<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 June 30, 1999 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 June 30, 1999, are:
21,399,301 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 16.
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1
<PAGE> 2
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
-------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,722 $ 2,226
Short term investments 11,170 16,137
Trade accounts receivable, less allowance for doubtful accounts
of $692 in 1999 and $730 in 1998 33,971 34,426
Inventories 6,952 5,948
Prepaid expenses and other 2,882 3,456
Refundable income taxes 1,563 1,475
Deferred income taxes 831 830
-------------------------------------------
Total current assets 60,091 64,498
Property and equipment, net 41,322 36,421
Excess of cost over net assets acquired, less accumulated amortization
of $6,129 in 1999 and $5,236 in 1998 37,519 34,913
Other assets 9,259 2,678
-------------------------------------------
Total assets $148,191 $138,510
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,913 $ 6,143
Accrued expenses 11,745 11,691
Income taxes payable 2,124 2,660
Notes payable to banks 13,796 2,941
Current portion of long-term debt and capital lease obligations 5,622 5,610
-------------------------------------------
Total current liabilities 39,200 29,045
Long-term debt 35,000 35,000
Capital lease obligations 4,308 4,619
Other 1,016 1,174
Deferred income taxes 3,690 3,649
STOCKHOLDERS' EQUITY:
Common stock 182 181
Additional paid-in capital 81,191 80,262
Retained earnings (deficit) 1,346 (3,503)
Accumulated comprehensive income (loss), net (326) (491)
-------------------------------------------
82,393 76,449
Treasury stock, at cost (17,416) (11,426)
-------------------------------------------
Total stockholders' equity 64,977 65,023
-------------------------------------------
Total liabilities and stockholders' equity $148,191 $138,510
===========================================
</TABLE>
See accompanying notes.
2
<PAGE> 3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
<S> <C> <C>
Net sales $44,453 $34,050
Cost of sales 25,907 18,334
Selling, general, and administrative expenses 11,986 8,988
-------------------------------------------
Operating income 6,560 6,728
Other income (expense)
Interest and dividend income 142 779
Interest expense (897) (903)
Other income (expense) 319 1,763
-------------------------------------------
(436) 1,639
-------------------------------------------
Income before income taxes 6,124 8,367
Income tax provision 2,526 3,348
-------------------------------------------
Net income available for common shares $ 3,598 $ 5,019
===========================================
Earnings per share:
Basic $ 0.17 $ 0.23
Diluted $ 0.17 $ 0.22
Weighted average number of common and common
equivalent shares outstanding 21,619 22,549
Dividends per Class A common share $ 0.065 $ 0.065
</TABLE>
See accompanying notes.
3
<PAGE> 4
Schawk, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 1999 and 1998
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
<S> <C> <C>
Net sales $86,430 $65,061
Cost of sales 49,420 34,686
Selling, general, and administrative expenses 23,155 17,301
-------------------------------------------
Operating income 13,855 13,074
Other income (expense)
Interest and dividend income 374 1,555
Interest expense (1,780) (1,812)
Other income 530 2,136
-------------------------------------------
(876) 1,879
-------------------------------------------
Income before income taxes 12,979 14,953
Income tax provision 5,317 5,982
-------------------------------------------
Net income 7,662 8,971
Preferred dividends (114)
Discount on redemption of preferred stock -- 5,832
-------------------------------------------
Net income available for common shares $ 7,662 $14,689
===========================================
Earnings per share:
Basic $ 0.35 $ 0.68
Diluted $ 0.35 $ 0.67
Weighted average number of common and common
equivalent shares outstanding 21,766 21,931
Dividends per Class A common share $ 0.13 $ 0.13
</TABLE>
4
<PAGE> 5
Schawk, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,662 $ 8,971
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 5,605 3,750
Deferred income taxes 40 (822)
Gain realized on sale of marketable securities (420) (2,136)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable 1,441 755
Inventories (982) (1,089)
Prepaid expenses and other 579 1,006
Trade accounts payable and accrued expenses (750) (546)
Income taxes refundable/payable (702) (2,482)
-------------------------------------------
Net cash provided by (used in) operating activities 12,473 7,407
INVESTING ACTIVITIES
Proceeds from sale of short term investments 11,614 19,125
Purchase of short term investments (6,343) (7,941)
Purchases of property and equipment (9,255) (3,951)
Acquisitions, net of cash acquired (8,363) (1,938)
Other (2,301) (219)
-------------------------------------------
Net cash provided by (used in) investing activities (14,648) 5,076
FINANCING ACTIVITIES
Proceeds from short term borrowings 10,855 --
Issuance of common stock 930 16,029
Redemption of preferred stock -- (14,715)
Principal payments on debt -- (746)
Principal payments on capital lease obligations (311) (231)
Common stock dividends (2,813) (3,018)
Purchase of common stock (5,990) (490)
Other -- (253)
-------------------------------------------
Net cash provided by (used in) financing activities 2,671 (3,424)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 496 9,059
Cash and cash equivalents beginning of period 2,226 4,022
-------------------------------------------
Cash and cash equivalents end of period $ 2,722 $ 13,081
===========================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued in connection with acquisitions $ -- $ 3,469
Cash paid for interest 1,478 1,517
Cash paid for income taxes 5,852 8,700
</TABLE>
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, 1998.
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:
June 30 December 31
1999 1998
---- ----
Raw materials $1,437 $1,429
Work in process 6,702 5,706
------ ------
8,139 7,135
Less: LIFO reserve (1,187) (1,187)
------ ------
$6,952 $5,948
====== ======
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30 December 31
1999 1998
---- ----
Land and improvements $ 1,375 $ 1,125
Building and improvements 9,100 7,850
Machinery and equipment 68,354 60,241
Leasehold improvements 5,054 5,054
Building and improvements under capital leases 7,500 7,500
------- -------
91,383 81,770
Accumulated depreciation and amortization (50,061) (45,349)
------- -------
$41,322 $36,421
======= =======
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<PAGE> 7
NOTE 6. INVESTMENTS
At June 30, 1999 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 losses on
these securities totaled $300 ($180 net of tax effects) at June 30, 1999 and is
included as a separate component of stockholders' equity.
The following is a summary of available for sale securities at June 30, 1999:
<TABLE>
<CAPTION>
Gross
Unrealized Estimated Fair
Cost Gains (Losses) Value
---- -------------- -----
<S> <C> <C> <C>
Pound sterling money market fund $ 7,563 $ -- $ 7,563
Bond mutual funds 3,787 (180) 3,607
------- ------ -------
$11,350 $ (180) $11,170
======= ======= =======
</TABLE>
During the three month period ended June 30, 1999 available-for-sale securities
were sold with a fair value at date of sale of $11,614 including a gross
realized gain of $420.
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 $ 7,563 $ 7,563
Due after one year through five years 3,787 3,607
Due after five years through ten years -- --
------- -------
$11,350 $11,170
</TABLE>
Amounts shown as short term investments on the balance sheet at June 30, 1999
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.
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<PAGE> 8
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended June 30
1999 1998
------------------------
Income available for common shareholders $ 3,598 $ 5,019
======== ========
Weighted average shares 21,478 22,276
Effect of dilutive stock options 141 273
-------- --------
Adjusted weighted average shares and
assumed conversions 21,619 22,549
======== ========
Basic earnings per share $ 0.17 $ 0.23
======== ========
Diluted earnings per share $ 0.17 $ 0.22
======== ========
Six months ended June 30
1999 1998
------------------------
Net income $ 7,662 $ 8,971
Preferred stock dividends -- (114)
Discount on redemption of preferred stock -- 5,832
-------- --------
Income available for common shareholders $ 7,662 $ 14,689
======== ========
Weighted average shares 21,642 21,744
Effect of dilutive stock options 124 187
-------- --------
Adjusted weighted average shares and
assumed conversions 21,766 21,931
======== ========
Basic earnings per share $ 0.35 $ 0.68
======== ========
Diluted earnings per share $ 0.35 $ 0.67
======== ========
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 six months
ended June 30, 1999 and 1998 and by geographic area is as follows:
THREE MONTHS ENDED JUNE 30
1999 UNITED STATES CANADA TOTAL
Sales $ 33,961 $ 10,492 $ 44,453
Operating income 5,189 1,371 6,560
Identifiable assets 130,063 18,128 148,191
THREE MONTHS ENDED JUNE 30
1998 UNITED STATES CANADA TOTAL
Sales $ 29,156 $ 4,894 $ 34,050
Operating income 6,384 344 6,728
Identifiable assets 118,846 12,574 131,420
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<PAGE> 9
SIX MONTHS ENDED JUNE 30
1999 UNITED STATES CANADA TOTAL
Sales $ 68,276 $ 18,154 $ 86,430
Operating income 12,147 1,708 13,855
Identifiable assets 130,063 18,128 148,191
SIX MONTHS ENDED JUNE 30
1998 UNITED STATES CANADA TOTAL
Sales $ 55,743 $ 9,318 $ 65,061
Operating income 12,421 653 13,074
Identifiable assets 118,846 12,574 131,420
NOTE 9. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards 130 (SFAS 130) requires unrealized
gains and losses on the Company's available-for -sale securities and foreign
currency translation adjustments to be included in comprehensive income.
The components of comprehensive income (loss), net of related tax, for the three
and six month periods ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30
----------------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net income $3,598 $5,019
Increase (decrease) in unrealized appreciation of
investments (816) (911)
Foreign currency translation adjustments 253 (206)
----------------- -----------------
Comprehensive income $3,035 $3,902
================= =================
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30
----------------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net income $7,662 $8,971
Increase (decrease) in unrealized appreciation of
investments (244) (1,029)
Foreign currency translation adjustments 409 (189)
----------------- -----------------
Comprehensive income $7,827 $7,753
================= =================
</TABLE>
The components of accumulated comprehensive income (loss), net of related tax,
at June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Unrealized gains (losses) on investments $ (180) $ 64
Foreign currency translation adjustments (146) (555)
----------------- -----------------
Accumulated comprehensive income $ (326) $ (491)
================= =================
</TABLE>
9
<PAGE> 10
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 $44,453 for the second quarter of 1999 represents a 30.5% increase
from sales of $34,050 for the same period in 1998. The increase was attributable
to revenues from businesses acquired during 1998. Sales from existing businesses
were approximately the same as compared to the strong prior year quarter.
Net sales of $86,430 for the first half of 1999 represents a 32.8% increase from
sales of $65,061 for the first half of 1998. Revenues from businesses acquired
during 1998 represented substantially all of the increase in sales for the first
half of 1999.
COST OF SALES for the second quarter of 1999 increased to 58.3% from 53.8% of
net sales for the same period in 1998. The higher cost of sales percentage was
primarily a result of lower margins from acquired businesses, as expected, and
weakness in the margins of existing businesses due to lower volumes of higher
margin projects compared to the previous year.
Cost of sales for the first half of 1999 increased to 57.2% from 53.3% of net
sales for the first half of 1998. The higher cost of sales percentage for the
first half of 1999 compared with the previous year is a result of the factors
described in the previous paragraph.
OPERATING INCOME in the second quarter of 1999 decreased 2.5% to $6,560 from
$6,728 for the same period in 1998. Operating margin decreased to 14.8% of sales
for the second quarter versus 19.8% for the same period in 1998. This decrease
was primarily the result of lower margins from acquired businesses and the lack
of high margin projects in the quarter compared to the previous year. Selling,
general and administrative expenses increased to 27.0% of sales for the second
quarter of 1999 from 26.4% of sales for the same period in 1998. The increase
was due to lower than expected sales volume on the fixed portion of general and
administrative expenses.
Operating income for the first half of 1999 increased 6.0% to $13,855 from
$13,074 for the same period in 1998. The increase was primarily attributable to
the higher sales volume from acquired businesses. Selling, general and
administrative expenses increased to 26.8% of sales for the first half of 1999
from 26.6% for the first half of 1998. This increase was due to lower than
expected sales volume on the fixed portion of general administrative expenses
for the first half of the year. Operating margin decreased to 16.0% for the
first half of 1999 versus 20% for the first half of 1998 due to the factors
previously discussed.
OTHER INCOME (EXPENSE) - NET decreased to $(436) for the second quarter of 1999
compared with $1,639 for the same period of 1998. Other income (expense), net
decreased for the first half of 1999 to $(876) from $1,879 for the first half of
1998. 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 the Company has
liquidated its investment portfolio for acquisitions. Other income, which
consists primarily of gains on sales of investments and capital gain
distributions, also declined in throughout 1999 from the same period as 1998 as
the Company's investment portfolio was liquidated.
INCOME BEFORE INCOME TAXES decreased to $6,124 for the second quarter of 1999
from $8,367 for the second quarter of 1998 and decreased to $12,979 for the
first half of 1999 from $14,953 for the first half of 1998 for the reasons
previously discussed.
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<PAGE> 11
INCOME TAX PROVISION increased to 41.2% of pretax income during the second
quarter of 1999, and was 41.0% for the first half of 1999 as the Company derived
a larger percentage of its income from higher taxed states. The Company's
effective tax rate for the second quarter of 1998 and the first half of 1998 was
40%. The Company's effective tax rate is expected to remain at approximately 41%
over the remainder of the fiscal year.
NET INCOME decreased to $3,598 for the second quarter of 1999 from $5,019 for
the same period of 1998, and decreased to $7,662 for the first half of 1999 from
$8,971 for the first half of 1998 for the reasons previously discussed.
PREFERRED DIVIDENDS decreased to zero in the second quarter of 1999 and 1998 and
were zero in the first half of 1999 versus $114 in the first half of 1998 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 half of 1998 (zero during
1999) 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 was $0.17 for the first quarter of 1999
compared with $0.23 basic and $0.22 diluted for the same period in 1998. Basic
and diluted earnings per share for the second quarter of 1998 without the
non-operating investment gains would have been $0.19 and $0.18, respectively.
Basic and diluted earnings per share was $0.35 for the first half of 1999
compared with $0.68 basic and $0.67 diluted for the first half of 1998. Basic
and diluted earnings per share for the first half of 1998 without the
non-recurring discount on the redemption of preferred stock would have been
$0.41and $0.40, respectively. Weighted average common and common equivalent
shares outstanding decreased to 21,619 for the second quarter of 1999 from
22,549 for the same period of 1998, primarily as a result of stock issued in
connection with acquisitions, and decreased by lower dilution from stock
options, and by shares repurchased under its common stock repurchase program.
Weighted average common and common equivalent shares outstanding decreased to
21,766 for the first half of 1999 from 21,931 for the first half of 1998 for the
same reasons.
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 an
unsecured $35,000 revolving credit facility expiring in January 2004,which had
$30,000 available at June 30, 1999. The facility is subject to certain financial
covenants that require the Company to maintain certain levels of net worth and
working capital. The Company maintains an additional $10,000 credit facility
($3,150 available at June 30, 1999) and its consolidated Canadian subsidiary
maintains a Cdn $10,000 unsecured working capital facility (approximately $4,900
available at June 30, 1999.) Both of these facilities are due on demand.
The Company held invested funds at June 30, 1999 of $11,170 primarily in
short-term bond mutual funds and in a British pound sterling money market
account. Unrealized losses on these investments of $180 at June 30, 1999, 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 June 30, 1999, outstanding long- term 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 $1,800 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 $9,255 were made during the first half of 1999 for land,
building, machinery, equipment and automation to expand production facilities
and improve productivity. Depreciation and amortization for the first half of
1999 totaled $5,605.
11
<PAGE> 12
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.
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 September 30, 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 September 30, 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 non-compliant 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 already 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
September 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 third 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.
12
<PAGE> 13
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 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.
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, the seasonal impact of the Company is changing due to its
expansion into the advertising and promotion markets. The impact of these
changes has not yet been fully evaluated.
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.
13
<PAGE> 14
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 8-K were filed during the second quarter of 1999
(B) Exhibit 27 - Financial Data Schedule
14
<PAGE> 15
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 13th day of August, 1999.
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
15
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 2,722 2,722
<SECURITIES> 11,170 11,170
<RECEIVABLES> 34,663 34,663
<ALLOWANCES> 692 692
<INVENTORY> 6,952 6,952
<CURRENT-ASSETS> 60,091 60,091
<PP&E> 91,383 91,383
<DEPRECIATION> (50,061) (50,061)
<TOTAL-ASSETS> 148,191 148,191
<CURRENT-LIABILITIES> 39,200 39,200
<BONDS> 39,308 39,308
0 0
0 0
<COMMON> 182 182
<OTHER-SE> 64,977 64,977
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<SALES> 44,453 86,430
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<CGS> 25,907 49,420
<TOTAL-COSTS> 25,907 49,420
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 897 1,780
<INCOME-PRETAX> 6,124 12,979
<INCOME-TAX> 2,526 5,317
<INCOME-CONTINUING> 3,598 7,662
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,598 7,662
<EPS-BASIC> 0.17 0.35
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