Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 January 7,
2005.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
As of November 27, 2004 and May 31, 2004 4
Condensed Consolidated Statements of Operations
For the three-month and six-month periods
ended November 27, 2004 and
November 29, 2003 5
Condensed Consolidated Statements of Cash Flows
For the six-month periods ended November 27, 2004 and
November 29, 2003 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits 21
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein, have been
prepared by the Company and have not been audited. However, the foregoing
statements contain all adjustments (consisting only of normal recurring
accruals) that are, in the opinion of Company management, necessary to
present fairly the financial position of the Company at November 27, 2004,
the results of operations for the three-month and six-month periods ended
November 27, 2004 and November 29, 2003, and cash flows for the six-month
periods ended November 27, 2004 and November 29, 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 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)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
November 27, May 31,
2004 2004
------------ ----------
ASSETS
Current Assets
Cash and cash equivalents $ 1,821 $ 2
Accounts receivable, less allowance for
doubtful accounts of $752 and $730, respectively 10,532 8,283
Notes receivable-current portion, less allowance for doubtful
accounts of $215 and $105, respectively 270 178
Inventories 10,875 10,394
Deferred income taxes 723 723
Income taxes refundable - 438
Other 1,205 858
---------- ----------
Total current assets 25,426 20,876
Notes receivable long-term, less allowance for
doubtful accounts of $0 and $16, respectively 263 59
Property, plant, and equipment
Land 309 309
Building and improvements 10,676 10,040
Machinery and equipment 40,433 40,821
---------- ----------
51,418 51,170
Less: accumulated depreciation (31,884) (31,178)
---------- ----------
19,534 19,992
Other assets 125 384
Assets held for sale 812 812
Goodwill 801 801
---------- ----------
Total assets $ 46,961 $ 42,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,125 $ -
Bank revolver loan - 1,850
Accounts payable 3,352 2,308
Book overdraft - 1,500
Accrued liabilities:
Salaries and wages 1,714 1,870
Income taxes 528 -
Other 1,205 795
---------- ----------
Total current liabilities 7,924 8,323
Long-term debt, less current maturities 2,625 -
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 25,633 23,822
Treasury stock (1,856,905 shares) (12,186) (12,186)
Officers' loans (274) (274)
---------- ----------
Total shareholders' equity 32,469 30,658
---------- ----------
Total liabilities and shareholders' equity $ 46,961 $ 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 Six-Month Period Ended
--------------------------- ---------------------------
November 27, November 29, November 27, November 29,
2004 2003 2004 2003
Net sales $ 19,738 $ 19,342 $ 36,945 $ 36,403
Cost of goods sold 16,051 15,461 29,499 29,996
---------- ---------- ---------- ----------
Gross profit 3,687 3,881 7,446 6,407
Recovery of bad debt (1,214) - (1,214) -
Selling, general, and administrative
expenses 2,773 2,928 5,349 5,774
---------- ---------- ---------- ----------
Operating profit 2,128 953 3,311 633
Other income (expense):
Interest expense (62) (87) (106) (136)
Interest and other income 12 37 16 69
---------- ---------- ---------- ----------
Earnings from operations before
income taxes 2,078 903 3,221 566
Income tax expense 800 348 1,240 218
---------- ---------- ---------- ----------
Net earnings $ 1,278 $ 555 $ 1,981 $ 348
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.38 $ 0.16 $ 0.59 $ 0.10
Diluted $ 0.37 $ 0.16 $ 0.58 $ 0.10
Dividends per share paid during
period: $ 0.05 $ 0.05 $ 0.10 $ 0.10
Weighted average number of shares
outstanding:
Basic 3,385,477 3,365,100 3,385,477 3,364,091
Diluted 3,432,274 3,386,965 3,423,666 3,394,041
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six-Month Period Ended
November 27, 2004 November 29, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,981 $ 348
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,657 1,655
Provision for (recovery of) doubtful accounts (1,040) 57
Gain on sale of assets (248) (26)
Change in assets and liabilities, net of effect of disposal
of business:
Accounts and notes receivable (1,129) (3,180)
Inventories (497) (3,274)
Other assets (74) (387)
Accounts payable 1,044 393
Accrued liabilities 431 227
Income taxes 966 756
---------- ----------
Net cash provided by (used in) operating activities 3,091 (3,431)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business 38 -
Proceeds from sale of assets 443 248
Acquisition of property, plant, and equipment (1,694) (1,857)
---------- ----------
Net cash used in investing activities (1,213) (1,609)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in revolving credit arrangement borrowings (1,850) 5,300
Repayment of long-term debt (250) -
Proceeds from long-term debt 4,000 -
Decrease in book overdraft (1,500) 26
Debt issuance cost (120) -
Exercise of stock options - 50
Dividends paid to shareholders (339) (336)
---------- ----------
Net cash (used in) provided by financing activities (59) 5,040
Net change in cash 1,819 -
Cash and cash equivalents at beginning of period 2 2
---------- ----------
Cash and cash equivalents at end of period $ 1,821 $ 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 Per Common Share:
Basic earnings per share are 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 Ended Six-Month Period Ended
November 27, November 29, November 27, November 29,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Weighted average shares
outstanding-Basic 3,385,477 3,365,100 3,385,477 3,364,091
Effect of dilutive securities -
Stock options 46,797 21,865 38,189 29,950
---------- ---------- ---------- ----------
Weighted average shares
outstanding - Diluted 3,432,274 3,386,965 3,423,666 3,394,041
========== ========== ========== ==========
2. Inventories:
Inventories consist of the following (in thousands):
November 27, 2004 May 31, 2004
----------------- ------------
Raw materials $ 4,005 $ 3,996
Work in process 861 1,065
Finished goods 6,009 5,333
--------- ---------
$ 10,875 $ 10,394
========= =========
3. Income Taxes:
The effective income tax rate used to calculate the income tax expense for
the quarters ended November 27, 2004 and November 29, 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
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. These sales are
within the Graphics segment. During the second quarter of fiscal 2005, IMP
accounted for approximately 12% of net sales and for the year-to-date
period accounted for approximately 13% 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. Recovery of Bad Debts:
On October 5, 2004, Outlook Group Corp. received $1.2 million in payment
of a judgment in favor of Outlook Group relating to a former customer,
which owed Outlook Group approximately $900,000, plus interest and costs
of collection. The obligation was for funds advanced to that customer in
fiscal 1994 and in respect of subsequent services. To resolve and settle
the matter, Outlook Group accepted the payment as full satisfaction of its
judgment.
As a result of non-payment, and delays and substantial uncertainties in
collecting any amounts due by the former customer, Outlook Group began to
establish substantial reserves against the amounts due from this customer
beginning in fiscal 1998, and had fully reserved for this by fiscal 2003.
7. Accounting Periods:
The Company has adopted 13-week quarters; however, fiscal year-end remains
May 31.
8. 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 at, and for the three-month and six-month periods ended
November 27, 2004 and November 29, 2003 are as follows:
INCOME STATEMENT DATA:
Three-Month Period Ended Three-Month Period Ended
November 27, 2004 November 29, 2003
(in thousands) (in thousands)
Net Sales Net Earnings Net Sales Net Earnings
--------- ------------ --------- ------------
Graphics $ 12,182 $ 1,117 Graphics $ 12,189 $ 202
Web 7,556 161 Web 7,153 353
--------- ------------ --------- ------------
Total $ 19,738 $ 1,278 $ 19,342 $ 555
========= ============ ========= ============
Six-Month Period Ended
Six-Month Period Ended November 29, 2003
November 27, 2004 (in thousands)
(in thousands)
Net Sales Net Earnings Net Sales Net Earnings (Loss)
--------- ------------ --------- -------------------
Graphics $ 22,500 $ 1,811 Graphics $ 22,292 $ (187)
Web 14,445 170 Web 14,111 535
--------- ------------ --------- ------------
Total $ 36,945 $ 1,981 $ 36,403 $ 348
========= ============ ========= ============
BALANCE SHEET DATA:
November 27, May 31,
Total 2004 2004
Assets (in thousands) (in thousands)
-------------- --------------
Graphics $ 29,318 $ 27,783
Web 17,643 15,141
--------- ------------
Total $ 46,961 $ 42,924
========= ============
9. Related Party Transactions:
As previously reported, the Company has agreed to make loans to certain
officers and key employees to purchase the common stock of the Company. At
November 27, 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.
10. Commitments and Contingencies:
In the opinion of management, the Company is not a defendant in any legal
proceedings other than routine litigation that is not material to its
business.
11. 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 $408,000
in cash, notes and assumed liabilities. 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. Of the remaining $58,000 sales price,
$37,000 was received in cash and the remaining balance was in assumed
liabilities. 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 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 of up to $85,000 per year for four years
to A.B. Data if Paragon Direct continuing sales are below specified
amounts for the next four fiscal year. Such payments would be expensed in
the relevant periods. No payments under this agreement are currently
expected. A.B. Data has also committed to making Paragon Direct services
available to Outlook Group to support Outlook Group customers.
12. Recently Issued Accounting Pronouncements:
During December 2004, the Financial Accounting Standards Board ( FASB )
issued Statement No. 123R, Share-Based Payment (SFAS 123R), which requires
companies to measure and recognize compensation expense for all
stock-based payments at fair value. The Company grants options to purchase
common stock to some of its employees and directors under various plans at
prices equal to the market value of the stock on the dates the options are
granted. The Company currently accounts for its share-based payments to
employees under the intrinsic value method of accounting set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues
to Employees." SFAS 123R is effective for all interim or annual periods
beginning after June 15, 2005. The Company has not yet adopted this
pronouncement and is currently evaluating the expected impact that the
adoption of SFAS 123R will have on its consolidated financial position,
and results of operations.
13. Subsequent Events:
The Company declared a quarterly cash dividend of $0.06 per common share
outstanding on December 15, 2004. The dividend is payable on January 20,
2005 to shareholders of record on January 13, 2005. Based on the current
number of shares outstanding, the payment will be approximately $203,000.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section presents a discussion and analysis of the Company's
results and operations during the first six months of fiscal 2005 and 2004, and
its financial condition at November 27, 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.
SUMMARY
The Company's net sales improved slightly from fiscal 2004 in both the second
quarter and the six months of fiscal 2005. However, costs of goods sold rose
more quickly than sales, and the gross profit therefore slightly decreased in
the second quarter. The reduction was primarily caused by substantial increases
in materials costs and start up expenses for a new customer project, offset by
continuing cost reduction initiatives in the manufacturing process and reduced
labor costs as a result of process improvements. However, due to reduced
selling, general and administrative expenses and a significant bad debt recovery
from a former customer, both operating and net income increased substantially,
in both the quarterly and six month periods.
RESULTS OF OPERATIONS
The Company's net sales performance for the second quarter and year-to-date
period of fiscal 2005 is summarized in the following chart:
Quarter 2 Quarter 2 Quarter 2 Quarter 2
Net Sales Fiscal 2005 Fiscal 2004 $ Change % Change
----------- ----------- --------- ---------
Graphics $ 12,182 $ 12,189 $ (7) -0.1%
Web 7,556 7,153 403 5.6%
-------- -------- -----
Total $ 19,738 $ 19,342 $ 396 2.0%
Year-to-date Year-to-date Year-to-date Year-to-date
Net Sales Fiscal 2005 Fiscal 2004 $ Change % Change
------------ ------------ ------------ ------------
Graphics $ 22,500 $ 22,292 $ 208 0.9%
Web 14,445 14,111 334 2.4%
-------- -------- -----
Total $ 36,945 $ 36,403 $ 542 1.5%
For the year-to-date period, the Company's sales are comprised 61% from the
Graphics segment and 39% from the Web segment for both fiscal 2005 and fiscal
2004.
The Company reported net sales for the second quarter of fiscal 2005 of $19.7
million. This is an increase of approximately $400,000 or 2.0% over the
comparable prior year quarter. This sales increase for the quarter is due to
increased sales volume in the Company's Web segment. Sales for the quarter in
the Company's Graphics segment were approximately the same as the prior year.
The Company reported net sales for the year-to-date period of $36.9 million.
This is an increase of approximately $500,000 or 1.5% over the comparable prior
year-to-date period. This sales increase for the year-to-date period is due to
increased sales volume of approximately $200,000 or 0.9% in the Company's
Graphics segment and approximately $300,000 or 2.4% in the Company's Web
segment. The sales increases also reflect the effects of increased materials
costs, as discussed below, to the extent they have been passed along to
customers.
The Company's Graphics segment reported sales of $12.2 million for the second
quarter of fiscal 2005, the same as the prior year's second quarter. For the
year-to-date period, the Graphics segment reported sales of $22.5 million, an
increase of approximately $200,000 or 0.9% over the prior year-to-date period.
Due to the Company's sale of its Paragon Direct operating division in June 2004,
the Company did not have significant sales from its Paragon operating division
during fiscal 2005. The Company's Paragon Direct operating unit had net sales of
approximately $40,000 during fiscal 2005. The Company's Paragon Direct operating
unit had net sales of approximately $250,000 during the second quarter of fiscal
2004 and net sales of approximately $550,000 during the year-to-date period of
fiscal 2004. Net sales to International Masters Publishing Inc. (IMP) under the
Company's contractual services agreement were approximately $3.4 million during
the second quarter of fiscal 2005 and approximately $3.1 million during the
second quarter of fiscal 2004. For the year-to-date period, sales to IMP under
the Company's contractual services agreement were approximately $6.4 million and
approximately $6.0 million during the comparable year-to-date period during
fiscal 2004.
The Company's Web segment reported net sales of $7.6 million for the second
quarter of fiscal 2005, up approximately $400,000 or 5.6% from the prior year's
second quarter. For the year-to-date period, the Web segment reported net sales
of $14.4 million, an increase of approximately $300,000 or 2.4% from the
comparable prior year-to-date period. This sales increase is due to the addition
of several new customers in the flexible packaging industry as well as growth
from existing customers in both the label and flexible packaging industry.
The Company's gross profit margin for the second quarter of fiscal 2005 was $3.7
million or 18.7% of net sales compared to $3.9 million or 20.1% of net sales
during the second quarter of fiscal 2004. For the year-to-date period, the gross
profit margin was $7.4 million or 20.2% compared to $6.4 million or 17.6% of net
sales during the prior year-to-date period.
The year-to-date gross margin increased significantly in fiscal 2005 as compared
to fiscal 2004, primarily as a consequence of increased sales and project mix.
However, the Company experienced a decrease in gross margin the second quarter
of fiscal 2005 as compared to fiscal 2004. In significant part, the decrease in
the second quarter relates to significant increases in costs of materials, which
the Company has experienced. As discussed below, the Company's operations have
had varying success in passing along the effects of these price increases to
customers. The Company expects that effects of these price increases, and
potential future price increases, will continue.
In the Company's Graphics segment, gross profit margins remain ahead of last
year's margins. The Company's Graphics segment has been helped by production
improvements in its mailing, finishing, and packaging operations and has
invested in capital equipment to allow the Company to better utilize its
employee resources. The Graphics segment has also had a more favorable product
mix as it completed several large promotional packaging jobs, which produced a
more favorable gross profit margin. The Company's Graphics segment has been able
to pass on many of its raw material price increases as well as freight and fuel
surcharges to its customers rather than absorb the additional expenses. The
Company's inability to pass along price increases could negatively impact gross
margins in the third quarter of fiscal 2005 and beyond. The Company's Graphics
segment disposed of equipment it no longer utilizes resulting in a gain of
approximately $200,000 during fiscal 2005. Improvements in gross margin of the
Graphics segment were partially offset by arrangements involving price
reductions of approximately $265,000 to a customer, which is expected by
management to be recovered in later periods through reimbursement of future cost
savings. Additionally, the Company incurred start-up costs for a new supply
chain management customer in advance of the receipt of significant revenues.
The Web segment continues to see declines in its gross profit margins.
Competitive pressures in both the label and flexible packaging industries
continue to squeeze margins. Several raw material price increases affecting both
the label and flexible packaging industries coupled with the inability to pass
these costs along in certain of the Company's longer-term contracts have eroded
margins. The Company's inability to pass along price increases could negatively
impact gross margins in the third quarter of fiscal 2005 and beyond. The fire
damage sustained on one of the Company's Web presses has caused the Company to
incur additional costs, which it has expensed during the first half of the
fiscal year. The Company has not yet received a settlement offer from its
insurer but believes it will be resolved during the Company's third quarter of
fiscal 2005. Such a recovery, if any, will be taken into income in the period
during which it is received. However, there can be no assurances that a
settlement will be
reached or as to the financial terms of any settlement. The Company's Web
segment disposed of equipment it no longer utilizes resulting in a gain of
approximately $50,000 during fiscal 2005.
During the second quarter of fiscal 2005, the Company received a $1.2 million
payment on a judgment in favor of Outlook Group relating to a former customer,
which owed Outlook Group approximately $900,000 plus interest and costs of
collection. To resolve and settle the matter, Outlook Group accepted the payment
as full satisfaction of its judgment. As a result of non-payment and delays and
substantial uncertainties in collecting any amounts due, Outlook Group began to
establish a substantial reserve against the customer beginning in fiscal 1998
and had fully reserved for this by fiscal 2003. The full amount received has
been recorded as a recovery of bad debt during the second quarter of fiscal
2005.
Selling, general and administrative expenses were $2.8 million or 14.0% of net
sales during the second quarter of fiscal 2005 compared to $2.9 million or 15.1%
of net sales during the second quarter of fiscal 2004. For the year-to-date
period selling, general and administrative expenses were $5.3 million or 14.5%
of net sales compared to $5.8 million or 15.9% of net sales during the
comparable prior year-to-date period.
General and administrative expenses were lower during fiscal 2005 partially due
to investments in training initiatives incurred during fiscal 2004. This
resulted in additional consulting fees and professional services during fiscal
2004 that were not repeated in fiscal 2005. In addition, the Company incurred
approximately $400,000 of selling, general and administrative expenses with its
former Paragon Direct operations during fiscal 2004. The Company no longer has
these expenses in fiscal 2005, due to the sale of Paragon Direct in June 2004.
Selling expenses have remained about the same as the prior year although the
Company is focusing on its marketing strategies in an attempt to increase the
Company's sales and marketing concentrations.
The Company had interest expense of approximately $100,000 in the year-to-date
periods for both fiscal 2005 and fiscal 2004. During fiscal 2004, the Company
had borrowings on its revolving credit facility ranging from $1.5 million to
$9.55 million during the six-month period at a weighted average of 4.25%. During
fiscal 2005, the Company had borrowings on its revolving credit facility ranging
from $0 to $4.25 million during the six-month period at a weighted average of
4.2%. The Company also entered into a $4.0 million term loan during August 2004
at an average rate of 4.7%. The Company expects that it will have adequate
resources with its revolving credit facility to finance future working capital
needs related to start-up projects and investments in capital equipment.
Earnings from operations before income taxes were $2.1 million or 10.5% of net
sales for the second quarter of fiscal 2005 compared to $900,000 or 4.7% of net
sales during the second quarter of fiscal 2004. Excluding the recovery of bad
debt, earnings from operations before income taxes was $900,000 or 4.6% of net
sales during the second quarter of fiscal 2005. Earnings from operations before
income taxes were $3.2 million or 8.7% of net sales for the first half of fiscal
2005 compared to $600,000 or 1.6% of net sales for the first half of fiscal
2004. Excluding the recovery of bad debt, earnings from operations before income
taxes were $2.0 million or 5.4% of net sales during the first half of fiscal
2005.
Income taxes continue to be accrued at the expected annual rate of 38.5%
although quarter-to-quarter fluctuations may occur. This is the same rate that
was used during both the quarterly and six-month periods of fiscal 2005 and
2004.
Net earnings for the second quarter of fiscal 2005 were $1.3 million or 6.4% of
net sales compared to $600,000 or 2.9% of net sales during fiscal 2004. For the
year-to-date period in fiscal 2005, net earnings were $2.0 million or 5.4% of
net sales compared to $350,000 or 1.0% of net sales.
Earnings per common share for the second quarter of fiscal 2005 were $0.38 for
basic and $0.37 for diluted compared to $0.16 for both basic and diluted common
share during fiscal 2004. For the year-to-date period, earnings per common share
were $0.59 for basic and $0.58 for diluted compared to $0.10 for both basic and
diluted common share during fiscal 2004. The recovery of bad debt after taxes
accounts for $0.22 of net earnings per common share basic and diluted.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, as shown on the Condensed Consolidated
Statements of Cash Flows, was approximately $3.1 million for the first six
months of fiscal 2005 compared to cash used in operating activities of $3.4
million during the first six months of fiscal 2004. In addition to increased
earnings, which generated $2.0 million, compared to approximately $350,000 in
the prior year, the Company benefited from a $1.2 million recovery of a bad debt
that was written off in previous years. Inventory levels in fiscal 2004
increased substantially in large part to a $2.1 million purchase of finished
goods from IMP in June 2003 to support the new supply agreement.
There was no equivalent purchase of inventory from IMP during fiscal 2005. As of
November 2004, the Company used substantially all of the inventory purchased to
fulfill production requirements. Accounts and notes receivable have increased
due in part to a note receivable related to the sale of the Company's former
Paragon Direct operating division. The note increased receivables at November
27, 2004 by approximately $300,000. There was a substantial increase in accounts
receivable from the May 31, 2004 balance, which reflects both the increased
sales activity as well as the timing of payments received from several large
customers who have favorable payment terms.
The Company used a net of $1.2 million of cash in investing activities during
the first six months of fiscal 2005. The Company used approximately $1.7 million
to acquire and upgrade existing machinery and equipment during the first six
months of fiscal 2005 compared to $1.9 million during the first six months of
fiscal 2004. Proceeds from the sales of assets generated approximately $500,000
during fiscal 2005 compared to approximately $250,000 during fiscal 2004. The
Company expects that it will invest approximately $4.0 million during the
remainder of fiscal 2005 to support new customer relationships excluding any
acquisition opportunities that may become available. The Company intends to
finance these expenditures through funds obtained from operations plus its
credit facility and possible leasing opportunities. The Company has
approximately $7.3 million in minimum lease payments under existing operating
leases as of November 27, 2004; the majority of which are for production related
machinery and equipment.
The Company used a net of $59,000 of cash in financing activities in the first
six months of fiscal 2005. During the period, the Company entered into a
long-term loan agreement for $4.0 million. These funds were used to finance
increased working capital needs and investments in capital equipment during the
first six months of fiscal 2005. During fiscal 2004, the Company used its
revolving credit facility to finance its increased working capital needs to
build and purchase inventory under its longer term contracts. The Company also
paid back $1.85 million during the first half of fiscal 2005 on its revolving
credit facility as of May 31, 2004 and made a quarterly installment payment on
its long-term loan agreement of $250,000. The Company has $3.75 million
outstanding on its long-term loan agreement as of November 27, 2004. Of this
$1.125 million is due during the next twelve months under quarterly principal
installment payments and the remaining $2.625 million is due over the remaining
two years of the agreement. At May 31, 2004, the Company reported a book
overdraft of $1.5 million as the Company had written and distributed checks in
excess of the Company's then current cash balance. There was no equivalent
transaction at November 27, 2004. The Company has no amounts outstanding on its
revolving credit facility. The Company paid dividends to its shareholders of
approximately $339,000 during the first six months of fiscal 2005.
The Company declared a quarterly cash dividend of $0.06 per common share
outstanding on December 15, 2004. The dividend is payable on January 20, 2005 to
shareholders of record on January 13, 2005. Dividends prior to this were
declared at $0.05 per common share outstanding. 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 new customer relationships. This facility was
increased to $16.0 million in August 2004. Of that amount, $4.0 million was 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 .50% to maintain its credit
facility. As a part of the amended financing agreement, the Company paid a
transaction fee of $120,000; this is being amortized over the life of the loan
agreement. As of November 27, 2004, the Company had no amount outstanding on its
revolving credit line and $3.75 million outstanding under the term loan. The
Company expects that it will continue to use its revolving credit facility for
the foreseeable future. The Company expects that it will have adequate resources
with its revolving credit facility and other sources of funds to finance future
working capital needs related to start-up projects and investments in capital
equipment.
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 obtain new clients and retain existing
clients
- The ability of the Company to recover increases in raw material
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 six months of fiscal 2005 has seen many such increases, and this trend is
expected to continue in the near future. At least to the extent that these costs
cannot be passed along to customers, the Company's failure to recover raw
material price increases 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 half of fiscal 2005, results in an increased dependence upon sales
to IMP. Sales to IMP were 13% of the Company's net sales in the first six months
of fiscal 2005, as compared to 12% 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. 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. 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. Because the
product mix changes from period to period, gross profit margins can vary
significantly in those periods, and the profit margin experienced for the
current period is not necessarily indicative of future profit margins.
The Company believes that while there may be several competitors for individual
services that it offers, few competitors currently offer the single source
solution that the Company can provide. However, 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 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. Although recent periods have
seen growth in the United States economy, the Company remains susceptible to
declines in economic conditions. Declining general economic conditions increase
the risk for the Company, as many of its clients could negatively be impacted by
a 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 other specific customer relationships, and may need in the
future 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, or who fail to
fulfill their contractual obligations. 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 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 November 27, 2004. The Company had no
commercial commitments to report as of the latest balance sheet date.
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
- ----------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Long-term debt $ 3,750 $ 1,125 $ 2,625 $ 0 $ 0
Capital lease obligation 0 0 0 0 0
Operating leases 7,261 2,000 5,103 158 0
Unconditional purchase obligations 0 0 0 0 0
Other long-term obligations 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 11,011 $ 3,125 $ 7,728 $ 158 $ 0
========== ========== ========== ========== ==========
In addition, at November 27, 2004, the Company had no amounts outstanding
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 November 27, 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. In determining sales
returns and allowances, the Company looks at historical returns of product as a
percentage of net sales and accrues against current sales an estimated allowance
for sales returns. 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. Certain contractual arrangements provide for an
adjustment of sales price when defined conditions are realized. For example, if
specialized equipment is kept running at specified levels, a performance bonus
is allowed that increases sales price. Additionally, sales price is reduced when
client sales levels achieve certain volumes. The Company also has contractual
arrangements whereby identified fixed costs, overhead and
profit are guaranteed regardless of minimum sales volume. Such guaranteed
amounts are earned and payable by the customers. The Company recognizes such
adjustments to the sales price when contractual conditions are met. Such
adjustments to revenue are identified in specific contractual terms and are,
therefore, considered to be guaranteed.
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 and 2003. However, the ultimate collectibility of a receivable is
dependent upon the financial condition of an individual customer, which could
change rapidly and without advance warning.
INVENTORY
The Company continues to use the same techniques to value inventory as have been
used in the past. The Company values certain of its inventory at the lower of
cost or market. For raw materials and work-in-process, cost is determined using
the first-in, first-out method. 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 long-term loan. 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.
At November 27, 2004, the Company had no amounts outstanding on its revolving
credit facility.
The Company had the following amount outstanding on its long-term loan:
Description Amount Maturity
- ----------- ------ --------
Long-term loan $ 3,750,000 2007
The interest rate on this loan is variable and at November 27, 2004 was at a
weighted average interest rate of 4.7%. Assuming the entire amount is
outstanding for an entire year, an increase (decrease) of one percentage point
in the weighted average interest rate would increase (decrease) interest expense
by approximately $38,000.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting of shareholders on October 20, 2004, the
two continuing directors who were management's nominees for re-election
were elected to the Board of Directors. These directors were re-elected
for terms ending in 2007 with the following votes:
Authority for
Director's Name Votes For Voting Withheld
Joseph J. Baksha 3,043,970 61,785
James L. Dillon 3,078,193 27,562
Harold J. Bergman, Jane M. Boulware, Jeffry H. Collier, Richard C. Fischer
and A. John Wiley, Jr. continue as directors with terms expiring in either
2005 or 2006.
ITEM 6. EXHIBITS
(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: January 11, 2005
/s/ Richard C. Fischer
---------------------------------------
Richard C. Fischer, Chairman and
Chief Executive Officer
/s/ Paul M. Drewek
---------------------------------------
Paul M. Drewek, Chief Financial Officer