1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
Commission File Numbers 0-9115 and 0-24494
MATTHEWS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 25-0644320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTHSHORE CENTER, PITTSBURGH, PA 15212-5851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 442-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock, $1.00 par value NASDAQ National Market System
Class B Common Stock, $1.00 par value None
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 check mark if disclosure of delinquent filers pursuant to Item 405a
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of November 30, 1998 was $454,000,000.
As of November 30, 1998, shares of common stock outstanding were:
Class A Common Stock 13,141,600 shares
Class B Common Stock 2,854,547 shares
Documents incorporated by reference: None
The index to exhibits is on pages 67-69.
2
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
Any forward-looking statements contained in this Annual Report on Form 10-K
(specifically those contained in Item 1, "Business" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations") are
included in this report pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks and uncertainties that may cause the Company's
actual results in future periods to be materially different from management's
expectations. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be given that
such expectations will prove correct. Factors that could cause the Company's
results to differ materially from the results discussed in such forward-looking
statements principally include economic, competitive and technological factors
beyond the Company's control.
ITEM 1. BUSINESS.
Matthews International Corporation, founded in 1850 and incorporated in
Pennsylvania in 1902, is a designer, manufacturer and marketer principally of
custom-made products which are used to identify people, places, products and
events. The Company's products and operations are comprised of three business
segments: Bronze, Graphics Imaging and Marking Products. The Bronze segment
is a leading manufacturer of cast bronze memorial products, crematories and
cremation-related products and a leading builder of mausoleums. The Graphics
Imaging segment manufactures and provides printing plates, pre-press services
and imaging systems for the corrugated and flexible packaging industries. The
Marking Products segment designs, manufactures and distributes a wide range of
marking equipment and consumables for identifying various consumer and
industrial products, components and packaging containers. The following table
sets forth sales and operating profit for the three business segments of the
Company for the past three fiscal years.
Fiscal Year Ended September 30,
--------------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Sales to unaffiliated customers:
Bronze $106,273 50.2% $ 96,384 50.9% $ 84,529 49.2%
Graphics Imaging 75,294 35.6 57,804 30.6 43,062 25.0
Marking Products 30,055 14.2 34,981 18.5 44,387 25.8
------- ----- ------- ----- ------- -----
Total $211,622 100.0% $189,169 100.0% $171,978 100.0%
======= ===== ======= ===== ======= =====
Operating profit:
Bronze 26,016 72.4 22,579 73.1 20,072 75.0
Graphics Imaging 6,910 19.2 5,507 17.8 4,217 15.7
Marking Products 3,003 8.4 2,801 9.1 2,482 9.3
------- ----- ------- ----- ------- -----
Total $ 35,929 100.0% $ 30,887 100.0% $ 26,771 100.0%
======= ===== ======= ===== ======= =====
3
ITEM 1. BUSINESS, continued.
Detailed financial information relating to business segments and to foreign and
domestic operations is presented in Note 15 (Segment Information) to the
Consolidated Financial Statements included in Part II of this Annual Report on
Form 10-K.
In fiscal 1998, approximately 91% of the Company's sales were made from the
United States, and 4%, 3% and 2% were made from Canada, Europe and Australia,
respectively. Bronze segment products are sold throughout the world with the
segment's principal operations located in the United States, Canada and
Australia. Products and services of the Graphics Imaging segment are sold
primarily in the United States and, beginning in September 1998, Germany
through a 50%-owned affiliate. The Marking Products segment sells equipment and
consumables directly to industrial consumers in the United States and
internationally through the Company's wholly-owned subsidiaries in Canada and
Sweden and through other foreign distributors. Matthews owns a minority
interest in distributors in Asia, Australia, France, Germany and the United
Kingdom.
The Company and its wholly-owned subsidiaries employ approximately 1,600
people. The Company's principal executive offices are located at Two
NorthShore Center, Pittsburgh, Pennsylvania 15212 and its telephone number is
(412) 442-8200.
PRODUCTS AND MARKETS:
Bronze:
The Bronze segment manufactures and markets in the United States, Canada and
Australia cast bronze memorial products used primarily in cemeteries. The
segment also manufactures and markets cast bronze and aluminum architectural
products used to identify or commemorate people, places and events. In
addition, the segment manufactures and markets crematories and
cremation-related products through a wholly-owned subsidiary, Industrial
Equipment and Engineering Company (IEEC).
Memorial products, which comprise the majority of the Bronze segment's sales,
include flush bronze memorials, flower vases, crypt letters, cremation urns,
niche units and cemetery features, along with other related products. Flush
bronze memorials, which represent approximately two-thirds of the segment's
memorial product sales, are bronze plaques which contain vital information
about a deceased individual such as name and birth and death dates. These
memorials are used in cemeteries as an alternative to upright granite
monuments. The memorials are even or "flush" with the ground and therefore are
preferred by many cemeteries for easier mowing and other maintenance. In order
to provide products for the granite memorial market, the Company's other
memorial products include granite monuments as well as bronze plaques, letters,
emblems, vases, lights and photoceramics that can be affixed to granite
monuments, mausoleums and crypts. Principal customers for memorial products
are cemeteries and memorial parks, which in turn sell the Company's products to
the consumer.
The Bronze segment manufactures a full line of memorial products for cremation,
including urns in a variety of sizes, styles and shapes. In addition, the
Company manufactures bronze niche units which are comprised of numerous
compartments used to display cremation urns in mausoleums and churches.
4
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Bronze, continued:
Architectural products include cast bronze and aluminum plaques, etchings and
letters that are used to recognize, commemorate and identify people, places,
events and accomplishments. The Company's plaques are frequently used to
identify the name of a building or the names of companies or individuals
located within a building. Such products are also used to commemorate events
or accomplishments, such as military service or financial donations. The
principal markets for the segment's architectural products are corporations,
fraternal organizations, contractors, churches, hospitals, schools and
government agencies. These products are sold to and distributed through a
network of independent dealers including sign suppliers, recognition companies
and trophy dealers.
IEEC, which is headquartered in Orlando, Florida, is the leading North American
designer and manufacturer of cremation equipment and cremation-related
products. IEEC equipment and products are sold primarily to mortuary and
cemetery facilities within North America, Europe and Asia.
In September 1998, Matthews purchased the assets of Gibraltar Mausoleum
Construction Company, Inc. ("Gibraltar"), a subsidiary of Service Corporation
International. Gibraltar, with annual sales of approximately $16 million, is
headquartered in Indianapolis, Indiana and is a leading builder of mausoleums
in the United States. The acquisition of Gibraltar is intended to expand
Matthews' presence in the mausoleum entombment marketplace.
Raw materials used by the Bronze segment consist principally of bronze and
aluminum ingot, sheet metal, coating materials, electrical components and
construction materials and are generally available in adequate supply. Ingot
is obtained from various North American and Australian smelters.
Graphics Imaging:
The Graphics Imaging segment provides printing plates, pre-press services and
imaging systems to the corrugated and flexible packaging industries. The
corrugated packaging industry consists of manufacturers of printed corrugated
boxes and the flexible packaging industry consists of manufacturers of printed
bags and other packaging products made of paper, film and foil.
The segment's principal products are printing plates used by corrugated
packaging manufacturers to print corrugated boxes with graphics that help sell
the packaged product and provide information such as product identification,
logos, bar codes and other packaging detail specified by the manufacturer of
the packaged product. The corrugated packaging manufacturer produces printed
boxes by first combining linerboard with fluted paper to form a corrugated
sheet. Using the Company's products, this sheet is then printed and die cut to
make a finished box. The flexible packaging industry produces printed
packaging from paper, film and foil, such as for food wrappers.
5
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Graphics Imaging, continued:
The Company works closely with manufacturers to provide the proper printing
plates and tooling used to print the packaging to the user's specifications.
The segment's printing plate products are made principally from photopolymer
resin. Upon customer request, plates can be pre-mounted press-ready in a
variety of configurations that maximize print quality and minimize press
set-up time.
The segment also provides creative art design services to manufacturers of
corrugated and flexible packaging and to end users of such packaging. Other
products and services include pre-press preparation, such as computer-generated
camera-ready art, negatives, films and master patterns; plate mounting
accessories for the corrugated industry; various press aids designed to improve
print quality; and rotary and flat cutting dies used to cut out intricately
designed containers and point-of-purchase displays.
The Graphics Imaging segment customer base consists primarily of packaging
industry manufacturers and "national accounts." National accounts are
generally large, well-known consumer goods companies with a national presence
that purchase their printing plates directly. These companies then provide
their printing plates to the packaging industry manufacturer of their choice.
Matthews International Corporation owns a fifty percent interest in Tukaiz
Communications L.L.C., a leading pre-press and pre-media firm based in Franklin
Park, Illinois. A pre-press firm prepares art or digital files for printing or
reproduction. The Company's services, which include creative design, audio,
video, animation, multimedia, digital photography, web-site service and
on-demand digital printing, are provided to ad agencies, manufacturers,
printers and publishers.
On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color
Communications, Inc., a digital graphics service company. O.N.E., with annual
sales of approximately $10 million, is headquartered in Oakland, California and
was formed 83 years ago. O.N.E. provides digital graphic services to
advertising agencies and packaging markets.
On September 19, 1998, Matthews acquired fifty percent of S+T Gesellschaft fur
Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany,
consist principally of flexographic printing preparation and the manufacture of
photopolymer printing forms for the packaging industry.
The combination of the Company's Graphics Imaging business, Tukaiz, O.N.E. and
S+T is an important part of the Matthews strategy to become a worldwide leader
in the graphics industry and service existing multinational customers on a
global basis.
Major raw materials for this segment's products include photopolymer resin,
film, rubber and graphic art supplies. All such materials are presently
available in adequate supply from various industry sources.
6
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Marking Products:
The Marking Products segment designs, manufactures and distributes a wide range
of marking equipment and consumables used by customers to identify various
consumer and industrial products, components and packaging containers. Marking
products range from simple handstamps made from special alloy steel to
sophisticated microprocessor-based ink-jet printing systems. The Marking
Products segment employs contact printing, indenting, ink-jet printing and
laser marking to meet customer needs, sometimes using a combination of these
marking methods.
A significant portion of the revenue of this segment is attributable to the
sale of consumables, software and replacement parts in connection with the
marking hardware sold by the Company. The Company develops inks in harmony
with the marking equipment in which they are used, which is critical to assure
ongoing equipment reliability and mark quality. Many marking equipment
customers also use the Company's ink, solvents and cleaners.
The principal customers for the Company's marking products include food and
beverage processors, metal fabricators, producers of health and beauty products
and manufacturers of textiles, plastic, rubber and building products. A large
percentage of the segment's sales are outside the United States and are
distributed through the Company's wholly-owned subsidiaries in Canada and
Sweden in addition to other international distributors. Matthews owns a
minority interest in distributors in Asia, Australia, France, Germany and the
United Kingdom.
The marking products industry is fragmented, with many companies having limited
product lines which focus on well-defined specialty markets. Other industry
participants, like the Company, have broad product offerings and compete in
various product markets and countries. In the United States, the Company has
been supplying marking products for over 140 years.
Major raw materials for this segment's products include printing components,
tool steels, rubber and chemicals, all of which are presently available in
adequate supply from various sources.
7
ITEM 1. BUSINESS, continued.
COMPETITION:
Bronze:
Competition from other bronze memorial manufacturers, which is intense, is on
the basis of reputation, product quality, delivery, price and design
availability. The Company also competes with upright granite monument and
flush granite memorial providers. The Company and its two major bronze
competitors account for a substantial portion of the bronze memorial market.
The Company believes that its superior quality, broad product lines, innovative
designs, delivery capability, customer responsiveness, experienced personnel
and customer oriented merchandising systems are competitive advantages in its
markets. Competitors in the architectural market are numerous and include
companies that manufacture cast and painted signs, plastic materials and other
fabricated products. The Company competes with several manufacturers in the
crematory market principally on the basis of product quality and price.
Competition in the mausoleum construction industry includes various
construction companies throughout North America and is on the basis of design,
quality and price.
Graphics Imaging:
Graphics Imaging is one of several manufacturers of printing plates and
providers of pre-press services with a national presence. The segment competes
in a fragmented industry consisting of a few multi-plant regional printing
plate suppliers and a large number of local one-plant companies located across
the United States. Competition is on the basis of price, timeliness of
delivery and product quality. The Company differentiates itself from the
competition by consistently meeting customer demands and its ability to service
customers nationwide.
Marking Products:
Competition is intense and based on product performance, service and price.
The Company normally competes with specialty companies in specific marking
applications. The Company believes that, in general, it has the broadest lines
of marking products to address industrial marking applications.
PATENTS, TRADEMARKS AND LICENSES:
The Company holds a number of domestic and foreign patents and trademarks.
However, the Company believes the loss of any or a significant number of
patents or trademarks would not have a material impact on operations or
revenues.
BACKLOG:
Because the nature of the Company's business is custom products made to order
with short lead times, backlogs are not generally material in any segment of
the Company's operations except for IEEC and Marking Products. Backlogs in
IEEC generally vary in the range of four to eight months of sales. Backlogs in
the Marking Products segment can vary in a range up to six weeks of sales.
8
ITEM 1. BUSINESS, continued.
REGULATORY MATTERS:
The Company is subject to various federal, state and local laws and regulations
relating to the protection of the environment. The Company believes that its
current operations are in material compliance with all presently applicable
environmental laws and regulations. The Company's expenditures for
environmental compliance have not had, nor are they presently expected to have,
a material adverse effect on the Company.
The Clean Air Act Amendments of 1990 are not expected to impact two of the
Company's operating segments, Graphics Imaging and Marking Products. In the
United States, the Company's Bronze segment operates four nonferrous foundries,
none of which is within the "major source" industry category as defined by the
Environmental Protection Agency. As such, it is believed that the Bronze
segment operations will be regulated as "area sources" at certain locations.
No material capital expenditures are anticipated within the next few years as a
result of the Clean Air Act Amendments.
Like most nonferrous foundry operations, the Company's plants produce a
significant volume of residual materials as a result of the bronze casting
process. Chief among these is spent foundry sands. Currently, the majority of
these materials, including foundry sands, are regulated as solid waste under
most state and federal laws. Pursuant to the Resource Conservation and
Recovery Act, the Company is regulated as a generator of hazardous waste, and
all plants are registered with the Environmental Protection Agency in
accordance with applicable regulations. The Company has implemented detailed
plans and procedures for waste management at each of its Bronze operating
plants in the United States.
9
ITEM 2. PROPERTIES.
The principal properties of the Company are as follows (properties are owned by
the Company except as noted):
Location Description of Property Square Feet
- -------- ----------------------- -----------
Bronze:
Pittsburgh, PA Manufacturing / Division Offices 94,000
Apopka, FL Manufacturing 40,000
Melbourne, Australia Manufacturing 26,000(1)
Milton, Ontario, Canada Manufacturing 30,000
Nashotah, WI Sales 8,000(1)
Searcy, AR Manufacturing 84,000
Seneca Falls, NY Manufacturing 21,000
Sun City, CA Manufacturing 24,000
Graphics Imaging:
Pittsburgh, PA Manufacturing / Division Offices 56,000
Atlanta, GA Manufacturing 16,000
Cranberry Twp., PA Manufacturing 15,000(1)
Dallas, TX Manufacturing 15,000(1)
Denver, CO Manufacturing 12,000(1)
Escondido, CA Manufacturing 15,600(1)
High Point, NC Manufacturing 34,700(1)
LaPalma, CA Manufacturing 22,000
St. Louis, MO Manufacturing 24,000
Marking Products:
Pittsburgh, PA Manufacturing / Division Offices 67,000
Pittsburgh, PA Ink Manufacturing 18,000
Gothenburg, Sweden Manufacturing / Distribution 28,000(1)
Corporate Office:
Pittsburgh, PA General Offices 48,000(2)
(1) These properties are leased by the Company under operating lease
arrangements. Rent expense incurred by the Company for leased facilities
was $691,000 in fiscal 1998.
(2) The Company uses approximately one-third of this building and leases, or
offers to lease, the remainder to unrelated parties.
All of the owned properties are unencumbered. The Company believes its
facilities are generally well suited for their respective uses and are of
adequate size and design to provide the operating efficiencies necessary for
the Company to be competitive. The Company's facilities provide adequate space
for meeting its near term production requirements and have availability for
additional capacity. The Company intends to continue to expand and modernize
its facilities as necessary to meet the demand for its products.
10
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings generally incidental to its
business. The eventual outcome of these matters is not predictable and it is
possible that their resolution could be unfavorable to the Company. Although
the ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that the matters should not result in liabilities
in an amount which would materially affect the consolidated financial position,
annual results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal year 1998.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information:
The authorized common stock of the Company is divided into two classes
consisting of Class A Common Stock, $1 par value, and Class B Common Stock,
$1 par value. Shares of Class A stock have one vote per share and are freely
transferable subject to applicable securities laws. Shares of Class B stock
have ten votes per share and are only transferable by a shareholder to the
Company or to an active employee of the Company. If shareholders wish to
otherwise sell Class B Common Stock, the Company may, at its discretion,
purchase such shares at the fair market value per share of the Company's
Class A Common Stock or permit shareholders to tender such shares to the
Company in exchange for an equal number of shares of Class A Common Stock.
On May 5, 1998, the Board of Directors declared a two-for-one stock split on
the Company's Class A and Class B common stock in the form of a 100% stock
distribution. The stock distribution was issued June 2, 1998 to shareholders
of record on May 15, 1998. Shareholders' equity has been adjusted for the
stock split by reclassifying from additional paid-in capital and retained
earnings to common stock the par value of the additional shares arising from
the split. All per share amounts and numbers of shares have been adjusted in
this report to reflect the stock split.
The Company's Class A Common Stock is traded on the NASDAQ National Market
System. The following table sets forth the high, low and closing prices as
reported by NASDAQ (adjusted for the stock split) for the periods indicated:
High Low Close
---- --- -----
Fiscal 1998:
Quarter ended: September 30, 1998 $29.00 $21.25 $25.00
June 30, 1998 27.25 20.00 24.56
March 31, 1998 22.50 19.50 20.00
December 31, 1997 23.00 18.75 22.00
Fiscal 1997:
Quarter ended: September 30, 1997 $20.63 $17.75 $19.88
June 30, 1997 18.25 14.44 18.25
March 31, 1997 15.50 14.13 15.22
December 31, 1996 15.38 13.88 14.13
In April 1998, the Company announced the continuation of its stock repurchase
program. Previously, the Company's Board of Directors had approved
repurchasing a total of 2,000,000 shares (adjusted for the stock split) of
Matthews Class A and Class B Common Stock, which has been completed. The
current authorization allows the Company to purchase up to an additional
1,000,000 shares. The buy-back program, which originated in fiscal 1996, is
designed to increase shareholder value, enlarge the Company's holdings of its
Class A and Class B Common Stock, and add to earnings per share. Repurchased
shares may be retained in treasury, utilized for acquisitions, or reissued to
employees or other purchasers, subject to the restrictions of the Restated
Articles of Incorporation.
12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS,
continued.
(a) Market Information, continued:
In conjunction with the buy-back program, the Company invoked the provisions of
the Fifth Article of its Restated Articles of Incorporation. Such Article
provides (among other things) that any shareholder wishing to sell or convert
any Class B common shares must first offer such shares to the Company for
redemption. The Company will then have an option to purchase such shares for a
24-hour period.
(b) Holders:
The number of registered holders of the Company's common stock at November 30,
1998 was as follows:
Class A Common Stock 476
Class B Common Stock 287
(c) Dividends:
A quarterly dividend of $.045 per share was paid for the fourth quarter of
fiscal 1998 to shareholders of record on October 30, 1998. The Company paid
quarterly dividends of $.0425 per share for the first three quarters of fiscal
1998 and the fourth quarter of fiscal 1997. The Company paid quarterly
dividends of $.04 per share for the first three quarters of fiscal 1997.
Cash dividends have been paid on common shares in every year for at least the
past thirty years. It is the present intention of the Company to continue to
pay quarterly cash dividends on its common stock. However, there is no
assurance that dividends will be declared and paid as the declaration and
payment of dividends is at the discretion of the Board of Directors of the
Company and is dependent upon the Company's financial condition, results of
operations, cash requirements, future prospects and other factors deemed
relevant by the Board.
13
ITEM 6. SELECTED FINANCIAL DATA.
Years ended September 30,
-------------------------------------------------------------------
1998 1997 1996(1) 1995 1994
----------- ----------- ----------- ----------- -----------
(Not Covered by Report of Independent Accountants)
Net sales $211,622,057 $189,168,640 $171,977,619 $166,747,781 $158,700,158
Gross profit 93,050,222 83,500,886 76,640,900 74,729,267 71,613,709
Operating profit 35,928,944 30,887,395 26,771,380 24,457,704 23,908,940
Interest expense 466,304 337,375 131,364 104,820 309,939
Income before income taxes 37,132,283 32,297,897 33,522,616 25,079,263 23,705,257
Income taxes 14,630,591 12,671,833 13,265,062 9,628,028 9,677,091
---------- ---------- ---------- ---------- ----------
Net income $ 22,501,692 $ 19,626,064 $ 20,257,554 $15,451,235 $ 14,028,166
========== ========== ========== ========== ==========
Earnings per common share:
Basic $ 1.38 $ 1.14 $ 1.14 $ .87 $ .78
Diluted 1.34 1.11 1.11 .87 .78
Weighted average common
shares outstanding:
Basic 16,336,359 17,194,073 17,781,824 17,700,700 17,964,706
Diluted 16,770,214 17,696,793 18,213,866 17,840,012 17,964,706
Cash dividends per share .173 .163 .145 .125 .05
Total assets $187,205,764 $169,204,390 $153,411,709 $138,206,376 $120,683,005
Long-term debt, noncurrent 1,434,679 2,151,413 - 270,092 745,616
<FN>
(1) Fiscal 1996 included after-tax income of $2.9 million ($.16 per share - diluted) which consisted
of a gain on the sale of Sunland Memorial Park, Inc., the write-off of the remaining goodwill of
Matthews Swedot AB and certain other non-operating charges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
/TABLE
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and related notes thereto. Also, see
"Cautionary Statement Regarding Forward-Looking Information" included in Part I
of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods indicated and the
percentage change in such income statement data from year to year.
Years Ended
September 30, Percentage Change
---------------------- -----------------
1998- 1997-
1998 1997 1996 1997 1996
---- ---- ---- ----- -----
Sales 100.0% 100.0% 100.0% 11.9% 10.0%
Gross profit 44.0 44.1 44.6 11.4 9.0
Operating profit 17.0 16.3 15.6 16.3 15.4
Income before taxes 17.5 17.1 19.5 15.0 (3.7)
Net income 10.6 10.4 11.8 14.7 (3.1)
Comparison of Fiscal 1998 and Fiscal 1997:
Sales for the year ended September 30, 1998 were $211.6 million and were
$22.4 million, or 11.9%, higher than sales of $189.2 million for the year ended
September 30, 1997. The sales increase for fiscal 1998 resulted from higher
sales in the Company's Graphics Imaging and Bronze segments. Sales for the
Graphics Imaging segment were $75.3 million, an increase of $17.5 million, or
30%, above fiscal 1997 primarily reflecting acquisitions completed during the
past two fiscal years. In fiscal 1997, the Company's acquisitions included the
purchase of Carolina Repro-Graphic ("Carolina") in May 1997 and a fifty percent
interest in Tukaiz Communications L.L.C. ("Tukaiz") in January 1997. In fiscal
1998, the Company's acquisitions included Western Plasti-Type, Inc. (October
1997), Allied Reprographics, Inc. (November 1997), Palomar Packaging, Inc.
(November 1997), S&N Graphics, Inc. (February 1998) and a fifty percent
interest in O.N.E. Color Communications, Inc. (May 1998). See "Acquisitions
and Dispositions" for further discussion. Bronze segment sales for the year
ended September 30, 1998 were $106.3 million, representing an increase of
$9.9 million, or 10%, over fiscal 1997. The higher level of sales for fiscal
1998 mainly reflected an increase in the unit volumes of bronze and granite
memorial products. In addition, sales of cremation equipment and
cremation-related products by the Company's wholly-owned subsidiary, Industrial
Equipment and Engineering Company ("IEEC"), increased for the year. Sales for
the Marking Products segment in fiscal 1998 were $30.1 million, representing a
decrease of $4.9 million, or 14%, below fiscal 1997. The decline, which was
expected, resulted from the sale of the segment's distribution operations in
Australia (August 1997) and France (February 1998), both of which had
historically produced marginal results for the Company. Sales for the
segment's North American operations increased 4% compared to fiscal 1997.
Excluding the effect of the divestitures in France and Australia, consolidated
sales for the Company increased 15% over fiscal 1997.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1998 and Fiscal 1997, continued:
Gross profit for the year ended September 30, 1998 was $93.1 million, or 44.0%
of sales, compared to $83.5 million, or 44.1% of sales, for the year ended
September 30, 1997. The increase in gross profit of $9.6 million, or 11.4%,
resulted from higher sales for the Graphics Imaging segment and increased sales
and an improvement in the gross margin percentage for the Bronze segment.
Marking Products gross profit for the year ended September 30, 1998 declined
from the prior year reflecting the divestitures of the segment's distribution
operations in Australia and France. Consolidated gross profit as a percent of
sales for fiscal 1998 was relatively consistent with the prior year. Gross
profit as a percent of sales for the Bronze segment increased for the year
reflecting improvements in sales volume and operating efficiencies. For the
Graphics Imaging and Marking Products segments, the gross profit percentage was
slightly lower for the year due to changes in product mix.
Selling and administrative expenses for the year ended September 30, 1998 were
$57.1 million, representing an increase of $4.5 million, or 8.6%, over
$52.6 million for the year ended September 30, 1997. The increase in selling
and administrative expenses from the prior year principally resulted from
acquisitions by the Graphics Imaging segment during the last two fiscal years.
In addition, selling costs for the Bronze segment were higher for the year
reflecting increased marketing and promotional expenses. Partially offsetting
these increases was a reduction in Marking Products selling and administrative
costs resulting from the sale of the segment's distribution operations in
Australia and France. Consolidated selling and administrative expenses were
27.0% of sales for fiscal 1998 compared to 27.8% for fiscal 1997.
Operating profit for the year ended September 30, 1998 was $35.9 million and
was $5.0 million, or 16.3%, higher than operating profit of $30.9 million for
fiscal 1997. The growth in the Company's operating profit for fiscal 1998
reflected increases in all three of the Company's business segments. Operating
profit for the Graphics Imaging segment was $6.9 million, representing an
increase of $1.4 million, or 25.5%, over the prior year. The increase was
primarily the result of the segment's acquisitions. Bronze segment operating
profit for the year ended September 30, 1998 was $26.0 million, representing an
increase of $3.4 million, or 15.2%, over fiscal 1997. The increase in Bronze
operating profit primarily reflected the segment's higher sales volume for the
year combined with improved cost-price relationships for some products.
Operating profit for the Marking Products segment also improved over last year
despite the sale of the segment's distribution operations in Australia and
France. The segment's operating profit was $3.0 million for the year ended
September 30, 1998, representing an increase of 7.2% over fiscal 1997 operating
profit of $2.8 million. The improvement, which represented the fifth
consecutive year of profit improvement for the segment, resulted from higher
sales combined with lower selling costs in the segment's North American
operations.
Investment income for the year ended September 30, 1998 was $2.5 million,
compared to $2.5 million for the year ended September 30, 1997. The Company's
average cash and investment balances were lower during fiscal 1998 as a result
of acquisitions and stock repurchases (See "Liquidity and Capital Resources").
The effect on investment income of the lower average cash and investment
balances was offset by a higher rate of return on investments.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1998 and Fiscal 1997, continued:
Interest expense for the year ended September 30, 1998 was $466,000, compared
to $337,000 for fiscal 1997. Interest expense was principally related to the
Company's capital lease obligations. Other income (deductions), net for the
year ended September 30, 1998 represented a net reduction in pre-tax income of
$382,000 compared to a net reduction of $318,000 for fiscal 1997.
Minority interest for the year ended September 30, 1998 related to the
Company's 50%-owned affiliate, Tukaiz Communications L.L.C., which was acquired
in January 1997.
The Company's effective tax rate for the year ended September 30, 1998 was
39.4%, compared to an effective rate of 39.2% for the year ended September 30,
1997. The difference between the Company's fiscal 1998 effective tax rate and
the Federal statutory rate of 35% primarily reflected the impact of state
income taxes.
Comparison of Fiscal 1997 and Fiscal 1996:
Sales for the year ended September 30, 1997 were $189.2 million and were
$17.2 million, or 10.0%, higher than sales of $172.0 million for the year ended
September 30, 1996. The increase for fiscal 1997 reflected higher sales in the
Company's Bronze and Graphics Imaging segments. Bronze segment sales were
$96.4 million for fiscal 1997 representing an increase of $11.9 million, or
14%, over fiscal 1996. The increase primarily reflected higher volume of
memorial products as well as sales by IEEC of crematories and cremation-related
products. Fiscal 1997 revenues of IEEC, which was acquired in March 1996, also
included sales of All Crematory Corporation, which was acquired in August 1996.
Sales for the Bronze segment increased over fiscal 1996 despite the absence of
Sunland Memorial Park, Inc. which was sold in January 1996. Graphics Imaging
segment sales for the year ended September 30, 1997 were $57.8 million,
representing an increase of $14.7 million, or 34%, over fiscal 1996. The sales
growth over fiscal 1996 resulted primarily from the acquisitions of Carolina
(May 1997) and a 50% interest in Tukaiz (January 1997). For the year ended
January 31, 1997, Tukaiz reported sales of $16.4 million and, for the year
ended December 31, 1996, Carolina reported sales of $3.7 million. Marking
Products sales for the year ended September 30, 1997 were $35.0 million
representing a decrease of $9.4 million, or 21%, below fiscal 1996. The
decrease in sales resulted from the sale of the segment's label printer
application business in September 1996 and the Company's decision in September
1996 to liquidate its German subsidiary. The label printer application
business had historically produced marginal results for the Company and the
German subsidiary had accumulated significant losses in previous years.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1997 and Fiscal 1996, continued:
Gross profit for the year ended September 30, 1997 was $83.5 million, or 44.1%
of sales, compared to $76.6 million, or 44.6% of sales, for fiscal 1996. The
increase in gross profit of $6.9 million, or 9.0%, was attributable to higher
gross profits in the Bronze and Graphics Imaging segments. Bronze gross profit
improved 15% as a result of higher sales of bronze memorials and the additional
sales related to the IEEC and All Crematory Corporation acquisitions. Bronze
gross profit as a percent of sales improved slightly for the year as a result
of the increased sales of memorial products. Gross profit for the Graphics
Imaging segment increased approximately 30% over fiscal 1996 as a result of the
acquisitions of Tukaiz and Carolina. Graphics Imaging gross profit as a
percent of sales declined for the year principally due to changes in product
mix. Marking Products gross profit declined 22% from fiscal 1996 as a result
of lower sales, but the segment's gross profit as a percent of sales remained
relatively unchanged.
Selling and administrative expenses for the year ended September 30, 1997 were
$52.6 million, representing an increase of $2.7 million, or 5.5%, over selling
and administrative expenses of $49.9 million for fiscal 1996. Selling and
administrative expenses for the Bronze segment increased over fiscal 1996
primarily reflecting the additions of IEEC and All Crematory Corporation.
Graphics Imaging expenses also increased for the year reflecting the
acquisitions of Tukaiz and Carolina. These increases were partially offset by
reductions in Marking Products selling and administrative costs due to the
disposition of the label printer application business and the liquidation of
the German subsidiary.
Operating profit for the year ended September 30, 1997 was $30.9 million and
was $4.1 million, or 15.4%, higher than fiscal 1996 operating profit of
$26.8 million. The increase in consolidated operating profit resulted from
improvements in all three of the Company's business segments. Operating profit
for the Bronze segment was $22.6 million for fiscal 1997 representing an
increase of $2.5 million, or 12%, over fiscal 1996 operating profit of
$20.1 million. The higher level of operating profit was due primarily to an
increase in the segment's sales of memorial and cremation products. Graphics
Imaging operating profit was $5.5 million for the year ended September 30, 1997
representing an increase of $1.3 million, or 31%, over fiscal 1996. The
increase over fiscal 1996 reflected the acquisitions of Tukaiz and Carolina.
Operating profit for the Marking Products segment was $2.8 million for fiscal
1997 representing an increase of approximately $300,000, or 13%, over fiscal
1996. The segment's operating profit improvement was due principally to the
absence of losses of the German subsidiary. Consolidated operating profit for
the year ended September 30, 1997 also reflected the favorable impact of
changes to the retiree medical plan. These changes, which provided additional
plan options while limiting future Company contributions to retiree benefits,
reduced net periodic postretirement benefit cost from fiscal 1996. This
reduction was partially offset by costs associated with the Company's
implementation of a 401(k) employee savings plan and related Company
contributions.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1997 and Fiscal 1996, continued:
Investment income for the year ended September 30, 1997 was $2.5 million,
representing a reduction of 5.4% from fiscal 1996 investment income of
$2.6 million. The slight decrease principally reflected fluctuations in the
average cash and investment position during fiscal 1997 as a result of the
Company's stock repurchase program and acquisitions.
Interest expense for the year ended September 30, 1997 was $337,000, compared
to $131,000 for fiscal 1996. The increase in interest expense for fiscal 1997
reflected the capital lease obligations assumed in connection with the
acquisition of Tukaiz.
Other income (deductions), net for the year ended September 30, 1997
represented a net reduction to pre-tax income of $318,000 compared to a net
increase of $4.3 million for fiscal 1996. Other income for fiscal 1996
included a $9.4 million pre-tax gain on the sale of Sunland Memorial Park, Inc.
This gain was partially offset by the write-off of the remaining goodwill with
respect to the Company's investment in its Swedish subsidiary and a charge for
certain other non-operating expenses during the year.
The Company's effective tax rate for the year ended September 30, 1997 was
39.2% compared to 39.6% for fiscal 1996. The decline from fiscal 1996
primarily reflected changes in the effect of foreign taxes. The difference
between the Company's effective tax rate and the Federal statutory rate of 35%
primarily reflected the impact of state and foreign income taxes.
Comparison of Fiscal 1996 and Fiscal 1995:
Sales for the year ended September 30, 1996 were $172.0 million and were
$5.3 million, or 3.1%, higher than sales of $166.7 million for the year ended
September 30, 1995. The increase in fiscal 1996 principally resulted from
higher sales in the Bronze segment and slight increases in the Graphics Imaging
and Marking Products segments. Bronze segment sales for the year were up
$4.5 million, or 5.6% over fiscal 1995 despite the sale of Sunland Memorial
Park, Inc. ("Sunland") in January 1996. Sunland sales were 6.5% of the
segment's total sales in fiscal 1995. Fiscal 1996 Bronze segment sales
reflected increases in both price and unit volume as well as additional sales
from IEEC which was acquired in March 1996, and All Crematory Corporation,
which was acquired in August 1996. Sales for the Graphics Imaging segment
increased $700,000, or 1.7%, over fiscal 1995. Marking Products sales in
fiscal 1996 were up less than 1.0% over the prior year. The segment's
international sales increased 5% over fiscal 1995 reflecting higher demand in
Europe and Australia which more than offset a decline in North American sales.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1996 and Fiscal 1995, continued:
Gross profit for the year ended September 30, 1996 was $76.6 million, or 44.6%
of sales, compared to $74.7 million, or 44.8% of sales, for the year ended
September 30, 1995. The increase in gross profit of $1.9 million, or 2.6%, was
attributable principally to higher gross profit in the Bronze segment. Bronze
segment gross profit increased as a result of higher sales and its gross profit
percentage improved slightly over the prior year. Graphics Imaging gross
profit improved slightly from the prior year also reflecting its higher sales
for the year. Marking Products gross profit for year ended September 30, 1996
was approximately 2.0% lower than fiscal 1995 reflecting lower sales in North
America and lower margins in Germany.
Selling and administrative expenses for the year ended September 30, 1996 were
$49.9 million, representing a decrease of $400,000 from $50.3 million for the
year ended September 30, 1995. The reduction in selling and administrative
costs for fiscal 1996 reflected the absence of Sunland, which was sold in
January 1996, and the discontinuance of the Company's Italian operations
effective November 1, 1995. North American selling costs of the Marking
Products segment also declined for the period on lower sales volume. Higher
sales and marketing costs in the Bronze and Graphics Imaging segments and the
selling and administrative costs of Industrial Equipment and Engineering
Company, Inc. partially offset these declines.
Operating profit for the year ended September 30, 1996 was $26.8 million and
was $2.3 million, or 9.5%, higher than operating profit of $24.5 million for
the year ended September 30, 1995. The higher operating profit for fiscal 1996
principally reflected increases in the Bronze and Marking Products segments.
The Bronze segment recorded the largest increase, $1.9 million, or 10.5% over
fiscal 1995, due principally to higher sales and related gross profit.
Operating profit improvement for the Marking Products segment reflected the
increase in international sales combined with lower North American selling
expenses. Graphics Imaging operating profit was relatively unchanged from
fiscal 1995.
Investment income for the year ended September 30, 1996 was $2.6 million
compared to $1.6 million for fiscal 1995. The increase reflected the Company's
higher cash and investment position during fiscal 1996 and a higher rate of
return (see "Liquidity and Capital Resources"). Interest expense for the year
ended September 30, 1996 was $131,000, compared to $105,000 for fiscal 1995.
Interest expense primarily related to the Company's capital lease obligations.
Other income (deductions), net for the year ended September 30, 1996
represented a net increase to pre-tax income of $4.3 million compared to a net
reduction of $894,000 for fiscal 1995. Other income for fiscal 1996 primarily
included a $9.4 million pre-tax gain on the sale of Sunland which was partially
offset by the write-off of the remaining goodwill with respect to the Company's
investment in its Swedish subsidiary and a charge for certain other
non-operating expenses during the year.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1996 and Fiscal 1995, continued:
The Company's effective tax rate for the year ended September 30, 1996 was
39.6%, compared to 38.4% for fiscal 1995. The higher effective tax rate for
fiscal 1996 primarily reflected the impact of foreign tax expense on the
Company's consolidated tax position. The difference between the Company's
effective tax rate and the Federal statutory rate of 35% primarily reflected
the impact of state and foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow from operations was $34.8 million for the year ended September 30,
1998, compared to $37.5 million for fiscal 1997 and $19.2 million for fiscal
1996. Operating cash flow for the year ended September 30, 1998 primarily
reflected the Company's net income of $22.5 million adjusted for non-cash
charges such as depreciation and amortization and increases in the Company's
compensation-related accruals. Fiscal 1997 operating cash flow reflected net
income for the year in addition to the effect of changes in the various
components of working capital, principally a significant increase in customer
prepayments. Operating cash flow for the year ended September 30, 1996 resulted
from net income for the year adjusted to exclude the effects of the pre-tax
gain on the sale of Sunland and the write-off of the remaining goodwill with
respect to the Company's investment in its Swedish subsidiary and a charge for
certain other non-operating expenses during the year.
Cash used in investing activities was $5.7 million for the year ended
September 30, 1998, compared to $7.7 million for fiscal 1997 and $34.2 million
for fiscal 1996. Investing activities for fiscal 1998 included $16.2 million
cash used for acquisitions, including Gibraltar Mausoleum Construction Company,
Inc. ($10.0 million) and O.N.E. Color Communications, Inc. ($2.0 million). See
"Acquisitions and Dispositions" for further discussion. In addition, investing
activities for the year ended September 30, 1998 included proceeds from the net
disposition of investments of $16.8 million.
Investing activities for fiscal 1997 included the acquisitions of Carolina in
May 1997 and a 50% interest in Tukaiz in January 1997 (See "Acquisitions and
Dispositions"). Fiscal 1997 investing activities also reflected net proceeds
from investments of $5.1 million. Investing activities for the year ended
September 30, 1996 included net investments of $36.8 million in securities of
the U.S. government and its agencies and corporate obligations. The
investments were designed to improve the rate of return on the Company's excess
cash position while maintaining a sufficient degree of liquidity for future
cash needs. Investing activities in fiscal 1996 also included the acquisitions
of IEEC and All Crematory Corporation and the disposition of Sunland (See
"Acquisitions and Dispositions"). In addition, fiscal 1996 investments
included the acquisition (for $1.6 million cash and 38,572 shares of Matthews
International Corporation Class A Common Stock) of 49% of the common stock of
Applied Technology Developments, Ltd., a British manufacturer of impulse
ink-jet printing equipment.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LIQUIDITY AND CAPITAL RESOURCES, continued:
Capital expenditures were $7.3 million for the year ended September 30, 1998,
compared to $6.2 million and $5.4 million for fiscal 1997 and 1996,
respectively. Capital expenditures in the last three fiscal years reflected
reinvestment in each of the Company's industry segments and were made primarily
for the purchase of new manufacturing machinery, equipment and facilities
designed to improve product quality, increase manufacturing efficiency, lower
production costs and meet regulatory requirements. Capital expenditures for
all three years were primarily financed through operating cash and the related
assets are unencumbered. Capital spending for property, plant and equipment
has averaged $6.3 million for the last three fiscal years. The capital budget
for fiscal 1999 is $10.9 million. The Company expects to generate sufficient
cash from operations to fund all anticipated capital spending projects.
Investing activities also included collections on notes receivable from
designated officers and employees for the purchase of the Company's common
stock under the Employees' Stock Purchase Plan. Collections under such loans
were $459,000, $492,000 and $1.4 million in fiscal 1998, 1997 and 1996,
respectively.
Cash used in financing activities for the year ended September 30, 1998 was
$23.1 million, compared to $21.7 million in fiscal 1997 and $11.9 million in
fiscal 1996. Financing activities for fiscal 1998 consisted of net treasury
stock purchases of $19.1 million, the Company's cash dividends on common stock
of $2.8 million ($.1725 per share) and repayments under the Company's capital
lease agreements of $1.2 million. Financing activities in fiscal 1997 included
net treasury stock purchases totaling $14.4 million, payments of $4.5 million
on long-term debt and capital lease obligations assumed in the acquisition of
Tukaiz, and dividends on common stock of $2.8 million ($.1625 per share). Cash
used in financing activities for the year ended September 30, 1996 was
$11.9 million, principally reflecting net treasury stock purchases of
$8.9 million and dividends on common stock of $2.6 million ($.145 per share).
In April 1998, the Company announced the continuation of its stock repurchase
program. Previously, the Company's Board of Directors had approved
repurchasing a total of 2,000,000 shares (adjusted for the stock split) of
Matthews Class A and Class B Common Stock, which has been completed. The
current authorization allows the Company to purchase up to an additional
1,000,000 shares. The buy-back program, which originated in fiscal 1996, is
designed to increase shareholder value, enlarge the Company's holdings of its
Class A and Class B Common Stock, and add to earnings per share. Repurchased
shares may be retained in treasury, utilized for acquisitions, or reissued to
employees or other purchasers, subject to the restrictions of the Restated
Articles of Incorporation.
The Company has a Revolving Credit and Term Loan Agreement. Under terms of the
agreement, the Company may borrow principal amounts up to $10.0 million in the
aggregate at various interest rate options approximating current market rates.
The Revolving Credit and Term Loan Agreement requires the Company to maintain
minimum levels of consolidated working capital and tangible net worth. At
September 30, 1998, 1997 and 1996, no amounts were outstanding under this
agreement.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LIQUIDITY AND CAPITAL RESOURCES, continued:
The Company has a line of credit of $500,000 in Canadian dollars which provides
for borrowings at the bank's prime interest rate. The Company has a foreign
exchange line of credit of $200,000 for standby letters of credit to support
performance guarantees. The Company also maintains a multi-currency line of
credit with a bank for 6.0 million French francs. The multi-currency line of
credit bears interest at various rates based on market as determined by the
bank. Tukaiz has a line of credit of $1.5 million which bears interest at the
bank's prime rate. Compensating balances of approximately $39,000 and $43,000
were maintained by the Company at September 30, 1998 and 1997, respectively, in
connection with the various lines of credit. There were no borrowings
outstanding on the various lines of credit at September 30, 1998 and 1997.
Consolidated working capital of the Company was $33.3 million at September 30,
1998 compared to $31.0 million and $30.8 million at September 30, 1997 and
1996, respectively. Cash and cash equivalents were $25.4 million at
September 30, 1998 compared to $20.0 million and $12.4 million at September 30,
1997 and 1996, respectively. The Company's current ratio at September 30, 1998
was 1.8, compared to 1.9 and 2.2 at September 30, 1997 and 1996, respectively.
YEAR 2000 ISSUE
The Company has assessed the potential impact of the Year 2000 issue on its
operations and information systems. Costs incurred to date for this assessment
and for systems modifications required to address any Year 2000 issues have not
been material. Based on management's assessment, the Year 2000 issue is not
expected to have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
ACQUISITIONS AND DISPOSITIONS:
On October 1, 1997, the Company acquired for $480,000 cash the assets of
Western Plasti-Type Co. ("Western"). On November 4, 1997, the Company acquired
the common stock of Allied Reprographics, Inc. ("Allied") for $700,000 cash.
Both Western and Allied are printing plate manufacturers located in Denver,
Colorado. On November 3, 1997, the Company acquired for $1.4 million cash the
assets of Palomar Packaging, Inc. ("Palomar"), a manufacturer of printing
plates and steel-rule cutting dies, located near San Diego, California. An
additional amount up to $880,000 may be payable for Palomar during the
five-year period from the acquisition date contingent on the attainment of
certain operating performance levels. On February 20, 1998, the Company
acquired for $1,600,000 cash certain assets of S&N Graphics, Inc., a St. Louis,
Missouri manufacturer of printing plates and other marking devices.
The acquisitions of Western and Allied are designed to provide Matthews with a
presence in the Colorado and surrounding markets which were not previously
served by the Company. The acquisition of Palomar is designed to increase
Matthews' presence in the growing marketplace for packaged products in southern
California and northern Mexico. The acquisition of S&N Graphics, Inc. is
designed to increase Matthews' share of the St. Louis marketplace for prepress
and printing plates in the flexible and corrugated packaging industries.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS AND DISPOSITIONS, continued:
On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color
Communications, Inc., a digital graphics service company. The transaction was
structured as an asset purchase with the purchase price consisting of
$2,000,000 cash and the assumption of a fifty percent interest in certain
liabilities of O.N.E. Color Communications, Inc. An additional amount is
payable by Matthews three years from the acquisition date contingent on the
attainment of certain operating performance levels of the new company, with
such payout to be not less than $400,000. Matthews and the shareholders of
O.N.E. Color Communications, Inc. have each contributed their respective fifty
percent interests into a newly-formed California limited liability company,
O.N.E. Color Communications, L.L.C. ("O.N.E.").
In addition, the purchase agreement requires Matthews to purchase the remaining
fifty percent interest in O.N.E. no later than May 2004. The purchase price
for the remaining interest is contingent on the attainment of certain operating
performance levels of the new company with such payment to be not less than
$4.5 million. The accounts of O.N.E. have been included in the consolidated
financial statements of Matthews and a liability has been recorded for the
present value of the minimum future payouts. O.N.E., with annual sales of
approximately $10 million, is headquartered in Oakland, California and was
formed 83 years ago. O.N.E. provides digital graphic services to advertising
agencies and packaging markets. The combination of Matthews and O.N.E. is an
integral part of Matthews' strategy to become a worldwide leader in advanced
applications of digital graphics.
On September 19, 1998, Matthews acquired for 11.6 million German Marks
(U.S.$6.9 million) fifty percent of the capital stock of S+T Gesellschaft fur
Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany,
consist principally of flexographic printing preparation and the manufacture of
photopolymer printing forms for the packaging industry. The remaining fifty
percent will continue to be owned by the existing president of S+T. The cash
payment is due January 2000 and is subject to reduction if S+T's calendar year
1999 operating results are below the calendar year 1997 level. In addition,
Matthews has a call option to acquire an additional thirty percent interest in
S+T at a purchase price contingent on the future operating performance of S+T.
The results of S+T will be reflected in the financial statements of Matthews
under the equity method of accounting. The combination of Matthews and S+T is
an important part of Matthews strategy to become a worldwide leader in the
graphics industry and serve existing multinational customers on a global basis.
In October 1998, the Company entered into a foreign currency forward contract
with a financial institution for the purchase of German Marks to hedge its
January 2000 payment commitment for the investment in S+T. In November 1998,
the Company also entered into a letter of credit agreement with a financial
institution to guarantee performance under this payment commitment.
Effective September 30, 1998, Matthews purchased for $10.0 million cash the
assets of Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"), a
subsidiary of Service Corporation International. Gibraltar, with annual sales
of approximately $16 million, is headquartered in Indianapolis, Indiana and is
a leading builder of mausoleums in the United States. The acquisition of
Gibraltar is intended to expand Matthews products and services in the growing
segments in the memorial industry of cremation and mausoleum entombment.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS AND DISPOSITIONS, continued:
On January 31, 1997, Matthews acquired fifty percent of Tukaiz Litho, Inc.
("Tukaiz"), a pre-press and pre-media firm headquartered in Franklin Park,
Illinois. A pre-press firm prepares art or digital files for printing or
reproduction. The remaining fifty percent continues to be owned by the
president of Tukaiz. The transaction was structured as an asset purchase with
the purchase price consisting of $4.0 million cash and the assumption of a
fifty percent interest, approximately $4.0 million, in certain of the
liabilities of Tukaiz. The parties each contributed their respective fifty
percent interests into a newly-formed Illinois limited liability company,
Tukaiz Communications, L.L.C. Matthews also provided the new company with
subordinated convertible debt of $5.5 million. Tukaiz reported sales of
$16.4 million for the year ended January 31, 1997. The accounts of Tukaiz
Communications L.L.C. have been included in the consolidated financial
statements of Matthews. The combination of the Company's Graphics Imaging
business and Tukaiz is designed to create a leader in the graphics industry,
providing a unique array of pre-press and pre-media services to ad agencies,
manufacturers, printers and publishers. These services include creative
design, audio, video, animation, multimedia, digital photography, web-site
service and on-demand digital printing.
On May 23, 1997, Matthews acquired for $2.4 million cash the common stock of
both Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press
services, flexible printing plates and steel rule cutting dies, located in
North Carolina. The acquisitions are expected to increase Matthews' market
share for these products in the southeast region of the United States.
Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were approximately
$3.7 million for the year ended December 31, 1996.
On March 25, 1996, Matthews acquired Industrial Equipment and Engineering
Company, Inc. ("IEEC"), a Florida corporation, for 427,724 shares of Matthews
Class A Common Stock (valued at $5.4 million) and $3.6 million cash. Sales of
IEEC for the year ended December 31, 1995 were $7.5 million. On August 1,
1996, IEEC acquired for cash substantially all of the assets and certain of the
liabilities of All Crematory Corporation. The total purchase price, including
the assumption of liabilities, was $2.0 million. Sales of All Crematory
Corporation for the year ended September 30, 1995 were $3.4 million. These
acquisitions provide Matthews International Corporation with the opportunity to
further participate in the increasing world-wide trend of cremation and expand
its range of products and services to the deathcare industry.
The Company has accounted for the aforementioned acquisitions using the
purchase method and, accordingly, recorded the acquired assets and liabilities
at their estimated fair values at the acquisition dates. The excess of the
purchase price over the fair value of the net assets has been recorded as
goodwill to be amortized on a straight-line basis over periods ranging from 15
to 25 years. For the acquisition of S+T, the excess of the purchase price over
the fair value of the net assets will be amortized on a straight-line basis
over 25 years as a charge to equity income.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS AND DISPOSITIONS, continued:
On January 5, 1996, Matthews sold for $13.1 million cash its cemetery and
mortuary facility (Sunland Memorial Park, Inc.) in Sun City, Arizona to Service
Corporation International. Matthews recorded a pre-tax gain in the fiscal 1996
second quarter of $9.4 million on the sale which was recorded in other income.
Sunland Memorial Park, Inc., which was purchased in 1982, was the only such
facility owned by the Company. The facility had sales in fiscal 1995 of
approximately $5.0 million, representing about three percent of the
consolidated sales of the Company.
In September 1996, the Company authorized the liquidation of its German
subsidiary and recorded a pre-tax charge to other expense of $1.2 million in
connection with the transaction. The transaction had no impact on the
Company's fiscal 1996 net income due to the tax benefits related to the
write-off of an intercompany loan and investment. The German subsidiary had
sales of $4.2 million with an operating loss of approximately $1.0 million in
fiscal 1996.
STOCK SPLIT
On May 5, 1998, the Board of Directors declared a two-for-one stock split on
the Company's Class A and Class B common stock in the form of a 100% stock
distribution. The stock distribution was issued June 2, 1998 to shareholders
of record on May 15, 1998. Shareholders' equity has been adjusted for the
stock split by reclassifying from additional paid-in capital and retained
earnings to common stock the par value of the additional shares arising from
the split. All per share amounts and numbers of shares have been adjusted in
this report to reflect the stock split.
FASB PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The pronouncement establishes standards for reporting and display of
comprehensive income and its components. The Statement requires that items of
other comprehensive income be classified by their nature in a financial
statement and the accumulated balance of other comprehensive income be
displayed separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. The required
presentation will be adopted by the Company in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The pronouncement establishes standards
for reporting information about operating segments of an enterprise. The
pronouncement requires the disclosure of selected segment information in
interim financial reports. SFAS No. 131 will not impact the current
presentation of the Company's segment information. The interim presentation
requirement of the pronouncement will be adopted by the Company in the first
quarter of fiscal 2000.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Description Pages
- ----------- -----
Report of Independent Accountants 27
Consolidated Balance Sheet 28-29
Consolidated Statement of Income 30
Consolidated Statement of Shareholders' Equity 31
Consolidated Statement of Cash Flows 32
Notes to Consolidated Financial Statements 33-52
Supplementary Financial Information 53
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Matthews International Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Matthews
International Corporation and subsidiaries at September 30, 1998 and 1997, and
the results of its operations and its cash flows for each of the three years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
November 19, 1998
28
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998 and 1997
----------
ASSETS 1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 25,369,834 $ 19,958,712
Short-term investments 229,903 3,090,507
Accounts receivable 32,892,094 30,054,396
Inventories (Note 3) 16,751,793 11,766,205
Deferred income taxes 931,020 865,082
Other current assets 1,053,033 1,354,549
---------- ----------
Total current assets 77,227,677 67,089,451
Investments (Note 4) 24,250,799 30,771,594
Property, plant and equipment, net (Note 5) 44,730,376 42,483,743
Deferred income taxes (Note 12) 8,207,623 6,160,927
Other assets 5,797,811 6,155,554
Goodwill, net of accumulated amortization of
$3,169,803 and $2,429,697, respectively 26,991,478 16,543,121
----------- -----------
$187,205,764 $169,204,390
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
29
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
September 30, 1998 and 1997
----------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
---- ----
Current liabilities:
Long-term debt, current maturities $ 800,252 $ 850,533
Trade accounts payable 6,901,044 5,854,582
Accrued compensation 8,299,442 4,505,358
Accrued vacation pay 3,855,552 3,198,676
Profit distribution to employees 4,069,514 3,540,965
Accrued income taxes 3,942,617 2,999,511
Customer prepayments 7,441,088 8,892,467
Postretirement benefits, current portion 749,136 626,925
Other current liabilities 7,847,924 5,578,066
---------- ----------
Total current liabilities 43,906,569 36,047,083
Long-term debt (Note 6) 1,434,679 2,151,413
Estimated finishing costs 3,831,674 3,309,098
Postretirement benefits other than pensions (Note 11) 20,082,548 20,676,282
Other liabilities (Note 16) 13,639,998 2,854,439
Commitments and contingent liabilities (Note 13)
Shareholders' equity (Notes 2, 7 and 8):
Common stock:
Class A, $1.00 par value, authorized 70,000,000
shares, 14,414,944 and 13,769,718 shares issued
at September 30, 1998 and 1997, respectively 14,414,944 6,884,859
Class B, $1.00 par value, authorized 30,000,000
shares, 3,752,052 and 4,397,278 shares issued
at September 30, 1998 and 1997, respectively 3,752,052 2,198,639
Preferred stock, $100 par value, authorized 10,000
shares, none issued - -
Additional paid-in capital - 6,688,414
Retained earnings 131,061,637 115,179,462
Other shareholders' equity (4,843,157) (4,346,430)
Treasury stock, 2,156,584 and 1,426,566 shares at
September 30, 1998 and 1997, respectively, at cost (40,075,180) (22,438,869)
----------- -----------
Total shareholders' equity 104,310,296 104,166,075
----------- -----------
$187,205,764 $169,204,390
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
30
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the years ended September 30, 1998, 1997 and 1996
----------
1998 1997 1996
---- ---- ----
Sales $211,622,057 $189,168,640 $171,977,619
Cost of goods sold 118,571,835 105,667,754 95,336,719
----------- ----------- -----------
Gross profit 93,050,222 83,500,886 76,640,900
Selling expense 33,646,395 31,651,446 31,495,111
Administrative expense 23,474,883 20,962,045 18,374,409
----------- ----------- -----------
Operating profit 35,928,944 30,887,395 26,771,380
Investment income 2,511,552 2,486,357 2,628,747
Interest expense (466,304) (337,375) (131,364)
Other income (deductions), net (380,860) (317,961) 4,253,853
Minority interest (461,049) (420,519) -
----------- ----------- -----------
Income before income taxes 37,132,283 32,297,897 33,522,616
Income taxes (Note 12) 14,630,591 12,671,833 13,265,062
----------- ----------- -----------
Net income $ 22,501,692 $ 19,626,064 $ 20,257,554
=========== =========== ===========
Earnings per share (Notes 2 and 9):
Basic $ 1.38 $ 1.14 $ 1.14
==== ==== ====
Diluted $ 1.34 $ 1.11 $ 1.11
==== ==== ====
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
31
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1998, 1997 and 1996
----------
Common Additional Other
Stock Paid-in Retained Shareholders' Treasury
(Note 7) Capital Earnings Equity Stock Total
---------- ---------- ----------- ----------- ----------- ----------
Balance, September 30, 1995 $8,850,350 $ 1,844,092 $ 80,690,206 $(4,586,244) $ - $ 86,798,404
Net income - - 20,257,554 - - 20,257,554
Treasury stock transactions:
Purchase of 671,464 shares - - - - (9,247,272) (9,247,272)
Sale of 10,000 shares - 1,769 - - 106,200 107,969
Issuance of 23,628 shares under
stock plans (Note 8) - (74,695) - - 334,250 259,555
Issuance of 466,296 shares for
acquisitions (Notes 4 and 16) 233,148 5,694,843 - - - 5,927,991
Dividends, $.145 per share - - (2,580,103) - - (2,580,103)
Other changes, net - - - 934,945 - 934,945
---------- ---------- ----------- --------- ---------- -----------
Balance, September 30, 1996 9,083,498 7,466,009 98,367,657 (3,651,299) (8,806,822) 102,459,043
Net income - - 19,626,064 - - 19,626,064
Treasury stock transactions:
Purchase of 1,030,018 shares - - - - (17,189,821) (17,189,821)
Issuance of 241,288 shares
under stock plans (Note 8) - (777,595) - - 3,557,774 2,780,179
Dividends, $.1625 per share - - (2,814,259) - - (2,814,259)
Other changes, net - - - (695,131) - (695,131)
---------- ---------- ----------- --------- ---------- -----------
Balance, September 30, 1997 9,083,498 6,688,414 115,179,462 (4,346,430) (22,438,869) 104,166,075
Net income - - 22,501,692 - - 22,501,692
Treasury stock transactions:
Purchase of 1,034,384 shares - - - - (23,069,770) (23,069,770)
Issuance of 304,366 shares
under stock plans (Note 8) - (1,144,117) (287,282) - 5,433,459 4,002,060
Stock split, two-for-one (Note 2) 9,083,498 (5,544,297) (3,539,201) - - -
Dividends, $.1725 per share - - (2,793,034) - - (2,793,034)
Other changes, net - - - (496,727) - (496,727)
---------- ---------- ----------- --------- ---------- -----------
Balance, September 30, 1998 $18,166,996 $ - $131,061,637 $(4,843,157) $(40,075,180) $104,310,296
========== ========== =========== ========= ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
32
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended September 30, 1998, 1997 and 1996
----------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $22,501,692 $19,626,064 $20,257,554
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,033,101 6,047,085 7,334,669
Change in deferred taxes (2,201,507) 80,349 (558,999)
Changes in working capital items (Note 14) 5,742,946 10,050,004 2,301,488
(Increase) decrease in other non-current assets 381,243 1,125,185 (1,378,517)
Increase in estimated finishing costs 522,576 354,799 156,284
Increase (decrease) in other liabilities 72,462 877,767 (287,921)
Increase (decrease) in postretirement benefits (471,523) (647,793) 894,131
(Gain) loss on sale of property, plant and equipment (55,818) 192,529 (80,686)
Gain on sale of subsidiary - - (9,409,058)
Net (gain) loss on investments 60,657 50,164 (33,756)
Effect of exchange rate changes on operations 197,107 (219,407) (10,517)
---------- ---------- ----------
Net cash provided by operating activities 34,782,936 37,536,746 19,184,672
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (7,332,691) (6,164,630) (5,378,053)
Proceeds from sales of property, plant and equipment 549,731 574,029 472,697
Acquisitions, net of cash acquired (16,221,247) (7,766,275) (5,182,055)
Proceeds from sale of subsidiary - - 13,070,853
Investments (1,773,193) (4,018,535) (43,735,439)
Proceeds from disposition of investments 18,576,625 9,146,833 5,225,068
Collections on loans to officers and employees 458,971 491,623 1,361,769
---------- ---------- ----------
Net cash used in investing activities (5,741,804) (7,736,955) (34,165,160)
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term debt (1,190,620) (4,474,258) (433,465)
Proceeds from the sale of treasury stock 4,002,060 2,780,179 367,524
Purchases of treasury stock (23,069,770) (17,189,821) (9,247,272)
Dividends (2,793,034) (2,814,259) (2,580,103)
---------- ---------- ----------
Net cash used in financing activities (23,051,364) (21,698,159) (11,893,316)
---------- ---------- ----------
Effect of exchange rate changes on cash (578,646) (561,638) 88,512
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 5,411,122 7,539,994 (26,785,292)
Cash and cash equivalents at beginning of year 19,958,712 12,418,718 39,204,010
---------- ---------- ----------
Cash and cash equivalents at end of year $25,369,834 $19,958,712 $12,418,718
========== ========== ==========
Cash paid during the year for:
Interest $ 466,304 $ 337,375 $ 131,364
Income taxes 14,436,012 10,458,745 13,523,856
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
33
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. NATURE OF OPERATIONS:
Matthews International Corporation, founded in 1850 and incorporated in
Pennsylvania in 1902, is a designer, manufacturer and marketer principally of
custom-made identification products. The Company's products and operations are
comprised of three business segments: Bronze, Graphics Imaging and Marking
Products. The Bronze segment is a leading manufacturer of cast bronze memorial
products, crematories and cremation-related products and a leading builder of
mausoleums. The Graphics Imaging segment manufactures and provides printing
plates, pre-press services and imaging systems for the corrugated and flexible
packaging industries. The Marking Products segment designs, manufactures and
distributes marking equipment and consumables used by customers for identifying
various consumer and industrial products and containers.
The Company has sales and manufacturing facilities in the United States,
Canada, Australia, Sweden and Germany.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include all majority-owned foreign and
domestic subsidiaries. The consolidated financial statements also include the
accounts of two of the Company's 50%-owned affiliates, Tukaiz Communications,
L.L.C. and O.N.E. Color Communications, L.L.C. (See Note 16). All intercompany
accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Split:
On May 5, 1998, the Board of Directors declared a two-for-one stock split on
the Company's Class A and Class B Common Stock in the form of a 100% stock
distribution. The stock distribution was issued June 2, 1998 to shareholders
of record on May 15, 1998. Shareholders' equity has been adjusted for the
stock split by reclassifying from additional paid-in capital and retained
earnings to common stock the par value of the additional shares arising from
the split. All per share amounts and numbers of shares have been adjusted in
this report to reflect the stock split.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Foreign Currency:
Balance sheet accounts for foreign subsidiaries are translated into U.S.
dollars at current exchange rates in effect at the consolidated balance sheet
date. Gains or losses that result from this process are recorded in other
shareholders' equity. The cumulative translation adjustment at September 30,
1998 and 1997 was a reduction in shareholders' equity of $4,243,290 and
$3,148,584, respectively. The revenue and expense accounts of foreign
subsidiaries are translated into U.S. dollars at the average exchange rates
that prevailed during the period.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Company considers
all investments purchased with a remaining maturity of three months or less to
be cash equivalents. The carrying amount of cash and cash equivalents
approximates fair value due to the short-term maturities of these instruments.
At September 30, 1998, a significant portion of the Company's cash and cash
equivalents were invested with one financial institution.
Inventories:
Inventories are stated at the lower of cost or market with cost generally
determined under the average cost method.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is computed
primarily on the straight-line method over the estimated useful lives of the
assets. Gains or losses from the disposition of assets are generally included
in other income or other deductions from income. The cost of maintenance and
repairs is charged against income as incurred. Renewals and betterments of a
nature considered to extend the useful lives of the assets are capitalized.
Goodwill:
Goodwill, which represents the excess of cost over the estimated fair value of
net assets of acquired businesses, is amortized using the straight-line method
over periods ranging from 10 to 25 years. Management periodically evaluates
the net realizable value of goodwill and, based on such analysis, goodwill will
be reduced if considered necessary. During the second quarter of fiscal 1996,
the Company wrote off the remaining goodwill ($2,288,000) of its subsidiary,
Matthews Swedot AB.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Estimated Finishing Costs:
Estimated costs for finishing have been provided for bronze memorials, vases
and granite bases which have been manufactured, sold to customers and placed in
storage for future delivery.
Treasury Stock:
Treasury stock is carried at cost. The cost of treasury shares sold is
determined under the average cost method. At September 30, 1998, treasury
stock consisted of 1,297,479 shares of Class A Common Stock and 859,105 shares
of Class B Common Stock. At September 30, 1997, treasury stock consisted of
797,370 shares of Class A Common Stock and 629,196 shares of Class B Common
Stock.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. Deferred income taxes for U.S. tax purposes have not been provided on
the undistributed earnings of foreign subsidiaries, as such earnings are
considered to be reinvested indefinitely. At September 30, 1998, undistributed
earnings for which deferred U.S. income taxes have not been provided
approximated $2,300,000. Determination of the amount of unrecognized U.S.
deferred tax liability on these unremitted earnings is not practical as any
taxes paid upon distribution to the Company would be offset, at least in part,
by foreign tax credits under U.S. tax regulations.
Research and Development Expenses:
Research and development costs are expensed as incurred and approximated
$1,659,000, $1,814,000 and $1,997,000 for the years ended September 30, 1998,
1997 and 1996, respectively.
Earnings Per Share:
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding. Diluted earnings per share assumes the
issuance of common stock for all dilutive securities.
Revenue Recognition:
Revenues of the Company are generally recognized at the time of product
shipment.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
3. INVENTORIES:
Inventories at September 30 consisted of the following:
1998 1997
---- ----
Materials and finished goods $15,114,759 $10,482,503
Labor and overhead in process 1,248,815 803,815
Supplies 388,219 479,887
---------- ----------
$16,751,793 $11,766,205
========== ==========
Materials and finished goods at September 30, 1998 included approximately
$4,100,000 of mausoleum work-in-process in connection with the Company's
acquisition of Gibraltar Mausoleum Construction Company, Inc. (Note 16).
4. INVESTMENTS:
Investment securities are recorded at estimated market value at the
consolidated balance sheet date and are classified as available-for-sale.
Short-term investments consisted principally of corporate obligations with
purchased maturities of over three months but less than one year. The cost of
short-term investments approximated market value at September 30, 1998 and
1997. Accrued interest on all investment securities was also classified with
short-term investments. The following investments were classified as
non-current and consisted of securities with purchased maturities intended to
range from one to five years.
Book Value Gross Gross
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
---------- ---------- ---------- ---------
September 30, 1998:
- ------------------
U.S. government and
its agencies $ 6,001,959 $172,598 $ - $ 6,174,557
Corporate obligations 8,012,563 152,330 11,233 8,153,660
Other 211,564 - - 211,564
---------- ------- ------- ----------
Total $14,226,086 $324,928 $ 11,233 $14,539,781
========== ======= ======= ==========
September 30, 1997:
- ------------------
U.S. government and
its agencies $14,002,207 $ 26,417 $ 77,577 $13,951,047
Corporate obligations 14,293,361 4,354 87,195 14,210,520
Other 23,105 - - 23,105
---------- ------ ------- ----------
Total $28,318,673 $ 30,771 $164,772 $28,184,672
========== ====== ======= ==========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
4. INVESTMENTS, continued:
Unrealized gains and losses on investment securities, including related
deferred taxes, are reflected in other shareholders' equity. Realized gains
and losses are based on the specific identification method and are recorded in
investment income. Realized gains for fiscal 1998 were $39,716. Realized
losses for fiscal 1997 and 1996 were $94,683 and $38,802, respectively. Bond
premiums and discounts are amortized on the straight-line method which does not
significantly differ from the interest method.
Investments also included the Company's interest in the following affiliates
(ownership interest is noted in parentheses):
1998 1997
---- ----
S+T Gesellschaft fur Reprotechnik mbH (50%) $ 7,090,261 $ -
Applied Technology Developments, Ltd. (49%) 2,340,872 2,326,840
Other (less than 20%) 279,885 260,082
---------- ----------
$ 9,711,018 $ 2,586,922
========== ==========
Investments in S+T Gesellschaft fur Reprotechnik mbH and Applied Technology
Developments, Ltd. are recorded under the equity method of accounting. Income
under the equity method of accounting is recorded in investment income.
Investments with ownership interests less than 20% are recorded under the cost
method of accounting.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and the related accumulated depreciation at
September 30 were as follows:
1998 1997
---- ----
Buildings $21,472,410 $21,496,235
Machinery and equipment 52,324,284 46,977,825
---------- ----------
73,796,694 68,474,060
Less accumulated depreciation 34,146,591 29,747,385
---------- ----------
39,650,103 38,726,675
Land 2,965,859 3,041,981
Construction in progress 2,114,414 715,087
---------- ----------
$44,730,376 $42,483,743
========== ==========
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. LONG-TERM DEBT:
The Company has a Revolving Credit and Term Loan Agreement. Under terms of the
agreement, the Company may borrow principal amounts up to $10,000,000 in the
aggregate at various interest rate options approximating current market rates.
The Revolving Credit and Term Loan Agreement requires the Company to maintain
minimum levels of consolidated working capital and tangible net worth. At
September 30, 1998 and 1997, no amounts were outstanding under this agreement.
Long-term debt at September 30, 1998 and 1997 of $2,234,931 and $3,001,946,
respectively, (which included $800,252 and $850,533, respectively, classified
as long-term debt, current maturities) consisted of obligations under capital
lease agreements. In connection with the investment in Tukaiz Communications,
L.L.C. in January 1997 (Note 16), the Company assumed bank debt and capital
lease obligations on certain equipment of $1,949,994 and $4,486,750,
respectively. The bank debt was immediately repaid in full.
The Company's capital lease agreements expire within five years and generally
provide for renewal or purchase options. Remaining future minimum lease
payments under capital leases are as follows:
1999 $1,009,411
2000 806,892
2001 601,013
2002 256,744
---------
2,674,060
Less amount representing interest 439,129
---------
$2,234,931
=========
Assets under capital leases are amortized by the straight-line method over the
estimated useful lives of the assets. Cost and accumulated amortization of
assets under capital leases were $2,908,499 and $949,581, respectively, at
September 30, 1998 and $2,799,328 and $312,708, respectively, at September 30,
1997.
The Company has a line of credit of $500,000 in Canadian dollars which provides
for borrowings at the bank's prime interest rate. The Company has a foreign
exchange line of credit of $200,000 for standby letters of credit to support
performance guarantees. The Company also maintains a multi-currency line of
credit with a bank for 6,000,000 French francs. The multi-currency line of
credit bears interest at various rates based on market as determined by the
bank. Tukaiz Communications, L.L.C. has a line of credit of $1,500,000 which
bears interest at the bank's prime rate. Compensating balances of
approximately $39,000 and $43,000 were maintained by the Company at
September 30, 1998 and 1997, respectively, in connection with the various lines
of credit. There were no borrowings outstanding on the various lines of credit
at September 30, 1998 and 1997.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
7. SHAREHOLDERS' EQUITY:
The authorized common stock of the Company consists of 100,000,000 shares,
divided into two classes: Class A Common Stock, 70,000,000 shares, $1 par
value, and Class B Common Stock, 30,000,000 shares, $1 par value. Shares of
Class A Common Stock have one vote per share and are freely transferable
subject to applicable securities laws. Shares of Class B Common Stock have ten
votes per share and are only transferable by a shareholder to the Company or to
an active employee of the Company. The Company may, at its discretion,
purchase such shares at the fair market value per share of the Company's
Class A Common Stock or permit shareholders to tender such shares to the
Company in exchange for an equal number of shares of Class A Common Stock. For
the fiscal years ended September 30, 1998, 1997 and 1996, 645,226, 1,690,634
and 3,593,282 shares, respectively, of Class B Common Stock were exchanged for
an equal number of shares of Class A Common Stock.
In April 1998, the Company announced the continuation of its stock repurchase
program, which had been initiated in fiscal 1996. Previously, the Company's
Board of Directors had approved repurchasing a total of 2,000,000 shares of
Matthews Class A and Class B Common Stock, which has been completed. The
current authorization allows the Company to purchase up to an additional
1,000,000 shares. Repurchased shares may be retained in treasury, utilized for
acquisitions, or reissued to employees or other purchasers, subject to the
restrictions of the Restated Articles of Incorporation.
Other shareholders' equity also includes notes receivable from officers and
employees which arise from purchases of common stock by designated officers and
employees under the Employees' Stock Purchase Plan. At September 30, 1998 and
1997, notes receivable of $453,089 and $912,060, respectively, were outstanding
which included $309,249 and $559,800, respectively, due from officers. Each
note bears interest at 6.5% per annum and is due five years from the date of
its execution, which period may be, and in some instances has been, extended by
the Executive Committee. There are 197,100 shares of the Company's Class B
Common Stock owned by borrowers pledged as collateral on the notes as of
September 30, 1998.
8. STOCK PLANS:
The Company has a stock incentive plan which provides for the granting of
incentive stock options, nonstatutory stock options and restricted share
awards. The plan is administered by the Compensation Committee of the Board of
Directors. The aggregate number of shares of the Company's common stock which
may be issued upon exercise of the stock options and pursuant to the restricted
share awards is 2,200,000 shares. The option price for each stock option which
may be granted under the plan may not be less than the fair market value of the
Company's common stock on the date of grant.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. STOCK PLANS, continued:
Outstanding stock options are exercisable in various share amounts based on the
attainment of certain market value levels of Class A Common Stock but, in the
absence of such events, are exercisable in full for a one-week period beginning
five years from the date of grant. In addition, options granted after
September 30, 1996 vest in one-third increments after three, four and five
years, respectively, from the grant date (but, in any event, not until the
attainment of the certain market value levels described above). The options
are not exercisable within six months from the date of grant and expire on the
earlier of ten years from the date of grant, upon employment termination, or
within specified time limits following voluntary employment termination (with
the consent of the Company), retirement or death.
The Company has elected to continue accounting for its stock incentive plan
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." If compensation cost had been determined under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and basic earnings per share would have
been as follows:
1998 1997
---- ----
Net income, as reported $22,501,692 $19,626,064
Net income, pro forma 21,967,279 19,140,081
Earnings per share - basic, as reported $1.38 $1.14
Earnings per share - basic, pro forma 1.34 1.11
The weighted average fair value of options granted was $7.69 per share in 1998
and $4.53 per share in 1997.
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes based pricing model with the following assumptions:
1998 1997
---- ----
Dividend yield 0.7% 1.0%
Expected volatility 23.1% 21.3%
Average risk-free interest rate 4.8% 6.1%
Average expected term (years) 7.7 6.0
The following tables summarize certain stock option information at
September 30, 1998:
Options Outstanding:
- -------------------
Range of Weighted average Weighted average
exercise price Number remaining life exercise price
- -------------- -------- ---------------- ----------------
$7.13 224,000 6.2 $ 7.13
$8.19 185,000 6.6 8.19
$9.44 50,300 7.2 9.44
$13.00 and $14.25 163,000 7.5 13.06
$14.06 - $17.38 633,850 8.2 14.17
$21.41 and $22.88 226,500 9.4 21.54
--------- --- -----
1,482,650 7.8 $13.20
========= === =====
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. STOCK PLANS, continued:
Options exercisable:
- -------------------
Range of Weighted average
exercise price Number exercise price
- -------------- ------- ----------------
$7.13 224,000 $ 7.13
$8.19 185,000 8.19
$9.44 50,300 9.44
$13.00 and $14.25 163,000 13.06
$14.06 - $17.38 - -
$21.41 and $22.88 - -
------- -----
622,300 $ 9.18
======= =====
The transactions for shares under options were as follows:
1998 1997 1996
---- ---- ----
Outstanding, beginning of year
Number 1,593,766 1,173,666 839,000
Weighted average exercise price $11.12 $ 8.78 $ 7.38
Granted:
Number 226,500 672,100 383,000
Weighted average exercise price $21.54 $14.17 $11.79
Exercised:
Number 304,366 239,668 22,002
Weighted average exercise price $ 8.38 $ 8.08 $ 9.44
Expired or forfeited:
Number 33,250 12,332 26,332
Weighted average exercise price $14.06 $13.92 $ 7.51
Outstanding, end of year:
Number 1,482,650 1,593,766 1,173,666
Weighted average exercise price $13.20 $11.12 $ 8.78
Exercisable, end of year:
Number 622,300 853,672 965,110
Weighted average exercise price $ 9.18 $ 8.57 $ 7.97
Shares reserved for future options,
end of year 151,314 344,564 4,332
In addition, under the Company's Director Fee Plan, directors who are not also
officers of the Company each receive as an annual retainer fee shares of the
Company's Class A Common Stock equivalent to approximately $16,000. Each
director may elect to be paid these shares on a current basis or have such
shares credited to a deferred stock account as phantom stock, with such shares
to be paid to the director subsequent to leaving the Board. The value of
deferred shares is recorded in other liabilities. Shares deferred under the
Director Fee Plan at September 30, 1998, 1997 and 1996 were 20,658, 16,908 and
12,934, respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. EARNINGS PER SHARE
1998 1997 1996
---- ---- ----
Net income $22,501,692 $19,626,064 $20,257,554
========== ========== ==========
Weighted average common
shares outstanding 16,336,359 17,194,073 17,781,824
Dilutive securities,
primarily stock options 433,855 502,720 432,042
---------- ---------- ----------
Diluted weighted average
common shares outstanding 16,770,214 17,696,793 18,213,866
========== ========== ==========
Basic earnings per share $1.38 $1.14 $1.14
==== ==== ====
Diluted earnings per share $1.34 $1.11 $1.11
==== ==== ====
10. PENSION PLANS:
The Company maintains noncontributory, defined benefit pension plans covering
most employees of the Company and its wholly-owned U.S. and Canadian
subsidiaries. The plans provide benefits based on years of service and average
monthly earnings for the highest five consecutive years during the ten years
immediately preceding termination of employment. The Company's funding policy
for the plans is to contribute annually the amount recommended by its
consulting actuaries, subject to statutory provisions. The Company has reached
the full-funding limitation and, accordingly, is not permitted to make
deductible contributions for tax purposes to its pension plans during periods
of such excess funding. Consequently, no contributions were made to the plans
for the plan years ended July 31, 1998, 1997 and 1996.
In addition, the Company has a Supplemental Retirement Plan which provides for
supplemental pension benefits to certain executive officers of the Company.
Upon normal retirement under this plan, such individuals who meet stipulated
age and service requirements are entitled to receive monthly supplemental
retirement payments, in addition to their pension under the Company's
retirement plan, based on final average monthly earnings. Benefits under this
plan do not vest until age 55; the Supplemental Retirement Plan is unfunded.
Actuarial assumptions for the regular U.S. and supplemental plans are evaluated
and revised as necessary as of August 1 each year. The weighted average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 7.0%, 7.5%, and 8.0% at August 1, 1998, 1997 and 1996,
respectively. The rate of increase in future compensation levels was 4.5% at
August 1, 1998, 1997 and 1996. The expected long-term rate of return on assets
was 9.5% at August 1, 1998 and 9.0% at August 1, 1997 and 1996.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. PENSION PLANS, continued:
Pension expense for the U.S. plans included the following components:
1998 1997 1996
---- ---- ----
Service cost - benefits
earned during the year $ 1,923,321 $ 1,715,536 $ 1,704,691
Interest cost on projected
benefit obligation 3,559,391 3,396,778 3,212,293
Actual return on plan assets (3,070,941) (13,160,172) (2,939,242)
Net amortization and deferral (1,874,051) 8,448,112 (1,677,961)
--------- ---------- ---------
Net pension expense $ 537,720 $ 400,254 $ 299,781
========= ========== =========
The following table sets forth the funded status of the regular U.S. and
supplemental plans and the amounts recognized in the Company's consolidated
financial statements at September 30, 1998 and 1997. Prepaid and accrued
pension costs are included in other assets and other liabilities, respectively.
1998 1997
------------------------- -------------------------
Regular Supplemental Regular Supplemental
----------- ------------ ----------- ------------
Actuarial value of
benefit obligation:
Vested benefit obligation $42,326,598 $ 2,017,875 $37,910,728 $ 2,003,108
========== ========= ========== =========
Accumulated benefit obligation $43,115,941 $ 2,588,807 $38,651,375 $ 2,260,901
========== ========= ========== =========
Plan assets at fair value,
primarily equity and fixed
income securities $59,314,028 $ - $58,870,495 $ -
Projected benefit obligation
for participants' service
rendered to date (51,804,368) (2,943,177) (46,164,647) (2,752,269)
---------- --------- ---------- ---------
Plan assets in excess of
(less than) projected
benefit obligation 7,509,660 (2,943,177) 12,705,848 (2,752,269)
Unrecognized transition asset
being recognized over 15 years (807,594) - (1,211,388) -
Unrecognized prior service cost 689,212 370,878 787,614 434,403
Unrecognized net (gain) loss (3,932,181) 908,685 (8,685,099) 825,868
Minimum liability adjustment - (925,193) - (768,903)
---------- --------- ---------- ---------
Prepaid (accrued) pension $ 3,459,097 $(2,588,807) $ 3,596,975 $(2,260,901)
========== ========= ========== =========
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides certain health care and life insurance benefits for most
retired employees. These health and life insurance benefits are unfunded and
are provided through insurance companies. Employees are assumed to be eligible
for these retiree benefits generally after attaining age 55 where age plus
years of service equal at least 75.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Company's consolidated balance sheet at September 30:
1998 1997
---- ----
Accumulated postretirement benefit obligation:
Retirees $ 5,736,340 $ 4,528,254
Fully eligible active plan participants 2,387,423 2,439,756
Other active plan participants 3,945,966 3,353,216
---------- ----------
12,069,729 10,321,226
Unrecognized reduction in prior service cost 11,776,711 12,785,782
Unrecognized net loss (3,014,756) (1,803,801)
---------- ----------
Accumulated postretirement benefit obligation 20,831,684 21,303,207
Current portion 749,136 626,925
---------- ----------
$20,082,548 $20,676,282
========== ==========
Net periodic postretirement benefit cost included the following components:
1998 1997 1996
---- ---- ----
Service cost - benefits attributed to
employee service during the year $ 277,803 $ 268,835 $ 441,330
Interest cost on accumulated
postretirement benefit obligation 748,625 855,587 1,719,158
Net amortization (953,595) (888,517) (29,663)
-------- -------- ---------
Net periodic postretirement benefit cost $ 72,833 $ 235,905 $2,130,825
======== ======== =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%, 7.5% and 8.0% at September 30,
1998, 1997 and 1996, respectively. The rate for compensation increases at
September 30, 1998, 1997 and 1996 was 4.5%.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued:
For measurement purposes, annual rates of increase of 20.0% and 6.9% in the per
capita cost of health care benefits for Medicare-Risk HMO Plans and all other
plans, respectively, were assumed for 1998; the rates were assumed to decrease
gradually to 5.0% for 2003 and remain at that level thereafter. The health
care cost trend rate has a significant effect on the amounts reported. An
increase in the assumed health care cost trend rates by one percentage point in
each year would have increased the accumulated postretirement benefit
obligation as of September 30, 1998 by 4.1% and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for
the year then ended by 6.6%. In September 1996, the Board of Directors
approved changes to the retiree medical plan which provided additional plan
options while limiting future Company contributions to retiree benefits.
12. INCOME TAXES:
The provision for income taxes consisted of the following:
1998 1997 1996
---- ---- ----
Current:
Federal $13,190,560 $ 9,245,044 $10,244,785
State 2,326,985 1,815,067 1,675,200
Foreign 685,204 1,533,969 1,027,798
---------- ---------- ----------
16,202,749 12,594,080 12,947,783
Deferred (1,572,158) 77,753 317,279
---------- ---------- ----------
Total $14,630,591 $12,671,833 $13,265,062
========== ========== ==========
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
1998 1997 1996
---- ---- ----
Federal statutory tax rate 35.0 % 35.0 % 35.0 %
Effect of state income taxes,
net of federal deduction 3.7 3.2 3.3
Foreign taxes in excess of
federal statutory rate - 1.7 .8
Other .7 ( .7) .5
---- ---- ----
Effective tax rate 39.4 % 39.2 % 39.6 %
==== ==== ====
The Company's foreign subsidiaries had income (losses) before income taxes for
the years ended September 30, 1998, 1997 and 1996 of approximately $1,513,000,
$2,825,000 and $(3,377,000), respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
12. INCOME TAXES, continued:
The components of the provision for deferred income taxes were as follows:
1998 1997 1996
---- ---- ----
Accrued vacation pay $ (62,410) $ (8,836) $ (136,489)
Estimated finishing costs (276,930) (145,346) 52,712
Postretirement benefits other
than pensions 183,894 246,309 (342,382)
Installment sales - - 1,092,937
Foreign subsidiary losses, net 125,000 450,000 236,821
Pension costs (208,149) (156,090) (116,887)
Deferred compensation (858,000) - -
Depreciation (126,393) (51,919) (233,522)
Deferred gain on sale of facilities (77,214) (30,274) (31,664)
Other (271,956) (226,091) (204,247)
---------- ---------- ----------
$(1,572,158) $ 77,753 $ 317,279
========== ========== ==========
The components of the net deferred tax asset at September 30 were as follows:
1998 1997
---- ----
Deferred tax assets:
Accrued vacation pay $ 833,780 $ 771,370
Estimated finishing costs 1,084,563 807,633
Postretirement benefits other than pensions 8,124,358 8,308,252
Deferred compensation 1,455,090 -
Foreign subsidiary losses, net 375,000 500,000
Other 905,706 634,426
---------- ----------
12,778,497 11,021,681
---------- ----------
Deferred tax liabilities:
Pension costs (257,854) (551,731)
Depreciation (2,752,485) (2,911,813)
Deferred gain on sale of facilities (507,174) (584,388)
Unrealized investment (gain) loss (122,341) 52,260
---------- ----------
(3,639,854) (3,995,672)
---------- ----------
Net deferred tax asset 9,138,643 7,026,009
Less current portion 931,020 865,082
---------- ----------
$ 8,207,623 $ 6,160,927
========== ==========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
12. INCOME TAXES, continued:
At September 30, 1998 and 1997, the Company had foreign net operating loss
carryforwards of approximately $2,500,000 and $3,200,000, respectively, related
to its subsidiaries in Canada and Sweden. Approximately $300,000 of the
carryforwards at September 30, 1998 expire between 2002 and 2003, while the
remainder have an indefinite carryforward period. The Company has recorded a
valuation allowance of approximately $375,000 and $500,000 at September 30,
1998 and 1997, respectively, related to the carryforwards.
13. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company operates various production and office facilities and equipment
under operating lease agreements. Annual rentals under these and other
operating leases were $2,837,000, $2,262,000 and $2,130,000 in 1998, 1997 and
1996, respectively. Future minimum rental commitments are not material.
The Company is party to various legal proceedings generally incidental to its
business. The eventual outcome of these matters is not predictable, and it is
possible that their resolution could be unfavorable to the Company. Although
the ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that they should not result in liabilities in an
amount which would materially affect the Company's consolidated financial
position, results of operations or cash flows.
The Company has employment agreements with certain employees, the terms of
which expire at various dates between 1999 and 2002. The agreements generally
provide for base salary and bonus levels and include a non-compete clause. The
aggregate commitment for salaries under these agreements at September 30, 1998
was approximately $4,600,000.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Significant non-cash transactions included the following:
In September 1998, Matthews acquired for 11,555,500 German Marks
(U.S.$6,900,000) fifty percent of the capital stock of S+T Gesellschaft fur
Reprotechnik mbH (Note 16). A liability has been recorded for the payment,
which is due January 2000.
In May 1998, Matthews acquired fifty percent of O.N.E. Color Communications,
Inc., a digital graphics service company (Note 16). In addition, the purchase
agreement requires Matthews to acquire the remaining fifty percent interest no
later than May 2004. A liability of $3,700,000 was recorded for the present
value of the minimum future payouts under the purchase agreement.
In fiscal 1996, Matthews issued 466,296 shares of Class A Common Stock
(valued at $5,900,000) in connection with the acquisitions of Industrial
Equipment and Engineering Company, Inc. (Note 16) and Applied Technology
Developments, Ltd. (Note 4).
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
14. SUPPLEMENTAL CASH FLOW INFORMATION, continued:
Changes in working capital items as presented in the Consolidated Statement of
Cash Flows consisted of the following:
1998 1997 1996
---- ---- ----
Current assets:
Accounts receivable $(1,051,982) $ (985,433) $ 2,463,712
Inventories (355,121) 2,087,337 (571,217)
Other current assets 392,197 (61,624) (770,017)
---------- ---------- ---------
(1,014,906) 1,040,280 1,122,478
---------- ---------- ---------
Current liabilities:
Trade accounts payable 732,701 (1,012,648) 737,433
Accrued compensation 3,539,657 2,010,941 326,942
Accrued vacation pay 275,473 56,238 197,241
Profit distribution to employees 528,549 (112,274) (239,942)
Accrued income taxes 943,106 1,991,625 (252,243)
Customer prepayments (1,451,379) 5,822,563 (177,754)
Other current liabilities 2,189,745 253,279 587,333
---------- ---------- ---------
6,757,852 9,009,724 1,179,010
---------- ---------- ---------
Net increase $ 5,742,946 $10,050,004 $ 2,301,488
========== ========== =========
15. SEGMENT INFORMATION:
Sales and operating profit of the Company's business segments follows:
Graphics Marking
Imaging Products Bronze Eliminations Consolidated
---------- ---------- ---------- ------------ ------------
Sales to unaffil-
iated customers:
1998 $75,294,549 $30,054,688 $106,272,820 $ - $211,622,057
1997 57,804,162 34,980,976 96,383,502 - 189,168,640
1996 43,062,133 44,386,703 84,528,783 - 171,977,619
Intersegment sales:
1998 6,973 63,424 35,364 (105,761) -
1997 4,681 53,473 39,849 (98,003) -
1996 42,408 238,439 26,479 (307,326) -
Operating profit:
1998 6,909,985 3,003,056 26,015,903 - 35,928,944
1997 5,507,148 2,800,757 22,579,490 - 30,887,395
1996 4,217,472 2,481,859 20,072,049 - 26,771,380
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
15. SEGMENT INFORMATION, continued:
Information related to assets identifiable to segments follows:
Graphics Marking
Imaging Products Bronze Other Consolidated
---------- ---------- ---------- ---------- ------------
Identifiable assets:
1998 $60,274,431 $20,060,272 $59,304,584 $47,566,477 $187,205,764
1997 38,495,477 22,118,584 49,753,812 58,836,517 169,204,390
1996 19,271,417 24,752,912 46,836,367 62,551,013 153,411,709
Depreciation expense:
1998 3,827,692 603,546 2,187,063 361,560 6,979,861
1997 2,033,727 739,978 1,944,148 520,930 5,238,783
1996 1,189,791 964,954 1,619,925 602,575 4,377,245
Capital expenditures:
1998 5,110,111 334,122 1,628,217 260,241 7,332,691
1997 3,189,371 400,543 2,144,218 430,498 6,164,630
1996 942,909 1,067,917 3,228,309 138,918 5,378,053
Information about the Company's operations in different geographic areas
follows:
United States Canada Australia Europe Eliminations Consolidated
------------- --------- --------- ---------- ------------ ------------
Sales to unaffil-
iated customers:
1998 $192,443,566 $8,808,520 $ 4,817,523 $ 5,552,448 $ - $211,622,057
1997 162,281,107 8,634,068 10,553,058 7,700,407 - 189,168,640
1996 139,945,843 8,180,041 10,534,846 13,316,889 - 171,977,619
Transfers between
geographic areas:
1998 6,210,190 131,453 - 1,884,293 (8,225,936) -
1997 6,728,953 187,161 - 2,820,395 (9,736,509) -
1996 7,361,044 244,185 - 2,342,427 (9,947,656) -
Operating profit:
1998 34,458,109 (115,435) 1,313,329 272,941 - 35,928,944
1997 28,223,301 405,658 1,933,004 325,432 - 30,887,395
1996 25,827,733 (349,587) 1,718,944 (425,710) - 26,771,380
Identifiable
assets:
1998 176,382,613 4,041,883 5,580,593 13,846,396 (12,645,721) 187,205,764
1997 164,499,917 4,444,878 8,840,270 7,973,623 (16,554,298) 169,204,390
1996 145,346,058 4,913,342 9,554,718 8,409,239 (14,811,648) 153,411,709
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
15. SEGMENT INFORMATION, continued:
Intersegment sales are accounted for at negotiated prices. Operating profit is
total revenue less operating expenses.
Identifiable assets include those assets which are used in the Company's
operations in each segment. Corporate headquarters' assets are included in
Other and principally consist of cash and cash equivalents, investments,
deferred tax assets and the headquarters' administration building.
16. ACQUISITIONS AND DISPOSITIONS:
On October 1, 1997, Matthews acquired for $480,000 cash the assets of Western
Plasti-Type Co. ("Western"). On November 4, 1997, Matthews acquired the common
stock of Allied Reprographics, Inc. ("Allied") for $700,000 cash. Both Western
and Allied are printing plate manufacturers located in Denver, Colorado. On
November 3, 1997, Matthews acquired for $1,400,000 cash the assets of Palomar
Packaging, Inc. ("Palomar"), a manufacturer of printing plates and steel-rule
cutting dies, located near San Diego, California. An additional amount up to
$880,000 may be payable for Palomar during the five-year period from the
acquisition date contingent on the attainment of certain operating performance
levels. On February 20, 1998, Matthews acquired for $1,600,000 cash certain
assets of S&N Graphics, Inc., a St. Louis, Missouri manufacturer of printing
plates and other marking devices.
On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color
Communications, Inc., a digital graphics service company. The transaction was
structured as an asset purchase with the purchase price consisting of
$2,000,000 cash and the assumption of a fifty percent interest in certain
liabilities of O.N.E. Color Communications, Inc. An additional amount is
payable by Matthews three years from the acquisition date contingent on the
attainment of certain operating performance levels of the new company, with
such payout to be not less than $400,000. Matthews and the shareholders of
O.N.E. Color Communications, Inc. have each contributed their respective fifty
percent interests into a newly-formed California limited liability company,
O.N.E. Color Communications, L.L.C. ("O.N.E.").
In addition, the purchase agreement requires Matthews to purchase the remaining
fifty percent interest in O.N.E. no later than May 2004. The purchase price
for the remaining interest is contingent on the attainment of certain operating
performance levels of the new company with such payment to be not less than
$4,500,000. The accounts of O.N.E. have been included in the consolidated
financial statements of Matthews and a liability has been recorded for the
present value of the minimum future payouts. O.N.E., with annual sales of
approximately $10,000,000, is headquartered in Oakland, California.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
16. ACQUISITIONS AND DISPOSITIONS, continued:
On September 19, 1998, Matthews acquired for 11,555,500 German Marks
(U.S.$6,900,000) fifty percent of the capital stock of S+T Gesellschaft fur
Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany,
consist principally of flexographic printing preparation and the manufacture of
photopolymer printing forms for the packaging industry. The remaining fifty
percent will continue to be owned by the existing president of S+T. The cash
payment is due January 2000 and is subject to reduction if S+T's calendar year
1999 operating results are below the calendar year 1997 level. In addition,
Matthews has a call option to acquire an additional thirty percent interest in
S+T at a purchase price contingent on the operating performance of S+T. The
results of S+T will be reflected in the financial statements of Matthews under
the equity method of accounting.
In October 1998, Matthews entered into a foreign currency forward contract with
a financial institution for the purchase of German Marks to hedge its January
2000 payment commitment for the investment in S+T. In November 1998, Matthews
also entered into a letter of credit agreement with a financial institution to
guarantee performance under this payment commitment.
Effective September 30, 1998, Matthews purchased for $10,000,000 cash the
assets of Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"), a
subsidiary of Service Corporation International. Gibraltar, with annual sales
of approximately $16,000,000, is headquartered in Indianapolis, Indiana and is
a leading builder of mausoleums in the United States.
On January 31, 1997, Matthews acquired fifty percent of Tukaiz Litho, Inc.
("Tukaiz"), a pre-press and pre-media firm headquartered in Franklin Park,
Illinois. A pre-press firm prepares art or digital files for printing or
reproduction. The remaining fifty percent continues to be owned by the
president of Tukaiz. The transaction was structured as an asset purchase with
the purchase price consisting of $4,000,000 cash and the assumption of a fifty
percent interest, approximately $4,000,000, in certain of the liabilities of
Tukaiz. The parties each contributed their respective fifty percent interests
into a newly-formed Illinois limited liability company, Tukaiz Communications,
L.L.C. Matthews also provided the new company with subordinated convertible
debt of $5,500,000. Tukaiz reported sales of $16,400,000 for the year ended
January 31, 1997. The accounts of Tukaiz Communications, L.L.C. have been
included in the consolidated financial statements of Matthews.
On May 23, 1997, Matthews acquired for $2,400,000 cash the common stock of both
Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services,
flexible printing plates and steel rule cutting dies, located in North
Carolina. Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were
approximately $3,700,000 for the year ended December 31, 1996.
On March 25, 1996, Matthews acquired Industrial Equipment and Engineering
Company, Inc. ("IEEC"), a Florida corporation, for 427,724 shares of Matthews
Class A Common Stock (valued at $5,400,000) and $3,600,000 cash. Sales of IEEC
for the year ended December 31, 1995 were $7,500,000. On August 1, 1996, IEEC
acquired for cash substantially all of the assets and certain of the
liabilities of All Crematory Corporation. The total purchase price, including
the assumption of liabilities, was $2,000,000. Sales of All Crematory
Corporation for the year ended September 30, 1995 were $3,400,000.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
16. ACQUISITIONS AND DISPOSITIONS, continued:
Matthews has accounted for the aforementioned acquisitions using the purchase
method and, accordingly, recorded the acquired assets and liabilities at their
estimated fair values at the acquisition dates. The excess of the purchase
price over the fair value of the net assets has been recorded as goodwill to be
amortized on a straight-line basis over periods ranging from 15 to 25 years.
For the acquisition of S+T, the excess of the purchase price over the fair
value of the net assets will be amortized on a straight-line basis over 25
years as a charge to equity income.
On January 5, 1996, Matthews sold for $13,100,000 cash its cemetery and
mortuary facility (Sunland Memorial Park, Inc.) in Sun City, Arizona to Service
Corporation International. Matthews recorded a pre-tax gain in the fiscal 1996
second quarter of $9,400,000 on the sale which was recorded in other income.
Sunland Memorial Park, Inc., which was purchased in 1982, was the only such
facility owned by Matthews. The facility had sales in fiscal 1995 of
approximately $5,000,000, representing about three percent of the consolidated
sales of Matthews.
In September 1996, Matthews authorized the liquidation of its German subsidiary
and recorded a pre-tax charge to other expense of $1,200,000 in connection with
the transaction. The transaction had no impact on the fiscal 1996 net income
of Matthews due to the tax benefits related to the write-off of an intercompany
loan and investment. The German subsidiary had sales of $4,200,000 with an
operating loss of $970,000 in fiscal 1996.
17. FASB PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income." The pronouncement establishes
standards for reporting and display of comprehensive income and its components.
The Statement requires that items of other comprehensive income be classified
by their nature in a financial statement and the accumulated balance of other
comprehensive income be displayed separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. The required presentation will be adopted by the Company in fiscal
1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The pronouncement establishes standards
for reporting information about operating segments of an enterprise. The
pronouncement requires the disclosure of selected segment information in
interim financial reports. SFAS No. 131 will not impact the current
presentation of the Company's segment information. The interim presentation
requirement of the pronouncement will be adopted by the Company in the first
quarter of fiscal 2000.
53
SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Financial Data (Unaudited):
The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of fiscal 1998 and
fiscal 1997.
Quarter Ended
----------------------------------------------------- Year Ended
December 31 March 31 June 30 September 30 September 30
----------- ----------- ----------- ------------ ------------
FISCAL YEAR 1998:
Sales $49,440,454 $51,563,344 $55,217,977 $55,400,282 $211,622,057
Gross profit 21,231,436 23,034,882 25,060,396 23,723,508 93,050,222
Operating profit 7,616,319 8,886,597 10,333,027 9,093,001 35,928,944
Net income 4,898,264 5,603,821 6,381,882 5,617,725 22,501,692
Earnings per share -
diluted .29 .33 .38 .34 1.34
FISCAL YEAR 1997:
Sales $42,582,795 $45,427,408 $51,736,477 $49,421,960 $189,168,640
Gross profit 18,863,418 20,237,199 22,843,057 21,557,212 83,500,886
Operating profit 6,613,758 7,885,207 8,797,942 7,590,488 30,887,395
Net income 4,304,408 5,012,993 5,484,608 4,824,055 19,626,064
Earnings per share -
diluted .24 .28 .31 .28 1.11
/TABLE
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in accountants or disagreements on accounting or
financial disclosure between the Company and PricewaterhouseCoopers LLP,
Certified Public Accountants, for the fiscal years ended September 30, 1998,
1997 and 1996.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information as of November 30, 1998 is furnished with respect to
each director and executive officer:
Name Age Positions with Registrant
- ---- --- -------------------------
David M. Kelly 56 Chairman of the Board, President and
Chief Executive Officer
Geoffrey D. Barefoot 51 President, Graphic Systems
Division and Director
Edward J. Boyle 52 Vice President, Accounting & Finance,
Treasurer and Secretary
David J. DeCarlo 53 President, Bronze Division
and Director
Robert B. Heffernan 50 President, Graphics Imaging Group
Robert J. Kavanaugh 61 Director
Thomas N. Kennedy 63 Director
Steven F. Nicola 38 Controller
John P. O'Leary, Jr. 51 Director
James L. Parker 60 Director
Robert J. Schwartz 51 President, Marking Products Division
William J. Stallkamp 59 Director
David M. Kelly was elected Chairman of the Board on March 15, 1996. He was
appointed President and Chief Operating Officer of the Company in April 1995
and President and Chief Executive Officer effective October 1, 1995. He was
appointed as a Director of the Company in May 1995. Prior to joining the
Company, he was a Senior Vice President for Carrier Corporation.
Geoffrey D. Barefoot, a Director of the Company since 1990, was elected
President, Graphic Systems Division in November 1993.
Edward J. Boyle was elected Vice President, Accounting & Finance effective
December 1, 1995. Prior thereto, he was Controller of the Company. He was
appointed Treasurer and Secretary in September 1996.
56
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued.
David J. DeCarlo, a Director of the Company since 1987, was elected President,
Bronze Division in November 1993. Prior thereto, he was Senior Vice President
and Division Manager, Bronze.
Robert B. Heffernan joined the Company in May 1998 and was appointed President,
Graphics Imaging Group. Prior thereto, he was President of the Brooks
Instrument Division of Emerson Electric since 1986.
Robert J. Kavanaugh was elected to the Board of Directors in February 1998.
Mr. Kavanaugh retired in 1996 as a partner of the Pittsburgh office of Arthur
Andersen LLP.
Thomas N. Kennedy, a Director of the Company since 1987, retired as an officer
of the Company effective December 1, 1995. He was Senior Vice President, Chief
Financial Officer and Treasurer since January 1991.
Steven F. Nicola was elected Controller of the Company effective December 1,
1995. Prior thereto, he was Manager, Tax Planning and International
Accounting.
John P. O'Leary, Jr., a Director of the Company since 1992, has been President
and Chief Executive Officer of Tuscarora, Incorporated, a plastics
manufacturer, since 1990.
James L. Parker, a Director of the Company since 1981, retired as an officer of
the Company effective November 1, 1996. He was Senior Vice President, General
Counsel and Secretary since January 1991.
Robert J. Schwartz was appointed President, Marking Products Division in
September 1997. Mr. Schwartz joined the Company in January 1997 as Director of
Sales and Marketing for the Marking Products Division. Prior thereto, he was
Vice President - Sales for Northeast Distributors, Inc.
William J. Stallkamp, a Director of the Company since 1981, is a Vice Chairman
of Mellon Bank Corporation in Pittsburgh, Pennsylvania and has been Chairman
and Chief Executive Officer of Mellon PSFS in Philadelphia since January 1996.
Prior thereto, he was an Executive Vice President of Mellon Bank, N.A.
57
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued.
Board Committees:
The Executive Committee is appointed by the Board of Directors to have and
exercise during the periods between Board meetings all of the powers of the
Board of Directors, except that the Executive Committee may not elect
directors, change the membership of or fill vacancies in the Executive
Committee, change the By-Laws of the Company or exercise any authority
specifically reserved by the Board. The membership of the Executive Committee
since October 1, 1997 consisted of Messrs. Kelly, DeCarlo and Barefoot.
The principal function of the Audit Committee, the members of which are
Messrs. O'Leary (Chairman), Kavanaugh and Stallkamp, is to endeavor to assure
the integrity and adequacy of financial statements issued by the Company. It
is intended that the Audit Committee will review internal auditing systems and
procedures as well as the activities of the public accounting firm performing
the external audit.
The principal function of the Compensation Committee, the members of which are
Messrs. Stallkamp (Chairman), Kavanaugh and Kennedy, is to review periodically
the suitability of the remuneration arrangements (including benefits) for the
principal officers of the Company other than stock remuneration. A
subcommittee of the Compensation Committee, the Stock Compensation Committee,
the members of which are Messrs. Stallkamp (Chairman) and Kavanaugh, consider
and grant stock remuneration and administer the Company's 1992 Stock Incentive
Plan.
58
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the individual compensation information for the
fiscal years ended September 30, 1998, 1997 and 1996 for the Company's Chief
Executive Officer and the four most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
----------------- -----------------------
Awards Payouts
------ ------- All
Securities Other
Name of Individual Underlying LTIP Compen-
and Principal Position Year Salary Bonus Options Payouts sation
- ---------------------- ---- ------- ------- ---------- --------- -------
(1) (Shares) (2) (3)
David M. Kelly 1998 $312,409 $324,082 40,000 $239,850 None
Chairman of the Board and 1997 290,174 290,687 190,000 None None
Chief Executive Officer 1996 268,764 261,193 70,000 None None
David J. DeCarlo 1998 207,921 169,552 None 269,660 $2,520
Director and President, 1997 199,473 174,477 250,000 None 3,046
Bronze Division 1996 188,100 159,409 40,000 None 4,904
Geoffrey D. Barefoot 1998 148,788 None None None 2,644
Director and President, 1997 146,080 13,487 None None 2,622
Graphic Systems Division 1996 142,497 59,827 30,000 None 2,028
Edward J. Boyle 1998 129,689 87,394 36,000 60,211 4,250
Vice President, 1997 113,379 75,043 41,000 None 3,804
Accounting & Finance 1996 104,709 68,308 28,000 None 2,205
Robert J. Schwartz 1998 118,323 75,177 32,000 None 1,038
President, Marking
Products Division
<FN>
(1) Includes the current portion of management incentive plan and supplemental management
incentive payments and, for Mr. Kelly, an amount equal to his life insurance premium
cost. At his request, the Company does not provide life insurance for Mr. Kelly, but
in lieu thereof pays to him annually the amount which the Company would have paid in
premiums to provide coverage, considering his position and age. Such amounts are not
included in calculating other Company benefits for Mr. Kelly. The amount paid to
Mr. Kelly in lieu of life insurance for 1998, 1997 and 1996 was $4,100 each year. The
Company has adopted a management incentive plan for officers and key management
personnel. Participants in such plan are not eligible for the Company's profit
distribution plan. The incentive plan is based on improvement in divisional and Company
economic value added and the attainment of established personal goals. A portion of
amounts earned are deferred by the Company and are payable with interest at a market
rate over a two-year period contingent upon economic value added performance and
continued employment during such period. See Long-Term Incentive Plans - Awards in Last
Fiscal Year table. In addition, payments include a supplement in amounts which are
sufficient to pay annual interest expense on the outstanding notes of management under
the Company's Designated Employee Stock Purchase Plan and to pay medical costs which are
not otherwise covered by a Company plan.
(2) Represents payments of deferred amounts under the management incentive plan.
59
ITEM 11. EXECUTIVE COMPENSATION, continued.
(3) Includes educational assistance for dependent children and premiums for term life
insurance. Educational assistance for dependent children is provided to any officer
or employee of the Company whose child meets the scholastic eligibility criteria and
is attending an eligible college or university. Educational assistance amounts
reported in this column for the named officers in fiscal 1998, 1997 and 1996,
respectively, were: Mr. DeCarlo, $2,000 (1996 only); and Mr. Boyle, $2,200, $2,000
and $1,000. Each officer of the Company is provided term life insurance coverage in
an amount approximately equivalent to three times his respective salary. Amounts
reported in this column for the named officers in fiscal 1998, 1997 and 1996 include
the following respective life insurance benefit costs: Mr. DeCarlo, $2,520, $3,046
and $2,904; Mr. Barefoot, $2,644, $2,622 and $2,028; Mr. Boyle, $2,050, $1,804 and
$1,205; and Mr. Schwartz, $1,038 (1998 only). See also note (1).
The Summary Compensation Table does not include expenses to the Company of
incidental benefits of a limited nature to executive officers including use of
Company vehicles, club memberships, dues, or tax planning services. The
Company believes such incidental benefits are in the conduct of the Company's
business, but, to the extent such benefits and use would be considered personal
benefits, the value thereof is not reasonably ascertainable and does not
exceed, with respect to any individual named in the compensation table, the
lesser of $50,000 or 10% of the annual compensation reported in such table.
Long-Term Incentive Plans - Awards in Last Fiscal Year
Performance Estimated Future
or Other Payouts Under
Number Period Non-Stock Price-
of Shares Until Based Plans
or Other Maturation ----------------
Name Rights or Payout Target
- ------------- ---------- ----------- ----------------
D.M. Kelly - 2 Years $ 906,596
D.J. DeCarlo - 2 Years 803,335
G.D. Barefoot - 2 Years None
E.J. Boyle - 2 Years 232,753
R.J. Schwartz - 2 Years 93,090
<FN>
The Company has a management incentive plan based on improvement in divisional and Company
economic value added and the attainment of established personal goals. A portion of amounts
earned are deferred by the Company and are payable with interest at a market rate over a
two-year period contingent upon economic value added performance and continued employment
during such period.
/TABLE
60
ITEM 11. EXECUTIVE COMPENSATION, continued.
Option/SAR Grants in Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants (1) Option Term
- ----------------------------------------------------------------- ----------------------
Percent
of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted Year per Share Date 5% 10%
- -------------- ---------- ---------- --------- ---------- -------- --------
D.M. Kelly 40,000 17.7% $21.406 12/02/07 $538,489 $1,364,643
D.J. DeCarlo None - - - - -
G.D. Barefoot None - - - - -
E.J. Boyle 36,000 15.9% $21.406 12/02/07 484,640 1,228,178
R.J. Schwartz 32,000 14.1% $21.406 12/02/07 430,791 1,091,714
<FN>
(1) All options were granted at market value as of the date of grant. Options are
exercisable in various share amounts based on the attainment of certain market value
levels of Class A Common Stock, but, in the absence of such events, are exercisable in
full for a one-week period beginning five years from the date of grant. In addition,
options vest in one-third increments after three, four and five years, respectively,
from the grant date (but, in any event, not until the attainment of the certain market
value levels described above). The options are not exercisable within six months from
the date of grant and expire on the earlier of ten years from the date of grant, upon
employment termination, or within specified time limits following voluntary employment
termination (with consent of the Company), retirement or death.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Value of Unexercised
Shares Securities Underlying In-the-Money Options
Acquired Unexercised Options at Fiscal Year End
On Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------- ---------- ---------- ----------- ------------- ----------- -------------
D.M. Kelly 15,000 $ 262,500 255,000 230,000 $4,077,812 $2,336,873
D.J. DeCarlo None None 126,000 250,000 2,080,250 2,859,375
G.D. Barefoot 94,000 1,133,875 None None None None
E.J. Boyle None None 63,000 77,000 993,125 616,310
R.J. Schwartz None None None 80,000 None 620,373
/TABLE
61
ITEM 11. EXECUTIVE COMPENSATION, continued.
Retirement Plans:
The Company's domestic retirement plan is noncontributory and provides benefits
based upon length of service and final average earnings. Generally, employees
age 21 with one year of continuous service are eligible to participate in the
retirement plan. The benefit formula is 3/4 of 1% of the first $550 of final
average monthly earnings plus 1-1/4% of the excess times years of credited
service (maximum 35). The plan is an insured, defined benefit plan and covered
compensation is limited generally to base salary or wages. Benefits are not
subject to any deduction or offset for Social Security.
In addition to benefits provided by the Company's retirement plan, the Company
has a Supplemental Retirement Plan, which provides for supplemental pension
benefits to executive officers of the Company designated by the Board of
Directors, including those named in the Summary Compensation Table. Upon
normal retirement under this plan, such individuals who meet stipulated age and
service requirements are entitled to receive monthly supplemental retirement
payments which, when added to their pension under the Company's retirement plan
and their maximum anticipated Social Security primary insurance amount, equal,
in total, 1.85% of final average monthly earnings (including incentive
compensation) times the individual's years of continuous service (subject to a
maximum of 35 years). Upon early retirement under this plan, reduced benefits
will be provided, depending upon age and years of service. Benefits under this
plan do not vest until age 55 and the attainment of 15 years of continuous
service. However, in order to recruit Mr. Kelly, the Company waived such
minimum service requirement with respect to Mr. Kelly. No benefits will be
payable under such supplemental plan following the voluntary employment
termination or death of any such individual. The Supplemental Retirement Plan
is unfunded; however, a provision has been made on the Company's books for the
actuarially computed obligation.
The following table shows the total estimated annual retirement benefits
payable at normal retirement under the above plans for the individuals named in
the Summary Compensation Table at the specified executive remuneration and
years of continuous service:
Years of Continuous Service
Covered ----------------------------------------------------
Remuneration 15 20 25 30 35
- ------------------ -------- -------- -------- -------- --------
$125,000 $ 34,688 $ 46,250 $ 57,813 $ 69,375 $ 80,938
150,000 41,625 55,500 69,375 83,250 97,125
175,000 48,563 64,750 80,938 97,125 113,313
200,000 55,500 74,000 92,500 111,000 129,500
225,000 62,438 83,250 104,063 124,875 145,688
250,000 69,375 92,500 115,625 138,750 161,875
300,000 83,250 111,000 138,750 166,500 194,250
400,000 111,000 148,000 185,000 222,000 259,000
500,000 138,750 185,000 231,250 277,500 323,750
600,000 166,500 222,000 277,500 333,000 388,500
700,000 194,250 259,000 323,750 388,500 453,250
62
ITEM 11. EXECUTIVE COMPENSATION, continued.
The table shows benefits at the normal retirement age of 65, before applicable
reductions for social security benefits. The Employee Retirement Income
Security Act of 1974 places limitations, which may vary from time to time, on
pensions which may be paid under federal income tax qualified plans, and some
of the amounts shown on the foregoing table may exceed the applicable
limitation. Such limitations are not currently applicable to the Company's
Supplemental Retirement Plan.
Estimated years of continuous service for each of the individuals named in the
Summary Compensation Table, as of October 1, 1998 and rounded to the next
higher year, are: Mr. Kelly, 4 years; Mr. DeCarlo, 14 years; Mr. Barefoot,
23 years; Mr. Boyle, 12 years and Mr. Schwartz, 2 years.
Compensation Committee Interlocks and Insider Participation:
Thomas N. Kennedy, a former officer of the Company, is a member of the
Company's Compensation Committee.
Compensation of Directors:
Pursuant to the Director Fee Plan, directors who are not also officers of the
Company each receive as an annual retainer fee shares of the Company's Class A
Common Stock equivalent to approximately $16,000. Each director may elect to
be paid these shares on a current basis or have such shares credited to a
deferred stock account as phantom stock. In addition, each such director is
paid $800 for every meeting of the Board of Directors attended and (other than
a Chairman) $500 for every committee meeting attended. The Chairman of a
committee of the Board of Directors is paid $700 for every committee meeting
attended. No other remuneration is otherwise paid by the Company to any
director for services as a director.
63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Management:
The Company's Articles of Incorporation divide its voting stock into three
classes: Preferred Stock and Class A and Class B Common Stock. At the present
time, none of the Preferred Stock is issued or outstanding. The following
information is furnished with respect to persons who the Company believes,
based on its records, beneficially own more than five percent of the
outstanding shares of Class A and Class B Common Stock of the Company, and with
respect to directors and officers. Those individuals with more than five
percent of such shares could be deemed to be "control persons" of the Company.
This information is as of November 30, 1998.
Number of Number of
Class A Shares Class B Shares
Name of Beneficially Percent Beneficially Percent
Beneficial Owner (1) Owned (2) of Class Owned (2) of Class
- ---------------- -------------- -------- -------------- --------
Directors and Officers:
- ----------------------
D.M. Kelly 43,925 0.3% 56,000 2.0%
G.D. Barefoot None - 209,000 7.3
D.J. DeCarlo None - 289,990 10.2
R.J. Kavanaugh 1,000 * None -
T.N. Kennedy 75,000 0.6 None -
J.P. O'Leary, Jr. 13,300 0.1 None -
J.L. Parker 100,000 0.8 None -
W.J. Stallkamp 6,200 * None -
All directors and
executive officers as
a group (12 persons) 252,177 1.9 609,690 21.4
Others:
- ------
D. Majestic None - 312,000 10.9
T. Rowe Price
Associates, Inc.
100 East Pratt Street
Baltimore, MD 21202 882,700 6.7 None -
* Less than 0.1%
(1) Unless otherwise noted, the mailing address of each beneficial owner is the
same as that of the Registrant.
(2) The nature of the beneficial ownership for all shares is sole voting and
investment power, except as follows:
Mr. Stallkamp has sole voting power except for 200 Class A shares held
by Mr. Stallkamp as custodian under UTMA for son.
T. Rowe Price Associates, Inc. has sole voting power for only 323,200
Class A shares.
(c) Changes in Control:
The Company knows of no arrangement which may, at a subsequent date, result in
a change in control of the Company.
64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Securities and Exchange Commission requires disclosure of certain business
transactions or relationships between the Company, or its subsidiaries, and
other organizations with which any of the Company's directors are affiliated as
an owner, partner, director, officer or employee. Briefly, disclosure is
required where such a business transaction or relationship meets the standards
of significance established by the Securities and Exchange Commission with
respect to the types and amounts of business transacted. The Company is aware
of no transaction requiring disclosure pursuant to this item during the past
fiscal year except as stated herein.
The following officers and directors were indebted to the Company on notes
carrying an annual interest rate of 6.5% which were issued under the Company's
Designated Employee Stock Purchase Plan, as referred to in Note 7 of the Notes
to Consolidated Financial Statements:
Highest Amount
Outstanding During Amount
the Year Ended Outstanding at
September 30, 1998 November 30, 1998
------------------ -----------------
Geoffrey D. Barefoot $ 83,206 $ 7,531
Edward J. Boyle 62,442 30,913
David J. DeCarlo 340,669 208,334
Steven F. Nicola 29,242 18,259
The Company has annually made supplemental management incentive payments to
officers and other employees indebted on such notes in amounts equal to the
interest paid by such persons on their respective notes.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following items are included in Part II, Item 8:
Pages
-----
Report of Independent Accountants 27
Consolidated Balance Sheet 28-29
Consolidated Statement of Income 30
Consolidated Statement of Shareholders' Equity 31
Consolidated Statement of Cash Flows 32
Notes to Consolidated Financial Statements 33-52
Supplementary Financial Information 53
2. Financial Statement Schedules:
Financial statement schedules have been omitted for the reason that the
information is not required or is otherwise given in the consolidated financial
statements and notes thereto.
3. Exhibits Filed:
The index to exhibits is on pages 67-69.
(b) Reports on Form 8-K:
A Form 8-K Current Report was filed by the Company on September 28, 1998
reporting under "Item 5 - Other Events" the Company's purchase of Gibraltar
Mausoleum Construction Company, Inc. and the Company's purchase of a fifty
percent interest in S&T Gesellschaft fur Reprotechnik mbH (See
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1998.
MATTHEWS INTERNATIONAL CORPORATION
----------------------------------
(Registrant)
By David M. Kelly
-------------------------------------
David M. Kelly, Chairman of the Board,
President and Chief Executive Officer
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 December 18, 1998:
David M. Kelly Edward J. Boyle
- ------------------------------------ ------------------------------------
David M. Kelly Edward J. Boyle
Chairman of the Board, President Vice President, Accounting & Finance,
and Chief Executive Officer Treasurer and Secretary (Principal
(Principal Executive Officer) Financial and Accounting Officer)
Geoffrey D. Barefoot John P. O'Leary, Jr.
- ------------------------------------ ------------------------------------
Geoffrey D. Barefoot, Director John P. O'Leary, Jr., Director
David J. DeCarlo James L. Parker
- ------------------------------------ ------------------------------------
David J. DeCarlo, Director James L. Parker, Director
Robert J. Kavanaugh William J. Stallkamp
- ------------------------------------ ------------------------------------
Robert J. Kavanaugh, Director William J. Stallkamp, Director
Thomas N. Kennedy
- ------------------------------------
Thomas N. Kennedy, Director
67
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
EXHIBITS
INDEX
----------
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated by reference. Exhibits marked with an "a"
represent a management contract or compensatory plan, contract or arrangement
required to be filed by Item 601(b)(10)(iii) of Regulation S-K.
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
3.1 Restated Articles of Incorporation * Exhibit Number 3.1 to Form
10-K for the year ended
September 30, 1994
3.2 By-laws * Exhibit Number 3.2 to Form
10-K for the year ended
September 30, 1994
4.1 a Form of Employee Stock Purchase Exhibit Number 4.1 to Form
Agreement Entered into by 10-K for the year ended
Designated Key Employees * September 30, 1983
4.2 a Form of Employee Stock Purchase Exhibit Number 4.2 to Form
Agreement Entered into by 10-K for the year ended
Designated Key Employees September 30, 1993
(effective October 1, 1993) *
4.3 a Representative Form of Option Exhibit Number 10.2 to Form
Agreement of Repurchase * S-2 Registration Statement
(No. 33-79538) filed on
June 1, 1994
4.4 a Form of Revised Option Agreement Exhibit Number 4.2 to Form
of Repurchase * 10-K for the year ended
September 30, 1983
4.5 a Form of Revised Option Agreement Exhibit Number 4.5 to Form
of Repurchase (effective 10-K for the year ended
October 1, 1993) * September 30, 1993
4.6 a Employees' Stock Purchase Plan * Exhibit Number 4.6 to Form
10-K for the year ended
September 30, 1993
4.7 Form of Share Certificate for Exhibit Number 4.9 to Form
Class A Common Stock * 10-K for the year ended
September 30, 1994
4.8 Form of Share Certificate for Exhibit Number 4.10 to Form
Class B Common Stock * 10-K for the year ended
September 30, 1994
68
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.1 a Form of Agreement which amends the Exhibit Number 19.1 to Form
Option Agreement of Repurchase with 10-Q for the quarter ended
Respect to Major Shareholders * March 31, 1988
10.2 Revolving Credit and Term Loan Exhibit Number 10.7 to Form
Agreement * 10-K for the year ended
September 30, 1986
10.3 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form
10-K for the year ended
September 30, 1988
10.4 a Written Description of Matthews Exhibit Number 10.9 to Form
International Corporation Management 10-K for the year ended
Incentive Compensation Plan * September 30, 1992
10.5 a 1992 Stock Incentive Plan (as Exhibit A to Definitive
amended through December 13, 1996) * Proxy Statement filed on
January 22, 1997
10.6 a Form of Stock Option Agreement * Exhibit Number 10.1 to Form
10-Q for the quarter ended
December 31, 1994
10.7 a 1994 Director Fee Plan (as Exhibit Number 10.11 to
amended through March 14, 1997) * Form 10-K for the year
ended September 30, 1998
10.8 a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form
10-Q for the quarter ended
March 31, 1995
10.9 Capital Stock Purchase Agreement, Exhibit Number 10.1 to Form
Sunland Memorial Park, Inc. * 10-Q for the quarter ended
December 31, 1995
10.10 Agreement of Plan and Merger, Exhibit Number 10.2 to Form
Industrial Equipment and Engineering 10-Q for the quarter ended
Company, Inc. * March 31, 1996
10.11 Asset Purchase Agreement among TKZ Exhibit Number 10.1 to Form
Holding Corp., Tukaiz Litho, Inc. 10-Q for the quarter ended
and Michael Vitallo * December 31, 1996
10.12 Membership Interest Agreement, Exhibit Number 10.2 to Form
Tukaiz Communications L.L.C. * 10-Q for the quarter ended
December 31, 1996
69
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.13 Subordinated Convertible Note from Exhibit Number 10.3 to Form
Tukaiz Communications, L.L.C. in favor 10-Q for the quarter ended
of Venetian Investment Corporation * December 31, 1996
10.14 Operating Agreement, Tukaiz Exhibit Number 10.4 to Form
Communications, L.L.C. * 10-Q for the quarter ended
December 31, 1996
10.15 Asset Purchase and Membership Exhibit Number 10.1 to Form
Interest Agreement, O.N.E. Color 10-Q for the quarter ended
Communications, L.L.C. * June 30, 1998
10.16 O.N.E. Color Communications, L.L.C., Exhibit Number 10.2 to Form
Operating Agreement * 10-Q for the quarter ended
June 30, 1998
10.17 Stock Purchase Agreement, S+T Filed Herewith
Gesellschaft fur Reprotechnik mbH
10.18 Asset Purchase Agreement, Gibraltar Filed Herewith
Mausoleum Construction Company, Inc.
21 Subsidiaries of the Registrant Filed Herewith
23 Consent of Independent Accountants Filed Herewith
27 Financial Data Schedule Filed Herewith (via EDGAR)
Copies of any Exhibits will be furnished to shareholders upon written request.
Requests should be directed to Mr. Edward J. Boyle, Vice President,
Accounting & Finance, Treasurer and Secretary of the Registrant.