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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 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 September
30, 2004.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
As of August 28, 2004 and May 31, 2004 4
Condensed Consolidated Statements of Operations
For the three-months ended August 28, 2004 and
August 30, 2003 5
Condensed Consolidated Statements of Cash Flows
For the three-months ended August 28, 2004 and
August 30, 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 August 28, 2004,
the results of operations for the three-month periods ended August 28,
2004 and August 30, 2003, and the results of cash flows for the
three-month periods ended August 28, 2004 and August 30, 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 2004 Form 10-K.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
August 28, May 31,
2004 2004
---------- -------
ASSETS
Current Assets
Cash and cash equivalents $ 1,810 $ 2
Accounts receivable, less allowance for
doubtful accounts of $769 and $730, respectively 9,287 8,283
Notes receivable-current portion, less allowance for doubtful
accounts of $94 and $105, respectively 267 178
Inventories 11,282 10,394
Deferred income taxes 723 723
Income taxes refundable 2 438
Other 1,590 858
---------- ----------
Total current assets 24,961 20,876
Notes receivable long-term, less allowance for
doubtful accounts of $6 and $16, respectively 278 59
Property, plant, and equipment
Land 583 583
Building and improvements 10,645 10,645
Machinery and equipment 40,412 40,827
---------- ----------
51,640 52,055
Less: accumulated depreciation (31,524) (31,251)
---------- ----------
20,116 20,804
Other assets 952 1,185
---------- ----------
Total assets $ 46,307 $ 42,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,000 $ -
Bank revolver loan 225 1,850
Accounts payable 4,350 2,308
Book overdraft - 1,500
Accrued liabilities:
Salaries and wages 1,442 1,870
Other 986 795
---------- ----------
Total current liabilities 8,003 8,323
Long-term debt, less current maturities 3,000 -
Deferred income taxes 3,943 3,943
Commitments and contingencies
Shareholders' Equity
Cumulative preferred stock - -
Common stock (5,242,382 shares issued) 52 52
Additional paid-in capital 19,244 19,244
Retained earnings 24,525 23,822
Treasury stock (1,856,905 shares) (12,186) (12,186)
Officers' loans (274) (274)
---------- ----------
Total shareholders' equity 31,361 30,658
---------- ----------
Total liabilities and shareholders' equity $ 46,307 $ 42,924
========== ==========
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
----------------------------
August 28, August 30,
2004 2003
Net sales $ 17,207 $ 17,061
Cost of goods sold 13,588 14,548
------------ ------------
Gross profit 3,619 2,513
Selling, general, and administrative expenses 2,576 2,846
------------ ------------
Operating profit (loss) 1,043 (333)
Other income (expense):
Interest expense (44) (49)
Interest and other income 144 45
------------ ------------
Earnings (loss) from operations
before income taxes 1,143 (337)
Income tax expense (benefit) 440 (130)
------------ ------------
Net earnings (loss) $ 703 $ (207)
============ ============
Earnings (loss) per common share:
Basic and Diluted $ 0.21 $ (0.06)
Weighted average number of shares
outstanding-Basic 3,385,477 3,363,082
============ ============
Weighted average number of shares
outstanding-Diluted 3,413,328 3,363,082
============ ============
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)
Three-Month Period Ended
August 28, 2004 August 30, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 703 $ (207)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 794 784
Provision for doubtful accounts 77 31
Gain on sale of assets (140) (12)
Change in assets and liabilities, net of effect of disposal of
business:
Accounts and notes receivable (1,016) (3,002)
Inventories (904) (3,010)
Other current assets (493) (350)
Accounts payable 2,042 1,480
Accrued liabilities (57) (205)
Income taxes 436 462
----------- -----------
Net cash provided by (used in) operating activities 1,442 (4,029)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business 38 -
Proceeds from sale of assets 362 242
Acquisition of property, plant, and equipment (620) (1,473)
----------- -----------
Net cash used in investing activities (220) (1,231)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in revolving credit arrangement
borrowings (1,625) 5,500
Proceeds from increase in long-term debt 4,000 -
Decrease in book overdraft (1,500) (71)
Debt issuance cost (120) -
Dividends paid to shareholders (169) (169)
----------- -----------
Net cash provided by financing activities 586 5,260
Net change in cash 1,808 -
Cash and cash equivalents at beginning of period 2 2
----------- -----------
Cash and cash equivalents at end of period $ 1,810 $ 2
=========== ===========
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 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.
The following is a reconciliation of the average shares outstanding used
to compute basic and diluted earnings per share.
Three-Month Period Ended
August 28, August 30,
2004 2003
---------- ----------
Weighted average shares outstanding-Basic 3,385,477 3,363,082
Effect of dilutive securities - Stock
options 27,851 -
---------- ----------
Weighted average shares outstanding -
Diluted 3,413,328 3,363,082
========== ==========
Options to purchase 42,452 shares of common stock were outstanding
at August 30, 2003, but were not included in the computation of diluted
shares because the effect of including such options would have been
anti-dilutive to the net loss for the quarter.
2. Inventories:
Inventories consist of the following (in thousands):
August 28, 2004 May 31, 2004
--------------- ------------
Raw materials $ 4,211 $ 3,996
Work in process 1,503 1,065
Finished goods 5,568 5,333
-------- --------
$ 11,282 $ 10,394
======== ========
3. Income Taxes
The effective income tax rate used to calculate the income tax expense
(benefit) for the quarters ended August 28, 2004 and August 30, 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 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. The effect of utilizing the fair value recognition
provisions of SFAS No. 123 and 148 is considered immaterial for
disclosure.
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 first
quarter of fiscal 2005, IMP accounted for approximately 21% of net sales.
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 periods ending August 28, 2004 and August
30, 2003 are as follows:
INCOME STATEMENT DATA:
Three-Month Period Ended Three-Month Period Ended
August 28, 2004 August 30, 2003
(in thousands) (in thousands)
Net Earnings Net Earnings
Net Sales (Loss) Net Sales (Loss)
--------- --------- --------- ---------
Graphics $ 10,318 $ 694 Graphics $ 10,103 $ (389)
Web 6,889 9 Web 6,958 182
--------- --------- --------- ---------
Total $ 17,207 $ 703 $ 17,061 $ (207)
========= ========= ========= =========
BALANCE SHEET DATA:
August 28, May 31,
Total 2004 2004
Assets (in thousands) (in thousands)
-------------- --------------
Graphics $ 30,650 $ 27,783
Web 15,657 15,141
--------- ---------
Total $ 46,307 $ 42,924
========= =========
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
August 28, 2004, the Company had loans totaling $274,000. 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.
On July 22, 2003 the Company repurchased 17,072 shares of common stock
from Mr. Baksha at $6.1466 per share, the average of the high and low
trading prices for that day and the preceding two trading days. The
proceeds were then used to repay a note due the Company, in accordance
with its terms.
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
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. Sale of Paragon Direct
On July 7, 2004, the Company sold certain assets of its Paragon Direct
division ("Paragon Direct") to A.B. Data, Ltd. for approximately $376,000
(subject to post-closing confirmation) in cash and notes. The note, which
has a stated value of $350,000, is due in four equal annual installments
of $87,500 each and bears interest at 5.0% per annum. No gain or loss was
recognized as a result of the sale as the purchase price equaled the net
book value of the assets sold. Outlook Group retained, among other assets,
account receivables, the facility lease, and certain customer agreements
and software licenses.
While A.B. Data acquired certain customer relationships which were with
Paragon Direct, Outlook Group retained relationships with other customers
who use multiple Outlook Group services and can continue to make these
types of services available to other customers directly or through ongoing
arrangements with A.B. Data or other providers.
Outlook Group and A.B. Data have also entered into agreements under which
they may sell each others services for specified commissions, and Outlook
Group will make limited payments to A.B. Data if Paragon Direct continuing
sales are below specified amounts in the future. A.B. Data has also
committed to making Paragon Direct services available to Outlook Group to
support Outlook Group customers.
11. Subsequent Events
The Company declared a quarterly cash dividend of $0.05 per common share
outstanding on September 15, 2004. The dividend is payable on October 21,
2004 to shareholders of record on October 14, 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 three months of fiscal 2005 and 2004,
and its financial condition at August 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 2005 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 "Risks and Other Cautionary Factors." 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
The Company's net sales for the first quarter of fiscal 2005 were $17.2 million,
up slightly from the first quarter of fiscal 2004. The Company's net sales
performance for the first quarter of fiscal 2005 is summarized in the following
chart:
Net Sales Quarter 1 Quarter 1 Quarter 1 Quarter 1
Fiscal 2005 Fiscal 2004 $ Change % Change
--------- --------- --------- ---------
Graphics $ 10,318 $ 10,103 $ 215 2.1%
Web 6,889 6,958 (69) -1.0%
--------- --------- ---------
Total $ 17,207 $ 17,061 $ 146 0.9%
For the year-to-date period, the Company's sales are comprised as follows:
Sales Breakdown Fiscal Fiscal
2005 2004
------ ------
Graphics 60% 59%
Web 40% 41%
--- ---
Total 100% 100%
The Graphics business segment had first quarter net sales of $10.3 million, up
2.1% from the first quarter of fiscal 2004, due largely to sales under the
Company's supply chain management agreement with International Masters
Publishers Inc. ("IMP") and other sales to IMP. Sales to IMP were $3.6 million
in the first quarter of fiscal 2005, as compared to $3.0 million in the first
quarter of fiscal 2004. Of those sales, $3.0 million in the first quarter of
fiscal 2005 were under the long-term agreement, with the balance under purchase
orders. This increase was offset in part due to the sale of Paragon Direct, as
the Company no longer has the benefit of sales for this operating division. The
acceleration of some sales into the fourth quarter of the Company's fiscal 2004
as a result of customers' acceleration of projects also had the effect of
eliminating some of those sales from the first quarter of fiscal 2005. The Web
business segment had first quarter net sales of $6.9 million, down 1.0% from the
first quarter of fiscal 2004, primarily due to decreased volumes in its label
business.
The Company's gross profit margin for the first quarter of fiscal 2005 was 21.0%
of net sales, up from 14.7% in the prior year. Gross margins increased primarily
as a result of a sales mix that produced higher overall profit margins in the
Graphics business segment. In fiscal 2004, 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. In addition, gains
in production efficiencies are being realized from investments made in equipment
and training for several long-term projects. The Graphics segment also completed
a number of profitable one-time projects during the first quarter, which also
contributed to the higher gross margins for the quarter.
In contrast, the Web division had gross margins that declined during the first
quarter primarily as a result of fire damage to one the Company's narrow web
presses. The Company has incurred additional costs and operating inefficiencies
including additional overtime wages, premium freight charges and has had to
outsource various projects to other providers based on capacity limitations and
customer production and delivery requirements. These additional costs continued
into the early parts of the second quarter of fiscal 2005. The Company is
working with its insurance carrier to quantify the damages and restitution and
hopes to enter into a settlement with its carrier during the second quarter of
fiscal 2005. However, there can be no assurance that such a settlement will be
reached or as to the financial terms of any settlement.
In addition, during the first quarter of fiscal 2005, both segments of the
Company experienced price increases for many of its raw materials. While the
Company is permitted to pass along these increases in many circumstances, some
customers are resisting these increases. The Company's inability to reflect
these raw material increases could affect gross margin in the second quarter of
fiscal 2005 and thereafter.
Selling, general and administrative expenses were 15.0% of net sales for the
first quarter of fiscal 2005, or $2.6 million. During the first quarter of
fiscal 2004, the Company had selling, general and administrative costs of 16.7%
of net sales or $2.8 million. This decrease was due in part to reduced
investments in training during fiscal 2005, as these initiatives were completed
during fiscal 2004, and reduced professional services and consulting fees. In
addition, with the sale of the Paragon Direct division, the Company did not
incur the selling, general and administrative costs associated with this
division. 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 first quarter of fiscal 2005 was
approximately $1.0 million or 6.1% of net sales. The Company reported an
operating loss during the first quarter of fiscal 2004 of approximately
$300,000.
The Company had $44,000 of interest expense during the first quarter of fiscal
2005 as compared to $49,000 during the first quarter of fiscal 2004. The Company
maintains a credit facility, which it uses to finance increased working capital
needs related to the start-up of the supply chain agreements. This facility was
increased to $16.0 million and amended in August 2004. Of that amount, $4.0
million is in the form of a term loan. The remainder is a revolving credit
facility. Interest on the balance of any 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 is subject to an unused line fee
of .25% to maintain its credit facility. As a part of the amended financing
agreement, the Company paid a transaction fee of $100,000; this is being
amortized over the life of the loan agreement. As of August 28, 2004, the
Company had $225,000 outstanding on its revolving credit line and $4.0 million
outstanding under the term loan. The Company expects that it will continue to
use its revolving credit facility for the foreseeable future, and as contracts
mature and assuming sales at contract levels, the Company's use of its revolving
credit facility is expected to diminish.
Of the Company's other income in the first quarter of fiscal 2005, $140,000
represents a net gain on the sale of unused equipment.
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 sold certain assets of its Paragon Direct operations as of June 30,
2004. The Company did not recognize a gain or loss on the sale transaction,
although the transaction had the effect of reducing certain costs relating to
Paragon Direct effective as of the transaction date. Paragon Direct operations
were not material to the Company.
The Company reported a net profit for the first quarter of fiscal 2005 of
$703,000 or $0.21 per diluted common share. The Company reported a net loss for
the first quarter of fiscal 2004 of $207,000 or ($0.06) per diluted common
share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, as shown on the Condensed Consolidated
Statements of Cash Flows, was approximately $1.4 million for the first quarter
of fiscal 2005, as compared to $4.0 million used during the first quarter of
fiscal 2004. The Company experienced a $900,000 increase in inventory during the
first three months of fiscal 2005. The Company had increases in all areas of
inventory as it produced inventory to meet client forecasts and production
schedules. Accounts and notes receivable increased by approximately $1.0 million
during the first three months of fiscal 2005 as a result of additional sales,
certain of its larger customers no longer taking early pay discounts therefore
maximizing their payment terms. Depreciation and amortization for the first
three months of fiscal 2005 and fiscal 2004 was approximately $794,000 and
$784,000 respectively.
The Company used approximately $600,000 of cash in acquiring and upgrading
existing machinery and equipment during the first three months of fiscal 2005.
This cash item was largely offset by cash obtained from the sale of
under-utilized equipment during the quarter. The Company expects that it will
invest approximately $3.0 million during fiscal 2005 in capital expenditures,
but 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 $7.7 million in minimum lease payments under existing operating
leases as of August 28, 2004; the majority are for production related machinery
and equipment. The Company does not currently have any capital lease
obligations, but expects to enter into an agreement during the second quarter of
fiscal 2004 for approximately $650,000.
In the quarter, the Company had $586,000 provided by financing activities. The
Company has borrowed $225,000 against its revolving credit facility and has a
long-term loan of $4.0 million to finance its increased working capital needs
and capital expenditures during the first three months of fiscal 2005. During
the quarter, the Company had a net increase in total borrowings under its credit
facility of $2.4 million. Borrowings during the first quarter of fiscal 2005
were primarily used to fund capital expenditures and to purchase and build
inventory under its longer-term contracts. In addition the Company paid
dividends to shareholders of approximately $169,000.
The Company declared a quarterly cash dividend of $0.05 per common share
outstanding on September 15, 2004. The dividend is payable on October 21, 2004
to shareholders of record on October 14, 2004. A continuation of dividends at
this level in future quarters would require similar resources in future periods.
The Company maintains a credit facility, which it uses to finance increased
working capital needs related to the start-up of the supply chain agreements.
This facility was increased to $16.0 million and amended in August 2004. Of that
amount, $4.0 million is in the form of a term loan. The remainder is a revolving
credit facility. Interest on the balance of any 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 is subject to an unused line fee
of .25% to maintain its credit facility. As a part of the amended financing
agreement, the Company paid a transaction fee of $100,000; this is being
amortized over the life of the loan agreement. As of August 28, 2004, the
Company had $225,000 outstanding on its revolving credit line and $4.0 million
outstanding under the term loan. The Company expects that it will continue to
use its revolving credit facility for the foreseeable future, and as contracts
mature and assuming sales at contract levels, the Company's use of its revolving
credit facility is expected to diminish.
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. Effective June 30, 2004,
the Company sold selected assets of its former Paragon Direct division to A.B.
Data Ltd. Through the transaction, A.B. Data acquired certain customer
relationships with the customers who do business with Paragon Direct. The
Company retained other relationships with the customers who use multiple Outlook
Group services and can continue to make these types of services available to
customers directly or through ongoing arrangements with A.B. Data. These reviews
resulted in various transactions during recent fiscal years and may result in
additional transactions during fiscal 2005 and beyond.
The Company continues to pursue the sale of its Troy, Ohio facility. This
property is vacant and is not currently being sub-leased. The Company 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 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 ability of the Company to recover increases in raw materials
prices
- 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 to acquire and maintain appropriate machinery and
equipment
- Start-up costs for significant new client relationships, including
working capital needs
- The ability to hire, train and retain a suitable work force
- Acquisitions or divestiture activities
- Capital asset additions or disposals
- Environmental compliance matters
RISK AND OTHER CAUTIONARY FACTORS
In addition to the matters discussed earlier in this Management's Discussion and
Analysis, the Company is subject to many factors, which can affect its
operations, results and financial condition. In addition to the factors which
are discussed above, some other factors that could negatively affect the
Company's results and financial condition are set forth below.
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 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.
The Company is subject to price increases in many of its raw materials. The
first quarter of fiscal 2005 has seen many such increases. The Company's failure
to recover raw material price increases in pricing its products could have a
negative affect on the future profitability of the Company. The Company has not
experienced difficulties in obtaining materials for its continuing operations in
the past and does not consider itself dependent on any particular supplier for
raw materials. The raw materials consumed by the Company include paper stocks,
inks, and plastic films, all of which are readily available from numerous
suppliers.
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
supply-chain agreement with IMP, which is now the Company's largest customer,
and the Company's only customer with sales in excess of 10% during fiscal 2004
or the first quarter of fiscal 2005, results in an increased dependence upon
sales to IMP. Sales to IMP were 20.9% of the Company's net sales in the first
quarter of fiscal 2005, as compared to 17.5% during the corresponding period in
fiscal 2004. Although significant long-term contracts provide more stability to
the Company, they can increase the Company's dependence on specific customers.
In particular, substantial portions 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.
Many clients purchase the Company's services under cancelable purchase orders
rather than long-term contracts. 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. Had these factors continue, it would make predictions of the Company's
future results very difficult. In addition, significant contracts, such as the
contract with IMP, expose the Company to additional risks, which would result
from non-performance by the particular customer because of the relative
significance of those contracts. 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 given 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. The Company cannot assure the levels of its 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 change 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, the war with Iraq and its aftermath, and other
factors 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 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 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 has
occurred in past, the Company may in the future again incur additional employee
expenses because of the need to maintain a work force in excess of then-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, 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 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 OFF BALANCE SHEET OBLIGATIONS, CONTRACTUAL OBLIGATIONS AND
COMMERCIAL COMMITMENTS
The Company has no "off balance sheet" arrangements that would otherwise
constitute balance sheet liabilities. See below, however, for information
regarding the Company's operating leases.
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
2004 Report on Form 10-K. In addition, the Company has prepared schedules
suggested by the SEC for the period ending August 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 $ 4,000 $ 1,000 $ 3,000 $ 0 $ 0
Capital lease obligation 0 0 0 0 0
Operating leases 7,763 2,007 5,491 265 0
Unconditional purchase
obligations 0 0 0 0 0
Other long-term obligations 0 0 0 0 0
-------- -------- -------- -------- --------
Total contractual cash
obligations $ 11,763 $ 3,007 $ 8,491 $ 265 $ 0
======== ======== ======== ======== ========
In addition, at August 28, 2004, the Company had borrowed $225,000 against the
revolving credit line included in its bank credit agreement.
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 August 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 2004 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 customers 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 was
used to compute this allowance at May 31, 2004 has been used during the first
three months of fiscal 2005. 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 continues to use the same techniques to value inventory as have been
used in the past. The Company values its inventory at the lower of cost or
market. Cost is determined using the first-in, first-out method. Raw materials
and work-in-process are based on actual costs. Finished goods are valued based
upon average selling prices and gross margins applicable to the related customer
and product. Valuing inventories at either method 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. Any
actions taken by the Company's customers that could impact the value of
inventory are considered when determining inventory 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 adopted Statement of Financial Accounting Standards ("FAS") No. 144,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" 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 value of the 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, exceeds its
fair market value.
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 and other indefinite-lived assets on at least an annual basis
to determine whether they are impaired.
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.
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
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: October 1, 2004
/s/ Richard C. Fischer
--------------------------------------------------------
Richard C. Fischer, Chairman and Chief Executive Officer
/s/ Paul M. Drewek
--------------------------------------------------------
Paul M. Drewek, Chief Financial Officer