Schawk 10K 2006 Annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission file number001-09335

SCHAWK, INC.

(Exact name of Registrant as specified in its charter)


Delaware		66-0323724
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1695 River Road Des Plaines, Illinois		60018 (Zip Code)
(Address of principal executive office)

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, $.008 par value		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

Large accelerated filer o Accelerated filer þ Non- accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Securities Act). Yes o No þ

The aggregate market value on June 30, 2006 of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $174,280,000.

The number of shares of the Registrant’s Common Stock outstanding as of March 1, 2007, was 26,651,129

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders’ meeting to be held May 16, 2007 are incorporated by reference into Part III.

SCHAWK, INC

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

DECEMBER 31, 2006


			Page

PART I
	Item 1.	Business		3
	Item 1A.	Risk Factors		10
	Item 1B.	Unresolved Staff Comments		14
	Item 2.	Properties		14
	Item 3.	Legal Proceedings		16
	Item 4.	Submission of Matters to a Vote of Security Holders		16

PART II
	Item 5.	Market for the Registrant��s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
	Item 6.	Selected Financial Data		18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		29
	Item 8.	Financial Statements and Supplementary Data		30
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		60
	Item 9A.	Controls and Procedures		60
	Item 9B.	Other Information		63

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		63
	Item 11.	Executive Compensation		63
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Matters		63
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		63
	Item 14.	Principal Accountant Fees and Services		63

PART IV
	Item 15.	Exhibits and Financial Statement Schedules		64
Signatures				68
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification
Certification
Certification

PART I


ITEM 1.	*BUSINESS*

General

Schawk, Inc. and its subsidiaries (“Schawk” or the “Company”) operate in one operating business segment, Digital Imaging Graphics Arts, which serves consumer products packaging, advertising and promotional markets. The Company has been in operation since 1953 and is incorporated under the laws of the State of Delaware.

The Company is one of the world’s largest independent brand image solutions companies. The Company delivers a broad range of digital pre-media graphic services through 151 locations in 12 countries across North America, Europe, Asia and Australia. The Company designs, creates and manages image and text for reproduction to exact specifications for a variety of media, including packaging for consumer products,point-of-sale displays and other promotional and advertising materials. These services provide a vital interface between the creative and production processes and assure the production of consistent, high-quality graphic images. The Company believes these services enable our clients to bring their products to market more quickly, consistently and efficiently.

The Company’s clients include 33 of the Fortune 100 companies. These clients select us for our comprehensive brand consulting services as they seek to more effectively and consistently communicate their visual identities and execute their branding and marketing strategies on a global scale. The Company believes our clients are increasingly choosing to outsource their imaging needs to us for a variety of reasons, including our:


	•	ability to service our clients’ graphic requirements throughout the world;

	•	rapid turnaround and delivery times;

	•	comprehensive,up-to-date knowledge of the printing press specifications of converters and printers located throughout the world;

	•	high quality creative design capabilities and production art expertise;

	•	consistent reproduction of colors across multiple packaging and promotional media;

	•	digital imaging asset management; and

	•	efficient workflow management.

The Company acquired one of its largest competitors, Seven Worldwide, Inc. (“Seven”) (formerly Applied Graphics Technologies, Inc.) in January 2005 and the business of Winnetts from Weir Holdings, Inc. in December 2004. In February 2006, the Company sold certain operations, including substantially all of the pre-press services business being provided through its Book and Publishing operations, most of which were acquired as part of the Seven Worldwide acquisition in 2005.

Graphic Services Industry

Industry services. “Pre-media graphic services” are the tasks involved in preparing images and text for reproduction to exact specifications for a variety of media, including packaging for consumer products,point-of-sale displays and other promotionaland/or advertising materials. Packaging for consumer products encompasses folding cartons, boxes, trays, bags, pouches, cans, containers, packaging labels and wraps. Graphic services do not entail the actual printing or production of such packaging materials, but rather include the various preparatory steps such as art production, digital photography, retouching, color separation and plate making services. While graphic services represent a relatively small percentage of overall product packaging and promotion costs, the visual impact and effectiveness of product packaging and promotions are largely dependent upon the quality of graphic imaging work.

“Color separation” generally refers to preparing color images, text and layout for the printing process. Graphic services such as color separations were traditionally performed by skilled craftspeople almost entirely by hand, using what is known as the “conventional” method. With the development of digital technology, graphics firms like ours have become more highly computerized, providing digital imaging services in which digitized images and text are manipulated according to client and converter specifications. On an increasing basis, clients supply material to

us in a digitized format on a variety of digitally generated media and via the Internet. More recently there is a trend toward an all-digital workflow, from creative design through printing. The industry is expanding the production of plates directly from a digital file, in a process referred to as “direct to plate” (DTP) or “computer to plate” (CTP). This process eliminates the step of preparing photographic film and exposing the film on a plate. CTP technology is more precise and reduces the time to produce a printing plate. Typically printers and converters provide CTP services as part of a bundled service to their customers; however, the Company maintains CTP units and has the capability to provide CTP services to our clients to accommodate their needs.

Size of industry. The global graphic services industry has thousands of market participants, including independent pre-press service providers, converters, printers and, to a lesser extent, advertising agencies. Most graphic services companies focus on publication work such as textbooks, advertising, catalogs, newspapers and magazines. The Company’s target markets, however, are high-end packaging, advertising and promotional applications for the consumer products industry. The Company estimates the North American market for graphic services in the consumer products packaging industry is approximately $1.5 billion and the worldwide market is as high as $6.0 billion. The Company estimates the broader market for graphic services including publishing, advertising and promotional as well as packaging applications in North America may be as high as $8.0 billion and worldwide may be as high as $30.0 billion. Within the consumer products graphic industry, the market is highly fragmented with thousands of limited service partners, only a small number of which have annual revenues exceeding $20.0 million.

The rapid development of lower-cost, faster desktop publishing software systems has increased the potential for competition in the graphic services industry by lowering barriers to entry relating to equipment costs. However, there are other barriers to entry in our industry. For example, hundreds of “technician — years” of expertise in working with printers and converters are required to make sure a package is printed according to the client’s specifications. For this reason in particular, the Company believes newstart-ups have difficulty competing with our Company. Other barriers to entry include increases in government regulation related to consumer products packaging, demand for faster turnaround times, and the need for global brand consistency and certainty of supply. The Company believes that the number of graphic services providers to the consumer products industry will continue to diminish due to consolidation and attrition caused by competitive forces such as accelerating technological requirements for advanced systems, the need for highly skilled personnel and the growing demands of clients for full-service global capabilities.

Graphic services for consumer products companies. High quality graphic services are critical to the effectiveness of any consumer products marketing strategy. A change in the graphic image of a package, advertisement orpoint-of-sale promotional display can dramatically increase sales of a particular product. New product development has become a vital strategy for consumer products companies, which introduce thousands of new products each year. In addition to introducing new products, consumer products companies are constantly redesigning their packaging, advertising and promotional materials for existing products to respond to rapidly changing consumer tastes (such as the fat or carbohydrate content of foods), current events (such as major sports championships and blockbuster film releases) and changing regulatory requirements. The speed and frequency of these changes and events have led to increased demand for shorter turnaround and delivery time between the creative design phase and the distribution of packaged products and related advertising and promotional materials.

Consumer products manufacturers seek to reduce overhead in many ways, including by outsourcing their internal brand image capabilities. To achieve cost savings and process efficiencies, consumer products companies increasingly consolidate their relationships with graphic image solution service providers that can offer comprehensive solutions on demand. Large global consumer products companies require worldwide quality and consistency in packaging, advertising and promotional materials as they attempt to build global brand name recognition. The Company believes that all of these factors lead consumer products companies to seek out larger brand image solutions companies with broader service offerings and geographic reach that will enable them to bring their products to market more quickly, consistently and efficiently.

Graphic services for consumer product packaging present specific challenges. Packaging requirements for consumer products are complex and demanding due to variations in package materials, shapes, sizes, custom colors, storage conditions and marketing enhancements. An ever-increasing number of stock-keeping units, or SKUs, compete for shelf space and market share, making product differentiation essential to our clients. In recent years consumer products companies have redirected significant portions of their marketing budgets toward package

design andpoint-of-sale media as they recognize the power ofpoint-of-sale marketing on consumer buying behavior. Because pre-media services represent only a small portion (estimated to be less than 10%) of the overall cost of consumer products packaging, changes in package design have only a modest impact on overall costs. Recognizing this high benefit/low cost relationship and the continuous need to differentiate their offerings, consumer products companies change package designs frequently as part of their core marketing strategy.

Factors driving increased demand for our brand image solutions. Rapidly changing consumer tastes, shifting marketing budgets, the need for product differentiation, changing regulatory requirements, the relative cost-effectiveness of packaging redesign and other factors described above have all led to a significant increase in the volume and frequency of package design modifications. This increase, along with the related changes in advertising and promotional materials, has resulted in significantly increased demand for the brand image solutions Schawk provides.

Services

The Company offers comprehensive, high quality digital imaging graphic services. The Company’s facilities produce conventional, electronic and desktop color separations, electronic production design, film preparation, plate making and press proofs for lithography, flexography and gravure. These services include both digital and analog image database archival and management, as well as creative design,3-D imaging, art production, large format printing, and various related outsourcing and graphics arts consulting services. The Company provides a series of best-practices driven advisory, implementation and management services, including workflow architecture, print management, color management and printer evaluation.

Schawk’s service offerings are organized within the graphic services umbrella into three core competencies: graphic services, brand strategy and creative design, and enterprise products.

Graphic services. Under the Schawk brand, graphic services encompasses a number of service offerings including traditional prepress business as well as high-end digital photography, color retouching and large format digital printing. Graphic service operations are located throughout North America, Europe and Asia. Graphic service business represented approximately 92% of our revenues in the twelve months ended December 31, 2006.

Brand strategy and creative design. Under the Anthem Group brand, the Company offers brand consulting and creative design for packaging applications to Fortune 1000 consumer-products companies, food and beverage retailers and mass merchandisers. Anthem Group consists of leading creative design firms acquired since 1998 in Toronto and San Francisco, as well asstart-ups in Chicago, New York, Singapore, Cincinnati and York, England. Anthem Group represented approximately 6% of our overall revenues in the twelve months ended December 31, 2006.

Enterprise products. Three services that help differentiate Schawk from its competitors are digital asset management, workflow management and online proofing. These services are available through Schawk’s Digital Solutions subsidiary, a software development company that develops software solutions for the marketing services departments of consumer products companies and pharmaceutical companies. Through its integrated software solution, Blue, Digital Solutions works with clients to organize their digital assets, streamline their internal workflow and improve efficiency. The improved speed to market allows the consumer products companies to increase the number of promotions without increasing costs. Schawk also offers digital three-dimensional modeling of prototypes or existing packages for our consumer products clients. This service is branded as Schawk3-D and is included in the enterprise products service offering. Enterprise products represented approximately 2% of our revenues in the twelve months ended December 31, 2006.

To capitalize on market trends, management believes they must continue to provide clients with the ability to make numerous changes and enhancements within increasingly shorter turnaround times. Accordingly, the Company has focused its efforts on improving our response times and continues to invest in rapidly emerging technology and the continuing education of our employees. The Company also educates our clients on the opportunities and complexities ofstate-of-the-art equipment and software. The Company believes that our ability to provide quick turnaround and delivery times, dependability and value-added training and education programs will continue to give us a competitive advantage in serving clients who require high volume, high quality product imagery.

Over the course of our business history, the Company has developed strong relationships with many of the major converters and printers in the United States, Canada, Europe and Asia. As a result, the Company has compiled an extensive proprietary database containing detailed information regarding the specifications, capabilities and limitations of printing equipment in the markets we serve around the world. This database enables us to increase the overall efficiency of the printing process. Internal operating procedures and conditions may vary from printer to printer, affecting the quality of the color image. In order to minimize the effects of these variations, the Company makes necessary adjustments to the color separation work to account for irregularities or idiosyncrasies in the printing presses of each of the clients’ converters. The Company’s database also enhances our ability to ensure the consistency of our clients’ branding strategies. The Company strives to afford our clients total control over their imaging processes with customized and coordinated services designed to fit each individual client’s particular needs, all aimed at ensuring that the color quality, accuracy and consistency of a client’s printed matter are maintained.

During 2006, the Company operated primarily in four geographic areas: the United States, Canada, Europe and Asia. Summary financial information for continuing operations by geographic area is contained in note 20 to the Company’s consolidated financial statements.

Competitive Strengths

The Company believes that the following factors have been critical to our past success and represent the foundation for future growth.

The Company is a leader in a highly fragmented market. The Company is one of the world’s largest independent brand image solutions companies. There are thousands of independent market participants in our industry in North America alone, and the vast majority of these are single-location, small niche firms with annual revenues of less than $20.0 million. The Company believes that our size, expertise, breadth of services and global presence represent a substantial competitive advantage in our industry.

The Company has direct client relationships. While many participants in the graphic services industry serve only intermediaries such as advertising firms and printers, the Company typically maintains direct relationships with our clients. As part of this focus on direct client relationships, the Company also deploys employeeson-site at and near client locations, leading to faster turnaround and delivery times and deeper, longer-lasting client relationships. At December 31, 2006, the Company had 93on-site locations staffed by approximately 267 Schawk employees. The Company’s direct client relationships enable us to strengthen and expand client relationships by better and more quickly anticipating and adapting to clients’ needs.

The Company has a comprehensive service offering. The Company provides our clients with a comprehensive offering of brand image solutions services. The Company has built upon our core pre-media services by acquiring and integrating digital imaging graphic services such as brand strategy services, workflow audit services, creative design, production art, print management consulting, digital asset management and high-end re-touching. In addition to generating more revenue, the increased breadth of our service offering enables us to manage the pre-media graphic process, from image planning and design to media fulfillment. This results in quicker, more consistent and cost-effective solutions for our clients, and in many cases enables our clients to undertake more product introductions or existing packaging alterations without exceeding their budgets.

The Company has unique global capabilities. The Company has 151 locations in 12 countries across 4 continents. The Company has combined this global platform with our proprietary databases of printer assets across the world, ensuring that the Company provides consistent service to clients on a local, regional and global basis. The ability to ensure a consistent brand image is increasingly important to global clients as they continue to expand their markets, extend and unify their brands and outsource their production internationally. The Company’s global presence and proprietary databases help ensure consistent brand imaging for our clients around the world.

The Company generates strong cash flow. The Company has a proven record of generating strong cash flow through profitable growth in operating performance and a strong financial discipline. The Company has been able to manage its costs efficiently, address prevailing market conditions and avoid dependence on revenue growth to maintain or increase profitability. Also, historically, the Company has only had a modest need for capital investment. The Company believes that these factors should enable us to continue to generate strong cash flow.

Strategy

The Company’s goal is to enhance our leadership position in the brand image solutions industry. Our strategies to realize this objective include:

Capitalizing on our recently enhanced platform. The Company seeks to capitalize on the breadth of its services and its global presence. The Company’s dedicated business development team emphasizes the ability to tailor integrated brand image solutions on a global scale to meet our clients’ specific needs. Our total solution approach has recently yielded several significant new opportunities by expanding service offerings to existing clients and winning global representation of clients previously using our services only in a single market. This strategy is expected to drive additional organic growth in the future.

Matching our services to the needs of our clients. As our clients continually create new products and extend and enhance their existing brands, the Company continues to match its brand image solutions to meet the needs and, where necessary, adapt services as their needs change and grow. The Company’s adaptability is exemplified by our ability to scale our service offerings, shift employees among our locations to address surges in a client’s promotional activity, and originate services from additional global locations based on changes in a client’s global branding strategy.

Pursuing acquisitions opportunistically. Where opportunities arise and in response to client needs, Schawk will continue to seek strategic acquisitions of selected businesses to broaden our service offerings, enhance our client base or build a new market presence. The Company believes that there will continue to be a number of attractive acquisition candidates in the fragmented and consolidating industry in which the Company operates.

Acquisitions

The Company’s profitability and access to capital have enabled us to make strategic acquisitions of companies that range in size from $2 million to $370 million in revenues. In our53-year business history, the Company has integrated approximately 50 graphic and imaging businesses into our operations. The Company typically has sought to acquire businesses that represent market niche companies with Fortune 1000 client lists, excellent client service or proprietary products, solid managementand/or offer the opportunity to expand into new service or geographic markets. Our acquisitions in 2005 of Winnetts and Seven Worldwide, Inc. have increased our ability to meet and adapt to client needs and industry trends by:


	•	expanding our geographic reach to Europe, Australia and India, which benefits our existing clients as they seek to establish global brand consistency; and

	•	increasing and expanding the scope of our global service offerings, such as creative design and high end retouching, and entering into new markets, such as retail and media.

Seven provides graphic services to companies in the following market segments: consumer goods; retail; pharmaceutical; media & entertainment; publishing; advertising; and general goods & services. Seven’s solutions enable these companies to create, distribute and manage communications assets, such as advertising and editorial pages, consumer goods packaging,out-of-home(point-of-sale, large format) signage and Internet content. Its mission is to bring both process efficiency and messaging consistency to marketing execution. Seven has graphic services capabilities to support clients who use multiple forms of marketing methods to connect with targeted audiences worldwide. The Company believes that Seven’s solution approach drives cost savings and streamlines execution as clients leverage Seven’s talent, processes, technology and infrastructure. Its graphic services solutions focus on both performing and coordinating key creative and production services, from planning and design through pre-press and media fulfillment.

Winnetts provides a wide range of graphics services to major brand owning clients and to clients in the packaging, mail-order and printing businesses. Winnetts offers a flexible platform of services to accommodate clients’ needs and priorities, from production of artwork files and reprographics for all print processes to providing the tools by which clients can manage their brands and improve quality, cost and reliability within their packaging and catalog processes.

The Seven and Winnetts acquisitions also have increased the amount of business the Company does for the world’s largest consumer products companies, particularly for thenon-U.S. divisions of our existing clients. As the

Company continues to integrate the acquired businesses into our Company, the Company has begun to realize cost and operating synergies among U.S. and overseas operations. Through these acquisitions, the Company believes we now have a platform with the necessary geographic reach and range of service offerings to succeed in meeting our clients’ imaging and branding needs on a global basis. The Company believes it is the only brand image solutions company positioned to offer such a breadth of services on a global scale.

In July 2006, the Company acquired the operating assets of WBK, Inc., a Cincinnati, Ohio-based design agency that provides services to retailers and consumer products companies. This operating unit is now known as Anthem Cincinnati.

The Company had previously acquired 50 percent of a company currently known as Schawk India, Ltd. in February 2005 as part of its acquisition of Seven Worldwide, Inc. In July 2006, the Company increased its ownership of Schawk India, Ltd. to 90 percent. Schawk India, Ltd. provides artwork management, premedia and print management services.

Marketing and Distribution

The Company markets its services nationally and internationally through seminars, newsletters and training sessions targeted at existing and potential clients. The Company sells its services through a group of approximately 200 direct salespersons and 490 client service technicians who call on consumer products manufacturers, including those in the food and beverage, home products, pharmaceutical and cosmetics industries and mass merchant retailers. The Company’s salespersons and client service technicians share responsibility for marketing our offerings to existing and potential clients, thereby fostering long-term institutional relationships with our clients.

Clients

The Company’s clients consist of direct purchasers of graphic services, including end-use consumer product manufacturers and mass merchant retailers, converters and advertising agencies. Many of our clients, a large percentage of which are Fortune 1000 companies, are multi-national in scope and often use numerous converters both domestically and internationally. Because these clients desire uniformity of color and image quality across a variety of media, the Company plays a very important role in coordinating their printing activities by maintaining current equipment specifications regarding our clients and converters. Management believes that this role has enabled us to establish closer and more stable relationships with these clients. Converters also have a great deal of confidence in the quality of our services and have worked closely with us to reduce required lead-time, thereby lowering their costs. End-use clients often select and use us to ensure better control of their packaging or other needs and depend on us to act as their agent to ensure quality management of data along with consistency among numerous converters and packaging media. Schawk has established 93on-site locations at or near clients that require high volume, specialized service. As our art production services continue to expand, the Company anticipates that it will further develop ouron-site services.

Many clients place orders on a daily and weekly basis and work closely with us year-round as they frequently redesign product packaging or introduce new products. While certain promotional activities are seasonal, such as those relating to summer,back-to-school time and holidays, shorter technology-driven graphic cycle time has enabled consumer products manufacturers to tie their promotional activities to regionaland/or current events (such as sporting events or motion picture releases). This prompts manufacturers to redesign their packages more frequently, resulting in a correspondingly higher number of packaging redesign assignments. This technology-driven trend toward more frequent packaging changes has offset previous seasonal fluctuations in the volume of our business. See “Seasonality and cyclicality”.

In addition, consumer product manufacturers have a tendency to single-source their graphic work with respect to a particular product line so that continuity can be assured in changes to the product image. As a result, the Company developed a base of steady clients in the food and beverage, health and beauty and home care industries. During 2005 and 2006, our largest client accounted for approximately 10% and 9% of our total revenues, respectively, and the 10 largest clients in the aggregate accounted for approximately 35% and 39% of revenues, respectively.

Competition

The Company’s competition comes primarily from other independent graphic service providers and converters and printers that have graphic service capabilities. The Company believes that converters and printers serve approximately one-half of our target market, and the other one-half is served by independent graphic service providers. Independent graphic service providers are companies whose business is performing graphic services for one or more of the principal printing processes. Since the acquisition of Seven, the Company believes that only three firms, Southern Graphics Systems, Matthews International Corporation and Vertis, Inc., compete with it on a national or international basis in certain markets. The remaining independent graphic service providers are regional or local firms that compete in specific markets. To remain competitive, each firm must maintain client relationships and recognize, develop and capitalize onstate-of-the-art technology and contend with the increasing demands for speed.

Some converters with graphic service capabilities compete with us by performing such services in connection with printing work. Independent graphic service providers, such as us, however, may offer greater technical capabilities, image quality control and speed of delivery. In addition, converters often utilize our services because of the rigorous demands being placed on them by clients who are requiring faster turnaround times. Increasingly, converters are being required to invest in technology to improve speed in the printing process and have avoided spending on graphic services technology.

As requirements of speed, consistency and efficiency continue to be critical, along with the recognition of the importance of focusing on their core competencies, we believe clients have increasingly recognized that Schawk provides services at a rate and cost that makes outsourcing more cost effective and efficient.

Research and Development

The Company is dedicated to keeping abreast of and, in a number of cases, initiating technological process developments in our industry that have applications for consumer products packaging. To build upon our leadership position, the Company is actively involved in system and software technical evaluations of various computer systems and software manufacturers and also independently pursues software development for implementation at our operating facilities. The Company continually invests in new technology designed to support our high quality graphic services. The Company concentrates its efforts in understanding systems and equipment available in the marketplace and creating solutions usingoff-the-shelf products customized to meet a variety of specific client and internal requirements. Blue and Schawk3-D are examples of our commitment to research and development. Total research and development spending is not material.

As an integral part of our commitment to research and development, the Company supports its internal Schawk Technical Advisory Board, as it researches and evaluates new technologies in the graphic arts and telecommunications industries. This board meets quarterly to review new equipment and programs, and then disseminates the information to the entire Company and to clients as appropriate.

Employees

As of December 31, 2006, Schawk had approximately 3,500 employees. Of this number, approximately 13% are production employees represented by local units of the Graphic Communications Conference of the International Brotherhood of Teamsters and by local units of the Communications, Energy & Paperworkers Union of Canada and the GPMU in the UK. Our union employees are vital to our operations. Collective bargaining agreements covering our union employees in four facilities are subject to renegotiations. The Company considers our relationships with our employees and unions to be good.

Backlog

The Company does not maintain backlog figures as the rapid turn-around requirements of our clients result in little backlog. Generally, projects or orders are in and out of our facilities within five to seven days. Approximately one-half of total revenues are derived from clients with whom the Company has entered into service agreements. With respect to revenues from clients that are not under contract, Schawk maintains client relationships by delivering timely graphic services, providing technology enhancements to make the process more efficient and bringing extensive experience with and knowledge of printers and converters.

Seasonality and Cyclicality

The Company’s digital imaging graphic business for the consumer product packaging graphic market is not currently seasonal because of the number of design changes that are able to be processed as a result ofspeed-to-market concepts and all-digital workflows. Increasingly, as demand for new products increases, traditional cycles related to timing of major brand redesign activity has gone from a three to four year cycle to a much shorter cycle. With respect to the advertising markets, some seasonality has historically existed in that the months of December and January were typically the slowest months of the year in this market because advertising agencies and their clients typically finish their work by mid-December and do not start up again until mid-January. This seasonality in our business is expected to be offset by the increase in holiday related business with respect to the retail portion of our business in the fourth quarter. Advertising spending is generally cyclical as the consumer economy is cyclical. When consumer spending and GDP decreases, the amount of ad pages declines. Generally, when ad pages decline, our advertising business declines.

Purchasing and Raw Materials

The Company purchases photographic film and chemicals, storage media, ink, plate materials and various other supplies and chemicals on consignment for use in its business. These items are purchased from a variety of sources and are available from a number of producers, both foreign and domestic. In 2006, materials and supplies accounted for $37.8 million or approximately 10.6% of the Company’s cost of sales, and no shortages are anticipated. Furthermore, as a growing proportion of the workflow is digital, the already low percentage of materials in cost of sales will continue to be reduced. Historically, the Company has negotiated and enjoys significant volume discounts on materials and supplies from most of its major suppliers.

Intellectual Property

The Company owns no significant patents. The trademarks “Schawk,” “Blue” and “PaRTS” and the trade names “Anthem New Jersey,” “Anthem New York,” “Anthem Los Angeles,” “Anthem San Francisco,” “Anthem Toronto,” “Anthem Chicago,” “Anthem Singapore,”, “Anthem Cincinnati,” “Anthem York,” “Schawk Asia,” “Schawk Atlanta,” “Schawk Cactus,” “Schawk Canada,” “Schawk Cherry Hill,” “Schawk Chicago,” “Schawk Chromart,” “Schawk Cincinnati 446,” “Schawk Cincinnati 447,” “Schawk Creative Imaging,” “Schawk Designer’s Atelier,” “Schawk Digital Solutions,” “Schawk India,” “Schawk Japan,” “Schawk Kalamazoo,” “Schawk Mexico,” “Schawk Milwaukee,” “Schawk Minneapolis,” “Schawk New York,” “Schawk Penang,” “Schawk St. Paul,” “Schawk Toronto” “Schawk Shanghai,” “Schawk Singapore,” “Schawk Stamford,” “Schawk3-D,” “Interchange,” “Interchange Digital,” “Interchange Digital Management Services,” “Laserscan” and “Winnetts,” are the most significant trademarks and trade names used by the Company or its subsidiaries.

Available Information

The Company’s website iswww.schawk.com, where investors can obtain copies of the Company’s annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company has filed such materials with, or furnished them to, the SEC. The Company will also furnish a paper copy of such filings free of charge upon request.


ITEM 1a.	*RISK FACTORS*


	The Company’s business is sensitive to general economic conditions. An economic decline or other circumstances that result in reductions in our clients’ marketing and advertising budgets could negatively impact the Company’s sales volume and revenues and the ability to respond to competition or take advantage of business opportunities.

The Company’s revenues are derived from many clients in a variety of industries and businesses, some of whose marketing and advertising spending levels can be cyclical in nature and subject to significant reductions based on changes in, among other things, general economic conditions. The Company’s operating results may reflect our client’s order patterns or the effects of economic downturns on their businesses. In addition, because the Company conducts its operations in a variety of markets, the Company is subject to economic conditions in each of these markets. Accordingly, general economic downturns or localized downturns in markets where the Company

has operations could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company’s operating results fluctuate from quarter to quarter.

The Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors, including:


	•	timing of the completion of particular projects or orders;

	•	material reduction or cancellation of major projects or the loss of a major client;

	•	timing of new business;

	•	differences in order flows;

	•	sensitivity to general economic conditions;

	•	the health of the consumer products industry;

	•	the relative mix of different types of work with differing margins;

	•	costs relating to the expansion of operations, including costs to integrate current and future acquisitions;

	•	changes in interest costs and tax rates; and

	•	costs associated with compliance with legal and regulatory requirements.

Many of these factors are outside of the Company’s control. The Company believes thatperiod-to-period comparisons of its financial results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year.

The Company is subject to unpredictable order flows.

The Company’s services and related business activity generally has been characterized by individual assignments from clients on aproject-by-project basis rather than long-term contractual arrangements. Continued engagements for successive jobs are primarily dependent upon the client’s satisfaction with services previously provided. While technological advances have enabled us to shorten considerably our production cycle to meet the Company’s clients’ increasingspeed-to-market demands, the Company may in turn receive less advance notice from our clients of upcoming projects. Although the Company has established long-standing relationships with many of our clients and believes our reputation for quality service is excellent, the Company is not able to predict with certainty the volume of its business even in the near future.

The Company is dependent on certain key clients.

The Company’s ten largest clients accounted for approximately 35% of our revenues in 2005 and 39% of revenues for 2006. In 2005 and 2006, approximately 10% and 9%, respectively, of total revenues came from the Company’s largest single client in the respective period. While the Company seeks to build long-term client relationships, revenues from any particular client can fluctuate from period to period due to such client’s purchasing patterns. Any termination of or significant reduction in our business relationships with any of our principal clients could have a material adverse effect on our business, financial condition and results of operations.

The Company’s foreign operations are subject to currency exchange, political, investment and other risks that could hinder the Company from transferring funds out of a foreign country, delay our debt service payments, cause the Company’s operating costs to increase and adversely affect its results of operations.

The Company’s foreign operations have expanded significantly as a result of our acquisition of the business of Winnetts from Weir Holdings, Inc. in December 2004 and our acquisition of Seven Worldwide, Inc. in January 2005. The Company now operates in twelve countries. For 2006, consolidated net sales from operations outside North America were approximately $103 million, which represented approximately 19% of our consolidated net sales. As a result of the Company’s foreign operations, the Company is subject to certain risks which could disrupt

its operations or force it to incur unanticipated costs and have an adverse effect on our ability to make payments on our debt obligations.

Devaluations and fluctuations in currency exchange rates may affect our operating performance by impacting revenues and expenses outside of the U.S. due to fluctuations in currencies other than the U.S. dollar or where the Company translates into U.S. dollars for financial reporting purposes the assets and liabilities of our foreign operations conducted in local currencies.

The Company is subject to various other risks associated with operating in foreign countries, such as the following:


	•	political, social and economic instability;

	•	war, civil disturbance or acts of terrorism;

	•	taking of property by nationalization or expropriation without fair compensation;

	•	changes in government policies and regulations;

	•	imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries;

	•	imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;

	•	hyperinflation in certain foreign countries; and

	•	impositions or increase of investment and other restrictions or requirements by foreign governments.

The Company operates in a highly competitive industry.

The Company competes with other providers of digital graphic and creative imaging services. The market for such services is highly fragmented, with several national and many regional participants. The Company faces, and will continue to face, competition in our business from many sources, including national and large regional companies, some of which have greater financial, marketing and other resources than the Company does. In addition, local and regional firms specializing in particular markets compete on the basis of established long-term relationships or specialized knowledge of such markets. The introduction of new technologies may create lower barriers to entry that may allow other firms to provide competing services.

There can be no assurance that competitors will not introduce services or products that achieve greater market acceptance than, or are technologically superior to, our current service offerings. The Company cannot offer assurance that it will be able to continue to compete successfully or that competitive pressures will not adversely affect our business, financial condition and results of operations.

Failure to properly manage the Company’s expanding operations may adversely impact our business.

Continued rapid growth will place a significant strain on our financial and other resources and could result in significant operating losses. Since December 31, 2003, the size of the Company’s employee base has increased 150%. Further increases are anticipated in the future, either through organic growth or through the carefully targeted acquisitions of companies that meet our acquisition criteria. In order to manage the growth of our client services staff, the Company will need to continue to improve its operational, financial and other internal systems. If the Company’s management is unable to manage growth effectively and revenues do not increase sufficiently to cover our increased expenses, the Company’s operations could be adversely affected.

The Company may encounter difficulties arising from future acquisitions or consolidation efforts.

During the past several years, the Company has invested, and in the future may continue to invest, a substantial amount of capital in acquisitions. Acquisitions involve numerous risks, including:


	•	difficulty in assimilating the operations and personnel of the acquired company with our existing operations and realizing anticipated synergies;

	•	the loss of key employees or key clients of the acquired company;


	•	difficulty in maintaining uniform standards, controls, procedures and policies; and

	•	unrecorded liabilities of acquired companies that the Company failed to discover during our due diligence investigations.

The Company cannot offer assurance that it will realize the expected benefits from future acquisitions or that our existing operations will not be harmed as a result of any such acquisitions. In addition, the cost of unsuccessful acquisition efforts could adversely affect our financial performance. The Company has undertaken consolidation efforts in the past in connection with our acquisitions, and in connection with future acquisitions, the Company will likely undertake consolidation plans to eliminate duplicate facilities and to otherwise improve operating efficiencies. Any future consolidation efforts may divert the attention of management, disrupt our ordinary operations or those of our subsidiaries or otherwise adversely affect the Company’s financial performance.

The loss of key personnel could adversely affect the Company’s current operations and its ability to achieve continued growth.

The Company is highly dependent upon the continued service and performance of the Company’s senior management team and other key employees, in particular David A. Schawk, our President and Chief Executive Officer, A. Alex Sarkisian, our Chief Operating Officer, and James J. Patterson, our Chief Financial Officer. The loss of one or more of these officers may significantly delay or prevent the achievement of the Company’s business objectives.

The Company’s continued success also will depend on retaining the highly skilled employees that are critical to the continued advancement, development and support of our client services and ongoing sales and marketing efforts. Any loss of a significant number of our client service, sales or marketing professionals could negatively affect our business and prospects. Although the Company generally has been successful in its recruiting efforts, the Company competes for qualified individuals with companies engaged in our business lines and with other technology, marketing and manufacturing companies. Accordingly, the Company may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan. If, for any reason, these officers or key employees do not remain with us, our operations could be adversely affected until suitable replacements with appropriate experience can be found.

Work stoppages and other labor relations matters may make it substantially more difficult or expensive for us to produce our products and services, which could result in decreased sales or increased costs, either of which would negatively impact our financial condition and results of operations.

The Company is subject to risk of work stoppages and other labor relations matters, particularly in the U.S. and Canada where approximately 17% of our employees are unionized. Any prolonged work stoppage or strike at any one of our principal facilities could have a negative impact on our business, financial condition or results of operations.

The Company is subject to restrictive debt covenants.

The Company has and may in the future incur indebtedness in connection with our acquisition strategy or to fund our operations. The Company’s current credit agreements contain covenants that in some cases restrict certain actions, such as our ability to incur additional indebtedness, dispose of assets or engage in certain types of mergers or acquisitions, and may impede our ability to implement our growth strategy. No assurances can be given that existing credit agreements will not restrict our growth strategy or that the Company will not in the future enter into agreements with our lenders that contain restrictive covenants that would have a similar effect.

The Company remains susceptible to risks associated with technological change, including risks based on the services the Company provides and may seek to provide in the future as a result of technological changes.

The Company believes its ability to develop and exploit emerging technologies has contributed to our success and has demonstrated to our clients the value of using our services rather than attempting to perform these functions in-house or through lower-cost, reduced-service competitors. The Company believes our success also has depended in part on our ability to adapt our business as technology advances in our industry have changed the way graphics

projects are produced. These changes include a shift from traditional production of images to offering more consulting and project management services to clients. Accordingly, our ability to grow will depend upon our ability to keep pace with technological advances and industry evolutions on a continuing basis and to integrate available technologies and provide additional services commensurate with client needs in a commercially appropriate manner. Our business may be adversely affected if the Company is unable to keep pace with relevant technological and industry changes or if the technologies that the Company adopts or services the Company promotes do not receive widespread market acceptance.

The Company may be subject to losses that might not be covered in whole or in part by existing insurance coverage. These uninsured losses could result in substantial liabilities to us that would negatively impact our financial condition.

The Company carries comprehensive liability, fire and extended coverage insurance on all of our facilities, and other specialized coverages, including errors and omissions coverage, with policy specifications and insured limits customarily carried for similar properties and purposes. There are certain types of risks and losses, however, such as losses resulting from wars or acts of God, that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could incur significant liabilities, and if such loss affects property the Company owns, the Company could lose capital invested in that property or the anticipated future revenues derived from the activities conducted at that property, while remaining liable for any lease or other financial obligations related to the property. In addition to substantial financial liabilities, an uninsured loss or a loss that exceeds our coverage could adversely affect our ability to replace property or capital equipment that is destroyed or damaged, and our productive capacity may diminish.


ITEM 1b.	*UNRESOLVED STAFF COMMENTS*

None.


ITEM 2.	*PROPERTIES*

The Company owns or leases the following office and operating facilities:

Lease

Square

Owned/

Expiration

Location

Feet

Leased

Purpose

Date

Division

Addison, Texas

3,400

Leased

Operating Facility

Month-to-month

Schawk U.S.A.

Antwerp, Belgium

39,000

Owned

Operating Facility

N/A

Schawk Belgium

Battle Creek, Michigan

8,862

Leased

Operating Facility

August, 2007

Schawk U.S.A.

Bristol, U.K

9,200

Leased

Subletting

September, 2014

Schawk U.K.

Carlstadt, New Jersey

46,000

Vacant

Operating Facility

February, 2011

N/A

Chennai, India

10,682

Leased

Operating Facility

October, 2007

Schawk Asia

Cherry Hill, New Jersey

10,000

Leased

Operating Facility

January, 2009

Schawk U.S.A.

Chicago, Illinois

45,000

Leased

Vacant

September, 2009

N/A

Chicago, Illinois

66,000

Leased

Operating Facility

June, 2009

Ambrosi

Chicago, Illinois

42,000

Leased

Operating Facility

June, 2019

Schawk U.S.A.

Chicago, Illinois

87,000

Owned

Operating Facility

N/A

Ambrosi

Chicago, Illinois

11,900

Leased

General Offices

April, 2010

General Offices

Cincinnati, Ohio

74,200

Leased

Operating Facility

August, 2009

Schawk U.S.A.

Cincinnati, Ohio

12,000

Leased

Operating Facility

August, 2009

Schawk U.S.A.

Cincinnati, Ohio

13,200

Leased

Operating Facility

February, 2009

Anthem U.S.A.

Crystal Lake, Illinois

78,800

Owned

Leased

N/A

Des Plaines, Illinois

18,200

Owned

Executive Offices

N/A

Corporate Office

Des Plaines, Illinois

55,000

Leased

Operating Facility

December, 2010

Schawk U.S.A.

Foster City, California

7,800

Leased

Vacant

May, 2008

N/A

Grand Rapids, Michigan

N/A

Owned

Vacant Lot

N/A

Hackettstown, NJ

3,000

Leased

Operating Facility

June, 2009

Anthem U.S.A.

Kalamazoo, Michigan

67,000

Owned

Operating Facility

N/A

Schawk U.S.A.

Lease

Square

Owned/

Expiration

Location

Feet

Leased

Purpose

Date

Division

Kobe, Japan

800

Leased

Operating Facility

February, 2007

Anthem Asia

Leeds, U.K

16,200

Leased

Operating Facility

January, 2010

Schawk U.K.

Lithia Springs, Georgia

79,700

Leased

Operating Facility

July, 2009

Ambrosi

London, U.K

42,700

Leased

Operating Facility

March, 2015

Schawk U.K.

London, U.K

4,000

Leased

Vacant

November, 2009

Schawk U.K.

Los Angeles, California

100,500

Owned

Operating Facility

N/A

Schawk U.S.A.

Manchester, U.K

45,200

Leased

Operating Facility

September, 2023

Schawk U.K.

Minneapolis, Minnesota

31,000

Owned

Operating Facility

N/A

Schawk U.S.A.

Mississauga, Canada

58,000

Leased

Operating Facility

December, 2014

Schawk Canada

Nashua, NH

3,000

Leased

Operating Facility

November, 2008

Schawk U.S.A.

New Berlin, Wisconsin

43,000

Leased

Operating Facility

June, 2008

Schawk U.S.A.

New York, New York

10,000

Leased

Operating Facility

December, 2008

Schawk U.S.A.

New York, New York

52,500

Leased

Subletting

December, 2012

N/A

New York, New York

8,000

Leased

Subletting

January, 2011

N/A

New York, New York

6,400

Leased

Operating Facility

Month-to-month

Ambrosi

New York, New York

5,000

Leased

Operating Facility

May, 2010

Anthem U.S.A.

Newcastle, U.K

17,000

Leased

Operating Facility

September, 2015

Schawk U.K.

N. Ryde, Australia

13,900

Leased

Operating Facility

May, 2008

Schawk Australia

Orlando, Florida

12,000

Owned

Leased

N/A

Penang, Malaysia

2,330

Owned

Operating Facility

N/A

Schawk Asia

Penang, Malaysia

34,000

Owned

Operating Facility

N/A

Schawk Asia

Penang, Malaysia

1,706

Owned

Operating Facility

N/A

Schawk Asia

Plano, Texas

12,300

Leased

Subletting

December, 2011

N/A

Pontiac, Illinois

24,900

Owned

Vacant

N/A

Queretaro, Mexico

18,000

Owned

Operating Facility

N/A

Schawk Mexico

Redmond, Washington

24,000

Leased

Operating Facility

April, 2017

Schawk U.S.A.

Roseville, Minnesota

28,000

Leased

Operating Facility

May, 2007

Schawk U.S.A.

San Francisco, CA

18,200

Leased

Operating Facility

April, 2010

Schawk U.S.A.

San Francisco, CA

8,100

Leased

Operating Facility

September, 2008

Anthem U.S.A.

San Francisco, CA

21,200

Leased

Operating Facility

May, 2008

Ambrosi

Santa Ana, CA

9,645

Leased

Operating Facility

July, 2011

Anthem U.S.A.

Shanghai, China

19,400

Leased

Operating Facility

November, 2008

Schawk Asia

Shenzhen, China

7,100

Leased

Operating Facility

December, 2008

Schawk Shenzhen

Shenzhen, China

11,300

Leased

Operating Facility

July, 2008

Anthem Shenzhen

Singapore

7,500

Leased

Operating Facility

January, 2008

Schawk Asia

Slough, U.K

3,000

Leased

Subletting

January, 2010

Schawk U.K.

Smyrna, Georgia

25,200

Leased

Operating Facility

October, 2008

Schawk U.S.A.

Stamford, Connecticut

20,000

Leased

Operating Facility

August, 2007

Schawk U.S.A.

Sterling Heights, MI

26,400

Leased

Operating Facility

May, 2008

Schawk U.S.A.

Swindon, U.K

39,000

Leased

Subletting

September, 2018

Schawk U.K.

Toronto, Canada

8,300

Leased

Operating Facility

January, 2010

Anthem Canada

Toronto, Canada

17,500

Leased

Operating Facility

November, 2007

Schawk Canada

Tunbridge Wells, U.K

6,400

Leased

Subletting

March, 2009

Schawk U.K.


ITEM 3.	*LEGAL PROCEEDINGS*

From time to time, the Company has been a party to routine pending or threatened legal proceedings and arbitrations. The Company insures some, but not all, of its exposure with respect to such proceedings. Based upon information presently available, and in light of legal and other defenses available to the Company, management does not consider the liability from any threatened or pending litigation to be material to the Company. The Company has not experienced any significant environmental problems.


ITEM 4.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

No items were submitted to a vote of security holders for the three months ended December 31, 2006.

PART II


ITEM 5.	*MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*

Stock Prices

The Company’s Class A common stock is listed on the New York Stock Exchange under the symbol “SGK”. The Company has approximately 1,065 stockholders of record as of March 1, 2007.

Set forth below are the high and low sales prices for the Company’s Class A common stock for each quarterly period within the two most recent fiscal years.


Quarter Ended:	2006 High/Low		2005 High/Low

March 31	$	26.22 - 20.27	$	21.98 - 17.70
June 30		26.15 - 17.34		26.00 - 17.96
September 30		19.57 - 15.11		24.75 - 19.64
December 31		20.97 - 17.58		21.40 - 17.05

Dividends Declared per Class A Common Share


Quarter Ended:	2006		2005

March 31	$	0.0325	$	0.0325
June 30		0.0325		0.0325
September 30		0.0325		0.0325
December 31		0.0325		0.0325

Total	$	0.1300	$	0.1300

The table below compares the cumulative total shareholder return on the Company’s common stock for the last five fiscal years with the cumulative total return of the Russell 2000 Index and a peer group of companies comprised of the following: Bemis Inc., Bowne & Co., Matthews International Corp., and Multi-Color Corp. (the“Peer Group” Index”). The companies in the Peer Group Index have been chosen due to their similar lines of business.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100*

December 2006


*		The graph assumes that $100 was invested on December 31, 2001 in each of Schawk Inc. common stock, the Russell 2000 Index and the Peer Group Index, and that all dividends were reinvested. The Peer Group Index is weighted by market capitalization.

Equity Compensation Plan Information

The following table summarizes information as of December 31, 2006, relating to equity compensation plans of the Company pursuant to which Common Stock is authorized for issuance (shares in thousands).

Number of

Securities to be

Number of

Issued Upon

Weighted-Average

Securities

Exercise of

Exercise Price of

Remaining Available

Outstanding

for Future Issuance

Options, Warrants

Under Equity

Plan Category

and Rights

Compensation Plans

Equity compensation plans approved by security holders

3,151

12.11

856

Equity compensation plans not approved by security holders

—

TOTAL

3,151

12.11

856

Purchases of Equity Securities by the Company

The Company occasionally repurchases its common shares, pursuant to a general authorization from the Board of Directors, which is renewed annually. As in prior years, the current general authorization allows the Company to repurchase up to $2 million in shares of Company common stock in the open market per year. As of December 31, 2006, the Company had purchased $1.2 million (62,500 shares) of its common stock pursuant to this general authorization since the beginning of the year. In addition, shares of common stock are occasionally tendered to the

Company by certain employee and director stockholders in payment of stock options exercised. The Company records the receipt of common stock in payment for stock options exercised as a purchase of treasury stock

The following table summarizes the shares repurchased by the Company during 2006:


					No. Shares		Dollar Value of
	Total No.		Avg. Price		Purchased as Part		Shares That may be
	Shares		Paid per		of Publicly		Purchased Under
Period	Purchased		Share		Announced Program		Program

January		—		—		—		—
February		—		—		—		—
March		1,781	$	23.15		—		—
April		—		—		—		—
May		62,500	$	18.90		—		—
June		—		—		—		—
July		—		—		—		—
August		—		—		—		—
September		—		—		—		—
October		—		—		—		—
November		—		—		—		—
December		—		—		—		—

2006 Total		64,281	$	19.02		—		—


ITEM 6.	*SELECTED FINANCIAL DATA*


	Year Ended December 31,
	2006(1)		2005(2)		2004(3)		2003		2002
			(In thousands, except per share amounts)

CONSOLIDATED INCOME STATEMENT INFORMATION
Net sales	$	548,406	$	562,104	$	238,345	$	201,031	$	186,189
Income from continuing operations		29,523		29,687		22,678		16,984		13,531
Income per common share from continuing operations:
Basic	$	1.12	$	1.16	$	1.05	$	0.79	$	0.63
Diluted	$	1.08		1.10		1.01		0.78		0.62
CONSOLIDATED BALANCE SHEET INFORMATION
Total assets		538,246		558,818		220,763		159,691		160,470
Long-term debt and capital lease obligations		140,763		169,579		39,964		21,021		37,232
OTHER DATA
Cash dividends per common share	$	0.13	$	0.13	$	0.13	$	0.13	$	0.13


(1)		Consolidated Income Statement and Balance Sheet Information was impacted by the disposition of the Book and Catalogue operations on February 28, 2006. See Note 4 to the Consolidated Financial Statements.

(2)		Consolidated Income Statement and Consolidated Balance Sheet Information was impacted by the acquisition of Seven Worldwide on January 31, 2005 and the acquisition of Winnetts on December 31, 2004. See Note 3 to the Consolidated Financial Statements.

(3)		Consolidated Balance Sheet Information was impacted by the acquisition of Winnetts on December 31, 2004. See Note 3 to the Consolidated Financial Statements.


ITEM 7.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

(Thousands of dollars, except per share amounts)

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained herein and in “Item 1. Business” that relate to the Company’s beliefs or expectations as to future events are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company intends any such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 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 the assumptions will prove to have been correct and undue reliance should not be placed on such statements. Important factors that could cause actual results to differ materially and adversely from the Company’s expectations and beliefs include, among other things, the strength of the United States economy in general and specifically market conditions for the consumer products industry, the level of demand for the Company’s services, loss of key management and operational personnel, the ability of the Company to implement its growth strategy, the stability of state, federal and foreign tax laws, the ability of the Company to identify and capitalize on industry trends and technological advances in the imaging industry, the stability of political conditions in Asia and other foreign countries in which the Company has production capabilities, terrorist attacks and the U.S. response to such attacks, as well as other factors detailed in the Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any of these statements in light of future events.

EXECUTIVE-LEVEL OVERVIEW

A majority of our revenues are driven by marketing and advertising spending by consumer product companies and retailers. The markets served are consumer product manufacturers and pharmaceutical, entertainment, retail and publishing companies. Our business involves producing graphic images for various applications. Generally, a graphic image is created by us or a third party and then the Company manipulates that image to enhance the color of the image and to prepare it for print. The applications vary from consumer product packaging, including food and beverage packaging images, to retail advertisements in newspapers, including free standing inserts (FSI’s) and magazine ads.

The graphics process is generally the same regardless of the application. The following steps in the graphics process must take place to produce a final image:


	•	Planning and Messaging

	•	Strategic Design

	•	Content Creation

	•	File Building

	•	Retouching

	•	Art Production

	•	Pre-Media

The Company’s involvement in a client project may involve many of the above steps or just one of the steps, depending on the client’s needs. Each client assignment, or “job”, is a custom job in that the image being produced is unique, even if it only involves a small change from an existing image, such as adding a “low fat” banner on a food package. Essentially, change equals revenue. The Company is paid for our graphic imaging work regardless of the success or failure of the food product, the promotion or the ad campaign.

Historically, a substantial majority of our revenues have been derived from providing graphic services for consumer product packaging applications. Packaging changes occur with such frequency and lack of notice, and customer turn-around requirements are so tight, that there is little backlog. There are regular promotions throughout

the year that create revenue opportunities for us, for example: Valentine’s Day, Easter, Fourth of July, Back To School, Halloween, Thanksgiving and Christmas. In addition, there are event driven promotions that occur regularly, such as the Super Bowl, Grammy Awards, World Series, Indianapolis 500 and the Olympics. Lastly, there are a number of health related “banners” that are added to food and beverage packaging, such as “heart healthy,” ”low in carbohydrates,” “enriched with essential vitamins,” “low in saturated fat” and “caffeine free.” All of these items require new product packaging designs or changes in existing designs, in each case creating additional opportunities for revenue. Graphic services for the consumer products packaging industry generally involve higher margins due to the substantial expertise necessary to meet consumer products companies’ precise specifications and to quickly, consistently and efficiently bring their products to market, as well as due to the complexity and variety of packaging materials, shapes and sizes, custom colors and storage conditions.

As a result of our most recent acquisitions described below, the Company has increased the percentage of our revenue derived from providing graphics services to our advertising and retail clients and added to our service offering graphic services to the entertainment market. These clients typically require high volume, commodity-oriented prepress graphic services. Graphic services for these clients typically yield relatively lower margins due to the lower degree of complexity in providing such services, and the number and size of companies in the industry capable of providing such services. As discussed more fully below under “— Acquisitions” and “— Results of Operations”, the altered mix of services following our acquisitions of Winnetts and Seven has impacted our results of operations in 2005 and 2006 and will continue to impact our results of operations in the future. The Company continues to review its operations to identify potential dispositions of assets that fail to meet our criteria for growth and profitability.

The Company’s ten largest clients accounted for approximately 35% of our revenues in 2005 and 39% of our revenues in 2006. In 2005 and 2006, approximately 10% and 9%, respectively, of our total revenues came from our largest single client in the respective period. While the Company seeks to build long-term client relationships, revenues from any particular client can fluctuate from period to period due to such client’s purchasing patterns. Any termination of or significant reduction in our business relationship with any of our principal clients could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions

The Company has grown our business through a combination of internal growth and acquisitions. Schawk has completed approximately 50 acquisitions since 1965. The Company’s recent acquisitions have significantly expanded our service offerings and our geographic presence, making us the only independent prepress firm with operations in North America, Europe and Asia. As a result of these acquisitions, the Company is able to offer a broader range of services to our clients. Our expanded geographic presence also allows us to better serve our multinational clients’ demands for global brand consistency.

WBK, Inc. On July 1, 2006, the Company acquired the operating assets of WBK, Inc., a Cincinnati, Ohio-based design agency that provides services to retailers and consumer products companies. This operating unit is now known as Anthem Cincinnati.

Anthem YorkIn January 2006, the Company acquired certain operating assets of the internal design agency operation of Nestle UK and entered into a design services agreement with this client. This operation is known as Anthem York.

Schawk IndiaThe Company had previously acquired 50 percent of a company currently known as Schawk India, Ltd. in February 2005 as part of its acquisition of Seven Worldwide, Inc. On July 1, 2006, the Company increased its ownership of Schawk India, Ltd. to 90 percent. Schawk India, Ltd. provides artwork management, premedia and print management services.

Seven Worldwide. On January 31, 2005, the Company acquired Seven Worldwide (formerly Applied Graphics Technologies, Inc.), a graphic services company with operations in 40 locations in the United States, Europe, Asia and Australia. The purchase price of $210,568 consisted of $135,566 paid in cash at closing, $4,482 of acquisition-related professional fees and the issuance of 4,000 shares of our common stock with a value of $70,520. Seven Worldwide’s results of operations are included in our results beginning January 31, 2005.

Winnetts. On December 31, 2004, The Company acquired certain assets and the business of Weir Holdings, Ltd., known as “Winnetts”, a UK based graphic services company with operations in 6 locations in the UK, Belgium

and Spain. The acquisition price was $23,338. Winnetts is our first operation in Europe. Since the acquisition occurred as of the close of business on December 31, 2004, there are no results of operations for Winnetts in our 2004 statement of operations.

The principal objective in acquiring Winnetts and Seven Worldwide was to expand our geographic presence and our service offering. This expansion enables us to provide a more comprehensive level of customer service, to build a broader platform from which to grow our business and continue to pursue greater operating efficiencies.

The Company began work on a consolidation plan before the acquisition of Seven Worldwide was finalized, recording an exit reserve of approximately $20,900 based on the plan. The major expenses included in the exit reserve were severance pay for employees of acquired facilities that were merged with existing Schawk operations and lease termination expenses (See Note 3 to the Consolidated Financial Statements for further discussion). The Company realized significant synergies and reduced operating costs from the closing of nine US and UK operating facilities and the downsizing of several other operating facilities in 2005 and early 2006 and the elimination of the Seven Worldwide corporate headquarters in New York City. In addition, the Company recorded acquisition integration and restructuring expenses which are shown as a separate line in the operating expense section of the Consolidated Statement of Operations of $6,898 and $3,933 for the years ended December 31, 2005 and December 31, 2006, respectively. The major items included in this expense were severance pay for employees at legacy Schawk, Inc. facilities that had been merged with operations of the acquired businesses, retention pay for key employees whose services were necessary during a transition period, travel expenses related to the planning and execution of facility consolidations, and professional fees for accounting, human resource, and integration planning advice.

In connection with Schawk’s financing of the Seven Worldwide acquisition, the Company entered into a credit agreement dated January 28, 2005 with JPMorgan Chase Bank, N.A. The credit agreement provides for a five-year unsecured revolving credit facility of $100,000, which was expanded to $115,000 on April 15, 2005. Also on January 28, 2005, the Company entered into a Note Purchase and Private Shelf Agreement with Prudential Investment Management Inc, pursuant to which the Company sold $50,000 in a series of three Senior Notes. As of December 31, 2006 there was $142,940 of debt outstanding, of which $140,763 was considered long-term.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2006 AND 2005

Schawk, Inc.

Comparative Consolidated Statements of Operations
Years Ended December 31, 2006 and 2005


							$			%
	2006			2005			Change			Change
	(In thousands)

Net sales	$	548,406		$	562,104		$	(13,698	)		(2.4	)%
Cost of sales		355,375			367,455			(12,080	)		(3.3	)%

Gross profit		193,031			194,649			(1,618	)		(0.8	)%
Gross margin percentage		35.2	%		34.6	%
Selling, general and administrative expenses		135,728			132,559			3,169			2.4	%
Acquisition integration and restructuring expenses		3,933			6,898			(2,965	)		(43.0	)%
Reserve reversal from litigation settlement		(5,120	)		—			(5,120	)		nm

Operating income		58,490			55,192			3,298			6.0	%
Operating margin percentage		10.7	%		9.8	%
Other income (expense)
Interest and dividend income		467			359			108			30.1	%
Interest expense		(10,716	)		(8,599	)		(2,117	)		(24.6	)%
Other income (expense)		—			498			(498	)		nm

		(10,249	)		(7,742	)		(2,507	)		(32.4	)%
Income from continuing operations before income taxes		48,241			47,450			791			1.7	%
Income tax provision		18,718			17,763			955			5.4	%

Income from continuing operations		29,523			29,687			(164	)		(0.6	)%
Income (loss) from discontinued operations		(1,135	)		785			(1,920	)		nm

Net income	$	28,388		$	30,472		$	(2,084	)		(6.8	)%

Effective income tax rate		38.8	%		37.4	%

nm — Percentage not meaningful

Net salesdecreased 2.4% to $548,406 compared to $562,104 in the prior year, primarily due to a decline in sales to the Company’s advertising and entertainment accounts, the reduction in overall advertising spending by the Company’s largest retail client, lost revenue from resigned accounts at closed or sold facilities, and lower advertising account revenues due to lower spending levels on promotions compared to the twelve months of 2005. Additionally, the acquisition of Seven Worldwide occurred at the end of January 2005. Therefore results for the twelve months of 2005 did not include Seven’s month of January 2005 revenues and expenses. Seven contributed approximately $19,800 of revenues from continuing operations in January 2006, increasing revenues for the full year 2006. Excluding the $19,800 of revenue in the month of January 2006 to make the periods comparable on a pro forma basis, sales from continuing operations decreased 6.0% from $562,104 million in 2005 to $528,606 in 2006.

Gross marginfrom continuing operations for the twelve months of 2006 was 35.2% as compared to 34.6%in the prior-year period. The increase in the gross profit percentage was due mainly to cost reduction efforts at certain locations and the realization of synergies resulting from acquisition integration efforts.

Operating incomefrom continuing operations increased to $58,490 in 2006 from $55,192 in 2005, an increase of 6.0 percent. The increase in operating income was primarily due to the reversal of two litigation reserves and lower acquisition integration and restructuring expenses, partially offset by an increase in selling, general and administrative expenses. The litigation reserves related to pre-acquisition contingencies associated with the

acquisition of Seven Worldwide in January of 2005, which were settled in 2006. The increase in selling general and administrative expenses was due primarily to stock option expense of $1.1 million recorded in 2006 as a result of the implementation of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payments” on January 1, 2006, an additional month of selling, general and administrative expenses in 2006 from the Seven operations, the addition of selling, general and administrative expenses of two design firms acquired in 2006 and an increase in legal and professional fees.

During the year ended December 31, 2006, the Company recorded acquisition integration and restructuring expenses of $1,848, which are included in the Acquisition integration and restructuring expense line in the operating expense section of the Consolidated Statement of Operations. The major items included in this expense are exit costs from the shut down of the Company’s existing Birmingham UK operating facility in February 2006, including retention pay for key employees whose services were necessary during a transition period, travel expenses related to the planning and execution of facility consolidations, professional fees for accounting, human resource, and integration planning advice and exit costs related to the shut down of the Company’s East Coast operating facility in June 2006.

During the year ended December 31, 2006, the Company recorded $2,085 of restructuring charges for the cost of severance, employee benefits, and outplacement services related to the termination of 100 employees located in the United Kingdom and Europe due to the consolidation and relocation of production and administrative functions. The restructuring charge is included in Acquisition integration and restructuring expenses on the Consolidated Statement of Operations. The Company anticipates a reduction in selling, general and administrative expenses in the form of lower compensation expense in future periods. The Company made payments of approximately $980 in 2006 and anticipates paying out the remaining $1,105 of the reserve balance in 2007.

Other income (expense)for the year ended December 31, 2006 resulted in a net expense of $10,249 compared to $7,742 of net expense in the comparable 2005 period. Interest expense of $10,716 for the year ended December 31, 2006 increased $2,117 compared to the same period in 2005. The increase in interest expense was from a combination of higher short-term borrowing rates and amortization of the present value discount related to vacant property reserves included in the Seven Worldwide acquisition. There was also a non-recurring other income item of approximately $498 in the year ended December 31, 2005.

Income tax provisionfor the year ended December 31, 2006 was at an effective tax rate of 38.8% compared to an effective tax rate of 37.4% for the year ended December 31, 2005. The increase in the effective tax rate was due to higher state income tax rates due in part to the sale of the discontinued operations.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005 AND 2004

Schawk, Inc.

Comparative Consolidated Statements of Operations
Years Ended December 31, 2005 and 2004


							$			%
	2005			2004			Change			Change
	(In thousands)

Net sales	$	562,104		$	238,345		$	323,759			135.8	%
Cost of sales		367,455			137,017			230,438			168.2	%

Gross profit		194,649			101,328			93,321			92.1	%
Gross margin percentage		34.6	%		42.5	%
Selling, general and administrative expenses		132,559			63,536			69,023			108.6	%
Acquisition integration and restructuring expenses		6,898			—			6,898			nm

Operating income		55,192			37,792			17,400			46.0	%
Operating margin percentage		9.8	%		15.9	%
Other income (expense)
Interest and dividend income		359			188			171			91.0	%
Interest expense		(8,599	)		(1,960	)		(6,639	)		nm
Other income (expense)		498			—			498			nm

		(7,742	)		(1,772	)		(5,970	)		nm
Income from continuing operations before income
taxes		47,450			36,020			11,430			31.7	%
Income tax provision		17,763			13,342			4,421			33.1	%

Income from continuing operations		29,687			22,678			7,009			30.9	%
Income from discontinued operations		785			—			785

Net Income	$	30,472		$	22,678		$	7,794			34.4	%

Effective income tax rate		37.4	%		37.0	%

nm — Percentage not meaningful

Net salesfor the year ended December 31, 2005, were $562,104 compared to $238,345 for the prior year, a 135.8 % increase. The growth in sales was primarily from acquired businesses. Schawk’s direct consumer products packaging related business was strong in 2005, as a result of increased demand from both new product introductions by consumer products companies and from regulatory requirements like trans fats disclosures on food packages. In addition, the Company won new accounts in 2005 and realized the full year impact of new accounts won in 2004.

Gross marginfor the year ended December 31, 2005, was 34.6% compared to 42.5% in the prior year. The lower gross margin is primarily due to the acquisitions of Seven Worldwide and Winnetts which historically have had lower gross margins.

Operating incomefor 2005 was $55,192 versus $37,792 in 2004. The increase in operating income was primarily due to the acquired companies. Selling, general and administrative expenses increased $69,023 or 108.6% as compared to the prior year. The increase in operating expenses was primarily due to the acquired businesses. The operating margin for 2005 was 9.8% compared to 15.9% in the prior year resulting from lower margins realized in the Seven and Winnetts businesses acquired.

During the year ended December 31, 2005, the Company recorded acquisition integration expenses of $6,898, which are included in the Acquisition integration and restructuring expense line in the operating expense section of the Consolidated Statement of Operations. The major items included in this expense were severance pay for

employees at legacy Schawk Inc facilities that have been merged with operations of the acquired businesses, retention pay for key employees whose services were necessary during a transition period, travel expenses related to the planning and execution of facility consolidations, and professional fees for accounting, human resource, and integration planning advice.

Other income (expense)for the year ended December 31, 2005, was $7,742 of expense, compared to $1,772 of expense in the prior year. The $5,970 increase in expense is due to increased interest expense from additional indebtedness incurred in 2005 in connection with the acquired businesses.

Income tax provisionfor the year ended December 31, 2005, was at an effective rate of 37.4% as anticipated. The effective rate in 2004 was 37.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2006, the Company had $10,177 in consolidated cash and cash equivalents, compared to $7,519 at December 31, 2005.

Cash provided by (used in) Operating Activities

Cash provided by operations was $33,411 in 2006 compared to cash provided by operations of $34,781 in 2005. The decrease in cash provided by operations is primarily due to the lower net income in 2006 compared to 2005.

Depreciation and amortization expense in 2006 was $24,711 as compared to $27,049 in the prior year. The decrease in depreciation and amortization expense is attributable to the sale of the Company’s Book and Publishing operations in the first quarter of 2006.

Cash used in Investing Activities

Cash used in investing activities was $7,002 for the year ended December 31, 2006 compared to $225,734 of cash used in investing activities during the year ended December 31, 2005. The cash used in investing activities during 2006 reflects three small acquisitions, totaling $9,747. The cash used in investing activities during 2005 reflects the acquisitions of Seven Worldwide, net of cash acquired, for $204,408. Capital expenditures were $29,771 in 2006 compared to $22,158 in 2005. The increase in capital expenditures in 2006 is due in part to the purchase of software and hardware for new accounting, costing and billing systems and a new printing press, as well as to the inclusion of capital expenditures of Seven Worldwide for an additional month in 2006 as compared to the prior year comparable period. The cash used in investing activities during 2006 was reduced by proceeds in the amount of $28,184 from the sale of the book and publishing business during the first quarter.

Cash provided by Financing Activities

Cash used in financing activities was $24,070 for 2006 compared to cash provided by financing activities of $191,394 in 2005. The cash used in financing activities in 2006 reflects the pay-down of the revolving credit facility with the $28,184 proceeds from the sale of the book and publishing operations in the first quarter. The cash provided by financing activities in 2005 includes $151,825 of proceeds from new debt and $70,520 of common stock issued to finance the Seven Worldwide acquisition.

Dividend payments on common stock were $3,424 in 2006 compared to $3,354 in 2005. The increase in the dividends paid was due to a greater number of shares outstanding in 2006 as compared to 2005.

In January 2005, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. The agreement provides for a five year unsecured revolving credit facility of $100,000, expandable to $125,000, with interest at LIBOR plus a margin based on the Company’s cash flow leverage ratio. This credit agreement replaced a $30,000 unsecured credit agreement previously in place. On April 15, 2005, the accordion feature of the credit agreement was utilized to increase the size of the revolving credit commitment to $115 million from $100 million to provide additional flexibility to the Company. $67,891 was outstanding under the agreement at December 31, 2006 and is included in Long-term debt on the December 31, 2006 Consolidated Balance Sheet.

Also in January 2005, the Company entered into a Note Purchase and Private Shelf Agreement with Prudential Investment Management Inc, pursuant to which the Company sold $50,000 in a series of three Senior Notes. The

first note, in the amount of $10,000, will mature in 2010 and bears interest at 4.81%. The second and third notes, each in the amount of $20,000, mature in 2011 and 2012, respectively, and bear interest at the rate of 4.99% and 5.17%, respectively. The total of these notes, $50,000, is included in Long-term debt on the December 31, 2006 Consolidated Balance Sheet.

In December of 2003, the Company entered into a private placement of debt to provide long-term financing. The terms of the Note Purchase Agreement relating to this transaction provided for the issuance and sale by the Company, pursuant to an exception from the registration requirements of the Securities Act of 1933, of two series of notes: 1) Tranche A, for $15,000 and bearing interest at 4.90%, which closed in December 2003; and, 2) Tranche B, for $10,000 and bearing interest at 4.98%, which closed in April 2004. The Tranche A note is payable in annual installments of $2,143 from 2007 to 2013. The Tranche B note is payable in annual installments of $1,429 from 2008 to 2014. The $2,143 installment of the Tranche A note due in 2007 is included in Current portion of long-term debt and capital lease obligations on the December 31, 2006 Consolidated Balance Sheet. The remaining debt of $22,857 issued under the private placement agreement is shown as Long Term Debt on the December 31, 2006 Consolidated Balance Sheet.

Management believes that the level of working capital is adequate for the Company’s liquidity needs related to normal operations both currently and in the foreseeable future, and that the Company has sufficient resources to support its growth, either through currently available cash and cash generated from future operations, or pursuant to its revolving credit facility.

SEASONALITY

With the acquisitions of Winnetts and Seven Worldwide, the seasonal fluctuations in business on a combined basis generally result in lower revenues in the first quarter as compared to the rest of the year ended December 31.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company does not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes the effect that minimum debt, lease and other material noncancelable commitments are expected to have on the Company’s cash flow in the future periods:


			Payments Due by Period
			Less						More
			Than 1		1-3		3-5		Than 5
Contractual Obligations	Total		Year		Years		Years		Years

Long-Term Debt Obligations	$	142,899	$	2,148	$	7,145	$	105,033	$	28,573
Capital Lease Obligations		44		31		13		—		—
Operating Lease Obligations		71,065		15,847		22,327		12,101		20,790
Purchase Obligations		2,347		2,347		—		—		—
Deferred Compensation		1,623		26		18		11		1,568

Total	$	217,978	$	20,399	$	29,503	$	117,145	$	50,931

Purchase obligations resulting from purchase orders entered in the normal course of business are not significant. The Company is a service business whose major cost is employees’ labor. Material purchases are limited to supplies incidental to the services provided.

The Company expects to fund future contractual obligations through funds generated from operations, together with general company financing transactions.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of

contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the notes to the Consolidated Financial Statements.

Accounts Receivable. Our clients are primarily consumer product manufacturers, converters and advertising agencies; none of which individually represents more than 9% of total revenue. Accounts receivable consist primarily of amounts due to us from our normal business activities. In assessing the carrying value of its accounts receivable, the Company estimated the recoverability by making assumptions based on past collection history and specific risks identified in the accounts receivable portfolio. Based on the Company’s estimates and assumptions, an allowance for doubtful accounts of $4,621 was established at December 31, 2006, compared to an allowance of $5,940 at December 31, 2005. A change in the Company’s assumptions would result in the Company recovering an amount of its accounts receivable that differs from the carrying value. Any difference could result in an increase or decrease in bad debt expense.

Impairment of Long-Lived Assets. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. No events or changes in circumstances have occurred that required the Company to assess the recoverability of its property and equipment, and therefore the Company has not recognized any impairment charges. A change in the Company’s business climate in future periods, including a general downturn in one of the Company’s operations, could lead to a required assessment of the recoverability of the Company’s long-lived assets, which may subsequently result in an impairment charge.

Goodwill and Other Acquired Intangible Assets. The Company has made acquisitions in the past that included a significant amount of goodwill and other intangible assets. Effective in 2002, goodwill is no longer amortized but is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Other intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test based on estimated undiscounted cash flows. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. Therefore, impairment losses could be recorded in the future.

The Company performed the required impairment test of goodwill in 2006, 2005 and 2004 and did not record an impairment charge.

Customer Rebates. The Company has rebate agreements with certain customers. The agreements offer discount pricing based on volume over a multi-year period. The Company accrues the estimated rebates over the term of the agreement, reducing revenue and crediting a current liability account. At the end of the rebate accounting period, typically annually, the rebate is settled in cash and the accrued liability account is charged. The Company accounts for changes in the estimated rebate amounts as soon as it has determined that the estimated sales for the rebate period have changed.

Stock-Based Compensation. As of December 31, 2006, the Company had three stock-based compensation plans which are described more fully in Note 18 to the Consolidated Financial Statements. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),“Share-Based Payments,” (“SFAS 123R”),which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method, no share-based compensation expense related to stock option awards granted to employees had been recognized in

the Company’s Consolidated Statements of Operations, as all stock option awards granted under the plans had an exercise price equal to the market value of the Common Stock on the date of the grant.

The Company adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation expense recognized during the year ended December 31, 2006 included compensation expense for all share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and using an accelerated expense attribution method. Compensation expense during the year ended December 31, 2006 for share-based awards granted subsequent to January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R) and is computed using the straight-line expense attribution method. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123(R). The Company must make certain assumptions in determining the fair value of stock options, including the volatility of the Company’s common stock, the future dividend yield on the Company’s common stock, and the term over which stock options will remain outstanding, including making assumptions about the future behavior patterns of the holders of stock options in regard to exercising stock options prior to their expiration. In addition, the Company must make certain assumptions regarding the rate at which options will be forfeited to estimate the service period that will be completed by the holders of stock options. Any deviation in the actual volatility of the Company’s common stock, the actual dividend yield, and the actual early exercise behavior of holders of stock options from that assumed in estimating the fair value of a stock option will not result in a change in the amount of compensation expense recognized by the Company, but will result in the actual value realized by the holder of the stock options to be different than the amount of compensation expense recognized. Any deviation in the actual forfeitures of nonvested stock options during the service period from that assumed will result in a change to the amount of compensation expense recognized, either as additional compensation expense or a reversal of previously recognized compensation expense in the period of change.

Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets arising from temporary differences and net operating losses will not be realized.

Schawk, like other multi-national companies, are regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax reserves have been recorded when, in management’s judgment, it is not probable that our tax position will ultimately be sustained. While predicting the outcome of the audits involves uncertainty and requires estimates and informed judgments, the Company believes that the recorded tax liabilities are adequate and appropriate. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretation of regulations. Income tax expense is adjusted in the period in which these events occur or when the statute of limitations for a specific exposure item has expired.

Exit Reserves. The Company records reserves for the consolidation of workforce and facilities of acquired companies. The exit plans are approved by company management prior to, or shortly after, the acquisition date and may be modified during the twelve-month period following the acquisition, as conditions change. The exit plans provide for severance pay, lease abandonment costs and other related expenses. A change in any of the assumptions used to estimate the exit reserves that result in a decrease to the reserve would result in a decrease to goodwill. Any change in assumptions that result in an increase to the exit reserves would result in a charge to income.

New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. While our analysis of the impact this Interpretation is not yet complete, we do not anticipate it will have a material impact on the Company’s retained earnings at the time of adoption.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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.


ITEM 7A.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Interest Rate Exposure

The Company has $67.9 million of variable rate debt outstanding at December 31, 2006 and expects to use its variable rate credit facilities during 2007 and beyond to fund acquisitions and cash flow needs. Assuming interest rate volatility in the future is similar to what has been seen in recent years, the Company does not anticipate that short-term changes in interest rates will materially affect its consolidated financial position, results of operations or cash flows. A 1.0% increase in short term interest rates would add $679 of interest cost annually based on the variable rate debt outstanding at December 31, 2006.

Foreign Exchange Exposure

The Company has foreign operations that expose it to translation risk when the local currency financial statements are translated to U.S. dollars. Since changes in translation risk are reported as adjustments to stockholders’ equity, a 10% change in foreign exchange rates would not have material effect on the Company’s financial position, results of operations or cash flows.


ITEM 8.	*FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*

Index to Financial Statements


	Page

Management’s Responsibilities for Financial Reporting		31
Report of Independent Registered Public Accounting Firm		32
FINANCIAL STATEMENTS:
Consolidated Balance Sheets — December 31, 2006 and 2005		33
Consolidated Statements of Operations — Years Ended December 31, 2006, 2005 and 2004		34
Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 2005 and 2004		35
Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2006, 2005 and 2004		36
Notes to Consolidated Financial Statements		37
FINANCIAL STATEMENT SCHEDULES:
SCHEDULE II — Valuation Reserves		67

MANAGEMENT’S RESPONSIBILITIES FOR FINANCIAL REPORTING

The management of Schawk, Inc. is responsible for the preparation and integrity of all financial statements and other information contained in the Schawk, Inc.Form 10-K Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts based on judgments and estimates by management giving due consideration to materiality. The Company maintains internal control systems designed to provide reasonable assurance that the Company’s financial records reflect the transactions of the Company and that its assets are protected from loss or unauthorized use.

The Company’s financial statements have been audited by Ernst & Young LLP, independent registered public accounting firm, whose report thereon follows. As part of their audit of the Company’s financial statements, Ernst & Young LLP considered the Company’s system of internal control to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Management has made available to Ernst & Young LLP the Company’s financial records and related data.

The Audit Committee of the Board of Directors is responsible for reviewing and evaluating the overall performance of the Company’s financial reporting and accounting practices. The Committee meets periodically and independently with management and the independent registered public accounting firm to discuss the Company’s internal accounting controls, auditing and financial reporting matters. The independent registered public accounting firm has unrestricted access to the Audit Committee.


/s/ David A. Schawk		/s/ James J. Patterson
David A. Schawk		James J. Patterson
President and Chief Executive Officer Principal Executive Officer		Senior Vice President and Chief Financial Officer Principal Financial and Accounting Officer

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Schawk, Inc.

We have audited the accompanying consolidated balance sheets of Schawk, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Schawk, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As disclosed in Note 18 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment”, effective January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Schawk, Inc. internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

March 15, 2007

Schawk, Inc.

Consolidated Balance Sheets


	December 31
	2006			2005
	(In thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	10,177		$	7,519
Trade accounts receivable, less allowance for doubtful accounts of $4,621 in 2006 and $5,940 in 2005		127,627			117,723
Inventories		23,575			24,868
Prepaid expenses and other		10,171			9,701
Deferred income taxes		8,580			9,845
Assets of discontinued operations		—			29,253

Total current assets		180,130			198,909
Property and equipment, net		82,227			77,291
Goodwill		235,501			233,838
Intangible assets		35,755			42,223
Other assets		4,633			6,557

Total assets	$	538,246		$	558,818


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	26,522		$	27,776
Accrued expenses		51,489			61,967
Income taxes payable		10,249			6,367
Current portion of long-term debt and capital lease obligations		2,177			454
Liabilities of discontinued operations		—			8,208

Total current liabilities		90,437			104,772
Long-term debt		140,751			169,528
Capital lease obligations		12			51
Other long-term liabilities		23,461			27,383
Deferred income taxes		14,657			25,688
Stockholders’ Equity:
Common stock		229			225
Additional paid-in capital		178,415			168,777
Retained earnings		113,365			88,424
Accumulated comprehensive income, net		6,079			1,933

		298,088			259,359
Treasury stock, at cost		(29,160	)		(27,963	)

Total stockholders’ equity		268,928			231,396

Total liabilities and stockholders’ equity	$	538,246		$	558,818

See accompanying notes.

Schawk, Inc.

Consolidated Statements of Operations


	Years Ended December 31
	2006			2005			2004
	(In thousands, except per share amounts)

Net sales	$	548,406		$	562,104		$	238,345
Cost of sales		355,375			367,455			137,017

Gross profit		193,031			194,649			101,328
Selling, general, and administrative expenses		135,728			132,559			63,536
Acquisition integration and restructuring expenses		3,933			6,898			—
Reserve reversal from litigation settlement		(5,120	)		—			—

Operating income		58,490			55,192			37,792
Other income (expense):
Interest and dividend income		467			359			188
Interest expense		(10,716	)		(8,599	)		(1,960	)
Other		—			498			—

		(10,249	)		(7,742	)		(1,772	)

Income from continuing operations before income taxes		48,241			47,450			36,020
Income tax provision		18,718			17,763			13,342

Income from continuing operations		29,523			29,687			22,678
Income (loss) from discontinued operations, net of tax (benefit) expense of ($720) in 2006 and $486 in 2005		(1,135	)		785			—

Net income	$	28,388		$	30,472		$	22,678

Earnings per share:
Basic:
Income from continuing operations	$	1.12		$	1.16		$	1.05
Income (loss) from discontinued operations	$	(0.04	)	$	0.03			—

Net income per common share	$	1.08		$	1.19		$	1.05
Diluted:
Income from continuing operations	$	1.08		$	1.10		$	1.01
Income (loss) from discontinued operations	$	(0.04	)	$	0.03			—

Net income per common share	$	1.04		$	1.13		$	1.01
Weighted average shares outstanding:
Basic		26,393			25,529			21,603
Diluted		27,395			26,963			22,515
Dividends per Class A common share	$	0.13		$	0.13		$	0.13

See accompanying notes.

Schawk, Inc.

Consolidated Statements of Cash Flows


	Years Ended December 31
	2006			2005			2004
	(In thousands)

Operating activities
Net income	$	28,388		$	30,472		$	22,678
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		21,245			22,606			11,803
Amortization		3,466			4,443			923
Deferred income taxes		(11,272	)		2,761			(789	)
Reserve reversal from litigation settlement		(5,120	)
Loss realized on sale of equipment		532			295			101
Share-based compensation expense		1,059
Tax benefit from stock options exercised		(1,662	)		1,657			—
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade accounts receivable		(4,650	)		(4,919	)		(14,230	)
Inventories		2,223			947			(231	)
Prepaid expenses and other		817			(1,033	)		431
Trade accounts payable and accrued expenses		(22,918	)		(22,795	)		4,562
Income taxes refundable/payable		21,303			347			1,185

Net cash provided by operating activities		33,411			34,781			26,433
Investing activities
Proceeds from disposal of property and equipment		4,551			2,213			248
Proceeds from sale of business		28,184			—			—
Purchases of property and equipment		(29,771	)		(22,158	)		(12,238	)
Acquisitions, net of cash acquired		(9,747	)		(205,702	)		(29,278	)
Contingent acquisition purchase price paid to escrow account		—			—			(2,574	)
Other		(219	)		(87	)		(527	)

Net cash used in investing activities		(7,002	)		(225,734	)		(44,369	)
Financing activities
Proceeds from debt		—			151,825			33,200
Issuance of common stock		6,922			74,805			4,428
Principal payments on debt		(27,514	)		(27,841	)		(14,700	)
Principal payments on capital lease obligations		(493	)		(648	)		(66	)
Tax benefit from stock options exercised		1,662
Cash dividends		(3,424	)		(3,354	)		(2,790	)
Purchase of common stock		(1,223	)		(3,115	)		(603	)
Capitalized loan fees		—			(580	)		—
Increase in deferred compensation liability		—			302			—
Net cash provided by (used in) financing activities		(24,070	)		191,394			19,469

Effect of foreign currency rate changes		319			(190	)		508

Net increase in cash and cash equivalents		2,658			251			2,041
Cash and cash equivalents beginning of period		7,519			7,268			5,227

Cash and cash equivalents end of period		10,177		$	7,519		$	7,268

Supplementary disclosure of cash flow information:
Dividends issued in the form of Class A common stock	$	23		$	24		$	19
Cash paid for interest		8,898			7,355			1,876
Cash paid for income taxes		3,686			14,559			13,025

See accompanying notes.

Schawk, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2004, 2005 and 2006


	Class A		Additional					Accumulated						Total
	Common		Paid-In		Retained			Comprehensive			Treasury			Stockholders’
	Stock		Capital		Earnings			Income			Stock			Equity
	(In thousands)

Balance at December 31, 2003	$	187	$	87,928	$	41,461		$	1,087		$	(24,291	)	$	106,372
Net income		—		—		22,678			—			—			22,678
Sale of Class A common stock		3		3,672		—			—			—			3,675
Purchase of Class A treasury stock		—		—		—			—			(603	)		(603	)
Stock issued under employee stock purchase plan		1		750		—			—			—			751
Foreign currency translation adjustment		—		—		—			1,355			—			1,355
Issuance of Class A common stock under dividend reinvestment program		—		—		(19	)		—			21			2
Cash dividends		—		—		(2,790	)		—			—			(2,790	)

Balance at December 31, 2004		191		92,350		61,330			2,442			(24,873	)		131,440
Net income		—		—		30,472			—			—			30,472
Sale of Class A common stock		1		2,963		—			—			—			2,964
Tax benefit from stock options exercised		—		1,657		—			—			—			1,657
Purchase of Class A treasury stock		—		—		—			—			(3,115	)		(3,115	)
Stock issued under employee stock purchase plan		1		1,319		—			—			—			1,320
Stock issued for acquisitions		32		70,488											70,520
Foreign currency translation adjustment		—		—		—			(509	)		—			(509	)
Issuance of Class A common stock under dividend reinvestment program		—		—		(24	)		—			25			1
Cash dividends		—		—		(3,354	)		—			—			(3,354	)

Balance at December 31, 2005		225		168,777		88,424			1,933			(27,963	)		231,396
Net income		—		—		28,388			—			—			28,388
Sale of Class A common stock		3		5,814		—			—			—			5,817
Tax benefit from stock options exercised		—		1,662		—			—			—			1,662
Purchase of Class A treasury stock		—		—		—			—			(1,223	)		(1,223	)
Stock issued under employee stock purchase plan		1		1,103		—			—			—			1,104
Stock-based compensation expense		—		1,059		—			—			—			1,059
Foreign currency translation adjustment		—		—		—			4,146			—			4,146
Issuance of Class A common stock under dividend reinvestment program		—		—		(23	)		—			26			3
Cash dividends		—		—		(3,424	)		—						(3,424	)

Balance at December 31, 2006	$	229	$	178,415	$	113,365		$	6,079		$	(29,160	)	$	268,928

See accompanying notes.

Schawk, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)


NOTE 1.	Basis of Presentation and Description of Business

Schawk, Inc. including its subsidiaries (the Company) is a leading provider of digital imaging graphic services for the consumer products industry in North America, Europe and Asia. The Company focuses on providing these services to multi-national clients in three primary markets: consumer products packaging, advertising agencies and promotion.


NOTE 2.	Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of all wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Cash Equivalents

Cash equivalents include highly liquid debt instruments and time deposits having an original maturity at the date of purchase of three months or less. Cash equivalents are stated at cost, which approximates market.

Accounts Receivable and Concentration of Credit Risk

The Company sells its products to a wide range of customers in the consumer products, retail, advertising agency and entertainment industries. The Company performs ongoing credit evaluations of its customers and does not require collateral. An allowance for doubtful accounts is maintained at a level management believes is sufficient to cover potential losses. The Company evaluates the collectibility of its accounts receivable based on the length of time the receivable is past due and its historic experience of write-offs. Trade accounts receivable are charged to the allowance when the Company determines that the receivable will not be collectible. Trade accounts receivable balances are determined to be delinquent when the amount is past due, based on the payment terms with the customer.

Inventories

Raw materials are stated at the lower of cost or market. Approximately 13% of total inventories in 2006 and 7% in 2005 are determined on the last in, first out (LIFO) cost basis. The remaining raw materials inventories are determined on the first in, first out (FIFO) cost basis.Work-in-process, consisting of labor, materials, and overhead on partially completed projects, is recorded at the lower of cost or net realizable value. The Company periodically evaluates the realizability of inventories and adjusts the carrying value as necessary.

Property and Equipment

Property and equipment, including capitalized leases is stated at cost, less accumulated depreciation and amortization, and is being depreciated and amortized using the straight-line method over the estimated useful lives of the assets or the term of the leases, ranging from 3 to 40 years.

Goodwill

Acquired goodwill and intangible assets with indefinite useful lives are not amortized, but instead are subject to an annual impairment test and subject to testing at other times during the year if certain events occur indicating that the carrying value of goodwilland/or indefinite lived intangibles may be impaired. In accordance with Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets, as amended”, goodwill must be tested for impairment at the reporting unit level. A reporting unit is defined as “an operating segment or one level below an operating segment (referred to as a component)”. For purposes of the goodwill impairment test, the reporting units of the Company, after considering the requirements of SFAS 142 and the

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

relevant provisions of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”, and related interpretive literature are defined primarily on a geographic basis.

If the carrying amount of the reporting unit is greater than the fair value, goodwill impairment may be present. The Company measures the goodwill impairment based upon the fair value of the underlying assets and liabilities of the reporting unit and estimates the implied fair value of goodwill. An impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill. Intangible assets with finite useful lives are amortized over their useful lives.

Long-lived Assets

The recoverability of long-lived assets, including amortizable intangibles, is evaluated by comparing their carrying value to the expected future undiscounted cash flows to be generated from such assets when events or circumstances indicate that an impairment may have occurred. Management also reevaluates the periods of amortization of long lived assets to determine whether events and circumstances warrant revised useful lives. If an impairment has occurred, the carrying value of the long-lived asset is adjusted to an amount equal to the discounted cash flows associated with the asset.

Revenue Recognition

The Company recognizes revenue at the later of delivery of the goodsand/or services to the customer or the acceptance of the goodsand/or services by the customer.

Customer Rebates

The Company has rebate agreements with certain customers. The agreements offer discount pricing based on volume over a multi-year period. The Company accrues the estimated rebates over the term of the agreement, reducing revenue and crediting a current liability account. At the end of the rebate accounting period, typically annually, the rebate is settled in cash and the accrued liability account is charged. The Company accounts for changes in the estimated rebate amounts as soon as it has determined that the estimated sales for the rebate period have changed.

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers for product shipments are recorded in“Net sales”in the Consolidated Statements of Operations. Shipping and handling costs are included in inventory forjobs-in-progress and included in“Cost of sales”in the Consolidated Statements of Operations when jobs are completed and invoiced.

Income Taxes

Income taxes are accounted for using the asset and liability approach. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided if, based on available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.

Foreign subsidiaries are taxed according to regulations existing in the countries in which they do business. Provision has not been made for United States income taxes on distributions that may be received from foreign subsidiaries, which are considered to be permanently invested overseas.

The Company, like other multi-national companies, is regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax reserves have been recorded when, in management’s judgment, it is not probable that the Company’s tax position will ultimately be sustained. While predicting the outcome of the audits involves uncertainty and requires estimates and

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

informed judgments, the Company believes that the recorded tax liabilities are adequate and appropriate. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretation of regulations. Income tax expense is adjusted in the period in which these events occur or when the statute of limitations for a specific exposure item has expired.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation

The Company’s foreign subsidiaries use the local currency as their functional currency. Accordingly, foreign currency assets and liabilities are translated at the rate of exchange existing at the balance sheet date and income and expense amounts are translated at the average of the monthly exchange rates for the period. Adjustments resulting from the translation of foreign currency financial statements into United States dollars are included in accumulated comprehensive income (loss) as a component of stockholders’ equity.

Fair Value of Financial Instruments

For purposes of financial reporting, the Company has determined that the fair value of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximates book value at December 31, 2006 and 2005, except as follows:


	December 31,		December 31,
	2006		2005

Fair value of fixed-rate notes payable	$	72,625	$	71,739
Book value of fixed-rate notes payable		75,000		75,000

Comprehensive Income

The components of comprehensive income, net of related tax, for the years ended December 31, 2006, 2005 and 2004 are as follows:


	2006		2005			2004

Net income	$	28,388	$	30,472		$	22,678
Foreign currency translation adjustments		4,146		(509	)		1,355

Comprehensive income	$	32,534	$	29,963		$	24,033

Stock Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),“Share-Based Payments,” (“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method, no share-based compensation expense related to stock option awards granted to employees had been recognized in the Company’s Consolidated Statements of Operations, as all stock option awards granted under the plans had an exercise price equal to the market value of the Common Stock on the date of the grant.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

SFAS 123(R) requires pro forma disclosures of net income and earnings per share for all periods prior to the adoption of the fair value accounting method for stock-based employee compensation. The pro forma disclosures are presented in Note 18 — Stock Based Compensation.

Reclassifications

Certain amounts in the 2005 and 2004 financial statements have been reclassified to conform to the 2006 presentations.

New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. While our analysis of the impact of this Interpretation is not yet complete, we do not anticipate it will have a material impact on the Company’s retained earnings at the time of adoption.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements,(“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.


NOTE 3.	Acquisitions

WBK, Inc

On July 1, 2006, the Company acquired the operating assets of WBK, Inc., a Cincinnati, Ohio-based design agency that provides services to retailers and consumer products companies. The results of operations of WBK, Inc. are included in the Consolidated Statement of Operations beginning July 1, 2006. The acquisition resulted in the recognition of goodwill in the Company’s financial statements because the purchase price reflects the complimentary strategic fit that the acquired business brings to the Company’s existing operations. The goodwill is expected to be deductible as an operating expense for tax purposes.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The purchase price of $4,865 consisted of $4,813 paid in cash to the seller and $52 of acquisition-related professional fees. The Company has recorded a purchase price allocation based upon a tangible and intangible asset fair value appraisal provided by an independent consulting firm. A summary of the fair values assigned to the acquired assets is as follows:


Trade accounts receivable	$	747
Other current assets		10
Fixed assets		66
Customer relationship intangible asset		1,600
Non-compete agreement intangible asset		50
Goodwill		2,686
Accounts payable		(168	)
Other current liabilities		(126	)

Total purchase price	$	4,865

The weighted-average amortization period of the customer relationship and non-compete intangible assets is eleven years. The intangible asset amortization expense was $78 for the year ended December 31, 2006, and will be approximately $155 annually for each of the next five years.

The Company does not expect to incur any merger integration or exit costs in connection with this acquisition. Supplemental pro-forma information is not presented because the acquisition is considered to be immaterial to the Company’s consolidated results of operations.

Schawk India, Ltd.

The Company had previously acquired 50 percent of a company currently known as Schawk India, Ltd. in February 2005 as part of its acquisition of Seven Worldwide, Inc. On July 1, 2006, the Company increased its ownership of Schawk India, Ltd. to 90 percent. Schawk India, Ltd. provides artwork management, premedia and print management services. The results of operations of Schawk India, Ltd., net of minority interest, are included in the Consolidated Statement of Operations beginning July 1, 2006. Prior to July 1, 2006, the Company included its 50 percent share of Schawk India, Ltd. net income in its results of operations using the equity method of accounting. The acquisition resulted in the recognition of goodwill in the Company’s financial statements because the purchase price reflects the complimentary strategic fit that the acquired business brings to the Company’s existing operations. The goodwill is not expected to be deductible as an operating expense for tax purposes.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The purchase price of the additional 40 percent of Schawk India, Ltd. acquired on July 1, 2006 was $2,371, consisting of $2,345 paid at closing and $26 of acquisition-related professional fees. The Company previously had recorded an equity-method investment in the India joint venture of $71, bringing the total investment to $2,442 as of July 1, 2006. The Company has completed the purchase price allocation and a summary of the fair values assigned to the acquired assets is as follows:


Cash	$	151
Trade accounts receivable		104
Other current assets		71
Fixed assets		136
Goodwill		2,340
Other assets		2
Accounts payable		(14	)
Other current liabilities		(30	)
Long-term debt		(303	)
Minority interest		(15	)

Total fair value of assets	$	2,442
Less equity method prior investment		(71	)
Less cash received		(151	)

Net cash purchase price	$	2,220

Anthem York

In January 2006, the Company acquired certain operating assets of the internal design agency operation of a UK consumer products company and entered into a design services agreement with this client. This operation is known as Anthem York. The acquisition resulted in the recognition of goodwill in the Company’s financial statements because the purchase price reflects the complimentary strategic fit that the acquired business brings to the Company’s existing operations. The goodwill is expected to be deductible as an operating expense for tax purposes.

The purchase price of $2,197 consisted of $618 paid in cash to the seller, $460 of acquisition-related professional fees and $1,119 reserved for severance payments to terminated employees. The Company has recorded an estimated purchase price allocation based upon an internal tangible and intangible asset fair value appraisal that is in process. The purchase price allocation will be finalized in January 2007. A summary of the estimated fair values assigned to the acquired assets is as follows:


Fixed assets	$	250
Inventory		110
Goodwill		1,837

Total purchase price	$	2,197

The acquisition plan included a decision to involuntarily terminate certain employees of the acquired operation and a reserve in the amount of $1,119 was recorded to cover the severance pay and benefits of terminated employees. The reserve was recorded as an adjustment to goodwill and was paid in full in 2006. A total of 16 employees were terminated in 2006.

Supplemental pro-forma information for this acquisition is not presented because the acquisition is considered to be immaterial to the Company’s consolidated results of operations.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

Seven Worldwide Holdings, Inc.

On January 31, 2005, the Company acquired 100% of the outstanding stock of Seven Worldwide Holdings, Inc. (Seven WorldWide), formerly known as KAGT Holdings, Inc. Seven Worldwide was the parent of Seven Worldwide, Inc, a graphics services company with operations in North America, Europe, and the Asia-Pacific region. The purchase price of $210,568 consisted of $135,566 paid in cash at closing, $4,482 of acquisition-related professional fees and the issuance of 4,000 shares of the Company’s Class A common stock with a value of $70,520. The results of operations of Seven Worldwide, Inc since the date of acquisition are included in the Consolidated Statement of Operations. The acquisition resulted in the recognition of goodwill in the Company’s financial statements because the purchase price reflects the complimentary strategic fit that the acquired business brings to the Company’s existing operations. The acquisition was recorded using the purchase method of accounting. The purchase price allocation was finalized during the first quarter of 2006, based on a fair value appraisal performed by an independent consulting firm. A summary of the fair values assigned to the acquired assets is as follows:


Trade accounts receivable	$	69,885
Inventory		20,004
Other current assets		5,899
Fixed assets		39,533
Intangible assets, principally customer relationships		43,651
Goodwill		162,439
Other assets		908
Accounts payable		(19,093	)
Other current liabilities		(73,958	)
Income taxes payable		(11,022	)
Deferred income taxes		(5,880	)
Long term debt and capital lease obligations		(50	)
Other liabilities		(27,908	)

Total purchase price, net of $6,160 cash received	$	204,408

During the 12 months ended January 31, 2006, management of the Company completed its assessment of the combined operations and implemented its plan to exit certain facilities of the acquired company. During 2005, the Company closed seven facilities in the US and the UK and downsized several others. Two additional facilities were closed in early 2006 in accordance with the Company’s exit plan. A total of 712 employees were terminated during 2005 and in early 2006. In addition, the Company’s management decided to market the Book and Publishing operations of the acquired company, since this business was outside the core business of the Company. Effective as of February 28, 2006, the Company sold substantially all of the operating assets of its Book and Publishing operations. See Footnote 4 — Discontinued Operations.

The Company recorded an estimated exit reserve at January 31, 2005 in the amount of $11,790. The major expenses included in the exit reserve are employee severance and lease termination expenses. As management of the Company completed its assessment of the acquired operations, additional amounts were added to the initial reserve estimate. The initial reserve and subsequent reserve modifications were recorded as adjustments to goodwill and current and non-current liabilities. The majority of the December 31, 2006 reserve balance related to employee severance will be paid during 2007. The reserve balance related to facility closings will be paid over the term of the leases of the closed facilities, with the longest lease expiring in 2015. The remaining reserve balance of $5,499 is included in Accrued expenses and Other non current liabilities on the Consolidated Balance Sheet as of December 31, 2006.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes the reserve recorded at January 31, 2005 and the activity through December 31, 2006:


	Balance							Balance
	January 31,							December 31,
	2005		Adjustments		Payments			2005

Employee severance	$	7,075	$	5,092	$	(6,721	)	$	5,446
Facility closure cost		4,715		3,969		(1,114	)		7,570

Total	$	11,790	$	9,061	$	(7,835	)	$	13,016


	Balance							Balance
	December 31,							December 31,
	2005		Adjustments		Payments			2006

Employee severance	$	5,446	$	155	$	(5,263	)	$	338
Facility closure cost		7,570		163		(2,572	)		5,161

Total	$	13,016	$	318	$	(7,835	)	$	5,499

During the year ended December 31, 2006, the Company settled two lawsuits related to pre-acquisition activities of Seven Worldwide, Inc., for which pre-acquisition contingent liabilities totaling $5,120 had been recorded. These adjustments were recorded in the operating expense section of the Consolidated Statement of Operations for the year ended December 31, 2006. See Footnotes 5 and 23.

Weir Holdings Limited

On December 31, 2004, the Company acquired the operating assets and assumed certain liabilities of Weir Holdings Limited, a company registered under the laws of England, and its subsidiaries. Weir, which operates under the trade name “Winnetts”, is one of the leading providers of graphic services to consumer products companies, retailers and major print groups in the United Kingdom and European markets. The results of operations of Winnetts since the date of acquisition are included in the Consolidated Statement of Operations.

The purchase price of $23,338 consisted of $22,086 paid in cash to an escrow account for the benefit of the seller at closing and $1,252 in acquisition-related professional fees. The acquisition was recorded using the purchase method of accounting. A summary of the fair values assigned to the acquired assets as of December 31, 2004 is as follows:


Trade accounts receivable	$	7,071
Inventory		1,267
Other current assets		651
Deferred income tax asset		985
Fixed assets		6,566
Customer relationship intangible asset		8,201
Goodwill		9,630
Other assets		307
Current liabilities		(7,593	)
Capital leases		(464	)
Facility exit reserve		(3,283	)

Net cash consideration	$	23,338

In connection with its acquisition of the assets of Winnetts, the Company established a facility exit reserve at December 31, 2004 in the amount of $2,500, primarily for employee severance and lease abandonment expenses. During 2005, the management of the Company completed its assessment of the acquired operations and

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

implemented its plan to exit certain of the facilities of the acquired company. During 2005, the Company closed one facility in the UK and downsized several others. A total of 39 employees were terminated. The exit reserve balance related to employee severance was paid during 2006. The exit reserve related to the facility closure will be paid over the term of the lease, which expires in 2014. The remaining reserve balance of $401 is included in Accrued expenses and Other non current liabilities on the Consolidated Balance Sheet as of December 31, 2006.

The following table summarizes the activity in the reserve during 2005 and 2006:


	Balance							Balance
	December 31,							December 31,
	2004		Adjustments		Payments			2005

Employee severance	$	1,254	$	65	$	(902	)	$	417
Facility closure cost		1,246		718		(632	)		1,332

Total	$	2,500	$	783	$	(1,534	)	$	1,749


	Balance								Balance
	December 31,								December 31,
	2005		Adjustments			Payments			2006

Employee severance	$	417	$	—		$	(417	)	$	—
Facility closure cost		1,332		(686	)		(245	)		401

Total	$	1,749	$	(686	)	$	(662	)	$	401

Since the acquisitions of Seven Worldwide and Winnetts, one of the Company’s priorities has been the integration of the acquired businesses into the Company’s combined operations. This has involved planning and executing the consolidation of duplicate facilities in locations served by separate facilities of the pre-acquisition businesses as well as elimination of duplicate administrative functions. During the years ended December 31, 2006 and 2005, the Company recorded acquisition integration expenses of $1,848 and $6,898, respectively, which are included in the Acquisition integration and restructuring expense line in the operating expense section of the Consolidated Statement of Operations. The major items included in this expense in 2006 are exit costs from the shut down of the Company’s existing Birmingham UK operating facility in February 2006, including retention pay for key employees whose services were necessary during a transition period, travel expenses related to the planning and execution of facility consolidations, professional fees for accounting, human resource, and integration planning advice and costs related to the shut down of the Company’s East Coast operating facility in June 2006. The major items included in this expense in 2005 were severance pay for employees at legacy Schawk Inc facilities that have been merged with operations of the acquired businesses, retention pay for key employees whose services were necessary during a transition period, travel expenses related to the planning and execution of facility consolidations, and professional fees for accounting, human resource, and integration planning advice.

Other acquisitions

During the year ended December 31, 2006 the Company paid $688 of additional purchase price to the former owners of certain companies acquired in 2003 and 2004. The additional purchase price was paid pursuant to the contingency provisions of the purchase agreements.


NOTE 4.	Discontinued Operations

Effective February 28, 2006, the Company sold certain operations including substantially all of the assets of its Book and Publishing operations, most of which were acquired as part of the Seven Worldwide acquisition in 2005. The operations were sold because they were considered to be outside of the Company’s core business. Proceeds from the sale were $28,184. No gain or loss was recorded as a result of the sale.

In accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets”, the Book and Publishing operations are being accounted for as discontinued operations and, accordingly, its assets and liabilities are segregated from continuing operations in the accompanying consolidated balance sheet, and its operating results

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

are segregated and reported as discontinued operations in the accompanying consolidated statement of operations in all periods presented. The results of operations of the Book and Publishing operations for the years ended December 31, 2006 and 2005 are as follows:


	Year Ended			Year Ended
	December 31,			December 31,
	2006			2005

Revenues	$	8,465		$	52,416

Operating income (loss)	$	(1,660	)	$	2,522

The results of operations of the Book and Publishing business include an allocation of interest expense of $172 and $1,204 for the years ended December 31, 2006 and 2005, respectively.

The carrying amounts, as of February 28, 2006, of the major classes of assets and liabilities sold were as follows:


Current assets	$	16,189
Other non-current assets		2,303
Intangible assets		15,327

Assets of discontinued operations	$	33,819

Current liabilities	$	5,635

Liabilities of discontinued operations	$	5,635


NOTE 5.	Reserve Reversal from Litigation Settlements

Included in the operating expense section of the Consolidated Statement of Operations for the year ended December 31, 2006, is $5,120 representing reserve reversals. In the second quarter of 2006, the Company settled a lawsuit with an equipment manufacturer related to pre-acquisition activities of Seven Worldwide, Inc. A pre-acquisition contingent liability reserve in the amount of $2,120, previously recorded for this item, was no longer needed and was reversed. In February 2007, a second lawsuit was settled, resulting in a $3,000 reserve reversal which was recorded in the fourth quarter. See Footnote 23 for discussion of this lawsuit settlement.


NOTE 6.	Restructuring

During 2006, the Company recorded $2,085 of restructuring charges for the cost of severance, employee benefits, and outplacement services related to the termination of 100 employees located in the United Kingdom and Europe due to the consolidation and relocation of production functions from our London office to our Leeds and Manchester offices in the United Kingdom and a relocation of production functions from our London office to offices in Asia. The restructuring charge is included in Acquisition integration and restructuring expenses on the Consolidated Statement of Operations. The Company made payments of approximately $980 in 2006 and anticipates paying out the remaining $1,105 of the reserve balance in 2007. The remaining reserve balance is included in Accrued Expenses on the Consolidated Balance Sheet as of December 31, 2006.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)


NOTE 7.	Inventories

Inventories consist of the following:


	December 31,
	2006			2005

Raw materials	$	4,444		$	4,662
Work in process		20,193			21,264

		24,637			25,926
Less: LIFO reserve		(1,062	)		(1,058	)

	$	23,575		$	24,868


NOTE 8.	Property and Equipment

Property and equipment consists of the following:


	December 31,
	2006			2005

Land and improvements	$	10,614		$	11,146
Buildings and improvements		20,970			21,594
Machinery and equipment		86,233			81,981
Leasehold improvements		14,979			17,368
Computer software		31,687			19,708

		164,483			151,797
Accumulated depreciation and amortization		(82,256	)		(74,506	)

	$	82,227		$	77,291


NOTE 9.	Goodwill and Intangible Assets

The Company’s intangible assets not subject to amortization consist entirely of goodwill. The changes in the carrying amount of goodwill during the years ended December 31, 2006 and 2005 were as follows:


Balance at December 31, 2004	$	71,720
Acquisitions		161,934
Foreign currency translation		184

Balance at December 31, 2005		233,838
Acquisitions		(667	)
Foreign currency translation		2,330

Balance at December 31, 2006	$	235,501

The Company performed the required impairment test of goodwill in 2006, 2005 and 2004. No impairment charge was recorded.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The Company’s intangible assets subject to amortization are as follows:


	Weighted		December 31,
	Average Life		2006			2005

Customer relationships		15.0 years	$	40,579		$	43,934
Digital images		5.0 years		928			882
Developed technologies		3.0 years		712			762
Non-compete agreements		3.6 years		731			681
Patents		20.0 years		326			326
Trade names		2.0 years		308			157
Contract acquisition cost		3.0 years		156			—

		14.3 years		43,740			46,742
Accumulated amortization				(7,985	)		(4,519	)

			$	35,755		$	42,223

Intangible assets, which resulted primarily from the acquisitions of Seven and Winnetts, were recorded at fair market value as of the dates of the acquisitions based upon an independent third party appraisal. Amortization expense related to the intangible assets totaled $3,466, $3,649 and $841 in 2006, 2005 and 2004, respectively. Amortization expense for each of the next five years is expected to be approximately $3,360 for 2007, $2,950 for 2008, $2,900 for 2009, $2, 780 for 2010 and $2,535 for 2011.


NOTE 10.	Accrued Expenses

Accrued expenses consist of the following:


	December 31,
	2006		2005

Accrued compensation and payroll taxes	$	27,243	$	26,687
Facility exit reserve		3,696		8,825
Accrued property taxes		2,614		2,564
Vacant property reserve		2,527		5,274
Unearned revenue		2,309		1,291
Accrued professional fees		1,787		2,449
Accrued customer rebates		1,684		2,830
Restructuring reserve		1,105		—
Accrued interest		757		870
Other		7,767		11,177

	$	51,489	$	61,967

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)


NOTE 11.	Other Long-Term Liabilities

Other long-term liabilities consist of the following:


	December 31,
	2006		2005

Vacant property reserve	$	14,827	$	16,552
Facility exit reserve		2,204		5,940
Other		6,430		4,891

	$	23,461	$	27,383


NOTE 12.	Debt

Long-term debt consists of the following:


	December 31,
	2006			2005

U.S. bank revolving credit agreement	$	67,891		$	94,520
Series A senior note payable — Tranche A		15,000			15,000
Series A senior note payable — Tranche B		10,000			10,000
Series C senior note payable		10,000			10,000
Series D senior note payable		20,000			20,000
Series E senior note payable		20,000			20,000
Other		8			13
		142,899			169,533
Less amounts due in one year or less		(2,148	)		(5	)

	$	140,751		$	169,528

The Series A note — Tranche A bears interest at 4.90% and is payable in annual installments of $2,143 from 2007 to 2013. The Series A note — Tranche B bears interest at 4.98% and is payable in annual installments of $1,429 from 2008 to 2014. Both series of notes were issued pursuant to the Company’s private placement Note Purchase Agreement dated December 23, 2003 and are unsecured. The notes may be prepaid in whole or in part at any time.

The Series C note bears interest at 4.81% and is payable in 2010. The Series D note bears interest at 4.99% and is payable in 2011. The Series E note bears interest at 5.17% and is payable in 2012. The three series of notes were issued pursuant to the Company’s Note Purchase and Private Shelf Agreement dated January 28, 2005 and are unsecured. The notes may be prepaid in whole or in part at any time.

The borrowings under the bank revolving credit agreement are unsecured and are at a floating rate of interest over the Federal Funds or Eurocurrency rates based upon certain financial ratios. The effective interest rate on borrowings under this agreement was 6.10% at December 31, 2006. The credit agreement provides maximum borrowings of $115,000 and expires in January 2010. Borrowings under the above agreements are subject to certain restrictive covenants, including working capital, fixed charge coverage, funded debt and leverage ratios. The Company is in compliance with all required covenants at December 31, 2006.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

Annual maturities of long-term debt at December 31, 2006 are as follows:


2007	$	2,148
2008		3,574
2009		3,571
2010		81,462
2011		23,571
Thereafter		28,573

	$	142,899


NOTE 13.	Stockholders’ Equity

Stockholders’ equity includes the following:


	December 31,
	2006		2005

Common stock:
Class A voting, $0.008 par value, 40,000,000 shares authorized; 28,989,013 and 28,441,689 shares issued at December 31, 2006 and 2005, respectively; 26,555,119 and 26,070,747 shares outstanding at December 31, 2006 and 2005, respectively	$	229	$	225

Treasury stock:
2,433,894 and 2,370,942 shares of Class A common stock at December 31, 2006 and 2005, respectively	$	29,160	$	27,963


NOTE 14.	Income Taxes

The provision (credit) for income taxes is comprised of the following:


	Years Ended December 31,
	2006			2005			2004

Current:
Federal	$	17,306		$	5,957		$	11,205
State		4,148			2,781			186
Foreign		8,536			6,264			1,162

		29,990			15,002			12,553
Deferred:
Federal		(4,380	)		6,192			663
State		(386	)		83			298
Foreign		(6,506	)		(3,514	)		(172	)

		(11,272	)		2,761			789

Total	$	18,718		$	17,763		$	13,342

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

Components of deferred income tax assets and liabilities are as follows:


	December 31,
	2006			2005

Deferred income tax assets:
Inventory	$	102		$	44
Accruals and reserves not currently deductible		5,795			5,170
Bad debt reserve		1,502			2,166
Accrued vacation		1,699			2,189
Other		—			715
Restructuring reserves		7,827			6,078
Net operating losses		12,366			7,407
Income tax credits		5,913			3,862
Capital losses		9,597			13,258

Deferred income tax assets before valuation allowances		44,801			40,889
Valuation allowances		(23,046	)		(20,116	)

Deferred income tax assets	$	21,755		$	20,773

Deferred income tax liabilities:
Prepaid expenses	$	(749	)	$	(372	)
Property and equipment		(3,891	)		(5,826	)
Customer intangibles		(12,190	)		(16,420	)
Domestic subsidiary stock		(9,805	)		(9,536	)
Goodwill on asset acquisitions		—			(1,046	)
Other		(1,197	)		(3,416	)

Deferred income tax liabilities	$	(27,832	)	$	(36,616	)

Reconciliation between the provision for income taxes for continuing operations computed by applying the federal statutory tax rate to income before incomes taxes and the actual provision is as follows:


	Year Ended December 31,
	2006			2005			2004

Income taxes at statutory rate		35.0	%		35.0	%		35.0	%
Nondeductible expenses		1.6			1.1			.2
State income taxes		4.6			3.2			3.0
Foreign rate differential		(1.6	)		(0.9	)		1.2
Reduction of accrual for prior year taxes		(0.1	)		(2.1	)		—
Other		(0.7	)		1.1			—
Prior year state refunds received		—			—			(2.4	)
		38.8	%		37.4	%		37.0	%

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The domestic and foreign components of income before income taxes are as follows:


	2006		2005		2004

Domestic	$	41,988	$	40,418	$	32,923
Foreign		6,253	$	7,032	$	3,097

Total	$	48,241	$	47,450	$	36,020

As of December 31, 2006, the Company has net operating loss carryforwards of approximately $8,636 U.S. and $22,555 foreign, foreign capital loss carryforwards of approximately $31,387, and income tax credit carryforwards of approximately $632 U.S. and $5,690 foreign which will be available to offset future income tax liabilities. If not used, $8,636 of the net operating loss carryfowards will expire in 2024 and 2025 while the remainder have no expiration period. Certain of these losses are subject to limitations on use due to tax rules affecting acquired tax attributes and business continuation, and therefore the Company has established tax-effected valuation allowances against these tax benefits in the amount of $23,046. Should the Company be able to use these tax benefits, most of the valuation allowances will be released and credited to goodwill.

The undistributed earnings of foreign subsidiaries were approximately $15,715 and $8,572 at December 31, 2006 and 2005, respectively. No income taxes are provided on the undistributed earnings because they are considered permanently reinvested.

The Company received a return of paid up capital distribution of $13,729 from its Canadian operations during 2006. This distribution has been accounted for as a distribution from earnings and profits for US income tax purposes. The distribution generated a foreign tax credit of $7,118 which the Company expects to fully utilize in 2006.


NOTE 15.	Related Party Transactions

During 2006, the Company paid $622 to Cochran, Caronia & Co. for investment banking advisory services in connection with the sale of its Book and Publishing operations — SeeNote 4- Discontinued Operations. During 2005, the Company paid $800 to Cochran, Caronia & Co. for investment banking advisory services in connection with the acquisition of Seven Worldwide Holdings, Inc. Len Caronia, who is a director of Schawk, Inc., is a partner of Cochran, Caronia & Co.

A receivable of approximately $4 and $21 from Geneva Waterfront, Inc., which is owned by a stockholder of the Company, is included in other assets at December 31, 2006 and 2005, respectively.

The Company also leases land and a building from a related party. See Note 16 — Leases and Commitments.


NOTE 16.	Leases and Commitments

The Company leases land and a building in Des Plaines, Illinois from a related party. Total rent expense incurred under this operating lease was $696 in 2006, $687 in 2005 and $673 in 2004.

The Company leases various plant facilities and equipment under operating leases that cannot be cancelled and expire at various dates through September 2023. Total rent expense incurred under all operating leases was approximately $16,028, $14,216 and $5,149, for the years ended December 31, 2006, 2005 and 2004, respectively.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

Future minimum payments under leases with terms of one year or more are as follows at December 31, 2006:


	Capital		Operating
	Leases		Leases

2007	$	31	$	15,847
2008		13		12,264
2009		—		10,063
2010		—		7,354
2011		—		4,747
Thereafter		—		20,790

	$	44	$	71,065

Less: Amounts representing interest		3

		41
Less: Current portion		29

	$	12

The Company has a deferred compensation agreement with the Chairman of the Board dated June 1, 1983 which was ratified and included in a restated employment agreement dated October 1, 1994. The agreement provides for deferred compensation for 10 years equal to 50% of final salary and was modified on March 9, 1998 to determine a fixed salary level for purposes of this calculation. The Company has a deferred compensation liability equal to $815 at December 31, 2006 and December 31, 2005, which is included in Other long-term liabilities on the Consolidated Balance Sheets. The liability was calculated using the net present value of ten annual payments at a 6% discount rate assuming, for calculation purposes only, that payments begin one year from the balance sheet date.

The Company also has a non-qualified income deferral plan for which certain highly-compensated employees are eligible. The plan allows eligible employees to defer a portion of their compensation until retirement or separation from the Company. The plan is unfunded and is an unsecured liability of the Company. The Company’s liability under the plan was $724 and $367, respectively, at December 31, 2006 and December 31, 2005 and is included in Other long-term liabilities on the Consolidated Balance Sheets.


NOTE 17.	Employee Benefit Plans

The Company has various defined contribution plans for the benefit of its employees. The plans provide a match of employee contributions based on a discretionary percentage determined by management. The matching percentage of wages (as defined) for the legacy Schawk 401K Plan was 5.0% in 2006, 2005 and 2004. The matching percentage of wages for the legacy Seven Worldwide 401K Plan for 2005 was 3.0%, with a one thousand dollar annual maximum company contribution per participant. The participants of the legacy Seven Worldwide 401K Plan were transferred to the Schawk 401K Plan on January 1, 2006. Contributions to the plans were $4,070, $2,834 and $1,942 in 2006, 2005 and 2004, respectively. In addition, the Company’s European subsidiaries contributed $811 and $518 to several defined-contribution plans for their employees in 2006 and 2005, respectively.

The Company is required to contribute to certain defined benefit union pension plans under various labor contracts covering union employees. Pension expense related to the union plans, which is determined based upon payroll data, was approximately $1,543, $1,260 and $984 in 2006, 2005 and 2004, respectively.

The Company established an employee stock purchase plan on January 1, 1999 that permits employees to purchase common shares of the Company through payroll deductions. During 2006, the Company issued new shares at a 5% discount from theend-of-quarter closing market price of the Company stock. Prior to 2006, The Company issued new shares at a discount of 15%, based upon the lower of thebeginning-of-quarter orend-of-quarter closing market price of the Company stock. The number of shares issued for this plan was 54

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

in 2006, 85 in 2005 and 63 in 2004. The discount from market value for the shares issued was $54 in 2006, $245 in 2005 and $132 in 2004.

The Company has collective bargaining agreements with production employees representing approximately 13% of its workforce. The significant contracts are with local units of the Graphic Communications Conference of the International Brotherhood of Teamsters, the Communications, Energy & Paperworkers Union of Canada and the GPMU union in the UK and expire in 2007 through 2010. The percentage of employees covered by contracts expiring within one year is approximately 5%.


NOTE 18.	Stock Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),“Share-Based Payments,”(“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method, no share-based compensation expense related to stock option awards granted to employees had been recognized in the Company’s Consolidated Statements of Operations, as all stock option awards granted under the plans had an exercise price equal to the market value of the Common Stock on the date of the grant.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the year ended December 31, 2006 are $1,059 and $648 lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the year ended December 31, 2006 were both $0.02 lower than if the Company had continued to account for share-based compensation under APB 25.

2006 Long-Term Incentive Plan

Effective May 17, 2006, the Company’s stockholders approved the Schawk Inc 2006 Long-Term Incentive Plan. The 2006 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based awards and other cash and stock-based awards to officers, other employees and directors of the Company. The total number of shares of common stock available for issuance under the 2006 Plan is 856 as of December 31, 2006. No additional shares have been reserved for issuance under the 2006 Plan.

During the year ended December 31, 2006, the Company issued 119 stock options and 25 restricted shares under the 2006 Long-Term Incentive Plan.

Options

The Company has granted stock options under several share-based compensation plans. The Company’s 2003 Equity Option Plan provided for the granting of options to purchase up to 5,252 shares of Class A common stock to key employees. The Company also adopted an Outside Directors’ Formula Stock Option Plan authorizing unlimited grants of options to purchase shares of Class A common stock to outside directors. As discussed above, the Company’s 2006 Long-Term Incentive Plan provides for the issuance of stock options, along with other types of

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

share-based awards. Options granted under all these plans have an exercise price equal to the market price of the underlying stock at the date of grant and are exercisable for a period of ten years from the date of grant. Options granted pursuant to the 2003 Equity Option Plan and Outside Directors Stock Option Plan vest over a two-year period; options granted pursuant to the 2006 Long-Term Incentive Plan vest over a three-year period.

During 2006, the Company issued 25 stock options to its directors under the Outside Directors Stock Option Plan.

The Company recorded $1,003 of compensation expense relating to outstanding options during the year ended December 31, 2006. No compensation expense was recorded related to outstanding options during the years ended December 31, 2005 and 2004.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.

The following assumptions were used to estimate the fair value of options granted during the years ended December 31, 2006, 2005 and 2004, using the Black-Scholes option-pricing model:


	Year Ended December 31,
	2006	2005	2004

Expected dividend yield	0.70% - 0.76%	0.70%	0.90% - 1.00%
Expected stock price volatility	27.33% - 27.40%	19.78% - 20.34%	16.60%
Risk-free interest rate range	4.28% - 4.83%	4.0%	4.0%
Weighted-average expected life	6 years	7 years	7 years
Forfeiture rate	2.65%	na	na
Total fair value of options granted	$870	$3,057	$2,097

The following table summarizes the Company’s activities with respect to its stock option plans for 2006, 2005 and 2004 (in thousands, except price per share and contractual term):


				Weighted Average		Weighted Average
	Number of			Exercise Price		Remaining		Aggregate
	Shares			per Share		Contractual Term		Intrinsic Value

Outstanding December 31, 2003		2,895		$	9.49
Granted		576		$	14.21
Exercised		(360	)	$	10.20
Cancelled		(28	)	$	9.47

Outstanding December 31, 2004		3,083		$	10.29
Granted		574		$	18.79
Exercised		(324	)	$	9.54
Cancelled		—			—

Outstanding December 31, 2005		3,333		$	11.73
Granted		144		$	17.75
Exercised		(326	)	$	9.84
Cancelled		—			—

Outstanding December 31, 2006		3,151		$	12.11		5.40	$	23,418
Vested at December 31, 2006		2,825		$	11.50		4.97	$	22,719
Exercisable at December 31, 2006		2,825		$	11.50		4.97	$	22,719

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

The weighted-average grant-date fair value of options granted during the years ended December 31, 2006, 2005 and 2004 was $6.02, $5.48 and $3.64, respectively. The total intrinsic value for options exercised during the years ended December 31, 2006, 2005 and 2004, respectively, was $4,193, $4,358 and $1,543.

Cash received from option exercises under all plans for the years ended December 31, 2006, 2005 and 2004 was approximately $3,175, $3,050 and $3,675, respectively. The actual tax benefit realized for the tax deductions from option exercises under all plans totaled approximately $1,662, $1,657 and $0, respectively, for the years ended December 31, 2006, 2005 and 2004.

The following table summarizes information concerning outstanding and exercisable options at December 31, 2006:


Options Outstanding							Options Exercisable
			Weighted Average						Weighted
			Remaining		Weighted				Average of
	Number		Contractual Life		Average		Number		Exercisable
Range of Exercise Price	Outstanding		(Years)		Exercise Price		Exercisable		price

$6.20 - $8.26		279		2.1	$	7.73		279	$	7.73
8.26 - 10.33		1,412		4.4		9.29		1,412		9.29
10.33 - 12.39		192		2.3		11.30		192		11.30
12.39 - 14.45		526		7.2		14.20		525		14.20
14.45 - 16.52		68		1.8		14.92		68		14.92
16.52 - 18.58		124		9.6		17.46		3		18.18
18.58 - 20.65		550		8.3		18.82		346		18.81

		3,151						2,825

As of December 31, 2006, there was $808 of total unrecognized compensation cost related to nonvested options outstanding. That cost is expected to be recognized over a weighted average period of 2 years. A summary of the Company’s nonvested option activity for the year ended December 31, 2006 is as follows (in thousands, except price per share and contractual term):


				Weighted Average
	Number of			Grant Date
	Shares			per Share

Nonvested at January 1, 2006		570		$	4.85
Granted		144		$	6.02
Vested		(388	)	$	4.58
Forfeited		—

Nonvested at December 31, 2006		326		$	5.70

Restricted Stock

As discussed above, the Company’s 2006 Long-Term Incentive Plan provides for the grant of various types of share-based awards, including restricted stock. During the year ended December 31, 2006, the Company granted 25 shares of restricted stock pursuant to this plan. Restricted shares are valued at the price of the common stock on the date of grant and vest at the end of a three year period. During the vesting period the participant has the rights of a shareholder in terms of voting and dividend rights but is restricted from transferring the shares. The expense is recorded on a straight-line basis over the vesting period.

The Company recorded $56 of compensation expense relating to restricted stock during the year ended December 31, 2006. No compensation expense was recorded related to restricted stock during the years ended December 31, 2005 and 2004.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)

A summary of the restricted share activity for the year ended December 31, 2006 is presented below:


			Weighted Average
	Number of		Grant Date
	Shares		Fair Value

Outstanding at January 1, 2006		—		—
Granted		25	$	17.43
Forfeited		—

Outstanding at December 31, 2006		25	$	17.43

As of December 31, 2006, there was $365 of total unrecognized compensation cost related to the outstanding restricted shares that will be recognized over a weighted average period of 3 years.

Employee Share-Based Compensation Expense

The table below shows the amounts recognized in the financial statements for the year ended December 31, 2006 for share-based compensation related to employees. The expense is included in selling, general and administrative expenses in the Consolidated Statement of Operations.


	Year Ended
	December 31, 2006

Total cost of share-based compensation	$	1,059
Income tax		(411	)

Amount charged against income	$	648

Impact on net income per common share:
Basic	$	0.02
Diluted	$	0.02

There were no amounts related to employee share-based compensation capitalized as assets during the year ended December 31, 2006.

Pro Forma Employee Share-Based Compensation Expense

Prior to January 1, 2006, the Company accounted for share-based employee compensation arrangements in accordance with the provisions and related interpretations of APB 25. Had compensation cost for share-based awards been determined consistent with SFAS No. 123(R), the net income and earnings per share would have been adjusted to the following pro forma amounts (in thousands, except for per share data):


	Year Ended			Year Ended
	December 31, 2005			December 31, 2004

Net income, as reported	$	30,472		$	22,678
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,503	)		(1,064	)

Net income, pro forma	$	28,969		$	21,614

Earnings per share
Basic	$	1.19		$	1.05
Diluted	$	1.13		$	1.01
Pro forma earnings per share
Basic	$	1.13		$	1.00
Diluted	$	1.07		$	0.96

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)


NOTE 19.	Earnings Per Share

Basic earnings per share and diluted earnings per share are shown on the Consolidated Statements of Operations. Basic earnings per share are computed by dividing net income by the weighted average shares outstanding for the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares and common stock equivalent shares (stock options) outstanding for the period. There were no reconciling items to net income to arrive at income available to common stockholders.

The following table sets forth the number of common and common stock equivalent shares used in the computation of basic and diluted earnings per share:


	2006		2005		2004

Weighted average shares-Basic		26,393		25,529		21,603
Effect of dilutive stock options		1,002		1,434		912

Weighted average shares-Diluted		27,395		26,963		22,515

Options to purchase 20 shares of Class A common stock at an exercise price of $20.65 per share were outstanding at December 31, 2006 but were not included in the computation of diluted earnings per share because the options were anti-dilutive. The options expire on May 17, 2015.

There were no anti-dilutive options outstanding at December 31, 2005.

Options to purchase 68 shares of Class A common stock at exercise prices ranging from $14.66-$15.00 per share were outstanding at December 31, 2004 but were not included in the computation of diluted earnings per share because the options were anti-dilutive. The options expire at various dates through December 31, 2014.


NOTE 20.	Geographic Reporting

The Company operates in a single business segment, Digital Imaging Graphic Arts. During 2006, the Company operated primarily in three geographic areas: the United States, Europe and Canada. Summary financial information for continuing operations by geographic area for 2006, 2005 and 2004 is as follows:


							Other
	United States		Canada		Europe		Foreign		Total

2006
Sales	$	407,105	$	35,485	$	80,805	$	25,011	$	548,406
Long-lived assets		271,687		20,495		56,009		9,925		358,116
2005
Sales	$	421,503	$	35,849	$	82,021	$	22,732	$	562,105
Long-lived assets		289,941		18,917		44,820		6,231		359,909
2004
Sales	$	190,983	$	33,398	$	—	$	13,964	$	238,345
Long-lived assets		87,863		19,196		23,734		7,144		137,937

Sales are attributed to countries based on the point of origin of the sale. Approximately 9%, 10%, and 7% of total revenues came from the Company’s largest single client in the years ended December 31, 2006, 2005 and 2004, respectively. Long-lived assets are non-current assets that are identified with the operations in each geographic area and include property andequipment-net, goodwill, intangible assets and other non current assets.


NOTE 21.	Other Income

For the year ended December 31, 2005, a $507 gain representing proceeds of a life insurance policy on a former employee is included in Other income on the Consolidated Statement of Operations.

Schawk, Inc.

Notes to Consolidated Financial Statements — (Continued)


NOTE 22.	Quarterly Financial Data (unaudited)

Unaudited summarized financial data by quarter for 2006 and 2005, adjusted for the disposal of the Book and Publishing operations, is as follows:


	March 31,			June 30,		Sept 30,			Dec 31,			March 31,			June 30,			Sept 30,		Dec 31,
	2006			2006		2006			2006			2005			2005			2005		2005
	(In thousands, except per share amounts)

Net sales	$	133,754		$	140,095	$	134,779		$	139,778		$	119,180		$	145,229		$	151,644	$	146,051
Gross Profit		45,716			49,756		48,349			49,210			41,336			51,182			53,374		48,757
Income (loss) from continuing operations	$	5,215		$	8,296	$	8,206		$	7,176		$	5,799		$	8,440		$	8,156	$	7,292
Income (loss) from discontinued operations		(433	)		44		(57	)		(689	)		(235	)		(588	)		604		1,004

Net income	$	4,782		$	8,970	$	8,149		$	6,487		$	5,564		$	7,852		$	8,760	$	8,296

Earnings per share from continuing operations:
Basic	$	0.20		$	0.34	$	0.31		$	0.27		$	0.24		$	0.33		$	0.31	$	0.28
Diluted		0.19			0.32		0.30			0.26			0.23			0.31			0.29		0.27
Net earnings per share:
Basic	$	0.18		$	0.34	$	0.31		$	0.24		$	0.23		$	0.31		$	0.34	$	0.32
Diluted		0.17			0.32		0.30			0.24			0.22			0.29			0.32		0.30


NOTE 23.	Subsequent Events

On February 8, 2007, the Company executed a settlement agreement with Rhodes, Inc. (“Rhodes”). Rhodes was a customer of Seven Worldwide Inc. (“Seven”) and had filed for bankruptcy in November 2004, prior to the Company’s acquisition of Seven on January 31, 2005. In September of 2006, Rhodes filed a claim against the Company, seeking the return of $6,527 of preferential payments made to Seven prior to the Rhodes’ bankruptcy filing.

The settlement agreement provided for a payment by the Company to Rhodes in the amount of $1,100 in full settlement of all claims. A pre-acquisition contingency reserve in the amount of $4,100 had been recorded by the Company on the purchase date balance sheet of Seven to provide for an estimated settlement of this claim. An adjustment in the amount of $3,000 was recorded as of December 31, 2006 to reverse the portion of the reserve that was no longer needed. The adjustment is included in the Reserve reversal from litigation settlement line in the Consolidated Statement of Operations.


ITEM 9.	*CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.*

There were no changes in or disagreements on any matters of accounting principles or financial statement disclosure with our independent registered public accounting firm during our two most recent fiscal years or any subsequent interim period.


ITEM 9A.	*CONTROLS AND PROCEDURES.*

Evaluation of Disclosure Controls and Procedures

The Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by thisForm 10-K. The controls evaluation was conducted under the supervision of the Company’s Disclosure Committee, and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or furnishes under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management, under the supervision and with the participation of the principal executive officer and principal financial officer, of Schawk Inc. (the“Company”) is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Exchange ActRule 13a-15(f)(“Internal Controls”). The Company’s Internal Controls are designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles(“GAAP”). The Company’s Internal Controls include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations in any Internal Controls, no matter how well designed, misstatements due to error or fraud may occur and not be detected. Accordingly, even effective Internal Controls provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Management, under the supervision and with the participation of the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s Internal Controls as of December 31, 2006. Management’s assessment was based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has concluded that the Company’s Internal Controls were effective as of December 31, 2006 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.

Ernst & Young LLP, our independent registered public accounting firm, has audited the consolidated financial statements of the Company for the year ended December 31, 2006, and has also issued an audit report dated March 15, 2007, on management’s assessment of the Company’s Internal Controls, which is included in this Annual Report onForm 10-K.


/s/ David A. Schawk		/s/ James J. Patterson
President and		Senior Vice President and
Chief Executive Officer		Chief Financial Officer

Changes in Internal Control over Financial Reporting

In January 2006, the Company implemented a new global Enterprise Resource Planning (“ERP”) system, PeopleSoft. This new PeopleSoft ERP system, which replaced multiple legacy financial systems was the Company’s primary financial system during 2006 for all of its operations other than those in Europe. As a result of the implementation of this new ERP system, several of the Company’s internal controls over financial reporting and related processes were modified and / or redesigned to conform with and support the new ERP system. This new ERP system and the related processes were included within the scope of management’s assessment and testing of its internal controls for 2006.

Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting

The Board of Directors and Stockholders

Schawk, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Schawk, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Schawk, Inc. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Schawk, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Schawk, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Schawk, Inc. as of December 31, 2006, and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended, and subsidiaries and our report dated March 15, 2007 expressed an unqualified opinion thereon.

Ernst & Young LLP

Chicago, Illinois

March 15, 2007


ITEM 9B.	*OTHER INFORMATION.*

None.

PART III


ITEM 10.	*DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.*

The information contained in our proxy statement for the 2007 annual meeting of stockholders (the “2007 Proxy Statement”) regarding the Company’s directors and executive officers, committees of the Company’s board of directors, audit committee financial experts, Section 16(a) beneficial ownership reporting compliance and stockholder director nomination procedures under the captions and subcaptions “Election of Directors,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

The Company has adopted a code of ethics (the “Code of Ethics”), as required by the listing standards of the New York Stock Exchange and the rules of the SEC. This Code of Ethics applies to all of the Company’s directors, officers and employees. The Company has also adopted a charter for its Audit Committee. The Company has posted the Code of Ethics and the Audit Committee Charter on its website (www.schawk.com) and will post on its website any amendments to, or waivers from, its Code of Ethics applicable to any of the Company’s directors or executive officers. The foregoing information will also be available in print to any stockholder who requests such information.


ITEM 11.	*EXECUTIVE COMPENSATION.*

The information contained in our 2007 Proxy Statement under the captions and subcaptions “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” is incorporated herein by reference (except that the Compensation Committee Report shall not be deemed to be “filed” with the Securities and Exchange Commission).


ITEM 12.	*SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*

The information contained in our 2007 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference. The information regarding securities authorized for issuance under our equity compensation plans is incorporated herein by reference to Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities,” of thisForm 10-K.


ITEM 13.	*CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.*

The information contained in our 2007 Proxy Statement under the caption “Related Party Transactions” and the information related to director independence under the caption “Corporate Governance” is incorporated herein by reference.


ITEM 14.	*PRINCIPAL ACCOUNTANT FEES AND SERVICES.*

The information contained in our 2007 Proxy Statement under the caption “Fees for Services Provided by Independent Auditors” is incorporated herein by reference.

PART IV


ITEM 15.	*EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES*

(a) 1. The following financial statements of Schawk, Inc are filed as part of this report underItem 8-Financial Statements and Supplementary Data:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets — Years Ended December 31, 2006 and 2005

Consolidated Statements of Operations — Years Ended December 31, 2006, 2005, and 2004

Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 2005, and 2004

Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2006, 2005, and 2004

Notes to Consolidated Financial Statements — December 31, 2006

2. Financial statement schedules required to be filed by Item 8 of this form, and by Item 15(d) below:

Schedule II — Valuation and qualifying accounts.

3. Exhibits


		Incorporated Herein
		by Reference to

3.1	Certificate of Incorporation of Schawk, Inc., as amended.	Exhibit 4.2 to Registration StatementNo. 333-39113
3.3	By-Laws of Schawk, Inc., as amended.	Exhibit 4.3 to Registration StatementNo. 333-39113
4.1	Specimen Class A Common Stock Certificate.	Exhibit 4.1 to Registration StatementNo. 33-85152
10.1	Lease Agreement dated as of July 1, 1987, and between Process Color Plate, a division of Schawk, Inc. and The Clarence W. Schawk 1979 Children’s Trust.	Registration StatementNo. 33-85152
10.2	Lease Agreement dated as of June 1, 1989, by and between Schawk Graphics, Inc., a division of Schawk, Inc. and C.W. Properties.	Registration StatementNo. 33-85152
10.3*	Schawk, Inc. 1991 Outside Directors’ Formula Stock Option Plan, as amended.	Appendix C to Proxy Statement for the 2001 Annual Meeting of Stockholders (FileNo. 001-09335)
10.4*	Form of Clarence W. Schawk Amended and Restated Employment Agreement between Clarence W. Schawk and Schawk, Inc.	Registration StatementNo. 33-85152
10.5*	Form of David A. Schawk Amended and Restated Employment Agreement between David A. Schawk and Schawk, Inc.	Registration StatementNo. 33-85152
10.6	Letter of Agreement dated September 21, 1992, by and between Schawk, Inc. and Judith W. McCue.	Registration StatementNo. 33-85152
10.7*	Schawk, Inc. Retirement Trust effective January 1, 1996.	199610-K (FileNo. 001-09335)
10.8*	Schawk, Inc. Retirement Plan for Imaging Employees Amended and Restated effective January 1, 1996.	199610-K (FileNo. 001-09335)
10.9	Stockholder Investment Program dated July 28, 1995.	Registration StatementNo. 33-61375
10.10*	Schawk, Inc. Employee Stock Purchase Plan effective January 1, 1999.	Registration StatementNo. 333-68521


		Incorporated Herein
		by Reference to

10.11	Note Purchase Agreement dated December 23, 2003 by and between Schawk, Inc and Massachusetts Mutual Life Insurance Company	200310-K (FileNo. 001-09335)
10.12	Credit Agreement dated June 11, 2004 by and between Schawk Inc. and Bank One, N. A.	Form 8-K dated June 16, 2004 (FileNo. 001-09335)
10.13	Schawk, Inc. 2001 Equity Option Plan	Appendix B to Proxy Statement for the 2001 Annual Meeting of Stockholders (FileNo. 001-09335)
10.14	Schawk, Inc. 2003 Equity Option Plan	Appendix A to Proxy Statement for the 2003 Annual Meeting of Stockholders (FileNo. 001-09335)
10.15	Stock Purchase Agreement by and among Schawk, Inc., Seven Worldwide, Inc., KAGT Holdings, Inc. and the Stockholders of KAGT Holdings, Inc. dated as of December 17, 2004.	Exhibit 2.1 toForm 8-K filed with the SEC on December 20, 2004 (fileno. 001-09335)
10.16	Business Sale Deed by and among Schawk, Inc., Schawk UK Limited, Sokaris XXI, S.L., Schawk Belgium B.V.B.A. and Weir Holdings Limited dated December 31, 2004.	Exhibit 2.1 toForm 8-K filed with the SEC on January 6, 2005 (fileno. 001-09335)
10.17	Amended and Restated Registration Rights Agreement, dated as of January 31, 2005, among Schawk, Inc. and certain principal stockholders of Schawk, Inc.	Exhibit 10.1 toForm 8-K filed with the SEC on February 2, 2005 (fileno. 001-09335)
10.18	Credit Agreement, dated as of January 28, 2005, among Schawk, Inc., certain subsidiaries of Schawk, Inc. from time to time party thereto, certain financial institutions from time to time party thereto as lenders, and JPMorgan Chase Bank, N.A., as agent.	Exhibit 10.4 toForm 8-K filed with the SEC on February 2, 2005 (fileno. 001-09335)
10.19	Note Purchase and Private Shelf Agreement, dated as of January 28, 2005, among Schawk, Inc., Prudential Investment Management, Inc., The Prudential Insurance Company of America, and RGA Reinsurance Company.	Exhibit 10.5 toForm 8-K filed with the SEC on February 2, 2005 (fileno. 001-09335)
10.20	First Amendment to Note Purchase Agreement, dated as of January 28, 2005, among Schawk, Inc. and the institutional purchasers party thereto.	Exhibit 10.6 toForm 8-K filed with the SEC on February 2, 2005 (fileno. 001-09335)
10.21	Description of executive compensation arrangements	Form 8-K filed with the SEC on June 6, 2005 (fileno. 001-09335)
10.22	Asset Purchase Agreement, dated as of March 3, 2006, by and between CAPS Group Acquisition, LLC and Schawk, Inc.	Exhibit 10.1 toForm 10-Q filed with the SEC on May 10, 2006
10.23	Schawk, Inc. 2006 Long-term Incentive Plan	Annex A to the Proxy Statement for the 2006 Annual Meeting filed with the SEC on April 21, 2006 (fileno. 001-09335))


		Incorporated Herein
		by Reference to

10.24	Description of executive equity awards	Form 8-K filed with the SEC on August 14, 2006 (fileno. 001-09335)
21 **	List of Subsidiaries.
23 **	Consent of Independent Registered Public Accounting Firm
31.1 **	Certification of Chief Executive Officer pursuant toRule 13a-14(a) andRule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2 **	Certification of Chief Financial Officer pursuant toRule 13a-14(a) and rule15d-14(a) of the Securities Exchange Act of 1934, as amended
32 **	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Represents management contract or compensation plan or arrangement required to be filed pursuant to Item 14 (c).

**		Document filed herewith.

Schawk, Inc.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS


	Year Ended December 31,
	2006			2005			2004
	(In thousands)

Balance beginning of year	$	5,940		$	1,632		$	1,449
Acquisitions		5			5,846			—
Provision (reversal of provision)		(180	)		(627	)		752
Deductions(1)		(1,252	)		(776	)		(569	)
Foreign currency adjustment		108			(135	)		—

Balance end of year	$	4,621		$	5,940		$	1,632


(1)		Uncollectible accounts written off, net of recoveries.

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Cook County, State of Illinois, on the 15th day of March 2007.

Schawk, Inc.


	By:	/s/ Clarence W. Schawk

Clarence W. Schawk

Chairman of the Board

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 15^th day of March 2007.


/s/ Clarence W. Schawk Clarence W. Schawk				Chairman of the Board and Director

/s/ David A. Schawk David A. Schawk				President, Chief Executive Officer, and Director (Principle Executive Officer)

/s/ A. Alex Sarkisian, Esq. A. Alex Sarkisian, Esq.				Executive Vice President, Chief Operating Officer and Director

/s/ James J. Patterson James J. Patterson				Senior Vice President and Chief Financial Officer (Principle Financial Officer and rinciple Accounting Officer)

/s/ John T. McEnroe, Esq. John T. McEnroe, Esq.				Director and Assistant Secretary

/s/ Leonard S. Caronia Leonard S. Caronia				Director

/s/ Judith W. McCue, Esq. Judith W. McCue, Esq.				Director

/s/ Hollis W. Rademacher Hollis W. Rademacher				Director

/s/ Michael G. O’Rourke Michael G. O’Rourke				Director

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	7th grade Avg

Schawk (SGK) Inactive 10-K2006 FY Annual report

Content analysis