-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ig6FtwAJAEPeWu3E094CRCsP0j4INHd7qqAJ/YcHdL9RQUyme0qfl2T6Sey3bVrH ovvK/apgfTlx05hjPtQwLg== 0000950123-98-003203.txt : 19980401 0000950123-98-003203.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950123-98-003203 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAXAR CORP CENTRAL INDEX KEY: 0000075681 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 135670050 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09493 FILM NUMBER: 98582220 BUSINESS ADDRESS: STREET 1: 105 CORPORATE PARK DRIVE CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146976800 FORMER COMPANY: FORMER CONFORMED NAME: PACKAGING SYSTEMS CORP DATE OF NAME CHANGE: 19870401 10-K 1 PAXAR CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to COMMISSION FILE NUMBER 0-5610 PAXAR CORPORATION (Exact name of Registrant as Specified in its Charter) NEW YORK 13-5670050 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 105 CORPORATE PARK DRIVE, WHITE PLAINS, NEW YORK 10604 (Address of Principal Executive Offices) 914-697-6800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Each Exchange on Which Registered Common Stock, par value $.10 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) 2 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. X ___ ___ Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the registrant's Common Stock held by non-affiliates of the Registrant as of March 25, 1998 was approximately $565,470,000. On such date, the closing price of the Registrant's Common Stock, as quoted on the New York Stock Exchange, was $15.00. The Registrant had 48,505,222 shares of Common Stock outstanding as of March 25, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is herein incorporated by reference from the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission with respect to the Registrant's Annual Meeting of Shareholders scheduled to be held on May 1, 1998. 3 PART I ITEM 1: BUSINESS GENERAL DEVELOPMENT OF BUSINESS Paxar Corporation ("Paxar" or the "Company") is a leading provider of identification and tracking systems to every segment of the retail supply chain from manufacturers through distribution centers to the retail store. Paxar's global manufacturing operations, worldwide distribution network, one-stop-shopping approach and brand recognition are enabling the Company to expand its leading position in apparel identification and printing solutions to the retail supply chain. The Company markets and distributes its products in more than 75 countries. The Company's Apparel Identification operations manufacture products for and provide services specifically to the apparel and textile industries. Label systems, consisting mainly of hot-stamp printers and related supplies and services, are sold to Company customers for in-plant label printing. Bar code systems, consisting of electronic printers and related supplies and services, are used by customers to print data on labels and tags to provide accurate product, inventory and point of sale information for integration with sophisticated data systems. Labels and tags are attached to apparel by manufacturers and retailers to identify and promote their products, allow automated data collection and provide brand identification and consumer information such as size, fabric content and care instructions. Labels are attached to garments early in the manufacturing process and must withstand all production processes and remain legible through washing and dry cleaning by the end user. To a limited extent, the Company's products also include tags and labels for sheets, towels, pillow cases and other white goods. The Company's Printing Solutions operations market and distribute (i) hand-held, mechanical labeling devices ("IPS labelers") that print pressure-sensitive (i.e., adhesive backed) price and other identification labels and affix them onto merchandise for retailers, and (ii) electronic bar code printers ("AIS printers"), which are used in a wide range of retail and industrial applications, including inventory management and distribution systems. It is also the largest manufacturer in North America of thermal transfer ribbons for numerous diverse applications. These thermal transfer ribbons are used in bar code printers to print single-color and full-color tags and labels for use in manufacturing and factory automation systems, shipping and distribution systems, retail price tag, packaging and medical applications. In addition to thermal transfer ribbons, the Company manufactures and markets other supplies used in both its IPS labelers and AIS printers and provides extensive service to its installed base of machines. During the past five years, Paxar has made several strategic foreign and domestic acquisitions that have enabled it to expand the international operations of its Apparel Identification business and to develop its Printing Solutions business. FOREIGN ACQUISITIONS. Italy: In May 1994, the Company acquired the corporate capital of Collitex S.r.l. ("Collitex") and the corporate capital of Astria S.r.l. ("Astria"), two related Italian companies in the woven label business. The Collitex and Astria acquisitions provided the Company with European-based woven label manufacturing capability. In October 1994, the Company acquired the corporate capital of Orvafin S.r.l. ("Orvafin"), an Italian company engaged in the production and distribution of inks and coated fabrics for labeling systems. The Orvafin acquisition provided the Company with additional manufacturing capacity for these products as well as access to a complementary distribution network. England: In January 1996, the Company acquired all of the outstanding stock of Brian Pulfrey Limited, which has changed its name to Paxar Graphics Ltd. Paxar Graphics Ltd. manufactures printed labels and tags. In addition, Paxar Graphics Ltd. sells woven labels and operates a service bureau for quick response to its customer's needs for labels and tags with 4 variable information. Brazil: In January 1997, the Company organized Paxar do Brasil Ltda. ("Paxar do Brasil") to acquire a 70% interest in the business of Label Systems Industria Commercio Importacao Exportacao Ltda., with an option to acquire the remaining 30% interest. Label Systems had been a distributor of Paxar's apparel systems since 1994. The Company believes that the establishment of Paxar do Brasil strategically positions the Company to increase exports to Brazil and expand operations further into South America. Colombia: In December 1997, the Company acquired a 51% interest in Disisit, Sistemas de Marcado S.A. ("Disisit"), located in Colombia, with an option to acquire the remaining 49% interest from the minority shareholders. Disisit had been a distributor of Paxar's apparel systems and Monarch's IPS and AIS systems for over 15 years in the Andean Community comprising Colombia, Venezuela, Peru, Ecuador and Bolivia. The Company believes that its acquisition of Disisit will complement its operations in Mexico and Brazil. Turkey: In February 1998, the Company acquired a 70% interest in Teslo Tekstil Urunleri Sanayii ve Ticaret A.S. ("Teslo"), a Turkish company, with an option to acquire the remaining 30% from the minority shareholders. Teslo offers a comprehensive range of apparel identification products to Turkish, European and U.S. customers, and its facilities include manufacturing and service bureau operations in addition to sales and marketing. The Company believes that the acquisition of Teslo will help it to expand rapidly into the strategically important market on the edge of Europe and to provide a base for further expansion in the region. DOMESTIC ACQUISITIONS. Monarch Marking Systems, Inc.: In June 1995, the Company acquired a 49.5% equity interest in Monarch Marking Systems, Inc. ("Monarch") through Monarch Holdings, Inc. ("Holdings"), a joint venture between the Company and Odyssey Partners, L.P. ("Odyssey"), formed to acquire all of the outstanding capital stock of Monarch. The Company acquired its equity interest in Holdings for $15 million. Thomas Loemker, a Director of the Company and the then Chairman of the Board of Monarch, acquired a 1% equity interest in Holdings, and Odyssey acquired the remaining 49.5% equity interest in Holdings. The equity interests of the Company and Odyssey were subsequently reduced to 49% as a result of the purchase of shares of Holdings common stock by John W. Paxton, Monarch's Chief Executive Officer, who was elected a Director of the Company in 1997. On March 3, 1997, the Company acquired Odyssey's equity interest in Holdings for (i) $94,083,750 in cash, (ii) a promissory note in the amount of $5,907,559 at an annual interest rate of 4.88%, payable on January 2, 1998 secured by a letter of credit issued by Fleet Bank, N.A. and (iii) five-year warrants (the "Warrants") to purchase a total of 1,500,000 shares of Paxar Common Stock. Immediately following the closing of the acquisition, the Company caused Holdings to be merged with and into the Company, and as a result of the merger, Monarch became a wholly-owned subsidiary of the Company. In connection with the merger, Messrs. Loemker and Paxton each received 156,536 shares of the Company's Common Stock in exchange for their equity interests in Holdings. Monarch manufactures, markets and distributes IPS labelers, AIS printers and related supplies. It also manufactures and markets supplies used in both its IPS labelers and AIS printers and provides extensive service to its installed base of machines. Monarch is a leading manufacturer and marketer of retail price marking equipment and supplies in the United States. Monarch also sells its products directly and through distributors in 75 other countries. International Imaging Systems, Inc: On October 28, 1997, Paxar completed the merger of International Imaging Materials, Inc. ("IIMAK") with a wholly- -2- 5 owned subsidiary of the Company, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 15, 1997. IIMAK is now a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, each share of IIMAK common stock was converted into 1.5 shares of the Company's Common Stock. In addition, each outstanding option and warrant to purchase IIMAK common stock was converted into an option or warrant to purchase 1.5 shares of the Company's Common Stock and became immediately exercisable. The Company issued 12,431,757 shares of its common stock to IIMAK stockholders in the Merger, representing approximately 25.7% of the Company's Common Stock outstanding following consummation of the Merger, and assumed options and warrants to purchase IIMAK common stock that were converted into options and warrants to purchase approximately 1,937,055 shares of the Company's common stock. IIMAK is the largest manufacturer in North America of thermal transfer ribbons for numerous diverse applications. These thermal transfer ribbons are used in bar code printers to print single-color and full-color tags and labels for use in manufacturing and factory automation systems, shipping and distribution systems, retail price tag, packaging and medical applications. Other thermal transfer ribbons produced by IIMAK are used in full-color printers to print high quality color graphics for business presentations, engineering and scientific drawings, graphic arts prepress layouts, signage and other full-color imaging applications. IIMAK also manufactures MICR ribbons for thermal transfer proof encoders used to encode checks for processing through the United States banking system, as well as ribbons used in plain-paper thermal transfer facsimile machines. The acquisitions of Monarch and IIMAK have given the Company the capacity to offer a full range of printing solutions, which both enhances its Apparel Identification business and permits the Company to expand into complementary fields. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The information required by this Item is incorporated by reference to the Company's Financial Statements included elsewhere in this report. (See Part IV, Item 14, note 13.) DESCRIPTION OF BUSINESS PRODUCTS AND SERVICES APPAREL IDENTIFICATION PRODUCTS AND SERVICES: The Company's Apparel Identification operations are vertically integrated in its major product lines, which permits it to better serve its customers, develop innovative products, control quality, reduce costs and speed delivery of products and services. It designs and builds most of its systems equipment and develops most of the operating software and all of the application software for its systems. The Apparel Identification operations also formulate coatings and inks, coat fabrics, weave narrow label fabrics, dye and finish fabrics, and design and print tags and labels. Tag and Label Systems. The tag and label systems consist primarily of bar code tag systems and hot-stamp label printers. These systems include complete hardware and software packages that enable customers to print, cut and batch large volumes of labels and tags in their plants. The sale of a system to a customer generally results in ongoing sales of inks, fabrics, tags and other supplies to the customer. In 1997 and 1996, tag and label systems, supplies and related services accounted for approximately 20% and 31%, respectively, of the Company's sales.* Bar Code Systems. The bar code systems business has experienced substantial growth in the United States. Such systems have not reached the same stage of widespread use in Europe. Apparel retailers require bar coded tags on their - ------------ *Historical financial information included in this report has been restated to combine the financial statements of the Company and the IIMAK for all periods, as required with pooling of interests accounting. Results of operations for 1997 included in this report include the results of Monarch since March 3, 1997, the date of acquisition. -3- 6 products to permit more accurate tracking of the products in stores, which, in turn, allows retailers to better monitor consumer demand and more effectively control inventories. Paxar's bar code tags and in-plant bar coding systems enable manufacturers to accommodate retailers' demands in a rapid and cost-effective manner. Bar codes consist of a series of lines or bars printed on a contrasting background. By varying the width of the bars and the spaces between bars, the bar code is encoded with information to identify an item, which enables the user's data system to provide the user with relevant information about that item, such as its location, cost, selling price and manufacturer. Bar codes are read by a fixed or hand-held scanning device, which transmits information to data collection systems, including computers, electronic cash registers and portable data collection devices. The Company has specialized in producing clearly readable and accurate tags, from which a variety of bar code readers can capture accurate data. The bar code tag systems manufactured by the Company include personal computers, electronic bar code printers, thermal ink, pre-printed tag stock and supporting software. The printers are controlled by computers and print variable information on tags, including bar codes and garment sizes. Data can be input to the bar code printer through simple stand-alone keyboards with a built-in display, personal computers with Paxar's application software or downloading from the manufacturer's central computer. Hot-Stamp Printing Systems. Hot-stamp printing systems include hot-stamp printers, fabrics, inks and printing accessories, which are used by manufacturers for in-plant printing of care labels and labels that carry brand logo, size and other information for the retail customer. Such systems provide manufacturers with the flexibility to imprint labels quickly in response to production order specifications. Tags and Labels. The Company designs and produces tags and woven and printed labels in its various manufacturing facilities in the United States, England, Italy, Mexico, Brazil, Colombia and Hong Kong and ships them to domestic and foreign manufacturers. The Company's labels are printed on a wide range of fabrics and other materials. Its woven labels consist of jacquard, multi-color labels woven on broad looms and needle looms. They are primarily used to build brand identification for apparel and to provide information to consumers. The Company's multi-color printed labels are printed on coated fabrics and narrow woven fabrics using various types of high-speed equipment and are used primarily for product identification and consumer information on apparel. These labels are produced in large runs with few changes. Merchandise tags are multi-color printed tags and bar code price tags used primarily for promotion and customer information and inventory control. PRINTING SOLUTIONS PRODUCTS AND SERVICES: Printing Solutions' products consist of Identification and Pricing Solutions ("IPS") labelers, Automated Identification Systems ("AIS") printers, and the related supplies for these systems, all of which are manufactured and/or distributed by Monarch. The Company's IIMAK subsidiary manufactures and distributes thermal transfer ribbons, which are used in a variety of labeling systems, including those manufactured by Paxar and Monarch. Monarch also generates revenue by providing maintenance services for its products. IPS Labelers. Monarch's handheld mechanical labelers print one to three lines of alphanumeric information in a variety of print types and sizes. These products, which are made of highly durable molded plastic parts, have multiple applications, including merchandise pricing, promotional labeling and component identification. Monarch manufactures models ranging from simple labelers that print one line of alphanumeric text with few characters to larger labelers that print three lines of alphanumeric text with more than thirty characters. Monarch also manufactures a broad range of supplies used with these labelers. In 1997, IPS labelers and supplies accounted for 11% of the Company's sales. AIS Printers. Monarch's AIS family of bar code machines consists of tabletop, handheld and portable thermal transfer and direct thermal printers. Thermal transfer printers create an image by applying an electrically heated printhead onto a ribbon that releases ink onto labeling stock. Thermal transfer printers produce excellent image quality which can be used with a wide variety of papers and fabrics. Direct thermal printers create an image by applying an electrically -4- 7 heated printhead directly to specially treated paper that changes color when heated. Direct thermal technology is preferable for the customer whose needs are for a smaller less expensive printing system, where image durability is less critical, and who does not require specialty labeling stock such as plastics, fabric or metal foils. Monarch also provides the supplies and maintenance for its printers. Supplies include thermal transfer and thermal direct ribbons and can be ordered from stock or customized. Monarch's portable printing line includes printers that also contain laser scanners and radio frequency communications. In 1997, AIS printers and supplies accounted for 21% of the Company's sales. Thermal Transfer Ribbons. IIMAK's thermal transfer ribbons are an essential consumable in the thermal transfer printing process. A basic thermal transfer ribbon is composed of an ink coating on a film substrate. Single-color thermal transfer ribbons, typically used in bar code applications, are manufactured by coating the film substrate with a wax or resin-based ink coating containing black or other monochromatic pigments. Color images have been traditionally printed with other ribbons, containing multiple sets of three separate panels, with each panel containing one of the three primary subtractive colors: yellow, magenta and cyan. As a variation of this principle, some recently developed high-speed color printers use separate yellow, magenta, cyan and black ribbons, which IIMAK also manufactures. By overlaying various combinations of the subtractive colors (e.g. cyan over yellow to create green) with different intensities and dot placements, a process color image is created. The film substrate is also backcoated with various resin-based coatings that are designed to prevent distortion of the ribbon during the printing process, minimize static electricity and reduce abrasion of the thermal transfer printhead. The end-user applications for IIMAK ribbons can be grouped into three fundamental categories: bar code, color and other. In 1997 and 1996, thermal transfer ribbons accounted for approximately 16% and 33%, respectively, of the Company's sales. IIMAK's bar code thermal transfer ribbons include a wide range of products designed to maximize bar code thermal transfer printer performance for specific applications. Bar code thermal transfer ribbons are produced to printer manufacturer (OEM) and end-user specifications based on variables such as printer speed, electronic printhead design, heat management characteristics and printing pressure. IIMAK manufactures bar code thermal transfer ribbons which are designed to meet these specifications and to comply with the industry bar code printing standards. IIMAK is the sole North American manufacturer of process color thermal transfer ribbons composed of separate panels of yellow, magenta, cyan and black on the same ribbon. Although color thermal transfer desktop printers imported into North America by OEM's based outside of North America initially used color thermal transfer ribbons produced by Fujicopian Co. Ltd. ("Fujicopian"), IIMAK's experience has been that most such OEM's eventually purchase compatible color thermal transfer ribbons from IIMAK to avoid the foreign exchange risk, longer lead times, additional shipping and distribution expenses and tariffs associated with imports of thermal transfer ribbons into the United States. The use of separate process color ribbons and other recent advancements in thermal transfer printers have increased color printing speeds by a factor of ten, compared to printers using a single ribbon composed of separate panels of yellow, magenta and cyan. Accordingly, IIMAK's sales of those ribbon products have declined significantly as the installed base of color thermal transfer printers has diminished. In addition to bar code and color thermal transfer ribbons, IIMAK manufactures other types of thermal transfer ribbons, primarily MICR and plain-paper facsimile ribbons. MICR ribbons are used to encode checks for processing through the United States banking system. Under a license agreement with Fujicopian, IIMAK has the right to manufacture MICR ribbons protected by Fujicopian's patents and to use certain proprietary technology to manufacture such ribbons. Also included in other products are ribbons that are used in plain-paper thermal transfer facsimile machines, which produce reliable, high quality and permanent thermal transfer printing. SALES AND MARKETING The Company employs salespersons who are compensated on a salary and bonus basis. These salespersons are located in leased offices across the United States, at the Company's Canadian branch, and at subsidiary companies in the United Kingdom, France, Germany, Belgium, Italy, Poland, Spain, Mexico, Australia, Hong Kong and Singapore. In addition, there are non-exclusive manufacturer's representatives located throughout the United States who sell the Company's -5- 8 products on a commission basis, as well as international and export distributors and commission agents, located in Europe, Africa, the Far East and Latin America. Sales promotion activities include direct mail campaigns, publication of catalogs and brochures, participation in trade shows, telemarketing, publicity and advertising principally in trade journals. The business of the Company is not highly seasonal in nature. CUSTOMERS Apparel Identification operations have more than 10,000 customers, including a number of major retailers and apparel manufacturers. These customers include Levi Strauss, Sears, J.C. Penney, The Limited, Liz Claiborne, Fruit-of-the- Loom, Sara Lee, Jockey, Land's End, The Lee Co., L.L. Bean and Victoria's Secret. Printing Solutions operations have both retail and industrial customers. Monarch historically has focused on the retail segment with special emphasis on price marking, merchandise identification, tracking and promotional applications. Retail customers include many of the major retailers in the United States and abroad. Retail marking is a mature market, however, and Monarch's revenues in this area have declined as a percentage of total sales. Monarch has leveraged its leadership position with retailers to expand beyond in-store item marking to in-store logistics applications and distribution center automation programs. As a greater number of retailers are requiring their vendors to apply bar codes to merchandise before they ship it to stores, Monarch is leveraging its retail presence to become a leading bar code supplier for vendors responding to retailers' compliance marking programs. Monarch has embarked on compliance marking solutions for several retail suppliers, including suppliers to Wal-Mart, J.C. Penney and Kmart. IIMAK's principal customers are printer manufacturers, OEM's (including Paxar and Monarch) and distributors, which in turn sell to thousands of end-users of thermal transfer ribbons. In addition, IIMAK sells its bar code thermal transfer ribbons to master distributors, value-added resellers and large dealers, and to a lesser extent, directly to dealers, distributors and end-users. No customer accounted for more than 10% of the Company's revenues in 1997. SOURCES AND AVAILABILITY OF RAW MATERIALS The Company purchases fabrics, inks, chemicals, polyester film, plastic resins, electronic components, adhesive-backed papers, yarns and other raw materials from major suppliers located throughout the United States and abroad. The Company believes that such materials are in good supply and are available from multiple sources. PATENTS, TRADEMARKS AND LICENSES The Company relies upon trade secrets and confidentiality to protect the proprietary nature of its technology. The Company also owns and controls numerous patents and trademarks, which in the aggregate are deemed to be important to the Company. IIMAK's license agreement with Fujicopian extends until 2008. Under the license agreement, Fujicopian has granted IIMAK an exclusive license (with certain exceptions) to manufacture and sell specified products, including thermal transfer ribbons, in North America and a non-exclusive right to sell and distribute such products in all countries other than those in Europe and Asia. The license applies to products using the technology and processes covered by the patents obtained and patent applications made and to be made by Fujicopian relating to such products and their manufacture. Fujicopian has also agreed that IIMAK can sell its thermal transfer ribbons to Paxar and Monarch for distribution outside of North America into Europe and into Asia in connection with the sale of their printers. In exchange for such rights, IIMAK pays -6- 9 annual royalties on the sale of essentially all thermal transfer ribbons. The Company believes that the two most important patents which IIMAK has the right to use under the license agreement are U.S. Patent No. 4503095 and U.S. Patent No. 4572684 both of which expire in 2003. Such patents relate to certain color thermal transfer ribbons and their use. WORKING CAPITAL PRACTICES The Company does not engage in unusual practices regarding inventories, receivables or other items of working capital. BACKLOG The Company's total backlog of orders at December 31, 1997 was approximately $47 million, as compared with $25 million at December 31, 1996. Management estimates that more than 80 percent of annual sales consist of orders that the Company typically fills within one month of receipt. The balance of orders are for products which are ordered to individual customer specifications and are for delivery within two to three months. COMPETITION Apparel Identification operations compete in both the domestic and international markets by means of price, product quality, innovation and customer services. Competitors include a large number of independent, often family-owned, regional companies and a division of a large corporation. The Company believes that it is a market leader in worldwide sales of apparel identification products and services. The price marking business is very competitive both in terms of price and product features. IPS price marking in the United States is a mature market with three principal competitors of the Company, Esselte-Meto, Garvey and Avery Dennison Corporation, each of which offers a full line of labeler and label products. The Company believes that it is a market leader in the United States IPS price marking market. IPS products are also distributed to and sold outside the U.S. by the Company's international operations. The Company's principal competitors outside of the United States are Esselte-Meto, Avery Dennison and Sato. In contrast to the IPS price marking market, many companies are engaged in the design, manufacture and marketing of bar code printing products, which constitute the Company's AIS business. The Company considers its direct competition to be the providers of direct thermal and thermal transfer printers and supplies. Competition in the Company's target markets is based on a number of factors, including reliability, quality and reputation of the manufacturer and its products, hardware innovations and specifications, price, level of technical support and applications support offered by the manufacturer and available distribution channels. The Company's principal competitors in the AIS business are Zebra, Eltron, Datamax, Comtec and DH Technology, Inc. Competition in the desktop color thermal transfer ribbon market has been limited as a result of Fujicopian's patents and IIMAK's rights to use these patents under the license agreement. As a result of the exclusivity provided by the license agreement, the Company believes that its principal competition for sales of color thermal transfer ribbons to printer OEM's comes from competing technologies, such as ink jet and laser. In contrast, the bar code thermal transfer ribbon market is highly competitive. Unlike the color thermal transfer ribbon market, the Company does not enjoy the benefit of any patent protection with respect to the proprietary technology it uses (other than in the manufacture of MICR ribbons). Sony Chemical, Dai Nippon Printing and Ricoh Electronics, all of which are Japanese companies, and SKC, a Korean company, compete with the Company in North America. North American-based companies that compete in the bar code thermal transfer ribbon market include Chemicraft and NCR Corporation. -7- 10 RESEARCH AND ENGINEERING The Company believes that continuous product development and innovation help the Company maintain a competitive advantage in the markets in which it operates. Therefore, the Company makes substantial annual research and product engineering expenditures in its efforts to develop new products to serve the needs of its customers. The Company's research and engineering staff comprises 128 employees involved in the development of, among other things, specialized tags and labels to meet particular customer requirements, improved IPS and AIS labeling systems, and new kinds of thermal transfer ribbons for unique applications. ENVIRONMENTAL COMPLIANCE The Company is subject to various federal, state and local environmental laws and regulations limiting or related to the use, emission, discharge, storage, treatment, handling and disposal of hazardous substances, particularly the federal Water Pollution Control Act, the Clear Air Act of 1970 (as amended in 1990), the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the special "Superfund" program. The Company has been advised of various enforcement and clean-up actions where it is responsible, however, to the best of the Company's knowledge, none of the existing or potential environmental claims against the Company are of a material nature. EMPLOYEES As of December 31, 1997, the Company employed 4,786 persons worldwide. Approximately 223 production employees of the Company in several locations in the United States are covered by four different union contracts, which expire at various times from June 1998 to June 2000. The Company has no recent history of material labor disputes. The Company believes that it has good employee relations. CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical information, this report, the Company's quarterly reports to the Securities and Exchange Commission on Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements, including, among others: - Economic and other business conditions that could affect demand for the Company's products in the United States or international markets. - The mix of products sold and the profit margins thereon. - Order cancellation or reduced bookings by customers or distributors. - Competitive product offerings and pricing actions. - The availability and pricing of key raw materials. - Productivity improvements in manufacturing. - Dependence on key members of management. Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. -8- 11 FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Certain financial information for operations in the United States, Europe and Asia is set forth below.
YEARS ENDED DECEMBER 31 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Sales to unaffiliated customers: United States - Domestic $ 385.6 $ 221.6 $ 210.8 - Export 29.5 25.1 15.9 Europe 107.8 53.2 42.7 Asia 44.3 26.1 20.0 -------- -------- -------- $ 567.2 $ 326.0 $ 289.4 ======== ======== ======== Operating income: United States - Domestic $ 50.7 $ 33.6 $ 31.7 - Export 4.3 4.2 3.8 Europe 8.8 7.2 6.6 Asia 11.6 7.2 5.0 -------- -------- -------- 75.4 52.2 47.1 Corporate expenses (23.7) (7.9) (8.7) -------- -------- -------- $ 51.7 $ 44.3 $ 38.4 ======== ======== ======== Assets employed United States and Export $ 429.5 $ 218.6 $ 208.7 Europe 119.1 61.8 50.4 Asia 49.8 19.4 13.5 -------- -------- -------- $ 598.4 $ 299.8 $ 272.6 ======== ======== ========
Assets employed in the United States are used to manufacture products sold to customers in the United States, export customers and in certain situations to non-U.S. intercompany customers. -9- 12 ITEM 2: PROPERTIES The Company uses the following principal facilities in connection with its Apparel Identification operations:
SQUARE OWNED/ LEASE LOCATION FOOTAGE LEASED EXPIRATION USED FOR - -------- ------- ------ ---------- -------- Ancarano, Italy 86,368 Owned Administrative and Manufacturing Orangeburg, New York 60,000 Owned Manufacturing Troy, Pennsylvania 60,000 Owned Unoccupied Sayre, Pennsylvania 58,000 Owned Administrative and Manufacturing Paterson, New Jersey 53,833 Owned Administrative and Manufacturing Vandalia, Ohio 40,590 Leased 2001 Administrative and Manufacturing Hillsville, Virginia 39,144 Owned Manufacturing Runcorn, England 37,237 Leased 2005 Administrative and Manufacturing Month- Sayre, Pennsylvania 36,000 Leased to-Month Manufacturing White Plains, New York 29,538 Leased 2003 Executive and Administrative Offices Runcorn, England 23,131 Leased 2011 Manufacturing Lenoir, North Carolina 20,000 Owned Administrative and Manufacturing Carpi, Italy 18,837 Leased 2004 Manufacturing Lenoir, North Carolina 17,180 Leased 1998 Warehouse Nottingham, England 17,000 Owned Administrative and Manufacturing Lenoir, North Carolina 11,600 Leased Month-to- Warehouse Month
-10- 13
SQUARE OWNED/ LEASE LOCATION FOOTAGE LEASED EXPIRATION USED FOR - -------- ------- ------ ---------- -------- Lohne, West Germany 8,910 Leased 2002 Warehouse and office space Milan, Italy 3,767 Leased 2002 Warehouse Pero, Italy 2,691 Leased 2000 Warehouse Milan, Italy 1,937 Leased 1998 Office space Warsaw, Poland 1,800 Leased 1998 Administrative and Manufacturing Rock Hill, South Carolina 56,000 Owned Manufacturing Canton, North Carolina 32,665 Owned Manufacturing Hong Kong 26,536 Leased 1998 Administrative and Manufacturing Santa Catarina, Brazil 13,000 Leased 1998 Administrative and Manufacturing Hong Kong 12,542 Leased 1997 Administrative and Manufacturing Hong Kong 6,862 Leased 1998 Administrative and Manufacturing
The Company uses the following facilities in connection with its Printing Solutions operations:
SQUARE OWNED/ LEASE LOCATION FOOTAGE LEASED EXPIRATION USED FOR - -------- ------- ------ ---------- -------- Miamisburg, Ohio (1) 392,000 Owned Office, Manufacturing, and Warehouse Amherst, New York (2) 275,000 Owned Office, Manufacturing, and Warehouse Pickering, Ontario, Administrative and Manufacturing Canada (1) 67,032 Owned Harlow, United Kingdom 60,668 Leased Month-to- Administrative and Manufacturing (1) Month Mexico City, Mexico (1) 57,193 Owned Administrative and Manufacturing Hong Kong (1) 18,800 Leased 1999 Administrative and Manufacturing Sydney, Australia (1) 17,248 Owned Administrative and Manufacturing Singapore (1) 15,939 Leased 1998 Administrative and Manufacturing
- ------------ (1) Monarch Marking Systems, Inc. facility. (2) International Imaging Materials, Inc. facility. -11- 14 In addition to the above facilities, the Company has various sales offices located throughout the world. These offices are subject to short-term leases. The Company believes that its facilities are adequate to maintain its existing business activities. ITEM 3: LEGAL PROCEEDINGS As a result of the June 29, 1995 acquisition of Monarch Marking Systems from Pitney Bowes Inc., a dispute arose over the calculation of the purchase price. In accordance with the terms of the Purchase Agreement, the parties submitted the dispute to binding arbitration. On September 6, 1996, the arbitrator determined that the purchase price should be reduced by $11.2 million. The New York Supreme Court, New York County, upheld the arbitrator's decision, and a judgment in the amount of $12.8 million (including interest) was entered on March 11, 1997. Pitney Bowes has appealed the Order and Judgment to the New York Supreme Court, Appellate Division. It is expected this court will issue a decision by the end of this year. The Company is involved in a number of other pending or threatened legal proceedings in the ordinary course of business. In the opinion of management, there are no other legal proceedings which will have a material adverse affect on the financial position or operating results of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 28, 1998, the Company held a Special Meeting of Shareholders to consider and vote upon (i) a proposal to approve the issuance of shares of the Company's Common Stock pursuant to the Agreement and Plan of Merger among Paxar, a wholly-owned subsidiary of Paxar, and IIMAK, (ii) an amendment to Paxar's 1997 Incentive Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 1,875,000 shares to 5,000,000 shares, and (iii) an amendment to Paxar's Certificate of Incorporation to increase the number of shares of authorized Common Stock from 100,000,000 shares to 200,000,000 shares. The number of votes cast for and against each of the foregoing proposals and the number of abstentions are set forth below. (i) Proposal to issue shares in connection with the IIMAK merger: For Against Abstain --- ------- ------- 25,813,226 87,612 52,451 (ii) Proposal to increase the number of shares available for issuance under the 1997 Incentive Stock Option Plan: For Against Abstain --- --------- ------- 25,319,768 524,763 108,759 (iii) Proposal to amend the Company's Certificate of Incorporation: For Against Abstain --- --------- ------- 30,256,104 933,138 88,880 -12- 15 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange using the symbol "PXR." The following table sets forth the 1997 and 1996 high and low sales prices of the Company's Common Stock as reported on the New York Stock Exchange for the periods indicated, as adjusted to reflect any stock splits or stock dividends effectuated by the Company.
SALES PRICES CALENDAR YEAR 1997 HIGH LOW ---- --- First Quarter $16-5/8 $13-1/8 Second Quarter 16-1/8 14-11/16 Third Quarter 20-11/16 14-5/8 Fourth Quarter $20-11/16 $14-3/16 CALENDAR YEAR 1996 First Quarter $10-9/16 $ 7-5/8 Second Quarter 11-7/16 9-7/8 Third Quarter 13-7/16 10-1/2 Fourth Quarter $14-13/16 $12-7/16
As of March 18, 1998, there were approximately 1,275 record holders of the Company's Common Stock. The Company has never paid any cash dividends on its Common Stock and has no present intention of doing so. The Company intends to retain all of its earnings for use in its business. -13- 16 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of and for the five-year period ended December 31, 1997 have been derived from the Company's Consolidated Financial Statements. This data should be read in conjunction with Consolidated Financial Statements and related Notes for the year ended December 31, 1997, and the Management's Discussion and Analysis of Financial Condition and Results of Operations. All data, except employee and per share data, are in millions.
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- OPERATING RESULTS Sales $ 567.2 $ 326.0 $ 289.4 $ 251.7 $ 200.4 Income before extraordinary item 24.4 33.1 25.6 21.6 15.0 Net income 15.8 33.1 25.6 21.6 15.0 Basic earnings per share (a) Income before extraordinary item 0.51 0.69 0.54 0.47 0.34 Net income 0.33 0.69 0.54 0.47 0.34 Diluted earnings per share (a) Income before extraordinary item (b) 0.49 0.68 0.52 0.45 0.33 Net income 0.32 0.68 0.52 0.45 0.33 EBITDA (c) 94.0 62.4 52.9 45.2 33.5 FINANCIAL CONDITION Working capital $ 121.3 $ 64.6 $ 54.6 $ 60.5 $ 49.2 Current ratio 2.1 2.3 2.0 2.5 2.8 Property, plant and equipment, net 187.1 137.3 125.7 108.8 84.6 Total assets 598.4 299.8 272.6 226.6 162.4 Long-term debt 211.4 21.1 25.4 17.7 6.4 Shareholders' equity 243.8 207.8 173.3 151.5 121.6 Debt as percent of total capital 46.4% 9.2% 12.8% 10.5% 5.0% FINANCIAL STATISTICS EBITDA as a percent of sales 16.6% 19.1% 18.3% 17.9% 16.7% Income before extraordinary items as a percent of sales 4.3% 10.1% 8.9% 8.6% 7.5% Net income as a percent of sales 2.8% 10.1% 8.9% 8.6% 7.5% Effective income tax rate 35.6% 28.8% 31.4% 35.0% 36.0% Return on shareholders' equity (d) 7.0% 17.4% 15.8% 15.8% 14.5% OTHER DATA Operating cash flow $ 29.3 $ 51.3 $ 32.9 $ 35.3 $ 17.3 Capital expenditures 30.3 27.6 29.8 25.5 25.4 Depreciation and amortization 27.1 18.1 14.5 11.3 8.4 Stock dividends 25% 25% 25% 25% 25% Cash dividends None None None None None Number of employees 4,786 2,785 2,531 2,511 2,027
-14- 17
OTHER DATA 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Weighted average shares outstanding (a) 49.5 49.0 48.8 47.9 46.1 Shares outstanding (a) 48.4 47.5 47.1 46.7 46.0 Book value per share (a) $ 5.04 $ 4.38 $ 3.68 $ 3.24 $ 2.64
(a) Retroactively adjusted to reflect stock dividends. (b) $0.74 in 1997 before non-recurring charges. (c) Earnings before interest, taxes, depreciation and amortization and, in 1997, before non-recurring charges. (d) 15.5% in 1997 before non-recurring and extraordinary items. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALL AMOUNTS IN THE FOLLOWING DISCUSSION ARE STATED IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA. OPERATING RESULTS On March 3, 1997, the Company acquired the remaining 51% of Monarch Marking Systems, Inc. ("Monarch") that it did not previously own. The acquisition has been accounted for as a purchase, and, accordingly, the results of operations include the results of Monarch since the date of acquisition, March 3, 1997. On October 28, 1997, the Company acquired International Imaging Materials, Inc. ("IIMAK") which has been accounted for as a pooling of interests. As required with a pooling of interests, historical financial information has been restated to combine the financial statements of the Company and IIMAK for all periods. The following table shows each element of the income statement as a percent of sales for the years indicated:
1997 1996 1995 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of products sold 61.6 65.4 65.7 Selling, general and administrative expense 23.1 18.7 19.1 Research and engineering expense 2.5 1.6 1.5 Amortization of intangibles 1.0 0.7 0.4 Acquisition-related costs 1.5 -- -- Integration/restructuring costs 1.2 -- -- ----- ----- ----- Operating income 9.1 13.6 13.3 Equity in net income of -- 1.2 0.2 Monarch Interest expense, net (2.4) (0.6) (0.6) ----- ----- ----- Income before taxes 6.7 14.2 12.9 Taxes on income 2.4 4.1 4.0 ----- ----- ----- Income before extra- ordinary item 4.3 10.1 8.9 Extraordinary item (1.5) -- -- ----- ----- ----- Net Income 2.8% 10.1% 8.9% ===== ===== =====
1997 COMPARED WITH 1996 Sales in 1997 increased by 74% over 1996 reaching a record $567.2. Domestic sales increased 37% from $236.9 to $377.3. Foreign-based and export sales increased from $89.1 to $189.9. In 1997, sales from the Company's Apparel Identification business grew 12% and the Printing Solutions business grew 202% (See Note 13 of Notes to Consolidated -15- 18 Financial Statements.) The increase in the Printing Solutions business was due principally to the acquisition of Monarch which contributed $228.1 of sales in 1997. (See Note 2 of Notes to Consolidated Financial Statements.) Cost of products sold for the year ended December 31, 1997 increased to $349.3 compared to $213.3 for the year ended December 31, 1996, due principally to the acquisition of Monarch. As a percent of sales, such costs decreased to 61.6% for 1997 compared to 65.4% for 1996. Selling, general and administrative expense ("SG&A") increased to $131.2 for the year ended December 31, 1997, compared to $61.1 for the 1996 period due principally to the acquisition of Monarch. As a percent of sales, SG&A was 23.1% for 1997 compared to 18.7% for 1996. Research and engineering expense ("R&E") increased from $5.1 in 1996 to $14.1 in 1997 due principally to the acquisition of Monarch. As a percent of sales, R&E was 2.5% for 1997 compared to 1.6% for 1996. Amortization of intangibles increased to $5.7 in 1997 as compared to $2.2 in 1996 due to the additional goodwill arising from the acquisition of Monarch. Acquisition related costs of $8.3 in 1997 are one-time costs related to the acquisition of IIMAK. These costs include $5 of fees and expenses specifically related to the acquisition and $3.3 related to the termination and severance of certain IIMAK employees pursuant to pre-existing agreements. The Company recorded a restructuring charge of $6.9 related to the integration of Monarch into the Company's operations. These costs pertain to the consolidation of certain facilities, the severance of personnel and other costs. The largest component of the costs related to the severance of 132 people from the Monarch, Maimisburg, Ohio operation. The Company expects that the plan will be completed during 1998, with estimated annual savings of $9. Operating income increased to $51.7 (9.1% of sales) for the year ended December 31, 1997 compared to $44.3 (13.6% of sales) for the year ended December 31, 1996. Equity in net income of Monarch was $4.1 for the year ended December 31, 1996. Such income represented Paxar's 49% ownership interest in Monarch for the relevant period. (See Note 2 of Notes to Consolidated Financial Statements.) Interest expense, net, increased to $13.8 for the year ended December 31, 1997 from $1.9 in 1996. The increase was attributable to the financing costs associated with the acquisition of Monarch. Income before taxes decreased to $37.9 (6.7% of sales) for the year ended December 31, 1997 as compared with $46.5 (14.2% of sales) for the year ended December 31, 1996. The effective income tax rate was 35.6% for the year ended December 31, 1997 compared to 28.8% for the year ended December 31, 1996. The increase was attributable to higher income tax rates at Monarch and the absence of equity accounting for Paxar's share of Monarch's after-tax income beginning in March 1997. The overall effective tax rate was impacted by many factors including different statutory rates on foreign income. The tax rate was slightly above the U.S. statutory Federal income tax rate of 35% due to certain IIMAK-related acquisition costs, which were capitalized for tax purposes, offset by lower rates on income derived from foreign sources, particularly from Hong Kong and Italy. Income before extraordinary item for the year ended December 31, 1997 was $24.4 compared to $33.1 for the year ended December 31, 1996. The extraordinary item of $8.6 (net of income taxes $5.1) resulted from the redemption of Monarch's 12 1/2% Senior Notes due July 1, 2003. (See Note 3 of Notes to Consolidated Financial Statements.) Net income for the year ended December 31, 1997 was $15.8 (2.8% of sales) compared to $33.1 (10.1% of sales) in 1996. The following chart shows the normalization of earnings for comparison purposes to 1996. Normalized earnings have been calculated reflecting the adjustment of those costs which are not expected to recur. -16- 19
Before Income Taxes After Income Taxes Diluted Earnings per Share ------------------- ------------------ -------------------------- 1996 Net income $ 46.5 $ 33.1 $ 0.68 ========= ========= =========== 1997 Net income $ 24.2 $ 15.8 $ 0.32 Add back: Extraordinary item 13.7 8.6 0.17 Non-recurring integration/restructuring costs 6.9 4.4 0.09 Non-recurring IIMAK acquisition costs 8.3 7.4 0.15 Other non-recurring costs 0.6 0.4 0.01 --------- --------- ----------- Normalized income $ 53.7 $ 36.6 $ 0.74 ========= ========= ===========
The other non-recurring charge principally represents the write-off of accumulated due diligence costs associated with a potential acquisition. 1996 COMPARED WITH 1995 Sales in 1996 increased by 13% reaching a record $326.0. Domestic sales increased slightly, while foreign-based and export sales increased 25% from $71.1 to $89.2. In 1996, sales from the Company's Apparel Identification business grew 9% and the Printing Solutions business 21%. Cost of products sold for 1996 increased to $213.3 compared to $190.2 in 1995, an increase of 12%. As a percent of sales, such costs decreased slightly to 65.4% for 1996 compared to 65.7% for 1995. Selling, general and administrative ("SG&A") expense increased to $61.1 in 1996, compared to $55.2 for 1995, an increase of 11%. As a percent of sales, SG&A was 18.7% for 1996 compared to 19.1% in 1995. Research and engineering expense ("R&E") was $5.1 in 1996 compared to $4.4 in 1995. As a percent of sales, R&E was 1.6% and 1.5% for the years ended 1996 and 1995, respectively. Amortization of intangibles was $2.2 for the year 1996 compared to $1.2 in 1995. Operating income increased 15% to $44.3 (13.6% of sales) for the year 1996 compared to $38.4 (13.3% of sales) for the year 1995. Equity in net income of Monarch was $4.1 for the year ended December 31, 1996 compared to $0.6 in 1995. (See Note 2 of Notes to Consolidated Financial Statements.) Interest expense, net, increased to $1.9 in 1996 compared to $1.7 in 1995. Income before taxes increased to $46.5 (14.2% of sales) for the year 1996, as compared with $37.3 (12.9% of sales) for the year 1995. The effective income tax rate was 28.8% for the year ended December 31, 1996 compared to 31.4% for the year ended 1995. The overall effective tax rate was impacted by many factors including different statutory rates on foreign income. The lower tax rate was attributable primarily to the significant increase in equity in the net income of affiliate, a large portion of which was excluded from tax expense. The tax rate was below the U.S. statutory Federal income tax rate of 35% due to lower rates on income derived from foreign sources, particularly from Hong Kong and Italy where the -17- 20 companies acquired in 1994 received special tax abatement incentives which expire through 1999. Net income for the year ended December 31, 1996 increased 29% to $33.1 (10.1% of sales) from $25.6 (8.9% of sales) in 1995. LIQUIDITY AND CAPITAL RESOURCES The table below presents summary cash flow information for the years indicated:
1997 1996 1995 ---- ---- ---- Net cash provided by operating activities $ 29.3 $ 51.3 $ 32.9 Net cash used by investing activities (109.8) (35.5) (50.5) Net cash provided by (used in) financing activities 89.6 (14.6) 14.9 -------- ------- ------- Total change in cash (a) $ 9.1 $ 1.2 $ (2.7) ======== ======= =======
(a) Before exchange rate effects. OPERATING ACTIVITIES Cash provided by operating activities continues to be the Company's primary source of funds to finance operating needs and internal growth opportunities. The net cash provided by operating activities was $29.3 in 1997, compared to $51.3 in 1996. Cash provided in 1996 was $51.3 up from $32.9 in 1995. Depreciation and amortization was $27.1 in 1997 compared to $18.1 in 1996. The increase is due mainly to the acquisition of Monarch, which resulted in increases to depreciation and goodwill amortization. INVESTING ACTIVITIES In 1997, capital expenditures were $30.3 compared to $27.6 in 1996. Other than projects for employee safety and environmental improvement, all new capital projects are carefully analyzed and are required to make a positive contribution on a net present value basis, generating an advantageous internal rate of return on invested capital. On March 3, 1997, the Company acquired the 49% equity interest of Odyssey Partners, L.P. in Monarch for (i) $94.1 in cash, (ii) a promissory note in the amount of $5.9 at an annual interest rate of 4.88% payable on January 2, 1998 secured by a letter of credit issued by Fleet Bank, N.A. and (iii) five year warrants to purchase (a) 1,250,000 shares of the Company's common stock, par value $0.10 ( the "Common Stock"), at an exercise price of $14 per share and (b) 250,000 shares of the Company's Common Stock at an exercise price of $17.50 per share. The warrants have been recorded at a fair value of approximately $9.7 at the date of acquisition. The remaining 2% of Monarch was acquired from the Chairman and President of Monarch. Each received 156,536 shares of the Company's Common Stock valued at $15.20 per share in exchange for the Monarch common stock owned by them. Additionally, the management of Monarch received incentive stock options to purchase an aggregate of 1,244,469 shares of the Company's Common Stock pursuant to the Company's 1990 Employee Stock Option Plan in exchange for outstanding options to purchase Monarch common stock. The options have been recorded at a fair value of approximately $16 at the date of acquisition. The acquisition was accounted for as a purchase with assets acquired and liabilities assumed recorded at their estimated fair values at the date of acquisition. The Company financed the cash portion of the purchase price with the proceeds of the term loan under a $280 credit facility with Fleet Bank, N.A. and Wachovia Bank of Georgia, N.A. as lead lenders. On April 11, 1997, Monarch completed the purchase of $100 of principal amount of its 12 1/2% Senior Notes due July 1, 2003 (the "Notes"). Monarch paid $120.2 consisting of $100 of principal, $3.5 of accrued interest, a $13.7 premium, and a consent payment of $3. Upon payment, all of the outstanding Notes were canceled and the indenture under which they were issued was terminated. The early redemption of the Notes resulted in an extraordinary charge of $8.6, net of income taxes of $5.1. -18- 21 On October 28, 1997, the Company completed the acquisition of IIMAK, which was accounted for as a pooling of interests. In connection with the merger, each outstanding share of IIMAK common stock was converted into 1.5 shares of the Company's Common Stock and all existing IIMAK warrants and options were converted into warrants and options to purchase the Company's Common Stock. As a result of the merger, shares of IIMAK common stock were converted to 12,431,757 shares of the Company's Common Stock and IIMAK options and warrants were converted to 1,937,055 Company options and warrants. On January 29, 1997, the Company acquired a 70% interest in a newly-formed subsidiary of the Company, Paxar do Brasil Ltda., located in Brazil, South America for approximately $0.6. The Company has an option to acquire the remaining 30% interest from the minority shareholder. In addition, on December 15, 1997, the Company acquired a 51% interest in the business of Disisit Sistemas de Marcado S.A., located in Colombia, South America for approximately $2 in cash. The Company has the option to acquire the remaining 49% interest from the minority shareholders in approximately four years. Subsequent to December 31, 1997, the Company acquired a 70% interest in the business of Teslo Tekstil Urunleri Sanayii ve Ticaret A.S., located in Istanbul, Turkey, for approximately $1.5. The Company has an option to acquire the remaining 30% interest in Teslo from the minority shareholders. The Company intends to continue its growth, in part by acquisitions of other complementary or related businesses, and believes that further acquisitions would be of important strategic value. FINANCING ACTIVITIES The table below shows the components of total capital for the years indicated:
1997 1996 1995 ---- ---- ---- Long-term debt $ 211.4 $ 21.1 $ 25.4 Shareholders' equity 243.8 207.8 173.3 -------- -------- -------- Total capital $ 455.2 $ 228.9 $ 198.7 ======== ======== ======== Long-term debt as a percent of total capital 46% 9% 13% -------- -------- --------
Long-term debt increased to $211.4 at December 31, 1997, from $21.1 at December 31, 1996. The increase is primarily attributable to the acquisition of Monarch. At December 31, 1997, long-term debt as a percent of total capital was 46% compared to 9% at December 31, 1996. On March 3, 1997, the Company entered into a six-year, $280 credit facility with Fleet Bank, N.A. and Wachovia Bank of Georgia, N.A., as lead lenders, consisting of a $140 term loan facility and a $140 revolving credit facility. Borrowings under the term loan and revolving credit facilities bear interest at rates referenced to the London Interbank Offered Rate (with applicable margins varying in accordance with the Company's attainment of specified financial tests) or the Prime Rate (as defined), and are guaranteed by the domestic subsidiaries of the Company. As of December 31, 1997, borrowings under the term loan and revolving credit facilities were $135 and $87.2, respectively, and the amount available was $52.8 (See Note 8 of Notes to Consolidated Financial Statements.) OTHER MATTERS STATUS OF PITNEY BOWES LITIGATION As a result of the June 29, 1995 acquisition of Monarch Marking Systems from Pitney Bowes Inc., a dispute arose over the calculation of the purchase price. In accordance with the terms of the Purchase Agreement, the parties submitted the dispute to binding arbitration. On September 6, 1996, the arbitrator determined that the purchase price should be reduced by $11.2. The New York Supreme Court, New York County, upheld the arbitrator's decision, and a judgment in the amount of $12.8 (including interest) was entered on March 11, 1997. Pitney Bowes has appealed the Order and Judgment to the New York Supreme Court, Appellate Division. It is expected this court will issue a decision by the end of this year. -19- 22 YEAR 2000 CONVERSION The Year 2000 can have a material adverse effect on businesses that are not prepared internally. The Company has been addressing this problem since early 1997. The Company is in the process of identifying all areas of vulnerability in both information systems and business processes, and has established a plan to achieve full Year 2000 compliance by December, 1998. This plan includes assessment and analysis of systems, upgrades to packaged software products, remediation of all internally written applications and validation testing. All Year 2000 related projects have been staffed primarily with internal resources and the aggregate costs are not expected to be material. The Company currently sees no evidence that any essential process, system or business function will not be ready for the millennium transition. MARKET RISK The Company experiences market risk relative to changes in interest rates. A 67 basis point move in interest rates (10% of the Company's weighted average interest rate on its $280 credit facility) affecting the Company's floating debt instruments would have an impact on the Company's pretax earnings and cash flows over the next fiscal year of $1.5 if rates increase and $1.2 were they to decrease. Such a move in interest rates would have no effect on the fair value of the Company's floating debt instruments. A 67 basis point increase in rates would cause the fair value of the Company's interest rate collar to decrease from a liability of $0.9 to $0.3. A 67 basis point decrease would cause the fair value to increase from a liability of $0.9 to $1.9. ASIAN CRISIS Approximately 8% of the Company's sales are made to customers based in Asia where certain countries are experiencing economic turmoil. Such turmoil is not expected to have a material impact on the Company as product is generally sold either to U.S.-based apparel manufacturers or to suppliers to U.S-based apparel manufacturers. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company experiences market risk relative to changes in interest rates. A 67 basis point move in interest rates (10% of the Company's weighted average interest rate on its $280 million credit facility) affecting the Company's floating debt instruments would have an impact on the Company's pretax earnings and cash flows over the next fiscal year of $1.5 million if rates increase and $1.2 million were they to decrease. Such a move in interest rates would have no effect on the fair value of the Company's floating debt instruments. A 67 basis point increase in rates would cause the fair value of the Company's interest rate collar to decrease from a liability of $0.9 million to $0.3 million. A 67 basis point decrease would cause the fair value to increase from a liability of $0.9 million to $1.9 million. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is included elsewhere in this report. (See Part IV, Item 14.) ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ON FINANCIAL DISCLOSURE None. -20- 23 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders scheduled to be held on May 1, 1998. ITEM 11: EXECUTIVE COMPENSATION Incorporated herein by reference to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders scheduled to be held on May 1, 1998. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders scheduled to be held on May 1, 1998. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to the Company's Definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders scheduled to be held on May 1, 1998. -21- 24 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS 1. FINANCIAL STATEMENTS - Report of Independent Public Accountants F-1 Consolidated Balance Sheets December 31, 1997 and 1996 F-2 Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995 F-3 Consolidated Statements of Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6 to F-17 2. FINANCIAL STATEMENT SCHEDULE - Schedule II - Valuation and Qualifying Accounts F-18 Notes: All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. Separate financial statements of the Registrant have been omitted because the Registrant is primarily an operating company. All subsidiaries included in the consolidated financial statements are totally owned, and none of the subsidiaries have indebtedness which is not guaranteed by the Registrant. 3. EXHIBITS 3.1 Amended and Restated Certificate of Incorporation. (G) 3.2 Amendment to Amended and Restated Certificate of Incorporation. (M) 3.3 By-Laws (A) 4.1 Warrant Agreement for "A" Warrants between the Registrant and Odyssey Partners, L.P. dated March 3, 1997. (J) 4.2 Odyssey Partners, L.P. Certificate for 1,000,000 Warrants dated March 3, 1997. (J) 4.3 Warrant Agreement for "B" Warrants between the Registrant and Odyssey Partners, L.P. dated March 3, 1997. (J) 4.4 Odyssey Partners, L.P. Certificate for 200,000 Warrants dated March 3, 1997. (J) 4.5 Bear Stearns International, Ltd. Certificate for 75,000 Warrants dated as of February 25, 1998. 10.1 Lease, dated October 1, 1974, for executive offices of Registrant in Pearl River, New York. (A) 10.2 Employment Agreement, dated as of December 16, 1986, between Registrant and Arthur Hershaft. (C) -22- 25 10.3 Employment Agreement, dated February 13, 1989, between Registrant and Victor Hershaft. (D) 10.4 Stock Purchase Agreement, by and between Arthur Hershaft and Registrant, dated as of December 19, 1989. (E) 10.5 Registrant's 1981 Incentive Stock Option Plan. (B) 10.6 Registrant's 1990 Employee Stock Option Plan. (F) 10.7 Registrant's 1997 Incentive Stock Option Plan. (N) 10.8 Amended and Restated Stock Purchase Agreement, by and between Arthur Hershaft and the Registrant. (G) 10.9 Omnibus Purchase and Sale Agreement dated June 6, 1995 by and between Pitney Bowes Inc., Monarch Marking Systems, Inc., Pitney Bowes Marking Systems Ltd., Pitney Bowes International Holdings Inc., Pitney Bowes France S.A. and Monarch Acquisition Corp. (H) 10.10 Stock Purchase Agreement dated as of December 20, 1996 between the Registrant and Odyssey Partners, L.P. (I) 10.11 Amendment No. 1 to Stock Purchase Agreement dated as of March 3, 1997 between the Registrant and Odyssey Partners, L.P. (I) 10.12 Agreement and Plan of Merger dated as of March 3, 1997 by and among the Registrant, Monarch Holdings, Inc., Thomas Loemker and John W. Paxton. (J) 10.13 Registration Rights Agreement dated as of March 3, 1997 between the Registrant and Odyssey Partners, L.P. (J) 10.14 Credit Agreement dated March 3, 1997. (K) 10.15 Agreement and Plan of Merger dated as of July 15, 1997, among the Registrant, Ribbon Manufacturing, Inc., and International Imaging Materials, Inc. (L) 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of KMPG Peat Marwick LLP. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. ----------------- (A) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1980. (B) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. (C) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (D) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (E) Incorporated herein by reference from Exhibits to Registrant's Annual Report on -23- 26 Form 10-K for the year ended December 31, 1989. (F) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (G) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (H) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated June 29, 1995. (I) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated December 20, 1996. (J) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated March 3, 1997. (K) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. (L) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated July 15, 1997. (M) Incorporated herein by reference from Annex D to the Joint Proxy Statement/Prospectus included in the Registrant's Registration Statement on Form S-4 (File No. 333-36283), filed on September 24, 1997. (N) Incorporated herein by reference from Exhibits to the Registrant's Registration Statement on Form S-8 (File No. 333-38923), filed on October 28, 1997. (b) REPORTS ON FORM 8-K On January 3, 1997, the Registrant filed a Report on Form 8-K dated December 20, 1996, reporting that it had entered into an agreement to acquire the 49% equity interest of Odyssey Partners, L.P. in Monarch Holdings, Inc. (Item 2) On March 18, 1997, the Registrant filed a Report on Form 8-K dated March 3, 1997, reporting the completion of its acquisition of the 51% interest in Monarch that it did not own. (Item 2) On May 7, 1997, the Registrant filed a Report on Form 8-K dated April 11, 1997, reporting that Monarch had completed the purchase of all of its outstanding 12-1/2% Senior Notes due July 1, 2003 having an aggregate principal amount of $100 million. (Item 5) On May 16, 1997, the Registrant filed Amendment No. 1 to its Report on Form 8-K dated December 20, 1996, reporting the Financial Information and Pro Forma Financial Information in connection with the Registrant's acquisition of the 51% interest in Monarch that it did not own. (Item 7) On July 30, 1997, the Registrant filed a Report on Form 8-K dated July 15, 1997, reporting that it had entered into an Agreement and Plan of Merger with International Imaging Systems, Inc. ("IIMAK"). (Item 5) On November 12, 1997, the Registrant filed a Report on Form 8-K dated October 28, 1997, reporting that it had completed its acquisition of IIMAK. (Item 2) On January 12, 1998, the Registrant filed an Amendment to its Report on Form 8-K dated October 28, 1997, reporting the Financial Information and Pro Forma Financial Information in connection with its acquisition of IIMAK. (Item 7) -24- 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Paxar Corporation: We have audited the accompanying consolidated balance sheets of Paxar Corporation (a New York corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of International Imaging Materials, Inc. ("IIMAK") prior to 1997, a company acquired during 1997 in a transaction accounted for as a pooling of interests, as discussed in Note 2. The IIMAK financial statements for 1996 and 1995 are included in the consolidated financial statements of Paxar Corporation and reflect total assets of 40% in 1996 and revenues of 33% and 31% for 1996 and 1995, respectively, of the related consolidated totals. The IIMAK financial statements for 1996 and 1995 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for IIMAK is based solely upon the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Paxar Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------- ARTHUR ANDERSEN LLP Stamford, Connecticut February 12, 1998 F-1 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders International Imaging Materials, Inc.: We have audited the accompanying consolidated balance sheet of International Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended March 31 1997. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended March 31, 1997, in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP ------------------------ KPMG PEAT MARWICK LLP Buffalo, New York April 23, 1997 29 INDEPENDENT AUDITORS'S REPORT The Board of Directors International Imaging Materials, Inc. Under date of April 23, 1997, we reported on the consolidated balance sheet of International Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ended March 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on form 10-K for the year ended March 31, 1997. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in item 14(a)2 of the annual report on form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KMPG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP Buffalo, New York April 23, 1997 30 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 December 31, 1996 ----------------- ----------------- (IN MILLIONS, EXCEPT SHARE AMOUNTS) ASSETS Current assets: Cash $ 13.7 $ 5.3 Short-term investments 2.2 1.9 Receivables, less allowances of $ 4.4 in 1997 and $1.0 in 1996 102.4 53.8 Inventories 97.4 46.5 Deferred income taxes 6.9 1.7 Other current assets 11.6 4.6 -------- -------- Total current assets 234.2 113.8 Property, plant and equipment, at cost 273.2 204.5 Accumulated depreciation (86.1) (67.2) -------- -------- Net property, plant and equipment 187.1 137.3 Long-term investments 3.0 4.9 Investment in Monarch -- 20.1 Goodwill 165.4 18.4 Other assets 8.7 5.3 -------- -------- $ 598.4 $ 299.8 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Due to banks $ 2.5 $ 10.2 Notes payable 5.9 -- Current maturities of long-term debt 21.7 1.7 Accounts payable and accrued liabilities 82.8 34.3 Accrued taxes on income -- 3.0 -------- -------- Total current liabilities 112.9 49.2 Long-term debt 211.4 21.1 Deferred income taxes 24.2 20.2 Other liabilities 6.1 1.5 Shareholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized, none issued and outstanding -- -- Common Stock, $0.10 par value, 200,000,000 shares authorized, 48,419,554 and 41,277,316 shares issued and outstanding in 1997 and 1996, respectively 4.8 4.1 Paid-in capital 109.3 81.6 Unearned compensation -- (0.4) Retained earnings 134.5 121.9 Foreign currency translation adjustments (4.8) 0.6 -------- -------- Total shareholders' equity 243.8 207.8 -------- -------- $ 598.4 $ 299.8 ======== ========
See Notes to Consolidated Financial Statements F-2 31 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ---- ---- ---- Sales $ 567.2 $ 326.0 $ 289.4 Costs and expenses: Cost of products sold 349.3 213.3 190.2 Selling, general and administrative expense 131.2 61.1 55.2 Research and engineering expense 14.1 5.1 4.4 Amortization of intangibles 5.7 2.2 1.2 Acquisition-related costs 8.3 -- -- Integration/restructuring costs 6.9 -- -- --------- --------- --------- Operating income 51.7 44.3 38.4 Equity in net income of Monarch -- 4.1 0.6 Interest expense, net (13.8) (1.9) (1.7) --------- --------- --------- Income before taxes 37.9 46.5 37.3 Taxes on income 13.5 13.4 11.7 --------- --------- --------- Income before extraordinary item 24.4 33.1 25.6 Extraordinary item, net of income taxes of $5.1 (8.6) -- -- --------- --------- --------- Net income $ 15.8 $ 33.1 $ 25.6 ========== ========== ========== Basic earnings per common share: Before extraordinary item $ 0.51 $ 0.69 $ 0.54 Extraordinary item (0.18) -- -- --------- --------- --------- Net income $ 0.33 $ 0.69 $ 0.54 ========== ========= ========== Diluted earnings per common share: Before extraordinary item $ 0.49 $ 0.68 $ 0.52 Extraordinary item (0.17) -- -- --------- --------- --------- Net income $ 0.32 $ 0.68 $ 0.52 ========== ========= ========= Average common shares outstanding Basic 48.1 47.7 47.7 Diluted 49.5 49.0 48.8
See Notes to Consolidated Financial Statements F-3 32 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
NOTES RECEIVABLE FROM EXERCISE FOREIGN UNEARNED OF OPTIONS CURRENCY COMMON STOCK PAID-IN COMPENS- AND TREASURY RETAINED TRANSLATION SHARES AMOUNT CAPITAL ATION WARRANTS STOCK EARNINGS ADJUSTMENT ------ ------ ------- ----- -------- ----- -------- ---------- BALANCE, DECEMBER 31, 1994 30.7 $ 3.1 $ 88.1 ($ 0.9) ($ 1.9) -- $ 64.2 $ (1.0) Net income -- -- -- -- -- -- 25.6 -- Stock split 4.4 0.4 -- -- -- -- (0.4) -- Notes received -- -- -- -- (0.5) -- -- -- Shares surrendered (0.3) -- (4.9) -- 1.2 -- -- -- Shares issued-various plans (a) 0.7 -- 2.9 -- -- 0.1 -- -- Tax benefit from exercise of stock options -- -- 2.2 -- -- -- -- -- Purchase of treasury shares -- -- -- -- -- (5.6) -- -- Restricted stock awards -- -- 0.3 0.2 -- -- -- -- Translation adjustments -- -- -- -- -- -- -- 0.3 BALANCE, DECEMBER 31, 1995 35.5 3.5 88.6 (0.7) (1.2) (5.5) 89.4 (0.7) Net income -- -- -- -- -- -- 33.1 -- Stock split 5.6 0.6 -- -- -- -- (0.6) -- Shares surrendered (0.3) -- (4.7) -- 1.2 -- -- -- Shares issued-various plans (a) 0.7 -- (1.6) -- -- 5.5 -- -- Tax benefit from exercise of stock options -- -- 1.8 -- -- -- -- -- Purchase and retirement of shares (0.2) -- (2.5) -- -- -- -- -- Restricted stock awards -- -- -- 0.3 -- -- -- -- Translation adjustments -- -- -- -- -- -- -- 1.3 BALANCE, DECEMBER 31, 1996 41.3 4.1 81.6 (0.4) -- -- 121.9 0.6 Net income -- -- -- -- -- -- 15.8 -- Stock split 7.1 0.7 -- -- -- -- (0.7) -- Shares surrendered (0.9) -- (9.5) -- -- -- -- -- Shares issued-various plans(a) 0.6 -- 5.4 -- -- -- -- -- Tax benefit from exercise of stock options -- -- 1.3 -- -- -- -- -- Stock issued - acquisitions 0.3 -- 4.7 -- -- -- -- -- Warrants and options issued - acquisitions -- -- 25.7 -- -- -- -- -- Restricted stock awards -- -- 0.1 0.4 -- -- -- -- IIMAK pooling adjustment -- -- -- -- -- -- (2.5) -- Translation adjustments -- -- -- -- -- -- -- (5.4) ---- ------ -------- ---- ---- ---- -------- ------ BALANCE, DECEMBER 31, 1997 48.4 $ 4.8 $ 109.3 -- -- -- $ 134.5 $ (4.8) ==== ====== ======== ==== ==== ==== ======== ======
(a) SEE NOTE 15 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4 33 PAXAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ( IN MILLIONS)
1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 15.8 $ 33.1 $ 25.6 -------- ------- ------- Adjustments to reconcile net income to net cash provided by operations: Extraordinary item 8.6 -- -- Depreciation and amortization 27.1 18.1 14.5 Deferred income taxes 4.0 3.6 3.8 Other (2.5) -- -- Equity in net income of affiliate -- (4.1) (0.6) Changes in assets and liabilities, net of businesses acquired: Receivables (8.4) (6.5) (6.9) Inventories (8.5) 0.8 (4.5) Other current assets (3.0) (1.0) (0.1) Accounts payable and accrued liabilities 1.4 6.3 (3.0) Taxes on income (5.4) 2.9 2.3 Other 0.2 (1.9) 1.8 -------- ------- ------- 13.5 18.2 7.3 -------- ------- ------- Net cash provided by operating activities 29.3 51.3 32.9 -------- ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (30.3) (27.6) (29.8) Acquisitions, net of cash acquired (81.6) (4.3) (2.2) Investment in Monarch -- -- (15.4) (Increase) decrease of short-term investments (0.3) 1.4 1.6 Other 2.4 (5.0) (4.7) -------- ------- ------- Net cash used in investing activities (109.8) (35.5) (50.5) -------- ------- ------- FINANCING ACTIVITIES: Increase (decrease) in short-term debt 12.2 (9.0) 13.8 Additions to long-term debt 286.7 21.7 21.6 Reductions in long-term debt (210.8) (26.5) (14.0) Exercise of stock options/Stock Purchase Plan 2.3 3.3 1.9 Purchase of common stock -- (2.5) (5.6) Other (0.8) (1.6) (2.8) -------- ------- ------- Net cash provided by (used in) financing activities 89.6 (14.6) 14.9 -------- ------- ------- OTHER ACTIVITIES: Effect of exchange rate changes on cash (0.7) 0.1 -- -------- ------- ------- Increase in cash 8.4 1.3 (2.7) Cash, at beginning of year 5.3 4.0 6.7 -------- ------- ------- Cash, at end of year $ 13.7 $ 5.3 $ 4.0 ======== ======= =======
See Notes to Consolidated Financial Statements F-5 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include those of Paxar Corporation (the "Company") and its majority-owned subsidiaries. The effects of all significant intercompany transactions have been eliminated. Short-term investments: Short-term investments consist of foreign lending institution and government bonds pledged as collateral against foreign debt, as well as certain other foreign financial institution commercial paper. Inventories: Inventories are stated at the lower of cost or market. The cost of inventories determined using the last-in, first-out (LIFO) method totaled $53.1 and $19.1 as of December 31, 1997 and 1996 respectively. The cost of all other inventories, determined using the first-in, first-out(FIFO) method, was $44.3 and $27.4 as of December 31, 1997 and 1996, respectively. Property, plant and equipment: Property, plant and equipment is stated at cost, and is depreciated by the straight-line method over the estimated useful lives of the assets. Upon retirement or other disposition, the cost and accumulated depreciation are removed from the asset and accumulated depreciation accounts, and the net gain or loss is reflected in income. Expenditures for maintenance and repairs are charged against income as incurred. Significant expenditures for betterments and renewals are capitalized. Income taxes: Deferred tax assets and liabilities are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates. A valuation allowance is established for any deferred tax asset for which realization is not likely. The classification of deferred tax assets and liabilities corresponds with the classification of the underlying assets and liabilities giving rise to the temporary difference. Revenue recognition: Revenue is recognized when title passes to the customer, generally upon shipment. Earnings per common share: In December 1997 the Company adopted the provisions of SFAS No. 128, "Earnings per Share". Under SFAS No. 128, basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if options and warrants were exercised resulting in the issuance of common stock. Prior-period amounts have been restated to conform to the requirements of SFAS No. 128. Stock dividend: On August 7, 1997, August 7, 1996 and August 9, 1995, the Board of Directors declared 25% stock splits, effected in the form of stock dividends. All per share information presented in the accompanying financial statements has been adjusted to reflect these stock dividends. Financial instruments: All financial instruments of the Company are carried at cost, which approximates fair value with the exception of interest rate collar agreements. During 1997, the Company entered into three notional value interest rate collar agreements covering $100 of debt. Under these agreements the Company's interest rate is variable between certain limits under one of the agreements and variable up to and including 8% under the other two ($40 is variable from 5.8% to 8% and $60 is variable up to 8%). All three collar agreements became effective on May 2, 1997 and have terms of three years. Net receipts or payments under the collar agreements are recognized as adjustments to interest expense. As the collar agreements hedge outstanding debt they are accounted for as hedges with gains and losses on the hedge instruments being deferred. The fair value of the interest rate collars at December 31, 1997 was a loss of $0.9. Fair values are based on estimates provided by financial institutions. F-6 35 Goodwill: Goodwill represents the excess of the cost of acquired companies over the sum of identifiable net assets. Goodwill is being amortized on a straight-line basis over forty years. Subsequent to acquiring goodwill, the Company continually evaluates whether events and circumstances, including anticipated future operating results, indicate the remaining estimated useful life of goodwill may warrant revision. Based upon its most recent analysis the Company believes that no material impairment of goodwill exists at December 31, 1997. Foreign currency translation: Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in shareholders' equity as foreign currency translation adjustments. Gains and losses resulting from foreign currency transactions are included in net income and were not significant in the past three years. Use of estimates: The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to use certain estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Reclassifications: Certain reclassifications have been made to prior year amounts to conform to the current year presentation. NOTE 2: BUSINESS ACQUISITIONS Monarch: On June 29, 1995, the Company acquired a 49% interest in Monarch Marking Systems, Inc. ("Monarch"), which had been accounted for using the equity method. On March 3, 1997, the Company acquired the remaining 51% of Monarch for a total purchase of $132. The Company acquired the 49% equity interest of Odyssey Partners, L.P. for $94.1 in cash, a promissory note in the amount of $5.9 at an annual interest rate of 4.88% payable on January 2, 1998, and five year warrants to purchase (a) 1,250,000 shares of the Company's common stock, par value $0.10, at an exercise price of $14.00 per share and (b) 250,000 shares of the Company's common stock at an exercise price of $17.50 per share. The warrants have been recorded at a fair value of approximately $9.7 at the date of acquisition. Upon completion of the acquisition, the Chairman and the President of Monarch each received 156,536 shares of the Company's common stock valued at $15.20 per share, in exchange for the shares of Monarch common stock owned by each of them. Additionally, the management of Monarch received incentive stock options to purchase an aggregate of 1,244,469 shares of the Company's common stock pursuant to the Company's 1990 Employee Stock Option Plan in exchange for outstanding options to purchase Monarch common stock. The options have been recorded at a fair value of approximately $16 at the date of acquisition. The acquisition was accounted for as a purchase with assets acquired and liabilities assumed recorded at their estimated fair values at the date of acquisition. The excess of the purchase price and transaction costs over the fair value of net assets acquired was recorded as goodwill. The resulting goodwill of $148.5 (including $13.5 related to the initial 1995 investment) is being amortized over 40 years. The fair value of assets acquired and liabilities assumed is as follows: Current assets $ 96.2 Property, plant and equipment 44.1 Goodwill 148.5 Other assets 11.8 Current liabilities (37.6) Long-term debt (105.8) Other (5.1) -------- Net assets 152.1 Initial investment (June 1995) (20.1) -------- $ 132.0 ========
F-7 36 The purchase price allocation is not complete and adjustments to goodwill may be necessary, reflecting the outcome of pending litigation with Pitney Bowes, Inc. (the former owner of Monarch). The litigation relates to a purchase price adjustment to which the Company believes it is entitled. It is expected that the matter will be finalized by the end of 1998. The operating results of Monarch are included in the accompanying consolidated statements of income beginning March 3, 1997. The following unaudited pro forma results of operations assume the acquisition occurred as of January 1,1996. These pro forma results do not purport to be indicative of the results of operations which may result in the future.
YEARS ENDED DECEMBER 31, 1997 1996 ---- ---- Sales $ 606.8 $ 578.6 ------- ------ Income before extraordinary item $ 22.8 $ 30.9 ------- ------ Net income $ 14.2 $ 30.9 ------- ------ Basic earnings per common share: Before extraordinary item $ 0.47 $ 0.65 Extraordinary item (0.18) -- ------- ------ Net income $ 0.29 $ 0.65 ------- ------ Diluted earnings per common share: Before extraordinary item $ 0.46 $ 0.63 Extraordinary item (0.17) -- ------- ------ Net income $ 0.29 $ 0.63 ------- ------
IIMAK: On October 28, 1997 the Company completed the acquisition of International Imaging Materials, Inc. ("IIMAK"), which was accounted for as a pooling of interests. In connection with the merger, each outstanding share of IIMAK common stock was converted into 1.5 shares of the Company's common stock and all existing IIMAK warrants and options were converted into warrants and options to purchase the Company's common stock. As a result of the merger, shares of IIMAK common stock were converted into 12,431,757 shares of the Company's common stock and IIMAK options and warrants were converted into 1,937,055 of the Company's options and warrants. As the merger was accounted for as a pooling of interests, the financial statements have been restated to include the results of IIMAK for all periods presented. Prior to the merger, IIMAK used a fiscal year ending on March 31. Accordingly, the restated financial statements combine the March 31, 1997 and 1996 financial statements of IIMAK with the December 31, 1996 and 1995 financial statements of the Company, respectively. Net sales and net income of IIMAK for the three month period ended March 31, 1997 were $25.4 and $2.5, respectively, with the net income reflected as an adjustment to retained earnings effective January 1, 1997. Combined and separate results of the Company and IIMAK during the periods preceding the merger were as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 ( UNAUDITED) PAXAR IIMAK ADJUSTMENTS COMBINED ----- ----- ----------- -------- Sales $ 342.3 $ 77.4 ($ 6.2) $ 413.5 -------- ------- ------ -------- Income before extraordinary item $ 19.0 $ 7.0 -- $ 26.0 Extraordinary item (8.6) -- -- (8.6) -------- ------- -------- Net income $ 10.4 $ 7.0 -- $ 17.4 ======== ======= ========
No adjustments were required to conform the accounting policies of the companies. The Company recognized acquisition-related costs of $8.3 in the fourth quarter of 1997. Included in these costs are $5 of fees and expenses specifically related to the merger and costs of $3.3 related to the termination and severance of certain members of IIMAK management pursuant to pre-existing IIMAK agreements. Other: During 1997 and 1996, the Company made several small acquisitions. The total purchase price, net of cash acquired, was $2.6 in 1997 and $4.3 in 1996. The acquisitions did not have a material effect on the Company's financial statements. F-8 37 NOTE 3: EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF DEBT On April 11, 1997, Monarch completed the purchase of $100 of principal amount of its 12 1/2 % Senior Notes due July 1, 2003 (the "Notes"). Monarch paid $120.2, consisting of $100 of principal, $3.5 of accrued interest, a $13.7 premium, and a consent payment of $3. Upon payment, all of the outstanding Notes were canceled and the indenture under which they were issued was terminated. The early redemption of the Notes resulted in an extraordinary charge of $8.6, net of income taxes of $5.1. NOTE 4: INTEGRATION/RESTRUCTURING COSTS During 1997, the Company recognized a total of $6.9 in restructuring charges related to the integration and restructuring of Monarch's operations. In the quarter ended June 30, 1997, the company recognized $2 in costs related to the consolidation of certain facilities, the severance of personnel and other costs. During the quarter ended December 31, 1997 the Company approved a plan to sever an additional 132 people from the Monarch, Miamisburg, Ohio operation. In connection with this plan, a charge of $4.9 was recognized. The Company expects that the severance plan will be complete during 1998, with estimated annual savings of $9. Of the total $6.9, $2.5 had been paid as of December 31, 1997. NOTE 5: INVENTORIES The components of inventories are set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 ----- ----- Raw materials $56.3 $23.1 Work-in-Process 8.6 8.2 Finished goods 32.5 15.2 ----- ----- $97.4 $46.5 ===== =====
If all inventories were reported on a FIFO basis, inventories would be approximately $1.8 and $1.6 higher at December 31, 1997 and 1996 respectively. NOTE 6: PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment is set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 ---- ---- Machinery and equipment $200.5 $160.9 Buildings and building improvements 66.8 41.0 Land 5.9 2.6 ------ ------ 273.2 204.5 Accumulated depreciation (86.1) (67.2) ------ ------ $187.1 $137.3 ====== ====== Estimated useful lives are principally: Buildings and building improvements 5 to 40 years Machinery and equipment 3 to 10 years
NOTE 7: DUE TO BANKS A summary of amounts due to banks is set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 ---- ---- Bank overdrafts $1.8 $ 1.6 Notes payable (a) - 8.5 Other foreign 0.7 0.1 ---- ----- $2.5 $10.2 ==== =====
(a) IIMAK maintained lines of credit with two banks totaling $40 which were due on demand and bore interest at either the London Interbank Offered Rate (LIBOR) plus .20%, the bank's cost of funds rate plus .50%, or the Prime Rate. At December 31, 1996, there was $8.5 outstanding under the facilities at 5.8%. These lines were terminated effective November 1997 in conjunction with the acquisition of IIMAK by the Company. F-9 38 NOTE 8: LONG TERM DEBT A summary of long-term debt is set forth below:
YEARS ENDED DECEMBER 31 1997 1996 ---- ---- Bank credit facility (a) $ 222.2 $ -- Unsecured revolving bank facility (b) -- 10.2 Economic Development Revenue Bonds due 2011 (c) 8.0 8.0 Secured term loans on certain plant and equipment(d) 1.4 2.3 Secured and unsecured loans on foreign property, plant and machinery (e) 1.2 2.0 Other 0.3 0.3 -------- ------- 233.1 22.8 Less current maturities 21.7 1.7 -------- ------- $ 211.4 $ 21.1 ======== =======
Maturities of long-term debt for the five years subsequent to December 31, 1997 are: $21.7, $24.7, $29.3, $29.1, $33.1 and $95.2 thereafter. (a) On March 3, 1997, the Company entered into a six-year, $280 credit facility with Fleet Bank, N.A. and Wachovia Bank of Georgia, N.A., as lead lenders, consisting of $140 term loan facility and a $140 revolving credit facility. Borrowings under the term loan and revolving credit facilities bear interest at rates referenced to the London Interbank Offered Rate (LIBOR) with applicable margins varying in accordance with the Company's attainment of specified financial tests (.75% at December 31, 1997 resulting in LIBOR based loans bearing interest at 6.50% -6.75% at December 31, 1997), or the Prime Rate, as defined (8.5% at December 31, 1997). The borrowings are guaranteed by the domestic subsidiaries of the Company. The Company has the option of electing either interest rate. As of December 31, 1997, borrowings under the term loan and revolving credit facilities were $135 and $87.2, respectively, and the amount available was $52.8. An annual commitment fee of .25% is payable on the total amount of the revolving credit facility. The agreement requires the Company, among other things, to maintain net worth (as defined) of no less than $200 debt, to EBITDA ratio of less than 3.25 to 1 and a fixed charge coverage ratio of not less than 1.5 to 1. The Company is in compliance with all covenants as of December 31, 1997. (b) The unsecured revolving bank facility provided for a maximum of $60 of borrowings and was terminated on March 3, 1997. On borrowings under this revolver, the Company had the option of electing the Prime Rate (8.25% at December 31, 1996) or LIBOR plus .35%-.65% (6.1% at December 31, 1996), depending on the fixed charge coverage ratio of the Company at the date of the borrowings, as defined by the credit agreement. (c) Economic Development Revenue Bond financed facilities have been accounted for as plant and equipment and the related bonds are recorded as long-term debt. The variable rate bonds for the years ended December 31, 1997 and 1996 had a weighted average interest rate of 3.8% and 3.6%, respectively. (d) The balances outstanding at December 31, 1997 and 1996 are payable by IIMAK in monthly installments, bear interest at variable rates based on the Prime Rate, are secured by certain plant and equipment, require the maintenance of certain financial ratios, limit the amount of capital expenditures and mature substantially by 2001. (e) The balances outstanding at December 31, 1997 and 1996 are payable by the Collitex Group, bear interest at rates ranging from 4.75% -13.5%, mature serially through 2003 and are secured by property, plant, machinery and lending institution bonds. The Company also maintains a $3 unsecured line of credit with a bank which expires September 15, 1998. This line of credit is available for standby and documentary letters of credit of which there were none outstanding at December 31, 1997. F-10 39 NOTE 9: INCOME TAXES The provision for income taxes contains the following:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Federal Current $ 3.1 $ 6.4 $ 5.7 Deferred 5.7 3.6 3.3 Foreign Current 6.1 2.3 1.8 Deferred (2.3) 0.1 (0.1) State 0.9 1.0 1.0 ------- ------- ------- $ 13.5 $ 13.4 $ 11.7 ======= ======= =======
The cumulative amounts of each temporary difference that comprise the net deferred tax liability are as follows:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Deferred tax assets: Alternative minimum and investment tax credit carryforwards $ 4.3 $ 8.2 $ 7.2 Costs capitalized to inventory 1.2 (0.2) (0.2) Accrued integration/restructuring 1.4 -- -- Other accrued liabilities and allowances 9.0 1.5 1.8 Other 1.2 -- -- ------- ------- ------- Total gross deferred tax asset 17.1 9.5 8.8 Valuation allowance -- (3.7) (2.7) ------- ------- ------- Net deferred tax asset 17.1 5.8 6.1 Deferred tax liability: Depreciation and other property basis differences (34.4) (24.3) (21.6) ------- ------- ------- Net deferred tax liability $ (17.3) $ (18.5) $ (15.5) ======= ======= =======
The valuation allowance decreased principally due to the expiration of certain of the credit carryforwards for which a valuation allowance had been made in prior years. An analysis of the differences between the federal statutory income tax rate and the effective tax rate is set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Federal statutory tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefit 1.5 1.4 1.7 Foreign taxes less than Federal rate (7.5) (4.8) (6.2) Non-deductible merger costs 4.3 -- -- Affiliate dividend exclusion -- (2.5) -- All other, net 2.3 (0.3) 0.9 ---- ---- ---- 35.6% 28.8% 31.4% ==== ==== ====
Collitex and Orvac currently benefit from tax incentives in Italy which significantly reduce the Company's effective tax rate. These incentives expire through 1999. F-11 40 United States income taxes have not been provided on undistributed foreign earnings of $53 since the Company intends to permanently reinvest such earnings in expanding foreign operations. The un-recognized U.S. tax liability on the undistributed earnings is approximately $10 at December 31, 1997. Total foreign based pre-tax income was approximately $21, $15, and $12 for 1997, 1996 and 1995, respectively. NOTE 10: RELATIONSHIP WITH FUJICOPIAN CO., LTD. The Company manufactures thermal transfer ribbons pursuant to a license agreement with Fujicopian Co., Ltd. which expires in 2008. Royal expenses under the agreement totaled $2.6 in 1997 and $2.7 in each of 1996 and 1995. NOTE 11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES A summary of accounts payable and accrued liabilities is set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 ---- ---- Accounts payable $ 31.9 $ 19.0 Accrued payroll costs 11.9 4.4 Accrued acquisition related costs 6.2 -- Other accrued liabilities 32.8 10.9 ------- ------- $ 82.8 $ 34.3 ======= =======
NOTE 12: EMPLOYEE SAVINGS PLANS The Company maintains three voluntary employee savings plans adopted pursuant to Section 401(k) of the Internal Revenue Code. The Company's contribution under the Plans was $3.3, $1.2 and $0.9 during 1997, 1996 and 1995 respectively. NOTE 13: BUSINESS SEGMENTS The Company operates in two business segments: Apparel Identification and Printing Solutions. The Apparel Identification business includes label systems, bar code systems, labels, tags, and related supplies for apparel manufacturers and retailers. The Printing Solutions business, comprised principally of Monarch and IIMAK includes electronic bar code printers, mechanical identification and price marking machines and associated supplies. The supplies include a variety of paper substrates and inks, especially thermal transfer ink ribbons. Corporate represents amounts not attributable to specific business segments, including acquisition-related costs and integration/restructuring costs in 1997. Included in the Company's consolidated balance sheet at December 31, 1997 are the net assets of the Company's European and Asian operations of approximately $42.4 and $31.0, respectively. The following presents financial information for the business segments:
YEAR ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Sales to unaffiliated customers: Apparel Identification $ 247.0 $ 219.8 $ 201.5 Printing Solutions 320.2 106.2 87.9 -------- -------- -------- Total $ 567.2 $ 326.0 $ 289.4 ======== ======== ======= Operating Income: Apparel Identification $ 37.8 $ 34.3 $ 31.8 Printing Solutions 37.6 17.9 15.3 -------- -------- -------- Sub-total 75.4 52.2 47.1 Corporate expenses (23.7) (7.9) (8.7) -------- -------- -------- Total $ 51.7 $ 44.3 $ 38.4 ======== ======== ======== Capital expenditures: Apparel Identification $ 15.4 $ 13.2 $ 11.2 Printing Solutions 14.4 13.8 17.5 Corporate 0.5 0.6 1.1 -------- -------- -------- Total $ 30.3 $ 27.6 $ 29.8 ======== ======== ========
F-12 41 Depreciation expense: Apparel Identification $ 9.2 $ 8.7 $ 7.2 Printing Solutions 11.6 6.7 5.6 Corporate 0.6 0.5 0.5 --------- --------- --------- Total $ 21.4 $ 15.9 $ 13.3 ========= ========= ========= Assets: Apparel Identification $ 183.2 $ 182.2 $ 157.1 Printing Solutions 415.2 117.6 115.5 --------- --------- --------- Total $ 598.4 $ 299.8 $ 272.6 ========= ========= =========
GEOGRAPHIC INFORMATION: YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Sales to unaffiliated customers: North America $ 415.1 $ 246.7 $ 226.7 Europe 107.8 53.2 42.7 Asia 44.3 26.1 20.0 --------- --------- --------- Total $ 567.2 $ 326.0 $ 289.4 ========= ========= ========= Operating Income: North America $ 55.0 $ 37.8 $ 35.5 Europe 8.8 7.2 6.6 Asia 11.6 7.2 5.0 --------- --------- --------- Sub-total 75.4 52.2 47.1 Corporate costs and other (23.7) (7.9) (8.7) --------- --------- --------- Total $ 51.7 $ 44.3 $ 38.4 ========= ========= ========= Assets: North America $ 429.5 $ 218.6 $ 208.7 Europe 119.1 61.8 50.4 Asia 49.8 19.4 13.5 --------- --------- --------- Total $ 598.4 $ 299.8 $ 272.6 ========= ========= =========
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes is set forth below:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Interest $ 10.8 $ 2.2 $ 1.7 Income Taxes $ 6.0 $ 7.0 $ 7.6
Additional supplemental information on non-cash investing and financing activities is included in Notes 2 and 15. NOTE 15: SHAREHOLDERS' EQUITY The Company has various stock-based compensation plans including stock options and an Employee Stock Purchase Pan. On April 25, 1997, the Company's shareholders approved the 1997 Employee Stock Option Plan under which shares of common stock are reserved for issuance upon the exercise of options to be granted to key employees and directors. On October 28, 1997, the Company's shareholders approved an increase in the number of shares of common stock reserved for issuance under the 1997 Employee Stock Option Plan from 1,875,000 shares to 5,000,000 shares of common stock. In addition, the 1990 Employee Stock Option Plan approved by the Company's shareholders on April 24, 1990 has 2,270,780 shares of common stock, as adjusted for subsequent stock dividends reserved for issuance upon the exercise of options granted to key employees and directors. The plans provide for issuances in the form of qualified or non-qualified stock options, and stock appreciation rights may be granted in tandem with non-qualified stock options. The option price per share of qualified stock options cannot be less than 100% of the market value at the date of grant. The option price per share of non-qualified stock options and stock appreciation rights are determined by the Board of Directors at its sole discretion. F-13 42 The options vest over periods of up to four years. Options granted prior to 1994 are for a period of five years and those granted subsequently, for a period of ten years. The following is a summary of outstanding stock options:
Number of Shares (in millions) Weighted Average Exercise Price ------------- ------------------------------- 1995 Outstanding at beginning of year 2.8 $ 7.12 Granted 1.3 $ 11.35 Exercised (0.6) $ 3.48 Canceled/Forfeited (0.4) $ 17.56 ---- Outstanding at end of year 3.1 $ 8.35 1996 Granted 0.9 $ 10.74 Exercised (0.7) $ 4.16 Canceled/Forfeited (0.2) $ 12.90 ---- Outstanding at end of year 3.1 $ 9.59 1997 Granted 1.8 $ 7.53 IIMAK grants in first quarter (0.1) $ 11.22 Exercised (0.7) $ 5.61 IIMAK exercised in first quarter 0.2 $ 3.33 Canceled/Forfeited (0.1) $ 8.19 ---- Outstanding at end of year 4.2 $ 9.79 ====
In connection with the acquisition of Monarch, 1,244,469 stock options were issued, at equivalent intrinsic value, to replace stock options to purchase Monarch common stock. The following table summarizes information about stock options outstanding as of December 31, 1997:
Weighted Average Options Outstanding Weighted Average Remaining Range of Exercise Prices (in millions) Exercise Price Contractual Life - ------------------------ ------------- -------------- ---------------- Options Outstanding $1.00 - $6.00 1.1 $ 3.96 7.9 $6.00 - $10.00 1.0 $ 7.55 7.4 $10.00 - $18.00 2.1 $ 13.84 7.9 --- 4.2 $ 9.79 7.8 === Options Exercisable $1.00 - $6.00 1.0 $ 3.83 $6.00 - $10.00 0.8 $ 7.53 $10.00 - $18.00 1.7 $ 13.82 --- 3.5 $ 9.58 ===
Total compensation expense recognized for stock-based compensation for 1997, 1996 and 1995 was $0.5, $0.4 and $0.1, respectively. The Company accounts for stock options under Accounting Principles Board Opinion No. 25, pursuant to which no compensation cost has been recognized for the options granted. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS123: F-14 43
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Net income: As reported $ 15.8 $ 33.1 $ 25.6 Pro forma $ 14.1 $ 32.3 $ 25.2 Basic earnings per share: As reported $ 0.33 $ 0.69 $ 0.54 Pro forma $ 0.29 $ 0.68 $ 0.53 Diluted earnings per share: As reported $ 0.32 $ 0.68 $ 0.52 Pro forma $ 0.28 $ 0.66 $ 0.52
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The following summarizes the assumptions used in the model:
1997 1996 1995 ---- ---- ---- Risk-free interest rate 6.0% 6.1% 6.1% Expected years until exercise 7.5 7.5 7.5 Expected stock volatility 38.4% 38.4% 38.4%
The Company maintains an Employee Stock Purchase Plan which allows employees to purchase a certain amount of stock at a discount of 20% to the market price. The Company may sell up to 818,847 shares under this plan and, as of December 31, 1997, 533,619 shares were available for future purchases. The weighted average fair value of shares sold in 1997 was $17.80. The total number of shares issued under this plan was 71,343, 50,324 and 57,781 in 1997, 1996 and 1995, respectively. As discussed in Note 2, warrants were granted to certain parties in connection with the acquisition of Monarch. Total outstanding warrants at December 31, 1997 were with exercise prices as follows:
1997 1996 ---- ----- Warrants outstanding 1.6 0.1 Warrants exercisable 0.1 0.1 Exercise price of exercisable warrants $6.67 $6.67
The remaining 1.5 warrants become exercisable on March 3, 1998 at prices between $14.00 and $17.50. During 1997, 1996 and 1995, the Company made loans to certain officers for the purpose of exercising options and paying the related income tax liability. Such loans were repaid through the surrender of Company stock. The following analyzes the activity in relation to these loans:
1997 1996 1995 ---- ---- ---- Loans made in connection with exercise of stock options $ 0.8 $ -- $ 0.5 Loans made in connection with income tax liabilities $ 0.8 $ 1.6 $ 2.8 Surrender of shares to repay loans $ 2.3 $ 4.0 $ 4.2 Surrender of shares to exercise options $ -- $ 0.7 $ 0.7
No loans from officers are outstanding at December 31, 1997. F-15 44 NOTE 16: EARNINGS PER COMMON SHARE The reconciliation of basic and diluted per-share computation is as follows:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- Income before extraordinary item $ 24.4 $ 33.1 $ 25.6 Extraordinary item (8.6) -- -- -------- -------- -------- Net income $ 15.8 $ 33.1 $ 25.6 ========= ========= ========= Average common shares (basic) 48.1 47.7 47.7 Options and warrants 1.4 1.3 1.1 -------- -------- -------- Adjusted average common shares (diluted) 49.5 49.0 48.8 ========= ========= ========= Earnings per common share: Basic Income before extraordinary item $ 0.51 $ 0.69 $ 0.54 Extraordinary Item (0.18) -- -- -------- -------- -------- Net income $ 0.33 $ 0.69 $ 0.54 ========= ========= ========= Diluted Income before extraordinary item $ 0.49 $ 0.68 $ 0.52 Extraordinary item (0.17) -- -- -------- -------- -------- Net income $ 0.32 $ 0.68 $ 0.52 ========= ========= =========
NOTE 17: COMMITMENTS AND CONTINGENT LIABILITIES A manufacturing facility in Sayre, Pennsylvania, owned beneficially by principal shareholders of the Company, is leased at an annual rental of $0.1 through 1997. An office building in Pearl River, New York also owned beneficially by principal shareholders, was leased at an annual rental of $0.1 through 1995. Total rental expense for all operating leases amounted to $6.7 in 1997, $2.8 in 1996 and $2.6 in 1995. Minimum rental commitments for all non-cancelable operating leases for the years 1998-2002 are $5.9, $4.2, $2.7, $2.1 and $1.6, respectively. The minimum total rental commitment for all years subsequent to 2002 is $4.4. The Company accrues severance expense for employees of its Italian subsidiaries, as required by Italian statue, and these amounts are included in other liabilities in the accompanying consolidated financial statements. The Company has been named a potentially responsible party relating to contamination which occurred at certain superfund sites. Management believes the ultimate outcome of settling these contingencies is not expected to be material. In the ordinary course of business, the Company and its subsidiaries are involved in certain disputes and litigation, none of which will in the opinion of management, have a material adverse effect on the Company's financial position or results of operations. F-16 45 NOTE 18: CONDENSED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 1997 Sales $ 105.9 $ 158.9 $ 148.8 $ 153.6 Operating income 13.9 17.3 16.7 3.8 Income (loss) before extraordinary item 8.2 8.6 9.2 (1.6) Net income (loss) 8.2 -- 9.2 (1.6) Basic earnings (loss) per common share: Income (loss) before extraordinary item 0.17 0.18 0.19 (0.03) Net income (loss) 0.17 -- 0.19 (0.03) Diluted earnings (loss) per common share: Income (loss) before extraordinary item 0.17 0.17 0.18 (0.03) Net income (loss) 0.17 -- 0.18 (0.03) 1996 Sales $ 77.6 $ 84.2 $ 79.5 $ 84.7 Operating income 10.5 11.8 11.0 11.0 Net income 7.2 8.5 8.3 9.1 Basic earnings per common share: Net income 0.15 0.18 0.18 0.18 Diluted earnings per common share: Net income 0.15 0.18 0.17 0.18
All per share data have been adjusted to reflect stock dividends. F-17 46 PAXAR CORPORATION AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
ADDITIONS BALANCE AT CHARGED BEGINNING OF TO COSTS AND BALANCE AT DESCRIPTION YEAR EXPENSES OTHER (1) DEDUCTIONS (2) END OF YEAR - ----------- ---- -------- --------- -------------- ----------- Year ended December 31, 1997 Allowance for doubtful accounts $ 1.0 $ 0.9 $ 3.7 $ 1.2 $ 4.4 Year ended December 31, 1996 Allowance for doubtful accounts $ 0.8 $ 0.6 -- $ 0.4 $ 1.0 Year ended December 31, 1995 Allowance for doubtful accounts $ 0.6 $ 0.4 -- $ 0.2 $ 0.8
(1) Allowance related to acquisition. (2) Write-off of uncollectible accounts, net of recoveries and other. F-18 47 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. PAXAR CORPORATION By: /s/ Arthur Hershaft - ----------------------------- Arthur Hershaft Chairman of the Board of Directors, President and Chief Executive Officer Dated: March 31, 1998 48 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 and on the dates indicated. By: /s/ Arthur Hershaft By: /s/ Jack Plaxe - ---------------------------------- ---------------------------------- Arthur Hershaft Jack Plaxe Chairman of the Board of Directors, President Senior Vice President and Chief Financial Officer and Chief Executive Officer (Principal Financial and Accounting Officer) (Principal Executive Officer) Dated: March 31, 1998 Dated: March 31, 1998 By: /s/ Victor Hershaft By: /s/ Leo Benatar - ---------------------------------- ---------------------------------- Victor Hershaft Leo Benatar Director Director Dated: March 31, 1998 Dated: March 31, 1998 By: /s/ Jack Becker By: /s/ Robert G. Laidlaw - ---------------------------------- ---------------------------------- Jack Becker Robert Laidlaw Director Director Dated: March 31, 1998 Dated: March 31, 1998 By: /s/ James C. McGroddy By: /s/ Sidney Merians - ---------------------------------- ---------------------------------- James C. McGroddy Sidney Merians Director Director Dated: March 31, 1998 Dated: March 31, 1998 By: /s/ David E. McKinney By: /s/ Walter W. Williams - ---------------------------------- ---------------------------------- David E. McKinney Walter W. Williams Director Director Dated: March 31, 1998 Dated: March 31, 1998 By: /s/ Thomas R. Loemker By: /s/ John W. Paxton - ---------------------------------- ---------------------------------- Thomas R. Loemker John W. Paxton Director Director Dated: March 31, 1998 Dated: March 31, 1998
49 EXHIBIT INDEX No. Description --- ----------- 3.1 Amended and Restated Certificate of Incorporation. (G) 3.2 Amendment to Amended and Restated Certificate of Incorporation. (M) 3.3 By-Laws (A) 4.1 Warrant Agreement for "A" Warrants between the Registrant and Odyssey Partners, L.P. dated March 3, 1997. (J) 4.2 Odyssey Partners, L.P. Certificate for 1,000,000 Warrants dated March 3, 1997. (J) 4.3 Warrant Agreement for "B" Warrants between the Registrant and Odyssey Partners, L.P. dated March 3, 1997. (J) 4.4 Odyssey Partners, L.P. Certificate for 200,000 Warrants dated March 3, 1997. (J) 4.5 Bear Stearns International, Ltd. Certificate for 75,000 Warrants dated as of February 25, 1998. 10.1 Lease, dated October 1, 1974, for executive offices of Registrant in Pearl River, New York. (A) 10.2 Employment Agreement, dated as of December 16, 1986, between Registrant and Arthur Hershaft. (C) 10.3 Employment Agreement, dated February 13, 1989, between Registrant and Victor Hershaft. (D) 10.4 Stock Purchase Agreement, by and between Arthur Hershaft and Registrant, dated as of December 19, 1989. (E) 10.5 Registrant's 1981 Incentive Stock Option Plan. (B) 10.6 Registrant's 1990 Employee Stock Option Plan. (F) 10.7 Registrant's 1997 Incentive Stock Option Plan. (N) 10.8 Amended and Restated Stock Purchase Agreement, by and between Arthur Hershaft and the Registrant. (G) 10.9 Omnibus Purchase and Sale Agreement dated June 6, 1995 by and between Pitney Bowes Inc., Monarch Marking Systems, Inc., Pitney Bowes Marking Systems Ltd., Pitney Bowes International Holdings Inc., Pitney Bowes France S.A. and Monarch Acquisition Corp. (H) 10.10 Stock Purchase Agreement dated as of December 20, 1996 between the Registrant and Odyssey Partners, L.P. (I) 10.11 Amendment No. 1 to Stock Purchase Agreement dated as of March 3, 1997 between the Registrant and Odyssey Partners, L.P. (I) 10.12 Agreement and Plan of Merger dated as of March 3, 1997 by and among the Registrant, Monarch Holdings, Inc., Thomas Loemker and John W. Paxton. (J) 50 10.13 Registration Rights Agreement dated as of March 3, 1997 between the Registrant and Odyssey Partners, L.P. (J) 10.14 Credit Agreement dated March 3, 1997. (K) 10.15 Agreement and Plan of Merger dated as of July 15, 1997, among the Registrant, Ribbon Manufacturing, Inc., and International Imaging Materials, Inc. (L) 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of KMPG Peat Marwick LLP. 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule - ----------- (A) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1980. (B) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. (C) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (D) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (E) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (F) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (G) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (H) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated June 29, 1995. (I) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated December 20, 1996. (J) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated March 3, 1997. (K) Incorporated herein by reference from Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. (L) Incorporated herein by reference from Exhibits to Registrant's Current Report on Form 8-K dated July 15, 1997. (M) Incorporated herein by reference from Annex D to the Joint Proxy Statement/Prospectus included in the Registrant's Registration Statement on Form S-4 (File No. 333-36283), filed on September 24, 1997. (N) Incorporated herein by reference from Exhibits to the Registrant's Registration Statement on Form S-8 (File No. 333-38923), filed on October 28, 1997. EX-4.5 2 BEAR STEARNS INTERNATIONAL, LTD. CERTIFICATE 1 EXHIBIT 4.5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER SAID ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. PAXAR CORPORATION Warrant to Subscribe for 75,000 Shares COMMON STOCK SUBSCRIPTION WARRANT as of February 25, 1998 Not Transferable or Exercisable Except Upon Conditions Herein Specified Void after May 5, 1998 THIS CERTIFIES that, for value received, BEAR, STEARNS INTERNATIONAL LIMITED, is entitled to subscribe for and purchase from PAXAR CORPORATION (the "Corporation"), a New York corporation, Seventy-Five Thousand (75,000) shares (subject to adjustment from time to time as hereinafter provided) of Common Stock, $0.10 par value (the "Common Stock") of the Corporation, at an exercise price of $6.662/3 per share (such price, subject to adjustment in accordance with Section 4 hereof, is hereinafter called the "Warrant Price"), at any time or from time to time on and after the date hereof up to and including May 5, 1998 (the period beginning on the date of this Warrant and ending on May 5, 1998 being hereinafter called the "Exercise Period"). This Warrant has been issued in substitution for and upon cancellation of the Common Stock Subscription Warrant, dated May 6, 1988, from International Imaging Materials, Inc., the predecessor in interest to the Corporation, to Norstar Bank, National Association, a predecessor in interest to the registered holder hereof. 2 Section 1 Exercise of Warrants The rights represented by this Warrant may be exercised by the holder hereof, in whole at any time or in part from time to time during the Exercise Period, but not as to a fractional share of Common Stock, by the surrender of this Warrant (properly endorsed) at the office of the Corporation, at 105 Corporate Park Drive, White Plains, New York 10604 (or at such other agency or office of the Corporation in the United States of America as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Corporation), together with a duly executed Notice of Exercise and payment to the Corporation of the Warrant Price in cash or by check for each share being purchased. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the holder, shall be delivered to the holder hereof within a reasonable time not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant Price, and any applicable taxes was made, irrespective of the date of delivery of such certificate. Section 2 Covenants as to Common Stock The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof. The Corporation further covenants and agrees that the Corporation will at all times have authorized and reserved, free from preemptive or other preferential rights, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. The Corporation further covenants and agrees that if any shares of capital stock to be reserved for the purpose of the issuance of shares upon the exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon exercise, then the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. If and so long as the Common Stock issuable upon the exercise of this Warrant is listed on any national securities exchange, the Corporation will, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all shares of such Common Stock issuable upon exercise of this Warrant. -2- 3 Section 3 Adjustment of Number of Shares Upon each adjustment of the Warrant Price as provided in Section 4, the holder of this Warrant shall thereafter be entitled to purchase, at the Warrant Price resulting from such adjustment, the number of shares (calculated to the nearest one hundredth of a share) obtained by multiplying the Warrant Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Price resulting from such adjustment. Section 4 Adjustment of Warrant Price The Warrant Price shall be subject to adjustment from time to time as follows: (i) If the Corporation shall at any time or from time to time during the Exercise Period issue shares of Common Stock other than Excluded Stock (as hereinafter defined) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Common Stock, the Warrant Price in effect immediately prior to each such issuance shall forthwith (except as provided in this clause (i)) be adjusted to a price equal to the quotient obtained by dividing: (A) an amount equal to the sum of (x) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and pursuant to clause (ii) below) immediately prior to such issuance multiplied by the Warrant Price in effect immediately prior to such issuance plus (y) the total consideration received by the Corporation upon such issuance, by (B) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately after the issuance of such Common Stock. For the purpose of any adjustment of the Warrant Price pursuant to this clause (i), the following -3- 4 provisions shall be applicable. (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors of the Corporation, irrespective of the accounting treatment thereof; provided, however, that such fair market value as determined by the Board of Directors of the Corporation shall not exceed the aggregate Current Market Price (as hereinafter defined) of the shares of Common Stock being issued. (3) In the case of the issuance of (i) options, warrants or other rights to purchase or subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options, warrants or other rights to purchase or subscribe for Common Stock shall be deemed to have been issued at the time such options, warrants or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such exercise), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options, warrants or other rights to purchase or subscribe for such convertible or exchangeable securities and subsequent conversions or exchanges thereof shall be deemed to have been issued at the time such securities were issued or such options, warrants or rights were issued and for a consideration received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights -4- 5 (the consideration in each case to be determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such conversion, exchange or exercise); (C) on any change in the number of shares of Common Stock deliverable upon exercise of any such options, warrants or rights or conversion of or exchange for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained had the adjustment made upon the issuance of such options, warrants, rights or securities not converted prior to such change been made upon the basis of such change; and (D) on the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained (but reflecting any other adjustments to the Warrant Price required to have been made pursuant to the provisions of Section 4 after the issuance of such options, warrants or rights) had the adjustment made upon the issuance of such options, warrants, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (ii) "Excluded Stock" shall mean shares of Common Stock issued (or deemed to be issued in the case of the options referred to in this clause (ii)) by the Corporation (1) as a stock dividend payable in shares of Common Stock or upon any subdivision or split-up of the outstanding shares of Common Stock, (2) upon the exercise of this Warrant and (3) to employees and directors of the Corporation or any subsidiary, including shares issuable upon exercise of stock options issued or issuable to employees or directors under stock option plans of the Corporation in existence prior to the commencement of the Exercise Period or thereafter adopted, provided that the aggregate number of shares of Common Stock so issued and issuable does not exceed 2,244,000 shares of Common Stock. The number of shares and the price per share set forth in Clauses (1) through (3) hereof shall be subject in all cases to appropriate adjustment in the event of stock dividends, stock splits and similar events. (iii) If, at any time during the Exercise Period, the number -5- 6 of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Warrant Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (iv) If, at any time during the Exercise Period, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then following the record date for such combination, the Warrant Price shall appropriately increase so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. (v) In case, at any time during the Exercise Period, the Corporation shall declare a cash dividend upon its Common Stock payable otherwise than out of earnings or earned surplus or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidence of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends and distributions) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), then, in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend of distribution, the Warrant Price in effect thereafter shall be determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction, the numerator of which shall be an amount equal to the remainder of (x) the Current Market Price of one share of Common Stock less (y) the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive) of the stock, securities, evidences of indebtedness, assets, options or rights so distributed in respect of one share of Common Stock, and the denominator of which shall be such Current Market Price. (vi) In the event, at any time during the Exercise Period, of any capital reorganization, of any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another corporation (other than a consolidation or merger in which the Corporation is the surviving corporation and which does not result in any change in the Common Stock) or of the sale of all or substantially all the -6- 7 properties and assets of the Corporation as an entirety to any other corporation, this Warrant shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which such holder would have been entitled if he had held the Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The Corporation shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor corporation or purchaser, as the case may be, shall assume by written instrument the obligation to deliver to the holder hereof such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder hereof is entitled to receive upon exercise of this Warrant. (vii) All calculations under this Section 4 shall be made to the nearest cent or to the nearest share, as the case may be. (viii) For the purpose of any computation pursuant to this Section 4, the Current Market Price at any date of one share of Common Stock shall be deemed to be the average of the daily closing prices for the 30 consecutive business days ending no more than 15 business days before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 30 business day period). The closing price for each day shall be the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading (or if the Common Stock is not at the time listed or admitted for trading on any such exchange, then such price as shall be equal to the average of the last reported bid and asked prices, as reported by the National Association of Securities Dealers Automated Quotations Systems ("NASDAQ") on such day, or if, on any day in question, the security shall not be quoted on the NASDAQ, then such price shall be equal to the last reported bid and asked prices on such day as reported by The National Quotation Bureau Incorporated or any similar reputable quotation and reporting service if such quotation is not reported by The National Quotation Bureau Incorporated); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to in this clause (viii) are available for the period required hereunder, the Current Market Price shall be determined in good faith by the Board of Directors of the Corporation or, if such good faith determination cannot be made, by a nationally recognized independent investment banking firm selected by the Board of Directors of the Corporation (or if such selection cannot be made, by a nationally recognized independent investment banking firm selected by the American Arbitration Association in accordance with its rules). -7- 8 (ix) Whenever the Warrant Price shall be adjusted as provided in Section 4, the Corporation shall prepare a statement showing the facts requiring such adjustment and the Warrant Price that shall be in effect after such adjustment. The Corporation shall cause a copy of such statement to be sent by mail, first class postage prepaid, to the holder of this Warrant at the address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of the notice required to be mailed under the provisions of subsection (xi) of this Section 4. (x) Adjustments made pursuant to clauses (iii), (iv) and (v) above shall be made on the date such dividend, subdivision, split-up, combination or distribution, as the case may be, is made, and shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to such dividend, subdivision, split-up, combination or distribution. (xi) In the event the Corporation shall propose to take any action of the types described in clauses (iii), (iv), (v) or (vi) of this Section 4, the Corporation shall forward, at the same time and in the same manner, to the holder of this Warrant such notice, if any, which the Corporation shall give to the holders of capital stock of the Corporation. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. (xii) In any case in which the provisions of this Section 4 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of all or any part of this Warrant which is exercised after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such exercise before giving effect to such adjustment; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (xiii) The sale or other disposition of any Common Stock theretofore held in the treasury of the Corporation shall be deemed to be an issuance thereof. Section 5 Call Option The Corporation or its assignee shall have the right to purchase this Warrant, in whole or in part, in connection with the Corporation's initial public offering of its Common Stock by paying to the holder hereof an amount equal to the greater of (i) twice the Warrant Price per share or (ii) an amount per share equal to the public offering price per share less underwriting discounts or commissions applicable thereto, such amount per share in either case to be reduced by the Warrant Price, to be payable upon the closing of the Corporation's initial public offering. -8- 9 Section 6 No Stockholder Rights This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Corporation. Section 7 Transfer of Warrant Subject to compliance with federal and state securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the agency or office of the Corporation referred to in Section 1, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. This Warrant, when endorsed in blank, shall be deemed negotiable, and, when so endorsed the holder hereof may be treated by the Corporation and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Corporation, any notice to the contrary notwithstanding; but until each transfer on such books, the Corporation may treat the registered holder hereof as the owner hereof for all purposes. Section 8 Exchange of Warrant This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Corporation designated in Section 1 hereof, for new Warrants of like tenor representing in the aggregate the rights to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. Section 9 Lost, Stolen, Mutilated or Destroyed Warrant If this Warrant is lost, stolen, mutilated or destroyed, the Corporation shall, on such terms as to security or indemnity as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof and, in the case of a destroyed, lost or stolen Warrant, include evidence satisfactory to the Corporation of the destruction, loss or theft of such Warrant and -9- 10 the ownership thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. Section 10 Covenants of the Corporation (i) Taxes. The Corporation covenants and agrees that it will pay when due and payable any and all federal, state and local taxes which may be payable in respect of the issue of this Warrant, or any Common Stock or certificates therefor issuable upon the exercise of this Warrant. (ii) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant, and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the holder of this Warrant against impairment, including, without limitation, taking such action as may be necessary or appropriate so that upon the exercise of this Warrant in whole or in part and the payment of the Warrant Price of the shares as to which this Warrant is then being exercised, the shares then being issued will be fully paid and nonassessable shares of Common Stock. Section 11 Miscellaneous This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party (or any predecessor in interest thereof) against -10- 11 which enforcement of the same is sought. The headings in this Warrant are for purposes of reference only and shall not affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, PAXAR CORPORATION has caused this Warrant to be executed by its duly authorized officer under its corporate seal and this Warrant to be dated as of February 25, 1998. PAXAR CORPORATION [SEAL] By: /s/ Arthur Hershaft ------------------------- Arthur Hershaft, Chairman ATTEST: /s/ Daniel S. Bishop -------------------------------- Daniel S. Bishop, Vice President and General Counsel -11- 12 FORM OF NOTICE OF EXERCISE [To be signed only upon exercise of Warrant] TO PAXAR CORPORATION The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant for, and to purchase thereunder, ___________________shares of Common Stock, $0.10 par value, of PAXAR CORPORATION, and herewith makes payment of $_________________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to,____________ whose address is_____________________________________________________________________. Dated: ____________________________________ (Signature) ____________________________________ (Address) -12- 13 FORM OF ASSIGNMENT [To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto _____________ the rights represented by the Warrant attached hereto to purchase shares of Common Stock of PAXAR CORPORATION to which the within Warrant relates, and appoints ______________________________________attorney-in-fact to transfer such rights on the books of PAXAR CORPORATION with full power of substitution in the premises. Dated: __________________________________________ (Signature) __________________________________________ (Address) Signed in the presence of: ____________________________________ -13- EX-21.1 3 LIST OF SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 PAXAR CORPORATION SUBSIDIARIES Company Jurisdiction of Organization - ------- ---------------------------- Paxar International, Inc. U.S. Virgin Islands Paxar Capital Corporation New York Paxar do Brasil Ltda. Brazil Paxar Europe Ltd. United Kingdom Paxar Iberia S.A. Spain Paxa Italia S.r.l. Italy Paxar Deutschland, GmbH Germany Paxar Polska Sp. Zo.o Poland Paxar Far East Ltd. Singapore Paxar (Singapore) Pte. Ltd. Singapore Disisit Sistemas de Marcado S.A. Colombia Woven Label Holdings, Inc. New York Collitex S.r.l. Italy T.L.E. S.r.l. Italy Astria S.r.l. Italy Systems Holdings, Inc. New York Orvac S.r.l. Italy Orvac Sud S.r.l. Italy Paxar Latin America S.A. de C.V. Mexico Paxar Benelux BvBA Belgium North Middletown Road Holdings B.V. Netherlands Paxar Graphics Limited United Kingdom Monarch Marking Systems, Inc. Delaware Monarch Marking International Holdings, Inc. Delaware Monarch Finance Corp. Delaware Monarch Marking Systems (S.E.A.) Pte. Ltd. (Singapore) Singapore Monarch Holding France, S.A. France Monarch Marking Systems Deutschland GmbH Germany Monarch Marking Systems Canada Limited Canada Monarch Marking Systems Australia Pty. Limited Australia Monarch Marking Systems de Mexico S.A. de C.V. Mexico Monarch Marking Systems Holdings Limited Delaware Monarch Service Bureau Limited Hong Kong Monarch Marking Systems, S.A. France Monarch Marking Systems Limited France International Imaging Materials, Inc. Delaware IIMAK, DRM, Inc. Delaware International Imaging Materials FSC Ltd. U.S. Virgin Islands EX-23.1 4 CONSENT OF ARTHUR ANDERSEN, L.L.P. 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated February 12, 1998, on the consolidated financial statements and schedule of Paxar Corporation included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-42685, 33-44299 and 333-38923. /s/ Arthur Andersen LLP - ----------------------- ARTHUR ANDERSEN LLP Stamford, Connecticut March 26, 1998 EX-23.2 5 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of International Imaging Materials, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 33-42685, 33-44299 and 333-38923) on Form S-8 of Paxar Corporation of our reports dated April 23, 1997, relating to the consolidated balance sheets of International Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the two-year period ended March 31, 1997, and related schedule, which reports appear in or are incorporated by reference in the December 31, 1997, annual report on Form 10-K of Paxar Corporation. /s/ KMPG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP Buffalo, New York March 26, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 0000075681 PAXAR CORPORATION 1,000 12-MOS DEC-31-1997 DEC-31-1997 13700 0 102400 0 97400 234200 273200 86100 598400 112900 0 0 0 4800 239000 598400 567200 567200 349300 349300 0 0 13800 37900 13500 24400 0 8600 0 15800 0 .32
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 0000075681 PAXAR CORPORATION 1,000 12-MOS DEC-31-1996 DEC-31-1996 5300 0 53800 0 46500 113800 204500 67200 299800 49200 0 0 0 4100 203700 299800 326000 326000 213300 213300 0 0 1900 46500 13400 33100 0 0 0 33100 0 .68
EX-27.3 8 FINANCIAL DATA SCHEDULE
5 0000075681 PAXAR CORPORATION 1,000 12-MOS DEC-31-1995 DEC-31-1995 4000 0 47500 0 47200 107600 177600 51900 272600 53000 0 0 0 3500 169800 272600 289400 289400 190200 190200 0 0 1700 37300 11700 25600 0 0 0 25600 0 .52
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