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, 1995 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 405 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. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of November 30, 1995 was $135,057,615. As of November 30, 1995, shares of common stock outstanding were: Class A Common Stock 4,961,660 shares Class B Common Stock 3,888,690 shares Documents incorporated by reference: None The index to exhibits is on pages 58-60. PART I ITEM 1. BUSINESS. Matthews International Corporation, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer of custom-made products which are used to identify people, places, products and events. The Company's products and operations are comprised of three business segments: Bronze, Graphic Systems and Marking Products. The Bronze segment is a leading manufacturer of cast bronze memorial products used primarily in cemeteries. The Graphic Systems segment manufactures and provides custom identification- related products and services used by the corrugated packaging industry and the flexible packaging industry. The Marking Products segment designs, manufactures and distributes a wide range of equipment and consumables used by customers to mark or identify various consumer and industrial products, components and packaging containers. The following table sets forth sales and operating profit for the three business segments of the Company for the past three fiscal years. Detailed financial information relating to business segments and to foreign and domestic operations is presented in Note 15 (Segment Information) to the Consolidated Financial Statements included in Part II of this annual report on Form 10-K. Fiscal Year Ended September 30, -------------------------------------------------------- 1995 1994 1993 --------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Sales to unaffiliated customers: Bronze $ 80,032 48.0% $ 75,065 47.3% $ 70,601 46.7% Graphic Systems 42,360 25.4 43,025 27.1 39,310 26.0 Marking Products 44,356 26.6 40,610 25.6 41,183 27.3 ------- ----- ------- ----- ------- ----- Total $166,748 100.0% $158,700 100.0% $151,094 100.0% ======= ===== ======= ===== ======= ===== Operating profit: Bronze 18,171 74.3 17,508 73.2 15,264 86.9 Graphic Systems 4,254 17.4 5,083 21.3 2,775 15.8 Marking Products 2,033 8.3 1,318(1) 5.5 (473)(2) (2.7) ------- ----- ------- ----- ------- ----- Total $ 24,458 100.0% $ 23,909 100.0% $ 17,566 100.0% ======= ===== ======= ===== ======= ===== (1) Fiscal 1994 operating profit for the Marking Products segment reflected unfavorable charges of approximately $450,000 representing inventory, currency exchange and other adjustments of its Italian operation. (2) Operating results of Marking Products for fiscal 1993 were unfavorably affected by charges approximating $1 million in connection with inventory write-offs and other adjustments, including a provision for restructuring the segment's Canadian operations, and the impact of approximately $800,000 for a change in the amortization period of goodwill for Matthews Swedot AB (See Note 1 of the Notes to Consolidated Financial Statements). ITEM 1. BUSINESS, continued. In fiscal 1995, approximately 81% of the Company's sales were made from the United States, and 8%, 5% and 6% were made from Europe, Canada and Australia, respectively. Bronze operations are primarily conducted in the United States and Canada with 6% of the segment's revenues coming from Australia. Graphic Systems products are manufactured and primarily sold in the United States. Marking Products sells equipment and consumables directly to industrial consumers and through distributors throughout the world. This segment has manufacturing and marketing facilities in the United States, Canada and Sweden with additional sales and distribution facilities in France, Germany and Australia. Approximately 52% of Marking Products sales were made to locations outside the United States in fiscal 1995. The Company's employs approximately 1475 people and has its principal executive offices at Two NorthShore Center, Pittsburgh, Pennsylvania 15212. Its telephone number is (412) 442-8200. PRODUCTS AND MARKETS: Bronze: The Bronze segment manufactures and markets in the United States, Canada and Australia cast bronze memorial products used primarily in cemeteries. The Bronze segment also manufactures and markets cast bronze and aluminum architectural products used to identify or commemorate people, places and events. Memorial products, which comprise the majority of the Bronze segment's sales, include flush bronze memorials, flower vases, crypt letters, cremation urns, niche units and cemetery features, along with other related products. Flush bronze memorials, which represent approximately two-thirds of the segment's memorial product sales, are bronze plaques which contain vital information about a deceased individual such as name and birth and death dates. These memorials are used in cemeteries as an alternative to upright granite tombstones. The memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier mowing and other maintenance. The Bronze segment manufactures a full line of memorial products for cremation, including urns in a variety of sizes, styles and shapes. In addition, the Company manufactures bronze niche units which are comprised of numerous compartments used to display cremation urns in mausoleums and churches. The Company's other bronze memorial products include flower vases and, in order to provide products for the granite memorial market, bronze plaques and letters that can be affixed to tombstones, mausoleums and crypts. Bronze segment sales in the United States account for over 85% of the segment's revenues. Principal customers for memorial products are cemeteries, memorial parks and monument dealers, which in turn sell the Company's products to the consumer. Within the Bronze segment is a wholly-owned subsidiary, Sunland Memorial Park, Inc. ("Sunland"). Sunland, located in Sun City, Arizona, is a cemetery and mortuary used by the Company to better understand the needs of its customers in the memorial industry and to test new products in a cemetery environment. The revenues of Sunland represent approximately 7% of the Bronze segment's sales. ITEM 1. BUSINESS, continued. PRODUCTS AND MARKETS, continued: Bronze, continued: Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are distributed through a network of independent dealers including sign suppliers, recognition companies and trophy dealers. Raw materials consist principally of bronze and aluminum ingot, sheet metal and coating materials and are generally available in adequate supply. Ingot is obtained from various North American and Australian smelters. Graphic Systems: The Graphic Systems segment provides printing plates and related products and services used in the corrugated packaging industry (manufacturers of printed corrugated boxes) for decorating and identifying corrugated packaging. The Graphic Systems segment also provides custom identification-related products and services used in the flexible packaging industry (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 from natural rubber, synthetic rubber or photopolymer resin. Upon customer request, plates can be pre-mounted press-ready in a variety of configurations that maximize print quality and minimize press set-up time. The segment also provides creative art design services to manufacturers of corrugated and flexible packaging and end users of such packaging. Other products and services include pre-press preparation, such as computer-generated camera-ready art, negatives, films and master patterns; plate mounting accessories for the corrugated industry; various press aids designed to improve print quality; rotary and flat cutting dies used to cut out intricately designed containers and point-of-purchase displays; and film masters used to print bar codes such as Universal Product Codes (known as "UPCs"). ITEM 1. BUSINESS, continued. PRODUCTS AND MARKETS, continued: Graphic Systems, continued: The Graphic Systems segment customer base consists 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. Major raw materials for this segment's products include rubber, photopolymer resin, film and graphic art supplies. All such materials are presently available in adequate supply from various industry sources. Marking Products: The Marking Products segment designs, manufactures and distributes a wide range of equipment and consumables used by customers to mark or 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 labeling methods 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. Most marking equipment customers also use the Company's ink, solvents and cleaners. The principal customers for the Company's marking products include food processors, metal fabricators and manufacturers of textiles, plastic and rubber products. A large percentage of the segment's sales are outside the United States and are distributed through Company subsidiaries in Canada, Australia, Sweden, Germany, Italy and France. 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 countries. In the United States, the Company has been supplying marking products for over 140 years. Major raw materials for this segment's products include printing components, tool steels, castings, rubber and chemicals, all of which are presently available in adequate supply from various sources. ITEM 1. BUSINESS, continued. COMPETITION: Bronze: Competition from other bronze memorial manufacturers, which is intense, is on the basis of product quality, delivery, price and design availability. The Company also competes with upright granite tombstone and flush granite memorial providers. The Company and its three major competitors account for a substantial portion of the bronze memorial market. The Company believes that its superior quality, broad product lines, product design, delivery capability, customer responsiveness and experienced personnel 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. Graphic Systems: Graphic Systems is one of only two manufacturers with a national presence and competes in a fragmented industry consisting of a few multi-plant regional printing plate suppliers and a large number of local one-plant companies located across the United States. Competition is on the basis of price, timeliness of delivery and product quality. The Company differentiates itself from the competition by meeting customer demands and by distinguishing itself as an innovator of new products. Marking Products: Competition is intense and based on product performance, service and price. The Company normally competes with specialty companies in specific marking applications. The Company believes that, in general, it has the broadest lines of marking products to address industrial marking application. 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 Marking Products. Backlogs in the Marking Products segment generally vary in the range of four to six weeks of sales. ITEM 1. BUSINESS, continued. REGULATORY MATTERS: The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company believes that its current operations are in material compliance with all presently applicable environmental laws and regulations. The Company's expenditures for environmental compliance have not had, nor are they presently expected to have, a material adverse effect on the Company. The Clean Air Act Amendments of 1990 are not expected to impact two of the Company's operating segments, Graphic Systems and Marking Products. In the United States, the Company's Bronze segment operates four nonferrous foundries, none of which is within the "major point source" industry category as defined by the Environmental Protection Agency. As such, it is believed that the Bronze segment operations will be regulated as "area sources" at certain locations. No material capital expenditures are anticipated within the next few years as a result of the Clean Air Act Amendments. Like most nonferrous foundry operations, the Company's plants produce a significant volume of residual materials as a result of the bronze casting process. Chief among these is spent foundry sands. Currently, the majority of these materials, including foundry sands, are regulated as solid waste under most state and federal laws. Pursuant to the Resource Conservation and Recovery Act, the Company is regulated as a generator of hazardous waste, and all plants are registered with the Environmental Protection Agency in accordance with applicable regulations. The Company has implemented detailed plans and procedures for waste management at each of its Bronze operating plants in the United States. The Company's Bronze facilities, like all U.S. foundries, will be required to achieve compliance with lower lead exposure limits in foundry ambient air by July 19, 1996. The Company has incurred expenditures at each of its operating foundries to install the necessary ventilation control technology to achieve compliance with the lower lead exposure limit standard. The Company expects to achieve compliance with the new lead exposure limits by the compliance date. ITEM 2. PROPERTIES. The principal properties of the Company are as follows (all are owned by the Company except as noted): Location Description of Property Square Feet - -------- ----------------------- ----------- Bronze: Pittsburgh, PA Manufacturing / Division Offices 94,000 Searcy, AR Manufacturing 84,000 Milton, Ontario, Canada Manufacturing 30,000 Melbourne, Australia Manufacturing 26,000(1) Sun City, CA Manufacturing 24,000 Seneca Falls, NY Manufacturing 21,000 Sun City, AZ Cemetery 14,000 Graphics Systems: Pittsburgh, PA Manufacturing / Division Offices 56,000 Atlanta, GA Manufacturing 16,000 Braintree, MA Manufacturing 14,000(1) Chicago, IL Manufacturing 15,000 Dallas, TX Manufacturing 15,000(1) LaPalma, CA Manufacturing 22,000 St. Louis, MO Manufacturing 24,000 Marking Products: Pittsburgh, PA Manufacturing / Division Offices 67,000 Pittsburgh, PA Ink Manufacturing 18,000 Pittsburgh, PA Manufacturing / Division Offices 18,000(3) Melbourne, Australia Distribution/Offices 13,000 Europe (various facilities) Manufacturing / Distribution 43,000(1) Corporate Office: Pittsburgh, PA General Offices 48,000(2) (1) These properties are leased by the Company under operating lease arrangements. Rent expense for these facilities was approximately $730,000 in fiscal 1995. (2) The Company uses approximately one-third of this building and leases, or offers to lease, the remainder to unrelated parties. (3) Property was sold and operation was consolidated with the segment's principal Pittsburgh location during fiscal 1995. 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, based on the facts now known to it, that the matters should not result in liabilities in an amount which would materially affect the consolidated financial position or annual results of operations 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 1995. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information: On July 20, 1994, the Company and some of its shareholders completed an initial public offering of 1,380,000 shares of its Class A Common Stock at an offering price of $14 per share. Prior to the offering, no shares of Class A Common Stock had been outstanding and there had been no established public trading market for the Company's common stock. Immediately prior to the offering, the Articles of Incorporation were amended and restated to divide the authorized common stock of the Company into two classes consisting of Class A Common Stock, $1 par value, and Class B Common Stock, $1 par value. The Company previously had one class of common stock, par value of $.10 per share. The Company's Class A Common Stock is traded on the NASDAQ National Market System. The following table sets forth the high, low and closing prices as reported by NASDAQ for the periods indicated: High Low Close ---- --- ----- Fiscal 1995: Quarter ended: September 30, 1995 20.50 18.25 20.125 June 30, 1995 19.00 15.00 18.75 March 31, 1995 16.25 12.50 15.50 December 31, 1994 15.50 13.75 13.75 Fiscal 1994: July 20, 1994 to September 30, 1994 $16.50 $14.25 $15.125 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. Prior to the offering, sales by the Company of its common stock were made only to eligible officers and employees and were subject to option agreements of repurchase. The Company's practice was to repurchase such shares when an option had arisen; therefore, the stock was not traded in any public trading market nor outside of the Company. Prior to the offering, the price for all sales and repurchases of the Company's common stock was Consolidated Adjusted Book Value per share as of the close of the fiscal year immediately preceding such sale or event giving rise to a repurchase option, unless otherwise provided by specific agreement. Consolidated Adjusted Book Value per share equaled the total shareholders' equity of the Company adjusted to account for retiree benefits on a cash basis and to exclude any reduction to shareholders' equity relative to notes receivable from officers and employees, divided by the number of outstanding shares of common stock. Such Consolidated Adjusted Book Value was otherwise determined in accordance with generally accepted accounting principles. Consolidated Adjusted Book Value per share as of September 30, 1993 was $7.96. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, continued. (b) Holders: The number of registered holders of the Company's common stock at November 30, 1995 was as follows: Class A Common Stock 440 Class B Common Stock 480 (c) Dividends: A quarterly dividend of $.07 per share was paid for the fourth quarter of fiscal 1995 to shareholders of record on September 30, 1995. The Company paid quarterly dividends of $.06 per share for the first three quarters of fiscal 1995 and the fourth quarter of fiscal 1994. Prior to the offering, the Company paid quarterly dividends of $.01 per share for the first three quarters of fiscal 1994. 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, ------------------------------------------------------------------- 1995 1994 1993(3) 1992 1991 ----------- ----------- ----------- ----------- ----------- (Not Covered by Independent Auditor's Report) Net sales $166,747,781 $158,700,158 $151,094,305 $149,781,172 $136,698,736 Gross profit 74,729,267 71,613,709 64,128,595 65,203,097 57,398,155 Interest expense 104,820 309,939 594,513 710,612 762,807 Income before income taxes and cumulative effect of changes in accounting principles 25,079,263 23,705,257 16,574,586 18,017,307 14,976,390 Income taxes 9,628,028 9,677,091 6,618,543 7,316,474 6,129,359 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of changes in accounting principles 15,451,235 14,028,166 9,956,043 10,700,833 8,847,031 Cumulative effect of changes in accounting principles (2) - - (10,836,726) - - ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 15,451,235 $ 14,028,166 $ (880,683) $ 10,700,833 $ 8,847,031 ========== ========== ========== ========== ========== Per common share (1): Income before cumulative effect of changes in accounting principles $ 1.75 $ 1.56 $ 1.07 $ 1.11 $ .92 Net income (loss) 1.75 1.56 ( .09) 1.11 .92 Cash dividends .25 .10 .03 .03 .03 Weighted average shares outstanding (excluding restricted shares)(1) 8,850,350 8,982,353 9,312,105 9,651,285 9,634,245 Total assets (4) $138,206,376 $120,683,005 $110,568,941 $114,336,773 $95,533,504 Long-term debt, noncurrent 270,092 745,616 6,133,340 7,768,962 5,561,932 (1) All periods reflect the 15-for-1 common stock split during fiscal 1994. See Note 6 of the Notes to Consolidated Financial Statements. (2) Fiscal year 1993 includes the cumulative effect of changes in accounting for postretirement benefits and income taxes. See Notes 10 and 11, respectively, of the Notes to Consolidated Financial Statements. (3) Fiscal year 1993 includes charges of $1 million relative to inventory write-offs and other adjustments, $800,000 for a change in the amortization period of goodwill for Matthews Swedot AB and $500,000 in connection with a public offering which did not occur during fiscal 1993. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." (4) Fiscal years 1991 through 1994 have been adjusted to reflect reclassifications to conform to fiscal 1995 presentation.
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. 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 ---------------------- ----------------- 1995- 1994- 1995 1994 1993 1994 1993 ---- ---- ---- ----- ----- Sales 100.0% 100.0% 100.0% 5.1% 5.0% Gross profit 44.8 45.1 42.4 4.4 11.7 Operating profit 14.7 15.1 11.6 2.3 36.1 Income before taxes 15.0 14.9 11.0(1) 5.8 43.0 Net income 9.3 8.8 6.6(1) 10.1 40.9 (1) Excludes the cumulative effect of changes in accounting principles for the adoption of SFAS No. 106 and SFAS No. 109. See "FASB Pronouncements." Comparison of Fiscal 1995 and Fiscal 1994: Sales for the year ended September 30, 1995 were $166.7 million, representing an increase of $8.0 million, or 5.1%, over fiscal 1994 sales of $158.7 million. The increase from the prior year resulted from higher sales in the Company's Bronze and Marking Products segments. Bronze segment sales in fiscal 1995 increased $5.0 million, or 6.6%, over fiscal 1994 reflecting increases in selling price and unit volume. Bronze sales were higher in the United States and Australia and, in the United States, reflected increases in both memorial and architectural products. Sales in the Marking Products segment increased $3.7 million, or 9.2%, over fiscal 1994 resulting principally from an increase in international sales. The increase in international sales reflected higher demand for non-contact printing equipment and related consumables, particularly in Germany and Australia. Sales in the Graphic Systems segment declined $665,000 (or 1.6%) below fiscal 1994. During fiscal 1995, the Graphic Systems segment experienced a reduction in demand for printing plates used by the corrugated packaging industry. This reduction in demand, which resulted from a shortage of linerboard and higher prices for corrugated shipping containers purchased by the packaging industry, is expected to be temporary. Gross profit for the year ended September 30, 1995 was $74.7 million, or 44.8% of sales, compared to $71.6 million, or 45.1% of sales, for fiscal 1994. The increase of $3.1 million, or 4.4%, from the prior year related primarily to higher gross profit levels in the Bronze and Marking Products segments. The increase in the Bronze segment gross profit reflected benefits of the segment's sales growth for the year, but was offset partially by higher material costs. The average cost of bronze ingot, the major raw material used in the production of the segment's memorial products, increased significantly during fiscal 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1995 and Fiscal 1994, continued: The higher gross profit in the Marking Products segment resulted from an increase in international sales volume, more favorable product mix and reductions in various overhead costs. Graphic Systems gross profit and gross profit as a percent of sales declined from fiscal 1994 primarily due to a reduction in sales for the year. The decline in sales in the Graphic Systems segment and increased prices for bronze ingot resulted in a slight reduction in consolidated gross profit as a percent of sales. Selling and administrative expenses for the year ended September 30, 1995 were $50.3 million, or 30.1% of sales, compared to $47.7 million, or 30.0% of sales, in fiscal 1994. Selling expenses increased $1.4 million, or 4.6%, over fiscal 1994, proportionate with the higher sales for the year. Selling expense for the year principally reflected higher marketing expenses and increased sales personnel costs in Australia and Europe for Marking Products. Administrative expense increased $1.2 million, or 6.7%, over the prior year. The increase in administrative expense primarily reflected normal growth in general and employee-related costs and an increase in research and development costs, principally in the Marking Products segment. Operating profit for the year ended September 30, 1995 was $24.5 million, or 14.7% of sales compared to fiscal 1994 operating profit of $23.9 million, or 15.1% of sales. The operating profit increase of $549,000, or 2.3%, generally reflected higher sales in the Bronze and Marking Products segments offset by a decline in demand for printing plates of the Graphic Systems segment and higher bronze ingot costs. Other income and deductions (net) for the year ended September 30, 1995 resulted in an increase in income before income taxes of $726,000 compared to an increase of $106,000 in fiscal 1994. Other income in fiscal 1995 primarily reflected higher investment income as a result of an increase in the Company's cash position. Cash and cash equivalents of the Company at September 30, 1995 were $39.2 million compared to $24.3 million at September 30, 1994. See "Liquidity and Capital Resources" for further discussion of the Company's cash position. Interest expense for the year ended September 30, 1995 was $105,000 compared to $310,000 for fiscal 1994. The decrease in interest expense was principally a result of the repayment of all amounts outstanding under the Term Loan Agreement during fiscal 1994. The Company's effective tax rate for the year ended September 30, 1995 was 38.4%, compared to 40.8% in fiscal 1994. The lower effective tax rate for fiscal 1995 is primarily the result of a reduction in the effect of foreign income taxes on the Company's consolidated tax position and favorable prior year federal income tax adjustments. The difference between the Company's effective tax rate and the federal statutory rate of 35% is principally the result of state and foreign income taxes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1994 and Fiscal 1993: Sales for the year ended September 30, 1994 were $158.7 million, representing an increase of $7.6 million, or 5.0%, over fiscal 1993. The higher sales reflected increases in the Company's Bronze and Graphic Systems segments. Bronze segment sales in fiscal 1994 increased $4.5 million, or 6.3%, over fiscal 1993 resulting from increases in both price and unit volume. The segment's total unit volume increased, particularly among cremation products. Sales in the Graphic Systems segment increased $3.7 million, or 9.5%, over fiscal 1993 resulting from an increase in unit volume, and a combination of higher prices and a more favorable product mix. The increase in unit volume reflected higher demand for the segment's principal product lines, particularly from national account customers. Sales in the Marking Products segment declined $573,000 (or 1.4%) below fiscal 1993. Fiscal 1994 sales were adversely affected by reductions in several European currencies against the U.S. dollar. In addition, the segment's lower sales for the fiscal year also reflected a slight decline in the sales volume of certain marking products, particularly in Germany. Gross profit for the year ended September 30, 1994 was $71.6 million, or 45.1% of sales, compared to $64.1 million, or 42.4% of sales, for fiscal 1993. The increase in gross profit and gross profit as a percent of sales primarily reflected higher margins in the Graphic Systems and Bronze segments. Graphic Systems gross profit increased as a result of improvements in manufacturing efficiency, selling price increases and favorable changes in product mix. The increase in the Bronze segment gross profit is attributed mainly to improved cost / price relationships and continued benefits from improvements in the segment's manufacturing efficiency. Marking Products gross profit and gross profit as a percent of sales also increased over fiscal 1993. The increase in gross profit from the prior year related primarily to additional charges of $1.0 million recorded by Marking Products in fiscal 1993 for inventory write- offs and other adjustments, including a provision for restructuring the segment's Canadian operations. The segment's gross profit in fiscal 1994 was adversely affected by increased material costs for the Company's Italian subsidiary related to inventory and unfavorable exchange adjustments of $450,000. The Company's consolidated gross profit in fiscal 1994 also reflected a favorable adjustment in U.S. workers' compensation insurance costs. Selling and administrative expenses for the year ended September 30, 1994 were $47.7 million, or 30.0% of sales, compared to $46.6 million, or 30.8% of sales, in fiscal 1993. Selling expense increased $2.3 million or 8.4%, over fiscal 1993. Selling expense was higher in the Graphic Systems and Bronze segments reflecting increased salaries and related benefits and commissions commensurate with the higher sales level of these segments. Administrative expense decreased $1.2 million, or 6.1%, from the prior year. Fiscal 1993 administrative expense included an additional charge of approximately $800,000 for a change in the amortization period of goodwill relative to Matthews Swedot AB. Fiscal 1994 selling and administrative expense also reflected reductions in marketing and research and development costs in Europe, favorable adjustments in U.S. workers' compensation insurance costs and general cost control efforts. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1994 and Fiscal 1993, continued: Operating profit for the year ended September 30, 1994 was $23.9 million, or 15.1% of sales. Fiscal 1993 operating profit was $17.6 million, or 11.6% of sales. The operating profit increase of $6.3 million, or 36.1%, reflected the benefits of higher sales and related gross profit in the Bronze and Graphic Systems segments and the absence of unusual charges recorded by Marking Products last year for inventory write-offs and other adjustments and a change in the amortization period of goodwill. Other income and deductions (net) for the year ended September 30, 1994 resulted in an increase in income before income taxes of $106,000 compared to a decrease of $396,000 in fiscal 1993. Other deductions in fiscal 1993 included expenses of $500,000 in connection with a public offering of the Company's common stock which did not occur during fiscal 1993 and losses on various fixed asset disposals. In fiscal 1994, other income primarily reflected higher investment income as a result of an increase in the Company's cash position. Other deductions in fiscal 1994 reflected additional charges of approximately $200,000 in connection with meeting certain foreign regulatory requirements. Interest expense for the year ended September 30, 1994 was $310,000 compared to $595,000 for fiscal 1993. The decrease in interest expense was principally a result of the repayment of all amounts outstanding under the Term Loan Agreement during fiscal 1994. The Company's effective tax rate for the year ended September 30, 1994 was 40.8%, compared to 39.9% in fiscal 1993. Fiscal 1994 was the first year for the full impact to the Company of the increased U.S. federal corporate income tax rate from 34% to 35%. The difference between the Company's effective tax rate and the federal statutory rate of 35% is principally the result of state and foreign income taxes. Comparison of Fiscal 1993 and Fiscal 1992: Sales for fiscal 1993 were $151.1 million and were $1.3 million, or 0.9%, higher than sales of $149.8 million for fiscal 1992. The slight growth in sales reflects increases in the Graphic Systems and Bronze segments, which were substantially offset by a decline in the Marking Products segment. Sales in the Graphic Systems segment increased $2.4 million, or 6.4%, over fiscal 1992 principally reflecting an increase in unit volume. Bronze segment sales in fiscal 1993 remained relatively level with fiscal 1992 sales (an increase of $139,000, or 0.2%, over fiscal 1992) despite a reduction in unit volume under the new three-year contract with the U.S. Veteran's Administration and the absence of granite block sales as a result of the May 1992 disposition of the segment's quarrying operations. An increase in the unit volume of sales to other customers and higher overall price levels more than offset these reductions. Sales in the Marking Products segment declined $1.2 million, or 2.8%, from fiscal 1992. Marking Products fiscal 1993 sales were adversely affected by significant reductions in several European currencies against the U.S. dollar and a decline in the demand for certain products as a result of weaker economic conditions, particularly within the European markets. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1993 and Fiscal 1992, continued: Gross profit for fiscal 1993 was $64.1 million, or 42.4% of sales, compared to $65.2 million, or 43.5% of sales, for fiscal 1992. The reduction in gross profit and gross profit as a percent of sales primarily reflected the additional costs in fiscal 1993 associated with the adoption of SFAS No. 106. The reduction from fiscal 1992 also reflected lower margins in the Marking Products segment resulting from charges of approximately $1.0 million in connection with inventory write-offs and other adjustments, including a provision for restructuring the segment's Canadian operations. Selling and administrative expenses for fiscal 1993 were $46.6 million, or 30.8% of sales, compared to $47.3 million, or 31.5% of sales, in fiscal 1992. Selling expense decreased slightly, $300,000 or 0.9%, from fiscal 1992 reflecting the comparable sales level with fiscal 1992 and a reduction in currency exchange rates. A reduction in administrative expense of $400,000, or 2.2%, from fiscal 1992 resulted from the termination of the Restricted Stock Plan (see "Liquidity and Capital Resources"). Expenses related to the appreciation of restricted stock, the majority of which were classified as administrative expense, were discontinued as of October 1, 1992. Increases in other administrative costs and the impact of a change in the amortization period of goodwill relative to Matthews Swedot AB of $800,000 partially offset the elimination of restricted stock expense. Selling and administrative expenses for fiscal 1993 also reflected additional costs relative to the adoption of SFAS No. 106. Operating profit for fiscal 1993 was $17.6 million, or 11.6% of sales, compared to $17.9 million, or 12.0%, in fiscal 1992. Despite the beneficial effect of the termination of the Restricted Stock Plan, operating profit was negatively affected by additional costs of $800,000 in connection with the adoption of SFAS No. 106, the change in the amortization period of goodwill relative to Matthews Swedot AB and inventory write-offs in the Marking Products segment. Other income and deductions (net) for fiscal 1993 resulted in a reduction in income before income taxes of $396,000 compared to an increase of $784,000 in fiscal 1992. Other deductions in fiscal 1993 included expenses of $500,000 in connection with a public offering of the Company's Common Stock which did not occur during fiscal 1993. In addition, fiscal 1993 reflected a decline in interest income due to a lower average cash balance and losses on various fixed asset disposals. In fiscal 1992, other income primarily included interest income and a gain of approximately $1.0 million on the sale of the Company's granite quarrying business and substantially all related properties in North Carolina and South Carolina. This gain was partially offset by a loss of approximately $300,000 on the sale of the Company's former corporate office building. Fiscal 1993 interest expense was $595,000 compared to $711,000 in fiscal 1992. The decline from fiscal 1992 reflected lower rates and principal balances. The Company's effective tax rate for fiscal 1993 was 39.9%, compared to 40.6% in fiscal 1992. The Company's consolidated effective rate decreased from fiscal 1992 due mainly to a change in enacted tax rates which resulted in an increase in the Company's net deferred tax asset position. The difference between the effective rate for fiscal 1993 and the federal statutory rate of 35% is principally the result 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: Consolidated working capital of the Company increased to $56.3 million at September 30, 1995, representing an increase of $15.3 million over working capital of $41.0 million at September 30, 1994. Consolidated working capital was $36.9 million at September 30, 1993. Cash and cash equivalents were $39.2 million at September 30, 1995 compared to $24.3 million at September 30, 1994 and $19.2 million at September 30, 1993. The Company's current ratio at September 30, 1995 was 3.5, compared to 2.9 and 3.0 at September 30, 1994 and 1993, respectively. Cash flow from operations was $20.2 million for fiscal 1995, compared to $20.4 million for fiscal 1994 and $7.6 million for fiscal 1993. Operating cash flow for both fiscal 1995 and 1994 reflected the Company's strong earnings for the periods of $15.5 million and $14.0 million, respectively. The decline in operating cash flow for fiscal 1993 resulted principally from a cash distribution in connection with the termination of the Company's Restricted Stock Plan. On December 4, 1992, the Board of Directors terminated the plan and authorized the liquidation of all participants' appreciated value thereunder. Liquidation of all participants' appreciated value required a cash distribution of $13.8 million, which resulted in a current income tax benefit of approximately $5.3 million. The distribution was made on December 10, 1992. The redemption of restricted shares reduced total shares outstanding by 2,888,250 shares. Cash used in investing activities was $2.7 million for fiscal 1995, compared to $3.2 million for fiscal 1994 and $7.4 million in fiscal 1993. Capital expenditures were $6.0 million, $3.9 million and $4.9 million in fiscal 1995, 1994 and 1993, respectively. The increase in capital expenditures in fiscal 1995 relates principally to the timing of anticipated capital spending projects. The capital budget for fiscal 1995 was $12.0 million compared to the 1994 capital budget of $7.2 million. Capital expenditures in the last three fiscal years reflected reinvestment in each of the Company's industry segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency and lower production costs. Capital expenditures for all three years were primarily financed through operating cash and the related assets are unencumbered. Capital spending for property, plant and equipment has averaged $4.9 million for the last three years. The capital budget for fiscal 1996 is $12.7 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Investing activities in fiscal 1995 reflected the sale of two of the Company's facilities. Two facilities of the Marking Products segment (one of the Company's Pittsburgh facilities and Canada) were sold during the year and the related operations were consolidated into other facilities of the Company. These sales did not have a material impact on the Company's results of operations for fiscal 1995. Investing activities also included notes receivable from designated officers and employees for the purchase of the Company's common stock under the Employees' Stock Purchase Plan. Loans made by the Company to officers and employees under this program amounted to $3.4 million in fiscal 1993. No loans were made in fiscal 1995 and 1994. Collections on loans to officers and employees were $1,520,000, $668,000 and $544,000 in fiscal 1995, 1994 and 1993, respectively. 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 fiscal 1995 was $2.7 million and represented repayments of $466,000 under capital lease obligations and cash dividends on common stock of $2.2 million. For the quarter ended September 30, 1995, the Company increased its quarterly cash dividend from $.06 per share to $.07 per share. Cash used in financing activities for fiscal 1994 was $12.3 million, primarily reflecting long-term debt repayments of $6.6 million and treasury stock redemptions under the Company's Employees' Stock Purchase Plan of $7.5 million. These amounts were partially offset by net proceeds of $2.0 million from an initial public offering of the Company's common stock (see "Initial Public Offering"). In addition, the Company increased its quarterly cash dividend from $.01 per share to $.06 per share effective with the quarter ended September 30, 1994. Cash used in financing activities in fiscal 1993 amounted to $1.3 million and primarily reflected net reductions in long-term debt and treasury stock activity. Financing activities in fiscal 1993 also reflected borrowings of $4.0 million under the Company's Revolving Credit and Term Loan Agreement, which were repaid prior to September 30, 1993. No amounts were outstanding under the Term Loan Agreement at September 30, 1995 and 1994. Under the terms of the Revolving Credit and Term Loan Agreement, the Company may borrow principal amounts up to $6.0 million in the aggregate at various interest rate options approximating current market rates. The agreement requires the Company to maintain minimum levels of consolidated working capital and tangible net worth. There were no outstanding borrowings under this agreement at September 30, 1995, 1994 or 1993. The Company has additional lines of credit for $3.0 million in U.S. dollars and $500,000 in Canadian dollars. These lines of credit provide for borrowings at the banks' prime interest rates. The Company has a foreign exchange line of credit of $200,000 for standby letters of credit to support performance guarantees, which bears interest at the bank's current market rates. The Company also maintains a multi-currency line of credit with a bank for 6 million French francs. The multi-currency line of credit bears interest at various rates based on market as determined by the bank. At September 30, 1995, approximately $45,000 of compensating balances were maintained in connection with the various lines of credit. There were no outstanding borrowings on the various lines of credit at September 30, 1995, 1994 and 1993. INITIAL PUBLIC OFFERING: On July 20, 1994, the Company and some of its shareholders completed an initial public offering of 1,380,000 shares of its Class A Common Stock at an offering price of $14 per share. Of the 1,380,000 shares, the Company sold 200,000 shares and the remaining 1,180,000 shares were sold by certain shareholders. The proceeds to the Company, after deducting commissions and estimated offering expenses, were $2.0 million. The Company applied its portion of the net proceeds to the repayment of outstanding indebtedness under the Term Loan Agreement. The Company did not receive any of the proceeds from the sale of 1,180,000 shares by the shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. INITIAL PUBLIC OFFERING, continued: Immediately prior to the offering, the Articles of Incorporation were amended and restated to change the authorized common stock of the Company to 100 million shares, divided into two classes consisting of 70 million shares of Class A Common Stock, $1 par value, and 30 million shares of Class B Common Stock, $1 par value. The Company previously had one class of common stock, par value of $.10 per share, with 4,000,000 authorized shares. In connection with such amendment, each share of the Company's common stock outstanding immediately prior to the filing of the restated Articles of Incorporation with the Pennsylvania Secretary of State became fifteen shares of Class B Common Stock. All treasury stock was retired. Under the Employees' Stock Purchase Plan, all outstanding shares of the Company's common stock prior to the offering were subject to option agreements of repurchase. Although the Company was not required to purchase any shareholders' stock, its consistent practice was to redeem all shares with respect to which an option of repurchase had arisen or which were voluntarily tendered. Subsequent to the offering, the Company will no longer continue its consistent practice of redeeming such shares. 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. The retirement, death or employment termination of a holder of Class B shares causes (except in limited circumstances) an automatic conversion of such stock to Class A shares. FASB PRONOUNCEMENTS: Effective October 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS No. 106, the Company is required to accrue the estimated cost of retiree benefits, other than pensions, ratably from the date of hire until the employee is eligible to receive the benefits. The cost of these benefits, which are principally health care and life insurance, were previously expensed by the Company when claims were paid. The Company elected to immediately recognize the cumulative effect of this change in accounting as a one-time charge to fiscal 1993 earnings of $17.8 million ($11.1 million net of income tax benefit), which represented the accumulated postretirement benefit obligation at October 1, 1992. In addition, this change resulted in an increase in fiscal 1993 operating expense of $835,000 ($518,000 net of income tax benefit). The Company also adopted the provisions of SFAS No. 109, "Accounting for Income Taxes," effective October 1, 1992. SFAS No. 109 requires the use of the liability method of accounting for deferred income taxes. The cumulative effect of adopting SFAS No. 109 as of October 1, 1992 was a $221,000 increase in fiscal 1993 net income. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. FASB PRONOUNCEMENTS, continued: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The pronouncement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. SFAS No. 121, when adopted, is not expected to have a material impact on the Company's financial position or results of operations. The pronouncement must be adopted by the Company by fiscal 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Description Pages - ----------- ----- Independent Auditor's Report 23 Consolidated Balance Sheet 24-25 Consolidated Statement of Income 26 Consolidated Statement of Shareholders' Equity 27 Consolidated Statement of Cash Flows 28 Notes to Consolidated Financial Statements 29-42 Supplementary Financial Information 43 INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors of Matthews International Corporation: We have audited the accompanying consolidated balance sheet of Matthews International Corporation and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matthews International Corporation and subsidiaries as of September 30, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 10 and 11 to the consolidated financial statements, Matthews International Corporation changed its methods of accounting for postretirement benefits other than pensions and accounting for income taxes in 1993. COOPERS & LYBRAND L.L.P. Pittsburgh, Pennsylvania November 16, 1995 MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1995 and 1994 ----------
ASSETS 1995 1994 ---- ---- Current assets: Cash and cash equivalents $ 39,204,010 $ 24,264,967 Accounts and notes receivable: Trade 28,145,651 26,733,873 Officers and employees 268,136 309,665 Other 101,823 79,081 Inventories (Note 2) 10,341,823 9,760,364 Deferred income taxes 718,531 699,596 Other current assets 456,265 769,444 ---------- ---------- Total current assets 79,236,239 62,616,990 Accounts receivable, noncurrent 1,401,056 1,402,129 Cemetery inventory, at average cost 1,193,652 799,484 Property, plant and equipment, net (Note 3) 38,021,777 38,249,276 Deferred income taxes (Note 11) 6,602,396 5,308,051 Deferred expenses 868,856 1,005,359 Other assets 5,522,261 5,521,689 Goodwill, net of accumulated amortization of $3,632,585 and $2,789,495, respectively (Note 1) 5,360,139 5,780,027 ----------- ----------- $138,206,376 $120,683,005 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET, continued September 30, 1995 and 1994 ----------
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 ---- ---- Current liabilities: Long-term debt, current maturities $ 433,465 $ 423,263 Trade accounts payable 5,181,954 4,699,634 Accrued compensation 1,811,438 1,823,747 Accrued vacation pay 2,542,442 2,563,636 Profit distribution to employees 3,590,944 3,924,351 Accrued income taxes 1,165,805 1,248,377 Customer prepayments 2,413,415 2,391,431 Postretirement benefits, current portion 1,329,237 1,098,948 Other current liabilities 4,441,320 3,432,768 ---------- ---------- Total current liabilities 22,910,020 21,606,155 Long-term debt (Note 4) 270,092 745,616 Estimated cemetery costs (Note 5) 2,143,085 1,941,210 Estimated finishing costs (Note 5) 2,848,391 2,819,903 Postretirement benefits other than pensions (Note 10) 19,727,632 18,584,826 Deferred revenue and other liabilities 3,508,752 3,622,027 Commitments and contingent liabilities (Note 12) Shareholders' equity (Notes 6, 7 and 8): Common Stock: Class A, $1.00 par value, authorized 70,000,000 shares, 4,009,753 and 1,380,000 shares issued at September 30, 1995 and 1994, respectively 4,009,753 1,380,000 Class B, $1.00 par value, authorized 30,000,000 shares, 4,840,597 and 7,470,350 shares issued at September 30, 1995 and 1994, respectively 4,840,597 7,470,350 Preferred stock, $100 par value, authorized 10,000 shares, none issued - - Additional paid-in capital 1,844,092 1,844,092 Retained earnings 80,690,206 67,451,034 Notes receivable from officers and employees (2,765,452) (4,285,463) Cumulative translation adjustment (1,820,792) (2,496,745) ----------- ----------- Total shareholders' equity 86,798,404 71,363,268 ----------- ----------- $138,206,376 $120,683,005 =========== =========== 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, 1995, 1994 and 1993 ----------
1995 1994 1993 ---- ---- ---- Sales $166,747,781 $158,700,158 $151,094,305 Cost of goods sold 92,018,514 87,086,449 86,965,710 ----------- ----------- ----------- Gross profit 74,729,267 71,613,709 64,128,595 Selling expense 31,146,043 29,788,416 27,485,392 Administrative expense 19,125,520 17,916,353 19,077,321 ----------- ----------- ----------- Operating profit 24,457,704 23,908,940 17,565,882 Other income 1,725,318 843,844 609,804 ----------- ----------- ----------- 26,183,022 24,752,784 18,175,686 Other deductions: Interest expense 104,820 309,939 594,513 Other deductions from income 998,939 737,588 1,006,587 ----------- ----------- ----------- 1,103,759 1,047,527 1,601,100 ----------- ----------- ----------- Income before income taxes and cumulative effect of changes in accounting principles 25,079,263 23,705,257 16,574,586 Income taxes (Note 11) 9,628,028 9,677,091 6,618,543 ----------- ----------- ----------- Income before cumulative effect of changes in accounting principles 15,451,235 14,028,166 9,956,043 Cumulative effect of changes in accounting principles for: Postretirement benefits, net of income tax benefit of $6,777,248 (Note 10) - - (11,057,615) Income taxes (Note 11) - - 220,889 ----------- ----------- ----------- Net income (loss) $ 15,451,235 $ 14,028,166 $ (880,683) =========== =========== =========== Earnings (loss) per share (Note 1): Before cumulative effect of changes in accounting principles $ 1.75 $ 1.56 $ 1.07 Changes in accounting principles for: Postretirement benefits - - (1.18) Income taxes - - .02 ------ ------ ------ Earnings (loss) per share $ 1.75 $ 1.56 $ (.09) ====== ====== ====== Weighted average number of common shares outstanding (Note 1) 8,850,350 8,982,353 9,312,105 ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. /TABLE
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY for the years ended September 30, 1995, 1994 and 1993 ---------- Common Additional Cumulative Stock Paid-in Retained Notes Translation Treasury (Note 6) Capital Earnings Receivable Adjustment Stock Total --------- ---------- ----------- ---------- ----------- ----------- ---------- Balance, September 30, 1992 $ 400,000 $30,152,035 $101,944,973 $(2,079,466) $ (88,178) $(48,542,503) $81,786,861 Net loss (880,683) (880,683) Treasury stock transactions: Purchase of 46,651 shares (5,213,628) (5,213,628) Sale of 54,127 shares 5,239,430 810,345 6,049,775 Redemption of 192,550 shares of restricted stock (11,690,594) (2,157,320) (13,847,914) Net increase in notes receivable (2,873,686) (2,873,686) Dividends, $.03 per share (269,081) (269,081) Net translation adjustment (3,762,796) (3,762,796) --------- ---------- ----------- --------- --------- ---------- ---------- Balance, September 30, 1993 400,000 23,700,871 100,795,209 (4,953,152) (3,850,974) (55,103,106) 60,988,848 Net income 14,028,166 14,028,166 Treasury stock transactions: Purchase of 62,858 shares (7,468,038) (7,468,038) Sale of 5,651 shares 548,568 92,507 641,075 Net decrease in notes receivable 667,689 667,689 Dividends, $.10 per share (892,793) (892,793) Recapitalization: Retirement of treasury shares (342,331) (24,249,439) (37,886,867) 62,478,637 - Stock split and par value change 8,592,681 (8,592,681) - Initial public offering (Note 6): Issuance of 200,000 shares 200,000 2,600,000 2,800,000 Offering expenses (755,908) (755,908) Net translation adjustment 1,354,229 1,354,229 --------- ---------- ----------- --------- --------- ---------- ---------- Balance, September 30, 1994 8,850,350 1,844,092 67,451,034 (4,285,463) (2,496,745) - 71,363,268 Net income 15,451,235 15,451,235 Net decrease in notes receivable 1,520,011 1,520,011 Dividends, $.25 per share (2,212,063) (2,212,063) Net translation adjustment 675,953 675,953 --------- ---------- ----------- --------- --------- ---------- ---------- Balance, September 30, 1995 $8,850,350 $ 1,844,092 $ 80,690,206 $(2,765,452) $(1,820,792) $ - $86,798,404 ========= ========== =========== ========= ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the years ended September 30, 1995, 1994 and 1993
1995 1994 1993 Cash flows from operating activities: Net income (loss) $15,451,235 $14,028,166 $ (880,683) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,887,122 4,259,313 3,941,897 Deferred taxes (1,313,280) (1,115,750) 4,748,629 Changes in accounting principles - - 10,836,726 Net change in certain working capital items (Note 13) (597,897) 2,220,580 1,538,235 (Increase) decrease in accounts receivable, noncurrent 1,073 (177,602) (144,021) (Increase) decrease in cemetery inventory (394,168) 70,715 135,057 Increase in other assets (572) (1,116,275) (46,761) Increase in estimated finishing and cemetery costs 230,363 293,452 582,628 Increase (decrease) in deferred revenue and expenses and other liabilities 23,228 419,774 (3,468) Increase in postretirement benefits 1,373,095 1,014,089 834,822 Redemption and cancellation of restricted stock - - (13,847,914) Loss on sale of property, plant and equipment 43,170 81,787 368,421 Effect of exchange rate changes on operations 486,135 397,287 (510,869) ---------- ---------- ---------- Net cash provided by operating activities 20,189,504 20,375,536 7,552,699 ---------- ---------- ---------- Cash flows from investing activities: Acquisitions of property, plant and equipment (5,976,264) (3,929,271) (4,921,475) Proceeds from property, plant and equipment disposals 1,736,869 34,517 348,856 Loans made to officers and employees - - (3,417,927) Collections on loans to officers and employees 1,520,011 667,689 544,241 ---------- ---------- ---------- Net cash used in investing activities (2,719,384) (3,227,065) (7,446,305) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt - - 4,000,000 Payments on long-term debt (465,322) (6,600,083) (5,888,821) Proceeds from initial public offering, net - 2,044,092 - Proceeds from the sale of treasury stock - 641,075 6 049,775 Purchase of treasury stock - (7,468,038) (5,213,628) Dividends (2,212,063) (892,793) (269,081) ---------- ---------- ---------- Net cash used in financing activities (2,677,385) (12,275,747) (1,321,755) ---------- ---------- ---------- Effect of exchange rate changes on cash 146,308 152,522 (396,665) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 14,939,043 5,025,246 (1,612,026) Cash and cash equivalents at beginning of year 24,264,967 19,239,721 20,851,747 ---------- ---------- ---------- Cash and cash equivalents at end of year $39,204,010 $24,264,967 $19,239,721 ========== ========== ========== Cash paid during the year for: Interest $ 104,820 $ 309,939 $ 594,513 Income taxes 11,023,880 10,073,283 2,977,144 The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include all foreign and domestic subsidiaries. All intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents: For purposes of the consolidated statement of cash flows, the Company considers all investments purchased with a 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, 1995, approximately $35,000,000 of the Company's cash and cash equivalents were invested with two financial institutions. Foreign Currency: Balance sheet accounts for foreign subsidiaries are translated into U.S. dollars at current exchange rates in effect at the balance sheet date. The gains or losses that result from this process are shown in the cumulative translation adjustment account in the shareholders' equity section of the balance sheet. The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevailed during the period. Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis for Bronze and Graphic Systems inventories, the first-in, first-out basis for Matthews Swedot AB inventories and the average cost method for all other inventories. Property, Plant and Equipment: Property, plant and equipment are carried at cost. Depreciation of machinery and equipment is computed primarily on the straight-line method. Depreciation of buildings is computed using both straight-line and declining balance methods. Gains or losses from the disposition of assets are 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. Other Assets: Other assets principally include prepaid pension assets (see Note 9) and the cash surrender value of life insurance, net of policy loans. No policy loans were outstanding at September 30, 1995 and 1994. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: 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 of 10 and 20 years. Income Taxes: Deferred tax liabilities and assets are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income taxes for U.S. tax purposes have not been provided on the undistributed earnings of foreign subsidiaries, as such earnings are considered to be reinvested indefinitely. At September 30, 1995, undistributed earnings for which deferred U.S. income taxes have not been provided approximated $4,571,000. 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 $2,138,000, $1,720,000 and $2,148,000 for the years ended September 30, 1995, 1994 and 1993, respectively. Treasury Stock: Treasury stock was carried at cost. The cost of treasury shares sold was determined on the average cost of shares held at the beginning of each fiscal year. During fiscal 1994, all treasury stock was retired (see Note 6). Earnings Per Share: Earnings per share is computed based on the weighted average number of shares of common stock outstanding during the year. Revenue Recognition: Pre-need sales of cemetery lots, mausoleum spaces and cemetery products (e.g., memorials and vaults) and services are primarily made through installment contracts with terms generally not exceeding 60 months. Revenues and costs are recognized on the installment basis over the contract period. The costs to provide cemetery products sold but uncompleted are reflected as estimated cemetery costs. All other revenues of the Company are recognized at the time of product shipment. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: Reclassifications: Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform to the current year presentation. 2. INVENTORIES: Inventories at September 30 consisted of the following: 1995 1994 ---- ---- Materials and finished goods $ 9,209,411 $ 8,697,118 Labor and overhead in process 812,178 764,219 Supplies 618,907 540,557 Less LIFO reserve (298,673) (241,530) ---------- ---------- $10,341,823 $ 9,760,364 ========== ========== The LIFO method of determining cost was used to value approximately 34% and 36% of inventories, before deducting LIFO reserves, at September 30, 1995 and 1994, respectively. 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment and the related accumulated depreciation at September 30 were as follows: 1995 1994 ---- ---- Buildings $21,273,617 $22,537,078 Machinery and equipment 35,850,622 33,483,893 ---------- ---------- 57,124,239 56,020,971 Less accumulated depreciation 24,407,809 21,821,201 ---------- ---------- 32,716,430 34,199,770 Land 3,281,726 3,551,734 Construction in progress 2,023,621 497,772 ---------- ---------- $38,021,777 $38,249,276 ========== ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 4. LONG-TERM DEBT: The Company has a Revolving Credit and Term Loan Agreement. Under terms of the agreement, the Company may borrow principal amounts up to $6,000,000 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. On December 10, 1992, the Company borrowed $4,000,000 under this agreement which was repaid during fiscal 1993. At September 30, 1995 and 1994, no amounts were outstanding under this agreement. During fiscal 1991, the Company converted all outstanding borrowings under the Revolving Credit and Term Loan Agreement into a separate seven-year term loan. All outstanding borrowings under the term loan were repaid in fiscal 1994. Long-term debt at September 30, 1995 and 1994 of $703,557 and $1,168,879, respectively, (which included $433,465 and $423,263, respectively, classified as long-term debt, current maturities) consisted of obligations under capital lease agreements. The Company maintains certain manufacturing and computer equipment under capital lease agreements which expire in fiscal 1997 and provide for renewal or purchase options. Future minimum lease payments under these leases are $448,985 and $299,084 in fiscal 1996 and 1997, respectively, which include an amount representing interest of $44,512. Assets under capital leases are depreciated by the straight-line method over the estimated useful lives of the assets. Cost and accumulated amortization of assets under capital leases were $2,073,290 and $1,249,082, respectively, at September 30, 1995 and $2,073,290 and $888,250, respectively, at September 30, 1994. At September 30, 1995 and 1994, the Company had additional lines of credit of $3,000,000 in U.S. dollars and $500,000 in Canadian dollars. These lines of credit provide for borrowings at the banks' prime interest rates. The Company has a foreign exchange line of credit of $200,000 for standby letters of credit to support performance guarantees. The Company also maintains a multi-currency line of credit with a bank for 6,000,000 French francs. The multi-currency line of credit bears interest at various rates based on market as determined by the bank. Compensating balances of approximately $45,000 and $270,000 were maintained by the Company at September 30, 1995 and 1994, respectively, in connection with the various lines of credit. There were no borrowings outstanding on the various lines of credit at September 30, 1995 and 1994. 5. ESTIMATED CEMETERY COSTS AND ESTIMATED FINISHING COSTS: Estimated cemetery costs represent current costs of providing various cemetery- related products and services sold to customers on a pre-need basis. 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 ---------- 6. SHAREHOLDERS' EQUITY: On July 20, 1994, the Company and some of its shareholders completed an initial public offering of 1,380,000 shares of its Class A Common Stock at an offering price of $14 per share. Of the 1,380,000 shares, the Company sold 200,000 shares and the remaining 1,180,000 shares were sold by certain shareholders. The proceeds to the Company, after deducting commissions and offering expenses, were $2,044,092. The Company did not receive any of the proceeds from the sale of 1,180,000 shares by the shareholders. Prior to the offering, no shares of Class A Common Stock had been outstanding and there had been no established public trading market for the Company's common stock. Immediately prior to the offering, the Articles of Incorporation were amended and restated to change the authorized common stock of the Company to 100,000,000 shares, divided into two classes consisting of 70,000,000 shares of Class A Common Stock, $1 par value, and 30,000,000 shares of Class B Common Stock, $1 par value. The Company previously had one class of common stock, par value of $.10 per share, with 4,000,000 authorized shares. In connection with such amendment, each share of the Company's common stock outstanding immediately prior to the filing of the restated Articles of Incorporation became, effective upon the filing of the restated Articles of Incorporation with the Pennsylvania Secretary of State, fifteen shares of Class B Common Stock. All treasury stock was retired. The consolidated financial statements reflect the effects of this 15-for-1 common stock split for all periods presented. 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. During fiscal 1995, 2,629,753 shares of Class B Common Stock were exchanged for an equal number of shares of Class A Common Stock. 7. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES: Notes receivable from officers and employees arise from purchases of common stock by designated officers and employees under the Employees' Stock Purchase Plan and, as of September 30, 1995 and 1994, included $1,575,269 and $2,550,316, respectively, due from officers. Each note bears interest ranging from 6.35% to 9% per annum (depending on the date of inception or renewal) 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 516,450 shares of the Company's common stock owned by borrowers pledged as collateral on the notes as of September 30, 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 8. RESTRICTED STOCK PLAN: Under the terms of the Company's Restricted Stock Plan, certain eligible, specified managerial employees were granted restricted shares of the Company's common stock from time to time in consideration of, and as an incentive to, service and continued service by such employees. Increases in the value of restricted shares were charged to operating expense as compensation and were credited to restricted stock which, for financial statement presentation, was included with additional paid-in capital. Effective October 1, 1992, the Board of Directors of the Company terminated the plan and authorized the liquidation of all participants' appreciated value thereunder. Liquidation of all participants' appreciated value required a cash distribution of $13,847,914, which resulted in an income tax benefit of approximately $5,300,000. The distribution was made on December 10, 1992. The redemption of restricted shares reduced total shares outstanding by 2,888,250 shares. 9. PENSION PLANS: The Company maintains noncontributory, defined benefit pension plans covering substantially all U.S. and Canadian employees. The plans provide benefits based on years of service and average monthly earnings for the highest five consecutive years during the ten years immediately preceding termination of employment. The Company's funding policy for the plans is to contribute annually the amount recommended by its consulting actuaries, subject to statutory provisions. The Company has reached the full-funding limitation and, accordingly, is not permitted to make deductible contributions for tax purposes to its pension plans during periods of such excess funding. Consequently, no contributions were made to the plans for the plan years ended July 31, 1995, 1994 and 1993. In addition, the Company has a Supplemental Retirement Plan which provides for supplemental pension benefits to certain executive officers of the Company. Upon normal retirement under this plan, such individuals who meet stipulated age and service requirements are entitled to receive monthly supplemental retirement payments, in addition to their pension under the Company's retirement plan, based on final average monthly earnings. Benefits under this plan do not vest until age 55; the Supplemental Retirement Plan is unfunded. Pension expense (income) included the following components: 1995 1994 1993 ---- ---- ---- Service cost - benefits earned during the year $ 1,675,738 $ 1,749,941 $ 1,573,741 Interest cost on projected benefit obligation 3,007,169 2,854,976 2,767,771 Actual return on plan assets (6,701,003) (487,554) (3,905,865) Net amortization and deferral 2,210,749 (4,035,874) (710,776) --------- --------- --------- Net pension expense (income) $ 192,653 $ 81,489 $ (275,129) ========= ========= ========= NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 9. PENSION PLANS, continued: The following table sets forth the funded status of the regular U.S. plan and the Supplemental Retirement Plan and the amounts recognized in the Company's consolidated financial statements at September 30, 1995 and 1994, which were determined as of August 1, 1995 and 1994, respectively:
1995 1994 ------------------------- ------------------------- Regular Supplemental Regular Supplemental ----------- ------------ ----------- ------------ Actuarial value of benefit obligation: Vested benefit obligation $32,118,747 $ 1,425,529 $29,625,074 $ 1,274,971 ========== ========= ========== ========= Accumulated benefit obligation $32,804,232 $ 1,504,739 $30,312,122 $ 1,376,709 ========== ========= ========== ========= Plan assets at fair value, primarily equity and fixed income securities $47,592,791 - $42,962,409 - Projected benefit obligation for participants' service rendered to date (39,555,653) (1,827,879) (36,949,388) (1,701,238) ---------- --------- ---------- --------- Plan assets in excess of (less than) projected benefit obligation 8,037,138 (1,827,879) 6,013,021 (1,701,238) Unrecognized transition asset being recognized over 15 years (2,018,976) - (2,422,770) - Unrecognized prior service cost 984,418 373,697 1,082,820 423,981 Unrecognized net (gain) loss (3,254,116) 157,496 (959,879) 208,496 Adjustment to recognize minimum liability - (208,053) - (307,948) ---------- --------- ---------- --------- Prepaid (accrued) pension $ 3,748,464 $(1,504,739) $ 3,713,192 $(1,376,709) ========== ========= ========== =========
Prepaid and accrued pension costs are included in other assets and deferred revenue and other liabilities, respectively. Actuarial assumptions are evaluated and revised as necessary as of August 1 each year. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.0% at August 1, 1995 and 1994 and 7.5% at August 1, 1993. The rate of increase in future compensation levels was 4.5% at August 1, 1995, 1994 and 1993. The expected long-term rate of return on assets was 9.0% at August 1, 1995 and 1994 and 9.5% at August 1, 1993. 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The Company provides certain health care and life insurance benefits for substantially all retired employees. These health and life insurance benefits are unfunded and are provided through an insurance company. Employees are assumed to be eligible for these retiree benefits generally after attaining age 55 where age plus years of service equal at least 75. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued: Effective October 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS No. 106, the Company is required to accrue the estimated cost of retiree benefits, other than pensions, ratably from the date of hire until the employee is eligible to receive the benefits. The cost of these benefits were previously expensed by the Company when claims were paid. The Company elected to immediately recognize the cumulative effect of this change in accounting as a one-time charge to earnings of $17,834,863 ($11,057,615 net of income tax benefit), which represented the accumulated postretirement benefit obligation at October 1, 1992. Net periodic postretirement benefit cost included the following components: 1995 1994 1993 ---- ---- ---- Service cost - benefits attributed to employee service during the year $ 472,206 $ 477,630 $ 404,934 Interest cost on accumulated postretirement benefit obligation 1,632,554 1,541,621 1,554,998 --------- --------- --------- Net periodic postretirement benefit cost $2,104,760 $2,019,251 $1,959,932 ========= ========= ========= The following table sets forth the plan's funded status reconciled with the amount shown in the Company's balance sheet at September 30: 1995 1994 ---- ---- Accumulated postretirement benefit obligation: Retirees $12,035,710 $10,251,717 Fully eligible active plan participants 1,039,817 874,944 Other active plan participants 8,761,497 9,257,146 ---------- ---------- 21,837,024 20,383,807 Unrecognized prior service cost 504,562 - Unrecognized net loss (1,284,717) (700,033) ---------- ---------- Accumulated postretirement benefit obligation $21,056,869 $19,683,774 Current portion 1,329,237 1,098,948 ---------- ---------- $19,727,632 $18,584,826 ========== ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued: The weighted average discount rate used in determining the accumulated postretirement benefit obligation at September 30, 1995 and 1994 was 8.25%. The rate for compensation increases at September 30, 1995 and 1994 was 4.5%. For measurement purposes, a 7.6% annual rate of increase in the per capita cost of health care benefits was assumed for 1996; the rate was assumed to decrease gradually to 5.0% for 2003 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. An increase in the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of September 30, 1995 by 10.4% and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by 12.1%. 11. INCOME TAXES: Effective October 1, 1992, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred tax liabilities and assets are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of adopting SFAS No. 109 as of October 1, 1992 was a $220,889 decrease in fiscal 1993 net loss. The provision for income taxes consisted of the following: 1995 1994 1993 ---- ---- ---- Current: Federal $ 8,430,866 $ 8,325,741 $ 1,140,519 State 1,886,148 1,961,429 246,450 Foreign 624,294 505,671 482,945 ---------- ---------- --------- 10,941,308 10,792,841 1,869,914 Deferred (1,313,280) (1,115,750) 4,748,629 ---------- --------- --------- Total $ 9,628,028 $ 9,677,091 $ 6,618,543 ========== ========= ========= The Company's foreign subsidiaries had income (losses) before income taxes for the years ended September 30, 1995, 1994 and 1993 of approximately $462,000, $(788,000) and $9,000, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 11. INCOME TAXES, continued: The components of the net deferred tax asset at September 30 were as follows: 1995 1994 ---- ---- Deferred tax assets: Accrued vacation pay $ 620,626 $ 622,769 Estimated finishing costs 714,999 638,119 Postretirement benefits other than pensions 8,212,179 7,676,671 Installment sales 1,092,937 1,017,177 Foreign subsidiary losses 1,186,821 691,275 Other 300,148 302,812 ---------- ---------- 12,127,710 10,948,823 ---------- ---------- Deferred tax liabilities: Pension costs (955,165) (1,030,299) Depreciation (3,074,966) (3,090,627) Deferred gain on sale of facilities (646,326) (668,512) Deferred commissions (130,326) (151,738) ---------- ---------- (4,806,783) (4,941,176) ---------- ---------- Net deferred tax asset 7,320,927 6,007,647 Less current portion 718,531 699,596 ---------- ---------- $ 6,602,396 $ 5,308,051 ========== ========== The components of the provision for deferred income taxes were as follows: 1995 1994 1993 ---- ---- ---- Accrued vacation pay $ 2,143 $ (27,724) $ (22,729) Estimated finishing costs (76,880) (67,559) (158,825) Postretirement benefits other than pensions (535,508) (395,494) (503,929) Restricted stock plan - - 5,328,971 Installment sales (75,760) (135,972) (139,153) Foreign subsidiary losses (495,546) (691,275) - Pension costs (75,134) (31,905) 131,785 Depreciation (15,661) 256,366 130,521 Deferred gain on sale of facilities (22,186) (44,696) (68,036) Other (18,748) 22,509 50,024 ---------- ---------- ---------- $(1,313,280) $(1,115,750) $ 4,748,629 ========== ========== ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 11. INCOME TAXES, continued: At September 30, 1995, the Company had foreign net operating loss carryforwards of approximately $5,600,000, principally related to its European subsidiaries. Approximately $700,000 of these carryforwards expire between 2000 and 2002, while the remainder have an indefinite carryforward period. The Company has recorded a valuation allowance of approximately $1,200,000 and $1,000,000, respectively, at September 30, 1995 and 1994 related to the carryforwards. The reconciliation of the federal statutory tax rate to the consolidated effective tax rate is as follows: 1995 1994 1993 ---- ---- ---- Federal statutory tax rate 35.0 % 35.0 % 35.0 % Effect of state income taxes, net of federal deduction 4.5 5.1 4.1 Foreign taxes in excess of federal statutory rates ( .9) .4 2.7 Impact of tax rate changes - - ( .9) Other ( .2) .3 (1.0) ---- ---- ---- Effective tax rate 38.4 % 40.8 % 39.9 % ==== ==== ==== During 1993, the maximum federal statutory tax rate increased to 35% for U.S. Corporations with taxable income in excess of $10 million. This change in enacted tax rates resulted in an increase in net deferred tax assets and a reduction in fiscal 1993 income tax expense of $147,162. 12. COMMITMENTS AND CONTINGENT LIABILITIES: The Company operates various production and office facilities and equipment under operating lease agreements expiring at various dates through 1997. Annual rentals under these and other operating leases were $2,089,000, $2,131,000 and $2,465,000 in 1995, 1994 and 1993, respectively. Minimum rental commitments for future years are not material. The Company is party to various legal proceedings generally incidental to its business. The eventual outcome of these matters is not predictable, and it is possible that their resolution could be unfavorable to the Company. Although the ultimate disposition of these proceedings is not presently determinable, management is of the opinion, based on the facts now known to it, that they should not result in liabilities in an amount which would materially affect the consolidated financial position or annual results of operations of the Company. The Company was contingently liable as guarantor of employees' bank borrowings for approximately $478,000 at September 30, 1994. Subsequent to the public offering, the program ended in fiscal 1995 and the Company was no longer a guarantor of any employees' bank borrowings at September 30, 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 13. SUPPLEMENTAL CASH FLOW INFORMATION: Changes in working capital items (excluding cash and cash equivalents, deferred income taxes, long-term debt, current maturities and postretirement benefits, current portion) consisted of the following: 1995 1994 1993 ---- ---- ---- Current assets: Accounts and notes receivable $ 1,392,991 $ 2,917,664 $ (196,402) Inventories 581,459 (964,612) (1,402,750) Other current assets (313,179) 250,391 (303,711) --------- --------- --------- 1,661,271 2,203,443 (1,902,863) --------- --------- --------- Current liabilities: Trade accounts payable 482,320 458,589 (775,431) Accrued compensation (12,309) (46,463) 116,385 Accrued vacation pay (21,194) 245,241 226,162 Profit distribution to employees (333,407) 857,151 343,455 Accrued income taxes (82,572) 719,558 (1,041,087) Customer prepayments 21,984 803,758 300,139 Other current liabilities 1,008,552 1,386,189 465,749 --------- --------- --------- 1,063,374 4,424,023 (364,628) --------- --------- --------- Net increase (decrease) $ 597,897 $(2,220,580) $(1,538,235) ========= ========= ========= 14. STOCK OPTION PLAN: The Company has a stock incentive plan which provides for the grant of incentive stock options, nonstatutory stock options and restricted share awards. The aggregate number of shares of the Company's common stock which may be issued upon exercise of the stock options and pursuant to the restricted share awards under the stock incentive plan is 600,000 shares. The option price for each stock option which may be granted under the plan may not be less than fair market value of the Company's common stock on the date of grant. During fiscal 1995, by action of the Compensation Committee of the Company's Board of Directors, certain officers and other management personnel were granted nonstatutory stock options to purchase a combined total of 477,500 shares of the Company's Class A Common Stock. On December 9, 1994, options to purchase 377,500 shares were granted at an exercise price of $14.25 per share. Of these grants, options to purchase 58,000 shares had been cancelled by September 30, 1995. On May 19, 1995, options to purchase 100,000 shares were granted at an exercise price of $16.375 per share. The outstanding 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 15. SEGMENT INFORMATION: Sales and operating profit of the Company's business segments were as follows:
Graphic Marking Systems Products Bronze Eliminations Consolidated ---------- ---------- ---------- ------------ ------------ Sales to unaffi- liated customers: 1995 $42,360,000 $44,356,157 $80,031,624 - $166,747,781 1994 43,024,980 40,610,034 75,065,144 - 158,700,158 1993 39,309,853 41,183,302 70,601,150 - 151,094,305 Intersegment sales: 1995 33,610 211,040 18,975 $ (263,625) - 1994 37,289 179,940 22,954 (240,183) - 1993 55,996 173,857 321,623 (551,476) - Operating profit: 1995 4,253,769 2,032,915 18,171,020 - 24,457,704 1994 5,083,101 1,318,281 17,507,558 - 23,908,940 1993 2,774,653 (473,101) 15,264,330 - 17,565,882
Information related to assets identifiable to segments is:
Graphic Marking Systems Products Bronze Other Consolidated ---------- ---------- ---------- ---------- ------------ Identifiable assets: 1995 $19,545,364 $23,787,942 $36,096,768 $58,776,302 $138,206,376 1994 19,003,458 24,893,567 33,602,927 43,183,053 120,683,005 1993 18,769,096 24,752,763 31,170,858 35,876,224 110,568,941 Depreciation expense: 1995 1,049,438 999,435 1,590,125 572,218 4,211,216 1994 877,452 878,146 1,349,866 533,731 3,639,195 1993 743,855 821,118 1,232,275 502,515 3,299,763 Capital expenditures: 1995 1,868,994 931,116 2,909,655 266,499 5,976,264 1994 880,069 854,989 1,991,690 202,523 3,929,271 1993 1,216,323 744,107 1,913,629 1,047,416 4,921,475
Fiscal 1994 operating profit for the Marking Products segment reflected unfavorable charges of approximately $450,000 representing inventory, currency exchange and other adjustments of its Italian operation. Fiscal 1993 operating profit for the Marking Products segment was unfavorably affected by charges of approximately $1,800,000 in connection with inventory write-offs and other adjustments, a provision for restructuring the segment's Canadian operations and the impact of a change in the amortization period of goodwill for Matthews Swedot AB. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 15. SEGMENT INFORMATION, continued: Intersegment sales are accounted for at negotiated prices. Operating profit is total revenue less operating expenses. Identifiable assets include those assets which are used in the Company's operations in each segment. Corporate headquarters' assets are included in Other and principally consist of cash and cash equivalents and the headquarters' administration building. Information about the Company's operations in different geographic areas is as follows:
United States Canada Australia Europe Eliminations Consolidated ----------- --------- --------- ---------- ------------ ------------ Sales to unaffi- liated customers: 1995 $135,078,165 $8,044,331 $9,710,776 $13,914,509 - $166,747,781 1994 133,037,135 7,637,341 8,324,132 9,701,550 - 158,700,158 1993 125,945,611 7,752,795 7,517,017 9,878,882 - 151,094,305 Transfers between geographic areas: 1995 7,581,885 260,007 - 2,280,101 $(10,121,993) - 1994 6,540,921 304,046 - 1,869,722 (8,714,689) - 1993 5,681,394 341,482 - 2,050,784 (8,073,660) - Operating profit: 1995 23,505,940 (228,905) 1,491,977 (311,308) - 24,457,704 1994 24,250,415 (155,309) 1,492,069 (1,678,235) - 23,908,940 1993 17,594,263 (267,198) 1,338,729 (1,099,912) - 17,565,882 Identifiable assets: 1995 130,465,301 5,261,030 8,558,234 14,362,677 (20,440,866) 138,206,376 1994 115,426,107 5,266,413 7,943,970 12,780,753 (20,734,238) 120,683,005 1993 106,704,160 5,661,038 6,456,320 10,722,790 (18,975,367) 110,568,941
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 1995 and fiscal 1994.
Quarter Ended ----------------------------------------------------- Year Ended December 31 March 31 June 30 September 30 September 30 ----------- ----------- ----------- ------------ ------------ FISCAL YEAR 1995: Sales $40,085,805 $42,085,583 $42,729,909 $41,846,484 $166,747,781 Gross profit 18,363,567 18,905,291 19,141,451 18,318,958 74,729,267 Operating profit 6,363,694 6,349,380 6,357,717 5,386,913 24,457,704 Net income 3,909,665 4,080,628 4,142,376 3,318,566 15,451,235 Earnings per share .44 .46 .47 .38 1.75 FISCAL YEAR 1994: Sales $37,981,327 $39,734,580 $40,644,593 $40,339,658 $158,700,158 Gross profit 17,078,248 17,696,966 18,122,874 18,715,621 71,613,709 Operating profit 6,199,958 6,285,722 5,939,981 5,483,279 23,908,940 Net income 3,616,840 3,716,148 3,390,631 3,304,547 14,028,166 Earnings per share .38 .42 .39 .37 1.56 /TABLE ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in accountants or disagreements on accounting or financial disclosure between the Company and Coopers & Lybrand L.L.P., Certified Public Accountants, for the fiscal years ended September 30, 1995, 1994 and 1993. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following information as of November 30, 1995 is furnished with respect to each director and executive officer: Name Age Positions with Registrant - ---- --- ------------------------- William M. Hauber 66 Chairman of the Board David M. Kelly 53 President and Chief Executive Officer Geoffrey D. Barefoot 48 President, Graphic Systems Division and Director Edward J. Boyle 49 Controller William A. Coates 66 Director David J. DeCarlo 50 President, Bronze Division and Director Richard C. Johnson 49 Vice President, Corporate Development and Human Resources Thomas N. Kennedy 60 Senior Vice President, Chief Financial Officer and Treasurer and Director George C. Oehmler 69 Director John P. O'Leary, Jr. 48 Director James L. Parker 57 Senior Vice President, General Counsel and Secretary and Director William J. Stallkamp 56 Director William M. Hauber, a Director of the Company since 1973, was elected Chairman of the Board in December 1987, was President and Chief Executive Officer from 1981 through 1992 and had been Chief Executive Officer from January 1993 until his retirement as an officer of the Company on October 1, 1995. Mr. Hauber is expected to continue as a director of the Company. David M. Kelly was appointed President and Chief Operating Officer of the Company in April 1995 and President and Chief Executive Officer effective October 1, 1995. He was appointed as a Director of the Company in May 1995. Prior to joining the Company, he worked for Carrier Corporation as Senior Vice President from 1993 to 1995; Vice President, Strategic Planning and Global Purchasing from 1992 to 1993; President, North American Operations from 1990 to 1992; and Vice President, Manufacturing - North American Operations prior thereto. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued. Geoffrey D. Barefoot, a Director of the Company since 1990, was elected President, Graphic Systems Division in November 1993. Prior thereto, he was Vice President and Division Manager, Graphic Systems beginning in March 1988. Edward J. Boyle was elected Controller in January 1991 and was Manager, Accounting and Taxes of the Company prior thereto. Effective December 1, 1995, Mr. Boyle has been appointed to the position of Vice President, Accounting & Finance. William A. Coates, a Director of the Company since 1992, retired in 1989 as Executive Vice President, Technology, Quality and Operations Services, Westinghouse Electric Corporation. David J. DeCarlo, a Director of the Company since 1987, was elected President, Bronze Division in November 1993. Prior thereto, he was Senior Vice President and Division Manager of Bronze beginning in January 1991 and Vice President and Division Manager of Bronze beginning in March 1986. Richard C. Johnson was elected Vice President, Corporate Development and Human Resources in December 1991. He was Manager of Corporate Development and Human Resources beginning in May 1991 and Manager of Corporate Development prior thereto. Thomas N. Kennedy, a Director of the Company since 1987, was elected Senior Vice President, Chief Financial Officer and Treasurer in January 1991. Prior thereto, he was Vice President - Treasurer beginning in March 1986. Mr. Kennedy retired as an officer of the Company effective December 1, 1995, but is expected to continue as a Director. George C. Oehmler, a Director of the Company since 1982, is President, Director and member of the Executive Committee of the World Affairs Council of Pittsburgh. He retired in 1986 as Corporate Vice President of Allegheny International, Inc. Mr. Oehmler passed away December 10, 1995. 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. Prior thereto, he was President - Western Region of such company. Mr. O'Leary is also a director of First Western Bancorp, Inc. James L. Parker, a Director of the Company since 1981, was elected Senior Vice President, General Counsel and Secretary in January 1991. Prior thereto, he was Vice President, General Counsel and Secretary beginning in 1976. William J. Stallkamp, a Director of the Company since 1981, is an Executive Vice President of Mellon Bank, N.A. See "Certain Relationships and Related Transactions." ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued. Board Committees: The Executive Committee is appointed by the Board of Directors to have and exercise during the periods between Board meetings all of the powers of the Board of Directors, except that the Executive Committee may not elect directors, change the membership of or fill vacancies in the Executive Committee, change the By-Laws of the Company or exercise any authority specifically reserved by the Board. The membership of the Executive Committee since October 1, 1994 consisted of the following: October 1, 1994 to October 1, 1995 Messrs. Hauber, Parker and Kennedy October 1, 1995 to December 1, 1995 Messrs. Kelly, Parker, Kennedy, DeCarlo and Barefoot December 1, 1995 to the date of Messrs. Kelly, Parker, DeCarlo and this report Barefoot The principal function of the Audit Committee, the members of which are Messrs. Stallkamp (Chairman), Oehmler and O'Leary, is to endeavor to assure the integrity and adequacy of financial statements issued by the Company. It is intended that the Audit Committee will review internal auditing systems and procedures as well as the activities of the public accounting firm performing the external audit. The principal function of the Compensation Committee, the members of which are Messrs. Coates (Chairman), Oehmler and Stallkamp, and, beginning October 1, 1995, Mr. Hauber, is to review periodically the suitability of the remuneration arrangements (including benefits) for the principal officers of the Company and to administer the Company's 1992 Stock Incentive Plan. Compliance with Section 16(a) of the Securities Exchange Act: On June 2, 1995, David M. Kelly filed an amended Form 3 with the Securities and Exchange Commission, reporting ownership of the Company's stock as of his employment commencement date, April 3, 1995. Former officer and director, R.T. Busteed also did not file with the Company a Form 5 with respect to his stock options. Apart from such matters, the Company is aware of no delinquent filings of Securities and Exchange Commission Forms 3, 4 or 5 during the period September 30, 1994 through November 30, 1995 by any holder of the registrant's equity securities. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth the individual compensation information for the fiscal years ended September 30, 1995, 1994 and 1993 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) (2) (Shares) (3) (4) William M. Hauber (5) 1995 $305,070 $276,700 None None $546,285 Chairman of the Board and 1994 290,256 275,085 None None 474,639 Chief Executive Officer 1993 286,500 165,278 None $3,333,480 329,956 David M. Kelly (6) 1995 $125,004 $ 94,233 100,000 None None Director, President and Chief Operating Officer David J. DeCarlo 1995 177,636 162,132 43,000 None 3,851 Director and President, 1994 169,224 161,168 None None 3,408 Bronze Division 1993 162,756 130,961 None 1,219,870 3,158 James L. Parker 1995 143,580 111,633 33,000 None 424,311 Director, Senior Vice 1994 139,296 121,430 None None 375,478 President, General 1993 137,694 80,593 None 2,369,351 260,496 Counsel and Secretary Thomas N. Kennedy (7) 1995 136,884 97,304 33,000 None 106,991 Director, Senior Vice 1994 128,892 102,178 None None 93,952 President, Chief Financial 1993 127,413 72,175 None 1,664,545 65,462 Officer and Treasurer (1) Includes salaries. Also includes directors' fees for fiscal year 1993. (2) Includes management incentive plan and supplemental management incentive payments and, for Mr. Kelly, an amount equal to his life insurance premium cost. At his request, the Company does not provide life insurance for Mr. Kelly, but in lieu thereof pays to him annually the amount which the Company would have paid in premiums to provide coverage, considering his position and age. Such amonuts are not included in calculating other Company benefits for Mr. Kelly. The amount paid to Mr. Kelly in lieu of life insurance for 1995 was $4,100. 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 attainment of established personal goals and on divisional and Company performance for the fiscal year. 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. As of the date of the Company's Initial Public Offering (July 20, 1994), no further notes have been issued under the Designated Employee Stock ITEM 11. EXECUTIVE COMPENSATION, continued. (3) Represents distribution of all appreciation accumulated under the Company's Restricted Stock Plan during the six-year period that the Plan was in effect. On December 4, 1992, the Board of Directors of the Company terminated the Restricted Stock Plan, which had been in effect since 1986, and all risks of forfeiture thereunder and authorized the liquidation of all participants' accrued value under the Plan. As provided by the Restricted Stock Plan, restricted share value was limited to the difference between book value at September 30, 1992 of $7.45 per share and base price per share. The distribution was made on December 10, 1992 and did not impact fiscal 1993 earnings because the appreciation had been accrued in the previous six years. Redemption of restricted shares reduced total outstanding shares of the Company's common stock by 2,888,250 shares. If the Restricted Stock Plan had not been terminated, the fiscal 1993 pre-tax earnings of the Company would have been approximately $1.5 million lower and its Consolidated Adjusted Book Value would have decreased concurrently. (4) Includes stock appreciation right benefits, educational assistance for dependent children and premiums for term life insurance. Messrs. Hauber, Parker and Kennedy previously have exchanged a portion of their respective common stock shareholdings for an equivalent number of stock appreciation rights, pursuant to which the Company credits and pays annually an amount equal to the participation value of all units so acquired. Participation value of each unit is the amount of earnings per share of common stock adjusted to account for retiree benefits on a cash basis, calculated on the basis of the weighted average number of unrestricted shares outstanding during the fiscal year. Stock appreciation right benefits expire upon retirement or death. Each officer of the Company is provided term life insurance coverage in an amount approximately equivalent to three times his respective salary. Amounts reported in this column for the named officers in fiscal 1995, 1994 and 1993 include the following respective life insurance benefit costs: Mr. Hauber, $17,193, $5,932 and $5,408; Mr. DeCarlo, $1,851, $2,408 and $2,158; Mr. Parker, $3,135, $2,371 and $2,144; and Mr. Kennedy, $3,491, $2,264 and $1,974. 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. Mr. DeCarlo received educational assistance benefits of $2,000 in fiscal 1995 and $1,000 in fiscal 1994 and 1993. See also note (2). (5) Mr. Hauber retired as Chief Executive Officer effective October 1, 1995, but is expected to continue as a director. (6) Mr. Kelly joined the Company on April 3, 1995 and was elected Chief Executive Officer effective October 1, 1995. Mr. Kelly has an employment arrangement with the Company which provides that, in the event of his discharge without cause prior to April 3, 1998, he will receive additional compensation of double his annual base salary rate as of the discharge date. Such arrangement further provides for the life insurance payments described in note (2) above and the waiver of minimum service for vesting purposes described below under "Retirement Plan." (7) Mr. Kennedy retired as an officer December 1, 1995, but is expected to continue as a director.
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. 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 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% - -------------- ---------- ---------- --------- ---------- -------- -------- W.M. Hauber None -- -- -- -- -- D.M. Kelly 100,000 20.9% $16.375 5/19/05 $1,029,800 $2,609,800 D.J. DeCarlo 43,000 9.0% $14.25 12/9/04 385,366 $976,573 J.L. Parker 33,000 6.9% $14.25 12/9/04 295,746 749,463 T.N. Kennedy (2) 33,000 6.9% $14.25 12/9/04 197,164 499,642 (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. 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. (2) In accordance with plan provisions, options for 11,000 shares were cancelled effective with Mr. Kennedy's retirement on December 1, 1995.
Retirement Plan: 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. ITEM 11. EXECUTIVE COMPENSATION, continued. In addition to benefits provided by the Company's retirement plan, the Company has a Supplemental Retirement Plan, which provides for supplemental pension benefits to executive officers of the Company designated by the Board of Directors, including those named in the Summary Compensation Table. Upon normal retirement under this plan, such individuals who meet stipulated age and service requirements are entitled to receive monthly supplemental retirement payments which, when added to their pension under the Company's retirement plan and their maximum anticipated Social Security primary insurance amount, equal, in total, 1.85% of final average monthly earnings (including incentive compensation) times the individual's years of continuous service (subject to a maximum of 35 years). Upon early retirement under this plan, reduced benefits will be provided, depending upon age and years of service. Benefits under this plan do not vest until age 55 and the attainment of 15 years of continuous service. However, in order to recruit Mr. Kelly, the Company waived such minimum service requirement with respect to Mr. Kelly. No benefits will be payable under such supplemental plan following the voluntary employment termination or death of any such individual. The Supplemental Retirement Plan is unfunded; however, a provision has been made on the Company's books for the actuarially computed obligation. The following table shows the total estimated annual retirement benefits payable at normal retirement under the above plans for the individuals named in the Summary Compensation Table at the specified executive remuneration and years of continuous service: Years of Continuous Service Covered ---------------------------------------------------- Remuneration 15 20 25 30 35 - ------------------ -------- -------- -------- -------- -------- $125,000 $ 34,688 $ 46,250 $ 57,813 $ 69,375 $ 80,938 150,000 41,625 55,500 69,375 83,250 97,125 175,000 48,563 64,750 80,938 97,125 113,313 200,000 55,500 74,000 92,500 111,000 129,500 225,000 62,438 83,250 104,063 124,875 145,688 250,000 69,375 92,500 115,625 138,750 161,875 300,000 83,250 111,000 138,750 166,500 194,250 400,000 111,000 148,000 185,000 222,000 259,000 450,000 124,875 166,500 208,125 249,750 291,375 500,000 138,750 185,000 231,250 277,500 323,750 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, 1995 and rounded to the next higher year, are: Mr. Hauber, 35 years; Mr. Kelly, 1 year; Mr. DeCarlo, 11 years; Mr. Parker, 29 years; and Mr. Kennedy, 24 years. ITEM 11. EXECUTIVE COMPENSATION, continued. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION: The Company's Compensation Committee consists entirely of directors who are not officers of or employed by the Company, namely Messrs. Coates, Oehmler and Stallkamp, and, beginning October 1, 1995, Mr. Hauber. Until such date, Mr. Hauber was an officer of the Company. See "Certain Relationships and Related Transactions." COMPENSATION OF DIRECTORS: A fee plan for directors of the Company was approved by the shareholders at the annual meeting held February 17, 1995. Pursuant to such plan, directors who are not also officers of the Company receive 800 shares of the Company's Class A Common Stock as an annual retainer fee. Each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock. In addition, each such director is paid $800 for every meeting of the Board of Directors attended and (other than a Chairman) $500 for every committee meeting attended. The Chairman of a committee of the Board of Directors is paid $700 for every committee meeting attended. No other remuneration is otherwise paid by the Company to any director for services as a director. Prior to fiscal year 1995, directors who were not also officers of the Company were paid directors' fees of $12,000 per year. Members of the Audit and Compensation Committees who were not also officers of the Company received $100 for each meeting of such committee held in conjunction with a meeting of the Board of Directors and $250 for each meeting of such committee held otherwise. No other remuneration was otherwise paid by the Company to any director for services as a director. Prior to and during fiscal year 1993, directors who were also officers of the Company were paid directors' fees of $5,250 per year. For fiscal 1994 and thereafter, such directors are no longer paid directors' fees. 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, 1995. 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: - ---------------------- W.M. Hauber (3) 473,675 9.5% None - D.M. Kelly 17,000 0.3 23,000 0.6% G.D. Barefoot None - 104,500 2.7 W.A. Coates 11,700 0.2 None - D.J. DeCarlo None - 194,995 5.0 T.N. Kennedy (3) 145,490 2.9 None - G.C. Oehmler 500 * None - J.P. O'Leary, Jr. 5,000 0.1 None - J.L. Parker (3) 45,000 0.9 672,760 17.3 W.J. Stallkamp 2,000 * None - All directors and officers as a group 704,865 14.9 1,129,505 29.0 Other: - ----- W. Witte None - 267,840 6.9 * Less than 0.1% (1) The mailing address of each beneficial owner is the same as that of the Registrant. (2) The nature of the beneficial ownership for all shares is sole voting and investment power, except those of Mr. Oehmler, whose shares were owned jointly with his spouse, and as to which voting and investment power were shared. Mr. Oehmler passed away on December 10, 1995. (3) On November 22, 1995, a Registration Statement on Form S-3 was filed with the Securities and Exchange Commission on behalf of Messrs. Hauber, Kennedy and Parker for the sale of 800,000 shares of Class A Common Stock. Of the 800,000 shares, 600,000 shares are being offered by Mr. Parker, 100,000 shares are being offered by Mr. Hauber and 100,000 shares are being offered by Mr. Kennedy. As of December 15, 1995, the sale of such shares had not occurred. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, continued. (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 transaction requiring disclosure pursuant to this item during the past fiscal year except as stated herein. Mellon Bank, N.A., of which Mr. Stallkamp is an officer, is the Company's principal bank. During the past year, the Company engaged in banking transactions with such bank, and it is anticipated that the Company may make secured or unsecured loans and engage in other banking transactions with Mellon Bank, N.A. in the future. The Company has a Revolving Credit and Term Loan agreement with Mellon Bank, N.A. Under terms of the agreement, the Company may borrow principal amounts up to $6 million 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. This agreement will expire March 31, 1996 unless extended by the parties. At November 30, 1995, no amounts were outstanding under this agreement. The Company also had a seven-year Term Loan Agreement with Mellon Bank, N.A. During fiscal 1994, the outstanding balance under the Term Loan Agreement was repaid. See Note 4 of the Notes to Consolidated Financial Statements. The following officers and directors were indebted to the Company on notes carrying annual interest rates of not less than 6.5% or more than 8% (depending on the date of inception or renewal) which were issued under the Company's Designated Employee Stock Purchase Plan, as referred to in Note 7 of the Notes to Consolidated Financial Statements: Highest Amount Outstanding During Amount the Year Ended Outstanding at September 30, 1995 November 30, 1995 ------------------ ----------------- Geoffrey D. Barefoot $ 254,536 $ 188,351 Edward J. Boyle 149,338 108,085 David J. DeCarlo 676,887 530,182 Richard C. Johnson 181,446 131,861 Thomas N. Kennedy 309,845 None James L. Parker 575,280 287,684 The Company has annually made supplemental management incentive payments to officers and other employees indebted on such notes in amounts equal to the interest paid by such persons on their respective notes. Since the date of the Company's Initial Public Offering (July 20, 1994), no further notes have been issued under the Designated Employee Stock Purchase Plan. 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 ----- Independent Auditor's Report 23 Consolidated Balance Sheet 24-25 Consolidated Statement of Income 26 Consolidated Statement of Shareholders' Equity 27 Consolidated Statement of Cash Flows 28 Notes to Consolidated Financial Statements 29-42 Supplementary Financial Information 43 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 58-60. (b) Reports on Form 8-K: None 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 14, 1995. MATTHEWS INTERNATIONAL CORPORATION ---------------------------------- (Registrant) By David M. Kelly ---------------------------------- David M. Kelly, 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 14, 1995: Signature Title --------- ----- David M. Kelly President and Chief Executive Officer - ---------------------------------- and Director (Principal Executive David M. Kelly Officer) Edward J. Boyle Vice President, Accounting and Finance - ---------------------------------- (Principal Accounting Officer) Edward J. Boyle William M. Hauber Chairman of the Board - ---------------------------------- William M. Hauber Geoffrey D. Barefoot Director - ---------------------------------- Geoffrey D. Barefoot William A. Coates Director - ---------------------------------- William A. Coates David J. DeCarlo Director - ---------------------------------- David J. DeCarlo Thomas N. Kennedy Director - ---------------------------------- Thomas N. Kennedy Director - ---------------------------------- John P. O'Leary, Jr. James L. Parker Director - ---------------------------------- James L. Parker William J. Stallkamp Director - ---------------------------------- William J. Stallkamp MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES EXHIBITS INDEX ---------- The following Exhibits to this report are filed herewith or, if marked with an asterisk (*), are incorporated by reference. Exhibits marked with an "a" represent a management contract or compensatory plan, contract or arrangement required to be filed by Item 601(b)(10)(iii) of Regulation S-K. Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 3.1 Restated Articles of Incorporation * Exhibit Number 3.1 to Form 10-K for the year ended September 30, 1994 3.2 By-laws * Exhibit Number 3.2 to Form 10-K for the year ended September 30, 1994 4.1 a Form of Employee Stock Purchase Exhibit Number 4.1 to Form Agreement Entered into by 10-K for the year ended Designated Key Employees * September 30, 1983 4.2 a Form of Employee Stock Purchase Exhibit Number 4.2 to Form Agreement Entered into by 10-K for the year ended Designated Key Employees September 30, 1993 (effective October 1, 1993) * 4.3 a Representative Form of Option Exhibit Number 10.2 to Form Agreement of Repurchase * S-2 Registration Statement (No. 33-79538) filed on June 1, 1994 4.4 a Form of Revised Option Agreement Exhibit Number 4.2 to Form of Repurchase * 10-K for the year ended September 30, 1983 4.5 a Form of Revised Option Agreement Exhibit Number 4.5 to Form of Repurchase (effective 10-K for the year ended October 1, 1993) * September 30, 1993 4.6 a Employees' Stock Purchase Plan * Exhibit Number 4.6 to Form 10-K for the year ended September 30, 1993 4.7 a Restricted Stock Plan * Exhibit Number 4.5 to Form 10-K for the year ended September 30, 1987 4.8 a Form of Option Agreement of Exhibit Number 4.6 to Form Repurchase - Restricted Stock Plan * 10-K for the year ended September 30, 1987 INDEX, Continued ---------- Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 4.9 Form of Share Certificate for Exhibit Number 4.9 to Form Class A Common Stock * 10-K for the year ended September 30, 1994 4.10 Form of Share Certificate for Exhibit Number 4.10 to Form Class B Common Stock * 10-K for the year ended September 30, 1994 10.1 a Supplemental Retirement Agreement Exhibit Number 10.1 to Form between the Registrant and Thomas F. 10-K for the year ended Purner, Jr., dated July 6, 1983 * September 30, 1983 10.2 a Form of Stock Appreciation Right Exhibit Number 10.2 to Form Agreement * 10-K for the year ended September 30, 1983 10.3 a Form of Agreement which amends the Exhibit Number 19.1 to Form Option Agreement of Repurchase with 10-Q for the quarter ended Respect to Major Shareholders * March 31, 1988 10.4 Revolving Credit and Term Loan Exhibit Number 10.7 to Form Agreement * 10-K for the year ended September 30, 1986 10.5 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form 10-K for the year ended September 30, 1988 10.6 Term Loan Agreement and Promissory Exhibit Number 10.9 to Form Note * 10-K for the year ended September 30, 1991 10.7 a Form of Termination Agreement - Exhibit Number 10.8 to Form Restricted Stock Plan * 10-K for the year ended September 30, 1992 10.8 a Written Description of Matthews Exhibit Number 10.9 to Form International Corporation Management 10-K for the year ended Incentive Compensation Plan * September 30, 1992 10.9 a 1992 Stock Incentive Plan * Exhibit Number 10.9 to Form S-2 Registration Statement (No. 33-79538) filed on June 1, 1994 10.10a Form of Stock Option Agreement * Exhibit Number 10.1 to Form 10-Q for the quarter ended December 31, 1994 INDEX, Continued ---------- Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 10.11a 1994 Director Fee Plan * Exhibit Number 10.1 to Form 10-Q for the quarter ended March 31, 1995 10.12a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form 10-Q for the quarter ended March 31, 1995 11 Computation of Earnings Per Share Filed Herewith 21 Subsidiaries of the Registrant Filed Herewith 23 Consent of Independent Public Filed Herewith Accountants 99 Annual Report on Form 11-K: Employee Stock Purchase Plan Filed Herewith Copies of any Exhibits will be furnished to shareholders upon written request. Requests should be directed to Mr. James L. Parker, Senior Vice President, General Counsel and Secretary of the Registrant.