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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 March 31, 2004
--------
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]
The number of shares outstanding of each of the issuer's classes of common stock
as of April 30, 2004 is: 21,594,599 Class A Common Stock, $.008 par value
1
SCHAWK, INC.
FORM 10-Q QUARTLY REPORT
TABLE OF CONTENTS
March 31, 2004
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schawk, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
MARCH 31,
2004 DECEMBER 31,
(UNAUDITED) 2003
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,282 $ 5,227
Trade accounts receivable, less allowance for doubtful accounts
of $1,653 at March 31, 2004 and $1,595 at December 31, 2003 40,762 35,642
Inventories 11,745 8,085
Prepaid expenses and other 3,777 3,902
Refundable income taxes 856 1,204
Deferred income taxes 2,313 2,086
---------- ----------
Total current assets 64,735 56,146
Property and equipment, less accumulated depreciation of $70,254
at March 31, 2004 and $67,423 at December 31, 2003 35,558 36,372
Goodwill 64,338 62,936
Intangible assets, net 4,697 1,912
Other assets 3,998 2,325
---------- ----------
Total assets $ 173,326 $ 159,691
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,270 $ 5,108
Accrued expenses 14,022 14,004
Income taxes payable 1,384 446
Notes payable to banks 8,700 --
Current portion of long-term debt and capital lease obligations 6,062 6,062
---------- ----------
Total current liabilities 35,438 25,620
Long-term debt 21,000 21,000
Capital lease obligations 12 21
Other 940 970
Deferred income taxes 6,308 5,708
Stockholders' Equity:
Common stock, $0.008 par value, 40,000,000 shares
authorized, 23,667,564 and 23,602,330 shares issued at
March 31, 2004 and December 31, 2003, respectively;
21,501,511 and 21,435,887 shares outstanding at March 31,
2004 and December 31, 2003, respectively 188 187
Additional paid-in capital 88,515 87,928
Retained earnings 44,391 41,461
Accumulated comprehensive income 820 1,087
---------- ----------
133,914 130,663
Treasury stock, at cost, 2,166,053 and 2,166,443 shares of common
stock at March 31, 2004 and December 31, 2003, respectively (24,286) (24,291)
---------- ----------
Total stockholders' equity 109,628 106,372
---------- ----------
Total liabilities and stockholders' equity $ 173,326 $ 159,691
========== ==========
See accompanying notes.
3
Schawk, Inc.
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands, Except Per Share Amounts)
2004 2003
---------- ----------
Net sales $ 52,077 $ 48,705
Cost of sales 31,310 27,849
Selling, general, and administrative expenses 14,542 13,385
---------- ----------
Operating income 6,225 7,471
Interest expense 465 528
---------- ----------
Income before income taxes 5,760 6,943
Income tax provision 2,133 2,742
---------- ----------
Net income $ 3,627 $ 4,201
========== ==========
Earnings per share:
Basic $ 0.17 $ 0.20
Diluted $ 0.16 $ 0.19
Weighted average number of common and common
equivalent shares outstanding 22,366 21,575
Dividends per common share $ 0.0325 $ 0.0325
See accompanying notes.
4
Schawk, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands)
2004 2003
---------- ----------
OPERATING ACTIVITIES
Net income $ 3,627 $ 4,201
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 2,934 2,772
Deferred income taxes 373 22
Loss (gain) realized on sale of property and equipment 7 (574)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable (5,120) (2,359)
Inventories (2,977) (1,061)
Prepaid expenses and other 125 377
Trade accounts payable and accrued expenses 59 (347)
Income taxes refundable/payable 1,286 2,234
---------- ----------
Net cash provided by operating activities 314 5,265
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 1 1,438
Capital expenditures (1,921) (1,656)
Acquisitions, net of cash acquired (5,126) --
Contingent acquisition purchase price paid to escrow account (1,600) --
Other (42) (116)
---------- ----------
Net cash used in investing activities (8,688) (334)
FINANCING ACTIVITIES
Proceeds from debt 8,700 262
Principal payments on debt -- (5,044)
Principal payments on capital lease obligations (9) (96)
Common stock dividends (692) (692)
Purchase of common stock -- (100)
Issuance of common stock 588 101
---------- ----------
Net cash provided by (used in) financing activities 8,587 (5,569)
---------- ----------
Effect of foreign currency rate changes (158) 332
---------- ----------
Net increase (decrease) in cash and cash equivalents 55 (306)
Cash and cash equivalents beginning of period 5,227 2,051
---------- ----------
Cash and cash equivalents end of period $ 5,282 $ 1,745
========== ==========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 258 $ 536
Cash paid for income taxes 474 483
See accompanying notes.
5
Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(Thousands of dollars, except per share data)
NOTE1. BASIS OF PRESENTATION
The consolidated 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, 2003, as filed with its
2003 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 provider of digital imaging graphic services for the
consumer products industry. The Company focuses on providing these services to
multi-national clients in three primary markets: consumer products packaging,
advertising agencies and promotion.
NOTE 4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2004 2003
---- ----
Raw materials $ 2,278 $ 2,129
Work in process 10,544 7,033
-------- -------
12,822 9,162
Less: LIFO reserve (1,077) (1,077)
-------- -------
$ 11,745 $ 8,085
======== =======
6
NOTE 5. EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share are shown on the
Consolidated Statement 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 March 31,
-----------------------------
2004 2003
--------- ---------
Net income $ 3,627 $ 4,201
========= =========
Weighted average shares 21,465 21,437
Effect of dilutive stock options 901 138
--------- ---------
Adjusted weighted average shares and
assumed conversions 22,366 21,575
========= =========
Basic earnings per share $ 0.17 $ 0.20
========= =========
Diluted earnings per share $ 0.16 $ 0.19
========= =========
NOTE 6. SEGMENT REPORTING
The Company operates in a single business segment, Digital Imaging Graphic Arts.
The Company operates primarily in two geographic areas, the United States and
Canada. Summary financial information by geographic area is as follows:
Three months ended March 31, 2004
---------------------------------
United States Canada Other Foreign Total
------------- -------- ------------- --------
Sales $ 41,905 $ 7,444 $ 2,728 $ 52,077
Long-lived assets 84,254 16,751 7,586 108,591
Net Assets 101,782 10,263 (2,417) 109,628
Three months ended March 31, 2003
---------------------------------
United States Canada Other Foreign Total
------------- ------- ------------- --------
Sales $ 39,489 $ 7,170 $ 2,046 $ 48,705
Long-lived assets 79,625 16,514 8,313 104,452
Net Assets 87,704 8,113 (1,738) 94,079
NOTE 7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarter
ended March 31, 2004 and 2003, respectively, are as follows:
Three months ended March 31,
-----------------------------------------
2004 2003
------ ------
Net income $3,627 $4,201
Foreign currency translation adjustments (267) 802
------ ------
Comprehensive income $3,360 $5,003
====== ======
7
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.
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Net income, as reported $ 3,627 $ 4,201
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (550) (343)
------- -------
Net income, pro forma $ 3,077 $ 3,858
======= =======
Earnings per share
Basic $ 0.17 $ 0.20
Diluted $ 0.16 $ 0.19
Pro forma earnings per share
Basic $ 0.14 $ 0.18
Diluted $ 0.14 $ 0.18
8
NOTE 9. ACQUISITIONS
The Company acquired certain assets and assumed certain liabilities of the
Virtualcolor division of Fort Dearborn Company, located in Elk Grove Village,
Illinois, effective as of January 1, 2004. Virtualcolor is a provider of digital
imaging graphic services and has been merged with an existing Company facility.
The acquisition has resulted in the recognition of goodwill in the Company's
financial statements; this goodwill arises because the purchase price reflects
the complimentary strategic fit and resulting synergy that the acquired business
brings to the Company's existing operations.
The results of operations of Virtualcolor from acquisition date to quarter-end
are included in the Consolidated Statement of Operations for the three months
ended March 31, 2004. Pro forma results of operations for the quarter ended
March 31, 2003 are not presented due to the lack of financial information
specific to the acquired operation in prior periods.
The purchase price of $4,894 consisted of $4,859 paid in cash to the seller at
closing and $35 in acquisition-related legal fees. In addition, there is
contingent additional purchase price of $1,600, which was paid to an escrow
account pending settlement of the purchase price adjustments specified in the
acquisition agreement. The amount paid to escrow is included in Other Assets in
the Consolidated Balance Sheet at March 31, 2004.
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:
Inventory $ 683
Machinery and equipment 150
Employee liabilities assumed (121)
Customer relationship intangible asset 2,300
Non-compete intangible asset 100
Goodwill 1,782
------
Net cash consideration $4,894
The weighted-average amortization period of the customer relationship intangible
asset is 19 years. The amortization period of the non-compete intangible asset
is five years. The intangible asset amortization expense was $38 for the quarter
ended March 31, 2004 and will be $154 annually for each of the five fiscal years
beginning with 2004.
The contingent purchase price of $1,600, which was paid to an escrow account, is
conditional upon the performance of the acquired business over a two-year
period. The purchase price allocation will be adjusted to include the additional
purchase price when the conditions have been satisfied.
The Company also completed two acquisitions during the fourth quarter of 2003.
The purchase price of the 2003 acquisitions was $2,432, with up to $3,300 in
additional payments contingent upon the performance of the acquired businesses
over a three-year period. At year-end 2003, the Company allocated the purchase
price to the estimated fair value of the net assets acquired, pending the
results of a tangible and intangible asset appraisal that was in process. The
preliminary purchase price allocation resulted in the recording of $1,460 of
goodwill.
During the first quarter of 2004, the Company completed the tangible and
intangible asset appraisal of the 2003 acquisitions and adjusted the preliminary
purchase price allocation recorded at the end of 2003. A summary of the adjusted
fair values assigned to the acquired assets is as follows:
Fair value of assets acquired, net of cash received $ 683
Customer relationship intangible asset 500
Non-compete intangible asset 60
Goodwill 1,131
-------
Net cash consideration $ 2,374
The amortization periods of the customer relationship intangible asset and the
non-compete intangible asset are seven years and five years, respectively. The
intangible asset amortization expense was $21 for the quarter ended March 31,
2004 and will be $83 annually for each of the five fiscal years beginning with
2004.
The purchase price allocation will be adjusted to include additional amounts due
pursuant to the contingent purchase price provisions of the acquisition
agreements when the conditions are met.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Thousands of dollars, except per share amounts)
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, 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, the stability of
political conditions in other countries in which the Company has production
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's revenues are driven by changes to consumer product packaging
designs and promotions and marketing spending. 90% of the Company's business is
graphic services for consumer product packaging applications. Generally, a
package design changes every three or four years. Between changes, there are
line extensions and promotions that take advantage of popular brand images in a
variety of products. However, the Company cannot predict when a design will
change or when a promotion will occur, therefore backlog does not exist. There
are regular promotions throughout the year that create revenue opportunities for
the company, for example, Valentine's Day, Easter, Fourth of July, Back To
School, Halloween, Thanksgiving and Christmas. In addition, there are event
driven promotions that occur regularly like the Super Bowl, Grammy Awards, World
Series, Indianapolis 500 and the Olympics. Lastly, there are a number of health
related "banners" that are added to food and beverage packaging, like "heart
healthy", "low in carbohydrates", "enriched with essential vitamins", "low in
saturated fat" and "caffeine free". All of these items create revenue for the
Company. In simple terms, change equals revenue.
For the quarter ended March 31, 2004, the Company increased sales by 6.9%
primarily as a result of revenues from three acquisitions the Company completed
at the end of 2003 / beginning of 2004. Organic growth was only 0.4% as an
unusually slow January and February negatively impacted results for the quarter.
Conversely, the month of March was the strongest revenue month in the Company's
history, resulting in a good quarter, overall. Net income decreased from $4,201
to $3,627 quarter over quarter due to three factors: lower results with the
Company's advertising agency accounts (which represent only 9% of the Company's
business), the dilutive effect on earnings of the first quarter results from the
three acquisitions, and the absence of a $319 after tax gain on the sale of a
building that was included in the prior year results. Although dilutive in the
first quarter of 2004, the Company expects the acquisitions to be accretive to
earnings within one year.
The Company finished the first quarter of 2004 with very strong financial ratios
in every category. The Company finished the quarter with a current ratio of 1.8
to 1 and debt to equity of 32.6% (with $35,774 of debt and $109,628 of equity).
Debt increased by $8,691in the first quarter of 2004 as a result of borrowing to
pay for the Virtual Color acquisition that closed effective January 1, 2004. The
Company completed a private placement of debt in December 2003 to provide
fixed-rate financing totaling $25,000 with a ten-year term, issuing $15,000 of
notes, with a rate of 4.9%, in December 2003 to provide funds for acquisitions,
and issuing notes representing the balance, with a rate of 4.98%, in April 2004.
The Company's $65,000 revolving credit facility had no borrowings thereunder for
the entire first quarter of 2004. The credit facility matures in May 2004. The
Company is in the process of negotiating with its banks to establish a new
$30,000 credit facility to replace the existing $65,000 credit facility.
Globally, the Company had no borrowings outside of the United States as of March
31, 2004.
10
The Company generates significant cash flow from operating activities on an
annual basis: $32,216 in 2003, $27,859 in 2002, and $23,186 in 2001. The first
quarter of 2004 cash flow from operating activities was temporarily lower than
normal because of the timing of a large surge in volume of business at the end
of the first quarter that either was completed and billed in March (and was in
trade accounts receivable at March 31, 2004) or business that was work in
process at March 31, 2004 (and was included in inventory in the quarter end
balance sheet). As a result, increased receivables and inventory caused a
decrease in cash generated by operating activities as of the end of the first
quarter. However, these accounts will be converted to positive cash flow in the
second quarter and it is anticipated that year to date cash flow from operating
activities will be at historic levels for the six-month period ended June 30,
2004.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 2004 AND 2003
Schawk, Inc.
Comparative Consolidated Statements of Operations
Quarters Ended March 31, 2004 and 2003
(in thousands)
$ %
2004 2003 CHANGE CHANGE
---- ---- ------ ------
Net sales $52,077 $48,705 $ 3,372 6.9%
Cost of sales 31,310 27,849 3,461 12.4%
------- ------- --------
Gross profit 20,767 20,856 (89) (0.4%)
Gross margin percentage 39.9% 42.8%
Selling, general and administrative expenses 14,542 13,385 1,157 8.6%
------- ------- --------
Operating income 6,225 7,471 (1,246) (16.7%)
Operating margin percentage 12.0% 15.3%
Interest expense 465 528 (63) (11.9%)
------- ------- --------
Income before income taxes 5,760 6,943 (1,183) (17.0%)
Income tax provision 2,133 2,742 (609) (22.2%)
------- ------- --------
Effective income tax rate 37.0% 39.5%
Net income $ 3,627 $ 4,201 $ (574) (13.7%)
======= ======= ========
(1) nm - Percentage not meaningful
Net sales increased 6.9% as compared to the prior year first quarter. The month
of March 2004 revenues were the strongest for any one-month period in the
Company's history, offsetting sales that were weak earlier in the quarter. On a
comparable basis excluding the three recently completed acquisitions, revenues
for the quarter were up 0.4% from the prior year period. Compared to the first
quarter of 2003 and excluding acquisitions in the 2004 revenues, packaging and
design account revenues (90% of the Company's business) increased $1,574, or
3.8%, and advertising agency account revenues (9% of the Company's business)
decreased $1,502, or 23.8%, in the first quarter of 2004.
Gross margin for the first quarter of 2004 decreased primarily due to lower
revenues from advertising agency accounts and low margins at the acquired
companies. Additionally, first quarter 2003 gross margin included a pretax gain
of $528, or 1.1 percentage points, on the sale of a building included in cost of
sales.
Operating income for the first quarter of 2004 decreased 16.7% from the prior
year first quarter. The operating margin percentage was also lower than the
prior year first quarter. The decrease in operating income and operating margin
was primarily due to increased selling, general and administrative expenses of
$1,157, including operating expenses at the recently completed acquisitions and
additional staff for sales growth efforts in both the graphic services and
design competencies and the absence of a $528 pretax gain, or 1.1 percentage
points, of operating margin and pretax margin, on the sale of a building in the
comparable prior year period, as previously noted.
11
Interest expense for the first quarter was approximately the same as the prior
year first quarter.
Income tax expense for the first quarter of 2004 was at an effective tax rate of
37.0% compared to a rate of 39.5% in the first quarter of 2003. The decrease in
the effective tax rate was due to lower profits in higher tax jurisdictions and
tax credits realized in 2004. It is anticipated that the effective tax rate for
2004 will be in the range of 37.0% to 38.0%.
Net income and earnings per share were lower in the first quarter of 2004 as
compared to the first quarter of 2003 for the reasons previously described.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED FROM OPERATIONS
Cash provided from operations was $314 in the first quarter of 2004 compared to
$5,265 in the first quarter of 2003. The decrease in cash provided was primarily
a result of first quarter 2004 increases in accounts receivable and
work-in-process inventories caused by a surge of business in March 2004. The
Company considers this increase in accounts receivable and work-in-process
inventories to be a timing issue and anticipates that both will return to normal
levels in the second quarter as the jobs begun in March are invoiced and
collected.
Depreciation and amortization expenses in the first quarter of 2004 were $2,934
as compared to $2,772 in the prior year first quarter.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities was $8,688 in the first quarter 2004 compared
to $334 in the first quarter of 2003. The increase in cash used in the first
quarter of 2004 reflects the acquisition of Virtualcolor for $4,894, $1,600 of
contingent purchase price related to the Virtualcolor acquisition paid to an
escrow account, and minor adjustments to the purchase price of fourth quarter
2003 acquisitions.
Capital expenditures, mainly for computer equipment and software, were $1,921 in
the first quarter of 2004 compared to $1,656 in the first quarter of 2003.
Capital expenditures are anticipated to be in a range of $8,000 to $10,000 for
all of 2004.
CASH PROVIDED FROM FINANCING ACTIVITIES
Cash provided from financing activities was $8,587 for the first quarter of 2004
compared to cash used in financing activities of $5,569 in the first quarter of
2003. The cash provided from financing activities in the first quarter of 2004
includes $8,700 that the Company borrowed on its short-term line of credit,
primarily to finance the Virtualcolor acquisition. The cash used in financing
activities in the first quarter of 2003 primarily reflects $5,044 of principal
payments made on the Company's credit facilities during that quarter.
Dividend payments on common stock were $692 in both the first quarter of 2004
and the first quarter of 2003. It is anticipated that the Company will keep the
dividend at the current level for all of 2004.
The Company presently finances its business from available cash and from cash
generated from operations. The Company maintains a $65,000 unsecured credit
facility, expiring May 2004, and a $15,000 unsecured demand line of credit to
provide financing and working capital flexibility, with US banks. The Company
also maintains working capital demand lines of credit in Canada (US $3,800),
China (US $1,500), and Malaysia (US $1,300). At March 31, 2004, the Company had
borrowings of $8,700 on its US unsecured demand line of credit. There were no
borrowings on its $65,000 unsecured credit facility or any of the non-US credit
lines.
The Company is presently in negotiations to renew or replace its $65,000
unsecured credit facility that expires in May 2004. It is anticipated that the
new credit facility will be a $30,000 unsecured credit facility with terms no
less favorable than those associated with the current $65,000 credit facility.
The reduced level of the credit facility reflects a lesser need for revolver
financing due in part to increased annual cash flow from operating activities
that has been increasing over the past three years and due to the receipt of
$25,000 of financing from a private placement issuance of debt in December 2003
and April 2004 as described further in the next paragraph.
The Company's long-term debt of $21,000 did not change in the first quarter of
2004 and consists of two private-placement financing agreements. $12,000 remains
outstanding on its Note Purchase Agreement dated August 18, 1995, of which
$6,000 due in August 2004 is classified as a current liability. In December of
2003, the Company entered into a new private placement of debt to provide
long-term financing. The terms of the Note Purchase Agreement relating to this
12
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, which
closed in December 2003 and remains outstanding at March 31, 2004; and, 2)
Tranche B, due April 30, 2014, for $10,000, which closed in April 2004.
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 the Note Purchase Agreement dated December 23, 2003
and short-term credit facilities.
SEASONALITY
With respect to consumer products packaging, the graphic services market is not
currently seasonal. On the other hand, there have historically been cycles of
design changes for brand images that most consumer products brands are subject
to. These historic cycles differ from brand to brand as to when design changes
have occurred and thus the Company's sales volume levels are unpredictable.
With respect to the advertising and promotional markets, some seasonality exists
in that the months of December and January are historically the slowest of the
year because advertising agencies and their clients typically finish their work
by mid-December and do not start up again until mid-January. In addition,
advertising and promotion is generally cyclical as the consumer economy is
cyclical. When consumer spending and GDP decrease, ad pages decline. Generally,
when ad pages decline the Company's advertising and promotion business declines.
The decline in business with the Company's clients in the advertising agency
market, which began in the second half of 2001, continued into the first quarter
of 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding market risk is disclosed in the Company's December 31,
2003 Form 10-K. There have been no material changes in information regarding
market risk relating to the Company since December 31, 2003.
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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
13
PART II - OTHER INFORMATION
ITEMS 1, 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT # DESCRIPTION
- --------- -----------
3.1 Certificate of Incorporation of Schawk, Inc., as amended.
Incorporated herein by reference to Registration Statement No.
33-85152.
3.3 By-Laws of Schawk, Inc., as amended. Incorporated herein by
Reference to Registration Statement No. 333-39113.
4.1 Specimen Class A Common Stock Certificate. Incorporated herein
by Reference to Registration Statement No. 33-85152.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
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,
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
B. Reports on Form 8-K
Form 8-K dated January 6, 2004 reporting under Item 9, a press release
announcing the completion of the acquisition of Virtualcolor.
Form 8-K dated January 13, 2004 reporting under Item 9, a press release
announcing the completion of the acquisition of Pixxon, Inc.
Form 8-K dated February 16, 2004 reporting under Item 9, a press
release announcing the plan to release 2003 financial results and hold
a conference call on February 24, 2004.
Form 8-K dated February 24, 2004 reporting under Item 12, a press
release announcing financial results for the quarter and year ended
December 31, 2003.
Form 8-K dated March 4, 2004 reporting under Item 9, a press release
announcing the declaration of the regular quarterly dividend.
Form 8-K dated March 17, 2004 reporting under Item 9, a press release
announcing the appointment of A. Alex Sarkisian as Chief Operating
Officer.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 7th day of May 2004.
SCHAWK, INC.
- ------------
(Registrant)
/s/ David A. Schawk
- ----------------------------------
President, Chief Executive Officer and Director
/s/ James J. Patterson
- ----------------------------------
Senior Vice President and Chief Financial Officer
15