse events occurred on January 1, 2000.
SUBSEQUENT EVENTS
On December 28, 1999, we received notice from the Nasdaq Stock Market that we are in compliance with Marketplace Rule 4450(a)(2), minimum market value of public float.
On March 7, 2000, at our annual shareholders meeting, the shareholders will vote on a proposal to create a parent holding company, named Impreso.com, Inc., which will trade under the symbol ZCOM. Impreso.com, Inc. will hold the shares of TST/Impreso, Inc. and a sibling subsidiary, Hotsheet.com, Inc.
The purpose of this transaction is to organize our different business segments into separate companies which we believe will enable us to more rapidly respond to opportunities and to more easily expand our HotSheet web portal site business.
On December 15, 1999, we executed a consulting contract with Direct Marketing Consultants, Inc., to locate and engage suitable experts, employees, and investors in Hotsheet.com. We initially intend to raise $10 million, through private placements, for approximately 10% to 15% of the equity of Hotsheet.com, Inc. to finance the operations and growth of the HotSheet web portal. There can be no assurance, however, that such financing can be obtained, or if available, will be on acceptable terms.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and the Results of Operations and the sections of this Form 10-Q contain "forward-looking statements" about our prospects for the future, such as our ability to generate sufficient working capital, our ability to continue to maintain sales to justify capital expenses, and our ability to generate additional sales to meet business expansion. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including availability of raw materials, availability of thermal facsimile, computer, laser and color ink jet paper, to the cyclical nature of the industry in which we operate, the potential of technological changes which would adversely affect the need for our products, price fluctuations which could adversely impact the large inventory we require, loss of any significant customer, and termination of contracts essential to our business. Parties are cautioned not to rely on any such forward-looking statements or judgments in making investment decisions.
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, 1999 August 31, 1999
(Unaudited)
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Current assets:
Cash and cash equivalents $ 55,579 $ 22,629
Trade accounts receivable, net of allowance for
doubtful accounts of $160,000 at November 30, 1999
and $130,397 at August 31, 1999 8,068,256 6,295,988
Income tax receivable -- 478,909
Investments in marketable securities 11,088 11,088
Inventories 22,182,244 18,801,015
Prepaid expenses and other 220,773 200,739
Deferred income tax assets 85,135 44,335
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Total current assets 30,623,075 25,854,703
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Property, plant and equipment, at cost 17,026,808 16,845,961
Less-Accumulated depreciation (9,540,568) (9,635,739)
------------ ------------
Net property, plant and equipment 7,486,240 7,210,222
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Other assets 72,532 19,453
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Total assets $ 38,181,847 $ 33,084,378
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The accompanying notes are an integral part of these consolidated balance sheets.
TST/IMPRESO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,1999 August 31,1999
(Unaudited)
---------------- --------------
Current liabilities:
Accounts payable $10,425,655 $ 9,053,907
Accrued liabilities 2,077,962 1,678,862
Current maturities of long-term debt 114,018 28,179
Line of credit 9,192,451 6,357,787
Prepetition liabilities:
Current maturities of long-term debt 33,797 35,233
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Total current liabilities 21,843,883 17,153,968
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Deferred income tax liability 744,041 727,865
Long-term portion of prepetition debt, net of current maturities 231,378 884,785
Long-term debt, net of current maturities 2,663,621 1,744,487
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Total liabilities 25,482,923 20,511,105
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Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized;
0 shares issued and outstanding -- --
Common Stock, $.01 par value; 15,000,000 shares authorized;
5,292,780 shares issued and outstanding 52,928 52,928
Warrants 110 110
Additional paid-in capital 6,319,572 6,319,572
Retained earnings 6,326,314 6,200,663
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Total stockholders' equity 12,698,924 12,573,273
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Total liabilities and stockholders' equity $38,181,847 $33,084,378
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The accompanying notes are an integral part of these consolidated balance sheets.