| RISK FACTORS The Company’s business is sensitive to general economic conditions |
| An economic decline or other circumstances that result in reductions in our clients’ marketing and advertising budgets could negatively impact the Company’s sales volume and revenues and the ability to respond to competition or take advantage of business opportunities |
| The Company’s revenues are derived from many clients in a variety of industries and businesses, some of whose marketing and advertising spending levels can be cyclical in nature and subject to significant reductions based on changes in, among other things, general economic conditions |
| The Company’s operating results may reflect our client’s order patterns or the effects of economic downturns on their businesses |
| In addition, because the Company conducts its operations in a variety of markets, the Company is subject to economic conditions in each of these markets |
| Accordingly, general economic downturns or localized downturns in markets where the Company has operations could have a material adverse effect on the Company’s business, results of operations and financial condition |
| The Company’s operating results fluctuate from quarter to quarter |
| The Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors, including: • timing of the completion of particular projects or orders; • material reduction or cancellation of major projects or the loss of a major client; • timing of new business; • differences in order flows; • sensitivity to general economic conditions; • the health of the consumer products industry; • the relative mix of different types of work with differing margins; 11 _________________________________________________________________ [61]Table of Contents • costs relating to the expansion of operations, including costs to integrate current and future acquisitions; • changes in interest costs and tax rates; and • costs associated with compliance with legal and regulatory requirements |
| Many of these factors are outside of the Company’s control |
| The Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance |
| In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year |
| The Company is subject to unpredictable order flows |
| The Company’s services and related business activity generally has been characterized by individual assignments from clients on a project-by-project basis rather than long-term contractual arrangements |
| Continued engagements for successive jobs are primarily dependent upon the client’s satisfaction with services previously provided |
| While technological advances have enabled us to shorten considerably our production cycle to meet the Company’s clients’ increasing speed-to-market demands, the Company may in turn receive less advance notice from our clients of upcoming projects |
| Although the Company has established long-standing relationships with many of our clients and believes our reputation for quality service is excellent, the Company is not able to predict with certainty the volume of its business even in the near future |
| The Company is dependent on certain key clients |
| The Company’s ten largest clients accounted for approximately 43prca of our revenues in 2004 and 35prca of revenues for 2005 |
| In 2004 and 2005, approximately 7prca and 9prca, respectively, of total revenues came from the Company’s largest single client in the respective period |
| The Company currently expects that its single largest client in 2005 may reduce its business with Schawk in 2006 by up to dlra20 million (approximately 3prca of the Company’s expected total annual revenue for 2006) as a result of a decision to substantially reduce its overall advertising budget |
| While the Company seeks to build long-term client relationships, revenues from any particular client can fluctuate from period to period due to such client’s purchasing patterns |
| Any termination of or significant reduction in our business relationships with any of our principal clients could have a material adverse effect on our business, financial condition and results of operations |
| The Company’s foreign operations are subject to currency exchange, political, investment and other risks that could hinder the Company from transferring funds out of a foreign country, delay our debt service payments, cause the Company’s operating costs to increase and adversely affect its results of operations |
| The Company’s foreign operations have expanded significantly as a result of our acquisition of the business of Winnetts from Weir Holdings, Inc |
| in December 2004 and our acquisition of Seven Worldwide, Inc |
| The Company now operates in thirteen countries |
| For 2005, consolidated net sales from operations outside North America were approximately dlra105 million, which represented approximately 17dtta0prca of our consolidated net sales |
| As a result of the Company’s foreign operations, the Company is subject to certain risks which could disrupt its operations or force it to incur unanticipated costs and have an adverse effect on our ability to make payments on our debt obligations |
| Devaluations and fluctuations in currency exchange rates may affect our operating performance by impacting revenues and expenses outside of the US due to fluctuations in currencies other than the US dollar or where the Company translates into US dollars for financial reporting purposes the assets and liabilities of our foreign operations conducted in local currencies |
| The Company is subject to various other risks associated with operating in foreign countries, such as the following: • political, social and economic instability; • war, civil disturbance or acts of terrorism; 12 _________________________________________________________________ [62]Table of Contents • taking of property by nationalization or expropriation without fair compensation; • changes in government policies and regulations; • imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries; • imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; • hyperinflation in certain foreign countries; and • impositions or increase of investment and other restrictions or requirements by foreign governments |
| The Company operates in a highly competitive industry |
| The Company competes with other providers of digital graphic and creative imaging services |
| The market for such services is highly fragmented, with several national and many regional participants |
| The Company faces, and will continue to face, competition in our business from many sources, including national and large regional companies, some of which have greater financial, marketing and other resources than the Company does |
| In addition, local and regional firms specializing in particular markets compete on the basis of established long-term relationships or specialized knowledge of such markets |
| The introduction of new technologies may create lower barriers to entry that may allow other firms to provide competing services |
| There can be no assurance that competitors will not introduce services or products that achieve greater market acceptance than, or are technologically superior to, our current service offerings |
| The Company cannot offer assurance that it will be able to continue to compete successfully or that competitive pressures will not adversely affect our business, financial condition and results of operations |
| Failure to properly manage the Company’s expanding operations may adversely impact our business |
| Continued rapid growth will place a significant strain on our financial and other resources and could result in significant operating losses |
| Since December 31, 2003, the size of the Company’s employee base has increased 207prca |
| Further increases are anticipated in the future, either through organic growth or through the carefully targeted acquisitions of companies that meet our acquisition criteria |
| In order to manage the growth of our client services staff, the Company will need to continue to improve its operational, financial and other internal systems |
| If the Company’s management is unable to manage growth effectively and revenues do not increase sufficiently to cover our increased expenses, the Company’s operations could be adversely affected |
| The Company may encounter difficulties arising from future acquisitions or consolidation efforts |
| During the past several years, the Company has invested, and in the future may continue to invest, a substantial amount of capital in acquisitions in addition to the acquisitions of Winnetts and Seven Worldwide |
| Acquisitions involve numerous risks, including: • difficulty in assimilating the operations and personnel of the acquired company with our existing operations and realizing anticipated synergies; • the loss of key employees or key clients of the acquired company; • difficulty in maintaining uniform standards, controls, procedures and policies; and • unrecorded liabilities of acquired companies that the Company failed to discover during our due diligence investigations |
| The Company cannot offer assurance that it will realize the expected benefits from future acquisitions or that our existing operations will not be harmed as a result of any such acquisitions |
| In addition, the cost of unsuccessful acquisition efforts could adversely affect our financial performance |
| The Company has undertaken consolidation efforts in the past in connection with our acquisitions, and in connection with future acquisitions, the Company will likely undertake consolidation plans to eliminate duplicate facilities and to 13 _________________________________________________________________ [63]Table of Contents otherwise improve operating efficiencies |
| Any future consolidation efforts may divert the attention of management, disrupt our ordinary operations or those of our subsidiaries or otherwise adversely affect the Company’s financial performance |
| The loss of key personnel could adversely affect the Company’s current operations and its ability to achieve continued growth |
| The Company is highly dependent upon the continued service and performance of the Company’s senior management team and other key employees, in particular David A Schawk, our President and Chief Executive Officer, A Alex Sarkisian, our Chief Operating Officer, and James J Patterson, our Chief Financial Officer |
| The loss of one or more of these officers may significantly delay or prevent the achievement of the Company’s business objectives |
| The Company’s continued success also will depend on retaining the highly skilled employees that are critical to the continued advancement, development and support of our client services and ongoing sales and marketing efforts |
| Any loss of a significant number of our client service, sales or marketing professionals could negatively affect our business and prospects |
| As the Company continues to integrate the businesses of Seven Worldwide and Winnetts, the Company’s competitors may intensify their efforts to recruit key employees of those businesses |
| Although the Company generally has been successful in our recruiting efforts, the Company competes for qualified individuals with companies engaged in our business lines and with other technology, marketing and manufacturing companies |
| Accordingly, the Company may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan |
| If, for any reason, these officers or key employees do not remain with us, our operations could be adversely affected until suitable replacements with appropriate experience can be found |
| Work stoppages and other labor relations matters may make it substantially more difficult or expensive for us to produce our products and services, which could result in decreased sales or increased costs, either of which would negatively impact our financial condition and results of operations |
| The Company is subject to risk of work stoppages and other labor relations matters, particularly in the US and Canada where approximately 14prca of our employees are unionized |
| Any prolonged work stoppage or strike at any one of our principal facilities could have a negative impact on our business, financial condition or results of operations |
| The Company is subject to restrictive debt covenants |
| The Company has and may in the future incur indebtedness in connection with our acquisition strategy or to fund our operations |
| The Company’s current credit agreements contain covenants that in some cases restrict certain actions, such as our ability to incur additional indebtedness, dispose of assets or engage in certain types of mergers or acquisitions, and may impede our ability to implement our growth strategy |
| No assurances can be given that existing credit agreements will not restrict our growth strategy or that the Company will not in the future enter into agreements with our lenders that contain restrictive covenants that would have a similar effect |
| The Company remains susceptible to risks associated with technological change, including risks based on the services the Company provides and may seek to provide in the future as a result of technological changes |
| The Company believes its ability to develop and exploit emerging technologies has contributed to our success and has demonstrated to our clients the value of using our services rather than attempting to perform these functions in-house or through lower-cost, reduced-service competitors |
| The Company believes our success also has depended in part on our ability to adapt our business as technology advances in our industry have changed the way graphics projects are produced |
| These changes include a shift from traditional production of images to offering more consulting and project management services to clients |
| Accordingly, our ability to grow will depend upon our ability to keep pace with technological advances and industry evolutions 14 _________________________________________________________________ [64]Table of Contents on a continuing basis and to integrate available technologies and provide additional services commensurate with client needs in a commercially appropriate manner |
| Our business may be adversely affected if the Company is unable to keep pace with relevant technological and industry changes or if the technologies that the Company adopts or services the Company promotes do not receive widespread market acceptance |
| The Company may be subject to losses that might not be covered in whole or in part by existing insurance coverage |
| These uninsured losses could result in substantial liabilities to us that would negatively impact our financial condition |
| The Company carries comprehensive liability, fire and extended coverage insurance on all of our facilities, and other specialized coverages, including errors and omissions coverage, with policy specifications and insured limits customarily carried for similar properties and purposes |
| There are certain types of risks and losses, however, such as losses resulting from wars or acts of God, that generally are not insured because they are either uninsurable or not economically insurable |
| Should an uninsured loss or a loss in excess of insured limits occur, the Company could incur significant liabilities, and if such loss affects property the Company owns, the Company could lose capital invested in that property or the anticipated future revenues derived from the activities conducted at that property, while remaining liable for any lease or other financial obligations related to the property |
| In addition to substantial financial liabilities, an uninsured loss or a loss that exceeds our coverage could adversely affect our ability to replace property or capital equipment that is destroyed or damaged, and our productive capacity may diminish |