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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 26, 2005
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 March 31,
2005.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
As of February 26, 2005 and May 31, 2004 4
Condensed Consolidated Statements of Operations
For the three-month and nine-month periods
ended February 26, 2005 and February 28, 2004 5
Condensed Consolidated Statements of Cash Flows
For the nine-month periods ended February 26, 2005
and February 28, 2004 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 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
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
February 26, 2005, the results of operations for the three-month and
nine-month periods ended February 26, 2005 and February 28, 2004, and
cash flows for the nine-month periods ended February 26, 2005 and
February 28, 2004. 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)
February 26, May 31,
ASSETS 2005 2004
- ----------------------------------------------------- ----------- ----------
Current Assets
Cash and cash equivalents $ 57 $ 2
Accounts receivable, less allowance for
doubtful accounts of $686 and $730, respectively 8,932 8,283
Notes receivable-current portion, less allowance for
doubtful accounts of $81 and $105, respectively 312 178
Inventories 11,034 10,394
Deferred income taxes 723 723
Income taxes refundable -- 438
Other 917 858
---------- ----------
Total current assets 21,975 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 10,643 10,040
Machinery and equipment 43,265 40,821
---------- ----------
Total property, plant, and equipment 54,217 51,170
Less: accumulated depreciation (32,300) (31,178)
---------- ----------
21,917 19,992
Other assets 123 384
Assets held for sale 812 812
Goodwill 801 801
---------- ----------
Total assets $ 45,891 $ 42,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,250 $ --
Bank revolver loan -- 1,850
Accounts payable 2,773 2,308
Checks issued in excess of balance in bank -- 1,500
Accrued liabilities:
Salaries and wages 1,767 1,870
Income taxes 257 --
Other 816 795
---------- ----------
Total current liabilities 6,863 8,323
Long-term debt, less current maturities 2,250 --
Deferred income taxes 3,943 3,943
Commitments and contingencies
Shareholders' Equity
Cumulative preferred stock -- --
Common stock $.01 par values - 15,000,000 shares
authorized; 5,242,382 shares issued and 3,385,477
outstanding 52 52
Additional paid-in capital 19,244 19,244
Retained earnings 25,999 23,822
Treasury stock (1,856,905 shares) (12,186) (12,186)
Officers' loans (274) (274)
---------- ----------
Total shareholders' equity 32,835 30,658
---------- ----------
Total liabilities and shareholders' equity $ 45,891 $ 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 Nine-Month Period Ended
------------------------------ ------------------------------
February 26, February 28, February 26, February 28,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 17,147 $ 17,236 $ 54,092 $ 53,639
Cost of goods sold 13,436 14,160 42,935 44,157
----------- ----------- ----------- -----------
Gross profit 3,711 3,076 11,157 9,482
Recovery of bad debt -- -- (1,214) --
Selling, general, and
administrative expenses 2,772 2,712 8,121 8,486
----------- ----------- ----------- -----------
Operating profit 939 364 4,250 996
Other income (expense):
Interest expense (46) (85) (152) (221)
Interest and other income 34 46 50 116
----------- ----------- ----------- -----------
Earnings from operations
before income taxes 927 325 4,148 891
Income tax expense 357 118 1,597 336
----------- ----------- ----------- -----------
Net earnings $ 570 $ 207 $ 2,551 $ 555
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.17 $ 0.06 $ 0.75 $ 0.16
Diluted 0.17 $ 0.06 $ 0.74 $ 0.16
Dividends per common share
paid during period: $ 0.06 $ 0.05 0.16 $ 0.15
Weighted average number of shares outstanding:
Basic 3,385,477 3,371,983 3,385,477 3,366,722
Diluted 3,441,778 3,400,424 3,430,507 3,398,575
The accompanying notes are an integral part of these financial statements.
OUTLOOK GROUP CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine-Month Period Ended
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: February 26, 2005 February 28, 2004
----------------- -----------------
Net earnings $ 2,551 $ 555
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,489 2,542
Provision for (recovery of) doubtful accounts (1,076) 162
Gain on sale of assets (321) (32)
Change in assets and liabilities, net of effect
of disposal of business:
Accounts and notes receivable 451 (4,643)
Inventories (656) (3,424)
Other assets (70) (261)
Accounts payable 465 1,375
Accrued liabilities 86 (346)
Income taxes 695 516
---------- ----------
Net cash provide by (used in) operating activities 4,614 (3,556)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business 38 --
Proceeds from sale of assets 531 264
Acquisition of property, plant, and equipment (4,616) (2,534)
---------- ----------
Net cash used in investing activities (4,047) (2,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in revolving credit arrangement borrowings (1,850) 5,605
Repayment of long-term debt (500) --
Proceeds from long-term debt 4,000 --
Checks issued in excess of balance in bank (1,500) 675
Debt issuance cost (120) --
Exercise of stock options -- 50
Dividends paid to shareholders (542) (504)
---------- ----------
Net cash provided by (used in) financing activities (512) 5,826
Net change in cash and cash equivalents 55 --
Cash and cash equivalents at beginning of period 2 2
---------- ----------
Cash and cash equivalents at end of period $ 57 $ 2
========== ==========
Supplemental Cash Flow Information
Cash paid during the year:
Nine-Month Period Ended
--------------------------------------
February 26, 2005 February 28, 2004
----------------- -----------------
(in thousands)
Interest $ 152 $ 228
Income taxes 902 (180)
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. All options were dilutive for the three
and nine month periods ended February 26, 2005 and February 28, 2004.
The following is a reconciliation of the average shares outstanding
used to compute basic and diluted earnings per share.
Three-Month Period Ended Nine-Month Period Ended
----------------------------- -----------------------------
February 26, February 28, February 26, February 28,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average shares outstanding -
Basic 3,385,477 3,371,983 3,385,477 3,366,722
Effect of dilutive securities - Stock
options 56,301 28,441 45,030 31,853
---------- ---------- ---------- ----------
Weighted average shares outstanding -
Diluted 3,441,778 3,400,424 3,430,507 3,398,575
========== ========== ========== ==========
2. Inventories:
Inventories consist of the following (in thousands):
February 26, 2005 May 31, 2004
----------------- ------------
Raw materials $ 4,111 $ 3,996
Work in process 1,032 1,065
Finished goods 5,891 5,333
-------- --------
$ 11,034 $ 10,394
======== ========
3. Income Taxes
The effective income tax rate used to calculate the income tax expense
for the quarters ended February 26, 2005 and February 28, 2004 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 and accounts
receivable are represented by the International Masters Publishing Inc.
(IMP) contract. The sales related to this contract are within the
Graphics segment. During the third quarter of fiscal 2005, the IMP
contract accounted for approximately 21% of net sales and for the
year-to-date period accounted for approximately 18% of net sales.
During the third quarter of fiscal 2004, the IMP contract accounted for
approximately 19% of net sales and for the year-to-date period
accounted for approximately 17% of net sales. As of February 26, 2005,
IMP represented approximately 23% of the Company's accounts receivable
balance. 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. The loss of IMP or 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. The amount received was taken into pre-tax income in the
second quarter of fiscal 2005, ended November 27, 2004.
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 custom 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 nine-month
periods ended February 26, 2005 and February 28, 2004 are as follows:
INCOME STATEMENT DATA:
Three-Month Period Ended Three-Month Period Ended
February 26, 2005 February 28, 2004
(in thousands) (in thousands)
--------------------------- ---------------------------
Net Sales Net Earnings Net Sales Net Earnings
--------- ------------ --------- ------------
Graphics $ 9,239 $ 183 $ 9,904 $ 5
Web 7,908 387 7,332 202
-------- ----- -------- -----
Total $ 17,147 $ 570 $ 17,236 $ 207
======== ===== ======== =====
Nine-Month Period Ended Nine-Month Period Ended
February 26, 2005 February 28, 2004
(in thousands) (in thousands)
--------------------------- ------------------------------------
Net Sales Net Earnings Net Sales Net Earnings / (Loss)
--------- ------------ --------- ---------------------
Graphics $ 31,739 $ 1,994 $ 32,196 $ (182)
Web 22,353 557 21,443 737
-------- ------- -------- -------
Total $ 54,092 $ 2,551 $ 53,639 $ 555
======== ======= ======== =======
BALANCE SHEET DATA:
February 26, 2005 May 31, 2004
----------------- ------------
(in thousands) (in thousands)
Total Assets
Graphics $ 28,977 $ 27,783
Web 16,914 15,141
-------- -------
Total $ 45,891 $ 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 February 26, 2005, 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, $38,000 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. Paragon Direct was included as part
of the Company's Graphics business segment.
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. As a
result, the sale of these relationships is not reflected as a
discontinued operation.
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 years. 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.
In November 2004, FASB issued SFAS No. 151 "Inventory Costs" which
amends the guidance in ARB No. 43, Chapter 4 "Inventory Pricing" to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of
ARB 43, Chapter 4, previously stated "that under some circumstances,
items such as idle facility expense, excessive spoilage, double freight
and rehandling costs may be so abnormal as to require treatment as
current period charges." SFAS No. 151, requires that those items be
recognized as current period charges regardless of whether they meet
the criterion of "so abnormal." In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151
shall be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after the date
SFAS No. 151 was issued. SFAS No. 151 shall be applied prospectively.
The Company does not expect the adoption of SFAS No. 151 to have a
material effect on its consolidated financial statements.
13. Subsequent Events:
The Company declared a quarterly cash dividend of $0.06 per common
share outstanding on March 16, 2005. The dividend is payable on April
21, 2005 to shareholders of record on April 14, 2005. Based on the
current number of shares outstanding, the payment will be approximately
$203,000.
14. Reclassifications:
Certain reclassifications have been made to the financial statements of
the prior period to conform to the February 26, 2005 presentation.
Item 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section presents a discussion and analysis of the Company's
results and operations during the first nine months of fiscal 2005 and 2004, and
its financial condition at February 26, 2005. 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 remained relatively flat for the third quarter of fiscal
2005 but for the year-to-date period continue to be slightly ahead of last year.
The absence of fiscal 2005 sales from the Company's former Paragon Direct
business unit, which was sold during June 2004, continue to affect the
year-to-year comparisons. Gross margins for both the quarter and year-to-date
have remained ahead of the prior year as a result of product mix. The Company
continues to see strong direct marketing activity and has completed several
particularly profitable flexible packaging projects during the third quarter.
The Company also recorded an insurance recovery of $175,000, in the third
quarter of fiscal 2005, from a business interruption claim related to a fire at
its Web facility during the latter part of the fourth quarter of fiscal 2004.
The related fire costs had been expensed during the first half of fiscal 2005.
Selling, general and administrative expenses were about the same as the prior
year's third quarter. However, reduced investments in training and professional
services compared to the prior year along with a significant bad debt recovery
from a former customer increased operating and net income for the nine-month
period.
Results of Operations
The Company's net sales performance for the third quarter and year-to-date
period of fiscal 2005 is summarized in the following chart:
Quarter 3 % of Quarter 3 % of Quarter 3 Quarter 3
Net Sales Fiscal 2005 Net Sales Fiscal 2004 Net Sales $ Change % Change
----------- --------- ----------- --------- --------- ---------
Graphics $9,239 54% $9,904 57% $(665) -6.7%
Web 7,908 46% 7,332 43% 576 7.9%
------- --- ------- --- -----
Total $17,147 100% $17,236 100% $ (89) -0.5%
======= ==== ======= ==== =====
Year-to-date % of Year-to-date % of Year-to-date Year-to-date
Net Sales Fiscal 2005 Net Sales Fiscal 2004 Net Sales $ Change % Change
------------ --------- ------------ --------- ------------ ------------
Graphics $31,739 59% $32,196 60% $(457) -1.4%
Web 22,353 41% 21,443 40% 910 4.2%
------- --- ------- --- -----
Total $54,092 100% $53,639 100% $ 453 0.8%
======= ==== ======= ==== =====
The Company's Graphics segment accounting for approximately 54% of fiscal 2005
third quarter sales, reported net sales of $9.2 million, down approximately
$665,000 or 6.7% from the third quarter of last year. Under the Company's
contractual services agreement, net sales to IMP were approximately $3.5 million
during the third quarter of fiscal 2005 and approximately $3.2 million during
the third quarter of fiscal 2004. Due to the Company's
sale of its Paragon Direct business unit in June 2004, the Company didn't have
comparable sales in 2005. The effect on the Company's third quarter net sales is
shown in the table below.
Quarter 3 Quarter 3
2005 2004 $ Change
--------- --------- --------
Paragon Direct $0 $335,000 $(335,000)
For the year-to-date period, the Company's Graphics segment, accounting for
approximately 59% of fiscal 2005 net sales, reported net sales of $31.7 million,
down approximately $457,000 or 1.4% from the comparable prior year-to-date
period. Under the Company's contractual services agreement, net sales to
International Masters Publishing Inc. (IMP) were approximately $10.0 million
during the year-to-date period of fiscal 2005 and approximately $9.2 million
during the year-to-date period of fiscal 2004. Due to the Company's sale of its
Paragon business unit in June 2004, the Company did not have comparable sales in
2005. The effect on the Company's year-to-date net sales is shown in the table
below.
Year-to-date Year-to-date
2005 2004 $ Change
------------ ------------ --------
Paragon Direct $40,000 $900,000 $(860,000)
The Company's Web segment, accounting for approximately 46% of fiscal 2005 third
quarter net sales, reported net sales of $7.9 million, an increase of
approximately $576,000 or 7.9% from the third quarter of last year. For the
year-to-date period, the Company's Web segment accounting for approximately 41%
of fiscal 2005 year-to-date net sales, reported net sales of $22.3 million, an
increase of approximately $910,000 or 4.2% from the comparable prior
year-to-date period. The net sales increase for both the third quarter and
year-to-date period for this segment are 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 third quarter of fiscal 2005 was $3.7
million or 21.6% of net sales compared to $3.1 million or 17.8% of net sales
during the third quarter of fiscal 2004. For the year-to-date period, the gross
profit margin was $11.15 million or 20.6% during fiscal 2005 compared to $9.5
million or 17.7% of net sales during the prior year-to-date period. The impact
on the Company's gross margin as a result of the Company's sale of its Paragon
business unit in June 2004 is shown in the table below.
Quarter 3 Quarter 3 Year-to-date Year-to-date
2005 2004 $ Change 2005 2004 $ Change
--------- --------- -------- ------------ ------------ --------
Paragon Direct $0 $26,000 ($26,000) ($39,000) $47,000 $(86,000)
Both the third quarter and year-to-date gross margins increased in fiscal 2005
as compared to fiscal 2004, primarily as a result of a more profitable project
mix as well as the $175,000 recovery of a business interruption claim related to
a fire at the Company's Web facility during April 2004. During fiscal 2005, the
Company also recognized gains on the sale of equipment of approximately
$300,000. During fiscal 2004, the Company did not have comparable gains on the
sale of equipment. The gross margins reflect increases in costs of material,
which the Company has had varying success in passing along to customers. The
Company expects that effects of these price increases, and potential future
price increases, will continue to negatively impact margins.
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 jobs, which produced a more favorable gross
profit margin. The Company's Graphics segment has been able to pass on to its
customers many of its raw material price increases, freight increases and fuel
surcharges, rather than absorb these additional expenses. The Company's
inability to pass along future price increases could negatively impact gross
margins in the fourth quarter of fiscal 2005 and beyond. The Company's Graphics
segment sold equipment it no longer utilizes, resulting in a gain of
approximately $200,000 during fiscal 2005. The Graphics segment did not have any
equipment sales during the third quarter of fiscal 2005. Improvement in gross
margins of the Graphics segment were partially offset by arrangements involving
price reductions of approximately $250,000 which management expects to recover
in later periods through cost savings initiatives. Additionally, the Company
incurred start-up costs for a new supply chain management customer in advance of
the expected receipt of related 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 affected both
the label and flexible packaging industries. This 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
continue to negatively impact gross margins in the fourth quarter of fiscal 2005
and beyond. The fire damage sustained on one of the Company's Web presses during
the fourth quarter of fiscal 2004 caused the Company to incur additional costs,
which were expensed during the first half of fiscal 2005. Costs of approximately
$175,000 were recovered during the third quarter of fiscal 2005 through a
settlement with the Company's insurance carrier. The Company's Web segment sold
equipment it no longer utilizes resulting in a gain of approximately $125,000
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 recovery of bad debt during the second quarter of fiscal 2005.
Selling, general and administrative expenses were $2.8 million or 16.2% of net
sales during the third quarter of fiscal 2005 compared to $2.7 million or 15.7%
of net sales during the third quarter of fiscal 2004. For the year-to-date
period selling, general and administrative expenses were $8.1 million or 15.0%
of net sales compared to $8.5 million or 15.8% of net sales during the
comparable prior year-to-date period.
Year-to-date general and administrative expenses were lower during fiscal 2005
partially due to investments in training initiatives that occurred during fiscal
2004. This resulted in additional consulting fees and professional services
during fiscal 2004 that were not incurred during fiscal 2005. In addition, the
Company incurred approximately $600,000 of selling, general and administrative
expenses with its former Paragon Direct operations during fiscal 2004 that it
did not incur during fiscal 2005 due to the sale this business unit 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 $150,000 during fiscal 2005
and approximately $221,000 during 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 nine-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 at a weighted average of 4.2%. The Company
entered into a $4.0 million term loan during August 2004 at an average rate of
4.9% and has not had to use its revolving credit facility since obtaining the
term loan financing. 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 approximately $0.9 million or
5.4% of net sales for the third quarter of fiscal 2005 compared to approximately
$0.3 million or 1.9% of net sales during the third quarter of fiscal 2004.
Earnings from operations before income taxes were $4.15 million or 7.7% of net
sales for the first nine months of fiscal 2005 compared to $0.9 million or 1.7%
of net sales for the first nine months of fiscal 2004.
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 nine-month periods of fiscal 2005 and
2004.
Net earnings for the third quarter of fiscal 2005 were $570,000 or 3.3% of net
sales compared to approximately $207,000 or 1.2% of net sales during the third
quarter of fiscal 2004. For the year-to-date period in fiscal 2005, net earnings
were $2.6 million or 4.7% of net sales compared to approximately $555,000 or
1.0% of net sales.
Earnings per common share for the third quarter of fiscal 2005 were $0.17 for
basic and diluted compared to $0.06 per common share for the third quarter of
fiscal 2004 for both basic and diluted. For the year-to-date period, earnings
per common share were $0.75 for basic and $0.74 for diluted compared to $0.16
per common share for both basic and diluted during fiscal 2004. The recovery of
bad debt after taxes accounts for $0.22 of net earnings per common share for
both basic and diluted in fiscal 2005.
Liquidity and Capital Resources
Cash provided by operating activities, as shown on the Condensed Consolidated
Statements of Cash Flows, was approximately $4.6 million for the first nine
months of fiscal 2005 compared to cash used in operating activities of $3.5
million during the first nine months of fiscal 2004. In addition to increased
earnings in fiscal 2005, which generated $2.5 million, compared to approximately
$555,000 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 inventory purchase in fiscal 2005. As of February 2005, the
Company used substantially the entire inventory purchased to fulfill production
requirements. Inventory levels at February 26, 2005 were slightly higher than at
May 31, 2004 as the Company purchased raw materials in advance of fourth quarter
production. In addition, finished goods at the Web facility increased as several
customers increased inventory demands as they begin to ship in advance of their
busy seasons. 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 receivable from this sale increased receivables at February
26, 2005 by approximately $350,000.
The Company used a net of $4.0 million of cash in investing activities during
the first nine months of fiscal 2005. During the first nine months of fiscal
2005, the Company used approximately $4.6 million to acquire and upgrade
existing machinery and equipment. The Company invested approximately $2.5
million in acquiring and upgrading machinery and equipment during the first nine
months of fiscal 2004. Proceeds from the sales of assets generated approximately
$531,000 during fiscal 2005 compared to approximately $264,000 during fiscal
2004. The Company expects that it will invest an additional $2.0 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 $6.8 million in minimum lease payments under existing operating
leases as of February 26, 2005; the majority of which are for production related
machinery and equipment. The Company expects its annual minimum lease payments
to be approximately $2.0 million during the next twelve months.
The Company used a net of approximately $512,000 of cash in financing activities
in the first nine months of fiscal 2005. During fiscal 2005, 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 nine 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 which
was on its revolving credit facility as of May 31, 2004 and made quarterly
installment payments on its long-term loan agreement totaling $500,000. The
Company has $3.5 million outstanding on its long-term loan agreement as of
February 26, 2005. Under its long-term loan agreement, $1.25 million is due
during the next twelve months in quarterly principal installment payments and
the remaining $2.25 million is due in quarterly principal installment payments
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 February 26, 2005. The Company currently has no
amounts outstanding on its revolving credit facility and has not utilized its
revolving credit facility since entering into the long-term loan agreement in
August 2004. The Company paid quarterly dividends to its shareholders totaling
approximately $542,000 during the first nine months of fiscal 2005.
The Company declared a quarterly cash dividend of $0.06 per common share
outstanding on March 16, 2005. The dividend is payable on April 21, 2005 to
shareholders of record on April 14, 2005. Based on the outstanding shares, the
payment is expected to be approximately $203,000.
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 interest 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 February 26, 2005, the Company had no amount outstanding on its
revolving credit line and $3.5 million outstanding under the term loan and was
in compliance with all of its loan covenants. 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 land and building
associated with this vacant facility are included in the Company's balance sheet
as assets held for sale. 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
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
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 for the next twelve months.
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 that 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 obtain new customers. The failure to 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. 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. In addition, the Company's ability to differentiate its
products and services from that of its competitors, successfully market these
initiatives, and subsequently manufacture them at a competitive cost will
enhance the Company's position in the marketplace and allow for continued growth
and expansion. The Company's failure to do this could significantly affect the
future growth and profitability of the Company.
The Company, like many others, is subject to price increases in its raw
materials. During the first nine months of fiscal 2005 there have been 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 these 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 nine months of fiscal 2005, results in an increased dependence upon
sales to IMP. Sales to IMP were 18% of the Company's net sales in the first nine
months of fiscal 2005, as compared to 17% 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, whether such a change would result from a change
in the relationship between the Company and the customer, or from business
difficulties or changes in the customer's business model or operations.
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. 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. In
addition, significant contracts, such as the contract with IMP, expose the
Company to additional risks, which could 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 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
direct mailing 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 Sarbanes-Oxley Act of 2002 and related SEC actions have substantially
increased compliance requirements and costs for publicly held companies. The
effects of this increase can be more pronounced on relatively small public
companies, such as Outlook Group, due to the fact that compliance costs are not
directly related to the size of the company involved.
The SEC has recently deferred the application of Section 404 of Sarbanes-Oxley,
relating to certification of internal control over financial reporting, for
companies that are not "accelerated filers." That deferral means that Outlook
Group will not be required to provide such a certification until its annual
report on Form 10-K for fiscal 2007. However, in interim periods, Outlook Group
will still need to expend substantial resources on preparation for compliance.
There can be no assurance that Outlook Group will be able to maintain a system
of internal control without material weaknesses or substantial deficiencies or
as to the effect of any such weaknesses or deficiencies.
The Company uses complex and specialized equipment to provide its services and
manufacture its products and it depends upon the functioning of such machinery
and its ability to acquire and maintain this equipment. In addition, the Company
has acquired specialized machinery related to the IMP arrangement and other
specific customer relationships, and may need to acquire specific machinery in
order to perform tasks for other customers or types of projects in the future.
Among other factors, the Company may be affected by equipment malfunctions, the
inability to configure machinery on a timely basis, on-going training and
operational needs related to the equipment, 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 the past, the Company may, in the future, need to
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,
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 and
Off-Balance Sheet Arrangements
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 ended February 26, 2005. The Company had no
commercial commitments to report as of the latest balance sheet date.
CONTRACTUAL OBLIGATIONS
(in thousands)
Less than
Total 1 year 1 - 3 Years 4 - 5 Years After 5 Years
Long-term debt $3,500 $1,250 $2,250 $ 0 $0
Capital
lease 0 0 0 0 0
obligation
Operating leases 6,759 1,978 4,676 105 0
Unconditional
purchase
obligations 0 0 0 0 0
Other long-term
obligations 0 0 0 0 0
Total
contractual
cash
obligations $10,259 3,228 $6,926 $105 $0
======= ===== ====== ==== ==
In addition, at February 26, 2005, 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 February 26, 2005,
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 and notes 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. 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 February 26, 2005 and May 31, 2004. However, the ultimate collectibility of a
receivable is dependent upon the financial condition of an individual customer,
which could change rapidly and without advance warning.
Inventory
The Company 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. The Company reviews 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 February 26, 2005, 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 $ 3,500,000 2007
The interest rate on this loan is variable and at February 26, 2005 was at a
weighted average interest rate of 4.9%. 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 $35,000.
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 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.
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(Registrant)
Dated: April 8, 2005
/s/ Richard C. Fischer
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Richard C. Fischer, Chairman and Chief Executive
Officer
/s/ Paul M. Drewek
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Paul M. Drewek, Chief Financial Officer