<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998 Commission File Number 1-9335
________
SCHAWK, INC.
(Exact name of Registrant
as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
847-827-9494
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------------ -------------------------------------------
CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE
$.008 PAR VALUE
Indicated 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 12 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
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock as of March 31, 1998, are:
22,268,531 shares, Common Stock, $.008 par value
------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to the Securities Exchange Act of 1934 Release 15502 and Rule
240.03(b), the pages of this document have been numbered sequentially. The
total number of pages contained herein is 14.
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1
<PAGE> 2
PART I
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,762 $ 4,022
Short term investments 11,930 12,250
Trade accounts receivable, less allowance for doubtful accounts
of $510 in 1998 and $464 in 1997 24,483 22,884
Inventories 5,690 4,464
Prepaid expenses and other 2,009 2,817
Deferred income taxes 417 543
----------------------
Total current assets 48,291 46,980
Marketable securities 34,601 33,917
Property and equipment, net 31,600 30,147
Excess of cost over net assets acquired, less accumulated amortization
of $4,414 in 1998 and $4,207 in 1997 16,159 12,713
Other assets 2,927 3,166
----------------------
Total assets $133,578 $126,923
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,596 $ 3,393
Accrued expenses 6,960 8,128
Income taxes payable 5,364 4,061
Notes payable to banks 4,509 4,685
Current portion of long-term debt and capital lease obligations 441 430
----------------------
Total current liabilities 20,870 20,697
Long-term debt 40,000 40,000
Capital lease obligations 4,744 4,854
Other 1,289 1,308
Deferred income taxes 3,936 4,156
STOCKHOLDERS' EQUITY:
Common stock 180 160
Preferred stock -- --
Additional paid-in capital 78,166 79,243
Accumulated deficit (12,926) (21,140)
Accumulated comprehensive income, net 864 965
----------------------
66,284 59,228
Treasury stock, at cost (3,545) (3,320)
----------------------
Total stockholders' equity 62,739 55,908
----------------------
Total liabilities and stockholders' equity $133,578 $126,923
======================
</TABLE>
See accompanying notes.
2
<PAGE> 3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Net sales $31,011 $26,192
Cost of sales 16,352 15,163
Selling, general, and administrative expenses 8,313 7,281
--------------------
Operating income 6,346 3,748
Other income (expense)
Interest and dividend income 776 309
Other income 373 --
Interest expense (909) (907)
--------------------
240 (598)
--------------------
Income before income taxes 6,586 3,150
Income tax provision 2,634 1,260
--------------------
Net income 3,952 1,890
Preferred dividends (114) (285)
Discount on redemption of preferred stock 5,832 --
--------------------
Net income available for common shares $ 9,670 $ 1,605
====================
Earnings per share:
Basic $ 0.45 $ 0.08
Diluted $ 0.45 $ 0.08
Weighted average number of common and common
equivalent shares outstanding 21,303 19,904
Dividends per Class A common share $ 0.065 $ 0.065
</TABLE>
See accompanying notes.
3
<PAGE> 4
Schawk, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,952 $ 1,890
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization 1,887 1,748
Deferred income taxes (94) (8)
Gain realized on sale of marketable securities (373) --
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade accounts receivable (158) 7
Inventories (1,086) (963)
Prepaid expenses and other 814 954
Trade accounts payable and accrued expenses (1,451) (5,636)
Income taxes payable 1,303 1,260
-----------------------
Net cash provided by (used in) operating activities 4,794 (748)
INVESTING ACTIVITIES
Proceeds from disposal of operating division -- 93,485
Proceeds from sale of marketable securities 5,755 --
Proceeds from disposal of property and equipment -- 441
Purchase of marketable securities (5,898) (9,937)
Purchases of property and equipment (2,355) (1,804)
Acquisitions, net of cash acquired (1,938) --
Other 266 (485)
-----------------------
Net cash provided by (used in) investing activities (4,170) 81,700
FINANCING ACTIVITIES
Issuance of common stock 16,029 --
Redemption of preferred stock (14,715) --
Principal payments on debt (165) (27,237)
Principal payments on capital lease obligations (110) (104)
Principal payments on notes payable to stockholders (5,765)
Cash dividends (1,570) (1,575)
Purchase of common stock (230) (444)
Other (123) (234)
-----------------------
Net cash provided by (used in) financing activities (884) (35,359)
-----------------------
Net increase (decrease) in cash and cash equivalents (260) 45,593
Cash and cash equivalents beginning of period 4,022 483
-----------------------
Cash and cash equivalents end of period $ 3,762 $ 46,076
=======================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued in connection with acquisition $ 3,469 $ --
Dividends issued in the form of Class A common stock 1 3
Cash paid for interest 744 1,594
Cash paid for income taxes 1,807 20
</TABLE>
See accompanying notes.
4
<PAGE> 5
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures included are adequate to make the information
presented not misleading. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto for the three years ended December 31, 1997.
NOTE 2. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the year.
NOTE 3. DESCRIPTION OF BUSINESS
Schawk, Inc. is a leading provider of digital imaging prepress services for the
consumer products industry in the United States and Canada primarily serving
consumer products businesses. The Company offers a complete line of high
quality prepress services, digital image management, digital photography and
art production. The Company also provides services for point-of-sale,
advertising and direct mail.
NOTE 4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 1,244 $ 1,239
Work in process 5,351 4,130
-------- --------
6,595 5,369
Less: LIFO reserve (905) (905)
-------- --------
$ 5,690 $ 4,464
======== ========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---- ----
<S> <C> <C>
Land and improvements $ 1,140 $ 520
Building and improvements 7,880 7,872
Machinery and equipment 51,885 49,567
Leasehold improvements 4,180 3,998
Building and improvements under capital leases 7,500 7,500
-------- --------
72,585 69,457
Accumulated depreciation and amortization (40,985) (39,310)
-------- --------
$ 31,600 $ 30,147
======== ========
</TABLE>
5
<PAGE> 6
NOTE 6. INVESTMENTS
At March 31, 1998 all of the Company's investments were classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of income taxes, reported in a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other than temporary on available for sale securities are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
classified as available-for-sale are included in investment income. Unrealized
appreciation on these securities totaled $2,006 ($1,156 net of tax effects) at
March 31, 1998 and is included as a separate component of stockholders' equity.
The following is a summary of available for sale securities at March 31, 1998:
<TABLE>
<CAPTION>
Gross
Unrealized Estimated Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
Equity securities and equity mutual funds $ 7,264 $1,603 $ 8,867
U.S. Treasury and U.S. Government notes 5,421 30 5,451
Corporate bonds 4,206 24 4,230
Bond mutual funds 27,634 349 27,983
------------------------------------
$44,525 $2,006 $46,531
</TABLE>
During the three month period ended March 31, 1998 available-for-sale securities
were sold with a fair value at date of sale of $5,755 including a gross realized
gain of $373.
The following is a summary of available-for-sale securities by maturity date:
<TABLE>
<CAPTION>
Estimated Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $14,490 $14,585
Due after one year through five years 21,819 22,121
Due after five years through ten years 952 958
------- -------
Total debt securities 37,261 37,664
Equity securities 7,264 8,867
------- -------
$44,525 $46,531
</TABLE>
Amounts shown as short term investments on the balance sheet at March 31, 1998
represent management's estimates of amounts available for current operations.
NOTE 7. EARINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the face
of the statement of operations. Basic earnings per share is computed by
dividing net income less preferred dividends, plus the discount on the
redemption of preferred stock, by the weighted average shares outstanding for
the period. Diluted earnings per share is computed by dividing net income less
preferred dividends, plus the discount on the redemption of preferred stock, by
weighted average number of common shares and common stock equivalent shares
outstanding (stock options) for the period.
6
<PAGE> 7
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
---------------------------
<S> <C> <C>
Net income $ 3,952 $ 1,890
Preferred stock dividends (114) (285)
Discount on redemption of preferred stock 5,832 --
------- -------
Income available for common shareholders $ 9,670 $ 1,605
======= =======
Weighted average shares 21,257 19,885
Effect of dilutive employee stock options 46 19
------- -------
Adjusted weighted average shares and
assumed conversions 21,303 19,904
======= =======
Basic earnings per share $ 0.45 $ 0.08
======= =======
Diluted earnings per share $ 0.45 $ 0.08
======= =======
</TABLE>
NOTE 8. SEGMENT REPORTING
The Company operates a single business segment, Imaging and Information
Technologies. The Company operates primarily in two geographic areas, the
United States and Canada. Summary financial information for the three months
ended March 31, 1998 and 1997 by geographic area is as follows:
<TABLE>
<CAPTION>
1998 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $26,588 $4,423 $31,011
Operating income 6,040 306 6,346
Identifiable assets 120,391 13,187 133,578
1997 UNITED STATES CANADA TOTAL
Sales $22,054 $4,138 $26,192
Operating income 3,556 192 3,748
Identifiable assets 117,987 12,612 130,599
</TABLE>
NOTE 9. STOCK OFFERING
In February 1998 the Company completed a public offering of 3,450 shares of
Class A common stock. The Company issued 1,950 of the shares and certain
stockholders of the Company sold the remaining 1,500 shares. The Company did
not receive any of the proceeds from the sale of stock by participating
stockholders. The proceeds of the offering to the Company after deducting
estimated underwriting discounts, commissions and expenses of the offering were
$16,029. The proceeds were used to redeem all of the Company's outstanding
Series A and Series B stock. The preferred stock was redeemed at a discount of
$6,035 from its liquidation value of $20,607. This discount was recorded as
additional income (after net income) available to common shareholders in the
first quarter of 1998.
NOTE 10. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or shareholder's
equity. Statement 130
7
<PAGE> 8
requires unrealized gains and losses on the Company's available-for -sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholder's equity, to be included in
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement 130.
The components of comprehensive income, net of related tax, for the three-month
periods ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net income $3,952 $1,890
Unrealized gains on securities (118) --
Foreign currency translation adjustments 17 (128)
------ ------
Comprehensive income $3,851 $1,762
====== ======
</TABLE>
The components of accumulated other comprehensive income, net of related tax,
at March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Unrealized gains on securities $1,156 $1,274
Foreign currency translation adjustments (292) (309)
------ ------
Accumulated comprehensive income $ 864 $ 965
====== ======
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Thousands of dollars, except per share amounts)
Statements contained herein that relate to the Company's beliefs or
expectations as to future events relating to, among other things, the success
of the Company's growth strategy, the ability of the Company to exploit
industry trends, such as outsourcing, and the Company's technological
advancements in the imaging industry, are not statements of historical fact and
are forward-looking statements with in the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act and are subject to the "Safe
Harbor" created thereby. Although the Company believes that the assumptions
upon which such forward-looking statements are based are reasonable within the
bounds of its knowledge of its business and operations, it can give no
assurance that the assumptions will prove to have been correct. Important
factors that could cause actual results to differ materially and adversely from
the Company's expectations and beliefs include the ability of the Company to
implement its growth strategy, to identify and exploit industry trends, and to
exploit technological advances in the imaging industry.
NET SALES Of $31,011 for the first quarter of 1998 represents an 18.4% increase
from sales of $26,192 for the same period in 1997. The increase was
attributable to higher revenues due to expansion of business with the existing
client base and additional new consumer products clients won during the latter
part of 1997. Substantially all of the increase in sales in the first quarter
was from internal growth.
COST OF SALES for the first quarter of 1998 decreased to 52.7% from 57.9% of
net sales for the same period in 1997, as the Company experienced operating
efficiencies from increased volume over its fixed operating costs. The sales
mix of high margin projects also contributed to the decrease in cost of sales
as a percentage of sales.
OPERATING INCOME in the first quarter of 1998 increased 69.3% to $6,346 from
$3,748 for the same period in 1997. This increase was due to the cost of sales
improvement previously described as well as lower selling, general and
administrative expenses as a percentage of sales. Selling, general and
administrative expenses decreased to 26.8% of sales for the first quarter of
1998 from 27.8% of sales for the same period in 1997. Sales volume increases
resulted in efficiencies leveraging the fixed portion of selling, general and
administrative expenses.
OTHER INCOME (EXPENSE) increased to $240 for the first quarter of 1998
compared with $(598) for the same period of 1997. While interest expense
remained constant over the periods, investment income increased substantially
as the Company earned income on the invested proceeds from the divestiture of
it Plastics business segment in February of 1997.
INCOME BEFORE INCOME TAXES increased to $6,586 for the first quarter of 1998
from $3,150 for the same period of 1997 for the reasons previously discussed.
INCOME TAX PROVISION remained constant at an effective tax rate of 40% of
pre-tax income for the first quarter of 1998 and 1997.
NET INCOME increased 109.1% to $3,952 for the first quarter of 1998 from
$1,890 for the same period of 1997 for the reasons previously discussed.
PREFERRED DIVIDENDS decreased to $114 for the first quarter of 1998 from $285
for the same period of 1997 as the Company repurchased all of the preferred
stock outstanding in February of 1998.
DISCOUNT ON REDEMPTION OF PREFERRED STOCK resulted in non-recurring income
available for common shares of $5,832 as the Company repurchased its
outstanding preferred stock at a discount over its liquidation value of
$20,607.
BASIC AND DILUTED EARNINGS PER SHARE increased to $0.45 for the first quarter
of 1998 from $0.08 for the same period in 1997. Earnings per share without the
non-recurring benefit from the repurchase of the Company's preferred stock
would have been $0.18. Weighted average common and common equivalent shares
outstanding increased to 21,303 for the first quarter of 1998 from 19,904 for
the same period of 1997 primarily as a
9
<PAGE> 10
result of an offering of common stock in February of 1998, stock issued in
connection with an acquisition during March of 1998, and shares repurchased
under its common stock repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently finances its business from available cash held by the
Company and from cash generated from operations. The Company maintains a
$10,000 unsecured credit facility and its consolidated Canadian subsidiary
maintains a Cdn $10,000 unsecured working capital facility. Both facilities are
due on demand. The domestic credit facility was unused at March 31, 1998 and
the Canadian credit facility had approximately U.S. $5,500 available at March
31, 1998.
The Company held invested balances at March 31, 1998 of $46,531 (including
$11,930 classified as short term investments) in bond mutual funds, equity
mutual funds, U.S. Treasury and U.S. Government notes, corporate bonds, and
equity securities. These funds are available-for-sale to provide for
acquisitions and corporate requirements. Unrealized appreciation on these
investments of $2,006 ($1,156 net of tax effects) at March 31, 1998, has been
excluded from earnings in the Company's consolidated statement of operations
and has been included as a separate component of stockholders' equity. The
Company has entered into a 90 day options collar agreement to hedge the impact
of market volatility in the investment in equity mutual funds. The cost of the
contract was $16 and it limits the Company's losses to $160 and its potential
gains to $360 on its equity mutual fund over the life of the contract.
At March 31, 1998, outstanding debt of the Company consisted of: (i) unsecured
notes issued pursuant to a Note Purchase Agreement dated August 18, 1995, for
$40,000 due in installments from 1999 through 2005 (averaging seven years) at
an average interest rate of 6.88%; and (ii) US $4,500 of borrowings under the
Company's Canadian subsidiary's working capital facility.
Management believes that the level of working capital is adequate for the
Company's liquidity needs related to normal operations both currently and in
the foreseeable future, and that the Company has sufficient resources to
support its growth, either through currently available cash and investments,
cash generated through future operations, or through short term financing.
Capital expenditures of $2,355 were made during the first quarter of 1998 for
land, machinery, equipment and automation to expand production facilities and
improve productivity. Depreciation and amortization for the first quarter of
1998 totaled $1,887.
YEAR 2000 COMPLIANCE
The Company has upgraded or replaced its computer software and systems which
the Company believes accommodates the "Year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years. The Company
does not expect that additional costs with regard to year 2000 compliance will
be material to its financial condition or results of operations. The Company
does not currently anticipate any material disruption in its operations as the
result of any failure by the Company to be in compliance. The Company does not
currently have any information concerning the compliance status of its
suppliers and customers.
STOCK OFFERING
In February 1998, the company issued 1,950 shares of Class A Common Stock in an
underwritten public offering at price of $9.00 per share. The proceeds from
the sale of the stock net of underwriting discounts, commissions and estimated
expenses, were approximately $16,000. Proceeds from the sale of the stock were
used to repurchase 15,400 shares of Series A Preferred Stock of the Company and
5,207 shares of Series B Preferred Stock of the Company for $14,715 and the
remaining proceeds are available for general corporate requirements.
SEASONALITY
Historically, the Company has experienced lower revenues in the first and
fourth quarters due to the seasonal trends of its clients and lower overall
economic activity. However, this did not occur during the fourth quarter of
1997 or
10
<PAGE> 11
the first quarter of 1998 and the Company believes that this seasonal effect
on the Company's revenues will be less pronounced in the future as a result of
frequent redesigns of packaging for promotional and other reasons.
IMPACT OF INFLATION
The Company believes that over the past three years inflation has not had a
significant impact on the Company's results of operations.
11
<PAGE> 12
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
Item 14. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
No forms on 8-K were filed during the three month period ended March 31,
1998
(B) Exhibit 27 - Financial Data Schedule
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 9th day of May, 1998.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- -----------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- -----------------------------
Executive Vice President and Chief Financial Officer
/s/ Dennis D. Wilson
- -----------------------------
Director of Financial Reporting and Chief Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,762
<SECURITIES> 46,531
<RECEIVABLES> 24,993
<ALLOWANCES> 510
<INVENTORY> 5,690
<CURRENT-ASSETS> 48,291
<PP&E> 72,585
<DEPRECIATION> 40,985
<TOTAL-ASSETS> 133,578
<CURRENT-LIABILITIES> 20,870
<BONDS> 44,744
0
0
<COMMON> 180
<OTHER-SE> 62,559
<TOTAL-LIABILITY-AND-EQUITY> 133,578
<SALES> 31,011
<TOTAL-REVENUES> 31,011
<CGS> 16,352
<TOTAL-COSTS> 16,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 909
<INCOME-PRETAX> 6,586
<INCOME-TAX> 2,634
<INCOME-CONTINUING> 3,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,952
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
