ITEM 1. BUSINESS.
Matthews International Corporation, founded in 1850 and incorporated in Pennsylvania in 1902, is a designer, manufacturer and marketer principally of custom-made products which are used to identify people, places, products and events. The Company's products and operations are comprised of three business segments: Bronze, Graphic Systems and Marking Products. The Bronze segment is a leading manufacturer of cast bronze memorial products, crematories and cremation-related products. The Graphic Systems segment manufactures and provides printing plates, pre-press services and imaging systems for the corrugated and flexible packaging industries. The Marking Products segment designs, manufactures and distributes a wide range of marking equipment and consumables for identifying various consumer and industrial products, components and packaging containers. The following table sets forth sales and operating profit for the three business segments of the Company for the past three fiscal years. Fiscal Year Ended September 30, -------------------------------------------------------- 1997 1996 1995 --------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Sales to unaffiliated customers: Bronze $ 96,384 50.9% $ 84,529 49.2% $ 80,032 48.0% Graphic Systems 57,804 30.6 43,062 25.0 42,360 25.4 Marking Products 34,981 18.5 44,387 25.8 44,356 26.6 ------- ----- ------- ----- ------- ----- Total $189,169 100.0% $171,978 100.0% $166,748 100.0% ======= ===== ======= ===== ======= =====
Operating profit: Bronze 22,579 73.1 20,072 75.0 18,171 74.3 Graphic Systems 5,507 17.8 4,217 15.7 4,254 17.4 Marking Products 2,801 9.1 2,482 9.3 2,033 8.3 ------- ----- ------- ----- ------- ----- Total $ 30,887 100.0% $ 26,771 100.0% $ 24,458 100.0% ======= ===== ======= ===== ======= =====
ITEM 1. BUSINESS, continued.
Detailed financial information relating to business segments and to foreign and domestic operations is presented in Note 14 (Segment Information) to the Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K.
In fiscal 1997, approximately 86% of the Company's sales were made from the United States, and 4%, 4% and 6% were made from Europe, Canada and Australia, respectively. Bronze operations are primarily conducted in the United States and Canada with 6% of the segment's revenues coming from Australia. Graphic Systems products are manufactured and primarily sold in the United States. Marking Products sells equipment and consumables directly to industrial consumers and through distributors throughout the world. This segment has manufacturing and marketing facilities in the United States, Canada, Sweden and the United Kingdom. Approximately 48% of Marking Products sales were made to locations outside the United States in fiscal 1997.
The Company employs approximately 1,500 people and has its principal executive offices at Two NorthShore Center, Pittsburgh, Pennsylvania 15212. Its telephone number is (412) 442-8200.
PRODUCTS AND MARKETS:
Bronze:
The Bronze segment manufactures and markets in the United States, Canada and Australia cast bronze memorial products used primarily in cemeteries. The segment also manufactures and markets cast bronze and aluminum architectural products used to identify or commemorate people, places and events. In addition, the segment manufactures and markets crematories and cremation-related products through a wholly-owned subsidiary, Industrial Equipment and Engineering Company (IEEC).
Memorial products, which comprise the majority of the Bronze segment's sales, include flush bronze memorials, flower vases, crypt letters, cremation urns, niche units and cemetery features, along with other related products. Flush bronze memorials, which represent approximately two-thirds of the segment's memorial product sales, are bronze plaques which contain vital information about a deceased individual such as name and birth and death dates. These memorials are used in cemeteries as an alternative to upright granite tombstones. The memorials are even or "flush" with the ground and therefore are preferred by many cemeteries for easier mowing and other maintenance. In order to provide products for the granite memorial market, the Company's other memorial products include granite tombstones as well as bronze plaques and letters that can be affixed to tombstones, mausoleums and crypts. Principal customers for memorial products are cemeteries and memorial parks, which in turn sell the Company's products to the consumer.
The Bronze segment manufactures a full line of memorial products for cremation, including urns in a variety of sizes, styles and shapes. In addition, the Company manufactures bronze niche units which are comprised of numerous compartments used to display cremation urns in mausoleums and churches.
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Bronze, continued:
Architectural products include cast bronze and aluminum plaques, etchings and letters that are used to recognize, commemorate and identify people, places, events and accomplishments. The Company's plaques are frequently used to identify the name of a building or the names of companies or individuals located within a building. Such products are also used to commemorate events or accomplishments, such as military service or financial donations. The principal markets for the segment's architectural products are corporations, fraternal organizations, contractors, churches, hospitals, schools and government agencies. These products are distributed through a network of independent dealers including sign suppliers, recognition companies and trophy dealers.
In March 1996, Matthews International Corporation acquired IEEC which is headquartered in Orlando, Florida and is the leading North American manufacturer of cremation equipment and cremation-related products. In August 1996, IEEC acquired the assets of All Crematory Corporation, which was also a manufacturer of cremation equipment. IEEC equipment and products are sold primarily to mortuary and cemetery facilities within North America and Europe.
Within the Bronze segment was a wholly-owned cemetery and mortuary facility, Sunland Memorial Park, Inc. ("Sunland"), located in Sun City, Arizona. Sunland was sold in January 1996. The revenues of Sunland represented approximately 7% of the Bronze segment's fiscal 1995 sales.
Raw materials used by the Bronze segment consist principally of bronze and aluminum ingot, sheet metal and coating materials and are generally available in adequate supply. Ingot is obtained from various North American and Australian smelters.
Graphic Systems:
The Graphic Systems segment provides printing plates, pre-press services and imaging systems to the corrugated and flexible packaging industries. The corrugated packaging industry consists of manufacturers of printed corrugated boxes and the flexible packaging industry consists of manufacturers of printed bags and other packaging products made of paper, film and foil.
The segment's principal products are printing plates used by corrugated packaging manufacturers to print corrugated boxes with graphics that help sell the packaged product and provide information such as product identification, logos, bar codes and other packaging detail specified by the manufacturer of the packaged product. The corrugated packaging manufacturer produces printed boxes by first combining linerboard with fluted paper to form a corrugated sheet. Using the Company's products, this sheet is then printed and die cut to make a finished box. The flexible packaging industry produces printed packaging from paper, film and foil, such as for food wrappers.
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Graphic Systems, continued:
The Company works closely with manufacturers to provide the proper printing plates and tooling used to print the packaging to the user's specifications. The segment's printing plate products are made from natural rubber, synthetic rubber or photopolymer resin. Upon customer request, plates can be pre-mounted press-ready in a variety of configurations that maximize print quality and minimize press set-up time.
The segment also provides creative art design services to manufacturers of corrugated and flexible packaging and to end users of such packaging. Other products and services include pre-press preparation, such as computer-generated camera-ready art, negatives, films and master patterns; plate mounting accessories for the corrugated industry; various press aids designed to improve print quality; rotary and flat cutting dies used to cut out intricately designed containers and point-of-purchase displays; and film masters used to print bar codes such as Universal Product Codes (known as "UPCs").
The Graphic Systems segment customer base consists primarily of packaging industry manufacturers and "national accounts." National accounts are generally large, well-known consumer goods companies with a national presence that purchase their printing plates directly. These companies then provide their printing plates to the packaging industry manufacturer of their choice.
On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz Litho, Inc. ("Tukaiz"), a leading pre-press and pre-media firm based in Franklin Park, Illinois. A pre-press firm prepares art or digital files for printing or reproduction. The combination of the Company's Graphic Systems business and Tukaiz is designed to create a leader in the graphics industry, providing a unique array of pre-press and pre-media services to ad agencies, manufacturers, printers and publishers. These services include creative design, audio, video, animation, multimedia, digital photography, web site service and on-demand digital printing.
On May 23, 1997, Matthews acquired the common stock of both Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services, flexible printing plates and steel rule cutting dies, located in North Carolina. The acquisitions are expected to increase Matthews' market share for these products in the southeast region of the United States.
On October 1, 1997, the Company acquired the assets of Western Plasti-Type Co. ("Western") and, on November 4, 1997, the common stock of Allied Reprographics, Inc. ("Allied"). Both Western and Allied are printing plate manufacturers located in Denver, Colorado. On November 3, 1997, the Company acquired the assets of Palomar Packaging ("Palomar"), a manufacturer of printing plates and steel-rule cutting dies, located near San Diego, California. The acquisitions of Western and Allied are designed to provide Matthews with a presence in the Colorado and surrounding markets which were not previously served by the Company. The acquisition of Palomar is designed to increase Matthews' presence in the growing marketplace for packaged products in southern California and northern Mexico.
ITEM 1. BUSINESS, continued.
PRODUCTS AND MARKETS, continued:
Graphic Systems, continued:
Major raw materials for this segment's products include rubber, photopolymer resin, film and graphic art supplies. All such materials are presently available in adequate supply from various industry sources.
Marking Products:
The Marking Products segment designs, manufactures and distributes a wide range of marking equipment and consumables used by customers to identify various consumer and industrial products, components and packaging containers. Marking products range from simple handstamps made from special alloy steel to sophisticated microprocessor-based ink-jet and impulse-jet printing systems. The Marking Products segment employs contact printing, indenting, ink-jet printing and impulse-jet printing to meet customer needs, sometimes using a combination of these marking methods.
A significant portion of the revenue of this segment is attributable to the sale of consumables, software and replacement parts in connection with the marking hardware sold by the Company. The Company develops inks in harmony with the marking equipment in which they are used, which is critical to assure ongoing equipment reliability and mark quality. Many marking equipment customers also use the Company's ink, solvents and cleaners.
The principal customers for the Company's marking products include food and beverage processors, metal fabricators, producers of health and beauty products and manufacturers of textiles, plastic and rubber products. A large percentage of the segment's sales are outside the United States and are distributed through the Company's wholly-owned subsidiaries in Canada, Sweden and France in addition to minority-owned companies in Asia, Australia, Germany and the United Kingdom.
The marking products industry is fragmented, with many companies having limited product lines which focus on well-defined specialty markets. Other industry participants, like the Company, have broad product offerings and compete in various product markets and countries. In the United States, the Company has been supplying marking products for over 140 years.
Major raw materials for this segment's products include printing components, tool steels, rubber and chemicals, all of which are presently available in adequate supply from various sources.
ITEM 1. BUSINESS, continued.
COMPETITION:
Bronze:
Competition from other bronze memorial manufacturers, which is intense, is on the basis of product quality, delivery, price and design availability. The Company also competes with upright granite tombstone and flush granite memorial providers. The Company and its two major competitors account for a substantial portion of the bronze memorial market. The Company believes that its superior quality, broad product lines, innovative designs, delivery capability, customer responsiveness, experienced personnel and customer oriented merchandising systems are competitive advantages in its markets. Competitors in the architectural market are numerous and include companies that manufacture cast and painted signs, plastic materials and other fabricated products. The Company competes with several manufacturers in the crematory market principally on the basis of product quality and price.
Graphic Systems:
Graphic Systems is one of several manufacturers of printing plates with a national presence and competes in a fragmented industry consisting of a few multi-plant regional printing plate suppliers and a large number of local one-plant companies located across the United States. Competition is on the basis of price, timeliness of delivery and product quality. The Company differentiates itself from the competition by meeting customer demands and by distinguishing itself as an innovator of new products.
Marking Products:
Competition is intense and based on product performance, service and price. The Company normally competes with specialty companies in specific marking applications. The Company believes that, in general, it has the broadest lines of marking products to address industrial marking applications.
PATENTS, TRADEMARKS AND LICENSES:
The Company holds a number of domestic and foreign patents and trademarks. However, the Company believes the loss of any or a significant number of patents or trademarks would not have a material impact on operations or revenues.
BACKLOG:
Because the nature of the Company's business is custom products made to order with short lead times, backlogs are not generally material in any segment of the Company's operations except for IEEC and Marking Products. Backlogs in IEEC generally vary in the range of four to six months of sales. Backlogs in the Marking Products segment can vary in a range up to six weeks of sales.
ITEM 1. BUSINESS, continued.
REGULATORY MATTERS:
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company believes that its current operations are in material compliance with all presently applicable environmental laws and regulations. The Company's expenditures for environmental compliance have not had, nor are they presently expected to have, a material adverse effect on the Company.
The Clean Air Act Amendments of 1990 are not expected to impact two of the Company's operating segments, Graphic Systems and Marking Products. In the United States, the Company's Bronze segment operates four nonferrous foundries, none of which is within the "major source" industry category as defined by the Environmental Protection Agency. As such, it is believed that the Bronze segment operations will be regulated as "area sources" at certain locations. No material capital expenditures are anticipated within the next few years as a result of the Clean Air Act Amendments.
Like most nonferrous foundry operations, the Company's plants produce a significant volume of residual materials as a result of the bronze casting process. Chief among these is spent foundry sands. Currently, the majority of these materials, including foundry sands, are regulated as solid waste under most state and federal laws. Pursuant to the Resource Conservation and Recovery Act, the Company is regulated as a generator of hazardous waste, and all plants are registered with the Environmental Protection Agency in accordance with applicable regulations. The Company has implemented detailed plans and procedures for waste management at each of its Bronze operating plants in the United States.
ITEM 2.
ITEM 2. PROPERTIES.
The principal properties of the Company are as follows (properties are owned by the Company except as noted):
Location Description of Property Square Feet - -------- ----------------------- ----------- Bronze: Pittsburgh, PA Manufacturing / Division Offices 94,000 Apopka, FL Manufacturing 40,000 Melbourne, Australia Manufacturing 26,000(1) Milton, Ontario, Canada Manufacturing 30,000 Nashotah, WI Sales 8,000(1) Searcy, AR Manufacturing 84,000 Seneca Falls, NY Manufacturing 21,000 Sun City, CA Manufacturing 24,000
Graphics Systems: Pittsburgh, PA Manufacturing / Division Offices 56,000 Atlanta, GA Manufacturing 16,000 Cranberry Twp., PA Manufacturing 15,000(1) Dallas, TX Manufacturing 15,000(1) Denver, CO Manufacturing 12,000(1) Escondido, CA Manufacturing 9,700(1) High Point, NC Manufacturing 34,700(1) LaPalma, CA Manufacturing 22,000 Orlando, FL Manufacturing 2,000(1) Randolph, MA Manufacturing 2,500(1) St. Louis, MO Manufacturing 24,000
Marking Products: Pittsburgh, PA Manufacturing / Division Offices 67,000 Pittsburgh, PA Ink Manufacturing 18,000 Gothenburg, Sweden Manufacturing / Distribution 28,000(1) Pontoise, France Distribution 8,600(1)
Corporate Office: Pittsburgh, PA General Offices 48,000(2)
(1) These properties are leased by the Company under operating lease arrangements. Rent expense incurred by the Company for these facilities was approximately $806,000 in fiscal 1997.
(2) The Company uses approximately one-third of this building and leases, or offers to lease, the remainder to unrelated parties.
All of the owned properties are unencumbered. The Company believes its facilities are generally well suited for their respective uses and are of adequate size and design to provide the operating efficiencies necessary for the Company to be competitive. The Company's facilities provide adequate space for meeting its near term production requirements and have availability for additional capacity. The Company intends to continue to expand and modernize its facilities as necessary to meet the demand for its products.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings generally incidental to its business. The eventual outcome of these matters is not predictable and it is possible that their resolution could be unfavorable to the Company. Although the ultimate disposition of these proceedings is not presently determinable, management is of the opinion, based on the facts now known, that the matters should not result in liabilities in an amount which would materially affect the consolidated financial position, annual results of operations or cash flows of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal year 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information:
The authorized common stock of the Company is divided into two classes consisting of Class A Common Stock, $1 par value, and Class B Common Stock, $1 par value. The Company's Class A Common Stock is traded on the NASDAQ National Market System. The following table sets forth the high, low and closing prices as reported by NASDAQ for the periods indicated:
High Low Close ---- --- ----- Fiscal 1997: Quarter ended: September 30, 1997 $41.25 $34.75 $39.75 June 30, 1997 35.50 28.875 35.50 March 31, 1997 31.00 28.25 30.50 December 31, 1996 30.75 27.75 29.25
Fiscal 1996: Quarter ended: September 30, 1996 $30.50 $27.125 $28.25 June 30, 1996 29.50 25.50 27.50 March 31, 1996 27.25 18.625 26.75 December 31, 1995 20.25 18.50 19.50
Shares of Class A stock have one vote per share and are freely transferable subject to applicable securities laws. Shares of Class B stock have ten votes per share and are only transferable by a shareholder to the Company or to an active employee of the Company. If shareholders wish to otherwise sell Class B Common Stock, the Company may, at its discretion, purchase such shares at the fair market value per share of the Company's Class A Common Stock or permit shareholders to tender such shares to the Company in exchange for an equal number of shares of Class A Common Stock.
In fiscal 1996, the Company initiated a limited stock repurchase program authorizing the repurchase of up to 500,000 shares of Class A and Class B Common Stock. In March 1997, the Company announced a continuation of the program and authorized the repurchase of up to an additional 500,000 shares of Class A and Class B Common Stock. The original stock repurchase program initiated in fiscal 1996 has been completed. In conjunction with the fiscal 1996 buy-back program, the Company invoked the provisions of the Fifth Article of its Restated Articles of Incorporation. Such Article provides (among other things) that any shareholder wishing to sell or convert any Class B common shares must first offer such shares to the Company for redemption. The Company will then have an option to purchase such shares for a 24-hour period. Repurchased shares may be retained in treasury, utilized for acquisitions, or reissued to employees or other purchasers, subject to the restrictions of the Restated Articles of Incorporation.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, continued.
(b) Holders:
The number of registered holders of the Company's common stock at November 30, 1997 was as follows: Class A Common Stock 454 Class B Common Stock 317
(c) Dividends:
A quarterly dividend of $.085 per share was paid for the fourth quarter of fiscal 1997 to shareholders of record on October 31, 1997. The Company paid quarterly dividends of $.08 per share for the first three quarters of fiscal 1997 and the fourth quarter of fiscal 1996. The Company paid quarterly dividends of $.07 per share for the first three quarters of fiscal 1996.
Cash dividends have been paid on common shares in every year for at least the past thirty years. It is the present intention of the Company to continue to pay quarterly cash dividends on its common stock. However, there is no assurance that dividends will be declared and paid as the declaration and payment of dividends is at the discretion of the Board of Directors of the Company and is dependent upon the Company's financial condition, results of operations, cash requirements, future prospects and other factors deemed relevant by the Board.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
MATTHEWS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME for the years ended September 30, 1997, 1996 and 1995 ----------
Prepaid and accrued pension costs are included in other assets and other liabilities, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides certain health care and life insurance benefits for substantially all retired employees. These health and life insurance benefits are unfunded and are provided through an insurance company. Employees are assumed to be eligible for these retiree benefits generally after attaining age 55 where age plus years of service equal at least 75.
The following table sets forth the plan's funded status reconciled with the amount shown in the Company's consolidated balance sheet at September 30:
1997 1996 ---- ---- Accumulated postretirement benefit obligation: Retirees $ 4,528,254 $ 5,222,939 Fully eligible active plan participants 2,439,756 1,032,226 Other active plan participants 3,353,216 4,952,054 ---------- ---------- 10,321,226 11,207,219
Unrecognized prior service cost 12,785,782 13,794,853 Unrecognized net loss (1,803,801) (3,051,072) ---------- ---------- Accumulated postretirement benefit obligation 21,303,207 21,951,000
Current portion 626,925 945,933 ---------- ---------- $20,676,282 $21,005,067 ========== ==========
Net periodic postretirement benefit cost included the following components:
1997 1996 1995 ---- ---- ---- Service cost - benefits attributed to employee service during the year $ 268,835 $ 441,330 $ 472,206 Interest cost on accumulated postretirement benefit obligation 855,587 1,719,158 1,632,554 Net amortization (888,517) (29,663) - --------- --------- --------- Net periodic postretirement benefit cost $ 235,905 $2,130,825 $2,104,760 ========= ========= =========
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%, 8.0% and 8.25% at September 30, 1997, 1996 and 1995, respectively. The rate for compensation increases at September 30, 1997, 1996 and 1995 was 4.5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, continued:
For measurement purposes, a 6.9% annual rate of increase in the per capita cost of health care benefits was assumed for 1997; the rate was assumed to decrease gradually to 5.0% for 2003 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. An increase in the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of September 30, 1997 by 4.4% and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by 7.2%.
In September 1996, the Board of Directors approved changes to the retiree medical plan which provides additional plan options while limiting future Company contributions to retiree benefits.
11. INCOME TAXES:
The provision for income taxes consisted of the following:
1997 1996 1995 ---- ---- ---- Current: Federal $ 9,245,044 $10,244,785 $ 8,430,866 State 1,815,067 1,675,200 1,886,148 Foreign 1,533,969 1,027,798 624,294 ---------- ---------- ---------- 12,594,080 12,947,783 10,941,308 Deferred 77,753 317,279 (1,313,280) ---------- ---------- ---------- Total $12,671,833 $13,265,062 $ 9,628,028 ========== ========== ==========
The reconciliation of the federal statutory tax rate to the consolidated effective tax rate is as follows: 1997 1996 1995 ---- ---- ---- Federal statutory tax rate 35.0 % 35.0 % 35.0 % Effect of state income taxes, net of federal deduction 3.2 3.3 4.5 Foreign taxes in excess of federal statutory rates 1.7 .8 ( .9) Other ( .7) .5 ( .2) ---- ---- ---- Effective tax rate 39.2 % 39.6 % 38.4 % ==== ==== ====
The Company's foreign subsidiaries had income (losses) before income taxes for the years ended September 30, 1997, 1996 and 1995 of approximately $2,825,000, $(3,377,000) and $462,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
11. INCOME TAXES, continued:
The components of the provision for deferred income taxes were as follows:
1997 1996 1995 ---- ---- ---- Accrued vacation pay $ (8,836) $ (136,489) $ 2,143 Estimated finishing costs (145,346) 52,712 (76,880) Postretirement benefits other than pensions 246,309 (342,382) (535,508) Installment sales - 1,092,937 (75,760) Foreign subsidiary losses, net 450,000 236,821 (495,546) Pension costs (156,090) (116,887) (75,134) Depreciation (51,919) (233,522) (15,661) Deferred gain on sale of facilities (30,274) (31,664) (22,186) Other (226,091) (204,247) (18,748) ---------- ---------- ---------- $ 77,753 $ 317,279 $(1,313,280) ========== ========== ==========
The components of the net deferred tax asset at September 30 were as follows:
1997 1996 ---- ---- Deferred tax assets: Accrued vacation pay $ 765,951 $ 757,115 Estimated finishing costs 807,633 662,287 Postretirement benefits other than pensions 8,308,252 8,554,561 Foreign subsidiary losses, net 500,000 950,000 Unrealized investment loss 52,260 272,780 Other 648,014 461,113 ---------- ---------- 11,082,110 11,657,856 ---------- ---------- Deferred tax liabilities: Pension costs (682,188) (838,278) Depreciation (2,789,525) (2,841,444) Deferred gain on sale of facilities (584,388) (614,662) ---------- ---------- (4,056,101) (4,294,384) ---------- ---------- Net deferred tax asset 7,026,009 7,363,472
Less current portion 865,082 886,450 ---------- ---------- $ 6,160,927 $ 6,477,022 ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
11. INCOME TAXES, continued:
At September 30, 1997, the Company had foreign net operating loss carryforwards of approximately $3,200,000, principally related to its European subsidiaries. Approximately $400,000 of these carryforwards expire between 2002 and 2003, while the remainder have an indefinite carryforward period. The Company has recorded a valuation allowance of approximately $500,000 and $950,000 at September 30, 1997 and 1996, respectively, related to the carryforwards.
12. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company operates various production and office facilities and equipment under operating lease agreements. Annual rentals under these and other operating leases were $2,262,000, $2,130,000 and $2,089,000 in 1997, 1996 and 1995, respectively. Future minimum rental commitments are not material.
The Company is party to various legal proceedings generally incidental to its business. The eventual outcome of these matters is not predictable, and it is possible that their resolution could be unfavorable to the Company. Although the ultimate disposition of these proceedings is not presently determinable, management is of the opinion, based on the facts now known, that they should not result in liabilities in an amount which would materially affect the Company's consolidated financial position, results of operations or cash flows.
Tukaiz has employment agreements with certain key employees, the terms of which expire at January 31, 2001 and 2002. The agreements provide for base salary levels and benefits and include a non-compete clause. The aggregate commitment for salaries under these agreements at September 30, 1997 was $2,650,000.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
On March 25, 1996, the Company issued 213,862 shares of authorized Class A Common Stock, valued at $5,400,000, in connection with the acquisition of Industrial Equipment and Engineering Company, Inc. (See Note 15). On May 6, 1996, the Company issued 19,286 shares of authorized Class A Common Stock, valued at $527,975, in connection with the purchase of an additional 9% interest in ATD (See Note 4).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
13. SUPPLEMENTAL CASH FLOW INFORMATION, continued:
Changes in working capital items (excluding cash and cash equivalents, short-term investments, deferred income taxes, long-term debt, current maturities and postretirement benefits, current portion) consisted of the following: 1997 1996 1995 ---- ---- ---- Current assets: Accounts and notes receivable $ (985,433) $ 2,463,712 $(1,392,991) Inventories 2,087,337 (571,217) (581,459) Other current assets (61,624) (770,017) 313,179 ---------- --------- --------- 1,040,280 1,122,478 (1,661,271) ---------- --------- --------- Current liabilities: Trade accounts payable (1,012,648) 737,433 482,320 Accrued compensation 2,010,941 326,942 (12,309) Accrued vacation pay 56,238 197,241 (21,194) Profit distribution to employees (112,274) (239,942) (333,407) Accrued income taxes 1,991,625 (252,243) (82,572) Customer prepayments 5,822,563 (177,754) 21,984 Other current liabilities 253,279 587,333 1,008,552 ---------- --------- --------- 9,009,724 1,179,010 1,063,374 ---------- --------- --------- Net increase (decrease) $10,050,004 $ 2,301,488 $ (597,897) ========== ========= =========
14. SEGMENT INFORMATION:
Sales and operating profit of the Company's business segments follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
14. SEGMENT INFORMATION, continued:
Information related to assets identifiable to segments follows:
Information about the Company's operations in different geographic areas follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
14. SEGMENT INFORMATION, continued:
Intersegment sales are accounted for at negotiated prices. Operating profit is total revenue less operating expenses.
Identifiable assets include those assets which are used in the Company's operations in each segment. Corporate headquarters' assets are included in Other and principally consist of cash and cash equivalents, investments, deferred tax assets and the headquarters' administration building.
15. ACQUISITIONS AND DISPOSITIONS:
On January 31, 1997, Matthews International Corporation acquired 50% of Tukaiz Litho, Inc. ("Tukaiz"), a pre-press and pre-media firm headquartered in Franklin Park, Illinois. The remaining 50% will continue to be owned by the existing president and chief executive officer of Tukaiz. The transaction was structured as an asset purchase with the purchase price consisting of $4,000,000 cash and the assumption of a 50% interest, approximately $4,000,000, in certain of the liabilities of Tukaiz. The parties have each contributed their respective 50% interests into a newly-formed Illinois limited liability company, Tukaiz Communications, L.L.C. Matthews also provided the new company with subordinated convertible debt of $5,500,000. Matthews has accounted for this acquisition using the purchase method and, accordingly, has recorded the acquired assets and liabilities at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets was recorded as goodwill to be amortized on a straight-line basis over 25 years. Tukaiz reported sales of $16,400,000 for the year ended January 31, 1997. The accounts of Tukaiz have been included in the consolidated financial statements of Matthews.
On May 23, 1997, Matthews acquired for $2,400,000 cash the common stock of both Carolina Repro-Graphic and Dieworks, Inc., manufacturers of pre-press services, flexible printing plates and steel rule cutting dies, located in North Carolina. Matthews has accounted for these acquisitions using the purchase method and, accordingly, has recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of the net assets was recorded as goodwill to be amortized on a straight-line basis over 25 years. Combined sales for Carolina Repro-Graphic and Dieworks, Inc. were approximately $3,700,000 for the year ended December 31, 1996.
On March 25, 1996, Matthews International Corporation acquired Industrial Equipment and Engineering Company, Inc., a Florida corporation ("IEEC"), for 213,862 shares of Matthews Class A Common Stock (valued at $5,400,000) and $3,600,000 cash. The Company has accounted for this acquisition using the purchase method and, accordingly, has recorded the acquired assets and liabilities at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets was recorded as goodwill to be amortized on a straight-line basis over 20 years. Sales of IEEC for the year ended December 31, 1995 were $7,500,000. On August 1, 1996, IEEC acquired for cash substantially all of the assets and certain of the liabilities of All Crematory Corporation. The total purchase price, including the assumption of liabilities, was $2,000,000. Sales of All Crematory Corporation for the year ended September 30, 1995 were $3,400,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
15. ACQUISITIONS AND DISPOSITIONS, continued:
On January 5, 1996, Matthews International Corporation sold for $13,100,000 cash its cemetery and mortuary facility (Sunland Memorial Park, Inc.) in Sun City, Arizona to Service Corporation International. Matthews recorded a pre-tax gain in the fiscal 1996 second quarter of $9,400,000 on the sale which was recorded in other income. Sunland Memorial Park, Inc., which was purchased in 1982, was the only such facility owned by the Company. The facility had sales in fiscal year 1995 of approximately $5,000,000, representing about 3 percent of the consolidated sales of the Company.
In September 1996, the Company authorized the liquidation of its German subsidiary and recorded a pre-tax charge to other expense of $1,200,000 in connection with the transaction. The transaction had no impact on the Company's fiscal 1996 net income due to the tax benefits related to the write-off of an intercompany loan and investment. The German subsidiary had sales of $4,200,000 with an operating loss of $970,000 in fiscal 1996.
16. SUBSEQUENT EVENTS:
On October 1, 1997, the Company acquired for $480,000 cash the assets of Western Plasti-Type Co. ("Western"). On November 4, 1997, the Company acquired the common stock of Allied Reprographics, Inc. ("Allied") for $700,000 cash. Both Western and Allied are printing plate manufacturers located in Denver, Colorado. On November 3, 1997, the Company acquired for $1,400,000 cash the assets of Palomar Packaging ("Palomar"), a manufacturer of printing plates and steel-rule cutting dies, located near San Diego, California. An additional amount up to $880,000 may be payable for Palomar during the five-year period from the acquisition date contingent on the attainment of certain operating performance levels. The Company will account for these acquisitions using the purchase method and, accordingly, record the acquired assets and liabilities at their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of the net assets will be recorded as goodwill to be amortized on a straight-line basis over 25 years.
17. FASB PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The pronouncement establishes standards for computing and presenting earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. Computations of basic and diluted earnings per share for the Company will not differ materially from the current computations of primary and fully-diluted earnings per share. The required dual presentation of basic and diluted earnings per share will be adopted by the Company for the quarter ended December 31, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
17. FASB PRONOUNCEMENTS, continued:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The pronouncement establishes standards for reporting information about operating segments of an enterprise. The pronouncement requires the disclosure of selected segment information in interim financial reports. SFAS No. 131 will not impact the current presentation of the Company's segment information. The interim presentation requirement of the pronouncement will be adopted by the Company in the first quarter of fiscal 1999.
SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Financial Data (Unaudited):
The following table sets forth certain items included in the Company's unaudited consolidated financial statements for each quarter of fiscal 1997 and fiscal 1996.
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
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Value of Unexercised Shares Securities Underlying In-the-Money Options Acquired Unexercised Options at Fiscal Year End On Value -------------------------- -------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------- ---------- ---------- ----------- ------------- ----------- -------------
D.M. Kelly None None 123,334 106,666 $2,673,759 $1,278,115 D.J. DeCarlo None None 56,334 131,666 1,286,884 1,561,240 G.D. Barefoot None None 42,000 5,000 958,750 69,375 E.J. Boyle None None 26,834 25,166 577,946 305,615 R.C. Johnson None None 26,167 16,833 568,691 206,995 /TABLE
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, 1997 and rounded to the next higher year, are: Mr. Kelly, 3 years; Mr. DeCarlo, 13 years; Mr. Barefoot, 22 years; Mr. Boyle, 11 years and Mr. Johnson, 10 years.
Compensation Committee Interlocks and Insider Participation:
Thomas N. Kennedy, a former officer of the Company, is a member of the Company's Compensation Committee.
Compensation of Directors:
Pursuant to the Director Fee Plan, directors who are not also officers of the Company each receive as a annual retainer fee shares of the Company's Class A Common Stock equivalent to approximately $16,000. Each director may elect to be paid these shares on a current basis or have such shares credited to a deferred stock account as phantom stock. In addition, each such director is paid $800 for every meeting of the Board of Directors attended and (other than a Chairman) $500 for every committee meeting attended. The Chairman of a committee of the Board of Directors is paid $700 for every committee meeting attended. No other remuneration is otherwise paid by the Company to any director for services as a director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Management:
The Company's Articles of Incorporation divide its voting stock into three classes: Preferred Stock and Class A and Class B Common Stock. At the present time, none of the Preferred Stock is issued or outstanding. The following information is furnished with respect to persons who the Company believes, based on its records, beneficially own more than five percent of the outstanding shares of Class A and Class B Common Stock of the Company, and with respect to directors and officers. Those individuals with more than five percent of such shares could be deemed to be "control persons" of the Company.
This information is as of November 30, 1997.
Number of Number of Class A Shares Class B Shares Name of Beneficially Percent Beneficially Percent Beneficial Owner (1) Owned (2) of Class Owned (2) of Class - ---------------- -------------- -------- -------------- -------- Directors and Officers: - ---------------------- D.M. Kelly 27,000 0.4% 28,000 1.5% G.D. Barefoot None - 104,500 5.6 W.A. Coates 17,572 0.3 None - D.J. DeCarlo None - 144,995 7.8 T.N. Kennedy 45,490 0.7 None - J.P. O'Leary, Jr. 5,750 0.1 None - J.L. Parker 199,760 3.1 None - W.J. Stallkamp 3,100 * None - All directors and executive officers as a group (11 persons) 298,672 4.6 354,845 19.1
Others: - ------ W. Hauber 423,300 6.6 None - D. Majestic None - 156,000 8.4 R. Buzza None - 103,250 5.6
* Less than 0.1%
(1) The mailing address of each beneficial owner is the same as that of the Registrant.
(2) The nature of the beneficial ownership for all shares is sole voting and investment power, except for 100 Class A shares held by Mr. Stallkamp as custodian under UTMA for son.
(c) Changes in Control:
The Company knows of no arrangement which may, at a subsequent date, result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Securities and Exchange Commission requires disclosure of certain business transactions or relationships between the Company, or its subsidiaries, and other organizations with which any of the Company's directors are affiliated as an owner, partner, director, officer or employee. Briefly, disclosure is required where such a business transaction or relationship meets the standards of significance established by the Securities and Exchange Commission with respect to the types and amounts of business transacted. The Company is aware of no transaction requiring disclosure pursuant to this item during the past fiscal year except as stated herein.
The following officers and directors were indebted to the Company on notes carrying annual interest rates of 6.5% were issued under the Company's Designated Employee Stock Purchase Plan, as referred to in Note 7 of the Notes to Consolidated Financial Statements:
Highest Amount Outstanding During Amount the Year Ended Outstanding at September 30, 1997 November 30, 1997 ------------------ ----------------- Geoffrey D. Barefoot $ 143,436 $ 70,373 Edward J. Boyle 88,125 57,064 David J. DeCarlo 446,670 317,960 Richard C. Johnson 96,373 - Steven F. Nicola 38,104 27,336
The Company has annually made supplemental management incentive payments to officers and other employees indebted on such notes in amounts equal to the interest paid by such persons on their respective notes.
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: