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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
Commission file number 000-18815
OUTLOOK GROUP CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1278569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 American Drive
Neenah, Wisconsin 54956
(Address of principal executive offices, including zip code)
(920) 722-2333
(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 twelve months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
3,353,319 share of common stock, $.01 par value, were outstanding at
January 13, 2003.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
As of November 30, 2002 and May 31, 2002 4
Condensed Consolidated Statements of Operations
For the three months and six months ended
November 30, 2002 and December 1, 2001 5
Condensed Consolidated Statements of Cash Flows
For the six months ended November 30, 2002 and
December 1, 2001 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein, have
been prepared by the Company and have not been audited. However, the
foregoing statements contain all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of Company management,
necessary to present fairly the financial position of the Company at
November 30, 2002, the results of operations for the three and six
month period ended November 30, 2002 and December 1, 2001, and the
results of cash flows for the six-month period ended November 30, 2002
and December 1, 2001. 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 such rules and regulations of the Securities and Exchange
Commission, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
The results of operations for interim periods are not necessarily
indicative of the results of operations for the entire year. It is
suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto
included in the Company's 2002 Form 10-K.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
November 30, May 31,
ASSETS 2002 2002
- -------------------------------------------------------- ----------- ---------
Current Assets
Cash and cash equivalents $ 2,143 $ 3,021
Accounts receivable, less allowance for
doubtful accounts of $611 and $459, respectively 8,537 7,575
Notes receivable-current portion 72 85
Inventories 5,873 5,411
Deferred income taxes 847 847
Other 460 500
-------- --------
Total current assets 17,932 17,439
Notes receivable long-term, less allowance for
doubtful accounts of $652 and $477, respectively 7 187
Property, plant, and equipment
Land 583 583
Building and improvements 10,502 10,088
Machinery and equipment 38,096 37,642
-------- --------
49,181 48,313
Less: accumulated depreciation (29,035) (28,340)
-------- --------
20,146 19,973
Other assets 2,037 1,274
-------- --------
Total assets $ 40,122 $ 38,873
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,257 $ 1,977
Accrued liabilities:
Salaries and wages 1,642 1,925
Other 655 397
-------- --------
Total current liabilities 4,554 4,299
Deferred income taxes 3,209 3,209
Shareholders' Equity
Cumulative preferred stock - -
Common stock (5,142,382 and 5,137,382 shares issued,
respectively) 51 51
Additional paid-in capital 18,848 18,828
Retained earnings 25,634 24,660
Treasury stock (1,789,063 shares at both dates) (11,739) (11,739)
Officers' loans (435) (435)
-------- --------
Total shareholders' equity 32,359 31,365
-------- --------
Total liabilities and shareholders' equity $ 40,122 $ 38,873
======== ========
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three-Month Period Ended Six-Month Period Ended
November 30, December 1, November 30, December 1,
2002 2001 2002 2001
Net sales $ 17,320 $ 18,077 $ 34,318 $ 35,700
Cost of goods sold 13,857 14,949 27,173 29,494
----------- ----------- ----------- -----------
Gross profit 3,463 3,128 7,145 6,206
Selling, general, and administrative
expenses 2,767 2,669 5,304 5,367
Facility relocation and legal
settlement expenses - 199 - 1,455
----------- ----------- ----------- -----------
Operating profit (loss) 696 260 1,841 (616)
Other income (expense):
Interest expense - (25) - (61)
Interest and other income 83 175 (3) 305
----------- ----------- ----------- -----------
Earnings (loss) from operations
before income taxes 779 410 1,838 (372)
Income tax expense (benefit) 295 160 696 (138)
----------- ----------- ----------- -----------
Net earnings (loss) $ 484 $ 250 $ 1,142 $ (234)
=========== =========== =========== ===========
Net earnings (loss) per common
share-Basic $ 0.14 $ 0.07 $ 0.34 $ (0.07)
Net earnings (loss) per common
share-Diluted $ 0.14 $ 0.07 $ 0.34 $ (0.07)
Weighted average number of shares
outstanding-Basic 3,353,319 3,385,237 3,350,930 3,442,598
=========== =========== =========== ===========
Weighted average number of shares
outstanding-Diluted 3,408,581 3,402,036 3,391,264 3,466,371
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six-Month Period Ended
November 30, 2002 December 1, 2001
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,142 $ (234)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,601 1,719
Provision for doubtful accounts 110 300
Loss (gain) on sale of assets 91 (104)
Change in assets and liabilities:
Accounts and notes receivable (499) 183
Inventories (440) 1,107
Other 44 (231)
Accounts payable 154 1,617
Accrued liabilities (105) 111
Income taxes refundable - (415)
------- -------
Net cash provided by operating activities 2,098 4,053
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business-net of cash acquired (1,247) -
Proceeds from sale of assets 508 2,524
Acquisition of property, plant, and equipment (2,089) (1,747)
Loan to officers - (207)
------- -------
Net cash (used in) provided by investing activities (2,828) 570
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings - (2,800)
Exercise of stock options 20 -
Purchase of treasury stock and redeemable equity - (1,152)
Dividends paid to shareholders (168) -
------- -------
Net cash used in financing activities (148) (3,952)
Net (decrease) increase in cash (878) 671
Cash and cash equivalents at beginning of period 3,021 757
------- -------
Cash and cash equivalents at end of period $ 2,143 $ 1,428
======= =======
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2002
1. Net Earnings (Loss) Per Common Share:
Basic earnings (loss) per share are computed by dividing net
earnings (loss) by the weighted average shares outstanding
during each period. Diluted earnings (loss) per share is
computed similar to basic earnings (loss) per share except that
the weighted average shares outstanding is increased to include
the number of additional shares that would have been outstanding
if stock options were exercised and the proceeds from such
exercise were used to acquire shares of common stock at the
average market price during the period.
Three-Month Period Ended Six-Month Period Ended
November 30, December 1, November 30, December 1,
2002 2001 2002 2001
--------- --------- --------- ---------
Weighted average shares
outstanding-Basic 3,353,319 3,385,237 3,350,930 3,442,598
Effect of dilutive securities --
Stock options 55,262 16,799 40,334 23,773
--------- --------- --------- ---------
Weighted average shares outstanding
-- Diluted 3,408,581 3,402,036 3,391,264 3,466,371
========= ========= ========= =========
2. Inventories:
Inventories consist of the following (in thousands):
November 30, 2002 May 31, 2002
----------------- ------------
Raw materials $ 2,805 $ 2,316
Work in process 955 697
Finished goods 2,113 2,398
------------ ------------
$ 5,873 $ 5,411
============ ============
3. Income Taxes:
The effective income tax rate used to calculate the income tax
expense for the quarters ended November 30, 2002 and December 1,
2001 is based on the anticipated income tax rate for the entire
fiscal year.
4. Reclassifications:
Certain reclassifications have been made to the financial statements
of the prior period to conform to the November 30, 2002 presentation.
5. Accounting Periods:
The Company has adopted 13-week quarters; however, fiscal year-end
remains May 31.
6. Outlook Packaging:
The Company has merged the operations of its Outlook Packaging, Inc.
Oak Creek, Wisconsin facility with its Outlook Label Systems, Inc.
facility of Neenah, Wisconsin. That merger was completed during the
second quarter of fiscal 2002. In June 2001, the Company sold its Oak
Creek facility and certain equipment for approximately $2.4 million.
During the first quarter of fiscal 2002, the Company incurred
approximately $700,000 of costs related to the merger including
approximately $300,000 of costs associated with the facility
relocation and related severance costs, and approximately $400,000
associated with equipment renovations and start-up costs. The Company
is not anticipating any further costs related to the merger during
fiscal 2003 and beyond.
7. Segment Reporting:
The Company has two reportable segments, Graphics and Web. Each are
strategic operations that offer different products and services. The
Graphics operation produces custom printed products on a wide range
of media including newsprint, coated paper, and heavy board,
including paperboard packaging. It also provides finishing services,
promotional contract packaging, direct mailing and distribution
services. The Web operation manufactures items such as coupons,
pressure sensitive specialty labels, printed vinyl cards, continuous
forms, cartons, sweepstakes and specialty game pieces, and printed
film for meat, coffee, snack food and non-food industries. The Web
operation has flexographic, rotary letterpress, laminating and
slitting capabilities.
The Company evaluates the performance of its reportable segments
based on the net income of the respective operations. Summarized
financial information for the three-month and six-month periods
ending November 30, 2002 and December 1, 2001 are as follows:
INCOME STATEMENT DATA:
Three-Month Period Ended Three-Month Period Ended
November 30, 2002 December 1, 2001
(in thousands) (in thousands)
Net Sales Net Earnings Net Earnings
(Loss) Net Sales (Loss)
---------- ------------ ---------- ------------
Graphics $ 9,655 $ 100 Graphics $ 9,906 $ 335
Web 7,919 384 Web 8,302 (85)
All Other (254) - All Other (131) -
---------- ------------ ---------- ------------
Total $ 17,320 $ 484 $ 18,077 $ 250
========== ============ ========== ============
Six-Month Period Ended Six-Month Period Ended
November 30, 2002 December 1, 2001
(in thousands) (in thousands)
Net Earnings Net Earnings
Net Sales (Loss) Net Sales (Loss)
---------- ------------ ---------- ------------
Graphics $ 18,990 $ 350 Graphics $ 19,975 $ 660
Web 15,846 792 Web 16,018 (894)
All Other (518) - All Other (293) -
---------- ------------ ---------- ------------
Total $ 34,318 $ 1,142 $ 35,700 $ (234)
========== ============ ========== ============
BALANCE SHEET DATA:
November 30, May 31,
2002 2002
Total Assets (in thousands) (in thousands)
-------------- --------------
Graphics $ 22,535 $ 22,091
Web 17,587 16,782
-------------- --------------
Total $ 40,122 $ 38,873
============== ==============
8. Recently Issued Accounting Standards:
In July 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This statement is effective for the Company in
fiscal year 2004. This rule is not expected to have a material effect
on the Company's financial statements.
In August 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement
addresses the financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This statement is effective for
the Company in fiscal year 2003. The Company adopted this rule on
June 1, 2002, which did not have an impact on its consolidated
financial statements.
In May 2002, the FASB issued FAS No. 145, "Rescission of FAS Nos. 4,
44 and 64, Amendment of FAS 13 and Technical corrections as of April
2002." This statement rescinds FAS No. 4, "Reporting Gains and Losses
from Extinguishments of Debt," and amends FAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
This statement also rescinds FAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." This statement amends FAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This statement
also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their
applicability under changed conditions. The provisions of this
statement related to FAS 13 are effective for transactions occurring
after May 15, 2002. All other provisions of this statement are
effective for the Company in 2003. This rule did not have a material
effect on the Company's financial statements.
On July 29, 2002 the FAS issued FAS No. 146, "Accounting for Exit or
Disposal Activities." FAS 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities that are currently accounted for pursuant to the guidance
that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issues No. 94-3, Liability Recognition of Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). FAS 146 will be effective
for exit or disposal activities that are initiated after December 31,
2002. This rule is not expected to have a material effect on the
Company's financial statements.
On November 25, 2002, the FASB issued FAS Interpretation No. 45, (FIN
45 or the "Interpretation"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (an interpretation of FAS Statements No. 5,
57, and 107 and rescission of FAS Interpretation No. 34). FIN 45
clarifies the requirements of FASB Statement No. 5 (FAS 5),
Accounting for Contingencies, relating to a guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes
under that guarantee. The Interpretation's provisions are effective
for guarantees issued or modified after December 31, 2002. This
interpretation is not expected to have a material effect on the
Company's financial statements.
9. Related Party Transactions
As previously reported, the Company has agreed to make loans to
certain officers and key employees to purchase the common stock of
the Company. Through November 30, 2002, the Company had loans
totaling $435,000. The loans bear an interest rate of 4.9% and are
for five-year terms. It is the Company's policy that all material
transactions between the Company, its officers, directors or
principal shareholders, or affiliates of any of them, shall be on
terms no less favorable to the Company than those which could have
been obtained if the transactions had been with unaffiliated third
parties on an arm's length basis, and such transactions are approved
by a majority of the members of the Audit Committee of the Board of
Directors, or a majority of the directors who are independent and not
financially interested in the transactions.
Additionally, in fiscal 2001, the Company provided some officers and
other key employees with advances on expected bonus amounts, subject
to year-end reconciliation. Because of the rapid deterioration of
general economic conditions in the second half of fiscal 2001, final
bonus amounts were substantially lower than had been expected. In
some cases, amounts advanced against fiscal 2001 bonuses were higher
than actual bonus amounts. These amounts were converted to notes
payable by the officers, and were paid, in part, by offsetting
current bonus payments. At November 30, 2002, $39,236 had been
re-paid to the Company by offsetting bonus payments.
As a result of legislation enacted on July 30, 2002, the Company will
no longer make loans to its officers; however, outstanding amounts at
that date may continue until paid in accordance with their terms.
10. Acquisitions
During June 2002, the Company purchased selected assets of Paragon
Direct, Inc. for $1.4 million in cash plus assumed liabilities.
Included in the assets purchased were approximately $200,000 in
property, plant and equipment, $500,000 in cash and receivables and
$200,000 in assumed liabilities. The excess of cost over the fair
value of the tangible net assets acquired is approximately $800,000.
Of this excess cost, approximately $600,000 was allocated to finite
lived intangible assets with lives ranging from 4 to 10 years. The
remaining $200,000 was allocated to goodwill. The resulting
amortization expense for the intangible assets recorded in the first
six months of fiscal 2003 was approximately $40,000. Pro forma
results would not materially change the results of operations as
presented in the financial statements.
11. Goodwill and other Intangibles
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("FAS") No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." These statements eliminate the pooling of interest method of
accounting for business combinations and require that goodwill and
certain intangible assets not be amortized. Instead these assets will
be reviewed for impairment annually with any related losses
recognized in earnings when incurred. Any remaining intangible assets
will be amortized over their estimated useful lives.
The Company adopted the new rules on accounting for goodwill and
other intangible assets on June 1, 2002. Application of the
non-amortization provisions of FAS No. 142 resulted in an increase in
net income of approximately $36,000 or $0.01 per diluted share, for
the six months ended November 30, 2002. Under the transitional
provisions of FAS No. 142, the Company has completed the initial
impairment tests on the net goodwill and other intangible assets
associated with each of the Company's reporting units, using a
valuation date of June 1, 2002. The Company expects that it will
recognize a goodwill impairment charge during fiscal 2003. The
Company currently has $1.3 million of goodwill recorded on its books;
it anticipates that the goodwill impairment charge will likely be
between 30% and 50% of the value of goodwill. The impairment will be
recorded as a cumulative effect of change in accounting principle on
the consolidated statements of earnings in accordance with the
transitional provisions of FAS No. 142. This is expected to be
recorded during the fourth quarter of fiscal 2003.
The following set forth a reconciliation of net income and earnings
per share information for the three month and six month period ended
November 30, 2002 and December 1, 2001, respectively adjusted for
the non-amortization provisions of FAS No. 142.
(Dollars in thousands, except per share data)
Three-Month Period Ended Six-Month Period Ended
November 30, December 1, November 30, December 1,
2002 2001 2002 2001
---------- ---------- ------------ ----------
Reported net earnings (loss) $ 484 $ 250 $ 1,142 $ (234)
Add: Goodwill amortization (net of
income taxes of $11 and $23
respectively) - 18 - 36
---------- ---------- ------------ ----------
Adjusted net earnings (loss) $ 484 $ 268 $ 1,142 (198)
========== ========== ============ ===========
Reported basic earnings (loss) per share $ .14 $ .07 $ .34 $ (.07)
Add: Goodwill amortization (net of
income taxes of $11 and $23
respectively) - .01 - .01
---------- ---------- ------------ ----------
Adjusted basic earnings (loss) per share $ .14 $ .08 $ .34 $ (.06)
========== ========== ============ ===========
Reported diluted earnings (loss) per
share $ .14 $ .07 $ .34 $ (.07)
Add: Goodwill amortization (net of
income taxes of $11 and $23
respectively) - .01 - .01
---------- ---------- ------------ ----------
Adjusted diluted earnings (loss) per
share $ .14 $ .08 $ .34 $ (.06)
========== ========== ============ ===========
12. Commitments and Contingencies
The Company has previously reported litigation against it by Health
Jet, Inc., d/b/a Chung's Gourmet Foods ("Chung's"), seeking damages
of $4.9 million. In August 2001, the Company and Chung's entered into
a settlement agreement solely for the purpose of avoiding the burden,
expense and uncertainty of litigation. Although neither party has
admitted any liability in the settlement agreement, the Company paid
Chung's $500,000 pursuant to the agreement. The Company recognized
the $500,000 legal settlement expense in the first quarter of fiscal
year 2002 along with approximately $55,000 of associated legal
expense. The Company continued to proceed on an action against a
third party seeking indemnification in connection with the Chung's
action. In March 2002, the Company and the third party entered into a
settlement agreement, and the Company negotiated a settlement with
its insurance carrier. The settlements totaled $500,000 and were
recognized during the third quarter of fiscal 2002.
13. Subsequent Events
The Company declared a quarterly cash dividend of $0.05 per common
share outstanding. The dividend is payable on January 15, 2003 to
shareholders of record on January 8, 2003. Based on the current
number of shares outstanding, the payment will be approximately
$168,000.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section presents a discussion and analysis of the Company's
results and operations during the first six months of fiscal 2003 and 2002, and
its financial condition at November 30, 2002. Statements that are not historical
facts, that relate to the Company's future performance, anticipated financial
position, or results of operations for fiscal 2003 or any other future period,
are forward-looking statements within the Safe Harbor Provision of the Private
Securities Litigation Reform Act of 1995. Such statements which are generally
indicated by words or phrases such as "plan", "estimate", "project",
"anticipate", "the Company believes", "managements expects", "currently
anticipates", "remains optimistic", and similar phrases are based on current
expectations and involve risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual future results could differ materially from
those anticipated, projected or estimated. The factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, particularly in "Results of Operations," "Liquidity and Capital
Resources," and "Disclosures Concerning Liquidity and Capital Resources
Including `Off-Balance Sheet' Arrangements." The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The dollars amounts in the tables in this section are presented in thousands,
except for per share amounts or where otherwise indicated.
RESULTS OF OPERATIONS
The Company's net sales for the second quarter of fiscal 2003 were $17.3
million, down 4.2% from the second quarter of fiscal 2002. The Graphics business
segment had second quarter sales of $9.7 million, down 2.5% from the second
quarter of fiscal 2002. The Web business segment had second quarter sales of
$7.9 million, down 4.6% from the second quarter of fiscal 2002. The Company's
net sales performance for the second quarter of fiscal 2003 is summarized in the
following chart:
Net Sales Quarter 2 Quarter 2 Quarter 2 Quarter 2
Fiscal 2003 Fiscal 2002 $ Change % Change
----------- ----------- -------- --------
Graphics $9,655 $9,906 $(251) -2.5%
Web 7,919 8,302 (383) -4.6%
All Other (254) (131) (123) 93.9%
---------- ---------- ----------
Total $17,320 $18,077 $(757) -4.2%
The Company's net sales for the first half of fiscal 2003 were $34.3 million,
down 3.9% from the first half of fiscal 2002. The Graphics business segment had
sales of $19.0 million, down 4.9% from the previous year. The Web business
segment had sales of $15.8 million, down 1.1% from the previous year. The
Company's net sales performance for the first half of fiscal 2003 is summarized
in the following chart:
Net Sales Year-to-date Year-to-date Year-to-date Year-to-date
Fiscal 2003 Fiscal 2002 $ Change % Change
----------- ----------- -------- --------
Graphics $18,990 $19,975 $(985) -4.9%
Web 15,846 16,018 (172) -1.1%
All Other (518) (293) (225) 76.8%
---------- ---------- ----------
Total $34,318 $35,700 $(1,382) -3.9%
For the year to date period, the Company's sales are comprised as follows:
Sales Breakdown Fiscal Fiscal
2003 2002
---------- ----------
Graphics 55% 56%
Web 46% 45%
All Other -1% -1%
---------- ----------
Total 100% 100%
Both of the Company's business segment's continue to be negatively impacted by
the depressed economy. The lower sales reflect continued weakness in the
promotional projects market, especially direct mail and the negative impact on
prices due to increased competitive pressures. The continued threat of further
terrorist attacks, the threat of a possible war with Iraq, the anthrax mailings,
the ensuing loss of general investor confidence and a volatile stock market have
further affected the markets in which the Company operates. The Company expects
that it will continue to be affected by the national economy, but is not in a
position to determine how extensive the effects of the economic slowdown will
be, whether or not it will be negatively impacted, or for how long it may be
impacted by the slowdown. During the first quarter of fiscal 2003, the Company's
remaining fulfillment client ceased using the Company's services. Although the
Company will attempt to find other fulfillment clients, this termination
eliminates a client that represented $1.0 million in fiscal 2002 sales, and
$600,000 in fiscal 2003 sales.
The Company's gross profit margin for the second quarter of fiscal 2003
increased to 20.0% of net sales, up from 17.3% in the prior year. This
represents an additional $300,000 in gross margin dollars. For the year to date
period, gross margins were 20.8% of net sales, up from 17.4% in the prior year.
This represents an additional $900,000 in gross margin dollars. Gross profit
margins were impacted by management's decision to forego some lower margin
projects. In addition, gross profit margins were directly improved by the
Company's decision to reduce operating costs, gains achieved in increased
productivity, and the merger of the Outlook Label and Outlook Packaging
subsidiaries. The Company also benefited from its decision to realign staffing
levels to be consistent with its current and anticipated level of business
activity and to eliminate staffing for marginal projects. The Company currently
believes that it has sufficient personnel to carry on its current and
anticipated business needs, but will occasionally contract for and / or hire
temporary employees to increase the number of personnel in certain operations,
as project commitments require. The Company continues its efforts related to
continuous process improvement and is committed to increasing efforts to provide
defect-free products and services, all of which have contributed to the overall
reduction of costs.
Selling, general and administrative expenses were 16.0% of net sales for the
second quarter of fiscal 2003, or $2.8 million. During the second quarter of
fiscal 2002, the Company had selling, general and administrative costs of $2.9
million; however, $0.2 million of these costs were for special charges related
to the facility relocation and legal settlement costs. Excluding the special
charges in fiscal 2002, selling, general and administrative costs were 14.8% of
net sales or $2.7 million for the second quarter of fiscal 2002. For the first
six months of fiscal 2003, selling, general and administrative expenses were
$5.3 million or 15.5% of net sales. During the first six months of fiscal 2002,
the Company had selling, general and administrative costs of $6.8 million, or
19.1% of net sales. Excluding the special charges of $1.5 million, the Company
had selling, general and administrative charges of $5.4 million, or 15.0% of net
sales. The effect of the Company's special charges related to the facility
relocation and legal settlement costs are summarized in the following chart:
Selling, General and Quarter 2 Quarter 2
Administrative Costs 2003 % of Net Sales 2002 % of Net Sales
---------- -------------- ---------- --------------
Total $ 2,767 16.0% $ 2,868 15.9%
Less: Facility Relocation
and Legal Settlement Costs 0 0.0% 199 1.1%
---------- --------- ---------- ---------
Adjusted Selling,
General and
Administrative Costs $ 2,767 16.0% $ 2,669 14.8%
Selling, General and Year to date Year to date
Administrative Costs 2003 % of Net Sales 2002 % of Net Sales
------------ -------------- ------------ --------------
Total $ 5,304 15.5% $ 6,822 19.1%
Less: Facility Relocation
and Legal Settlement Costs 0 0.0% 1,455 4.1%
---------- --------- ---------- ---------
Adjusted Selling,
General and
Administrative Costs $ 5,304 15.5% $ 5,367 15.0%
The Company adopted the new rules on accounting for goodwill and other
intangible assets on June 1, 2002. Under the transitional provisions of FAS No.
142, the Company has completed the initial impairment tests on the net goodwill
and other intangible assets associated with each of the Company's reporting
units, using a valuation date of June 1, 2002. The Company expects that it will
recognize a goodwill impairment charge during fiscal 2003. The Company currently
has $1.3 million of goodwill recorded on its books; it anticipates that the
goodwill impairment charge will likely by between 30% and 50% of the value of
goodwill. The impairment will be recorded as a cumulative effect of change in
accounting principle on the consolidated statements of earnings in accordance
with the transitional provisions of FAS No. 142. This is expected to be recorded
during the fourth quarter of fiscal 2003.
The Company continues to focus on reducing its operating expenses, in particular
those that do not contribute to increased sales or increased profit margins. The
Company is deploying additional resources into marketing strategies in an
attempt to increase the Company's sales and marketing concentrations.
The Company's operating profit for the second quarter of fiscal 2003 was $0.7
million or 4.0% of net sales. The Company had an operating profit during the
second quarter of fiscal 2002 of $260,000, which included $199,000 of special
charges. Excluding the special charges in fiscal 2002, the Company had an
operating profit for the second quarter of fiscal 2002 of $459,000 of 2.5% of
net sales. For the first six months of fiscal 2003, the Company had a $1.8
million operating profit. For the comparable period in fiscal 2002, the Company
had an operating loss of $616,000. Excluding the special charges in fiscal 2002,
the Company had an operating profit of $839,000 or 2.4%. The Company's operating
profit showing the effects of the special charges is shown in the chart below:
Operating Profit Quarter 2 Quarter 2
---------------- Fiscal 2003 % of Net Sales Fiscal 2002 % of Net Sales
----------- -------------- ----------- --------------
As Reported $696 4.0% $260 1.4%
Add: Facility
Relocation and Legal 0 0.0% 199 1.1%
Settlement Costs
----------- -------------- ----------- --------------
Adjusted Operating
Profit $696 4.0% $459 2.5%
Operating Profit Year to date Year to date
Fiscal 2003 % of Net Sales Fiscal 2002 % of Net Sales
----------- -------------- ----------- --------------
As Reported $1,841 5.4% $(616) (1.7)%
Add: Facility
Relocation and 0 0.0% 1,455 4.1%
Legal Settlement
Costs
----------- -------------- ----------- --------------
Adjusted Operating
Profit $1,841 5.4% $839 2.4%
The Company had no interest expense during the first half of fiscal 2003. The
other loss reflects a loss on the trade-in of assets related to a refinancing of
equipment leases, offset by interest and other income. Although there were some
up front costs, the lease refinancing will result in lower lease rental payments
in future months. The Company paid off its remaining long-term debt during
fiscal 2002 in conjunction with the sale of its manufacturing facility in Oak
Creek, Wisconsin. The Company does, however, maintain a revolving credit
facility. The Company did not use its revolving credit facility during fiscal
2002 or the first half of fiscal 2003, but pays an unused credit facility charge
to maintain its line of credit.
The Company's effective tax rate for fiscal 2002 was 33.0%. The Company is
currently accruing income tax expense at the expected annual rate of 38.0%,
although quarter-to-quarter fluctuations may occur. The fiscal 2002 rate was
lower due to benefits realized as a result of the merger of the Company's
Outlook Packaging, Inc. and Outlook Label Systems, Inc. subsidiaries, and
certain state income tax credits.
The Company reported net earnings for the second quarter of fiscal 2003 of
$484,000 or $0.14 per diluted common share. This represents 2.8% of net sales
for the second quarter of fiscal 2003. The Company reported a net profit for the
second quarter of fiscal 2002 of $250,000 or $0.07 per diluted common share.
Excluding the one-time charges, adjusted for taxes, the Company had earnings of
$372,000 or $0.11 per diluted share during the second quarter of fiscal 2002,
which represented 2.1% of net sales for the second quarter of fiscal 2002. The
Company reported year-to-date net earnings of $1.1 million or $0.34 per diluted
common share. This represents 3.3% of net sales. The Company reported a net loss
of $0.2 million for the comparable year to date period last year. Excluding the
one-time charges, the Company had net earnings of $0.7 million or $0.19 per
diluted common share. This
represents 1.9% of net sales. The Company's net earnings showing the effects of
the one-time charges are summarized in the following chart:
Net Income
-----------------
% of Basic/Diluted Basic/Diluted
Quarter 2 Net Earnings Quarter 2 % of Net Earnings
Fiscal 2003 Sales per Share Fiscal 2002 Sales per Share
----------- ------ ---------- ----------- ----- ---------
As Reported $484 2.8% $0.14 $250 1.4% $0.07
Add:
Facility - 0.0% .00 122 .7% .04
Relocation and
Legal Settlement
Costs Less
Provision for
Income Taxes of $77
----------- ----- --------- ----------- ----- ---------
Adjusted Net Income $484 2.8% $0.14 $372 2.1% $0.11
Net Income % of Basic/Diluted Basic/Diluted
Year-to-date Net Earnings Year-to-date % of Net Earnings
Fiscal 2003 Sales per Share Fiscal 2002 Sales per Share
----------- ----- --------- ----------- ----- ---------
As Reported $1,142 3.3% $0.34 $(234) (.65)% $(0.07)
Add:
Facility - 0.0% .00 895 2.5% .26
Relocation and
Legal Settlement
Costs Less
Provision for
Income Taxes of
$560
----------- ----- --------- ----------- ----- ---------
Adjusted Net Income $1,142 3.3% $0.34 $661 1.85% $0.19
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, as shown on the Condensed Consolidated
Statements of Cash Flows, was approximately $2.1 million for the first six
months of fiscal 2003, as compared to $4.1 million during the first half of
fiscal 2002. The Company experienced a $0.4 million increase in inventory during
the first half of fiscal 2003. This increase was primarily in raw materials as
the Company adjusted its inventory to meet client forecasts and production
schedules. Accounts and notes receivable increased by approximately $0.5 million
during the first six months of fiscal 2003. The Company increased its provision
for doubtful accounts by approximately $110,000 as compared to an increase of
$300,000 during the first six months of fiscal 2002. Depreciation and
amortization for the first six months of fiscal 2003 was approximately $1.6
million as compared to $1.7 million during the first six months of fiscal 2002.
The Company used approximately $2.1 million of cash in acquiring and upgrading
existing machinery and equipment during the first six months of fiscal 2003, in
addition to the $1.2 million associated with the acquisition of Paragon Direct.
The Company expects that it will invest approximately $3.0 million during fiscal
2003 in capital expenditures, excluding any acquisition opportunities that
become available. The Company intends to finance these expenditures through
funds obtained from operations plus its credit facilities and possible leasing
opportunities. During the first quarter of fiscal 2003, the Company refinanced
one of its existing machinery and equipment leases to obtain a rate more
favorable to the Company. Although there were upfront costs, the refinancing
results in lower
lease rental payments in future months. The Company has approximately $11.9
million in minimum lease payments under existing operating leases as of November
30, 2002; the majority are for production related machinery and equipment. The
Company does not currently have any capital lease obligations. Cash used in
financing activities decreased substantially, due to the Company's repayment of
debt and stock purchases in fiscal 2002.
Outlook Group's board of directors has determined to begin paying quarterly cash
dividends. The first dividend was paid on October 16, 2002, to shareholders of
record on October 9, 2002. The initial cash dividend of $0.05 per share resulted
in a total payment of approximately $168,000 in the second quarter of fiscal
2003. A second quarterly dividend was declared payable on January 15, 2003, to
shareholders of record on January 8, 2003. A continuation of dividends at that
level in future quarters would require similar resources in future periods.
During June 2002, the Company purchased selected assets of Paragon Direct, Inc.
for $1.2 million in cash plus assumed liabilities. The Paragon Direct business
was combined into the Company's Graphics division. Paragon Direct provides
computer-based information management services for clients in the direct
marketing industry. This acquisition opportunity was financed from operating
cash flows.
As previously reported, the Company holds a single note receivable that is
overdue. The Company has obtained a favorable judgment in excess of the value of
the note and the Company continues to pursue collection. Although the Company
has previously established a reserve, and currently believes the remaining
balance is collectible, the Company may be required to write-off the remaining
balance of the note if collection efforts prove ineffective and payments are not
received. The Company is fully reserved for this possibility and no impact on
current earnings would result if the remaining balance of the note were written
off.
The Company maintains a credit facility with a bank that provides for a maximum
revolving credit commitment of $15.0 million. Interest on the debt outstanding
can vary with the Company's selection to have the debt based upon margins over
the bank determined preference or an IBOR rate. The Company's actual rate is
dependent upon the Company's performance against a specific ratio as measured
against a predetermined performance chart. The Company's failure to meet
specified performance measures could adversely affect the Company's ability to
acquire future capital to meet its needs. The Company has not used its facility
during fiscal 2002 or the first half of fiscal 2003; however, the Company is
subject to an unused line fee of .25% to maintain its credit facility. The
Company currently has no amounts outstanding on its revolving credit line and is
in compliance with all of its loan covenants.
The Company regularly reassesses how its various operations complement the
Company as a whole and considers strategic decisions to acquire new operations,
expand, terminate, or sell certain existing operations. These reviews resulted
in various transactions during recent fiscal years and may results in additional
transactions during fiscal 2003 and beyond.
The Company continues to pursue the sale of its Troy, Ohio facility. Although
the Company has not yet received an acceptable offer, the facility is being
leased to a third party on a month-to-month basis. It is unclear whether the
continuing economic slowdown or other factors will continue to affect the
Company's ability to sell that facility on terms acceptable or profitable to the
Company, or that the Company will continue to successfully lease the facility.
FURTHER DISCLOSURES CONCERNING LIQUIDITY AND CAPITAL RESOURCES, INCLUDING
"OFF-BALANCE SHEET" ARRANGEMENTS
On January 22, 2002 the SEC issued FR-61, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations." The SEC has indicated that, while it intends to consider rulemaking
regarding these topics and other topics covered by the MD&A requirements, the
purpose of its statement is to suggest steps that issuers should consider in
meeting their current disclosure obligations with respect to the topics
addressed.
The Company continues to evaluate FR-61 and the effects it may have, if any, on
this and future filings. The Company has responded to each of the areas
addressed by FR-61. Any statements in this section, which discuss or are related
to future dates or periods, are "forward-looking statements."
FR-61 requires management to identify any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way. FR-61 also
requires management to identify any known material trends, favorable or
unfavorable, in the Company's capital resources including any expected material
changes in the mix and relative cost of such resources.
The Company's primary source of liquidity has been, and continues to be, cash
flows. The Company's future cash flows are dependent upon and affected by many
factors, including but not limited to the following:
- The ability of the Company to attract new and retain existing clients
- The number and size of the projects completed for these customers
- The effects of any loss of business of one or more primary customers
- Cancellations or delays of customer orders
- Changes in sales mix
- Changes in general economic conditions and world events
- Management's effectiveness in managing the manufacturing process
- The ability to collect in full and in a timely manner, amounts due the
Company
- The ability to acquire and maintain appropriate machinery and equipment
- The ability to hire, train and retain a suitable work force
- Acquisitions or divestiture activities, such as the integration of
Paragon Direct
- Capital asset additions or disposals
- Environmental matters
The Company is dependent upon its ability to retain its existing client base,
and additionally, obtain new clients. The Company's failure to do this could
significantly affect the future profitability of the Company.
Due to the project-oriented nature of the Company's business, the Company's
largest clients have historically tended to vary from year to year depending on
the number and size of the projects completed for these clients. As with many of
the Company's clients, the timing and volume of activities can vary
significantly from period to period. There can be no assurance that the volume
from any one particular client will continue beyond the current period. The
Company had no clients during fiscal 2002 or the first half of fiscal 2003 that
accounted for more than 10% of net sales.
The loss of one or more principal clients or a change in the number or character
of projects for particular clients could have a material adverse effect on the
Company's sales volume and profitability. For example, the Company's remaining
fulfillment client ceased using the Company's services in the first six months
of fiscal 2003. Although the Company will attempt to find other fulfillment
clients, the termination eliminates a client that represented $1.0 million in
fiscal 2002 sales. In the first six months of fiscal 2003, this client
represented $600,000 in sales.
Clients generally purchase the Company's services under cancelable purchase
orders rather than long-term contracts, although exceptions sometimes occur when
the Company is required to purchase substantial inventories or special machinery
to meet orders. While the Company believes that operating without long-term
contracts is consistent with industry practices, it is committed to developing
multi-year projects that can add stability to its business. The Company
continues to concentrate its efforts on increasing the number of clients with
long-term contracts; however, the failure of the Company to add multi-year
projects would mean that the Company would remain significantly dependent on
project-by-project business, thus increasing the Company's vulnerability to
losses of business and significant period-to-period changes. This would continue
to make prediction of the Company's future results very difficult. Even though
the Company is looking to increase the volume of longer term contract work, the
Company expects that it will continue to experience significant sales
concentration give the relatively large size of projects accepted for certain
clients.
Due to the range of services that the Company provides, the product sales mix
can produce a range of profit margins. Some business in which the Company
operates, produce lower profit margins than others. A substantial change in the
mix of product sales, could materially affect profit margins. The profit margin
experienced for the current period, is not indicative of future profit margins.
The Company believes that while there may be several competitors for individual
services that it offers, few competitors offer the single source solution that
the Company can provide.
Deteriorating or weak economic conditions, including slowdowns at both the
national or local level, could affect future sales and profitability of the
Company. Similarly, world events can affect the Company as occurred in fiscal
2002. Promotional mailings by the Company's clients were significantly reduced
as a result of the September 11, 2001 terrorist attacks and the subsequent
anthrax mailings. Technologies such as the Internet will continue to affect the
demand for printing services in general and the continuing increases in postal
rates will likely impact the direct mail business. The Company is not in a
position to determine how it will be affected by these circumstances, how
extensive the effects may be, or for how long it may be impacted by these
circumstances.
Management's effectiveness in managing its manufacturing process will have a
direct impact on its future profitability. The Company regularly makes decisions
that affect production schedules, shipping schedules, employee levels, and
inventory levels. The Company's ineffectiveness in managing these areas could
have an effect on future profitability.
From time to time, the Company has had significant accounts receivable or other
amounts due from its customers or other parties. On occasion, certain of these
accounts receivable or other amounts due have become unusually large and / or
overdue, and the Company has written off significant accounts receivable
balances. The failure of the Company's customers to pay in full amounts due to
the Company could affect future profitability. As previously reported, the
Company holds a single note receivable (from an unaffiliated party) that is
overdue. The Company has obtained a favorable judgment in excess of the value of
the note and the Company continues to pursue collection. Although the Company
has previously established a reserve, and currently believes the remaining
balance is collectible, the Company may be required to write-off the remaining
balance of the note if collection efforts prove ineffective and payments are not
received. The Company is fully reserved for this possibility and no impact on
current earnings would result if the remaining balance of the note were written
off. The general economic slowdown also increases the risk for the Company, as
many of its clients could negatively be impacted by the economy or the financial
climate.
The Company uses complex and specialized equipment to provide its services and
manufacture its products; therefore, the Company depends upon the functioning of
such machinery and its ability to acquire and maintain appropriate equipment.
Among other factors, the Company may be affected by equipment malfunctions,
training and operational needs related to the equipment, which may delay its
utilization, maintenance requirements and technological or mechanical
obsolescence. In addition, larger companies with greater capital resources may
have an advantage in financing state of the art equipment.
The Company is dependent upon its ability to hire, train, and retain a skilled
work force. On occasion, the Company will contract for and / or hire temporary
employees to increase the number of personnel in certain operations as project
commitments require. In May of 2002, the Company announced a workforce reduction
of approximately 12% of its workforce. This reduction brought the number of
employees to approximately 540 people at November 30, 2002. The Company
currently believes that it has appropriately aligned its staffing to be
consistent with its current and anticipated levels of business activity. The
failure of the Company to properly align and maintain skilled staffing levels
could affect the future profitability of the Company.
The Company regularly reassesses how its various operations complement the
Company as a whole and considers strategic decisions to acquire new operations
or expand, terminate or sell certain existing operations. There can be no
assurance that any decisions to acquire new operations, expand, terminate or
sell certain existing operations will be implemented successfully. The Company's
failure to successfully implement any initiatives could affect future
profitability.
From time to time, the Company may sell or dispose of assets, which it feels are
under-performing or are no longer needed in the businesses in which the Company
operates. There can be no assurance that the Company will be able to sell or
dispose of the assets in a manner, which is profitable to the Company. In
addition, the Company will make investments in assets that it feels are needed
to acquire and maintain the businesses in which the Company operates. Again,
there can be no assurance that the Company will be able to acquire the necessary
assets, or that the Company can obtain a reasonable return on the investments.
The Company and the industry in which it operates are subject to environmental
laws and regulations concerning emissions into the air, discharges into
waterways and the generation, handling and disposal of waste materials. These
laws and regulations are constantly evolving, making it difficult to predict the
effect they may have upon the future capital expenditures, profitability and
competitive position of the Company. Growth in the Company's production capacity
with a resultant increase in discharges and emissions could require significant
capital expenditures for environmental control facilities in the future.
The Company has no "off balance sheet" arrangements, which would otherwise
constitute balance sheet liabilities. See below, however, for information
regarding the Company's operating leases.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FR-61 encourages Company's to identify obligations and commitments to make
future payments under contracts such as debt and lease agreements, and under
contingent commitments, such as debt guarantees. It is also suggested that the
disclosure reference the various parts of a registrant's filings, which
discussed these commitments. The SEC believes that investors would find it
beneficial if aggregated information about contractual obligations and
commercial commitments were provided in a single location such that a total
picture of obligations would be readily available. In addition, the SEC had
suggested the use of a least one additional aid to present the total picture of
a registrant's liquidity and capital resource and the integral role of on and
off balance sheet arrangements may be schedules of contractual obligations and
commercial commitments as of the latest balance sheet date.
The Company has disclosed information pertaining to these events in its fiscal
2002 Report on Form 10-K. In addition, the Company has prepared schedules
suggested by the SEC in FR-61 for the period ending November 30, 2002. The
Company had no commercial commitments to report as of the latest balance sheet
date.
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
(Dollars in thousands) ------- ------- ------- ------- -------
- ---------------------
Long-term debt $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligation 0 0 0 0 0
Operating leases 11,941 2,161 6,661 2,961 158
Unconditional purchase obligations 0 0 0 0 0
Other long-term obligations 0 0 0 0 0
------- ------- ------- ------- -------
Total contractual cash
obligations $11,941 $ 2,161 $ 6,661 $ 2,961 $ 158
------- ------- ------- ------- -------
DISCLOSURES ABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED
CONTRACTS ACCOUNTED FOR AT FAIR VALUE
The Company does not have any trading activities that include non-exchange
traded contracts accounted for at fair value.
DISCLOSURES ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
As previously reported, the Company agreed to make loans to certain officers and
key employees to purchase the common stock of the Company. At November 30, 2002,
the Company had loans totaling $435,000. The loans bear an interest rate of 4.9%
and are for a five-year term. It is the Company's policy that all material
transactions between the Company, its officers, directors or principal
shareholders, or affiliates of any of them, shall be on terms no less favorable
to the Company than those which could have been obtained if the transaction had
been with unaffiliated third parties on an arm's length, and such transactions
are approved by a majority of the members of the Audit Committee of the Board of
Directors, or a majority of the directors who are independent and not
financially interested in the transactions.
Additionally, in fiscal 2001, the Company provided some officers and other key
employees with advances on expected bonus amounts, subject to year-end
reconciliation. Because of the rapid deterioration of general economic
conditions in the second half of fiscal 2001, final bonus amounts were
substantially lower than had been expected. In some cases, amounts advanced
against fiscal 2001 bonuses were higher than actual bonus amounts. These amounts
were converted to notes payable by the officers, and were paid, in part, by
offsetting current bonus payments. At November 30, 2002, $39,236 had been
re-paid to the Company by offsetting bonus payments. As of December 2002, the
remaining $60,000 was deemed earned by the officer, having met certain
pre-determined performance criteria.
As a result of legislation enacted on July 30, 2002, the Company will no longer
make loans to its officers; however, outstanding amounts at that date may
continue until paid in accordance with their terms.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the SEC issued FR-60 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies." FR-60 is an intermediate step to
alert companies to prepare adequate disclosure that will facilitate an
understanding of the Company's financial status, and the possibility, likelihood
and implications of changes in its financial and operating status. It encourages
companies to aid awareness in its "critical accounting policies, the judgments
and uncertainties affecting the application of those policies, and the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions."
The Company's accounting policies are disclosed in its fiscal 2002 Report on
Form 10-K. The more critical of these policies include revenue recognition and
the use of estimates (which inherently involve judgment and uncertainties) in
valuing inventory, accounts receivable, and fixed assets.
REVENUE RECOGNITION
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery has occurred; the
seller's price to the buyer is fixed or determinable; and collectivity is
reasonably assured. These criteria are generally satisfied and the Company
recognizes revenue upon shipment. The Company's revenue recognition policies are
in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." The Company also offers certain of its
customers the right to return products that do no meet the standards agreed
upon. The Company continuously monitors and tracks such product returns, and
while such returns have historically been minimal, the Company cannot guarantee
that it will continue to experience the same return rates that it has in the
past. Any significant increase in product quality failure rates and the
resulting credit returns could have a material adverse impact on the Company's
operating results.
ACCOUNTS AND NOTES RECEIVABLE
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current credit
worthiness, as determined by the review of the customer's current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon the
Company's historical experience and any specific customer collection issues that
have been identified. The Company values accounts and notes receivable net of an
allowance for uncollectible accounts. The allowance is calculated based upon the
Company's evaluation of specific customer accounts where the Company has
information that the customer may have an inability to meet its financial
obligations (bankruptcy, etc.). In these cases, the Company uses its judgment,
based on the best available facts and circumstances, and records a specific
reserve for the customer against amounts due, to reduce the receivable to the
amount that is expected to be collected. These specific reserves are
re-evaluated and adjusted as additional information is received that impacts the
amount reserved. The same technique used to compute this allowance at May 31,
2002 has been used during the first half of fiscal 2003. However, the ultimate
collectibility of a receivable is dependent upon the financial condition of an
individual customer, which could change rapidly and without advance warning.
INVENTORY
The Company values inventory at the lower of cost or market. Cost is determined
using the first-in, first-out method. Valuing inventories at the lower of cost
or market requires the use of estimates and judgment. As discussed under
"Further Disclosures Concerning Liquidity and Capital Resources, Including
`Off-Balance Sheet' Arrangements," customers may cancel their order, change
production quantities or delay production for a number of reasons. Any of these,
or certain additional actions, could create excess inventory levels, which would
impact the valuation of inventory. The Company continues to use the same
techniques to value inventory as have been used in the past. Any actions taken
by the Company's customers that could impact the value of inventory are
considered
when determining the lower of cost or market valuations. The Company regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based on its forecast of product demand and production
requirements. Generally, the Company does not experience issues with obsolete
inventory due to the nature of its products. If the Company were not able to
achieve its expectations of the net realizable value of the inventory at its
current value, the Company would have to adjust its reserves accordingly.
FIXED ASSETS AND GOODWILL
The Company continues to apply the criteria established in evaluating and
establishing a reserve for long-lived assets determined to be impaired under
Statement of Financial Accounting Standards ("FAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." At November 30, 2002 the Company
had recorded an impairment reserve of $317,000 associated with certain machinery
and equipment. On June 1, 2002, the Company adopted the provision of FAS No. 142
"Goodwill and Other Intangible Assets" for evaluating and establishing any
reserves for intangible assets determined to be impaired. Going forward the
Company will need to review goodwill periodically to determine whether it has
become impaired and thus must be written off.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about the Company's risk management activities may
include forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those discussed.
The Company has financial instruments, consisting of notes receivable, which are
sensitive to changes in interest rates. However, the Company does not use any
interest-rate swaps or other types of derivative financial instruments to limit
its sensitivity to changes in interest rates because of the relatively
short-term nature of its notes receivable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. In response to
the Sarbanes-Oxley Act of 2002, the Company and its certifying
officers have implemented disclosure controls and procedures,
building upon the Company's pre-existing practices and procedures,
to ensure that material information relating to the Company is
made known by the signing officers, so as to be reflected in
periodic SEC reports. The Company and those officers regularly
evaluate the effectiveness of those disclosure controls and
procedures, including within 90 days prior to the filing of any
periodic SEC report. The Company believes that these disclosure
controls and procedures are effective, based upon an evaluation
made within the past 90 days.
(b) Changes in internal controls. During the period covered by this
report, there were not any significant changes in the Company's
internal controls or in other factors, which could significantly
affect these internal controls subsequent to the date of their
evaluation, including any corrective actions with respect to
significant deficiencies and material weaknesses.
(c) Asset-backed issuers. Not applicable.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders on October 17, 2002,
the three continuing directors who were managements nominees for
re-election were elected to the Company Board of Directors. These
directors were re-elected for terms ending in 2005 with the following
votes:
Authority for Voting
Director's Name Votes For Withheld
Harold Bergman 3,016,030 10,575
Jane M. Boulware 3,015,780 10,825
Richard C. Fischer 3,016,030 10,575
Joseph J. Baksha, Jeffry H. Collier, James L. Dillon, Pat Richter and A. John
Wiley, Jr. continue as directors with terms expiring in either 2003 or 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Sarbanes-Oxley Section 906 Certification by the CEO
99.2 Sarbanes-Oxley Section 906 Certification by the CFO
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated September 24,
2002, reporting the commencement of cash dividends.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
OUTLOOK GROUP CORP.
------------------
(Registrant)
Dated: January 14, 2003
/s/ Richard C. Fischer
----------------------------
Richard C. Fischer, Chairman and
Chief Executive Officer
/s/ Paul M. Drewek
----------------------------
Paul M. Drewek, Chief Financial
Officer
CERTIFICATIONS
I, Richard C. Fischer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Outlook Group
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made know to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal control which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Richard C. Fischer
------------------------------------------
Richard C. Fischer
Chairman and Chief Executive Officer
I, Paul M. Drewek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Outlook Group
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made know to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal control which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Paul M. Drewek
------------------------------------------
Paul M. Drewek
Chief Financial Officer