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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2004
Commission file number 1-9335
SCHAWK, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware
  36-2545354
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
1695 River Road
Des Plaines, Illinois
(Address of principal executive office)
  60018
(Zip Code)
(Registrant’s telephone number, including area code)
847-827-9494
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Exchange on Which Registered
     
Class A Common Stock, $.008 par value
  New York Stock Exchange
      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)     Yes o          No þ
      The aggregate market value on June 30, 2004 of the voting stock held by non-affiliates of the registrant was approximately $73,195,284.
      As of March 8, 2005, 25,847,488 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
      Portions of the proxy statement for the annual shareholders’ meeting to be held May 17, 2005 are incorporated by reference into Part III.
 
 


SCHAWK INC
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
DECEMBER 31, 2004
             
        Page
         
 PART I
   Business     3  
   Properties     12  
   Legal Proceedings     14  
   Submission of Matters to a Vote of Security Holders     14  
 
 PART II
   Market for the Registrant’s Common Stock and Related Stockholder Matters     14  
   Selected Financial Data     16  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
   Quantitative and Qualitative Disclosures about Market Risk     24  
   Financial Statements and Supplementary Data     26  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosures     50  
   Controls and Procedures     50  
 
 PART III
   Directors and Executive Officers of the Registrant     50  
   Executive Compensation     50  
   Security Ownership of Certain Beneficial Owners and Management     50  
   Certain Relationships and Related Transactions     50  
   Principal Accountant Fees and Services     50  
 
 PART IV
   Exhibits, Financial Statement Schedules and Reports on Form 8-K     51  
 Signatures     54  
 List of Subsidiaries
 Consent of Indpendent Registered Public Accounting Firm
 Certification of CEO
 Certification of CFO
 Certification of CEO and CFO

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PART I
ITEM 1. BUSINESS
General
      Schawk, Inc. and its subsidiaries (“Schawk” or the “Company”) operate in one operating business segment, Digital Imaging Graphics Arts, that serves consumer products packaging, advertising and promotional markets. The Company has been in operation since 1953 and is incorporated under the laws of the State of Delaware.
      The Company believes it is the largest independent provider of digital imaging graphic services to the consumer products packaging market in the world. The Company’s facilities produce conventional, electronic and desktop color separations, creative design, art production, electronic retouching, conventional and digital plate making and digital press proofs for the three main printing processes used in the graphic arts industry: lithography, flexography and gravure. The Company’s services also include both digital and analog image database archival and management as well as 3D imaging for package design, large format printing, digital photography, workflow management consulting services, and various related outsourcing and graphics arts consulting services. These services require skilled, highly trained technicians applying various computerized design, manipulation and assembly techniques. The preparation of production art, digital files, retouching and image output for printing processes related to packaging and promotions accounted for over 90% of net sales for 2004 and over 85% for 2003 and 2002. The balance of the Company’s business consists primarily of the preparation of graphic images for advertising applications.
      The Company has particular expertise in preparing color images for high volume print production runs of consumer products packaging. The Company functions as a vital interface between its Fortune 1000 consumer products clients, their creative designers and their converters or printers in assuring the production of consistent, high quality packaging materials in increasingly shorter turnaround and delivery times. The Company’s ability to provide high quality, customized graphic services quickly makes it a valued player in new product introduction and promotional activity.
      The Company maintains both digital and analog data archives of product package layouts and designs for many of its clients. This activity brings value to those clients while improving the Company’s efficiency in accommodating clients’ rapidly changing packaging design modifications and product line extensions. By continuing to provide such high-end, value-added services, the Company commands a significant share of the market for graphic services for the food and beverage industry, which uniquely positions it to benefit from positive industry trends.
      The Company believes that its clients have increasingly chosen to outsource their imaging needs to the Company for reasons including but not limited to the following Schawk capabilities: (i) creative design capabilities, (ii) production art expertise, (iii) high quality customized imaging capabilities; (iv) rapid turnaround and delivery times; (v) up-to-date knowledge of the printing press specifications of converters and printers located throughout the United States, Canada, Mexico, Europe and Asia; (iv) color expertise; (vi) digital imaging asset management; (vii) workflow management; and (viii) ability to service its clients’ global graphic requirements through the Company’s North American facilities and international subsidiaries.
Graphic Services Industry
      “Graphic Services” are the tasks involved in preparing images and text for reproduction to exact specifications for a variety of media, including packaging for consumer products, point-of-sale displays and other promotional and/or advertising materials. Packaging for consumer products encompasses folding cartons, boxes, trays, bags, pouches, cans, containers, packaging labels and wraps. While graphics work represents a relatively small percentage of overall product packaging and promotion costs, the visual impact and effectiveness of product packaging and promotions are largely dependent upon the quality of graphic imaging work.

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      Graphic services do not entail the actual printing or production of such packaging materials, but rather include the various preparatory steps such as art production, digital photography, retouching, color separation and plate making services. “Color separation” generally refers to preparing color images, text and layout for the printing process. Graphic services such as color separations were traditionally performed by skilled craftspeople almost entirely by hand, using what is known as the “conventional” method. With the development of digital technology, graphics firms such as the Company have become more highly computerized, providing digital imaging services in which digitized images and text are manipulated according to client and converter specifications. On an increasing basis, clients supply material to the Company in a digitized format on a variety of digitally generated media and via the Internet. More recently there is a trend toward an all-digital workflow, from creative design through printing. The industry is expanding the production of plates directly from a digital file, hence the term “direct to plate” (DTP) or “computer to plate” (CTP). This process eliminates the step of preparing photographic film and exposing the film on a plate. CTP technology is more precise and reduces the time to produce a printing plate. The Company has CTP units and has the capacity to service its clients with CTP services, however, the current trend in the market is for printers and converters to provide this service as part of a bundled service to their customers.
      The Company believes that the graphic services industry in North America has over 1,000 market participants, principally independent color separators, such as the Company, converters, printers and advertising agencies that perform these services in-house. The majority of graphic services providers specialize in publication work that includes textbooks, advertising, catalogs, newspapers and magazines. The Company’s target markets, however, are high-end packaging for the consumer products industry, advertising and promotional applications. The North American market for graphic services for packaging to the consumer products industry is estimated by the Company to be approximately $2.0 billion, while the worldwide market is estimated by the Company to be as high as $6.0 billion. The consumer products graphic industry is highly fragmented with hundreds of market participants, only a small number of whom have annual revenues exceeding $20.0 million. The Company believes that the number of participants in the North American graphic services market for the consumer products industry will diminish due to consolidation and attrition caused by competitive forces such as accelerating technological requirements for advanced systems, equipment and highly skilled personnel and the growing demands of clients for full-service global capabilities.
      The rapid development of lower-cost, faster desktop publishing software systems has increased the potential for competition in the graphic services industry by lowering barriers to entry relating to equipment costs. However, increases in governmental regulations, demand for faster turnaround times, the need for global brand consistency and certainty of supply have created greater barriers to entry.
      There is also a more significant barrier to entry that has always existed — hundreds of “technician–years” of expertise in working with all of the major printers and converters to make sure a package is printed according to the client’s specifications. For this reason, new start-ups have difficulty competing with the Company.
      The Company focuses on three primary markets: consumer products packaging, advertising agencies, and promotion. The food and beverage segment of the consumer products industry has packaging requirements that are complex and demanding due to variations in packaging materials, shapes and sizes, custom colors, varying storage conditions and marketing enhancements. Product extensions and frequent packaging redesigns have resulted in an increasing volume of color separation and related work in the consumer products industry and in particular for the food and beverage segment. Additional industry trends include: (i) the shorter turnaround and delivery time requirements from the creative design phase to final distribution of the packaged product; (ii) an increasing number of SKUs competing for shelf space and market share; (iii) the increasing importance of package appearance and promotions due to demonstrated point-of-sale consumer purchasing behavior; and (iv) the increasing requirements for worldwide quality and consistency in packaging as companies attempt to build global brand name recognition. Increasingly, the advertising and promotion markets require coordination of these efforts, with the initiatives coming from advertising agencies. The Company’s expansion into these markets strengthens and enhances the overall service offering to the unified marketing approach of our clients.

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      The advertising portion of the Company’s business requires the Company’s personnel to produce final artwork in extremely short timeframes, often less than 24 hours. Creative retouching, color correction and composition in multiple file formats are produced to meet requirements of the clients and the printers. The Company is a leader in conventional, computer to plate and digital ad delivery to publications.
The Company’s Growth Strategy
      The Company’s primary goal is to enhance its leadership position in the graphic imaging market serving the consumer products, advertising and promotion markets. Key aspects of the Company’s business strategy to achieve this goal include the following:
        Organic Growth. Historically the Company has primarily grown through acquisitions. As market conditions have created growing opportunities, the Company has realized greater opportunity for internal growth, and accordingly has increased its focus on organic growth, turning to its highly skilled sales force to be the primary growth driver for the Company.
  •  Growth through Acquisitions. The Company’s profitability and ready access to capital have enabled it to make strategic acquisitions of companies that range in size from $2 million to $38 million in revenues. In its 51-year business history, the Company has integrated approximately 50 graphic and imaging businesses into its operations while streamlining overhead and improving margins in the aggregate. The acquisitions of consequence since 1999 were:
  •  Blue Mint Associates, a San Francisco based $2 million in annual revenue brand strategy and creative design firm, acquired December 1, 2003;
 
  •  Certain assets and the business of Pixxon, Inc., a San Francisco based $5 million in annual revenue prepress business acquired effective December 31, 2003
 
  •  Certain assets and the business of a Chicago-based $10 million in annual revenues prepress division of Fort Dearborn Company, a leading label printer, effective January 1, 2004; and
 
  •  Certain assets and the business of Weir Holdings, Ltd. a $38 million in revenue European graphic services business based in Leeds, England with operations in the United Kingdom, Belgium and Spain. The Weir Holdings acquisition was completed on December 31, 2004 and the acquired assets and liabilities are included in the Company’s balance sheet as of December 31, 2004.
  Subsequent to year end 2004, on January 31, 2005, the Company acquired Seven Worldwide, Inc. (formerly Applied Graphics Technologies, Inc.), a $370 million in revenue graphic services company with operations in 35 locations in the United States, Europe, Asia and Australia.
 
  Seven Worldwide, Inc. (“Seven”) provides graphic services to companies in the following market segments: Consumer Goods; Retail; Pharmaceutical; Media & Entertainment; Publishing; Advertising; and General Goods & Services. Seven’s solutions enable these companies to create, distribute and manage communications assets, such as advertising and editorial pages, consumer goods packaging, out-of-home (point-of-sale, large format) signage and Internet content.
 
  Seven’s mission is to bring both process efficiency and messaging consistency to marketing execution. Seven has graphic services capabilities to support clients who use multiple forms of marketing methods to connect with targeted audiences worldwide. The Company believes that Seven’s solution approach drives cost savings and streamlines execution as clients leverage Seven’s talent, processes, technology and infrastructure.
 
  Seven’s graphic services solutions focus on both performing and coordinating key creative and production services — from planning and design through pre-press and media fulfillment.
 
  The Company intends to continue expanding through acquisitions of well-managed companies with solid market positions, a reputation for quality work and established client lists. The Company believes that an emphasis on complementary acquisitions of companies serving targeted markets will allow it to broaden

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  its service offerings and provide single source design, graphic image database services and workflow management services.
 
  The Company believes it has greater versatility in meeting the various requirements of its clients than smaller, less integrated competitors lacking technical expertise, and that this versatility will result in greater opportunities for internal growth as well as enhancing the Company’s image as an attractive purchaser for potential consolidation candidates. The Company believes that there will continue to be a number of attractive acquisition candidates in the fragmented and consolidating industry in which it operates. The Company expects to strengthen its market position by applying its management and operational philosophies and practices, which have been successful in its graphic arts businesses, to newly acquired businesses.

  •  Capitalizing on Industry Trends; Outsourcing. The Company has historically attempted to strengthen its market position by identifying and capitalizing on industry trends. As a consequence, the Company has been uniquely positioned to benefit as consumer products companies continue to reduce both their graphic staffs and total number of suppliers. The Company’s on-site strategy developed as clients outsource imaging functions in an attempt to cut costs and improve turnaround and delivery times. The Company intends to expand this effort, as clients increasingly require on-site service. As of December 31, 2004, the Company had 44 on-site locations staffed by over 150 Schawk employees, approximately 8% of its total workforce. Further, the Company believes that its commitment to client service and its broad array of premium service offerings position the Company as a cost effective, value-added supplier of digital imaging services. As clients continue to reduce their staffing levels, they are expanding the number of services required of their graphic services suppliers. Schawk has an advantage in the marketplace because it has the full complement of capabilities required by larger consumer products companies, capabilities that its competitors do not have.
 
  •  Capitalizing on Technology Advancements. The Company is dedicated to keeping abreast of and initiating technological process developments in its industry. To build upon its leadership position, the Company actively evaluates systems and software products of various computer and software manufacturers and also independently develops software for implementation at its operating facilities. The Company continually invests in new technology designed to support its high quality graphic services. The Company concentrates its efforts on understanding the systems and equipment available in the marketplace and creating solutions using off-the-shelf products, customized to meet a variety of specific client and internal requirements. None of the Company’s technology activities are deemed to be patentable other than its InterchangeDigital software development products, which represent approximately one percent of revenues.
Management Philosophy
      As part of the Company’s ongoing strategic planning process, management of the Company introduced Vision 2020, a roadmap that the Company will follow into the future. Annualy, the Chief Executive Officer, David A. Schawk, provides an overview and update of the strategy to every employee of the Company and subsidiaries around the world. The overriding guidelines for the Company’s strategy are summarized in a “Vivid Description” of what the Company believes in. The Vivid Description of the Company is as follows:
        The value and breadth of our services and capabilities will be driven first and foremost by the requirements and satisfaction of our clients... We will deliver value through ensuring global brand consistency and the premiere speed-to-market solution to those clients. By becoming an integrated strategic partner to our clients, we will demonstrate value and inspire their unwavering confidence and loyalty... We will become the most profitable company in our industry and we will reach a dominant market share globally... We will continue to invest in training and development so that our employees and their tools will be the best of the best... The Schawk brand name will be recognized as the highest value answer to clients’ brand image requirements.

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      The business objectives of the Company support the Vivid Description of the Company and are as follows:
  •  Increase Global Coverage through Acquisitions Worldwide
 
  •  Redefine Our Source of Revenue and Profit for the future
 
  •  Invent/ Reinvent Solutions for Our Clients
 
  •  Increase Organic Growth
 
  •  Hire and Retain the Best of the Best Employees
 
  •  Measure Customer Satisfaction and Improve on our performance
      To achieve the Company’s business objectives, management stresses the following:
      Client Service. A key component of the Company’s management philosophy has been its commitment to client service. The Company’s offering continues to be increasingly focused on meeting the changing needs of its clients. This requires a commitment to working with clients to understand these needs. The Company believes that this commitment has contributed to the confidence and loyalty its clients have shown. Because of the increasingly competitive markets faced by its clients, the Company must be flexible enough to modify its operations in order to meet the specialized needs of its clients. The Company’s emphasis on on-site client representatives and operations helps to address this requirement and has further solidified existing client relationships.
      Employee Training and Investment in Equipment. The Company believes that its most valuable assets are its employees because its ability to provide clients with high quality services and products depends upon their dedication and expertise. The Company provides extensive and continuous training to keep its employees abreast of the latest technological developments and the particular needs of its clients. Providing its employees with the latest equipment, software and training are fundamental to the Company’s philosophy.
      Technical Expertise. The Company is able to provide its clients with high quality services and products and quick response time because of its efficient utilization of state-of-the-art equipment, software, computer servers, storage technology, and telecommunication systems. As part of its commitment to maintain its technological expertise, the Company has historically worked with software developers to create software that fully addresses the Company’s and its clients’ needs. The Company acts as a test site for numerous hardware and software products. In order to facilitate the exchange of information among its various facilities, the Company supports Schawk Technical Advisory Board (“STAB”) for the purpose of coordinating the research and evaluation of new technologies in the graphic arts industry. This group is recognized for its efforts and its leaders have been invited to lecture at numerous national and international symposiums and conferences.
Services
      The Company offers comprehensive, high quality digital imaging graphic services. The Company’s facilities produce conventional, electronic and desktop color separations, electronic production design, film preparation, plate making and press proofs for lithography, flexography and gravure.
      The Company’s services also include both digital and analog image database archival and management, as well as creative design, 3-D imaging, art production, large format printing, and various related outsourcing and graphics arts consulting services.
      The Company provides a series of best practices driven advisory, implementation and management services including but not limited to the following: workflow architecture, print management, color management and printer evaluation.
      As part of the strategic planning process at the Company, Schawk’s service offerings within the graphic services umbrella were organized into three core competencies: Brand Strategy and Creative Design, Graphic Services and Enterprise Products.

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      Brand Strategy and Creative Design. Under the Anthem Group brand, Schawk offers brand consulting and creative design for packaging applications to its Fortune 1000 consumer products company clients, food and beverage retailers and mass merchandisers. Anthem Group consists of leading creative design companies acquired by Schawk since 1998 in Toronto and San Francisco as well as start-ups in Chicago, New York and Singapore. Anthem Group represents approximately 5% of the Company’s overall revenues and is the fastest growing component of Schawk’s service offerings.
      Graphic Services. Under the Schawk brand, Graphic Services encompasses a number of service offerings including traditional prepress business as well as high-end digital photography, color retouching and large format digital printing. Graphic Service operations are located throughout North America, Europe and Asia. Graphic Service business represents approximately 92% of the Company’s revenues.
      Enterprise Products. The Company develops services in response to its clients needs. Three services that help differentiate Schawk from its competitors are digital asset management, work flow management and online proofing. These services are available through Schawk’s InterchangeDigital subsidiary, a software development company that develops software solutions for the marketing services departments of consumer products companies and pharmaceutical companies. Through its integrated software solution, PaRTS (Production and Resource Tracking System), InterchangeDigital works with clients to organize their digital assets, streamline their internal workflow and improve efficiency. The improved speed to market allows the consumer products companies to increase the number of promotions without increasing costs. This is very valuable to InterchangeDigital clients. The Company also offers digital three-dimensional modeling of prototypes or existing packages for its consumer products clients. This service is branded as Schawk 3-D and is included in the Enterprise Products service offering. Enterprise Products represent approximately 3% of the Company’s revenues.
      To capitalize on market trends, management believes that the Company must continue to be able to provide clients the ability to make numerous changes and enhancements with shorter turnaround times than ever before. Accordingly, the Company has focused its efforts on improving its response times and continues to invest in rapidly emerging technology and the continuing education of its employees. The Company also educates clients on the opportunities and complexities of state-of-the-art equipment and software. The Company believes that its ability to provide quick turnaround and delivery times, dependability and value-added training and education programs will continue to give it a competitive advantage in serving clients who require high volume, high quality product imagery.
      Over the course of its 51-year business history, the Company has developed strong relationships with many of the major converters and printers in the United States and Canada. As a result, the Company has extensive knowledge of their equipment, thereby enabling the Company to increase the overall efficiency of the printing process. Internal operating procedures and conditions may vary from printer to printer, affecting the quality of the color image. In order to minimize the effects of these variations, the Company makes necessary adjustments to its color separation work to account for irregularities or idiosyncrasies in the printing presses of each of its clients’ converters. The Company strives to afford its clients total control over their imaging processes with customized and coordinated services designed to fit each individual client’s particular needs, all aimed at ensuring that the color quality, accuracy and consistency of a client’s printed matter are maintained.
Acquisitions and Start-Up Operations
      The Company has acquired and integrated approximately 50 graphic and imaging businesses into its operations since 1965. Throughout its history, the Company has successfully identified acquisition candidates that represent market niche companies with Fortune 1000 client lists, excellent client service or proprietary products and solid management. The Company favors businesses with management teams that will continue to operate the businesses as semi-autonomous units. The Company has also commenced a number of start-up operations over the years when client servicing requirements or market conditions warranted.
      In late 2003, the Company purchased Blue Mint Associates and certain assets of Pixxon, Inc., both based in San Francisco, California. In addition, certain assets and the business of the prepress division of

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Fort Dearborn Company, in suburban Chicago, were acquired effective as of January 1, 2004. In 2002 the Company purchased the remaining 35% of the Laserscan Group. Also in 2002, the Company’s Canadian subsidiary acquired certain assets and assumed certain liabilities of Imaginex, a Toronto area graphic company. There were no acquisitions in 2000 or 2001.
      Schawk Shenzhen, a graphic services consulting office in China and Anthem New York, a Schawk creative design office, were the only start-up operations in 2004. There were no start-ups established in 2003 or 2002. In 2001, the Company established an Anthem creative design operation in Chicago, Illinois. In 2000, the Company established a start-up operation in Singapore.
      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 $38 million in revenues and operations in the UK, Belgium and Spain. Winnetts is the first operation in Europe for Schawk. This acquisition will allow us to expand our service offering over a greater global footprint as the only independent prepress firm with extensive global operations.
      Subsequent to year end 2004, on January 31, 2005, the Company acquired Seven Worldwide, Inc. (“Seven”) (formerly Applied Graphics Technologies, Inc.), a graphic services company with revenues of $370 million and operations in the United States, Europe, Asia and Australia. On a combined basis the Company has pro forma revenues of over $640 million based on 2004 results of each business.
      The Company intends to continue expanding through acquisitions of well-managed companies with solid market positions and established client lists. The Company believes that emphasis on complementary acquisitions of businesses serving targeted markets will allow it to broaden its product offerings and provide its clients with a single source for imaging and image database services. The Company will also continue to analyze and investigate start-up operations on an ongoing basis.
Research and Development
      The Company is dedicated to keeping abreast of and, in a number of cases, initiating technological process developments in its industry that have applications for consumer products packaging. To build upon its leadership position, the Company is actively involved in system and software technical evaluations of various computer systems and software manufacturers and also independently pursues software development for implementation at its operating facilities. The Company continually invests in new technology designed to support its high quality graphic services. The Company concentrates its efforts in understanding systems and equipment available in the marketplace and creating solutions using off-the-shelf products customized to meet a variety of specific client and internal requirements. PaRTStm and Schawk 3-D are examples of the Company’s commitment to research and development. Total research and development spending is not material.
      As an integral part of its commitment to research and development, the Company supports its internal STAB group as it researches and evaluates new technologies in the graphic arts and telecommunications industries. STAB meets quarterly to review new equipment and programs, and then disseminates the information to the entire Company and to clients as appropriate.
Marketing and Distribution
      The Company markets its services nationally and internationally through seminars, newsletters and training sessions targeted at existing and potential clients. The Company sells its services through a group of approximately 150 direct salespersons and 200 client service technicians who call on consumer products manufacturers, including those in the food and beverage, home products, pharmaceutical and cosmetics industries and mass merchant retailers. Both the Company’s salespersons and the Company’s client service technicians share responsibility for marketing the Company’s offerings to existing and potential clients, thereby fostering long-term institutional relationships with its clients.
      In addition to its numerous operations in the United States and Canada, the Company has operations in Mexico, the United Kingdom, Belgium, Spain, Japan, Singapore, Malaysia and China.

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Clients
      The Company’s clients consist of direct purchasers of graphic services, including end-use consumer product manufacturers and mass merchant retailers, converters and advertising agencies. Many of the Company’s clients, a large percentage of which are Fortune 1000 companies, are multi-national in scope and often use numerous converters both domestically and internationally. Because these clients desire uniformity of color and image quality across a variety of media, the Company plays a very important role in coordinating their printing activities by maintaining current equipment specifications regarding its clients and converters. Management believes that this role has enabled the Company to establish closer and more stable relationships with these clients. Converters also have a great deal of confidence in the quality of the Company’s services and have worked closely with the Company to reduce the converters’ required lead-time, thereby lowering their costs. End-use clients often select and utilize the Company to ensure better control of their packaging or other needs and depend upon the Company to act as their agent to ensure quality management of data along with consistency among numerous converters and packaging media. The Company has established 44 on-site locations at or near clients that require high volume, specialized service. As its art production services continue to expand, the Company anticipates that it will further develop its on-site services to its client base.
      Many of the Company’s clients place orders on a daily and weekly basis and work closely with the Company year-round as they frequently redesign product packaging or introduce new products. While certain promotional activities are seasonal, such as those relating to summer, back-to-school time and holidays, shorter technology-driven graphic cycle time has enabled consumer products manufacturers to tie their promotional activities to regional and/or current events (such as sporting events or motion picture releases). This prompts such manufacturers to redesign their packages more frequently, resulting in a correspondingly higher number of packaging redesign assignments. This technology-driven trend toward more frequent packaging changes has offset previous seasonal fluctuations in the volume of the Company’s business (also see “Seasonality and Cyclicality”).
      In addition, consumer product manufacturers have a tendency to single-source their graphic work with respect to a particular product line so that continuity can be assured in changes to the product image. As a result, the Company has developed a base of steady clients in the food and beverage, health and beauty and home care industries. During 2004 no single client accounted for more than 7.0% of the Company’s net sales, and the 10 largest clients in the aggregate accounted for approximately 43% of net sales.
Competition
      The Company’s competition comes primarily from other independent color separators and converters and printers that have graphic service capabilities. The Company believes that approximately one-half of the Company’s target market is served by converters and printers, and the other one-half is served by independent color separators. Independent color separators are companies whose business is performing graphic services for one or more of the principal printing processes. Since the Company acquired Seven Worldwide, Inc. in January 2005, the Company believes that only three firms, Southern Graphics Systems, a subsidiary of Alcoa, Mathews International Corporation and Vertis, Inc. compete with the Company on a national or international basis in certain markets. The remaining independent color separators are regional or local firms that compete in specific markets. To remain competitive, each firm must maintain client relationships and recognize, develop and capitalize on state-of-the-art technology and contend with the increasing demands for speed.
      Some converters with graphic service capabilities compete with the Company by performing such services in connection with printing work. Independent color separators such as the Company, however, may offer greater technical capabilities, image quality control and speed of delivery. In addition, converters often utilize the services of the Company because of the rigorous demands being placed on them by clients who are requiring faster turnaround times. Increasingly, converters are being required to invest in technology to improve speed in the printing process and have avoided spending on graphic services technology.
      As requirements of speed continue to be critical, along with the recognition of the importance of focusing on their core competencies, clients have increasingly recognized that the Company provides services at a rate and cost that makes outsourcing more cost effective and efficient.

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Purchasing and Raw Materials
      The Company purchases photographic film and chemicals, storage media, ink, plate materials and various other supplies and chemicals on consignment for use in its business. These items are purchased from a variety of sources and are available from a number of producers, both foreign and domestic. In 2004, materials and supplies accounted for $18.3 million or approximately 13.3% of the Company’s cost of sales, and no shortages are anticipated. Furthermore, as a growing proportion of the workflow is digital, the already low percentage of materials in cost of sales will continue to be reduced. Historically, the Company has negotiated and enjoys significant volume discounts on materials and supplies from most of its major suppliers.
Intellectual Property
      The Company owns no significant patents. The trademarks “Schawk,” and “PaRTS” and the trade names “Anthem New Jersey,” “Anthem New York,” “Anthem Los Angeles,” “Anthem San Francisco,” “Anthem Toronto,” “Anthem Chicago,” “Anthem Singapore,” “Schawk Asia,” “Schawk Atlanta,” “Schawk Cactus,” “Schawk Canada,” “Schawk Cherry Hill,” “Schawk Chicago,” “Schawk Chromart,” “Schawk Cincinnati 446,” “Schawk Cincinnati 447,” “Schawk Designer’s Atelier,” “Schawk Japan,” “Schawk Kalamazoo,” “Schawk Mexico,” “Schawk Milwaukee,” “Schawk Minneapolis,” “Schawk New York,” “Schawk Penang,” “Schawk St. Paul,” “Schawk Toronto” “Schawk Shanghai,” “Schawk Singapore,” “Schawk Stamford,” “Schawk 3-D,” “Interchange,” “InterchangeDigital,” “Interchange Digital Management Services,” “Laserscan,” and “Winnetts” are the most significant trademarks and trade names used by the Company or its subsidiaries.
Employees
      As of December 31, 2004 the Company had approximately 1,800 full-time employees. Of this number, approximately 22% are production employees represented by local units of the Graphic Communications International Union and by local units of the Communications, Energy & Paperworkers Union of Canada and the GPMU in the UK. The Company’s union employees are vital to its operations. Collective bargaining agreements covering the Company’s union employees in four facilities are subject to renegotiations. The Company considers its relationships with its employees and unions to be good.
Backlog
      The Company does not have or keep backlog figures, as projects or orders are generally in and out of the Company’s facilities within five to seven days. For the approximately one-half of total revenues that are not under contract, the Company maintains client relationships by delivering timely graphic services, providing technology enhancements to make the process more efficient and bringing extensive experience with and knowledge of printers and converters.
Seasonality and Cyclicality
      The Company’s digital imaging graphic business for the consumer product packaging graphic market is not currently seasonal because of the number of design changes that are able to be processed as a result of speed-to-market concepts and all-digital workflows. Increasingly, as demand for new products increases, traditional cycles related to timing of major brand redesign activitiy has gone from a three to four year cycle to a much shorter cycle. With respect to the advertising markets, some seasonality exists in that the months of December and January are typically the slowest months of the year in this market because advertising agencies and their clients typically finish their work by mid-December and do not start up again until mid-January. Advertising spending is generally cyclical as the consumer economy is cyclical. When consumer spending and GDP decreases, the amount of ad pages declines. Generally, when ad pages decline, the Company’s advertising business declines.

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Available Information
      The Company’s website is www.schawk.com. Investors can obtain copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company has filed such materials with, or furnished them to, the SEC. The Company will also furnish a paper copy of such filings free of charge upon request.
      The Company has adopted a code of ethics (the “Code of Ethics”), as required by the listing standards of the New York Stock Exchange and the rules of the SEC. This Code applies to all of the Company’s directors, officers and employees. The Company has also adopted a charter for its Audit Committee. The Company has posted the Code of Ethics and the Audit Committee Charter on its website and will post on its website any amendments to, or waivers from, its Code of Ethics applicable to any of the Company’s directors or executive officers. The foregoing information will also be available in print to any stockholder who requests such information.
ITEM 2. PROPERTIES
      The Company owns or leases the following office and operating facilities:
                         
                Lease    
    Square   Owned/       Expiration    
Location   Feet   Leased   Purpose   Date   Division
                     
    (Approx.)                
Antwerp, Belgium
    39,000     Owned   Operating Facility   N/A   Winnetts — Belgium
 
Bristol, England
    7,700     Leased   Operating Facility   September 2014   Winnetts — UK
 
Cherry Hill, New Jersey
    10,000     Leased   General Offices, Operating Facility   January 2007   Schawk Cherry Hill
 
Chicago, Illinois
    15,200     Leased   General Offices, Operating Facility   May 2005   Anthem Chicago
 
Cincinnati, Ohio
    74,200     Leased   General Offices, Operating Facility   August 2009   Schawk Cincinnati 446
 
Cincinnati, Ohio
    12,000     Leased   General Offices Operating Facility   August 2009   Schawk Cincinnati 447
 
Costa Mesa, California
    3,000     Leased   General Offices, Operating Facility   April 2004   Anthem Los Angeles
 
Des Plaines, Illinois
    18,200     Owned   Executive Offices   N/A   Corporate Office
 
Des Plaines, Illinois
    55,000     Leased   General Offices, Operating Facility   December 2010   Schawk Chicago
 
Franklin Park, Illinois
    62,000     Owned   General Offices, Operating Facility   N/A   Schawk Chicago
 
Hackettstown, New Jersey
    3,000     Leased   General Offices, Operating Facility   September 2005   Anthem New Jersey
 
Kalamazoo, Michigan
    67,000     Owned   General Offices, Operating Facility   N/A   Schawk Kalamazoo
 
Kobe, Japan
    800     Leased   General Offices, Operating Facility   February 2006   Schawk Japan
 
Leeds, England
    16,200     Leased   General Offices Operating Facility   January 2010   Winnetts — UK

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                Lease    
    Square   Owned/       Expiration    
Location   Feet   Leased   Purpose   Date   Division
                     
    (Approx.)                
 
London, England
    2,000     Leased   Operating Facility   December 2009   Winnetts — UK
 
Minneapolis, Minnesota
    31,000     Owned   General Offices, Operating Facility   N/A   Schawk Minneapolis
 
Mississauga, Ontario Canada
    58,000     Leased   General Offices, Operating Facility   December 2014   Schawk Toronto
 
New Berlin, Wisconsin
    43,000     Leased   General Offices, Operating Facility   June 2008   Schawk Milwaukee
 
New York, New York
    31,000     Leased   General Offices, Operating Facility   April 2006   Schawk New York
 
Penang, Malaysia
    34,000     Owned   General Offices, Operating Facility   N/A   Schawk Imaging
 
Penang, Malaysia
    1,706     Owned   General Offices, Operating Facility   N/A   Schawk Penang
 
Penang, Malaysia
    2,330     Owned   General Offices, Operating Facility   N/A   Laserscan Technology
 
Queretaro, Mexico
    18,000     Owned   General Offices, Operating Facility   N/A   Schawk Mexico
 
Roseville, Minnesota
    28,000     Leased   General Offices, Operating Facility   May 2007   Schawk St. Paul
 
Salford, England
    45,200     Leased   Operating Facility   September 2023   Winnetts — UK
 
San Francisco, California
    8,000     Leased   General Offices, Operating Facility   January 2009   Schawk San Francisco
 
San Francisco, California
    8,100     Leased   General Offices, Operating Facility   September 2008   Anthem San Francisco
 
Shanghai, China
    19,400     Leased   General Offices, Operating Facility   November 2005   Schawk Shanghai
 
Shenzhen, China
    1,800     Leased   General Offices Operating Facility   December 2005   Schawk Shenzhen
 
Singapore
    7,500     Leased   General Offices   December 2004   Schawk Singapore
 
Slough, England
    3,000     Leased   Operating Facility   January 2010   Winnetts — UK
 
Smyrna, Georgia
    25,200     Leased   General Offices, Operating Facility   October 2008   Schawk Atlanta

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                Lease    
    Square   Owned/       Expiration    
Location   Feet   Leased   Purpose   Date   Division
                     
    (Approx.)                
 
Stamford, Connecticut
    20,000     Leased   General Offices, Operating Facility   August 2005   Schawk Stamford
 
Toronto, Ontario, Canada
    8,292     Leased   General Offices, Operating Facility   January 2005   Anthem Toronto
 
Toronto, Ontario, Canada
    17,500     Leased   General Offices, Operating Facility   November 2007   Schawk Cactus
ITEM 3. LEGAL PROCEEDINGS
      From time to time, the Company has been a party to routine pending or threatened legal proceedings and arbitrations. The Company insures some, but not all, of its exposure with respect to such proceedings. Based upon information presently available, and in light of legal and other defenses available to the Company, management does not consider the liability from any threatened or pending litigation to be material to the Company. The Company has not experienced any significant environmental problems.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      No items were submitted to a vote of security holders for the three months ended December 31, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Recent Sales of Unregistered Securities
      On April 30, 2004, the Company issued and sold $10 million of its 4.98% Series 2003-A Notes due 2014 to Massachusetts Mutual Life Insurance Company in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. The proceeds of this offering were used to provide funds for acquisitions.
Stock Prices
      The Company’s Class A common stock is listed on the NYSE under the symbol “SGK”. The Company has approximately 923 stockholders of record as of March 1, 2005.
      Set forth below are the high and low sales prices for the Company’s Class A common stock for each quarterly period within the two most recent fiscal years.
                 
Quarter Ended:   2004 High/Low   2003 High/Low
         
March 31
  $ 15.65 - 12.48     $ 9.90 -  8.99  
June 30
    14.50 - 12.76       10.97 -  9.25  
September 30
    14.70 - 13.10       12.52 - 10.40  
December 31
    18.90 - 14.43       13.95 - 11.95  

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Dividends Declared Per Class A Common Share
                   
Quarter Ended:   2004   2003
         
March 31
  $ 0.0325     $ 0.0325  
June 30
    0.0325       0.0325  
September 30
    0.0325       0.0325  
December 31
    0.0325       0.0325  
             
 
Total
  $ 0.1300     $ 0.1300  
             
Equity Compensation Plan Information
      The following table summarizes information as of December 31, 2004, relating to equity compensation plans of the Company pursuant to which Common Stock is authorized for issuance (shares in thousands).
                         
    Number of Securities       Number of Securities