<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, 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 September 30, 1999, are:
21,201,566 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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<PAGE> 2
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,133 $ 2,226
Short term investments 3,604 16,137
Trade accounts receivable, less allowance for doubtful accounts
of $761 in 1999 and $694 in 1998 43,121 34,426
Inventories 8,233 5,948
Prepaid expenses and other 2,838 3,456
Refundable income taxes 1,646 1,475
Deferred income taxes 831 830
----------------------------
Total current assets 61,406 64,498
Property and equipment, net 45,237 36,421
Excess of cost over net assets acquired, less accumulated amortization 64,317 34,913
of $5,603 in 1999 and $4,207 in 1998
Other assets 3,812 2,678
----------------------------
Total assets $ 174,772 $ 138,510
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,660 $ 6,143
Accrued expenses 13,431 11,691
Income taxes payable 2,690 2,660
Notes payable to banks 6,775 2,941
Current portion of long-term debt and capital lease obligations 5,136 5,610
----------------------------
Total current liabilities 33,692 29,045
Long-term debt 66,640 35,000
Capital lease obligations 4,641 4,619
Other 1,017 1,174
Deferred income taxes 3,650 3,649
STOCKHOLDERS' EQUITY:
Common stock 182 181
Additional paid-in capital 81,307 80,262
Retained earnings (deficit) 3,484 (3,503)
Accumulated comprehensive income (loss), net (214) (491)
----------------------------
84,759 76,449
Treasury stock, at cost (19,627) (11,426)
----------------------------
Total stockholders' equity 65,132 65,023
----------------------------
Total liabilities and stockholders' equity $ 174,772 $ 138,510
============================
</TABLE>
See accompanying notes.
2
<PAGE> 3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
Net sales $ 47,188 $ 37,692
Cost of sales 27,127 20,577
Selling, general, and administrative expenses 13,070 9,972
--------------------
Operating income 6,991 7,143
Other income (expense)
Interest and dividend income 120 614
Interest expense (1,160) (906)
Other income (expense) (7) 368
--------------------
(1,047) 76
--------------------
Income before income taxes 5,944 7,219
Income tax provision 2,426 2,934
--------------------
Net income available for common shares $ 3,518 $ 4,285
====================
Earnings per share:
Basic $ 0.17 $ 0.19
Diluted $ 0.17 $ 0.19
Weighted average number of common and common
equivalent shares outstanding 21,290 22,538
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, 1999 and 1998
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Net sales $ 133,618 $ 102,753
Cost of sales 76,547 55,263
Selling, general, and administrative expenses 36,225 27,273
----------------------
Operating income 20,846 20,217
Other income (expense)
Interest and dividend income 494 2,169
Interest expense (2,940) (2,718)
Other income 523 2,504
----------------------
(1,923) 1,955
----------------------
Income before income taxes 18,923 22,172
Income tax provision 7,743 8,916
----------------------
Net income 11,180 13,256
Preferred dividends -- (114)
Discount on redemption of preferred stock -- 5,832
----------------------
Net income available for common shares $ 11,180 $ 18,974
======================
Earnings per share:
Basic $ 0.52 $ 0.85
Diluted $ 0.52 $ 0.84
Weighted average number of common and common
equivalent shares outstanding 21,598 22,475
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, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,180 $ 13,256
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 8,681 5,907
Deferred income taxes -- (842)
Gain realized on sale of marketable securities (420) (2,504)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable (2,354) (3,198)
Inventories (1,420) (1,343)
Prepaid expenses and other 874 848
Trade accounts payable and accrued expenses (1,884) 745
Income taxes refundable/payable (383) (2,539)
--------------------
Net cash provided by (used in) operating activities 14,274 10,330
INVESTING ACTIVITIES
Proceeds from sale of investments 20,424 35,602
Purchase of investments (7,563) (14,217)
Purchases of property and equipment (13,436) (5,764)
Acquisitions, net of cash acquired (38,899) (20,369)
Other 892 1,077
--------------------
Net cash provided by (used in) investing activities (38,582) (3,671)
FINANCING ACTIVITIES
Proceeds from bank debt 34,798 --
Issuance of common stock 1,046 16,469
Redemption of preferred stock -- (14,715)
Principal payments on debt -- (931)
Principal payments on capital lease obligations (235) (320)
Common stock dividends (4,193) (4,472)
Purchase of common stock (8,201) (4,853)
Other -- (225)
--------------------
Net cash provided by (used in) financing activities 23,215 (9,047)
--------------------
Net increase (decrease) in cash and cash equivalents (1,093) (2,388)
Cash and cash equivalents beginning of period 2,226 4,022
--------------------
Cash and cash equivalents end of period $ 1,133 $ 1,634
====================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued in connection with acquisitions $ -- $ 5,016
Cash paid for interest 2,377 2,258
Cash paid for income taxes 7,370 11,800
See accompanying notes.
</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:
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 2,391 $ 1,429
Work in process 7,029 5,706
------- -------
9,420 7,135
Less: LIFO reserve (1,187) (1,187)
------- -------
$ 8,233 $ 5,948
======= =======
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Land and improvements $ 1,375 $ 1,125
Building and improvements 9,100 7,850
Machinery and equipment 74,842 60,241
Leasehold improvements 5,054 5,054
Building and improvements under capital leases 7,500 7,500
-------- --------
97,871 81,770
Accumulated depreciation and amortization (52,634) (45,349)
-------- --------
$ 45,237 $ 36,421
======== ========
</TABLE>
6
<PAGE> 7
NOTE 6. INVESTMENTS
At September 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 $260 ($156 net of tax effects) at September 30, 1999
and is included as a separate component of stockholders' equity.
The following is a summary of available for sale securities at September 30,
1999:
<TABLE>
<CAPTION>
Gross
Unrealized Estimated Fair
Cost Gains (Losses) Value
------- -------------- ---------------
<S> <C> <C> <C>
Bond mutual funds $ 3,760 $ (156) $3,604
======= ======= ======
</TABLE>
During the three month period ended September 30, 1999 available-for-sale
securities were sold with a fair value and cost at date of sale of $7,563.
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 $ -- $ --
Due after one year through five years 3,760 3,604
Due after five years through ten years -- --
------ ------
$3,760 $3,604
</TABLE>
Amounts classified as current assets on the balance sheet at September 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 for the three month
periods ended September 30, 1999 and 1998, and for the nine month period ended
September 30, 1999, is computed by dividing net income for the period by the
weighted average shares outstanding for the period. Diluted earnings per share
for the three month periods ended September 30, 1999 and 1998, and for the nine
month period ended September 30, 1999, is computed by dividing net income for
the period by the weighted average number of common shares and common equivalent
shares outstanding (stock options) for the period. In February 1998 the Company
redeemed all of its preferred stock. Therefore, the computations for the nine
month period ended September 30, 1998 subtract preferred stock dividends and add
the discount on the redemption of preferred stock from income available for
common shareholders.
7
<PAGE> 8
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended September 30
1999 1998
------- -------
<S> <C> <C>
Income available for common shareholders $ 3,518 $ 4,285
======= =======
Weighted average shares 21,237 22,261
Effect of dilutive stock options 53 277
------- -------
Adjusted weighted average shares and
assumed conversions 21,290 22,538
======= =======
Basic earnings per share $ 0.17 $ 0.19
======= =======
Diluted earnings per share $ 0.17 $ 0.19
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30
1999 1998
-------- --------
<S> <C> <C>
Net income $ 11,180 $ 13,256
Preferred stock dividends -- (114)
Discount on redemption of preferred stock -- 5,832
-------- --------
Income available for common shareholders $ 11,180 $ 18,974
======== ========
Weighted average shares 21,493 22,267
Effect of dilutive stock options 105 208
-------- --------
Adjusted weighted average shares and
assumed conversions 21,598 22,475
======== ========
Basic earnings per share $ 0.52 $ 0.85
======== ========
Diluted earnings per share $ 0.52 $ 0.84
======== ========
</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, 1999 and 1998 and by geographic area is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1999 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $ 36,851 $ 10,337 $ 47,188
Identifiable assets 144,568 30,204 174,772
THREE MONTHS ENDED SEPTEMBER 30
1998 UNITED STATES CANADA TOTAL
Sales $ 32,985 $ 4,707 $ 37,692
Identifiable assets 121,846 13,080 134,926
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $ 105,127 $ 28,491 $ 133,618
Identifiable assets 130,063 18,128 148,191
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 UNITED STATES CANADA TOTAL
<S> <C> <C> <C>
Sales $ 88,728 $ 14,025 $ 102,753
Identifiable assets 121,846 13,080 134,926
</TABLE>
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 nine month periods ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended
September 30
------------------
1999 1998
------- --------
<S> <C> <C>
Net income $ 3,518 $ 4,285
Increase (decrease) in unrealized appreciation of
investments 24 (76)
Foreign currency translation adjustments 88 (273)
------- -------
Comprehensive income $ 3,630 $ 3,936
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 11,180 $ 13,256
Increase (decrease) in unrealized appreciation of
investments (220) (1,105)
Foreign currency translation adjustments 497 (462)
======== ========
Comprehensive income $ 11,457 $ 11,689
======== ========
</TABLE>
The components of accumulated comprehensive income (loss), net of related tax,
at September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Unrealized gains (losses) on investments $(156) $ 64
Foreign currency translation adjustments (58) (555)
===== =====
Accumulated comprehensive income $(214) $(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 ability of the Company
to finance growth and acquisitions from future cash flows and available
borrowings and the future income tax rate of the Company, 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 $47,188 for the third quarter of 1999 represents a 25.2% increase
from sales of $37,692 for the same period in 1998. The increase was attributable
to revenues from businesses acquired over the last twelve months. Sales from
existing businesses were approximately the same as compared to the strong prior
year quarter.
Net sales of $133,618 for the first nine months of 1999 represents a 30.0%
increase from sales of $102,753 for the same period of 1998. Revenues from
businesses acquired during the last twelve months represented substantially all
of the increase in sales for the first nine months of 1999.
COST OF SALES for the third quarter of 1999 increased to 57.5% from 54.6% of net
sales for the same period in 1998. The higher cost of sales percentage was
primarily a result of a shift in sales mix from higher margin prepress packaging
customers to lower margin prepress advertising customers.
Cost of sales for the first nine months of 1999 increased to 57.3% from 53.8% of
net sales for the first nine months of 1998. The higher cost of sales percentage
for the first nine months of 1999 compared with the previous year is a result of
the factors described in the previous paragraph.
OPERATING INCOME in the third quarter of 1999 decreased 2.1% to $6,991 from
$7,143 for the same period in 1998. Operating margin decreased to 14.8% of sales
for the third quarter versus 19.0% for the same period in 1998. This decrease
was primarily the result of the sales mix change as previously described.
Selling, general and administrative expenses increased to 27.7% of sales for the
third quarter of 1999 from 26.5% of sales for the same period in 1998. The
increase was due to higher selling, general and administrative expenses as a
percentage of sales for advertising prepress customers relative to packaging
prepress customers.
Operating income for the first nine months of 1999 increased 3.1% to $20,846
from $20,217 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 27.1% of sales for the first
nine months of 1999 from 26.5% for the first nine months of 1998. This increase
was due to sales mix change described in the previous paragraph. Operating
margin decreased to 15.6% for the first nine months of 1999 versus 19.7% for the
first nine months of 1998 due to the factors previously discussed.
OTHER INCOME (EXPENSE) - NET decreased to $(1,047) for the third quarter of 1999
compared with $76 for the same period of 1998. The decrease was due primarily to
higher investment interest income of $869 in the third quarter of 1998.
Additionally, interest expense increased by $254 during the third quarter of
1999 compared with the prior year quarter. Other income (expense), net decreased
for the first nine months of 1999 to $(1,923) from $1,955 for the first nine
months of 1998. Interest expense has increased by $222 over the nine month
periods as the Company's debt level has steadily increased due to acquisitions.
Investment income, including gains on the sale of investments, has declined by
$3,656 as the Company has liquidated its investment portfolio for acquisitions.
INCOME BEFORE INCOME TAXES decreased to $5,944 for the third quarter of 1999
from $7,219 for the third quarter of 1998 and decreased to $18,923 for the first
nine months of 1999 from $22,172 for the first nine months of 1998 for the
reasons previously discussed.
10
<PAGE> 11
INCOME TAX PROVISION increased to 40.8% of pretax income during the third
quarter of 1999 from 40.6% for the same period of 1998, and was 40.9% for the
first nine months of 1999 versus 40.2% for the same period in 1998, as the
Company derived a larger percentage of its income from higher taxed states. The
Company's effective tax rate is expected to remain at approximately 41% for the
remainder of 1999.
NET INCOME decreased to $3,518 for the third quarter of 1999 from $4,285 for the
same period of 1998, and decreased to $11,180 for the first nine months of 1999
from $13,256 for the first nine months of 1998 for the reasons previously
discussed.
PREFERRED DIVIDENDS were zero in the third quarter of 1999 and 1998 and were
zero in the nine months of 1999 versus $114 in the first nine months 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 nine months 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 third quarter of 1999
compared with $0.19 for the same period in 1998. Basic and diluted earnings per
share was $0.52 for the first nine months of 1999 compared with $0.85 basic and
$0.84 diluted for the first nine months of 1998. Basic and diluted earnings per
share for the first nine months of 1998 without the non-recurring discount on
the redemption of preferred stock would have been $0.58 and $0.57, respectively.
Weighted average common and common equivalent shares outstanding decreased to
21,290 for the third quarter of 1999 from 22,538 for the same period of 1998,
primarily as a result of shares repurchased under its common stock repurchase
program. Weighted average common and common equivalent shares outstanding
decreased to 21,598 for the first nine months of 1999 from 22,475 for the first
nine months 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, all of
which was drawn at September 30, 1999. In October, 1999 the facility was
increased to $65,000. 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 $15,000 unsecured demand line of
credit ($8,000 available at September 30, 1999) and its consolidated Canadian
subsidiary maintains a Cdn $7,500 unsecured demand line of credit (approximately
Cdn $4,500 available at September 30, 1999.) Both of these facilities are due on
demand.
The Company held invested funds at September 30, 1999 of $3,604 in a bond mutual
fund. Unrealized losses, net of tax, on these investments of $156 at September
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 September 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 $30,000 due in installments from 1999 through 2005 (averaging
seven years) at an interest rate of 6.98%; and (ii) approximately $ 37,000 of
borrowings under the Company's credit lines.
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
borrowings from its banks.
Capital expenditures of $13,436 were made during the first nine months of 1999
for land, building, machinery, equipment and automation to expand production
facilities and improve productivity. Depreciation and amortization for the first
nine months of 1999 totaled $8,681.
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 been
substantially completed. The Company has substantially completed its assessment
with regard to Year 2000 compliance status of its significant suppliers.
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 it
has modified or replaced substantially all existing hardware and software
thereby mitigating Year 2000 concerns. However, if any unknown Year 2000
problems are imbedded in any critical systems, there could be a material impact
on the Company.
For the Company's divisions at risk for information technology problems, to date
the Company is substantially 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 successfully installed and
tested a new accounting and financial software system in the third quarter of
1999 at a division which was not Year 2000 compliant. As a result, therefore
management believes that its financial accounting system is Year 2000 compliant.
THIRD PARTY EXPOSURE
The Company's accounts payable, purchasing and accounts receivable information
technology systems do not interface directly with third parties. The Company
substantially completed its query of these third parties with regard to whether
their systems are Year 2000 compliant. Management believes that there are
several alternative suppliers it all critical purchasing areas and that
alternative sourcing will mitigate any significant problems.
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.
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.
Management believes that it has substantially completed its Year 2000
remediation. However, the Company may 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.
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 15th day of November, 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 1,133 1,133
<SECURITIES> 3,604 3,604
<RECEIVABLES> 43,882 43,882
<ALLOWANCES> 761 761
<INVENTORY> 8,233 8,233
<CURRENT-ASSETS> 61,406 61,406
<PP&E> 97,871 97,871
<DEPRECIATION> (52,634) (52,634)
<TOTAL-ASSETS> 174,772 174,772
<CURRENT-LIABILITIES> 33,692 33,692
<BONDS> 66,640 66,640
0 0
0 0
<COMMON> 182 182
<OTHER-SE> 64,950 64,950
<TOTAL-LIABILITY-AND-EQUITY> 174,772 174,772
<SALES> 47,188 133,618
<TOTAL-REVENUES> 47,188 133,618
<CGS> 27,127 76,547
<TOTAL-COSTS> 27,127 76,547
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,160 2,940
<INCOME-PRETAX> 5,944 18,923
<INCOME-TAX> 2,426 7,743
<INCOME-CONTINUING> 3,518 11,180
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,518 11,180
<EPS-BASIC> 0.17 0.52
<EPS-DILUTED> 0.17 0.52
</TABLE>
