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. 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. 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"). 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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 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.
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.
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.
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.
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.
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. 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. 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). 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 ========== ======= ======= ========== 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 ========== ========== 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. 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. 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. 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 ========= === ===== 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. 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 ========= ========= ========= ========= ========= =========
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. 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. 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. 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. 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: 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
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. 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. 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
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. 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. 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. 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. 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. 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.
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
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 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. 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. 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. 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. 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 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 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 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.