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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, 1999
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, 1999 was $351,000,000.
As of November 30, 1999, shares of common stock outstanding were:
Class A Common Stock 13,238,293 shares
Class B Common Stock 2,386,667 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 changes in domestic or international economic
conditions, changes in product demand or pricing as a result of consolidation
in the industries in which the Company operates, changes in product demand or
pricing as a result of competitive pressures, and technological factors beyond
the Company's control.
ITEM 1. BUSINESS.
Matthews International Corporation ("Matthews"), founded in 1850 and
incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer
principally of custom-made products which are used to identify people, places,
products and events. The Company's products and operations are comprised of
three business segments: Bronze, Graphics Imaging and Marking Products. The
Bronze segment is a leading manufacturer of cast bronze memorials and other
memorialization products, crematories and cremation-related products and a
leading builder of mausoleums in the United States. The Graphics Imaging
segment manufactures and provides printing plates, pre-press services and
imaging systems for the corrugated and flexible packaging industries. The
Marking Products segment designs, manufactures and distributes a wide range of
marking equipment and consumables for identifying various consumer and
industrial products, components and packaging containers.
The Company and its wholly-owned subsidiaries have approximately 1,600
employees. The Company's principal executive offices are located at Two
NorthShore Center, Pittsburgh, Pennsylvania 15212 and its telephone number is
(412) 442-8200.
The following table sets forth sales and operating profit for the Company's
business segments for the past three fiscal years. Detailed financial
information relating to business segments and to domestic and international
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.
3
ITEM 1. BUSINESS, continued.
Fiscal Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Sales to unaffiliated customers:
Bronze $123,760 51.7% $106,273 50.2% $ 96,384 50.9%
Graphics Imaging 85,095 35.6 75,294 35.6 57,804 30.6
Marking Products 30,474 12.7 30,055 14.2 34,981 18.5
------- ----- ------- ----- ------- -----
Total $239,329 100.0% $211,622 100.0% $189,169 100.0%
======= ===== ======= ===== ======= =====
Operating profit:
Bronze 31,777 77.6 26,016 72.4 22,579 73.1
Graphics Imaging 5,135 12.5 6,910 19.2 5,507 17.8
Marking Products 4,036 9.9 3,003 8.4 2,801 9.1
------- ----- ------- ----- ------- -----
Total $ 40,948 100.0% $ 35,929 100.0% $ 30,887 100.0%
======= ===== ======= ===== ======= =====
In fiscal 1999, approximately 87% of the Company's sales were made from the
United States, and 7%, 4% and 2% were made from Europe, Canada and Australia,
respectively. Bronze segment products are sold throughout the world with the
segment's principal operations located in the United States, Italy, Canada and
Australia. Products and services of the Graphics Imaging segment are sold
primarily in the United States and Germany. The Marking Products segment sells
equipment and consumables directly to industrial consumers in the United States
and internationally through the Company's wholly-owned subsidiaries in Canada
and Sweden and through other foreign distributors. Matthews owns a minority
interest in distributors in Asia, Australia, France, Germany and the
United Kingdom.
PRODUCTS AND MARKETS:
Bronze:
The Bronze segment manufactures and markets in the United States, Italy, Canada
and Australia products used primarily in the cemetery and funeral home
industries. The segment's principal products include cast bronze memorials and
other memorialization 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. Other products of the
Bronze segment include crematories and cremation-related products which are
manufactured and marketed through the Company's wholly-owned subsidiary,
Industrial Equipment and Engineering Company ("IEEC"). In addition, Matthews
is a leading builder of mausoleums in the United States through the Bronze
segment's Gibraltar Mausoleum Construction Company operation ("Gibraltar").
4
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Bronze, continued:
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 are bronze plaques which contain vital information about a
deceased individual such as name, birth date and death date. These memorials
are used in cemeteries as an alternative to upright granite monuments. The
memorials are even or "flush" with the ground and therefore are preferred by
many cemeteries for easier mowing and other maintenance. In order to provide
products for the granite memorial and mausoleum markets, the Company's other
memorial products include community and family mausoleums, granite monuments
and bronze plaques, letters, emblems, vases, lights and photoceramics that can
be affixed to granite monuments, mausoleums and crypts. Principal customers
for memorial products are cemeteries and memorial parks, which in turn sell the
Company's products to the consumer.
The Bronze segment manufactures a full line of memorial products for cremation,
including urns in a variety of sizes, styles and shapes. In addition, the
Company manufactures bronze and granite niche units which are comprised of
numerous compartments used to display cremation urns in mausoleums and
churches. A new concept introduced by the Bronze segment in 1999 is a
"turnkey" cremation garden, which includes the design and all related products
for a cremation garden.
Architectural products include cast bronze and aluminum plaques, etchings and
letters that are used to recognize, commemorate and identify people, places,
events and accomplishments. The Company's plaques are frequently used to
identify the name of a building or the names of companies or individuals
located within a building. Such products are also used to commemorate events
or accomplishments, such as military service or financial donations. The
principal markets for the segment's architectural products are corporations,
fraternal organizations, contractors, churches, hospitals, schools and
government agencies. These products are sold to and distributed through a
network of independent dealers including sign suppliers, recognition companies
and trophy dealers.
IEEC, which is headquartered in Orlando, Florida, is the leading North American
designer and manufacturer of cremation equipment and cremation-related
products. IEEC equipment and products are sold primarily to cemeteries and
mortuary facilities within North America, Europe and Asia. Gibraltar, which is
headquartered in Pittsburgh, is a leading builder of mausoleums in the United
States. Mausoleums are sold primarily to cemeteries within North America.
In June 1999, Matthews purchased the assets of Caggiati S.p.A., the leading
supplier of bronze memorialization products in Europe. Caggiati S.p.A., with
consolidated annual sales of approximately $25 million (U.S.), is based in
Colorno (Parma), Italy and has two subsidiaries: Caggiati Espana S.A. in
Valencia, Spain and Caggiati France S.a.r.l. in Lyon, France. The combination
of Matthews and Caggiati S.p.A. is an important part of Matthews' strategy to
enhance its position as the worldwide leader in the memorialization industry.
5
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Bronze, continued:
This acquisition is designed to serve as a platform for Matthews to penetrate
existing European markets, enter new markets in other areas of the world, and
improve Matthews' ability to serve existing multi-national customers on a
global basis. In addition, Caggiati products are manufactured via die cast,
shell molding and lost wax technologies whereas the majority of Matthews'
products are produced by sand cast technology. The combination of these
manufacturing processes is expected to provide Matthews with opportunities for
the introduction of new products to both existing and new markets. Caggiati
S.p.A. (which is celebrating its 40th year as a bronze memorial supplier) is
considered to be the premier supplier in the markets they serve and has a
reputation for high quality products and outstanding customer service.
Raw materials used by the Bronze segment consist principally of bronze and
aluminum ingot, sheet metal, coating materials, electrical components and
construction materials and are generally available in adequate supply. Ingot
is obtained from various North American, European and Australian smelters.
Graphics Imaging:
The Graphics Imaging segment provides printing plates, pre-press services and
imaging systems to the corrugated and flexible packaging industries. The
corrugated packaging industry consists of manufacturers of printed corrugated
boxes and the flexible packaging industry consists of manufacturers of printed
bags and other packaging products made of paper, film and foil.
The segment's principal products are printing plates used by corrugated
packaging manufacturers to print corrugated boxes with graphics that help sell
the packaged product and provide information such as product identification,
logos, bar codes and other packaging detail specified by the manufacturer of
the packaged product. The corrugated packaging manufacturer produces printed
boxes by first combining linerboard with fluted paper to form a corrugated
sheet. Using the Company's products, this sheet is then printed and die cut to
make a finished box. The flexible packaging industry produces printed
packaging from paper, film and foil, such as for food wrappers.
The Company works closely with manufacturers to provide the proper printing
plates and tooling used to print the packaging to the user's specifications.
The segment's printing plate products are made principally from photopolymer
resin and sheet. Upon customer request, plates can be pre-mounted press-ready
in a variety of configurations that maximize print quality and minimize press
set-up time.
The segment also provides creative art design services to manufacturers of
corrugated and flexible packaging and to end users of such packaging. Other
products and services include pre-press preparation, such as computer-generated
camera-ready art, negatives, films and master patterns; plate mounting
accessories for the corrugated industry; various press aids designed to improve
print quality; and rotary and flat cutting dies used to cut out intricately
designed containers and point-of-purchase displays.
6
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Graphics Imaging, continued:
The Graphics Imaging segment customer base consists primarily of packaging
industry manufacturers and "national accounts." National accounts are
generally large, well-known consumer goods companies with a national presence
that purchase their printing plates directly. These companies then provide
their printing plates to the packaging industry manufacturer of their choice.
As part of the Graphics Imaging segment, Matthews owns a fifty percent interest
in Tukaiz Communications L.L.C. ("Tukaiz"), O.N.E. Color Communications, L.L.C.
("O.N.E."), and S+T GmbH & Co. KG ("S+T GmbH"). Tukaiz, based in Franklin
Park, Illinois, is a pre-press and pre-media firm which principally prepares
art or digital files for printing or reproduction. Services of Tukaiz, which
include creative design, audio, video, animation, multimedia, digital
photography, commercial printing, web-site service and on-demand digital
printing, are provided to ad agencies, manufacturers, printers and publishers.
O.N.E., headquartered in Oakland, California, provides digital graphic services
to advertising agencies and packaging markets. The operations of S+T GmbH,
located in Julich, Germany, consist principally of flexographic printing
preparation and the manufacture of photopolymer printing plates primarily for
the German packaging industry. The combination of the Company's Graphics
Imaging business, Tukaiz, O.N.E. and S+T GmbH is an important part of the
Matthews strategy to become a worldwide leader in the graphics industry and
service existing multinational customers on a global basis.
Major raw materials for this segment's products include photopolymer resin,
film, rubber and graphic art supplies. All such materials are presently
available in adequate supply from various industry sources.
Marking Products:
The Marking Products segment designs, manufactures and distributes a wide range
of marking equipment and consumables used by customers to identify various
consumer and industrial products, components and packaging containers. Marking
products range from simple handstamps made from special alloy steel to
sophisticated microprocessor-based ink-jet printing systems. The Marking
Products segment employs contact printing, indenting, ink-jet printing and
laser marking to meet customer needs, sometimes using a combination of these
marking methods.
A significant portion of the revenue of this segment is attributable to the
sale of consumables, software and replacement parts in connection with the
marking hardware sold by the Company. The Company develops inks in harmony
with the marking equipment in which they are used, which is critical to assure
ongoing equipment reliability and mark quality. Many marking equipment
customers also use the Company's ink, solvents and cleaners.
The principal customers for the Company's marking products include food and
beverage processors, metal fabricators, producers of health and beauty products
and manufacturers of textiles, plastic, rubber and building products.
7
ITEM 1. BUSINESS, continued.
Marking Products, continued:
A large percentage of the segment's sales are outside the United States and are
distributed through the Company's subsidiaries in Canada and Sweden in addition
to other international distributors. Matthews owns a minority interest in
distributors in Asia, Australia, France, Germany and the United Kingdom.
The marking products industry is fragmented, with many companies having limited
product lines which focus on well-defined specialty markets. Other industry
participants, like the Company, have broad product offerings and compete in
various product markets and countries. In the United States, the Company has
been supplying marking products for 150 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.
COMPETITION:
Bronze:
Competition from other bronze memorialization product manufacturers, which is
intense, is on the basis of reputation, product quality, delivery, price and
design availability. In North America, the Company and its two major bronze
competitors account for a substantial portion of the bronze memorial market.
The Company also competes with upright granite monument and flush granite
memorial providers. The Company believes that its superior quality, broad
product lines, innovative designs, delivery capability, customer
responsiveness, experienced personnel and customer-oriented merchandising
systems are competitive advantages in its markets. Competitors in the
architectural market are numerous and include companies that manufacture cast
and painted signs, plastic materials and other fabricated products. The
Company competes with several manufacturers in the crematory market principally
on the basis of product quality and price. Competition in the mausoleum
construction industry includes various construction companies throughout North
America and is on the basis of design, quality and price.
Graphics Imaging:
Graphics Imaging is one of several manufacturers of printing plates and
providers of pre-press services with a national presence. The segment competes
in a fragmented industry consisting of a few multi-plant regional printing
plate suppliers and a large number of local one-plant companies located across
the United States. Competition is on the basis of price, timeliness of
delivery and product quality. The Company differentiates itself from the
competition by consistently meeting customer demands and its ability to service
customers nationwide.
Marking Products:
Competition is intense and based on product performance, service and price.
The Company normally competes with specialty companies in specific marking
applications. The Company believes that, in general, it has the broadest lines
of marking products to address industrial marking applications.
8
ITEM 1. BUSINESS, continued.
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, Gibraltar and in the Marking
Products segment. Backlogs generally vary in the range of four to eight months
of sales for IEEC, three to five months of sales for Gibraltar and up to six
weeks of sales in the Marking Products segment.
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 have had minimal impact to date on two of
the Company's business segments, Graphics Imaging and Marking Products. In the
United States, the Company's Bronze segment operates four nonferrous foundries,
none of which is within the "major source" industry category as defined by the
Environmental Protection Agency. The Bronze segment operations are regulated
as "minor sources" at certain locations. No material capital expenditures are
anticipated 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.
Principal properties of the Company and its majority-owned subsidiaries are as
follows (properties are owned by the Company except as noted):
Location Description of Property Square Feet
- -------- ----------------------- -----------
Bronze:
Pittsburgh, PA Manufacturing / Division Offices 97,000
Apopka, FL Manufacturing 40,000
Melbourne, Australia Manufacturing 26,000(1)
Milton, Ontario, Canada Manufacturing 30,000
Montreal, Quebec, Canada Manufacturing 16,000(1)
Nashotah, WI Sales 12,000(1)
Parma, Italy Manufacturing / Warehouse 231,000(1)
Searcy, AR Manufacturing 104,000
Seneca Falls, NY Manufacturing 21,000
Sun City, CA Manufacturing 24,000
Graphics Imaging:
Pittsburgh, PA Manufacturing / Division Offices 56,000
Atlanta, GA Manufacturing 16,000
Cranberry Twp., PA Manufacturing 15,000(1)
Dallas, TX Manufacturing 15,000(1)
Denver, CO Manufacturing 12,000(1)
High Point, NC Manufacturing 35,000(1)
LaPalma, CA Manufacturing 22,000
St. Louis, MO Manufacturing 25,000
Marking Products:
Pittsburgh, PA Manufacturing / Division Offices 67,000
Pittsburgh, PA Ink Manufacturing 18,000
Gothenburg, Sweden Manufacturing / Distribution 28,000(1)
Corporate Office:
Pittsburgh, PA General Offices 48,000(2)
(1) These properties are leased by the Company under operating lease
arrangements. Rent expense incurred by the Company for leased facilities
was $802,000 in fiscal 1999.
(2) The Company uses approximately one-third of this building and leases, or
offers to lease, the remainder to unrelated parties.
All of the owned properties are unencumbered. The Company believes its
facilities are generally well suited for their respective uses and are of
adequate size and design to provide the operating efficiencies necessary for
the Company to be competitive. The Company's facilities provide adequate space
for meeting its near term production requirements and have availability for
additional capacity. The Company intends to continue to expand and modernize
its facilities as necessary to meet the demand for its products.
10
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings generally incidental to its
business. The eventual outcome of these matters is not predictable and it is
possible that their resolution could be unfavorable to the Company. Although
the ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that the matters should not result in liabilities
in an amount which would materially affect the consolidated financial position,
annual results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal year 1999.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information:
The authorized common stock of the Company is divided into two classes
consisting of Class A Common Stock, $1 par value, and Class B Common Stock,
$1 par value. Shares of Class A stock have one vote per share and are freely
transferable subject to applicable securities laws. Shares of Class B stock
have ten votes per share and are only transferable by a shareholder to the
Company or to an active employee of the Company. If shareholders wish to
otherwise sell Class B Common Stock, the Company may, at its discretion,
purchase such shares at the fair market value per share of the Company's
Class A Common Stock or permit shareholders to tender such shares to the
Company in exchange for an equal number of shares of Class A Common Stock.
In 1998, the Board of Directors declared a two-for-one stock split on the
Company's Class A and Class B Common Stock in the form of a 100% stock
distribution. Shareholders' equity was adjusted for the stock split by
reclassifying from additional paid-in capital and retained earnings to common
stock the par value of the additional shares arising from the split. All per
share amounts and numbers of shares in this report reflect the stock split.
The Company's Class A Common Stock is traded on the NASDAQ National Market
System. The following table sets forth the high, low and closing prices as
reported by NASDAQ (adjusted for the stock split) for the periods indicated:
High Low Close
---- --- -----
Fiscal 1999:
Quarter ended: September 30, 1999 $32.88 $24.88 $30.13
June 30, 1999 30.38 25.13 29.63
March 31, 1999 31.38 25.00 27.38
December 31, 1998 34.00 24.25 31.50
Fiscal 1998:
Quarter ended: September 30, 1998 $29.00 $21.25 $25.00
June 30, 1998 27.25 20.00 24.56
March 31, 1998 22.50 19.50 20.00
December 31, 1997 23.00 18.75 22.00
The Company has an active stock repurchase program, which was initiated in
fiscal 1996. Under the program, the Company's Board of Directors have
authorized repurchasing a total of 3,000,000 shares of Matthews Class A and
Class B Common Stock, of which 2,695,533 shares have been repurchased as of
September 30, 1999. The buy-back program is designed to increase shareholder
value, enlarge the Company's holdings of its Class A and Class B Common Stock,
and add to earnings per share. Repurchased shares may be retained in treasury,
utilized for acquisitions, or reissued to employees or other purchasers,
subject to the restrictions of the Restated Articles of Incorporation.
12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS,
continued.
(a) Market Information, continued:
In conjunction with the buy-back program, the Company invoked the provisions of
the Fifth Article of its Restated Articles of Incorporation. Such Article
provides (among other things) that any shareholder wishing to sell or convert
any Class B Common Stock must first offer such shares to the Company for
redemption. The Company will then have an option to purchase such shares for a
24-hour period.
(b) Holders:
The number of registered holders of the Company's common stock at November 30,
1999 was as follows:
Class A Common Stock 485
Class B Common Stock 264
(c) Dividends:
A quarterly dividend of $.0475 per share was paid for the fourth quarter of
fiscal 1999 to shareholders of record on October 29, 1999. The Company paid
quarterly dividends of $.045 per share for the first three quarters of fiscal
1999 and the fourth quarter of fiscal 1998. The Company paid quarterly
dividends of $.0425 per share for the first three quarters of fiscal 1998.
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,
-------------------------------------------------------------------
1999 1998 1997 1996(1) 1995
----------- ----------- ----------- ----------- -----------
(Not Covered by Report of Independent Accountants)
Net sales $239,329,223 $211,622,057 $189,168,640 $171,977,619 $166,747,781
Gross profit 103,036,695 93,050,222 83,500,886 76,640,900 74,729,267
Operating profit 40,947,991 35,928,944 30,887,395 26,771,380 24,457,704
Interest expense 867,400 466,304 337,375 131,364 104,820
Income before income taxes 41,276,659 37,132,283 32,297,897 33,522,616 25,079,263
Income taxes 16,260,957 14,630,591 12,671,833 13,265,062 9,628,028
---------- ---------- ---------- ---------- ----------
Net income $ 25,015,702 $ 22,501,692 $ 19,626,064 $ 20,257,554 $15,451,235
========== ========== ========== ========== ==========
Earnings per common share:
Basic $ 1.58 $ 1.38 $ 1.14 $ 1.14 $ .87
Diluted 1.54 1.34 1.11 1.11 .87
Weighted average common
shares outstanding:
Basic 15,851,393 16,336,359 17,194,073 17,781,824 17,700,700
Diluted 16,241,153 16,770,214 17,696,793 18,213,866 17,840,012
Cash dividends per share .183 .173 .163 .145 .125
Total assets $225,677,572 $187,205,764 $169,204,390 $153,411,709 $138,206,376
Long-term debt, noncurrent 14,144,038 1,434,679 2,151,413 - 270,092
(1) Fiscal 1996 included after-tax income of $2.9 million ($.16 per share, diluted) which consisted
of a gain on the sale of a subsidiary net of certain non-operating charges.
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
---------------------- -----------------
1999- 1998-
1999 1998 1997 1998 1997
---- ---- ---- ----- -----
Sales 100.0% 100.0% 100.0% 13.1% 11.9%
Gross profit 43.1 44.0 44.1 10.7 11.4
Operating profit 17.1 17.0 16.3 14.0 16.3
Income before taxes 17.2 17.5 17.1 11.2 15.0
Net income 10.5 10.6 10.4 11.2 14.7
Comparison of Fiscal 1999 and Fiscal 1998:
Sales for the year ended September 30, 1999 were $239.3 million and were
$27.7 million, or 13.1%, higher than sales of $211.6 million for the year ended
September 30, 1998. The increase in consolidated sales for fiscal 1999
resulted from revenue growth in all three of the Company's business segments.
Fiscal 1999 sales for the Bronze segment were $123.8 million, representing an
increase of $17.5 million, or 16.5%, over fiscal 1998. The sales increase
primarily reflected the Company's acquisitions of Gibraltar Mausoleum
Construction Company ("Gibraltar") in September 1998 and Caggiati S.p.A.
("Caggiati") in June 1999. Gibraltar is a leading builder of mausoleums in the
United States and Caggiati is the leading supplier of bronze memorialization
products in Europe (See "Acquisitions"). Graphics Imaging segment sales were
$85.1 million in fiscal 1999, representing an increase of $9.8 million, or
13.0%, over fiscal 1998. The increase in Graphics Imaging sales resulted
principally from the Company's acquisitions of a 50% interest in O.N.E. Color
Communications, L.L.C. ("O.N.E.") in May 1998 and a 50% interest in
S+T GmbH & Co. KG ("S+T GmbH") in September 1998. O.N.E. is a digital graphics
service company in the United States and S+T GmbH is a manufacturer of
photopolymer printing plates for the European packaging industry. The
consolidated financial statements of Matthews included the accounts of S+T GmbH
effective April 1, 1999 as a result of a change in control. In addition, sales
for the Graphics Imaging segment were favorably impacted by the installation of
a commercial printing operation at Tukaiz Communications, L.L.C. ("Tukaiz").
The increase in sales from these events was partially offset by a decline in
sales for the segment's existing operations. Demand for the segment's products
and services has been unfavorably impacted by mergers and consolidations among
packaging converters and by technology changes that enable customers to move
portions of their pre-press work in-house. The Company believes, however, that
the technology changes taking place in the graphics industry also provide
opportunities to those companies that can effectively broaden their product
offerings to customers and take advantage of economies of scale as the
pre-press industry consolidates.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1999 and Fiscal 1998, continued:
Marking Products segment sales for the year ended September 30, 1999 were
$30.5 million, representing an increase of $400,000 over fiscal 1998. Sales
for the segment's North American operations increased 7.0% over last year
primarily as a result of new product offerings during fiscal 1999. These
increases were partially offset by a decline resulting from the sale of the
segment's distribution operation in France in February 1998.
Gross profit for the year ended September 30, 1999 was $103.0 million, or 43.1%
of sales, compared to $93.1 million, or 44.0% of sales, for fiscal 1998. The
increase in consolidated gross profit of approximately $10.0 million, or 10.7%,
reflected higher gross profit levels in all three business segments. Increases
in gross profit in the Bronze and Graphics Imaging segments resulted from
higher sales, reflecting the Company's recent acquisitions. Gross profit as a
percent of sales for the Bronze segment in fiscal 1999 was comparable with
fiscal 1998 and reflected higher margins on sales of memorialization products
by Caggiati offset by lower margins on sales of mausoleums. Fiscal 1999 gross
profit as a percent of sales for the Graphics Imaging segment was lower than a
year ago as a result of lower margins on the segment's pre-press sales, higher
material costs related to the commercial printing operation of Tukaiz and an
increase in depreciation expense due to higher levels of capital investment.
Capital expenditures for the segment in fiscal 1999 included the investment by
Tukaiz in commercial printing equipment and related facilities. Gross profit
and gross profit as a percent of sales for the Marking Products segment for
fiscal 1999 were higher than a year ago reflecting higher North American sales
and an improved product mix.
Selling and administrative expenses for the year ended September 30, 1999 were
$62.1 million, representing an increase of $5.0 million, or 8.7%, over
$57.1 million for fiscal 1998. The increase over the prior year principally
resulted from the acquisitions of O.N.E. in May 1998 and Caggiati in June 1999.
In addition, administrative costs in the Graphics Imaging segment were higher
in fiscal 1999 reflecting one-time expenses associated with implementing
organizational changes. Partially offsetting these increases were lower
selling and administrative costs for the Marking Products segment due to the
sale of the Company's subsidiary in France and a reduction in the Company's
corporate administration costs. Excluding selling and administrative expenses
of Caggiati for the period, the Bronze segment's selling and administrative
expenses declined slightly in fiscal 1999 as a result of cost improvements
combined with lower incremental selling costs of Gibraltar. Consolidated
selling and administrative expense as a percent of sales was 26.0% for the year
ended September 30, 1999 compared to 27.0% for fiscal 1998.
Operating profit for the year ended September 30, 1999 was $40.9 million and
was $5.0 million, or 14.0%, higher than fiscal 1998. The improvement for
fiscal 1999 resulted from increases in the operating profits of the Bronze and
Marking Products segments of 22.1% and 34.4%, respectively. Operating profit
for the Bronze segment increased to $31.8 million in fiscal 1999 as a result of
higher revenues from the acquisitions of Caggiati and Gibraltar, an increase in
sales and improved margins for cremation products and improvements in the
segment's selling and administrative costs. Fiscal 1999 operating profit for
the Marking Products segment was $4.0 million compared to $3.0 million in
fiscal 1998. The increase primarily resulted from higher sales in the segment's
North American operations as a result of new product offerings.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1999 and Fiscal 1998, continued:
Operating profit for the Graphics Imaging segment in fiscal 1999 was
$5.1 million, compared to $6.9 million in fiscal 1998. The 25.7% decline in
operating profit from fiscal 1998 was due to several factors which included
weak demand for corrugated printing plates, lower margins on the segment's
pre-press sales, and an increase in depreciation expense due to higher levels
of capital investment at Tukaiz. The Graphics Imaging segment also incurred
one-time expenses of approximately $400,000 during fiscal 1999 associated with
the start-up of a commercial printing operation at Tukaiz and the
implementation of organizational changes within the segment.
Investment income for the year ended September 30, 1999 was $1.8 million,
compared to $2.5 million for fiscal 1998. The decline in investment income
primarily reflected a reduction in the Company's average cash and investment
balances. The Company's average cash and investment balances were lower than a
year ago primarily as a result of acquisitions and stock repurchases.
Interest expense for the year ended September 30, 1999 was $867,000, compared
to $466,000 for fiscal 1998. Interest expense principally related to new
borrowings and assumed debt in connection with the acquisition of Caggiati, the
long-term debt and capital lease obligations of Tukaiz, and the Company's
obligations related to the acquisition of O.N.E. (See "Acquisitions").
Other income (deductions), net, for the year ended September 30, 1999
represented a reduction to pre-tax income of $570,000, compared to a reduction
of $382,000 for fiscal 1998. Fiscal 1998 included gains on the sale of various
fixed assets. Minority interest, which was $22,000 for fiscal 1999, relates to
income generated by Tukaiz and S+T GmbH. Minority interest was $461,000 for
fiscal 1998. The reduction in minority interest for the current year reflected
a decline in the operating results of Tukaiz.
The Company's effective tax rate for the year ended September 30, 1999 was
39.4%, compared to 39.4% for fiscal 1998. The difference between the Company's
effective tax rate and the Federal statutory rate of 35% primarily reflected
the impact of state income taxes.
Comparison of Fiscal 1998 and Fiscal 1997:
Sales for the year ended September 30, 1998 were $211.6 million and were
$22.4 million, or 11.9%, higher than sales of $189.2 million for the year ended
September 30, 1997. The sales increase for fiscal 1998 resulted from higher
sales in the Company's Graphics Imaging and Bronze segments. Fiscal 1998 sales
for the Graphics Imaging segment were $75.3 million, an increase of
$17.5 million, or 30%, over the prior year primarily reflecting acquisitions
completed during fiscal years 1998 and 1997. The Company's acquisitions
included Carolina Repro-Graphic ("Carolina") in May 1997, a 50% interest in
Tukaiz in January 1997 and a 50% interest in O.N.E. in May 1998 (See
"Acquisitions"). Bronze segment sales for the year ended September 30, 1998
were $106.3 million, representing an increase of $9.9 million, or 10%, over
fiscal 1997. The higher level of sales for fiscal 1998 mainly reflected an
increase in the unit volumes of bronze and granite memorial products. In
addition, sales of cremation equipment and cremation-related products increased
for the year.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1998 and Fiscal 1997, continued:
Sales for the Marking Products segment in fiscal 1998 were $30.1 million,
representing a decrease of $4.9 million, or 14%, below fiscal 1997. The
decline, which was expected, resulted from the sale of the segment's
distribution operations in Australia (August 1997) and France (February 1998),
both of which had historically produced marginal results for the Company.
Fiscal 1998 sales for the segment's North American operations increased 4.0%
compared to fiscal 1997.
Gross profit for the year ended September 30, 1998 was $93.1 million, or 44.0%
of sales, compared to $83.5 million, or 44.1% of sales, for the year ended
September 30, 1997. The increase in gross profit of $9.6 million, or 11.4%,
resulted from higher sales for the Graphics Imaging segment and increased sales
and an improvement in the gross margin percentage for the Bronze segment.
Marking Products gross profit for the year ended September 30, 1998 declined
from fiscal 1997 reflecting the divestitures of the segment's distribution
operations in Australia and France. Consolidated gross profit as a percent of
sales for fiscal 1998 was relatively consistent with fiscal 1997. Gross profit
as a percent of sales for the Bronze segment increased in fiscal 1998
reflecting improvements in sales volume and operating efficiencies. For the
Graphics Imaging and Marking Products segments, the fiscal 1998 gross profit
percentage was slightly lower than fiscal 1997 due to changes in product mix.
Selling and administrative expenses for the year ended September 30, 1998 were
$57.1 million, representing an increase of $4.5 million, or 8.6%, over fiscal
1997. The increase in selling and administrative expenses from fiscal 1997
principally resulted from acquisitions by the Graphics Imaging segment during
fiscal years 1998 and 1997. In addition, selling costs for the Bronze segment
were higher in fiscal 1998 reflecting increased marketing and promotional
expenses. Partially offsetting these increases was a reduction in Marking
Products selling and administrative costs resulting from the sale of the
segment's distribution operations in Australia and France. Consolidated
selling and administrative expenses were 27.0% of sales for fiscal 1998
compared to 27.8% for fiscal 1997.
Operating profit for the year ended September 30, 1998 was $35.9 million and
was $5.0 million, or 16.3%, higher than fiscal 1997, reflecting increases in
all three of the Company's business segments. Operating profit for the
Graphics Imaging segment was $6.9 million, representing an increase of
$1.4 million, or 25.5%, over fiscal 1997. The increase was primarily the
result of the segment's acquisitions. Bronze segment operating profit for the
year ended September 30, 1998 was $26.0 million, representing an increase of
$3.4 million, or 15.2%, over fiscal 1997. The increase in Bronze operating
profit primarily reflected the segment's higher sales volume for the year
combined with improved cost-price relationships for some products. Fiscal 1998
operating profit for the Marking Products segment also improved over fiscal
1997 despite the sale of the segment's distribution operations in Australia and
France. The segment's operating profit was $3.0 million for the year ended
September 30, 1998, representing an increase of 7.2% over fiscal 1997. The
improvement resulted from higher sales combined with lower selling costs in the
segment's North American operations.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1998 and Fiscal 1997, continued:
Investment income for the year ended September 30, 1998 was $2.5 million,
compared to $2.5 million for fiscal 1997. The Company's average cash and
investment balances were lower in fiscal 1998 as a result of acquisitions and
stock repurchases. The effect on investment income of the lower average cash
and investment balances was offset by a higher rate of return on investments.
Interest expense for the year ended September 30, 1998 was $466,000, compared
to $337,000 for fiscal 1997. Interest expense principally related to the
Company's capital lease obligations. Other income (deductions), net for the
year ended September 30, 1998 represented a reduction in pre-tax income of
$382,000 compared to a reduction of $318,000 for fiscal 1997. Minority
interest for the year ended September 30, 1998 related Tukaiz.
The Company's effective tax rate for the year ended September 30, 1998 was
39.4%, compared to an effective rate of 39.2% for fiscal 1997. The difference
between the Company's fiscal 1998 effective tax rate and the Federal statutory
rate of 35% primarily reflected the impact of state income taxes.
Comparison of Fiscal 1997 and Fiscal 1996:
Sales for the year ended September 30, 1997 were $189.2 million and were
$17.2 million, or 10.0%, higher than sales of $172.0 million for the year ended
September 30, 1996. The increase for fiscal 1997 reflected higher sales in the
Company's Bronze and Graphics Imaging segments. Bronze segment sales were
$96.4 million for fiscal 1997, representing an increase of 14% over fiscal
1996. The increase primarily reflected higher volume of memorial products
combined with sales of crematories and cremation-related products as a result
of the acquisitions of Industrial Equipment and Engineering Company, Inc.
(March 1996) and All Crematory Corporation (August 1996). Fiscal 1997 Graphics
Imaging segment sales were $57.8 million, representing an increase of 34% over
fiscal 1996. The increase resulted primarily from the acquisitions of Carolina
and Tukaiz. Marking Products sales for fiscal 1997 were $35.0 million,
representing a decrease of $9.4 million, or 21%, below fiscal 1996. The
decline in sales resulted from the sale of the segment's label printer
application business and the liquidation of the segment's German operation in
fiscal 1996. These operations had historically produced marginal results for
the segment.
Gross profit for the year ended September 30, 1997 was $83.5 million, or 44.1%
of sales, compared to $76.6 million, or 44.6% of sales, for fiscal 1996. The
increase in gross profit of $6.9 million, or 9.0%, was attributable to higher
gross profits in the Bronze and Graphics Imaging segments. Bronze gross profit
improved 15% as a result of higher sales of bronze memorials, crematories and
cremation-related products. Bronze gross profit as a percent of sales improved
slightly for the year as a result of the increased sales of memorial products.
Gross profit for the Graphics Imaging segment increased approximately 30% over
fiscal 1996 as a result of the acquisitions of Carolina and Tukaiz. Graphics
Imaging gross profit as a percent of sales declined for the year principally
due to changes in product mix. Marking Products gross profit declined 22% from
fiscal 1996 as a result of lower sales, but the segment's gross profit as a
percent of sales remained relatively unchanged.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Comparison of Fiscal 1997 and Fiscal 1996, continued:
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 fiscal
1996. Fiscal 1997 selling and administrative expenses for the Bronze segment
increased over fiscal 1996 primarily reflecting the acquisitions of Industrial
Equipment and Engineering Company, Inc. and All Crematory Corporation. Selling
and administrative expenses for the Graphics Imaging segment also increased in
fiscal 1997 reflecting the acquisitions of Carolina and Tukaiz. 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 operation.
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. Operating profit for the Bronze segment was $22.6 million for
fiscal 1997, representing an increase of 12% over fiscal 1996. The higher
level of operating profit was due primarily to an increase in the segment's
sales of memorial and cremation products. Graphics Imaging operating profit
for fiscal 1997 was $5.5 million, which represented an increase of 31% over
fiscal 1996 and reflected the acquisitions of Carolina and Tukaiz. Operating
profit for the Marking Products segment was $2.8 million for fiscal 1997,
representing an increase of 13% over fiscal 1996. The increase was due
principally to the absence of losses of the German operation.
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 decrease principally reflected fluctuations in the average
cash and investment position during fiscal 1997 as a result of the Company's
acquisitions and stock repurchases.
Interest expense for the year ended September 30, 1997 was $337,000, compared
to $131,000 for fiscal 1996. The increase in interest expense for fiscal 1997
reflected the capital lease obligations assumed in connection with the
acquisition of Tukaiz.
Other income (deductions), net for the year ended September 30, 1997
represented a reduction to pre-tax income of $318,000 compared to an increase
of $4.3 million for fiscal 1996. Other income for fiscal 1996 included a gain
on the sale of a subsidiary, Sunland Memorial Park, Inc.
The Company's effective tax rate for the year ended September 30, 1997 was
39.2% compared to 39.6% for fiscal 1996. The decline from fiscal 1996
primarily reflected changes in the effect of foreign taxes. The difference
between the Company's effective tax rate and the Federal statutory rate of 35%
primarily reflected the impact of state and foreign income taxes.
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 $26.4 million for the year ended September 30,
1999, compared to $34.8 million for fiscal 1998 and $37.5 million for fiscal
1997. Operating cash flow for the year ended September 30, 1999 principally
reflected the Company's net income for the year of $25.0 million adjusted for
non-cash expenses such as depreciation and amortization. The decrease in
operating cash flow from fiscal 1998 resulted primarily from changes in working
capital items (excluding increases in connection with acquisitions) including
an increase in trade accounts receivable and reductions in various current
liabilities. Operating cash flow for the year ended September 30, 1998
primarily reflected the Company's net income of $22.5 million plus non-cash
expenses and an increase in the Company's compensation-related accruals.
Fiscal 1997 operating cash flow reflected net income for the year in addition
to the effect of changes in certain working capital items, principally a
significant increase in customer prepayments.
Cash used in investing activities was $18.0 million for the year ended
September 30, 1999, compared to $5.7 million for fiscal 1998 and $7.7 million
for fiscal 1997. Investing activities for the year ended September 30, 1999
included capital expenditures of $13.3 million and acquisitions of
$10.8 million (net of cash acquired). Fiscal 1999 acquisitions consisted
primarily of the purchase of Caggiati S.p.A. in June 1999. See "Acquisitions"
for further discussion of the Company's acquisitions during the last three
fiscal years. Investing activities for fiscal 1999 also reflected proceeds
from the net disposition of investments of $5.5 million.
Investing activities for fiscal 1998 included capital expenditures of
$7.3 million and acquisitions of $16.2 million. Fiscal 1998 acquisitions
included Gibraltar Mausoleum Construction Company, Inc. and a 50% interest in
O.N.E. Color Communications, L.L.C. Investing activities for fiscal 1998 also
included proceeds from the net disposition of investments of $16.8 million.
Investing activities for fiscal 1997 included capital expenditures of $6.2
million and acquisitions of $7.8 million. Fiscal 1997 acquisitions included
Carolina Repro-Graphic and a 50% interest in Tukaiz Communications L.L.C.
Fiscal 1997 investing activities also reflected proceeds of $5.1 million from
the net disposition of investments.
Capital expenditures were $13.3 million for the year ended September 30, 1999,
compared to $7.3 million and $6.2 million for fiscal 1998 and 1997,
respectively. The increase in capital expenditures in fiscal 1999 resulted
primarily from investments in commercial printing equipment and facilities for
Tukaiz and production equipment for the Bronze segment operations in Searcy,
Arkansas. Capital expenditures in each of the last three fiscal years
reflected reinvestment in the Company's three business 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 the last three fiscal years were primarily financed through
operating cash and the related assets are unencumbered. The investment in
commercial printing equipment and facilities for Tukaiz was partially financed
through a bank loan. Capital spending for property, plant and equipment has
averaged $8.9 million for the last three fiscal years. The capital budget for
fiscal 2000 is $11.7 million. The Company expects to generate sufficient cash
from operations to fund all anticipated capital spending projects.
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, 1999 was
$2.2 million and included borrowings of $10.9 million (Lit. 20.2 billion) for
the acquisition of Caggiati S.p.A. and $4.0 million by Tukaiz to finance
capital projects. Repayments under these borrowings and the Company's capital
lease obligations were $1.6 million in fiscal 1999. Financing activities in
fiscal 1999 also included net treasury stock purchases of $12.6 million and the
Company's dividends on common stock of $2.9 million ($0.1825 per share).
Cash used in financing activities for the years ended September 30, 1998 and
1997 were $23.1 million and $21.7 million, respectively. Financing activities
for fiscal 1998 consisted of net treasury stock purchases of $19.1 million, the
Company's dividends on common stock of $2.8 million ($.1725 per share) and
repayments under the Company's capital lease agreements of $1.2 million.
Financing activities in fiscal 1997 included net treasury stock purchases
totaling $14.4 million, payments of $4.5 million on long-term debt and capital
lease obligations assumed in the acquisition of Tukaiz, and dividends on common
stock of $2.8 million ($.1625 per share).
The Company has an active stock repurchase program, which was initiated in
fiscal 1996. Under the program, the Company's Board of Directors have
authorized repurchasing a total of 3,000,000 shares of Matthews Class A and
Class B Common Stock, of which 2,695,533 shares have been repurchased as of
September 30, 1999. The buy-back program is designed to increase shareholder
value, enlarge the Company's holdings of its Class A and Class B Common Stock,
and add to earnings per share. Repurchased shares may be retained in treasury,
utilized for acquisitions, or reissued to employees or other purchasers,
subject to the restrictions of the Restated Articles of Incorporation.
The Company has a Revolving Credit and Term Loan Agreement. Under terms of the
agreement, the Company may borrow principal amounts up to $10.0 million in the
aggregate at various interest rate options approximating current market rates.
The Revolving Credit and Term Loan Agreement requires the Company to maintain
minimum levels of consolidated working capital and tangible net worth. At
September 30, 1999 and 1998, no amounts were outstanding under this agreement.
The Company has a line of credit of $500,000 (Canadian dollars) which provides
for borrowings at the bank's prime interest rate. The Company has a $200,000
(U.S.) foreign exchange line of credit for standby letters of credit to support
performance guarantees. There were no borrowings outstanding on these lines of
credit at September 30, 1999 and 1998. Tukaiz has a line of credit of
$1.5 million which bears interest at the bank's prime rate, which was 8.25% at
September 30, 1999. Outstanding borrowings under this line were $365,000 at
September 30, 1999.
Consolidated working capital of the Company was $34.6 million at September 30,
1999, compared to $32.4 million and $31.0 million at September 30, 1998
and 1997, respectively. Cash and cash equivalents were $31.5 million at
September 30, 1999, compared to $25.4 million and $20.0 million at
September 30, 1998 and 1997, respectively. The Company's current ratio at
September 30, 1999 was 1.6, compared to 1.7 and 1.9 at September 30, 1998 and
1997, respectively.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
YEAR 2000 ISSUE
The Company has assessed the potential impact of the Year 2000 issue on its
operations and information systems. Costs incurred to date for this assessment
and for systems modifications specifically required to address any Year 2000
issues have not been material. The Company's significant operating and
information systems are substantially Year 2000 compliant.
In connection with this assessment, the Company has also contacted its key
suppliers and customers as necessary concerning their Year 2000 readiness.
Since the Year 2000 readiness of suppliers and customers is not within the
Company's control, there can be no assurance that some disruptions in the
Company's operations could not occur. However, based on responses from
suppliers and customers to date, and due to the nature of the Company's
businesses, its key supply arrangements and customer base, the Company does not
currently expect any material disruptions in its operations.
Based on management's assessment, the Year 2000 issue is not expected to have a
material impact on the consolidated financial position, results of operations
or cash flows of the Company.
ACQUISITIONS:
On June 1, 1999, Matthews completed the largest acquisition in its history with
the purchase of Caggiati S.p.A. Caggiati S.p.A., with consolidated annual
sales of approximately $25 million (U.S.), is the leading supplier of bronze
memorialization products in Europe. Caggiati S.p.A. is based in Colorno
(Parma), Italy and has two subsidiaries: Caggiati Espana S.A. in Valencia,
Spain and Caggiati France S.a.r.l. in Lyon, France. The transaction was
structured as an asset purchase. The purchase price was Lit. 34.6 billion
(U.S.$19.0 million) cash plus the assumption of bank debt of Lit. 10.2 billion
(U.S.$5.5 million) and certain other trade liabilities. Matthews paid cash
of Lit. 20.2 billion (U.S.$10.9 million) at the closing with Lit. 7.2 billion
(U.S.$4.0 million) payable one year after the closing date and the remaining
Lit. 7.2 billion payable two years after the closing date. Interest at an
annual rate of 5% is payable on the deferred payments. The cash payment of
Lit. 20.2 billion was financed through borrowings from an Italian bank,
UniCredito Italiano, Parma, Italy.
The combination of Matthews and Caggiati S.p.A. is an important part of
Matthews' strategy to enhance its position as the worldwide leader in the
memorialization industry. This acquisition is designed to serve as a platform
for Matthews to penetrate existing European markets, enter new markets in other
areas of the world, and improve Matthews' ability to serve existing
multi-national customers on a global basis. In addition, Caggiati products are
manufactured via die cast, shell molding and lost wax technologies whereas the
majority of Matthews' products are produced by sand cast technology. The
combination of these manufacturing processes is expected to provide Matthews
with opportunities for the introduction of new products to both existing and
new markets. Caggiati S.p.A. (which is celebrating its 40th year as a bronze
memorial supplier) is considered to be the premier supplier in the markets they
serve and has an excellent reputation for high quality products and outstanding
customer service.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS, continued:
In September 1998, Matthews acquired for 11,255,500 German Marks
(U.S.$6.2 million) a fifty percent interest in S+T GmbH & Co. KG ("S+T GmbH").
The operations of S+T GmbH, located in Julich, Germany, consist principally of
flexographic printing preparation and the manufacture of photopolymer printing
plates for the European packaging industry. S+T GmbH reported sales of
approximately $5.0 million (U.S.) in 1997. The remaining fifty percent
interest will continue to be owned by the existing president of S+T GmbH. The
cash payment is due January 2000. In addition, Matthews has a call option to
acquire an additional thirty percent interest in S+T GmbH at a purchase price
contingent on the operating performance of S+T GmbH. The investment in S+T
GmbH was recorded under the equity method of accounting until March 31, 1999.
As a result of a change in control of S+T GmbH, the consolidated financial
statements of Matthews included the accounts of S+T GmbH effective April 1,
1999. The combination of Matthews and S+T GmbH is an important part of
Matthews' strategy to become a worldwide leader in the graphics industry and
serve existing multinational customers on a global basis.
In October 1998, Matthews entered into a foreign currency forward contract with
a financial institution for the purchase of German Marks to hedge its January
2000 payment commitment for the investment in S+T GmbH. In November 1998,
Matthews also entered into a letter of credit agreement with a financial
institution to guarantee performance under this payment commitment.
In September 1998, Matthews purchased for $10.0 million cash the assets of
Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"). Gibraltar is a
leading builder of mausoleums in the United States. The acquisition of
Gibraltar is intended to expand Matthews products and services in the growing
segments in the memorial industry of cremation and mausoleum entombment.
In May 1998, Matthews acquired a fifty percent interest in O.N.E. Color
Communications, L.L.C. ("O.N.E."), a digital graphics service company. The
transaction was structured as an asset purchase with the purchase price
consisting of $2.0 million cash and the assumption of a fifty percent interest
in certain liabilities of O.N.E. An additional amount is payable by Matthews
three years from the acquisition date contingent on the attainment of certain
operating performance levels of O.N.E., with such payout to be not less
than $400,000.
In addition, the purchase agreement requires Matthews to purchase the remaining
fifty percent interest in O.N.E. no later than May 2004. The purchase price
for the remaining interest is contingent on the attainment of certain operating
performance levels of O.N.E. with such payment to be not less than
$4.5 million. The accounts of O.N.E. have been included in the consolidated
financial statements of Matthews and a liability has been recorded for the
present value of the minimum future payouts. O.N.E., with annual sales of
approximately $10.0 million, is headquartered in Oakland, California. O.N.E.
provides digital graphic services to advertising agencies and packaging
markets. The combination of Matthews and O.N.E. is an integral part of
Matthews' strategy to become a worldwide leader in advanced applications of
digital graphics.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
ACQUISITIONS, continued:
In May 1997, Matthews acquired for $2.4 million cash the common stock of both
Carolina Repro-Graphic and Dieworks, Inc. (collectively "Carolina"),
manufacturers of pre-press services, flexible printing plates and steel rule
cutting dies, located in North Carolina. Carolina provides products and
services primarily to the southeast region of the United States. Annual
combined sales for Carolina were $3.7 million in 1996.
In January 1997, Matthews acquired a fifty percent interest in Tukaiz
Communications L.L.C. ("Tukaiz"), a pre-press and pre-media firm headquartered
in Franklin Park, Illinois. A pre-press firm prepares art or digital files for
printing or reproduction. The remaining fifty percent interest continues to be
owned by the president of Tukaiz. The transaction was structured as an asset
purchase with the purchase price consisting of $4.0 million cash and the
assumption of a fifty percent interest, approximately $4.0 million, in certain
of the liabilities of Tukaiz. Matthews also provided Tukaiz with subordinated
convertible debt of $5.5 million. Tukaiz reported sales of $16.4 million for
the year ended January 31, 1997. The accounts of Tukaiz have been included
in the consolidated financial statements of Matthews. The combination of
Matthews' Graphics Imaging business and Tukaiz is designed to provide 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, commercial printing, web-site
service and on-demand digital printing.
Matthews has accounted for the aforementioned acquisitions using the purchase
method and, accordingly, recorded the acquired assets and liabilities at their
estimated fair values at the acquisition dates. The excess of the purchase
price over the fair value of the net assets has been recorded as goodwill to be
amortized on a straight-line basis over periods ranging from 20 to 25 years.
STOCK SPLIT
In 1998, the Board of Directors declared a two-for-one stock split on the
Company's Class A and Class B Common Stock in the form of a 100% stock
distribution. Shareholders' equity was adjusted for the stock split by
reclassifying from additional paid-in capital and retained earnings to common
stock the par value of the additional shares arising from the split. All per
share amounts and numbers of shares in this report reflect the stock split.
FASB PRONOUNCEMENTS:
At September 30, 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." The pronouncement
established standards for reporting and display of comprehensive income and its
components. Comprehensive income consists of net income adjusted for changes
in cumulative foreign currency translation, unrealized investment gains and
losses and minimum pension liability.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
FASB PRONOUNCEMENTS, continued:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The pronouncement established standards for reporting information about
operating segments of an enterprise and requires the disclosure of selected
segment information in interim financial reports. SFAS No. 131 was adopted by
the Company in the consolidated financial statements for the year ended
September 30, 1999. The interim presentation requirement of the pronouncement
will be adopted by the Company in the first quarter of fiscal 2000.
At September 30, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
pronouncement revised employers' disclosures about pension and other
postretirement benefit plans, but did not change the measurement or recognition
of those plans.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Description Pages
- ----------- -----
Report of Independent Accountants 27
Consolidated Balance Sheet 28-29
Consolidated Statement of Income 30
Consolidated Statement of Shareholders' Equity 31
Consolidated Statement of Cash Flows 32
Notes to Consolidated Financial Statements 33-51
Supplementary Financial Information 52
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Matthews International Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Matthews
International Corporation and subsidiaries at September 30, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended September 30, 1999 in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
November 18, 1999
28
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1999 and 1998
----------
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 31,531,686 $ 25,369,834
Short-term investments 147,114 229,903
Accounts receivable 45,949,743 36,072,213
Inventories (Note 3) 16,400,477 12,658,467
Deferred income taxes 966,019 931,020
Other current assets 1,896,322 1,053,033
---------- ----------
Total current assets 96,891,361 76,314,470
Investments (Note 4) 11,312,730 24,250,799
Property, plant and equipment, net (Note 5) 50,670,747 44,730,376
Deferred income taxes (Note 11) 7,509,257 8,207,623
Other assets 6,130,466 5,797,811
Goodwill, net of accumulated amortization of
$5,245,992 and $3,169,803, respectively 53,163,011 27,904,685
----------- -----------
Total assets $225,677,572 $187,205,764
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
29
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
September 30, 1999 and 1998
----------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
---- ----
Current liabilities:
Long-term debt, current maturities $ 7,604,443 $ 800,252
Trade accounts payable 9,798,531 6,901,044
Accrued compensation 10,218,612 8,299,442
Accrued vacation pay 3,983,468 3,855,552
Profit distribution to employees 3,925,566 4,069,514
Accrued income taxes 818,324 3,942,617
Customer prepayments 6,825,149 7,441,088
Postretirement benefits, current portion 790,809 749,136
Other current liabilities (Note 15) 18,326,222 7,847,924
---------- ----------
Total current liabilities 62,291,124 43,906,569
Long-term debt (Note 6) 14,144,038 1,434,679
Estimated finishing costs 4,059,837 3,831,674
Postretirement benefits other than pensions (Note 10) 19,513,936 20,082,548
Other liabilities (Note 15) 11,046,706 13,639,998
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, 14,777,391 and 14,414,944 shares issued
at September 30, 1999 and 1998, respectively 14,777,391 14,414,944
Class B, $1.00 par value, authorized 30,000,000
shares, 3,389,605 and 3,752,052 shares issued
at September 30, 1999 and 1998, respectively 3,389,605 3,752,052
Preferred stock, $100 par value, authorized 10,000
shares, none issued - -
Retained earnings 152,098,622 131,061,637
Accumulated other comprehensive income (loss) (3,970,000) (4,390,068)
Notes receivable (54,800) (453,089)
Treasury stock, 2,507,232 and 2,156,584 shares at
September 30, 1999 and 1998, respectively, at cost (51,618,887) (40,075,180)
----------- -----------
Total shareholders' equity 114,621,931 104,310,296
----------- -----------
Total liabilities and shareholders' equity $225,677,572 $187,205,764
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
30
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the years ended September 30, 1999, 1998 and 1997
----------
1999 1998 1997
---- ---- ----
Sales $239,329,223 $211,622,057 $189,168,640
Cost of goods sold 136,292,528 118,571,835 105,667,754
----------- ----------- -----------
Gross profit 103,036,695 93,050,222 83,500,886
Selling expense 36,877,151 33,646,395 31,651,446
Administrative expense 25,211,553 23,474,883 20,962,045
----------- ----------- -----------
Operating profit 40,947,991 35,928,944 30,887,395
Investment income 1,788,135 2,511,552 2,486,357
Interest expense (867,400) (466,304) (337,375)
Other income (deductions), net (569,992) (380,860) (317,961)
Minority interest (22,075) (461,049) (420,519)
----------- ----------- -----------
Income before income taxes 41,276,659 37,132,283 32,297,897
Income taxes (Note 11) 16,260,957 14,630,591 12,671,833
----------- ----------- -----------
Net income $ 25,015,702 $ 22,501,692 $ 19,626,064
=========== =========== ===========
Earnings per share (Notes 2 and 9):
Basic $ 1.58 $ 1.38 $ 1.14
==== ==== ====
Diluted $ 1.54 $ 1.34 $ 1.11
==== ==== ====
The accompanying notes are an integral part of these consolidated financial statements.
31
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1999, 1998 and 1997
----------
Accumulated
Other
Common Additional Comprehensive Notes
Stock Paid-in Retained Income (Loss) Receivable Treasury
(Note 7) Capital Earnings (net of tax) (Note 7) Stock Total
---------- ---------- ----------- ------------- ---------- ----------- ----------
Balance, September 30, 1996 $ 9,083,498 $ 7,466,009 $ 98,367,657 $(2,247,616) $(1,403,683) $ (8,806,822) $102,459,043
Net income - - 19,626,064 - - - 19,626,064
Unrealized gains (losses) - - - 344,914 - - 344,914
Minimum pension liability - - - (124,200) - - (124,200)
Translation adjustment - - - (1,407,468) - - (1,407,468)
Total comprehensive income 18,439,310
Treasury stock transactions:
Purchase of 1,030,018 shares - - - - - (17,189,821) (17,189,821)
Issuance of 241,288 shares
under stock plans - (777,595) - - - 3,557,774 2,780,179
Dividends, $.1625 per share - - (2,814,259) - - - (2,814,259)
Payments on notes receivable - - - - 491,623 - 491,623
---------- ---------- ----------- --------- --------- ---------- -----------
Balance, September 30, 1997 9,083,498 6,688,414 115,179,462 (3,434,370) (912,060) (22,438,869) 104,166,075
Net income - - 22,501,692 - - - 22,501,692
Unrealized gains (losses) - - - 273,095 - - 273,095
Minimum pension liability - - - (134,087) - - (134,087)
Translation adjustment - - - (1,094,706) - - (1,094,706)
Total comprehensive income 21,545,994
Treasury stock transactions:
Purchase of 1,034,384 shares - - - - - (23,069,770) (23,069,770)
Issuance of 304,366 shares
under stock plans - (1,144,117) (287,282) - - 5,433,459 4,002,060
Stock split, two-for-one 9,083,498 (5,544,297) (3,539,201) - - - -
Dividends, $.1725 per share - - (2,793,034) - - - (2,793,034)
Payments on notes receivable - - - - 458,971 - 458,971
---------- ---------- ----------- --------- --------- ---------- -----------
Balance, September 30, 1998 18,166,996 - 131,061,637 (4,390,068) (453,089) (40,075,180) 104,310,296
Net income - - 25,015,702 - - - 25,015,702
Unrealized gains (losses) - - - (204,977) - - (204,977)
Minimum pension liability - - - 278,315 - - 278,315
Translation adjustment - - - 346,730 - - 346,730
Total comprehensive income 25,435,770
Treasury stock transactions:
Purchase of 543,384 shares - - - - - (15,723,226) (15,723,226)
Issuance of 192,736 shares
under stock plans - - (1,101,157) - - 4,179,519 3,078,362
Dividends, $.1825 per share - - (2,877,560) - - - (2,877,560)
Payments on notes receivable - - - - 398,289 - 398,289
---------- ---------- ----------- --------- --------- ---------- -----------
Balance, September 30, 1999 $18,166,996 $ - $152,098,622 $(3,970,000) $ (54,800) $(51,618,887) $114,621,931
========== ========== =========== ========= ========= ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
32
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended September 30, 1999, 1998 and 1997
----------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $25,015,702 $22,501,692 $19,626,064
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,609,368 8,033,101 6,047,085
Change in deferred taxes 616,479 (2,201,507) 80,349
Changes in working capital items (Note 13) (8,923,444) 5,742,946 10,050,004
(Increase) decrease in other assets (110,070) 381,243 1,125,185
Increase in estimated finishing costs 228,163 522,576 354,799
Increase (decrease) in other liabilities (1,105,873) 72,462 877,767
Decrease in postretirement benefits (526,939) (471,523) (647,793)
(Gain) loss on sale of property, plant and equipment 143,345 (55,818) 192,529
Net (gain) loss on investments (94,744) 60,657 50,164
Effect of exchange rate changes on operations 522,515 197,107 (219,407)
---------- ---------- ----------
Net cash provided by operating activities 26,374,502 34,782,936 37,536,746
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (13,282,403) (7,332,691) (6,164,630)
Proceeds from sales of property, plant and equipment 200,987 549,731 574,029
Acquisitions, net of cash acquired (10,797,675) (16,221,247) (7,766,275)
Investments (787,785) (1,773,193) (4,018,535)
Proceeds from disposition of investments 6,316,700 18,576,625 9,146,833
Payments on notes receivable 398,289 458,971 491,623
---------- ---------- ----------
Net cash used in investing activities (17,951,887) (5,741,804) (7,736,955)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 14,950,926 - -
Payments on long-term debt (1,602,541) (1,190,620) (4,474,258)
Proceeds from the sale of treasury stock 3,078,362 4,002,060 2,780,179
Purchases of treasury stock (15,723,226) (23,069,770) (17,189,821)
Dividends (2,877,560) (2,793,034) (2,814,259)
---------- ---------- ----------
Net cash used in financing activities (2,174,039) (23,051,364) (21,698,159)
---------- ---------- ----------
Effect of exchange rate changes on cash (86,724) (578,646) (561,638)
---------- ---------- ----------
Net increase in cash and cash equivalents 6,161,852 5,411,122 7,539,994
Cash and cash equivalents at beginning of year 25,369,834 19,958,712 12,418,718
---------- ---------- ----------
Cash and cash equivalents at end of year $31,531,686 $25,369,834 $19,958,712
========== ========== ==========
Cash paid during the year for:
Interest $ 867,400 $ 466,304 $ 337,375
Income taxes 17,446,574 14,436,012 10,458,745
The accompanying notes are an integral part of these consolidated financial statements.
33
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. NATURE OF OPERATIONS:
Matthews International Corporation ("Matthews"), founded in 1850 and
incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer
principally of custom-made products which are used to identify people, places,
products and events. The Company's products and operations are comprised of
three business segments: Bronze, Graphics Imaging and Marking Products. The
Bronze segment is a leading manufacturer of cast bronze memorials and other
memorialization products, crematories and cremation-related products and is a
leading builder of mausoleums in the United States. The Graphics Imaging
segment manufactures and provides printing plates, pre-press services and
imaging systems for the corrugated and flexible packaging industries. The
Marking Products segment designs, manufactures and distributes a wide range of
equipment and consumables for identifying various consumer and industrial
products, components and packaging containers.
The Company has manufacturing and marketing facilities in the United States,
Australia, Canada, Germany, Italy and Sweden.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include all majority-owned foreign and
domestic subsidiaries. The consolidated financial statements also include the
accounts of the Company's 50%-owned affiliates, Tukaiz Communications, L.L.C.
("Tukaiz"), O.N.E. Color Communications, L.L.C. and, effective April 1, 1999,
S+T GmbH & Co. KG (Note 4). All intercompany accounts and transactions have
been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Split:
In 1998, the Board of Directors declared a two-for-one stock split on the
Company's Class A and Class B Common Stock in the form of a 100% stock
distribution. Shareholders' equity was adjusted for the stock split by
reclassifying from additional paid-in capital and retained earnings to common
stock the par value of the additional shares arising from the split. All per
share amounts and numbers of shares in this report reflect the stock split.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Foreign Currency:
Balance sheet accounts for foreign subsidiaries are translated into U.S.
dollars at current exchange rates in effect at the consolidated balance sheet
date. Gains or losses that result from this process are recorded in other
comprehensive income. The cumulative translation adjustment at September 30,
1999 and 1998 was a reduction in accumulated other comprehensive income of
$3,896,560 and $4,243,290, respectively. The revenue and expense accounts of
foreign subsidiaries are translated into U.S. dollars at the average exchange
rates that prevailed during the period.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Company considers
all investments purchased with a remaining maturity of three months or less to
be cash equivalents. The carrying amount of cash and cash equivalents
approximates fair value due to the short-term maturities of these instruments.
At September 30, 1999, a significant portion of the Company's cash and cash
equivalents was invested with one financial institution.
Inventories:
Inventories are stated at the lower of cost or market with cost generally
determined under the average cost method.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is computed
primarily on the straight-line method over the estimated useful lives of the
assets. Gains or losses from the disposition of assets are generally included
in other income or other deductions from income. The cost of maintenance and
repairs is charged against income as incurred. Renewals and betterments of a
nature considered to extend the useful lives of the assets are capitalized.
Goodwill:
Goodwill, which represents the excess of cost over the estimated fair value of
net assets of acquired businesses, is amortized using the straight-line method
over periods ranging from 10 to 25 years. Management periodically evaluates
the net realizable value of goodwill and, based on such analysis, goodwill will
be reduced if considered necessary.
Estimated Finishing Costs:
Estimated costs for finishing have been provided for bronze memorials, vases
and granite bases which have been manufactured, sold to customers and placed in
storage for future delivery.
35
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, 1999, treasury
stock consisted of 1,536,864 shares of Class A Common Stock and 970,368 shares
of Class B Common Stock. At September 30, 1998, treasury stock consisted of
1,297,479 shares of Class A Common Stock and 859,105 shares of Class B
Common Stock.
Income Taxes:
Deferred tax assets and liabilities are provided for the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. Deferred income taxes for U.S. tax purposes have not been provided on
the undistributed earnings of foreign subsidiaries, as such earnings are
considered to be reinvested indefinitely. At September 30, 1999, undistributed
earnings for which deferred U.S. income taxes have not been provided
approximated $3,100,000. 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
$2,000,000, $1,700,000 and $1,800,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
Earnings Per Share:
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding. Diluted earnings per share assumes the
issuance of common stock for all dilutive securities.
Revenue Recognition:
Revenues are generally recognized at the time of product shipment, except for
construction revenues which are recognized under the percentage-of-completion
method of accounting.
Reclassifications:
Certain amounts in the 1998 consolidated financial statements have been
reclassified to reflect changes in the allocation of the purchase price of
Gibraltar Mausoleum Construction Company, Inc. (Note 15).
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
3. INVENTORIES:
Inventories at September 30 consisted of the following:
1999 1998
---- ----
Materials and finished goods $14,883,879 $11,021,433
Labor and overhead in process 1,212,485 1,248,815
Supplies 304,113 388,219
---------- ----------
$16,400,477 $12,658,467
========== ==========
4. INVESTMENTS:
Investment securities are recorded at estimated market value at the
consolidated balance sheet date and are classified as available-for-sale.
Short-term investments consisted principally of corporate obligations with
purchased maturities of over three months but less than one year. The cost of
short-term investments approximated market value at September 30, 1999 and
1998. Accrued interest on all investment securities was also classified with
short-term investments. The following investments were classified as
non-current and consisted of securities with purchased maturities intended to
range from one to five years.
Book Value Gross Gross
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
---------- ---------- ---------- ---------
September 30, 1999:
- ------------------
U.S. government and
its agencies $ 4,598,047 $ 15,859 $ 16,560 $ 4,597,346
Corporate obligations 3,998,133 - 21,633 3,976,500
Other 173,939 - - 173,939
---------- ------- ------- ----------
Total $ 8,770,119 $ 15,859 $ 38,193 $ 8,747,785
========== ======= ======= ==========
September 30, 1998:
- ------------------
U.S. government and
its agencies $ 6,001,959 $172,598 $ - $ 6,174,557
Corporate obligations 8,012,563 152,330 11,233 8,153,660
Other 211,564 - - 211,564
---------- ------- ------- ----------
Total $14,226,086 $324,928 $ 11,233 $14,539,781
========== ======= ======= ==========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
4. INVESTMENTS, continued:
Unrealized gains and losses on investment securities, including related
deferred taxes, are reflected in other comprehensive income. Realized gains
and losses are based on the specific identification method and are recorded in
investment income. Realized gains for fiscal 1999 and 1998 were $17,325 and
$39,716, respectively. Realized losses for fiscal 1997 were $94,683. Bond
premiums and discounts are amortized on the straight-line method which does not
significantly differ from the interest method.
Investments also included the Company's interest in the following affiliates
(ownership interest is noted in parentheses):
1999 1998
---- ----
S+T GmbH & Co. KG (50%) $ - $ 7,090,261
Applied Technology Developments, Ltd. (49%) 2,035,001 2,340,872
Other (less than 20%) 529,944 279,885
---------- ----------
$ 2,564,945 $ 9,711,018
========== ==========
The investment in S+T GmbH & Co. KG ("S+T GmbH") was recorded under the equity
method of accounting until March 31, 1999. As a result of a change in control
of S+T GmbH, the consolidated financial statements of Matthews included the
accounts of S+T GmbH effective April 1, 1999. The investment in Applied
Technology Developments, Ltd. is recorded under the equity method of
accounting. Income under the equity method of accounting is recorded in
investment income. Investments with ownership interests less than 20% are
recorded under the cost method of accounting.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and the related accumulated depreciation at
September 30 were as follows:
1999 1998
---- ----
Buildings $24,387,333 $21,472,410
Machinery and equipment 59,242,710 52,324,284
---------- ----------
83,630,043 73,796,694
Less accumulated depreciation (39,107,236) (34,146,591)
---------- ----------
44,522,807 39,650,103
Land 3,019,778 2,965,859
Construction in progress 3,128,162 2,114,414
---------- ----------
$50,670,747 $44,730,376
========== ==========
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. LONG-TERM DEBT:
Long-term debt at September 30, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Note payable to bank, 4.145% $10,966,546 $ -
Note payable to bank, 6.7% 3,714,286 -
Capital lease obligations 1,482,334 2,234,931
---------- ----------
16,163,166 2,234,931
Less current maturities (2,019,128) (800,252)
---------- ----------
$14,144,038 $ 1,434,679
========== ==========
In June 1999, a portion of the purchase price of Caggiati S.p.A. was financed
through a loan of Lit. 20.2 billion (U.S.$ 10,900,000) from an Italian bank,
UniCredito Italiano, Parma, Italy. The loan amortization period is 15 years.
Payments including principal and interest are due quarterly with interest at an
annual rate of 4.145% for the first five years, subject to renewal after five
and ten years at an interest rate approximating current market rates.
In March 1999, Tukaiz entered into a note payable with a bank for an original
amount of $4,000,000. The note, which bears interest at an annual rate of
6.7%, matures in March 2002 and is collateralized by assets of Tukaiz.
Aggregate maturities for the loans payable to banks for the five years
following September 30, 1999 are as follows:
2000 $1,314,923
2001 1,314,923
2002 1,314,923
2003 1,314,923
2004 1,314,923
---------
$6,574,615
=========
Long-term debt, current maturities, which totaled $7,604,443 at September 30,
1999, also included short-term borrowings of $5,585,315. Short-term borrowings
principally included $5,100,000 by Caggiati S.p.A. under various line of credit
arrangements for working capital requirements. The weighted-average interest
rate on these borrowings, which are secured by certain trade accounts
receivable, was 3.25% at September 30, 1999. In addition, short-term
borrowings at September 30, 1999 included $365,000 by Tukaiz Communications
L.L.C. ("Tukaiz") under a line of credit. Tukaiz has a line of credit of
$1,500,000 which bears interest at the bank's prime rate, which was 8.25% at
September 30, 1999.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. LONG-TERM DEBT, continued:
The carrying amounts of the Company's borrowings under its financing
arrangements approximate their fair value.
In connection with the acquisition of Caggiati S.p.A. (Note 15), the Company
assumed bank debt of $5,500,000. In connection with the investment in Tukaiz
in January 1997 (Note 15), the Company assumed bank debt and capital lease
obligations on certain equipment of $1,900,000 and $4,500,000, respectively.
The Tukaiz bank debt was immediately repaid in full.
The Company's capital lease agreements expire within four years and generally
provide for renewal or purchase options. Remaining future minimum lease
payments under capital leases are as follows:
2000 $ 828,978
2001 602,256
2002 225,066
2003 13,662
---------
1,669,962
Less amount representing interest (187,628)
---------
$1,482,334
=========
Assets under capital leases are amortized by the straight-line method over the
estimated useful lives of the assets. Cost and accumulated amortization of
assets under capital leases were $2,976,310 and $2,226,925, respectively, at
September 30, 1999 and $2,908,499 and $1,260,618, respectively, at
September 30, 1998.
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, 1999 and 1998, no amounts were outstanding under this agreement.
The Company has a line of credit of $500,000 (Canadian dollars) which provides
for borrowings at the bank's prime interest rate. The Company has a $200,000
(U.S.) foreign exchange line of credit for standby letters of credit to support
performance guarantees. There were no borrowings outstanding on these lines of
credit at September 30, 1999 and 1998.
40
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, 1999, 1998 and 1997, 362,447, 645,226 and
1,690,634 shares, respectively, of Class B Common Stock were exchanged for an
equal number of shares of Class A Common Stock.
The Company has an active stock repurchase program, which was initiated in
fiscal 1996. Under the program, the Company's Board of Directors have
authorized repurchasing a total of 3,000,000 shares of Matthews Class A and
Class B Common Stock, of which 2,695,533 shares have been repurchased as of
September 30, 1999. The buy-back program is designed to increase shareholder
value, enlarge the Company's holdings of its Class A and Class B Common Stock,
and add to earnings per share. Repurchased shares may be retained in treasury,
utilized for acquisitions, or reissued to employees or other purchasers,
subject to the restrictions of the Restated Articles of Incorporation.
Shareholders' equity 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. 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 55,500 shares of the Company's Class B Common Stock owned by borrowers
pledged as collateral on the notes as of September 30, 1999.
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." The pronouncement establishes
standards for reporting and display of comprehensive income and its components.
Comprehensive income consists of net income adjusted for changes in cumulative
foreign currency translation, unrealized investment gains and losses and
minimum pension liability.
8. STOCK PLANS:
The Company has a stock incentive plan which provides for the granting of
incentive stock options, nonstatutory stock options and restricted share
awards. The plan is administered by the Compensation Committee of the Board of
Directors. The aggregate number of shares of the Company's common stock which
may be issued upon exercise of the stock options and pursuant to the restricted
share awards was 2,348,965 shares at September 30, 1999. 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.
41
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
expire on the earlier of ten years from the date of grant, upon employment
termination, or within specified time limits following voluntary employment
termination (with the consent of the Company), retirement or death.
The Company has elected to account for its stock incentive plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." If compensation cost had been determined under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and diluted
earnings per share would have been as follows:
1999 1998
---- ----
Net income, as reported $25,015,702 $22,501,692
Net income, pro forma 23,851,524 21,967,279
Earnings per share, as reported $1.54 $1.34
Earnings per share, pro forma 1.47 1.31
The weighted-average fair value of options granted was $11.61 per share in 1999
and $7.69 per share in 1998.
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:
1999 1998
---- ----
Dividend yield 0.8% 0.7%
Expected volatility 24.8% 23.1%
Average risk-free interest rate 6.3% 4.8%
Average expected term (years) 8.0 7.7
The following tables summarize certain stock option information at
September 30, 1999:
Options Outstanding:
- -------------------
Range of Weighted-average Weighted-average
exercise price Number remaining life exercise price
- -------------- -------- ---------------- ----------------
$7.13 and $8.19 285,000 5.4 $ 7.63
$9.44 - $14.25 145,000 6.5 12.72
$14.06 - $17.38 633,050 7.2 14.17
$21.41 and $22.88 206,500 8.2 21.41
$27.69 - $30.69 679,800 9.4 27.94
--------- --- -----
1,949,350 7.8 $18.67
========= === =====
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. STOCK PLANS, continued:
Options exercisable:
- -------------------
Range of Weighted-average
exercise price Number exercise price
- -------------- ------- ----------------
$7.13 and $8.19 285,000 $ 7.63
$9.44 - $14.25 145,000 12.72
$14.06 - $17.38 - -
$21.41 and $22.88 - -
$27.69 - $30.69 - -
------- -----
430,000 $ 9.35
======= =====
The transactions for shares under options were as follows:
1999 1998 1997
---- ---- ----
Outstanding, beginning of year:
Number 1,482,650 1,593,766 1,173,666
Weighted-average exercise price $13.20 $11.12 $ 8.78
Granted:
Number 699,800 226,500 672,100
Weighted-average exercise price $27.93 $21.54 $14.17
Exercised:
Number 192,300 304,366 239,668
Weighted-average exercise price $ 8.82 $ 8.38 $ 8.08
Expired or forfeited:
Number 40,800 33,250 12,332
Weighted-average exercise price $25.06 $14.06 $13.92
Outstanding, end of year:
Number 1,949,350 1,482,650 1,593,766
Weighted-average exercise price $18.67 $13.20 $11.12
Exercisable, end of year:
Number 430,000 622,300 853,672
Weighted-average exercise price $ 9.35 $ 9.18 $ 8.57
Shares reserved for future options,
end of year 399,615 151,314 344,564
Under the Company's Director Fee Plan, directors who are not also officers of
the Company each receive as an annual retainer fee shares of the Company's
Class A Common Stock equivalent to approximately $16,000. Directors may also
elect to receive the common stock equivalent of meeting fees. 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, 1999, 1998 and 1997 were 23,072, 20,658 and
16,908, respectively.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
9. EARNINGS PER SHARE
1999 1998 1997
---- ---- ----
Net income $25,015,702 $22,501,692 $19,626,064
========== ========== ==========
Weighted average common
shares outstanding 15,851,393 16,336,359 17,194,073
Dilutive securities,
primarily stock options 389,760 433,855 502,720
---------- ---------- ----------
Diluted weighted-average
common shares outstanding 16,241,153 16,770,214 17,696,793
========== ========== ==========
Basic earnings per share $1.58 $1.38 $1.14
==== ==== ====
Diluted earnings per share $1.54 $1.34 $1.11
==== ==== ====
10. PENSION AND OTHER POSTRETIREMENT PLANS:
The Company provides defined benefit pension and postretirement plans to
certain employees. Net periodic pension and postretirement benefit costs
included the following components:
Pension Other Postretirement
---------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
Service cost $2,161,278 $1,923,321 $1,715,536 $ 321,533 $ 277,803 $ 268,835
Interest cost 3,724,617 3,559,391 3,396,778 816,476 748,625 855,587
Expected return
on plan assets (5,288,217) (4,748,334) (4,476,913) - - -
Amortization:
Transition asset (403,794) (403,794) (403,794) - - -
Prior service cost 161,927 161,927 148,686 (1,009,071) (1,009,071) (1,009,071)
Net actuarial
(gain) loss 54,262 45,209 19,961 112,254 55,476 120,554
--------- --------- --------- --------- --------- ---------
Net benefit cost $ 410,073 $ 537,720 $ 400,254 $ 241,192 $ 72,833 $ 235,905
========= ========= ========= ========= ========= =========
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. PENSION AND OTHER POSTRETIREMENT PLANS, continued:
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans.
Pension Other Postretirement
------------------------ -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Change in benefit obligation:
Benefit obligation, beginning $ 54,747,545 $48,916,916 $ 12,069,729 $ 10,321,226
Service cost 2,161,278 1,923,321 321,533 277,803
Interest cost 3,724,617 3,559,391 816,476 748,625
Assumption changes (1,961,143) 3,550,250 (367,573) 673,206
Actuarial (gain) loss (51,860) (346,699) 474,566 675,794
Benefit payments (2,660,989) (2,855,634) (751,365) (626,925)
---------- ---------- ---------- ----------
Benefit obligation, ending 55,959,448 54,747,545 12,563,366 12,069,729
---------- ---------- ---------- ----------
Change in plan assets:
Fair value, beginning 59,314,028 58,870,495 - -
Actual return 12,775,502 3,070,941 - -
Benefit payments (2,660,989) (2,855,634) (751,365) (626,925)
Employer contributions 228,226 228,226 751,365 626,925
---------- ---------- ---------- ----------
Fair value, ending 69,656,767 59,314,028 - -
---------- ---------- ---------- ----------
Funded status 13,697,319 4,566,483 (12,563,366) (12,069,729)
Unrecognized transition asset (403,800) (807,594) - -
Unrecognized actuarial (gain) loss (12,578,346) (3,023,496) 3,026,261 3,014,756
Unrecognized prior service cost 898,163 1,060,090 (10,767,640) (11,776,711)
---------- ---------- ---------- ----------
Net amount recognized $ 1,613,336 $ 1,795,483 $(20,304,745) $(20,831,684)
========== ========== ========== ==========
Amounts recognized in the
balance sheet:
Prepaid pension cost $ 3,471,504 $ 3,459,097 $(20,304,745) $(20,831,684)
Accrued benefit liability (2,263,582) (2,588,807) - -
Intangible asset 307,353 370,878 - -
Accumulated other
comprehensive income 98,061 554,315 - -
---------- ---------- ---------- ----------
Net amount recognized $ 1,613,336 $ 1,795,483 $(20,304,745) $(20,831,684)
========== ========== ========== ==========
The Company has an unfunded defined benefit pension plan which had a benefit
obligation of $2,556,500 and $2,943,177 at September 30, 1999 and 1998,
respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. PENSION AND OTHER POSTRETIREMENT PLANS, continued:
Weighted-average assumptions for the pension and postretirement benefit plans
as of August 1 and September 30, respectively, were:
Pension Other Postretirement
---------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Discount rate 7.25% 7.00% 7.50% 7.25% 7.00% 7.50%
Return on plan assets 9.00 9.50 9.00 - - -
Compensation increase 4.50 4.50 4.50 4.50 4.50 4.50
For measurement purposes, annual rates of increase of 10.0% and 6.5% in the per
capita cost of health care benefits for Medicare-Risk HMO Plans and all other
plans, respectively, were assumed for 1999; the rates were assumed to decrease
gradually to 5.0% for 2003 and remain at that level thereafter. Assumed health
care cost trend rates have a significant effect on the amounts reported. An
increase in the assumed health care cost trend rates by one percentage point
would have increased the accumulated postretirement benefit obligation as of
September 30, 1999 by $445,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year then
ended by $57,000. A decrease in the assumed health care cost trend rates by
one percentage point would have decreased the accumulated postretirement
benefit obligation as of September 30, 1999 by $424,000 and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $52,000.
11. INCOME TAXES:
The provision for income taxes consisted of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $12,116,079 $13,190,560 $ 9,245,044
State 2,400,713 2,326,985 1,815,067
Foreign 1,117,029 685,204 1,533,969
---------- ---------- ----------
15,633,821 16,202,749 12,594,080
Deferred 627,136 (1,572,158) 77,753
---------- ---------- ----------
Total $16,260,957 $14,630,591 $12,671,833
========== ========== ==========
At September 30, 1999 and 1998, the Company had foreign net operating loss
carryforwards of $3,500,000 and $2,500,000, respectively. Carryforwards at
September 30, 1999 of $130,000 expire at September 30, 2003, while the
remainder have an indefinite carryforward period. The Company has recorded a
valuation allowance of $1,350,000 and $375,000 at September 30, 1999 and 1998,
respectively, related to the carryforwards.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. INCOME TAXES, continued:
The components of the provision for deferred income taxes were as follows:
1999 1998 1997
---- ---- ----
Postretirement benefits other
than pensions $ 230,018 $ 183,894 $ 246,309
Deferred compensation (378,345) (858,000) -
Estimated finishing costs 10,900 (276,930) (145,346)
Accrued vacation pay (23,759) (62,410) (8,836)
Foreign subsidiary losses, net 205,000 125,000 450,000
Depreciation and amortization 666,701 (40,935) (51,919)
Deferred gain on sale of facilities 1,538 (77,214) (30,274)
Pension costs 13,122 (208,149) (156,090)
Other (98,039) (357,414) (226,091)
---------- ---------- ----------
$ 627,136 $(1,572,158) $ 77,753
========== ========== ==========
The components of the net deferred tax asset at September 30 were as follows:
1999 1998
---- ----
Deferred tax assets:
Postretirement benefits other than pensions $ 7,894,340 $ 8,124,358
Deferred compensation 1,833,435 1,455,090
Bad debt / other provisions 1,109,910 634,093
Estimated finishing costs 1,073,663 1,084,563
Accrued vacation pay 857,539 833,780
Foreign subsidiary losses, net 170,000 375,000
Other 443,142 361,263
---------- ----------
13,382,029 12,868,147
---------- ----------
Deferred tax liabilities:
Depreciation and amortization (3,957,835) (2,842,135)
Deferred gain on sale of facilities (508,713) (507,174)
Pension costs (448,915) (257,854)
Unrealized investment (gain) loss 8,710 (122,341)
---------- ----------
(4,906,753) (3,729,504)
---------- ----------
Net deferred tax asset 8,475,276 9,138,643
Less current portion (966,019) (931,020)
---------- ----------
$ 7,509,257 $ 8,207,623
========== ==========
The Company's foreign subsidiaries had income before income taxes for the years
ended September 30, 1999, 1998 and 1997 of approximately $4,300,000, $1,500,000
and $2,800,000, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. INCOME TAXES, continued:
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
1999 1998 1997
---- ---- ----
Federal statutory tax rate 35.0 % 35.0 % 35.0 %
Effect of state income taxes,
net of federal deduction 3.8 3.7 3.2
Foreign taxes in excess of (less
than) federal statutory rate ( .6) - 1.7
Goodwill amortization .5 .6 -
Other .7 .1 ( .7)
---- ---- ----
Effective tax rate 39.4 % 39.4 % 39.2 %
==== ==== ====
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 $3,100,000, $2,800,000 and $2,300,000 in 1999, 1998 and
1997, respectively. Future minimum rental commitments are not material.
The Company is party to various legal proceedings generally incidental to its
business. The eventual outcome of these matters is not predictable, and it is
possible that their resolution could be unfavorable to the Company. Although
the ultimate disposition of these proceedings is not presently determinable,
management is of the opinion that they should not result in liabilities in an
amount which would materially affect the Company's consolidated financial
position, results of operations or cash flows.
The Company has employment agreements with certain employees, the terms of
which expire at various dates between 2000 and 2002. The agreements generally
provide for base salary and bonus levels and include a non-compete clause. The
aggregate commitment for salaries under these agreements at September 30, 1999
was approximately $2,200,000.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
Significant non-cash transactions included the following:
In fiscal 1998, Matthews acquired a 50% interest in S+T GmbH (Note 15). A
liability for 11,255,500 German Marks (U.S.$6,200,000) has been recorded in
other current liabilities for the payment, which is due January 2000. The
investment in S+T GmbH was recorded under the equity method of accounting until
March 31, 1999. As a result of a change in control of S+T GmbH, the
consolidated financial statements of Matthews included the accounts of S+T GmbH
effective April 1, 1999.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
13. SUPPLEMENTAL CASH FLOW INFORMATION, continued:
In fiscal 1998, Matthews acquired a 50% interest in O.N.E. (Note 15). The
purchase agreement requires Matthews to acquire the remaining 50% interest no
later than May 2004. A liability of $3,700,000 was recorded in other
liabilities for the present value of the minimum future payouts under the
purchase agreement.
Changes in working capital items as presented in the Consolidated Statement of
Cash Flows consisted of the following:
1999 1998 1997
---- ---- ----
Current assets:
Accounts receivable $(1,977,766) $(1,051,982) $ (985,433)
Inventories 1,126,300 (355,121) 2,087,337
Other current assets 28,048 392,197 (61,624)
---------- ---------- ----------
(823,418) (1,014,906) 1,040,280
---------- ---------- ----------
Current liabilities:
Trade accounts payable (2,311,459) 732,701 (1,012,648)
Accrued compensation 990,705 3,539,657 2,010,941
Accrued vacation pay 84,406 275,473 56,238
Profit distribution to employees (143,948) 528,549 (112,274)
Accrued income taxes (3,155,184) 943,106 1,991,625
Customer prepayments (615,939) (1,451,379) 5,822,563
Other current liabilities (2,948,607) 2,189,745 253,279
---------- ---------- ----------
(8,100,026) 6,757,852 9,009,724
---------- ---------- ----------
Net change $(8,923,444) $ 5,742,946 $10,050,004
========== ========== ==========
14. SEGMENT INFORMATION:
The Company is organized into three business segments based on products and
services. The segments, which are Bronze, Graphics Imaging and Marking
Products, are described under Nature of Operations (Note 1). Management
evaluates segment performance based on operating profit (before income taxes)
and does not allocate non-operating items such as investment income, interest
expense, other income (deductions),net and minority interest.
Information about the Company's segments follows:
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
14. SEGMENT INFORMATION, continued:
Graphics Marking
Imaging Products Bronze Other Consolidated
---------- ---------- ---------- ------------ ------------
Sales to external customers:
1999 $85,094,574 $30,474,292 $123,760,357 $ - $239,329,223
1998 75,294,549 30,054,688 106,272,820 - 211,622,057
1997 57,804,162 34,980,976 96,383,502 - 189,168,640
Intersegment sales:
1999 5,515 54,650 45,553 - 105,718
1998 6,973 63,424 35,364 - 105,761
1997 4,681 53,473 39,849 - 98,003
Depreciation and amortization:
1999 5,829,134 586,859 3,789,643 403,732 10,609,368
1998 4,202,894 618,861 2,849,786 361,560 8,033,101
1997 2,171,389 741,003 2,613,763 520,930 6,047,085
Operating profit:
1999 5,135,373 4,036,043 31,776,575 - 40,947,991
1998 6,909,985 3,003,056 26,015,903 - 35,928,944
1997 5,507,148 2,800,757 22,579,490 - 30,887,395
Total assets:
1999 $66,925,288 $19,685,133 $97,005,147 $42,062,004 $225,677,572
1998 60,274,431 20,060,272 59,304,584 47,566,477 187,205,764
1997 38,495,477 22,118,584 49,753,812 58,836,517 169,204,390
Capital expenditures:
1999 7,243,220 497,372 5,390,338 151,473 13,282,403
1998 5,110,111 334,122 1,628,217 260,241 7,332,691
1997 3,189,371 400,543 2,144,218 430,498 6,164,630
Information about the Company's operations by geographic area follows:
United States Canada Australia Europe Consolidated
------------- --------- --------- ---------- ------------
Sales to external customers:
1999 $207,727,477 $9,463,587 $ 4,581,785 $17,556,374 $239,329,223
1998 192,443,566 8,808,520 4,817,523 5,552,448 211,622,057
1997 162,281,107 8,634,068 10,553,058 7,700,407 189,168,640
Long-lived assets:
1999 72,540,145 2,557,147 3,133,019 25,603,447 103,833,758
1998 67,653,629 1,974,039 2,894,405 112,988 72,635,061
1997 52,911,263 2,280,488 3,707,169 127,944 59,026,864
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
14. SEGMENT INFORMATION, continued:
The accounting policies of the segments are the same as those described in
Summary of Significant Accounting Policies (Note 2). Intersegment sales are
accounted for at negotiated prices. Operating profit is total revenue less
operating expenses. Segment assets include those assets which are used in the
Company's operations in each segment. Other assets principally consist of cash
and cash equivalents, investments, deferred tax assets and corporate
headquarters' assets. Long-lived assets include property, plant and equipment,
net of accumulated depreciation, and goodwill, net of accumulated amortization.
15. ACQUISITIONS:
On June 1, 1999, Matthews purchased the assets of Caggiati S.p.A., the leading
supplier of bronze memorialization products in Europe. Caggiati S.p.A. is
based in Colorno (Parma), Italy and has two subsidiaries: Caggiati Espana S.A.
in Valencia, Spain and Caggiati France S.a.r.l. in Lyon, France. The purchase
price was Lit. 34.6 billion (U.S.$19,000,000) cash plus the assumption of bank
debt of Lit. 10.2 billion (U.S.$5,500,000) and certain other trade liabilities.
Matthews paid cash of Lit. 20.2 billion (U.S.$10,900,000) at the closing with
Lit. 7.2 billion (U.S.$4,000,000) payable one year after the closing date
(classified in other current liabilities) and the remaining Lit. 7.2 billion
payable two years after the closing date. Interest at an annual rate of 5% is
payable on the deferred payments.
The following unaudited pro forma information presents a summary of the
consolidated results of Matthews and Caggiati S.p.A. as if the acquisition had
occurred on October 1, 1997:
1999 1998
---- ----
Sales $255,000,000 $235,100,000
Net income 25,800,000 23,500,000
Earnings per share, diluted $1.59 $1.40
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as goodwill amortization and
interest expense on acquisition debt. The pro forma information does not
purport to be indicative of the results of operations which actually would have
resulted had the acquisition occurred on the date indicated, or which may
result in the future.
In September 1998, Matthews acquired for 11,255,500 German Marks
(U.S.$6,200,000) a fifty percent interest in S+T GmbH & Co. KG ("S+T GmbH").
The operations of S+T GmbH, located in Julich, Germany, consist principally of
flexographic printing preparation and the manufacture of photopolymer printing
plates for the packaging industry. The remaining fifty percent interest will
continue to be owned by the existing president of S+T GmbH. The cash payment
is due January 2000. S+T GmbH reported sales of approximately U.S.$5,000,000
in 1997. In addition, Matthews has a call option to acquire an additional
thirty percent interest in S+T GmbH at a purchase price contingent on the
operating performance of S+T GmbH.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
15. ACQUISITIONS, continued:
In October 1998, Matthews entered into a foreign currency forward contract with
a financial institution for the purchase of German Marks to hedge its January
2000 payment commitment for the investment in S+T GmbH. In November 1998,
Matthews also entered into a letter of credit agreement with a financial
institution to guarantee performance under this payment commitment.
In September 1998, Matthews purchased for $10,000,000 cash the assets of
Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"). Gibraltar, with
annual sales of approximately $16,000,000, is a leading builder of mausoleums
in the United States.
In May 1998, Matthews acquired a fifty percent interest in O.N.E. Color
Communications, L.L.C. ("O.N.E."), a digital graphics service company. The
transaction was structured as an asset purchase with the purchase price
consisting of $2,000,000 cash and the assumption of a fifty percent interest in
certain liabilities of O.N.E. An additional amount is payable by Matthews
three years from the acquisition date contingent on the attainment of certain
operating performance levels of O.N.E., with such payout to be not less
than $400,000.
In addition, the purchase agreement requires Matthews to purchase the remaining
fifty percent interest in O.N.E. no later than May 2004. The purchase price
for the remaining interest is contingent on the attainment of certain operating
performance levels of O.N.E. with such payment to be not less than $4,500,000.
The accounts of O.N.E. have been included in the consolidated financial
statements of Matthews and a liability has been recorded for the present value
of the minimum future payouts. O.N.E., with annual sales of approximately
$10,000,000, is headquartered in Oakland, California.
In May 1997, Matthews acquired for $2,400,000 cash the common stock of both
Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services,
flexible printing plates and steel rule cutting dies, located in North
Carolina. Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were
approximately $3,700,000 for the year ended December 31, 1996.
In January 1997, Matthews acquired a fifty percent interest in Tukaiz
Communications L.L.C. ("Tukaiz"), a pre-press and pre-media firm headquartered
in Franklin Park, Illinois. A pre-press firm prepares art or digital files for
printing or reproduction. The remaining fifty percent interest continues to be
owned by the president of Tukaiz. The transaction was structured as an asset
purchase with the purchase price consisting of $4,000,000 cash and the
assumption of a fifty percent interest, approximately $4,000,000, in certain of
the liabilities of Tukaiz. Matthews also provided Tukaiz with subordinated
convertible debt of $5,500,000. Tukaiz reported sales of $16,400,000 for the
year ended January 31, 1997. The accounts of Tukaiz have been included in the
consolidated financial statements of Matthews.
Matthews has accounted for the aforementioned acquisitions using the purchase
method and, accordingly, recorded the acquired assets and liabilities at their
estimated fair values at the acquisition dates. The excess of the purchase
price over the fair value of the net assets has been recorded as goodwill to be
amortized on a straight-line basis over periods ranging from 20 to 25 years.
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 1999 and
fiscal 1998.
Quarter Ended
-------------------------------------------------- Year Ended
December 31 March 31 June 30 September 30 September 30
----------- ----------- ----------- ------------ ------------
FISCAL YEAR 1999:
Sales $56,441,488 $58,588,219 $61,405,443 $62,894,073 $239,329,223
Gross profit 23,458,498 25,157,646 25,493,116 28,927,435 103,036,695
Operating profit 8,699,255 10,559,876 11,126,662 10,562,198 40,947,991
Net income 5,415,119 6,425,198 6,888,062 6,287,323 25,015,702
Earnings per share, diluted .33 .39 .43 .39 1.54
FISCAL YEAR 1998:
Sales $49,440,454 $51,563,344 $55,217,977 $55,400,282 $211,622,057
Gross profit 21,231,436 23,034,882 25,060,396 23,723,508 93,050,222
Operating profit 7,616,319 8,886,597 10,333,027 9,093,001 35,928,944
Net income 4,898,264 5,603,821 6,381,882 5,617,725 22,501,692
Earnings per share, diluted .29 .33 .38 .34 1.34
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 PricewaterhouseCoopers LLP,
Certified Public Accountants, for the fiscal years ended September 30, 1999,
1998 and 1997.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information as of November 30, 1999 is furnished with respect to
each director and executive officer:
Name Age Positions with Registrant
- ---- --- -------------------------
David M. Kelly 57 Chairman of the Board, President and
Chief Executive Officer
Edward J. Boyle 53 Vice President, Accounting & Finance,
Treasurer and Secretary
David J. DeCarlo 54 President, Bronze Division
and Director
Robert J. Kavanaugh 62 Director
Thomas N. Kennedy 64 Director
Steven F. Nicola 39 Controller
John P. O'Leary, Jr. 52 Director
Robert J. Schwartz 52 President, Marking Products Division
William J. Stallkamp 60 Director
John D. Turner 53 Director
David M. Kelly has been Chairman of the Board since March 1996. He was
appointed President and Chief Operating Officer of the Company in April 1995
and President and Chief Executive Officer in October 1995. He was appointed as
a Director of the Company in May 1995. Prior to joining the Company, he was a
Senior Vice President for Carrier Corporation.
Edward J. Boyle has been Vice President, Accounting & Finance since December
1995. Prior thereto, he was Controller of the Company. He was appointed
Treasurer and Secretary in September 1996.
David J. DeCarlo, a Director of the Company since 1987, has been President,
Bronze Division since November 1993. Prior thereto, he was Senior Vice
President and Division Manager, Bronze.
Robert J. Kavanaugh was elected to the Board of Directors in February 1998.
Mr. Kavanaugh retired in 1996 as a partner of the Pittsburgh office of Arthur
Andersen LLP.
Thomas N. Kennedy, a Director of the Company since 1987, retired as an officer
of the Company in December 1995. He was Senior Vice President, Chief Financial
Officer and Treasurer since January 1991.
55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued.
Steven F. Nicola has been Controller of the Company since December 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.
Robert J. Schwartz has been President, Marking Products Division since
September 1997. Mr. Schwartz joined the Company in January 1997 as Director of
Sales and Marketing for the Marking Products Division. Prior thereto, he was
Vice President - Sales for Northeast Distributors, Inc.
William J. Stallkamp, a Director of the Company since 1981, is a Vice Chairman
of Mellon Bank Corporation in Pittsburgh, Pennsylvania and has been Chairman of
Mellon PSFS in Philadelphia since January 1996. Prior thereto, he was an
Executive Vice President of Mellon Bank, N.A.
John D. Turner was elected to the Board of Directors in April 1999. Mr. Turner
has been Executive Vice President of The LTV Corporation and President of LTV
Copperweld, a manufacturer of tubular and bimetallic wire products, since
November 1999. Mr. Turner was formerly President and Chief Executive Officer
of Copperweld Corporation.
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
from October 1, 1998 until June 4, 1999 consisted of Messrs. Kelly, DeCarlo and
Geoffrey D. Barefoot. The membership of the Committee since June 4, 1999
consisted of Messrs. Kelly and DeCarlo.
The principal function of the Audit Committee, the members of which are
Messrs. O'Leary (Chairman), Kavanaugh and Stallkamp, is to endeavor to assure
the integrity and adequacy of financial statements issued by the Company. It
is intended that the Audit Committee will review internal auditing systems and
procedures as well as the activities of the public accounting firm performing
the external audit.
The principal function of the Compensation Committee, the members of which
are Messrs. Stallkamp (Chairman), Kavanaugh and Kennedy, is to review
periodically the suitability of the remuneration arrangements (including
benefits), other than stock remuneration, for the principal officers of the
Company. A subcommittee of the Compensation Committee, the Stock Compensation
Committee, the members of which are Messrs. Stallkamp (Chairman) and Kavanaugh,
consider and grant stock remuneration and administer the Company's 1992 Stock
Incentive Plan.
57
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the individual compensation information for the
fiscal years ended September 30, 1999, 1998 and 1997 for the Company's Chief
Executive Officer and the four most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
----------------- -----------------------
Awards Payouts
------ ------- All
Securities Other
Name of Individual Underlying LTIP Compen-
and Principal Position Year Salary Bonus Options Payouts sation
- ---------------------- ---- ------- ------- ---------- --------- -------
(1) (Shares) (2) (3)
David M. Kelly 1999 $329,618 $339,298 275,000 $734,737 None
Chairman of the Board and 1998 312,409 324,082 40,000 239,850 None
Chief Executive Officer 1997 290,174 290,687 190,000 None None
David J. DeCarlo 1999 217,411 171,334 149,000 711,607 $ 1,419
Director and President, 1998 207,921 169,552 None 269,660 2,520
Bronze Division 1997 199,473 174,477 250,000 None 3,046
Edward J. Boyle 1999 143,041 89,962 78,000 187,183 3,294
Vice President, 1998 129,689 87,394 36,000 60,211 4,250
Accounting & Finance 1997 113,379 75,043 41,000 None 3,804
Robert J. Schwartz 1999 126,577 80,952 10,000 55,464 747
President, Marking 1998 118,323 75,177 32,000 None 1,038
Products Division
Robert B. Heffernan 1999 183,626 None 20,000 None 85,069
President, Graphics 1998 64,308 18,653 20,000 None 120
Imaging Group
(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 did not provide life insurance for Mr. Kelly, but
in lieu thereof paid 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 1999, 1998 and 1997 was $4,100 each year. The
Company has adopted a management incentive plan for officers and key management
personnel. Participants in such plan are not eligible for the Company's profit
distribution plan. The incentive plan is based on improvement in divisional and Company
economic value added and the attainment of established personal goals. A portion of
amounts earned are deferred by the Company and are payable with interest at a market
rate over a two-year period contingent upon economic value added performance and
continued employment during such period. See Long-Term Incentive Plans - Awards in Last
Fiscal Year table. In addition, payments include a supplement in amounts which are
sufficient to pay annual interest expense on the outstanding notes of management under
the Company's Designated Employee Stock Purchase Plan and to pay medical costs which
are not otherwise covered by a Company plan.
58
ITEM 11. EXECUTIVE COMPENSATION, continued.
(2) Represents payments of deferred amounts under the management incentive plan.
(3) Includes premiums for term life insurance and educational assistance for dependent
children. Each officer of the Company is provided term life insurance coverage in
an amount approximately equivalent to three times his respective salary. 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. Amounts reported in this column include life insurance benefit
costs except for Mr. Boyle and Mr. Heffernan. Educational assistance amounts for
Mr. Boyle in fiscal 1999, 1998 and 1997, respectively, were $2,400, $2,200 and $2,000.
The amount reported in this column in 1999 for Mr. Heffernan represents severance
benefits only. See also note (1).
The Summary Compensation Table does not include expenses to the Company of
incidental benefits of a limited nature to executive officers including use of
Company vehicles, club memberships, dues, or tax planning services. The
Company believes such incidental benefits are in the conduct of the Company's
business, but, to the extent such benefits and use would be considered personal
benefits, the value thereof is not reasonably ascertainable and does not
exceed, with respect to any individual named in the compensation table, the
lesser of $50,000 or 10% of the annual compensation reported in such table.
Long-Term Incentive Plans - Awards in Last Fiscal Year
Performance Estimated Future
or Other Payouts Under
Number Period Non-Stock Price-
of Shares Until Based Plans
or Other Maturation ----------------
Name Rights or Payout Target
- ------------- ---------- ----------- ----------------
D.M. Kelly - 2 Years $ 429,438
D.J. DeCarlo - 2 Years 585,654
E.J. Boyle - 2 Years 112,322
R.J. Schwartz - 2 Years 125,718
R.B. Heffernan - 2 Years None
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.
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 250,000 35.7% $27.969 03/16/09 $4,397,349 $11,143,746
25,000 3.6 27.688 11/16/08 435,313 1,103,169
D.J. DeCarlo 126,000 18.0 27.969 03/16/09 2,216,264 5,616,448
23,000 3.3 27.688 11/16/08 400,488 1,014,915
E.J. Boyle 63,000 9.0 27.969 03/16/09 1,108,132 2,808,224
15,000 2.1 27.688 11/16/08 261,188 661,901
R.J. Schwartz 10,000 1.4 27.688 11/16/08 174,125 441,267
R.B. Heffernan 20,000 2.9 27.688 11/16/08 348,250 882,535
(1) All options were granted at market value as of the date of grant. Options are
exercisable in various share amounts based on the attainment of certain market value
levels of Class A Common Stock, but, in the absence of such events, are exercisable in
full for a one-week period beginning five years from the date of grant. In addition,
options vest in one-third increments after three, four and five years, respectively,
from the grant date (but, in any event, not until the attainment of the certain market
value levels described above). The options are not exercisable within six months from
the date of grant and expire on the earlier of ten years from the date of grant, upon
employment termination, or within specified time limits following voluntary employment
termination (with consent of the Company), retirement or death.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Value of Unexercised
Shares Securities Underlying In-the-Money Options
Acquired Unexercised Options at Fiscal Year End
On Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------- ---------- ---------- ----------- ------------- ----------- -------------
D.M. Kelly 50,000 $1,115,625 205,000 505,000 $3,891,353 $3,338,063
D.J. DeCarlo None None 126,000 399,000 2,497,688 3,819,887
E.J. Boyle 63,000 1,279,250 None 155,000 None 941,482
R.J. Schwartz None None None 80,000 None 620,373
R.B. Heffernan None None None None None None
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
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
800,000 222,000 296,000 370,000 444,000 518,000
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, 1999 and rounded to the next
higher year, are: Mr. Kelly, 5 years; Mr. DeCarlo, 15 years; Mr. Boyle,
13 years and Mr. Schwartz, 3 years.
Compensation Committee Interlocks and Insider Participation:
Thomas N. Kennedy, a former officer of the Company, is a member of the
Company's Compensation Committee.
Compensation of Directors:
Pursuant to the Director Fee Plan, directors who are not also officers of the
Company each receive as an annual retainer fee shares of the Company's Class A
Common Stock equivalent to approximately $16,000. In addition, each such
director is paid $1,000 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. Directors may also elect to receive the common
stock equivalent of meeting fees. 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. 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, 1999.
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 302,333 (3) 2.2% 56,000 2.3%
E.J. Boyle 31,417 (3) 0.2 18,750 0.8
D.J. DeCarlo 209,333 (3) 1.6 289,990 12.2
R.J. Kavanaugh 1,000 * None -
T.N. Kennedy 55,000 0.4 None -
J.P. O'Leary, Jr. 13,450 0.1 None -
R.J. Schwartz 21,352 (3) 0.2 None -
W.J. Stallkamp 6,200 * None -
J.D. Turner None - None -
All directors and
executive officers as
a group (10 persons) 671,528 (3) 4.9 381,940 16.0
Others:
- ------
D. Majestic None - 302,000 12.7
T. Rowe Price
Associates, Inc.
100 East Pratt Street
Baltimore, MD 21202 1,321,400 10.0 None -
Lord, Abbett & Co.
767 Fifth Avenue
New York, NY 10153 1,196,925 9.0 None -
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158 712,165 5.4 None -
* Less than 0.1%
(1) Unless otherwise noted, the mailing address of each beneficial owner is the
same as that of the Registrant.
63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(2) The nature of the beneficial ownership for all shares is sole voting and
investment power, except as follows:
Mr. Stallkamp has sole voting power except for 200 Class A shares held
by Mr. Stallkamp as custodian under UTMA for son.
Shares held by T. Rowe Price Associates, Inc. ("Price Associates") are
owned by various individual and institutional investors, including
T. Rowe Price Small-Cap Stock Fund, Inc. which owns 803,000 shares,
which Price Associates serves as investment advisor with power to
direct investments and/or sole power to vote the shares. For purposes
of the reporting requirements of the Securities Exchange Act of 1934,
Price Associates is deemed to be a beneficial owner of such shares;
however, Price Associates expressly disclaims that it is, in fact,
the beneficial owner of such shares. Price Associates has sole
dispositive power for 1,321,400 shares and sole voting power for
404,200 shares.
Lord, Abbett & Co. is an investment advisor for various accounts and,
as such, disclaims beneficial ownership of shares.
Neuberger Berman, L.L.C. ("Neuberger"), as a registered investment
advisor, may have discretionary authority to dispose of or vote shares
that are under its management. As a result, Neuberger may be deemed
to have beneficial ownership of such shares. Neuberger does not,
however, have any economic interest in the shares. Its clients are
the actual owners of the shares and have the sole right to receive and
the power to direct the receipt of dividends from or proceeds from the
sale of such shares. Of the shares set forth in the table, Neuberger
had shared dispositive power with respect to 712,165 shares, sole
voting power with respect to 362,365 shares and shared voting power
on 349,800 shares. With regard to the shared voting power, Neuberger
Berman Management, Inc. and Neuberger Berman Funds are deemed to be
beneficial owners for purpose of Rule 13(d) since they have shared
power to make decisions whether to retain or dispose of the shares.
Neuberger is the sub-advisor to the above referenced Funds.
(3) Includes options exercisable within 60 days of November 30, 1999 as
follows: Mr. Kelly, 268,333 shares; Mr. Boyle, 13,667 shares;
Mr. DeCarlo, 209,333 shares; Mr. Schwartz, 10,000 shares; and all
directors and officers as a group, 524,333 shares.
(c) Changes in Control:
The Company knows of no arrangement which may, at a subsequent date, result in
a change in control of the Company.
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 significant transaction requiring disclosure pursuant to this item during
the past fiscal year.
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 27
Consolidated Balance Sheet 28-29
Consolidated Statement of Income 30
Consolidated Statement of Shareholders' Equity 31
Consolidated Statement of Cash Flows 32
Notes to Consolidated Financial Statements 33-51
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:
A Form 8-K Current Report, dated July 22, 1999, was filed by the Company
reporting under "Item 5 - Other Events" that the Board of Directors approved
the addition of new Section 2.09 to Article II of the By-laws of the Company.
The new section of the By-laws requires that any shareholder of the Company
intending to present a proposal for action by the shareholders at an annual
meeting must give written notice of the proposal, containing specified
information, to the Secretary of the Company not later than the notice deadline
established under the new section of the By-laws.
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 20, 1999.
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 20, 1999:
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)
David J. DeCarlo John P. O'Leary, Jr.
- ------------------------------------ ------------------------------------
David J. DeCarlo, Director John P. O'Leary, Jr., Director
Robert J. Kavanaugh William J. Stallkamp
- ------------------------------------ ------------------------------------
Robert J. Kavanaugh, Director William J. Stallkamp, Director
Thomas N. Kennedy John D. Turner
- ------------------------------------ ------------------------------------
Thomas N. Kennedy, Director John D. Turner, 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 Restated By-laws * Exhibit Number 3.1 to Form
8-K dated July 22, 1999
4.1 a Form of Employee Stock Purchase Exhibit Number 4.1 to Form
Agreement Entered into by 10-K for the year ended
Designated Key Employees * September 30, 1983
4.2 a Form of Employee Stock Purchase Exhibit Number 4.2 to Form
Agreement Entered into by 10-K for the year ended
Designated Key Employees September 30, 1993
(effective October 1, 1993) *
4.3 a Representative Form of Option Exhibit Number 10.2 to Form
Agreement of Repurchase * S-2 Registration Statement
(No. 33-79538) filed on
June 1, 1994
4.4 a Form of Revised Option Agreement Exhibit Number 4.2 to Form
of Repurchase * 10-K for the year ended
September 30, 1983
4.5 a Form of Revised Option Agreement Exhibit Number 4.5 to Form
of Repurchase (effective 10-K for the year ended
October 1, 1993) * September 30, 1993
4.6 a Employees' Stock Purchase Plan * Exhibit Number 4.6 to Form
10-K for the year ended
September 30, 1993
4.7 Form of Share Certificate for Exhibit Number 4.9 to Form
Class A Common Stock * 10-K for the year ended
September 30, 1994
4.8 Form of Share Certificate for Exhibit Number 4.10 to Form
Class B Common Stock * 10-K for the year ended
September 30, 1994
67
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.1 a Form of Agreement which amends the Exhibit Number 19.1 to Form
Option Agreement of Repurchase with 10-Q for the quarter ended
Respect to Major Shareholders * March 31, 1988
10.2 Revolving Credit and Term Loan Exhibit Number 10.7 to Form
Agreement * 10-K for the year ended
September 30, 1986
10.3 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form
10-K for the year ended
September 30, 1988
10.4 a Written Description of Matthews Exhibit Number 10.9 to Form
International Corporation Management 10-K for the year ended
Incentive Compensation Plan * September 30, 1992
10.5 a 1992 Stock Incentive Plan (as Exhibit A to Definitive
amended through December 23, 1998) * Proxy Statement filed on
January 20, 1999
10.6 a Form of Stock Option Agreement * Exhibit Number 10.1 to Form
10-Q for the quarter ended
December 31, 1994
10.7 a 1994 Director Fee Plan (as Filed Herewith
amended through April 22, 1999)
10.8 a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form
10-Q for the quarter ended
March 31, 1995
10.9 Capital Stock Purchase Agreement, Exhibit Number 10.1 to Form
Sunland Memorial Park, Inc. * 10-Q for the quarter ended
December 31, 1995
10.10 Agreement of Plan and Merger, Exhibit Number 10.2 to Form
Industrial Equipment and Engineering 10-Q for the quarter ended
Company, Inc. * March 31, 1996
10.11 Asset Purchase Agreement among TKZ Exhibit Number 10.1 to Form
Holding Corp., Tukaiz Litho, Inc. 10-Q for the quarter ended
and Michael Vitallo * December 31, 1996
10.12 Membership Interest Agreement, Exhibit Number 10.2 to Form
Tukaiz Communications L.L.C. * 10-Q for the quarter ended
December 31, 1996
68
INDEX, Continued
----------
Exhibit Prior Filing or Sequential
No. Description Page Numbers Herein
- ------- ----------- --------------------------
10.13 Subordinated Convertible Note from Exhibit Number 10.3 to Form
Tukaiz Communications, L.L.C. in favor 10-Q for the quarter ended
of Venetian Investment Corporation * December 31, 1996
10.14 Operating Agreement, Tukaiz Exhibit Number 10.4 to Form
Communications, L.L.C. * 10-Q for the quarter ended
December 31, 1996
10.15 Asset Purchase and Membership Exhibit Number 10.1 to Form
Interest Agreement, O.N.E. Color 10-Q for the quarter ended
Communications, L.L.C. * June 30, 1998
10.16 O.N.E. Color Communications, L.L.C., Exhibit Number 10.2 to Form
Operating Agreement * 10-Q for the quarter ended
June 30, 1998
10.17 Stock Purchase Agreement, S+T Exhibit Number 10.17 to
Gesellschaft fur Reprotechnik mbH * Form 10-K for the year
ended September 30, 1998
10.18 Asset Purchase Agreement, Gibraltar Exhibit Number 10.18 to
Mausoleum Construction Company, Inc. * Form 10-K for the year
ended September 30, 1998
10.19 Caggiati S.p.A. Asset Purchase Exhibit Number 10.1 to
Agreement * Form 10-Q for the quarter
ended June 30, 1999
10.20 Loan Agreement, Caggiati S.p.A. 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.