1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 36-2545354
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1695 RIVER ROAD
DES PLAINES, ILLINOIS 60018
(Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847-827-9494
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Exchange on Which Registered:
CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE
$.008 PAR VALUE
---------------------------
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 7, 2001, of the voting stock held by
non-affiliates of the Registrant was approximately $48,375,501
The number of shares outstanding of each of the issuer's classes of common stock
as of March 7, 2001, are: 21,363,399 shares, Class A Common Stock, $.008 par
value
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART AND ITEM NUMBER OF FORM 10-K INTO WHICH INCORPORATED.
- --------------------------------------------- ----------------------------------------------------------
1. Proxy Statement for the 2001 Annual Part III, Items 10, 11, 12 and 13.
Meeting of Stockholders to be held May 16,
2001 (the "Proxy Statement").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
SCHAWK, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
DECEMBER 31, 2000
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrants' Common Stock and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Transactions........................................ 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 40
i
3
PART I
ITEM 1. BUSINESS
THE COMPANY
Schawk, Inc. and its subsidiaries ("Schawk" or the "Company") operate in
one operating business segment, Digital Imaging Graphics Arts for consumer
products packaging, advertising and promotional applications. The Company is
incorporated under the laws of the State of Delaware.
BUSINESS
GENERAL
The Company is the largest independent provider of digital imaging prepress
services to the consumer products packaging market in the world. The Company's
facilities produce conventional, electronic and desktop color separations,
creative design, art production, electronic retouching, conventional and digital
platemaking and digital press proofs for the three main printing processes used
in the graphic arts industry: lithography, flexography and gravure. The
Company's services also include both digital and analog image database archival
and management as well as 3-D imaging for package design, large format printing,
digital photography and various related outsourcing and graphics arts consulting
services. These services require skilled, highly trained technicians applying
various computerized design, manipulation and assembly techniques. The
preparation of film, digital tape and press proofs for lithography, flexography
and other printing processes related to packaging accounted for over 70% net
sales during 2000, 1999 and 1998. The balance of the Company's business consists
of the production of similar advertising and promotional applications.
The Company has particular expertise in preparing color images for high
volume print production runs of consumer products packaging. The Company
functions as a vital interface between its Fortune 1000 consumer products
clients, their creative designers and their converters or printers in assuring
the production of consistent, high quality packaging materials in increasingly
shorter turnaround and delivery times. The Company's ability to provide high
quality, customized prepress services quickly makes it a valued player in new
product introduction and promotional activity.
The Company maintains both digital and analog data archives of product
package layouts and designs as a value-added service which improves the
Company's efficiency in accommodating clients' rapidly changing packaging design
modifications and product line extensions. By continuing to provide such
high-end, value-added services, the Company 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.
The Company believes that its clients have increasingly chosen to outsource
their imaging needs to the Company because of its: (i) high quality customized
imaging capabilities; (ii) rapid turnaround and delivery times; (iii) up-to-date
knowledge of the printing press specifications of converters and printers
located throughout the United States, Canada, Mexico and Asia, (iv) digital
imaging asset management; (v) art production; and (vi) ability to service its
clients' global prepress requirements through the Company's North American
facilities and international subsidiaries and alliance partners.
PREPRESS SERVICES INDUSTRY
"Prepress services" are the tasks involved in preparing images and text for
reproduction to exact specifications for a variety of media, including packaging
for consumer products, point-of-sale displays and other promotional materials.
Packaging for consumer products encompasses folding cartons, boxes, trays, cans,
containers, packaging labels and wrap. While prepress work represents a
relatively small percentage of overall product packaging and promotion costs,
the visual impact and effectiveness of product packaging and promotions are
largely dependent upon the quality of prepress work.
1
4
Prepress services do not entail the actual printing or production of such
packaging materials, but rather include the various preparatory steps such as
art production design, digital photography, retouching, color separation and
other platemaking services, for use in lithography, flexography and gravure.
"Color separation" refers to preparing color images, text and layout for the
printing process. Prepress services such as color separation work have
traditionally been performed by skilled craftspeople almost entirely by hand,
using what is known as the "conventional" method. With the development of
digital technology, prepress firms such as Schawk have become totally
computerized, relying instead on digital imaging, in which digitized images and
text are manipulated according to client and converter specifications. On an
increasing basis, clients supply material to the Company in a digitized format
on a variety of media, including tape, floppy disk, CD-ROM and via the Internet.
More recently there is a trend toward an all digital work flow, from creative
design through printing. The most recent innovation is the production of plates
directly from a digital file, hence the term "direct to plate" (DTP) or
"computer to plate" (CTP). This innovation eliminates the step of preparing
photographic film and exposing the film on a plate. This CTP technology is more
precise and reduces the time to produce a printing plate. The Company has
acquired several CTP units and has the capacity to service its clients with CTP
services throughout North America.
The prepress industry in North America has over 1,300 market participants,
principally independent color separators, such as Schawk, converters, printers
and consumer products companies that perform these services in-house. The
majority of prepress providers specialize in high volume, commodity-oriented
publication work that includes textbooks, advertising, catalogs, newspapers and
magazines. The Company's target markets, however, are high-end packaging for the
consumer products industry, advertising and promotional applications. The North
American market for prepress services for packaging to the consumer products
industry is estimated by the Company to range from $1.5 billion to $1.7 billion,
while the worldwide market is estimated by the Company to be as high as $6.0
billion. The consumer products prepress industry is highly fragmented with
hundreds of market participants, only a small number of which have annual
revenues exceeding $30.0 million. The Company believes that the number of
participants in the North American prepress market for the consumer products
industry will diminish due to consolidation and attrition caused by competitive
forces such as accelerating technological requirements for advanced systems,
equipment and highly skilled personnel and the growing demands of clients for
full-service global capabilities.
The rapid development of lower-cost, faster desktop publishing software
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 systems, many of
which have created training issues. Frequent changes in software necessitates
continuous training and education and investment in faster equipment. It has
also created the demand from clients for increasingly faster turnaround and
delivery times. As technology advances in the imaging industry, speed has
become, and continues to be a significant differentiator between the Company and
its competition.
There is also a more significant barrier to entry that has always
existed -- hundreds of "technician-years" of expertise in working with all of
the major printers and convertors to make sure a package is printed according to
the client's specifications. For this reason, new upstarts have difficulty
competing with Schawk.
The Company focuses on three primary markets: consumer product packaging,
advertising agencies, and promotion. The food and beverage segment of the
consumer products industry has packaging requirements that are complex and
demanding due to variations in packaging materials, shapes and sizes, custom
colors, varying storage conditions and marketing enhancements. Product
extensions and frequent packaging redesigns have resulted in an increasing
volume of color separation and related work in the consumer products industry
and in particular for the food and beverage segment. Additional industry trends
include: (i) the shorter turnaround and delivery time requirements from the
creative design phase to final distribution of the packaged product; (ii) an
increasing number of SKUs competing for shelf space and market share; (iii) the
increasing importance of package appearance and promotions due to demonstrated
point-of-sale consumer purchasing behavior; and (iv) the increasing requirements
for worldwide quality and consistency in packaging as companies attempt to build
global brand name recognition. Increasingly, the advertising and promotion
markets require coordination of these efforts, with the initiatives coming from
advertising agencies. The
2
5
Company's expansion into these markets strengthens and enhances the overall
service offering to the unified marketing approach of our clients.
Meeting the requirements of the advertising and promotional business
demands production of work under extremely short timelines, usually in under 24
hours. Creative retouching, color correction and composition in multiple file
formats are produced to meet requirements of the printers. The Company is a
leader in conventional, computer to plate and digital ad delivery to
publications.
THE COMPANY'S GROWTH STRATEGY
The Company's primary goal is to enhance its leadership positions in the
prepress imaging market serving the consumer products, advertising and promotion
markets. Key aspects of the Company's business strategy to achieve this goal
include the following:
- Growth through Acquisitions and Start-up Operations. The Company's
profitability and ready access to capital have enabled it to make
strategic acquisitions of companies that range in size from $2 million to
$20 million in revenues. In its 47-year business history, the Company has
integrated more than 43 prepress and imaging businesses into its
operations while streamlining overhead and improving margins in the
aggregate. The Company acquired 13 businesses from March 1998 to November
1999 with combined annualized revenues in excess of $77 million. These
acquisitions are part of the Company's growth strategy to acquire market
niche companies with Fortune 1000 client lists, excellent client service
or proprietary products and solid management who will continue to operate
the business after the acquisition. The managers of acquired businesses
receive performance incentives to continue to profitably grow the
business. There were no acquisitions by the Company in 2000.
The Company intends to continue expanding through acquisitions of
well-managed companies with solid market positions, a reputation for
quality work and established client lists. Schawk believes that an
emphasis on complementary acquisitions of companies serving targeted
markets will allow it to broaden its service offerings and provide single
source prepress and imaging and image database services to its clients.
The Company believes it has greater versatility in meeting the various
requirements of its clients than smaller, less integrated competitors
lacking technical expertise, 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 consolidation
candidates. Schawk believes that there will continue to be a number of
attractive acquisition candidates in the fragmented and consolidating
industry in which it operates. The Company expects to strengthen its
market position by applying its management and operational philosophies
and practices, which have been successful in its graphic arts businesses,
to newly acquired businesses.
The Company has also had some success in establishing start-up operations
in response to client and market requirements. Schawk intends to continue
this strategy as opportunities warrant. See "Acquisitions and Start-up
Operations."
- Exploitation of Industry Trends; Outsourcing. The Company has
historically attempted to strengthen its market position by identifying
and exploiting industry trends. As a consequence, the Company has been
uniquely positioned to benefit as consumer products companies continue to
reduce both their prepress staffs and total number of suppliers. The
Company's on-site strategy developed as clients outsource imaging
functions in an attempt to cut costs and improve turnaround and delivery
times. The Company intends to expand this effort as clients increasingly
require on-site service. As of December 31, 2000, the Company had 41
on-site locations staffed by over 130 Schawk employees, approximately 9%
of its total workforce. Further, the Company believes that its commitment
to client service and its broad array of premium service offerings
position the Company as a cost effective, value-added supplier of digital
imaging services. As clients continue to cut their staffing levels, they
are expanding the number of services required of their prepress
suppliers. As a result, fewer of the
3
6
Company's competitors have the full complement of capabilities required
in the marketplace. The Company believes outsourcing trends will
continue.
- Exploitation of Technology Advancements. The Company is dedicated to
keeping abreast of and initiating technological process developments in
its industry. To build upon its leadership position, the Company actively
evaluates systems and software products of various computer and software
manufacturers and also independently develops software for implementation
at its operating facilities. The Company continually invests in new
technology designed to support its high quality prepress services. The
Company concentrates its efforts on understanding the systems and
equipment available in the marketplace and creating solutions using
off-the-shelf products, customized to meet a variety of specific client
and internal requirements.
MANAGEMENT PHILOSOPHY
The Company believes that by adhering to its management philosophy, the
Company has gained in market share and improved margin performance in its core
business. The strength of the Company's management philosophy is evidenced by
the fact that the Company increased sales and operating income in its digital
imaging business in 18 of the last 22 years. The Company's management philosophy
incorporates the following key concepts:
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 "Total Quality Management" ("TQM") and stresses to all employees,
regardless of level, the importance of striving to meet or exceed client
expectations. Historically, the Company has been committed to employee training
and technological improvements to achieve this level of performance. Through the
Company's application of TQM, employees have adopted the necessary commitment to
client service that is essential to quick turnaround and consistent delivery of
high quality services and products. Such increased quality results in decreased
costs to clients and the Company in the long run. The Company views itself as a
service provider to its clients. Understanding the needs of its clients and
customizing its services and products is part of the TQM process that has helped
the Company differentiate itself from the competition. Consequently, the Company
makes the necessary investments to ensure that these services continue to meet
the highest quality standards and needs of its clients. A number of the
Company's operations are, or are soon to be, ISO 9000 and/or ISO 9002 certified.
Client Service. Another key component of the Company's management
philosophy has been its commitment to client service. The Company believes that
this commitment has contributed to the confidence and loyalty its clients have
shown. Because of the increasingly competitive markets faced by its clients, the
Company must be flexible enough to modify its operations in order to meet the
specialized needs of its clients. The Company's emphasis on on-site client
representatives and operations helps to address this requirement and has further
solidified existing client relationships.
Employee Training and Investment in Equipment. The Company believes that
its most valuable assets are its employees because its ability to provide
clients with high quality services and products depends upon their dedication
and expertise. The Company provides extensive and continuous training to keep
its employees abreast of the latest technological developments and the
particular needs of its clients. Providing its employees with the latest
equipment, software and training are fundamental to the Company's philosophy.
Technical Expertise. The Company is able to provide its clients with high
quality services and products and quick response time because of its efficient
utilization of state-of-the-art equipment, software, digital server, storage
technology and telecommunication systems. As part of its commitment to maintain
its technological expertise, the Company has historically worked with software
developers to create software that fully addresses the Company's and its
clients' needs. The Company acts as a test site for numerous hardware and
software products. In order to facilitate the exchange of information among its
various facilities, in 1991, the Company established the Schawk Technical
Advisory Board for the purpose of coordinating the research and evaluation of
new technologies in the graphic arts industry. This group continues to be
recognized for its efforts and has been invited to lecture at numerous national
and international symposiums and conferences.
4
7
SERVICES
The Company offers comprehensive, high quality digital imaging prepress
services. The Company's facilities produce conventional, electronic and desktop
color separations, electronic production design, film preparation, platemaking
and press proofs for lithography, flexography and gravure. The Company's
services also include both digital and analog image database archival and
management as well as creative design, 3-D imaging art production large format
printing and various related outsourcing services.
The Company interfaces between consumer products manufacturers and the
creative designers and converters used by those businesses to produce packaging,
such as folding cartons, boxes, trays, cans, containers, packaging labels and
wrap and related point-of-sale and promotional materials. The Company's services
consist principally of the electronic and digital production of art design,
color separations and color proofs to client and converter specifications and
imaging asset management. These services are an intermediate step between
creative artwork and the actual printing of graphic materials. The production of
color separations requires well-trained and highly skilled technicians applying
various digital and analog image manipulation, assembly and color management
techniques in order to preserve the integrity of the original image when
translated into print and to ensure consistency of the printed materials.
The Company specializes in digital imaging prepress services relating to
the packaging and promotional needs of clients in the consumer products industry
and in the advertising and promotion markets. The Company serves Fortune 1000
companies and their advertising agencies to ensure worldwide quality and
consistency in the packaging and related imagery of their products with the wide
array of consumer products in the marketplace. Because there is no consistent
size, shape, color or packaging material, the Company functions as a network of
custom job shops taking advantage of its size for technical expertise while
being able to respond quickly to the varying needs of global clients.
Image quality and consistency and ever-shortening response and delivery
times are becoming increasingly important to consumer products manufacturers as
packaging assumes a greater role in promotion. While prepress work represents a
relatively small percentage of overall packaging costs, the visual impact and
effectiveness of product packaging is largely dependent upon the quality of the
prepress work.
The Company's clients typically outsource their prepress requirements and
assign the Company the responsibility of interfacing with the clients'
designated graphic designers, who design the packaging and the converters or
printers who print and produce the packaging and related materials. The Company
competes on the basis of offering its multi-national client base: (i) high
quality customized imaging; (ii) rapid turnaround and delivery times; (iii)
up-to-date knowledge of the printing press specifications of converters and
printers located throughout the United States and Canada; (iv) digital imaging
asset management; (v) art production; and (vi) the ability to service its
clients' global prepress requirements through the Company's North American
facilities and international subsidiaries and alliance partners.
As technology has created opportunities for quicker production turnarounds
and deliveries, most of the Company's Fortune 1000 consumer products clients
have capitalized on the opportunity to modify their packaging more frequently in
order to customize their promotional activities on a regional, seasonal or event
related basis. This activity has greatly increased the importance of maintaining
the integrity of the digital and analog image design and text data for each
package variation.
With its expansion into electronic art production design, the Company is
utilizing its technical expertise to serve clients' requirements in a variety of
outsourcing services including workflow management, image database archiving,
telecommunication and trafficking. The Company, through it wholly owned
subsidiary InterchangeDigital, has the capacity to archive and manage past,
current and future package design data and, accordingly, serves as a quick
access library of accurate file data for its clients. InterchangeDigital is
continuously updating and improving its workflow management and imaging database
management system, called PaRTs(TM) (Packaging and Resource Tracking system).
The Company believes that PaRTs(TM) enhances a client's ability to manage its
graphics department workflows and its imaging assets more efficiently and with
reduced time commitments. When compared to other database management systems
available in the market place, the Company believes that PaRTs(TM) is a more
robust tool that significantly improves workflow
5
8
management while its competitors offerings are essentially digital asset
libraries only. Through its workflow management offering, the Company and
InterchangeDigital also believe that PaRTS(TM) contributes to the Company's
ability to increase its clients' profits by reducing cycle time for the launch
of a promotion or new design.
The Company has also developed a customized client electronic communication
system called CLICk(TM) (Client Linked Information Centers) for its authorized
clients, designated converters and other authorized personnel. Compatible with
all major platforms and operating systems, CLICk(TM) allows clients to
efficiently communicate with the Company and others on the system using
telephone lines and/or the Internet.
Given the increased computerization of the prepress services industry,
highly trained technicians are essential to the quality of the end product.
Requirements of turnaround speed without a reduction in quality are increasing
as clients strive for differentiation and customization of their products and
brands. Schawk has met these requirements by continuously reinvesting in
technology, training its personnel and establishing numerous satellite on-site
operations to complement its main operating facilities.
To capitalize on market trends, management believes that the Company must
continue to be able to provide clients the ability to make numerous changes and
enhancements with shorter turnaround times than ever before. Accordingly, the
Company has focused its efforts on improving its response times and continues to
invest in rapidly emerging technology and the continuing education of its
employees. The Company also educates clients on the opportunities and
complexities of state-of-the-art equipment and software. The Company believes
that its ability to provide quick turnaround and delivery times, dependability
and value-added training and education programs will continue to give it a
competitive advantage in serving clients who require high volume, high quality
product imagery.
The Company's services are distinguished by its ability to complete
prepress services for packaging designs in increasingly compressed time frames
and with high standards of quality. In order to satisfy client requirements, the
Company is frequently required to provide services in as little as 24 hours. The
following core competencies of the Company are described in more detail below:
- Technical Expertise. The Company places an emphasis on investment in
state-of-the-art systems and equipment and the need for continual
training and development of its employees through programs offered at the
Company-owned training center and operating facilities and on-site at
client locations. The Company has had success in elevating its employees'
competency and its clients' standards to levels requiring the superior
technical expertise and capabilities that distinguish the Company's
services.
- On-Site Personnel. The Company has placed over 130 employees on-site at
or near 41 client locations in an effort to further integrate its
prepress services directly with the client operations. This facilitates
faster turnaround and delivery times and fosters stronger client
relationships.
- Strong Relationships with Converters and Printers. As each client selects
its own converter(s) and/or printer(s) the Company coordinates
extensively with the converter to ensure uniformity in color and
appearance of the printed product packages. Each client generally selects
its printing services on a bid basis. By using the Company as its imaging
specialist, the print/read imagery information is not captive at any one
printer or converter. This affords each client consistent image
replication at any printing site because the Company can supply any
printer or converter with film customized for its printing press.
Additionally, this allows the client to reproduce its image consistently
across many printing sources and it also provides the client with
information as to location and cost of its press runs.
Over the course of its 47-year business history, the Company has developed
strong relationships with many of the major converters and printers in the
United States and Canada. As a result, the Company has extensive knowledge of
their equipment, thereby enabling the Company to increase the overall efficiency
of the printing process. Internal operating procedures and conditions may vary
from printer to printer, affecting the quality of the color image. In order to
minimize the effects of these variations, the Company makes necessary
adjustments to its color separation work to account for irregularities or
idiosyncrasies in the printing presses of each of its clients' converters. The
Company strives to afford its clients total control over their
6
9
imaging processes with customized and coordinated services designed to fit each
individual client's particular needs, all aimed at ensuring that the color
quality, accuracy and consistency of a client's printed matter are maintained.
- Imaging Asset Management. The Company maintains and manages a database
for its clients' images and package designs. Once an image is in the
Company's database, the client can make frequent regional, seasonal or
event related adjustments to the file image prior to printing. The
Company's ability to quickly manipulate digital images enables its
clients to deliver their products to the market faster. The Company's
capabilities also allow it to send an image for output and printing
virtually anywhere in the world. As more and more multi-national consumer
products companies strengthen their international packaging quality
control to enhance their global brand image, they are requiring a more
consistent worldwide image. In response to this trend, the Company is
playing an increasing role in ensuring that its clients' images are
satisfactory and consistent both domestically and internationally. The
acquisition of 65% of the Laserscan Group in September, 1999 with
operations in China, Malaysia and Thailand is indicative of Schawk's
commitment to its clients on a world-wide basis.
ACQUISITIONS AND START-UP OPERATIONS
The Company has acquired and integrated more than 43 prepress and imaging
businesses into its operations since the business was founded in 1953.
Throughout its history, the Company has successfully identified acquisition
candidates that represent market niche companies with Fortune 1000 client lists,
excellent client service or proprietary products and solid management. The
Company favors businesses with management teams that will continue to operate
the businesses as autonomous units. The Company has also commenced a number of
start-up operations over the years when client servicing requirements or market
conditions warranted.
There were no acquisitions in 2000. During 1999 the Company completed eight
acquisitions: Cactus Imaging Centres in Toronto, Canada; Color One in
Cincinnati, OH; Deluxe Engraving in Cincinnati, OH; Designer's Atelier in New
York, NY; Inter-Process Service in Stamford, CT; The Mackinder Group in New
York, NY; Plewes-Bertouche in Toronto, Canada and Laserscan, with operations in
China, Malaysia, and Thailand. During 1998 the Company completed five
acquisitions: S&M Rotogravure in New Berlin, Wisconsin; Chromart, Inc. in New
York, NY; Horan Imaging Solutions in New York, NY; Design Partners in Toronto,
Canada; and Herzig Somerville, Ltd. In Toronto, Canada.
In 2000, the Company established start-up operations in Stamford,
Connecticut and Singapore. In 1999, the Company established a start-up operation
in Kobe, Japan, Ardsley, New York and Charlotte, North Carolina. In 1998, the
Company established start-up operations in Queretaro, Mexico. Due to unfavorable
market conditions in 1999 and 2000 the start-ups in Ardsley, New York and
Charlotte, North Carolina were shut down in 1999 and 2000, respectively.
The Company intends to continue expanding through acquisitions of
well-managed companies with solid market positions and established client lists.
The Company believes that emphasis on complementary acquisitions of businesses
serving targeted markets will allow it to broaden its product offerings and
provide its clients with a single source for imaging and image database
services. The Company will also continue to analyze and investigate start-up
operations on an ongoing basis.
RESEARCH AND DEVELOPMENT
The Company is dedicated to keeping abreast of and, in a number of cases,
initiating technological process developments in its industry that have
applications for packaging. To build upon its leadership position, the Company
is actively involved in system and software technical evaluations of various
computer systems and software manufacturers and also independently pursues
software development for implementation at its operating facilities. The Company
continually invests in new technology designed to support its high quality
prepress services. The Company concentrates its efforts in understanding systems
and equipment available in the marketplace and creating solutions using
off-the-shelf products customized to meet a variety
7
10
of specific client and internal requirements. PaRTS(TM) and CLICk(TM) are
examples of the Company's commitment to systems development. Total research and
development spending is not material.
As an integral part of its commitment to research and development, the
Company has established the Schawk Technical Advisory Board for the purpose of
researching and evaluating new technologies in the graphic arts and
telecommunications industries. The Advisory Board meets formally, at least
quarterly, to review new equipment and programs, then disseminates the
information to the entire Company and to clients as appropriate.
MARKETING AND DISTRIBUTION
The Company markets its services nationally and internationally through
seminars, newsletters and training sessions targeted at existing and potential
clients. The Company sells its services through a group of approximately 150
direct salespersons and 200 client service technicians who call on consumer
products manufacturers, including those in the food and beverage, home products,
pharmaceutical and cosmetics industries and mass merchant retailers. The Company
has adopted a team approach to marketing, reflective of its TQM philosophy. Both
the Company's salespersons and the Company's client service technicians share
responsibility for marketing the Company's offerings to existing and potential
clients, thereby fostering long-term institutional relationships with its
clients.
In addition to its numerous operations in the United States and Canada, the
Company has operations in Queretaro, Mexico, Kobe, Japan, Singapore, Malaysia
and China and a network of global affiliations in Australia, Europe and Asia.
CLIENTS
The Company's clients consist of direct purchasers of color separations,
including end-use consumer product manufacturers and mass merchant retailers,
converters and advertising agencies. Many of the Company's clients, a large
percentage of which are Fortune 1000 companies, are multi-national in scope and
often use numerous converters both domestically and internationally. Because
these clients desire uniformity of color and image quality across a variety of
media, the Company plays a very important role in coordinating their printing
activities by maintaining current equipment specifications regarding its clients
and converters. Management believes that this role has enabled the Company to
establish closer and more stable relationships with these clients. Converters
also have a great deal of confidence in the quality of the Company's services
and have worked closely with the Company to reduce the converters' required
lead-time, thereby lowering their costs. End-use clients often select and
utilize the Company to ensure better control of their packaging or other needs
and depend upon the Company to act as their agent to ensure quality management
of data along with consistency among numerous converters and packaging media.
The Company has established 41 on-site locations at or near clients that require
high volume, specialized service. As its art production services continue to
expand, the Company anticipates that it will further develop its on-site
services to its client base.
Many of the Company's clients place orders on a daily and weekly basis and
work closely with the Company year-round as they frequently redesign product
packaging or introduce new products. While certain promotional activities are
seasonal, such as those relating to summer, back-to-school time and holidays,
shorter technology-driven prepress cycle time has enabled consumer products
manufacturers to tie their promotional activities to regional and/or current
events (such as sporting events or motion picture releases). This prompts such
manufacturers to redesign their packages more frequently, resulting in a
correspondingly higher number of packaging redesign assignments. This
technology-driven trend toward more frequent packaging changes has offset
previous seasonal fluctuations in the volume of the Company's business (also see
"Seasonality and Cyclicality"). In addition, consumer product manufacturers have
a tendency to single-source their prepress work with respect to a particular
product line so that continuity can be assured in changes to the product image.
As a result, the Company has developed a base of steady clients in the food and
beverage industry. During 2000 no single client accounted for more than 4% of
the Company's net sales, and the 10 largest clients in the aggregate accounted
for approximately 23% of net sales.
8
11
COMPETITION
The Company's competition comes primarily from other independent color
separators and converters and printers that have prepress service capabilities.
Independent color separators are companies whose business is performing prepress
services for one or more of the principal printing processes. The Company
believes that only two firms, Applied Graphics Technologies, Inc., through its
Wace Group subsidiary, and Southern Graphics, a subsidiary of Alcoa, compete
with Schawk on a national basis. The remaining independent color separators are
regional or local firms that compete in specific markets. To remain competitive,
each firm must maintain client relationships and recognize, develop and exploit
state-of-the-art technology and contend with the increasing demands for speed.
Some converters with prepress service capabilities compete with the Company
by performing such services in connection with printing work. Independent color
separators such as the Company, however, may offer greater technical
capabilities, image quality control and speed of delivery. In addition,
converters often utilize the services of the Company because of the rigorous
demands being placed on them by clients who are requiring faster turnaround
times. Increasingly, converters are being required to invest in technology to
improve speed in the printing process and have avoided spending on prepress
technology.
As requirements of speed continue to be critical, along with the
recognition of the importance of focusing on their core competencies, clients
have increasingly recognized that the Company provides services at a rate and
cost that makes outsourcing more cost effective and efficient.
PURCHASING AND RAW MATERIALS
The Company purchases photographic film and chemicals, storage media, ink,
plate materials and various other supplies and chemicals on consignment for use
in its business. These items are purchased from a variety of sources and are
available from a number of producers, both foreign and domestic. Materials and
supplies account for only a small portion of the Company's cost of production,
and no shortages are anticipated. Furthermore, as a growing proportion of the
workflow is digital, the already low percentage of materials in cost of sales
will continue to be reduced. Historically, the Company has negotiated and enjoys
significant volume discounts on materials and supplies from most of its major
suppliers.
INTELLECTUAL PROPERTY
The Company owns no significant patents. The trademarks "Schawk,"
"Clockface and Creole," "CLICk" "PaRTS" and "Satellite" and the trade names
"Amber Design," "Color Data East," "Schawkgraphics," "Schawk Client Services
Group," "Schawk Prep," "Interchange," "Interchange Digital," "Interchange
Digital Management Services," "Lincoln Graphics," "Litho Colorplate,"
"LSI/Atlanta," "LSI/Kala," "Process Color Plate," "Total Reproductions," "Weston
Engraving," "The Palm Group," "Stebbins Photography," "Blue Barrel," "StanMont,"
"PrinterNet," "CyberImages," "Batten Graphics," "Fishbowl," "Deluxe Engraving,"
"Interprocess," "Mackinder Group," "Schawk Asia," "Schawk Japan," "Laserscan,"
"Laserscan Toyo Flexographic," "Rave Design," and "Xzact" are the most
significant trademarks and trade names used by the Company or its subsidiaries.
EMPLOYEES
As of December 31, 2000, the Company had approximately 1,400 full-time
employees. Of this number, approximately 30% are production employees
represented by local units of the Graphic Arts International Union and by local
units of the Toronto Typographical Union. The Company's union employees are
vital to its operations. Collective bargaining agreements covering the Company's
union employees in four facilities are subject to renegotiations. Approximately
70 employees are subject to renegotiations during 2001. The Company considers
its relationships with its employees and unions to be good.
9
12
BACKLOG
The Company does not have or keep backlog figures as projects or orders are
generally in and out of the facilities within five to seven days. Generally, the
Company does not have contracts with its clients, but maintains client
relationships by delivering timely prepress services, providing technology
enhancements to make the process more efficient and bringing extensive
experience with and knowledge of printers and converters.
SEASONALITY AND CYCLICALITY
The Company's digital imaging prepress business for the consumer product
packaging prepress market is not currently seasonal because of the number of
design changes that are able to be processed as a result of speed-to-market
concepts and all-digital workflows. On the other hand, there is a two to three
year cycle for major design changes that the Company has experienced in the last
six years resulting in greater volumes in certain years followed by more modest
volumes as only small changes are made before the next major redesign cycle.
With respect to the advertising and promotional markets, some seasonality exists
in that the months of December and January are typically the slowest months of
the year in this market because advertising agencies and their clients typically
finish their work by mid December and don't start up again until mid January.
Advertising and promotion is generally cyclical as the consumer economy is
cyclical. When consumer spending and GDP decreases, ad pages decline. Generally,
when ad pages decline the Company's advertising and promotion business declines.
ITEM 2. PROPERTIES
FACILITIES
The Company owns or leases the following office and operating facilities:
LEASE
SQUARE OWNED/ EXPIRATION
LOCATION FEET LEASED PURPOSE DATE DIVISION
- -------- ------------- ------ ------------------ -------------- --------------------
(APPROXIMATE)
Ardsley, New York.......... 23,200 Leased General Offices, December 2003 Color Data East
Operating Facility
Charlotte, North 4,800 Leased General Offices, September 2004 Schawk Charlotte
Carolina.................
Operating Facility
Cherry Hill, New Jersey.... 35,000 Owned General Offices, N/A Lincoln Graphics
Operating Facility
Cincinnati, Ohio........... 74,200 Leased General Offices, August 2004 Deluxe Engraving
Operating Facility
Cincinnati, Ohio........... 12,000 Leased General Offices August 2004 Schawk Cincinnati
Operating Facility
Costa Mesa, California..... 1,625 Leased General Offices, April 2001 929 Design
Operating Facility
Des Plaines, Illinois...... 20,000 Owned Executive Offices N/A Corporate
Des Plaines, Illinois...... 60,000 Leased General Offices, November 2005 Schawk Chicago
Operating Facility
Des Plaines, Illinois...... 8,000 Owned Storage N/A Schawk, Inc.
Franklin Park, Illinois.... 62,000 Owned General Offices, N/A Schawk Chicago
Hackettstown, New Jersey... 3,000 Leased General Offices, December 2000 Amber Design
Operating Facility Associates
Kalamazoo, Michigan........ 67,000 Owned General Offices, N/A Schawk/LSI
Operating Facility
Kobe, Japan................ 1,160 Leased General Offices, December 2002 Schawk Japan
Operating Facility
10
13
LEASE
SQUARE OWNED/ EXPIRATION
LOCATION FEET LEASED PURPOSE DATE DIVISION
- -------- ------------- ------ ------------------ -------------- --------------------
(APPROXIMATE)
Kuala Lumpur, Malaysia..... 5,280 Owned General Offices, N/A Laserscan Sdn Bhd
Operating Facility
Minneapolis, Minnesota..... 31,000 Owned General Offices, N/A Weston Engraving
Operating Facility Company, Inc.
The Palm Group
New Berlin, Wisconsin...... 43,000 Leased General Offices, June 2003 S&M Rotogravure
Operating Facility
New York, New York......... 5,000 Leased General Offices, December 2003 Chromart
Operating Facility
New York, New York......... 31,000 Leased General Offices, April 2003 Horan Imaging
Operating Facility Solutions
New York, New York......... 5,000 Leased General Offices, December 2003 Designer's Atelier
Operating Facility
Penang, Malaysia........... 34,000 Owned General Offices, N/A Laserscan Sdn Berhad
Operating Facility
Penang, Malaysia........... 1,706 Owned General Offices, N/A Laserscan
Operating Facility Flexographic
Penang, Malaysia........... 2,330 Owned General Offices, N/A Laserscan Technology
Operating Facility
Queretaro, Mexico.......... 18,000 Owned General Offices, N/A Schawk de Mexico
Operating Facility
Roseville, Minnesota....... 28,000 Leased General Offices, May 2004 Dimension Imaging
Operating Facility
Shanghai, China............ 9,468 Leased General Offices, December 2000 Toyo Laserscan
Operating Facility Flexographic
Smyrna, Georgia............ 25,200 Leased General Offices, October 2003 LSI/Atlanta
Operating Facility
Stamford, Connecticut...... 2,600 Leased General Offices, May 2001 Intergraphx, Inc.
Operating Facility
Stamford, Connecticut...... 20,000 Leased General Offices, August 2004 Inter-Process
Operating Facility Services, Inc. and
Color Data East
Toronto, Ontario, Canada... 56,000 Leased General Offices, December 2004 Batten Graphics
Operating Facility CyberImages
Herzig Somerville
Toronto, Ontario, Canada... 8,292 Leased General Offices, January 2005 Design Partners
Operating Facility
Toronto, Ontario, Canada... 17,500 Leased General Offices, November 2007 Cactus Imaging
Operating Facility Centres
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 the liability from any threatened or
pending litigation to be material to the Company. The Company has not
experienced any significant environmental problems.
11
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders for the three months
ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SCHAWK, INC. SUPPLEMENTAL STOCKHOLDER INFORMATION QUARTERLY FINANCIAL DATA
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............ $41,977 $44,453 $47,188 $51,186 $52,856 $54,741 $50,631 $48,271
Cost of sales........ 23,513 25,907 27,127 31,639 31,194 32,128 29,975 29,903
------- ------- ------- ------- ------- ------- ------- -------
Gross Profit......... 18,464 18,546 20,061 19,547 21,662 22,613 20,656 18,368
Net income........... 4,064 3,598 3,518 618 2,908 3,887 3,575 271
Earnings per share
Basic.............. 0.19 0.17 0.17 0.03 0.14 0.18 0.17 0.01
Diluted............ 0.19 0.17 0.17 0.03 0.14 0.18 0.17 0.01
DIVIDENDS DECLARED
PER CLASS A
COMMON SHARE
-----------------
QUARTER ENDED: 2000 1999
- -------------- ------- -------
March 31.................................................... $0.0325 $0.0650
June 30..................................................... 0.0325 0.0650
September 30................................................ 0.0325 0.0650
December 31................................................. 0.0325 0.0325
------- -------
Total............................................. $0.1300 $0.2275
======= =======
STOCK PRICES
QUARTER ENDED: 2000 HIGH/LOW 1999 HIGH/LOW
- -------------- ------------------- ---------------------
March 31............................................ $9 1/8 - 7 1/2 $14 1/8 - 7 1/8
June 30............................................. 9 7/16 - 7 7/8 12 15/16 - 8 7/16
September 30........................................ 9 11/16 - 8 7/8 11 1/16 - 8 3/16
December 31......................................... 9 5/8 - 8 9/16 9 3/4 - 7 15/16
The Registrant's stock is listed on the NYSE. The Registrant has
approximately 944 stockholders of record as of March 7, 2001.
12
15
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED INCOME STATEMENT
INFORMATION(a)
Net Sales............................. $206,499 $184,804 $145,389 $116,053 $ 90,763
Operating Income...................... 22,973 23,661 28,308 19,865 13,373
Income From Continuing Operations
Before Income Taxes and Minority
Interest........................... 18,111 20,038 29,748 20,446 9,056
Income Taxes.......................... 7,567 8,240 12,050 8,297 3,530
Minority Interest in net loss of
subsidiary......................... 97 -- -- -- --
Income From Continuing Operations..... 10,641 11,798 17,698 12,149 5,526
Income From Continuing Operations Per
Common Share (b)
Basic.............................. $ 0.50 $ 0.55 $ 1.07 $ 0.56 $ 0.22
Diluted............................ 0.50 0.55 1.06 0.55 0.22
CONSOLIDATED BALANCE SHEET
INFORMATION(c)
Working Capital....................... $ 15,579 $ 22,364 $ 35,453 $ 26,283 $ 21,881
Total Assets.......................... 167,863 177,261 138,510 126,923 160,840
Long-Term Debt, Capital Lease
Obligations and Redeemable
Preferred Stock.................... 48,020 67,494 39,619 44,854 67,785
Stockholders' Equity.................. 74,508 66,658 65,023 55,908 48,926
OTHER DATA
Cash Dividends per Common Share....... $ 0.13 $ 0.2275 $ 0.26 $ 0.26 $ 0.26
Depreciation and Amortization(c)...... 14,278 12,310 7,741 6,949 15,435
Capital Expenditures(c)............... 15,476 17,874 9,508 7,148 16,823
- ---------------
(a) On February 7, 1997, the Company sold the Plastics business segment for
$93,485 plus working capital adjustments. The consolidated income statement
information for 1996 and prior has been restated to exclude discontinued
operations.
(b) 1998 earnings per share includes $0.27 for the discount on redemption of
preferred stock.
(c) Includes data from discontinued Plastics Group in 1996.
13
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Statements contained herein that relate to the Company's beliefs or
expectations as to future events relating to, among other things, the
anticipated benefits from restructuring activities, the success of the Company's
growth strategy, the ability of the Company to exploit industry trends, such as
outsourcing and the Company's exploitation of technological advancements in the
imaging industry, are not statements of historical fact and are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act and are subject to the "Safe Harbor" created thereby.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable within the bounds of its
knowledge of its business and operations, it can give no assurance that the
assumptions will prove to have been correct. Important factors that could cause
actual results to differ materially and adversely from the Company's
expectations and beliefs include the level of business activity at the Company's
clients and the ability of the Company to implement its growth strategy, to
identify and exploit industry trends and to exploit technological advances in
the imaging industry.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of selected items in the Company's consolidated income
statement:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 54.4 58.5 59.7
Gross profit................................................ 45.6 41.5 40.3
Selling, general and administrative......................... 25.3 25.9 26.7
Goodwill amortization....................................... 0.8 1.1 1.0
Restructuring and other charges............................. -- 1.7 1.5
Operating income............................................ 19.5 12.8 11.1
Income before income taxes.................................. 20.5 10.8 8.8
Net income.................................................. 12.2% 6.4% 5.2%
2000 COMPARED TO 1999
Net sales. Net sales for 2000 increased 11.7% to $206.5 million from
$184.8 million in 1999. The increase in revenues was all attributable to
revenues from acquisitions in 1999. The market for digital imaging for high end
consumer product packaging was soft in the second half of 2000. As a result,
lower than anticipated volumes were experienced throughout the last six months
of 2000 at both the Company's historical operations and at its acquired
businesses.
Cost of sales. Cost of sales for 2000 increased as a percent of sales to
59.7% from 58.5% for 1999 because of higher indirect costs as a percentage of
sales as a result of the reduced sales volumes.
Operating income. Operating income decreased 3.0% to $23.0 million in 2000
from $23.7 million in 1999. Excluding restructuring and other charges and the
loss at InterchangeDigital, the Company's software start-up, operating income
increased 0.7% to $27.5 million in 2000 from $27.3 million in 1999. Operating
income was negatively impacted by lower gross margin due to lower volumes at
most of the Company's divisions in 2000. Selling, general and administrative
("SG&A") expenses increased as a percentage of sales to 26.7% in 2000 from 25.9%
for 1999 as a result of a full year of SG&A costs at acquired companies. The
acquired companies have higher SG&A costs as a percentage of sales than the
Company's historical operations. The Company has instituted various
restructuring initiatives to reduce the higher SG&A costs in 2001.
The Company acquired 13 businesses in 1998 and 1999. As part of the
Company's continuing process of integrating these businesses and improving the
profitability of all of its divisions, it is continuing the process
14
17
started in 1999 to consolidate certain operations. In 2000, the Company
identified certain operations that were to be combined and/or shut down. In
addition, other locations carried out staffing reductions during 2000. These
activities resulted in $2.3 million dollars of pretax charges in 2000. These
restructuring charges relate to three separate restructuring plans that impacted
2000 results. These restructurings and the charges related to each are described
in the following paragraph. In addition, in the fourth quarter of 2000, the
Company wrote down the book value of certain assets whose value was impaired.
The impairment was caused by, among other things, replacement with newly
acquired technically advanced hardware and software that provided more efficient
throughput, rendering existing equipment obsolete. This charge was $0.8 million
on a pretax basis.
Restructuring. In 1999 the Company carried out a United States
Restructuring Plan "the 1999 Restructuring" (See 1999 Restructuring). As the
Company continued to evaluate its operations in 2000 further restructurings were
undertaken.
2000 Canadian Restructuring. In the third quarter of 2000, the
Company determined that it needed to reduce the number of locations it was
operating in the Toronto marketplace from four to three in order to reduce
costs and better coordinate services for clients. As a result, a
restructuring plan was put into place "the 2000 Canadian Restructuring".
This plan was carried out in July 2000. The restructuring relocated the
Herzig Somerville business into the Batten Graphics location. In connection
with the relocation, the three printing presses at Herzig Somerville were
sold. In addition, a staff reduction occurred to reflect the level of
business at Herzig Somerville at the time of the relocation. Therefore, in
connection with the relocation, 49 positions were eliminated out of a total
staff of 129. The total cost of the restructuring in the third quarter of
2000 was $1.3 million, consisting of $0.8 million of severance costs and
$0.5 million of lease termination costs. The Company realized a gain of
$0.9 million on the sale of the three printing presses.
In addition, in the fourth quarter of 2000, the Company increased its
accruals for shutdown costs at the vacated Herzig Somerville facility and
laid off six additional employees resulting in fourth quarter charges
totaling $0.2 million.
2000 Restructuring. In the fourth quarter of 2000, in response to a
drop in business with many of the Company's top accounts and due to the
need for further layoffs to reduce costs, the Company decided to further
restructure its operations and adopted a 2000 United States Restructuring
Plan "the 2000 Restructuring". The 2000 Restructuring included the closing
of a small start-up in North Carolina as well as staffing reductions at a
number of the Company's facilities. The total restructuring charge in the
fourth quarter for the 2000 Restructuring was $0.7 million. In addition,
the Company recorded a charge for asset impairments of $0.8 million related
to equipment that is no longer used in the Company's operations and has
been written down to net realizable value.
In addition, subsequent to December 31, 2000, the Company carried out
additional staff reductions in January and February 2001 that will be
accounted for as first quarter 2001 charges. As of February 28, 2001, fifty
employees, 3.69% of the workforce, were laid-off at a cost of $0.2 million.
1999 Restructuring. In the third quarter of 2000, the Company
reviewed its accruals from the 1999 Restructuring and determined that there
were excess accruals totaling $0.4 million. This amount was added back to
income on the restructuring charge line on the statement of operations in
the third quarter of 2000. The excess accruals related to rent at
facilities that were anticipated to be vacant for several months in 2000.
In fact, the Company occupied these facilities for several more months in
2000 than anticipated therefore, the monthly rental expense was charged to
regular operations and not to the restructuring accrual. As a result there
was excess accrual for rent at certain facilities as of the end of the
third quarter.
In the fourth quarter of 2000, additional charges totaling $0.5
million were added to the 1999 Restructuring accounts. The consolidation of
the New York operations in 1999 resulted in the Company's paying rent at a
vacated facility. The vacated facility is being marketed for sublet but as
of the fourth quarter it was still vacant. As a result, the original
accrual for rent at the site has been increased by $0.3 million, an
estimate of the remaining cost that the Company will be responsible for.
15
18
In addition, $0.2 million of charges for additional accruals were
necessary to reflect increased severance costs as compared to the amounts
accrued in 1999.
During 2000, all of the plant closings, consolidations and staffing
reductions that were planned for in the 1999 Restructuring were completed
(See details in the "1999 Compared to 1998" discussion).
Other income (expense). Other income (expense) for 2000 resulted in other
expense, net of $4.9 million as compared to $3.6 million net expense in the
prior year. The increased expense is primarily due to $1.4 million of additional
interest expense in 2000 as compared to 1999. The increased interest expense
resulted from a full year of borrowings related to acquisitions made in 1999.
Interest and dividend income decreased to forty-one thousand dollars in 2000
from $0.6 million in 1999 as the Company liquidated its investment portfolio to
provide funds for acquisitions in 1999.
Other income in 2000 consisted primarily of gains from the sale of printing
presses in Canada in the third quarter totaling $0.9 million. Other income of
$0.2 million in 1999 consisted primarily of gains on the sale of investments. In
addition, the Company recognized a loss of $0.5 million on the sale of its
Montreal operations in 2000.
Income before income taxes. Income before income taxes for 2000 decreased
9.5% to $18.1 million from $20.0 in 1999. The pretax income margin for 2000 was
8.8% compared with 10.8% in 1999. The reduction in pretax income margin was
primarily due to increased interest expense in 2000 as compared to 1999 as
described previously
Income taxes. Income taxes were at an effective rate of 41.8% and 41.1%
for 2000 and 1999, respectively. The increase in the effective rate was
primarily due to the non-recurrence of reductions in certain deferred tax
liabilities in 1999.
Net income. Net income decreased 10.2% to $10.6 million for 2000 from
$11.8 for 1999 for the reasons previously discussed.
Earnings per share. Both basic and diluted earnings per share decreased to
$0.50 for 2000 from $0.55 in 1999.
1999 COMPARED TO 1998
Net sales. Net sales for 1999 increased 27.1% to $184.8 million from
$145.4 million in 1998. The increase in revenues was all attributable to
revenues from acquisitions in 1999 and a full year of revenues from the 1998
acquisitions. The market for digital imaging for high end consumer product
packaging was soft throughout 1999. As a result, lower than anticipated volumes
were experienced throughout the year at both the Company's historical operations
and at its acquired businesses.
Cost of sales. Cost of sales for 1999 increased as a percent of sales to
58.5% from 54.4% for 1998 because of higher cost of sales at the acquired
companies versus the Company's historical operations and due to reduced sales
volumes.
Operating income. Operating income decreased 16.4% to $23.7 million in
1999 from $28.3 million in 1998. Excluding restructuring and other charges,
operating income decreased 5.4% to $26.0 million in 1999 from $28.3 million in
1998. The lower operating income was due to lower volumes at most of the
Company's divisions in 1999. The Company acquired 13 businesses in 1998 and
1999. As part of the Company's continuing process of integrating these
businesses and improving the profitability of all of its 25 divisions, it
consolidated certain operations. The Company identified certain operations to be
combined and/or moved and the costs related to the combinations and relocations
resulted in a $2.2 million dollar pretax charge in the fourth quarter. The 1999
Restructuring was adopted to accomplish these changes. In addition, the Company
identified certain assets that will be written down to reflect the impairment of
these assets caused by, among other things, replacement with newly acquired
technically advanced hardware and software that provided more efficient
throughput, rendering existing equipment obsolete. This charge was $0.9 million
on a pretax basis.
16
19
Selling, general and administrative expenses. Selling, general and
administrative expenses increased as a percentage of sales to 25.9% in 1999 from
25.3% for 1998 as a result of a full year of higher commission costs in the
businesses acquired in 1998 that serve the advertising and promotional markets.
Restructuring. The Company acquired 13 businesses in 1998 and 1999. As a
result, the Company had multiple businesses operating in certain geographic
areas. After a review of all of the Company's operations in the fourth quarter
of 1999, management of the Company decided to consolidate certain operations.
In addition, due to the soft market experienced by the industry in 1999,
the Company reviewed all of its new and existing operations and developed a
restructuring plan that resulted in a reduction in staffing levels at certain
operations.
Restructuring of existing operations. In the fourth quarter of 1999,
the Company approved (the 1999 Restructuring) and recorded a charge of $2.2
million, consisting of $1.7 million of lease termination costs and $0.5
million of severance costs. This charge related to the planned
consolidation of four facilities in the following states: Illinois, Ohio
(two facilities consolidating into one) and New York. The consolidations
were started in December 1999, and were completed by November 15, 2000.
With regard to workforce reductions, a total of 50 employees were laid off
at four existing facilities either as part of an early retirement program
or as normal terminations. In addition, the Plan included eleven layoffs at
an operation in Wisconsin due to lower sales volumes. All of the above is
described in more detail in the following paragraphs.
The Illinois facility was relocated to provide a more efficient
workflow for the operations as well as improved access to the Company's
distribution channels. The then existing lease, which was scheduled to
expire in June 30, 2002, was with a related party who was in the process of
selling the building. Based on a review of the current market demand for
the area, it was estimated that the building would be sold by December 31,
2000. Therefore, although there was no assurance the building would be sold
by December 31, 2000, $0.2 million representing rent charges to December
31, 2000 were recorded as part of restructuring and other expense in the
Statement of Operations. In fact, the building was sold by the related
party in November 2000.
Certain of the operations of the aforementioned facility are being
consolidated with another Illinois facility. In anticipation of the
Illinois consolidation, a staffing reduction program was carried out that
was completed in the fourth quarter of 1999. There were 24 affected
employees (approximately 12% of the combined Illinois workforce in 1999).
This program had two components: normal terminations and early retirements.
The normal terminations required a charge of $0.1 million. The early
retirements required a charge of $0.3 million. Both of these amounts were
included in the restructuring charge.
In New York, the Company leased a facility in January 1999 to enter a
new market related to the large format imaging needs of its food and
beverage clients in the East Coast market. The market had not developed as
fast as Company management had anticipated and monthly losses were being
incurred at the facility. In addition, several months after opening the new
facility, the Company acquired a business in Stamford, Connecticut in
September 1999. In December 1999, in connection with the Plan, the Company
decided to close the new large format facility and move the operation in
with the Stamford operation to reduce costs. This move was completed in
July 2000. The New York facility was vacated in July 2000. The existing
lease at the facility to be closed expires December 31, 2003. Therefore, a
charge for lease abandonment cost of $1.0 million was included in the
restructuring charge which assumed the Company would be able to sublease at
the existing lease rate for half of the remaining lease term after vacating
the facility. Severance cost at the business being relocated was ten
thousand dollars at December 31, 1999. As of December 31, 2000 the facility
had not been subleased and an additional charge of $0.3 million was
recorded related to this lease in the fourth quarter of 2000 (see 200
compared to 1999 discussion).
The Ohio facility was vacated and combined with another operation at a
site that the Company is leasing in connection with an acquisition of a
business in Cincinnati in September 1999. The consolidation of operations
is taking place because the Company operates three businesses in the
17
20
Cincinnati area and the Plan called for locating all three businesses at
one site that has excess capacity thereby reducing costs and better
coordinating the Company's efforts in the Mid-East regional marketplace.
There were only nine months left on the lease, which was with an unrelated
third party. The charge to vacate the current site was approximately $0.1
million, which represents rent after vacating the facility, net of
estimated recoveries from sublease income. Leasehold improvements of $0.1
million were written off in the restructuring charge in connection with the
relocation as well. In fact, we remained at the Ohio facility for the
remainder of the lease term through October 31, 2000 (see 2000 compared to
1999).
As part of the Plan, the Company carried out a workforce reduction at
an operation in Wisconsin in the fourth quarter resulting in a charge of
$0.1 million. Eleven employees were terminated (approximately 17% of the
workforce in 1999). The operation was experiencing a decline in volume due
to a continued weakness in sales with current customers and weak new
business development results. The workforce reduction created an ongoing
cost structure that allowed the operation to be profitable at the sales
volume level that was expected for 2000.
Impairment of machinery and equipment. In connection with the 1999
Restructuring, the Company performed a comprehensive review of all its
fixed assets to identify any obsolete and impaired assets. As a result of
this review, equipment with a net book value of $0.9 million was deemed to
be impaired and a charge for that amount was recorded in the fourth quarter
of 1999. The single largest dollar item included in the charge related to a
short run digital press that was purchased four years prior in response to
the Company's customers needs. However, the demand for short-run products
was not as great as management expected. As a result, the press was idle
and a write down of $0.4 million was taken in the impairment charge. The
remaining net book value is at a level that the Company believes it could
sell the press for in the used equipment market. The press was sold at a
price in excess of its net book value in June 2000.
In addition, two high-end workstations with a net book value of $0.1
million were determined to no longer be in use and were written off. The
technology that the workstations used was no longer state of the art and
was not as efficient or versatile as more advanced equipment that the
Company used at that time. Therefore, the salvage value was determined to
be negligible.
The balance of the impairment charge relates to over one hundred
individual pieces of equipment or software that for the most part were
obsolete due to the fast pace of change in technology in the graphics arts
industry. These items were replaced by more modern equipment and as a
result, were determined to have a negligible salvage value and were
therefore written off completely.
Income before income taxes. Income before income taxes for 1999 decreased
32.6% to $20.0 million from $29.7 million in 1998. The pretax income margin for
1999 was 12.8% compared with 19.5% in 1998. The reduction in pretax income
margin was primarily due to reduced sales volume, and the restructuring and
other charges previously described. Additionally, interest and dividend income
decreased to $0.6 million in 1999 from $2.6 million in 1998 as the Company
liquidated its investment portfolio to provide funds for acquisitions. The
Company had gains on the sale of investments in 1999 of $0.2 million compared
with $2.4 million in 1998. Interest expense increased to $4.4 million in 1999
from $3.6 million in 1998 as the Company's outstanding debt increased in
connection with acquisitions in 1999.
Income taxes. Income taxes were at an effective rate of 41.1% and 40.5%
for 1999 and 1998, respectively. The primary reason for the increase in the
effective tax rate was the increase in non-deductible goodwill amortization in
1999 as compared to 1998. The increase in non-deductible goodwill amortization
relates to certain acquisitions in 1998 and 1999.
Net income. Net income decreased 33.3% to $11.8 million for 1999 from
$17.7 for 1998 for the reasons previously discussed.
Earnings per share. Both basic and diluted earnings per share decreased to
$0.55 for 1999 from $1.07 and $1.06 respectively in 1998. A discount on the
redemption of preferred stock increased earnings per share by $0.27 in 1998.
18
21
LIQUIDITY AND CAPITAL RESOURCES
The Company presently finances its business from available cash and from
cash generated from operations. Cash generated from operations in 2000 totaled
$20.6 million. The Company maintains a $65 million unsecured credit facility,
expiring May 2004, of which approximately $41.0 million was available for
borrowings at December 31, 2000. The Company also maintains a $15 million
unsecured demand line of credit to provide financing and working capital
flexibility. At December 31, 2000, approximately $1.8 million was available for
borrowings under the demand line of credit.
Long-term debt and capital lease obligations decreased to $48.0 million at
December 31, 2000 from $67.5 million at December 31, 1999 as the Company paid
down debt from cash generated from operations and benefited from the
cancellation of certain capital lease obligations in connection with the
shutting down and consolidation of certain facilities.
At December 31, 2000, outstanding debt of the Company consisted of: (i)
unsecured notes issued pursuant to a Note Purchase Agreement dated August 18,
1995, for $30.0 million with terms ranging from 2001 through 2005 at an interest
rate of 6.98%; and (ii) $24.0 million of borrowings under the Company's
unsecured credit facility; and (iii) $13.2 million of borrowings under its
unsecured demand credit line.
Management believes that the level of working capital is adequate for the
Company's liquidity needs related to normal operations both currently and in the
foreseeable future, and that the Company has sufficient resources to support its
growth, either through currently available cash, through cash generated from
future operations or through short-term financing.
The Company had capital expenditures in 2000 of $15.5 million, in 1999 of
$17.9 million, and in 1998 of $9.5 million. Capital expenditures made in 2000,
1999, and 1998 were principally for machinery, equipment and computer hardware
and software to improve productivity, and for the purchase of one facility and
building renovations.
The Company had depreciation of $12.1 million in 2000, $10.4 million in
1999, and $6.6 million in 1998. Amortization of goodwill totaled $2.2 million in
2000, $1.9 in 1999, and $1.1 million in 1998.
In 2000 contingent payments representing additional purchase price on
certain acquisitions totaled $1.1 million. In 1999 and 1998 cash paid for
acquisitions totaled $41.6 million and $28.6 million, respectively.
The Company repurchased $8.2 million in Class A Common Stock in 1999 and
$8.1 million during 1998 under a share repurchase program approved by the Board
of Directors. No Class A Common Stock was purchased in 2000.
IMPACT OF INFLATION
The Company believes that over the past three years inflation has not had a
significant impact on the Company's results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Based on the Company's variable rate debt outstanding at December 31, 2000,
a 1% change in interest rates would impact interest expense by approximately
$372. Assuming similar interest rates volatility in the future, a near-term (12
months) change in interest rates would not materially affect the Company's
consolidated financial position, results of operation or cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has foreign operations that exposes it to translation risk when
the local currency financial statements are translated to U.S. dollars. Since
changes in translation risk are reported as adjustments to stockholders' equity,
a 10% change in the foreign exchange rate would not have material effect on the
Company's financial position, results of operations or cash flows.
19
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS COVERED BY
REPORTS OF INDEPENDENT AUDITORS
PAGE
----
Management's Responsibilities for Financial Reporting....... 21
Report of Independent Auditors.............................. 22
FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 2000 and
1999................................................... 23
Consolidated Statements of Operations -- Years Ended
December 31, 2000, 1999 and 1998....................... 24
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998....................... 25
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 2000, 1999,
and 1998............................................... 26
Notes to Consolidated Financial Statements................ 27
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- Valuation Reserves........................... 44
20
23
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING
The management of Schawk, Inc. is responsible for the preparation and
integrity of all financial statements and other information contained in the
Schawk, Inc. Form 10-K Annual Report. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
necessarily include amounts based on judgments and estimates by management
giving due consideration to materiality. The Company maintains internal control
systems designed to provide reasonable assurance that the Company's financial
records reflect the transactions of the Company and that its assets are
protected from loss or unauthorized use.
The Company's financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report thereon follows. As part of their audit of
the Company's financial statements, Ernst & Young LLP considered the Company's
system of internal control to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests. Management has made available to
Ernst & Young LLP the Company's financial records and related data.
The Audit Committee of the Board of Directors is responsible for reviewing
and evaluating the overall performance of the Company's financial reporting and
accounting practices. The Committee meets periodically and independently with
management and the independent auditors to discuss the Company's internal
accounting controls, auditing and financial reporting matters. The independent
auditors have unrestricted access to the Audit Committee.
/s/ DAVID A. SCHAWK
- ------------------------------------------------------
David A. Schawk
President and Chief Executive Officer
Principal Executive Officer
/s/ JAMES J. PATTERSON
- ------------------------------------------------------
James J. Patterson
Senior Vice President and
Chief Financial Officer
Principal Financial and Accounting Officer
21
24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Schawk, Inc.
We have audited the accompanying consolidated balance sheets of Schawk,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the index at item 8. These financial statements and
schedule are the responsibility of Schawk, Inc. management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Schawk, Inc. at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 16, 2001
22
25
SCHAWK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
--------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 357 $ 2,893
Short term investments.................................... -- 3,604
Trade accounts receivable, less allowance for doubtful
accounts of $861 in 2000 and $636 in 1999.............. 40,420 41,441
Inventories............................................... 7,930 7,813
Prepaid expenses and other................................ 4,986 3,629
Refundable income taxes................................... 747 252
Deferred income taxes..................................... 1,236 1,197
-------- --------
Total current assets.............................. 55,676 60,829
Property and equipment, net................................. 44,197 48,777
Excess of cost over net assets acquired, less accumulated
amortization of $9,335 in 2000 and $7,180 in 1999......... 62,302 64,529
Other assets................................................ 5,688 3,126
-------- --------
Total assets...................................... $167,863 $177,261
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 6,170 $ 6,928
Accrued expenses.......................................... 13,520 17,116
Income taxes payable...................................... 927 356
Notes payable to banks.................................... 13,220 8,400
Current portion of long-term debt and capital lease
obligations............................................ 6,260 5,665
-------- --------
Total current liabilities......................... 40,097 38,465
Long-term debt.............................................. 48,000 63,370
Capital lease obligations................................... 20 4,124
Other....................................................... 1,687 1,013
Deferred income taxes....................................... 2,420 2,403
Minority interest in consolidated subsidiary................ 1,131 1,228
Stockholders' Equity:
Common stock.............................................. 183 182
Additional paid-in capital................................ 83,057 82,951
Retained earnings......................................... 11,276 3,410
Accumulated comprehensive loss, net....................... (415) (263)
-------- --------
94,101 86,280
Treasury stock, at cost................................... (19,593) (19,622)
-------- --------
Total stockholders' equity........................ 74,508 66,658
-------- --------
Total liabilities and stockholders' equity........ $167,863 $177,261
======== ========
See accompanying notes.
23
26
SCHAWK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... $206,499 $184,804 $145,389
Cost of sales............................................... 123,200 108,186 79,104
Selling, general, and administrative expenses............... 55,034 47,901 36,834
Goodwill amortization....................................... 2,155 1,944 1,143
Restructuring and other charges............................. 3,137 3,112 --
-------- -------- --------
Operating income............................................ 22,973 23,661 28,308
Other income (expense):
Interest and dividend income.............................. 41 624 2,627
Interest expense.......................................... (5,819) (4,424) (3,598)
Other income.............................................. 916 177 2,411
-------- -------- --------
(4,862) (3,623) 1,440
-------- -------- --------
Income before income taxes and minority interest............ 18,111 20,038 29,748
Income tax provision........................................ 7,567 8,240 12,050
-------- -------- --------
Income before minority interest............................. 10,544 11,798 17,698
Minority interest in net loss of subsidiary................. 97 -- --
-------- -------- --------
Net income........................................ 10,641 11,798 17,698
Preferred dividends......................................... -- -- (114)
Discount on redemption of preferred stock................... -- -- 5,832
-------- -------- --------
Net income available for common shares...................... $ 10,641 $ 11,798 $ 23,416
======== ======== ========
Earnings per share:
Basic..................................................... $ 0.50 $ 0.55 $ 1.07
Diluted................................................... $ 0.50 $ 0.55 $ 1.06
Dividends per Class A common share.......................... $ 0.13 $ 0.22 $ 0.26
See accompanying notes.
24
27
SCHAWK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 10,641 $ 11,798 $ 17,698
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation.............................................. 12,123 10,366 6,598
Amortization.............................................. 2,155 1,944 1,143
Loss on sale of division.................................. 455 -- --
Gain on capital lease termination......................... (372) -- --
Deferred income taxes..................................... (671) (1,613) (1,031)
Restructuring charge...................................... 468 -- --
Asset impairment charge................................... 799 869 --
Gain realized on sale of equipment........................ (980) -- --
Gain realized on sale of marketable securities............ 2 (84) (2,504)
Minority interest in net loss of subsidiary............... (97) -- --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade accounts receivable.............................. 1,025 1,463 (1,445)
Inventories............................................ (339) (843) (249)
Prepaid expenses and other............................. (1,632) 234 47
Trade accounts payable and accrued expenses............ (3,734) 1,846 295
Income taxes refundable/payable........................ 725 (1,323) (3,083)
-------- -------- --------
Net cash provided by operating activities......... 20,568 24,657 17,469
INVESTING ACTIVITIES
Proceeds from sale of division.............................. 1,521 -- --
Proceeds from sale of marketable securities................. 3,602 20,116 47,108
Proceeds from disposal of property and equipment 2,298 -- --
Purchase of marketable securities........................... -- (7,563) (14,574)
Purchases of property and equipment......................... (15,476) (17,874) (9,508)
Acquisitions, net of cash acquired.......................... (1,071) (41,569) (28,607)
Other....................................................... (1,414) 230 1,163
-------- -------- --------
Net cash used in investing activities............. (10,540) (46,660) (4,418)
FINANCING ACTIVITIES
Proceeds from debt.......................................... 5,020 38,829 --
Issuance of common stock.................................... 544 2,690 16,153
Redemption of preferred stock............................... -- -- (14,715)
Principal payments on debt.................................. (14,370) (5,000) (1,911)
Principal payments on capital lease obligations............. (851) (899) (493)
Cash dividends.............................................. (2,775) (4,885) (5,893)
Purchase of common stock.................................... -- (8,241) (8,127)
Other....................................................... (132) 176 139
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... (12,564) 22,670 (14,847)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (2,536) 667 (1,796)
Cash and cash equivalents beginning of period............... 2,893 2,226 4,022
-------- -------- --------
Cash and cash equivalents end of period..................... $ 357 $ 2,893 $ 2,226
======== ======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued in connection with acquisitions................ $ -- $ 791 $ 5,017
Stock options issued in connection with acquisitions........ -- 700 324
Dividends issued in the form of Class A common stock........ 20 26 21
Cash paid for interest...................................... 4,954 3,778 3,023
Cash paid for income taxes.................................. 8,241 10,331 15,400
Forgiveness of capital lease obligation..................... 3,858 -- --
See accompanying notes.
25
28
SCHAWK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
CLASS A ADDITIONAL RETAINED ACCUMULATED
COMMON PAID-IN EARNINGS TREASURY COMPREHENSIVE
STOCK CAPITAL (DEFICIT) STOCK INCOME
------- ---------- --------- -------- -------------
BALANCE AT DECEMBER 31, 1997........... $160 $ 79,243 $(21,140) $ (3,320) $ 965
Net income............................. -- -- 17,698 -- --
Sale of Class A common stock........... 16 16,137 -- -- --
Purchase of Class A treasury stock..... -- -- -- (8,127) --
Foreign currency translation
adjustment........................... -- -- -- -- (246)
Decrease in unrealized appreciation of
marketable securities................ -- -- -- -- (1,210)
Issuance of Class A Common stock under
dividend reinvestment plan........... -- -- -- 21 --
Redemption of preferred stock.......... -- (20,607) 5,832 -- --
Issuance of Class A common stock for
acquisitions......................... 5 5,012 -- -- --
Issuance of Class A restricted shares
to employees......................... -- 118 -- -- --
Stock options issued in acquisitions... -- 324 -- -- --
Cash dividends......................... -- -- (5,893) -- --
Other.................................. -- 35 -- -- --
---- -------- -------- -------- -------
BALANCE AT DECEMBER 31, 1998........... $181 $ 80,262 $ (3,503) $(11,426) $ (491)
Net income............................. -- -- 11,798 -- --
Sale of Class A and B common stock..... -- 47 -- -- --
Purchase of Class A treasury stock..... -- -- -- (8,241) --
Issuance of Class A common restricted
shares to employees.................. -- 182 -- -- --
Stock options issued in acquisitions... -- 700 -- -- --
Stock issued under employee stock
purchase plan........................ -- 520 -- -- --
Foreign currency translation
adjustment........................... -- -- -- -- 292
Issuance of Class A stock in connection
with acquisition..................... 1 790 -- -- --
Issuance of Class A common stock under
dividend reinvestment program........ -- -- -- 45 --
Cash dividends......................... -- -- (4,885) -- --
Other.................................. -- 450 -- -- --
Decrease in unrealized appreciation of
marketable securities................ -- -- -- -- (64)
---- -------- -------- -------- -------
BALANCE AT DECEMBER 31, 1999........... $182 $ 82,951 $ 3,410 $(19,622) $ (263)
Net income............................. -- -- 10,641 -- --
Sale of Class A and B common stock..... -- 60 -- -- --
Purchase of Class A treasury stock..... -- -- -- (1) --
Stock issued under employee stock
purchase plan........................ 1 647 -- -- --
Foreign currency translation
adjustment........................... -- -- -- -- (152)
Issuance of Class A common stock under
dividend reinvestment program........ -- -- -- 30 --
Cash dividends......................... -- -- (2,775) -- --
Cancellation of stock issued for
acquisition.......................... -- (486) -- -- --
Other.................................. -- (115) -- -- --
---- -------- -------- -------- -------
BALANCE AT DECEMBER 31, 2000........... $183 $ 83,057 $ 11,276 $(19,593) $ (415)
==== ======== ======== ======== =======
See accompanying notes.
26
29
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Schawk, Inc. including its subsidiaries (the Company) is a leading provider
of digital imaging prepress services for the consumer products industry in North
America and Asia. The Company focuses on providing these services to
multi-national clients in three primary markets: consumer products packaging,
advertising agencies and promotion.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue at the later of delivery of the goods and/or
services to the customer or the acceptance of the goods and/or services by the
customer.
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 28% of total inventories in 2000 and 31% in 1999 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.
INVESTMENTS
Generally Accepted Accounting Principles require that investments in debt
securities and marketable equity securities be designated as trading,
held-to-maturity or available-for-sale. Management determines the appropriate
classification of its securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The company had no investment
securities at December 31, 2000. All of the Company's investments at December
31, 1999 were designated as available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses, net of income
taxes, reported in a separate component of stockholders' equity. Realized gains
and losses and declines in value judged to be other than temporary are included
in investment income. The cost of securities sold is determined by the specific
identification method. Interest and dividends on available-for-sale securities
are included in investment income.
PROPERTY AND EQUIPMENT
Property and equipment, including capitalized leases, is 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.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired (goodwill) is being amortized using
the straight-line method over periods with a life of 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.
27
30
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries use the local currency as their
functional currency. Accordingly, foreign currency assets and liabilities are
translated at the rate of exchange existing at year-end and income and expense
amounts are translated at the average of the monthly exchange rates. Adjustments
resulting from the translation of foreign currency financial statements are
included in accumulated comprehensive income (loss) as a component of
stockholders' equity.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the years
ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
------- ------- -------
Net income.............................................. $10,641 $11,798 $17,698
Increase (decrease) in unrealized appreciation of
available-for-sale securities......................... -- (64) (1,210)
Foreign currency translation adjustments................ (152) 292 (247)
------- ------- -------
Comprehensive income.................................... $10,489 $12,026 $16,241
======= ======= =======
Accumulated comprehensive income (loss), net of related tax, at December
31, 2000 and 1999 consists of foreign currency translation adjustments.
NOTE 3. RESTRUCTURING
The Company acquired 13 businesses from March 1998 through November 1999.
At the end of 1999, Company management determined that since the Company had
multiple operations in certain markets there were opportunities to consolidate
operations. The three markets that were to be consolidated were: New York,
Cincinnati and Chicago. In addition, staffing reductions were carried out in
certain other locations due to lower volumes of business. The Company carried
out a 1999 United States Restructuring ("1999 Restructuring") to accomplish
these objectives and in the fourth quarter of 1999, the Company incurred charges
of $2.2 million, consisting of $1.7 million of lease termination costs and $0.5
million of severance costs included in "Restructuring and other charges" on the
Consolidated Statement of Operations. This restructuring included the planned
shutdown and consolidation of four facilities in the following states: Illinois,
Ohio (two facilities consolidating into one) and New York. The shutdowns and
consolidations were started in December 1999, and were completed by November 15,
2000. With regard to workforce reductions, a total of 50 employees were laid off
at four existing facilities either as part of an early retirement program or as
normal terminations. In
28
31
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the 1999 Restructuring included the layoff of eleven employees at an
operation in Wisconsin due to lower sales volumes.
During 2000 there were revisions to estimates based on changes in facts
that were not anticipated when the 1999 Restructuring charges were recorded in
the fourth quarter of 1999. Additional charges recorded in 2000 related to
refining estimates for severance costs amounting to $0.2 million. In addition,
the Company was unable to sublease a vacated facility as planned and as a result
an additional accrual of $0.3 million was recorded in the fourth quarter of 2000
to increase the accrual to the estimated liability as of December 31, 2000.
In addition, the Company did not vacate certain premises as early in 2000
as was anticipated at December 31, 1999. As a result, in the third quarter of
2000, $0.4 million of vacant premises leases accruals were revised and are
included as a reduction of the Restructuring and other charges line on the
Statement of Operations.
In the third quarter of 2000, the Company decided to consolidate its two
prepress operations in Toronto into one facility and reduce staffing
accordingly. This consolidation was the 2000 Canadian Restructuring ("Canadian
Restructuring").
In the fourth quarter of 2000, the Company determined that due to softness
in the market for prepress services for consumer products packaging, additional
staffing reductions were required. In addition a start up facility was shut
down. This restructuring was the 2000 United States Restructuring ("2000
Restructuring").
CANADIAN RESTRUCTURING
In July 2000, Company management in Toronto announced that the Herzig
Somerville operation was moving into Batten Graphics location in Toronto.
Severance costs for 49 employees of $0.8 million and lease termination costs of
$0.5 million were charged to the "Restructuring and other charges" line on the
Statement of Operations. In addition, three printing presses at Herzig
Somerville were sold. The Company recognized a gain on sale of $0.9 million. The
gain is reflected on the other income line in the Statement of Operations.
In the fourth quarter of 2000, there were additional lease termination
costs related to the vacated facility totaling $0.2 million. These costs were
included on the Restructuring and other charges line on the Statement of
Operations.
The Company also sold its Montreal operations effective June 1, 2000. The
Company recognized a net loss of $0.5 million on the sale after finalization of
the accounting for the sale in the fourth quarter of 2000. The loss on the sale
is not a restructuring charge. It is included in Other income as a loss on the
Statement of Operations.
2000 RESTRUCTURING
In the fourth quarter of 2000 the Company carried out the 2000
Restructuring a plan that involved staff reductions and the closing of one small
facility in North Carolina. The staff reductions totaled 20 employees, or 1.4%
of the workforce, and the Company recorded a charge of $0.1 million for
severance costs. The North Carolina plant was closed at a cost of $0.6 million
consisting of: $0.1 million estimate of the cost of canceling the lease for the
premises and $0.5 million of written off leasehold improvements and other costs.
The total of the above items, $0.7 million, is included in the Restructuring and
other charges line on the Statement of Operations.
29
32
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY
2000 1999
------ ------
RESTRUCTURING CHARGES
Severance and other employee termination costs.............. $1,122 $ 500
Lease termination costs..................................... 1,095 888
Reversal of lease termination costs......................... (440)
Write off of leasehold improvements and other............... 561 855
------ ------
2,338 2,243
IMPAIRMENT CHARGES (SEE NOTE 4)
Computer equipment and software............................. 733 869
Other....................................................... 66
------ ------
799 869
------ ------
RESTRUCTURING CHARGES AND OTHER............................. $3,137 $3,112
====== ======
NOTE 4. IMPAIRMENT OF MACHINERY AND EQUIPMENT
In connection with the 1999 Restructuring and the 2000 Restructuring,
Company management performed detailed reviews of all of the Company's assets to
determine whether any of the assets were impaired.
In the 2000 Restructuring, assets totaling $799 were written down to net
realizable value. The assets involved were primarily computer equipment or
software. The most significant portion of the charge was $192 related to four
high-end graphics systems that have been rendered obsolete by newer more
efficient equipment. The remainder of the charge principally relates to dozens
of individual pieces of equipment or software that have been replaced by newer
versions.
In connection with the 1999 Restructuring, all of the Company's fixed
assets were reviewed to determine whether there were any asset impairments
either in the operations being consolidated or in any other of the Company's
operations. As a result of this review, assets with a net book value of $869
were deemed to be impaired and a charge for that amount was recorded in the
fourth quarter of 1999. All of the assets written down were either equipment or
software. The charge was included as part of "Restructuring and other charges"
on the Statement of Operations. The largest part of the charge related to a
short- run digital press that was purchased in response to the Company's
customers need for short run sales samples and other collateral items. The
demand for short run products was not as great as the Company thought it would
be. As a result, the press is idle and is held for disposal. The press was
written down to net realizable value of $100 that resulted in a write down of
$357. The estimated net realizable value was determined to be the amount
management believes the asset can be sold for in the used equipment market. The
press was sold at a price in excess of its net book value in June 2000. The
remaining items consist of equipment which has become obsolete due to
technological changes.
NOTE 5. ACQUISITIONS
The Company did not make any acquisitions in 2000. The $1,071 amount on the
Consolidated Statement of Cash Flows for the year ended December 31, 2000 for
Acquisitions, net of cash acquired, represents contingent payments made in 2000
related to certain 1999 acquisitions. This amount was recorded as cost in excess
of net assets acquired in 2000.
The following acquisitions made during 1999 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 and liabilities as of the date
of the
30
33
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisitions, and the results of operations have been included in the
accompanying consolidated statements of operations from the effective date of
the respective acquisitions. Pro-forma financial information has not been
presented because the effects of the operations of the acquired companies prior
to the date of acquisition were not significant.
2000 1999
------ -------
Fair value of assets acquired, net of cash acquired of
$2,043 in 1999............................................ $ -- $11,961
Cost in excess of net assets acquired....................... 1,071 31,560
Liabilities assumed......................................... -- (459)
Stock options issued in connection with acquisition......... -- (700)
Class A common stock issued (82 shares in 1999)............. -- (791)
------ -------
Cash paid, net of cash acquired............................. $1,071 $41,569
====== =======
NOTE 6. RELATED PARTY TRANSACTIONS
Included in other liabilities at December 31, 2000 was a payable of
approximately $433 to Geneva Waterfront, Inc. which is owned by a stockholder of
the Company. At December 31, 1999 the Company had a receivable of approximately
$2 from Geneva Waterfront, Inc., included in other assets.
The Company also leases land and a building from a related party. See Note
14.
NOTE 7. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
---------------
2000 1999
------ ------
Raw materials............................................... $2,147 $2,521
Work in process............................................. 6,771 6,500
------ ------
8,918 9,021
Less: LIFO reserve.......................................... (988) (1,208)
------ ------
$7,930 $7,813
====== ======
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Land and improvements....................................... $ 1,492 $ 1,211
Buildings and improvements.................................. 12,210 10,112
Machinery and equipment..................................... 91,142 78,655
Leasehold improvements...................................... 9,232 7,014
Building and improvements under capital leases.............. -- 7,500
-------- --------
114,076 104,492
Accumulated depreciation and amortization................... (69,879) (55,715)
-------- --------
$ 44,197 $ 48,777
======== ========
31
34
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated depreciation and amortization includes $3,576 for building and
improvements under capital leases at December 31, 1999. At December 31, 2000 the
capital leases were cancelled and related asset and accumulated depreciation
balances were written off.
NOTE 9. INVESTMENTS
The Company had no securities held for investment at December 31, 2000. At
December 31, 1999 all of the Company's securities were classified as available
for sale. For the year ended December 31, 1999, the value of a bond mutual fund
with a cost of $3,972 was determined to be permanently impaired and was written
down to fair market value at December 31, 1999, and a loss of $368 was recorded
in other income (expense) in the accompanying consolidated statement of
operations. The investment was disposed of subsequent to December 31, 1999.
The following table summarizes available-for-sale securities at December
31, 1999:
1999
-------------------------------
GROSS
UNREALIZED ESTIMATED
GAINS FAIR
COST (LOSSES) VALUE
------ ---------- ---------
Bond mutual funds....................................... $3,604 $-- $3,604
====== == ======
During the years ended December 31, 2000 and 1999, marketable equity
securities were sold or determined permanently impaired, which resulted in gross
realized gains (loss) of $(2) and $84 respectively, which are included in other
income in the accompanying Statement of Operations.
NOTE 10. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------
2000 1999
------- -------
Accrued compensation and payroll taxes...................... $ 8,330 $ 8,460
Accrued restructuring charges............................... 769 1,805
Other....................................................... 4,421 6,851
------- -------
$13,520 $17,116
======= =======
NOTE 11. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------
2000 1999
------- -------
Series A senior note payable................................ $ -- $ 5,000
Series B senior note payable................................ 30,000 30,000
------- -------
30,000 35,000
Bank credit agreement....................................... 24,000 33,370
------- -------
54,000 68,370
Less amounts due in one year or less........................ (6,000) (5,000)
------- -------
$48,000 $63,370
======= =======
32
35
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series A note was paid in 2000. The Series B note bears interest at
6.98% and is payable in annual installments of $6,000 from 2001 to 2005. The
notes may be prepaid in whole or in part at any time.
The borrowings under the bank credit agreement are unsecured and are at a
floating rate of interest over the Federal Funds or Eurocurrency rates based
upon certain financial ratios. The effective interest rate on these borrowings
was 7.76% at December 31, 2000. The credit agreement is for $65,000 and expires
on May 6, 2004. The Company had approximately $41,000 available to borrow under
this line at December 31, 2000.
Borrowings under the above agreements are subject to certain restrictive
covenants. In addition, the agreements require the Company to maintain certain
net worth and other financial ratio requirements. The fair value of these
obligations approximates carrying value at December 31, 2000 and 1999.
Annual maturities of long-term debt at December 31, 2000 are as follows:
2002....................................................... $ 6,000
2003....................................................... 6,000
2004....................................................... 30,000
2005....................................................... 6,000
-------
$48,000
=======
The Company also has an unsecured $15,000 demand line of credit with a bank
to provide financing and working capital flexibility. Interest is at a floating
rate over LIBOR. At December 31, 2000, the Company had $13,220 outstanding under
this line of credit. The effective interest rate on these borrowings was 7.25%
at December 31, 2000.
NOTE 12. STOCKHOLDERS' EQUITY
Stockholders' equity includes the following:
DECEMBER 31,
-----------------
2000 1999
------- -------
Common stock:
Class A voting, $0.008 par value, 40,000,000 shares
authorized; 23,062,811 and 22,907,563 shares issued at
December 31, 2000 and 1999, respectively; 21,362,993
and 21,205,101 shares outstanding at December 31, 2000
and 1999, respectively................................. $ 183 $ 182
------- -------
Treasury stock:
1,699,818 and 1,702,462 shares of Class A common stock at
December 31, 2000 and 1999, respectively............... $19,593 $19,622
======= =======
33
36
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES
The provision (credit) for income taxes for continuing operations is
comprised of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------- -------
Current:
Federal................................................ $6,209 $ 7,140 $ 9,571
State.................................................. 754 1,182 1,520
Foreign................................................ 1,275 1,531 666
------ ------- -------
8,238 9,853 11,757
Deferred:
Federal................................................ (614) (1,428) 165
State.................................................. (76) (191) 26
Foreign................................................ 19 6 102
------ ------- -------
(671) (1,613) 293
------ ------- -------
Total.......................................... $7,567 $ 8,240 $12,050
====== ======= =======
Components of deferred income tax assets and liabilities are as follows:
DECEMBER 31,
-----------------
2000 1999
------- -------
Current deferred income taxes:
Inventory................................................. $ 133 $ 217
Accruals and reserves not currently deductible............ 1,092 968
Foreign taxes............................................. 11 12
------- -------
Net current asset........................................... $ 1,236 $ 1,197
======= =======
Noncurrent deferred income taxes:
Depreciation.............................................. $ (859) $ (331)
Property and equipment acquisition basis differences...... (1,618) (1,618)
Unrealized gains on marketable securities................. -- --
Other..................................................... 57 (454)
------- -------
Net noncurrent liability.................................... $(2,420) $(2,403)
======= =======
A reconciliation between the provision for income taxes for continuing
operations computed by applying the federal statutory tax rate to income before
incomes taxes and the actual provision is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Income taxes at statutory rate.............................. 35.0% 35.0% 35.0%
Nondeductible expenses...................................... 3.2 3.4 1.1
State income taxes.......................................... 2.4 4.9 4.8
Other....................................................... 1.2 (2.2) (0.4)
---- ---- ----
41.8% 41.1% 40.5%
==== ==== ====
The undistributed earnings of foreign subsidiaries were approximately
$4,559 and $3,314 at December 31, 2000 and 1999, respectively. No income taxes
are provided on the undistributed earnings because they are
34
37
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
considered permanently reinvested. The foreign component of income before income
taxes was $1,431 for 2000, $3,808 for 1999 and $1,810 for 1998.
NOTE 14. LEASES AND COMMITMENTS
The Company leased land and a building from an unrelated party. This lease
was recorded as a capital lease. A related party had an option to purchase the
land and building in January 2000. During 2000, the purchase option was
exercised, the lease with the unrelated party was terminated, and the Company
executed an operating lease at the same monthly rental amounts as previously
with the related party. The Company recorded a gain of $524 on the termination
of the capital lease.
The Company also leased land and a building from a related party. This
lease was also recorded as a capital lease. During 2000, this lease was
terminated and the Company relocated its operation to another site. The Company
recorded a loss of $152 on the termination of the capital lease.
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
$2,990, $2,490, and $1,389, for the years ended December 31, 2000, 1999 and
1998, respectively.
Future minimum payments under leases with terms of one year or more are as
follows at December 31, 2000:
CAPITAL OPERATING
LEASES LEASES
------- ---------
2001........................................................ $273 $ 2,496
2002........................................................ 21 2,610
2003........................................................ -- 2,243
2004........................................................ -- 1,253
2005........................................................ -- 720
Thereafter.................................................. -- 3,356
---- -------
$294 $12,678
=======
Less: Amounts representing interest......................... 14
----
280
Less: Current portion....................................... 260
----
$ 20
====
The Company has a deferred compensation agreement with the Chairman of the
Board dated June 1, 1983 which was ratified and included in a restated
employment agreement dated October 1, 1994. The agreement provides for deferred
compensation for 10 years equal to 50% of final salary and was modified on March
9, 1998 to determine a fixed salary level for purposes of this calculation. The
Company has recorded a deferred compensation liability equal to $828 at both
December 31, 2000 and December 31, 1999. The liability was calculated using the
net present value of ten annual payments at a 6% discount rate assuming, for
calculation purposes only, that payments begin one year from the balance sheet
date.
NOTE 15. EMPLOYEE BENEFIT PLANS
The Company has various defined-contribution plans for the benefit of its
employees. The plans provide a 100% match of employee contributions based on a
discretionary percentage determined by management. The matching percentage of
wages (as defined) was 5.0% in 2000, 5.5% in 1999 and 5.0% in 1998.
Contributions to the plans were $1,834, $1,780 and $1,357 in 2000, 1999 and
1998, respectively.
35
38
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is required to contribute to certain defined benefit union
pension plans under various labor contracts covering union employees. Pension
expense related to the union plans, which is determined based upon payroll data,
was approximately $1,306, $1,145 and $1,036 in 2000, 1999 and 1998,
respectively.
The Company established an employee stock purchase plan on January 1, 1999 that
permits employees to purchase common shares of the Company through payroll
deductions. The Company issues new shares at a discount of 15%, based upon the
lower of the beginning-of-quarter or end-of-quarter closing market price of the
Company stock. The discount is recorded as compensation expense. The number of
shares issued for this plan was 78 in 2000 and 53 in 1999. The discount recorded
as compensation expense was $97 in 2000. No expense was recorded in 1999 as the
amount was negligible. At December 31, 2000 the number of shares committed but
not yet issued was not significant.
NOTE 16. STOCK/EQUITY OPTION PLANS
The Company has an Equity Option Plan that provides for the granting of
options to purchase up to 2,252 shares of Class A common stock to key employees.
The Company has also adopted an Outside Directors' Formula Stock Option Plan
authorizing unlimited grants of options to purchase shares of Class A common
stock to outside directors. Options granted under these plans have an exercise
price equal to the market price of the underlying stock at the date of grant and
are exercisable for a period of ten years from the date of grant and vest over a
three-year period.
A summary of options outstanding at each of the three years ended December
31, 2000, 1999 and 1998, and other data for the three years then ended under all
option plans is as follows:
OUTSTANDING
OPTIONS OF CLASS A WEIGHTED AVERAGE
COMMON STOCK EXERCISE PRICE
------------------ ----------------
Balance, December 31, 1997........................... 659 $ 8.80
Granted.............................................. 172 11.88
Exercised............................................ (18) 8.00
Cancelled............................................ (124) 14.87
-----
Balance, December 31, 1998........................... 689 9.29
Granted.............................................. 548 10.09
Exercised............................................ (7) 7.00
Cancelled............................................ -- --
-----
Balance, December 31, 1999........................... 1,230 9.65
Granted.............................................. 502 7.68
Exercised............................................ (7) 7.46
Cancelled............................................ -- --
-----
Balance, December 31, 2000........................... 1,725 $ 9.37
=====
36
39
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ---------------------------------
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OF
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISABLE PRICE
- -------------- ----------- ---------------- ---------------- ----------- -------------------
$ 6.00-$ 7.50........ 42 5.0 $ 7.00 42 $ 7.00
7.51- 9.00........ 751 7.7 7.84 460 7.93
9.01- 10.50........ 596 7.1 9.57 445 9.58
10.51- 12.00........ 187 7.3 11.48 179 11.47
12.01- 13.50........ 66 8.0 13.50 45 13.50
13.51- 15.00........ 83 7.7 14.83 83 14.83
----- -----
1,725 1,254
===== =====
Options available for grant under the plans were 681, 1,183 and 1,563 at
December 31, 2000, 1999 and 1998, respectively. Options exercisable under the
plans were 817 in 1999 and 487 in 1998.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation (Statement 123)," requires the use
of option-valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the number of shares is fixed and the
exercise price of the Company's employee stock options approximates the market
price of the underlying stock on the date of grant, no compensation is
recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123 as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value method of
that Statement. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period.
The Company's pro forma information follows:
2000 1999 1998
------- ------- -------
Income from continuing operations..................... $10,641 $11,798 $17,698
Pro forma income...................................... 9,962 11,147 16,426
Earnings per share
Basic............................................... $ 0.50 $ 0.55 $ 1.07
Diluted............................................. $ 0.50 $ 0.55 $ 1.06
Pro forma earnings per share Operations
Basic............................................... $ 0.47 $ 0.52 $ 1.05
Diluted............................................. $ 0.47 $ 0.52 $ 1.04
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option valuation model with the following assumptions:
2000 1999 1998
-------- -------- --------
Expected dividend yield............................. 1.48% 1.5% 3.0%
Expected stock price volatility..................... 31.66% 33.94% 33.94%
Risk-free interest rate range....................... 5.5%-6.0% 5.0%-5.7% 5.6%-5.8%
Weighted-average expected life of options........... 7 years 7 years 7 years
37
40
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 17. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
face of the statement of operations. Basic earnings per share is computed by
dividing net income less preferred dividends by the weighted average shares
outstanding for the year. Diluted earnings per share is computed by dividing net
income less preferred dividends by the weighted average number of common shares
and common stock equivalent shares outstanding (stock options) for the year.
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
------- ------- -------
Net income............................................ $10,641 $11,798 $17,698
Preferred stock dividends............................. -- -- (114)
Discount on redemption of preferred stock............. -- -- 5,832
------- ------- -------
Income available for common shareholders.............. $10,641 $11,798 $23,416
------- ------- -------
Weighted average shares............................... 21,312 21,421 21,924
Effect of dilutive employee stock options............. 69 86 235
------- ------- -------
Adjusted weighted average shares and assumed
conversions......................................... 21,381 21,507 22,159
======= ======= =======
Basic earnings per share.............................. $ 0.50 $ 0.55 $ 1.07
======= ======= =======
Diluted earnings per share............................ $ 0.50 $ 0.55 $ 1.06
======= ======= =======
Options to purchase 937 shares of Class A common stock at exercise prices
ranging from $8.62-$15 per share were outstanding at December 31, 2000 but were
not included in the computation of diluted earnings per share because the
options were anti-dilutive. The options expire at various dates through December
31, 2010.
Options to purchase 746 shares of Class A common stock at exercise prices
ranging from $9.75-$15 per share were outstanding at December 31, 1999 but were
not included in the computation of diluted earnings per share because the
options were anti-dilutive. The options expire at various dates through December
31, 2009.
38
41
SCHAWK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. GEOGRAPHIC REPORTING
The Company operates a single business segment, Imaging and Information
Technologies. The Company operates primarily in two geographic areas, the United
States and Canada. Summary financial information for continuing operations by
geographic area for 2000, 1999 and 1998 is as follows:
OTHER
UNITED STATES CANADA FOREIGN
------------- ------- -------
2000
Sales............................................... $160,761 $39,850 $5,888
Long-lived assets................................... 87,796 16,839 7,552
1999
Sales............................................... $142,702 $40,182 $1,920
Long-lived assets................................... 89,980 19,939 6,513
1998
Sales............................................... $123,096 $22,293 $ --
Long-lived assets................................... 59,225 14,757 --
Long-lived assets are non-current assets that are identified with the
operations in each geographic area.
39
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has no items to report under item 9 of this Annual Report on
Form 10-K.
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 Proxy Statement for the Annual Meeting of Stockholders to be held Wednesday,
May 16, 2001, and is to be filed with the Securities and Exchange Commission on
or before April 30, 2001 (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 "Proposal 1; Election of
Directors" and is incorporated herein by reference.
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 and independent public accountants
FINANCIAL STATEMENTS:
Consolidated Balance Sheets--Years Ended December 31, 2000 and 1999
Consolidated Statements of Operations--Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows--Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 2000, 1999 and
1998
Notes to Consolidated Financial Statements
2. The following financial schedules for the years 2000, 1999 and 1998
are submitted herewith:
SCHEDULE II -- Valuation Reserves
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant for the fourth
quarter of 2000 through the filing date of this document.
40
43
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION INCORPORATED
------- ----------- ------------
3.1 -- Certificate of Incorporation of Schawk, Inc., as Registration Statement
amended. No. 33-85152
3.3 -- By-Laws of Schawk, Inc., as amended. Registration Statement
No. 333-39113
4.1 -- Specimen Class A Common Stock Certificate. Registration Statement
No. 33-85152
10.12* -- Schawk, Inc. 1988 Equity Option Plan. 1988 10-K
10.13a* -- First Amendment to Schawk, Inc. 1988 Equity Option 1992 10-K
Plan.
10.13b* -- Second Amendment to Schawk, Inc. 1988 Equity Option Registration Statement
Plan. No. 33-85152
10.22 -- Lease Agreement dated as of July 1, 1987, and Registration Statement
between Process Color Plate, a division of Schawk, No. 33-85152
Inc. and The Clarence W. Schawk 1979 Children's
Trust.
10.23 -- Lease Agreement dated as of June 1, 1989, by and Registration Statement
between Schawk Graphics, Inc., a division of Schawk, No. 33-85152
Inc. and C.W. Properties.
10.26* -- Schawk, 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 Registration Statement
Employment Agreement between Clarence W. Schawk and No. 33-85152
Schawk, Inc.
10.28* -- Form of David A. Schawk Amended and Restated Registration Statement
Employment Agreement between David A. Schawk and No. 33-85152
Schawk, Inc.
10.31 -- Form of Registration Rights Agreement dated December Registration Statement
30, 1994, by and among Schawk, Inc. and certain No. 33-85152
investors.
10.32 -- Money Market Demand Note dated February 7, 1997 from Registration Statement
Schawk, Inc., borrower, to the Northern Trust No. 333-39113
Company, lender.
10.33 -- Demand Note Agreement dated September 12, 1996 Registration Statement
between Schawk Canada, Inc. and First Chicago NBD No. 33-39113
Canada and related continuing Guaranty of Schawk,
Inc.
10.35 -- Letter of Agreement dated September 21, 1992, by and Registration Statement
between Schawk, Inc. and Judith W. McCue. No. 33-85152
10.37* -- Schawk, Inc. Retirement Trust effective January 1, 1996 10-K
1996.
10.38* -- Schawk, Inc. Retirement Plan for Imaging Employees 1996 10-K
Amended and Restated effective January 1, 1996.
10.42 -- Schawk, Inc. Note Agreement dated as of August 18, 1996 10-K
1995.
10.43 -- Stockholder Investment Program dated July 28, 1995. Registration Statement
No. 33-61375
10.44a -- Credit Agreement dated January 23, 1999, by and Form 8-K dated January
between Schawk, Inc. and The First National Bank of 28, 1999
Chicago.
41
44
EXHIBIT
NUMBER DESCRIPTION INCORPORATED
------- ----------- ------------
10.44b -- Amendment No. 1 to Credit Agreement dated March 15, Form 8-K dated
1999 by and between Schawk, Inc. and The First March 17, 1999
National Bank of Chicago.
10.45* -- Schawk, Inc. Employee Stock Purchase Plan effective Registration Statement
January 1, 1999. No. 333-68521
10.46 -- Second Amended and Restated Credit Agreement dated 1999 10-K
as of October 29, 1999, by and among Schawk, Inc.
and Bank One, NA, excluding exhibits.
21** -- List of Subsidiaries.
23a** -- Consent of Expert.
27** -- Financial Data Schedule -- 2000.
- ---------------
* Represents management contract or compensation plan or arrangement required
to be filed pursuant to Item 14 (c).
** Document attached hereto.
42
45
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized, in Cook County,
State of Illinois, on the 16th day of March, 2001.
Schawk, Inc.
By: /s/ Clarence W. Schawk
----------------------------------
Clarence W. Schawk
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 16th day of March, 2001.
SIGNATURE TITLE
--------- -----
/s/ CLARENCE W. SCHAWK Chairman of the Board and Director
- -----------------------------------------------------
Clarence W. Schawk
/s/ DAVID A. SCHAWK President, Chief Executive Officer, and
- ----------------------------------------------------- Director
David A. Schawk
/s/ A. ALEX SARKISIAN, ESQ. Executive Vice President, Corporate
- ----------------------------------------------------- Secretary and Director
A. Alex Sarkisian, Esq.
/s/ JAMES J. PATTERSON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
James J. Patterson
/s/ JOHN T. MCENROE, ESQ. General Counsel, Assistant Secretary, and
- ----------------------------------------------------- Director
John T. McEnroe, Esq.
/s/ LEONARD S. CARONIA Director
- -----------------------------------------------------
Leonard S. Caronia
/s/ JUDITH W. MCCUE, ESQ. Director
- -----------------------------------------------------
Judith W. McCue, Esq.
/s/ HOLLIS W. RADEMACHER Director
- -----------------------------------------------------
Hollis W. Rademacher
43
46
SCHAWK, INC.
SCHEDULE II -- VALUATION RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------ ------ -------
(IN THOUSANDS)
Balance beginning of year................................... $636 $730 $ 464
Provision................................................... 394 (94) 266
Deductions.................................................. 169 -- --
---- ---- -----
Balance end of year......................................... $861 $636 $ 730
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
44
47
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION INCORPORATED
------- ----------- ------------
3.1 -- Certificate of Incorporation of Schawk, Inc., as Registration Statement
amended. No. 33-85152
3.3 -- By-Laws of Schawk, Inc., as amended. Registration Statement
No. 333-39113
4.1 -- Specimen Class A Common Stock Certificate. Registration Statement
No. 33-85152
10.12* -- Schawk, Inc. 1988 Equity Option Plan. 1988 10-K
10.13a* -- First Amendment to Schawk, Inc. 1988 Equity Option 1992 10-K
Plan.
10.13b* -- Second Amendment to Schawk, Inc. 1988 Equity Option Registration Statement
Plan. No. 33-85152
10.22 -- Lease Agreement dated as of July 1, 1987, and Registration Statement
between Process Color Plate, a division of Schawk, No. 33-85152
Inc. and The Clarence W. Schawk 1979 Children's
Trust.
10.23 -- Lease Agreement dated as of June 1, 1989, by and Registration Statement
between Schawk Graphics, Inc., a division of Schawk, No. 33-85152
Inc. and C.W. Properties.
10.26* -- Schawk, 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 Registration Statement
Employment Agreement between Clarence W. Schawk and No. 33-85152
Schawk, Inc.
10.28* -- Form of David A. Schawk Amended and Restated Registration Statement
Employment Agreement between David A. Schawk and No. 33-85152
Schawk, Inc.
10.31 -- Form of Registration Rights Agreement dated December Registration Statement
30, 1994, by and among Schawk, Inc. and certain No. 33-85152
investors.
10.32 -- Money Market Demand Note dated February 7, 1997 from Registration Statement
Schawk, Inc., borrower, to the Northern Trust No. 333-39113
Company, lender.
10.33 -- Demand Note Agreement dated September 12, 1996 Registration Statement
between Schawk Canada, Inc. and First Chicago NBD No. 33-39113
Canada and related continuing Guaranty of Schawk,
Inc.
10.35 -- Letter of Agreement dated September 21, 1992, by and Registration Statement
between Schawk, Inc. and Judith W. McCue. No. 33-85152
10.37* -- Schawk, Inc. Retirement Trust effective January 1, 1996 10-K
1996.
10.38* -- Schawk, Inc. Retirement Plan for Imaging Employees 1996 10-K
Amended and Restated effective January 1, 1996.
10.42 -- Schawk, Inc. Note Agreement dated as of August 18, 1996 10-K
1995.
10.43 -- Stockholder Investment Program dated July 28, 1995. Registration Statement
No. 33-61375
10.44a -- Credit Agreement dated January 23, 1999, by and Form 8-K dated January
between Schawk, Inc. and The First National Bank of 28, 1999
Chicago.
48
EXHIBIT
NUMBER DESCRIPTION INCORPORATED
------- ----------- ------------
10.44b -- Amendment No. 1 to Credit Agreement dated March 15, Form 8-K dated
1999 by and between Schawk, Inc. and The First March 17, 1999
National Bank of Chicago.
10.45* -- Schawk, Inc. Employee Stock Purchase Plan effective Registration Statement
January 1, 1999. No. 333-68521
10.46 -- Second Amended and Restated Credit Agreement dated 1999 10-K
as of October 29, 1999, by and among Schawk, Inc.
and Bank One, NA, excluding exhibits.
21** -- List of Subsidiaries.
23a** -- Consent of Expert.
27** -- Financial Data Schedule -- 2000.
- ---------------
* Represents management contract or compensation plan or arrangement required
to be filed pursuant to Item 14(c).
** Document attached hereto.