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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)
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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.
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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
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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-
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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
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*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.
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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.
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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.
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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.