NATIONAL FIBERSTOK CORP, 10-K, 1997-03-31

NATIONAL FIBERSTOK CORP
10-K, 1997-03-31
CONVERTED PAPER & PAPERBOARD PRODS (NO CONTANERS/BOXES)

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UNITED STATES
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 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission File Number 333-8925
NATIONAL FIBERSTOK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2574778
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5775 Peachtree Dunwoody Road 30342
Suite C-150 (Zip code)
Atlanta, Georgia
(Address of principal executive offices)
Registrant's telephone number, including area code: (404) 256-1123
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on: None
Title of Each Class
11 5/8% $100,000,000 Senior Unsecured Notes
____________________________
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. 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 voting stock held by nonaffiliates of the
registrant was $22,299,419 based upon the price at which the outstanding
common stock was originally issued.
<PAGE>

As of December 31, 1996, there are 283,803 shares of the registrant's
Common Stock, par value $0.01 per share outstanding.

ITEM 1. BUSINESS

THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN
ITEMS 1, 3 AND 7 HEREOF, AS WELL AS WITHIN THIS REPORT GENERALLY. IN
ADDITION, WHEN USED IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM
THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
FLUCTUATIONS IN THE COST OF PAPER AND OTHER RAW MATERIALS USED BY THE
COMPANY, CHANGES IN THE ADVERTISING AND PRINTING MARKETS, THE FINANCIAL
CONDITION OF THE COMPANY'S CUSTOMERS, THE CONDITION OF THE UNITED STATES
ECONOMY AND OTHER MATTERS SET FORTH IN THE REPORT. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS
TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE
EVENTS OR CIRCUMSTANCES.

GENERAL

The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial data,
including the financial statements and notes thereto, appearing elsewhere
in this Form 10-K. Unless otherwise stated in this document, references to
(a) "NFC" shall mean National Fiberstok Corporation, a Delaware
corporation, (b) "Transkrit" shall mean the former Transkrit Corporation,
and its subsidiaries and (c) the "Company" shall mean NFC and Transkrit
which was acquired on June 28, 1996 and is included thereafter.

The Company believes that it is a leading designer and manufacturer of
custom paper-based products for the mailer, direct mail, pressure sensitive
label and certain custom envelope markets. The Company has pursued a
strategy of focusing on the rapidly growing markets for non-impact self-
mailers, direct mail products and services and custom pressure sensitive
labels, while maintaining leading positions in more mature markets such as
impact mailers. The Company's products are grouped into four principal
business areas that accounted for the following percentages of 1996 net
sales: impact and non-impact mailer products (22%), direct mail products
and services (14%), custom pressure sensitive labels (19%) and custom
envelopes (45%).

HISTORY

National Fiberstok Acquisition Co. ("NFAC") was formed in 1989 by
McCown De Leeuw, a private investment firm specializing in buying and
building middle market businesses. On September 18, 1989, NFAC purchased
the assets and assumed the liabilities of National Fiberstok Corporation
("NFC"), a manufacturer of custom file folders. NFAC was organized solely
for the purpose of acquiring the net assets of NFC. Subsequent to the
acquisition, NFAC changed its name to NFC. Since its inception, NFC has
pursued an acquisition strategy aimed at creating a leading manufacturer of
custom paper-based communications products targeting the direct mail and
transaction processing industries. In 1992, NFC acquired Diversified
Assembly, Inc., a manufacturer of expanding envelopes, pockets, wallets and
other products for the professional office. In late 1992, NFC also acquired
Double Envelope Corporation, a manufacturer and distributor of custom
envelopes, catalog bind-in order forms and pressure sensitive labels. NFC
<PAGE>

simultaneous with the acquisition of Double Envelope Corporation in 1992
became the sole subsidiary of DEC International, Inc. (the holding
company). In 1996, NFC purchased Transkrit Corporation. Transkrit had three
principal product lines: mailer systems, direct marketing products and
custom pressure sensitive labels.

Transkrit was established in 1938 as a producer of spot-carbonized
sheets supplied to business forms, printers and binders. The company since
that date expanded into a multi-plant operation supplying the pressure
sensitive label and business forms markets. In 1968, Transkrit began
producing impact mailers with the opening of a rotary press facility. In
1986, Transkrit acquired Label Art, Inc., a leading producer of custom
pressure sensitive labels. Transkrit increased its impact mailer market
with the acquisition of Wright Business Forms, Inc.'s mailer product line
and Bedinghaus Communications, Inc. in 1991 and 1992, respectively. In
1993, Transkrit increased its presence in the label market with the
acquisition of Short Run Labels, Inc., a 24-hour turnaround producer of
custom pressure sensitive labels. In 1995, Transkrit relocated its
headquarters and major manufacturing facility from Brewster, New York to
Roanoke, Virginia.

NFC has four principal product lines: custom envelopes, mailer
systems, direct mail products and services and custom pressure sensitive
labels. The following table summarizes the company's historical net sales
by product line (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Custom Envelopes . . . . . . . . . . . . . . . . $49,585 $54,527 $49,841
Mailer Systems . . . . . . . . . . . . . . . . . - - 24,454
Direct Mail Products and Services . . . . . . . . 13,558 13,087 15,771
Custom Pressure Sensitive Labels . . . . . . . . 2,855 3,643 21,276
_______ _______ ________
$65,998 $71,257 $111,342
_______ _______ ________
_______ _______ ________
</TABLE>
MARKET BACKGROUND

MARKET DATA USED THROUGHOUT THIS REPORT WAS OBTAINED FROM INDUSTRY
PUBLICATIONS AND INTERNAL COMPANY ESTIMATES. WHILE THE COMPANY BELIEVES
SUCH INFORMATION IS RELIABLE, THE ACCURACY OF SUCH INFORMATION HAS NOT BEEN
INDEPENDENTLY VERIFIED AND CANNOT BE GUARANTEED.

Mailer Industry

The Company competes in the U.S. mailer market, which includes both
impact mailers and non-impact mailer systems. Mailers are used by a wide
variety of businesses and organizations as a substitute for the most
commonly used mailing method, a printed flatsheet which is folded and
inserted into envelopes. Because of their convenience and cost advantages,
mailers are widely used for the preparation and mailing of invoices,
payroll checks, account and direct deposit statements, W-2 forms and
university grade reports. Management believes that mailers are popular with
direct marketers due to the cost effectiveness of this form of
solicitation.

The introduction of laser and other non-impact printer compatible
mailers, which have numerous advantages relative to traditional spot carbon
<PAGE>

impact mailers, has expanded the range of potential applications for
customers who are willing to substitute mailers for traditional fold and
insert methods. Management believes that the growth of the overall mailer
market has been relatively flat over the past five years as a decline in
impact mailer sales during that period has been largely offset by rapid
growth in sales of non-impact mailers.

Impact mailers are an integrated mailing package with addresses and
other data printed inside the package using built-in carbonized paper and
an impact printer. With estimated annual revenues of $180 million, this
market has a core group of customers who use impact mailers for the
preparation and mailing of payroll checks, vendor payments, direct deposit
statements, collection notices, medical and utility bills and tax notices.
Since the early 1990's, the impact mailer market has decreased in size due
to the rapid growth of laser, inkjet and other non-impact printers which
are not compatible with impact mailers. This contraction in the impact
mailer market has resulted in industry consolidation. Management believes
that the decline in this market will continue, and that the exit of certain
manufacturers provides further consolidation opportunities for focused
competitors such as the Company.

Responding to the changes in office printing technology, a small
number of manufacturers, including the Company, have developed mailers
which are compatible with laser and other non-impact printer systems.
Unlike impact mailers, non-impact mailers are typically sold as an
integrated system with mailer forms and dedicated and patented folding and
sealing equipment. The non-impact mailer offers the cost advantages and
convenience of a mailer form and the versatility and image quality of a
laser printed product. Non-impact mailers have experienced rapid
acceptance for the preparation and mailing of payroll checks, vendor
payments, direct deposit statements and university grade reports.
Management believes that non-impact mailer technology provides an
attractive alternative to traditional mailing methods.

Direct Mail Industry

Direct marketing has become an increasingly important advertising
medium and an integral component of many companies' overall marketing
programs. Direct marketing programs are delivered to a targeted audience
through a variety of channels, including direct mail, telemarketing, print,
radio and television. As consumer data and marketing analyses have become
more sophisticated, advertisers have been able to target more specific
audiences. As a result, advertisers have used a greater number of more
customized, feature-oriented marketing campaigns. Manufacturers and
fulfillment providers, such as the Company, have capitalized on this
industry trend as advertisers have demanded more specialized products and
have outsourced the execution of these campaigns.

Direct mail is the second largest direct marketing segment (after
telemarketing) with 1995 revenues of approximately $30 billion,
representing approximately 23% of total industry expenditures. Over the
past five years, direct mail expenditures have grown at a compound annual
rate of approximately 6%.

The Company competes in the highly fragmented direct mail segment,
where the majority of industry participants are small, specialized firms
formed to capitalize on the industry's growth. Most competitors offer
customers a range of services including strategic and creative design,
information and data base management and tracking and fulfillment
production. Large corporations often undertake direct mail campaigns
internally and represent the other component of the direct mail segment.
<PAGE>

The Company offers a selection of products, including catalog bind-in
order forms, advertising insert booklets and coupons, which are sold
exclusively to the direct mail segment of the direct marketing industry.
The Company also provides direct mail fulfillment services, which include
personalization, addressing and mailing. To complement these direct
marketing products, mailers, envelopes and labels produced by the Company
are customized and sold for use in direct marketing applications.

Pressure Sensitive Label Industry

Management estimates that the total U.S. label market (excluding non-
customized labels sold primarily in office supply stores) had 1995 revenues
of approximately $9.0 billion. The pressure sensitive label segment had
estimated 1995 revenues of $4.0 billion, representing approximately 45% of
the overall U.S. label market. The Company competes in this segment and is
the largest manufacturer selling custom pressure sensitive labels to
independent distributors. The other major segment, glue-applied labels, had
estimated 1995 revenues of $4.4 billion, representing approximately 50% of
the overall market. Management estimates that the more mature glue applied
label segment is growing at approximately 2% annually, while pressure
sensitive label market is growing at approximately 8% annually. The rapid
growth in this market is attributable to several advantages pressure
sensitive labels have over traditional glue-applied labels, such as reduced
wrinkling and superior adhesion and durability.

A number of other factors have contributed to the rapid growth of
pressure sensitive labels including: (i) new government regulations
requiring an increase in the amount of information displayed on consumer
and industrial products, including food, bulk chemicals, household
appliances and automobiles; (ii) increased use of barcoding to track retail
sales of consumer products and business inventories in a wide variety of
manufacturing industries; (iii) continued demand from businesses of all
types for targeted promotional material; and (iv) continued need for
manufacturers to reduce potential product liabilities by providing
consumers with more information on the proper usage of products. Pressure
sensitive labels are used by virtually all industries, including airlines
(baggage tags), automotive (warning labels), consumer durables (operating
instructions and warnings), food and beverage (product labeling), health
and beauty (product labeling), household chemicals (product labeling and
warnings), industrial chemicals (hazard warnings), pharmaceutical (dosage
information), retail (price and inventory data) and transportation and
distribution (logistics).

The pressure sensitive label industry is served by approximately 2,000
manufacturers, most of whom operate one production facility and maintain
close relationships with local and regional customers. The fact that many
pressure sensitive label customers are accustomed to conducting business
with local manufacturers, has contributed to the fragmentation of the
industry. Due to significant economies of scale achieved through
consolidation, however, national manufacturers have acquired small regional
firms and integrated them into national networks.

Custom Envelope Industry

The custom envelope market accounted for 65%, or $1.9 billion, of the
overall $3 billion U.S. envelope market. Custom envelopes are distinguished
from commodity envelopes by design, printing and other finishing features
which are tailored to specific customer needs. Custom envelope features
include special shapes, labels, multiple windows and flap lengths, often
designed for comparability with specific direct-mail insertion equipment,
and a large variety of paper and printing options designed to meet specific
customer needs. Major customers in the custom envelope segment include
direct mail firms, financial institutions, publishers, utilities and
<PAGE>

businesses using the mail for billing and advertising purposes. Due to the
specific value-added features of custom envelopes, including complex
graphics and envelope enhancements, products generally have a higher
average selling price, higher gross margins and are sold to customers under
one to three year fixed term contracts.

Manufacturers of custom and specialty envelopes are generally
separated into two groups. The first group is composed of a small number of
large multi-plant companies with sales in excess of $50 million who produce
both commodity and custom envelopes for the national market or broadly
cover specific regional markets. The rest of the market consists of smaller
one-plant manufacturers with sales ranging from $1 million to $25 million
and which produce custom envelopes for local and regional customers.

PRODUCTS AND SERVICES

Mailer Products

The Company believes it is a leading U.S. manufacturer of spot carbon
impact mailers and has the largest installed base of laser and other non-
impact printer compatible mailer systems with approximately 1,400 units.
Impact mailers are ready-to-mail, multi-part forms, which are widely used
to print correspondence such as account statements, invoices, tax notices
and utility and medical bills without opening or sealing the envelope. Non-
impact mailers are laser printer compatible self-mailer forms which are
printed, folded, sealed and mailed as payroll checks, direct deposit
statements and vendor remittances. Sales of the Company's non-impact
mailers are experiencing rapid growth due to the proliferation of laser and
inkjet printers and the cost effectiveness of mailers versus traditional
fold and insert mailing methods. Since 1968, when the Company began
manufacturing impact mailers, the Company has been a leader in the
development of mailer technology and, at December 31, 1996, held patents
valued at approximately $18.4 million. In 1987, the Company introduced the
patented InfoSeal(REGISTERED) self-mailer system, which led the industry in
the development of laser printer compatible mailers. InfoSeal(REGISTERED)
is an integrated, turn-key mailer system utilizing a patented form which is
printed and then processed by dedicated equipment that moistens an adhesive
and folds the form into a one-piece mailer. The Company believes that the
InfoSeal(REGISTERED) system has the largest installed base of dedicated
self-mailer office equipment with over 1,400 units installed. Competitive
mailer systems are available in the market which utilize more expensive
pressure seal or more maintenance intensive glue vat systems. With 1996 pro
forma net sales of $10.6 million, InfoSeal(REGISTERED) forms have achieved
compound annual net sales growth of 67% over the past five years. The
Company's ability to produce mailers in all popular sizes and with a wide
variety of custom features enables it to offer a broad line of high quality
stock and custom mailers.

Direct Mail Products and Services

The Company offers a selection of products sold exclusively to the
direct mail industry, which includes catalog bind-in order forms,
advertising inserts and coupons. Often these products include an integrated
envelope or are structured such that the order form can be folded into an
envelope and mailed. The Company has developed extensive customization
capabilities enabling it to produce these inserts and envelopes in a wide
variety of sizes and styles on coated and uncoated paper stock, using high
quality lithography with options for complex multi-color printing. The
Company also provides customers with direct mail fulfillment services.
These direct mail fulfillment services include art and copy preparation,
prepress services, printing, mail list preparation and selection, printed
personalization, addressing, stuffing, labeling and mail sorting, bundling
and drop off services. To complement these products and services, the
<PAGE>

Company's mailers, envelopes and labels are customized and sold for use in
direct mail applications. The Company's direct mail customers include Bear
Creek Direct (Harry & David), Frederick's of Hollywood, Inc., the American
Red Cross and American Bankers Insurance Group. The Company believes that
its array of products and services to the direct mail industry is
extensive. The industry has grown at a compound annual rate of 6% over the
past five years.

Custom Pressure Sensitive Labels

According to an October 1995 survey contained in Business Forms,
Labels and Systems (the "1995 Survey"), the Company is the largest U.S.
manufacturer of custom pressure sensitive labels sold through independent
distributors, as measured by revenues.In this segment, the Company
competes with other larger national manufacturers who are dominant in other
channels, particularly in the direct sales distribution channel.

The Company differentiates itself from its competitors by offering a
variety of customized value-added label products aimed at short and medium-
run customers. Operating out of five strategically located manufacturing
facilities, the Company offers a variety of value-added products aimed at
short and medium-run customer orders. Management believes that the Company
is recognized in the industry for its high quality products, excellent
customer service and an ability to respond quickly to time-sensitive
customer orders. The Company recently introduced Label Launch(TM) service, an
online software application which enables pressure sensitive label
customers to electronically process orders and transfer artwork directly to
the Company's facilities, thereby reducing pre-press set up time, order
entry and shipping costs. The Tag and Label Manufacturers Institute
estimates that the pressure sensitive label market is growing at a compound
annual rate of approximately 8%, and the Company's custom pressure
sensitive label products have achieved compound annual net sales growth of
17%, on a pro forma basis, over the past five years.

The Company's custom pressure sensitive label products are used by a
wide range of businesses and institutions in numerous end-use applications,
including mailing labels, promotional literature, inventory routing,
packaging and retail pricing. The Company's largest end-user markets are
the retail, food and beverage, health and beauty, toy manufacturing and
chemical industries. The Company also provides national 24-hour order
processing for short production runs requiring rapid turnaround. The
Company's customers include distributors such as Bank-N-Business Forms,
Taylor Business Products and Standard Forms, Inc. Direct customers include
the Paralyzed Veterans of America, Boston Scientific Corporation, Hasbro,
Inc. and Sterilite, Inc. No single customer represented greater than 10% of
the Company's 1996 custom pressure sensitive label net sales.

Custom Envelopes

According to the Envelope Manufacturers Association (the "EMA"), the
Company is the second largest U.S. supplier of custom envelopes in the
growing Southeastern regional market (which currently represents
approximately 13% of the overall custom envelope market) as measured by
revenues. The Company has focused on the high value-added specialty
segments of the envelope market, placing particular emphasis on the direct
mail, photo-finishing and banking industries, where it has established
leadership positions. Almost all of the Company's envelope products are
specially printed or manufactured to end-user specifications and generally
have higher margins than plain commodity envelopes. The Company also
produces custom expanding envelopes, pockets, wallets and other products
for the professional office. These products are hand assembled, medium to
large sized folders used to file legal documents or store and carry
artwork. From its five production facilities, the Company manufactures in
<PAGE>

excess of 2.5 billion envelopes per year. Net sales of the Company's custom
envelopes have increased at a compound annual growth rate of 1% over the
past five years. The Company competes in this market with many small
regional suppliers and several larger national manufacturers which compete
aggressively. Certain of these larger competitors are less highly leveraged
than the Company and may have greater financing and operating flexibility.

COMPETITIVE STRENGTHS

The Company believes that its products and market presence distinguish
it as one of the leading designers and manufacturers of mailer products,
direct mail products and services, custom pressure sensitive labels and
custom envelopes. The Company's position in these product segments and
continued opportunities for growth and operating profitability are
attributable to the following competitive strengths:

- Market Leader. The Company believes that it is a market leader in
most of its core product lines, including mailer products, custom
pressure sensitive labels and custom envelopes. In the mailer products
and custom pressure sensitive label markets, the Company believes that
it is a leading supplier of products sold through independent
distributors. According to the EMA, the Company is a leading supplier
of custom envelopes sold directly to end-use customers in the
Southeastern region of the U.S. The Company competes in its core
product lines with larger national and smaller local manufacturers
certain of which are less highly leveraged and may have greater
financing and operating flexibility.

- Focus on High Value-Added Products . Almost all of the Company's
products have a high value-added component which differentiates them
from lower margin, commodity paper-based products. Substantially all
of the Company's pressure sensitive label and envelope products are
customized to end-user specifications. Most mailer products and direct
mail products and services are also customized to specific customer
design or printing requirements. The Company's patented
InfoSeal(REGISTERED) self-mailer system, which generally uses
customized forms, provides a value-added, innovative and cost
effective system for a wide variety of mail applications.

- Comprehensive Direct Mail Product Line. The Company produces a
broad range of products which target direct mail customers, including
impact and non-impact mailers, catalog bind-in order forms, custom
pressure sensitive labels and custom envelopes. Combined with the
Company's direct mail fulfillment services, these products offer an
integrated solution to the direct mail industry which has grown at a
compound annual rate of 6% over the past five years.

- Product Development Expertise. The Company has a record of
successful new product introductions and service enhancements which
distinguishes it as a provider of high value-added solution-oriented
technologies. Recent examples of this product development expertise
include the new, patented InfoSeal(REGISTERED) desktop folder/sealer
which the Company expects will significantly expand the market for the
InfoSeal(REGISTERED) system by targeting small businesses and
satellite offices of large companies. The Company believes that it is
the first manufacturer to develop a self-mailer system targeting this
market. The Company has also recently introduced the Label Launch(TM)
service, an on-line software package enabling pressure sensitive label
customers to electronically process orders and transfer artwork
directly to the Company's pre-press and design facilities.

- Diverse Distribution Channels. The Company sells its products
through distribution channels which optimize access to respective end-
<PAGE>

use markets. In its mailer and pressure sensitive label businesses,
the Company believes that it is the largest manufacturer selling
through independent distributors who provide superior coverage of the
Company's small to medium-sized customer base. In this segment, the
Company competes with other larger manufacturers who are dominant in
other distribution channels, particularly in the direct sales
distribution channel.

The Company's catalog bind-in order forms and custom envelopes are
sold directly to end-users who, due to exacting specifications and
high volume requirements, prefer direct relationships with the
manufacturer. The Company's strategic partnership with Xerox
Corporation, which recently selected InfoSeal(REGISTERED) as the non-
impact mailer system to be marketed by the Xerox Supplies Group sales
force, is expected to enhance distribution to large companies.

SALES, DISTRIBUTION AND MARKETING

Direct Mail Products and Services

The Company sells its direct mail products through its seven person
in-house sales force which solicits business from other direct marketing
companies in addition to fulfilling the requirements of the Company's
direct marketing business. The Company has in excess of 940 active
customers. Given long term customer relationships and large average order
sizes, the Company's sales professionals, which average over 14 years of
industry experience, are compensated with a combination of salary and
bonus.

Custom Pressure Sensitive Labels

The Company markets its custom pressure sensitive labels to both
independent distributors and directly to end-users. Over the past 24 months
the Company has conducted business with approximately 26,000 independent
distributors, such as business forms companies, printing brokers, printers
and quick printers. Sales to independent distributors collectively
accounted for 54% of 1996 net sales with the top 20 distributor accounts
accounting for 8.2% of 1996 custom pressure sensitive label net sales.
Direct sales customers constitute the remaining 46%.

Mailer Products

The Company markets mailers to approximately 5,000 independent
distributors across the U.S. through nine regional sales managers.
Distributors, in turn, sell these products to the end user. In 1996
independent distributor accounted for approximately 90% of the Company's
mailer product net sales with the balance sold directly to major direct
manufacturers and end-use customers. In addition to the independent
distributor network, the Company benefits from the marketing efforts of its
corporate partners--the Xerox Corporation, Wallace Computer Services, Inc.
and Tab Products Co. The Xerox Corporation's Supplies Group has selected
the Company's InfoSeal(REGISTERED) system as the only non-impact mailer
system to be marketed by its sales force. Likewise, in 1996, Wallace
Computer Services Inc. introduced the product as their exclusive one-piece
laser compatible mailer system. InfoSeal(REGISTERED) equipment for high and
moderate volume users is marketed by Tab Products Co. which manufactures
the machines. Since InfoSeal(REGISTERED) equipment can only be used with
InfoSeal(REGISTERED) forms, the Company expects to realize significant
repeat form sales as the installed base of these systems grows. The desk-
top folder/sealer system is marketed directly by the Company. The Company
will continue to look for innovative, cost effective ways to attract
customers, including a plan to cross-sell products to selected customers
through the Company's direct sales force.
<PAGE>

Custom Envelopes

Due to the exacting specifications and high volume requirements of the
custom envelope customer, the Company sells these products directly to end-
users. The Company maintains a 32 person sales force which primarily covers
the Southeastern U.S. and averages 12 years of industry experience. These
sales people receive commissions determined by the relationship between
selling price and estimated full production cost. The Company maintains a
diverse customer base with the top 20 envelope accounts providing 41.8% of
total 1996 envelope net sales. Expanding envelopes, pockets and wallets are
sold primarily through independent distributors due to the smaller order
size, which is typical of sales of these products.

MANUFACTURING

Direct Mail Products and Services

Direct mail products are produced in two facilities both of which are
located in Roanoke, Virginia. One of these plants utilizes four high volume
heat-set, web offset printing presses to produce a wide range of bind-in
catalog order forms, advertising inserts and other direct mail items. These
presses range in web width from 26" to 38" and are equipped with state-of-
the-art, in-line finishing equipment to functionally customize printed
products. The other facility includes six impact printers, multiple ion
deposition engines and ink jet printers to personalize mailers for direct
mail applications. This equipment is controlled by in-house software.

Custom Pressure Sensitive Labels

Pressure sensitive labels are produced in five facilities located in
Fort Smith, Arkansas, San Carlos, California, Linthicum, Maryland, Wilton,
New Hampshire and Salem, Virginia, which are strategically positioned
throughout the U.S. Three of these plants incorporate 28 traditional
flexographic presses ranging in web width from 6" to 16", which produce a
full complement of label graphics, including process printing and foil
stamping. The other two plants are designed to meet quick response label
orders and utilize 29 highly customized letter presses designed to cost
effectively produce labels in small order quantities.

Mailer Products

Mailers are produced in three facilities located in Roanoke, Virginia,
Fort Smith, Arkansas and Sparks, Nevada, thereby allowing cost-effective
national distribution. In total, these facilities utilize 20 web offset
presses ranging in width from 20" to 30" to create rolls of printed
materials which are then further converted on 18 highspeed collators into
multiple ply mailer sets. Additional major pieces of equipment in these
plants include three MICR routing encryption and five InfoSeal(REGISTERED)
converting lines.

Custom Envelopes

Custom envelopes are produced in four plants located throughout the
Company's core Southeastern U.S. regional market in Gainesville, Florida,
Greenville, South Carolina, Louisville, Kentucky, and Roanoke, Virginia.
Production equipment at the four envelope plants includes seven high-speed
web folding machines with in-line flexographic printing capacity which can
produce finished, customized envelopes in one pass.

In addition, these plants house 42 folding machines which convert die-
cut blanks into finished envelopes. Other equipment includes computer
controlled high-speed die-cutters and a variety of off-line printing
equipment. In addition to the four envelope plants the company manufactures
<PAGE>

custom expanding envelopes, pockets, wallets and other products for the
professional office at a fifth facility in Austell, Georgia, which
incorporates a wide array of specialized die-cutters and assembly
equipment.

All of the Company's mailer, direct marketing and pressure sensitive
label facilities are supported by state of the art, electronic pre-press
capabilities. These services are also available to the Company's custom
envelope plants via electronic file transfer on the Company's frame relay
based intranet. The Company's pre-press design capability is composed of
Apple MacIntosh and Mecca hardware architecture.

Suppliers

The Company has a broad base of high quality, national suppliers. The
primary raw materials used by the Company are uncoated and coated papers,
plastic films, inks and adhesives.

Paper represents the Company's single largest raw material. Union Camp
Corp., International Paper Co., Georgia-Pacific Corp., Kimberly-Clark Corp.
and Appleton Paper are the largest paper suppliers for the Company's
transactional mailers, direct mail products and custom envelopes. In 1996,
the Company purchased paper from more than eleven major suppliers and
several major paper merchants. The Company's custom pressure sensitive
label business purchases paper and other key substrates from Fasson and
Flexcon Inc.

The Company's principal raw material is paper. Paper, which
represented approximately one-half of the Company's cost of goods sold in
1996, has a historical pattern of cyclical price change based upon industry
capacity versus market demand. Supply has historically been available;
however, during periods of increased economic activity and resultant low
inventory levels, paper companies tend to place customers on allocation,
which limits the short term supply available. Prices during these periods
tend to increase. The Company maintains multiple sources of supply in all
grades of paper which limits the risk of paper shortage due to isolated
paper plant shut-downs and which provides alternate sources during
allocation periods. Because the Company's customer quotations are honored
for a period of 30 days from quotation, the Company historically has been
able to pass paper price increases to its customers. In addition, the
Company's sales contracts generally contain provisions permitting
escalation of prices based upon increases in the underlying paper cost.

Competition

The markets for the Company's products are highly fragmented and
competitive. Competition is based upon product breadth, geographic reach,
delivery time, product quality and customer service. Customer relationships
in the markets in which the Company competes tend to be long-term, and
service and familiarity with a customer's needs, as well as personal
factors, are important in building and maintaining such relationships.
Competitors range from large manufacturers to regional and local firms.

Direct Mail Products and Services

Direct mail products and services are primarily sold directly to end-
users. Competitors which manufacture bind-in catalog order forms and
related direct mail products include Webcraft Technologies, Inc., the
Cyrill Scott Company, American In-Line Graphics, Inc. (R.R. Donnelly & Sons
Co.) and Web Inserts (World Color Press, Inc.). Other than Webcraft, most
competitors are single plant operations. The Company believes it is among
the four largest suppliers of direct mail inserts and other bind-in mailing
products. The Company's direct mail fulfillment business competes
<PAGE>

primarily with Communicolor (the Standard Register Company) and ColorForms
(Wallace Computer Services, Inc.).

Custom Pressure Sensitive Labels

Competitors in the custom label market sell their products either
directly to end-use customers or to independent distributors. Those
competitors that sell directly to end-users include the Standard Register
Company, Moore Corporation Limited, Uarco Business Forms and Wallace
Computer Services, Inc. These companies primarily produce stock labels but
also compete in the market for custom labels. The Company is recognized as
the market leader in the independent distribution channel. Major
competitors in this highly fragmented channel include Discount Labels,
Inc., Data Labels, Inc., Continental Datalabel, Inc., Rittenhouse, Inc. and
Lancer Labels, Inc. Competitors in this channel are typically small
regional, privately-owned operators with a single production facility.

Custom Envelopes

Due to the high bulk and weight characteristics of envelopes,
transportation and freight costs are generally an important component of
the total cost of envelope production. With transportation costs typically
accounting for 3% of total envelope production costs, long distance trade
is often limited to high value-added products. As a result, envelope
manufacturers generally focus production facilities on immediate regional
markets. The Company estimates it has approximately 14% market share of the
custom envelope market in the Southeastern U.S. The Company's major
competitors in this region are Atlantic Envelope Co. (National Service
Industries, Inc.), Allen Envelope Corp., Tri State Envelope Corp., Oles
Envelope Corp. and, to a lesser extent, Mail-Well, Inc. and Westvaco Corp.
Like the Company, most of these competitors maintain an in-house sales
force.

Mailer Product

Impact mailers are sold through two principal distribution channels,
direct to customers and to independent distributors. The direct channel is
dominated by large manufacturers, which include Wallace Computer Services,
Inc., Moore Corporation Limited, Uarco Business Forms and the Standard
Register Company. These manufacturers generally maintain long term
relationships and tend to offer a full range of business form products,
with mailers generally representing a small percentage of total sales to
customers. The Company sells its products primarily to independent
distributors. See "Products and Services." The Company believes that it is
the a leading supplier to independent distributors.

The non-impact mailer market is comprised of three primary
competitors: the Company, Moore Corporation Limited and the Standard
Register Company. These three competitors offer self-mailer systems, that
consist of one piece forms and dedicated folder/sealer equipment and target
medium and high-volume customers.

Management believes that the Company, through its patented
InfoSeal(REGISTERED) system, has the largest number of non-impact self-
mailer installations with over 1,400. The Company has recently developed a
patented low cost desktop folder/sealer machine to specifically address the
low volume small business segment. Management believes that it is the first
manufacturer to develop a self-mailer system targeting small businesses and
satellite offices of large companies.

Employees
<PAGE>

As of December 31, 1996, the Company employed approximately 1,361
people, of which 1,058 work in manufacturing facilities, 195 work in
sales/service functions, 83 work in administration and 25 work in corporate
functions. None of the Company's employees are unionized, and the Company
believes relations with employees are good.

Environmental, Health and Safety Matters

Like similar companies, the Company's operations and properties are
subject to a wide variety of federal, state and local laws and regulations,
including those governing the use, storage, handling, generation,
treatment, emission, release, discharge and disposal of certain materials,
substances and wastes, the remediation of contaminated soil and
groundwater, and the health and safety of employees. As such, the nature of
the Company's operations exposes it to the risk of claims with respect to
environmental protection and health and safety matters and there can be no
assurance that material costs or liabilities will not be incurred in
connection with such claims.

In January 1988, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it and 11 other parties are
potentially liable for costs incurred by the EPA in responding to the
cleanup of the Dixie Caverns Landfill Superfund Site in Roanoke County,
Virginia. Subsequently, Roanoke County expended $2.0 million to clean up a
portion of the Dixie Cavern Landfill Site and has filed suit against the
Company and the 11 other potentially responsible parties ("PRPs") for
reimbursement of these cleanup costs.

Although, under Superfund, the PRPs may be jointly and severally
liable for cleanup costs, management believes that the Company's potential
liability in connection with the County's claim is de minimis, based upon
the amount of waste attributable to it in relation to the other parties.
Management believes that the Company will have no liability in connection
with the remaining portion of the site, and that the ultimate outcome of
this matter will not have a material adverse impact on the financial
position or results of operations of the Company.

The EPA has also named the Company as one of a number of PRPs in
connection with the alleged disposal of hazardous substances at the Smiths
Farm Landfill Superfund Site in Kentucky. In February 1992, the Company and
35 other parties entered into an alternative dispute resolution process
("ADRP") to allocate liability. Subsequently, a number of the PRPs
responsible for contributions of waste to the site dropped out of the ADRP
group. The remaining ADRP group members, including the Company, have
proposed a de minimis settlement to the EPA, which, if accepted, would
resolve the Company's liability in connection with the EPA. Management
believes that the ultimate outcome of this matter will not have a material
adverse impact on the financial position or results of operations of the
Company.

Although the Company does not anticipate that material expenditures
will be required to achieve or maintain compliance with, or resolve
liability under, environmental protection and occupational health and
safety laws and regulations, changing laws and regulations might affect the
industries in which the Company participates. Accordingly, there can be no
assurance that additional environmental, health or safety matters resulting
in material liabilities or expenditures will not be discovered or that, in
the future, material expenditures for environmental, health or safety
matters will not be required by changes in applicable laws or regulations.
<PAGE>

ITEM 2. PROPERTIES

As of December 31, 1996 the Company operated manufacturing, warehouse
and distribution facilities in the U.S. with a total floor area of
approximately 808,000 square feet. Of this footage, approximately 304,000
square feet are leased and approximately 504,000 square feet are owned.

The following table describes the manufacturing, warehouse and
distribution facilities of the Company as of December 31, 1996.

<TABLE>
<CAPTION>
TRANSKRIT/ OWNED/ EXPIRATION
LOCATION NFC PRODUCT<F1> LEASED<F2> OF LEASE SQUARE FEET
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ARKANSAS
Fort Smith TRANSKRIT M, D O 125
Fort Smith TRANSKRIT L L 12/31/1997 20
CALIFORNIA
San Carlos TRANSKRIT L L MONTHLY 24
FLORIDA
Gainesville NFC E O 52
GEORGIA
Atlanta NFC A L 8/31/2000 5
Austell NFC E L 9/1/2001 39
KENTUCKY
Louisville NFC E L 3/31/2000 70
MARYLAND
Linthicurn Transkrit L L 6/30/2000 15
NEW HAMPSHIRE
Wilton Transkrit L O 79

NEVADASparks Transkrit M L 11/30/1998 42

PENNSYLVANIA
Norristown NFC E L 4/30/2001 15
SOUTH CAROLINA
Greenville NFC E L 6/18/1997 46
VIRGINIA
Roanoke NFC E, D, L O 137
Roanoke Transkrit M, D O 111
Salem Transkrit D L 1/31/1998 27

<FN>
<F1> D=Direct Mail; E=Envelopes; L=Labels; M=Mailers; A=Administrative
<F2> O=Owned
L=Leased
</FN>
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of
any of the matters in which it is currently involved will have a material
adverse effect on the financial condition or results of operations of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OR SECURITY HOLDERS

None.
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

None.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of NFC. The
selected financial data as of and for each of the five fiscal years in the
period ended December 31, 1996 were derived from the audited financial
statements of NFC (in thousands except share data) :

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,

---------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales . . . . . . . . . . . $ 17,095 $ 64,545 $ 65,998 $ 71,257 $ 111,342
Gross profit . . . . . . . . . 3,760 13,161 13,388 15,549 31,127
Selling, general and administrative 3,714 12,930 12,428 13,410 25,200
Operating income (loss) . . . . 46 (2,020) 960 2,139 5,927
Interest expense, net . . . . . 803 2,873 2,975 3,179 8,126
Loss before income taxes . . . (757) (4,893) (2,015) (1,040) (2,199)
Income (loss) before
extraordinary item . . . . . (634) (3,550) (2,015) 860 (1,572)
Extraordinary item . . . . . . -- -- -- -- (798)
Net income (loss) . . . . . . (634) (3,550) (2,015) 860 (2,370)
Average shares outstanding . . 284 284 284 284 284
Per share of common stock:
Net income (loss) before
extraordinary item . . . $ (2.23) $ (12.50) $ (7.09) $ 3.03 $ (5.54)
Extraordinary item . . . . -- -- -- -- (2.81)
Net income (loss) . . . . . (2.23) (12.50) (7.09) 3.03 (8.35)
Dividends declared . . . . . . -- -- -- -- -

OTHER DATA:
EBITDA<F1> . . . . . . . . . . $ 1,094 $ 3,610 $ 4,308 $ 5,159 $ 12,495
Depreciation and amortization . 5,503 6,345 6,776 6,024 7,409
Capital expenditures . . . . . 104 1,179 940 2,308 3,490
Ratio of Earnings to
Fixed Charges<F2> . . . . . . -- -- -- -- --

BALANCE SHEET DATA (at period end):
Working capital . . . . . . . . $ 9,670 $ 7,190 $ 7,202 $ 7,182 $ 18,840
Net property, plant and equipment 12,314 11,285 9,881 10,302 47,367
Total assets . . . . . . . . . 42,044 39,607 37,837 38,116 133,374
Long-term debt, net of
current portion . . . . . . . 23,486 22,541 21,776 21,412 102,353
Common stockholder's equity . . 11,432 7,883 5,867 6,727 12,122

<FN>
<F1> EBITDA is defined as operating income plus depreciation, amortization, non-cash charges related to the defined benefits
plans and reduced by gains on disposal of equipment and the non-cash gain due to change in vacation policy.
<F2> The ratio of earnings to fixed charges is computed by adding fixed charges (interest and amortization of deferred
financing costs and discounts) to income or loss before provision for income taxes and dividing that sum by the sum of fixed
charges. Earnings were insufficient to cover fixed charges by $757, $4,893, $2,014, $1,040 and $2,198 for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively.
<PAGE>

</FN>
</TABLE>

On October 16, 1992, the Company acquired all of the issued and
outstanding capital stock of DEC International Corporation and its
subsidiary, Double Envelope Company (hereafter referred to as collectively,
"Double") for $24.6 million plus transaction costs. Subsequent to the
acquisition, Double was merged into the Company. The results of operations
of Double have been included in the results of operations of the Company
since October 17, 1992.

On June 28, 1996, the Company acquired all of the issued and
outstanding capital stock of Transkrit Corporation for $86.5 million plus
transaction costs. Subsequent to the acquisition, Transkrit and all of its
subsidiaries were merged into the Company. The results of operations of
Transkrit have been included in the results of operations of the Company
since June 29, 1996.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

On June 28, 1996, the Company acquired all of the issued and
outstanding capital stock of Transkrit Corporation for $86.5 million plus
transaction costs. Subsequent to the acquisition, Transkrit and all of its
subsidiaries were merged into the Company. The discussion below relates to
the financial condition and results of operations of NFC, which includes
the results of operations from the acquired Transkrit Corporation and
subsidiary from June 29, 1996.

Pursuant to the acquisition of Transkrit, the Company expects to
realize approximately $2.3 million of annualized cost savings through raw
material purchasing efficiencies, and reduction of headcount and operating
expenses. The Company believes that its operating results following the
acquisition of Transkrit may not be directly comparable to historical
operating results of either NFC or Transkrit due to the Company's increased
size, integration of the two businesses and related cost savings.

The Company's results of operations for the periods presented have been
significantly impacted by the amortization of intangible assets and the
depreciation of property, plant and equipment which were written-up to fair
market value as a result of the application of purchase accounting to the
acquisitions of Double Envelope Company in 1992 and Transkrit in 1996.

<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
Custom Envelopes . . . . . . . . . . . . . . . . $49,585 $54,527 $49,841
Mailer Systems . . . . . . . . . . . . . . . . . - - 24,454
Direct Mail Products and Services . . . . . . . . 13,558 13,087 15,771
Custom Pressure Sensitive Labels . . . . . . . . 2,855 3,643 21,276
_______ _______ ________
$65,998 $71,257 $111,342

</TABLE>
<PAGE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net Sales for the year ended December 31, 1996 increased $40.1
million to $111.3 million, or 56.3%, from the comparable 1995 period. Net
sales of custom envelopes decreased 8.6%, or $4.7 million from 1996 to
1995. While the average unit price for envelope sales increased .8%, the
total number of units shipped decreased 11.2%. The decrease in the number
of envelope units shipped is the result of a managed change in the mix of
products sold and, to a lesser extent, weak industry conditions. The
Company has changed the mix of products sold in the envelope business units
toward value-added, higher margin products (see discussion regarding
envelope gross profits below). The increase in mailer systems, direct mail
products and services and custom pressure sensitive label net sales is the
result of the acquisition of Transkrit Corporation . Net sales for direct
mail products and services increased 20.5% or $2.7 million from 1995 to
1996. Net sales for custom pressure sensitive labels increased 484.0% or
$17.6 million from 1995 to 1996.

Gross profit for the year ended December 31, 1996 increased $15.6
million to $31.1 million, or 100.7%, from the comparable 1995 period. In
addition, gross profit, as a percent of net sales, increased from 21.9% for
the year ended December 31, 1995 to 28.0% for the comparable 1996 period.
The increase in gross profit in absolute dollars and as a percent of net
sales is mostly attributable to the product lines acquired from the
acquisition of Transkrit. The acquired product lines of mailer systems,
direct mail products and services and custom pressure sensitive labels
generate higher gross profit margins than the historical product lines of
the Company. Gross profit for custom envelopes remained relatively
unchanged from 1995 to 1996 even though net sales decreased 8.6%.

Selling, general and administrative expenses, as a percentage of net
sales, increased by $11.8 million from 18.8% of net sales for the year
ended December 31, 1995 to 22.6% of net sales for the comparable 1996
period. The $11.8 million increase in these expenses is due to the
acquisition of Transkrit at June 28, 1996. The acquired product lines from
the Transkrit acquisition historically incur a higher percentage of
selling, general and administrative expenses as a percent of net sales.

Income from operations for the year ended December 31, 1996 was $5.9
million, or 5.3% of net sales as compared to $2.1 million or 3.0% of net
sales for the comparable 1995 period. The increase of $3.8 million of
income from operations is the result of the acquisition of Transkrit. The
increase in income from operations as a percent of revenues from 1995 to
1996 is due to the increase in gross profit from the acquired product lines
reduced by, to a lesser extent, the increase in selling, general and
administrative expenses. EBITDA, as a percentage of net sales, increased to
11.2% for the year ended December 31, 1996 from 7.3% for the comparable
1995 period. EBITDA for the year ended December 31, 1996 increased to $12.5
million from $5.2 million for the comparable 1995 period. The increase in
EBITDA from 1995 to 1996 is the result of the acquisition of Transkrit.

Interest expense for the year ended December 31, 1996 increased $5.0
million, or 157.2%, to $8.2 million from $3.2 million for the year ended
December 31, 1995 on significantly higher average debt balances for the
period ended December 31, 1996. The weighted average interest rate for the
year ended December 31, 1996 was 11.7% as compared to 13.8% for the
comparable 1994 period. The increase in the average debt balances from
1995 to 1996 is due to the issuance of $100,000,000 Senior Unsecured Notes
issued to purchase Transkrit partially offset by the payoff and termination
of the revolving line of credit, bank long-term debt and subordinated
outstanding as of June 28, 1996. The weighted average interest rate
decreased from 1995 to 1996 due to the lower borrowing rate of the Senior
<PAGE>

Unsecured Notes of 11 5/8% versus 1995 long-term debt and subordinated debt
stated interest rates ranging from 10.25% to 14%.

Income tax benefit for the year ended December 31, 1996 and 1995 was
$.6 million and $1.9 million, respectively, resulting in an effective tax
rate of 28% and 183%, respectively. The income tax benefit recorded in
1995 is the result of benefiting the cumulative net operating losses as of
December 31, 1995 previously not recognized.

As of December 31, 1996, $10.9 million of cumulative net operating
loss carryforward benefits have been recognized based upon the expected
reversals of temporary differences into taxable income and management's
estimate of taxable income within the period prior to the expiration of the
net operating loss carryforwards. The Company expects to generate taxable
income prior to the expiration of the net operating loss carryforwards.
Taxable income of $10.9 million would have to be realized prior to the year
ended December 31, 2011 to ensure realizability of the net operating loss
carryforwards prior to their expiration for federal income tax purposes.
The cumulative net operating loss carryforward, generated from 1989 through
1996, will begin to expire in 2004 and continue through 2011.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net Sales for the year ended December 31, 1995 increased $5.3 million
to $71.3 million, or 8.0%, from the comparable 1994 period. Net sales of
custom envelopes increased 10.0%, or $4.9 million from 1994 to 1995. This
increase in net sales was due to a rise in the average unit sales price
resulting from passing on a portion of paper cost increases while units
shipped remained stable. While the average unit sales price for direct
mail products increased 13.1% from 1994 to 1995, this was more than offset
by a 14.6% decrease in units shipped over the same period. The decrease in
direct mail product units shipped reflects a deferral or reduction in
orders due to historically high paper cost. The 27.6% increase in net
sales of custom pressure sensitive labels resulted from a 14.1% increase in
units shipped and a 12.1% increase in average unit sales price. The
increase in units shipped represents new business, while the increase in
average unit sales price reflects the increase in underlying paper costs.

Gross profits as a percentage of net sales increased to 21.8% for the
year ended December 31, 1995 from 20.3% for the comparable 1994 period as
gross profit for the period increased $2.1 million to $15.5 million. This
increase was attributable to price increases for custom envelopes and
direct mail products, a portion of which reflected paper cost increases,
and improved coverage of fixed costs due to increase production volumes of
custom pressure sensitive labels.

Selling, general and administrative expenses as a percentage of net
sales remained unchanged at 18.8% for the year ended December 31, 1995 and
the comparable 1994 period. Selling, general and administrative expense
for 1995 increase to $13.4 million from $12.4 million in 1994 to support
the increase level of net sales and higher corporate development
expenditures.

Income from operations for the year ended December 31, 1995 was $2.1
million or 3% of net sales as compared to $1.0 million or 1.5% for the
comparable 1994 period. The increase in income from operations is due to
the increase in gross profit of $2.1 million offset by an increase in
selling, general and administrative expenses of $1.0 million. The overall
increase in net sales is due to increased unit sale prices which are than
offset the increase in selling, general and administrative expenses to
support the sales growth. EBITDA, as a percentage of net sales, increased
to 7.3% for the year ended December 31, 1995 from 6.5% for the comparable
1994 period. EBITDA for 1995 increased to $5.2 million from $4.3 million
<PAGE>

in 1994. The increase in EBITDA as a percentage of net sales is
attributable to the same factors discussed above for income from
operations.

Interest expense for the year ended December 31, 1995 increased $.2
million, or 6.7%, to $3.2 million from $3.0 million for the year ended
December 31, 1994 due to higher average interest rates. The weighted
average interest rate for the year ended December 31, 1995 was 13.8% as
compared to 12.6% for the comparable 1994 period. The increase in interest
expense resulted from higher working capital borrowing needs and, to a
lesser extent, higher average interest rates in 1995 as compared to 1994.
As the average raw material paper prices rose during 1995 as compared to
1994, borrowings to fund such purchases were greater during 1995 as
compared to 1994.

Income tax benefit for the year ended December 31, 1995 and 1994 was
$1.9 million and $0, respectively, resulting in an effective tax rate of
183% and 0%, respectively. The income tax benefit recorded in 1995 is the
result of benefiting the cumulative net operating loss as of December 31,
1995. As a result, a deferred income tax asset of $1.9 million has been
recorded as of December 31, 1995. The Company recorded the deferred tax
asset in the fourth quarter of 1995 based upon the expected future
reversals of temporary differences and evidence indicating that the Company
would generate taxable income within the period prior to the expiration of
the net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by (used in) operating activities was $7.1 million
and $(0.2) million for the years ended December 31, 1996 and 1995,
respectively. The increase in net cash provided by operating activities
for the year ended December 31, 1996 is mostly attributable to depreciation
and amortization and the decreases in operating assets, reduced by, to a
lesser extent, the net loss. The cash used in operating activities of
$(0.2) million for the year ended December 31, 1995 resulted from the cash
flow used for the reduction of certain liabilities offset, to a lesser
extent, by the cash flow from the operations.

Net cash used in investing activities was $79.8 million and $1.9
million for the years ended December 31, 1996 and 1995, respectively. The
cash used in investing activities for the year ended December 31, 1995
resulted from purchases of equipment reduced, to a lesser extent, by the
proceeds from the disposition of certain assets. The increase in cash used
in investing activities for the year ended December 31, 1996 is due
primarily to the purchase of outstanding stock of Transkrit Corporation for
$86.5 million, net of cash acquired.

Capital expenditures, excluding acquisitions (but including purchases
under capital leases), were $6.3 million and $2.3 million for the years
ended December 31, 1996 and 1995, respectively.

Net cash provided by financing activities was $74.2 million and $2.3
million for the years ended December 31, 1996 and 1995, respectively.
During 1995, the Company borrowed an additional $1.0 million from the
senior lender to fund deposits for future equipment purchases. In
addition, the Company provided cash from financing activities by increasing
its bank overdraft by $2.3 million. This was offset by cash used to pay
down senior debt by $1.0 million. The net cash provided by financing
activities for the year ended December 31, 1996 is primarily attributable
to the $100 million Senior Unsecured Notes and $7.8 million capital
contribution from DEC used to retire certain long-term and subordinated
debt instruments and to acquire the outstanding capital stock of Transkrit.
<PAGE>

ADOPTION OF ACCOUNTING STANDARD

On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used as well as long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of this standard was not
material to the Company's financial position or results of operations.

INFLATION AND PRICE CHANGES

The Company believes that inflation, exclusive of paper price
increases, has not had a material impact on its results of operations for
the three years ended December 31, 1996. The Company currently does not nor
does it plan to engage in hedges to offset potential charges in the cost of
paper or charges in interest rates.

Paper is the Company's primary raw material requirement, and accounted
for approximately 50% of the Company's cost of goods sold. Generally, when
the price of paper decreases, the Company has short-term opportunity to
improve its operating margins due to delays in passing price reductions
through to customers. In the long-term, however, since paper price declines
tend to occur in a weak economy, net sales and operating margins may be
negatively affected in the short-term since it generally takes from 30 to
90 days to pass on such increases to customers. In the longer-term,
however, since paper price increases tend to occur in a strong economy, the
Company is generally able to pass through increases in its cost of paper to
customers and therefore maintain or improve operating margins.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Financial Statements on page F-1 for
National Fiberstok Corporation's financial statements and notes thereto
included herein. All schedules have been omitted as they are not required
or they are not applicable or because the information required to be
presented is included in the financial statements and the related notes
thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers and directors of National
Fiberstok Corporation at December 31, 1996 :

<TABLE>
<CAPTION>
NAME Age Position
<S> <C> <C>
Robert B. Webster 49 Executive Vice President
<PAGE>

Thomas J. Cobery 50 Senior Vice
Jack Resnick 49 Senior Vice
Robert D. Oliver 45 Vice President/Operations
John D. Weil 49 Chairman of the Board of

David E. De Leeuw 53 Director
David E. King 38 Director
Glenn S. McKenzie 44 Director
Calvin Ingram 63 Director

</TABLE>

THOMAS J. COBERY (50), Senior Vice President of NFC since June 1996. Mr.
Cobery has been President of Label Art, Inc. since November 1987 till June
28, 1996 (the acquisition date of Transkrit Corporation and subsidiary by
NFC). Mr. Cobery is currently President of the Tag and Label Manufacturers
Institute, the major trade association for the label industry in the United
States.

DAVID E. DE LEEUW (52), Director of NFC since September 1989. Mr. De Leeuw
is a managing general partner of MDC Management Company II, L.P., which is
the general partner of McCown De Leeuw & Co.II, L.P. and McCown De Leeuw
Associates, L.P., MDC Management Company IIE, L.P., the general partner of
McCown De Leeuw & Co. Offshore (Europe), L.P. and MDC Management Company
IIA, L.P., the general partner of McCown De Leeuw & Co. Offshore (Asia),
L.P. He currently serves as a director of American Residential Investment
Trust, Inc., Vans, Inc., Pelican Companies, MBW Holdings, Inc., OSI
Holdings Corp., Nimbus CD International, Inc. and Tiara Motorcoach
Corporation.

CALVIN INGRAM (63), Director of NFC since January 1995. Mr. Ingram has
served as Chairman of AmeriComm Direct Marketing, Inc. since January 1991.
Mr. Ingram currently serves as a director of AmeriMarketing Group,
AmeriComm Direct Marketing, Associated Premium and National Association of
Advertising Distributors.

DAVID E. KING (38), Director of NFC since April 1991. Mr. King is a general
partner of MDC Management Company II, L.P. Mr. King has been associated
with McCown De Leeuw & Co. since 1990. He currently serves as a director of
OSI Holdings Corp., International Data Response Corporation, Fitness
Holdings, Inc. and ASC Networks, Inc.

GLENN S. MCKENZIE (44), Director of NFC since October 1992. Mr. McKenzie
has been President of Alpha Investments, Inc., a management consulting
firm, since October 1991. He currently serves as a director of Specialty
Paperboard, Inc., Nimbus CD International, Inc., Exeter Health Resources,
Inc. and Tiara Motorcoach Corporation.

ROBERT M. MIKLAS (45), Director, President and Chief Executive Officer of
NFC since June 1990. Mr. Miklas has been Director, President and Chief
Executive Officer of DEC since June 1990. Prior to joining DEC, Mr. Miklas
worked for 15 years with the consumer packaging division of the Boise
Cascade Corporation and its successor, Sonoco Products Company.

ROBERT D. OLIVER (45), Vice President/Operations. Mr. Oliver joined NFC in
December 1993 as Vice President/Manufacturing. Previously, Mr. Oliver was
an area manufacturing manager with Graham Packaging Company, a HDPE blow
molding manufacturer. Prior to joining Graham, Mr. Oliver held several
operational positions with Sonoco Products Company and Boise Cascade
Corporation.

JACK RESNICK (49), Senior Vice President of NFC since June 1996. Mr.
Resnick was Chief Operating Officer of Transkrit from January 1991 until
<PAGE>

June 1996. Prior to joining Transkrit, Mr. Resnick worked in the direct
mail marketing and business forms industry with Wallace Computer Services,
Uarco Business Forms and Torrington Product Ventures, where he served as
President and Vice Chairman.

ROBERT B. WEBSTER, CPA (49), Executive Vice President and Chief Financial
Officer of NFC since June 1995. Mr. Webster has been the Executive Vice
President and Chief Financial Officer of DEC since June 1995. Mr. Webster
served as Vice President and Chief Financial Officer of Sunds Defibrator,
Inc., from March 1991 to November 1994. Prior, Mr. Webster worked in the
business forms and computer industry with Burroughs Corp and Wang
Laboratories, Inc.

JOHN D. WEIL (49), Chairman of the Board of Directors of NFC since October
1995. In 1995, Mr. Weil joined McCown De Leeuw & Co. as an operating
affiliate to assist in portfolio management. From 1991 to 1994, Mr. Weil
served as President and Chief Executive Officer of American Envelope
Company. Between 1983 and 1994, Mr. Weil served as a director of the
Envelope Manufacturers Association (the "EMA"), as Chairman of the EMA's
Public Affairs Committee and has served on its Technical, Training, Plant
Operations and Finance Committees. Mr. Weil also serves as a director of
Specialty Paperboard, Inc., Tiara Motorcoach Corporation, International
Data Response Corporation and Sage Enterprises, Inc.

DIRECTOR COMPENSATION

Non-employee directors (excluding Mr. De Leeuw, Mr. King and Mr.
McKenzie) of NFC receive $2,000 per meeting of the Board of Directors,
$1,000 per special meeting of the Board of Directors and $500 per Committee
meeting plus, in each case, reimbursement for travel and out-of-pocket
expenses incurred in connection with attendance at all such meetings. Mr.
Weil is an employee of NFC and receives compensation.

LATE FILINGS

None.

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

The following table sets forth information concerning the compensation
paid or accrued for the years ended December 31, 1996 and 1995 for the
Chief Executive Officer of NFC and each of the four other most highly
compensated executive officers of the Company. The compensation of Messrs.
Miklas, Webster and Oliver was paid entirely by NFC and the compensation of
Messrs. Resnick and Cobery was paid by Transkrit and NFC.

Summary Compensation Table
<TABLE>
<CAPTION>
<PAGE>

Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
------------------------------ ------------------------ --------

Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Principal Salary Bonus sation Award(s) SARs (#) Payouts sation
Position Year ($) ($)<F1> ($) ($) <F4> ($) ($)<F2>
------------------ ---- ------ ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. Miklas
President & CEO 1996 190,144 - - - - - 625<F3>
1995 169,937 14,559 - - - - 696<F3>

Robert B. Webster
Executive Vice
President and CFO 1996 153,000 - - - 57,736 - 567<F3>
1995 84,571 30,600 - - - - -

Thomas J. Cobery
Senior Vice 1996 184,626 27,431 - - 47,763 1,518,300 -
President <F5>
1995 154,265 57,279 - - - 34,815 -
<F5>

Jack Resnick
Senior Vice 1996 205,792 67,249 - - 58,485 329,039 -
President <F6>
1995 185,328 34,731 - - - 27,416 15,984
<F6>

Robert D. Oliver
Vice President/
Operations 1996 118,242 5,233 - - - - 464
1995 112,977 12,956 - - - - 696

<FN>
<F1> Includes amounts earned and accrued in 1996.
<F2> Represents the dollar value of annual compensation not properly characterized as salary or bonus. Following Commission
rules, perquisites and other personal benefits which do not exceed 25% of the total perquisites and other personal
benefits for each of the named executive officers have been omitted from these footnotes.
<F3> Consists of the taxable portion of group term life insurance premiums for paid by NFC.
<F4> Certain employees of NFC are participants in the amended and restated DEC International, Inc. 1996 stock option plan.
<F5> Includes bonus payments to Mr. Cobery under the Label Art, Inc. Equity Share Plan (the "Equity Share Plan"). Pursuant
to the Equity Share Plan, Mr. Cobery has received 138,468 equity shares ("Equity Shares") simulating ownership in Label
Art, Inc. The Equity Share Plan provides that if Label Art, Inc. declares a dividend on its common stock at any time
during which a participant has been allocated Equity Shares, the participant shall receive a bonus, equal to the
dividend he or she would have received if his or her Equity Shares were common stock of Label Art, Inc. The Equity
Share Plan was terminated concurrently with the consummation of the acquisition of Transkrit. Mr. Cobery sold 4,898
Equity Shares back to Label Art, Inc. in February, 1994 for which he received $22,114.
<F6> Includes $27,416 representing dividends on 220.5 equity shares ("Stock Credits") simulating economic ownership in
Transkrit issued to Mr. Resnick under his employment agreement with Transkrit, dated January 9, 1991 (the "Employment
Agreement"). As holder of Stock Credits, Mr. Resnick is entitled to receive amounts equal to the cash dividends that he
would have received had he owned a number of shares of common stock of Transkrit Corporation equal to the number of
Stock Credits then credited to Mr. Resnick's account. The Employment Agreement was terminated concurrently with
consummation of the acquisition of Transkrit. Also includes $15,984 representing reimbursement for relocation expenses.
</FN>
</TABLE>
<PAGE>

STOCK OPTION PLAN AND OTHER BENEFIT PLANS AND ARRANGEMENTS

NFC does not have any stock option plans. DEC has a stock option plan
in which several NFC employees participate.

AMENDED AND RESTATED DEC INTERNATIONAL, INC. 1996 STOCK OPTION PLAN
DEC adopted the DEC International, Inc. 1996 Stock Option Plan (the
"1996 Plan") on June 28, 1996, and was amended and restated by DEC on
January 28, 1997. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors (the "Board") of DEC (or such other
Board committee as may be designated by the Board) (the "Committee"). Under
the 1996 Plan, the Committee may grant or award (a) stock options (which
may be either incentive stock options ("ISOs"), within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or stock
options other than ISOs), (b) stock appreciation rights granted in
conjunction with stock options or independently, (c) restricted stock, (d)
bonuses or other compensation payable in stock and/or (e) other stock-based
awards to executive and other key salaried employees, including officers,
as well as to consultants of NFC and its subsidiaries and affiliates
designated by the Committee, but excluding non employee directors and
members of the Committee.

DEC INTERNATIONAL, INC. 1997 STOCK OPTION PLAN FOR DIRECTORS
The DEC International, Inc. 1997 Stock Option Plan For Directors (the
"1997 Plan") was adopted by DEC on January 28, 1997. The 1997 Plan is
administered by the Board. Stock options, which are not ISO's, were granted
under the 1997 Plan as of January 28, 1997, to certain members of the Board
who are not eligible to participate in any plan entitling participants to
acquire securities or derivative securities of the Company (and who
otherwise qualify as "eligible directors" within the meaning of the 1997
Plan), who are designated in the 1997 Plan (or in a Board resolution). Such
stock options may be granted by the Board under the 1997 Plan from time to
time after such date to eligible directors designated by the Board to
receive such options.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------

Number of Percent of Potential Realizable Value At
Securities Total Options Assumed Rates of Stock Price
Underlying Granted to Exercise Appreciation for Option Term
Options Participants Price Expiration ----------------------------
Granted(#) in 1996 ($/share) Date 5%($) 10%($)
---------- ------------- --------- ---------- ----- ------

<S> <C> <C> <C> <C> <C> <C>
Robert M. Miklas - - - - - -
Jack Resnick 58,485 21 4.33 6/28/2006 412,501 656,839
Thomas J. Cobery 47,763 17 4.33 6/28/2006 336,878 536,422
Robert B. Webster 57,736 21 2.62<F1> 6/28/2006 407,219 648,428
Robert D. Oliver - - - - - -

<FN>
<F1> The exercise price of $2.62 is an average exercise price for the 57,736 stock options granted to Mr. Webster per the
terms of Mr. Webster's employment agreement dated June 8, 1995 of which 28,868 were immediately vested on June 28, 1996 and
exercised at $0.91 per share and the remaining 28,868 currently unvested options for shares of common stock of DEC with an
exercise price of $4.33 per share.
</FN>
</TABLE>
1. RETIREMENT PLANS
<PAGE>

NFC sponsors two defined benefit plans, the Transkrit Corporation
Employees' Pension Plan, which covers Mr. Resnick, and the Employees'
Retirement Plan of National Fiberstok Corporation.

Transkrit Corporation Employees' Pension Plan. The Transkrit
Corporation Employees' Pension Plan (the "Transkrit Plan") provides an
annual benefit equal to .4% of "average final compensation" multiplied by
benefit service completed before July 15, 1971, plus .7% of "average final
compensation" multiplied by benefit service completed after July 15, 1971,
plus an additional 3% of "average final compensation" multiplied by benefit
service earned while an employee of Short Run Labels, Inc., if any. Average
final compensation is determined by averaging a participant's compensation
for the five consecutive calendar years during the ten years immediately
preceding retirement, termination of employment, or death that give the
highest average.

The following table gives the estimated annual benefit payable upon
retirement for participants in the Transkrit Plan:

<TABLE>
TRANSKRIT PLAN TABLE

<CAPTION>
Years of Service
-------------------------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
100,000 10,500 14,000 17,500 21,000 24,500
125,000 13,100 17,500 21,900 26,300 30,600
150,000 15,800 21,000 26,300 31,500 36,800

175,000 18,000 24,200 30,300 36,400 42,500
200,000 20,300 27,300 34,300 41,300 48,300
225,000 22,000 29,700 37,400 45,100 52,700
250,000 22,000 29,700 37,400 45,100 52,700
275,000 22,000 29,700 37,400 45,100 52,700
300,000 22,000 29,700 37,400 45,100 52,700
325,000 22,000 29,700 37,400 45,100 52,700
350,000 22,000 29,700 37,400 45,100 52,700
375,000 22,000 29,700 37,400 45,100 52,700
400,000 22,000 29,700 37,400 45,100 52,700
425,000 22,000 29,700 37,400 45,100 52,700

450,000 22,000 29,700 37,400 45,100 52,700
475,000 22,000 29,700 37,400 45,100 52,700
500,000 22,000 29,700 37,400 45,100 52,700

</TABLE>
Compensation covered by the Transkrit Plan is equal to the annual
amount paid to a participant by Transkrit which includes base salary,
overtime and commissions, as shown in the Summary Compensation Table, but
excluding bonuses as shown in the Summary Compensation Table; provided,
however, compensation in excess of $150,000 is disregarded.

The estimated years of credited service for purposes of calculating
benefits for Mr. Resnick is five. The current amount of compensation
covered by the Transkrit Plan for Mr. Resnick is $190,890.

Benefits shown above are computed as a single life annuity beginning
at age 65 and are not subject to any offset amounts.
<PAGE>

EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS

NFC and Robert M. Miklas entered into an agreement dated as of June
28, 1996 which sets forth certain terms of the employment of Mr. Miklas as
President and CEO of NFC and DEC. This agreement provides for an annual
base salary which may be increased pursuant to an agreed upon plan subject
to the approval of the Compensation Committee of the Board of Directors of
DEC and NFC. Mr. Miklas is eligible to receive bonus compensation as
determined from time to time by the Board of Directors of DEC and NFC. In
the event that NFC terminates Mr. Miklas' employment under certain
circumstances, Mr. Miklas shall be entitled to continuation of his base
compensation for a period of one year.

NFC and Jack Resnick entered into an agreement dated as of June 28,
1996 which sets forth certain terms of the employment of Mr. Resnick as
Senior Vice President of NFC and DEC and President of Chief Executive
Officer--Transkrit Division. This agreement provides for an annual base
salary which may be increased pursuant to an agreed upon plan subject to
the approval of the Compensation Committee of the Board of Directors of DEC
or NFC. The agreement also provides a plan under which bonus compensation
is to be awarded. In the event that NFC terminates Mr. Resnick's employment
under certain circumstances, Mr. Resnick shall be entitled to continuation
of his base compensation for a period of one year.

NFC and Thomas J. Cobery entered into an agreement dated as of June
28, 1996 which sets forth certain terms of the employment of Mr. Cobery as
Senior Vice President of NFC and DEC and President of Chief Executive
Officer--Label Art Division. This agreement provides for an annual base
salary which may be increased pursuant to an agreed upon plan subject to
the approval of the Compensation Committee of the Board of Directors of DEC
or NFC. The agreement also provides a plan under which bonus compensation
is to be awarded. In the event that NFC terminates Mr. Cobery's employment
under certain circumstances, Mr. Cobery shall be entitled to continuation
of his base compensation for a period of six months.

NFC and Robert B. Webster entered into an agreement on June 8, 1995
which sets forth certain terms of employment of Mr. Webster as Executive
Vice President and Chief Financial Officer of NFC. The agreement provides
for an annual base salary that is subject to annual upward adjustment at
the discretion of the Board of Directors of NFC. The agreement also
provides for bonus compensation and stock options based upon an agreed upon
plan. In the event that NFC terminates Mr. Webster's employment for any
reason under certain circumstances, Mr. Webster shall be entitled to his
base compensation for a period of nine months.

ITEM 12. SECURITY OWNERSHIP

The authorized capital stock of NFC consists of 300,000 shares of
common stock, par value $.01 per share, of which 283,807 shares are issued
and outstanding, all of which have voting rights and are presently held by
DEC.

The authorized capital stock of the DEC consists of (i) 4,000,000
shares of Class A common stock, par value $.0001 per share, of which
2,457,125 shares are issued and outstanding, and which have voting rights.
In addition, DEC has issued options to purchase 267,652 shares of Class A
common stock to the management and directors of DEC and NFC pursuant to the
1996 Plan and the 1997 Plan and warrants to purchase 132,240 shares of
Class A common stock to certain investors, all of which are outstanding;
(ii) 300,000 shares of Class B common stock, par value $.0001 per share, of
which no shares are issued and outstanding, and which have no voting
rights; and (iii) 250,000 shares of Cumulative Redeemable Preferred Stock,
<PAGE>

par value $.0001 per share, of which 10,000 shares are issued and
outstanding.

The following table sets forth as of December 31, 1996, the number and
percentage of shares of DEC Class A Common Stock capital stock beneficially
owned by (i) each person known to the Company to be the beneficial owner of
more than 5% of any class of DEC's equity securities, (ii) each director of
the Company or DEC, and (iii) all directors and executive officers of DEC
as a group.

<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT AND OF DEC
NATURE OF CLASS A
BENEFICIAL OWNERSHIP COMMON
OF DEC CLASS A STOCK
COMMON STOCK OUTSTANDING
------------ -----------
<S> <C> <C>
MCCOWN DE LEEUW & CO. 11, L.P.<F2> 1,403,104 55.80%
C/O MCCOWN DE LEEUW & COMPANY
3000 SAND HILL ROAD
BUILDING 3, SUITE 290
MENLO PARK, CA 94025
MCCOWN DE LEEUW ASSOCIATES, L.P.<F2> 755,603 30.10%
c)o McCown De Leeuw & Company
30M Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025

MDC/JAFCO Ventures, L.P.<F3> 52,174 2.10%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
David E. De Leeuw<F4> 2,210,881 88.00%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025

Glenn McKenzie 9,294 0.40%
24 Beach Plum Way
Hampton, NH 03842
Robert Miklas 57,736 2.30%
4982 Carol Lane
Atlanta, GA 30327
All directors and executive officers as a group 106,252 4.00%

<FN>
<F1> Class A Common Stock is the only class of capital stock of DEC which has voting rights. Beneficial ownership is
determined in accordance with the rules of the Commission. Shares of capital stock subject to options, warrants and convertible
securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, the persons named in the table above have sole voting and investment power with
respect to all shares of capital stock indicated as beneficially owned by them.

<F2> MDC Management Company II, L.P. ("MDC II") is the general partner of both McCown De Leeuw & Co. II, L.P. and McCown
De Leeuw Associates, L.P. George E. McCown, David E. De Leeuw, Robert B. Hellman Jr., Charles Ayres, Steven A. Zuckerman and
David E. King are the general partners of MDC II. Mr. De Leeuw is the managing general partner of MDC II.
<PAGE>

<F3> MDC Management Company ("MDC") is the general partner of MDC/JAFCO Ventures, L.P. George E. McCown and David E. De
Leeuw are the general partners of MDC. Mr. De Leeuw is the managing general partner of MDC.

<F4> Represents shares of DEC Class A Common Stock held by McCown De Leeuw & Co. II, L.P., McCown De Leeuw Associates, L.P.
and MDC/JAFCO Ventures, L.P. Mr. De Leeuw, a director of the Company, may be deemed to own beneficially all of the shares held
by McCown De Leeuw & Co. II, L.P., McCown De Leeuw Associates, L.P. and MDC/JAFCO Ventures, L.P. because of his position as
managing general partner of MDC II and MDC. Mr. De Leeuw has no direct ownership of any Class A Common Stock of DEC and
disclaims beneficial ownership as to all of such shares, except to the extent of his proportional partnership interests.
</FN>
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ADVISORY SERVICES AGREEMENT

NFC maintains a Advisory Services Agreement (the "Advisory Services
Agreement") with MDC Management Company II, L.P. ("MDC Management"), an
affiliate. Under the Advisory Services Agreement, MDC Management provides
certain consulting, financial, and managerial functions to the Company for
a fee initially in an amount not to exceed $350,000 in any fiscal year,
which amount may be increased to an amount not to exceed $500,000 in any
fiscal year with the approval of the members of the Board of Directors of
the Company who do not have a direct financial interest in any person
receiving such payments under the Advisory Services Agreement. MDC
Management has agreed to subordinate its right to receive such fees in the
event of an acceleration of maturity of the Senior Unsecured Notes or a
bankruptcy, liquidation or insolvency proceeding involving the Company. In
1996 and 1995, NFC paid $862,000 (of which $562,000 was accrued as of
December 31, 1995) and $187,500, respectively, for such services. The
Advisory Services Agreement expires December 31, 2000 and is renewable
annually thereafter, unless terminated by NFC for justifiable cause, as
defined.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS - Reference is made to the Index to
Financial Statements included herein.

(a)(2) FINANCIAL STATEMENT SCHEDULES - Reference is made to Note 2 of
the Notes to Financial Statements. All schedules have been
omitted as not required or not applicable or because the
information required to be presented is included in the financial
statements and related notes.

(a)(3) EXHIBITS
12 - Statement, re: Ratio of Earnings to Fixed Charges
23 - Consent of Independent Public Accountants
27 - Financial Data Schedule

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.

NATIONAL FIBERSTOK CORPORATION

Date : _____________________ _____________________________
John D. Weil
Director
<PAGE>

Date : _____________________ _____________________________
Robert M. Miklas
President and Chief Executive Officer
(Principal Executive Officer)

Date : _____________________ _____________________________
Ddavid e. De Leeuw
Director

Date : _____________________ _____________________________
David E. King
Director

Date : _____________________ _____________________________
Glenn S. McKenzie
Director

Date : _____________________ _____________________________
Robert B. Webster
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>

INDEX TO FINANCIAL STATEMENTS
NATIONAL FIBERSTOK CORPORATION

Page
----

Report of Independent Public Accountants . . . . . . . . . . . . . .
Balance Sheets at December 31, 1995 and 1996 . . . . . . . . . . . .
Statements of Operations for the years ended December 31, 1994,
1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Stockholder's Equity for the years ended December 31,
1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the years ended December 31, 1994
1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . .
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholder of National Fiberstok Corporation:

We have audited the accompanying balance sheets of NATIONAL FIBERSTOK
CORPORATION (a Delaware Corporation) as of December 31, 1995 and 1996 and
the related statements of operations, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National
Fiberstok Corporation as of December 31, 1995 and 1996 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 7, 1997
<PAGE>

<TABLE>
NATIONAL FIBERSTOK CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<CAPTION>
DECEMBER 31
-------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 444,422 $ 1,979,493
Accounts receivable, net of allowance for doubtful
accounts of $171,950 and $611,170, respectively . . . . . . . 8,875,098 17,384,354
Income tax receivable . . . . . . . . . . . . . . . . . . . . . - 547,944
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 5,591,888 11,261,155
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . - 304,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363,935 1,835,674
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . 15,275,343 33,313,219
------------ ------------

Property and Equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,982 1,852,686
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,762,147 12,020,573
Machinery and equipment . . . . . . . . . . . . . . . . . . . . 11,247,136 36,970,991
Office equipment, furniture and fixtures . . . . . . . . . . . 890,809 2,993,039
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 70,290 1,045,565
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . - 166,677
Construction in progress . . . . . . . . . . . . . . . . . . . 1,383,915 1,809,007
------------ ------------
15,690,279 56,858,538
Less accumulated depreciation and amortization . . . . . . . . (5,388,670) (9,491,356)
------------ ------------
Net property and equipment . . . . . . . . . . . . . . . 10,301,609 47,367,182
------------ ------------

Other Assets:
Patents, net of accumulated amortization of $0 and . . . . . .
$1,038,940, respectively . . . . . . . . . . . . . . . . . . - 18,405,060
Goodwill, net of accumulated amortization of $830,468,
and $1,290,028, respectively . . . . . . . . . . . . . . . . 8,146,188 25,079,097
Covenants not to compete, net of accumulated amortization
of $4,667,741 and $5,703,213, respectively . . . . . . . . . 982,292 487,304
Deferred financing costs, net of accumulated amortization
of $833,339 and $478,283, respectively . . . . . . . . . . . 588,454 5,260,429
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . 922,436 1,931,101
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,900,000 -
Due from parent . . . . . . . . . . . . . . . . . . . . . . . . - 875,931
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 655,056
------------ ------------
Total other assets . . . . . . . . . . . . . . . . . . . 12,539,370 52,693,978
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 38,116,322 $ 133,374,379
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>

<TABLE>
NATIONAL FIBERSTOK CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
<CAPTION>
DECEMBER 31
-------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . $ 2,105,935 $ 446,037
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . 2,354,439 1,505,703
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 2,082,277 4,337,366
Accrued employee compensation . . . . . . . . . . . . . . . . . 289,165 2,873,080
Other accrued expenses . . . . . . . . . . . . . . . . . . . . 1,261,329 5,310,772
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . 8,093,145 14,472,958
------------ ------------

Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . 1,883,713 4,426,790
------------ ------------

Long-Term Debt :
Senior unsecured notes . . . . . . . . . . . . . . . . . . . . - 100,000,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 9,847,535 2,352,881
Revolving line of credit . . . . . . . . . . . . . . . . . . . 7,050,000 -
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . 4,514,710 -
------------ ------------
Total long-term debt . . . . . . . . . . . . . . . . . . 21,412,245 102,352,881
------------ ------------

Commitments and Contingencies (Note 8)

Stockholder's Equity:
Common stock, $.01 par value, 300,000 shares authorized, . . .
283,807 shares issued and outstanding . . . . . . . . . . . . 2,838 2,838
Additional paid-in capital . . . . . . . . . . . . . . . . . . 14,532,070 22,296,581
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (7,807,689) (10,177,669)
------------ ------------
Total stockholder's equity . . . . . . . . . . . . . . . 6,727,219 12,121,750
------------ ------------

Total liabilities and stockholder's equity . . . . . . . $ 38,116,322 $ 133,374,379
------------ ------------
------------ ------------

</TABLE>

The accompanying notes are an integral part of these balance sheets.
<PAGE>

<TABLE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<CAPTION>

December 31

--------------------------------------------------
1994 1995 1996
----- ----- -----

<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $ 65,998,093 $ 71,257,112 $ 111,342,230
Cost of products sold . . . . . . . . . . . . . . 52,610,089 55,708,018 80,215,498
------------ ------------ -------------
Gross profit . . . . . . . . . . . . . . . . . . 13,388,004 15,549,094 31,126,732
------------ ------------ -------------
Operating expenses:
Selling . . . . . . . . . . . . . . . . . . . . 5,936,621 6,760,438 10,716,599
General & administrative . . . . . . . . . . . 4,777,837 4,833,618 11,949,210
Amortization:
Patents . . . . . . . . . . . . . . . . . . . - - 1,038,940
Covenants not to compete . . . . . . . . . . 1,425,000 1,439,607 1,035,472
Goodwill . . . . . . . . . . . . . . . . . . 240,433 236,113 459,560
Other . . . . . . . . . . . . . . . . . . . . 48,000 140,000 -
------------ ------------ -------------
Total operating expenses . . . . . . . . . . 12,427,891 13,409,776 25,199,781
------------ ------------ -------------
Income from operations . . . . . . . . . . . . . 960,113 2,139,318 5,926,951
Interest expense . . . . . . . . . . . . . . . . 2,974,755 3,179,328 8,125,767
------------ ------------ -------------
Net loss before income taxes and
extraordinary item . . . . . . . . . . . . . . (2,014,642) (1,040,010) (2,198,816)
Income tax benefit . . . . . . . . . . . . . . . - 1,900,000 626,739
------------ ------------ -------------
Net income (loss) before extraordinary item . . . (2,014,642) 859,990 (1,572,077)
Extraordinary loss on retirement
of debt, net of tax benefit of $460,864 . . . . - - (797,903)
------------ ------------ -------------
Net income (loss) . . . . . . . . . . . . . . . . $ (2,014,642) $ 859,990 $ (2,369,980)
------------ ------------ -------------
------------ ------------ -------------

</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>

<TABLE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

<CAPTION>
SHARES ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
------- ---------- ------- ----------- -----

<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 283,807 $2,838 $14,532,070 $(6,653,037) $7,881,871
Net loss . . . . . . . - - - (2,014,642) (2,014,642)
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1994 283,807 2,838 14,532,070 (8,667,679) 5,867,229
Net income . . . . . . - - - 859,990 859,990
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1995 283,807 2,838 14,532,070 (7,807,689) 6,727,219
Capital contribution . - - 7,764,511 - 7,764,511
Net loss . . . . . . . - - - (2,369,980) (2,369,980)
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1996 283,807 $2,838 $22,296,581 $(10,177,669) $12,121,750
---------- ---------- ------------ ------------ ------------
---------- ---------- ------------ ------------ ------------

</TABLE>

The accompanying notes are an integral part of these statements.
<PAGE>

<TABLE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<CAPTION>
December 31

------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income . . . . . . . . . . . . . . . $ (2,014,642) $ 859,990 $ (2,369,980)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Extraordinary loss on early retirement of debt,
net of income tax benefit . . . . . . . . - - 797,903
Depreciation and amortization . . . . . . . 3,685,439 4,004,992 7,409,137
Deferred income taxes benefit . . . . . . . - (1,900,000) (626,739)
Net gain on disposal of property and
equipment . . . . . . . . . . . . . . . (86,604) (173,646) (294,000)
Amortization of prepaid pension asset . . . (77,853) (180,310) (45,865)
Imputed interest . . . . . . . . . . . . . 134,501 130,172 60,414
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . (1,117,611) 216,782 2,045,704
Inventories . . . . . . . . . . . . . . . (459,217) 141,682 1,017,917
Other assets . . . . . . . . . . . . . . . (257,594) (7,436) (226,946)
Accounts payable . . . . . . . . . . . . . 2,563,236 (2,143,754) 534,704
Accrued expenses and other . . . . . . . . (1,166,381) (1,165,768) (1,154,287)
------------- -------------- -------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . 1,203,274 (217,296) 7,147,962
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . (940,387) (2,308,105) (3,490,447)
Proceeds from sale of property and equipment . 546,959 369,194 423,428
Restricted certificate of deposit . . . . . . . 125,000 - -
Proceeds from investment securities . . . . . - - 2,620,000
Payment for the purchase of the outstanding
stock of Transkrit Corporation, net of cash
acquired . . . . . . . . . . . . . . . . . . - - (79,390,682)
------------- -------------- -------------
Net cash used in investing activities . . (268,428) (1,938,911) (79,837,701)
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdraft, net . . - 2,354,437 (2,758,170)
Borrowings (payments) on Term Loan B . . . . . - 1,000,000 (4,500,000)
Payments on Term Loan A . . . . . . . . . . . . (1,250,000) (1,050,000) (7,400,000)
Payment on subordinated debt . . . . . . . . . - - (5,000,000)
Due from parent . . . . . . . . . . . . . . . . - - (875,931)
Payments on other long-term debt . . . . . . . (100,000) - -
Payments on capital leases . . . . . . . . . . (8,206) (37,130) (216,888)
Net borrowings (payments) on revolving line
of credit . . . . . . . . . . . . . . . . . . 500,000 50,000 (7,050,000)
Increase in deferred financing costs . . . . . - - (5,738,712)
Proceeds from issuance of senior unsecured
notes . . . . . . . . . . . . . . . . . . . - - 100,000,000
Additional capital contribution . . . . . . . . - - 7,764,511
------------- -------------- -------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . (858,206) 2,317,307 74,224,810
------------- -------------- -------------
NET INCREASE IN CASH. . . . . . . . . . . . . . . 76,640 161,100 1,535,071
<PAGE>

CASH, BEGINNING OF YEAR . . . . . . . . . . . . . 206,682 283,322 444,422
------------- -------------- -------------

CASH, END OF YEAR . . . . . . . . . . . . . . . . $ 283,322 $ 444,422 $ 1,979,493
------------- -------------- -------------
------------- -------------- -------------

SUPPLEMENTAL DISCLOSURE OF :
Cash paid for interest . . . . . . . . . . . . $ 2,412,000 $ 2,821,000 $ 7,744,000
------------- -------------- -------------
------------- -------------- -------------
Assets acquired by assuming liabilities . . . $ - $ - $ 11,038,000
------------- -------------- -------------
------------- -------------- -------------
</TABLE>

SUPPLEMENTAL DISCLOSURE ON NONCASH INVESTING ACTIVITIES :
A capital lease obligation of $2,799,000 was incurred when the Company
entered into leases for new equipment.

The accompanying notes are an integral part of these statements.

NATIONAL FIBERSTOK CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

1. BACKGROUND

National Fiberstok Corporation (the "Company"), a wholly-owned
subsidiary of DEC International, Inc. ("DEC" or "parent"), manufactures and
distributes a broad range of paper-based communication products, including
envelopes, catalog inserts, labels, business forms, printed products and
office supplies. The Company markets its products to customers throughout
the United States through operations in Roanoke and Salem, Virginia;
Austell, Georgia; Louisville, Kentucky; Gainesville, Florida; Greenville,
South Carolina; Wilton, New Hampshire; Linthicum, Maryland; Sparks, Nevada;
San Carlos, California; and Fort Smith, Arkansas.

On June 28, 1996, pursuant to a Stock Purchase Agreement dated June
19, 1996, the Company acquired all of the issued and outstanding capital
stock of Transkrit Corporation ("Transkrit") for $86.5 million plus
transaction costs. Subsequent to the acquisition, Transkrit and all of its
subsidiaries were merged into the Company.

The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations of Transkrit have
been included in the results of operations of the Company since June 29,
1996. The purchase price was allocated to assets and liabilities based on
their estimated fair value as of the date of the acquisition. The excess of
the consideration paid over the estimated fair value of net assets acquired
of $17,393,000 has been recorded as goodwill and is being amortized on the
straight-line basis over 40 years. The following presents, on an unaudited
pro forma basis, the Company's results of operations as though the
acquisition and related transactions discussed had occurred on January 1,
1995 for the years ended December 31, 1995 and 1996 (in thousands):

1995
1996
----
----
<S> <C> <C>
<PAGE>

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,760 $ 159,346
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 10,272 8,322
Net income (loss) before extraordinary item . . . . . . . . . . 1,057 (2,684)

</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Revenue Recognition

Sales are recorded as products are shipped, except for certain sales
for which revenue is recognized when the customer is billed based on
passage of legal title at the date of billing. Such 'bill and hold' sales
are not material to the Company's results of operations.

Use of Estimates

The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements as well as
during the reporting period. Actual results could differ from these
estimates.

Cash Equivalents

For purposes of the reporting of cash flows, the Company considers all
highly liquid debt instruments with a maturity at date of purchase of three
months or less to be cash equivalents.

The Company does not believe it is exposed to any significant credit
risk on money market funds with commercial banks because its policy is to
make such deposits only with highly rated institutions.

Accounts Receivable

A summary of changes in the allowance for doubtful accounts is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period . . . . . . . . . . $ 148,084 $ 141,841 $ 171,950
Acquired balance from Transkrit (Note 1) . . . . - - 495,154
Provisions . . . . . . . . . . . . . . . . . . . 83,602 78,089 215,455
Recoveries . . . . . . . . . . . . . . . . . . . 18,770 18,679 75,028
Write-offs . . . . . . . . . . . . . . . . . . . (108,615) (66,659) (346,417)
------------ ------------ ------------

Balance, end of period . . . . . . . . . . . . . $ 141,841 $ 171,950 $ 611,170
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

Inventories

Inventories are stated at the lower of cost or market. Costs of raw
materials are determined using the first-in, first-out ("FIFO") method.
Costs (net of an obsolescence reserve) of work in process, finished goods,
<PAGE>

and customized stock (consisting of products which have been produced and
held for certain customers under short-term delayed-shipping arrangements)
are determined using the average cost (which approximates FIFO), or FIFO
method.

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---- ----
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,764,452 $ 5,837,794
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . 968,671 1,288,685
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 556,649 2,834,589
Customized stock . . . . . . . . . . . . . . . . . . . . . . . . 1,302,116 1,300,087
------------ ------------

Balance, end of period . . . . . . . . . . . . . . . . . . . . . $ 5,591,888 $ 11,261,155
------------ ------------
------------ ------------
</TABLE>

Property and Equipment

Property and equipment are recorded at cost or at estimated fair value
at date of acquisition (Note 1), if acquired, and are depreciated using the
straight-line method over the following lives:

Buildings . . . . . . . . . . . . . . . . . . 25 to 30 years
Machinery and equipment . . . . . . . . . . . . 3 to 7 years
Office equipment, furniture and fixtures . . . 3 to 7 years
Vehicles . . . . . . . . . . . . . . . . . . . 3 to 5 years

Leasehold improvements are depreciated over the lesser of the useful
lives of the assets or the lease term.

The Company's policy is to remove the cost and accumulated
depreciation of retirements from the accounts and recognize the related
gain or loss upon the disposition of assets.

Goodwill

Goodwill is stated at cost, less accumulated amortization, and is
amortized over 15 to 40 years using the straight-line method. The
recoverability of goodwill is periodically reviewed by management based on
current and anticipated conditions. The amount of goodwill considered
realizable, however, could be reduced in the near term if changes occur in
anticipated conditions. Based upon a review of projected undiscounted cash
flow from operations and other pertinent information, management is of the
opinion that there has been no diminution in the value assigned to
goodwill.

Patents

The Company has been granted several patents related to certain
products manufactured by the Company. Patents acquired through the
acquisition of Transkrit were recorded at their estimated fair value at the
<PAGE>

date of acquisition (Note 1). These amounts are being amortized on a
straight-line basis over the life of the patents.

Covenants Not to Compete

Covenants not to compete have been recorded at cost and are being
amortized on a straight-line basis over the terms (three to five years) of
the agreements.

Deferred Financing Costs

Deferred financing costs represent costs incurred to raise financing
and are amortized over the related terms of the borrowings (Note 3). Such
amounts are not expected to be repaid within one year.

Due from parent

Due from parent represents funds borrowed by DEC to fund certain
transactions as allowable by the Senior Unsecured Notes and revolving loan
facility (Note 3). Such amounts are not expected to be repaid within one
year.

Income Taxes

The Company accounts for income taxes using the asset and liability
method for recognition of deferred tax consequences of temporary
differences, net operating losses, and tax credits by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities.

Concentration of Risk

During 1994, 1995, and 1996, the Company's ten largest customers
accounted for 29%, 25%, and 18%, respectively, of total company sales. No
individual customer accounted for more than 6% of sales in any year. In
management's opinion, a loss of any one individual customer would not have
a material impact on the Company's financial position or results of
operations.

The Company's largest purchased raw material is paper. While the
Company utilizes multiple paper suppliers, it obtained 49%, 67% and 30% of
its paper from two suppliers in 1994, 1995, and 1996, respectively.
Further, the supply and price of paper are cyclical in nature. As a
result, the Company is subject to the risk that pricing may significantly
impact results of operations and that it may be unable to purchase
sufficient quantities of paper to meet production requirements during times
of tight supply. While the Company believes that it could obtain other
suppliers of paper, paper industry conditions may have a material effect on
the Company's results of operations.

Vacation Policy

In 1995, the Company revised its vacation policy for certain
locations, whereby employees must take vacation earned during the year
prior to December 31 or forfeit the balance. As a result of this change in
policy, a vacation accrual was no longer required as of December 31, 1995
and approximately $575,000 of accrued vacation was reversed and is
reflected as a reduction in cost of products sold in 1995.

Fair Value of Financial Instruments
<PAGE>

The Company's financial instruments consist primarily of cash,
accounts receivable, accounts payable, and debt. The carrying amounts of
cash, accounts receivable, and accounts payable approximate their fair
values because of the short-term maturity of such instruments. The fair
value of the Senior Unsecured Notes (Note 3) at December 31, 1996 was
approximately $106,000,000 and was estimated using a quote from a broker.
At December 31, 1995, the carrying value of the other long-term debt,
except the Rice Note (Note 3) approximated its fair value, because interest
rates on such debt were periodically adjusted and approximated current
market rates. The fair value of the Rice Note at December 31, 1995,
discounted at 10.5%, which approximated market, was $5,648,000.

Adoption of Accounting Standard

On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used as well as long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of this standard was not
material to the Company's financial position or results of operations.

3. LONG-TERM DEBT

Long-term debt consists of the following at December 31,:
<PAGE>

1995 1996
---------- ----------
<S> <C> <C>
11 5/8% Senior Unsecured Notes, interest payable
semi-annually commencing December 15, 1996 . . . . . . . . . . $ - $ 100,000,000

Capital lease payable to The CIT Group/Equipment
Financing, Inc. ("CIT"), monthly principal and interest
payments of $48,250 commencing July 1996 through
June 2001, with a balloon payment of $513,485 due
June 2001, interest at 10.2% . . . . . . . . . . . . . . . . . - 2,405,831

Term Loan A payable to Heller Financial, Inc. ("Heller"),
quarterly principal payments ranging from $250,000 to
$500,000 for the period commencing December 31, 1992
through September 30, 1999, bearing interest at a base
rate plus 1.75% (10.25% at December 31, 1995) . . . . . . . . . 7,400,000 -

Term Loan B payable to Heller, payable in four successive
quarterly principal payments of $875,000 commencing the
earlier of December 31, 1999 or upon full payment of Term
Loan A and the balance due on December 31, 2000, bearing
interest at a base rate plus 5% (13.5% at December 31,
1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 -

Revolving line of credit payable to Heller, principal payable in
full upon the earlier of termination, as defined, or September
30,2000, bearing interest at a base rate plus 1.75% (10.25%
at December 31, 1995) . . . . . . . . . . . . . . . . . . . . . 7,050,000 -

Subordinated note payable to Rice Mezzanine Lenders, L.P.
("Rice"), principal balloon payment due on the earlier of
termination, as defined, or September 30, 2000, bearing
interest at 14% . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 -

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,991 393,087

Less unamortized portion of discount due to value assigned to
parent company warrants attached to Term Loans A and B
and the subordinated note payable . . . . . . . . . . . . . . . (658,811) -
------------ -------------
23,518,180 102,798,918
Less current portion . . . . . . . . . . . . . . . . . . . . . . (2,105,935) (446,037)
------------ -------------

$ 21,412,245 $ 102,352,881
------------ -------------
------------ -------------
</TABLE>
Maturities of long-term debt and capital lease obligations at December
31,1996 are as follows:
<PAGE>

The Company maintained a term loan and line-of-credit agreement (the
"Credit Agreement") with Heller. Under the terms of the Credit Agreement,
as amended, the Company had an $11,000,000 term loan ("Term Loan A"), a
$4,500,000 term loan ("Term Loan B") and a $8,500,000 revolving line-of-
credit facility (the "Line"). As additional consideration for the Credit
Agreement, the parent issued to Heller stock warrants to purchase 254,435
shares of DEC Class B common stock. The warrants were valued at $400,000
and were recorded as a discount to the face value of Term Loan A and Term
Loan B. The effect of the warrants at the inception of Term Loan A and
Term Loan B was to cause effective yields of 10.35% and 13.33%,
respectively. The effective yields for Term Loan A and B were 10.6% and
13.8%, respectively, for the year ended December 31, 1995.

The Company also maintained a $5,000,000 note purchase agreement (the
"Rice Note"), as amended, with Rice. As consideration for the Rice Note,
the parent issued to Rice stock warrants to purchase 413,457 shares of
DEC's Class A common stock. The warrants were valued at $649,954 and were
recorded as a discount to the Rice Note. The effective interest rate on
the Rice Note, after discounting for the warrants, was 17.12%.

Concurrent with the issuance of the Senior Unsecured Notes ("Notes")
discussed below, the Company repaid Term Loans A and B, the Line and the
Rice Note, purchased the outstanding Heller and Rice warrants and paid a
prepayment penalty to Rice all of which aggregated to approximately
$25,100,000. As a result of the early retirement of debt, the Company
incurred an extraordinary loss of $797,903, net of income tax benefit of
$460,864. Subsequently, the Credit Agreement and Rice Note were terminated.

Concurrent with the consummation of the acquisition discussed in Note
1, the Company issued $100,000,000 aggregate principal amount of 11 5/8%
Notes due June 15, 2002. Interest is payable semi-annually commencing
December 15, 1996. The Notes are senior obligations of the Company and will
be pari passu in right of payment to all future senior indebtedness. The
indenture to the Notes limits the incurrence of additional debt by NFC,
does not allow the Company to pay any common stock dividends and limits the
Company's ability to redeem any capital stock and to sell its assets, as
defined. The Company may incur additional indebtedness, as defined, as long
as its fixed charge coverage ratio, as defined, is greater than certain
minimum levels.

Concurrent with the termination of the Credit Agreement, the Company
entered into a revolving loan facility with Heller. The facility provides
borrowings based on the lesser of qualified accounts receivable and
inventories, as defined, or $20,000,000. The revolving loan facility bears
interest at the 30 to 180 day London Interbank Offered Rate plus 2.25% or
Prime plus 1%. This facility will expire the earlier of the Expiry Date, as
defined, or June 28, 2001. Borrowings under the revolving loan facility are
subject to certain financial covenants that include, among others, minimum
fixed charge coverage and total indebtedness to operating cash flow ratio,
<PAGE>

as defined. The Company was in compliance with each covenant as of December
31, 1996. As of December 31, 1996, there were no borrowings outstanding and
$18,300,000 was available on the revolving loan facility.

Under the CIT capital lease payable, CIT has a first-perfected
security interest in certain equipment. At the end of the lease term, the
Company will have the option to purchase the equipment for $513,485. The
CIT capital lease payable is cross-defaulted with all other loan agreements
if such default is not cured within 90 days following the default.

Interest expense on long-term debt and capital leases in 1994, 1995
and 1996 was approximately $2,975,000, $3,179,000 and $8,126,000,
respectively, including approximately $123,000, $127,000 and $60,000,
respectively, of warrant-related discount amortization and $259,000,
$231,000 and $564,000, respectively, of deferred finance cost amortization.

4. INCOME TAXES

The income tax benefits for the years ended December 31, 1994, 1995
and 1996 represent the income tax benefit from operating losses. As a
result, income tax benefits for all periods presented consist of deferred
tax benefits.

The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the 1994, 1995, and 1996 benefit
for income taxes is as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal tax benefit at statutory rate . . . . . . $ (684,978) $ (353,600) $ (747,597)
State, net of federal benefit . . . . . . . . . . - (34,000) (58,049)
Change in valuation allowance . . . . . . . . . . 612,467 (1,485,000) -
Non-deductible amortization . . . . . . . . . . - - 164,139
Non-deductible expenses . . . . . . . . . . . . - - 42,854
Other, net . . . . . . . . . . . . . . . . . . . 72,511 (27,400) (28,086)
------------ ------------ ------------
Actual income tax benefit . . . . . . . . . . . . $ - $ (1,900,000) $ (626,739)
------------ ------------ ------------
------------ ------------ ------------
Effective tax rate . . . . . . . . . . . . . . . 0% 183% 29%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

Significant components of the Company's net deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows:
<PAGE>

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards . . . . . . . . . . . . . . . $ 2,692,000 $ 4,127,000
Book basis in property over tax basis . . . . . . . . . . . . . (2,710,000) (6,703,000)
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,457,000)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . - (712,000)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . (143,000) (185,000)
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . (369,000) (692,000)
Covenant not-to-compete . . . . . . . . . . . . . . . . . . . . 1,371,000 1,556,000
Employee benefit accruals . . . . . . . . . . . . . . . . . . . 490,000 903,000
Accrued liabilities not currently deductible . . . . . . . . . 488,000 548,000
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000 157,377
------------ ------------
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . $ 1,900,000 $ (2,457,623)
------------ ------------
------------ ------------
</TABLE>

The net operating loss carryforwards will be used to offset future
taxable income, subject to their expirations, beginning in 2004 and
continuing through 2011. Any future issuance of stock by the Company could
result in an ownership change, as defined by the Tax Reform Act of 1986,
and could limit utilization of net operating loss carryforwards. Also,
benefits derived from using net operating loss carryforwards to offset any
taxes calculated as alternative minimum tax could be less than the recorded
amount of the net operating loss carryforwards. Although realization is
not assured, management believes all net operating loss carryforwards will
be realized.

5. CAPITAL STOCK

The Company has authorized 300,000 shares of common stock with a par
value of $.01 per share. As of December 31, 1995 and 1996, 283,807 shares
are issued and outstanding.

Concurrent with the acquisition of Transkrit (Note 1), DEC made a
$7,764,511 capital contribution.

Effective June 28, 1996, the board of directors of the parent adopted
the DEC International, Inc. 1996 Stock Option Plan. During 1996, the board
of directors granted 267,652 options to purchase Class A common stock at an
exercise price ranging from $2.62 to $4.33 per share to certain employees
of the Company. The options vest based upon time or based upon the
profitability and the liquidation value of the Company if it is sold to a
third party. During 1996, 28,868 options vested and were exercised, and as
of December 31, 1996, no other options were vested or exercisable.

The parent accounts for its stock option plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," under which no compensation was recognized during
1996. In 1996, the parent adopted SFAS No. 123, "Accounting for Stock-Based
Compensation Plans," for disclosure purposes. In accordance with the
disclosure requirements of SFAS No. 123, the parent is required to
calculate pro forma compensation cost of all stock options granted using an
option pricing model. The Company used a minimum value method to perform
the calculation as its stock is not publicly traded. Accordingly, the fair
value of the stock option grant has been estimated as of the grant date
under the minimum value method using the following weighted average
assumptions for 1996: a risk-free interest rate of 6.44%, dividend yield of
<PAGE>

0.00%, and expected life of 4.5 years. Using these assumptions, the fair
value of the stock options at the date of grant was $0. As a result, there
is no pro forma compensation expense.

6. RELATED-PARTY TRANSACTIONS

Fees to Affiliate

The Company maintains an Advisory Services Agreement (the "Agreement")
with MDC Management Company II, L.P. ("MDC"), an affiliate. Under the
Agreement, MDC provides certain consulting, financial, and managerial
functions for a $250,000 annual fee through June 28, 1996 and a $350,000
annual fee thereafter. In 1994, 1995 and 1996, $0, $187,500 and $862,000,
respectively, were paid. The Company has recorded a liability of $562,000
and $0 on the accompanying balance sheets related to the unpaid portion of
these costs as of December 31, 1995 and 1996, respectively. No payments
shall be made by the Company to MDC under the Agreement if there is an
event of default, as defined, under the revolving loan facility or the
Notes (Note 3). As of December 31, 1996, there are no such events of
default. The Agreement expires December 31, 2000 and is renewable
thereafter, unless terminated by the Company for justifiable cause, as
defined.

For services related to the acquisition of Transkrit (Note 1) and the
issuance of the Notes (Note 3), the Company paid MDC $500,000 of which
$350,000 has been recorded as deferred financing costs.

Stockholder's Agreement

In 1992, certain NFC officers and former officers purchased an
aggregate of 298,150 shares of DEC common stock, representing 12% of the
voting common stock of DEC. The stock was purchased at $4.33, the fair
value at the date of purchase. Such stock was purchased through a cash
payment of $620,000 and the issuance of $670,000 of 6% nonrecourse notes.

All stockholders of DEC are subject to the terms of a stockholders
agreement. This agreement restricts the stockholders' ability to sell,
transfer, and assign the DEC common stock, with DEC having the first right
of purchase. The holders of the stock may be forced to sell the shares to
DEC under certain conditions. In addition, on expiration of a
stockholder's employment with the Company, the Company has the option to
buy back the stockholder's common stock at a specified price primarily
based upon either the cost of the shares or the book value of DEC.

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

The Company has a defined benefit pension plan ("The Employees'
Retirement Plan of National Fiberstok Corporation") covering certain
employees. On December 20, 1993, the Company amended the plan, freezing
future participation to any new employees of the Company effective December
31,1993. Effective December 31, 1994, the Company again amended the plan,
freezing future accrual of benefits for all participants. In conjunction
with this agreement, all participants of the plan were retroactively
vested.

The funded status of the plan as of December 31, 1995 and 1996 is as
follows:
<PAGE>

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated projected benefit obligation . . . . . . . . . . . $ (17,030,297) $ (16,991,377)
Plan assets at fair value . . . . . . . . . . . . . . . . . . . 17,345,512 17,320,422
------------- -------------
Plan assets greater than projected benefit obligation . . . . . . 315,215 329,045
Unrecognized net loss from past experience . . . . . . . . . . . 607,221 784,056
------------- -------------
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . $ 922,436 $ 1,113,101
------------- -------------
------------- -------------
</TABLE>

The weighted average discount rates used to measure the accumulated
projected benefit obligation was 7.75% for 1995 and 1996. The assumed
rates of increase in future compensation levels are 5% and the expected
long-term rates of return on assets are 8.75% for both 1995 and 1996.

Net periodic pension costs for 1994, 1995, and 1996 include the
following:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 437,088 $ - $ -
Interest cost on projected benefit obligation . . 1,388,943 1,230,610 1,266,209
Actual return on plan assets . . . . . . . . . . 521,415 (1,772,831) (1,252,658)
Net amortization on plan assets . . . . . . . . . (2,025,970) 361,915 (204,216)
------------- ------------- -------------
$ 321,476 $ (180,306) $ (190,665)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The Company has another defined benefit pension plan ("The Transkrit
Corporation Employees' Pension Plan") covering certain employees. Normal
retirement age is 65, but a provision is made for early retirement.
Benefits are based on the employee's compensation level and years of
service. The Company makes annual contributions to the plan equal to the
maximum amount that can be deducted for income tax purposes. Plan assets
consist principally of equity and debt securities.

The 1996 projected benefit obligation was computed using the projected
unit credit method, assuming a discount rate on benefit obligations of
7.25%, an expected long-term rate of return on plan assets of 9% and annual
salary increases of 4% over the remaining service lives of the employees in
the plan.

The funded status of the plan as of December 31, 1996 is as follows:

<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Accumulated projected benefit obligations, including vested benefits
of $2,144,000 . . . . . . . . . . . . . . . . . . . . . . . . $ (2,243,000)
-------------
Projected benefit obligation . . . . . . . . . . . . . . . . . . (3,924,000)
<PAGE>

Plan assets at fair value . . . . . . . . . . . . . . . . . . . . 5,137,000
-------------
Plan assets greater than projected benefit obligation . . . . . . 1,213,000
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . (395,000)
-------------
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . $ 818,000
-------------
-------------
</TABLE>

Net periodic pension costs for 1996 include the following:

<TABLE>
<S> <C>
Service cost -- benefits earned during the period $ 230,000
Interest cost on projected benefit obligation . . 143,000
Actual return on plan assets . . . . . . . . . . (227,000)
Net amortization on plan assets . . . . . . . . . 52,000
-------------
$ 198,000
-------------
-------------
</TABLE>

Due to the application of purchase accounting related to the
acquisition of Transkrit (Note 1), as of June 28, 1996, there was no
unamortized prior service cost or unrecognized net asset. In addition, the
Company recorded an asset for the amount of the plan assets in excess of
the projected benefit obligation of this plan of $1,016,000 at June 28,
1996.

Deferred Compensation Plans

The Company has unfunded deferred compensation plans that provide
retirement benefits to certain current and former employees. The plans
provide retirement benefits generally based on the service provided by the
employees to the Company. Benefits are vested as service is provided. The
Company provides for these plans during the related service lives of the
participants at amounts sufficient to accrue the present value of benefits
earned to their retirement dates. Effective December 31, 1994, the Company
froze future benefit accruals under certain of these deferred compensation
agreements. Included in the accompanying balance sheets are liabilities of
$426,000 and $587,000 for these plans as of December 31, 1995 and 1996,
respectively.

Defined Contribution Plans

In July 1992, the Company instituted a retirement savings plan, ("The
National Fiberstok 401(k) Savings Plan") for nonunion employees at certain
locations. The plan provides for employee contributions of up to 10% of
employee compensation and company matching contributions of 60% of employee
contributions up to 6% of employee compensation, as defined. The Company
recorded an expense of approximately $41,000, $283,000 and $262,000 in
1994, 1995 and 1996, respectively, as a result of contributions to the
plan.

The Company has an employee savings plan ("The Capital Accumulation
Plan for Employees of Transkrit Corporation") covering all eligible
employees at certain locations under Section 401(k) of the Internal Revenue
Code. The plan includes a provision which allows employees to make pretax
contributions. The Company matches between 15% to 45% of employee
contributions up to 4% to 6% of the employee's wages. The Company
<PAGE>

recognized contribution expense of $159,000 for the year ended December 31,
1996.

Postretirement Benefits

The Company provides certain health care and life insurance benefits
for certain retired individuals. The Company accounts for these benefits
in accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This statement requires the accrual of the
costs of providing postretirement benefits, including medical and life
insurance coverage, during the active service period of the employee. The
plan was frozen in 1993 and all eligible participants of the plan are
retired.

Interest cost, representing all of the net periodic postretirement
benefit expense for the years ended December 31, 1994, 1995 and 1996, was
$0, $56,000, and $43,000, respectively. In addition, the impact of the
change in the assumed discount rate was a benefit of $56,000 for the year
ended December 31, 1995.

The accrued postretirement benefit obligation at December 31, 1995 and 1996
was $771,000 and $711,000, respectively.

Assumptions used in the computation of postretirement benefit expense and
the related obligation are as follows:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Discount rate used to determine accumulated postretirement
benefit obligation . . . . . . . . . . . . . . . . . . . . . . 8% 8%
Initial health care cost trend rate . . . . . . . . . . . . . . . 13% 13%
Ultimate health care cost trend rate . . . . . . . . . . . . . . 5% 5%
Year ultimate health care cost trend rate . . . . . . . . . . . . 2004 2005
</TABLE>

If the health care trend rates increased 1% for all future years, the
accumulated postretirement benefit obligation as of December 31, 1996 would
have increased by 7%. The effect of such a change on the interest cost for
1996 would have been an increase of approximately $50,000.

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has certain noncancelable operating leases for office and
plant facilities and office equipment. The total rental expense was
$641,000, $351,000 and $826,000 in 1994, 1995, and 1996, respectively.
Minimum annual rental payments remaining under noncancelable operating
leases as of December 31, 1996 are as follows:

-------------
</TABLE>

Environmental Liabilities

The Company has been notified by the United States Environmental
Protection Agency ("EPA") that it and 11 other parties are potentially
liable for costs incurred by the EPA in responding to the cleanup of the
Dixie Caverns Landfill Superfund Site in Roanoke County, Virginia.
Subsequently, Roanoke County expended $2,000,000 to clean up a portion of
the Dixie Cavern landfill site and has filed suit against the Company and
the 11 other potentially responsible parties ("PRPs") for reimbursement of
these cleanup costs. Although the PRPs may be jointly and severally liable
for cleanup costs, management believes that the Company's claim is de
minimis, based upon the amount of waste attributable to it in relation to
the other parties. Management believes that the Company will have no
liability in connection with the remaining portions of the site and that
the ultimate outcome of this matter will not have a material adverse impact
on the financial position or results of operations of the Company.

The EPA has also named the Company as one of a number of PRPs in
connection with the alleged disposal of hazardous substances at the Smiths
Farm Landfill Superfund Site in Kentucky. In February 1992, the Company
and 35 other parties entered into an alternative dispute resolution process
("ADRP") to allocate liability. Subsequently, a number of the PRPs
responsible for contributions of waste to the site dropped out of the ADRP
group. The remaining ADRP group members, including the Company, have
proposed a de minimis settlement to the EPA, which, if accepted, would
resolve the Company's liability in connection with the site. Management
believes that the ultimate outcome of this matter will not have a material
adverse impact on the financial position or results of operations of the
Company.

9. SUBSEQUENT EVENTS

Purchase of Label America, Inc.

On February 21, 1997, pursuant to a stock purchase agreement, the
Company acquired all of the issued and outstanding capital stock of Label
America, Inc. ("LAI") for $8,500,000, less outstanding indebtedness and the
amount of certain capitalized leases as of the close of business on
February 21, 1997, plus transaction costs, which was funded through
borrowings on the Company's revolving loan facility. Additional
consideration of $700,000 was paid to the principal stockholder for a
noncompete agreement which amount was also funded through borrowings on the
Company's revolving loan facility. Upon consummation of the acquisition,
LAI was merged into NFC.

Americomm Direct Marketing, Inc.

On February 20, 1997, the Company entered into a stock purchase
agreement with Americomm Direct Marketing, Inc. ("Americomm") and
Americomm's stockholders to purchase the outstanding capital stock of
Americomm for $24,000,000 less outstanding indebtedness of Americomm as of
the closing date. In addition, the Company has agreed to distribute to the
stockholders of Americomm on the closing date (i) cash on Americomm's
balance sheet as of November 30, 1996 less certain phantom stock and non-
accrued bonus obligations of Americomm, (ii) an amount equal to the tax on
net income of Americomm during the period commencing December 1, 1996 and
ending on the closing date and (iii) certain other assets of Americomm.
Additional consideration of $1,000,000 will be paid to the principal
stockholder of Americomm for a noncompete agreement. Americomm's principal
stockholder is a member of the boards of directors of NFC and DEC. The
<PAGE>

Company's obligation to purchase Americomm is subject to, among other
things, the Company having received financing, reasonably acceptable to it
and to there having been no material adverse change in the business,
operations, financial condition or results of operation of Americomm.
Accordingly, the stock purchase agreement may be terminated if either of
these or any other condition to the Company's obligation to consummate the
purchase has not been satisfied. In addition, the stock purchase agreement
can be terminated any time prior to the closing date by written mutual
consent of the Company and the stockholders of Americomm.

<TABLE>
NATIONAL FIBERSTOK CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)

Year Ended
December 31,
_______________
1992 1993 1994 1995 1996
____ ____ ____ ____ ____

NATIONAL FIBERSTOK-HISTORICAL
CONSOLIDATED FINANCIAL DATA:

Income (loss) before income (757) (4,893) (2,015) (1,040) (2,199)
taxes and extraordinary items

Interest expense(a) 803 2,873 2,975 3,179 8,126
----- ------- ------- ------- -------
Earnings 46 (2,020) 961 2,139 5,928

Interest Expense(a) 803 2,873 2,975 3,179 8,126
----- ------- ------ ------- -------

Fixed charges 803 2,873 2,975 3,179 8,126
Ratio of earnings to fixed -- -- -- -- --
changes(b) ----- ------- ------ ------- ------

<FN>
(a) Interest expense includes amortization of deferred financing costs and
debt discounts.

(b) Earnings were insufficient to cover fixed charges by $757, $4,893,
$2,014, $1,040 and $2,198 for the years ended December 31, 1992, 1993,
1994, 1995 and 1996, respectively.
</FN>
</TABLE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation by reference of our report included in this Form 10-K, into
the Company's previously filed Registration Statement on Form S-4, file
number 333-8925.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 26, 1997

<ARTICLE> 5

<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>