UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 Commission File Numbers 0-9115 and 0-24494 MATTHEWS INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) COMMONWEALTH OF PENNSYLVANIA 25-0644320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) TWO NORTHSHORE CENTER, PITTSBURGH, PA 15212-5851 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (412) 442-8200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Class A Common Stock, $1.00 par value NASDAQ National Market System Class B Common Stock, $1.00 par value None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405a of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of November 30, 1998 was $454,000,000. As of November 30, 1998, shares of common stock outstanding were: Class A Common Stock 13,141,600 shares Class B Common Stock 2,854,547 shares Documents incorporated by reference: None The index to exhibits is on pages 67-69. PART I CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION: Any forward-looking statements contained in this Annual Report on Form 10-K (specifically those contained in Item 1, "Business" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations") are included in this report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements principally include economic, competitive and technological factors beyond the Company's control. ITEM 1. BUSINESS. Matthews International Corporation, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of custom-made products which are used to identify people, places, products and events. The Company's products and operations are comprised of three business segments: Bronze, Graphics Imaging and Marking Products. The Bronze segment is a leading manufacturer of cast bronze memorial products, crematories and cremation-related products and a leading builder of mausoleums. The Graphics Imaging segment manufactures and provides printing plates, pre-press services and imaging systems for the corrugated and flexible packaging industries. The Marking Products segment designs, manufactures and distributes a wide range of marking equipment and consumables for identifying various consumer and industrial products, components and packaging containers. The following table sets forth sales and operating profit for the three business segments of the Company for the past three fiscal years. Fiscal Year Ended September 30, -------------------------------------------------------- 1998 1997 1996 --------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Sales to unaffiliated customers: Bronze $106,273 50.2% $ 96,384 50.9% $ 84,529 49.2% Graphics Imaging 75,294 35.6 57,804 30.6 43,062 25.0 Marking Products 30,055 14.2 34,981 18.5 44,387 25.8 ------- ----- ------- ----- ------- ----- Total $211,622 100.0% $189,169 100.0% $171,978 100.0% ======= ===== ======= ===== ======= ===== Operating profit: Bronze 26,016 72.4 22,579 73.1 20,072 75.0 Graphics Imaging 6,910 19.2 5,507 17.8 4,217 15.7 Marking Products 3,003 8.4 2,801 9.1 2,482 9.3 ------- ----- ------- ----- ------- ----- Total $ 35,929 100.0% $ 30,887 100.0% $ 26,771 100.0% ======= ===== ======= ===== ======= ===== ITEM 1. BUSINESS, continued. Detailed financial information relating to business segments and to foreign and domestic operations is presented in Note 15 (Segment Information) to the Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. In fiscal 1998, approximately 91% of the Company's sales were made from the United States, and 4%, 3% and 2% were made from Canada, Europe and Australia, respectively. Bronze segment products are sold throughout the world with the segment's principal operations located in the United States, Canada and Australia. Products and services of the Graphics Imaging segment are sold primarily in the United States and, beginning in September 1998, Germany through a 50%-owned affiliate. The Marking Products segment sells equipment and consumables directly to industrial consumers in the United States and internationally through the Company's wholly-owned subsidiaries in Canada and Sweden and through other foreign distributors. Matthews owns a minority interest in distributors in Asia, Australia, France, Germany and the United Kingdom. The Company and its wholly-owned subsidiaries employ approximately 1,600 people. The Company's principal executive offices are located at Two NorthShore Center, Pittsburgh, Pennsylvania 15212 and its telephone number is (412) 442-8200. PRODUCTS AND MARKETS: Bronze: The Bronze segment manufactures and markets in the United States, Canada and Australia cast bronze memorial products used primarily in cemeteries. The segment also manufactures and markets cast bronze and aluminum architectural products used to identify or commemorate people, places and events. In addition, the segment manufactures and markets crematories and cremation-related products through a wholly-owned subsidiary, Industrial Equipment and Engineering Company (IEEC). Memorial products, which comprise the majority of the Bronze segment's sales, include flush bronze memorials, flower vases, crypt letters, cremation urns, niche units and cemetery features, along with other related products. Flush bronze memorials, which represent approximately two-thirds of the segment's memorial product sales, are bronze plaques which contain vital information about a deceased individual such as name and birth and death dates. These memorials are used in cemeteries as an alternative to upright granite monuments. The memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier mowing and other maintenance. In order to provide products for the granite memorial market, the Company's other memorial products include granite monuments as well as bronze plaques, letters, emblems, vases, lights and photoceramics that can be affixed to granite monuments, mausoleums and crypts. Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer. The Bronze segment manufactures a full line of memorial products for cremation, including urns in a variety of sizes, styles and shapes. In addition, the Company manufactures bronze niche units which are comprised of numerous compartments used to display cremation urns in mausoleums and churches. ITEM 1. BUSINESS, continued. PRODUCTS AND MARKETS, continued: Bronze, continued: Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are sold to and distributed through a network of independent dealers including sign suppliers, recognition companies and trophy dealers. IEEC, which is headquartered in Orlando, Florida, is the leading North American designer and manufacturer of cremation equipment and cremation-related products. IEEC equipment and products are sold primarily to mortuary and cemetery facilities within North America, Europe and Asia. In September 1998, Matthews purchased the assets of Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"), a subsidiary of Service Corporation International. Gibraltar, with annual sales of approximately $16 million, is headquartered in Indianapolis, Indiana and is a leading builder of mausoleums in the United States. The acquisition of Gibraltar is intended to expand Matthews' presence in the mausoleum entombment marketplace. Raw materials used by the Bronze segment consist principally of bronze and aluminum ingot, sheet metal, coating materials, electrical components and construction materials and are generally available in adequate supply. Ingot is obtained from various North American and Australian smelters. Graphics Imaging: The Graphics Imaging segment provides printing plates, pre-press services and imaging systems to the corrugated and flexible packaging industries. The corrugated packaging industry consists of manufacturers of printed corrugated boxes and the flexible packaging industry consists of manufacturers of printed bags and other packaging products made of paper, film and foil. The segment's principal products are printing plates used by corrugated packaging manufacturers to print corrugated boxes with graphics that help sell the packaged product and provide information such as product identification, logos, bar codes and other packaging detail specified by the manufacturer of the packaged product. The corrugated packaging manufacturer produces printed boxes by first combining linerboard with fluted paper to form a corrugated sheet. Using the Company's products, this sheet is then printed and die cut to make a finished box. The flexible packaging industry produces printed packaging from paper, film and foil, such as for food wrappers. ITEM 1. BUSINESS, continued. PRODUCTS AND MARKETS, continued: Graphics Imaging, continued: The Company works closely with manufacturers to provide the proper printing plates and tooling used to print the packaging to the user's specifications. The segment's printing plate products are made principally from photopolymer resin. Upon customer request, plates can be pre-mounted press-ready in a variety of configurations that maximize print quality and minimize press set-up time. The segment also provides creative art design services to manufacturers of corrugated and flexible packaging and to end users of such packaging. Other products and services include pre-press preparation, such as computer-generated camera-ready art, negatives, films and master patterns; plate mounting accessories for the corrugated industry; various press aids designed to improve print quality; and rotary and flat cutting dies used to cut out intricately designed containers and point-of-purchase displays. The Graphics Imaging segment customer base consists primarily of packaging industry manufacturers and "national accounts." National accounts are generally large, well-known consumer goods companies with a national presence that purchase their printing plates directly. These companies then provide their printing plates to the packaging industry manufacturer of their choice. Matthews International Corporation owns a fifty percent interest in Tukaiz Communications L.L.C., a leading pre-press and pre-media firm based in Franklin Park, Illinois. A pre-press firm prepares art or digital files for printing or reproduction. The Company's services, which include creative design, audio, video, animation, multimedia, digital photography, web-site service and on-demand digital printing, are provided to ad agencies, manufacturers, printers and publishers. On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color Communications, Inc., a digital graphics service company. O.N.E., with annual sales of approximately $10 million, is headquartered in Oakland, California and was formed 83 years ago. O.N.E. provides digital graphic services to advertising agencies and packaging markets. On September 19, 1998, Matthews acquired fifty percent of S+T Gesellschaft fur Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany, consist principally of flexographic printing preparation and the manufacture of photopolymer printing forms for the packaging industry. The combination of the Company's Graphics Imaging business, Tukaiz, O.N.E. and S+T is an important part of the Matthews strategy to become a worldwide leader in the graphics industry and service existing multinational customers on a global basis. Major raw materials for this segment's products include photopolymer resin, film, rubber and graphic art supplies. All such materials are presently available in adequate supply from various industry sources. ITEM 1. BUSINESS, continued. PRODUCTS AND MARKETS, continued: Marking Products: The Marking Products segment designs, manufactures and distributes a wide range of marking equipment and consumables used by customers to identify various consumer and industrial products, components and packaging containers. Marking products range from simple handstamps made from special alloy steel to sophisticated microprocessor-based ink-jet printing systems. The Marking Products segment employs contact printing, indenting, ink-jet printing and laser marking to meet customer needs, sometimes using a combination of these marking methods. A significant portion of the revenue of this segment is attributable to the sale of consumables, software and replacement parts in connection with the marking hardware sold by the Company. The Company develops inks in harmony with the marking equipment in which they are used, which is critical to assure ongoing equipment reliability and mark quality. Many marking equipment customers also use the Company's ink, solvents and cleaners. The principal customers for the Company's marking products include food and beverage processors, metal fabricators, producers of health and beauty products and manufacturers of textiles, plastic, rubber and building products. A large percentage of the segment's sales are outside the United States and are distributed through the Company's wholly-owned subsidiaries in Canada and Sweden in addition to other international distributors. Matthews owns a minority interest in distributors in Asia, Australia, France, Germany and the United Kingdom. The marking products industry is fragmented, with many companies having limited product lines which focus on well-defined specialty markets. Other industry participants, like the Company, have broad product offerings and compete in various product markets and countries. In the United States, the Company has been supplying marking products for over 140 years. Major raw materials for this segment's products include printing components, tool steels, rubber and chemicals, all of which are presently available in adequate supply from various sources. ITEM 1. BUSINESS, continued. COMPETITION: Bronze: Competition from other bronze memorial manufacturers, which is intense, is on the basis of reputation, product quality, delivery, price and design availability. The Company also competes with upright granite monument and flush granite memorial providers. The Company and its two major bronze competitors account for a substantial portion of the bronze memorial market. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and customer oriented merchandising systems are competitive advantages in its markets. Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials and other fabricated products. The Company competes with several manufacturers in the crematory market principally on the basis of product quality and price. Competition in the mausoleum construction industry includes various construction companies throughout North America and is on the basis of design, quality and price. Graphics Imaging: Graphics Imaging is one of several manufacturers of printing plates and providers of pre-press services with a national presence. The segment competes in a fragmented industry consisting of a few multi-plant regional printing plate suppliers and a large number of local one-plant companies located across the United States. Competition is on the basis of price, timeliness of delivery and product quality. The Company differentiates itself from the competition by consistently meeting customer demands and its ability to service customers nationwide. Marking Products: Competition is intense and based on product performance, service and price. The Company normally competes with specialty companies in specific marking applications. The Company believes that, in general, it has the broadest lines of marking products to address industrial marking applications. PATENTS, TRADEMARKS AND LICENSES: The Company holds a number of domestic and foreign patents and trademarks. However, the Company believes the loss of any or a significant number of patents or trademarks would not have a material impact on operations or revenues. BACKLOG: Because the nature of the Company's business is custom products made to order with short lead times, backlogs are not generally material in any segment of the Company's operations except for IEEC and Marking Products. Backlogs in IEEC generally vary in the range of four to eight months of sales. Backlogs in the Marking Products segment can vary in a range up to six weeks of sales. ITEM 1. BUSINESS, continued. REGULATORY MATTERS: The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company believes that its current operations are in material compliance with all presently applicable environmental laws and regulations. The Company's expenditures for environmental compliance have not had, nor are they presently expected to have, a material adverse effect on the Company. The Clean Air Act Amendments of 1990 are not expected to impact two of the Company's operating segments, Graphics Imaging and Marking Products. In the United States, the Company's Bronze segment operates four nonferrous foundries, none of which is within the "major source" industry category as defined by the Environmental Protection Agency. As such, it is believed that the Bronze segment operations will be regulated as "area sources" at certain locations. No material capital expenditures are anticipated within the next few years as a result of the Clean Air Act Amendments. Like most nonferrous foundry operations, the Company's plants produce a significant volume of residual materials as a result of the bronze casting process. Chief among these is spent foundry sands. Currently, the majority of these materials, including foundry sands, are regulated as solid waste under most state and federal laws. Pursuant to the Resource Conservation and Recovery Act, the Company is regulated as a generator of hazardous waste, and all plants are registered with the Environmental Protection Agency in accordance with applicable regulations. The Company has implemented detailed plans and procedures for waste management at each of its Bronze operating plants in the United States. ITEM 2. PROPERTIES. The principal properties of the Company are as follows (properties are owned by the Company except as noted): Location Description of Property Square Feet - -------- ----------------------- ----------- Bronze: Pittsburgh, PA Manufacturing / Division Offices 94,000 Apopka, FL Manufacturing 40,000 Melbourne, Australia Manufacturing 26,000(1) Milton, Ontario, Canada Manufacturing 30,000 Nashotah, WI Sales 8,000(1) Searcy, AR Manufacturing 84,000 Seneca Falls, NY Manufacturing 21,000 Sun City, CA Manufacturing 24,000 Graphics Imaging: Pittsburgh, PA Manufacturing / Division Offices 56,000 Atlanta, GA Manufacturing 16,000 Cranberry Twp., PA Manufacturing 15,000(1) Dallas, TX Manufacturing 15,000(1) Denver, CO Manufacturing 12,000(1) Escondido, CA Manufacturing 15,600(1) High Point, NC Manufacturing 34,700(1) LaPalma, CA Manufacturing 22,000 St. Louis, MO Manufacturing 24,000 Marking Products: Pittsburgh, PA Manufacturing / Division Offices 67,000 Pittsburgh, PA Ink Manufacturing 18,000 Gothenburg, Sweden Manufacturing / Distribution 28,000(1) Corporate Office: Pittsburgh, PA General Offices 48,000(2) (1) These properties are leased by the Company under operating lease arrangements. Rent expense incurred by the Company for leased facilities was $691,000 in fiscal 1998. (2) The Company uses approximately one-third of this building and leases, or offers to lease, the remainder to unrelated parties. All of the owned properties are unencumbered. The Company believes its facilities are generally well suited for their respective uses and are of adequate size and design to provide the operating efficiencies necessary for the Company to be competitive. The Company's facilities provide adequate space for meeting its near term production requirements and have availability for additional capacity. The Company intends to continue to expand and modernize its facilities as necessary to meet the demand for its products. ITEM 3. LEGAL PROCEEDINGS. The Company is party to various legal proceedings generally incidental to its business. The eventual outcome of these matters is not predictable and it is possible that their resolution could be unfavorable to the Company. Although the ultimate disposition of these proceedings is not presently determinable, management is of the opinion that the matters should not result in liabilities in an amount which would materially affect the consolidated financial position, annual results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal year 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information: The authorized common stock of the Company is divided into two classes consisting of Class A Common Stock, $1 par value, and Class B Common Stock, $1 par value. Shares of Class A stock have one vote per share and are freely transferable subject to applicable securities laws. Shares of Class B stock have ten votes per share and are only transferable by a shareholder to the Company or to an active employee of the Company. If shareholders wish to otherwise sell Class B Common Stock, the Company may, at its discretion, purchase such shares at the fair market value per share of the Company's Class A Common Stock or permit shareholders to tender such shares to the Company in exchange for an equal number of shares of Class A Common Stock. On May 5, 1998, the Board of Directors declared a two-for-one stock split on the Company's Class A and Class B common stock in the form of a 100% stock distribution. The stock distribution was issued June 2, 1998 to shareholders of record on May 15, 1998. Shareholders' equity has been adjusted for the stock split by reclassifying from additional paid-in capital and retained earnings to common stock the par value of the additional shares arising from the split. All per share amounts and numbers of shares have been adjusted in this report to reflect the stock split. The Company's Class A Common Stock is traded on the NASDAQ National Market System. The following table sets forth the high, low and closing prices as reported by NASDAQ (adjusted for the stock split) for the periods indicated: High Low Close ---- --- ----- Fiscal 1998: Quarter ended: September 30, 1998 $29.00 $21.25 $25.00 June 30, 1998 27.25 20.00 24.56 March 31, 1998 22.50 19.50 20.00 December 31, 1997 23.00 18.75 22.00 Fiscal 1997: Quarter ended: September 30, 1997 $20.63 $17.75 $19.88 June 30, 1997 18.25 14.44 18.25 March 31, 1997 15.50 14.13 15.22 December 31, 1996 15.38 13.88 14.13 In April 1998, the Company announced the continuation of its stock repurchase program. Previously, the Company's Board of Directors had approved repurchasing a total of 2,000,000 shares (adjusted for the stock split) of Matthews Class A and Class B Common Stock, which has been completed. The current authorization allows the Company to purchase up to an additional 1,000,000 shares. The buy-back program, which originated in fiscal 1996, is designed to increase shareholder value, enlarge the Company's holdings of its Class A and Class B Common Stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Restated Articles of Incorporation. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, continued. (a) Market Information, continued: In conjunction with the buy-back program, the Company invoked the provisions of the Fifth Article of its Restated Articles of Incorporation. Such Article provides (among other things) that any shareholder wishing to sell or convert any Class B common shares must first offer such shares to the Company for redemption. The Company will then have an option to purchase such shares for a 24-hour period. (b) Holders: The number of registered holders of the Company's common stock at November 30, 1998 was as follows: Class A Common Stock 476 Class B Common Stock 287 (c) Dividends: A quarterly dividend of $.045 per share was paid for the fourth quarter of fiscal 1998 to shareholders of record on October 30, 1998. The Company paid quarterly dividends of $.0425 per share for the first three quarters of fiscal 1998 and the fourth quarter of fiscal 1997. The Company paid quarterly dividends of $.04 per share for the first three quarters of fiscal 1997. Cash dividends have been paid on common shares in every year for at least the past thirty years. It is the present intention of the Company to continue to pay quarterly cash dividends on its common stock. However, there is no assurance that dividends will be declared and paid as the declaration and payment of dividends is at the discretion of the Board of Directors of the Company and is dependent upon the Company's financial condition, results of operations, cash requirements, future prospects and other factors deemed relevant by the Board. ITEM 6. SELECTED FINANCIAL DATA.
Years ended September 30, ------------------------------------------------------------------- 1998 1997 1996(1) 1995 1994 ----------- ----------- ----------- ----------- ----------- (Not Covered by Report of Independent Accountants) Net sales $211,622,057 $189,168,640 $171,977,619 $166,747,781 $158,700,158 Gross profit 93,050,222 83,500,886 76,640,900 74,729,267 71,613,709 Operating profit 35,928,944 30,887,395 26,771,380 24,457,704 23,908,940 Interest expense 466,304 337,375 131,364 104,820 309,939 Income before income taxes 37,132,283 32,297,897 33,522,616 25,079,263 23,705,257 Income taxes 14,630,591 12,671,833 13,265,062 9,628,028 9,677,091 ---------- ---------- ---------- ---------- ---------- Net income $ 22,501,692 $ 19,626,064 $ 20,257,554 $15,451,235 $ 14,028,166 ========== ========== ========== ========== ========== Earnings per common share: Basic $ 1.38 $ 1.14 $ 1.14 $ .87 $ .78 Diluted 1.34 1.11 1.11 .87 .78 Weighted average common shares outstanding: Basic 16,336,359 17,194,073 17,781,824 17,700,700 17,964,706 Diluted 16,770,214 17,696,793 18,213,866 17,840,012 17,964,706 Cash dividends per share .173 .163 .145 .125 .05 Total assets $187,205,764 $169,204,390 $153,411,709 $138,206,376 $120,683,005 Long-term debt, noncurrent 1,434,679 2,151,413 - 270,092 745,616 (1) Fiscal 1996 included after-tax income of $2.9 million ($.16 per share - diluted) which consisted of a gain on the sale of Sunland Memorial Park, Inc., the write-off of the remaining goodwill of Matthews Swedot AB and certain other non-operating charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." /TABLE ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements of the Company and related notes thereto. Also, see "Cautionary Statement Regarding Forward-Looking Information" included in Part I of this Annual Report on Form 10-K. RESULTS OF OPERATIONS: The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods indicated and the percentage change in such income statement data from year to year. Years Ended September 30, Percentage Change ---------------------- ----------------- 1998- 1997- 1998 1997 1996 1997 1996 ---- ---- ---- ----- ----- Sales 100.0% 100.0% 100.0% 11.9% 10.0% Gross profit 44.0 44.1 44.6 11.4 9.0 Operating profit 17.0 16.3 15.6 16.3 15.4 Income before taxes 17.5 17.1 19.5 15.0 (3.7) Net income 10.6 10.4 11.8 14.7 (3.1) Comparison of Fiscal 1998 and Fiscal 1997: Sales for the year ended September 30, 1998 were $211.6 million and were $22.4 million, or 11.9%, higher than sales of $189.2 million for the year ended September 30, 1997. The sales increase for fiscal 1998 resulted from higher sales in the Company's Graphics Imaging and Bronze segments. Sales for the Graphics Imaging segment were $75.3 million, an increase of $17.5 million, or 30%, above fiscal 1997 primarily reflecting acquisitions completed during the past two fiscal years. In fiscal 1997, the Company's acquisitions included the purchase of Carolina Repro-Graphic ("Carolina") in May 1997 and a fifty percent interest in Tukaiz Communications L.L.C. ("Tukaiz") in January 1997. In fiscal 1998, the Company's acquisitions included Western Plasti-Type, Inc. (October 1997), Allied Reprographics, Inc. (November 1997), Palomar Packaging, Inc. (November 1997), S&N Graphics, Inc. (February 1998) and a fifty percent interest in O.N.E. Color Communications, Inc. (May 1998). See "Acquisitions and Dispositions" for further discussion. Bronze segment sales for the year ended September 30, 1998 were $106.3 million, representing an increase of $9.9 million, or 10%, over fiscal 1997. The higher level of sales for fiscal 1998 mainly reflected an increase in the unit volumes of bronze and granite memorial products. In addition, sales of cremation equipment and cremation-related products by the Company's wholly-owned subsidiary, Industrial Equipment and Engineering Company ("IEEC"), increased for the year. Sales for the Marking Products segment in fiscal 1998 were $30.1 million, representing a decrease of $4.9 million, or 14%, below fiscal 1997. The decline, which was expected, resulted from the sale of the segment's distribution operations in Australia (August 1997) and France (February 1998), both of which had historically produced marginal results for the Company. Sales for the segment's North American operations increased 4% compared to fiscal 1997. Excluding the effect of the divestitures in France and Australia, consolidated sales for the Company increased 15% over fiscal 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1998 and Fiscal 1997, continued: Gross profit for the year ended September 30, 1998 was $93.1 million, or 44.0% of sales, compared to $83.5 million, or 44.1% of sales, for the year ended September 30, 1997. The increase in gross profit of $9.6 million, or 11.4%, resulted from higher sales for the Graphics Imaging segment and increased sales and an improvement in the gross margin percentage for the Bronze segment. Marking Products gross profit for the year ended September 30, 1998 declined from the prior year reflecting the divestitures of the segment's distribution operations in Australia and France. Consolidated gross profit as a percent of sales for fiscal 1998 was relatively consistent with the prior year. Gross profit as a percent of sales for the Bronze segment increased for the year reflecting improvements in sales volume and operating efficiencies. For the Graphics Imaging and Marking Products segments, the gross profit percentage was slightly lower for the year due to changes in product mix. Selling and administrative expenses for the year ended September 30, 1998 were $57.1 million, representing an increase of $4.5 million, or 8.6%, over $52.6 million for the year ended September 30, 1997. The increase in selling and administrative expenses from the prior year principally resulted from acquisitions by the Graphics Imaging segment during the last two fiscal years. In addition, selling costs for the Bronze segment were higher for the year reflecting increased marketing and promotional expenses. Partially offsetting these increases was a reduction in Marking Products selling and administrative costs resulting from the sale of the segment's distribution operations in Australia and France. Consolidated selling and administrative expenses were 27.0% of sales for fiscal 1998 compared to 27.8% for fiscal 1997. Operating profit for the year ended September 30, 1998 was $35.9 million and was $5.0 million, or 16.3%, higher than operating profit of $30.9 million for fiscal 1997. The growth in the Company's operating profit for fiscal 1998 reflected increases in all three of the Company's business segments. Operating profit for the Graphics Imaging segment was $6.9 million, representing an increase of $1.4 million, or 25.5%, over the prior year. The increase was primarily the result of the segment's acquisitions. Bronze segment operating profit for the year ended September 30, 1998 was $26.0 million, representing an increase of $3.4 million, or 15.2%, over fiscal 1997. The increase in Bronze operating profit primarily reflected the segment's higher sales volume for the year combined with improved cost-price relationships for some products. Operating profit for the Marking Products segment also improved over last year despite the sale of the segment's distribution operations in Australia and France. The segment's operating profit was $3.0 million for the year ended September 30, 1998, representing an increase of 7.2% over fiscal 1997 operating profit of $2.8 million. The improvement, which represented the fifth consecutive year of profit improvement for the segment, resulted from higher sales combined with lower selling costs in the segment's North American operations. Investment income for the year ended September 30, 1998 was $2.5 million, compared to $2.5 million for the year ended September 30, 1997. The Company's average cash and investment balances were lower during fiscal 1998 as a result of acquisitions and stock repurchases (See "Liquidity and Capital Resources"). The effect on investment income of the lower average cash and investment balances was offset by a higher rate of return on investments. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1998 and Fiscal 1997, continued: Interest expense for the year ended September 30, 1998 was $466,000, compared to $337,000 for fiscal 1997. Interest expense was principally related to the Company's capital lease obligations. Other income (deductions), net for the year ended September 30, 1998 represented a net reduction in pre-tax income of $382,000 compared to a net reduction of $318,000 for fiscal 1997. Minority interest for the year ended September 30, 1998 related to the Company's 50%-owned affiliate, Tukaiz Communications L.L.C., which was acquired in January 1997. The Company's effective tax rate for the year ended September 30, 1998 was 39.4%, compared to an effective rate of 39.2% for the year ended September 30, 1997. The difference between the Company's fiscal 1998 effective tax rate and the Federal statutory rate of 35% primarily reflected the impact of state income taxes. Comparison of Fiscal 1997 and Fiscal 1996: Sales for the year ended September 30, 1997 were $189.2 million and were $17.2 million, or 10.0%, higher than sales of $172.0 million for the year ended September 30, 1996. The increase for fiscal 1997 reflected higher sales in the Company's Bronze and Graphics Imaging segments. Bronze segment sales were $96.4 million for fiscal 1997 representing an increase of $11.9 million, or 14%, over fiscal 1996. The increase primarily reflected higher volume of memorial products as well as sales by IEEC of crematories and cremation-related products. Fiscal 1997 revenues of IEEC, which was acquired in March 1996, also included sales of All Crematory Corporation, which was acquired in August 1996. Sales for the Bronze segment increased over fiscal 1996 despite the absence of Sunland Memorial Park, Inc. which was sold in January 1996. Graphics Imaging segment sales for the year ended September 30, 1997 were $57.8 million, representing an increase of $14.7 million, or 34%, over fiscal 1996. The sales growth over fiscal 1996 resulted primarily from the acquisitions of Carolina (May 1997) and a 50% interest in Tukaiz (January 1997). For the year ended January 31, 1997, Tukaiz reported sales of $16.4 million and, for the year ended December 31, 1996, Carolina reported sales of $3.7 million. Marking Products sales for the year ended September 30, 1997 were $35.0 million representing a decrease of $9.4 million, or 21%, below fiscal 1996. The decrease in sales resulted from the sale of the segment's label printer application business in September 1996 and the Company's decision in September 1996 to liquidate its German subsidiary. The label printer application business had historically produced marginal results for the Company and the German subsidiary had accumulated significant losses in previous years. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1997 and Fiscal 1996, continued: Gross profit for the year ended September 30, 1997 was $83.5 million, or 44.1% of sales, compared to $76.6 million, or 44.6% of sales, for fiscal 1996. The increase in gross profit of $6.9 million, or 9.0%, was attributable to higher gross profits in the Bronze and Graphics Imaging segments. Bronze gross profit improved 15% as a result of higher sales of bronze memorials and the additional sales related to the IEEC and All Crematory Corporation acquisitions. Bronze gross profit as a percent of sales improved slightly for the year as a result of the increased sales of memorial products. Gross profit for the Graphics Imaging segment increased approximately 30% over fiscal 1996 as a result of the acquisitions of Tukaiz and Carolina. Graphics Imaging gross profit as a percent of sales declined for the year principally due to changes in product mix. Marking Products gross profit declined 22% from fiscal 1996 as a result of lower sales, but the segment's gross profit as a percent of sales remained relatively unchanged. Selling and administrative expenses for the year ended September 30, 1997 were $52.6 million, representing an increase of $2.7 million, or 5.5%, over selling and administrative expenses of $49.9 million for fiscal 1996. Selling and administrative expenses for the Bronze segment increased over fiscal 1996 primarily reflecting the additions of IEEC and All Crematory Corporation. Graphics Imaging expenses also increased for the year reflecting the acquisitions of Tukaiz and Carolina. These increases were partially offset by reductions in Marking Products selling and administrative costs due to the disposition of the label printer application business and the liquidation of the German subsidiary. Operating profit for the year ended September 30, 1997 was $30.9 million and was $4.1 million, or 15.4%, higher than fiscal 1996 operating profit of $26.8 million. The increase in consolidated operating profit resulted from improvements in all three of the Company's business segments. Operating profit for the Bronze segment was $22.6 million for fiscal 1997 representing an increase of $2.5 million, or 12%, over fiscal 1996 operating profit of $20.1 million. The higher level of operating profit was due primarily to an increase in the segment's sales of memorial and cremation products. Graphics Imaging operating profit was $5.5 million for the year ended September 30, 1997 representing an increase of $1.3 million, or 31%, over fiscal 1996. The increase over fiscal 1996 reflected the acquisitions of Tukaiz and Carolina. Operating profit for the Marking Products segment was $2.8 million for fiscal 1997 representing an increase of approximately $300,000, or 13%, over fiscal 1996. The segment's operating profit improvement was due principally to the absence of losses of the German subsidiary. Consolidated operating profit for the year ended September 30, 1997 also reflected the favorable impact of changes to the retiree medical plan. These changes, which provided additional plan options while limiting future Company contributions to retiree benefits, reduced net periodic postretirement benefit cost from fiscal 1996. This reduction was partially offset by costs associated with the Company's implementation of a 401(k) employee savings plan and related Company contributions. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1997 and Fiscal 1996, continued: Investment income for the year ended September 30, 1997 was $2.5 million, representing a reduction of 5.4% from fiscal 1996 investment income of $2.6 million. The slight decrease principally reflected fluctuations in the average cash and investment position during fiscal 1997 as a result of the Company's stock repurchase program and acquisitions. Interest expense for the year ended September 30, 1997 was $337,000, compared to $131,000 for fiscal 1996. The increase in interest expense for fiscal 1997 reflected the capital lease obligations assumed in connection with the acquisition of Tukaiz. Other income (deductions), net for the year ended September 30, 1997 represented a net reduction to pre-tax income of $318,000 compared to a net increase of $4.3 million for fiscal 1996. Other income for fiscal 1996 included a $9.4 million pre-tax gain on the sale of Sunland Memorial Park, Inc. This gain was partially offset by the write-off of the remaining goodwill with respect to the Company's investment in its Swedish subsidiary and a charge for certain other non-operating expenses during the year. The Company's effective tax rate for the year ended September 30, 1997 was 39.2% compared to 39.6% for fiscal 1996. The decline from fiscal 1996 primarily reflected changes in the effect of foreign taxes. The difference between the Company's effective tax rate and the Federal statutory rate of 35% primarily reflected the impact of state and foreign income taxes. Comparison of Fiscal 1996 and Fiscal 1995: Sales for the year ended September 30, 1996 were $172.0 million and were $5.3 million, or 3.1%, higher than sales of $166.7 million for the year ended September 30, 1995. The increase in fiscal 1996 principally resulted from higher sales in the Bronze segment and slight increases in the Graphics Imaging and Marking Products segments. Bronze segment sales for the year were up $4.5 million, or 5.6% over fiscal 1995 despite the sale of Sunland Memorial Park, Inc. ("Sunland") in January 1996. Sunland sales were 6.5% of the segment's total sales in fiscal 1995. Fiscal 1996 Bronze segment sales reflected increases in both price and unit volume as well as additional sales from IEEC which was acquired in March 1996, and All Crematory Corporation, which was acquired in August 1996. Sales for the Graphics Imaging segment increased $700,000, or 1.7%, over fiscal 1995. Marking Products sales in fiscal 1996 were up less than 1.0% over the prior year. The segment's international sales increased 5% over fiscal 1995 reflecting higher demand in Europe and Australia which more than offset a decline in North American sales. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1996 and Fiscal 1995, continued: Gross profit for the year ended September 30, 1996 was $76.6 million, or 44.6% of sales, compared to $74.7 million, or 44.8% of sales, for the year ended September 30, 1995. The increase in gross profit of $1.9 million, or 2.6%, was attributable principally to higher gross profit in the Bronze segment. Bronze segment gross profit increased as a result of higher sales and its gross profit percentage improved slightly over the prior year. Graphics Imaging gross profit improved slightly from the prior year also reflecting its higher sales for the year. Marking Products gross profit for year ended September 30, 1996 was approximately 2.0% lower than fiscal 1995 reflecting lower sales in North America and lower margins in Germany. Selling and administrative expenses for the year ended September 30, 1996 were $49.9 million, representing a decrease of $400,000 from $50.3 million for the year ended September 30, 1995. The reduction in selling and administrative costs for fiscal 1996 reflected the absence of Sunland, which was sold in January 1996, and the discontinuance of the Company's Italian operations effective November 1, 1995. North American selling costs of the Marking Products segment also declined for the period on lower sales volume. Higher sales and marketing costs in the Bronze and Graphics Imaging segments and the selling and administrative costs of Industrial Equipment and Engineering Company, Inc. partially offset these declines. Operating profit for the year ended September 30, 1996 was $26.8 million and was $2.3 million, or 9.5%, higher than operating profit of $24.5 million for the year ended September 30, 1995. The higher operating profit for fiscal 1996 principally reflected increases in the Bronze and Marking Products segments. The Bronze segment recorded the largest increase, $1.9 million, or 10.5% over fiscal 1995, due principally to higher sales and related gross profit. Operating profit improvement for the Marking Products segment reflected the increase in international sales combined with lower North American selling expenses. Graphics Imaging operating profit was relatively unchanged from fiscal 1995. Investment income for the year ended September 30, 1996 was $2.6 million compared to $1.6 million for fiscal 1995. The increase reflected the Company's higher cash and investment position during fiscal 1996 and a higher rate of return (see "Liquidity and Capital Resources"). Interest expense for the year ended September 30, 1996 was $131,000, compared to $105,000 for fiscal 1995. Interest expense primarily related to the Company's capital lease obligations. Other income (deductions), net for the year ended September 30, 1996 represented a net increase to pre-tax income of $4.3 million compared to a net reduction of $894,000 for fiscal 1995. Other income for fiscal 1996 primarily included a $9.4 million pre-tax gain on the sale of Sunland which was partially offset by the write-off of the remaining goodwill with respect to the Company's investment in its Swedish subsidiary and a charge for certain other non-operating expenses during the year. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. Comparison of Fiscal 1996 and Fiscal 1995, continued: The Company's effective tax rate for the year ended September 30, 1996 was 39.6%, compared to 38.4% for fiscal 1995. The higher effective tax rate for fiscal 1996 primarily reflected the impact of foreign tax expense on the Company's consolidated tax position. The difference between the Company's effective tax rate and the Federal statutory rate of 35% primarily reflected the impact of state and foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES: Cash flow from operations was $34.8 million for the year ended September 30, 1998, compared to $37.5 million for fiscal 1997 and $19.2 million for fiscal 1996. Operating cash flow for the year ended September 30, 1998 primarily reflected the Company's net income of $22.5 million adjusted for non-cash charges such as depreciation and amortization and increases in the Company's compensation-related accruals. Fiscal 1997 operating cash flow reflected net income for the year in addition to the effect of changes in the various components of working capital, principally a significant increase in customer prepayments. Operating cash flow for the year ended September 30, 1996 resulted from net income for the year adjusted to exclude the effects of the pre-tax gain on the sale of Sunland and the write-off of the remaining goodwill with respect to the Company's investment in its Swedish subsidiary and a charge for certain other non-operating expenses during the year. Cash used in investing activities was $5.7 million for the year ended September 30, 1998, compared to $7.7 million for fiscal 1997 and $34.2 million for fiscal 1996. Investing activities for fiscal 1998 included $16.2 million cash used for acquisitions, including Gibraltar Mausoleum Construction Company, Inc. ($10.0 million) and O.N.E. Color Communications, Inc. ($2.0 million). See "Acquisitions and Dispositions" for further discussion. In addition, investing activities for the year ended September 30, 1998 included proceeds from the net disposition of investments of $16.8 million. Investing activities for fiscal 1997 included the acquisitions of Carolina in May 1997 and a 50% interest in Tukaiz in January 1997 (See "Acquisitions and Dispositions"). Fiscal 1997 investing activities also reflected net proceeds from investments of $5.1 million. Investing activities for the year ended September 30, 1996 included net investments of $36.8 million in securities of the U.S. government and its agencies and corporate obligations. The investments were designed to improve the rate of return on the Company's excess cash position while maintaining a sufficient degree of liquidity for future cash needs. Investing activities in fiscal 1996 also included the acquisitions of IEEC and All Crematory Corporation and the disposition of Sunland (See "Acquisitions and Dispositions"). In addition, fiscal 1996 investments included the acquisition (for $1.6 million cash and 38,572 shares of Matthews International Corporation Class A Common Stock) of 49% of the common stock of Applied Technology Developments, Ltd., a British manufacturer of impulse ink-jet printing equipment. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. LIQUIDITY AND CAPITAL RESOURCES, continued: Capital expenditures were $7.3 million for the year ended September 30, 1998, compared to $6.2 million and $5.4 million for fiscal 1997 and 1996, respectively. Capital expenditures in the last three fiscal years reflected reinvestment in each of the Company's industry segments and were made primarily for the purchase of new manufacturing machinery, equipment and facilities designed to improve product quality, increase manufacturing efficiency, lower production costs and meet regulatory requirements. Capital expenditures for all three years were primarily financed through operating cash and the related assets are unencumbered. Capital spending for property, plant and equipment has averaged $6.3 million for the last three fiscal years. The capital budget for fiscal 1999 is $10.9 million. The Company expects to generate sufficient cash from operations to fund all anticipated capital spending projects. Investing activities also included collections on notes receivable from designated officers and employees for the purchase of the Company's common stock under the Employees' Stock Purchase Plan. Collections under such loans were $459,000, $492,000 and $1.4 million in fiscal 1998, 1997 and 1996, respectively. Cash used in financing activities for the year ended September 30, 1998 was $23.1 million, compared to $21.7 million in fiscal 1997 and $11.9 million in fiscal 1996. Financing activities for fiscal 1998 consisted of net treasury stock purchases of $19.1 million, the Company's cash dividends on common stock of $2.8 million ($.1725 per share) and repayments under the Company's capital lease agreements of $1.2 million. Financing activities in fiscal 1997 included net treasury stock purchases totaling $14.4 million, payments of $4.5 million on long-term debt and capital lease obligations assumed in the acquisition of Tukaiz, and dividends on common stock of $2.8 million ($.1625 per share). Cash used in financing activities for the year ended September 30, 1996 was $11.9 million, principally reflecting net treasury stock purchases of $8.9 million and dividends on common stock of $2.6 million ($.145 per share). In April 1998, the Company announced the continuation of its stock repurchase program. Previously, the Company's Board of Directors had approved repurchasing a total of 2,000,000 shares (adjusted for the stock split) of Matthews Class A and Class B Common Stock, which has been completed. The current authorization allows the Company to purchase up to an additional 1,000,000 shares. The buy-back program, which originated in fiscal 1996, is designed to increase shareholder value, enlarge the Company's holdings of its Class A and Class B Common Stock, and add to earnings per share. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Restated Articles of Incorporation. The Company has a Revolving Credit and Term Loan Agreement. Under terms of the agreement, the Company may borrow principal amounts up to $10.0 million in the aggregate at various interest rate options approximating current market rates. The Revolving Credit and Term Loan Agreement requires the Company to maintain minimum levels of consolidated working capital and tangible net worth. At September 30, 1998, 1997 and 1996, no amounts were outstanding under this agreement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. LIQUIDITY AND CAPITAL RESOURCES, continued: The Company has a line of credit of $500,000 in Canadian dollars which provides for borrowings at the bank's prime interest rate. The Company has a foreign exchange line of credit of $200,000 for standby letters of credit to support performance guarantees. The Company also maintains a multi-currency line of credit with a bank for 6.0 million French francs. The multi-currency line of credit bears interest at various rates based on market as determined by the bank. Tukaiz has a line of credit of $1.5 million which bears interest at the bank's prime rate. Compensating balances of approximately $39,000 and $43,000 were maintained by the Company at September 30, 1998 and 1997, respectively, in connection with the various lines of credit. There were no borrowings outstanding on the various lines of credit at September 30, 1998 and 1997. Consolidated working capital of the Company was $33.3 million at September 30, 1998 compared to $31.0 million and $30.8 million at September 30, 1997 and 1996, respectively. Cash and cash equivalents were $25.4 million at September 30, 1998 compared to $20.0 million and $12.4 million at September 30, 1997 and 1996, respectively. The Company's current ratio at September 30, 1998 was 1.8, compared to 1.9 and 2.2 at September 30, 1997 and 1996, respectively. YEAR 2000 ISSUE The Company has assessed the potential impact of the Year 2000 issue on its operations and information systems. Costs incurred to date for this assessment and for systems modifications required to address any Year 2000 issues have not been material. Based on management's assessment, the Year 2000 issue is not expected to have a material impact on the consolidated financial position, results of operations or cash flows of the Company. ACQUISITIONS AND DISPOSITIONS: On October 1, 1997, the Company acquired for $480,000 cash the assets of Western Plasti-Type Co. ("Western"). On November 4, 1997, the Company acquired the common stock of Allied Reprographics, Inc. ("Allied") for $700,000 cash. Both Western and Allied are printing plate manufacturers located in Denver, Colorado. On November 3, 1997, the Company acquired for $1.4 million cash the assets of Palomar Packaging, Inc. ("Palomar"), a manufacturer of printing plates and steel-rule cutting dies, located near San Diego, California. An additional amount up to $880,000 may be payable for Palomar during the five-year period from the acquisition date contingent on the attainment of certain operating performance levels. On February 20, 1998, the Company acquired for $1,600,000 cash certain assets of S&N Graphics, Inc., a St. Louis, Missouri manufacturer of printing plates and other marking devices. The acquisitions of Western and Allied are designed to provide Matthews with a presence in the Colorado and surrounding markets which were not previously served by the Company. The acquisition of Palomar is designed to increase Matthews' presence in the growing marketplace for packaged products in southern California and northern Mexico. The acquisition of S&N Graphics, Inc. is designed to increase Matthews' share of the St. Louis marketplace for prepress and printing plates in the flexible and corrugated packaging industries. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. ACQUISITIONS AND DISPOSITIONS, continued: On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color Communications, Inc., a digital graphics service company. The transaction was structured as an asset purchase with the purchase price consisting of $2,000,000 cash and the assumption of a fifty percent interest in certain liabilities of O.N.E. Color Communications, Inc. An additional amount is payable by Matthews three years from the acquisition date contingent on the attainment of certain operating performance levels of the new company, with such payout to be not less than $400,000. Matthews and the shareholders of O.N.E. Color Communications, Inc. have each contributed their respective fifty percent interests into a newly-formed California limited liability company, O.N.E. Color Communications, L.L.C. ("O.N.E."). In addition, the purchase agreement requires Matthews to purchase the remaining fifty percent interest in O.N.E. no later than May 2004. The purchase price for the remaining interest is contingent on the attainment of certain operating performance levels of the new company with such payment to be not less than $4.5 million. The accounts of O.N.E. have been included in the consolidated financial statements of Matthews and a liability has been recorded for the present value of the minimum future payouts. O.N.E., with annual sales of approximately $10 million, is headquartered in Oakland, California and was formed 83 years ago. O.N.E. provides digital graphic services to advertising agencies and packaging markets. The combination of Matthews and O.N.E. is an integral part of Matthews' strategy to become a worldwide leader in advanced applications of digital graphics. On September 19, 1998, Matthews acquired for 11.6 million German Marks (U.S.$6.9 million) fifty percent of the capital stock of S+T Gesellschaft fur Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany, consist principally of flexographic printing preparation and the manufacture of photopolymer printing forms for the packaging industry. The remaining fifty percent will continue to be owned by the existing president of S+T. The cash payment is due January 2000 and is subject to reduction if S+T's calendar year 1999 operating results are below the calendar year 1997 level. In addition, Matthews has a call option to acquire an additional thirty percent interest in S+T at a purchase price contingent on the future operating performance of S+T. The results of S+T will be reflected in the financial statements of Matthews under the equity method of accounting. The combination of Matthews and S+T is an important part of Matthews strategy to become a worldwide leader in the graphics industry and serve existing multinational customers on a global basis. In October 1998, the Company entered into a foreign currency forward contract with a financial institution for the purchase of German Marks to hedge its January 2000 payment commitment for the investment in S+T. In November 1998, the Company also entered into a letter of credit agreement with a financial institution to guarantee performance under this payment commitment. Effective September 30, 1998, Matthews purchased for $10.0 million cash the assets of Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"), a subsidiary of Service Corporation International. Gibraltar, with annual sales of approximately $16 million, is headquartered in Indianapolis, Indiana and is a leading builder of mausoleums in the United States. The acquisition of Gibraltar is intended to expand Matthews products and services in the growing segments in the memorial industry of cremation and mausoleum entombment. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. ACQUISITIONS AND DISPOSITIONS, continued: On January 31, 1997, Matthews acquired fifty percent of Tukaiz Litho, Inc. ("Tukaiz"), a pre-press and pre-media firm headquartered in Franklin Park, Illinois. A pre-press firm prepares art or digital files for printing or reproduction. The remaining fifty percent continues to be owned by the president of Tukaiz. The transaction was structured as an asset purchase with the purchase price consisting of $4.0 million cash and the assumption of a fifty percent interest, approximately $4.0 million, in certain of the liabilities of Tukaiz. The parties each contributed their respective fifty percent interests into a newly-formed Illinois limited liability company, Tukaiz Communications, L.L.C. Matthews also provided the new company with subordinated convertible debt of $5.5 million. Tukaiz reported sales of $16.4 million for the year ended January 31, 1997. The accounts of Tukaiz Communications L.L.C. have been included in the consolidated financial statements of Matthews. The combination of the Company's Graphics Imaging business and Tukaiz is designed to create a leader in the graphics industry, providing a unique array of pre-press and pre-media services to ad agencies, manufacturers, printers and publishers. These services include creative design, audio, video, animation, multimedia, digital photography, web-site service and on-demand digital printing. On May 23, 1997, Matthews acquired for $2.4 million cash the common stock of both Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services, flexible printing plates and steel rule cutting dies, located in North Carolina. The acquisitions are expected to increase Matthews' market share for these products in the southeast region of the United States. Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were approximately $3.7 million for the year ended December 31, 1996. On March 25, 1996, Matthews acquired Industrial Equipment and Engineering Company, Inc. ("IEEC"), a Florida corporation, for 427,724 shares of Matthews Class A Common Stock (valued at $5.4 million) and $3.6 million cash. Sales of IEEC for the year ended December 31, 1995 were $7.5 million. On August 1, 1996, IEEC acquired for cash substantially all of the assets and certain of the liabilities of All Crematory Corporation. The total purchase price, including the assumption of liabilities, was $2.0 million. Sales of All Crematory Corporation for the year ended September 30, 1995 were $3.4 million. These acquisitions provide Matthews International Corporation with the opportunity to further participate in the increasing world-wide trend of cremation and expand its range of products and services to the deathcare industry. The Company has accounted for the aforementioned acquisitions using the purchase method and, accordingly, recorded the acquired assets and liabilities at their estimated fair values at the acquisition dates. The excess of the purchase price over the fair value of the net assets has been recorded as goodwill to be amortized on a straight-line basis over periods ranging from 15 to 25 years. For the acquisition of S+T, the excess of the purchase price over the fair value of the net assets will be amortized on a straight-line basis over 25 years as a charge to equity income. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued. ACQUISITIONS AND DISPOSITIONS, continued: On January 5, 1996, Matthews sold for $13.1 million cash its cemetery and mortuary facility (Sunland Memorial Park, Inc.) in Sun City, Arizona to Service Corporation International. Matthews recorded a pre-tax gain in the fiscal 1996 second quarter of $9.4 million on the sale which was recorded in other income. Sunland Memorial Park, Inc., which was purchased in 1982, was the only such facility owned by the Company. The facility had sales in fiscal 1995 of approximately $5.0 million, representing about three percent of the consolidated sales of the Company. In September 1996, the Company authorized the liquidation of its German subsidiary and recorded a pre-tax charge to other expense of $1.2 million in connection with the transaction. The transaction had no impact on the Company's fiscal 1996 net income due to the tax benefits related to the write-off of an intercompany loan and investment. The German subsidiary had sales of $4.2 million with an operating loss of approximately $1.0 million in fiscal 1996. STOCK SPLIT On May 5, 1998, the Board of Directors declared a two-for-one stock split on the Company's Class A and Class B common stock in the form of a 100% stock distribution. The stock distribution was issued June 2, 1998 to shareholders of record on May 15, 1998. Shareholders' equity has been adjusted for the stock split by reclassifying from additional paid-in capital and retained earnings to common stock the par value of the additional shares arising from the split. All per share amounts and numbers of shares have been adjusted in this report to reflect the stock split. FASB PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The pronouncement establishes standards for reporting and display of comprehensive income and its components. The Statement requires that items of other comprehensive income be classified by their nature in a financial statement and the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The required presentation will be adopted by the Company in fiscal 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The pronouncement establishes standards for reporting information about operating segments of an enterprise. The pronouncement requires the disclosure of selected segment information in interim financial reports. SFAS No. 131 will not impact the current presentation of the Company's segment information. The interim presentation requirement of the pronouncement will be adopted by the Company in the first quarter of fiscal 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Description Pages - ----------- ----- Report of Independent Accountants 27 Consolidated Balance Sheet 28-29 Consolidated Statement of Income 30 Consolidated Statement of Shareholders' Equity 31 Consolidated Statement of Cash Flows 32 Notes to Consolidated Financial Statements 33-52 Supplementary Financial Information 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Matthews International Corporation: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Matthews International Corporation and subsidiaries at September 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Pittsburgh, Pennsylvania November 19, 1998 MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1998 and 1997 ----------
ASSETS 1998 1997 ---- ---- Current assets: Cash and cash equivalents $ 25,369,834 $ 19,958,712 Short-term investments 229,903 3,090,507 Accounts receivable 32,892,094 30,054,396 Inventories (Note 3) 16,751,793 11,766,205 Deferred income taxes 931,020 865,082 Other current assets 1,053,033 1,354,549 ---------- ---------- Total current assets 77,227,677 67,089,451 Investments (Note 4) 24,250,799 30,771,594 Property, plant and equipment, net (Note 5) 44,730,376 42,483,743 Deferred income taxes (Note 12) 8,207,623 6,160,927 Other assets 5,797,811 6,155,554 Goodwill, net of accumulated amortization of $3,169,803 and $2,429,697, respectively 26,991,478 16,543,121 ----------- ----------- $187,205,764 $169,204,390 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET, continued September 30, 1998 and 1997 ----------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ---- ---- Current liabilities: Long-term debt, current maturities $ 800,252 $ 850,533 Trade accounts payable 6,901,044 5,854,582 Accrued compensation 8,299,442 4,505,358 Accrued vacation pay 3,855,552 3,198,676 Profit distribution to employees 4,069,514 3,540,965 Accrued income taxes 3,942,617 2,999,511 Customer prepayments 7,441,088 8,892,467 Postretirement benefits, current portion 749,136 626,925 Other current liabilities 7,847,924 5,578,066 ---------- ---------- Total current liabilities 43,906,569 36,047,083 Long-term debt (Note 6) 1,434,679 2,151,413 Estimated finishing costs 3,831,674 3,309,098 Postretirement benefits other than pensions (Note 11) 20,082,548 20,676,282 Other liabilities (Note 16) 13,639,998 2,854,439 Commitments and contingent liabilities (Note 13) Shareholders' equity (Notes 2, 7 and 8): Common stock: Class A, $1.00 par value, authorized 70,000,000 shares, 14,414,944 and 13,769,718 shares issued at September 30, 1998 and 1997, respectively 14,414,944 6,884,859 Class B, $1.00 par value, authorized 30,000,000 shares, 3,752,052 and 4,397,278 shares issued at September 30, 1998 and 1997, respectively 3,752,052 2,198,639 Preferred stock, $100 par value, authorized 10,000 shares, none issued - - Additional paid-in capital - 6,688,414 Retained earnings 131,061,637 115,179,462 Other shareholders' equity (4,843,157) (4,346,430) Treasury stock, 2,156,584 and 1,426,566 shares at September 30, 1998 and 1997, respectively, at cost (40,075,180) (22,438,869) ----------- ----------- Total shareholders' equity 104,310,296 104,166,075 ----------- ----------- $187,205,764 $169,204,390 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME for the years ended September 30, 1998, 1997 and 1996 ----------
1998 1997 1996 ---- ---- ---- Sales $211,622,057 $189,168,640 $171,977,619 Cost of goods sold 118,571,835 105,667,754 95,336,719 ----------- ----------- ----------- Gross profit 93,050,222 83,500,886 76,640,900 Selling expense 33,646,395 31,651,446 31,495,111 Administrative expense 23,474,883 20,962,045 18,374,409 ----------- ----------- ----------- Operating profit 35,928,944 30,887,395 26,771,380 Investment income 2,511,552 2,486,357 2,628,747 Interest expense (466,304) (337,375) (131,364) Other income (deductions), net (380,860) (317,961) 4,253,853 Minority interest (461,049) (420,519) - ----------- ----------- ----------- Income before income taxes 37,132,283 32,297,897 33,522,616 Income taxes (Note 12) 14,630,591 12,671,833 13,265,062 ----------- ----------- ----------- Net income $ 22,501,692 $ 19,626,064 $ 20,257,554 =========== =========== =========== Earnings per share (Notes 2 and 9): Basic $ 1.38 $ 1.14 $ 1.14 ==== ==== ==== Diluted $ 1.34 $ 1.11 $ 1.11 ==== ==== ==== The accompanying notes are an integral part of these consolidated financial statements. /TABLE
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY for the years ended September 30, 1998, 1997 and 1996 ---------- Common Additional Other Stock Paid-in Retained Shareholders' Treasury (Note 7) Capital Earnings Equity Stock Total ---------- ---------- ----------- ----------- ----------- ---------- Balance, September 30, 1995 $8,850,350 $ 1,844,092 $ 80,690,206 $(4,586,244) $ - $ 86,798,404 Net income - - 20,257,554 - - 20,257,554 Treasury stock transactions: Purchase of 671,464 shares - - - - (9,247,272) (9,247,272) Sale of 10,000 shares - 1,769 - - 106,200 107,969 Issuance of 23,628 shares under stock plans (Note 8) - (74,695) - - 334,250 259,555 Issuance of 466,296 shares for acquisitions (Notes 4 and 16) 233,148 5,694,843 - - - 5,927,991 Dividends, $.145 per share - - (2,580,103) - - (2,580,103) Other changes, net - - - 934,945 - 934,945 ---------- ---------- ----------- --------- ---------- ----------- Balance, September 30, 1996 9,083,498 7,466,009 98,367,657 (3,651,299) (8,806,822) 102,459,043 Net income - - 19,626,064 - - 19,626,064 Treasury stock transactions: Purchase of 1,030,018 shares - - - - (17,189,821) (17,189,821) Issuance of 241,288 shares under stock plans (Note 8) - (777,595) - - 3,557,774 2,780,179 Dividends, $.1625 per share - - (2,814,259) - - (2,814,259) Other changes, net - - - (695,131) - (695,131) ---------- ---------- ----------- --------- ---------- ----------- Balance, September 30, 1997 9,083,498 6,688,414 115,179,462 (4,346,430) (22,438,869) 104,166,075 Net income - - 22,501,692 - - 22,501,692 Treasury stock transactions: Purchase of 1,034,384 shares - - - - (23,069,770) (23,069,770) Issuance of 304,366 shares under stock plans (Note 8) - (1,144,117) (287,282) - 5,433,459 4,002,060 Stock split, two-for-one (Note 2) 9,083,498 (5,544,297) (3,539,201) - - - Dividends, $.1725 per share - - (2,793,034) - - (2,793,034) Other changes, net - - - (496,727) - (496,727) ---------- ---------- ----------- --------- ---------- ----------- Balance, September 30, 1998 $18,166,996 $ - $131,061,637 $(4,843,157) $(40,075,180) $104,310,296 ========== ========== =========== ========= ========== =========== The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the years ended September 30, 1998, 1997 and 1996 ----------
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $22,501,692 $19,626,064 $20,257,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,033,101 6,047,085 7,334,669 Change in deferred taxes (2,201,507) 80,349 (558,999) Changes in working capital items (Note 14) 5,742,946 10,050,004 2,301,488 (Increase) decrease in other non-current assets 381,243 1,125,185 (1,378,517) Increase in estimated finishing costs 522,576 354,799 156,284 Increase (decrease) in other liabilities 72,462 877,767 (287,921) Increase (decrease) in postretirement benefits (471,523) (647,793) 894,131 (Gain) loss on sale of property, plant and equipment (55,818) 192,529 (80,686) Gain on sale of subsidiary - - (9,409,058) Net (gain) loss on investments 60,657 50,164 (33,756) Effect of exchange rate changes on operations 197,107 (219,407) (10,517) ---------- ---------- ---------- Net cash provided by operating activities 34,782,936 37,536,746 19,184,672 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures (7,332,691) (6,164,630) (5,378,053) Proceeds from sales of property, plant and equipment 549,731 574,029 472,697 Acquisitions, net of cash acquired (16,221,247) (7,766,275) (5,182,055) Proceeds from sale of subsidiary - - 13,070,853 Investments (1,773,193) (4,018,535) (43,735,439) Proceeds from disposition of investments 18,576,625 9,146,833 5,225,068 Collections on loans to officers and employees 458,971 491,623 1,361,769 ---------- ---------- ---------- Net cash used in investing activities (5,741,804) (7,736,955) (34,165,160) ---------- ---------- ---------- Cash flows from financing activities: Payments on long-term debt (1,190,620) (4,474,258) (433,465) Proceeds from the sale of treasury stock 4,002,060 2,780,179 367,524 Purchases of treasury stock (23,069,770) (17,189,821) (9,247,272) Dividends (2,793,034) (2,814,259) (2,580,103) ---------- ---------- ---------- Net cash used in financing activities (23,051,364) (21,698,159) (11,893,316) ---------- ---------- ---------- Effect of exchange rate changes on cash (578,646) (561,638) 88,512 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 5,411,122 7,539,994 (26,785,292) Cash and cash equivalents at beginning of year 19,958,712 12,418,718 39,204,010 ---------- ---------- ---------- Cash and cash equivalents at end of year $25,369,834 $19,958,712 $12,418,718 ========== ========== ========== Cash paid during the year for: Interest $ 466,304 $ 337,375 $ 131,364 Income taxes 14,436,012 10,458,745 13,523,856 The accompanying notes are an integral part of these consolidated financial statements. /TABLE MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. NATURE OF OPERATIONS: Matthews International Corporation, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of custom-made identification products. The Company's products and operations are comprised of three business segments: Bronze, Graphics Imaging and Marking Products. The Bronze segment is a leading manufacturer of cast bronze memorial products, crematories and cremation-related products and a leading builder of mausoleums. The Graphics Imaging segment manufactures and provides printing plates, pre-press services and imaging systems for the corrugated and flexible packaging industries. The Marking Products segment designs, manufactures and distributes marking equipment and consumables used by customers for identifying various consumer and industrial products and containers. The Company has sales and manufacturing facilities in the United States, Canada, Australia, Sweden and Germany. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include all majority-owned foreign and domestic subsidiaries. The consolidated financial statements also include the accounts of two of the Company's 50%-owned affiliates, Tukaiz Communications, L.L.C. and O.N.E. Color Communications, L.L.C. (See Note 16). All intercompany accounts and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Split: On May 5, 1998, the Board of Directors declared a two-for-one stock split on the Company's Class A and Class B Common Stock in the form of a 100% stock distribution. The stock distribution was issued June 2, 1998 to shareholders of record on May 15, 1998. Shareholders' equity has been adjusted for the stock split by reclassifying from additional paid-in capital and retained earnings to common stock the par value of the additional shares arising from the split. All per share amounts and numbers of shares have been adjusted in this report to reflect the stock split. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: Foreign Currency: Balance sheet accounts for foreign subsidiaries are translated into U.S. dollars at current exchange rates in effect at the consolidated balance sheet date. Gains or losses that result from this process are recorded in other shareholders' equity. The cumulative translation adjustment at September 30, 1998 and 1997 was a reduction in shareholders' equity of $4,243,290 and $3,148,584, respectively. The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevailed during the period. Cash and Cash Equivalents: For purposes of the consolidated statement of cash flows, the Company considers all investments purchased with a remaining maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. At September 30, 1998, a significant portion of the Company's cash and cash equivalents were invested with one financial institution. Inventories: Inventories are stated at the lower of cost or market with cost generally determined under the average cost method. Property, Plant and Equipment: Property, plant and equipment are carried at cost. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the assets. Gains or losses from the disposition of assets are generally included in other income or other deductions from income. The cost of maintenance and repairs is charged against income as incurred. Renewals and betterments of a nature considered to extend the useful lives of the assets are capitalized. Goodwill: Goodwill, which represents the excess of cost over the estimated fair value of net assets of acquired businesses, is amortized using the straight-line method over periods ranging from 10 to 25 years. Management periodically evaluates the net realizable value of goodwill and, based on such analysis, goodwill will be reduced if considered necessary. During the second quarter of fiscal 1996, the Company wrote off the remaining goodwill ($2,288,000) of its subsidiary, Matthews Swedot AB. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: Estimated Finishing Costs: Estimated costs for finishing have been provided for bronze memorials, vases and granite bases which have been manufactured, sold to customers and placed in storage for future delivery. Treasury Stock: Treasury stock is carried at cost. The cost of treasury shares sold is determined under the average cost method. At September 30, 1998, treasury stock consisted of 1,297,479 shares of Class A Common Stock and 859,105 shares of Class B Common Stock. At September 30, 1997, treasury stock consisted of 797,370 shares of Class A Common Stock and 629,196 shares of Class B Common Stock. Income Taxes: Deferred tax assets and liabilities are provided for the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income taxes for U.S. tax purposes have not been provided on the undistributed earnings of foreign subsidiaries, as such earnings are considered to be reinvested indefinitely. At September 30, 1998, undistributed earnings for which deferred U.S. income taxes have not been provided approximated $2,300,000. Determination of the amount of unrecognized U.S. deferred tax liability on these unremitted earnings is not practical as any taxes paid upon distribution to the Company would be offset, at least in part, by foreign tax credits under U.S. tax regulations. Research and Development Expenses: Research and development costs are expensed as incurred and approximated $1,659,000, $1,814,000 and $1,997,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Earnings Per Share: Basic earnings per share is computed by dividing net income by the average number of common shares outstanding. Diluted earnings per share assumes the issuance of common stock for all dilutive securities. Revenue Recognition: Revenues of the Company are generally recognized at the time of product shipment. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 3. INVENTORIES: Inventories at September 30 consisted of the following: 1998 1997 ---- ---- Materials and finished goods $15,114,759 $10,482,503 Labor and overhead in process 1,248,815 803,815 Supplies 388,219 479,887 ---------- ---------- $16,751,793 $11,766,205 ========== ========== Materials and finished goods at September 30, 1998 included approximately $4,100,000 of mausoleum work-in-process in connection with the Company's acquisition of Gibraltar Mausoleum Construction Company, Inc. (Note 16). 4. INVESTMENTS: Investment securities are recorded at estimated market value at the consolidated balance sheet date and are classified as available-for-sale. Short-term investments consisted principally of corporate obligations with purchased maturities of over three months but less than one year. The cost of short-term investments approximated market value at September 30, 1998 and 1997. Accrued interest on all investment securities was also classified with short-term investments. The following investments were classified as non-current and consisted of securities with purchased maturities intended to range from one to five years. Book Value Gross Gross (Amortized Unrealized Unrealized Market Cost) Gains Losses Value ---------- ---------- ---------- --------- September 30, 1998: - ------------------ U.S. government and its agencies $ 6,001,959 $172,598 $ - $ 6,174,557 Corporate obligations 8,012,563 152,330 11,233 8,153,660 Other 211,564 - - 211,564 ---------- ------- ------- ---------- Total $14,226,086 $324,928 $ 11,233 $14,539,781 ========== ======= ======= ========== September 30, 1997: - ------------------ U.S. government and its agencies $14,002,207 $ 26,417 $ 77,577 $13,951,047 Corporate obligations 14,293,361 4,354 87,195 14,210,520 Other 23,105 - - 23,105 ---------- ------ ------- ---------- Total $28,318,673 $ 30,771 $164,772 $28,184,672 ========== ====== ======= ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 4. INVESTMENTS, continued: Unrealized gains and losses on investment securities, including related deferred taxes, are reflected in other shareholders' equity. Realized gains and losses are based on the specific identification method and are recorded in investment income. Realized gains for fiscal 1998 were $39,716. Realized losses for fiscal 1997 and 1996 were $94,683 and $38,802, respectively. Bond premiums and discounts are amortized on the straight-line method which does not significantly differ from the interest method. Investments also included the Company's interest in the following affiliates (ownership interest is noted in parentheses): 1998 1997 ---- ---- S+T Gesellschaft fur Reprotechnik mbH (50%) $ 7,090,261 $ - Applied Technology Developments, Ltd. (49%) 2,340,872 2,326,840 Other (less than 20%) 279,885 260,082 ---------- ---------- $ 9,711,018 $ 2,586,922 ========== ========== Investments in S+T Gesellschaft fur Reprotechnik mbH and Applied Technology Developments, Ltd. are recorded under the equity method of accounting. Income under the equity method of accounting is recorded in investment income. Investments with ownership interests less than 20% are recorded under the cost method of accounting. 5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment and the related accumulated depreciation at September 30 were as follows: 1998 1997 ---- ---- Buildings $21,472,410 $21,496,235 Machinery and equipment 52,324,284 46,977,825 ---------- ---------- 73,796,694 68,474,060 Less accumulated depreciation 34,146,591 29,747,385 ---------- ---------- 39,650,103 38,726,675 Land 2,965,859 3,041,981 Construction in progress 2,114,414 715,087 ---------- ---------- $44,730,376 $42,483,743 ========== ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 6. LONG-TERM DEBT: The Company has a Revolving Credit and Term Loan Agreement. Under terms of the agreement, the Company may borrow principal amounts up to $10,000,000 in the aggregate at various interest rate options approximating current market rates. The Revolving Credit and Term Loan Agreement requires the Company to maintain minimum levels of consolidated working capital and tangible net worth. At September 30, 1998 and 1997, no amounts were outstanding under this agreement. Long-term debt at September 30, 1998 and 1997 of $2,234,931 and $3,001,946, respectively, (which included $800,252 and $850,533, respectively, classified as long-term debt, current maturities) consisted of obligations under capital lease agreements. In connection with the investment in Tukaiz Communications, L.L.C. in January 1997 (Note 16), the Company assumed bank debt and capital lease obligations on certain equipment of $1,949,994 and $4,486,750, respectively. The bank debt was immediately repaid in full. The Company's capital lease agreements expire within five years and generally provide for renewal or purchase options. Remaining future minimum lease payments under capital leases are as follows: 1999 $1,009,411 2000 806,892 2001 601,013 2002 256,744 --------- 2,674,060 Less amount representing interest 439,129 --------- $2,234,931 ========= Assets under capital leases are amortized by the straight-line method over the estimated useful lives of the assets. Cost and accumulated amortization of assets under capital leases were $2,908,499 and $949,581, respectively, at September 30, 1998 and $2,799,328 and $312,708, respectively, at September 30, 1997. The Company has a line of credit of $500,000 in Canadian dollars which provides for borrowings at the bank's prime interest rate. The Company has a foreign exchange line of credit of $200,000 for standby letters of credit to support performance guarantees. The Company also maintains a multi-currency line of credit with a bank for 6,000,000 French francs. The multi-currency line of credit bears interest at various rates based on market as determined by the bank. Tukaiz Communications, L.L.C. has a line of credit of $1,500,000 which bears interest at the bank's prime rate. Compensating balances of approximately $39,000 and $43,000 were maintained by the Company at September 30, 1998 and 1997, respectively, in connection with the various lines of credit. There were no borrowings outstanding on the various lines of credit at September 30, 1998 and 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 7. SHAREHOLDERS' EQUITY: The authorized common stock of the Company consists of 100,000,000 shares, divided into two classes: Class A Common Stock, 70,000,000 shares, $1 par value, and Class B Common Stock, 30,000,000 shares, $1 par value. Shares of Class A Common Stock have one vote per share and are freely transferable subject to applicable securities laws. Shares of Class B Common Stock have ten votes per share and are only transferable by a shareholder to the Company or to an active employee of the Company. The Company may, at its discretion, purchase such shares at the fair market value per share of the Company's Class A Common Stock or permit shareholders to tender such shares to the Company in exchange for an equal number of shares of Class A Common Stock. For the fiscal years ended September 30, 1998, 1997 and 1996, 645,226, 1,690,634 and 3,593,282 shares, respectively, of Class B Common Stock were exchanged for an equal number of shares of Class A Common Stock. In April 1998, the Company announced the continuation of its stock repurchase program, which had been initiated in fiscal 1996. Previously, the Company's Board of Directors had approved repurchasing a total of 2,000,000 shares of Matthews Class A and Class B Common Stock, which has been completed. The current authorization allows the Company to purchase up to an additional 1,000,000 shares. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Restated Articles of Incorporation. Other shareholders' equity also includes notes receivable from officers and employees which arise from purchases of common stock by designated officers and employees under the Employees' Stock Purchase Plan. At September 30, 1998 and 1997, notes receivable of $453,089 and $912,060, respectively, were outstanding which included $309,249 and $559,800, respectively, due from officers. Each note bears interest at 6.5% per annum and is due five years from the date of its execution, which period may be, and in some instances has been, extended by the Executive Committee. There are 197,100 shares of the Company's Class B Common Stock owned by borrowers pledged as collateral on the notes as of September 30, 1998. 8. STOCK PLANS: The Company has a stock incentive plan which provides for the granting of incentive stock options, nonstatutory stock options and restricted share awards. The plan is administered by the Compensation Committee of the Board of Directors. The aggregate number of shares of the Company's common stock which may be issued upon exercise of the stock options and pursuant to the restricted share awards is 2,200,000 shares. The option price for each stock option which may be granted under the plan may not be less than the fair market value of the Company's common stock on the date of grant. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 8. STOCK PLANS, continued: Outstanding stock options are exercisable in various share amounts based on the attainment of certain market value levels of Class A Common Stock but, in the absence of such events, are exercisable in full for a one-week period beginning five years from the date of grant. In addition, options granted after September 30, 1996 vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the certain market value levels described above). The options are not exercisable within six months from the date of grant and expire on the earlier of ten years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with the consent of the Company), retirement or death. The Company has elected to continue accounting for its stock incentive plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If compensation cost had been determined under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net income and basic earnings per share would have been as follows: 1998 1997 ---- ---- Net income, as reported $22,501,692 $19,626,064 Net income, pro forma 21,967,279 19,140,081 Earnings per share - basic, as reported $1.38 $1.14 Earnings per share - basic, pro forma 1.34 1.11 The weighted average fair value of options granted was $7.69 per share in 1998 and $4.53 per share in 1997. The fair value of each option grant is estimated on the date of grant using a Black-Scholes based pricing model with the following assumptions: 1998 1997 ---- ---- Dividend yield 0.7% 1.0% Expected volatility 23.1% 21.3% Average risk-free interest rate 4.8% 6.1% Average expected term (years) 7.7 6.0 The following tables summarize certain stock option information at September 30, 1998: Options Outstanding: - ------------------- Range of Weighted average Weighted average exercise price Number remaining life exercise price - -------------- -------- ---------------- ---------------- $7.13 224,000 6.2 $ 7.13 $8.19 185,000 6.6 8.19 $9.44 50,300 7.2 9.44 $13.00 and $14.25 163,000 7.5 13.06 $14.06 - $17.38 633,850 8.2 14.17 $21.41 and $22.88 226,500 9.4 21.54 --------- --- ----- 1,482,650 7.8 $13.20 ========= === ===== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 8. STOCK PLANS, continued: Options exercisable: - ------------------- Range of Weighted average exercise price Number exercise price - -------------- ------- ---------------- $7.13 224,000 $ 7.13 $8.19 185,000 8.19 $9.44 50,300 9.44 $13.00 and $14.25 163,000 13.06 $14.06 - $17.38 - - $21.41 and $22.88 - - ------- ----- 622,300 $ 9.18 ======= ===== The transactions for shares under options were as follows: 1998 1997 1996 ---- ---- ---- Outstanding, beginning of year Number 1,593,766 1,173,666 839,000 Weighted average exercise price $11.12 $ 8.78 $ 7.38 Granted: Number 226,500 672,100 383,000 Weighted average exercise price $21.54 $14.17 $11.79 Exercised: Number 304,366 239,668 22,002 Weighted average exercise price $ 8.38 $ 8.08 $ 9.44 Expired or forfeited: Number 33,250 12,332 26,332 Weighted average exercise price $14.06 $13.92 $ 7.51 Outstanding, end of year: Number 1,482,650 1,593,766 1,173,666 Weighted average exercise price $13.20 $11.12 $ 8.78 Exercisable, end of year: Number 622,300 853,672 965,110 Weighted average exercise price $ 9.18 $ 8.57 $ 7.97 Shares reserved for future options, end of year 151,314 344,564 4,332 In addition, under the Company's Director Fee Plan, directors who are not also officers of the Company each receive as an annual retainer fee shares of the Company's Class A Common Stock equivalent to approximately $16,000. Each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock, with such shares to be paid to the director subsequent to leaving the Board. The value of deferred shares is recorded in other liabilities. Shares deferred under the Director Fee Plan at September 30, 1998, 1997 and 1996 were 20,658, 16,908 and 12,934, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 9. EARNINGS PER SHARE 1998 1997 1996 ---- ---- ---- Net income $22,501,692 $19,626,064 $20,257,554 ========== ========== ========== Weighted average common shares outstanding 16,336,359 17,194,073 17,781,824 Dilutive securities, primarily stock options 433,855 502,720 432,042 ---------- ---------- ---------- Diluted weighted average common shares outstanding 16,770,214 17,696,793 18,213,866 ========== ========== ========== Basic earnings per share $1.38 $1.14 $1.14 ==== ==== ==== Diluted earnings per share $1.34 $1.11 $1.11 ==== ==== ==== 10. PENSION PLANS: The Company maintains noncontributory, defined benefit pension plans covering most employees of the Company and its wholly-owned U.S. and Canadian subsidiaries. The plans provide benefits based on years of service and average monthly earnings for the highest five consecutive years during the ten years immediately preceding termination of employment. The Company's funding policy for the plans is to contribute annually the amount recommended by its consulting actuaries, subject to statutory provisions. The Company has reached the full-funding limitation and, accordingly, is not permitted to make deductible contributions for tax purposes to its pension plans during periods of such excess funding. Consequently, no contributions were made to the plans for the plan years ended July 31, 1998, 1997 and 1996. In addition, the Company has a Supplemental Retirement Plan which provides for supplemental pension benefits to certain executive officers of the Company. Upon normal retirement under this plan, such individuals who meet stipulated age and service requirements are entitled to receive monthly supplemental retirement payments, in addition to their pension under the Company's retirement plan, based on final average monthly earnings. Benefits under this plan do not vest until age 55; the Supplemental Retirement Plan is unfunded. Actuarial assumptions for the regular U.S. and supplemental plans are evaluated and revised as necessary as of August 1 each year. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0%, 7.5%, and 8.0% at August 1, 1998, 1997 and 1996, respectively. The rate of increase in future compensation levels was 4.5% at August 1, 1998, 1997 and 1996. The expected long-term rate of return on assets was 9.5% at August 1, 1998 and 9.0% at August 1, 1997 and 1996. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 10. PENSION PLANS, continued: Pension expense for the U.S. plans included the following components: 1998 1997 1996 ---- ---- ---- Service cost - benefits earned during the year $ 1,923,321 $ 1,715,536 $ 1,704,691 Interest cost on projected benefit obligation 3,559,391 3,396,778 3,212,293 Actual return on plan assets (3,070,941) (13,160,172) (2,939,242) Net amortization and deferral (1,874,051) 8,448,112 (1,677,961) --------- ---------- --------- Net pension expense $ 537,720 $ 400,254 $ 299,781 ========= ========== ========= The following table sets forth the funded status of the regular U.S. and supplemental plans and the amounts recognized in the Company's consolidated financial statements at September 30, 1998 and 1997. Prepaid and accrued pension costs are included in other assets and other liabilities, respectively.
1998 1997 ------------------------- ------------------------- Regular Supplemental Regular Supplemental ----------- ------------ ----------- ------------ Actuarial value of benefit obligation: Vested benefit obligation $42,326,598 $ 2,017,875 $37,910,728 $ 2,003,108 ========== ========= ========== ========= Accumulated benefit obligation $43,115,941 $ 2,588,807 $38,651,375 $ 2,260,901 ========== ========= ========== ========= Plan assets at fair value, primarily equity and fixed income securities $59,314,028 $ - $58,870,495 $ - Projected benefit obligation for participants' service rendered to date (51,804,368) (2,943,177) (46,164,647) (2,752,269) ---------- --------- ---------- --------- Plan assets in excess of (less than) projected benefit obligation 7,509,660 (2,943,177) 12,705,848 (2,752,269) Unrecognized transition asset being recognized over 15 years (807,594) - (1,211,388) - Unrecognized prior service cost 689,212 370,878 787,614 434,403 Unrecognized net (gain) loss (3,932,181) 908,685 (8,685,099) 825,868 Minimum liability adjustment - (925,193) - (768,903) ---------- --------- ---------- --------- Prepaid (accrued) pension $ 3,459,097 $(2,588,807) $ 3,596,975 $(2,260,901) ========== ========= ========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The Company provides certain health care and life insurance benefits for most retired employees. These health and life insurance benefits are unfunded and are provided through insurance companies. Employees are assumed to be eligible for these retiree benefits generally after attaining age 55 where age plus years of service equal at least 75. The following table sets forth the plan's funded status reconciled with the amount shown in the Company's consolidated balance sheet at September 30: 1998 1997 ---- ---- Accumulated postretirement benefit obligation: Retirees $ 5,736,340 $ 4,528,254 Fully eligible active plan participants 2,387,423 2,439,756 Other active plan participants 3,945,966 3,353,216 ---------- ---------- 12,069,729 10,321,226 Unrecognized reduction in prior service cost 11,776,711 12,785,782 Unrecognized net loss (3,014,756) (1,803,801) ---------- ---------- Accumulated postretirement benefit obligation 20,831,684 21,303,207 Current portion 749,136 626,925 ---------- ---------- $20,082,548 $20,676,282 ========== ========== Net periodic postretirement benefit cost included the following components: 1998 1997 1996 ---- ---- ---- Service cost - benefits attributed to employee service during the year $ 277,803 $ 268,835 $ 441,330 Interest cost on accumulated postretirement benefit obligation 748,625 855,587 1,719,158 Net amortization (953,595) (888,517) (29,663) -------- -------- --------- Net periodic postretirement benefit cost $ 72,833 $ 235,905 $2,130,825 ======== ======== ========= The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0%, 7.5% and 8.0% at September 30, 1998, 1997 and 1996, respectively. The rate for compensation increases at September 30, 1998, 1997 and 1996 was 4.5%. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued: For measurement purposes, annual rates of increase of 20.0% and 6.9% in the per capita cost of health care benefits for Medicare-Risk HMO Plans and all other plans, respectively, were assumed for 1998; the rates were assumed to decrease gradually to 5.0% for 2003 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. An increase in the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of September 30, 1998 by 4.1% and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by 6.6%. In September 1996, the Board of Directors approved changes to the retiree medical plan which provided additional plan options while limiting future Company contributions to retiree benefits. 12. INCOME TAXES: The provision for income taxes consisted of the following: 1998 1997 1996 ---- ---- ---- Current: Federal $13,190,560 $ 9,245,044 $10,244,785 State 2,326,985 1,815,067 1,675,200 Foreign 685,204 1,533,969 1,027,798 ---------- ---------- ---------- 16,202,749 12,594,080 12,947,783 Deferred (1,572,158) 77,753 317,279 ---------- ---------- ---------- Total $14,630,591 $12,671,833 $13,265,062 ========== ========== ========== The reconciliation of the federal statutory tax rate to the consolidated effective tax rate is as follows: 1998 1997 1996 ---- ---- ---- Federal statutory tax rate 35.0 % 35.0 % 35.0 % Effect of state income taxes, net of federal deduction 3.7 3.2 3.3 Foreign taxes in excess of federal statutory rate - 1.7 .8 Other .7 ( .7) .5 ---- ---- ---- Effective tax rate 39.4 % 39.2 % 39.6 % ==== ==== ==== The Company's foreign subsidiaries had income (losses) before income taxes for the years ended September 30, 1998, 1997 and 1996 of approximately $1,513,000, $2,825,000 and $(3,377,000), respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 12. INCOME TAXES, continued: The components of the provision for deferred income taxes were as follows: 1998 1997 1996 ---- ---- ---- Accrued vacation pay $ (62,410) $ (8,836) $ (136,489) Estimated finishing costs (276,930) (145,346) 52,712 Postretirement benefits other than pensions 183,894 246,309 (342,382) Installment sales - - 1,092,937 Foreign subsidiary losses, net 125,000 450,000 236,821 Pension costs (208,149) (156,090) (116,887) Deferred compensation (858,000) - - Depreciation (126,393) (51,919) (233,522) Deferred gain on sale of facilities (77,214) (30,274) (31,664) Other (271,956) (226,091) (204,247) ---------- ---------- ---------- $(1,572,158) $ 77,753 $ 317,279 ========== ========== ========== The components of the net deferred tax asset at September 30 were as follows: 1998 1997 ---- ---- Deferred tax assets: Accrued vacation pay $ 833,780 $ 771,370 Estimated finishing costs 1,084,563 807,633 Postretirement benefits other than pensions 8,124,358 8,308,252 Deferred compensation 1,455,090 - Foreign subsidiary losses, net 375,000 500,000 Other 905,706 634,426 ---------- ---------- 12,778,497 11,021,681 ---------- ---------- Deferred tax liabilities: Pension costs (257,854) (551,731) Depreciation (2,752,485) (2,911,813) Deferred gain on sale of facilities (507,174) (584,388) Unrealized investment (gain) loss (122,341) 52,260 ---------- ---------- (3,639,854) (3,995,672) ---------- ---------- Net deferred tax asset 9,138,643 7,026,009 Less current portion 931,020 865,082 ---------- ---------- $ 8,207,623 $ 6,160,927 ========== ========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 12. INCOME TAXES, continued: At September 30, 1998 and 1997, the Company had foreign net operating loss carryforwards of approximately $2,500,000 and $3,200,000, respectively, related to its subsidiaries in Canada and Sweden. Approximately $300,000 of the carryforwards at September 30, 1998 expire between 2002 and 2003, while the remainder have an indefinite carryforward period. The Company has recorded a valuation allowance of approximately $375,000 and $500,000 at September 30, 1998 and 1997, respectively, related to the carryforwards. 13. COMMITMENTS AND CONTINGENT LIABILITIES: The Company operates various production and office facilities and equipment under operating lease agreements. Annual rentals under these and other operating leases were $2,837,000, $2,262,000 and $2,130,000 in 1998, 1997 and 1996, respectively. Future minimum rental commitments are not material. The Company is party to various legal proceedings generally incidental to its business. The eventual outcome of these matters is not predictable, and it is possible that their resolution could be unfavorable to the Company. Although the ultimate disposition of these proceedings is not presently determinable, management is of the opinion that they should not result in liabilities in an amount which would materially affect the Company's consolidated financial position, results of operations or cash flows. The Company has employment agreements with certain employees, the terms of which expire at various dates between 1999 and 2002. The agreements generally provide for base salary and bonus levels and include a non-compete clause. The aggregate commitment for salaries under these agreements at September 30, 1998 was approximately $4,600,000. 14. SUPPLEMENTAL CASH FLOW INFORMATION: Significant non-cash transactions included the following: In September 1998, Matthews acquired for 11,555,500 German Marks (U.S.$6,900,000) fifty percent of the capital stock of S+T Gesellschaft fur Reprotechnik mbH (Note 16). A liability has been recorded for the payment, which is due January 2000. In May 1998, Matthews acquired fifty percent of O.N.E. Color Communications, Inc., a digital graphics service company (Note 16). In addition, the purchase agreement requires Matthews to acquire the remaining fifty percent interest no later than May 2004. A liability of $3,700,000 was recorded for the present value of the minimum future payouts under the purchase agreement. In fiscal 1996, Matthews issued 466,296 shares of Class A Common Stock (valued at $5,900,000) in connection with the acquisitions of Industrial Equipment and Engineering Company, Inc. (Note 16) and Applied Technology Developments, Ltd. (Note 4). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 14. SUPPLEMENTAL CASH FLOW INFORMATION, continued: Changes in working capital items as presented in the Consolidated Statement of Cash Flows consisted of the following: 1998 1997 1996 ---- ---- ---- Current assets: Accounts receivable $(1,051,982) $ (985,433) $ 2,463,712 Inventories (355,121) 2,087,337 (571,217) Other current assets 392,197 (61,624) (770,017) ---------- ---------- --------- (1,014,906) 1,040,280 1,122,478 ---------- ---------- --------- Current liabilities: Trade accounts payable 732,701 (1,012,648) 737,433 Accrued compensation 3,539,657 2,010,941 326,942 Accrued vacation pay 275,473 56,238 197,241 Profit distribution to employees 528,549 (112,274) (239,942) Accrued income taxes 943,106 1,991,625 (252,243) Customer prepayments (1,451,379) 5,822,563 (177,754) Other current liabilities 2,189,745 253,279 587,333 ---------- ---------- --------- 6,757,852 9,009,724 1,179,010 ---------- ---------- --------- Net increase $ 5,742,946 $10,050,004 $ 2,301,488 ========== ========== ========= 15. SEGMENT INFORMATION: Sales and operating profit of the Company's business segments follows:
Graphics Marking Imaging Products Bronze Eliminations Consolidated ---------- ---------- ---------- ------------ ------------ Sales to unaffil- iated customers: 1998 $75,294,549 $30,054,688 $106,272,820 $ - $211,622,057 1997 57,804,162 34,980,976 96,383,502 - 189,168,640 1996 43,062,133 44,386,703 84,528,783 - 171,977,619 Intersegment sales: 1998 6,973 63,424 35,364 (105,761) - 1997 4,681 53,473 39,849 (98,003) - 1996 42,408 238,439 26,479 (307,326) - Operating profit: 1998 6,909,985 3,003,056 26,015,903 - 35,928,944 1997 5,507,148 2,800,757 22,579,490 - 30,887,395 1996 4,217,472 2,481,859 20,072,049 - 26,771,380
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 15. SEGMENT INFORMATION, continued: Information related to assets identifiable to segments follows:
Graphics Marking Imaging Products Bronze Other Consolidated ---------- ---------- ---------- ---------- ------------ Identifiable assets: 1998 $60,274,431 $20,060,272 $59,304,584 $47,566,477 $187,205,764 1997 38,495,477 22,118,584 49,753,812 58,836,517 169,204,390 1996 19,271,417 24,752,912 46,836,367 62,551,013 153,411,709 Depreciation expense: 1998 3,827,692 603,546 2,187,063 361,560 6,979,861 1997 2,033,727 739,978 1,944,148 520,930 5,238,783 1996 1,189,791 964,954 1,619,925 602,575 4,377,245 Capital expenditures: 1998 5,110,111 334,122 1,628,217 260,241 7,332,691 1997 3,189,371 400,543 2,144,218 430,498 6,164,630 1996 942,909 1,067,917 3,228,309 138,918 5,378,053
Information about the Company's operations in different geographic areas follows:
United States Canada Australia Europe Eliminations Consolidated ------------- --------- --------- ---------- ------------ ------------ Sales to unaffil- iated customers: 1998 $192,443,566 $8,808,520 $ 4,817,523 $ 5,552,448 $ - $211,622,057 1997 162,281,107 8,634,068 10,553,058 7,700,407 - 189,168,640 1996 139,945,843 8,180,041 10,534,846 13,316,889 - 171,977,619 Transfers between geographic areas: 1998 6,210,190 131,453 - 1,884,293 (8,225,936) - 1997 6,728,953 187,161 - 2,820,395 (9,736,509) - 1996 7,361,044 244,185 - 2,342,427 (9,947,656) - Operating profit: 1998 34,458,109 (115,435) 1,313,329 272,941 - 35,928,944 1997 28,223,301 405,658 1,933,004 325,432 - 30,887,395 1996 25,827,733 (349,587) 1,718,944 (425,710) - 26,771,380 Identifiable assets: 1998 176,382,613 4,041,883 5,580,593 13,846,396 (12,645,721) 187,205,764 1997 164,499,917 4,444,878 8,840,270 7,973,623 (16,554,298) 169,204,390 1996 145,346,058 4,913,342 9,554,718 8,409,239 (14,811,648) 153,411,709
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 15. SEGMENT INFORMATION, continued: Intersegment sales are accounted for at negotiated prices. Operating profit is total revenue less operating expenses. Identifiable assets include those assets which are used in the Company's operations in each segment. Corporate headquarters' assets are included in Other and principally consist of cash and cash equivalents, investments, deferred tax assets and the headquarters' administration building. 16. ACQUISITIONS AND DISPOSITIONS: On October 1, 1997, Matthews acquired for $480,000 cash the assets of Western Plasti-Type Co. ("Western"). On November 4, 1997, Matthews acquired the common stock of Allied Reprographics, Inc. ("Allied") for $700,000 cash. Both Western and Allied are printing plate manufacturers located in Denver, Colorado. On November 3, 1997, Matthews acquired for $1,400,000 cash the assets of Palomar Packaging, Inc. ("Palomar"), a manufacturer of printing plates and steel-rule cutting dies, located near San Diego, California. An additional amount up to $880,000 may be payable for Palomar during the five-year period from the acquisition date contingent on the attainment of certain operating performance levels. On February 20, 1998, Matthews acquired for $1,600,000 cash certain assets of S&N Graphics, Inc., a St. Louis, Missouri manufacturer of printing plates and other marking devices. On May 22, 1998, Matthews acquired fifty percent of O.N.E. Color Communications, Inc., a digital graphics service company. The transaction was structured as an asset purchase with the purchase price consisting of $2,000,000 cash and the assumption of a fifty percent interest in certain liabilities of O.N.E. Color Communications, Inc. An additional amount is payable by Matthews three years from the acquisition date contingent on the attainment of certain operating performance levels of the new company, with such payout to be not less than $400,000. Matthews and the shareholders of O.N.E. Color Communications, Inc. have each contributed their respective fifty percent interests into a newly-formed California limited liability company, O.N.E. Color Communications, L.L.C. ("O.N.E."). In addition, the purchase agreement requires Matthews to purchase the remaining fifty percent interest in O.N.E. no later than May 2004. The purchase price for the remaining interest is contingent on the attainment of certain operating performance levels of the new company with such payment to be not less than $4,500,000. The accounts of O.N.E. have been included in the consolidated financial statements of Matthews and a liability has been recorded for the present value of the minimum future payouts. O.N.E., with annual sales of approximately $10,000,000, is headquartered in Oakland, California. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 16. ACQUISITIONS AND DISPOSITIONS, continued: On September 19, 1998, Matthews acquired for 11,555,500 German Marks (U.S.$6,900,000) fifty percent of the capital stock of S+T Gesellschaft fur Reprotechnik mbH ("S+T"). The operations of S+T, located in Julich, Germany, consist principally of flexographic printing preparation and the manufacture of photopolymer printing forms for the packaging industry. The remaining fifty percent will continue to be owned by the existing president of S+T. The cash payment is due January 2000 and is subject to reduction if S+T's calendar year 1999 operating results are below the calendar year 1997 level. In addition, Matthews has a call option to acquire an additional thirty percent interest in S+T at a purchase price contingent on the operating performance of S+T. The results of S+T will be reflected in the financial statements of Matthews under the equity method of accounting. In October 1998, Matthews entered into a foreign currency forward contract with a financial institution for the purchase of German Marks to hedge its January 2000 payment commitment for the investment in S+T. In November 1998, Matthews also entered into a letter of credit agreement with a financial institution to guarantee performance under this payment commitment. Effective September 30, 1998, Matthews purchased for $10,000,000 cash the assets of Gibraltar Mausoleum Construction Company, Inc. ("Gibraltar"), a subsidiary of Service Corporation International. Gibraltar, with annual sales of approximately $16,000,000, is headquartered in Indianapolis, Indiana and is a leading builder of mausoleums in the United States. On January 31, 1997, Matthews acquired fifty percent of Tukaiz Litho, Inc. ("Tukaiz"), a pre-press and pre-media firm headquartered in Franklin Park, Illinois. A pre-press firm prepares art or digital files for printing or reproduction. The remaining fifty percent continues to be owned by the president of Tukaiz. The transaction was structured as an asset purchase with the purchase price consisting of $4,000,000 cash and the assumption of a fifty percent interest, approximately $4,000,000, in certain of the liabilities of Tukaiz. The parties each contributed their respective fifty percent interests into a newly-formed Illinois limited liability company, Tukaiz Communications, L.L.C. Matthews also provided the new company with subordinated convertible debt of $5,500,000. Tukaiz reported sales of $16,400,000 for the year ended January 31, 1997. The accounts of Tukaiz Communications, L.L.C. have been included in the consolidated financial statements of Matthews. On May 23, 1997, Matthews acquired for $2,400,000 cash the common stock of both Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services, flexible printing plates and steel rule cutting dies, located in North Carolina. Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were approximately $3,700,000 for the year ended December 31, 1996. On March 25, 1996, Matthews acquired Industrial Equipment and Engineering Company, Inc. ("IEEC"), a Florida corporation, for 427,724 shares of Matthews Class A Common Stock (valued at $5,400,000) and $3,600,000 cash. Sales of IEEC for the year ended December 31, 1995 were $7,500,000. On August 1, 1996, IEEC acquired for cash substantially all of the assets and certain of the liabilities of All Crematory Corporation. The total purchase price, including the assumption of liabilities, was $2,000,000. Sales of All Crematory Corporation for the year ended September 30, 1995 were $3,400,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 16. ACQUISITIONS AND DISPOSITIONS, continued: Matthews has accounted for the aforementioned acquisitions using the purchase method and, accordingly, recorded the acquired assets and liabilities at their estimated fair values at the acquisition dates. The excess of the purchase price over the fair value of the net assets has been recorded as goodwill to be amortized on a straight-line basis over periods ranging from 15 to 25 years. For the acquisition of S+T, the excess of the purchase price over the fair value of the net assets will be amortized on a straight-line basis over 25 years as a charge to equity income. On January 5, 1996, Matthews sold for $13,100,000 cash its cemetery and mortuary facility (Sunland Memorial Park, Inc.) in Sun City, Arizona to Service Corporation International. Matthews recorded a pre-tax gain in the fiscal 1996 second quarter of $9,400,000 on the sale which was recorded in other income. Sunland Memorial Park, Inc., which was purchased in 1982, was the only such facility owned by Matthews. The facility had sales in fiscal 1995 of approximately $5,000,000, representing about three percent of the consolidated sales of Matthews. In September 1996, Matthews authorized the liquidation of its German subsidiary and recorded a pre-tax charge to other expense of $1,200,000 in connection with the transaction. The transaction had no impact on the fiscal 1996 net income of Matthews due to the tax benefits related to the write-off of an intercompany loan and investment. The German subsidiary had sales of $4,200,000 with an operating loss of $970,000 in fiscal 1996. 17. FASB PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." The pronouncement establishes standards for reporting and display of comprehensive income and its components. The Statement requires that items of other comprehensive income be classified by their nature in a financial statement and the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The required presentation will be adopted by the Company in fiscal 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The pronouncement establishes standards for reporting information about operating segments of an enterprise. The pronouncement requires the disclosure of selected segment information in interim financial reports. SFAS No. 131 will not impact the current presentation of the Company's segment information. The interim presentation requirement of the pronouncement will be adopted by the Company in the first quarter of fiscal 2000. SUPPLEMENTARY FINANCIAL INFORMATION Selected Quarterly Financial Data (Unaudited): The following table sets forth certain items included in the Company's unaudited consolidated financial statements for each quarter of fiscal 1998 and fiscal 1997.
Quarter Ended ----------------------------------------------------- Year Ended December 31 March 31 June 30 September 30 September 30 ----------- ----------- ----------- ------------ ------------ FISCAL YEAR 1998: Sales $49,440,454 $51,563,344 $55,217,977 $55,400,282 $211,622,057 Gross profit 21,231,436 23,034,882 25,060,396 23,723,508 93,050,222 Operating profit 7,616,319 8,886,597 10,333,027 9,093,001 35,928,944 Net income 4,898,264 5,603,821 6,381,882 5,617,725 22,501,692 Earnings per share - diluted .29 .33 .38 .34 1.34 FISCAL YEAR 1997: Sales $42,582,795 $45,427,408 $51,736,477 $49,421,960 $189,168,640 Gross profit 18,863,418 20,237,199 22,843,057 21,557,212 83,500,886 Operating profit 6,613,758 7,885,207 8,797,942 7,590,488 30,887,395 Net income 4,304,408 5,012,993 5,484,608 4,824,055 19,626,064 Earnings per share - diluted .24 .28 .31 .28 1.11 /TABLE ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in accountants or disagreements on accounting or financial disclosure between the Company and PricewaterhouseCoopers LLP, Certified Public Accountants, for the fiscal years ended September 30, 1998, 1997 and 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following information as of November 30, 1998 is furnished with respect to each director and executive officer: Name Age Positions with Registrant - ---- --- ------------------------- David M. Kelly 56 Chairman of the Board, President and Chief Executive Officer Geoffrey D. Barefoot 51 President, Graphic Systems Division and Director Edward J. Boyle 52 Vice President, Accounting & Finance, Treasurer and Secretary David J. DeCarlo 53 President, Bronze Division and Director Robert B. Heffernan 50 President, Graphics Imaging Group Robert J. Kavanaugh 61 Director Thomas N. Kennedy 63 Director Steven F. Nicola 38 Controller John P. O'Leary, Jr. 51 Director James L. Parker 60 Director Robert J. Schwartz 51 President, Marking Products Division William J. Stallkamp 59 Director David M. Kelly was elected Chairman of the Board on March 15, 1996. He was appointed President and Chief Operating Officer of the Company in April 1995 and President and Chief Executive Officer effective October 1, 1995. He was appointed as a Director of the Company in May 1995. Prior to joining the Company, he was a Senior Vice President for Carrier Corporation. Geoffrey D. Barefoot, a Director of the Company since 1990, was elected President, Graphic Systems Division in November 1993. Edward J. Boyle was elected Vice President, Accounting & Finance effective December 1, 1995. Prior thereto, he was Controller of the Company. He was appointed Treasurer and Secretary in September 1996. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued. David J. DeCarlo, a Director of the Company since 1987, was elected President, Bronze Division in November 1993. Prior thereto, he was Senior Vice President and Division Manager, Bronze. Robert B. Heffernan joined the Company in May 1998 and was appointed President, Graphics Imaging Group. Prior thereto, he was President of the Brooks Instrument Division of Emerson Electric since 1986. Robert J. Kavanaugh was elected to the Board of Directors in February 1998. Mr. Kavanaugh retired in 1996 as a partner of the Pittsburgh office of Arthur Andersen LLP. Thomas N. Kennedy, a Director of the Company since 1987, retired as an officer of the Company effective December 1, 1995. He was Senior Vice President, Chief Financial Officer and Treasurer since January 1991. Steven F. Nicola was elected Controller of the Company effective December 1, 1995. Prior thereto, he was Manager, Tax Planning and International Accounting. John P. O'Leary, Jr., a Director of the Company since 1992, has been President and Chief Executive Officer of Tuscarora, Incorporated, a plastics manufacturer, since 1990. James L. Parker, a Director of the Company since 1981, retired as an officer of the Company effective November 1, 1996. He was Senior Vice President, General Counsel and Secretary since January 1991. Robert J. Schwartz was appointed President, Marking Products Division in September 1997. Mr. Schwartz joined the Company in January 1997 as Director of Sales and Marketing for the Marking Products Division. Prior thereto, he was Vice President - Sales for Northeast Distributors, Inc. William J. Stallkamp, a Director of the Company since 1981, is a Vice Chairman of Mellon Bank Corporation in Pittsburgh, Pennsylvania and has been Chairman and Chief Executive Officer of Mellon PSFS in Philadelphia since January 1996. Prior thereto, he was an Executive Vice President of Mellon Bank, N.A. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued. Board Committees: The Executive Committee is appointed by the Board of Directors to have and exercise during the periods between Board meetings all of the powers of the Board of Directors, except that the Executive Committee may not elect directors, change the membership of or fill vacancies in the Executive Committee, change the By-Laws of the Company or exercise any authority specifically reserved by the Board. The membership of the Executive Committee since October 1, 1997 consisted of Messrs. Kelly, DeCarlo and Barefoot. The principal function of the Audit Committee, the members of which are Messrs. O'Leary (Chairman), Kavanaugh and Stallkamp, is to endeavor to assure the integrity and adequacy of financial statements issued by the Company. It is intended that the Audit Committee will review internal auditing systems and procedures as well as the activities of the public accounting firm performing the external audit. The principal function of the Compensation Committee, the members of which are Messrs. Stallkamp (Chairman), Kavanaugh and Kennedy, is to review periodically the suitability of the remuneration arrangements (including benefits) for the principal officers of the Company other than stock remuneration. A subcommittee of the Compensation Committee, the Stock Compensation Committee, the members of which are Messrs. Stallkamp (Chairman) and Kavanaugh, consider and grant stock remuneration and administer the Company's 1992 Stock Incentive Plan. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth the individual compensation information for the fiscal years ended September 30, 1998, 1997 and 1996 for the Company's Chief Executive Officer and the four most highly compensated executive officers. SUMMARY COMPENSATION TABLE
Annual Long-Term Compensation Compensation ----------------- ----------------------- Awards Payouts ------ ------- All Securities Other Name of Individual Underlying LTIP Compen- and Principal Position Year Salary Bonus Options Payouts sation - ---------------------- ---- ------- ------- ---------- --------- ------- (1) (Shares) (2) (3) David M. Kelly 1998 $312,409 $324,082 40,000 $239,850 None Chairman of the Board and 1997 290,174 290,687 190,000 None None Chief Executive Officer 1996 268,764 261,193 70,000 None None David J. DeCarlo 1998 207,921 169,552 None 269,660 $2,520 Director and President, 1997 199,473 174,477 250,000 None 3,046 Bronze Division 1996 188,100 159,409 40,000 None 4,904 Geoffrey D. Barefoot 1998 148,788 None None None 2,644 Director and President, 1997 146,080 13,487 None None 2,622 Graphic Systems Division 1996 142,497 59,827 30,000 None 2,028 Edward J. Boyle 1998 129,689 87,394 36,000 60,211 4,250 Vice President, 1997 113,379 75,043 41,000 None 3,804 Accounting & Finance 1996 104,709 68,308 28,000 None 2,205 Robert J. Schwartz 1998 118,323 75,177 32,000 None 1,038 President, Marking Products Division (1) Includes the current portion of management incentive plan and supplemental management incentive payments and, for Mr. Kelly, an amount equal to his life insurance premium cost. At his request, the Company does not provide life insurance for Mr. Kelly, but in lieu thereof pays to him annually the amount which the Company would have paid in premiums to provide coverage, considering his position and age. Such amounts are not included in calculating other Company benefits for Mr. Kelly. The amount paid to Mr. Kelly in lieu of life insurance for 1998, 1997 and 1996 was $4,100 each year. The Company has adopted a management incentive plan for officers and key management personnel. Participants in such plan are not eligible for the Company's profit distribution plan. The incentive plan is based on improvement in divisional and Company economic value added and the attainment of established personal goals. A portion of amounts earned are deferred by the Company and are payable with interest at a market rate over a two-year period contingent upon economic value added performance and continued employment during such period. See Long-Term Incentive Plans - Awards in Last Fiscal Year table. In addition, payments include a supplement in amounts which are sufficient to pay annual interest expense on the outstanding notes of management under the Company's Designated Employee Stock Purchase Plan and to pay medical costs which are not otherwise covered by a Company plan. ITEM 11. EXECUTIVE COMPENSATION, continued. (3) Includes educational assistance for dependent children and premiums for term life insurance. Educational assistance for dependent children is provided to any officer or employee of the Company whose child meets the scholastic eligibility criteria and is attending an eligible college or university. Educational assistance amounts reported in this column for the named officers in fiscal 1998, 1997 and 1996, respectively, were: Mr. DeCarlo, $2,000 (1996 only); and Mr. Boyle, $2,200, $2,000 and $1,000. Each officer of the Company is provided term life insurance coverage in an amount approximately equivalent to three times his respective salary. Amounts reported in this column for the named officers in fiscal 1998, 1997 and 1996 include the following respective life insurance benefit costs: Mr. DeCarlo, $2,520, $3,046 and $2,904; Mr. Barefoot, $2,644, $2,622 and $2,028; Mr. Boyle, $2,050, $1,804 and $1,205; and Mr. Schwartz, $1,038 (1998 only). See also note (1).
The Summary Compensation Table does not include expenses to the Company of incidental benefits of a limited nature to executive officers including use of Company vehicles, club memberships, dues, or tax planning services. The Company believes such incidental benefits are in the conduct of the Company's business, but, to the extent such benefits and use would be considered personal benefits, the value thereof is not reasonably ascertainable and does not exceed, with respect to any individual named in the compensation table, the lesser of $50,000 or 10% of the annual compensation reported in such table. Long-Term Incentive Plans - Awards in Last Fiscal Year
Performance Estimated Future or Other Payouts Under Number Period Non-Stock Price- of Shares Until Based Plans or Other Maturation ---------------- Name Rights or Payout Target - ------------- ---------- ----------- ---------------- D.M. Kelly - 2 Years $ 906,596 D.J. DeCarlo - 2 Years 803,335 G.D. Barefoot - 2 Years None E.J. Boyle - 2 Years 232,753 R.J. Schwartz - 2 Years 93,090 The Company has a management incentive plan based on improvement in divisional and Company economic value added and the attainment of established personal goals. A portion of amounts earned are deferred by the Company and are payable with interest at a market rate over a two-year period contingent upon economic value added performance and continued employment during such period. /TABLE ITEM 11. EXECUTIVE COMPENSATION, continued. Option/SAR Grants in Last Fiscal Year
Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants (1) Option Term - ----------------------------------------------------------------- ---------------------- Percent of Total Number of Options Securities Granted to Exercise Underlying Employees or Base Options in Fiscal Price Expiration Name Granted Year per Share Date 5% 10% - -------------- ---------- ---------- --------- ---------- -------- -------- D.M. Kelly 40,000 17.7% $21.406 12/02/07 $538,489 $1,364,643 D.J. DeCarlo None - - - - - G.D. Barefoot None - - - - - E.J. Boyle 36,000 15.9% $21.406 12/02/07 484,640 1,228,178 R.J. Schwartz 32,000 14.1% $21.406 12/02/07 430,791 1,091,714 (1) All options were granted at market value as of the date of grant. Options are exercisable in various share amounts based on the attainment of certain market value levels of Class A Common Stock, but, in the absence of such events, are exercisable in full for a one-week period beginning five years from the date of grant. In addition, options vest in one-third increments after three, four and five years, respectively, from the grant date (but, in any event, not until the attainment of the certain market value levels described above). The options are not exercisable within six months from the date of grant and expire on the earlier of ten years from the date of grant, upon employment termination, or within specified time limits following voluntary employment termination (with consent of the Company), retirement or death.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Value of Unexercised Shares Securities Underlying In-the-Money Options Acquired Unexercised Options at Fiscal Year End On Value -------------------------- -------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------- ---------- ---------- ----------- ------------- ----------- ------------- D.M. Kelly 15,000 $ 262,500 255,000 230,000 $4,077,812 $2,336,873 D.J. DeCarlo None None 126,000 250,000 2,080,250 2,859,375 G.D. Barefoot 94,000 1,133,875 None None None None E.J. Boyle None None 63,000 77,000 993,125 616,310 R.J. Schwartz None None None 80,000 None 620,373 /TABLE ITEM 11. EXECUTIVE COMPENSATION, continued. Retirement Plans: The Company's domestic retirement plan is noncontributory and provides benefits based upon length of service and final average earnings. Generally, employees age 21 with one year of continuous service are eligible to participate in the retirement plan. The benefit formula is 3/4 of 1% of the first $550 of final average monthly earnings plus 1-1/4% of the excess times years of credited service (maximum 35). The plan is an insured, defined benefit plan and covered compensation is limited generally to base salary or wages. Benefits are not subject to any deduction or offset for Social Security. In addition to benefits provided by the Company's retirement plan, the Company has a Supplemental Retirement Plan, which provides for supplemental pension benefits to executive officers of the Company designated by the Board of Directors, including those named in the Summary Compensation Table. Upon normal retirement under this plan, such individuals who meet stipulated age and service requirements are entitled to receive monthly supplemental retirement payments which, when added to their pension under the Company's retirement plan and their maximum anticipated Social Security primary insurance amount, equal, in total, 1.85% of final average monthly earnings (including incentive compensation) times the individual's years of continuous service (subject to a maximum of 35 years). Upon early retirement under this plan, reduced benefits will be provided, depending upon age and years of service. Benefits under this plan do not vest until age 55 and the attainment of 15 years of continuous service. However, in order to recruit Mr. Kelly, the Company waived such minimum service requirement with respect to Mr. Kelly. No benefits will be payable under such supplemental plan following the voluntary employment termination or death of any such individual. The Supplemental Retirement Plan is unfunded; however, a provision has been made on the Company's books for the actuarially computed obligation. The following table shows the total estimated annual retirement benefits payable at normal retirement under the above plans for the individuals named in the Summary Compensation Table at the specified executive remuneration and years of continuous service: Years of Continuous Service Covered ---------------------------------------------------- Remuneration 15 20 25 30 35 - ------------------ -------- -------- -------- -------- -------- $125,000 $ 34,688 $ 46,250 $ 57,813 $ 69,375 $ 80,938 150,000 41,625 55,500 69,375 83,250 97,125 175,000 48,563 64,750 80,938 97,125 113,313 200,000 55,500 74,000 92,500 111,000 129,500 225,000 62,438 83,250 104,063 124,875 145,688 250,000 69,375 92,500 115,625 138,750 161,875 300,000 83,250 111,000 138,750 166,500 194,250 400,000 111,000 148,000 185,000 222,000 259,000 500,000 138,750 185,000 231,250 277,500 323,750 600,000 166,500 222,000 277,500 333,000 388,500 700,000 194,250 259,000 323,750 388,500 453,250 ITEM 11. EXECUTIVE COMPENSATION, continued. The table shows benefits at the normal retirement age of 65, before applicable reductions for social security benefits. The Employee Retirement Income Security Act of 1974 places limitations, which may vary from time to time, on pensions which may be paid under federal income tax qualified plans, and some of the amounts shown on the foregoing table may exceed the applicable limitation. Such limitations are not currently applicable to the Company's Supplemental Retirement Plan. Estimated years of continuous service for each of the individuals named in the Summary Compensation Table, as of October 1, 1998 and rounded to the next higher year, are: Mr. Kelly, 4 years; Mr. DeCarlo, 14 years; Mr. Barefoot, 23 years; Mr. Boyle, 12 years and Mr. Schwartz, 2 years. Compensation Committee Interlocks and Insider Participation: Thomas N. Kennedy, a former officer of the Company, is a member of the Company's Compensation Committee. Compensation of Directors: Pursuant to the Director Fee Plan, directors who are not also officers of the Company each receive as an annual retainer fee shares of the Company's Class A Common Stock equivalent to approximately $16,000. Each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock. In addition, each such director is paid $800 for every meeting of the Board of Directors attended and (other than a Chairman) $500 for every committee meeting attended. The Chairman of a committee of the Board of Directors is paid $700 for every committee meeting attended. No other remuneration is otherwise paid by the Company to any director for services as a director. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a)(b) Security Ownership of Certain Beneficial Owners and Management: The Company's Articles of Incorporation divide its voting stock into three classes: Preferred Stock and Class A and Class B Common Stock. At the present time, none of the Preferred Stock is issued or outstanding. The following information is furnished with respect to persons who the Company believes, based on its records, beneficially own more than five percent of the outstanding shares of Class A and Class B Common Stock of the Company, and with respect to directors and officers. Those individuals with more than five percent of such shares could be deemed to be "control persons" of the Company. This information is as of November 30, 1998. Number of Number of Class A Shares Class B Shares Name of Beneficially Percent Beneficially Percent Beneficial Owner (1) Owned (2) of Class Owned (2) of Class - ---------------- -------------- -------- -------------- -------- Directors and Officers: - ---------------------- D.M. Kelly 43,925 0.3% 56,000 2.0% G.D. Barefoot None - 209,000 7.3 D.J. DeCarlo None - 289,990 10.2 R.J. Kavanaugh 1,000 * None - T.N. Kennedy 75,000 0.6 None - J.P. O'Leary, Jr. 13,300 0.1 None - J.L. Parker 100,000 0.8 None - W.J. Stallkamp 6,200 * None - All directors and executive officers as a group (12 persons) 252,177 1.9 609,690 21.4 Others: - ------ D. Majestic None - 312,000 10.9 T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, MD 21202 882,700 6.7 None - * Less than 0.1% (1) Unless otherwise noted, the mailing address of each beneficial owner is the same as that of the Registrant. (2) The nature of the beneficial ownership for all shares is sole voting and investment power, except as follows: Mr. Stallkamp has sole voting power except for 200 Class A shares held by Mr. Stallkamp as custodian under UTMA for son. T. Rowe Price Associates, Inc. has sole voting power for only 323,200 Class A shares. (c) Changes in Control: The Company knows of no arrangement which may, at a subsequent date, result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Securities and Exchange Commission requires disclosure of certain business transactions or relationships between the Company, or its subsidiaries, and other organizations with which any of the Company's directors are affiliated as an owner, partner, director, officer or employee. Briefly, disclosure is required where such a business transaction or relationship meets the standards of significance established by the Securities and Exchange Commission with respect to the types and amounts of business transacted. The Company is aware of no transaction requiring disclosure pursuant to this item during the past fiscal year except as stated herein. The following officers and directors were indebted to the Company on notes carrying an annual interest rate of 6.5% which were issued under the Company's Designated Employee Stock Purchase Plan, as referred to in Note 7 of the Notes to Consolidated Financial Statements: Highest Amount Outstanding During Amount the Year Ended Outstanding at September 30, 1998 November 30, 1998 ------------------ ----------------- Geoffrey D. Barefoot $ 83,206 $ 7,531 Edward J. Boyle 62,442 30,913 David J. DeCarlo 340,669 208,334 Steven F. Nicola 29,242 18,259 The Company has annually made supplemental management incentive payments to officers and other employees indebted on such notes in amounts equal to the interest paid by such persons on their respective notes. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: The following items are included in Part II, Item 8: Pages ----- Report of Independent Accountants 27 Consolidated Balance Sheet 28-29 Consolidated Statement of Income 30 Consolidated Statement of Shareholders' Equity 31 Consolidated Statement of Cash Flows 32 Notes to Consolidated Financial Statements 33-52 Supplementary Financial Information 53 2. Financial Statement Schedules: Financial statement schedules have been omitted for the reason that the information is not required or is otherwise given in the consolidated financial statements and notes thereto. 3. Exhibits Filed: The index to exhibits is on pages 67-69. (b) Reports on Form 8-K: A Form 8-K Current Report was filed by the Company on September 28, 1998 reporting under "Item 5 - Other Events" the Company's purchase of Gibraltar Mausoleum Construction Company, Inc. and the Company's purchase of a fifty percent interest in S&T Gesellschaft fur Reprotechnik mbH (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 18, 1998. MATTHEWS INTERNATIONAL CORPORATION ---------------------------------- (Registrant) By David M. Kelly ------------------------------------- David M. Kelly, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 18, 1998: David M. Kelly Edward J. Boyle - ------------------------------------ ------------------------------------ David M. Kelly Edward J. Boyle Chairman of the Board, President Vice President, Accounting & Finance, and Chief Executive Officer Treasurer and Secretary (Principal (Principal Executive Officer) Financial and Accounting Officer) Geoffrey D. Barefoot John P. O'Leary, Jr. - ------------------------------------ ------------------------------------ Geoffrey D. Barefoot, Director John P. O'Leary, Jr., Director David J. DeCarlo James L. Parker - ------------------------------------ ------------------------------------ David J. DeCarlo, Director James L. Parker, Director Robert J. Kavanaugh William J. Stallkamp - ------------------------------------ ------------------------------------ Robert J. Kavanaugh, Director William J. Stallkamp, Director Thomas N. Kennedy - ------------------------------------ Thomas N. Kennedy, Director MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES EXHIBITS INDEX ---------- The following Exhibits to this report are filed herewith or, if marked with an asterisk (*), are incorporated by reference. Exhibits marked with an "a" represent a management contract or compensatory plan, contract or arrangement required to be filed by Item 601(b)(10)(iii) of Regulation S-K. Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 3.1 Restated Articles of Incorporation * Exhibit Number 3.1 to Form 10-K for the year ended September 30, 1994 3.2 By-laws * Exhibit Number 3.2 to Form 10-K for the year ended September 30, 1994 4.1 a Form of Employee Stock Purchase Exhibit Number 4.1 to Form Agreement Entered into by 10-K for the year ended Designated Key Employees * September 30, 1983 4.2 a Form of Employee Stock Purchase Exhibit Number 4.2 to Form Agreement Entered into by 10-K for the year ended Designated Key Employees September 30, 1993 (effective October 1, 1993) * 4.3 a Representative Form of Option Exhibit Number 10.2 to Form Agreement of Repurchase * S-2 Registration Statement (No. 33-79538) filed on June 1, 1994 4.4 a Form of Revised Option Agreement Exhibit Number 4.2 to Form of Repurchase * 10-K for the year ended September 30, 1983 4.5 a Form of Revised Option Agreement Exhibit Number 4.5 to Form of Repurchase (effective 10-K for the year ended October 1, 1993) * September 30, 1993 4.6 a Employees' Stock Purchase Plan * Exhibit Number 4.6 to Form 10-K for the year ended September 30, 1993 4.7 Form of Share Certificate for Exhibit Number 4.9 to Form Class A Common Stock * 10-K for the year ended September 30, 1994 4.8 Form of Share Certificate for Exhibit Number 4.10 to Form Class B Common Stock * 10-K for the year ended September 30, 1994 INDEX, Continued ---------- Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 10.1 a Form of Agreement which amends the Exhibit Number 19.1 to Form Option Agreement of Repurchase with 10-Q for the quarter ended Respect to Major Shareholders * March 31, 1988 10.2 Revolving Credit and Term Loan Exhibit Number 10.7 to Form Agreement * 10-K for the year ended September 30, 1986 10.3 a Supplemental Retirement Plan * Exhibit Number 10.8 to Form 10-K for the year ended September 30, 1988 10.4 a Written Description of Matthews Exhibit Number 10.9 to Form International Corporation Management 10-K for the year ended Incentive Compensation Plan * September 30, 1992 10.5 a 1992 Stock Incentive Plan (as Exhibit A to Definitive amended through December 13, 1996) * Proxy Statement filed on January 22, 1997 10.6 a Form of Stock Option Agreement * Exhibit Number 10.1 to Form 10-Q for the quarter ended December 31, 1994 10.7 a 1994 Director Fee Plan (as Exhibit Number 10.11 to amended through March 14, 1997) * Form 10-K for the year ended September 30, 1998 10.8 a 1994 Employee Stock Purchase Plan * Exhibit Number 10.2 to Form 10-Q for the quarter ended March 31, 1995 10.9 Capital Stock Purchase Agreement, Exhibit Number 10.1 to Form Sunland Memorial Park, Inc. * 10-Q for the quarter ended December 31, 1995 10.10 Agreement of Plan and Merger, Exhibit Number 10.2 to Form Industrial Equipment and Engineering 10-Q for the quarter ended Company, Inc. * March 31, 1996 10.11 Asset Purchase Agreement among TKZ Exhibit Number 10.1 to Form Holding Corp., Tukaiz Litho, Inc. 10-Q for the quarter ended and Michael Vitallo * December 31, 1996 10.12 Membership Interest Agreement, Exhibit Number 10.2 to Form Tukaiz Communications L.L.C. * 10-Q for the quarter ended December 31, 1996 INDEX, Continued ---------- Exhibit Prior Filing or Sequential No. Description Page Numbers Herein - ------- ----------- -------------------------- 10.13 Subordinated Convertible Note from Exhibit Number 10.3 to Form Tukaiz Communications, L.L.C. in favor 10-Q for the quarter ended of Venetian Investment Corporation * December 31, 1996 10.14 Operating Agreement, Tukaiz Exhibit Number 10.4 to Form Communications, L.L.C. * 10-Q for the quarter ended December 31, 1996 10.15 Asset Purchase and Membership Exhibit Number 10.1 to Form Interest Agreement, O.N.E. Color 10-Q for the quarter ended Communications, L.L.C. * June 30, 1998 10.16 O.N.E. Color Communications, L.L.C., Exhibit Number 10.2 to Form Operating Agreement * 10-Q for the quarter ended June 30, 1998 10.17 Stock Purchase Agreement, S+T Filed Herewith Gesellschaft fur Reprotechnik mbH 10.18 Asset Purchase Agreement, Gibraltar Filed Herewith Mausoleum Construction Company, Inc. 21 Subsidiaries of the Registrant Filed Herewith 23 Consent of Independent Accountants Filed Herewith 27 Financial Data Schedule Filed Herewith (via EDGAR) Copies of any Exhibits will be furnished to shareholders upon written request. Requests should be directed to Mr. Edward J. Boyle, Vice President, Accounting & Finance, Treasurer and Secretary of the Registrant.