10-Q 1 c01272e10vq.txt QUARTERLY REPORT 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 November 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 by check mark whether the registrant is a shell company (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. 3,395,477 shares of common stock, $.01 par value, were outstanding at January 10, 2006. OUTLOOK GROUP CORP. AND SUBSIDIARIES INDEX

Page Number ------ PART I. FINANCIAL INFORMATION: Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets As of ~~August~~November 2726, 2005 and May 31, 2005 4 Condensed Consolidated Statements of Operations For the three-month ~~period~~and six-month periods ended ~~August~~November 2726, 2005 and ~~August~~November 2827, 2004 5 Condensed Consolidated Statements of Cash Flows For the three-month ~~period~~and six-month periods ended ~~August~~November 2726, 2005 and ~~August~~November 2827, 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 21 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits 2122

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 consolidated 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 26, 2005, the results of operations for the three-month and six-month periods ended November 26, 2005 and November 27, 2004, and cash flows for the six-month periods ended November 26, 2005 and November 27, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 2005 Form 10-K. OUTLOOK GROUP CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

~~August~~November 2726, May 31, 2005 2005 ~~ASSETS~~ (Unaudited) (Audited) ------------~~-------------------------------------------------~~ ---------~~----~~ ~~-------------~~ASSETS Current Assets Cash and cash equivalents $ ~~301~~1 $ 931 Accounts receivable, less allowance for doubtful accounts of $~~552~~504 and $585, respectively 12,~~409~~738 10,166 Notes receivable-current portion, less allowance for doubtful accounts of $69109 and $71, respectively ~~232~~203 261 Inventories 1110,~~377~~686 11,213 Deferred income taxes 614 614 Income taxes refundable -- 68 Other ~~1,166~~667 724 --------~~-----~~ --------~~-----~~ Total current assets 2624,~~099~~909 23,977 --------~~-----~~ --------~~-----~~ Property, plant, and equipment Assets held for sale ~~812~~-- 812 Land 309 309 Building and improvements 10,~~656~~668 10,653 Machinery and equipment 4648,~~929~~090 46,535 --------~~-----~~ --------~~-----~~ ~~Total property~~59,067 ~~plant, and equipment~~ 58,~~706 58,~~309 Less: accumulated depreciation (34,~~020~~278) (33,069) --------~~-----~~ --------~~-----~~ 24,~~686~~788 25,240 --------~~-----~~ --------~~-----~~ Notes receivable long-term, less allowance for doubtful accounts of $0 and $0, respectively 175 263 Other assets 77216 97 Goodwill 800 800 --------~~-----~~ --------~~-----~~ Total non-current assets 25,~~738~~979 26,400 --------~~-----~~ --------~~-----~~ Total assets $ 5150,~~837~~888 $ 50,377 ========~~=====~~ ========~~=====~~ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank revolver loan $ 32,~~275~~100 $ 2,100 Current maturities of long-term debt 1,500 1,375 Accounts payable 3,~~479~~785 4,583 Accrued liabilities: Salaries and wages 1,~~721~~957 2,343 Other 1,~~710~~339 721 --------~~-----~~ --------~~-----~~ Total current liabilities 1110,~~685~~681 11,122 --------~~-----~~ --------~~-----~~ Long-term debt, less current maturities 1,~~500~~125 1,875 Deferred income taxes 4,274 4,274 --------~~-----~~ --------~~-----~~ Total non-current liabilities 5,~~774~~399 6,149 --------~~-----~~ --------~~-----~~ Commitments and contingencies Shareholders' Equity Cumulative preferred stock -- -- Common stock $.01 par values - 15,000,000 shares authorized; 5,252,382 shares issued and 3,395,477 outstanding at ~~August~~November 2726, 2005 5253 52 Additional paid-in capital 19,~~294~~293 19,244 Retained earnings 27,~~492~~922 26,270 Treasury stock (1,856,905 shares) (12,186) (12,186) Officers' loans (274) (274) --------~~-----~~ --------~~-----~~ Total shareholders' equity 34,~~378~~808 33,106 --------~~-----~~ --------~~-----~~ Total liabilities and shareholders' equity $ 5150,~~837~~888 $ 50,377 ========~~=====~~ ========~~=====~~

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~~month ~~Period~~period ~~Ended~~ending ~~August~~Six-month period ending --------------------------- --------------------------- November 26, November 27, ~~August~~November 2826, November 27, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net sales $ 2321,~~128~~887 $ 1719,~~207~~474 $ 45,015 $ 36,681 Cost of goods sold 1817,~~335~~719 1315,~~588~~787 36,054 29,235 ---------- ---------- ---------- ---------- Gross profit 4,~~793~~168 3,~~619~~687 8,961 7,446 Recovery of bad debt -- (1,214) -- (1,214) Selling, general, and administrative expenses 23,~~707~~014 2,~~576~~773 5,721 5,349 ---------- ---------- ---------- ---------- Operating profit 1,154 2,~~086~~128 13,~~043~~240 3,311 Other income (expense): Interest expense (8797) (4462) (184) (106) Interest and other income 38(1) ~~144~~12 37 16 ---------- ---------- ---------- ---------- Earnings before income taxes 1,056 2,~~037~~078 13,~~143~~093 3,221 Income tax expense ~~815~~422 ~~440~~800 1,237 1,240 ---------- ---------- ---------- ---------- Net earnings $ 634 $ 1,~~222~~278 $ ~~703~~1,856 ~~============~~$ ~~============~~1,981 ---------- ---------- ---------- ---------- Earnings per common share: Basic $ 0.3619 $ 0.2138 $ 0.55 $ 0.59 Diluted $ 0.3518 $ 0.2137 $ 0.53 $ 0.58 Dividends per common share paid during period: $ 0.06 $ 0.05 $ 0.12 $ 0.10 Weighted average number of shares outstanding: Basic 3,~~388~~395,~~033~~477 3,385,477 3,391,755 3,385,477 Diluted 3,~~453~~479,~~977~~782 3,~~413~~432,~~328~~274 3,469,327 3,423,666

The accompanying notes are an integral part of these financial statements. OUTLOOK GROUP CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

~~Three~~Six-Month Period Ended ~~CASH~~------------------------------------- ~~FLOWS~~November ~~FROM OPERATING ACTIVITIES: August 27~~26, 2005 ~~August~~November 2827, 2004 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,~~222~~856 $ ~~703~~1,981 Adjustments to reconcile net earnings to net cash provided by ~~(used in)~~ operating activities: Depreciation and amortization ~~951~~1,754 ~~794~~1,657 Provision for (recovery of) doubtful accounts -- 77(1,040) Gain on sale of property, plant and equipment (28231) (~~140~~248) Change in assets and liabilities, net of effect of disposal of business: Accounts and notes receivable (2,~~126~~426) (1,~~016~~129) Inventories ~~(164)~~527 (~~904~~497) Other assets (~~219~~62) (~~493~~74) Accounts payable (~~1,104~~798) 21,~~042~~044 Accrued liabilities ~~367~~436 ~~(57)~~431 Income taxes refundable 68 ~~436~~966 -------~~---------~~ -------~~---------~~ Net cash provided by ~~(used in)~~ operating activities (1,~~033)~~124 13,~~442~~091 -------~~---------~~ -------~~---------~~ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of business -- 38 Proceeds from sale of assets --969 ~~362~~443 Acquisition of property, plant, and equipment (~~369~~2,041) (~~620~~1,694) -------~~---------~~ -------~~---------~~ Net cash used in investing activities (~~369~~1,072) (~~220~~1,213) -------~~---------~~ -------~~---------~~ CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in revolving credit arrangement ~~1,175~~-- (1,~~625~~850) Repayment of long-term debt (625) (250) -- Proceeds from long-term debt -- 4,000 Checks issued in excess of balance in bank -- (1,500) Debt issuance cost -- (120) Exercise of stock options 50 -- Dividends paid to shareholders (~~203~~407) (~~169~~339) -------~~---------~~ -------~~---------~~ Net cash ~~provided~~used byin financing activities ~~772~~(982) ~~586~~(59) -------~~---------~~ -------~~---------~~ Net change in cash and cash equivalents (~~630~~930) 1,~~808~~819 Cash and cash equivalents at beginning of period 931 2 -------~~---------~~ -------~~---------~~ Cash and cash equivalents at end of period $ ~~301~~1 $ 1,~~810~~821 =======~~=========~~ =======~~=========~~

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 common share are computed by dividing net earnings by the weighted average shares outstanding during each period. Diluted earnings per common share is computed similar to basic earnings per common 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-month and six-month periods ended November 26, 2005 and November 27, 2004. The following is a reconciliation of the average shares outstanding used to compute basic and diluted earnings per share.

Three-Month Period Ended ~~August~~Six-Month Period Ended --------------------------- --------------------------- November 26, November 27, ~~August~~November 2826, November 27, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Weighted average shares outstanding - Basic 3,~~388~~395,~~033~~477 3,385,477 3,391,755 3,385,477 Effect of dilutive securities - Stock options 6584,~~944~~305 2746,~~851~~797 77,572 38,189 --------- --------- --------- --------- Weighted average shares outstanding - Diluted 3,~~453~~479,~~977~~782 3,~~413~~432,~~328~~274 3,469,327 3,423,666 ========= ========= ========= =========

2. Inventories: Inventories consist of the following (in thousands):

~~August~~November 2726, 2005 May 31, 2005 ----------------- ------------ Raw materials $ 4,~~736~~527 $ 4,169 Work in process ~~1,119~~873 892 Finished goods 5,~~522~~286 6,152 -------~~--------~~ -------~~-----~~ $ 1110,~~377~~686 $ 11,213 =======~~========~~ =======~~=====~~

3. Income Taxes The effective income tax rate used to calculate the income tax expense for the periods ended November 26, 2005 and November 27, 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") supply agreement. IMP is the Company's largest customer and the Company's only customer with sales in excess of 10% of the Company's total net sales. The sales related to this agreement are within the Graphics business segment. During the first six months of fiscal 2006, IMP contractual sales accounted for approximately 12% of net sales. In addition, the Company had non-contractual sales to IMP accounting for an additional 3.6% of net sales during the first six months of fiscal 2006. During the first six months of fiscal 2005, IMP contractual sales accounted for approximately 17% of net sales and non-contractual sales accounting for an additional 3.6% of net sales. As of November 26, 2005, IMP contractual sales represented approximately 23% of the Company's accounts receivable balance while non-contractual sales represented an additional 3.4% 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 could 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. Accounting Periods: The Company has adopted 13-week quarters; however, the fiscal year-end remains May 31. 7. Segment Reporting: The Company has two reportable segments, Graphics and Web. Each are strategic operations that offer different products and services. The Graphics operation produces custom printed products on a wide range of media including newsprint, coated paper, and heavy board, including paperboard packaging. It also provides finishing services, promotional contract packaging, direct mailing and distribution services. The Web operation manufactures items such as 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 Company evaluates the performance of its reportable segments based on the net earnings of the respective operations. Summarized financial information at, and for the three-month and six-month periods ended November 26, 2005 and November 27, 2004 are as follows: INCOME STATEMENT DATA:

Three-Month Period Ended Three-Month Period Ended ~~August~~November 2726, 2005 ~~August~~November 2827, 2004 (in thousands) (in thousands) ------------------------ ------------------------ Net Sales Net Earnings Net Sales Net Earnings ---------~~---~~ ------------ ---------~~---~~ ------------ Graphics $ 1412,~~292~~546 $ ~~842~~78 $ 1011,~~318~~918 $1,117 ~~694~~ Web 89,~~836~~341 ~~380~~556 67,~~889~~556 9161 -------~~-----~~ ----~~--------~~ -------~~-----~~ ------~~------~~ Total $ 2321,~~128~~887 $634 1$19,~~222~~474 $ 171,~~207~~278 ~~$ 703~~ =======~~=====~~ ====~~========~~ =======~~=====~~ ======~~======~~

~~August~~Six-Month 27Period Ended Six-Month Period Ended November 26, 2005 ~~May~~November 3127, ~~2005~~2004 (in thousands) (in thousands) ------------------------ ------------------------ ~~Total~~Net ~~Assets~~Sales ~~(in~~Net ~~thousands)~~Earnings ~~(in~~Net ~~thousands)~~Sales Net Earnings --------- ------------ --------- ------------ Graphics $ 3326,~~399~~838 $ 34920 $22,~~525~~236 $1,811 Web 18,~~438~~177 15936 14,~~852~~445 170 ------- ------- ------- ------- Total $45,015 51$1,~~837~~856 $36,681 50$1,~~377~~981 ======= ======= ======= =======

BALANCE SHEET DATA:

~~Quarter~~Total 1Assets %November of26, ~~Quarter~~2005 1May %31, ~~of Quarter 1 Quarter 1 Net Sales Fiscal 2006 Net Sales Fiscal~~ 2005 ~~Net Sales $ Change % Change~~ ------------ ------------ -----~~-------~~ ------------ --~~----------~~ ~~------------~~(in ~~Graphics~~thousands) $(in ~~14,292~~thousands) ~~62%~~Graphics $ 1032,~~318~~859 ~~60%~~ $ 334,~~974~~525 ~~38.5%~~ Web 818,~~836~~029 ~~38% 6~~15,~~889~~852 ~~40% 1,947 28.3%~~ -------~~-----~~ -------~~-----~~ ~~------------ ------------ ------------~~ Total $ 2350,~~128~~888 ~~100%~~ $ 1750,~~207~~377 ~~100% $ 5,921 34.4%~~ =======~~=====~~ =======~~===== ============ ============ ============~~

8. Related Party Transactions: As previously reported, the Company made loans in prior years, to certain officers and key employees to purchase the common stock of the Company. At November 26, 2005, the outstanding balance of the loans was $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. 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. Payment under these loan agreements are due at the end of the loan period. 9. Commitments and Contingencies: The Company is subject to claims and lawsuits in the ordinary course of business. 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 financial position or results of operations of any reporting period. 10. Sale of Paragon Direct: On July 7, 2004, the Company sold certain assets of its Paragon Direct division ("Paragon Direct") to A.B. Data, Ltd. for approximately $0.4 million. While A.B. Data acquired certain customer relationships, which, were with Paragon Direct, the Company retained relationships with other customers who use multiple company 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. The transaction provided for a total purchase price equaling the book value of the assets, which were sold at approximately $0.4 million. Of that amount, approximately $40,000 was paid at closing, and the balance will be paid periodically over four years. The Company retained, among other assets, accounts receivables, the facility lease and certain customer agreements and software licenses. The Company and A.B. Data have also entered into agreements under which they may sell each other's services for specified commissions, and the Company will make limited payments to A.B. Data if Paragon Direct continuing sales are below specified amounts in the future. This agreement is in effect for four years. The amounts of any payments by the Company arising out of this agreement are not determinable at this time, although the contractual maximum exposure is $85,000 annually. A.B. Data has also committed to making Paragon Direct services available to the Company to support its customers. The sale was accounted for as a divestiture because title to the assets transferred, A.B. Data will control and manage the assets, the buyer has the financial ability to pay on the note, and the contingent purchase price provisions related to sales do not in and of themselves guarantee that A.B. Data will be able to pay the note. In addition, at the time of the sale, annual Paragon Direct revenues exceeded the continuing sales target provided in the purchase agreement. As discussed above, if A.B. Data's sales were below specified amounts in the future, the Company would be required to make contingent payments to A.B. Data. These potential payments would be recognized, if any, when probable and estimable. At this time, the Company does not expect to make any related payments. The sale was not reported as a discontinued operation because the assets of Paragon Direct did not constitute a segment or component of the Company's business and the Company retained assets and on-going service capabilities associated with Paragon Direct customers. 11. Sale of Assets In October of 2005, the Company sold its Troy, Ohio production facility. The net value of the land and building was approximately $0.8 million and was previously recorded as assets "held for sale". As a result of the sale, the Company recognized a pre-tax gain of approximately $0.1 million in the second quarter of fiscal 2006. 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 as of the beginning of the first interim or annual reporting period of the first year that begins on or after June 15, 2005. SFAS 12R is effective for the Company in fiscal year 2007. 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." In addition, 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 Event: The Company declared a quarterly cash dividend of $0.06 per common share outstanding on December 21, 2005. The dividend is payable on January 19, 2006 to shareholders of record on January 12, 2006. Based on the current number of shares outstanding, the payment will be approximately $204,000. 14. Reclassifications: Certain reclassifications have been made to the financial statements of the prior period to conform to the November 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 six months of fiscal 2006 and 2005, and its financial condition at November 26, 2005. Statements that are not historical facts, that relate to the Company's future performance, anticipated financial position, or results of operations beyond the first six months of fiscal 2006 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 AND OUTLOOK The Company's net sales for the second quarter of fiscal 2006 were $21.9 million compared to $19.5 million in the second quarter of fiscal 2005, an increase of $2.4 million or 12.4%. The sales growth over the prior year second quarter is primarily attributable to increases from the Company's Web business segment. This business segment had a net sales increase of 23.6% or $1.8 million, while the Graphics business segment had a net sales increase of 5.3% or $0.6 million over the prior year quarter. For the year-to-date period net sales were $45.0 million compared to $36.7 million in the prior year period, an increase of $8.3 million or 22.7%. The Graphics business segment had increases over the prior year of $4.6 million or 20.7% while the Web business segment had a net sales increase over the prior year of $3.7 million or 25.8%. Net earnings for the second quarter of fiscal 2006 were $0.6 million compared to $1.3 million during the second quarter of fiscal 2005. For the year-to-date period net earnings were $1.9 million during fiscal 2006 and $2.0 million during fiscal 2005. Fiscal 2005 results included the recovery of a prior period bad debt of $0.7 million ($1.2 million pre-tax). Based on historical activity, including the effect of the Christmas holiday season, the Company has often experienced weaker sales volume and profitability during its third quarter. In fiscal 2005, in addition to the third quarter being particularly strong, those historical effects were also offset to a significant degree by an insurance recovery for expenses incurred during the first six months of fiscal 2005 related to a press fire at the Company's Web facility. Since the Company has no reason to expect these unusual items to reoccur, the Company currently expects its net sales in the third quarter of fiscal 2006 to be less than in the second quarter of fiscal 2006, but slightly increased over the third quarter of fiscal 2005, and the other trends affecting third quarter operating results are not expected to be substantially different than those in years prior to 2005; therefore, the Company would not expect results in the third quarter of fiscal 2006 to be as strong as in the third quarter of fiscal 2005. The net results for the third quarter of fiscal 2006 and beyond will be affected by the level of sales, product mix, increases in raw material prices, and increases in energy costs among other factors. Since certain costs and expenses are relatively fixed, the level of sales can substantially affect profitability. In addition, the Company's net results depend significantly upon the particular projects that the Company completes during a quarter because projects vary significantly in the profit margins. Due to the fact that many customers purchase the Company's services under cancelable purchase orders rather than long-term supply agreements, and the fact that the sales volume of the Company's long-term agreements are not guaranteed, predictions of the Company's net sales and profitability will continue to be difficult. Based on the project-oriented nature of the Company's business, the Company remains vulnerable to significant period-to-period fluctuations and the Company's largest customers have historically tended to vary from year to year depending on the nature and size of projects completed for these customers. The loss of one or more principal clients or a change in the number or character of projects for particular clients could have a material adverse effect on the Company's sales volume and profitability. RESULTS OF OPERATIONS The Company's net sales performance for the second quarter and year-to-date periods of fiscal 2006 is summarized in the following chart:

~~Less~~Quarter ~~than~~2 ~~Total~~% 1of ~~year~~Quarter 12 -% 3of ~~Years~~Quarter 42 -Quarter 52 ~~Years~~Net ~~Revolving~~Sales ~~credit~~Fiscal ~~arrangement~~2006 $Net ~~3,275~~Sales $Fiscal 02005 $Net ~~3,275~~Sales $ 0Change ~~Long-term~~% ~~debt,~~Change ~~including~~--------- ~~interest~~----------- ~~3,195~~--------- ~~1,598~~----------- ~~1,597~~--------- 0--------- ~~Capital~~--------- ~~lease~~Graphics ~~obligations~~$12,546 057% 0$11,918 061% 0$ ~~Operating~~628 ~~leases~~5.3% ~~6,281~~Web 29,~~425~~341 343% 7,~~744~~556 ~~112~~39% ~~Unconditional~~1,785 ~~purchase~~23.6% ~~obligations~~------- 0--- 0------- 0--- ~~0 Other long~~-~~term~~----- ~~obligations 0 0 0 0~~ Total ~~contractual~~$21,887 ~~cash~~100% ~~obligations~~ $ 1219,~~751~~474 ~~4,023~~100% $ 82,~~616~~413 $12.4% ~~112~~ ======= ===== =======~~=====~~ ===~~=========~~ ======~~======~~

~~Description~~Year-to-date ~~Amount~~% ~~Maturity~~of Year-to-date % of Year-to-date Year-to-date Net Sales Fiscal 2006 Net Sales Fiscal 2005 Net Sales $ Change % Change --------- ------------ --------- ------------ ~~Long~~-~~term~~-------- ~~loan~~------------ ------------ Graphics $26,838 360% $22,~~000~~236 61% $4,~~000~~602 ~~2007~~20.7% ~~Revolving~~Web ~~loan~~18,177 $40% 14,445 39% 3,~~275~~732 25.8% ------- --- ------- --- ------ Total $45,~~000~~015 ~~2007~~100% $36,681 100% $8,334 22.7% ======= === ======= === ======

The Company's net sales for the second quarter of fiscal 2006 were $21.9 million compared to $19.5 million in the second quarter of fiscal 2005, an increase of $2.4 million or 12.4%. The sales growth over the prior year second quarter is primarily attributable to increases from the Company's Web business segment. This business segment had a net sales increase of 23.6% or $1.8 million, while the Graphics business segment had a net sales increase of 5.3% or $0.6 million over the prior year quarter. The net sales increase in the Graphics business segment is due primarily to the Procter and Gamble Company ("P&G") supply agreement signed in July 2005. Although P&G contributed to the net sales growth during both the three-month and six-month periods, those sales were below the Company's expectations. The net sales increase in the Web business segment is due to several new customers in the flexible packaging market as well as growth in the label market from existing customers with whom the Company has long-term agreements. For the year-to-date period net sales were $45.0 million compared to $36.7 million in the prior year period, an increase of $8.3 million or 22.7%. The Graphics business segment had increases over the prior year of $4.6 million or 20.7% while the Web business segment had a net sales increase over the prior year of 25.8% or $3.7 million. The net sales increase in the Graphics business segment is due in large part to the additional sales provided by the P&G supply agreement. In addition, the Graphics segment has added several new customers and has additional growth from existing customers in the lenticular printing and paperboard packaging business. The net sales increase in the Web business segment is due to several new customers in the flexible packaging market as well as growth in the label market from existing customers with whom the Company has long-term agreements. Sales at both of the Company's business segments are attributable to the addition of several new customers as well as growth from existing customers with which the Company has long-term or continuing agreements. The Company believes that relatively larger orders and customers, especially in the context of continuing agreements, tend to be more advantageous to it than smaller ones. However, the Company cannot assure the levels of its sales under its long-term production and supply agreements since these agreements do not guarantee a minimum sales volume. This strategy also increases the Company's dependence on these larger customers. In addition, since the Company has no proprietary products of its own, the Company is highly dependent on the sales and marketing efforts of its customers, which are outside of the Company's control. Total sales, both non-contractual and under the Company's long-term supply agreement with IMP were $3.3 million or 15.2% of net sales for the second quarter of fiscal 2006 and $7.0 million or 15.5% of net sales for the year-to-date period. During fiscal 2005, total sales to IMP were $4.0 million or 20.3% of net sales for the second quarter and $7.5 million or 20.5% of net sales for the year-to-date period. Net sales under the IMP long-term supply agreement are included in the Graphics business segment. Net sales to IMP are net of any rebates and performance bonuses due under the arrangement. The Company cannot assure that this level of sales will continue in the future, especially because the level of the Company's sales to IMP are highly dependent upon sales and marketing efforts of IMP, which are outside of the Company's control. Sales under the P&G agreement are included in the Company's Graphics business segment and have been below P&G's original projections. Future revenues under this agreement are not guaranteed and are subject to many factors including consumer acceptance and demand in the market place. Based upon results to date and current forecasts, the Company believes that sales under this two-year agreement will likely be less than the original customer projections of $18 to $20 million. The Company's arrangements with P&G include a requirement that P&G reimburse the Company for various equipment-related expenses in the event that sales are below specified amounts. However, those equipment related payments, if any, will not be determined until the end of the contract, and may be subject to negotiation and dispute between the parties. The Company also has a master long-term supply agreement with a direct mail franchisor providing a preferred arrangement for that entity's franchisees. These franchisees order independently under this agreement. Sales to any franchisee do not necessarily depend upon sales to the other franchisees; however, in the event of the termination of the master agreement with the franchisor, sales to the franchisees would likely be substantially negatively affected. While no single account represents 10% or more of the Company's net sales, sales to an increasing number of franchisees, now over 70 franchises, accounts for approximately 19.2% of the Company's second quarter net sales and approximately 15.7% of the Company's year-to-date net sales. These sales are included in the Company's Graphics business segment. The gross profit margin for the second quarter was 19.0% of net sales and for the year-to-date period was 19.9% of net sales. Despite competitive pressures, negative trends in raw material prices, increases in energy, freight and fuel surcharges, the Company has maintained gross margins similar to those of last fiscal year although those factors and the effects of the particular product mix during the quarter resulted in gross margins for the second quarter of fiscal 2006 which were less than in the first quarter of fiscal 2006. In many cases, although not all, the Company has been able to pass along these increases. The inability to recover these costs and future increases due to contractual limitations, competitive pressures, and / or other factors will negatively impact gross margins in the future. Gross margins can vary from period-to-period based on the product sales mix being produced. The Company custom produces products based on each customer's specific needs, and some products can generate a substantially different profitability level than other products. The same sales level in two different periods can produce two substantially different profitability levels, depending upon the nature of the products being produced. Since many customers purchase the Company's services under cancelable purchase orders rather than long-term supply agreements, there is no guarantee that the product mix experienced during the current period will be indicative of future periods. The Company had gains of approximately $0.2 million during the second quarter and year-to-date period of fiscal 2006 related to the sale of production-related equipment and the unused production facility located in Troy, Ohio. During fiscal 2005, the Company had gains of approximately $0.1 million during the second quarter and approximately $0.2 during the year-to-date period. These gains are included in the Company's gross profit margin for the quarter and year-to-date periods. The Company has made considerable investments in equipment to secure long-term production agreements during fiscal 2006. These investments will not only secure the production and supply agreements, but are expected to help production by improving operating efficiencies and employee utilization as the agreements mature. Gross profit margins could negatively be affected by capital equipment investments in the event that utilization does not reach expected levels. During fiscal 2005, the Company recovered a previously written-off bad debt. The proceeds totaling $1.2 million were taken into pre-tax income in the second quarter of fiscal 2005. There was no recovery of a prior period bad debt during the first six months of fiscal 2006 and none is expected during the remainder of fiscal 2006. Selling, general and administrative expenses have decreased over the prior periods as a percentage of net sales for both the quarter and year-to-date periods. Sales and marketing costs have remained about the same as the prior year. However, the Company is focusing on its sales and marketing strategies to differentiate itself in the marketplace as a supplier of choice to select customers, while continuing to provide high quality products and a complete supply chain management solutions for its customers. With the increased sales over the prior year-to-date period, wage and commission expense has increased over the prior year. The Company has also experienced increases in sales, support and servicing personnel as it invests resources in a new digital printing technology without the benefit of significant sales. The Company has experienced increases in travel related expenses, director's fees, recruiting fees, and professional services related to its technical services staff. The Company incurred higher interest expenses over the comparable prior year quarter and year-to-date periods. This is due to increased use of the Company's revolving credit agreement as well as its long-term debt, which the Company used to fund capital investments in machinery and equipment as well as to fund its working capital needs. During the second quarter and year-to-date period of fiscal 2006 the Company had borrowings on its revolving credit facility ranging from $0.7 million to $3.3 million at a weighted average interest rate of 6.7% for the quarter and 6.5% during the six month period. The Company entered into a long-term debt agreement during August 2004 at an average rate of 6.5% for the year-to-date period. Earnings before income taxes were $1.1 million during the second quarter of fiscal 2006 compared to $2.1 million during the second quarter of fiscal 2005. Earnings before income taxes were $3.1 million for the year-to-date period of fiscal 2006 compared to $3.2 million during the year-to-date period of fiscal 2005. Included in the fiscal 2005 quarter and year-to-date periods is the Company's recovery of bad debt of $1.2 million. Income taxes are being accrued at the expected annual rate of 40%, although quarter-to-quarter fluctuations may occur. Net earnings for the second quarter of fiscal 2006 were $0.6 million compared to $1.3 million during the second quarter of fiscal 2005. Net earnings for the year-to-date period were $1.9 million during fiscal 2006 compared to $2.0 million during the year-to-date period during fiscal 2005. Included in the fiscal 2005 quarter and year-to-date periods is the Company's after tax recovery of bad debt of $0.7 million. Earnings per share during for the second quarter of fiscal 2006 were $0.19 per basic common share and $0.18 per diluted common share compared to $0.38 for the second quarter of fiscal 2005 per basic common share and $0.37 per diluted common share. Earnings per share for the year-to-date period of fiscal 2006 were $0.55 per basic common share and $0.53 per diluted common shared compared to $0.59 for the year-to-date period of fiscal 2005 per basic common share and $0.58 per diluted common share. Earnings per share for the second quarter and year-to-date period of fiscal 2005 include $0.21 per diluted common share related to the recovery of a previously written off bad debt. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was approximately $1.1 million for the first six months of fiscal 2006 compared to $3.1 million during the first six months of fiscal 2005. Earnings during fiscal 2006 generated approximately $1.9 million compared to $2.0 million during fiscal 2005. During fiscal 2005, the Company received approximately $1.2 million for the recovery of a previously written off bad debt. During fiscal 2006, the Company reduced its inventory levels by approximately $0.5 million or 4.7%. Raw materials increased by approximately $0.4 million while finished goods decreased by approximately $.9 million. The increase in raw materials is primarily due to the timing of orders and inventory receipts for a large flexible packaging project at the Company's Web facility. The finished goods decrease is primarily due to increased shipments of finished goods as customers increase shipments over the peak selling season, and a decrease in customer's levels of managed inventory at the Company's Web facility. As a result of the increased sales of 22.7%, accounts and notes receivables have increased approximately $2.4 million or 22.7%. The Company used a net of $1.1 million in investing activities during the first six months of fiscal 2006 compared to $1.2 million during the first six months of fiscal 2005. The Company invested approximately $2.0 million in the first six months of fiscal 2006 to acquire and upgrade existing machinery and equipment compared to $1.7 million during the first six months of fiscal 2005. The Company expects that it will invest another $6.0 million during the remainder of fiscal 2006 to provide capital equipment to support new supply chain relationships as well as acquire and upgrade existing machinery and equipment. The Company expects to finance these expenditure through funds obtained from operations plus its credit facility and possible leasing opportunities. The Company generated proceeds from the sale of assets and equipment, including the Troy, Ohio facility of approximately $1.0 million during fiscal 2006 compared to proceeds of $0.4 million during fiscal 2005. The Company has approximately $5.7 million in minimum lease payments under existing operating leases as of November 26, 2005; the majority of which are for production related machinery and equipment. The Company expects its annual minimum operating lease payments to be approximately $2.2 million during the next twelve months. Financing activities used approximately $1.0 million during fiscal 2006 compared to $0.1 million during fiscal 2005. During fiscal 2005, the Company entered into a term loan agreement for $4.0 million. The Company made quarterly installment payments on its term loan agreement totaling $0.6 million during fiscal 2006 compared to $0.3 million during fiscal 2005 and has $2.6 million outstanding on its term loan agreement as of November 26, 2005. The Company has $1.5 million due in the next twelve months in scheduled principal installment payments on the term loan of $0.4 million each. As of January 10, 2006, the Company has $2.3 million outstanding on its term loan agreement. The Company paid increased dividends to shareholders in fiscal 2006 totaling $0.4 million compared to $0.3 million fiscal 2005. During fiscal 2006, the Company used its revolving credit facility to finance its increased working capital needs to build and purchase inventory under its long-term supply agreements as well as invest in capital equipment. As of November 26, 2005, the Company had $2.1 million outstanding on its revolving credit facility. As of January 10, 2006, the Company had $6.0 million outstanding on its revolving credit facility. The Company's Board of Directors declared a quarterly cash dividend of $0.06 per common share outstanding on December 21, 2005. The dividend is payable on January 19, 2006 to shareholders of record on January 12, 2006. Based on the outstanding shares, the payment is expected to be approximately $0.2 million. A continuation of dividends at this level, or any level, would require similar resources in future periods. The Company maintains a credit facility with a bank that provides for a maximum credit commitment of $16.0 million, which was increased from $15.0 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. The facility extends to June 2007. As a part of the amended financing agreement, the Company paid a transaction fee of $0.1 million; this is being amortized over the life of the loan agreement. As of November 26, 2005, the Company had $2.1 million outstanding on its revolving credit line at a weighted average interest rate of 6.5% and had borrowings ranging from $.7 million to $3.3 million; the weighted average interest rate during fiscal 2005 was 4.25%. At January 10, 2006, the Company has $6.0 million outstanding and $6.0 million available on its revolving credit facility. The Company had $2.6 million outstanding at November 26, 2005 under the term loan at a weighted average interest rate of 6.5% and was in compliance with all of its loan covenants. Approximately $1.5 million is due in quarterly installment payments on the term debt during the next twelve months. The weighted average rate on the term debt during fiscal 2005 was 5.2%. 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 for at least the next twelve months. The Company regularly reassesses how its various operations complement the Company as a whole and considers strategic decisions to acquire new operations, expand, terminate, or sell certain existing operations. These reviews resulted in various transactions during recent fiscal years and may result in additional transactions during fiscal 2006 and beyond. On July 7, 2004, the Company sold selected assets of its former Paragon Direct division to A.B. Data Ltd. effective June 30, 2004. 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 company services and can continue to make these types of services available to customers directly or through ongoing arrangements with A.B. Data. During fiscal 2005, as part of the consideration for the sale of its former Paragon Direct division, the Company accepted a receivable from the purchase for $0.4 million. The receivable is due in annual installment payments of $87,500. The first installment was received, as scheduled, during the first quarter of fiscal 2006. The Company completed the sale of its unused Troy, Ohio facility during the second quarter of fiscal 2006. Up until the time of the sale, the Company had accounted for the net book value of the assets as "held for sale" assets under SFAS 144. The land and building was sold for approximately $1.0 million. The Company received cash of approximately $0.9 million and accepted a note for $26,000 plus interest. Interest on the note is due in monthly installments. The principal amount is due in one lump payment at October 1, 2006. The Company recognized a pre-tax gain on the sale of the facility of approximately $0.1 million. The Company's primary source of liquidity has been cash flows from operations, although the Company has also utilized borrowing and equipment leasing where appropriate. 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 - The success of our customer's products - Changes in sales or product 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 or projects, 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. 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. 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. 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 fiscal 2005 and the first six months of fiscal 2006 there have been many such increases, and this trend is expected to continue in the near future. In particular, oil and other energy prices have significantly increased in fiscal 2006, and it is expected that these increases may also affect indirectly, prices for other products, which are purchased by the Company. To the extent that these costs and future 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. In some cases, contractual provisions, competitive pressures and other factors can limit the Company's ability to pass along price increases at all or on a timely basis. 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. However, depending upon market conditions, such problems could develop in the future. 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 and other non-contractual sales to IMP, which is now the Company's largest customer, results in an increased dependence upon sales to IMP. Although significant long-term agreements provide more stability to the Company, they can increase the Company's dependence on specific customers. 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 supply agreements. While the Company believes that operating without long-term arrangements is consistent with industry practices, it is committed to developing multi-year projects that can add stability to its business. In addition, the Company is not necessarily guaranteed a minimum sales volume under its long-term production and supply agreements. Many factors including contract disputes, performance problems, customer financial difficulties, changes in business strategies, changes in demand for the customer's products and / or future negotiated changes to the agreements could cause actual results to differ. In addition, significant agreements expose the Company to additional risks, which could result from non-performance by the particular customer because of the relative significance of those agreements. Even though the Company is looking to increase the volume of longer term or other continuing 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. The Company is dependent on the success of its' customers products. With any new consumer product introduction, sales volumes are dependent upon the consumer's acceptance of the new product in the marketplace. The Company is dependent upon its customers to develop a consumer product, introduce it into the consumer market, and the customer's creation and execution of a focused sales and marketing plan to increase sales of the product; all of which are outside the Company's control, making sales volumes difficult to predict. 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 and do vary significantly in those periods, and the profit margin experienced for the current period or recent periods 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, Hurricanes Katrina and Rita and their paths of destruction, fluctuating energy prices and other factors have substantially affected the United States economy as a whole. Some of these matters, such as the 2001 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 adverse effect on future profitability. From time to time, the Company has had significant accounts receivable or other amounts due from its customers or other parties. On occasion, certain of these accounts receivable or other amounts due have become unusually large and / or overdue, and the Company has written off significant accounts receivable balances. The failure of the Company's customers to pay in full amounts due to the Company could affect future profitability and liquidity. 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 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 arrangement. 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, like the Company, since 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 the Company will not be required to provide such a certification until its annual report on Form 10-K for fiscal 2008. However, in interim periods, the Company will still need to expend substantial resources on preparation for compliance. There can be no assurance that the Company 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; therefore, the Company is dependent 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, P&G, and other arrangements and may need to acquire specific machinery in order to perform tasks for other customers or types of projects. In certain cases, the cost of the machinery is factored into costs or prices charged to related customers, and in some cases related agreements provide for make-whole payments in the event that specified production levels are not achieved; however, the costs may not be fully recovered, such as in the event that sales to specific customers do not reach anticipated levels or the customer otherwise does not comply with its reimbursement or other obligations. 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, 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 that is profitable or otherwise acceptable 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 2005 Report on Form 10-K. In addition, the Company has prepared schedules suggested by the SEC for the period ended November 26, 2005. The Company had no commercial commitments to report as of the latest balance sheet date. CONTRACTUAL OBLIGATIONS (in thousands)

In addition, at November 26, 2005 the Company had borrowed $2.1 million against its $12.0 million bank revolver agreement and had $2.6 million outstanding on its term loan agreement. The Company is in compliance with its covenants under the related 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 in prior periods made loans to certain officers and key employees to purchase the common stock of the Company. At November 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 the Sarbanes-Oxley Act 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 2005 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, property, plant, and equipment 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 agreed upon standards. 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 may be allowed that increases sales price. Additionally, sales price may be 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. The Company recognizes positive adjustments to the sales price when contractual conditions or performance standards are met. The Company recognizes sales price reductions as a charge to revenue when the loss is probable and estimable. 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 customer's current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. The Company values accounts and notes receivable, net of an allowance for uncollectible accounts. The allowance is calculated based upon the Company's evaluation of specific customer accounts where the Company has information that the customer may have an inability to meet its financial obligations (bankruptcy, etc.). In these cases, the Company uses its judgment, based on the best available facts and circumstances, and records a specific reserve for the customer against amounts due, to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. The same technique was used to compute this allowance at May 31, 2005. However, the ultimate collectibility of a receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without advance warning. Inventory The Company continues to use the same techniques to value inventory as have been used in the past. The Company values its inventory at the lower of cost or market. 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 less gross margins and expenditures incurred in disposal applicable to the related customer and product. The Company values finished goods on this basis because of the difficulty in determining cost and the inter-changeability of its inventory. 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. Goodwill and Property, Plant and Equipment Annually, or more frequently if events indicate an impairment is likely, the Company reviews goodwill to assess recoverability based on estimated future results of operations and cash flows at the aggregate business unit level. 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. 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 26, 2005, the Company had $4.7 million outstanding on its credit agreement:

The interest rate on this loan is variable and at November 26, 2005 was at a weighted average interest rate of 6.5%. 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 $47,250. 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 held on October 19, 2005, the two continuing directors who were management's nominees for re-election were elected to the Board of Directors. In addition, Michael P. Cisler was elected to replace Jane M. Boulware who did not stand for re-election. These directors were re-elected for terms ending in 2008 with the following votes:

The Company's continuing directors, with whose terms expire at the 2006 or 2007 annual meetings, are Joseph J. Baksha, Jeffry H. Collier, James L. Dillon, Pat Richter and A. John Wiley, Jr. At the Company's annual meeting of shareholders held on October 19, 2005, the 2005 Stock Incentive Plan was approved. The plan was approved with the following votes:

1,446,595 shares were broker non-votes and not voted. At the Company's annual meeting of shareholders held on October 19, 2005. The appointment of Virchow Krause, LLP as the Company's internal auditors for fiscal 2006 was ratified. Virchow Krause, LLP was ratified with the following votes:

ITEM 6. EXHIBITS (a) Exhibits. 10.1 Form of Option Grant for Officers and Employees 10.2 Form of Option Grant for Non-Employee Directors 10.3 Form of Restricted Stock Award for Officers and Employees 10.4 Form of Restricted Stock Award for Non-Employee Directors 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 10, 2006 /s/ Joseph J. Baksha ---------------------------------------- Joseph J Baksha, President and Chief Executive Officer /s/ Paul M. Drewek ---------------------------------------- Paul M. Drewek, Chief Financial Officer

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