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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
COMMISSION FILE NUMBER 1-9335
SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2545354
(I.R.S. Employer Identification No.)
1695 RIVER ROAD
DES PLAINES, ILLINOIS
(Address of principal executive office)
60018
(Zip Code)
847-827-9494
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act.)
Yes No X
----- -----
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes No X
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of October 28, 2005 is:
26,146,862 Shares of Class A Common Stock, $.008 par value
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SCHAWK, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
September 30, 2005
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 24
Signatures 25
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
SEPTEMBER 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,064 $ 7,268
Trade accounts receivable, less allowance for doubtful accounts
of $5,565 at September 30, 2005 and $1,773 at December 31, 2004 137,614 56,332
Inventories 32,968 10,339
Prepaid expenses and other 10,453 4,702
Refundable income taxes 1,021 1,832
Deferred income taxes 16,467 2,353
-------- --------
Total current assets 208,587 82,826
Property and equipment, less accumulated depreciation of
$76,989 at September 30, 2005 and $69,668 91,475 46,431
at December 31, 2004
Goodwill 212,681 71,720
Intangible assets, net 53,909 12,754
Other assets 7,013 7,032
-------- --------
Total assets $573,665 $220,763
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 23,588 $ 8,424
Accrued expenses 71,875 26,578
Income taxes payable 15,101 --
Current portion of long-term debt and capital lease obligations 541 6,683
-------- --------
Total current liabilities 111,105 41,685
Long-term debt 180,959 39,500
Capital lease obligations 70 464
Other 15,604 979
Deferred income taxes 40,577 6,695
Stockholders' equity:
Common stock, $0.008 par value, 40,000,000 shares authorized, 28,386,779 and
24,025,915 shares issued at September 30, 2005 and
December 31, 2004, respectively; 26,146,814 and 21,816,879 shares
outstanding at September 30, 2005 and December 31, 2004,
respectively 225 191
Additional paid-in capital 168,265 92,350
Retained earnings 80,981 61,330
Accumulated comprehensive income 1,465 2,442
-------- --------
250,936 156,313
Treasury stock, at cost, 2,239,965 and 2,209,036 shares of common
stock at September 30, 2005 and December 31, 2004, respectively (25,586) (24,873)
-------- --------
Total stockholders' equity 225,350 131,440
-------- --------
Total liabilities and stockholders' equity $573,665 $220,763
======== ========
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(Unaudited)
(In Thousands, Except Per Share Amounts)
2005 2004
-------- -------
Net sales $165,343 $62,245
Cost of sales 107,388 34,027
Selling, general, and administrative expenses 39,760 16,562
Acquisition integration expenses 1,971 --
-------- -------
Operating income 16,224 11,656
Other income (expense)
Interest income 103 126
Interest expense (2,452) (519)
Other income 21 --
-------- -------
(2,328) (393)
-------- -------
Income before income taxes 13,896 11,263
Income tax provision 5,136 3,946
-------- -------
Net income $ 8,760 $ 7,317
-------- -------
Earnings per share:
Basic $ 0.34 $ 0.34
Diluted $ 0.32 $ 0.33
Weighted average number of common and common
equivalent shares outstanding - diluted 27,705 22,511
Dividends per common share $ 0.0325 $0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(In Thousands, Except Per Share Amounts)
2005 2004
-------- --------
Net sales $454,742 $178,778
Cost of sales 297,251 102,362
Selling, general, and administrative expenses 111,869 47,516
Acquisition integration expenses 4,043 --
-------- --------
Operating income 41,579 28,900
Other income (expense)
Interest income 254 127
Interest expense (6,875) (1,497)
Other income 507 --
-------- --------
(6,114) (1,370)
-------- --------
Income before income taxes 35,465 27,530
Income tax provision 13,289 9,965
-------- --------
Net income $ 22,176 $ 17,565
-------- --------
Earnings per share:
Basic $ 0.88 $ 0.82
Diluted $ 0.83 $ 0.79
Weighted average number of common and common
equivalent shares outstanding - diluted 26,761 22,370
Dividends per common share $ 0.0975 $ 0.0975
See accompanying notes.
5
Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(In Thousands)
2005 2004
--------- --------
OPERATING ACTIVITIES
Net income $ 22,176 $ 17,565
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 20,100 9,450
Deferred income taxes 151 (796)
Loss (gain) realized on sale of property and equipment 187 45
Tax benefit from stock options exercised 1,524 --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade accounts receivable (10,082) (14,398)
Inventories (2,625) (108)
Prepaid expenses and other (777) (1,311)
Trade accounts payable and accrued expenses (18,666) 3,242
Other liabilities (2,700) --
Income taxes refundable/payable 4,890 1,755
--------- --------
Net cash provided by operating activities 14,178 15,444
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 2,523 192
Capital expenditures (14,554) (8,256)
Acquisitions, net of cash acquired (204,453) (5,243)
Contingent acquisition purchase price received from
(paid to) escrow account 890 (1,600)
Other (280) (290)
--------- --------
Net cash used in investing activities (215,874) (15,197)
FINANCING ACTIVITIES
Proceeds from debt 151,180 18,700
Principal payments on debt (15,730) (14,700)
Principal payments on capital lease obligations (577) (45)
Payment of deferred loan fees (636) --
Common stock dividends (2,525) (2,086)
Purchase of common stock (726) (603)
Issuance of common stock 74,438 3,086
--------- --------
Net cash provided by financing activities 205,424 4,352
--------- --------
Effect of foreign currency rate changes (932) 130
--------- --------
Net increase in cash and cash equivalents 2,796 4,729
Cash and cash equivalents beginning of period 7,268 5,227
--------- --------
Cash and cash equivalents end of period $ 10,064 $ 9,956
========= ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 4,466 $ 1,144
Cash paid for income taxes 8,134 8,987
See accompanying notes.
6
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(In thousands of dollars, except per share data)
NOTE 1. BASIS OF PRESENTATION
The consolidated interim financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although Schawk, Inc. (the Company) believes the disclosures
included are adequate to make the information presented not misleading. In
addition, certain prior year amounts have been reclassified to conform to the
current year presentation. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the three years ended December 31, 2004, as filed with its
2004 annual report on Form 10-K.
NOTE 2. INTERIM RESULTS
Results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTE 3. DESCRIPTION OF BUSINESS
The Company is a leading independent provider of digital imaging graphic
services to the global consumer products packaging, retail, point of sale,
advertising, entertainment and promotional markets. The Company provides
clients, at their option, access to a fully integrated or modular set of
products and services on a global or local basis. The Company has been in
operation since 1953 and is incorporated under the laws of the State of
Delaware. The Company presently has operations in North America (U.S., Canada
and Mexico), Asia (Singapore, China, Japan, Thailand and Malaysia), Europe
(United Kingdom, Belgium and Spain), India and Australia.
The Company's services include brand strategy, creative design, tactical design
and adaptive design. The Company's services also include both digital and analog
image database archival and management as well as 3D imaging for package design,
large format printing, digital photography, workflow management consulting
services, and various related outsourcing and graphics arts consulting services.
The Company's facilities produce conventional, electronic and desktop color
separations, creative design, art production, electronic retouching,
conventional and digital plate making and digital press proofs. 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.
NOTE 4. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2005 2004
------------- ------------
Raw materials $ 4,455 $ 3,768
Work in process 29,595 7,653
------- -------
34,050 11,421
Less: LIFO reserve (1,082) (1,082)
------- -------
$32,968 $10,339
======= =======
7
NOTE 5. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statements of Operations. Basic earnings per share are computed by
dividing net income by the weighted average shares outstanding for the period.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common shares and common stock equivalent shares outstanding
(stock options) for the period.
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended September 30,
--------------------------------
2005 2004
------- -------
Net income $ 8,760 $ 7,317
======= =======
Weighted average shares 26,111 21,657
Effect of dilutive stock options 1,594 854
------- -------
Adjusted weighted average shares and
assumed conversions 27,705 22,511
======= =======
Basic earnings per share $ 0.34 $ 0.34
======= =======
Diluted earnings per share $ 0.32 $ 0.33
======= =======
Nine months ended September 30,
-------------------------------
2005 2004
------- -------
Net income $22,176 $17,565
======= =======
Weighted average shares 25,334 21,548
Effect of dilutive stock options 1,427 822
------- -------
Adjusted weighted average shares and
assumed conversions 26,761 22,370
======= =======
Basic earnings per share $ 0.88 $ 0.82
======= =======
Diluted earnings per share $ 0.83 $ 0.79
======= =======
NOTE 6. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
The Company operates primarily in three geographic areas, the United States,
Europe and Canada. Summary financial information by geographic area is as
follows:
Three months ended September 30, 2005
------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- ------- ------- ------- --------
Sales $129,079 $ 9,358 $20,089 $ 6,817 $165,343
Long-lived assets 314,766 19,081 24,570 6,661 365,078
Net Assets 209,211 15,724 1,281 (866) 225,350
8
Three months ended September 30, 2004
------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- ------- ------- ------- --------
Sales $ 50,617 $ 7,635 -- $ 3,993 $ 62,245
Long-lived assets 84,076 17,490 -- 7,302 108,868
Net Assets 115,956 11,072 -- (2,342) 124,686
Nine months ended September 30, 2005
------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- ------- ------- ------- --------
Sales $348,283 $26,290 $63,260 $16,909 $454,742
Long-lived assets 314,766 19,081 24,570 6,661 365,078
Net Assets 209,211 15,724 1,281 (866) 225,350
Nine months ended September 30, 2004
------------------------------------------------------
Other
United States Canada Europe Foreign Total
------------- ------- ------- ------- --------
Sales $145,257 $23,192 -- $10,329 $178,778
Long-lived assets 84,076 17,490 -- 7,302 108,868
Net Assets 115,956 11,072 -- (2,342) 124,686
NOTE 7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter and
nine months ended September 30, 2005 and 2004, respectively, are as follows:
Three months ended September 30,
--------------------------------
2005 2004
------ ------
Net income $8,760 $7,317
Foreign currency translation adjustments 115 1,042
------ ------
Comprehensive income $8,875 $8,359
====== ======
Nine months ended September 30,
-------------------------------
2005 2004
-------- -------
Net income $22,176 $17,565
Foreign currency translation adjustments (977) 352
------- -------
Comprehensive income $21,199 $17,917
======= =======
NOTE 8. STOCK BASED COMPENSATION
The Company has an Equity Option Plan that provides for the granting of options
to purchase up to 5,252 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.
The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
these plans have an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
9
Three Months Ended
September 30,
------------------
2005 2004
------ ------
Net income, as reported $8,760 $7,317
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (259) (178)
------ ------
Net income, pro forma $8,501 $7,139
====== ======
Earnings per share
Basic $ 0.34 $ 0.34
Diluted $ 0.32 $ 0.33
Pro forma earnings per share
Basic $ 0.33 $ 0.33
Diluted $ 0.31 $ 0.32
Nine Months Ended
September 30,
-----------------
2005 2004
------- -------
Net income, as reported $22,176 $17,565
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,249) (917)
------- -------
Net income, pro forma $20,927 $16,648
======= =======
Earnings per share
Basic $ 0.88 $ 0.82
Diluted $ 0.83 $ 0.79
Pro forma earnings per share
Basic $ 0.83 $ 0.77
Diluted $ 0.78 $ 0.74
In December 2004, the FASB issued SFAS 123(R) (revised December 2004), "Share-
Based Payment", which is a revision of SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." This statement requires that the fair value at the grant date
resulting from all share-based payment transactions be recognized in the
financial statements. Further, SFAS 123(R) requires entities to apply a
fair-value based measurement method in accounting for these transactions. This
value is recorded over the vesting period. This statement is effective for the
first fiscal year beginning after June 15, 2005. The Company is currently
evaluating the provisions of SFAS 123(R), and the impact on its consolidated
financial position and results of operations.
10
NOTE 9. ACQUISITIONS
On January 31, 2005, the Company completed its acquisition of 100% of the
outstanding stock of Seven Worldwide Holdings, Inc., formerly known as KAGT
Holdings, Inc. Seven Worldwide Holdings was the parent of Seven Worldwide, Inc,
a graphics services company with operations in North America, Europe, and the
Asia-Pacific region. The results of operations of Seven Worldwide, Inc. for the
periods July 1, 2005 through September 30, 2005 and February 1 through September
30, 2005 are included in the Consolidated Statement of Operations for the three
and nine month periods ended September 30, 2005, respectively. The acquisition
resulted in the recognition of goodwill in the Company's financial statements
because the purchase price reflects the complimentary strategic fit that the
acquired business brings to the Company's existing operations. The Company
expects to realize significant operating synergies as a result of this
acquisition through consolidation of duplicate facilities and reduced operating
expenses. The goodwill is not expected to be deductible as an operating expense
for tax purposes.
The purchase price of $210,042 consisted of $135,566 paid in cash at closing,
$3,956 of acquisition-related professional fees and the issuance of 4,000 shares
of the Company's Class A common stock with a value of $70,520, based on the
average market price of the Company's common stock for the five day period
beginning two business days before the execution of the acquisition agreement.
Included in the purchase price were cash of $5,993 and 448 shares of the
Company's Class A common stock, valued at $7,892, paid to the KAGT Holdings,
Inc. Rabbi Trust, to be allocated to the subaccounts of certain stockholders and
Seven Worldwide executives under the KAGT Holdings, Inc 2005 Deferred
Compensation Plan. The assets of the Rabbi Trust were distributed to the
participants in the KAGT Holdings, Inc. Deferred Compensation Plan during the
second quarter of 2005.
The Company has recorded a preliminary purchase price allocation based upon a
tangible and intangible asset appraisal that is in progress and will adjust the
allocation as needed upon completion of the appraisal. A summary of the
preliminary estimated fair values assigned to the acquired assets is as follows:
Trade accounts receivable $ 71,200
Inventory 20,004
Other current assets 5,900
Fixed assets 51,380
Intangible assets, principally customer relationships 44,157
Goodwill 138,480
Other assets 1,522
Accounts payable (19,093)
Other current liabilities (61,654)
Income taxes payable (16,445)
Long term debt and capital lease obligations (50)
Deferred income taxes (14,194)
Other liabilities (17,325)
--------
Total purchase price, net of $6,160 cash received $203,882
========
The weighted-average amortization period of the intangible assets, principally
customer relationships, is 13.9 years. The intangible asset amortization expense
was $1,006 and $2,684 for the three month and nine month periods ended September
30, 2005, respectively, and will be approximately $4,000 annually for the twelve
month periods ending September 30, 2006 and 2007, approximately $3,100 for the
twelve month period ending September 30, 2008 and approximately $2,700 for the
twelve month periods ending September 30, 2009 and 2010.
The Company expects significant synergies and reduced operating expenses from
the consolidation of duplicate facilities acquired in this acquisition and began
work on a consolidation plan before the acquisition was finalized. Based on the
preliminary consolidation plan, the Company recorded an estimated restructuring
reserve at January 31, 2005 in the amount of $11,790. The major expenses
included in the restructuring reserve are employee severance and lease
termination expenses. The Company expects that most of the facility
consolidations included in this plan will be initiated by the end of 2005 and
will adjust the restructuring reserve as better information becomes available.
The initial reserve and subsequent reserve modifications were recorded as
adjustments to Goodwill and Accrued Expenses. The following table summarizes the
reserve recorded at January 31, 2005 and the activity through September 30,
2005:
11
Balance Balance Balance
Jan 31, Mar 31, Additions June 30,
2005 Payments 2005 (Reductions) Payments 2005
------- -------- ------- ------------ -------- --------
Employee severance $ 7,075 ($1,729) $5,346 $ 583 ($1,318) $4,611
Lease termination 1,861 (62) 1,799 1,427 (348) 2,878
Other 2,854 (180) 2,674 (1,612) (166) 896
------- ------- ------ ------- ------- ------
Total $11,790 ($1,971) $9,819 $ 398 ($1,832) $8,385
======= ======= ====== ======= ======= ======
Balance Balance
June 30, Additions Sept 30,
2005 (Reductions) Payments 2005
-------- ------------ -------- --------
Employee severance $4,611 $ 579 ($1,944) $3,246
Lease termination 2,878 (57) (243) 2,578
Other 896 (140) (66) 690
------ ----- ------- ------
Total $8,385 $ 382 ($2,253) $6,514
====== ===== ======= ======
The Company has reviewed the tax history with respect to its acquisition of KAGT
Holdings and its Seven Worldwide, Inc. subsidiary and has accrued additional tax
liabilities through purchase accounting for certain tax implications of the
prior acquisition of Seven Worldwide, Inc. by the prior owner. The Company is a
party to an indemnity provision in the Stock Purchase Agreement which may allow
for a recovery of some or all of these liabilities if and when a final
determination is made.
The following table presents the unaudited pro forma results of operations of
the Company for the three and nine month periods ended September 30, 2005 and
September 30, 2004. The unaudited pro forma financial information summarizes the
results of operations for the periods indicated as if the KAGT Holdings, Inc.
acquisition had occurred at the beginning of each period. The pro forma
information contains the actual combined operating results of Schawk, Inc. and
Seven Worldwide, Inc., with the results prior to the acquisition adjusted to
include the pro forma impact of: 1) elimination of Seven Worldwide interest
expense and deferred financing cost amortization related to bank debt retired at
acquisition, offset by pro forma interest expense on Schawk, Inc. bank debt and
private placement financing used to fund the acquisition, 2) elimination of
redundant Seven Worldwide senior management not retained post-acquisition, and
3) proforma adjustment of depreciation and intangible asset amortization based
on estimated fair values of the Seven Worldwide assets used in the Company's
September 30, 2005 financial statements. The Seven Worldwide results of
operations for the three month and nine month periods ended September 30, 2004
have been restated to eliminate discontinued operations of a division of the
company divested in mid 2004.
Pro forma, unaudited, in thousands, Three months ended Three months ended
except per share amounts Sept 30, 2005 Sept 30, 2004
- ----------------------------------- ------------------ ------------------
Total revenue $165,343 $155,214
Net income 8,760 9,919
Diluted earnings per share $ 0.32 $ 0.36
Pro forma, unaudited, in thousands, Nine months ended Nine months ended
except per share amounts Sept 30, 2005 Sept 30, 2004
- ----------------------------------- ----------------- -----------------
Total revenue $478,935 $451,297
Net income 19,494 18,414
Diluted earnings per share $ 0.73 $ 0.69
12
On December 31, 2004, the Company acquired the operating assets and assumed
certain liabilities of Weir Holdings Limited (Winnetts.) The purchase price
allocation for this acquisition has not been finalized. The Company will adjust
the preliminary purchase price allocation upon the completion of the tangible
and intangible asset appraisal that is in process.
In connection with its acquisition of the assets of Weir Holdings Limited
(Winnetts) on December 31, 2004, the Company established a restructuring
reserve, primarily for employee severance and lease abandonment expenses, in the
amount of $2,500. The following table summarizes the activity in the reserve for
the first nine months of 2005:
Balance Balance Balance
Dec 31, Mar 31, June 30,
2004 Payments 2005 Payments 2005
------- -------- ------- -------- --------
Employee severance $1,254 -- $1,254 ($198) $1,056
Lease termination 837 -- 837 -- 837
Other 409 -- 409 (53) 356
------ --- ------ ----- ------
Total $2,500 -- $2,500 ($251) $2,249
====== === ====== ===== ======
Balance Balance
June 30, Sept 30,
2005 Payments 2005
-------- -------- --------
Employee severance $1,056 ($120) $ 936
Lease termination 837 -- 837
Other 356 (200) 156
------ ----- ------
Total $2,249 ($320) $1,929
====== ===== ======
One of the highest priorities of the Company during 2005 has been the
integration of the Seven Worldwide and Winnetts acquisitions into the Company's
combined operations. This has involved planning and executing the consolidation
of duplicate facilities in locations served by separate facilities of the
pre-acquisition businesses as well as elimination of duplicate administrative
functions. During the three month and nine month periods ended September 30,
2005, the Company recorded Acquisition integration expenses of $1,971 and
$4,043, respectively, which are shown as a separate line in the operating
expense section of the Consolidated Statement of Operations for the three month
and nine month periods ended September 30, 2005. The major items included in
this expense are severance pay for employees at legacy Schawk Inc facilities
that have been merged with operations of the acquired businesses, retention pay
for key employees whose services were necessary during a transition period,
travel expenses related to the planning and execution of facility
consolidations, and professional fees for accounting, human resource, and
integration planning advice.
NOTE 10. DEBT
In connection with the Company's financing of the Seven Worldwide acquisition,
the Company entered into a credit agreement dated January 28, 2005 with JPMorgan
Chase Bank, N.A. The credit agreement provides for a five-year unsecured
revolving credit facility of $100,000, expandable to $125,000, with interest at
LIBOR plus a margin based on the Company's cash flow leverage ratio. On April
15, 2005, the accordion feature of the agreement was utilized to increase the
revolving credit commitment to $115,000. $105,950 was outstanding under this
agreement at September 30, 2005 and is included in Long-term debt on the
Consolidated Balance Sheet.
Also on January 28, 2005, the Company entered into a Note Purchase and Private
Shelf Agreement with Prudential Investment Management Inc, pursuant to which the
Company sold $50,000 in a series of three Senior Notes. The first note, in the
amount of $10,000, will mature in 2010 and bears interest at 4.81%. The second
and third notes, each in the amount of $20,000, mature in 2011 and 2012,
respectively, and bear interest at the rate of 4.99% and 5.17%, respectively.
The total of these notes, $50,000, is included in Long-term debt on the
September 30, 2005 Consolidated Balance Sheet.
13
The borrowings under both agreements are subject to certain restrictive
covenants. The Company is in compliance with these covenants as of September 30,
2005.
NOTE 11. INTANGIBLES
As of September 30, 2005, the acquired intangible assets related to the Winnetts
acquisition on December 31, 2004 and the Seven Worldwide acquisition on January
31, 2005 have been valued based on preliminary purchase price allocations. The
amounts allocated to intangible assets may be adjusted when these purchase price
allocations are finalized. Intangible assets, resulting primarily from the
Winnetts, Seven Worldwide and previous acquisitions accounted for under the
purchase method of accounting, consist of the following:
Sept 30, Dec 31, Weighted
2005 2004 Average Life
-------- ------- ------------
Customer relationships $52,230 $12,632 15.2 years
Non-compete agreements 681 681 3.5 years
Patents 323 311 20.0 years
Digital Images 900 -- 5.0 years
Developed technologies 4,061 -- 3.0 years
------- -------
58,195 13,624 14.1 years
Accumulated amortization (4,286) (870)
------- -------
$53,909 $12,754
Amortization expense related to intangible assets was $1,303 and $3,416 for the
three month and nine month periods ended September 30, 2005. Amortization
expense for each of the next five fiscal years beginning October 1, 2005 is
expected to be approximately $5,063 for fiscal years 2006 and 2007, $4,161 for
fiscal year 2008, $3,685 for fiscal year 2009 and $3,602 for fiscal year 2010.
NOTE 12. SUBSEQUENT EVENTS
On October 26, 2005, the Company filed a Form S-3 Registration Statement with
the Securities and Exchange Commission to register 3,552,372 shares of its
common stock for offer and sale from time to time by certain stockholders of the
Company who received shares in connection with the Company's acquisition of
Seven Worldwide, Inc. in January 2005. The registration statement also registers
for sale from time to time by the Company 500,000 shares of its common stock.
The Company may offer such shares to the public from time to time in order to
fund future acquisitions, to reduce indebtedness or to fund other corporate
purposes. The Company will not receive any proceeds from sales of the shares
made by any selling stockholder.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein that relate to the Company's beliefs or
expectations as to future events are not statements of historical fact and are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. The Company intends any such statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1999. Although the
Company believes that the assumptions upon which such forward-looking statements
are based are reasonable within the bounds of its knowledge of its business and
operations, it can give no assurance the assumptions will prove to have been
correct and undue reliance should not be placed as such statements. Important
factors that could cause actual results to differ materially and adversely from
the Company's expectations and beliefs include, among other things, higher than
expected costs or unanticipated difficulties associated with integrating the
acquired operations of Winnetts and Seven Worldwide, higher than expected costs
associated with compliance with legal and regulatory requirements, the strength
of the United States economy in general and specifically market conditions for
the consumer products industry, the level of demand for the Company's services,
loss of key management and operational personnel, the ability of the Company to
implement its growth strategy, the stability of state, federal and foreign tax
laws, the ability of the Company to identify and exploit industry trends and to
exploit technological advances in the imaging industry, ability to implement
restructuring plans, the stability of political conditions in other countries in
which the Company has production service capabilities, terrorist attacks, wars,
diseases and other geo-political events as well as other factors detailed in the
Company's filings with the Securities and Exchange Commission. The Company
assumes no obligation to update publicly any of these statements in light of
future events.
EXECUTIVE-LEVEL OVERVIEW
The Company grew substantially in the first nine months of 2005 as a result of
two important acquisitions. The Company's annual revenue is expected to reach
$610,000 - $620,000 in 2005 as compared to $238,000 in 2004 with most of the
growth attributable to the two acquisitions, Weir Holdings, Inc. (trade name
"Winnetts") on December 31, 2004 and Seven Worldwide, Inc. (Seven Worldwide) on
January 31, 2005.
A majority of the Company's revenues are driven by marketing and advertising
spending by consumer products companies and retailers. The markets served are
consumer products manufacturers and pharmaceutical, entertainment, retail and
publishing companies. All of the company's business involves producing graphic
images for various applications. Generally, a graphic image is created by the
Company or a third party and then the Company manipulates that image to enhance
the color of the image and to prepare it for print. The applications vary from
consumer product packaging, including food and beverage packaging images, to
retail advertisements in newspapers, including free standing inserts (FSI's),
magazine ads, publications, catalogs and textbooks.
The graphics process is generally the same regardless of the application. The
following steps in the graphics process must take place to produce a final
image:
- Planning and Messaging
- Strategic Design
- Content Creation
- File Building
- Retouching
- Art Production
- Pre-Media
The Company's involvement in a client project may involve many of the above
steps or just one of the steps, depending on the client's needs.
15
ACQUISITIONS
The Company has grown its business through a combination of internal growth and
through acquisitions. The Company has completed approximately 50 acquisitions
since its business was founded in 1953. The Company's two most recent
acquisitions have significantly expanded its service offerings and its
geographic presence, making it the only independent prepress firm with
operations in North America, Europe and Asia. As a result of these acquisitions,
the Company is able to offer a broader range of services to its clients. The
Company's expanded geographic presence also allows it to better serve its
multinational clients' demands for global brand consistency.
Winnetts. On December 31, 2004, the Company acquired certain assets and the
business of Weir Holdings, Ltd. (known as "Winnetts"), a UK based graphic
services company with $37.8 million in revenues in 2004 and operations in 6
locations in the UK, Belgium and Spain. The acquisition price was $23.5 million.
Winnetts is the Company's first operation in Europe. Since the acquisition
occurred as of the close of business on December 31, 2004, there are no results
of operations for Winnetts in the Company's 2004 statement of operations, but
the acquired assets and liabilities of Winnetts are included in the Company's
2004 year end balance sheet. Winnetts had revenues of $37.8 million and $35.8
million in 2004 and 2003, respectively, with gross margin and operating income
percentages lower than those of Schawk, Inc. for those periods.
Seven Worldwide. On January 31, 2005, the Company acquired Seven Worldwide, Inc.
(formerly Applied Graphics Technologies, Inc.), a graphic services company with
operations in 40 locations in the United States, Europe, Asia and Australia and
revenues of $369.9 million in 2004. Seven Worldwide's results of operations are
included in the Company's results beginning January 31, 2005. Seven Worldwide
had revenues of $369.9 million and $377.7 million in 2004 and 2003,
respectively, with gross margin and operating income percentages lower than
those of Schawk, Inc. for those periods.
The principal objective in acquiring Winnetts and Seven Worldwide was to expand
the Company's geographic presence and its service offering. This expansion
enables the Company to provide a more comprehensive level of customer service,
to build a broader platform from which to grow its business and continue to
pursue greater operating efficiencies. On a combined basis, assuming the Company
had acquired each of Winnetts and Seven Worldwide on January 1, 2004, the
Company had pro forma revenues of over $646.0 million in 2004.
The Company has 62 operating locations globally that produce graphic images for
clients. While providing a variety of services from location to location, the
Company's operations are similar to one another in that regardless of the client
assignment, graphic artists produce the work by applying specialized techniques
and using standard graphics software and computers. Many locations produce
graphic images for more than one market.
Each client assignment, or "job", is a custom job in that the image being
produced is unique, even if it only involves a small change from an existing
image, such as adding a "low fat" banner on a food package. Essentially, change
equals revenue. The Company is paid for its graphic imaging work based on time
and materials, not based on the success or failure of the food product, the
promotion or the ad campaign.
For the quarter ended September 30, 2005, the Company increased sales by 165.6%
over the third quarter of 2004. The revenue growth was primarily a result of the
Winnetts and Seven Worldwide acquisitions. The Company's gross profit and
operating income increased in the third quarter of 2005 as a result of the
acquisitions. The gross margin and operating margin percentages decreased in the
third quarter of 2005 relative to the third quarter of 2004 as a result of lower
margin business from the acquired companies. Net income increased to $8,760 from
$7,317 quarter over quarter. Third quarter earnings per share were 32 cents,
fully diluted, compared to the prior year third quarter earnings per share of 33
cents.
The Company's sales for the nine-month period ended September 30, 2005 were
154.4% higher than the first nine months of 2004, with the increase attributable
to the two acquisitions. The lower margin business from the acquisitions
resulted in gross margin and operating margin percentages that were lower in the
first nine months of 2005 compared to 2004. Net income increased 26.3%, from
$17,565 for the first nine months of 2004 to $22,176 for the first nine months
of 2005. Earnings per share for the first nine months of 2005 were 83 cents,
fully diluted, compared to 79 cents, fully diluted, in the first nine months of
2004.
16
As previously disclosed, on January 31, 2005, the Company completed the
acquisition of Seven Worldwide, a graphic services company with $370 million of
revenue in 2004 and operations in 40 locations in the United States, Europe,
Asia and Australia. The purchase price of $210,042 consisted of $135,566 paid in
cash at closing, $3,956 of acquisition-related professional fees and the
issuance of 4,000 shares of the Company's Class A common stock with a value of
$70,520.
The Company expects significant synergies and reduced operating expenses from
the consolidation of duplicate facilities acquired in this acquisition and began
work on a consolidation plan before the acquisition was finalized. The Company
has recorded an estimated restructuring reserve based on the preliminary
consolidation plan. The major expenses included in the restructuring reserve are
severance pay for employees of acquired facilities that will be merged with
existing operations and lease termination expenses. In addition, the Company
recorded acquisition integration expenses which are shown as a separate line in
the operating expense section of the Consolidated Statement of Operations of
$1,971 for the third quarter of 2005 and $4,043 for the nine month period ended
September 30, 2005. The major items included in this expense are severance pay
for employees at legacy Schawk, Inc. facilities that have been merged with
operations of the acquired businesses, retention pay for key employees whose
services were necessary during a transition period, travel expenses related to
the planning and execution of facility consolidations, and professional fees for
accounting, human resource, and integration planning advice.
In connection with the Company's financing of the Seven Worldwide acquisition,
the Company entered into a credit agreement dated January 28, 2005 with JPMorgan
Chase Bank, N.A. The credit agreement provides for a five-year unsecured
revolving credit facility of $100,000, which was expanded to $115,000 on April
15, 2005. Also on January 28, 2005, the Company entered into a Note Purchase and
Private Shelf Agreement with Prudential Investment Management Inc, pursuant to
which the Company sold $50,000 in a series of three Senior Notes. As of
September 30, 2005 there was $181,570 of debt outstanding of which $181,029 was
considered long-term.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Thousands of dollars, except per share amounts)
Schawk, Inc.
Comparative Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(in thousands)
$ %
2005 2004 CHANGE CHANGE
-------- ------- -------- ------
Net sales $165,343 $62,245 $103,098 165.6%
Cost of sales 107,388 34,027 73,361 215.6%
-------- ------- --------
Gross profit 57,955 28,218 29,737 105.4%
Gross margin percentage 35.1% 45.3%
Selling, general and administrative expenses 39,760 16,562 23,198 140.1%
Acquisition integration expenses 1,971 -- 1,971 nm
-------- ------- --------
Operating income 16,224 11,656 4,568 39.2%
Operating margin percentage 9.8% 18.7%
Other income (expense)
Interest income 103 126 (23) nm
Interest expense (2,452) (519) (1,933) 372.4%
Other income 21 -- 21 nm
-------- ------- --------
(2,328) (393) (1,935) 492.4%
-------- ------- --------
Income before income taxes 13,896 11,263 2,633 23.4%
Income tax provision 5,136 3,946 1,190 30.2%
-------- ------- --------
Effective income tax rate 37.0% 35.0%
Net income $ 8,760 $ 7,317 $ 1,443 19.7%
======== ======= ========
nm - Percentage not meaningful
Net sales increased $103.1 million or 165.6% as compared to the prior year third
quarter. The increase is primarily due to the acquisitions of Winnetts and Seven
Worldwide ("the acquired businesses".)
Gross margin for the third quarter of 2005 decreased to 35.1% from 45.3% for the
third quarter of 2004, primarily due to lower margin business from the acquired
businesses.
Operating income for the third quarter of 2005 increased 39.2% to $16.2 million
compared to $11.7 million in the third quarter of 2004. The increase is
primarily due to the additional operating income from the acquired companies.
The operating margin percentage decreased to 9.8% in the third quarter of 2005
compared to 18.7% in the third quarter of 2004, primarily due to lower margin
business from the acquired businesses.
Interest expense of $2.5 million for the third quarter of 2005 increased $1.9
million compared to the same period in 2004. The increase is due to additional
indebtedness incurred during the first nine months of 2005 in connection with
the acquired businesses.
Income tax expense for the third quarter of 2005 was at an effective tax rate of
37.0% compared to a rate of 35.0% in the third quarter of 2004. The lower
effective tax rate in 2004 was due to tax refunds and credits that did not recur
in 2005. It is anticipated that the effective tax rate for 2005 will be in the
range of 37.0% to 38.0%.
18
Net income was higher in the third quarter of 2005 as compared to the third
quarter of 2004 for the reasons previously described.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Thousands of dollars, except per share amounts)
Schawk, Inc.
Comparative Consolidated Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(in thousands)
$ %
2005 2004 CHANGE CHANGE
-------- -------- -------- ------
Net sales $454,742 $178,778 $275,964 154.4%
Cost of sales 297,251 102,362 194,889 190.4%
-------- -------- --------
Gross profit 157,491 76,416 81,075 106.1%
Gross margin percentage 34.6% 42.7%
Selling, general and administrative expenses 111,869 47,516 64,353 135.4%
Acquisition integration expenses 4,043 -- 4,043 nm
-------- -------- --------
Operating income 41,579 28,900 12,679 43.9%
Operating margin percentage 9.1% 16.2%
Other income (expense)
Interest income 254 127 127 nm
Interest expense (6,875) (1,497) (5,378) 359.3%
Other income 507 -- 507 nm
-------- -------- --------
(6,114) (1,370) (4,744) 346.3%
-------- -------- --------
Income before income taxes 35,465 27,530 7,935 28.8%
Income tax provision 13,289 9,965 3,324 33.4%
-------- -------- --------
Effective income tax rate 37.5% 36.2%
Net income $ 22,176 $ 17,565 $ 4,611 26.3%
======== ======== ========
nm - Percentage not meaningful
Net sales increased $276.0 million or 154.4% in the first nine months of 2005 as
compared to the first nine months of the prior year. The increase is primarily
due to the acquired businesses.
Gross margin for the first nine months of 2005 decreased to 34.6% from 42.7% for
the first nine months of 2004, primarily due to lower margin business from the
acquired businesses.
Operating income for the first nine months of 2005 increased 43.9% to $41.6
million compared to $28.9 million in the first nine months of 2004. The increase
is primarily due to the additional operating income from the acquired companies.
The operating margin percentage decreased to 9.1% in the first nine months of
2005 compared to 16.2% in the first nine months of 2004 primarily due to lower
margin business from the Seven Worldwide and Winnetts acquisitions. Interest
expense of $6.9 million for the first nine months of 2005 increased $5.4 million
compared to the same period in 2004. The increase is due to additional
indebtedness incurred during the first nine months of 2005 in connection with
the acquired businesses.
Income tax expense for the first nine months of 2005 was at an effective tax
rate of 37.5% compared to a rate of 36.2% in the first nine months of 2004. The
lower effective tax rate in 2004 was due to tax refunds and credits that did not
recur
19
in 2005. It is anticipated that the effective tax rate for 2005 will be in the
range of 37.0% to 38.0%.
Net income and earnings per share were higher in the first nine months of 2005
as compared to the first nine months of 2004 for the reasons previously
described.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, the Company had $10,064 in consolidated cash and cash
equivalents, compared to $7,268 at December 31, 2004.
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Cash provided by operations was $14,178 in the first nine months of 2005
compared to cash provided by operations of $15,444 in the first nine months of
2004. The Company's higher net income in the 2005 period was offset by increased
usage of cash to pay for acquisition-related accounts payable and accrued
expenses. In addition, cash collections on trade accounts receivable slowed at
the end of the third quarter, negatively impacting cash flow for the quarter.
Depreciation and amortization expense in the first nine months of 2005 was
$20,100 as compared to $9,450 in the first nine months of the prior year. The
increase in depreciation and amortization expense is attributable to the
additional property, plant and equipment and intangible assets acquired in the
Seven Worldwide and Winnetts acquisitions.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities was $215,874 in the first nine months of 2005
compared to $15,197 in the first nine months of 2004. The increase in cash used
in the first nine months of 2005 reflects the acquisition of Seven Worldwide for
$203,882. In the first nine months of 2004, $6,843, including $1,600 of
contingent purchase price paid to an escrow account, was used for acquisition of
the assets of Virtualcolor.
Capital expenditures were $14,554 in the first nine months of 2005 compared to
$8,256 in the first nine months of 2004. The increase in capital expenditures in
2005 is primarily due to capital expenditures at the newly acquired companies.
Capital expenditures are anticipated to be in a range of $20,000 to $22,000 for
all of 2005.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities was $205,424 for the first nine months of
2005 compared to $4,352 in the first nine months of 2004. The cash provided by
financing activities in the 2005 period includes $142,030 of proceeds from new
debt and $70,520 of common stock issued to finance the Seven Worldwide
acquisition.
Dividend payments on common stock were $2,525 for the first nine months of 2005
compared to $2,086 in the first nine months of 2004. The increase in the
dividends paid was due to a greater number of shares outstanding in 2005 as
compared to 2004. It is anticipated that the Company will continue to pay
dividends at the current level for the remainder of 2005.
In January 2005, the Company entered into a credit agreement with JPMorgan Chase
Bank, N.A. The agreement provides for a five year unsecured revolving credit
facility of $100,000, expandable to $125,000, with interest at LIBOR plus a
margin based on the Company's cash flow leverage ratio. This credit agreement
replaced a $30,000 unsecured credit agreement previously in place. On April 15,
2005, the accordion feature of the credit agreement was utilized to increase the
size of the revolving credit commitment to $115 million from $100 million to
provide additional flexibility to the Company. $105,950 was outstanding under
the new agreement at September 30, 2005 and is included in Long-term debt on the
September 30, 2005 Consolidated Balance Sheet.
Also in January 2005, the Company entered into a Note Purchase and Private Shelf
Agreement with Prudential Investment Management Inc, pursuant to which the
Company sold $50,000 in a series of three Senior Notes. The first note, in the
amount of $10,000, will mature in 2010 and bears interest at 4.81%. The second
and third notes, each in the amount of $20,000, mature in 2011 and 2012,
respectively, and bear interest at the rate of 4.99% and 5.17%, respectively.
The total of these notes, $50,000, is included in Long-term debt on the
September 30, 2005 Consolidated Balance Sheet.
In December of 2003, the Company entered into a private placement of debt to
provide long-term financing. The terms of the Note Purchase Agreement relating
to this transaction provided for the issuance and sale by the Company, pursuant
to an exception from the registration requirements of the Securities Act of
1933, of two series of notes: 1) Tranche A, due December 31, 2013, for $15,000
and bearing interest at 4.90%, which closed in December 2003; and, 2) Tranche B,
20
due April 30, 2014, for $10,000 and bearing interest at 4.98%, which closed in
April 2004. The total debt of $25,000 issued under the private placement
agreement is shown as Long Term Debt on the September 30, 2005 Consolidated
Balance Sheet.
Management believes that the level of working capital is adequate for the
Company's liquidity needs related to normal operations both currently and in the
foreseeable future, and that the Company has sufficient resources to support its
growth, either through currently available cash and cash generated from future
operations, or pursuant to its revolving credit facility.
SEASONALITY
With the acquisitions of Winnetts and Seven Worldwide, the seasonal fluctuations
in business on a combined basis generally result in lower revenues in the first
quarter as compared to the rest of the year ended December 31.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2004 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company's business on a consolidated basis since
December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the Securities and Exchange Commission (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on an evaluation of the Company's disclosure controls
and procedures as of the end of the period covered by this report conducted by
the Company's management, with the participation of the Chief Executive and
Chief Financial Officers, the Chief Executive and Chief Financial Officers
believe that these controls and procedures are effective to ensure that the
Company is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.
In order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 ("Section 404"), beginning with the Company's Annual Report on Form 10-K
for the fiscal year ending December 31, 2005, the Company will be required to
furnish a report of management as to the effectiveness of the Company's internal
control over financial reporting and a report by the Company's independent
auditors addressing management's assessment. The Company is in the process of
documenting and evaluating the design and operating effectiveness of its
internal control procedures. These assessments, which have been underway for
more than a year and are not yet complete, have been impacted by the Company's
recent growth related to the Winnetts and Seven Worldwide acquisitions. Since
December 31, 2004, the Company has grown from approximately 30 operating
locations to approximately 61 combined operating locations worldwide, with
varied policies, procedures, systems, personnel and internal control procedures
which are still in the process of being integrated.
In connection with its assessment, management has identified and communicated to
the Company's Audit Committee and independent auditors the following
deficiencies in the documentation, design and effectiveness of its internal
control over financial reporting that the Company is in the process of
remediating:
Inadequate general computer controls primarily relating to a lack of
segregation of duties surrounding (i) financial systems and information
technology infrastructure change controls; and (ii) user access rights to
certain financial systems at multiple global locations; and
Primarily as a result of the recently completed Winnetts and Seven
Worldwide acquisitions, lack of (i) documented, comprehensive, standardized
policies and procedures for the combined global company; and (ii)
sufficient documentation over the financial statement closing process,
combined with key employee turnover and redundant staffing levels.
21
Although management believes it has made significant progress in these areas,
there is a significant risk that remediation and testing of these deficiencies
may not be completed on a timely basis. It is also possible that the Company
could experience further delays in its Section 404 compliance efforts or
identify deficiencies in addition to those discussed above. If the Company is
unable to complete Section 404 compliance efforts and/or its remediation and
testing process in a timely manner, management may be required to conclude that
its internal control over financial reporting is not effective as of December
31, 2005.
Because the Company has not completed its evaluation of the deficiencies
described above, it has not been able to determine whether the deficiencies
described above or any as yet unidentified deficiencies constitute significant
deficiencies, material weaknesses or aggregate to material weaknesses in the
Company's internal control over financial reporting.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no other changes to our internal control over financial reporting
during the quarter ended September 30, 2005 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
22
PART II - OTHER INFORMATION
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PURCHASES OF EQUITY SECURITIES BY THE COMPANY
As previously disclosed, the Company occasionally repurchases its common shares,
pursuant to a general authorization from the Board of Directors, which is
renewed annually. In addition, shares of common stock are occasionally tendered
to the Company by certain employee stockholders in payment of stock options
exercised. The Company records the receipt of common stock in payment for stock
options exercised as a purchase of treasury stock.
The following table summarizes the shares repurchased by the Company during the
first nine months of 2005:
No. Shares Purchased as
Total No. Shares Avg. Price Paid Part of Publicly
Period Purchased Per Share Announced Program
- ------ ---------------- --------------- -----------------------
January -- -- --
February -- -- --
March 2,056 $20.98 --
------ ------ ---
1st Qtr 2005 Total 2,056 $20.98 --
====== ====== ===
April -- -- --
May -- -- --
June 30,567 $22.33 --
------ ------ ---
2nd Qtr 2005 Total 30,567 $22.33 --
====== ====== ===
July -- -- --
August -- -- --
September -- -- --
------ ------ ---
3rd Qtr 2005 Total -- -- --
====== ====== ===
Year-to-date Total 32,623 $22.25 --
====== ====== ===
23
ITEM 6. EXHIBITS
A. Exhibits
EXHIBIT # DESCRIPTION
- --------- -----------
3.1 Certificate of Incorporation of Schawk, Inc., as amended.
Incorporated herein by reference to Exhibit 4.2 to Registration
Statement No. 333-39113.
3.3 By-Laws of Schawk, Inc., as amended. Incorporated herein by
reference to Exhibit 4.3 to Registration Statement No. 333-39113.
4.1 Specimen Class A Common Stock Certificate. Incorporated herein by
reference to Exhibit 4.1 to Registration Statement No. 333-39113.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended *
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended *
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *
* Filed herewith
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November 2005.
SCHAWK, INC.
(Registrant)
/s/ David A. Schawk
- -------------------------------------
President, Chief Executive Officer
and Director
/s/ James J. Patterson
- -------------------------------------
Senior Vice President and
Chief Financial Officer
25