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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, 1997
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, 1997 was $326,294,000.
As of November 30, 1997, shares of common stock outstanding were:
Class A Common Stock 6,450,261 shares
Class B Common Stock 1,858,242 shares
Documents incorporated by reference: None
The index to exhibits is on pages 66-68.
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, Graphic Systems and Marking Products. The Bronze segment is
a leading manufacturer of cast bronze memorial products, crematories and
cremation-related products. The Graphic Systems 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,
--------------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Sales to unaffiliated customers:
Bronze $ 96,384 50.9% $ 84,529 49.2% $ 80,032 48.0%
Graphic Systems 57,804 30.6 43,062 25.0 42,360 25.4
Marking Products 34,981 18.5 44,387 25.8 44,356 26.6
------- ----- ------- ----- ------- -----
Total $189,169 100.0% $171,978 100.0% $166,748 100.0%
======= ===== ======= ===== ======= =====
Operating profit:
Bronze 22,579 73.1 20,072 75.0 18,171 74.3
Graphic Systems 5,507 17.8 4,217 15.7 4,254 17.4
Marking Products 2,801 9.1 2,482 9.3 2,033 8.3
------- ----- ------- ----- ------- -----
Total $ 30,887 100.0% $ 26,771 100.0% $ 24,458 100.0%
======= ===== ======= ===== ======= =====
3
ITEM 1. BUSINESS, continued.
Detailed financial information relating to business segments and to foreign and
domestic operations is presented in Note 14 (Segment Information) to the
Consolidated Financial Statements included in Part II of this Annual Report on
Form 10-K.
In fiscal 1997, approximately 86% of the Company's sales were made from the
United States, and 4%, 4% and 6% were made from Europe, Canada and Australia,
respectively. Bronze operations are primarily conducted in the United States
and Canada with 6% of the segment's revenues coming from Australia. Graphic
Systems products are manufactured and primarily sold in the United States.
Marking Products sells equipment and consumables directly to industrial
consumers and through distributors throughout the world. This segment has
manufacturing and marketing facilities in the United States, Canada, Sweden and
the United Kingdom. Approximately 48% of Marking Products sales were made to
locations outside the United States in fiscal 1997.
The Company employs approximately 1,500 people and has its principal executive
offices at Two NorthShore Center, Pittsburgh, Pennsylvania 15212. 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
tombstones. 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 tombstones as well as bronze plaques and
letters that can be affixed to tombstones, 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 distributed through a network of
independent dealers including sign suppliers, recognition companies and trophy
dealers.
In March 1996, Matthews International Corporation acquired IEEC which is
headquartered in Orlando, Florida and is the leading North American
manufacturer of cremation equipment and cremation-related products. In August
1996, IEEC acquired the assets of All Crematory Corporation, which was also a
manufacturer of cremation equipment. IEEC equipment and products are sold
primarily to mortuary and cemetery facilities within North America and Europe.
Within the Bronze segment was a wholly-owned cemetery and mortuary facility,
Sunland Memorial Park, Inc. ("Sunland"), located in Sun City, Arizona. Sunland
was sold in January 1996. The revenues of Sunland represented approximately 7%
of the Bronze segment's fiscal 1995 sales.
Raw materials used by the Bronze segment consist principally of bronze and
aluminum ingot, sheet metal and coating materials and are generally available
in adequate supply. Ingot is obtained from various North American and
Australian smelters.
Graphic Systems:
The Graphic Systems 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:
Graphic Systems, 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 from natural rubber, synthetic
rubber or 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; rotary and flat cutting dies used to cut out intricately
designed containers and point-of-purchase displays; and film masters used to
print bar codes such as Universal Product Codes (known as "UPCs").
The Graphic Systems 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.
On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz
Litho, Inc. ("Tukaiz"), 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 combination of the Company's Graphic Systems
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 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.
On October 1, 1997, the Company acquired the assets of Western Plasti-Type Co.
("Western") and, on November 4, 1997, the common stock of Allied Reprographics,
Inc. ("Allied"). Both Western and Allied are printing plate manufacturers
located in Denver, Colorado. On November 3, 1997, the Company acquired the
assets of Palomar Packaging ("Palomar"), a manufacturer of printing plates and
steel-rule cutting dies, located near San Diego, California. 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.
6
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Graphic Systems, continued:
Major raw materials for this segment's products include rubber, photopolymer
resin, film and graphic art supplies. All such materials are presently
available in adequate supply from various industry sources.
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 and impulse-jet printing systems.
The Marking Products segment employs contact printing, indenting, ink-jet
printing and impulse-jet printing 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 and rubber 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, Sweden and France in
addition to minority-owned companies in Asia, Australia, 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 product quality, delivery, price and design availability. The
Company also competes with upright granite tombstone and flush granite memorial
providers. The Company and its two major 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.
Graphic Systems:
Graphic Systems is one of several manufacturers of printing plates with a
national presence and 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 meeting customer demands and by
distinguishing itself as an innovator of new products.
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 six 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, Graphic Systems 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 Systems:
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 9,700(1)
High Point, NC Manufacturing 34,700(1)
LaPalma, CA Manufacturing 22,000
Orlando, FL Manufacturing 2,000(1)
Randolph, MA Manufacturing 2,500(1)
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)
Pontoise, France Distribution 8,600(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 these facilities
was approximately $806,000 in fiscal 1997.
(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, based on the facts now known, 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 1997.
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. 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 for the periods indicated:
High Low Close
---- --- -----
Fiscal 1997:
Quarter ended: September 30, 1997 $41.25 $34.75 $39.75
June 30, 1997 35.50 28.875 35.50
March 31, 1997 31.00 28.25 30.50
December 31, 1996 30.75 27.75 29.25
Fiscal 1996:
Quarter ended: September 30, 1996 $30.50 $27.125 $28.25
June 30, 1996 29.50 25.50 27.50
March 31, 1996 27.25 18.625 26.75
December 31, 1995 20.25 18.50 19.50
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.
In fiscal 1996, the Company initiated a limited stock repurchase program
authorizing the repurchase of up to 500,000 shares of Class A and Class B
Common Stock. In March 1997, the Company announced a continuation of the
program and authorized the repurchase of up to an additional 500,000 shares of
Class A and Class B Common Stock. The original stock repurchase program
initiated in fiscal 1996 has been completed. In conjunction with the fiscal
1996 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.
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.
(b) Holders:
The number of registered holders of the Company's common stock at November 30,
1997 was as follows:
Class A Common Stock 454
Class B Common Stock 317
(c) Dividends:
A quarterly dividend of $.085 per share was paid for the fourth quarter of
fiscal 1997 to shareholders of record on October 31, 1997. The Company paid
quarterly dividends of $.08 per share for the first three quarters of fiscal
1997 and the fourth quarter of fiscal 1996. The Company paid quarterly
dividends of $.07 per share for the first three quarters of fiscal 1996.
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,
-------------------------------------------------------------------
1997 1996(1) 1995 1994 1993(3)
----------- ----------- ----------- ----------- -----------
(Not Covered by Independent Auditor's Report)
Net sales $189,168,640 $171,977,619 $166,747,781 $158,700,158 $151,094,305
Gross profit 83,500,886 76,640,900 74,729,267 71,613,709 64,128,595
Interest expense 337,375 131,364 104,820 309,939 594,513
Income before income taxes and
cumulative effect of changes
in accounting principles 32,297,897 33,522,616 25,079,263 23,705,257 16,574,586
Income taxes 12,671,833 13,265,062 9,628,028 9,677,091 6,618,543
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of changes in accounting
principles 19,626,064 20,257,554 15,451,235 14,028,166 9,956,043
Cumulative effect of changes
in accounting principles (2) - - - - (10,836,726)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 19,626,064 $ 20,257,554 $ 15,451,235 $14,028,166 $ (880,683)
========== ========== ========== ========== ==========
Per common share:
Income before cumulative
effect of changes in
accounting principles $ 2.28 $ 2.28 $ 1.75 $ 1.56 $ 1.07
Net income (loss) 2.28 2.28 1.75 1.56 ( .09)
Cash dividends .325 .29 .25 .10 .03
Weighted average common
shares outstanding 8,597,036 8,890,912 8,850,350 8,982,353 9,312,105
Total assets $169,204,390 $153,411,709 $138,206,376 $120,683,005 $110,568,941
Long-term debt, noncurrent 2,151,413 - 270,092 745,616 6,133,340
(1) Fiscal 1996 included after-tax income of $2.9 million ($.33 per share) 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."
(2) Fiscal year 1993 includes the cumulative effect of changes in accounting for postretirement
benefits and income taxes.
(3) Fiscal year 1993 includes charges of $1.0 million relative to inventory write-offs and other
adjustments, $800,000 for a change in the amortization period of goodwill for Matthews Swedot AB
and $500,000 in connection with a public offering which did not occur during fiscal 1993.
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
---------------------- -----------------
1997- 1996-
1997 1996 1995 1996 1995
---- ---- ---- ----- -----
Sales 100.0% 100.0% 100.0% 10.0% 3.1%
Gross profit 44.1 44.6 44.8 9.0 2.6
Operating profit 16.3 15.6 14.7 15.4 9.5
Income before taxes 17.1 19.5 15.0 (3.7) 33.7
Net income 10.4 11.8 9.3 (3.1) 31.1
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 Graphic Systems 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 Industrial Equipment and Engineering
Company, Inc. ("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 the prior year despite the absence of Sunland
Memorial Park, Inc. which was sold in January 1996. Graphic Systems 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 was primarily the result of acquisitions. On January 31, 1997,
Matthews acquired a 50% interest in Tukaiz Litho, Inc. ("Tukaiz") and, on
May 23, 1997, Matthews purchased 100% of the common stock of both Carolina
Repro-Graphic and Dieworks, Inc. (collectively "Carolina"). 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 21.1%, below fiscal 1996. The
decrease in sales for Marking Products 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 during the past
few years.
15
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 Graphic Systems 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 Graphic
Systems segment increased approximately 30% over fiscal 1996 as a result of the
acquisitions of Tukaiz and Carolina. Graphic Systems gross profit as a percent
of sales declined for the year principally due to lower margins on the sales of
Tukaiz products. Marking Products gross profit declined 22% from fiscal 1996
as a result of lower sales. Marking Products gross profit as a percent of
sales for fiscal 1997 remained relatively unchanged from fiscal 1996.
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.
Graphic Systems 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. Graphic
Systems 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 the prior year 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 which were approved by the Board of
Directors in September 1996. These changes, which provide additional plan
options while limiting future Company contributions to retiree benefits,
reduced net periodic postretirement benefit cost from the prior year. This
reduction was partially offset by costs associated with the Company's
implementation of a 401(k) employee savings plan and related Company
contributions.
16
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 the year as a result of the
Company's stock repurchase program and recent 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 the current
year reflected the capital lease obligations assumed in connection with the
acquisition of Tukaiz in January 1997.
Other income (deductions), net for the year ended September 30, 1997
represented a net reduction to pre-tax income of $738,000 compared to a net
increase of $4.3 million for fiscal 1996. Other deductions in fiscal 1997
included contributions of approximately $500,000 to the Jas. H. Matthews & Co.
Educational and Charitable Trust. 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 period.
The Company's effective tax rate for the year ended September 30, 1997 was
39.2% compared to 39.6% for the year ended September 30, 1996. The decline
from fiscal 1996 primarily reflected changes in the effect of foreign taxes and
a tax benefit in connection with life insurance proceeds. The difference
between the Company's effective tax rate and the Federal statutory rate of 35%
primarily reflects 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, but also reflected slight increases in the
Graphic Systems 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 Graphic Systems segment
increased $700,000, or 1.7%, over fiscal 1995. Sales for this segment were
adversely impacted from the postponement by many customers of printing plate
purchases in an attempt to offset increased costs for linerboard. Marking
Products segment sales for fiscal 1996 were up less than 1.0% over fiscal 1995.
The segment's international sales increased 5% over the same period a year ago
reflecting higher demand in Europe and Australia which more than offset a
decline in North American sales volume.
17
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. Graphic Systems 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, less than one percent, 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.
In addition, administrative costs were lower for the year as a result of
several executive retirements and other management changes as well as
management's cost control efforts. Higher sales and marketing costs in the
Bronze and Graphic Systems 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 consolidated operating profit
for fiscal 1996 principally resulted from operating profit 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. Graphic Systems 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 as a result of a change in the Company's investment strategies (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 principally related to the
Company's capital lease obligations.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1996 and Fiscal 1995, continued:
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. This gain was
partially offset by the write-off of the remaining goodwill ($2.3 million) with
respect to the Company's investment in its Swedish subsidiary. Other
deductions for fiscal 1996 also reflected certain other non-operating expenses
which principally included estimated costs of $1.2 million associated with the
liquidation of the Company's German subsidiary. In September 1996, the Company
authorized the liquidation of its German subsidiary. 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 Company's effective tax rate for the year ended September 30, 1996 was
39.6%, compared to 38.4% for the year ended September 30, 1995. The higher
effective tax rate for fiscal 1996 was primarily the result of the impact of
the Company's foreign income tax position, primarily in Sweden, on the
Company's consolidated tax position offset partially by the tax benefits
related to the write-off of an intercompany loan and investment in connection
with the liquidation of the Company's German subsidiary. 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 1995 and Fiscal 1994:
Sales for the year ended September 30, 1995 were $166.7 million, representing
an increase of $8.0 million, or 5.1%, over fiscal 1994 sales of $158.7 million.
The increase from the prior year resulted from higher sales in the Company's
Bronze and Marking Products segments. Bronze segment sales in fiscal 1995
increased $5.0 million, or 6.6%, over fiscal 1994 reflecting increases in
selling price and unit volume. Bronze sales were higher in the United States
and Australia reflecting increases in both memorial and architectural products.
Sales in the Marking Products segment increased $3.7 million, or 9.2%, over
fiscal 1994 resulting principally from an increase in international sales. The
increase in international sales reflected higher demand, particularly in
Germany and Australia. Sales in the Graphic Systems segment declined $665,000,
or 1.6%, below fiscal 1994. During fiscal 1995, the Graphic Systems segment
experienced a reduction in demand due the postponement by many customers of
printing plate purchases in an attempt to offset increased linerboard costs.
Gross profit for the year ended September 30, 1995 was $74.7 million, or 44.8%
of sales, compared to $71.6 million, or 45.1% of sales, for fiscal 1994. The
increase of $3.1 million, or 4.4%, from the prior year related primarily to
higher gross profit levels in the Bronze and Marking Products segments. The
increase in the Bronze segment gross profit resulted from the segment's sales
growth for the year, but was offset partially by higher material costs. The
higher gross profit in the Marking Products segment resulted from an increase
in international sales volume, more favorable product mix and reductions in
various overhead costs. Graphic Systems gross profit and gross profit as a
percent of sales declined from fiscal 1994 primarily due to a reduction in
sales for the year.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1995 and Fiscal 1994, continued:
Selling and administrative expenses for the year ended September 30, 1995 were
$50.3 million, or 30.1% of sales, compared to $47.7 million, or 30.0% of sales,
in fiscal 1994. Selling expenses increased $1.4 million, or 4.6%, over fiscal
1994, proportionate with the higher sales for the year. Selling expenses for
the year principally reflected higher marketing expenses and increased sales
personnel costs in Australia and Europe for Marking Products. Administrative
expenses increased $1.2 million, or 6.7%, over the prior year. The increase in
administrative expenses primarily reflected normal growth in general and
employee-related costs and an increase in research and development costs,
principally in the Marking Products segment.
Operating profit for the year ended September 30, 1995 was $24.5 million, or
14.7% of sales compared to fiscal 1994 operating profit of $23.9 million, or
15.1% of sales. The operating profit increase of $549,000, or 2.3%, generally
reflected higher sales in the Bronze and Marking Products segments offset by a
decline in demand for printing plates of the Graphic Systems segment and higher
bronze material costs.
Investment income for the year ended September 30, 1995 was $1.6 million
compared to $626,000 for fiscal 1994. The increase from fiscal 1994 related
primarily to an increase in the average cash position of the Company from the
previous year as well as a higher rate of return.
Interest expense for the year ended September 30, 1995 was $105,000 compared to
$310,000 for fiscal 1994. The decrease in interest expense was principally a
result of the repayment of all amounts outstanding under the Term Loan
Agreement during fiscal 1994.
Other income and deductions (net) for the year ended September 30, 1995
resulted in a net reduction in pre-tax income of $894,000 compared to a net
reduction of $519,000 in fiscal 1994. Other deductions in fiscal 1995
reflected costs in connection with the liquidation of the Company's Italian
subsidiary.
The Company's effective tax rate for the year ended September 30, 1995 was
38.4%, compared to 40.8% in fiscal 1994. The lower effective tax rate for
fiscal 1995 was primarily the result of a reduction in the effect of foreign
income taxes on the Company's consolidated tax position and favorable prior
year federal income tax adjustments. The difference between the Company's
effective tax rate and the federal statutory rate of 35% was principally the
result of state and foreign income taxes.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow from operations was $37.5 million for the year ended September 30,
1997, compared to $19.2 million for fiscal 1996 and $20.2 million for fiscal
1995. Operating cash flow for fiscal 1997 reflected the improvement in the
Company's operating profit over the prior year in addition to the effect of
changes in the various components of working capital, principally an increase
in customer prepayments. Operating cash flow for the year ended September 30,
1996 resulted from the Company's net income of $20.3 million adjusted to
exclude the effects of the pre-tax gain of $9.4 million of the sale of Sunland,
the write-off of remaining $2.3 million goodwill of Matthews Swedot AB and
estimated liquidation costs in connection with the Company's German subsidiary.
Operating cash flow for fiscal 1995 primarily reflected the Company's net
income of $15.5 million.
Cash used in investing activities was $7.7 million for the year ended
September 30, 1997, compared to $34.2 million for fiscal 1996 and $2.7 million
for fiscal 1995. Investing activities for fiscal 1997 included the
acquisitions of Tukaiz in January 1997 and Carolina in May 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 short-term and intermediate-term 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 investing activities included the
acquisition (for $1.6 million cash and 19,286 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. Investing activities in fiscal 1995 included the sale of
two of the Company's facilities. Two facilities of the Marking Products
segment (one of the Company's Pittsburgh facilities and the Division's Canadian
facility) were sold during the year and the related operations were
consolidated into other facilities of the Company.
Capital expenditures were $6.2 million for the year ended September 30, 1997,
compared to $5.4 million and $6.0 million for fiscal 1996 and 1995,
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 $5.8 million for the last three fiscal years. The capital budget
for fiscal 1998 is $10.9 million. The Company expects to generate sufficient
cash from operations to fund all anticipated capital spending projects.
Investing activities 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 $500,000,
$1.4 million and $1.5 million in fiscal 1997, 1996 and 1995, respectively.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LIQUIDITY AND CAPITAL RESOURCES, continued:
Cash used in financing activities for the year ended September 30, 1997 was
$21.7 million, compared to $11.9 million in fiscal 1996 and $2.7 million in
fiscal 1995. 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. The Company paid dividends of $.085
per share for the fourth quarter and $.08 per share for each of the first three
quarters of fiscal 1997.
In fiscal 1996, the Company initiated a limited stock repurchase program
authorizing the repurchase of up to 500,000 shares of Class A and Class B
Common Stock. In March 1997, the Company announced a continuation of the
program and authorized the repurchase of up to an additional 500,000 shares of
Class A and Class B Common Stock. The original stock repurchase program
initiated in fiscal 1996 has been completed. In conjunction with the fiscal
1996 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.
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.
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. The Company paid
dividends of $.08 per share for the fourth quarter and $.07 per share for each
of the first three quarters of fiscal 1996. Cash used in financing activities
for fiscal 1995 primarily reflected dividends on common stock of $2.2 million.
The Company paid dividends of $.07 per share for the fourth quarter and
$.06 per share for each of the first three quarters of fiscal 1995.
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, 1997, 1996 and 1995, no amounts were outstanding under this
agreement.
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
one-half percent over the bank's prime rate. Compensating balances of
approximately $43,000 and $44,000 were maintained by the Company at
September 30, 1997 and 1996, respectively, in connection with the various lines
of credit. There were no borrowings outstanding on the various lines of credit
at September 30, 1997 and 1996.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LIQUIDITY AND CAPITAL RESOURCES, continued:
Consolidated working capital of the Company was $31.0 million at September 30,
1997 compared to $30.8 million at September 30, 1996. Consolidated working
capital was $56.3 million at September 30, 1995. Cash and cash equivalents
were $20.0 million at September 30, 1997 compared to $12.4 million at
September 30, 1996 and $39.2 million at September 30, 1995. The Company's
current ratio at September 30, 1997 was 1.9, compared to 2.2 and 3.5 at
September 30, 1996 and 1995, respectively. The reductions in working capital,
cash and cash equivalents and current ratio from fiscal 1995 reflected the
Company's investments in longer-term securities.
ACQUISITIONS AND DISPOSITIONS:
On January 31, 1997, Matthews International Corporation acquired 50% 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 50% will continue to be owned by the
existing president and chief executive officer 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 50% interest, approximately
$4.0 million, in certain of the liabilities of Tukaiz. The parties each
contributed their respective 50% 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. Matthews has
accounted for this acquisition using the purchase method and, accordingly, has
recorded the acquired assets and liabilities at their estimated fair values at
the date of acquisition. The excess of the purchase price over the fair value
of the net assets was recorded as goodwill to be amortized on a straight-line
basis over 25 years. Tukaiz reported sales of $16.4 million for the year ended
January 31, 1997. The accounts of Tukaiz have been included in the
consolidated financial statements of Matthews. The combination of the
Company's Graphic Systems 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.
Matthews has accounted for these acquisitions using the purchase method and,
accordingly, has recorded the acquired assets and liabilities at their
estimated fair values at the acquisition date. The excess of the purchase
price over the fair value of the net assets was recorded as goodwill to be
amortized on a straight-line basis over 25 years. Combined sales for Carolina
Repro-Graphic and Dieworks, Inc. were approximately $3.7 million for the year
ended December 31, 1996.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS AND DISPOSITIONS, continued:
On March 25, 1996, Matthews International Corporation acquired Industrial
Equipment and Engineering Company, Inc., a Florida corporation ("IEEC"), for
213,862 shares of Matthews Class A Common Stock (valued at $5.4 million) and
$3.6 million cash. The Company has accounted for this acquisition using the
purchase method and, accordingly, has recorded the acquired assets and
liabilities at their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net assets was recorded
as goodwill to be amortized on a straight-line basis over 20 years. 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.
On January 5, 1996, Matthews International Corporation 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 3 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.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
SUBSEQUENT EVENTS:
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 ("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. 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 Company will account
for these acquisitions using the purchase method and, accordingly, record the
acquired assets and liabilities at their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of the
net assets will be recorded as goodwill to be amortized on a straight-line
basis over 25 years.
FASB PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The pronouncement establishes standards for computing and presenting
earnings per share. SFAS No. 128 replaces the presentation of primary earnings
per share with basic earnings per share and requires dual presentation of basic
and diluted earnings per share on the face of the income statement.
Computations of basic and diluted earnings per share for the Company will not
differ materially from the current computations of primary and fully-diluted
earnings per share. The required dual presentation of basic and diluted
earnings per share will be adopted by the Company for the quarter ended
December 31, 1997.
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 1999.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Description Pages
- ----------- -----
Report of Independent Accountants 26
Consolidated Balance Sheet 27-28
Consolidated Statement of Income 29
Consolidated Statement of Shareholders' Equity 30
Consolidated Statement of Cash Flows 31
Notes to Consolidated Financial Statements 32-51
Supplementary Financial Information 52
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Matthews International Corporation:
We have audited the accompanying consolidated balance sheet of Matthews
International Corporation and subsidiaries as of September 30, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended September 30, 1997.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Matthews International Corporation and subsidiaries as of September 30, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
November 20, 1997
27
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997 and 1996
----------
ASSETS 1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 19,958,712 $ 12,418,718
Short-term investments 3,090,507 3,079,084
Accounts receivable 30,054,396 26,158,666
Inventories (Note 3) 11,766,205 11,973,194
Deferred income taxes 865,082 886,450
Other current assets 1,354,549 1,244,106
---------- ----------
Total current assets 67,089,451 55,760,218
Investments (Note 4) 30,771,594 35,333,326
Property, plant and equipment, net (Note 5) 42,483,743 37,322,773
Deferred income taxes (Note 11) 6,160,927 6,477,022
Other assets 6,155,554 7,092,783
Goodwill, net of accumulated amortization of
$2,429,697 and $1,763,003, respectively (Note 2) 16,543,121 11,425,587
----------- -----------
$169,204,390 $153,411,709
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
28
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
September 30, 1997 and 1996
----------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
---- ----
Current liabilities:
Long-term debt, current maturities $ 850,533 $ 270,092
Trade accounts payable 5,854,582 6,049,732
Accrued compensation 4,505,358 2,234,233
Accrued vacation pay 3,198,676 2,722,521
Profit distribution to employees 3,540,965 3,579,467
Accrued income taxes 2,999,511 963,886
Customer prepayments 8,892,467 3,069,904
Postretirement benefits, current portion 626,925 945,933
Other current liabilities 5,578,066 5,075,162
---------- ----------
Total current liabilities 36,047,083 24,910,930
Long-term debt (Note 6) 2,151,413 -
Estimated finishing costs 3,309,098 2,954,299
Postretirement benefits other than pensions (Note 10) 20,676,282 21,005,067
Other liabilities 2,854,439 2,082,370
Commitments and contingent liabilities (Note 12)
Shareholders' equity (Notes 2, 7 and 8):
Common stock:
Class A, $1.00 par value, authorized 70,000,000
shares, 6,884,859 and 6,039,542 shares issued
at September 30, 1997 and 1996, respectively 6,884,859 6,039,542
Class B, $1.00 par value, authorized 30,000,000
shares, 2,198,639 and 3,043,956 shares issued
at September 30, 1997 and 1996, respectively 2,198,639 3,043,956
Preferred stock, $100 par value, authorized 10,000
shares, none issued - -
Additional paid-in capital 6,688,414 7,466,009
Retained earnings 115,179,462 98,367,657
Other shareholders' equity (4,346,430) (3,651,299)
Treasury stock, at cost, 713,283 and 318,918 shares
at September 30, 1997 and 1996, respectively (22,438,869) (8,806,822)
----------- -----------
Total shareholders' equity 104,166,075 102,459,043
----------- -----------
$169,204,390 $153,411,709
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
29
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the years ended September 30, 1997, 1996 and 1995
----------
1997 1996 1995
---- ---- ----
Sales $189,168,640 $171,977,619 $166,747,781
Cost of goods sold 105,667,754 95,336,719 92,018,514
----------- ----------- -----------
Gross profit 83,500,886 76,640,900 74,729,267
Selling expense 31,651,446 31,495,111 31,146,043
Administrative expense 20,962,045 18,374,409 19,125,520
----------- ----------- -----------
Operating profit 30,887,395 26,771,380 24,457,704
Investment income 2,486,357 2,628,747 1,620,038
Interest expense (337,375) (131,364) (104,820)
Other income (deductions), net (738,480) 4,253,853 (893,659)
----------- ----------- -----------
Income before income taxes 32,297,897 33,522,616 25,079,263
Income taxes (Note 11) 12,671,833 13,265,062 9,628,028
----------- ----------- -----------
Net income $ 19,626,064 $ 20,257,554 $ 15,451,235
=========== =========== ===========
Earnings per share (Note 2) $ 2.28 $ 2.28 $ 1.75
==== ==== ====
Weighted average number of common
shares outstanding 8,597,036 8,890,912 8,850,350
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
30
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1997, 1996 and 1995
----------
Common Additional Other
Stock Paid-in Retained Shareholders' Treasury
(Note 7) Capital Earnings Equity Stock Total
--------- ---------- ----------- ----------- ----------- ----------
Balance, September 30, 1994 $8,850,350 $ 1,844,092 $ 67,451,034 $(6,782,208) $ - $ 71,363,268
Net income - - 15,451,235 - - 15,451,235
Dividends, $.25 per share - - (2,212,063) - - (2,212,063)
Other changes, net - - - 2,195,964 - 2,195,964
--------- ---------- ----------- --------- ---------- ----------
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 335,732 shares - - - - (9,247,272) (9,247,272)
Sale of 5,000 shares - 1,769 - - 106,200 107,969
Issuance of 11,814 shares under
stock plans (Note 8) - (74,695) - - 334,250 259,555
Issuance of 233,148 shares for
acquisitions (Notes 4 and 15) 233,148 5,694,843 - - - 5,927,991
Dividends, $.29 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 515,009 shares - - - - (17,189,821) (17,189,821)
Issuance of 120,644 shares
under stock plans (Note 8) - (777,595) - - 3,557,774 2,780,179
Dividends, $.325 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
========= ========== =========== ========= ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
31
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended September 30, 1997, 1996 and 1995
----------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $19,626,064 $20,257,554 $15,451,235
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,047,085 7,334,669 4,887,122
Change in deferred taxes 80,349 (558,999) (1,313,280)
Net change in certain working capital items (Note 13) 10,050,004 2,301,488 (597,897)
(Increase) decrease in other non-current assets 1,125,185 (1,378,517) (393,667)
Increase in estimated finishing and cemetery costs 354,799 156,284 230,363
Increase (decrease) in other liabilities 877,767 (287,921) 23,228
Increase (decrease) in postretirement benefits (647,793) 894,131 1,373,095
(Gain) loss on sale of property, plant and equipment 192,529 (80,686) 43,170
Gain on sale of subsidiary - (9,409,058) -
Net (gain) loss on investments 50,164 (33,756) -
Effect of exchange rate changes on operations (219,407) (10,517) 486,135
---------- ---------- ----------
Net cash provided by operating activities 37,536,746 19,184,672 20,189,504
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (6,164,630) (5,378,053) (5,976,264)
Proceeds from sales of property, plant and equipment 574,029 472,697 1,736,869
Acquisitions, net of cash acquired (7,766,275) (5,182,055) -
Proceeds from sale of subsidiary - 13,070,853 -
Investments (4,018,535) (43,735,439) -
Proceeds from disposition of investments 9,146,833 5,225,068 -
Collections on loans to officers and employees 491,623 1,361,769 1,520,011
---------- ---------- ----------
Net cash used in investing activities (7,736,955) (34,165,160) (2,719,384)
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term debt (4,474,258) (433,465) (465,322)
Proceeds from the sale of treasury stock 2,780,179 367,524 -
Purchases of treasury stock (17,189,821) (9,247,272) -
Dividends (2,814,259) (2,580,103) (2,212,063)
---------- ---------- ----------
Net cash used in financing activities (21,698,159) (11,893,316) (2,677,385)
---------- ---------- ----------
Effect of exchange rate changes on cash (561,638) 88,512 146,308
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 7,539,994 (26,785,292) 14,939,043
Cash and cash equivalents at beginning of year 12,418,718 39,204,010 24,264,967
---------- ---------- ----------
Cash and cash equivalents at end of year $19,958,712 $12,418,718 $39,204,010
========== ========== ==========
Cash paid during the year for:
Interest $ 337,375 $ 131,364 $ 104,820
Income taxes 10,458,745 13,523,856 11,023,880
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
32
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 products which are used to identify people, places, products and
events. The Company's products and operations are comprised of three business
segments: Bronze, Graphic Systems and Marking Products. The Bronze segment is
a leading manufacturer of cast bronze memorial products, crematories and
cremation-related products. The Graphic Systems segment manufactures and
provides printing plates, pre-press services and imaging systems for the
corrugated and the 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.
Matthews International Corporation has sales and manufacturing facilities in
the United States, Canada, Australia and Sweden as well as sales and
distribution operations in France and the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include all foreign and domestic
subsidiaries. The consolidated financial statements also include the accounts
of the Company's 50%-owned affiliate, Tukaiz Communications, L.L.C. (See
Note 15). 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.
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, 1997, a significant portion of the Company's cash and cash
equivalents were invested with one financial institution.
33
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,
1997 and 1996 was a reduction in shareholders' equity of $3,148,584 and
$1,741,116, 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.
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 of machinery
and equipment is computed primarily on the straight-line method. Depreciation
of buildings is computed using both straight-line and declining balance
methods. 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.
Estimated Finishing Costs and Estimated Cemetery 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. Estimated cemetery costs represented current
costs of providing various cemetery-related products and services sold to
customers on a pre-need basis. The Company's cemetery, Sunland Memorial Park,
Inc., was sold in January 1996 (See Note 15).
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Treasury Stock:
Treasury stock is carried at cost. The cost of treasury shares sold is
determined under the average cost method. At September 30, 1997, treasury
stock consisted of 398,685 shares of Class A Common Stock and 314,598 shares of
Class B Common Stock. At September 30, 1996, treasury stock consisted of
241,634 shares of Class A Common Stock and 77,284 shares of Class B Common
Stock. No treasury shares were held at September 30, 1995.
Income Taxes:
Deferred tax liabilities and assets 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, 1997, undistributed
earnings for which deferred U.S. income taxes have not been provided
approximated $4,000,000. 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
$1,814,000, $1,997,000 and $2,138,000 for the years ended September 30, 1997,
1996 and 1995, respectively.
Earnings Per Share:
Earnings per share is computed based on the weighted average number of shares
of common stock outstanding during the year.
Revenue Recognition:
Revenues of the Company are generally recognized at the time of product
shipment. Pre-need sales of cemetery lots, mausoleum spaces and cemetery
products (e.g., memorials and vaults) and services were primarily made through
installment contracts with terms generally not exceeding 60 months. Revenues
and costs were recognized on the installment basis over the contract period.
The costs to provide cemetery products sold but uncompleted were reflected as
estimated cemetery costs. The Company's cemetery, Sunland Memorial Park, Inc.,
was sold in January 1996 (See Note 15).
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
3. INVENTORIES:
Inventories at September 30 consisted of the following:
1997 1996
---- ----
Materials and finished goods $10,482,503 $10,424,521
Labor and overhead in process 803,815 879,593
Supplies 479,887 669,080
---------- ----------
$11,766,205 $11,973,194
========== ==========
4. INVESTMENTS:
The following investment securities are classified as available-for-sale and
are recorded at estimated market value at the consolidated balance sheet date.
Short-term investments consist of securities with purchased maturities of over
three months but less than one year. Accrued interest on all investment
securities, including purchased interest, is also classified with short-term
investments. Investments classified as non-current consist of securities with
purchased maturities intended to range from one to five years.
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 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.
Book Value Gross Gross
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
---------- ---------- ---------- ---------
September 30, 1997:
- ------------------
Short-term investments:
Corporate obligations $ 2,600,000 $ - $ - $ 2,600,000
Other 490,507 - - 490,507
---------- ------ ------- ----------
Total $ 3,090,507 $ - $ - $ 3,090,507
========== ====== ======= ==========
Investments:
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
========== ====== ======= ==========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
4. INVESTMENTS, continued:
Book Value Gross Gross
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
---------- ---------- ---------- ---------
September 30, 1996:
- ------------------
Short-term investments:
U.S. government and
its agencies $ 1,499,957 $ 343 $ - $ 1,500,300
Corporate obligations 1,100,000 - - 1,100,000
Other 478,784 - - 478,784
---------- ------ ------- ----------
Total $ 3,078,741 $ 343 $ - $ 3,079,084
========== ====== ======= ==========
Investments:
U.S. government and
its agencies $14,502,942 $ - $375,532 $14,127,410
Corporate obligations 19,121,106 - 324,246 18,796,860
Other 189,454 - - 189,454
---------- ------ ------- ----------
Total $33,813,502 $ - $699,778 $33,113,724
========== ====== ======= ==========
In fiscal 1996, the Company acquired for $1,596,688 cash and 19,286 shares of
Class A Common Stock (valued at $527,975), 49% of the common stock of Applied
Technology Developments, Ltd. (ATD), a British manufacturer of impulse ink-jet
printing equipment. The investment has been recorded under the equity method
of accounting. The Company's investment in ATD at September 30, 1997 and 1996
was $2,326,840 and $2,219,602, respectively. In addition, the Company acquired
during fiscal 1997 minority interests (less than 20% each) in several foreign
marking products distributors. These investments totaled $260,082 at
September 30, 1997 and have been 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:
1997 1996
---- ----
Buildings $21,496,235 $20,373,634
Machinery and equipment 46,977,825 37,817,758
---------- ----------
68,474,060 58,191,392
Less accumulated depreciation 29,747,385 26,169,878
---------- ----------
38,726,675 32,021,514
Land 3,041,981 3,117,945
Construction in progress 715,087 2,183,314
---------- ----------
$42,483,743 $37,322,773
========== ==========
37
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, 1997 and 1996, no amounts were outstanding under this agreement.
Long-term debt at September 30, 1997 and 1996 of $3,001,946 and $270,092,
respectively, (which included $850,533 and $270,092, respectively, classified
as long-term debt, current maturities) consisted of obligations under capital
lease agreements. In connection with the acquisition of Tukaiz Litho, Inc.
(see Note 15), 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 capital lease agreements expire within
five years and provide for renewal or purchase options. Future minimum lease
payments under these leases are as follows:
1998 $1,144,213
1999 977,366
2000 774,847
2001 572,070
2002 256,744
---------
3,725,240
Less amount representing interest 723,294
---------
$3,001,946
=========
Assets under capital leases are depreciated by the straight-line method over
the estimated useful lives of the assets. Cost and accumulated amortization of
assets under capital leases were $2,799,328 and $312,708, respectively, at
September 30, 1997 and $2,073,290 and $1,629,057, respectively, at
September 30, 1996.
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 has a line of credit of $1,500,000 which bears interest at
one-half percent over the bank's prime rate. Compensating balances of
approximately $43,000 and $44,000 were maintained by the Company at
September 30, 1997 and 1996, respectively, in connection with the various lines
of credit. There were no borrowings outstanding on the various lines of credit
at September 30, 1997 and 1996.
38
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, 1997, 1996 and 1995, 845,317, 1,796,641
and 2,629,753 shares, respectively, of Class B Common Stock were exchanged for
an equal number of shares of Class A Common Stock.
In fiscal 1996, the Company initiated a limited stock repurchase program
authorizing the repurchase of up to 500,000 shares of Class A and Class B
Common Stock. In March 1997, the Company announced a continuation of the
program and authorized the repurchase of up to an additional 500,000 shares of
Class A and Class B Common Stock. The original stock repurchase program
initiated in fiscal 1996 has been completed. In conjunction with the fiscal
1996 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.
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, 1997 and
1996, notes receivable of $912,060 and $1,403,683, respectively, were
outstanding which included $559,800 and $812,708, 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 255,600 shares of the
Company's Class B Common Stock owned by borrowers pledged as collateral on the
notes as of September 30, 1997.
8. STOCK PLANS:
The Company has a stock incentive plan which provides for the grant 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 under the stock incentive plan was increased in fiscal 1997 to
1,100,000 shares from 600,000 shares in fiscal 1996. 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.
39
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.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." The pronouncement establishes a fair value based
method of accounting for stock-based compensation plans. The pronouncement
allows an entity to continue to measure those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue its accounting under APB Opinion No. 25. If compensation
cost had been determined under SFAS No. 123, the Company's net income and
earnings per share would have been as follows:
1997 1996
---- ----
Net income, as reported $19,626,064 $20,257,554
Net income, pro forma 19,140,081 19,575,947
Earnings per share, as reported $2.28 $2.28
Earnings per share, pro forma 2.23 2.20
The weighted average fair value of options granted was $9.05 per share in 1997
and $7.35 per share in 1996.
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 for 1997 and
1996: dividend yield, 1.0%; expected volatility, 21.3%; average risk-free
interest rate, 6.1%; and average expected term, 6.0 years.
The following tables summarize certain stock option information at
September 30, 1997:
Options Outstanding:
- -------------------
Range of Weighted average Weighted average
exercise price Number remaining life exercise price
- -------------- ------- ---------------- ----------------
$14.25 221,000 7.2 $14.25
$16.375 100,000 7.7 16.375
$18.875 32,833 8.2 18.875
$26.00 and $28.50 109,500 8.5 26.09
$28.125 - $34.75 333,550 9.2 28.34
------- --- -----
796,883 8.3 $22.23
======= === =====
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. STOCK PLANS, continued:
Options exercisable:
- -------------------
Range of Weighted average
exercise price Number exercise price
- -------------- ------- ----------------
$14.25 221,000 $14.25
$16.375 100,000 16.375
$18.875 32,833 18.875
$26.00 and $28.50 73,003 26.09
$28.125 - $34.75 - -
------- -----
426,836 $17.13
======= =====
The transactions for shares under options were as follows:
1997 1996 1995
---- ---- ----
Outstanding, beginning of year
Number 586,833 419,500 -
Weighted average exercise price $17.55 $14.76 -
Granted:
Number 336,050 191,500 477,500
Weighted average exercise price $28.33 $23.58 $14.70
Exercised:
Number 119,834 11,001 -
Weighted average exercise price $16.15 $18.88 -
Expired or forfeited:
Number 6,166 13,166 58,000
Weighted average exercise price $27.84 $15.01 $14.25
Outstanding, end of year:
Number 796,883 586,833 419,500
Weighted average exercise price $22.23 $17.55 $14.76
Exercisable, end of year:
Number 426,836 482,555 279,667
Weighted average exercise price $17.13 $15.94 $14.76
Shares reserved for future options,
end of year 172,282 2,166 180,500
In addition, under the Company's Director Fee Plan, directors who are not also
officers of the Company each receive as a 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, 1997, 1996 and 1995 were 8,454, 6,467 and
3,222, respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. PENSION PLANS:
The Company maintains noncontributory, defined benefit pension plans covering
substantially all 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, 1997, 1996 and 1995.
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.
Pension expense for the U.S. plans included the following components:
1997 1996 1995
---- ---- ----
Service cost - benefits
earned during the year $ 1,715,536 $ 1,704,691 $ 1,675,738
Interest cost on projected
benefit obligation 3,396,778 3,212,293 3,007,169
Actual return on plan assets (13,160,172) (2,939,242) (6,701,003)
Net amortization and deferral 8,448,112 (1,677,961) 2,210,749
--------- --------- ---------
Net pension expense $ 400,254 $ 299,781 $ 192,653
========= ========= =========
Actuarial assumptions 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 7.5% at
August 1, 1997 and 8.0% at September 30, 1996 and 1995. The rate of increase
in future compensation levels was 4.5% at August 1, 1997, 1996 and 1995. The
expected long-term rate of return on assets was 9.0% at August 1, 1997, 1996
and 1995.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. PENSION PLANS, continued:
The following table sets forth the funded status of the regular U.S. plan and
the Supplemental Retirement Plan and the amounts recognized in the Company's
consolidated financial statements at September 30, 1997 and 1996, which were
determined as of August 1, 1997 and 1996, respectively:
1997 1996
------------------------- -------------------------
Regular Supplemental Regular Supplemental
----------- ------------ ----------- ------------
Actuarial value of
benefit obligation:
Vested benefit obligation $37,910,728 $ 2,003,108 $34,062,739 $ 1,756,116
========== ========= ========== =========
Accumulated benefit obligation $38,651,375 $ 2,260,901 $34,793,265 $ 1,915,448
========== ========= ========== =========
Plan assets at fair value,
primarily equity and fixed
income securities $58,870,495 $ - $48,201,382 $ -
Projected benefit obligation
for participants' service
rendered to date (46,164,647) (2,752,269) (41,582,145) (2,211,073)
---------- --------- ---------- ---------
Plan assets in excess of
(less than) projected
benefit obligation 12,705,848 (2,752,269) 6,619,237 (2,211,073)
Unrecognized transition asset
being recognized over 15 years (1,211,388) - (1,615,182) -
Unrecognized prior service cost 787,614 434,403 886,016 323,413
Unrecognized net (gain) loss (8,685,099) 825,868 (2,193,824) 476,803
Minimum liability adjustment - (768,903) - (504,591)
---------- --------- ---------- ---------
Prepaid (accrued) pension $ 3,596,975 $(2,260,901) $ 3,696,247 $(1,915,448)
========== ========= ========== =========
Prepaid and accrued pension costs are included in other assets and other
liabilities, respectively.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides certain health care and life insurance benefits for
substantially all retired employees. These health and life insurance benefits
are unfunded and are provided through an insurance company. 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:
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $ 4,528,254 $ 5,222,939
Fully eligible active plan participants 2,439,756 1,032,226
Other active plan participants 3,353,216 4,952,054
---------- ----------
10,321,226 11,207,219
Unrecognized prior service cost 12,785,782 13,794,853
Unrecognized net loss (1,803,801) (3,051,072)
---------- ----------
Accumulated postretirement benefit obligation 21,303,207 21,951,000
Current portion 626,925 945,933
---------- ----------
$20,676,282 $21,005,067
========== ==========
Net periodic postretirement benefit cost included the following components:
1997 1996 1995
---- ---- ----
Service cost - benefits attributed to
employee service during the year $ 268,835 $ 441,330 $ 472,206
Interest cost on accumulated
postretirement benefit obligation 855,587 1,719,158 1,632,554
Net amortization (888,517) (29,663) -
--------- --------- ---------
Net periodic postretirement benefit cost $ 235,905 $2,130,825 $2,104,760
========= ========= =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, 8.0% and 8.25% at September 30,
1997, 1996 and 1995, respectively. The rate for compensation increases at
September 30, 1997, 1996 and 1995 was 4.5%.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued:
For measurement purposes, a 6.9% annual rate of increase in the per capita cost
of health care benefits was assumed for 1997; the rate was 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, 1997 by 4.4% and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for
the year then ended by 7.2%.
In September 1996, the Board of Directors approved changes to the retiree
medical plan which provides additional plan options while limiting future
Company contributions to retiree benefits.
11. INCOME TAXES:
The provision for income taxes consisted of the following:
1997 1996 1995
---- ---- ----
Current:
Federal $ 9,245,044 $10,244,785 $ 8,430,866
State 1,815,067 1,675,200 1,886,148
Foreign 1,533,969 1,027,798 624,294
---------- ---------- ----------
12,594,080 12,947,783 10,941,308
Deferred 77,753 317,279 (1,313,280)
---------- ---------- ----------
Total $12,671,833 $13,265,062 $ 9,628,028
========== ========== ==========
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
1997 1996 1995
---- ---- ----
Federal statutory tax rate 35.0 % 35.0 % 35.0 %
Effect of state income taxes,
net of federal deduction 3.2 3.3 4.5
Foreign taxes in excess of
federal statutory rates 1.7 .8 ( .9)
Other ( .7) .5 ( .2)
---- ---- ----
Effective tax rate 39.2 % 39.6 % 38.4 %
==== ==== ====
The Company's foreign subsidiaries had income (losses) before income taxes for
the years ended September 30, 1997, 1996 and 1995 of approximately $2,825,000,
$(3,377,000) and $462,000, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. INCOME TAXES, continued:
The components of the provision for deferred income taxes were as follows:
1997 1996 1995
---- ---- ----
Accrued vacation pay $ (8,836) $ (136,489) $ 2,143
Estimated finishing costs (145,346) 52,712 (76,880)
Postretirement benefits other
than pensions 246,309 (342,382) (535,508)
Installment sales - 1,092,937 (75,760)
Foreign subsidiary losses, net 450,000 236,821 (495,546)
Pension costs (156,090) (116,887) (75,134)
Depreciation (51,919) (233,522) (15,661)
Deferred gain on sale of facilities (30,274) (31,664) (22,186)
Other (226,091) (204,247) (18,748)
---------- ---------- ----------
$ 77,753 $ 317,279 $(1,313,280)
========== ========== ==========
The components of the net deferred tax asset at September 30 were as follows:
1997 1996
---- ----
Deferred tax assets:
Accrued vacation pay $ 765,951 $ 757,115
Estimated finishing costs 807,633 662,287
Postretirement benefits other than pensions 8,308,252 8,554,561
Foreign subsidiary losses, net 500,000 950,000
Unrealized investment loss 52,260 272,780
Other 648,014 461,113
---------- ----------
11,082,110 11,657,856
---------- ----------
Deferred tax liabilities:
Pension costs (682,188) (838,278)
Depreciation (2,789,525) (2,841,444)
Deferred gain on sale of facilities (584,388) (614,662)
---------- ----------
(4,056,101) (4,294,384)
---------- ----------
Net deferred tax asset 7,026,009 7,363,472
Less current portion 865,082 886,450
---------- ----------
$ 6,160,927 $ 6,477,022
========== ==========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. INCOME TAXES, continued:
At September 30, 1997, the Company had foreign net operating loss carryforwards
of approximately $3,200,000, principally related to its European subsidiaries.
Approximately $400,000 of these carryforwards expire between 2002 and 2003,
while the remainder have an indefinite carryforward period. The Company has
recorded a valuation allowance of approximately $500,000 and $950,000 at
September 30, 1997 and 1996, respectively, related to the carryforwards.
12. 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 $2,262,000, $2,130,000 and $2,089,000 in 1997, 1996 and
1995, 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, based on the facts now known, 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.
Tukaiz has employment agreements with certain key employees, the terms of which
expire at January 31, 2001 and 2002. The agreements provide for base salary
levels and benefits and include a non-compete clause. The aggregate commitment
for salaries under these agreements at September 30, 1997 was $2,650,000.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
On March 25, 1996, the Company issued 213,862 shares of authorized Class A
Common Stock, valued at $5,400,000, in connection with the acquisition of
Industrial Equipment and Engineering Company, Inc. (See Note 15). On May 6,
1996, the Company issued 19,286 shares of authorized Class A Common Stock,
valued at $527,975, in connection with the purchase of an additional 9%
interest in ATD (See Note 4).
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
13. SUPPLEMENTAL CASH FLOW INFORMATION, continued:
Changes in working capital items (excluding cash and cash equivalents,
short-term investments, deferred income taxes, long-term debt, current
maturities and postretirement benefits, current portion) consisted of the
following:
1997 1996 1995
---- ---- ----
Current assets:
Accounts and notes receivable $ (985,433) $ 2,463,712 $(1,392,991)
Inventories 2,087,337 (571,217) (581,459)
Other current assets (61,624) (770,017) 313,179
---------- --------- ---------
1,040,280 1,122,478 (1,661,271)
---------- --------- ---------
Current liabilities:
Trade accounts payable (1,012,648) 737,433 482,320
Accrued compensation 2,010,941 326,942 (12,309)
Accrued vacation pay 56,238 197,241 (21,194)
Profit distribution to employees (112,274) (239,942) (333,407)
Accrued income taxes 1,991,625 (252,243) (82,572)
Customer prepayments 5,822,563 (177,754) 21,984
Other current liabilities 253,279 587,333 1,008,552
---------- --------- ---------
9,009,724 1,179,010 1,063,374
---------- --------- ---------
Net increase (decrease) $10,050,004 $ 2,301,488 $ (597,897)
========== ========= =========
14. SEGMENT INFORMATION:
Sales and operating profit of the Company's business segments follows:
Graphic Marking
Systems Products Bronze Eliminations Consolidated
---------- ---------- ---------- ------------ ------------
Sales to unaffil-
iated customers:
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
1995 42,360,000 44,356,157 80,031,624 - 166,747,781
Intersegment sales:
1997 4,681 53,473 39,849 (98,003) -
1996 42,408 238,439 26,479 (307,326) -
1995 33,610 211,040 18,975 (263,625) -
Operating profit:
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
1995 4,253,769 2,032,915 18,171,020 - 24,457,704
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
14. SEGMENT INFORMATION, continued:
Information related to assets identifiable to segments follows:
Graphic Marking
Systems Products Bronze Other Consolidated
---------- ---------- ---------- ---------- ------------
Identifiable assets:
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
1995 19,559,346 25,811,626 39,084,530 53,750,874 138,206,376
Depreciation expense:
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
1995 1,049,438 999,435 1,590,125 572,218 4,211,216
Capital expenditures:
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
1995 1,868,994 931,116 2,909,655 266,499 5,976,264
Information about the Company's operations in different geographic areas
follows:
United States Canada Australia Europe Eliminations Consolidated
------------- --------- --------- ---------- ------------ ------------
Sales to unaffil-
iated customers:
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
1995 135,078,165 8,044,331 9,710,776 13,914,509 - 166,747,781
Transfers between
geographic areas:
1997 6,728,953 187,161 - 2,820,395 (9,736,509) -
1996 7,361,044 244,185 - 2,342,427 (9,947,656) -
1995 7,581,885 260,007 - 2,280,101 (10,121,993) -
Operating profit:
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
1995 23,505,940 (228,905) 1,491,977 (311,308) - 24,457,704
Identifiable
assets:
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
1995 130,465,301 5,261,030 8,558,234 14,362,677 (20,440,866) 138,206,376
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
14. 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.
15. ACQUISITIONS AND DISPOSITIONS:
On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz
Litho, Inc. ("Tukaiz"), a pre-press and pre-media firm headquartered in
Franklin Park, Illinois. The remaining 50% will continue to be owned by the
existing president and chief executive officer 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 50% interest, approximately $4,000,000,
in certain of the liabilities of Tukaiz. The parties have each contributed
their respective 50% 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. Matthews has accounted for
this acquisition using the purchase method and, accordingly, has recorded the
acquired assets and liabilities at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets was recorded as goodwill to be amortized on a straight-line basis over
25 years. Tukaiz reported sales of $16,400,000 for the year ended January 31,
1997. The accounts of Tukaiz 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. Matthews has accounted for these acquisitions using the purchase
method and, accordingly, has recorded the acquired assets and liabilities at
their estimated fair values at the acquisition date. The excess of the
purchase price over the fair value of the net assets was recorded as goodwill
to be amortized on a straight-line basis over 25 years. 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 International Corporation acquired Industrial
Equipment and Engineering Company, Inc., a Florida corporation ("IEEC"), for
213,862 shares of Matthews Class A Common Stock (valued at $5,400,000) and
$3,600,000 cash. The Company has accounted for this acquisition using the
purchase method and, accordingly, has recorded the acquired assets and
liabilities at their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net assets was recorded
as goodwill to be amortized on a straight-line basis over 20 years. 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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
15. ACQUISITIONS AND DISPOSITIONS, continued:
On January 5, 1996, Matthews International Corporation 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 the Company. The facility had
sales in fiscal year 1995 of approximately $5,000,000, representing about
3 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 $1,200,000 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 $4,200,000 with an operating loss of $970,000 in fiscal 1996.
16. SUBSEQUENT EVENTS:
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 $1,400,000 cash the
assets of Palomar Packaging ("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. The Company will account for these acquisitions using the
purchase method and, accordingly, record the acquired assets and liabilities at
their estimated fair values at the acquisition date. The excess of the
purchase price over the fair value of the net assets will be recorded as
goodwill to be amortized on a straight-line basis over 25 years.
17. FASB PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The pronouncement establishes standards for computing and presenting
earnings per share. SFAS No. 128 replaces the presentation of primary earnings
per share with basic earnings per share and requires dual presentation of basic
and diluted earnings per share on the face of the income statement.
Computations of basic and diluted earnings per share for the Company will not
differ materially from the current computations of primary and fully-diluted
earnings per share. The required dual presentation of basic and diluted
earnings per share will be adopted by the Company for the quarter ended
December 31, 1997.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
17. FASB PRONOUNCEMENTS, continued:
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 1999.
52
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 1997 and
fiscal 1996.
Quarter Ended
----------------------------------------------------- Year Ended
December 31 March 31 June 30 September 30 September 30
----------- ----------- ----------- ------------ ------------
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 .49 .58 .64 .57 2.28
FISCAL YEAR 1996:
Sales $41,185,350 $42,791,474 $44,304,394 $43,696,401 $171,977,619
Gross profit 18,583,348 18,971,759 19,724,336 19,361,457 76,640,900
Operating profit 6,452,253 6,846,286 6,979,626 6,493,215 26,771,380
Net income 4,245,989 7,376,045 4,480,071 4,155,449 20,257,554
Earnings per share .48 .83 .50 .47 2.28
/TABLE
53
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 Coopers & Lybrand L.L.P.,
Certified Public Accountants, for the fiscal years ended September 30, 1997,
1996 and 1995.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information as of November 30, 1997 is furnished with respect to
each director and executive officer:
Name Age Positions with Registrant
- ---- --- -------------------------
David M. Kelly 55 Chairman of the Board, President and
Chief Executive Officer
Geoffrey D. Barefoot 50 President, Graphic Systems
Division and Director
Edward J. Boyle 51 Vice President, Accounting & Finance,
Treasurer and Secretary
William A. Coates 68 Director
David J. DeCarlo 52 President, Bronze Division
and Director
Richard C. Johnson 51 Vice President, Corporate
Development and Human Resources
Thomas N. Kennedy 62 Director
Steven F. Nicola 37 Controller
John P. O'Leary, Jr. 50 Director
James L. Parker 59 Director
William J. Stallkamp 58 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 worked for Carrier Corporation as Senior Vice President from 1993
to 1995; and Vice President, Strategic Planning and Global Purchasing from 1992
to 1993.
Geoffrey D. Barefoot, a Director of the Company since 1990, was elected
President, Graphic Systems Division in November 1993. Prior thereto, he was
Vice President and Division Manager, Graphic Systems.
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.
55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued.
William A. Coates, a Director of the Company since 1992, retired in 1989 as
Executive Vice President, Technology, Quality and Operations Services,
Westinghouse Electric Corporation.
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.
Richard C. Johnson was elected Vice President, Corporate Development and Human
Resources in December 1991.
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.
William J. Stallkamp, a Director of the Company since 1981, 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.
56
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, 1996 consisted of the following:
October 1, 1996 to October 31, 1996 Messrs. Kelly, Parker, DeCarlo and
Barefoot
November 1, 1996 to the date of Messrs. Kelly, DeCarlo and Barefoot
this report
The principal function of the Audit Committee, the members of which are Messrs.
Stallkamp (Chairman), Coates and O'Leary, 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. Coates (Chairman), Kennedy and Stallkamp 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. Coates (Chairman) and Stallkamp, consider and
grant stock remuneration and administer the Company's 1992 Stock Incentive
Plan.
57
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the individual compensation information for the
fiscal years ended September 30, 1997, 1996 and 1995 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)
David M. Kelly (3) 1997 $290,174 $290,687 95,000 None None
Chairman of the Board and 1996 268,764 261,193 35,000 None None
Chief Executive Officer 1995 125,004 94,233 100,000 None None
David J. DeCarlo 1997 199,473 174,477 125,000 None $3,046
Director and President, 1996 188,100 159,409 20,000 None 4,904
Bronze Division 1995 177,636 162,132 43,000 None 3,851
Geoffrey D. Barefoot 1997 146,080 13,487 None None 2,622
Director and President, 1996 142,497 59,827 15,000 None 2,028
Graphic Systems Division 1995 135,696 68,213 32,000 None 1,391
Edward J. Boyle 1997 113,379 75,043 20,500 None 3,804
Vice President, 1996 104,709 68,308 14,000 None 2,205
Accounting & Finance 1995 92,745 47,484 17,500 None 1,092
Richard C. Johnson 1997 109,570 75,814 12,500 None 4,685
Vice President, 1996 104,562 55,004 13,000 None 5,216
Corporate Development 1995 98,508 54,515 17,500 None 4,082
(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 1997, 1996 and 1995 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. The deferred portion of management incentive compensation will be
included under LTIP Payouts for the fiscal years paid. 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.
58
ITEM 11. EXECUTIVE COMPENSATION, continued.
(2) 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 1997, 1996 and 1995, respectively, were:
Mr. DeCarlo, none, $2,000 and $2,000; Mr. Boyle, $2,000, $1,000 and none; and
Mr. Johnson, $3,000, $4,000 and $3,000. 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
1997, 1996 and 1995 include the following respective life insurance benefit costs:
Mr. DeCarlo, $3,046, $2,904 and $1,851; Mr. Barefoot, $2,622, $2,028 and $1,391;
Mr. Boyle, $1,804, $1,205 and $1,092 and Mr. Johnson, $1,685, $1,216 and $1,082.
See also note (1).
(3) Mr. Kelly joined the Company on April 3, 1995 and was elected Chief Executive Officer
effective October 1, 1995. Mr. Kelly has an employment arrangement with the Company
which provides that, in the event of his discharge without cause prior to April 3, 1998,
he will receive additional compensation of double his annual base salary rate as of the
discharge date. Such arrangement further provides for the life insurance payments
described in note (1) above and the waiver of minimum service for vesting purposes
described under "Retirement Plans."
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 $452,547
D.J. DeCarlo - 2 Years 508,791
G.D. Barefoot - 2 Years None
E.J. Boyle - 2 Years 113,306
R.C. Johnson - 2 Years 91,040
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
59
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 95,000 28.3% $28.125 12/13/06 $1,680,318 $4,258,274
D.J. DeCarlo 125,000 37.2% $28.125 12/13/06 2,210,944 5,602,992
G.D. Barefoot None - - - - -
E.J. Boyle 20,500 6.1% $28.125 12/13/06 362,594 918,890
R.C. Johnson 12,500 3.7% $28.125 12/13/06 221,094 560,299
(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 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 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 None None 123,334 106,666 $2,673,759 $1,278,115
D.J. DeCarlo None None 56,334 131,666 1,286,884 1,561,240
G.D. Barefoot None None 42,000 5,000 958,750 69,375
E.J. Boyle None None 26,834 25,166 577,946 305,615
R.C. Johnson None None 26,167 16,833 568,691 206,995
/TABLE
60
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
61
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, 1997 and rounded to the next
higher year, are: Mr. Kelly, 3 years; Mr. DeCarlo, 13 years; Mr. Barefoot,
22 years; Mr. Boyle, 11 years and Mr. Johnson, 10 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 a 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.
62
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, 1997.
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 27,000 0.4% 28,000 1.5%
G.D. Barefoot None - 104,500 5.6
W.A. Coates 17,572 0.3 None -
D.J. DeCarlo None - 144,995 7.8
T.N. Kennedy 45,490 0.7 None -
J.P. O'Leary, Jr. 5,750 0.1 None -
J.L. Parker 199,760 3.1 None -
W.J. Stallkamp 3,100 * None -
All directors and
executive officers as
a group (11 persons) 298,672 4.6 354,845 19.1
Others:
- ------
W. Hauber 423,300 6.6 None -
D. Majestic None - 156,000 8.4
R. Buzza None - 103,250 5.6
* Less than 0.1%
(1) 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 for 100 Class A shares held by Mr. Stallkamp as
custodian under UTMA for son.
(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.
63
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 annual interest rates of 6.5% 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, 1997 November 30, 1997
------------------ -----------------
Geoffrey D. Barefoot $ 143,436 $ 70,373
Edward J. Boyle 88,125 57,064
David J. DeCarlo 446,670 317,960
Richard C. Johnson 96,373 -
Steven F. Nicola 38,104 27,336
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.
64
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 26
Consolidated Balance Sheet 27-28
Consolidated Statement of Income 29
Consolidated Statement of Shareholders' Equity 30
Consolidated Statement of Cash Flows 31
Notes to Consolidated Financial Statements 32-51
Supplementary Financial Information 52
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 66-68.
(b) Reports on Form 8-K:
None
65
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 12, 1997.
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 12, 1997:
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
William A. Coates James L. Parker
- ------------------------------------ ------------------------------------
William A. Coates, Director James L. Parker, Director
David J. DeCarlo William J. Stallkamp
- ------------------------------------ ------------------------------------
David J. DeCarlo, Director William J. Stallkamp, Director
Thomas N. Kennedy
- ------------------------------------
Thomas N. Kennedy, Director
66
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 a Restricted Stock Plan * Exhibit Number 4.5 to Form
10-K for the year ended
September 30, 1987
4.8 a Form of Option Agreement of Exhibit Number 4.6 to Form
Repurchase - Restricted Stock Plan * 10-K for the year ended
September 30, 1987
67
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
4.9 Form of Share Certificate for Exhibit Number 4.9 to Form
Class A Common Stock * 10-K for the year ended
September 30, 1994
4.10 Form of Share Certificate for Exhibit Number 4.10 to Form
Class B Common Stock * 10-K for the year ended
September 30, 1994
10.1 a Supplemental Retirement Agreement Exhibit Number 10.1 to Form
between the Registrant and Thomas F. 10-K for the year ended
Purner, Jr., dated July 6, 1983 * September 30, 1983
10.2 a Form of Stock Appreciation Right Exhibit Number 10.2 to Form
Agreement * 10-K for the year ended
September 30, 1983
10.3 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
10.4 Revolving Credit and Term Loan Exhibit Number 10.7 to Form
Agreement * 10-K for the year ended
September 30, 1986
10.5 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form
10-K for the year ended
September 30, 1988
10.6 Term Loan Agreement and Promissory Exhibit Number 10.9 to Form
Note * 10-K for the year ended
September 30, 1991
10.7 a Form of Termination Agreement - Exhibit Number 10.8 to Form
Restricted Stock Plan * 10-K for the year ended
September 30, 1992
10.8 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
10.9 a 1992 Stock Incentive Plan (as Exhibit A to Definitive
amended through December 13, 1996) * Proxy Statement filed on
January 22, 1997
10.10a Form of Stock Option Agreement * Exhibit Number 10.1 to Form
10-Q for the quarter ended
December 31, 1994
68
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.11a 1994 Director Fee Plan (as Filed Herewith
amended through March 14, 1997)
10.12a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form
10-Q for the quarter ended
March 31, 1995
10.13 Capital Stock Purchase Agreement, Exhibit Number 10.1 to Form
Sunland Memorial Park, Inc. * 10-Q for the quarter ended
December 31, 1995
10.14 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
10.15 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
10.16 Membership Interest Agreement among Exhibit Number 10.2 to Form
TKZ Holding Corp., Tukaiz Litho, Inc., 10-Q for the quarter ended
Frank Defino, Sr. and Tukaiz December 31, 1996
Communications, L.L.C. *
10.17 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
10.18 Operating Agreement of Tukaiz Exhibit Number 10.4 to Form
Communications, L.L.C. between TKZ 10-Q for the quarter ended
Holding Corp. and Tukaiz Litho, Inc. * December 31, 1996
11 Computation of Earnings Per Share Filed Herewith
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.