<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 September 30, 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 September 30, 1998, are: 22,090,904 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 17.
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1
<PAGE> 2
PART I
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
-------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,634 $ 4,022
Short term investments 18,342 12,250
Trade accounts receivable, less allowance for doubtful accounts
of $694 in 1998 and $464 in 1997 32,737 22,884
Inventories 6,241 4,464
Prepaid expenses and other 2,520 2,817
Deferred income taxes 415 543
-------------------------------------------
Total current assets 61,889 46,980
Marketable securities 7,102 33,917
Property and equipment, net 36,122 30,147
Excess of cost over net assets acquired, less accumulated amortization
of $ 4,895 in 1998 and $4,207 in 1997 26,782 12,713
Other assets 3,031 3,166
-------------------------------------------
Total assets $134,926 $126,923
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,829 $ 3,393
Accrued expenses 11,278 8,128
Income taxes payable 1,565 4,061
Notes payable to banks 3,721 4,685
Current portion of long-term debt and capital lease obligations 5,463 430
-------------------------------------------
Total current liabilities 25,856 20,697
Long-term debt 35,000 40,000
Capital lease obligations 4,972 4,854
Other 1,195 1,308
Deferred income taxes 3,249 4,156
STOCKHOLDERS' EQUITY:
Common stock 181 160
Preferred stock -- --
Additional paid-in capital 79,766 79,243
Accumulated deficit (6,528) (21,140)
Accumulated comprehensive income (loss), net (602) 965
-------------------------------------------
72,817 59,228
Treasury stock, at cost (8,163) (3,320)
-------------------------------------------
Total stockholders' equity 64,654 55,908
-------------------------------------------
Total liabilities and stockholders' equity $134,926 $126,923
===========================================
</TABLE>
See accompanying notes.
2
<PAGE> 3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
<S> <C> <C>
Net sales $ 37,692 $ 29,568
Cost of sales 20,577 16,523
Selling, general, and administrative expenses 9,972 7,872
-------------------------------------------
Operating income 7,143 5,173
Other income (expense)
Interest and dividend income 614 843
Interest expense (906) (918)
Other income 368 422
-------------------------------------------
76 347
-------------------------------------------
Income before income taxes 7,219 5,520
Income tax provision 2,934 2,208
-------------------------------------------
Net income 4,285 3,312
Preferred dividends -- (285)
-------------------------------------------
Net income available for common shares $ 4,285 $ 3,027
===========================================
Earnings per share:
Basic $ 0.19 $ 0.15
Diluted $ 0.19 $ 0.15
Weighted average number of common and common
equivalent shares outstanding 22,538 19,904
Dividends per Class A common share $ 0.065 $ 0.065
</TABLE>
See accompanying notes.
3
<PAGE> 4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
<S> <C> <C>
Net sales $102,753 $ 85,157
Cost of sales 55,263 47,853
Selling, general, and administrative expenses 27,273 23,527
-------------------------------------------
Operating income 20,217 13,777
Other income (expense)
Interest and dividend income 2,169 2,149
Interest expense (2,718) (2,791)
Other income 2,504 563
-------------------------------------------
1,955 (79)
-------------------------------------------
Income before income taxes 22,172 13,698
Income tax provision 8,916 5,479
-------------------------------------------
Net income 13,256 8,219
Preferred dividends (114) (855)
Discount on redemption of preferred stock 5,832 --
-------------------------------------------
Net income available for common shares $ 18,974 $ 7,364
===========================================
Earnings per share:
Basic $ 0.85 $ 0.37
Diluted $ 0.84 $ 0.37
Weighted average number of common and common
equivalent shares outstanding 22,475 19,879
Dividends per Class A common share $ 0.195 $ 0.195
</TABLE>
See accompanying notes.
4
<PAGE> 5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,256 $ 8,219
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 5,907 5,309
Deferred income taxes (842) 1,303
Gain realized on sale of marketable securities (2,504) (567)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable (3,198) (2,718)
Inventories (1,343) (1,612)
Prepaid expenses and other 848 3,798
Trade accounts payable and accrued expenses 745 (3,394)
Income taxes payable (2,539) (6,432)
-------------------------------------------
Net cash provided by (used in) operating activities 10,330 3,906
INVESTING ACTIVITIES
Proceeds from disposal of operating division -- 93,485
Proceeds from sale of marketable securities 35,602 2,789
Proceeds from disposal of property and equipment -- 441
Purchase of marketable securities (14,217) (52,985)
Purchases of property and equipment (5,764) (5,458)
Acquisitions, net of cash acquired (20,369) --
Other 1,077 (749)
-------------------------------------------
Net cash provided by (used in) investing activities (3,671) 37,523
FINANCING ACTIVITIES
Issuance of common stock 16,469 390
Redemption of preferred stock (14,715) --
Principal payments on debt (931) (27,886)
Principal payments on capital lease obligations (320) (322)
Principal payments on notes payable to stockholders -- (5,765)
Cash dividends (4,472) (4,723)
Purchase of common stock (4,853) (1,389)
Other (225) (339)
-------------------------------------------
Net cash provided by (used in) financing activities (9,047) (40,034)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,388) 1,395
Cash and cash equivalents beginning of period 4,022 483
-------------------------------------------
Cash and cash equivalents end of period $ 1,634 $ 1,878
===========================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued in connection with acquisitions $ 5,016 $ --
Dividends issued in the form of Class A common stock 3 6
Cash paid for interest 2,258 3,091
Cash paid for income taxes 11,800 10,876
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 North America primarily serving the consumer
products, packaging, advertising and promotional markets. 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>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Raw materials $1,595 $1,239
Work in process 5,551 4,130
------ ------
7,146 5,369
Less: LIFO reserve (905) (905)
------- -------
$6,241 $4,464
====== ======
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Land and improvements $ 1,119 $ 520
Building and improvements 7,840 7,872
Machinery and equipment 66,151 49,567
Leasehold improvements 4,402 3,998
Building and improvements under capital leases 7,500 7,500
------- -------
87,012 69,457
Accumulated depreciation and amortization (50,890) (39,310)
-------- --------
$36,122 $30,147
======= =======
</TABLE>
6
<PAGE> 7
NOTE 6. INVESTMENTS
At September 30, 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 $282 ($169 net of tax effects) at September 30, 1998
and is included as a separate component of stockholders' equity.
The following is a summary of available for sale securities at September 30,
1998:
<TABLE>
<CAPTION>
Gross
Unrealized Estimated Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
Equity securities $ 58 $ -- $ 58
U.S. Treasury and U.S. Government notes -- -- --
Bank notes 5,880 -- 5,880
Bond mutual funds 19,224 282 19,506
------- ---- -------
$25,162 $282 $25,444
======= ==== =======
</TABLE>
During the nine month period ended September 30, 1998 available-for-sale
securities were sold with a fair value at date of sale of $35,602 including a
gross realized gain of $2,504.
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 $18,075 $18,342
Due after one year through five years 7,029 7,044
Due after five years through ten years -- --
------- --------
Total debt securities 25,104 25,386
Equity securities 58 58
------- -------
$25,162 $25,444
======= =======
</TABLE>
Amounts shown as short term investments on the balance sheet at September 30,
1998 represent management's estimates of amounts available for current
operations.
NOTE 7. EARNINGS 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.
7
<PAGE> 8
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended September 30
1998 1997
----------------------------------------------------
<S> <S> <C>
Net income $ 4,285 $ 3,312
Preferred stock dividends -- (285)
----------------- -----------------
Income available for common shareholders $ 4,285 $ 3,027
================= =================
Weighted average shares 22,261 19,822
Effect of dilutive employee stock options 277 82
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 22,538 19,904
================= =================
Basic earnings per share $ 0.19 $ 0.15
================= =================
Diluted earnings per share $ 0.19 $ 0.15
================= =================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30
1998 1997
----------------------------------------------------
<S> <C> <C>
Net income $ 13,256 $ 8,219
Preferred stock dividends (114) (855)
Discount on redemption of preferred stock 5,832 --
----------------- -----------------
Income available for common shareholders $ 18,974 $ 7,364
================= =================
Weighted average shares 22,267 19,834
Effect of dilutive employee stock options 208 45
----------------- -----------------
Adjusted weighted average shares and
assumed conversions 22,475 19,879
================= =================
Basic earnings per share $ 0.85 $ 0.37
================= =================
Diluted earnings per share $ 0.84 $ 0.37
================= =================
</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 and nine months
ended September 30, 1998 and 1997 by geographic area is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1998 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $ 32,985 $ 4,707 $ 37,692
Operating income 6,631 512 7,143
Identifiable assets 121,846 13,080 134,926
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1997 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $ 24,849 $ 4,719 $ 29,568
Operating income 4,944 229 5,173
Identifiable assets 116,554 12,997 129,551
NINE MONTHS ENDED SEPTEMBER 30
1998 UNITED STATES CANADA TOTAL
Sales $ 88,728 $ 14,025 $ 102,753
Operating income 19,052 1,165 20,217
Identifiable assets 121,846 13,080 134,926
1997 UNITED STATES CANADA TOTAL
Sales $ 72,288 $ 12,869 $ 85,157
Operating income 13,315 462 13,777
Identifiable assets 116,554 12,997 129,551
</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 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 (loss), net of related tax, for the three
and nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended September 30
----------------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Net income $4,285 $3,312
Increase (decrease) in unrealized appreciation of
investments (76) (363)
Foreign currency translation adjustments (273) (105)
================= =================
Comprehensive income $3,936 $2,844
================= =================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Nine months ended September 30
----------------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Net income $13,256 $8,219
Increase (decrease) in unrealized appreciation of
investments (1,105) 1,558
Foreign currency translation adjustments (462) (212)
================= =================
Comprehensive income $11,689 $9,565
================= =================
</TABLE>
The components of accumulated comprehensive income (loss), net of related tax,
at September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Unrealized appreciation of investments $ 169 $1,274
Foreign currency translation adjustments (771) (309)
================= =================
Accumulated comprehensive income $(602) $ 965
================= =================
</TABLE>
10
<PAGE> 11
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 $37,692 for the third quarter of 1998 represents a 27.5% increase
from sales of $29,568 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.
Sales from new and existing customers increased by 10.2% and the remaining
increase was due to acquisitions.
Net sales of $102,753 for the first nine months of 1998 represents a 20.7%
increase from sales of $85,157 for the same period of 1997. Sales from new and
existing customers increased by 12.6% and the remainder of the increase was due
to acquisitions.
COST OF SALES for the third quarter of 1998 decreased to 54.6% from 55.9% of net
sales for the same period in 1997. Cost of sales decreased to 53.8% from 56.2%
of net sales for the first nine months of 1998 versus the same period of 1997.
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 third quarter of 1998 increased 38.1% to $7,143 from
$5,173 for the same period in 1997, and increased 46.7% to $20,217 for the first
nine months of 1998 compared to $13,777 for the first nine months of 1997. This
increase was primarily due to the cost of sales improvement previously
described. Lower selling, general and administrative expenses as a percentage of
sales also contributed to higher operating income. Selling, general and
administrative expenses decreased to 26.5% of sales for the third quarter of
1998 from 26.6% of sales for the same period in 1997, and decreased to 26.5% of
sales for the first nine months of 1998 compared to 27.6% of sales for the first
nine months of 1997. Sales volume increases resulted in efficiencies leveraging
the fixed portion of selling, general and administrative expenses.
OTHER INCOME (EXPENSE) - NET decreased to $76 for the third quarter of 1998
compared with $347 for the same period of 1997, but increased to $1,955 for the
first nine months of 1998 from $(79) for the first nine months of 1997. Interest
expense has remained relatively constant over the periods as the Company's debt
level has remained stable and most of its borrowings are at fixed rates.
Interest and dividend income have steadily declined as a result of the changes
in the invested balances over the periods shown. During the first nine months of
1998 the Company sold investments to provide additional liquidity for
acquisitions resulting in a gain of $2,504.
INCOME BEFORE INCOME TAXES increased to $7,219 for the third quarter of 1998
from $5,520 for the same period of 1997, and increased to $22,172 for the first
nine months of 1998 from $13,698 for the first nine months of 1997 for the
reasons previously discussed.
INCOME TAX PROVISION increased to 40.6% of pretax income during the third
quarter of 1998, as the Company derived a larger percentage of its income from
higher taxed states. The Company's previous effective tax rate was 40%. The
Company's effective tax rate is expected to increase to 41% over the next twelve
months.
NET INCOME increased 29.4% to $4,285 for the third quarter of 1998 from $3,312
for the same period of 1997, and increased 61.3% to $13,256 from $8,219 for the
nine months of 1998 compared to the first nine months of 1997 for the reasons
previously discussed.
11
<PAGE> 12
PREFERRED DIVIDENDS decreased to $114 for the first nine months of 1998 from
$855 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 for the first nine months of 1998 as the
Company repurchased its outstanding preferred stock at a discount compared to
its liquidation value of $20,607 in February 1998.
BASIC AND DILUTED EARNINGS PER SHARE increased to $0.19 for the third quarter of
1998 from $0.15 for the same period in 1997. Basic and diluted earnings per
share increased to $0.85 and $0.84, respectively, for the first nine months of
1998 compared to $0.37 for the first nine months of 1997. Basic and diluted
earnings per share for the first nine months of 1998 without the non-recurring
benefit from the repurchase of the Company preferred stock would have been $0.59
and $0.58, respectively. Weighted average common and common equivalent shares
outstanding increased to 22,538 for the third quarter of 1998 from 19,904 for
the same period of 1997, and to 22,475 from 19,879 for the first nine months of
1998 compared to the first nine months of 1997, primarily as a result of an
offering of common stock in February of 1998, stock issued in connection with
acquisitions, increase in dilution from stock options, and reduced by shares
repurchased under its common stock repurchase program. The Company repurchased
348 shares at a cost of $4,853 during the first nine months of 1998 under this
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 September 30, 1998 and the
Canadian credit facility had approximately U.S. $2,800 available at September
30, 1998.
The Company held invested balances at September 30, 1998 of $25,444 (including
$18,342 classified as short term investments) primarily in bond mutual funds and
bank notes. These funds are available-for-sale to provide for acquisitions and
corporate requirements. Unrealized appreciation on these investments of $282
($169 net of tax effects) at September 30, 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.
At September 30, 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) approximately US $3,700 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 and planned acquisitions
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 $1,813 were made during the third quarter of 1998 and
$5,764 for the first nine months of 1998 for land, machinery, equipment and
automation to expand production facilities and improve productivity.
Depreciation and amortization for the third quarter of 1998 totaled $2,157 and
$5,907 for the first nine months of 1998.
YEAR 2000 ISSUE
GENERAL DESCRIPTION OF THE ISSUE
The "Year 2000 issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. If not corrected, many
computer applications could fail or create erroneous results. As required by
recent guidance from the Securities and Exchange Commission (SEC) applicable to
all public companies, the following disclosure provides more detail regarding
the Company's Year 2000 compliance than previous reports filed by the Company.
12
<PAGE> 13
STATUS OF PROGRESS IN YEAR 2000 COMPLIANCE
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has substantially completed its assessment of all internal information,
production, and manufacturing systems that could be significantly affected by
the Year 2000. The assessment indicated that although the information technology
systems for most of the Company's operations are not at risk, certain of the
Company's operations which have been acquired during the last few years have
information technology systems that are not Year 2000 compliant. That assessment
also indicated that software and hardware (embedded chips) used in production
and manufacturing systems "operating equipment", are not significantly at risk.
The Company believes that it does not have a material exposure for Year 2000 as
it relates to its products. The assessment of building systems, equipment at
properties which make use of embedded computer chips, such as elevators,
security systems, telecommunications equipment, and HVAC equipment, has not yet
been completed. It is expected that the assessment of building systems will be
completed by March 31, 1999. The Company has not completed its assessment with
regard to Year 2000 compliance status of its significant suppliers. It is
expected that this assessment will be completed by March 31, 1999.
Based on recent assessments, the Company has determined that it will be required
to modify or replace portions of its software and certain hardware at those
divisions that have noncompliant systems so that those systems will properly
utilize dates beyond December 31, 1999. The Company presently believes that with
modifications or replacements of existing software and certain hardware, the
Year 2000 issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
For the divisions at risk for information technology problems, to date the
Company is 90% complete on the remediation phase. The remediation phase involves
primarily the purchase of software and hardware that has aleady been verified as
Year 2000 compliant. The Company is currently testing a new accounting and
financial software system which will be implemented at those divisions by June
30, 1999.
THIRD PARTY EXPOSURE
The Company's accounts payable, purchasing and accounts receivable information
technology systems do not interface directly with third parties. The Company has
not yet completed its query of these third parties with regard to whether their
systems are Year 2000 compliant. This is expected to be completed by the end of
the first quarter 1999. The inability of these third parties to complete their
Year 2000 compliance process in a timely fashion could materially impact the
Company.
COSTS
The Company had previously planned and/or begun implementing several system
replacement projects to modernize and improve its systems. The Year 2000 problem
heightened the need for the timely completion and some project schedules have
been accelerated. These project costs have been included in the Company's
budgeting process and its internal forecasts, and already form part of the
Company's financial plans. It is not expected that these costs will be material
to the Company's financial statements. The actual costs to be incurred by the
Company depend on a number of factors which cannot be accurately predicted,
including the extent and difficulty of the remediation and other work to be
done, the availability and cost of consultants, and the extent of testing
required to demonstrate Year 2000 compliance.
RISKS
Based on current information, the Company believes that the Year 2000 problem
will not have a material adverse effect on the Company, its business or its
financial condition. There can, however, be no assurances that Year 2000
remediation by the Company or third parties will be properly and timely
completed, and failure to do so could have a material adverse effect on the
Company, its business and its financial condition. The Company cannot predict
the actual effects to it of the Year 2000 problem, which depends on numerous
uncertainties such as the factors listed above under Costs, whether significant
third parties properly and timely address the Year 2000 issue, whether broad
based or systemic economic failures may occur, and the severity and duration of
such failures, which could include disruptions in transportation systems
generally, loss of utility and/or telecommunications services, and errors or
failures in financial transactions or payment processing systems and whether the
Company becomes the subject of
13
<PAGE> 14
litigation or other proceedings regarding any Year 2000 related events and the
outcome of any such litigation or proceedings.
As part of its contingency planning, the Company is analyzing the most
reasonably likely worst case scenarios that could result from failing to
complete all necessary phases of the Year 2000 program in a timely manner. In
the event the Company does not complete any additional phases, the Company may
experience difficulty in producing, shipping and billing orders in the event of
the failure of building systems, may experience difficulty in producing timely
and accurate financial data for certain of its divisions, and will be
susceptible to significant disruption in its business due to failures of third
parties previously described. Additionally, broad based and systemic economic
failures could have a materially adverse effect on the Company. The amount of
potential liability or lost revenue from these factors cannot be reasonably
estimated at this time.
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds, reallocating work among its divisions, increasing
inventories, and adjusting staffing strategies. There can be no assurance,
however, that these plans would mitigate all of the effects previously
described.
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 $16,029. 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 the
first nine months 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 by its
clients.
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.
14
<PAGE> 15
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
Form 8-K dated August 21, 1998
(B) Exhibit 27 - Financial Data Schedule
15
<PAGE> 16
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 11th day of November, 1998.
SCHAWK, INC.
- -----------
(Registrant)
/s/ David A. Schawk
- ------------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ------------------------------------
Senior Vice President and Chief Financial Officer
/s/ Dennis D. Wilson
- ------------------------------------
Director of Financial Reporting and Chief Accounting Officer
16
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 1,634 1,634
<SECURITIES> 18,342 18,342
<RECEIVABLES> 33,431 33,431
<ALLOWANCES> 694 694
<INVENTORY> 6,241 6,241
<CURRENT-ASSETS> 61,889 61,889
<PP&E> 87,012 87,012
<DEPRECIATION> (50,890) (50,890)
<TOTAL-ASSETS> 134,926 134,926
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<BONDS> 39,972 39,972
0 0
0 0
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<SALES> 37,692 102,753
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<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 906 2,718
<INCOME-PRETAX> 7,219 22,172
<INCOME-TAX> 2,934 8,916
<INCOME-CONTINUING> 4,285 13,256
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 4,285 13,256
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