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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-9335
SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
708-827-9494
(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
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CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE
$.008 PAR VALUE
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation 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 this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value on March 1, 1994, of the voting stock held by
non-affiliates of the Registrants was approximately $60,472,041.
The number of shares outstanding of each of the issuer's classes of common
stock as of March 1, 1995, are:
19,175,840 shares, Common Stock, $.008 par value
139,737 shares, Class B Common Stock, $.05 par value
DOCUMENTS INCORPORATED BY REFERENCE
PART AND ITEM NUMBER OF FORM 10-K INTO WHICH
DOCUMENT INCORPORATED.
------------------------------------------- ---------------------------------------------------------
1. Joint Proxy Statement for the 1995 Annual Part III, Items 10, 11, 12 and 13.
Meeting of Stockholders to be held May 17,
1995 (the "Joint Proxy Statement").
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SCHAWK, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
DECEMBER 31, 1994
PAGE
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PART I
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Item 1. Business 2
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
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Item 5. Market for the Registrants'
Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 53
PART III
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Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Transactions 54
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 54
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PART 1
ITEM 1. BUSINESS
THE COMPANY
Schawk, Inc. (the "Company") ("Schawk") has two operating divisions, the
Graphics Group and the Plastics Group. The Graphics Group is a leader in the
prepress industry in the United States primarily serving consumer products
businesses. The Graphics Group offers a complete line of prepress services and
products for the production of consumer product packaging and related marketing
and advertising materials. The Plastics Group manufactures injection molded
plastic filtration, custom specialty plastic and thermoformed products.
Schawk was founded in 1953 as a small platemaking venture operating from
one location in Chicago, Illinois. Under the direction of Clarence W. Schawk
and his son, David A. Schawk, Schawk grew to a diversified international
corporation with operations in the United States, Puerto Rico and Europe
employing more than 1,600 personnel. Over the past 20 years, Schawk developed
an active acquisition program and successfully integrated more than 25
businesses into Schawk's operations while streamlining overhead.
In 1992, in order to capitalize on its growing expertise in the plastics
industry, Schawk effectively acquired a controlling interest in Filtertek, Inc.
("Filtertek"). See "Recapitalization" for a description of the recent Merger of
Schawk with and into Filtertek. The Company intends to continue to expand
through acquisitions of well-managed companies with solid market positions,
established customer relationships and new technologies.
Effective December 30, 1994, the corporation previously known as Schawk,
Inc. ("Old Schawk") and certain affiliated corporations (collectively with Old
Schawk, the "Old Schawk Companies") were merged into the Registrant (formerly
known as "Filtertek, Inc.") in a transaction accounted for as a purchase
transaction. The surviving corporation in the merger was Filtertek, Inc. which
then changed its name to Schawk, Inc.; however, under applicable accounting
rules the historical financial statements of the Old Schawk Companies, rather
than the Filtertek, Inc. statements, will be treated as the financial
statements of the Registrant. The Registrant's operations consist of two
segments, its graphics business (the "Graphics Group") and its plastics
business (the "Plastics Group"). The Plastics Group is comprised primarily of
what had been the business of Filtertek, Inc. prior to the merger and the
Graphics Group is comprised primarily of what had been the business of the old
Schawk Companies.
Filtertek was formed in 1970 and was incorporated under the laws of the
State of Delaware. Prior to June 1, 1994, the shares of Class A Common Stock of
Filtertek (formerly known as Filtertek de Puerto Rico, Inc.) and the common
shares of the corporation formerly known as Filtertek, Inc. ("Old Filtertek")
were paired and were transferable and traded only as paired shares consisting
of one share of each company. At the Filtertek annual meeting of stockholders
held on May 31, 1994, stockholders approved a reorganization which provided for
the unpairing of the shares and merged Old Filtertek with a wholly-owned
subsidiary of Filtertek, resulting in the Class A Common Stock being the only
remaining exchange-traded class of stock.
The Company's principal executive offices are located at 1695 River Road,
Des Plaines, Illinois, 60018, and its telephone number is (708) 827-9494.
GRAPHICS GROUP
The Company has grown the Graphics Group through a combination of internal
growth and a series of acquisitions. The Company believes that its Graphics
Group is the leading producer of color prepress graphic arts services for the
consumer products packaging industry in the United States, particularly for
food and beverage producers. For more than 40 years, the Graphics Group has
provided comprehensive prepress services, including conventional, electronic
and desktop color separations, electronic production design, film preparation,
platemaking and press proofs for the three main printing processes:
lithography, flexography and gravure.
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The Graphics Group has particular expertise in preparing four-color films
from which plates are made for multi-million-unit production runs of consumer
products packaging. The Graphics Group functions as a vital interface between
its Fortune 500 consumer products customers and their converters in assuring
the production of consistent, high quality packaging materials in increasingly
shorter turnaround times. The Group's ability to provide high quality prepress
work in a short time frame makes it a valued player in new product introduction
and promotion teams. The Graphics Group also maintains archives of product
package layouts and designs, further improving its efficiency in accommodating
customers' packaging design changes and product line extensions. By continuing
to provide such high-end, value-added services, the Graphics Group commands a
significant share of the market for prepress services for the food and beverage
industry which uniquely positions it to benefit from positive industry trends,
such as labeling changes resulting from the adoption of the NLEA, the increased
number of SKU's and the use of packaging as a means of product promotion and
differentiation.
PLASTICS GROUP
The Plastics Group includes Filtertek, Plastic Molded Concepts, Inc.
("PMC") and Tek Packaging Group, Inc. (formerly known as Robinson Industries,
Inc. ("Robinson"), Fuzere Manufacturing Company, Inc., and the Fuzere Midwest
division).
The formation of the Plastics Group began in 1984 when Schawk acquired
Robinson, a supplier of visual packaging products and Schawk's first
acquisition outside the graphic arts industry. Because it capitalized on
Schawk's expertise in production package design and increased Schawk's
packaging capabilities, visual or blister packaging was a natural extension for
Schawk. Subsequently, Schawk expanded its plastic packaging capabilities with
various acquisitions and start-up ventures. Building on its expertise in the
plastics industry, and its experience in dealing with a large multinational
Fortune 500 client base, Schawk effectively acquired a controlling interest in
Filtertek in 1992.
Although the product and customer overlap between Schawk's and Filtertek's
core businesses was not extensive, Schawk perceived Filtertek as a significant
new vehicle for growth. The plastic filter industry is currently characterized
by many of the trends and dynamics that pervaded the prepress graphic business
two decades ago. The filter business is an industry comprised of many small,
niche operations and presents significant consolidation and acquisition
opportunities. The manufacturing and management skills of Schawk's senior
management team with respect to acquisition, customer service, employee
training and TQM are directly applicable to the Company's Plastics Group
business.
Management believes that one of the Plastics Group's key competitive
advantages lies in its advanced designs and patented manufacturing processes,
which have enabled the Group to occupy strong positions in each of the niche
markets it serves. New product applications provide opportunities for growth in
the various markets served by the Plastics Group, and the Plastics Group also
seeks to diversify into new markets for its products and services. For example,
through strategic alliances, the Plastics Group has recently achieved unique
access to the dental and after-market automotive market segments.
RECAPITALIZATION
In December 1994, Filtertek and the Schawk Companies consummated a
Recapitalization consisting of the following transactions resulting in the
Merger of Filtertek and the Schawk Companies to form the Company.
MERGER
Effective as of December 30, 1994, the Schawk Companies were merged (the
"Merger") into Filtertek pursuant to an Amended and Restated Agreement and Plan
of Merger dated November 23, 1994, by and among Schawk, Flexo Graphics, Lincoln
Graphics and Filtertek. The Merger was approved by more than the requisite 66
2/3% vote of the independent Filtertek stockholders at the special meeting of
stockholders of the Company held on December 23, 1994. Independent Filtertek
stockholders for these purposes were those stockholders other than
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Schawk, its affiliates and the Schawk Family. Upon consummation of the Merger,
the Company acquired title to all of the assets of the Schawk Companies and
assumed all of the liabilities of those corporations. The Schawk Family
received as Merger consideration an aggregate of 16,245,399 shares of Class A
Common Stock in exchange for all of the outstanding common stock of each of the
Old Schawk Companies (13,142,528 shares for Old Schawk; 1,884,466 shares for
Lincoln Graphics; and 1,218,405 shares for Flexo Graphics); 5,207 shares of the
Company's mandatorily redeemable Series B Preferred Stock in exchange for all
of the Series B preferred stock of Old Schawk; and 22,000 shares of the
Company's Series A Preferred Stock in exchange for all of the outstanding
shares of Series A preferred stock of Old Schawk.
In connection with the Merger, Filtertek stockholders also approved an
amendment to the Company's Amended Certificate of Incorporation which increased
the authorized shares of Class A Common Stock from 20,000,000 shares to
40,000,000 shares.
BUSINESS
The Graphics Group is one of the leading providers of prepress graphic
arts services in the United States for consumer products businesses. The
Graphics Group offers a complete line of prepress services and products,
including electronic production design, color separations, film proofs, plate
and laser-engraved rollers for the manufacture of product packaging and related
marketing and advertising materials.
The Plastics Group manufactures injection molded plastic filtration,
custom specialty plastic and thermoformed products.
INDUSTRY BACKGROUND
GRAPHICS GROUP. Prepress services are generally defined as those tasks
involved in preparing an image for duplication by any of several types of
printing processes. Providers of prepress services, such as the Company's
Graphics Group, interface between consumer products manufacturers and the
converters used by those businesses to produce packaging, for example, product
cartons, boxes, trays, cans, containers, packaging labels and related
promotional materials.
PREPRESS SERVICES DO NOT ENTAIL THE ACTUAL PRINTING OR PRODUCTION OF SUCH
PACKAGING MATERIALS, BUT RATHER INCLUDE THE VARIOUS PREPARATORY STEPS SUCH AS
COLOR SEPARATION AND OTHER PHOTOPLATEMAKING SERVICES, AS WELL AS PRODUCTION
DESIGN, FOR USE IN LITHOGRAPHY, FLEXOGRAPHY, AND GRAVURE, WHICH ARE THE
PRINCIPAL PRINTING PROCESSES CURRENTLY USED IN THE GRAPHIC ARTS INDUSTRY.
"COLOR SEPARATION" REFERS TO PREPARING COLOR IMAGES, TEXT AND LAYOUT FOR THE
PRINTING PROCESS.
The Graphics Group's services consist principally of the conventional,
electronic and digital production, to customer specifications, of color
separations and color proofs. These products are an intermediate step between
creative artwork and the actual printing of graphic materials. The production
of color separations requires skilled, highly trained craftsmen applying
various image manipulation, assembly and color filtering techniques in order to
preserve the integrity of the original image when translated into print and to
ensure consistency of the printed materials.
Prepress services such as color separation work have traditionally been
performed by skilled craftsmen almost entirely by hand using what is known as
the "conventional" method. With the development of electronic technology,
prepress firms such as the Graphics Group have become increasingly
computerized, relying instead on digitized imaging, in which artwork is scanned
using laser optics, digitized, then output to film, tape, or disc, according to
customer specifications. On an increasing basis, the material being supplied by
the customers is presented in a digitized format on a variety of media,
including tape, floppy disk and CD ROM. The image can also be manipulated
electronically (as, for example, to substitute a different background in a
particular picture or to enhance shading or lighting of the graphics). Given
the increased computerization of the prepress services industry, highly trained
technicians are essential to the quality of the end product.
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The prepress services industry is highly fragmented among many market
participants which tend to be smaller companies. Providers of prepress services
include independent color separators, such as the Graphics Group, and
converters. The Graphics Group specializes in prepress services relating to the
packaging and promotional needs of customers in the food and beverage industry,
particularly high-end customers who need to ensure nationwide consistency in
the packaging of their products.
Each time a manufacturer redesigns its packaging or wishes to use
packaging as a promotional vehicle, new color separation work is required.
Product extensions and a high level of packaging redesign, prompted by several
trends, have contributed to an increasing volume of color separation work for
the consumer products industry. These trends include: (i) consumer products
companies are producing increasing numbers of SKU's in order to gain shelf
space and market share; (ii) food and beverage producers are increasingly
utilizing package design and point-of-purchase promotions to market their
products; (iii) the disclosure requirements of the NLEA, which have heightened
consumer awareness of product ingredients; and (iv) consumers' increasing
preferences for healthier, reformulated food and beverage products. To
capitalize on these trends, management believes that the Graphics Group must
continue to be able to afford customers the ability to make numerous changes
and enhancements with shorter turnaround times than ever before. Accordingly,
the Graphics Group continues to invest in the rapidly emerging technology and
is committed to the continuing education of its employees and customers.
The development of lower cost desktop publishing systems has increased the
potential for competition in the prepress industry by lowering barriers to
entry relating to equipment costs. However, this development has also resulted
in the proliferation of software packages, many of which create new
capabilities for the equipment. This frequent change in industry software
necessitates constant training and education. The Graphics Group believes that
its ability to provide quick turnaround time, dependability and value-added
training and education programs will continue to give the Group a competitive
advantage in serving customers who require high volume, high quality product
imagery.
PLASTICS GROUP. The business of the Plastics Group consists primarily of
the design, manufacture and sale of specialty plastic insert injected
filtration devices, custom injection molded components and thermoform packaging
for automotive, healthcare, consumer, industrial and other markets. The
industry in which the Plastics Group participates is characterized by many of
the trends that pervaded the graphics industry two decades ago. The industry is
highly fragmented with many niche players, providing significant consolidation
opportunities in this market.
Prior the mid-1960s, most filters were manufactured from metal components
by stamping, assembling, crimping and welding metal frames to form filter
elements. These metal filters were relatively expensive, excessively heavy, of
varying levels of quality, and subject to fatigue and corrosion. However, in
the mid-1960s, fabricated metal filter products began to be replaced with
lighter weight, more efficient plastic filter products. The development of new
membranes and synthetic media, such as polyester and nylon, paralleled the
rapidly developing technology of thermoplastic resins to provide significantly
improved filters. These new materials made possible low cost, disposable
filters with high filtration levels that were compatible with a wider range of
fluids and gasses. These enhancements expanded the demand for lightweight, high
filtration devices. The Plastics Group has introduced numerous new products and
entered several new markets to capitalize on this increased demand. The group's
volume is also growing as new applications for filtration devices are being
developed on an ongoing basis in response to recent developments for
healthcare, automotive and environmental applications.
The insert injection molding techniques used by the Plastics Group involve
inserting filter media, such as woven screen, membrane or felt which have been
preformed and precut, into an injection mold. The mold is closed and
thermoplastic resin is injected, framing and bonding the media to form a
unitized filter. The Plastics Group's molds are able to produce as many as 128
filters per cycle, depending on size, complexity and cost targets. Other
processing technologies exist whereby injection molded component parts are
subjected to a secondary process, such as sonic, vibration or spin welding,
that assembles media into component parts to form completed filtration devices.
Other devices, such as light gauge thermoform products and packages, are
manufactured from raw materials with highly sensitive properties that require
special handling.
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The synthetic fiber, filter paper, membrane and metallic cloth media that
the Plastics Group works with satisfy a wide range of customer requirements for
particle control, tensile strength, flow rates and corrosion resistance.
Thermoplastic resins also are used in designing custom molded frames. The
selected resin is often coated with additives to augment certain desired
properties. Advanced design and manufacturing techniques employed by the
Plastics Group, including such patented processes as overmolding multi-layer
encapsulation and two-piece, in-line filter construction, provide greater
latitude, structural integrity, and cost-effectiveness required by today's low-
or zero-defect markets.
In order to protect their equipment and to ensure the efficiency of the
devices being protected or the effectiveness of the device itself, a number of
the Plastics Group's customers, particularly in the automotive and healthcare
markets, require inspection of each filtration device produced, as opposed to
random sample inspections. Because of the time and expense involved in
establishing manufacturing processes compatible with such requirements,
competitors of the Plastics Group face a potential barrier to entry in these
markets which require a high volume of precision devices coupled with short
cycle times and 100% inspection.
The Plastics Group also provides visual packaging products, including
blister packaging, which is an increasingly popular means of displaying
consumer products for sale in hardware, convenience, warehouse and drug stores
and other similar retail outlets. Batteries, cosmetics, hardware items,
electrical components, razor blades and toys are among the large variety of
products sold in clear plastic blisters. The Plastics Group believes that the
visual packaging market offers considerable growth opportunity.
STRATEGIC OUTLOOK
The Company's goal is to enhance its leadership positions in the prepress
graphic arts and plastic injection molded filtration device markets, and to
strengthen its positions in the specialty plastics and thermoforming markets.
Key aspects of the Company's business strategy to achieve these goals include
the following:
- ACQUISITIONS. To create the economies of scale required to support
the cost of its business strategy, the Company has developed an
active acquisition program. The Company's sustained profitability and
ready access to capital have enabled it to make strategic
acquisitions. In its 41-year history, the Company has successfully
integrated more than 25 acquired businesses into its operations while
streamlining overhead. These successful acquisitions are elements of
a strategic plan to acquire market niche companies with Fortune 500
customer lists, excellent customer service or proprietary products
and solid management which receives performance incentives to
continue to grow the business. The Company intends to continue
expanding through acquisitions of well-managed companies with solid
market positions and established customer lists and new technologies.
The Company believes that emphasis on complementary acquisitions of
companies serving targeted markets will allow it to broaden its
product offerings and provide its customers with a single source for
prepress and/or plastics products. The Company believes it has
greater versatility in manufacturing and in serving its customers
than smaller, less integrated competitors, and that this versatility
will result in greater opportunities for internal growth as well as
enhancing the Company's image as an attractive purchaser for
potential acquisition candidates. The Company believes that there
continue to be a number of attractive acquisition candidates in the
fragmented consolidating industries in which it operates,
particularly packaging, filtration and specialty plastics. The
Company expects to strengthen its market positions by applying its
management and operational practices, which have been successful in
its graphic arts businesses, to newly acquired businesses.
- MANAGEMENT PHILOSOPHY. The Company believes that its management
philosophy has resulted in improved market share and margin
performance in its Graphics Group. The Company has instilled this
same philosophy in the Plastics Group which, it believes, has
contributed to recent performance improvement. This philosophy
incorporates the following key concepts:
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- TOTAL QUALITY MANAGEMENT. A cornerstone of the Company's management
philosophy is its emphasis on high quality. The Company is committed
to the principles of TQM and stresses to all employees, regardless of
level, the importance of striving to meet or exceed customer
expectations. Historically, the Graphics Group has made the necessary
investments in employee training and technological improvements to
achieve this level of performance. Since the formation of the
Plastics Group, one of management's primary initiatives has been to
instill this philosophy in that Group. Through the Company's
application of TQM, employees have adopted the necessary commitment
to customer service that is essential to quick turnaround and
consistent delivery of high quality products and services.
Management believes that the Company's commitment to TQM is essential
to customer satisfaction by decreasing the likelihood of a defect in
or failure of any of the Company's products or services which could
prove costly to a customer. Such increased quality results in
decreased costs to customers and the Company in the long run.
Consequently, the Company is driven to make the necessary investments
to ensure that these products and services continue to meet the
highest quality standards.
- CUSTOMER SERVICE. Another key to the Company's management philosophy
has been its commitment to customer service. The Graphics Group
believes that this commitment has contributed to consistent increases
in its sales despite the growing availability to customers of
lower-cost graphic arts alternatives. Use of the latest computer
equipment and software, while providing the opportunity for quicker
turnaround, has placed greater reliance upon the accuracy of
formatting and information input methodologies. In order to ensure
this accuracy as early in the process as possible, well trained,
highly efficient customer service personnel are vital. The Company's
emphasis on on-site customer representatives, along with a "whatever
it takes" attitude, have further solidified existing graphics arts
customer relationships. Management believes that the Plastics Group
is beginning to reap similar rewards for its focus on customer
service.
- EMPLOYEE TRAINING AND INCENTIVES. The Company believes that its most
valuable assets are its employees because its ability to provide
customers with high quality products and services depends upon their
dedication and expertise. The Company provides extensive and frequent
training to keep its employees abreast of the latest technological
developments in the graphics arts and plastics industries. During
1994, for example, the Graphics Group provided an estimated 2,500
hours of in-house training to its employees customers and customers'
suppliers. In 1992, in order to facilitate its employees' familiarity
with the latest technological developments, the Company established a
program pursuant to which all employees were eligible to receive
interest-free loans of up to $2,500 for the purchase of personal
computers. By maintaining high levels of employee satisfaction, the
Company has secured consistently high levels of responsiveness to its
customers. In order to reward employees for superior performance, the
Company has developed incentive compensation programs, including an
economic value-added ("EVA") bonus program.
- TECHNICAL EXPERTISE. The Company is able to provide its customers
with high quality products and services and quick response time
because of its effective utilization of state-of-the-art equipment
and systems. The Company is dedicated to remaining on the "cutting
edge" of prepress and plastics molding technologies by participating
in innovations in operations and equipment. As part of this
commitment to new technology, the Company has historically worked
with software developers to create software that fully addresses the
Company's needs and currently acts as a test site for new software
products. In order to facilitate the exchange of information among
its various facilities, in 1991, the Graphics Group established the
Schawk Technical Advisory Board for the purpose of coordinating the
research and evaluation of new technologies in the graphic arts
market industry.
- EXPLOITATION OF INDUSTRY TRENDS. The Company enjoys a successful
history of strengthening its market positions by identifying and
exploiting industry trends. For example, while other prepress
specialists targeted the highly competitive publishing and
once-dominant advertising markets, the Graphics Group carved out its
own high-end, niche market in packaging. Consequently, the Group was
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uniquely positioned, as a premium single-source provider of prepress
services, to benefit as consumer products manufacturers began to
downsize and outsource packaging functions. This unique position has
enabled the Graphics Group to capitalize on the increased use of
packaging as a means of product differentiation and marketing.
Further, the Graphics Group believes that its commitment to customer
service and its broad array of premium services demonstrate to
customers the value of using the Graphics Group instead of performing
prepress work in-house. The Graphics Group has benefited from the
trends in the food and beverage industries packaging toward extended
product lines and increased SKU's to capture additional shelf space
and market share and increased use of packaging for promotional
purposes. The Company believes that trends in the healthcare and
consumer products industries present similar opportunities for the
Plastics Group. For example, recent heightened awareness of potential
air and water contamination provides new product opportunities for
the Plastics Group's filtration business.
PRODUCTS AND SERVICES
GRAPHICS GROUP. The Graphics Group offers comprehensive, high quality
prepress services. The Graphics Group's facilities produce conventional,
electronic and desktop color separations, electronic production design, film
preparation, platemaking and press proofs for the three main printing
processes: lithography, flexography and gravure. The Graphics Group's services
consist principally of the production, to customer specifications, of color
separations and color proofs produced conventionally, electronically and
digitally. These products are an intermediate step between creative artwork and
the actual printing of graphic materials. The production of color separations
requires skilled, highly trained craftsmen applying various color filtering,
photographic and assembly techniques. Increasingly, these techniques
incorporate highly sophisticated computerized processes.
The preparation of film, digital tape and press proofs for lithography and
other printing processes accounted for approximately 80.0% of the Graphics
Group's net sales in 1994. The balance of the Group's business consisted of the
production of printing plates for lithographic printing, photopolymer, and
laser-engraved rubber plates and cylinders used in the flexographic printing
process. The Graphics Group focuses on customers in the consumer products
industry, where its ability to provide a high degree of image quality and
consistency afford it a competitive advantage. Image quality and consistency
and ever-shortening response time are becoming increasingly important to
consumer products manufacturers as packaging assumes a greater role in product
promotion. While prepress work represents a relatively small percentage of
overall packaging costs, the visual impact (and, consequently, the
effectiveness) of product packaging is largely dependent upon the quality of
the prepress work.
As technology has created opportunities for quicker production
turnarounds, most of the Graphic Group's Fortune 500 consumer products
customers have capitalized on this opportunity to modify their packaging more
frequently in order to customize their promotional activities on a regional,
seasonal or sporting event basis. This activity has greatly increased the
importance of maintaining the integrity of the electronic image design and text
data for each package variation. The Graphics Group has the capacity to
maintain past, current and future package design data and, accordingly, serves
as a quick access library of accurate file data for its customers.
The Graphics Group's services are distinguished by a combination of the
following core competencies:
- TECHNICAL EXPERTISE. The Graphics Group emphasizes continuing
training and development of its employees to ensure their effective
utilization of state-of-the-art equipment and systems. Through
programs offered at the Company-owned training center, at customers'
on-site locations and at various national and regional seminars, the
Graphics Group has had success in elevating its customers' standards
to levels requiring the superior technical expertise and capabilities
that distinguish its services.
- ACTIVE INTERFACE WITH CONVERTERS. The Graphics Group coordinates
extensively with the converters for its customers' product packages
to ensure uniformity in color and appearance. Individual printing
presses may vary in the application of ink, affecting the quality of
the color image. In order to
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minimize the effects of these variations, the Graphics Group makes
necessary adjustments to its color separation work to account for
irregularities or idiosyncrasies in the printing presses of its
customers' converters. The Graphics Group strives to afford its
customers total control over their graphic arts processes with
customized and coordinated service designed to ensure that the color
quality, accuracy and consistency of a customer's printed matter is
maintained.
- QUICK RESPONSE TIME. The ability to complete prepress services for
packaging designs in a short period of time is essential to the
Graphics Group's success. In connection with the introduction of a
new or reformulated product, the Group is often required to complete
prepress packaging work in as little as 24 hours. The Graphics Group
is able to provide its customers with a short turnaround time largely
because of its state-of-the-art prepress technologies as well as its
extensive archive of its customers' package designs. The Graphics
Group also places its employees on-site with customers to facilitate
development of packaging designs which will convert easily into
attractive packaging.
PLASTICS GROUP. The Plastics Group currently produces more than 1,200
different filtration products ranging from highly sophisticated disposable
medical and automotive filters to simple filters used to protect equipment from
dust and water contamination. Most of the Plastics Group's filters are produced
utilizing insert injection molding techniques, in which the filtration media is
encapsulated in a plastic housing. The Plastics Group believes it is one of
the leading producers in the world of filtration devices manufactured through
the insert injection molding process.
The market for filtration devices has grown consistently as end-users
develop new applications in which filtration provides protection for people and
equipment and improves product safety and performance. Management believes that
one of the Plastics Group's primary strengths is its employment of advanced
design and manufacturing techniques, which provide broader latitude, greater
structural integrity and increased cost-effectiveness compared to more
conventional techniques.
Consistent with its emphasis on technological innovations, the Plastics
Group has developed numerous proprietary products and processes designed to
enhance the Plastics Group's competitive position. The Plastics Group owns
several significant patents, including a claim for the encapsulation of
membrane filters, a two-piece filter design, the encapsulation of multiple
layers of membrane, fuel injection nozzle filters, a process to hermetically
seal sump transmission filters, a design for European in-tank fuel filters, a
friction welding process, a needle-free access device for medical applications,
a medical check valve and a manufacturing component tray.
The Plastics Group's products are sold primarily to manufacturers in the
following four markets:
- AUTOMOTIVE. As the complexity of automotive systems has increased, so
has the demand for filtration. The two fastest growing filtration
applications for automobiles involve anti-lock braking ("ABS") and
powertrain-related systems. It is estimated that by the mid-to-late
1990s, ABS systems will be installed on almost all domestically
produced cars. The Plastics Group has made significant penetration in
the ABS market and will continue to have opportunities for additional
market share as these systems become required standard devices. The
Plastics Group's newly patented vibration welding process for
automatic transmission sump filters is becoming more widely accepted
at the original equipment manufacturer ("OEM") level given the
increased design flexibility, weight savings, recyclability and
increased performance the process provides over other technologies.
Given the lead time from design to introduction of new car models,
the Plastics Group has yet to realize significant revenue from this
filter. The transmission filter also has an aftermarket usage that
permits higher financial returns than the OEM market. To access the
automotive aftermarket, the Plastics Group entered into a strategic
alliance with one of the largest aftermarket distributors for
transmission filters, Raybesto/Allomatic, located in Sullivan,
Indiana. This agreement will afford the Plastics Group increased
market penetration in the aftermarket without diminishing the
Plastics Group's focus on the OEM market.
- HEALTHCARE. The Plastics Group's healthcare filters and devices are
mainly sold to OEMs in the industry. These products are incorporated
into finished products by the Plastics Group's customers and
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sold to end-users. The Plastics Group currently manufactures an
extensive range of healthcare products, from simple vent filter
devices to complex blood filters. The heightened awareness of disease
transmittal and contamination associated with blood transfer has
increased demand for blood filtration devices. The Plastics Group's
filter media encapsulation process is particularly important in that
it achieves the required uniform and complete sealing of delicate
filter media within the plastic housing. This process also allows the
sealing of plastic materials such as nylon and polypropylene, which
are difficult to seal with other types of processes.
Patent applications have been filed for a new family of needle-free
access connectors which can be used in drug infusion therapy as well
as in numerous other medical applications. In addition, in May 1994,
the Plastics Group entered into an alliance with SciTech Dental, Inc.
of Seattle, Washington, to market a new, patented dental water
filtration system designed to eliminate a variety of microbial
contaminants in dental water lines. The new filter was developed in
response to recent studies showing high levels of pathogens inside
dental unit water lines, that pose a health threat to patients and
dental workers. SciTech, which holds the patent on the new filter,
will be responsible for sales and marketing of this new device.
The Plastics Group also serves the healthcare market through the
design and production of thermoform packaging products meeting
specified sterilization requirements. In addition, the Plastics Group
produces light gauge thermoform products, including components
manufactured from raw materials with highly sensitive properties
requiring special handling, environmentally controlled clean room
manufacturing facilities or sterilization processes, for the
healthcare market.
- CONSUMER PRODUCTS. The Plastics Group's products sold to consumer
products manufacturers are principally point-of-purchase visual
packaging. "Blister" packaging, another product of the Plastics
Group, is an increasingly popular means of displaying consumer
products for sale in hardware, convenience, warehouse and drug stores
and other similar retail outlets. Thermoformed blister packaging is
produced by heat-sealing a clear plastic bubble, or blister, which
the Plastics Group's technicians have shaped and designed, onto
coated cardboard, or by sealing two-sided packages through heat or
microwave application. Batteries, cosmetics, hardware items,
electrical components, sporting goods and toys are among the large
variety of products sold in clear, thermoformed plastic packages. The
Plastics Group designs and manufactures a complete selection of
visual packaging in such forms as blisters, cards, clam shells,
tri-folds, trays and header and display cards. In addition, under the
tradename "Plasti-Chain," the Plastics Group manufactures finished
products such as plastic chains, stanchions, posts, brick and log
border edgings and other lawn and garden items, which it distributes
directly to retailers.
- INDUSTRIAL AND OTHER PRODUCTS. The Plastics Group sells more than 550
different products to OEMs for use in a variety of applications,
including appliances, computers, scientific equipment and farm
machinery. Specific products include filters and molded components
for coffee makers, dishwashers, tertiary water purification systems,
lawn mowers, outboard motors, small engines and numerous other
diverse applications. The Plastics Group also produces certain light
gauge thermoform products for the electronics industry. The Plastics
Group has capabilities in product design, tool design, prototype tool
construction, molding of production and prototype parts, and various
decorating and post molding operations.
RESEARCH AND DEVELOPMENT
GRAPHICS GROUP. The Graphics Group is dedicated to keeping abreast of and,
in a number of cases, initiating technological developments in its industry. To
build upon its leadership position, the Graphics Group is actively involved in
system and software technical evaluations of various computer and software
manufacturers and also independently pursues software development for
implementation at its operating facilities. The Graphics Group continually
invests in new technology designed to support its high quality prepress
services.
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The Graphics Group has established the Schawk Technical Advisory Board for
the purpose of researching and evaluating new technologies in the graphic arts
industry. The Advisory Board, which formally meets quarterly to review new
equipment and programs, facilitates the exchange of information among the
various facilities in the Graphics Group, thereby conserving time and money
spent in researching new technologies. Informal review and discussion of
technological developments, however, is ongoing.
The Graphics Group provides training to customers and employees alike on a
regular basis. In 1992, the Graphics Group established the Schawk Client
Service Consulting Group to offer customers desktop software training,
proprietary software development, and technical training designed for the
packaging industry. In 1993, the Graphics Group opened the Schawk Technical
Training and Education Center to offer industry desktop software training to
customers, certain vendors and employees. During 1994, the Graphics Group
presented four seminars to customers, and to many of their designers and
converters, and provided an estimated 2,500 hours of in-house training to its
employees.
PLASTICS GROUP. An important component of the Plastics Group's research
and development efforts involves coordination with customers in developing new
products designed to suit customer needs. In 1992, 1993 and 1994, research and
development expenditures were approximately $3.6 million, $3.7 million, and
$3.4 million respectively, substantially all of which amounts were effectively
reimbursed by customers. Development of a new product typically begins with
customer contact by the Plastics Group's sales engineers to identify a product
need. The sales engineers work closely with a customer to define the customer's
requirements and expectations. The Plastics Group develops a product design,
mold and automation design. After the Plastics Group reviews the design with
the customer, tooling and automation are built using state-of-the-art CAD/CAM
systems and machining centers. The Plastics Group added dedicated research and
development equipment in an effort to reduce product development time. The
acquisition of PMC has also expanded in-house tooling capabilities, thus
reducing cycle time.
In most cases, a prototype is produced to aid in the development of a
product and to identify unknown factors in process and product design. Field
trials may be conducted with the prototype product to verify that the product
meets customer requirements. Testing and specifications are developed
cooperatively with customers so that specified requirements are consistently
understood and met.
The Plastics Group has expanded its design and development capabilities to
include 3D design and rapid prototype modeling and has invested in advanced
equipment devices (ultrasonic welding, laser machines and robots) and computer
control systems to ensure process and quality control in its manufacturing
operations. In many cases, the Plastics Group will use specialized outside
suppliers to assist in building equipment components that cannot be
economically built by the group, as well as to ensure that the newest
technologies are being used to maintain the Plastics Group's technological edge
in the marketplace. The cost of tooling for a new product (automation and
molds) is often borne by the customer, in which case the customer owns, and has
a proprietary interest in, the mold. The cost of tooling for a typical new
product may range from as low as $5,000 to more than $200,000. The customer
often shares in costs of automation in addition to the tooling. Management
believes that strong, long-term customer partnerships develop as a result of
this shared financial commitment where the customer participates in the costs
of tooling and/or automation.
The Plastics Group has a number of standard products which, in many cases,
assist the customer in developing its own unique products, thereby shortening
the development process. Standard products require no tooling or automation
investment by the customer. The Plastics Group is also actively involved in the
development of new product applications, such as improved check valves, drug
infusion filters and needle-free connectors, in anticipation of customer needs
and independent of customer funding. To date, these products have been
primarily in the healthcare area.
As another means of accessing new technologies, the Plastics Group has
pursued strategic alliances with customers in an effort to improve its
competitive position, such as its recent alliance with SciTech Dental.
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Resources are devoted to new products on the basis of a market and
economic analysis which indicates a long-term product usage potential. Product
development and qualification can take from six months to two years before
final product release.
MARKETING AND DISTRIBUTION
GRAPHICS GROUP. The Graphics Group markets its services nationally,
including through seminars, newsletters and training sessions targeted at
existing and potential customers. The Graphics Group sells its services through
a group of approximately 74 direct salespersons and 96 customer service
technicians who call on consumer products manufacturers, including those in the
food and beverage, pharmaceutical and cosmetics industries. In the early 1970s,
the Graphics Group, in a departure from the industry practice of serving
advertising agencies and converters, began calling directly on consumer
products manufacturers. The Graphics Group has marketing agreements with four
European companies and one company in the Far East.
PLASTICS GROUP. The Plastics Group sells its products to OEMs in North
America and Europe through a combination of direct sales professionals and
manufacturers' representatives. At year-end, North American operations had 24
full-time direct sales professionals and European operations had four full-time
direct sales professionals and had contracted with one independent sales
representative. Recently, the European operations' sales and marketing efforts
were reorganized to centralize reporting responsibility directly to the
President of European operations, based in France. Sales representatives are
based at each manufacturing plant. In 1994, the Plastics Group's foreign
operations accounted for approximately 16% of the group's net sales and were
generated primarily in France, Germany, the United Kingdom and Italy.
CUSTOMERS
GRAPHICS GROUP. The Graphics Group's customers consist of: (i) direct
purchasers of color separations, including end-use consumer products
manufacturers; (ii) converters; and (iii) advertising agencies. Many of the
Graphics Group's customers, a large percentage of which are Fortune 500
companies, are national in scope and often use numerous converters throughout
the country. Because these customers desire uniformity of color and image
quality across a variety of media, the Graphics Group plays a very important
role in coordinating their printing activities by maintaining current
specifications of each of its customers' converters. Management believes that
this role has enabled the Graphics Group to establish closer and more stable
relationships with the manufacturers. End-use customers often select and
utilize the Graphics Group to ensure better control of their packaging or other
needs and depend upon the Graphics Group to act as the customer's agent to
ensure consistency among numerous converters and packaging media. The Graphics
Group also has several employees working at selected customer facilities to
maximize the efficiency and quality of the Graphics Group's services to those
clients.
Many of the Graphics Group's customers place orders on a daily and weekly
basis and work closely with the Group year round as they frequently redesign
product packaging or introduce new products. While certain promotional
activities are seasonal, such as those relating to back-to-school time and
holidays, shorter technology-driven prepress cycle time has enabled consumer
products manufacturers to tie their promotional activities to current events
(such as sporting events), prompting such manufacturers to redesign their
packages more frequently and resulting in a correspondingly higher number of
packaging redesign assignments. This technology-driven trend towards more
frequent packaging changes has offset previous seasonal fluctuations in the
volume of the Graphics Group's business. In addition, consumer products
manufacturers have a tendency to sole-source their prepress work with respect
to a particular product line, so that changes to the basic design can be made
more efficiently. As a result, the Graphics Group has developed a base of
steady customers in the food and beverage industry. During 1994, no single
customer accounted for more than 6% of the Graphics Group's net sales, and the
10 largest customers in the aggregate accounted for less than 37% of net sales.
The Graphics Group's reputation for high quality services is in large part
due to its emphasis on customer service and TQM. Each customer is assigned to a
designated customer service technician (large accounts may be assigned to two
or more customer service representatives) to promote continuity in a customer's
relations with the
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Graphics Group. Customer relations are generally handled through the facility
providing services to the particular customers. Customer service
representatives typically monitor the production of a customer's project
throughout the production process to ensure compliance with customer
specifications and completion of the project in a timely manner.
PLASTICS GROUP. The Plastics Group primarily sells its products to
manufacturers for incorporation into finished products subsequently sold to
end-users. The Plastics Group sells most of its automotive filters directly to
OEMs both domestically and in Europe, as well as to the automotive suppliers
who require filters in the subsystems they supply to the automobile
manufacturers. The Plastics Group supplies its healthcare product filters and
devices to customers in the U.S. and Europe. Many of the Plastics Group's
customers in the automotive and healthcare industries sole-source their
production work with the company which originally designed the product. Thus,
the Plastics Group frequently gets contracts from customers for whom it has
performed design work. The Plastics Group also supplies many other smaller
customers in the U.S. and Europe with a wide range of filters and devices. The
Plastics Group's thermoforming business has targeted the custom electronics and
medical packaging market segments. During 1994, no single customer accounted
for more than 6% of the Plastics Group's net sales, and the 10 largest
customers in the aggregate accounted for less than 28% of net sales.
The following is an alphabetical listing of a representative sample of
current customers of the Company:
GRAPHICS GROUP PLASTICS GROUP
-------------- --------------
Campbell Soup Company Abbott Laboratories
ConAgra, Inc. Baxter International Inc.
General Mills, Inc. Bendix
Hunt-Wesson, Inc. Robert Bosch Corporation
Kraft General Foods, Inc. Braun, Inc.
Leaf Inc. Chrysler Corporation
Leo Burnett Company, Inc. Emerson Electric
Lipton Tea Company, Ltd. Ford Motor Company
M&M/Mars G.D. Searle & Company
Limited
Miles Inc. General Motors Corporation
Miller Brewing Company Gerber Products Company
Nabisco Foods Group IGA, Inc.
Pillsbury Inc. IMED
The Procter & Gamble Company ITT Teves America
Publishers Clearing House M&M/Mars
The Quaker Oats Company Marwal European
The Reader's Digest Association, Inc. Motorola, Inc.
SmithKline Beecham Pall Corporation
Stouffer Foods Corporation Renault V.I. and Peugeot
S.A.
Tyson Foods, Inc. Zenith Electronics Corp.
BACKLOG
The Company's backlog of unfilled orders was approximately $23,844 on
December 31, 1994, compared with approximately $21,430 on December 31, 1993.
Most orders are filled within 90 days of receipt. It is anticipated that
substantially all of the orders on hand on December 31, 1994 will be filled
during 1995. Although orders are subject to cancellation by the purchaser, the
Company's experience has been that the impact of such cancellations is not
significant.
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COMPETITION
GRAPHICS GROUP. The Graphics Group's competition comes from three sources:
other independent color separators, converters which have prepress service
capabilities, and customers who are able to use developing technologies to
perform in-house the services previously provided by the Graphics Group.
Independent color separators are companies whose business is performing
prepress services for one or more of the principal printing processes. The
Graphics Group believes that only one firm, Wace Group U.S.A., a subsidiary of
Wace P.L.C., competes with it on a national basis and that only one other firm,
Southern Graphics, a subsidiary of Reynolds Aluminum, competes with it on a
regional basis. The remaining independent color separators are local firms that
compete in specific markets. To remain competitive, each firm must maintain
customer relationships and recognize, develop and exploit state-of-the-art
technology.
Converters with prepress service capabilities compete with the Graphics
Group by performing such services in connection with printing work. Converters
frequently consider prepress services as loss leaders and incorporate into
their bids for converting jobs a relatively low price for the prepress service
portion. Independent color separators such as the Graphics Group, however, may
offer greater technical capabilities and speed of delivery. In addition,
converters may also utilize the services of the Graphics Group because of their
own limited productive capacities and technical skills.
Finally, the Graphics Group faces continuing competition from some of its
own customers who seek to reduce costs by performing color separation services
in-house. To counter this threat, the Graphics Group uses customer education
programs to demonstrate the value added by the Graphics Group's continual
investments in rapidly changing technology and training. The Graphics Group
believes that its skilled personnel and the ongoing training provided to
employees and customers, will continue to distinguish the group from its
competitors.
PLASTICS GROUP. The Plastics Group competes in the filter, visual
packaging and specialty plastics markets. The filter industry is characterized
by a wide range of specialty products. The Plastics Group's market niche
developed from its ability to insert mold and overmold a wide variety of woven
screens, non-woven media and membranes. The Plastics Group competes on the
basis of service, cost, quality, design, manufacturing process and timeliness
of delivery.
The Plastics Group has five principal competitors in the insert molding
business of filter manufacturing in the United States: the Filtran Division of
SPX Corp.; ITW-Deltar Division; the Kuss Division of Fleetguard Corp.; Arbor
Technologies; and Gelman Sciences. Each of these companies competes only in
certain market segments and none competes in every market segment against the
Plastics Group.
The thermoforming market is fairly fragmented with no company having a
dominant share of the market. The printing market is similarly fragmented. Very
few competitors have both thermoforming and printing capabilities.
PURCHASING AND RAW MATERIALS
GRAPHICS GROUP. The Graphics Group purchases photographic film and
chemicals, paper, ink, plate materials, and various other supplies and
chemicals 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. Materials and supplies account for only a small portion of the
Graphics Group's costs of production, and no shortage is anticipated.
Historically, the Graphics Group has negotiated and enjoys significant volume
discounts on materials and supplies from most of its suppliers.
PLASTICS GROUP. The Plastics Group's major raw materials are thermoplastic
resins, filtration media and purchased components. Supplies of these materials
are available from both domestic and foreign sources. Recently the Plastics
Group entered into several strategic alliances in an effort to intensify
supplier competition. The Plastics
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Group believes these alliances will reduce its costs of raw material in the
future. The purchased filtration media generally requires special processing
before its use in the manufacturing process. In the past, the majority of this
specialty processing was performed in the Plastics Group's Hebron, Illinois and
France facilities. The Plastics Group recently has expanded this specialty
process to each of its filter manufacturing locations and believes that this
expansion will reduce scrap and inventories.
PATENTS AND TRADEMARKS
GRAPHICS GROUP. The Graphics Group owns no significant patents. The
trademarks "Schawk" and "Clockface and Creole," and the trade names "Amber
Design," "Color Data East," "Schawkgraphics," "Schawk Client Services Group and
Schawk Prep," "Lincoln Graphics," "Litho Colorplate," "LSI/Atlanta,"
"LSI/Kala," "Process Color Plate," "Total Reproductions" and "Weston Engraving"
are the most significant trademarks and trade names used by the Graphics Group.
PLASTICS GROUP. The Plastics Group owns several significant patents, none
of which expires prior to 1995. They include the encapsulation of membrane
filters, a two-piece filter design, the encapsulation of multiple layers of
membrane, fuel injection nozzle filters, a process to hermetically seal sump
transmission filters, a design for European in-tank fuel filters, a friction
welding process, a medical check valve and a manufacturing component tray.
Patents are material to the competitiveness of the business. The trademarks
"Filtertek" and "Plasti-Chain" are the most significant trademarks used by the
Plastics Group.
EMPLOYEES
GRAPHICS GROUP. As of December 31, 1994, the Graphics Group had
approximately 698 full-time employees. Of this number, 35% are craft employees
and are represented by local units of the Graphic Arts International Union. The
Graphics Group's craft employees are crucial to its operations. Seven contracts
covering the Graphics Group's craft employees in five facilities are subject to
renegotiation in 1997. All contracts are area-wide agreements bargained by
groups of employers. The Graphics Group considers its relationships with its
employees to be good.
PLASTICS GROUP. As of December 31, 1994, the Plastics Group employed 1,204
full-time employees. Substantially all of the Plastics Group's employees are
engaged in production. Filtertek Ireland has 103 employees, including 73
employees covered by collective bargaining agreements. No other employees in
the Plastics Group are covered by collective bargaining agreements. The
Plastics Group considers its relationship with its employees to be good.
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ITEM 2. PROPERTIES
FACILITIES
The Company owns or leases the following office and manufacturing
facilities:
LEASE
OWNED/ EXPIRATION
LOCATION SQUARE FEET LEASED PURPOSE DATE
-------- ----------- ------ ------- ----
(APPROXIMATE)
GRAPHICS GROUP:
Armonk, New York . . . . . . . . . . . 10,000 Leased General Offices, April 1995
Manufacturing
Cherry Hill, New Jersey . . . . . . . . 35,000 Owned General Offices, N/A
Manufacturing
Chicago, Illinois . . . . . . . . . . . 42,000 Leased General Offices, June 2002
Manufacturing
Des Plaines, Illinois . . . . . . . . . 20,000 Owned Executive Offices, N/A
Customer Training
Center
Des Plaines, Illinois . . . . . . . . . 60,000 Leased General Offices, N/A
Manufacturing
Hackettstown, New Jersey . . . . . . . 2,000 Leased General Offices, October 1994
Manufacturing
Kalamazoo, Michigan . . . . . . . . . . 67,000 Owned General Offices, N/A
Manufacturing
Lincolnwood, Illinois . . . . . . . . . 60,000 Leased General Offices, June 1997
Manufacturing
Minneapolis, Minnesota . . . . . . . . 31,000 Owned General Offices, N/A
Manufacturing
Roseville, Minnesota . . . . . . . . . 30,000 Leased General Offices, May 1997
Manufacturing
Smyrna, Georgia . . . . . . . . . . . . 20,000 Leased General Offices, October 1998
Manufacturing
PLASTICS GROUP:
County Limerick, Ireland . . . . . . . 37,000 Owned General Offices, N/A
Manufacturing
Eagle, Wisconsin . . . . . . . . . . . 53,000 Owned General Offices, N/A
Manufacturing
Gustorf, Germany . . . . . . . . . . . 1,200 Leased General Offices, Month to
Sales Product month
Development
Hebron, Illinois . . . . . . . . . . . 108,000 Owned Executive Offices, N/A
Manufacturing
Huntley, Illinois . . . . . . . . . . . 98,000 Owned General Offices, N/A
Manufacturing
Huntley, Illinois . . . . . . . . . . . 40,000 Owned General Offices, N/A
Manufacturing
Patillas, Puerto Rico . . . . . . . . . 100,000 Owned General Offices, N/A
Manufacturing
Plailly, France . . . . . . . . . . . . 33,000 Owned General Offices, N/A
European
Headquarters,
Manufacturing
Stockton, California . . . . . . . . . 54,000 Leased/ General Offices, May 2003
Option Manufacturing
to Purchase
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ITEM 3. LEGAL PROCEEDINGS
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 liability from any
threatened or pending litigation to be material to the Company. The Company has
not experienced any material environmental problems.
Prior to the Merger, three stockholders of Filtertek filed separate
lawsuits, each seeking to bring a class action relating to the Merger. Two of
the suits were filed on October 18, 1994, and one was filed on October 25,
1994. The suits, brought against Filtertek, Schawk and the directors of
Filtertek in the Court of Chancery for the State of Delaware on behalf of
stockholders of Filtertek other than the defendants, allege, in pertinent part,
that the defendants breached their fiduciary and other common law duties by
entering into and approving the Merger. Subsequent to the filing of these
complaints, the Merger received the requisite approval by more than 66 2/3% of
the independent stockholders at a special meeting of stockholders of Filtertek
held on December 23, 1994. The Company has and intends to continue to
vigorously defend against the lawsuits and believes that they are without
merit. Management does not consider the actions to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
RECAPITALIZATION
Filtertek and the Old Schawk Companies recently completed a number of
structural and capitalization changes, referred to herein as the
"Recapitalization." These changes, which were approved by stockholders of
Filtertek at a special meeting of stockholders held on December 23, 1994,
consist of the following:
1. Approval of an Amended and Restated Agreement and Plan of
Reorganization (including the Amended and Restated Plan of Merger
attached thereto), among Filtertek, Filtertek USA, Inc., a wholly
owned subsidiary of Filtertek, Schawk, Inc. ("Schawk"), Lincoln
Graphics, Inc. ("Lincoln Graphics"), an affiliate of Schawk, and
Flexo Graphics, Inc. ("Flexo Graphics"), also an affiliate of Schawk,
pursuant to which Schawk, Lincoln Graphics and Flexo Graphics will be
merged into Filtertek. Pursuant to and in accordance with the terms
of such merger, upon consummation thereof, the name Filtertek, Inc.
was changed to "Schawk, Inc." This issue was approved by a vote of
2,108,124 for, 217,346 against, and 7,486 abstentions.
2. Approval of an amendment to the Amended Certificate of Incorporation
of Filtertek to increase the authorized shares of Class A Common
Stock from 20,000,000 to 40,000,000 shares. This issue was approved
by a vote of 5,962,817 for, 243,519 against, and 12,363 abstentions.
3. Approval of the issuance of 518,627 shares of Class A Common Stock of
Filtertek as a portion of the purchase price for the assets of the
Robinson Industries and Fuzere Midwest divisions of Schawk and the
stock of Fuzere Manufacturing Co. held by Schawk. This issue was
approved by a vote of 2,070,075 for, 249,804 against, and 13,077
abstentions.
Upon consummation of the Merger described above, the Company acquired
all of the assets and businesses of the Old Schawk Companies and
assumed all of those corporations' liabilities, including a liability
for deferred income taxes relating to the termination of the Old
Schawk Companies' S Corporation tax status of $3,000,000. In the
Merger, the shares of Schawk common stock were converted into
13,142,528 shares of Class A Common Stock and the shares of preferred
stock of Schawk were converted on a one-for-one basis into 22,000
shares of Series A Preferred Stock and 5,207 shares of Series B
Preferred Stock. Similarly, the shares of Lincoln Graphics and Flexo
Graphics common stock were converted into 1,884,466 shares and
1,218,405 shares, respectively, of Class A Common Stock.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
SCHAWK, INC. SUPPLEMENTAL STOCKHOLDER INFORMATION
QUARTERLY FINANCIAL DATA
(Thousands of Dollars, Except Per Share Amounts)
Pro Forma Net
Income Adjusted Primary and Fully
only for Income Diluted Earnings
Net Sales Cost of Sales Net Income (Loss) Taxes (a) Per Share (a)
--------- ------------- ----------------- ---------------- -----------------
1994 Quarter Ended:
March 31 $ 46,430 $ 28,667 $ 5,361 $ 3,395 $ 6.69
June 30 48,839 31,084 4,548 2,848 5.61
September 30 44,630 27,929 4,764 2,983 5.88
December 31 46,246 32,284 (1,204) 1,021 2.02
-------- -------- ------- ------- ------
Total $186,145 $119,964 $13,469 $10,247 $20.20
======== ======== ======= ======= ======
1993 Quarter Ended:
March 31 $ 40,763 $ 27,938 $ 2,541 $ 1,577 $ 3.11
June 30 42,827 27,021 4,781 2,959 5.83
September 30 43,458 28,816 2,458 1,527 3.01
December 31 41,990 25,774 4,836 2,993 5.90
-------- -------- -------- ------- ------
Total $169,038 $109,549 $ 14,616 $ 9,056 $17.85
======== ======== ======== ======= ======
DIVIDENDS DECLARED (b)
Quarter Ended 1994 1993
------------- ---- ----
March 31 $ -- $ --
June 30 5,789 4,390
September 30 5,809 2,661
December 31 8,800 1,750
------- ------
Total $20,398 $8,801
======= ======
(a) Adjusted only for pro forma income taxes (See Note 15 to the Schawk,
Inc. audited financial statements)
(b) Dividends declared are for the Old Schawk Companies, and do not
include amounts of the former Registrant, Filtertek, Inc. Prior
to the Merger with Filtertek, Inc. on December 30, 1994, the Old Schawk
Companies were privately-held S Corporations with a limited number of
shares outstanding. Dividends were declared on the basis of
stockholder cash requirements and not necessarily on the basis of
earnings. Dividends declared per share computations have not been
presented because management does not consider this information to be
meaningful.
STOCK PRICES (c)
Quarter Ended 1994 High/Low 1993 High/Low
------------- ------------- -------------
March 31 9 7/8 - 8 1/2 10 7/8 - 8 3/4
June 30 10 3/4 - 8 1/4 9 7/8 - 8 3/8
September 30 13 3/8 - 9 5/8 10 3/8 - 8 3/4
December 31 13 1/8 - 9 3/8 10 3/4 - 9 1/8
(c) Stock prices are for the former Registrant Filtertek, Inc. The
Registrant had 2,400 stockholders of record on November 7, 1994. The
Registrant's stock is listed on the NYSE.
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ITEM 6. SELECTED FINANCIAL DATA
PRO FORMA (a) HISTORICAL
Years Ended December 31
(Thousands of Dollars, Except Per Share 1994 1993 1994 1993 1992 (c) 1991 1990
Amounts) ------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENT INFORMATION
Net Sales $186,145 $169,038 $186,145 $169,038 $110,999 $79,432 $77,537
Operating Income 26,254 21,820 24,273 19,965 14,331 12,325 12,874
Income Before Income Taxes and Minority
Interest 21,016 17,640 19,035 15,785 12,854 11,706 11,974
Income Taxes 7,071 6,400 3,849(b) 840 571 248 275
Net Income 12,585 9,907 13,469 14,616 12,466 11,458 11,699
PRO FORMA INFORMATION
Pro forma Income Taxes -- -- 7,071 6,400 5,300 4,700 4,800
Pro forma Net Income Adjusted Only for Income
Taxes -- -- 10,247 9,056 7,737 7,006 7,174
Pro forma Net Income
Per Share .64 .49 -- -- -- -- --
CONSOLIDATED BALANCE SHEET INFORMATION
Working Capital -- -- $ 25,254 $30,049 $ 26,186 $12,984 $12,014
Total Assets -- -- 193,426 180,193 155,756 55,401 58,613
Long-Term Debt, Capital Lease Obligations and
Redeemable Preferred Stock -- -- 81,090 83,271 70,803 7,172 13,802
Stockholders' Equity -- -- 76,275 51,119 44,183 36,630 31,426
OTHER DATA
Cash Dividends per Common Share (d) -- -- -- -- -- --
Depreciation and Amortization -- -- 14,866 15,336 7,784 4,485 4,127
Capital Expenditures -- -- 13,882 19,066 11,060 3,747 4,552
(a) Pro forma net income includes adjustments for the Merger, purchase
accounting, and income tax adjustments. See Note 15 to the Schawk, Inc.
audited financial statements.
(b) Includes a one time deferred tax charge of $3,000 for termination of S
Corporation tax election.
(c) On September 21, 1992, Old Schawk effectively acquired a controlling
interest in Filtertek which was accounted for as a purchase.
(d) Because of the limited number of stockholders prior to the Merger,
dividends per share data is not meaningful and has not been presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Schawk has grown through a series of strategic acquisitions over the
last 20 years in which many owner-manager teams of acquired firms have been
retained. Purchase terms have typically involved cash, notes and
performance-based future compensation. These acquisitions have been
assimilated and in nearly every instance have been accretive to future earnings
growth.
These successful acquisitions are elements of a strategic plan to
acquire market niche companies with Fortune 500 customer list, excellent
customer service or proprietary products and solid management which receives
performance incentives to continue to grow the business. All Schawk's
acquisitions were in strong markets serving customers with both technological
and quality advantages. The Company believes that continued emphasis on
complementary acquisitions of companies serving targeted markets will allow it
to broaden its prepress and plastics product offerings. The Company also
believes it has greater versatility in manufacturing and in serving its
customers than smaller, less capitalized and less integrated competitors, and
that this versatility will result in greater opportunities for internal growth.
Schawk acquired or initiated the start-up of the following companies
during the last three years. In May 1992, Schawk acquired Lincoln Graphics,
Inc. in Cherry Hill, New Jersey. Lincoln Graphics gives the Graphics Group a
strong East Coast presence in the prepress packaging markets. In July 1992,
Schawk acquired Flexo Graphics, Inc. in Roseville, Minnesota. Flexo Graphics,
Weston Engraving and Litho Colorplate are three Graphics Group companies
servicing the Minneapolis-St. Paul packaging markets. Schawk Client Services
Consulting Group was formed during the third quarter of 1992 to service the
graphic arts software, hardware and training needs of the Graphics Group's
customers. In 1994, Schawk Client Services Group was enhanced when the
previous owners of Clockface and Creole, a well-known graphic arts training
company, agreed to liquidate its operation, join the group and further develop
the technical training and education division of Schawk.
Schawk effectively acquired a controlling interest of the outstanding
equity of Filtertek in September 1992. On June 1, 1993, Filtertek purchased
Plastic Molded Concepts (PMC) in Eagle, Wisconsin. PMC is a manufacturer of
specialty plastic components for the healthcare and industrial industries. On
October 2, 1993, Filtertek purchased three plastics thermoforming operations:
Robinson Industries and Fuzere Midwest, both located in Huntley, Illinois, from
Schawk, and Fuzere Manufacturing Company, Inc., located in Stockton,
California, from the stockholders of Schawk (collectively, the "Robinson/Fuzere
transaction"). These thermoforming companies are now operated as the Tek
Packaging Group, Inc.
Filtertek and Schawk had been operating under common control and
management since September 1992. During that time, it became apparent to
management that combining the companies would simplify and enhance the
operations, management, and strategic direction. In November 1994, Filtertek
and Schawk agreed to merge, and, following receipt of the requisite stockholder
approval by more than 66 2/3% of the independent stockholders of Filtertek,
Schawk merged with and into Filtertek effective as of December 30, 1994.
Filtertek's name was changed then to Schawk, Inc.
BASIS OF PRESENTATION
The Merger was accounted for using the purchase method of accounting.
Because Schawk owned a controlling interest in Filtertek prior to the Merger,
under AICPA Accounting Interpretation 26 of Accounting Principles Board Opinion
No. 16, the Merger is required to be accounted for as if Schawk had acquired
the minority interest in Filtertek's Class A Common Stock outstanding at the
effective time of the Merger. Accordingly, the consolidated financial
statements of Schawk will be treated as the Company's historical financial
statements in future financial reporting. Such historical financial statements
of Schawk include the results of Filtertek since Schawk's acquisition of its
controlling interest in September 1992.
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In light of the changes to be made in future accounting presentation,
the following discussion of periods prior to the consummation of the Merger
includes an analysis of (i) pro forma consolidated income statement data for
the Company; and (ii) the historical consolidated results of operations and
financial condition of Schawk, which include 100% of sales but only 60% of
earnings for 1992, 1993 and 1994, since Schawk's controlling interest in
Filtertek beginning September 1992.
Pro forma calculations:
The earnings per share presented are pro forma calculations. The Company
believes that the pro forma presentation best represents the actual results of
the combined operations as if they had been merged for the comparable periods
of 1993 and 1994. The actual earnings per share for Schawk, Inc. are not
informative because Schawk was a privately owned S Corporation and had a
limited number of outstanding shares prior to the Merger with Filtertek, Inc.
on December 30, 1994. Further, as an S Corporation, taxation of the Corporate
entity was minimal. The shares outstanding in the pro forma earnings per share
calculations account for the shares exchanged in the Merger as if the exchange
occurred at the beginning of each of the periods presented. Consequently, the
minority interest in the earnings of Filtertek has been eliminated. In
addition, pro forma purchase accounting adjustments for increased goodwill
amortization, increased depreciation for fair value adjustments to property and
equipment, and reductions in compensation expense for new employee/stockholder
agreements effective January 1, 1995 have also been made to present pro forma
earnings per share. Additionally, the earnings have been adjusted as if the
Graphics Group had been taxed at regular corporate income tax rates instead of
S Corporation rates. Schawk terminated S Corporation tax status on December
30, 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRO FORMA CONSOLIDATED RESULTS - 1994 VERSUS 1993
NET SALES. Sales were $186.1 million for 1994 versus 1993 sales of $169.0
million. This was a 10.1% increase due to steady internal growth of the
Company's existing customer base.
OPERATING INCOME AND MARGIN. Pro forma operating income for 1994 was $26.3
million, a 20.3% increase over 1993 operating income of $21.8 million. The
operating margin increased to 14.1% in 1994, from 12.9% in 1993. This margin
improvement resulted from operating efficiencies, the closure of excess
manufacturing capacity in Germany, and continued improvements through
automation of manufacturing processes.
INCOME BEFORE INCOME TAXES. Pro forma income before income taxes for 1994 was
$21.0 million compared with $17.6 million for the same period in 1993. This
was a 19.1% increase in income before income taxes. Interest expense increased
from $4.9 million in 1993 to $5.2 million in 1994 due to rising interest rates.
The Company also recorded in the fourth quarter a $1.0 million pre-tax charge
to income related to the proposed offering of Schawk, Inc. Class A common stock
which was withdrawn from the Securities and Exchange Commission (S.E.C.) in
March 1995.
NET INCOME. Pro forma primary and fully diluted earnings per share adjusted
for the Merger, purchase accounting, and income taxes (see Note 15 to the
Schawk, Inc. audited financial statements) for Schawk, Inc. was $0.64 for 1994,
a 30.6% increase over pro forma primary and fully diluted 1993 earnings per
share adjusted for the Merger, purchase accounting and income taxes of $0.49.
Pro forma net income increased to $12.6 million in 1994 from $9.9 million in
1993. The Company also recorded in the fourth quarter of 1994 a $0.6 million
after-tax charge to income related to the proposed offering of Schawk, Inc.
Class A common stock which was withdrawn from the S.E.C. in March 1995.
PRO FORMA GRAPHICS GROUP - 1994 VERSUS 1993
NET SALES. Sales increased 8.4% to $103.9 million in 1994, from $95.8 million
in 1993. The largest sales increases were seen in the flexographics operations
with more food and consumer products moving towards flexible
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23
packaging. This increase was due to continued product extensions, increased
product entries into the market, and packaging label changes required by
Federal Law.
OPERATING INCOME AND MARGIN. Operating income rose 24.6% to $20.4 million for
1994 as compared with $16.4 million for 1993. The 1994 operating margin was
19.6% as compared to the 1993 operating margin of 17.1%. This increase
reflects higher gross margins on increased sales with only modest increases in
selling, general and administrative expenses. Technology gains and enhanced
training for production personnel have improved gross margins because work
moves more quickly through the manufacturing sites.
PRO FORMA PLASTICS GROUP - 1994 VERSUS 1993
NET SALES. Sales for the Plastics Group for 1994 increased 12.3% to $82.3
million compared with $73.2 million for 1993. The Plastics Group's sales
growth was primarily due to increases at the Tek Packaging Group's Robinson
facility, the Filtertek U.S. and French divisions and PMC.
Year over year automotive filter product sales were up 24%, consumer sales were
up 10% and industrial sales were up 30%. Healthcare filter product sales
declined 9% due in part to a significant drop in orders during the fourth
quarter 1994 as healthcare customers reduced inventories.
OPERATING INCOME AND MARGIN. Operating income for 1994 increased 7.9% to $4.1
million in 1994 from $3.8 million in 1993. The 1994 operating margin for this
group was 5.0% as compared with the 1993 operating margin of 5.2%. Margins
continued to lag in Europe from pricing pressures and the closing of the German
manufacturing facility and assimilation of much of its volume into other
operations. Margins also were impacted by the greater percentage of
automotive product orders which have lower product margins than the healthcare,
industrial and consumer segments.
MANAGEMENT'S DISCUSSION AND ANALYSIS
HISTORICAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORICAL CONSOLIDATED RESULTS - 1994 VERSUS 1993
NET SALES. Historical sales for this period were identical to the pro forma
sales (see page 21).
OPERATING INCOME AND MARGIN. Operating income increased by 21.6% from $20.0
million in 1993 to $24.3 million in 1994. Operating margin improved from 11.8%
in 1993 to 13.0% in 1994. This increase reflects higher gross margins on
increased sales with only modest increases in selling, general and
administrative expenses. A faster generation of equipment and a well trained
work force which can take advantage of such technology advances has improved
gross margins because work moves more quickly through the manufacturing sites.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST. Income before income taxes
and minority interest for 1994 was $19.0 million, up 20.6% from $15.8 million
in 1993 as a result of the above discussion regarding net sales and operating
income and margin.
NET INCOME. Net income for 1994 was $13.5 million, down 7.8% from $14.6
million in 1993. The 1994 income tax provision includes a $3.0 million
adjustment to reflect the termination of the S Corporation status of Schawk.
Additionally, 1994 reflects a $0.6 million after-tax charge related to the
proposed offering of Schawk, Inc. Class A common stock which was withdrawn from
the S.E.C. in March 1995.
HISTORICAL CONSOLIDATED RESULTS - 1993 VERSUS 1992
NET SALES. Net sales increased 52.3% to $169.0 million for the year ended 1993
from $111.0 million for year ended 1992. Net sales reflect a full year of
Filtertek sales in 1993 compared to only three months of 1992 sales as well as
a full year of sales from two Graphics Group acquisitions, Lincoln Graphics and
Flexo Graphics. Internal growth of
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10.1% was attributable to increased orders from existing Graphics Group
customers including the fourth quarter orders as customers began to change
their food and beverage labels to comply with the federally mandated NLEA
requirements, offset by a sales decline in a non-packaging commercial prepress
and printing facility.
OPERATING INCOME AND MARGIN. Operating income increased by 39.3% to $20.0
million in 1993 from $14.3 million in 1992. The operating margin declined from
12.9% in 1992 to 11.8% in 1993 because of the inclusion of a full year of
Filtertek operations in 1993 which has lower margins than Schawk. Operating
income from the Graphics Group increased 15.5% to $16.4 million in 1993,
compared with $14.2 million in 1992, as operating margins in this segment
remained the same on increased volume.
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST. Income before income taxes
and minority interest increased 22.8% to $15.8 million in 1993 from $12.9
million in 1992. Interest expense increased 110.4% from $2.3 million in 1992
to $4.9 million in 1993 as a result of additional debt incurred for the
acquisition of a controlling interest in Filtertek.
NET INCOME. Net income increased by 17.2% to $14.6 million in 1993 compared
with 1992 net income of $12.5 million due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Schawk has a $49.0 million Revolving Credit Agreement to provide financing,
acquisition funding and working capital flexibility. The agreement was
effective in September 1992 and matures on August 31, 1999. Advances under the
revolver bear interest at an annual rate equal to either the Eurodollar
interest rate plus 0.625% until August 31, 1996, and 0.75% thereafter, or, at
the election of the borrower, the lender's prime rate. The blended interest
rate for the year ended December 31, 1994 was 5.3%. On December 31, 1994
advances under the revolver were $46 million, down from the December 31, 1993
level of $51.5 million. Amounts borrowed and repaid under the facility may be
borrowed again from time to time up to the current maximum of $49.0 million.
Schawk has an interest rate swap (floating to fixed) which sets the rate of
interest on the revolving credit facility at 5.81%. See Note 8 to the Schawk,
Inc. audited financial statements. The swap amount at December 31, 1994 was
$26.0 million and had a positive value of $643,000. If the swap was terminated
at December 31, 1994, the bank would owe Schawk, Inc. $643,000. From November
1992 through November 1994 the swap had a negative value. The amount of
additional interest from November 1992 through November 1994 was approximately
$1.4 million.
In connection with the Merger, Schawk issued notes payable in payment of the
$8.8 million S Corporation dividend to the Schawk Family. These notes bear
interest at 5% per annum and are payable on demand or, if not repaid earlier,
December 31, 1995. The Company has arranged an unsecured short-term credit
facility for up to $8.8 million to fund repayment of these notes payable if
needed. This facility bears interest at LIBOR plus 0.50% and matures at
December 31, 1995.
Filtertek currently has a $30.0 million Revolving Credit Agreement to provide
financing, acquisition funding and working capital flexibility. The agreement
was effective in December 1993 and matures in December 1998. Advances under
this revolver bear interest at an annual rate of LIBOR plus 0.5% or, at the
election of Filtertek, the lender's prime rate. At December 31, 1994,
Filtertek had outstanding advances of $28.3 million pursuant to the revolver,
up from the December 31, 1993 level of $22.0 million. The blended interest
rate for the year ended December 31, 1994 was 5.5%.
Filtertek negotiated a $3.5 million foreign currency line of credit to
facilitate the funding of European working capital needs. This short-term line
is available to provide cash flow to cover the costs related to the closing of
the German manufacturing site. At December 31, 1994, Filtertek had borrowed
$645,000 on this line of credit.
The Company's working capital at December 31, 1993 was $30.0 million,
representing a 14.8% increase over the 1992 year-end level of $26.2 million,
and was $25.3 million at December 31, 1994. Management believes that the level
of combined working capital is adequate for the Company's liquidity needs
related to normal operations both
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currently and in the foreseeable future, and that the Company has sufficient
resources to support its growth, either through currently available cash,
through cash generated from future operations, or through short-term or
long-term financing. The Company currently pays a regular quarterly dividend
on the Class A Common Stock of $0.065 per share, or $0.26 per share annually.
The Company also pays a 5% dividend on its preferred stock.
The Company had combined capital expenditures for 1994 of $13.9 million. The
Schawk combined capital expenditures during 1993 were $19.1 million, and $11.1
million during 1992. The expenditures were primarily due to acquisitions,
building renovations, the purchase of several properties and new equipment.
As a result of the Schawk's acquisition of the majority interest in Filtertek,
the acquisitions of Flexo Graphics and Lincoln Graphics, and the combined
capital expenditures of the Plastics and the Graphics Groups, combined
depreciation and amortization increased from $7.8 million in 1992 to $15.3
million in 1993 and to $14.9 million for the year ended 1994.
Acquisitions of $48.3 million in the Schawk 1992 cash flow statement are
related to the Filtertek, Lincoln Graphics and Flexo Graphics acquisitions, and
acquisition costs of $13.4 million in 1993 were due to the second stage of the
Filtertek transaction and Filtertek's acquisition of PMC. Acquisitions during
1994 were negligible.
Schawk's current revolving credit facility is being renegotiated to increase
the Company's borrowing capacity and recognize the improved credit worthiness
of the combined entities. The Company anticipates putting a new revolver in
place early in the second quarter of 1995. This revolver will supersede the
current Schawk revolver, the Filtertek revolver, the foreign currency line of
credit and the short-term dividend note. The new revolver is anticipated to
have more favorable pricing than combined existing lines of credit. The unused
portions of the Company's revolving credit facilities will be available to fund
possible future acquisitions and for general corporate purposes.
1995 ACQUISITIONS
To further strengthen its market position, the Company has recently completed
or is currently contemplating the acquisition of the following companies:
On November 30, 1994, Schawk, Inc. announced its agreement to acquire the
business and certain assets of Noral Color Corporation, a prepress graphic arts
business servicing packaging, point-of-sale and the advertising markets. The
Company has merged Noral's operations into the Total Reproductions operating
division of the Graphics Group which is located in Lincolnwood, Illinois. For
the fiscal year ended April 30, 1994, Noral had sales of approximately $5.6
million. The acquisition was completed during the week of January 3, 1995.
In November 1994, the Company entered into an agreement in principle to acquire
a small teleproductions company in the Chicago area, which will provide the
Company entree into a new multi-media product line. The purchase price,
payable in cash or stock, plus additional consideration based on earnings, is
not material to the Company. It is also contemplated that the Company will
enter into long-term employment agreements with the sellers. The acquisition
is subject to the satisfaction of certain conditions, including completion of a
due diligence audit and negotiation of a definitive agreement.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Covered by Report of Independent
Auditors.
Page
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Management's Responsibilities For Financial Reporting 26
Reports of Independent Auditors 27
FINANCIAL STATEMENTS
Consolidated Balance Sheets-
December 31, 1994 and 1993 30
Consolidated Statements of Income-Years ended
December 31, 1994, 1993, and 1992 31
Consolidated Statements of Stockholders' Equity-Years ended
December 31, 1994, 1993 and 1992 32
Consolidated Statements of Cash Flows-Years ended
December 31, 1994, 1993 and 1992 33
Notes to Consolidated Financial Statements 34
FINANCIAL STATEMENT SCHEDULES:
SCHEDULE II - Valuation Reserves 61
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27
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. Annual Report to Stockholders. 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 public accountants, whose report thereon follows. Their report
relies on the audit of Arthur Andersen LLP, which audits the Company's Plastic
Group. As part of their audit of the Company's financial statements, Ernst &
Young LLP and Arthur Andersen 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 and Arthur Andersen 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 accountants to discuss the Company's internal
accounting controls, auditing and financial reporting matters. The independent
accountants have unrestricted access to the Audit Committee.
_______________________________ _______________________________
David A. Schawk Marie Meisenbach Graul
President and Chief Executive Officer Chief Financial Officer
and Treasurer
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28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Schawk, Inc.
We have audited the accompanying consolidated balance sheets of Schawk, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. Our audits also included
the financial statement schedules listed in the index at item 14a. These
financial statements and schedules are the responsibility of Schawk, Inc.
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the financial
statements of Filtertek, Inc. (the Plastics Group of Schawk, Inc.), which
statements reflect total assets of $77,723,000 and $72,930,000 as of December
30, 1994 and December 31, 1993, respectively, and total revenues of $82,257,000
and $73,183,000 for the period ended December 30, 1994 and the year ended
December 31, 1993, respectively, and $12,368,000 for the period from September
21, 1992 to December 31, 1992. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to data included for the Plastics Group, is based solely on the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Schawk, Inc. at
December 31, 1994 and 1993, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Chicago, Illinois ERNST & YOUNG LLP
February 24, 1995
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29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Schawk, Inc.
We have audited the consolidated balance sheets of FILTERTEK, INC. and
subsidiaries (a Delaware corporation and subsidiary of Schawk, Inc.; previously
a combined entity of Filtertek, Inc. and Filtertek de Puerto Rico, Inc., see
Note 1) as of December 30, 1994 and December 31, 1993, and the related
consolidated statements of income, cash flows and stockholders' equity for the
period ended December 30, 1994 and for the years ended December 31, 1993 and
1992, not separately presented herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. As discussed in
Note 2, on October 2, 1993, the Company acquired Fuzere Manufacturing Company,
Inc., Fuzere Midwest, and Robinson Industries ("Robinson/Fuzere") in a purchase
transaction between companies under common control and accounted for as though
it was effective September 22, 1992, in a manner similar to
pooling-of-interests accounting. We did not audit the statements of income of
Robinson/Fuzere for the nine months ended September 30, 1993. Such statements
are included in the consolidated financial statements of Filtertek, Inc. and
subsidiaries. The net sales and net income of Robinson/Fuzere for the period
covered by the report of the other auditors represent 17 percent and 35
percent, respectively, of the total consolidated net sales and net income for
the year ended December 31, 1993. These financial statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included in those financial statements, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Filtertek, Inc. and
subsidiaries as of December 30, 1994 and December 31, 1993, and the
consolidated results of operations and cash flows for the period ended December
30, 1994 and for the years ended December 31, 1993, and 1992 in conformity with
generally accepted accounting principles.
Chicago, Illinois ARTHUR ANDERSEN LLP
February 17, 1995
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30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fuzere Manufacturing Company, Inc.
Robinson Industries, and Fuzere Midwest
We have audited the combined balance sheets of Fuzere Manufacturing Company,
Inc., Robinson Industries, and Fuzere Midwest (Companies) as of September 30,
1993 and December 31, 1992, and the related combined statements of income and
retained earnings, and cash flows for the nine months ended September 30, 1993,
and the year ended December 31, 1992 (not presented separately herein). These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits is accordance with generally accepted auditing
standards. 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 combined financial position of Fuzere
Manufacturing Company, Inc., Robinson Industries, and Fuzere Midwest at
September 30, 1993 and December 31, 1992, and the combined results of their
operations and their cash flows for the nine months ended September 30, 1993,
and the year ended December 31, 1992, in conformity with generally accepted
accounting principles.
Chicago, Illinois ERNST & YOUNG LLP
November 12, 1993
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31
Schawk, Inc.
Consolidated Balance Sheets
(Thousands of Dollars)
DECEMBER 31
1994 1993
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,288 $ 3,533
Trade accounts receivable, less allowance for doubtful
accounts of $947 in 1994 and $791 in 1993 31,906 30,760
Inventories 19,078 17,569
Prepaid expenses and other 3,464 3,277
-------- --------
Total current assets 56,736 55,139
Property and equipment - Net 81,450 76,578
Excess of cost over net assets acquired, less accumulated
amortization of $4,516 in 1994 and $4,173 in 1993 48,287 38,193
Other intangible assets, less accumulated amortization of
$1,788 in 1994 and $1,110 in 1993 1,321 1,828
Other 5,632 8,455
-------- --------
Total assets $193,426 $180,193
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,719 $ 7,758
Accrued expenses 13,908 12,584
Dividends payable -- 2,235
Notes payable to stockholders 8,780 902
Current portion of long-term debt and capital lease
obligations 2,075 1,611
-------- --------
Total current liabilities 31,482 25,090
Long-term debt 75,059 76,918
Capital lease obligations 6,031 6,353
Minority interest -- 18,797
Other 1,209 1,615
Deferred income taxes 3,370 301
Commitments and contingencies
Stockholders' equity:
Common stock 164 108
Preferred stock -- --
Additional paid-in capital 75,412 16,559
Retained earnings 3,971 38,107
Cumulative foreign currency translation adjustment (947) (1,393)
-------- --------
78,600 53,381
Less: Treasury stock at cost 2,325 2,262
-------- --------
76,275 51,119
-------- --------
Total liabilities and stockholders' equity $193,426 $180,193
======== ========
See accompanying notes.
30
32
Schawk, Inc.
Consolidated Statements of Income
(Thousands of Dollars, Except Per Share Amounts)
YEAR ENDED DECEMBER 31
1994 1993 1992
---- ---- ----
Net sales $186,145 $169,038 $110,999
Cost of sales 119,964 109,549 66,753
Selling, general, and administrative expenses 41,908 39,524 29,915
-------- -------- --------
Operating income 24,273 19,965 14,331
Other income (expense):
Interest and dividend income 997 627 807
Interest expense (5,231) (4,922) (2,339)
Other (1,004) 115 55
-------- -------- --------
(5,238) (4,180) (1,477)
-------- -------- --------
Income before income taxes and minority interest 19,035 15,785 12,854
Income taxes:
Income taxes prior to termination of S Corporation status 849 840 571
Deferred income tax charge related to termination of S
Corporation status 3,000 -- --
-------- -------- --------
Income before minority interest 15,186 14,945 12,283
Minority interest in net (income) loss of consolidated subsidiary (1,717) (329) 183
-------- -------- --------
Net income $ 13,469 $ 14,616 $ 12,466
======== ======== ========
Pro forma data (unaudited):
Pro forma income taxes $ 7,071 $ 6,400 $ 5,300
Pro forma net income adjusted only for income taxes 10,247 9,056 7,737
Pro forma net income adjusted for merger, purchase accounting and
income taxes (Note 15) 12,585 9,907 --
Pro forma primary and fully diluted earnings per share adjusted
for merger, purchase accounting, and income taxes 0.64 0.49 --
Pro forma weighted average number of common and common equivalent
shares outstanding 19,543 20,105 --
See accompanying notes.
31
33
Schawk, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1992, 1993, and 1994
(Thousands of Dollars)
SCHAWK, INC.
OLD
SCHAWK
COMPANIES CLASS A CLASS B SERIES A SERIES B ADDITIONAL
COMMON COMMON COMMON PREFERRED PREFERRED PAID-IN RETAINED
STOCK STOCK STOCK STOCK STOCK CAPITAL EARNINGS
--------- -------- -------- --------- --------- ---------- --------
Balance at December 31, 1991 $ 73 $ -- $ -- $ -- $ -- $ 8,319 $30,500
Net income -- -- -- -- -- -- 12,466
Capitalization related to purchase of
Lincoln Graphics, Inc. 10 -- -- -- -- 5,251 --
Capitalization related to purchase of
Flexo Graphics, Inc. 25 -- -- -- -- 975 --
Capital contribution to Flexo Graphics, -- -- -- -- -- 304 --
Inc.
Dividends -- -- -- -- -- -- (10,662)
Cumulative foreign currency translation
adjustment -- -- -- -- -- -- --
------ ------- ---- ----- ----- ------- -------
Balance at December 31, 1992 108 -- -- -- -- 14,849 32,304
Net income -- -- -- -- -- -- 14,616
Capital contribution to Fuzere
Manufacturing Company, Inc. -- -- -- -- -- 1,550 --
Capital contribution to Flexo Graphics, -- -- -- -- -- 198 --
Inc.
Dividends -- -- -- -- -- -- (8,801)
Cumulative foreign currency translation
adjustment -- -- -- -- -- -- --
Other -- -- -- -- -- (38) (12)
------ ------- ---- ----- ----- ------- -------
Balance at December 31, 1993 108 -- -- -- -- 16,559 38,107
Net income -- -- -- -- -- -- 13,469
Capital contribution to Flexo Graphics, -- -- -- -- -- 198 --
Inc.
Dividends -- -- -- -- -- -- (20,398)
Cumulative foreign currency translation
adjustment -- -- -- -- -- -- --
Issuance of Series A Preferred Stock -- -- -- -- -- 22,000 (22,000)
Issuance of Series B Preferred Stock -- -- -- -- -- 5,207 (5,207)
Deemed purchase of minority -- -- -- -- -- 31,502 --
Recapitalization for merger (108) 155 9 -- -- (54) --
------ ------- ---- ----- ----- ------- -------
Balance at December 31, 1994 $ -- $155 $ 9 $ -- $ -- $75,412 $ 3,971
====== ======= ==== ===== ===== ======= =======
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION TREASURY
ADJUSTMENT STOCK
---------- --------
Balance at December 31, 1991 $ -- $(2,262)
Net income -- --
Capitalization related to purchase of
Lincoln Graphics, Inc. -- --
Capitalization related to purchase of
Flexo Graphics, Inc. -- --
Capital contribution to Flexo Graphics, -- --
Inc.
Dividends -- --
----- -------
Cumulative foreign currency translation
adjustment (816) --
Balance at December 31, 1992 (816) (2,262)
Net income -- --
Capital contribution to Fuzere
Manufacturing Company, Inc. -- --
Capital contribution to Flexo Graphics, -- --
Inc.
Dividends -- --
Cumulative foreign currency translation
adjustment (577) --
Other -- --
----- -------
Balance at December 31, 1993 (1,393) (2,262)
Net income -- --
Capital contribution to Flexo Graphics, -- --
Inc.
Dividends -- --
Cumulative foreign currency translation
adjustment 446 --
Issuance of Series A Preferred Stock -- --
Issuance of Series B Preferred Stock -- --
Deemed purchase of minority -- --
Recapitalization for merger -- (63)
----- -------
Balance at December 31, 1994 ($947) ($2,325)
===== =======
See accompanying notes.
32
34
Schawk, Inc.
Consolidated Statements of Cash Flows
(Thousands of Dollars)
YEAR ENDED DECEMBER 31
1994 1993 1992
---- ---- ----
OPERATING ACTIVITIES
Net income $13,469 $14,616 $12,466
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 14,866 15,336 7,784
Deferred income taxes 3,051 (13) --
Other (147) (1,291) (176)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade accounts receivable (1,146) (2,018) (926)
Inventories (1,509) (715) 739
Prepaid expenses and other (169) (1,058) 385
Trade accounts payable and accrued expenses 285 1,682 212
-------- -------- -------
Net cash provided by operating activities 28,700 26,539 20,484
INVESTING ACTIVITIES
Purchases of property and equipment (13,882) (19,066) (11,060)
Cash proceeds from disposals of property and equipment 1,423 333 --
Advances from (to) related parties 1,238 (410) (609)
Acquisitions, net of cash acquired (618) (13,414) (48,298)
Other (401) 347 (1,336)
-------- -------- -------
Net cash used in investing activities (12,240) (32,210) (61,303)
FINANCING ACTIVITIES
Proceeds from debt 22,495 45,253 53,858
Principal payments on debt (25,035) (32,434) (11,492)
Principal payments on capital lease obligations (293) (192) (98)
Cash dividends (12,878) (9,165) (10,395)
Repurchase of common stock -- -- (78)
Increase in additional paid-in capital, net 198 1,748 --
Capitalization of acquisition corporations -- -- 6,565
Capital contribution to Fuzere Manufacturing Company, Inc. -- 1,578 --
(Purchase) sale of Class A common stock, net (1,960) 1,085 --
Foreign currency rate fluctuation (175) (99) --
Sale of Class B common stock 57 -- --
Other (114) -- --
-------- -------- -------
Net cash (used in) provided by financing activities (17,705) 7,774 38,360
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (1,245) 2,103 (2,459)
Cash and cash equivalents beginning of year 3,533 1,430 3,889
-------- -------- -------
Cash and cash equivalents end of year $ 2,288 $ 3,533 $ 1,430
======== ======== =======
See accompanying notes
33
35
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Schawk, Inc. (the Company) operates in two business segments, graphics and
plastics. The graphics segment provides prepress graphics arts services to
customers primarily in the consumer products industries located in the United
States. The plastics segment develops and manufactures insert injection molded
plastic filtration elements and custom specialty plastic products for the
automotive, healthcare and industrial markets. The plastics group also
manufacturers thermoform visual and specialty packaging for the general
commercial, healthcare, and consumer markets. The Company operates plastics
manufacturing facilities in the United States, Puerto Rico, Ireland, and
France.
The graphics segment consists of the company known as Schawk, Inc. (Old Schawk)
and companies previously affiliated through common ownership, Lincoln Graphics,
Inc. and Flexo Graphics, Inc., collectively, the Old Schawk Companies. The
plastics segment consists of the previously 60% owned subsidiaries, Filtertek,
Inc. and subsidiaries (Filtertek or the Filtertek Companies).
On December 30, 1994, the Old Schawk Companies merged with and into Filtertek
(the Merger). Pursuant to the Merger, Filtertek issued an aggregate of
16,245,399 shares of Class A common stock, 22,000 shares of Series A Preferred
stock, and 5,207 shares of Series B Preferred stock to the stockholders of the
Old Schawk Companies, and the shares of Filtertek's Class A common stock
previously held by Old Schawk (which had a controlling interest prior to the
Merger) were cancelled. The new Company was renamed Schawk, Inc.
Because Old Schawk owned a controlling interest of Filtertek prior to the
Merger, AICPA Accounting Interpretation 26 of Accounting Principles Board
Opinion No. 16, requires that the Merger be accounted for as if the Old Schawk
Companies acquired all the remaining Class A common stock of Filtertek.
The accompanying consolidated financial statements include the accounts of the
Old Schawk Companies and the Filtertek Companies based upon Old Schawk's
effective control as of September 21, 1992. All significant intercompany
balances and transactions have been eliminated. The Company's consolidated
balance sheet at December 31, 1994 reflects the accounting as described in the
previous paragraph as of the date of the Merger and includes purchase
accounting adjustments for the portion of Filtertek (40%) not owned by Old
Schawk prior to the Merger.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents include highly liquid debt instruments and time deposits with
an original maturity of three months or less. Cash equivalents are stated at
cost, which approximates market.
INVENTORIES
Inventories are stated at the lower of cost or market. Certain inventories,
which approximate 11% in 1994, and 16% in 1993, respectively, of total
inventories, are determined on the last in, first out (LIFO) cost basis. The
remaining inventories are determined on the first in, first out (FIFO) cost
basis.
34
36
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment, including capitalized leases, are stated at cost, less
accumulated depreciation and amortization and are 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.
INTANGIBLE ASSETS
Intangible assets are comprised primarily of excess of cost over net assets
acquired (goodwill) and noncompete agreements. Goodwill acquired is being
amortized using the straight-line method over periods ranging from 5 to 40
years. The Company continually evaluates the existence of goodwill impairment
on the basis of whether the goodwill is fully recoverable from projected,
undiscounted net cash flows of the related business unit. Noncompete
agreements are being amortized using the straight-line method over the terms of
the agreements ranging from 1 to 5 years.
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated at the rate of exchange
existing at year-end, and income amounts are translated at the average of the
monthly exchange rates. Gains and losses resulting from the translation of
foreign currency financial statements are deferred and classified as a separate
component of stockholders' equity.
INCOME TAXES
The Old Schawk Companies elected to be taxed as S Corporations under applicable
provisions of the Internal Revenue Code (IRC). S Corporation income for
federal income tax purposes is treated substantially as if the company were a
partnership, and, therefore, is not ordinarily subject to federal income tax.
Upon consummation of the Merger, Schawk, Inc. recorded a provision for deferred
income taxes of $3,000 to reflect the termination of the S Corporation status
of the Old Schawk Companies. For informational purposes, the statements of
income include an unaudited pro forma adjustment for income taxes which would
have been recorded if these companies had been C Corporations, based on the tax
laws in effect during those periods. Filtertek is a C Corporation under
applicable provisions of the Internal Revenue Code.
Effective January 1, 1993, Filtertek adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under the provisions of this statement, 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 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. The adoption of SFAS No. 109 did not have a material effect on the
financial condition or results of operations of Filtertek.
35
37
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Pro forma primary and fully diluted earnings per share is computed by dividing
net income adjusted as described in Note 15 by the pro forma weighted average
number of common and common equivalent shares outstanding as a result of the
Merger.
RECLASSIFICATIONS
Certain amounts in the 1992 and 1993 financial statements have been
reclassified to conform to the 1994 presentation.
NOTE 3. ACQUISITIONS
The following acquisitions were completed during 1992, 1993 and 1994. All have
been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the respective net assets acquired based
on the fair value of such assets, including certain noncompete agreements (Note
8) and liabilities as of the date of the acquisitions, and the results of
operations have been included in the accompanying consolidated statements of
income from the effective date of the acquisitions.
FLEXO GRAPHICS STOCK PURCHASE
During 1992, the stockholders of Old Schawk formed the Flexographics
Acquisition Company (Flexo Graphics Acquisition). Effectively July 1, 1992,
Flexo Graphics Acquisition acquired all of the outstanding stock of Flexo
Graphics for approximately $1,813, of which $1,000 was paid in cash, $500 in a
note payable, and $313 in amounts payable. Subsequent to this transaction,
Flexo Graphics Acquisition was merged into Flexo Graphics. The following
summarizes the purchase price allocation and cash paid:
Fair value of assets acquired, net of cash acquired of
approximately $188 $1,536
Cost in excess of net assets acquired 966
Liabilities assumed (1,690)
------
Cash paid, net of cash acquired $ 812
======
The cost in excess of net assets acquired is being amortized over 10 years.
36
38
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 3. ACQUISITIONS (CONTINUED)
LINCOLN GRAPHICS STOCK PURCHASE
During 1992, the stockholders of Schawk formed Schawk of New Jersey, Inc.
(Schawk NJ). Effective May 5, 1992, Schawk NJ acquired all of the outstanding
stock of Lincoln Graphics for approximately $5,261 in cash. Subsequent to this
transaction, Schawk NJ was merged into Lincoln Graphics. The following
summaries the purchase price allocation and cash paid:
Fair value of assets acquired, net of cash
acquired of
approximately $508 $12,351
Cost in excess of net assets acquired 890
Liabilities assumed (8,488)
-------
Cash paid, net of cash acquired $ 4,753
=======
The cost in excess of net assets acquired is being amortized over 10 years.
FILTERTEK
On September 21, 1992, Old Schawk acquired 2,884,596 shares of Class A common
stock and 254,363 stock options of Filtertek for approximately $43,573 in cash.
In addition, on September 21, 1992, an additional 744,939 shares of Class A
common stock of Filtertek were placed in an irrevocable trust as part of an
agreement by Schawk to purchase these shares. This additional purchase was
secured by a letter of credit of $10,770. On January 5, 1993, the shares in
the trust were distributed to Schawk for $10,770 in cash. As a result, Schawk
had effective control of Filtertek as of September 21, 1992. The allocation of
the purchase price was finalized in 1993 upon completion of analyses,
valuations, and other studies relating to the acquired assets and assumed
liabilities. The fair value of assets acquired includes a step up in basis by
Old Schawk's ownership interest (60%) of the excess of fair value of the
related assets over their net book values at the date of acquisition. The
following summarizes the purchase price allocation and cash paid:
Fair value of assets acquired $ 31,416
Fair value of stock options acquired 1,065
Cost in excess of net assets acquired 34,505
Liabilities assumed (12,643)
-------
Cash paid $54,343
=======
During 1994, Old Schawk acquired approximately 51,000 additional shares of
Filtertek for $618. On December 30, 1994, the Old Schawk Companies merged with
and into Filtertek. As described in Note 1, the Merger was accounted for as if
the Old Schawk Companies had acquired all the remaining Class A common stock of
Filtertek. The following summarizes the purchase price allocation in
connection with the Merger:
37
39
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 3. ACQUISITIONS (CONTINUED)
Fair value of remaining Filtertek Class A Common stock $31,502
Elimination of minority interest (18,017)
-------
13,485
Increase of property and equipment to fair value (4,252)
-------
Increase to cost in excess of net assets acquired $ 9,233
=======
The cost in excess of net assets acquired is being amortized over 40 years.
All of Class A common stock and stock options acquired by the Old Schawk on
September 21, 1992, were cancelled pursuant to the terms of the Merger.
PLASTIC MOLDED CONCEPTS, INC. STOCK PURCHASE
Effective June 2, 1993, Filtertek acquired all of the outstanding stock of
Plastic Molded Concepts, Inc. (PMC) for approximately $3,673, of which $2,650
was paid in cash and $1,023 in shares of Class A common stock (105,069 shares).
The following summarizes the purchase price allocation and cash paid:
Fair value of assets acquired, net of cash acquired of
approximately $6 $4,417
Cost in excess of net assets acquired 1,093
Liabilities assumed (1,843)
Class A common stock issued (1,023)
------
Cash paid, net of cash acquired $2,644
======
The cost in excess of net assets acquired is being amortized over 40 years.
NOTE 4. RELATED PARTY TRANSACTIONS
Other noncurrent assets includes $1,238 in notes receivable at December 31,
1993, from a trust set up for the beneficial interest of certain stockholders
and their family members. The notes paid interest at rates ranging from 5% to
9%. Interest of approximately $162 was accrued at December 31, 1993, and is
included in prepaid expenses and other current assets. Interest income related
to these notes was $50, $88, and $55 for 1994, 1993 and 1992, respectively.
Included in prepaid expenses and other at December 31, 1994 and 1993, was
approximately $141 and $355, respectively, of advances to Geneva Waterfront,
Inc., which is owned by a stockholder of the Company.
Other noncurrent assets also includes approximately $685 and $629 in notes
receivable from employees at December 31, 1994 and 1993, respectively. The
notes are non-interest-bearing demand notes collateralized by Class B common
stock.
38
40
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has approximately $8,780 and $902 in notes payable at December 31,
1994, and 1993, respectively, payable to certain stockholders. The notes bear
interest at rates ranging from 5% to 6%. Interest expense related to these
notes was $100, $108, and $40 for 1994, 1993, and 1992.
NOTE 5. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1994 1993
---- ----
Raw materials $ 7,633 $ 6,556
Work in process 6,792 7,663
Finished goods 5,298 3,982
-------- -------
19,723 18,201
Less: LIFO reserve (645) (632)
-------- -------
$ 19,078 $17,569
======== =======
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
1994 1993
---- ----
Land and improvements $ 2,315 $ 2,644
Buildings and improvements 35,390 32,806
Machinery and equipment 81,782 70,234
Leasehold improvements 3,167 2,387
Building and improvements under capital leases 7,500 7,500
-------- -------
130,154 115,571
Accumulated depreciation and amortization 48,704 38,993
-------- --------
$ 81,450 $ 76,578
======== ========
Accumulated depreciation and amortization includes $1,501 and $1,087 for
building and improvements under capital leases at December 31, 1994 and 1993,
respectively. Depreciation and amortization expense for property and equipment
was $12,868, $13,089, and $6,520 in 1994, 1993, and 1992, respectively.
39
41
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1994 1993
---- ----
Accrued compensation and payroll taxes $ 8,805 $ 8,279
Accrued income taxes 557 667
Other 4,546 3,638
------- -------
$13,908 $12,584
======= =======
NOTE 8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
1994 1993
---- ----
OLD SCHAWK
Revolving credit facility $46,000 $51,500
Obligations under noncompete agreements 855 1,333
Other 799 1,883
THE FILTERTEK COMPANIES
Revolving credit facility 28,300 22,000
Deutsche Mark line of credit, due April 1995 (interest at
Eurodeutsche mark rate plus 0.5%) 645 --
Term loans, denominated in French Francs, due in quarterly
installments through May 2004 (interest ranging from 8.725% to
10.784%) -- 2,076
Other 213 347
-------- --------
76,812 79,139
Less: Current portion (1,753) (2,221)
-------- --------
$ 75,059 $ 76,918
======== ========
OLD SCHAWK
On September 21, 1992, Old Schawk entered into a revolving credit facility with
three participating banks (collectively, Lenders). The facility has a
termination date of August 31, 1999. On December 30, 1994, as a result of the
Merger, Schawk, Inc. became the new borrower of the Old Schawk revolving credit
facility.
40
42
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 8. LONG-TERM DEBT (CONTINUED)
The maximum borrowing limit of $49,000, as amended, is reduced on a semiannual
basis, in amounts ranging from $3,000 to $4,000 through February 1999 with a
maximum borrowing limit of $18,500 for the period from March 1999 through
August 1999. Schawk may permanently reduce the facility in multiples of $1,000
at any time.
The revolving credit facility bears interest at the Eurodollar interest rate
plus .625% (6.10% at December 31, 1994), as defined, or the Lenders' alternate
base rate (6.5% at December 31, 1994), as defined, as determined by the
Company. Interest is payable at intervals ranging from 30 days to 90 days. The
unused facility carries a 0.25% commitment fee. A letter of credit facility of
$3,000 is also provided for under the revolving credit facility.
Borrowings under the revolving credit facility are unsecured but are subject to
certain restrictive covenants which include, among other things, (i)
restrictions on the incurrence of additional indebtedness, (ii) limitations on
capital expenditures, (iii) limitations on new leases, and (iv) restrictions on
the payment of dividends or other distributions to stockholders. In addition,
the facility requires the Company to maintain certain net worth, interest
coverage, and other financial ratio requirements.
In November 1992, Old Schawk entered into an interest rate swap agreement to
hedge the impact of changes in interest rates on its revolving credit facility.
The agreement converts the interest rate on the revolving credit facility to a
fixed rate of 5.81%. The agreement applies to $40,000 of the outstanding
principal balance, decreasing by $2,000 each quarter until termination in
October 1997. If the swap was terminated at December 31, 1994, it would result
in a net receipt by the Company of approximately $643. Net amounts paid or
received on interest rate swap agreements that qualify as hedges are recognized
over the term of the agreement as an adjustment to interest expense. Realized
gains and losses resulting from interest rate swap agreements are recognized in
the period the agreement is terminated. Unrealized gains and losses from
interest rate swap agreements are deferred until realized.
In connection with the $8,800 notes payable to certain stockholders described
in Note 9, Old Schawk arranged an unsecured short-term credit facility for up
to $8,800 to fund repayment of these notes payable. The facility bears
interest at LIBOR plus .50% and matures at December 31, 1995. No amounts on
this facility are outstanding at December 31, 1994.
THE FILTERTEK COMPANIES
The revolving credit facility, executed in 1993, provides for a maximum
borrowing limit of $30,000 until December 31, 1998. The commitment is reduced
by $2,000 annually as part of the agreement. The unused line of credit carries
a 0.25% commitment fee.
The revolving credit facility bears interest at an average banking rate which
approximates prime (8.5% at December 31, 1994), or LIBOR plus 0.5% (6.5% at
December 31, 1994) as determined by Filtertek.
Borrowings under the above agreement are unsecured. However, the agreement
contains restrictive covenants which include, among other things, (i)
restrictions on the incurrence of additional indebtedness, (ii) limitations on
capital transactions, (iii) limitations on new leases, (iv) limitations on
investments, and (v) restrictions on the payment of dividends. In addition,
the agreement requires the maintenance of certain tangible net worth, leverage
ratios, and other financial ratio requirements.
41
43
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 8. LONG-TERM DEBT (CONTINUED)
Filtertek also entered into a working capital foreign currency line of credit
agreement for $3,500 through May 31, 1995. The line bears interest at the
Eurodollar interest rate plus .5%.
OBLIGATIONS UNDER NONCOMPETE AGREEMENTS
All obligations under noncompete agreements are guaranteed by the Company.
Annual maturities of all long-term debt at December 31, 1994, are as follows:
1995 $ 1,753
1996 11,471
1997 9,625
1998 31,471
1999 22,268
Thereafter 224
-------
$76,812
=======
As substantially all of the debt of the Company bears interest at floating
rates, the carrying value of the Company's debt approximates fair value.
Interest paid on long-term debt during the years ended December 31, 1994, 1993,
and 1992, was approximately $5,375, $5,803, and $2,028, respectively.
42
44
Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 9. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following:
DECEMBER 31,
1994 1993
------ ------
Common stock:
Schawk, Inc. -
Class A voting, $0.008 par value, 40,000,000 shares authorized;
19,601,863 shares issued; 19,388,852 shares outstanding
$ 155 $ --
Class B nonvoting, $0.05 par value, 200,000 shares authorized;
172,281 shares issued; 138,432 shares outstanding 9 --
Old Schawk Companies -
Old Schawk, $0.10 par value; 900,000 shares authorized; 733,767
shares issued; 461,196 shares outstanding -- 73
Lincoln Graphics, $0.50 par value; 100,000 shares authorized;
20,139.60 shares issued and outstanding -- 10
Flexo Graphics, $1.00 par value; 25,000 shares authorized,
issued, and outstanding -- 25
------- -------
$ 164 $ 108
======= =======
Preferred stock, 1,000,000 shares authorized:
Schawk, Inc. -
Series A, $0.01 par value, 22,000 shares issued and outstanding $ -- $ --
Series B, $0.01 par value, 5,207 shares issued and outstanding
-- --
------- -------
$ -- $ --
======= =======
Additional paid-in capital:
Schawk, Inc. $75,412 $ --
Old Schawk -- 9,831
Lincoln Graphics -- 5,251
Flexo Graphics -- 1,477
------- -------
$75,412 $16,559
======= =======
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
DECEMBER 31,
1994 1993
------ ------
Retained earnings:
Schawk, Inc. $3,971 $ --
Old Schawk -- 37,207
Lincoln Graphics -- 349
Flexo Graphics -- 551
------ -------
$3,971 $38,107
====== =======
Treasury stock:
Schawk, Inc., 213,011 shares Class A and
33,849 shares Class B, at cost $2,325 $ --
Old Schawk, 272,571 shares, at cost -- 2,262
------ -------
$2,325 $ 2,262
====== =======
In December 1994, prior to the Merger, the Old Schawk Companies paid a dividend
of previously taxed and undistributed S Corporation earnings of the Old Schawk
Companies to the existing stockholders in the form of notes payable in the
aggregate amount of $8,800 plus an aggregate of 27,207 shares of preferred
stock.
On December 30, 1994, the Company issued 22,000 shares of Series A preferred
stock and 5,207 shares of Series B preferred stock. The liquidation value of
each share is equal to $1,000 per share plus all accumulated and unpaid
dividends. The Series A preferred shares are mandatorily redeemable by the
Company on December 31, 2004, or, at the option of the Board, on any December
31, beginning on December 31, 1995, and ending on December 31, 2003, by issuing
to the holder the number of shares of Class A common stock equal to the sum of
$1,000 plus an amount equal to all accumulated and unpaid dividends per share
divided by $13.80, or cash in the amount of the fair market value, as defined,
of the number of shares of Class A common stock. The Series B preferred shares
are mandatorily redeemable by the Company on December 31,1999 under the same
redemption formula as Series A. Dividends shall accrue on each share of
preferred stock at the rate of 5.0% per year and are payable quarterly.
Holders of preferred shares are entitled to limited voting rights.
Upon the liquidation, dissolution or winding up of the Company, the holders of
Class A common and Class B common stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock,
until the holders of Class B common stock have received distributions (maximum
amount of $10,000) equal to the par value of their shares. Thereafter, all
distributions shall be made for the benefit of the holders of Class A common
stock.
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 10. INCOME TAXES
The provision (credit) for income taxes is comprised of the following:
YEAR ENDED DECEMBER 31
1994 1993 1992
------ ------ ------
Current:
U.S./Puerto Rico $ 76 $ 212 $ 17
State 722 635 457
Foreign -- 6 (21)
------ ----- ----
798 853 453
Deferred:
U.S./Puerto Rico 2,404 87 31
State 390 -- --
Foreign 257 (100) 87
------ ----- ----
3,051 (13) 118
------ ----- ----
Total $3,849 $ 840 $571
====== ===== ====
On December 30, 1994, the effective date of the Merger, Schawk, Inc. recorded a
$3,000 deferred income tax charge related to the termination of the S
Corporation status of the Old Schawk Companies.
Components of deferred income tax assets and liabilities (tax effected) are as
follows:
DECEMBER 31,
1994 1993
------ ------
Current deferred income taxes:
Inventory $ 246 $ 112
Accruals and reserves not currently deductible 1,493 193
Offering costs 400 --
Other 334 88
Valuation allowance (2,369) (307)
------- -------
Net current asset $ 104 $ 86
======= =======
Long-term deferred income taxes:
Depreciation (3,396) (1,244)
Property and equipment acquisition
basis differences (2,432) --
Net operating losses and other credit carryforwards 6,792 7,808
Other (507) 44
Valuation allowance (3,827) (6,909)
------- -------
Net long-term liability $(3,370) $ (301)
======= =======
45
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 10. INCOME TAXES (CONTINUED)
The European (primarily German and France) and U.S. losses cannot be further
benefited due to the inability to carryback the losses against taxable income
from previous years or to further benefit the losses against any remaining
deferred tax liabilities in the future. As a result, a valuation allowance
under SFAS No. 109 has been established against net operating losses.
A reconciliation between the provision for income taxes computed by applying
the Federal statutory tax rate to income before income taxes and minority
interest and the actual provision is as follows:
YEAR ENDED DECEMBER 31,
1994 1993 1992
------ ------ ------
Income taxes at statutory rate 34.0% 34.0% 34.0%
Income exempt from income tax (32.9) (121.5) (40.5)
State income taxes 3.8 4.0 3.3
Europe operating losses not benefited -- 98.0 8.9
S Corporation earnings of acquired entities -- (10.7) (2.4)
Deferred tax related to S Corporation termination 15.8 -- --
Other (0.5) 1.5 1.1
---- ---- ----
20.2% 5.3% 4.4%
==== ==== ====
The Company's Puerto Rican operation is exempt from the payment of Puerto Rico
income taxes on 90% of its income from the manufacture and sale of all products
in Puerto Rico until January 2010. This exemption was received from the
government of Puerto Rico in January 1974 and amended in June 1981, June 1983,
and December 1990, under the Puerto Rico Industrial Incentive Acts of 1963 and
1987. In addition, 90% of the dividends paid to residents of Puerto Rico are
exempt from tax under grant.
The Company's operation in the Republic of Ireland is subject to a 10% income
tax.
The approximate effects of these tax holidays described above was to increase
net income by $1,334, $1,420 and $1,397 in 1994, 1993, and 1992 respectively,
and to increase pro forma earnings per share by $0.07 and $0.07 in 1994 and
1993, respectively.
The Company qualifies under Section 936 of the Internal Revenue Code to receive
a credit equal to its United States tax on income from sources in Puerto Rico.
As a result, no United States income tax has been provided on the exempt
income.
Tax loss carryforwards at December 31, 1994, are approximately $7,990, $1,232,
and $7,972, in the United States, France, and Germany, respectively. These
loss carryforwards can be recognized through future taxable income in the
United States through the years 2003 through 2007, and in France and Germany
for an indefinite period of years. Of the U.S. tax loss carryforward,
approximately $2,100 will be recognized in stockholders' equity when realized
and the remaining amounts will be recognized in the statements of income.
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 10. INCOME TAXES (CONTINUED)
The undistributed earnings of foreign subsidiaries were approximately $4,780 at
December 31, 1994. No income taxes are provided on the distribution of such
earnings because they are considered permanently invested. The foreign
component of income (losses) before income taxes and minority interest was
($745,000), ($4,036,000) and ($790,000) for the years 1994, 1993, and 1992,
respectively.
Income taxes paid during the years ended December 31, 1994, 1993, and 1992,
were approximately $959, $654, and $372, respectively.
NOTE 11. LEASES AND COMMITMENTS
The Company leases land and a building from an unrelated party. This lease
requires monthly installments of approximately $48 through January 2010. A
related party has an option to purchase the land and building in January 2000.
The Company also leases land and a building from a related party, with monthly
installments of approximately $32 through June 2002. The agreement contains an
option to purchase the land and building at the end of the lease for 90% of
fair market value at the end of the lease. The Company is required to pay
utilities, real estate taxes, and insurance on the property on both leases.
These leases are recorded as capital leases.
The Company also leases various plant facilities and equipment under
noncancellable operating leases that expire at various dates through February
2010. Total rent expense incurred under all operating leases, was
approximately $808, $1,099, and $942 for the years ended December 31, 1994,
1993, and 1992, respectively.
Future minimum payments under leases with terms of one year or more are as
follows at December 31, 1994:
CAPITAL OPERATING
LEASES LEASES
-------- ------
1995 $ 959 $ 668
1996 959 551
1997 959 404
1998 959 285
1999 959 227
Thereafter 6,779 737
-------- ------
11,574 $2,872
Less: Amounts representing interest 5,221 ======
--------
6,353
Less: Current portion 322
--------
$ 6,031
========
47
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 11. LEASES AND COMMITMENTS (CONTINUED)
The Company's production facility in Ireland is being financed in part by
Grants from the Industrial Development Authority of Ireland (IDA). The Grants
provide 25% of the actual amount of funds expended on the acquisition and
equipping of the production facility up to a maximum of approximately
1.4 million Irish punts (approximately $2,158 at December 31, 1994). Grants
received to date totaled approximately 1.2 million Irish punts ($1,837 at
December 31, 1994), are reported as a reduction of the related assets, and are
being amortized over the life of the asset. A contingent liability for
repayment of the Grants received exists if the Ireland operations were
liquidated. The Grants are forgiven ratably over a ten-year period. The
unamortized Grant liability totaled approximately .4 million Irish punts ($541
at December 31, 1994). In 2001, all obligations for repayment of the Grants
terminate. There is no intention of liquidating the Ireland operation.
NOTE 12. EMPLOYEE BENEFIT PLANS
DEFINED-CONTRIBUTION PLANS
The Company has the following defined-contribution plans for the benefit of its
employees. The Schawk, Inc. Employee Retirement Plan, a 401(k) plan, covers
all nonunion employees of the Illinois, New York, California, Michigan, and
Minneapolis operations, plus a related company, Geneva Waterfront, Inc. The
Weston Engraving, Inc. Profit Sharing Plan, is a frozen plan that previously
covered employees of the Weston Engraving division that are currently covered
in the Schawk, Inc. Employee Savings Plan. Effective January 1, 1995 the
Weston Engraving, Inc. Profit Sharing Plan was merged into the Schawk, Inc.
Employee Retirement Plan. The Schawkgraphics, Inc. Profit Sharing Plan covers
the union employees of the Schawk Graphics division. The Lincoln Graphics,
Inc. Flexible Compensation Plan, a 401(k) plan, covers all nonunion employees
of Lincoln Graphics. Effective January 1, 1994, the Lincoln Graphics, Inc.
Flexible Compensation Plan was merged into the Schawk, Inc. Employee
Retirement Plan. The Filtertek, Inc. Retirement Savings Plan, a 401(k) plan,
covers employees of the Illinois and Puerto Rico operations. The plans provide
a 100% match of employee contributions up to 5% of wages (as defined).
Contributions to the plans were as follows:
YEAR ENDED DECEMBER 31,
1994 1993 1992
----- ----- -----
Schawk, Inc. Employee Retirement Plan $1,093 $ 930 $ 843
Schawkgraphics, Inc. Profit Sharing Plan 40 40 40
Lincoln Graphics, Inc. Flexible Compensation Plan -- 90 7
Filtertek, Inc. Retirement Savings Plan 383 321 --
------ ------ -----
$1,516 $1,381 $ 890
====== ====== =====
48
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 12. EMPLOYEE BENEFIT PLANS (CONTINUED)
MULTI-EMPLOYER PENSION PLANS
The Company is required to contribute to certain defined-contribution 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 $558, $587, and $519 in 1994, 1993, and 1992.
NOTE 13. STOCK/EQUITY OPTION PLANS
In 1988, the Company adopted an Equity Option Plan which, as amended, provides
for the issuance of up to 2,252,250 shares of common stock to key employees.
In 1991, the Company adopted an Outside Directors' Formula Stock Option Plan as
amended in 1994, and authorized grants thereunder to nonemployee directors of
options of shares of common stock.
In addition, in 1984 and 1987, options totaling 236,226 shares were made
available and granted to former employees.
The Employees Stock Bonus Plan and Trust, a retirement program, had previously
been granted options representing 260,481 shares. During 1992, this plan was
terminated.
Options granted under all of these plans are at market price at date of grant
and are exercisable for a period of ten years from the date of grant.
49
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 13. STOCK/EQUITY OPTION PLANS (CONTINUED)
A summary of options outstanding at each of the three years ended December 31,
1994, 1993, and 1992, and other data for the three years then ended under all
option plans, including options granted to the Employees Stock Bonus Plan and
Trust is as follows:
YEAR ENDED DECEMBER 31,
1994 1993 1992
------ ------ ------
Outstanding January 1, . . . . . . 846,033 1,153,288 1,605,388
Granted . . . . . . . . . . . . . 364,984 35,000 90,000
Exercised. . . . . . . . . . . . . (21,966) (334,182) (538,846)
Cancelled. . . . . . . . . . . . . (258,363) (8,073) (3,254)
------- ------- ---------
Outstanding December 31, . . . . . 930,688 846,033 1,153,288
======= ======= =========
Average price of options
exercised . . . . . . . . . . $6.00 $6.00 $6.00
Average price of options
outstanding . . . . . . . . . . . $9.37 $8.17 $7.55
Available for grant
December 31, . . . . . . . . . 919,681 58,481 68,481
======= ====== ======
50
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 14. SEGMENT DATA
The Company operates in two industry segments, graphics and plastics as
described in Note 1. Net sales, operating income, capital expenditures,
depreciation and amortization, and identifiable assets, by segment are
summarized as follows:
Graphics Plastics General
Group Group Corporate
---------- ----------- -----------
1994
----
Net sales $103,889 $82,256 $ --
Operating income 20,380 4,087 (194)
Capital expenditures 4,551 8,750 581
Depreciation and amortization 7,192 7,674 --
Identifiable assets 43,781 130,588 19,057
1993
----
Net sales $ 95,809 $73,229 $ --
Operating income 16,356 3,789 (180)
Capital expenditures 6,138 9,100 3,828
Depreciation and amortization 8,906 6,430 --
Identifiable assets 46,332 111,940 21,921
1992
----
Net sales $ 82,860 $28,139 $ --
Operating income 14,165 266 (100)
Capital expenditures 3,898 5,623 1,539
Depreciation and amortization 5,928 1,856 --
Identifiable assets 46,227 92,558 16,971
General corporate identifiable assets consist primarily of cash, property and
equipment, and miscellaneous other assets.
51
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Schawk, Inc.
Notes to Consolidated Financial Statements
(Thousands of Dollars, Except Per Share Amounts)
NOTE 15. EARNINGS PER SHARE
Historical earnings per share is computed by dividing net income adjusted only
for pro forma income taxes by the historical weighted average number of common
shares outstanding of the Old Schawk Companies.
The historical earnings per share adjusted only for pro forma income taxes is
as follows:
YEAR ENDED DECEMBER 31,
1994 1993 1992
---- ---- ----
Net income $13,469 $14,616 $12,466
Pro forma income taxes 7,071 6,400 5,300
Pro forma net income adjusted only for
income taxes 10,247 9,056 7,737
Primary and fully diluted common shares
outstanding 507,328 507,328 488,115
Primary and fully diluted earnings per
share adjusted only for income taxes $20.20 $17.85 $15.85
Because of the merger with Filtertek on December 30, 1994, the Company
does not consider the historical earnings per share calculation shown above to
be meaningful information. Pro forma earnings per share information shown on
the statements of income is presented to compare net income and earnings per
share as if the Merger had occurred at the beginning of each of the periods
presented. The following pro forma adjustments have been made to each of the
periods. Increased depreciation and amortization was recorded to reflect the
increased basis in property and equipment and goodwill amortization resulting
from the merger. Compensation expense was reduced to reflect the terms of
employee/stockholder agreements in effect at January 1, 1995. Income tax
expense was adjusted to reflect taxation at regular income tax rates instead of
S Corporation rates. Preferred stock dividends were recorded to reflect the
issuance of preferred stock in connection with the Merger.
52
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective December 30, 1994, the corporation previously known as Schawk, Inc.
("Old Schawk") and certain affiliated corporations (collectively with Old
Schawk, the "Old Schawk Companies") were merged into the Registrant (formerly
known as "Filtertek, Inc.") in a transaction accounted for as a purchase. The
surviving corporation in the merger was Filtertek, Inc. which then changed its
name to Schawk, Inc.; however, under applicable accounting rules the historical
financial statements of the Old Schawk Companies, rather than the Filtertek,
Inc. statements, will be treated as the financial statements of the Registrant.
The Registrant's operations consist of two segments, its graphics business (the
"Graphics Group") and its plastics business (the "Plastics Group"). The
Plastics Group is comprised primarily of what was the business of Filtertek,
Inc. prior to the merger and the Graphics Group is comprised primarily of what
was the business of the Old Schawk Companies.
The Registrant's principal accountant from 1983 through January 16, 1995 has
been Arthur Andersen LLP. The Old Schawk Companies' principal accountant from
January 1, 1992 through December 30, 1994 has been Ernst & Young LLP.
On January 16, 1995, the Board of Directors decided to continue to retain
Arthur Andersen LLP to audit the Plastics Group and Ernst & Young LLP to audit
the Graphics Group for the fiscal year ended December 31, 1994. However, as a
result of the merger, Ernst & Young LLP has become the Registrant's principal
accountants because, as stated above, under accounting rules the financial
statements of the Old Schawk Companies will be treated as the financial
statements of the Registrant. Consequently, Ernst & Young LLP will deliver an
audit opinion on behalf of the Registrant for the fiscal year ended December
31, 1994. Arthur Andersen LLP will deliver an audit opinion with respect to
the Plastics Group for the year ended December 31, 1994, and Ernst & Young LLP
will refer to such opinion in delivering its audit opinion on behalf of the
Registrant.
The Registrant and Arthur Andersen LLP have not disagreed on any matter of
accounting principles or practice, financial statement disclosure or auditing
scope or procedure in connection with the audits for the Registrant's two most
recent audited fiscal years or during the period of January 1, 1994 to January
16, 1995. The Board of Directors' determination not to retain Arthur Andersen
LLP was not based on the expectation that any such disagreement would arise in
connection with the audit of its financial statements for the year ended
December 31, 1994, but rather by virtue of the merger.
Other than as described above, Filtertek, Inc. had not engaged or otherwise
consulted with Ernst & Young LLP regarding any matter relating to Filtertek,
Inc.'s financial statements, and no written report or oral advise was provided
to Filtertek, Inc. by Ernst & Young LLP regarding any decision of Filtertek,
Inc. as to any accounting, audit or financial reporting issue.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and persons nominated to become Directors,
and information regarding Executive Officers of the Registrant is included in
the Joint Proxy Statement for the Annual Meeting of Stockholders to be held
Wednesday, May 17, 1995 and is to be filed with the Securities and Exchange
Commission on or before March 31, 1995 ("the Proxy Statement"), and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is included in the Proxy Statement
under the heading "Executive Compensation" and is incorporated herein by
reference.
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55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is included in the Proxy Statement
under the heading of "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN TRANSACTIONS
Information with respect to this item is included in the Proxy Statement
under the heading of "Certain Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following financial statements are included in Item 8:
1. All financial statements
Reports of Independent Auditors
FINANCIAL STATEMENTS:
Consolidated Balance Sheets-Years Ended
December 31, 1994 and 1993
Consolidated Statements of Income-Years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows-Years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity-Years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. The following financial schedules for the years 1994, 1993 and 1992
are submitted herewith:
SCHEDULE II - Valuation Reserves
FINANCIAL DATA SCHEDULE
All other schedules are omitted because they are not applicable or not
required.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed by Filtertek, Inc., the former
Registrant during 1994 and are incorporated herein by reference:
Form 8-K dated May 31, 1994
Form 8-K dated October 14, 1994, as amended by Form 8-K/A (No. 1) dated
October 14, 1994 and filed November 4, 1994
Form 8-K dated November 23, 1994 and filed December 8, 1994
54
56
The following Reports on Form 8-K were filed during the first quarter 1995
and are incorporated herein by reference:
Form 8-K dated December 30, 1994 and filed January 6, 1995
Form 8-K dated January 16, 1995 and filed February 6, 1995
(c) Exhibits
INCORPORATED
------------
2.1 Amended and Restated Agreement and Plan of Reorganization Registration Statement
dated November 23, 1994, by and among Filtertek, Inc., No. 33-85152
Schawk, Inc., Flexo Graphics, Inc., Lincoln Graphics, Inc.
and Filtertek USA, Inc., as amended.
2.2 Amended and Restated Plan of Merger dated November 23, Registration Statement
1994, by and among Filtertek, Inc., Schawk, Inc., Flexo No. 33-85152
Graphics, Inc., Lincoln Graphics, Inc. and Filtertek USA,
Inc., as amended.
3.1 Certificate of Incorporation of Schawk, Inc., as amended. Registration Statement
No. 33-85152
3.3 By-Laws of Filtertek, Inc. as amended. Registration Statement
No. 2-83456
4.1 Specimen Class A Common Stock Certificate. Registration Statement
No. 33-85152
4.2 Certificate of Registration of Series A Preferred Stock. Registration Statement
No. 33-85152
4.3 Certificate of Registration of Series B Preferred Stock. Registration Statement
No. 33-85152
10.1(a) Filtertek/Filtertek P.R. Service Agreement. Registration Statement
No. 2-83456
10.1(b) Amendment to Service Agreement. 1986 10-K
10.2(a) Filtertek/Filtertek P.R. Distribution Agreement. Registration Statement
No. 2-83456
10.2(b) Amendment to Distribution Agreement. 1986 10-K
10.3 IDA Grant and Tax Exemption Letter. Registration Statement
No. 2-83456
10.7 Filtertek P.R. Restricted Stock Ownership Plan for Key Registration Statement
Employees. No. 2-83456
10.12 Filtertek, Inc. 1988 Equity Option Plan. 1988 10-K
10.13(a) First Amendment to Filtertek, Inc. 1988 Equity Option Plan. 1992 10-K
10.13(b) Second Amendment to Filtertek, Inc. 1988 Equity Option Registration Statement
Plan. No. 33-85152
55
57
10.14 Acquisition Agreement of Robinson Industries and Fuzere 1993 10-K
Midwest Divisions of Schawk, Inc. and Fuzere Manufacturing
Co., Inc.
10.15 Management Agreement Re: Administrative Services. 1993 10-K
10.16 Retirement Savings Plan First Amendment and Restatement 1993 10-K
Effective January 1, 1993.
10.17 German Severance Agreement dated March 9, 1993. 1993 10-K
10.18 Credit Agreement dated December 22, 1993 by and among Registration Statement
Filtertek, Inc., Filtertek de Puerto Rico, Inc. and the No. 33-85152
lenders named therein and the Northern Trust Company, as
Agent.
10.18(a) Consent, Waiver and Amendment dated as of December 28, 1994 Registration Statement
by and among Filtertek, Inc., Filtertek USA, Inc. and the No. 33-85152
lenders named therein and the Northern Trust Company, as
agent.
10.19 $3,500,000 Credit Facility dated June 2, 1994 between Registration Statement
Filtertek, B.V. and The First National Bank of Chicago. No. 33-85152
10.20 Credit Agreement dated September 21, 1992 by and between Registration Statement
Schawk, Inc. and First National Bank of Chicago, as amended No. 33-85152
through May 5, 1994.
10.21 Interest Rate and Currency Exchange Agreement dated Registration Statement
April 1, 1992, by and between Schawk, Inc. and First No. 33-85152
National Bank of Chicago.
10.22 Lease Agreement dated as of July 1, 1987, and between Registration Statement
Process Color Plate, a division of Schawk, Inc. and The No. 33-85152
Clarence W. Schawk 1979 Children's Trust.
10.23 Lease Agreement dated as of June 1, 1989, by and between Registration Statement
Schawk Graphics, Inc. a division of Schawk, Inc. and No. 33-85152
C.W. Properties.
10.24 Employment Agreement between Ronald J. Kay and Filtertek, 1993 10-K
Inc.
10.25 Employment Agreement between Denis C. Singery and 1993 10-K
Filtertek, Inc.
10.26 Filtertek, Inc. 1991 Outside Directors' Formula Stock Registration Statement
Option Plan, as amended. No. 33-85152
10.27 Form of Clarence W. Schawk Amended and Restated Employment Registration Statement
Agreement between Clarence W. Schawk and Schawk, Inc. No. 33-85152
10.28 Form of David A. Schawk Amended and Restated Employment Registration Statement
Agreement between David A. Schawk and Schawk, Inc. No. 33-85152
10.29 Manufacturing and Sales Agreement between Filtertek, Inc. Registration Statement
and SciTech Dental, Inc., dated as of May 25, 1994. No. 33-85152
56
58
10.30 Strategic Alliance and Distribution Agreement between Registration Statement
Filtertek, Inc. and Allomatic Products Company, dated No. 33-85152
November 15, 1993.
10.31 Form of Registration Rights Agreement dated December 30, Registration Statement
1994, by and among Schawk, Inc. and certain investors. No. 33-85152
10.32 Money Market Demand Note dated December 22, 1994 from Registration Statement
Schawk, Inc. borrower, to The Northern Trust Company, No. 33-85152
lender.
10.33 Description of bonus arrangements with Messrs. Kay, Registration Statement
Singery, Larkin and Soltwedel. No. 33-85152
10.34 Notes payable to certain stockholders in connection with S Registration Statement
Corporation Dividend. No. 33-85152
10.35 Letter of agreement dated September 21, 1992 by and between Registration Statement
Schawk, Inc. and Judith W. McCue. No. 33-85152
10.36 Acquisition Agreement by and among Noral Color Acquisition, Registration Statement
the Stockholders of Noral Color Corporation and Schawk, No. 33-85152
Inc., dated as of November 14, 1994.
11 Statement Re-Computation of Per Share Earnings.
16 Letter Re-Change in Certifying Accountant.
21 List of Subsidiaries. Registration Statement
No. 33-85152
23A Consent of Expert
23B Consent of Expert
27 Financial Data Schedules
99.1(a) Puerto Rico Tax Grant Registration Statement
No. 2-83456
99.1(b) Amended Puerto Rico Tax Grant Registration Statement
No. 2-83456
99.1(c) Puerto Rico Tax Grant, December 10, 1990 1990 10-K
57