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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 February 28, 2004
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.
3,385,477 shares of common stock, $.01 par value, were outstanding at April 13,
2004.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
As of February 28, 2004 and May 31, 2003 4
Condensed Consolidated Statements of Operations
For the three-months and nine-months ended
February 28, 2004 and March 1, 2003 5
Condensed Consolidated Statements of Cash Flows
For the nine-months ended February 28, 2004 and
March 1, 2003 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
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
February 28, 2004, the results of operations for the three-month and
nine-month periods ended February 28, 2004 and March 1, 2003, and the
results of cash flows for the nine-month periods ended February 28,
2004 and March 1, 2003. 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 2003 Form 10-K.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
February 28, May 31,
2004 2003
------------ -------
ASSETS
Current Assets
Cash and cash equivalents $ 2 $ 2
Accounts receivable, less allowance for
doubtful accounts of $726 and $478, respectively 11,309 7,223
Notes receivable-current portion 291 12
Inventories 11,374 7,950
Deferred income taxes 846 846
Income taxes refundable 294 810
Other 808 545
------------ --------
Total current assets 24,924 17,388
Notes receivable long-term, less allowance for
doubtful accounts of $652 in both years 117 1
Property, plant, and equipment
Land 583 583
Building and improvements 10,645 10,621
Machinery and equipment 40,970 40,237
------------ --------
52,198 51,441
Less: accumulated depreciation (31,270) (30,347)
------------ --------
20,928 21,094
Other assets 1,210 1,286
------------ --------
Total assets $ 47,179 $ 39,769
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank revolver loan $ 7,105 $ 1,500
Accounts payable 3,400 2,025
Book overdraft 1,404 729
Accrued liabilities:
Salaries and wages 1,450 1,612
Other 65 375
------------ --------
Total current liabilities 13,424 6,241
Deferred income taxes 3,279 3,279
Shareholders' Equity
Cumulative preferred stock -- --
Common stock (5,209,882 and 5,152,382 shares issued,
respectively) 52 52
Additional paid-in capital 19,114 18,888
Retained earnings 23,640 23,422
Treasury stock (1,837,899 and 1,789,063 shares,
respectively) (12,056) (11,739)
Officers' loans (274) (374)
------------ --------
Total shareholders' equity 30,476 30,249
------------ --------
Total liabilities and shareholders' equity $ 47,179 $ 39,769
============ ========
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 Nine-Month Period Ended
---------------------------- ----------------------------
February 28, March 1, February 28, March 1,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 17,236 $ 12,596 $ 53,639 $ 46,914
Cost of goods sold 14,166 11,195 44,188 38,368
------------ ------------ ------------ ------------
Gross profit 3,070 1,401 9,451 8,546
Selling, general, and administrative expenses 2,712 2,429 8,486 7,733
------------ ------------ ------------ ------------
Operating profit (loss) 358 (1,028) 965 813
Other income (expense):
Interest expense (85) - (221) -
Interest and other
income (expense) 52 33 147 31
------------ ------------ ------------ ------------
Earnings (loss)
from operations
before income taxes
and cumulative effect
of change in accounting
principle 325 (995) 891 844
Income tax expense
(benefit) 118 (357) 336 340
------------ ------------ ------------ ------------
Earnings (loss) before
cumulative effect of
change in accounting
principle 207 (638) 555 504
Cumulative effect of
change in accounting
principle (net of tax) - - - (236)
------------ ------------ ------------ ------------
Net earnings (loss) $ 207 $ (638) $ 555 $ 268
============ ============ ============ ============
Earnings (loss) per
common share before
cumulative effect of
change in accounting
principle:
Basic and Diluted $ 0.06 $ (0.19) $ 0.16 $ 0.15
Cumulative effect of
change in accounting
principle:
Basic and Diluted - - - $ (0.07)
Earnings (loss) per
common share:
Basic and Diluted $ 0.06 $ (0.19) $ 0.16 $ 0.08
Weighted average
number of shares
outstanding-Basic 3,371,983 3,353,319 3,366,722 3,351,726
============ ============ ============ ============
Weighted average
number of shares
outstanding-Diluted 3,400,424 3,353,319 3,398,575 3,397,339
============ ============ ============ ============
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)
Nine-Month Period Ended
February 28, 2004 March 1, 2003
----------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 555 $ 268
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,497 2,454
Provision for doubtful accounts 162 37
(Gain) loss on sale of assets (32) 81
Cumulative effect of change in accounting principle, net - 236
Change in assets and liabilities:
Accounts and notes receivable (4,643) 1,024
Inventories (3,424) (1,482)
Other assets (216) (286)
Accounts payable 1,375 1,296
Accrued liabilities (346) (978)
Income taxes 516 -
------- -------
Net cash (used in) provided by operating activities (3,556) 2,650
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business-net of cash acquired - (1,247)
Proceeds from sale of assets 264 523
Acquisition of property, plant, and equipment (2,534) (3,868)
------- -------
Net cash used in investing activities (2,270) (4,592)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving credit arrangement borrowings 5,605 -
Increase in book overdraft 675 -
Exercise of stock options 50 20
Dividends paid to shareholders (504) (335)
------- -------
Net cash provided by (used in) financing activities 5,826 (315)
Net change in cash - (2,257)
Cash and cash equivalents at beginning of period 2 3,021
------- -------
Cash and cash equivalents at end of period $ 2 $ 764
======= =======
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Net Earnings (Loss) Per Common Share:
Basic earnings (loss) per share is computed by dividing net earnings by
the weighted average shares outstanding during each period. Diluted
earnings per share is computed similar to basic earnings 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.
The following is a reconciliation of the average shares outstanding
used to compute basic and diluted earnings per share.
Three-Month Period Nine-Month Period
Ended Ended
February 28, March 1, February 28, March 1,
2004 2003 2004 2003
------------ --------- ------------ ---------
Weighted average
shares outstanding-
Basic 3,371,983 3,353,319 3,366,722 3,351,726
Effect of dilutive
securities - Stock options 28,441 - 31,853 45,613
------------ --------- ------------ ---------
Weighted average
shares outstanding -
Diluted 3,400,424 3,353,319 3,398,575 3,397,339
============ ========= ============ =========
2. Inventories:
Inventories consist of the following (in thousands):
February 28, 2004 May 31, 2003
----------------- ------------
Raw materials $ 4,260 $ 3,129
Work in process 1,527 971
Finished goods 5,587 3,850
------------ ---------
$ 11,374 $ 7,950
============ =========
3. Income Taxes
The effective income tax rate used to calculate the income tax expense
for the three-month and nine-month periods ended February 28,2004 and
March 1, 2003 is based on the anticipated income tax rate for the
entire fiscal year.
4. Stock Option Accounting
The Company has elected to account for all its stock option plans in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation expense related to stock options is reflected in net
earnings (loss) as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. Had compensation cost
been applied utilizing the fair value recognition provisions of SFAS
No. 123 and 148, the pro forma effect for the nine-month periods ended
February 28, 2004 and March 1, 2003 on net earnings would have been
$(0) and ($6,100), respectively. There was no pro forma effect on the
February 28, 2004 and March 1, 2003 earnings per share for either basic
or diluted.
5. Concentration of Risk
A substantial portion of the Company's net sales are represented by the
International Masters Publishing Inc. (IMP) contract. During the third
quarter and the first nine months of fiscal 2004, IMP accounted for
approximately 26.4% and 24.9% of net sales, respectively. The loss of
IMP sales would have a material adverse effect on the Company's sales
volume and profitability. Additionally, the loss of one or more other
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.
6. Accounting Periods:
The Company has adopted 13-week quarters; however, fiscal year-end
remains May 31.
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 earnings (loss) of the respective operations. Summarized
financial information for the three-month and nine-month periods ending
February 28, 2004 and March 1, 2003 are as follows:
Income Statement Data:
Three-Month Period Ended Three-Month Period Ended
February 28, 2004 March 1, 2003
(in thousands) (in thousands)
Net Earnings
Net Sales Net Earnings Net Sales (Loss)
--------- ------------ --------- ------------
Graphics $ 9,904 $ 5 Graphics $ 5,892 $ (791)
Web 7,332 202 Web 6,704 153
-------- ----- --------- ------
Total $ 17,236 $ 207 Total $ 12,596 $ (638)
Nine-Month Period Ended Nine-Month Period Ended
February 28, 2004 March 1, 2003
(in thousands) (in thousands)
Net Earnings Net Earnings
Net Sales (Loss) Net Sales (Loss)
--------- ------------ --------- ------------
Graphics $ 32,196 $ (182) Graphics * $ 24,364 $ (677)
Web 21,443 737 Web 22,550 945
--------- ------- --------- ------
Total $ 53,639 $ 555 Total $ 46,914 $ 268
Balance Sheet Data:
* The net earnings for the Graphics segment includes a cumulative effect of a
change in accounting principle charge of $236 (net of tax)
February 28, May 31,
2004 2003
(in thousands) (in thousands)
-------------- --------------
Total Assets
Graphics $ 31,923 $ 23,614
Web 15,256 16,155
-------- --------
Total $ 47,179 $ 39,769
======== ========
8. 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.
At February 28, 2004, the Company had loans totaling $274,000 to these
individuals. 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 must be 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.
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.
9. Commitments and Contingencies
As previously reported, the Company was sued in fiscal 2003 by Silly
Productions, Inc. and its owner Thomas Riccio in an action which arose
out of the actions of a former employee of the Company who appears to
have stolen small amounts of certain materials, including collectable
cards that the Company was printing for the plaintiffs. The plaintiffs
alleged total damages of $4.9 million. The Company denied liability;
however, to avoid the further expense of litigation, the Company
entered into a settlement agreement with the plaintiffs pursuant to
which the Company paid Silly Productions $150,000. The plaintiffs
dismissed the litigation, and the parties released each other from
further liability. This settlement was recorded in the second quarter
of fiscal 2004.
In the opinion of management, the Company is not a defendant in any
other legal proceedings other than routine litigation that is not
material to its business.
10. Recently Issued Financial Accounting Pronouncements:
In May 2003, the Financial Accounting Standards Board (FASB or the
"Board) issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This
standard specifies that instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as
liabilities. This statement is effective for the Company in fiscal year
2004. This pronouncement is not expected to have a material effect on
the Company's financial statements.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which requires the consolidation of and disclosures
about variable interest entities (VIEs). VIEs are entities for which
control is achieved through means other than voting rights. In December
2003, the FASB revised FIN No. 46 to incorporate all decisions,
including those in previously issued FASB Staff Positions, into one
Interpretation. The revised Interpretation supersedes the original
Interpretation. Requirements for non-special purpose entities acquired
before February 1, 2003 are effective at the end of the fourth quarter
of fiscal 2004. FIN No. 46 is not expected to have a significant impact
on the Company's financial statements.
11. Subsequent Events
The Company declared a quarterly cash dividend of $0.05 per common
share outstanding on March 17, 2004. The dividend is payable on April
15, 2004 to shareholders of record on April 8, 2004. Based on the
current number of shares outstanding, the payment will be approximately
$169,000.
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 nine months of fiscal 2004 and 2003, and
its financial condition at February 28, 2004. Statements that are not historical
facts, that relate to the Company's future performance, anticipated financial
position, or results of operations for fiscal 2004 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," "management 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 dollar amounts in the tables in this section are presented in thousands,
except for per share amounts or where otherwise indicated.
RESULTS OF OPERATIONS
Comparisons between the fiscal 2004 and fiscal 2003 periods are substantially
affected by the long-term production and supply chain management agreement
between the Company and International Masters Publishers Inc. ("IMP"), which was
entered into in March 2003. Under this five-year agreement, the Company is
providing substantial services on behalf of IMP. The Company has made
significant expenditures to support the IMP arrangement. Particular aspects of
the IMP arrangement, which increased sales and decreased profitability in the
first three quarters of fiscal 2004, are discussed below.
The Company's net sales for the third quarter of fiscal 2004 were $17.2 million,
up $4.6 million from the third quarter of fiscal 2003. The Graphics business
segment had third quarter net sales of $9.9 million, up 68.1% from the third
quarter of fiscal 2003, due largely to net sales of $4.6 million under the IMP
contract. Net sales to IMP during the quarter are net of any rebates and
performance bonuses due under the arrangement. Due to volume shortfalls during
the third quarter, the Company has recorded a receivable of approximately
$140,000 due under the agreement. See also the discussion of gross profit margin
for a description of certain IMP inventory sales included in net sales in fiscal
2004. The Company's sales increases were partially offset by a loss of sales,
which was previously disclosed, to two customers, which were significant in
fiscal 2003; those sales represented $2.2 million in the first nine months of
fiscal 2003.
The Web business segment had third quarter net sales of $7.3 million, up 9.4%
from the third quarter of fiscal 2003, primarily due to increased volumes in its
label business.
The Company's net sales performance for the third quarter of fiscal 2004 is
summarized in the following chart:
Net Sales Quarter 3 Quarter 3 Quarter 3 Quarter 3
Fiscal 2004 Fiscal 2003 $ Change % Change
----------- ----------- --------- ---------
Graphics $ 9,904 $ 5,892 $ 4,012 68.1%
Web 7,332 6,704 628 9.4%
------- ------- ------- ----
Total $17,236 $12,596 $ 4,640 36.8%
The Company's net sales for the first nine months of fiscal 2004 were $53.6
million, up $6.7 million from the first nine months of fiscal 2003. The Graphics
business segment had year-to-date net sales of $32.2 million, up 32.1% from the
prior year, due largely to net sales of $13.4 million under the IMP contract
offset by reductions to two former customers.
The Web business segment had year-to-date net sales of $21.4 million, down 4.9%
from the prior year, primarily due to decreased volumes in its label business.
The Company's net sales performance for the year-to-date period is summarized in
the following chart:
Year-to-date Year-to-date Year-to-date Year-to-date
Net Sales Fiscal 2004 Fiscal 2003 $ Change % Change
------------ ------------ ------------ ------------
Graphics $ 32,196 $ 24,364 $ 7,832 32.1%
Web 21,443 22,550 (1,107) -4.9%
Other -
-------- -------- ------- ----
Total $ 53,639 $ 46,914 $ 6,725 14.3%
For the year-to-date period, the Company's sales are comprised as follows:
Sales Breakdown Fiscal Fiscal
2004 2003
------ ------
Graphics 60% 52%
Web 40% 48%
--- ---
Total 100% 100%
The Company's gross profit margin for the third quarter of fiscal 2004 was 17.8%
of net sales as compared to 11.1% of net sales in fiscal 2003. For the
year-to-date period, gross margins were 17.6% of net sales in fiscal 2004
compared to 18.2% of net sales in fiscal 2003. For the year-to-date period,
gross margins decreased primarily as a result of a product sales mix that
produced lower overall profit margins, a printing industry that, in general,
suffers from overcapacity and severe pricing pressures, the continuing effects
of a slumping economy, increases in certain raw materials, and the investments
in start-up costs for IMP and the other new long-term supply-chain contracts.
The Company believes it has now incurred the bulk of the transition and start-up
costs related to these contracts, which has helped improve margins in the third
quarter. In addition, margins were negatively affected by provisions of the IMP
contract under which certain finished inventory materials which were acquired
from IMP during the first quarter of fiscal 2004, were credited back to IMP at
cost after the Company provided additional production, overwrapping, and
fulfillment services. Sales of approximately $300,000 in the third quarter and
approximately $1.6 million in the nine-month period relate to this inventory.
Since those materials are being used in the ordinary course of the arrangement,
the Company expects that the related effect will diminish in future quarters,
although these arrangements reduced the Company's gross margins in the 2004
periods.
Selling, general and administrative expenses were 15.7% of net sales for the
third quarter of fiscal 2004, or $2.7 million as compared to $2.4 million or
19.2% of net sales in the third quarter of fiscal 2003. In fiscal 2004
year-to-date selling, general and administrative expenses were 15.8% of net
sales or $8.5 million as compared to 16.5% of net sales or $7.7 million in
fiscal 2003. The Company incurred $150,000 during the second quarter of fiscal
2004 as part of a settlement agreement with Silly Production, Inc. 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, as the Company
believes that relatively large orders and customers tend to be more advantageous
to it than smaller ones. However, this strategy also increases the Company's
dependence on these larger customers.
The Company's operating income for the third quarter of fiscal 2004 was
approximately $358,000 or 2.1% of net sales. The Company reported an operating
loss during the third quarter of fiscal 2003 of approximately $1,028,000 or
(8.2%) of net sales. For the year-to-date period, the Company had operating
income of $965,000 or 1.8% of net sales during fiscal 2004. During the first
nine months of fiscal 2003, the Company had operating income of $813,000 or 1.7%
of net sales.
The Company incurred $85,000 of interest expense during the third quarter of
fiscal 2004 and incurred $221,000 for the year-to-date period. The Company
maintains a revolving credit facility, which it uses to finance increased
working capital needs related to the start-up of supply chain agreements. As of
February 28, 2004, the Company had $7.1 million outstanding on its revolving
credit agreement. Borrowings during the first nine months of fiscal 2004 were
used primarily to fund capital expenditures of $2.5 million as well as the
purchase and production of inventory related to IMP and its other longer-term
contracts.
The Company is currently accruing income tax expense at the expected annual rate
of 38.5%, although quarter-to-quarter fluctuations may occur.
The Company reported net income for the third quarter of fiscal 2004 of $207,000
or $0.06 per diluted common share. The Company reported a net loss for the third
quarter of fiscal 2003 of $638,000 or $(0.19) per diluted common share. The
Company reported net income for the year-to-date period in fiscal 2004 of
$555,000 or $0.16 per diluted share. The Company reported a net profit for the
year-to-date period in fiscal 2003 of $268,000 or $0.08 per diluted share. The
results for fiscal 2003 include a loss related to the cumulative effect of a
change in accounting principle of $236,000, net of tax, or $(0.07) per diluted
common share.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities, as shown on the Condensed Consolidated
Statements of Cash Flows, was approximately $3.6 million for the first nine
months of fiscal 2004, as compared to $2.7 million provided during the first
nine months of fiscal 2003. The Company experienced a $3.4 million increase in
inventory during the first nine months of fiscal 2004. This increase was
primarily in finished goods resulting from the acquisition of finished goods
that are being sold back to IMP based on demand, as well as the Company's
production of finished goods to meet various other customers' forecasted
requirements. When inventory is produced to a customer's forecast, the customer
generally is ultimately obligated to purchase the inventory; however, the
Company may be required to store the inventory for a period of time before
delivery is made. In June 2003, the Company purchased $2.0 million of completed
inventory from IMP as part of its contract obligation and had approximately
$500,000 of that inventory remaining as of February 28, 2004. The Company also
had an increase in raw materials as the Company adjusted its inventory to meet
client forecasts and production schedules. Accounts and notes receivable
increased by approximately $4.6 million during the first nine months of fiscal
2004. The most significant source of cash and liquidity for the Company are the
payments received from its customers; therefore, changes in the frequency at
which customers pay and any other significant disruption in customer payments
can affect Company liquidity. The largest share of this increase is related to
the invoicing under the IMP contract. At February 28, 2004, the Company has
approximately $4.1 million in accounts receivable related to IMP for contract
and non-contract work. Depreciation and amortization for the first nine months
of fiscal 2004 and fiscal 2003 was approximately $2.5 million and $2.5 million,
respectively.
The Company used approximately $2.5 million of cash in acquiring and upgrading
existing machinery and equipment during the first nine months of fiscal 2004.
The Company expects that it will invest an additional $1.0 million during fiscal
2004 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. The Company has approximately $9.2 million in minimum lease
payments under existing operating leases as of February 28, 2004; the majority
are for production related machinery and equipment. The Company does not
currently have any capital lease obligations. See "Disclosures about Contractual
Obligations and Commercial Commitments" below.
The Company had $5.8 million provided by financing activities. The Company has
borrowed $5.6 million against its revolving credit facility to fund capital
expenditures of $2.5 million and to purchase and build inventory under its
longer-term contracts. As of March 31, 2004, the Company had $7.1 million
outstanding on its revolving credit agreement. The line of credit provides a
significant source of additional liquidity to the Company. The Company expects
to continue to use the revolving credit facility for the foreseeable future.
Assuming IMP and other longer-term contract sales continue at the contract
levels, the Company expects that its use of its revolving credit facility will
diminish because the start-up costs and related inventory purchases are being
absorbed into the Company's sales over time.
The Company declared a quarterly cash dividend of $0.05 per common share
outstanding on March 17, 2004. The dividend is payable on April 15, 2004 to
shareholders of record on April 8, 2004. Based on the current number of shares
outstanding, the payment will be approximately $169,000. A continuation of
dividends at this level in future quarters would require similar resources in
future periods.
The Company converted three customers with account receivable balances to note
receivables during the second and third quarters of fiscal 2004. The notes are
for approximately $408,000 and have terms of twenty-four months.
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 operational needs. The Company is in
compliance with all of its related loan covenants. Management believes that the
remaining $7.9 million available under the credit facility, assuming its
extension or renewal, will be sufficient to meet the Company's expected
liquidity needs unless the Company was to make an acquisition or enter into a
significant new
customer arrangement requiring substantial up-front expenditures. In those
cases, the Company may need to expand or add additional financing arrangements
to meet those needs. The Company is in the early state of negotiating and
extending its credit facility, which expires in April 2004. The renewal is
expected to be completed during the first quarter of fiscal 2005 although the
Company cannot assure that it will be able to reach a satisfactory agreement.
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 result in additional
transactions during fiscal 2004 and beyond. The Company previously reported that
it had accepted an offer in principle to sell its Troy, Ohio facility. That
offer has since been withdrawn. The Company has been notified that its existing
tenant for its Troy, Ohio facility intends to vacate the premises during the
fourth quarter of fiscal 2004. The Company had monthly rental income of
approximately $6,000. The Company will continue to pursue the sale or lease of
this unused property, but cannot assure that it will be able to sell or lease
this property in a timely manner or that it will receive and accept an offer
that is profitable to the Company.
The Company's primary source of liquidity has been operating cash flows, and in
particular payments received from its customers, but supplemented with
borrowings under its credit facility. The Company's future cash receipts 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
- Continued availability of bank financing
Additionally, liquidity will be affected by cash needs including:
- The ability and need to acquire and maintain appropriate
machinery and equipment
- Start up costs for significant new client relationships,
including working capital needs
- The ability and need to hire, train and retain a suitable work
force
- Acquisitions or divestiture activities
- Capital asset additions or disposals
- Environmental compliance matters
The Company is dependent upon its ability to retain its existing client base,
and additionally, obtain new clients. Its success will depend upon the Company's
ability to use existing technical and manufacturing capabilities and knowledge
in the development and introduction of new value-added products and services
targeted at new markets and clients through increased marketing initiatives that
allow the Company to differentiate its products and services from that of its
competitors. The failure to utilize its capabilities or properly identify and
address the evolving needs of targeted customers and markets, will limit the
Company's ability to capture and develop new business opportunities. In
addition, the Company's success is dependent on its ability to manufacture
products and provide services at a competitive cost and subsequently price them
competitively. 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 2003 that accounted for more than 10% of
net sales. However, the entry into the agreement with International Masters
Publishing (IMP) in late fiscal 2003 has resulted in an increased dependence
upon sales to IMP, which is now the Company's largest customer and its only
customer with sales in excess of 10% during fiscal 2004. During the third
quarter and the first nine months of fiscal 2004, IMP accounted for
approximately 26.4% and 24.9% of net sales respectively.
Although significant long-term contracts provide more stability to the Company,
they can increase the Company's dependence on specific customers. In particular,
a substantial portion of the Company's sales are now represented by the IMP
contract. The loss of IMP sales would have a material adverse effect on the
Company's sales volume and profitability. Additionally, the loss of one or more
other 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. During the third quarter of fiscal
2003, the Company was notified of reductions in volume by two of its major
clients with ongoing projects. These clients represented approximately $2.2
million of sales during fiscal 2003.
Except for specific longer-term contracts, 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 arrangements 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, management expects that it
will continue to experience significant sales concentration given the relatively
large size of projects accepted for certain clients.
Due to the range of services that the Company provides, product sales mix can
produce a range of profit margins. Some businesses in which the Company operates
produce lower profit margins than others. For example, certain aspects of the
IMP arrangement, relating to large amounts of inventory purchases at the
commencement of the arrangement, have negatively affected the Company's margins
during the reported periods. 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. The Company cannot guarantee the level of sales under its longer-term
contracts, including the IMP contract. Many factors including contract disputes,
performance problems, customer financial difficulties or changes in business
strategies, changes in demand for the customer's products and / or future
negotiated changes to the agreements could cause actual results to differ.
The September 11, 2001 terrorist attacks, the U.S. and international response,
the fear of additional attacks, and the war with Iraq and its aftermath have
substantially affected the United States economy as a whole. Some of these
matters, such as the anthrax mailings, have specifically affected the industry
in which the Company operates because of their effect on promotional mailings.
These events could adversely affect business and operating results for an
undeterminable period of time in ways that presently cannot be predicted.
Technologies such as the Internet will continue to affect the demand for
printing services in general, and the continuing increases in postal rates and
legislation changes such as the national "do not call" list and "can spam"
limitations will likely impact the direct mail business in varying ways.
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 a material adverse 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 and liquidity and the Company's
reserves for these items may not be sufficient. Declining general economic
conditions also increase the risk for the Company, as many of its clients could
negatively be impacted by the depressed economy. As sales to contractual
customers such as IMP become a larger percentage of the Company's sales and
receivables, disputes or collection problems would likely affect a larger
portion of the Company's sales and/or receivables. Additionally, several
customers with contractual arrangements have extended payment terms although
payments have generally been received according to the terms of the contract.
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. In
addition, the Company has acquired specialized machinery related to the IMP
arrangement and may need to acquire specific machinery in order to perform tasks
for other customers or types of projects. In certain cases, the cost of this
machinery is factored into costs or prices charged to related customers;
however, the costs may not be fully recovered, such as in the event sales to
customers do not reach anticipated levels. Among other factors, the Company may
be affected by equipment malfunctions, the inability to configure machinery on a
timely basis, 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. 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. In
addition, as occurred in the third quarter of fiscal 2003, the Company may in
the future again incur additional employee expenses because of the need to
maintain a work force in excess of current needs to service anticipated customer
products; such a decision would increase expenses in the short term.
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. Acquisitions,
in particular, are subject to potential problems and inherent risks, including:
- Difficulties in identifying, financing and completing viable
acquisitions
- Difficulties in integrating the acquired company, retaining
the acquired company's customers and achieving the expected
benefits of the acquisition, such as expected revenue
increases and cost savings
- Loss of key employees of the acquired company
- The resulting diversion of managements' attention away from
current operations
- The assumption of undisclosed liabilities
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, such as the Troy
facility, 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
satisfactory return on the investments.
The Company and the industry in which it operates are subject to environmental
laws and regulation 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.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL 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 now requires the use of a least one
additional aid to present the total picture of a registrant's liquidity and
capital resources and the integral role of on and off balance sheet
arrangements. The Company has prepared a schedule 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
2003 Report on Form 10-K. In addition, the Company has prepared schedules
suggested by the SEC for the period ending February 28, 2004. The Company had no
commercial commitments to report as of the latest balance sheet date.
Contractual
Obligations Less than 1 - 3 4 - 5 After 5
(Dollars in thousands) Total 1 year years years years
- ------------------------- ------ --------- ------ ------ -------
Long-term debt $ 0 $ 0 $ 0 $ 0 $ 0
Capital lease obligation 0 0 0 0 0
Operating leases 9,240 2,161 6,543 536 0
Unconditional purchase obligations 0 0 0 0 0
Other long-term obligations 0 0 0 0 0
------ ------ ------ ------ -------
Total contractual cash obligations $9,240 $2,161 $6,543 $ 536 $ 0
====== ====== ====== ====== =======
In addition, at February 28, 2004, the Company had borrowed $7.1 million against
its $15.0 million bank revolver agreement. The Company is in compliance with its
covenants under the related agreement. The Company is currently in the process
of re-negotiating a revised credit facility with its lender. This is expected to
be complete in the fourth quarter of fiscal 2004, although the Company cannot
assure that it will reach a satisfactory agreement.
The Company has no "off balance sheet" arrangements, which would otherwise
constitute balance sheet liabilities.
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 February 28, 2004,
the Company had loans totaling $274,000. 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.
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
The Company's accounting policies are disclosed in its fiscal 2003 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, fixed assets and intangible assets.
Management has discussed the development, selection and disclosure of these
estimates and assumptions with the audit committee and its board of directors.
REVENUE RECOGNITION
Revenue is recognized by the Company when all of the following criteria are met:
persuasive evidence of a selling arrangement exists; the Company's price to the
customer is fixed; collectibility is reasonably assured; and title has
transferred to the customer. Generally, these criteria are met at the time of
shipment. 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,
2003 has been used during the first nine months of fiscal 2004. 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, assuming customers comply with their
obligations with respect to inventory produced to meet their forecasts, 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 adopted Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" during
fiscal 2003. In accordance with the provision of SFAS 144, the Company reviews
property, plant, and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of property, plant and equipment is measured by
comparison of its carrying amount to future net cash flows which the property,
plant and equipment are expected to generate. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the property, plant and equipment, if any, exceed its
fair market value. The Company has established a reserve of $247,000 as of
February 28, 2004.
On June 1, 2002, the Company adopted the provision of SFAS No. 142 "Goodwill and
Other Intangible Assets" for evaluating whether goodwill or indefinite-lived
intangible assets are impaired. Going forward the Company will need to review
goodwill and other indefinite-lived intangible assets on at least an annual
basis to determine whether they are impaired.
The Company recorded a goodwill impairment charge of $352,000 ($236,000 net of
taxes) during fiscal 2003, in its Graphics segment. The impairment has been
recorded as a cumulative effect of change in accounting principle on the
consolidated statements of operations.
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 is exposed to changing interest rates, principally under its
revolving credit facility and outstanding notes receivable. Currently, 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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting: There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Extension of Loan Agreement
10.1 Baksha Employment Agreement Second Extension
31.1 Sarbanes-Oxley Section 302 Certification by the CEO
31.2 Sarbanes-Oxley Section 302 Certification by the CFO
32.1 Sarbanes-Oxley Section 906 Certification by the CEO
32.2 Sarbanes-Oxley Section 906 Certification by the CFO
(b) Reports on Form 8-K.
None filed or to be incorporated by reference into other
documents. However, the Company submitted a Form 8-K dated
January 7, 2004 to report the Company's fiscal 2004 second
quarter results for the period ended November 29, 2003 and
dated March 29, 2004 to report the Company's fiscal 2004 third
quarter results for the period ended February 28, 2004.
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: April 13, 2004
/s/ Richard C. Fischer
---------------------------------------------
Richard C. Fischer, Chairman and
Chief Executive Officer
/s/ Paul M. Drewek
---------------------------------------------
Paul M. Drewek, Chief Financial Officer