PAXAR CORP, 10-K405, 1999-03-31

PAXAR CORP
10-K405, 1999-03-31
COMMERCIAL PRINTING

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-5610
PAXAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEW YORK
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
13-5670050
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

105 CORPORATE PARK DRIVE, WHITE PLAINS, NEW YORK 10604
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

914-697-6800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE, INC.
-------------------------------------- -----------------------------------------
<C> <S>

</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None
(TITLE OF CLASS)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []

Indicate by check mark if disclosure of delinquent filers pursuant to Item
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. [X]

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of March 26, 1999 was approximately
$330,130,000. On such date, the closing price of the Registrant's Common Stock,
as quoted on the New York Stock Exchange, was $8.125.

The Registrant had 47,224,744 shares of Common Stock outstanding as of
March 26, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K is herein incorporated by
reference from the Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the Registrant's Annual
Meeting of Shareholders scheduled to be held on May 7, 1999.
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PART I

ITEM 1: BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Paxar Corporation ("Paxar" or the "Company") is a leading provider of
identification and tracking systems to every segment of the retail supply chain
from manufacturers through distribution centers to the retail store. Paxar's
global manufacturing operations, worldwide distribution network,
one-stop-shopping approach and brand recognition enable the Company to expand
its leading position in apparel identification and printing solutions to the
retail supply chain. The Company markets and distributes its products in more
than 75 countries.

The Company's Apparel Identification operations manufacture products for
and provide services specifically to the apparel and textile industries. A
significant portion of the Company's products are delivered to apparel
manufacturers located in Asia and Mexico whose products are sold in the US.
Label systems, consisting mainly of hot-stamp printers and related supplies and
services, are sold to Company customers for in-plant label printing. Bar code
systems, consisting of electronic printers and related supplies and services,
are used by customers to print data on labels and tags to provide accurate
product, inventory and point of sale information for integration with
sophisticated data systems. Labels and tags are attached to apparel by
manufacturers and retailers to identify and promote their products, allow
automated data collection and provide brand identification and consumer
information such as country of origin, size, fabric content and care
instructions. Labels are attached to garments early in the manufacturing process
and must withstand all production processes and remain legible through washing
and dry cleaning by the end user. The Company's products also include tags and
labels for sheets, towels, pillow cases and other white goods. The Company's
Apparel Identification operations are primarily located in North America and
Hong Kong.

The Company's Printing Solutions operations market and distribute (i)
electronic bar code printers, which are used in a wide range of retail and
industrial applications, including inventory management and distribution
systems, and (ii) hand-held, mechanical labeling devices that print
pressure-sensitive (i.e., adhesive-backed) price and other identification labels
and affix them onto merchandise for retailers. The Company is also the largest
manufacturer in North America of thermal transfer ribbons for numerous diverse
applications. These thermal transfer ribbons are used in bar code printers to
print single-color and multi-color tags and labels for use in manufacturing and
factory automation systems, shipping and distribution systems, retail price tag,
packaging and medical applications. In addition to thermal transfer ribbons, the
Company manufactures and markets other supplies used in both its mechanical
labelers and bar code printers and provides comprehensive service to its
installed base of machines.

Service to the Company's customers requires that the Company manufacture
its goods and services on a global basis. For this reason the Company offers the
products of its Apparel Identification and its Printing Solutions operations
through its International operation. The Company's International operation
either manufactures or offers for sale items manufactured by the other business
segments. Its customers are those in the apparel industry and the retail supply
chain principally in Europe.

ACQUISITIONS

TURKEY:

In February 1998, the Company acquired a 70% interest in Teslo Tekstil
Urunleri Sanayii ve Ticaret A.S. ("Teslo"), a Turkish company, with an option to
acquire the remaining 30% from the minority shareholders. Teslo offers a
comprehensive range of apparel identification products to European and U.S.
customers, and its facilities include manufacturing and service bureau
operations in addition to sales and marketing. The Company believes that the
acquisition of Teslo will help it to expand rapidly into this strategically
important market where garment manufacturing is large and growing, serving both
European and American retailers, and to provide a base for further expansion in
the region.

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ENGLAND, HONG KONG, CHINA AND SRI LANKA:

On February 2, 1999, the Company acquired the apparel identification
business of Ferguson International PLC ("Ferguson"). The acquisition price was
approximately $24 million and is subject to a final price adjustment based upon
the net assets of the business on the transaction date. The acquisition involved
the purchase of certain assets in the U.K. and the purchase of 100% of the
shares of Ferguson Asia Limited and 90% of the shares of Ferguson Lanka
(Private) Limited.

Assets acquired in the U.K. include manufacturing and sales facilities for
printed and woven labels and for graphic tags and labels primarily for the
apparel market. Ferguson Asia Limited has production and sales facilities in
Hong Kong, China and Malaysia for all of its fabric and paper products. Ferguson
Lanka (Private) Limited operates a new state-of-the-art manufacturing facility
in Sri Lanka. Ferguson Lanka has subsequently changed its name to Paxar Lanka
(Private) Limited.

The acquisition of Ferguson's apparel identification business enables the
Company to offer its full line of products to customers in Europe and Asia in
line with the Company's strategy to be a worldwide one-stop-shop for
identification and tracking in the retail supply chain.

RECENT EVENTS

PRESIDENT AND CHIEF OPERATING OFFICER:

Craig O. Morrison, age 43, joined the Company as its President and Chief
Operating Officer on October 1, 1998. Mr. Morrison has direct responsibility for
all of the Company's operations worldwide. Most recently Mr. Morrison was
President of Van Leer Containers, USA, the North American subsidiary of Royal
Packaging Industries Van Leer N.V. Prior positions were with General Electric,
Bain & Company, and the U.S. Marine Corps where he was an aviator.

LOAN RESTRUCTURE:

On March 3, 1997, the Company entered into an unsecured six-year, $280
million credit agreement ($140 million term loan, $140 million revolving credit
facility) with Fleet Bank, N.A. and other participating banks. On August 11,
1998, the Company and the banks amended and restated the credit agreement to
provide a $200 million unsecured revolving credit facility for five years from
the date of the amendment. Borrowings under the agreement bear interest at rates
referenced to the London Interbank Offered Rate (LIBOR) with applicable margins
varying in accordance with the Company's attainment of specified financial
thresholds or, at the Company's option, the Prime Rate (as defined), and are
guaranteed by certain domestic subsidiaries of the Company.

SENIOR NOTE AGREEMENT:

On August 11, 1998, the Company entered into unsecured ten-year $150
million Senior Note agreements with institutional lenders, primarily insurance
companies. The Senior Notes bear interest at 6.74%, payable semi-annually. The
proceeds were used to repay the term loan and a portion of the indebtedness
outstanding under the revolving credit facility before it was amended.

STOCK REPURCHASE:

On July 30, 1998, the Company announced a plan to purchase, from time to
time, up to $25 million of the Company's common stock on the open market as
conditions warrant. The repurchased shares will be available for issuance under
employee stock option and stock purchase plans and other general corporate
purposes. As of December 31, 1998 the Company had repurchased 1,434,400 shares
at an average price of $9.10. On February 12, 1999 the Company announced it had
increased the stock repurchase plan from the initial $25 million to $40 million.

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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 14, Note 11.)

DESCRIPTION OF BUSINESS

PRODUCTS AND SERVICES

The Company manufactures and distributes its products and services
worldwide. It operates in three segments: Apparel Identification, Printing
Solutions and International.

APPAREL IDENTIFICATION PRODUCTS AND SERVICES:

The Company's Apparel Identification operations are vertically integrated
in its major product lines which permits it to:

- better serve its customers
- develop innovative products
- control quality
- reduce costs
- speed delivery of products and services

The Company designs and builds most of its systems equipment and develops
most of the operating software and all of the application software for its
systems. The Apparel Identification operations also:

- formulate coatings and inks
- coat fabrics
- weave labels
- weave narrow label fabrics
- dye and finish fabrics
- design and print tags and labels

TAG AND LABEL SYSTEMS. The tag and label systems consist primarily of bar
code systems and hot-stamp label systems. These systems include complete
hardware and software packages that enable customers to print, cut and batch
large volumes of labels and tags in their plants. The sale of a system to a
customer generally results in ongoing sales of inks, fabrics, tags and other
supplies to the customer.

Bar Code Systems. The bar code systems business generally has experienced
substantial growth in the United States. Apparel retailers require bar
coded tags on their products to permit more accurate tracking of the
products in stores, which, in turn, allows retailers to better monitor
consumer demand and more effectively control inventories. The Company's bar
code systems enable manufacturers to accommodate retailers' demands in a
rapid and cost-effective manner. The Company has introduced innovative
systems that provide manufacturers and retailers with the capability to
place "permanent" bar codes in apparel utilizing specialty fabrics and
inks.

Bar codes consist of a series of lines or bars printed on a contrasting
background. By varying the width of the bars and the spaces between bars,
the bar code is encoded with information to identify an item, which enables
the user's data system to provide the user with relevant information about
that item, such as its location, cost, selling price and manufacturer. Bar
codes are read by a fixed or hand-held scanning device, which transmits
information to data collection systems, including computers, electronic
cash registers and portable data collection devices. The Company has
specialized in producing clearly readable and accurate tags, from which a
variety of bar code readers can capture accurate data.

The Company's bar code systems and supplies include:
- electronic bar code printers
- thermal inks
- pre-printed tag stock and specialty fabrics
- supporting software
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The printers are controlled by computers and print variable information
such as garment identification numbers and size in either readable or bar
code form. Data can be input to the bar code printer through simple
stand-alone keyboards with a built-in display, through personal computers
with the Company's application software or by downloading from the
manufacturer's central computer.

Hot-Stamp Labels Systems. Hot-stamp label systems include hot-stamp
printers, fabrics, inks and printing accessories, which are used by
manufacturers for in-plant printing of care labels and labels that carry
brand logo, size and other information for the retail customer. Such
systems provide manufacturers with the flexibility to imprint labels
quickly in response to production order specifications.

TAGS AND LABELS. The Company designs and produces tags and woven and
printed labels in its various manufacturing facilities in the United States,
Mexico and Hong Kong and ships them to domestic and foreign manufacturers. The
Company's labels are printed on a wide range of fabrics and other materials. Its
woven labels consist of jacquard, multi-color labels woven on broad looms and
needle looms. They are primarily used to build brand identification for apparel
and to provide information to consumers. The Company's multi-color printed
labels are printed on coated fabrics and narrow woven fabrics using various
types of high-speed equipment and are used primarily for product identification
and consumer information on apparel. These labels are produced in large runs
with few changes. Merchandise tags are multi-color printed tags and bar code
price tags used primarily for promotion, customer information and inventory
control.

PRINTING SOLUTIONS PRODUCTS AND SERVICES:

Printing Solutions' products consist of mechanical labelers, bar code
printers and the related supplies for these systems, which are manufactured at
the Company's facilities in Miamisburg, Ohio, and Amherst, New York.

MECHANICAL LABELERS. The Company's handheld mechanical labelers print one
to three lines of alphanumeric information in a variety of print types and
sizes. These products, which are made of highly durable molded plastic parts,
have multiple applications, including merchandise pricing, promotional labeling
and component identification. Such mechanical labelers include models ranging
from simple labelers that print one line of alphanumeric text with few
characters to larger labelers that print three lines of alphanumeric text with
more than thirty characters.

BAR CODE PRINTERS. The Company's family of bar code machines consists of
tabletop, handheld and portable thermal transfer and direct thermal printers.
Thermal transfer printers create an image by applying an electrically heated
printhead onto a ribbon that releases ink onto labeling stock. Thermal transfer
printers produce excellent image quality which can be used with a wide variety
of papers and fabrics. Direct thermal printers create an image by applying an
electrically heated printhead directly to specially treated paper that changes
color when heated. Direct thermal technology is preferable for the customer:

- whose needs are for a smaller less expensive printing system
- where image durability is less critical
- who does not require specialty labeling stock such as plastics,
fabric or metal foils

The Company's hand-held and portable printing lines includes printers that
also contain laser scanners and radio frequency communications.

SUPPLIES.

Thermal Transfer Ribbons. Thermal transfer ribbons, which are composed of
an ink coating on a film substrate, are an essential consumable in the
thermal transfer printing process supplies. Single-color thermal transfer
ribbons, typically used in bar code applications, are manufactured by
coating the film substrate with a wax or resin-based ink coating containing
black or other single color pigments. Color images have been traditionally
printed with other ribbons, containing multiple sets of three separate
panels, with each panel containing one of the three primary subtractive
colors: yellow, magenta and cyan. As a variation of this principle, some
recently developed high-speed color printers use separate yellow,

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magenta, cyan and black ribbons, which the Company also manufactures. By
overlaying various combinations of the subtractive colors (e.g., cyan over
yellow to create green) with different intensities and dot placements, a
process color image is created. The film substrate is also backcoated with
various resin-based coatings that are designed to prevent distortion of the
ribbon during the printing process, minimize static electricity and reduce
abrasion of the thermal transfer printhead. The end-user applications for
the Company's ribbons can be grouped into three fundamental categories:
automatic identification, digital color imaging and fax and other.
Recently, the Company introduced a product line for printing identification
cards.

Automatic identification thermal transfer ribbons include a wide range of
products designed to maximize bar code thermal transfer printer performance
for specific applications. Bar code thermal transfer ribbons are produced
to the specifications of printers, original equipment manufacturers
("OEM's") and the end-users based on variables such as printer speed,
electronic printhead design, heat management characteristics and printing
pressure. The Company manufactures bar code thermal transfer ribbons that
are designed to meet these specifications and to comply with the industry
bar code printing standards. Thermal transfer and thermal direct ribbons
can be ordered from stock or customized.

The Company manufactures a complete line of spot and process color thermal
transfer ribbons. The original product lines were paneled process ribbons
consisting of yellow, magenta and cyan panels for use in office printing.
These products are in decline as they have been made obsolete by
technology. New thermal transfer color products have been developed based
on pigmented resin chemistries. These inks are very durable in harsh
outdoor environments. They are being sold into emerging digital printing
applications, which are currently satisfied by screen printing. Specific
uses include outdoor signage, decals, bus wraps, and safety/hazardous
labeling.

In addition to automatic identification and color thermal transfer ribbons,
the Company manufactures other types of thermal transfer ribbons, primarily
MICR and plain-paper facsimile ribbons. MICR ribbons are used to encode
checks for processing through the United States banking system. Under a
license agreement with Fujicopian, the Company has the right to manufacture
MICR ribbons protected by Fujicopian's patents and to use certain
proprietary technology to manufacture such ribbons. The Company also
manufactures thermal transfer ribbons that are used in plain-paper thermal
transfer facsimile machines, which produce reliable, high quality and
permanent thermal transfer printing.

Self-adhesive Labels. The Company manufactures and distributes a broad
range of self-adhesive labels for use in connection with its mechanical
labelers and its bar code printers. Labels for use in the Company's
mechanical labelers are made pursuant to patent-protected specifications
relating to the way in which the labels are fed through the labelers.
Labels for use in the Company's bar code printers often are customized with
store name, brand logo or other information unique to a particular
customer. The Company has developed and introduced a linerless
self-adhesive label material which expands the supply capacity of its
printers and allows customers to avoid having to dispose of the usual
backing material.

Service. The Company provides its customers with comprehensive service for
its mechanical labelers and bar code printers. In addition to central
service facilities, the Company has a field service organization that
provides preventive maintenance and service at customers' locations.

INTERNATIONAL OPERATIONS:

The Company's International operations produce, market and sell the
products of the Company's Apparel Identification and Printing Solutions
operations. The International operations are principally located in the U.K.
with manufacturing operations located in Runcorn, Milton Keynes and Nottingham.
There is also a strong manufacturing base in Italy, with its principal operation
located in Ancarano. Other of the Company's facilities are located throughout
Europe and Asia. The geographic locations of the Company's International
operations are widespread so that the Company may better service its markets and
customers, which are equally widespread.

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The International operation:
- weaves and coats narrow label fabrics
- weaves jacquard process multi-colored labels for high-end apparel
identification
- prints labels using high speed equipment for product identification
and care labels
- prints tickets, tags and labels and board products for product
marking, pricing and identification in the retail market
- sells and services bar code systems and associated supply products
to customers who wish to satisfy certain identification, marking and
pricing functions internally
- converts and sells thermal transfer ribbons for use in bar code
printers

The scope of the Company's operations was expanded in 1999 with the
acquisition of the apparel identification operations of Ferguson. This expanded
the customer base in the apparel markets and added manufacturing capabilities in
the U.K., China and Sri Lanka. The Company believes that expanded capacity in
Asia is important so that the Company may adequately respond to the increasing
global manufacturing requirements of its customers. The Company believes that
the trend toward the globalization of its markets and customers will continue
and expects that its sales generated outside the US will increase as a
percentage of total Company sales.

SALES AND MARKETING

The Company employs salespersons who are compensated on a salary and bonus
basis. These salespersons are located in leased offices across the United
States, and at subsidiary companies in Canada, the U.K., France, Germany,
Belgium, Italy, Poland, Spain, Turkey, Mexico, Australia, Hong Kong, Sri Lanka
and Singapore. In addition, there are non-exclusive manufacturers'
representatives located throughout the United States who sell the Company's
products on a commission basis, as well as international and export distributors
and commission agents, located in Europe, Africa, the Far East and Latin
America. Sales promotion activities include:
- direct mail campaigns
- publication of catalogs and brochures
- participation in trade shows
- telemarketing
- advertising, principally in trade journals

The business of the Company is not highly seasonal in nature.

CUSTOMERS

Apparel Identification operations have more than 10,000 customers,
including many major retailers and apparel manufacturers. These customers
include:

<TABLE>
<S> <C>
- - Levi Strauss - Jockey
- - Sears - Lands' End
- - J.C. Penney - VF Corporation
- - The Limited - L.L. Bean
- - Liz Claiborne - Victoria's Secret
- - Fruit-of-the-Loom - The Gap
- - Sara Lee - Old Navy
- - Mervyns - Wal-Mart
</TABLE>

Printing Solutions operations have both retail and industrial customers.
The Company historically has focused on the retail segment with special emphasis
on price marking, merchandise identification, tracking and promotional
applications. Retail customers include many of the major retailers in the United
States and abroad. Retail marking is a mature market, however, and sales in this
area have declined as a percentage of total sales. The Company has leveraged its
leadership position with retailers to expand beyond in-store item marking to
in-store logistics applications and distribution center automation programs.

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As a greater number of retailers are requiring their vendors to apply bar
codes to merchandise before they ship it to stores, the Company is leveraging
its retail presence to become a supplier for vendors responding to retailers'
compliance marking programs. The Company has established complete compliance
marking solutions for suppliers, to major retailers including Wal-Mart, J.C.
Penney and Kmart.

The Company's principal customers for thermal transfer ribbons are OEM's
and distributors, which in turn sell to thousands of end-users of thermal
transfer ribbons. In addition, the Company sells its bar code thermal transfer
ribbons to master distributors, value-added resellers and large dealers, and to
a lesser extent, directly to dealers, distributors and end-users. A significant
portion of the Company's thermal transfer ribbon sales are made in connection
with the sale of its bar code printers in the United States and Europe. In 1998,
the Company established a distribution facility in the United Kingdom to sell
its thermal transfer ribbons directly to OEM's and distributors throughout
Europe.

No customer accounted for more than 10% of the Company's revenues in 1998.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company purchases fabrics, inks, chemicals, polyester film, plastic
resins, electronic components, adhesive-backed papers, yarns and other raw
materials from major suppliers located throughout the United States and abroad.
The Company believes that such materials are in good supply and are available
from multiple sources.

PATENTS, TRADEMARKS AND LICENSES

The Company relies upon trade secrets and confidentiality to protect the
proprietary nature of its technology. The Company also owns and controls
numerous patents and trademarks. Although no one patent or group of related
patents is material to the Company's business, the Company believes that, in the
aggregate, its patents are significant to its operations and its competitive
position.

The Company's International Imaging Materials, Inc. ("IIMAK") subsidiary's
license agreement with Fujcopian was scheduled to extend until 2008. As a result
of a change in business conditions, the parties are presently renegotiating the
terms of the license agreement. The Company expects the basic terms of the
renegotiated license agreement to provide for a phased reduction in royalties
paid on bar code thermal transfer ribbon products with no further royalties on
these products being paid after 2002; a right to sell in Europe on a
non-exclusive basis beginning January 1, 1999, the right of both Fujicopian and
IIMAK to sell in any territory beginning in 2000; and other changes to royalty
payments for other products. The Company believes that the two most important
patents which IIMAK has the right to use under the license agreement are U.S.
Patent No. 4503095 and U.S. Patent No. 4572684, both of which expire in 2003.
Such patents relate to certain color thermal transfer ribbons and their use.

WORKING CAPITAL PRACTICES

The Company does not engage in unusual practices regarding inventories,
receivables or other items of working capital.

BACKLOG

The Company's total backlog of orders at December 31, 1998 was
approximately $45 million, as compared with $47 million at December 31, 1997.
Management estimates that more than 80 percent of annual sales consist of orders
that the Company typically fills within one month of receipt. The balance of
orders are for products which are ordered to individual customer specifications
and are for delivery within two to three months.

COMPETITION

Apparel Identification operations compete in both the domestic and
international markets by means of price, product quality, innovation and
customer services. Competitors include a large number of independent,
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often family-owned, regional companies and a division of a large corporation.
The Company believes that it is a market leader in worldwide sales of apparel
identification products and services.

The price marking business is very competitive both in terms of price and
product features. Mechanical labeling in the United States is a mature market.
The Company believes that it is a market leader in the United States. These
products are also distributed and sold outside the U.S. by the Company's
International operations. The Company's principal competitors are Esselte-Meto,
Avery Dennison, Sato and Garvey.

Many companies are engaged in the design, manufacture and marketing of bar
code printing products. The Company considers its direct competition to be the
providers of direct thermal and thermal transfer printers and supplies.
Competition in the Company's target markets is based on a number of factors,
including:
- reliability
- quality
- reputation of the manufacturer and its products
- hardware innovations
- specifications
- price
- level of technical support
- applications support offered by the manufacturer
- available distribution channels

The Company's principal competitors in the bar code printer business are
Zebra, Datamax, Unova, Comtec and DH Technology, Inc.

The thermal transfer ribbon market has been limited as a result of
Fujicopian's patents and the Company's rights to use these patents under the
license agreement. As a result of the exclusivity provided by the license
agreement, the Company believes that its principal competition for sales of
color thermal transfer ribbons to printer OEM's comes from competing
technologies, such as ink jet and laser.

The bar code thermal transfer ribbon market is highly competitive. Unlike
the color thermal transfer ribbon market, the Company does not enjoy the benefit
of any patent protection with respect to the proprietary technology it uses
(other than in the manufacture of MICR ribbons). Sony Chemical, Dai Nippon
Printing and Ricoh Electronics, all of which are Japanese companies, and SKC, a
Korean company, compete with the Company in North America. SKC has announced the
sale of part of its film processing operations in the U.S. to Illinois Tool
Works effective May 7, 1999. North American-based companies that compete in the
bar code thermal transfer ribbon market include Chemicraft and NCR Corporation.

RESEARCH AND ENGINEERING

The Company believes that continuous product development and innovation
help the Company maintain a competitive advantage in the markets in which it
operates. Therefore, the Company makes substantial annual research and product
engineering expenditures in its efforts to develop new products to serve the
needs of its customers. The Company's research and engineering staff comprises
88 employees involved in the development of, among other things:
- specialized tags and labels to meet particular customer requirements
- improved mechanical labeling and bar code printers
- new kinds of thermal transfer ribbons for unique applications.

ENVIRONMENTAL COMPLIANCE

The Company is subject to various federal, state and local environmental
laws and regulations limiting or related to the use, emission, discharge,
storage, treatment, handling and disposal of hazardous substances. Federal laws
that are particularly applicable are:
- Water Pollution Control Act
- Clear Air Act of 1970 (as amended in 1990)
- Resource Conservation and Recovery Act (including amendments
relating to underground tanks)

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The Company has been advised of various enforcement and clean-up actions
where it may be responsible. The Company believes, however, that none of those
actions, individually or collectively, is material.

EMPLOYEES

The Company has approximately 6,000 employees worldwide, including former
Ferguson employees. Approximately 186 production employees of the Company in
several locations in the United States are covered by four different union
contracts, which expire at various times from June 2000 to August 2001. The
Company has no recent history of material labor disputes. The Company believes
that it has good employee relations.

CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases,
as well as other public documents and statements, contain "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by the statements,
regarding, among others:

- rate of migration of garment manufacturing industry moving from the
United States and Western Europe
- worldwide economic and other business conditions that could affect
demand for the Company's products in the United States or
international markets
- the mix of products sold and the profit margins thereon
- order cancellation or reduced bookings by customers or distributors
- competitive product offerings and pricing actions
- the availability and pricing of key raw materials
- productivity improvements in manufacturing
- dependence on key members of management
- the current economic situation in Asia
- schedules and completion dates of Y2K compliance activity
- the ability of the Company to complete the upgrades of its IT
systems
- the ability of suppliers and customers to be Y2K compliant
- the accuracy of Y2K information provided by suppliers and customers

Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.

FINANCIAL INFORMATION ABOUT OPERATIONS IN THE UNITED STATES AND OTHER COUNTRIES

The information required by this Item is incorporated by reference to the
Company's Financial Statements included elsewhere in this report. (See Part IV,
Item 14, Note 11.)

9
<PAGE> 11

ITEM 2: PROPERTIES

The Company uses the following principal facilities in its operations:

<TABLE>
<CAPTION>
SQUARE OWNED/ LEASE
LOCATION FOOTAGE LEASED EXPIRATION USED FOR
- -------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Miamisburg, Ohio............ 392,000 Owned Office, Manufacturing, and Warehouse
Amherst, New York........... 275,000 Owned Office, Manufacturing, and Warehouse
Lenoir, North Carolina...... 127,000 Owned Administrative and Manufacturing
Huber Heights, Ohio......... 104,000 Owned Administrative and Manufacturing
Orangeburg, New York........ 60,000 Owned Manufacturing
Sayre, Pennsylvania......... 58,000 Owned Administrative and Manufacturing
Sayre, Pennsylvania......... 36,000 Leased Monthly Manufacturing
Rock Hill, South Carolina... 56,000 Owned Manufacturing
Canton, North Carolina...... 32,665 Owned Manufacturing
Hillsville, Virginia........ 39,144 Owned Manufacturing
Runcorn, England............ 37,237 Leased 2005 Administrative and Manufacturing
Runcorn, England............ 23,131 Leased 2011 Manufacturing
Harlow, England............. 56,000 Leased 2013 Administrative and Manufacturing
Milton Keynes, England...... 63,550 Leased 2015 Administrative and Manufacturing
Nottingham, England......... 28,906 Owned Administrative and Manufacturing
Ancarano, Italy............. 86,368 Owned Administrative and Manufacturing
Mexico City, Mexico......... 57,193 Owned Administrative and Manufacturing
Pickering, Ontario,
Canada.................... 67,032 Owned Administrative and Manufacturing
Hong Kong................... 26,536 Leased 1999 Administrative and Manufacturing
Hong Kong................... 12,542 Leased 1999 Administrative and Manufacturing
Hong Kong................... 6,862 Leased 2000 Administrative and Manufacturing
Sri Lanka................... 24,800 Owned Administrative and Manufacturing
Panyu, China................ 36,000 Leased 2001 Manufacturing
</TABLE>

In addition to the above facilities, the Company has other administrative,
manufacturing facilities and sales offices located throughout the world.

The Company believes that its facilities are adequate to maintain its
existing business activities.

ITEM 3: LEGAL PROCEEDINGS

The Company is involved in a number of pending or threatened legal
proceedings in the ordinary course of business. In the opinion of management,
there are no legal proceedings which will have a material adverse affect on the
financial position or operating results of the Company.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

10
<PAGE> 12

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock is traded on the New York Stock Exchange using
the symbol "PXR." The following table sets forth the 1998 and 1997 high and low
sales prices of the Company's common stock as reported on the New York Stock
Exchange for the periods indicated, as adjusted to reflect any stock splits or
stock dividends effectuated by the Company.

<TABLE>
<CAPTION>
SALES PRICES
------------
CALENDAR YEAR 1998 HIGH LOW
- ------------------ ---- ----
<S> <C> <C>
First Quarter............................................... $15 7/16 $13 1/8
Second Quarter.............................................. 14 7/8 10 7/8
Third Quarter............................................... 11 9/16 7 13/16
Fourth Quarter.............................................. $11 9/16 $ 8
CALENDAR YEAR 1997
First Quarter............................................... $16 5/8 $13 1/8
Second Quarter.............................................. 16 1/8 14 11/16
Third Quarter............................................... 20 11/16 14 5/8
Fourth Quarter.............................................. $20 11/16 $14 3/16
</TABLE>

As of March 11, 1999, there were approximately 1,300 record holders of the
Company's common stock.

The Company has never paid any cash dividends on its Common Stock and has
no present intention of doing so. The Company intends to retain all of its
earnings for use in its business.

ISSUANCES OF SECURITIES

On August 11, 1998, the Company issued $150 million in unsecured 6.74%
Senior Notes due August 11, 2008 to eighteen institutional investors under the
terms of a Note Purchase Agreement dated August 4, 1998 with each such investor.
The Company relied on Section 4(2) of the Securities Act for the exemption from
registration in connection with the issuance of the Senior Notes.

11
<PAGE> 13

ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data as of and for the five-year period
ended December 31, 1998 have been derived from the Company's Consolidated
Financial Statements. These data should be read in conjunction with Consolidated
Financial Statements and related Notes for the year ended December 31, 1998, and
the Management's Discussion and Analysis of Financial Condition and Results of
Operations.

All data, except employee and per share data, are in millions.

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales......................................... $611.6 $567.2 $326.0 $289.4 $251.7
Income before extraordinary item.............. 33.6 24.4 33.1 25.6 21.6
Net income.................................... 33.6 15.8 33.1 25.6 21.6
Basic earnings per share (a)
Income before extraordinary item.............. 0.69 0.51 0.69 0.54 0.47
Net income.................................... 0.69 0.33 0.69 0.54 0.47
Diluted earnings per share (a)
Income before extraordinary item (b).......... 0.68 0.49 0.68 0.52 0.45
Net income.................................... 0.68 0.32 0.68 0.52 0.45
EBITDA (c).................................... 95.3 94.0 62.4 52.9 45.2

FINANCIAL CONDITION
Working capital............................... $139.2 $121.3 $ 64.6 $ 54.6 $ 60.5
Current ratio................................. 2.5 2.1 2.3 2.0 2.5
Property, plant and equipment, net............ 193.6 187.1 137.3 125.7 108.8
Total assets.................................. 593.2 598.4 299.8 272.6 226.6
Total debt.................................... 207.1 241.5 33.0 46.9 25.4
Shareholders' equity.......................... 273.4 243.8 207.8 173.4 151.5
Total debt as percent of total capital........ 43.1% 49.8% 13.7% 21.3% 14.4%

FINANCIAL STATISTICS
EBITDA as a percent of sales.................. 15.6% 16.6% 19.1% 18.3% 17.9%
Income before extraordinary items as a percent
of sales.................................... 5.5% 4.3% 10.1% 8.9% 8.6%
Net income as a percent of sales.............. 5.5% 2.8% 10.1% 8.9% 8.6%
Effective income tax rate..................... 30.0% 35.6% 28.8% 31.4% 35.0%
Return on shareholders' equity (d)............ 13.0% 7.0% 17.4% 15.8% 15.8%

OTHER DATA
Operating cash flow........................... $ 68.5 $ 29.3 $ 51.3 $ 32.9 $ 35.3
Capital expenditures.......................... 35.7 30.3 27.6 29.8 25.5
Depreciation and amortization................. 32.7 27.1 18.1 14.5 11.3
Stock dividends............................... None 25% 25% 25% 25%
Cash dividends................................ None None None None None
Number of employees........................... 4,949 4,786 2,785 2,531 2,511
Weighted average shares outstanding, diluted
(a)......................................... 49.4 49.7 49.0 48.8 47.9
Shares outstanding (a)........................ 47.9 48.4 47.5 47.1 46.7
Book value per share (a)...................... $ 5.71 $ 5.04 $ 4.38 $ 3.68 $ 3.24
</TABLE>

- ---------------
(a) Retroactively adjusted to reflect stock dividends.
(b) $0.74 in 1997 before non-recurring charges.
(c) Earnings before interest, taxes, depreciation and amortization and, in 1997,
before non-recurring charges.
(d) 15.5% in 1997 before non-recurring and extraordinary items.

12
<PAGE> 14

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

All amounts in the following discussion are stated in millions, except
share and per share data.

OPERATING RESULTS

The following table shows each element of the income statement as a percent
of sales for the years indicated:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Sales....................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 61.1 61.3 65.4
----- ----- -----
Gross profit................................................ 38.9 38.7 34.6
Selling, general and administrative expense................. 26.0 23.7 18.7
Research and engineering expense............................ 1.7 2.2 1.6
Amortization of intangibles................................. 1.0 1.0 0.7
Acquisition-related costs................................... -- 1.5 --
Integration/restructuring costs............................. -- 1.2 --
----- ----- -----
Operating income............................................ 10.2 9.1 13.6
Equity in net income of Monarch............................. -- -- 1.2
Interest expense, net....................................... (2.4) (2.4) (0.6)
----- ----- -----
Income before taxes......................................... 7.8 6.7 14.2
Taxes on income............................................. 2.3 2.4 4.1
----- ----- -----
Income before extraordinary item............................ 5.5 4.3 10.1
Extraordinary item.......................................... -- (1.5) --
----- ----- -----
Net income.................................................. 5.5% 2.8% 10.1%
===== ===== =====
</TABLE>

1998 COMPARED WITH 1997

Sales for the year ended December 31, 1998 increased by 8% to $611.6
compared with $567.2 for the year ended December 31, 1997. Sales in the United
States were $403.9 for the year ended December 31, 1998 compared with $415.1 for
the year ended December 31, 1997. Sales in other countries increased from $152.1
for the year ended December 31, 1997 to $207.7 for the year ended December 31,
1998. Sales from the Company's Apparel Identification and Printing Solutions
operations each grew 7% and the International operation grew 9% for the year
ended December 31, 1998 compared with the year ended December 31, 1997. (See
Note 11 of Notes to Consolidated Financial Statements.) Sales growth was
achieved across all of the product lines in each business segment, except
thermal transfer ribbon (included in the Printing Solutions operation), which
experienced significant price competition during 1998.

Cost of sales for the year ended December 31, 1998 increased to $373.7
compared with $347.6 for the year ended December 31, 1997. As a percent of
sales, such costs decreased to 61.1% for 1998 compared with 61.3% for 1997.

Gross profit increased to $237.9 for the year ended December 31, 1998
compared with $219.6 for the year ended December 31, 1997. The gross profit
margin was 38.9% for the year ended December 31, 1998 compared with 38.7% for
the year ended December 31, 1997.

Selling, general and administrative expense ("SG&A") increased to $159.2
for the year ended December 31, 1998, compared with $134.2 for the year ended
December 31, 1997. As a percent of sales, SG&A was 26.0% for 1998 compared with
23.7% for 1997. The increase was primarily due to the Monarch acquisition
consolidated for ten months of 1997 compared with twelve months of 1998.

13
<PAGE> 15

Research and engineering expense ("R&E") decreased from $12.4 in 1997 to
$10.7 in 1998. As a percent of sales, R&E was 1.7% for 1998 compared with 2.2%
for 1997. The decrease was primarily due to the headcount reduction related to
the integration of the Monarch acquisition.

Acquisition related costs of $8.3 in 1997 are one-time costs related to the
acquisition of IIMAK. These costs include $5 of fees and expenses specifically
related to the acquisition and $3.3 related to the termination and severance of
certain IIMAK employees pursuant to pre-existing agreements.

During 1997, the Company recorded a restructuring charge of $6.9 related to
the integration of Monarch into the Company's operations. These costs pertain to
the consolidation of certain facilities, the severance of personnel and other
costs. The largest component of the costs related to the severance of 132 people
from the Miamisburg, Ohio, operation. During 1998, the Company paid $4.5
representing costs associated with the severance plan.

Operating income increased to $62.6 (10.2% of sales) for the year ended
December 31, 1998 compared with $51.7 (9.1% of sales) for the year ended
December 31, 1997.

Interest expense, net, increased to $14.6 for the year ended December 31,
1998 from $13.8 in 1997. Interest expense, net, for the year ended December 31,
1998 included a $2.2 non-recurring charge resulting from unauthorized interest
rate speculation and $3.3 interest income resulting from settlement of the
dispute with Pitney Bowes regarding the original purchase price and other
disputed amounts related to the Monarch acquisition. Interest expense, net of
those non-recurring items increased to $15.7 in the year ended December 31, 1998
from $13.8 in the year ended December 31, 1997. The increase resulted from
interest expense associated with the additional debt related to the Monarch
purchase, the $0.7 cost in 1998 related to the change in fair value of interest
rate derivatives and increased cost related to fixed rate borrowings under the
$150, 6.74% Senior Notes issued in August 1998, offset somewhat by lower
borrowing levels and lower interest rates related to variable rate borrowings in
1998.

Income before taxes increased to $48.0 (7.8% of sales) for the year ended
December 31, 1998 as compared with $37.9 (6.7% of sales) for the year ended
December 31, 1997.

The effective tax rate was 30.0% for the year ended December 31, 1998
compared with 35.6% for the year ended December 31, 1997. The tax rate was below
the U.S. statutory Federal income tax rate of 35% primarily due to reassessment
by the Company of potential liabilities that may result from tax examinations
and lower rates on income derived from foreign sources, particularly from Hong
Kong and Italy. Special tax abatement incentives for Italian companies acquired
in 1994 will expire through 1999.

Income before extraordinary item for the year ended December 31, 1998 was
$33.6 compared with $24.4 for the year ended December 31, 1997.

The extraordinary item of $8.6 (net of income taxes $5.1) resulted from the
redemption of Monarch's 12 1/2% Senior Notes due July 1, 2003. (See Note 3 of
Notes to Consolidated Financial Statements.)

Net income for the year ended December 31, 1998 was $33.6 (5.5% of sales)
compared with $15.8 (2.8% of sales) in 1997.

1997 COMPARED WITH 1996

Sales in 1997 increased by 74% over 1996 reaching a record $567.2. Sales in
the United States increased from $246.7 to $415.1. Sales in other countries
increased from $79.3 to $152.1. In 1997, sales from the Company's Apparel
Identification operation grew 19%, the Printing Solutions operation grew 122%
and the International operation grew 145% (See Note 11 of Notes to Consolidated
Financial Statements.) The increase in the Printing Solutions and International
operations was due principally to the acquisition of Monarch. (See Note 2 of
Notes to Consolidated Financial Statements.)

14
<PAGE> 16

Cost of sales for the year ended December 31, 1997 increased to $347.6
compared with $213.3 for the year ended December 31, 1996, due principally to
the acquisition of Monarch. As a percent of sales, such costs decreased to 61.3%
for 1997 compared with 65.4% for 1996.

Gross profit increased to $219.6 for the year ended December 31, 1997
compared with $112.7 for the year ended December 31, 1996. The gross profit
margin was 38.7% for the year ended December 31, 1997 compared with 34.6% for
the year ended December 31, 1996.

Selling, general and administrative expense ("SG&A") increased to $134.2
for the year ended December 31, 1997, compared with $61.1 for the 1996 period
due principally to the acquisition of Monarch. As a percent of sales, SG&A was
23.7% for 1997 compared with 18.7% for 1996.

Research and engineering expense ("R&E") increased from $5.1 in 1996 to
$12.4 in 1997 due principally to the acquisition of Monarch. As a percent of
sales, R&E was 2.2% for 1997 compared with 1.6% for 1996.

Amortization of intangibles increased to $6.1 in 1997 compared with $2.2 in
1996 due to the additional goodwill arising from the acquisition of Monarch.

Acquisition related costs of $8.3 in 1997 were related to the acquisition
of IIMAK. These costs included $5 of fees and expenses specifically related to
the acquisition and $3.3 related to the termination and severance of certain
IIMAK employees pursuant to pre-existing agreements.

The Company recorded a restructuring charge of $6.9 related to the
integration of Monarch into the Company's operations. These costs pertain to the
consolidation of certain facilities, the severance of personnel and other costs.
The largest component of the costs related to the severance of 132 people from
the Monarch, Miamisburg, Ohio operation.

Operating income increased to $51.7 (9.1% of sales) for the year ended
December 31, 1997 compared with $44.3 (13.6% of sales) for the year ended
December 31, 1996.

Equity in net income of Monarch was $4.1 for the year ended December 31,
1996. Such income represented the Company's 49% ownership interest in Monarch
for the relevant period. (See Note 2 of Notes to Consolidated Financial
Statements.)

Interest expense, net, increased to $13.8 for the year ended December 31,
1997 from $1.9 in 1996. The increase was attributable to the financing costs
associated with the acquisition of Monarch.

Income before taxes decreased to $37.9 (6.7% of sales) for the year ended
December 31, 1997 compared with $46.5 (14.2% of sales) for the year ended
December 31, 1996.

The effective income tax rate was 35.6% for the year ended December 31,
1997 compared with 28.8% for the year ended December 31, 1996. The increase was
attributable to higher income tax rates at Monarch and the change from equity
accounting for the Company's share of Monarch's after-tax income beginning in
March 1997. The overall effective tax rate was impacted by many factors
including different statutory rates on foreign income. The tax rate was slightly
above the U.S. statutory Federal income tax rate of 35% due to certain
IIMAK-related acquisition costs, which were capitalized for tax purposes, offset
by lower rates on income derived from foreign sources, particularly from Hong
Kong and Italy.

Income before extraordinary item for the year ended December 31, 1997 was
$24.4 compared with $33.1 for the year ended December 31, 1996.

The extraordinary item of $8.6 (net of income taxes $5.1) resulted from the
redemption of Monarch's 12 1/2% Senior Notes due July 1, 2003. (See Note 3 of
Notes to Consolidated Financial Statements.)

Net income for the year ended December 31, 1997 was $15.8 (2.8% of sales)
compared with $33.1 (10.1% of sales) in 1996.

15
<PAGE> 17

The following chart shows the normalization of earnings for comparison
purposes to 1996. Normalized earnings have been calculated reflecting the
adjustment of those costs that are not expected to recur.

<TABLE>
<CAPTION>
AFTER
BEFORE INCOME TAXES INCOME TAXES DILUTED EARNINGS PER SHARE
------------------- ------------ --------------------------
<S> <C> <C> <C>
1996
Net income............................. $46.5 $33.1 $0.68
===== ===== =====
1997
Net income............................. $24.2 $15.8 $0.32
Add back:
Extraordinary item..................... 13.7 8.6 0.17
Non-recurring integration/restructuring
costs................................ 6.9 4.4 0.09
Non-recurring IIMAK acquisition
costs................................ 8.3 7.4 0.15
Other non-recurring costs.............. 0.6 0.4 0.01
----- ----- -----
Normalized income...................... $53.7 $36.6 $0.74
===== ===== =====
</TABLE>

The other non-recurring charge principally represents the write-off of
accumulated due diligence costs associated with a potential acquisition.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents summary cash flow information for the years
indicated:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Net cash provided by operating activities............... $ 68.5 $ 29.3 $ 51.3
Net cash used by investing activities................... (28.2) (109.8) (35.5)
Net cash provided by (used in) financing activities..... (39.8) 89.6 (14.6)
------ ------- ------
Total change in cash (a)...................... $ 0.5 $ 9.1 $ 1.2
====== ======= ======
</TABLE>

- ---------------
(a) Before exchange rate effects.

OPERATING ACTIVITIES

Cash provided by operating activities continues to be the Company's primary
source of funds to finance operating needs and internal growth opportunities.
The net cash provided by operating activities was $68.5 in 1998, compared with
$29.3 in 1997 and $51.3 in 1996, including depreciation and amortization of
$32.7 in 1998, $27.1 in 1997 and $18.1 in 1996. The increase in depreciation and
amortization resulted primarily from the acquisition of Monarch.

INVESTING ACTIVITIES

In 1998, capital expenditures were $35.7 compared with $30.3 in 1997 and
$27.6 in 1996. All capital projects are carefully analyzed and are required to
fit the Company's strategies and generate an advantageous internal rate of
return on invested capital, and/or improve employee safety or the environment.

On March 3, 1997, the Company acquired the remaining 51% of Monarch for a
total purchase price of $132, consisting of cash, notes, stock, options and
warrants. The acquisition was accounted for as a purchase with assets acquired
and liabilities assumed recorded at their estimated fair values at the date of
acquisition. The Company financed the cash portion of the purchase price with
the proceeds of the term loan under a $280 credit facility with Fleet Bank, N.A.
and Wachovia Bank of Georgia, N.A. as lead lenders.

On February 25, 1998, the Company acquired a 70% interest in the business
of Teslo Tekstil Urunleri Sanayii ve Ticaret A.S., located in Istanbul, Turkey,
for approximately $1.5. The Company has an option to acquire the remaining 30%
interest in Teslo from the minority shareholders.
16
<PAGE> 18

The Company intends to augment its growth rate by the acquisition of
complementary or related businesses.

MATERIAL COMMITMENTS

Rental expense for all operating leases amounted to $7.3 in 1998, $6.7 in
1997 and $2.8 in 1996. Minimum rental commitments for all non-cancelable
operating leases for the years 1999-2003 are $6.3, $4.5, $3.2, $2.6 and $2.9,
respectively. The minimum total rental commitment for all years subsequent to
2003 is $8.9. (See Note 15 of Notes to Consolidated Financial Statements).

FINANCING ACTIVITIES

The table below shows the components of total capital for the years
indicated:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Due to banks................................................ $ 1.9 $ 2.5 $ 10.2
Notes payable............................................... -- 5.9 --
Current maturities of long-term debt........................ 0.7 21.7 1.7
Long-term debt.............................................. 204.5 211.4 21.1
------ ------ ------
Total debt.................................................. $207.1 $241.5 $ 33.0
Shareholders' equity........................................ 273.4 243.8 207.8
------ ------ ------
Total capital............................................... $480.5 $485.3 $240.8
====== ====== ======
Total debt as a percent of total capital.................... 43.1% 49.8% 13.7%
====== ====== ======
</TABLE>

The decrease in total debt to $207.1 at December 31, 1998, from $241.5 at
December 31, 1997 was attributable to cash generated from operations. (See Note
6 of Notes to Consolidated Financial Statements.) On March 3, 1997, the Company
entered into an unsecured six-year, $280 credit agreement ($140 term loan, $140
revolving credit facility) with Fleet Bank, N.A. and other participating banks.
On August 11, 1998, the Company and the banks amended and restated the credit
agreement to provide a $200 unsecured revolving credit facility for five years
from the date of the amendment. Borrowings under the agreement bear interest at
rates referenced to the London Interbank Offered Rate ("LIBOR") with applicable
margins varying in accordance with the Company's attainment of specified
financial thresholds or, at the Company's option, the Prime Rate (as defined),
and are guaranteed by certain domestic subsidiaries of the Company.

On August 11, 1998, the Company also entered into unsecured ten-year $150
Senior Note agreements with institutional lenders, primarily insurance
companies. The Senior Notes bear interest at 6.74%, payable semi-annually. The
proceeds were used to repay the term loan and a portion of the indebtedness
outstanding under the revolving credit facility before it was amended.

OTHER MATTERS

ACQUISITION

On February 2, 1999, the Company acquired the apparel identification
business of Ferguson International PLC, located in the U.K., Hong Kong, China
and Sri Lanka, for approximately $24.

STOCK REPURCHASE

On July 30, 1998, the Company announced a plan to purchase, from time to
time, up to $25 of the Company's common stock as conditions warrant. The
repurchased shares will be available for issuance under employee stock option
and stock purchase plans and other general corporate purposes. As of December
31, 1998, the Company had repurchased 1,434,400 shares at an average price of
$9.10. On February 12, 1999 the Company announced it had increased the stock
repurchase plan from the initial $25 to $40.

17
<PAGE> 19

ASIAN CURRENCY AND ECONOMIC SITUATION

The Company has worldwide operations, including operations in Asia. While
the currency situation is causing some pricing pressure on products made and
sold in the U.S., it is also creating opportunities for increased sales in the
Pacific Rim by Company subsidiaries located in that region. On the whole, the
Company does not expect the current economic situation in Asia to have a
material adverse impact upon its operations.

YEAR 2000

The Company is actively addressing the Year 2000 ("Y2K") issue, which stems
from the inability of certain computer programs and embedded computer
micro-controllers to distinguish between the year 1900 and the year 2000 and
recognize the Year 2000 as a leap year. Each operating entity within the Company
has designated an individual under the general supervision of the Company
President, to ensure that each unit achieves timely Y2K readiness. The Company's
Audit Committee of the Board of Directors reviews progress quarterly.

STATE OF READINESS

The Company began its internal Y2K assessments and upgrades in 1997. The
Company expects nearly all its information technology ("IT") systems to be
compliant during the first half of 1999. The Company will devote the remainder
of 1999 to testing the readiness of its systems and its major vendors.

The Company has also assessed non-IT systems in the products it sells and
the products it uses in its own manufacturing processes. Non-IT systems are
those with embedded technology such as micro controllers. Non-IT systems in
products the Company sells are Y2K compliant. Manufacturing equipment used by
the Company that contains embedded systems has also been assessed, and the
Company expects all equipment to be Y2K compliant by the end of the first half
of 1999.

COST TO ADDRESS Y2K ISSUES

The Company continues to resolve its Y2K issues principally through
hardware and software system upgrades and the installation of new computer
systems that are Y2K compliant. These upgrades and new systems were the result
of scheduled purchases that the Company has made in the ordinary course of
business to meet its expanding business needs. These upgrades and new systems
have either been expensed or capitalized and the impact of such costs are
currently reflected in the Company's operating results. The Company believes
that costs specifically relating to Y2K compliance will be less than $0.5 and
such costs are not deemed material.

RISKS TO THE COMPANY AND CONTINGENCY PLANS

The Company is conducting inquiries regarding Y2K compliance programs of
its key customers and suppliers, including power and telecommunications
utilities. No assurance can be given at this time that the Company's customers
and suppliers will be Y2K compliant. However, the Company has a contingency plan
to qualify alternative vendors, including their Y2K readiness, for those key
vendors who cannot demonstrate Y2K readiness. The Company is also developing
contingency plans relating to its ability to communicate with its customers. The
Company will rely on its existing business continuity plans as a contingency
plan for its internal information processing systems.

EURO CONVERSION

As part of the European Economic Monetary Union (EMU), a single currency
("Euro") will replace the national currencies of most of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed as of January 1, 1999, with
the participating national currencies being removed from circulation over the
next three years. During this transition period, the Euro and the local currency
will jointly circulate. The Company's European operations are preparing to be
fully Euro compliant by the end of calendar year 1999, well in advance of the

18
<PAGE> 20

conversion date of January 1, 2002. To the extent that certain customers request
Euro invoices, before the full phase-in of the Company's Euro compliant system,
these individual requests may be accommodated by the Company under its existing
IT system. The cost to convert the Company's software and business processes to
become Euro compliant is not expected to be material.

NEW PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measure at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company experiences market risk relative to interest rates. A 10%
change in interest rates affecting the Company's floating rate debt instruments
would have an insignificant impact on the Company's pretax earnings and cash
flows over the next fiscal year. Such a move in interest rates would have no
effect on the fair value of the Company's floating rate debt instruments. A 10%
increase in interest rates over the life of the interest rate derivatives would
cause the fair value of the derivatives to decrease from a liability of $1.5 to
$1.0. A 10% decrease would cause the fair value to increase from a liability of
$1.5 to $2.1.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by Item 8 is included elsewhere in this
report. (See Part IV, Item 14.)

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

None.

19
<PAGE> 21

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 7, 1999.

ITEM 11: EXECUTIVE COMPENSATION

Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 7, 1999.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 7, 1999.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference to the Company's Definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders scheduled
to be held on May 7, 1999.

20
<PAGE> 22

PART IV

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

(A) DOCUMENTS

1. FINANCIAL STATEMENTS -

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F - 1
Consolidated Balance Sheets December 31, 1998 and 1997...... F - 2
Consolidated Statements of Income Years ended December 31,
1998, 1997 and 1996....................................... F - 3
Consolidated Statements of Shareholders' Equity Years ended
December 31, 1998, 1997 and 1996.......................... F - 4
Consolidated Statements of Cash Flows Years ended December
31, 1998, 1997 and 1996................................... F - 5
Notes to Consolidated Financial Statements.................. F - 6 to F - 21
</TABLE>

2. FINANCIAL STATEMENT SCHEDULE -

<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ F - 22
</TABLE>

Notes
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.

Separate financial statements of the Registrant have been omitted because the
Registrant is primarily an operating company. All subsidiaries included in the
consolidated financial statements are majority owned, and none of the
subsidiaries have indebtedness which is not guaranteed by the Registrant.

3. EXHIBITS

<TABLE>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (G)
3.2 Amendment to Amended and Restated Certificate of
Incorporation. (M)
3.3 By-Laws (A)
4.1 Warrant Agreement for "A" Warrants between the Registrant
and Odyssey Partners, L.P. dated March 3, 1997. (J)
4.2 Odyssey Partners, L.P. Certificate for 1,000,000 Warrants
dated March 3, 1997. (J)
4.3 Warrant Agreement for "B" Warrants between the Registrant
and Odyssey Partners, L.P. dated March 3, 1997. (J)
4.4 Odyssey Partners, L.P. Certificate for 200,000 Warrants
dated March 3, 1997. (J)
10.2 Employment Agreement, dated as of December 16, 1986, between
Registrant and Arthur Hershaft. (C)
10.3 Employment Agreement, dated February 13, 1989, between
Registrant and Victor Hershaft. (D)
10.4 Amendment dated as of October 1, 1998 to the Employment
Agreement, dated as of February 13, 1989 between Registrant
and Victor Hershaft.
10.5 Employment Agreement dated as of August 6, 1998 between
Registrant and Craig O. Morrison.
10.6 Promissory Note dated September 8, 1998 from Craig O.
Morrison to the Registrant.
10.7 Promissory Note dated September 18, 1998 from Craig O.
Morrison to the Registrant.
10.8 Registrant's 1990 Employee Stock Option Plan. (F)
10.9 Registrant's 1997 Incentive Stock Option Plan. (N)
10.10 Deferred Compensation Plan for Directors. (O)
10.11 Omnibus Purchase and Sale Agreement dated June 6, 1995 by
and between Pitney Bowes Inc., Monarch Marking Systems,
Inc., Pitney Bowes Marking Systems Ltd., Pitney Bowes
International Holdings Inc., Pitney Bowes France S.A. and
Monarch Acquisition Corp. (H)
10.12 Stock Purchase Agreement dated as of December 20, 1996
between the Registrant and Odyssey Partners, L.P. (I)
10.13 Amendment No. 1 to Stock Purchase Agreement dated as of
March 3, 1997 between the Registrant and Odyssey Partners,
L.P. (I)
10.14 Agreement and Plan of Merger dated as of March 3, 1997 by
and among the Registrant, Monarch Holdings, Inc., Thomas
Loemker and John W. Paxton. (J)
</TABLE>

21
<PAGE> 23
<TABLE>
<S> <C>
10.15 Registration Rights Agreement dated as of March 3, 1997
between the Registrant and Odyssey Partners, L.P. (J)
10.16 Credit Agreement dated March 3, 1997. (K)
10.17 Agreement and Plan of Merger dated as of July 15, 1997,
among the Registrant, Ribbon Manufacturing, Inc., and
International Imaging Materials, Inc. (L)
10.18 Amended and Restated Credit Agreement dated as of August 11,
1998.(P)
10.19 Note Purchase Agreement dated as of August 4, 1998.(P)
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
27.1 Financial Data Schedule
</TABLE>

- ---------------

(A) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1980.

(B) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1985.

(C) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.

(D) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.

(E) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.

(F) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.

(G) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.

(H) Incorporated herein by reference from Exhibits to Registrant's Current
Report on Form 8-K dated June 29, 1995.

(I) Incorporated herein by reference from Exhibits to Registrant's Current
Report on Form 8-K dated December 20, 1996.

(J) Incorporated herein by reference from Exhibits to Registrant's Current
Report on Form 8-K dated March 3, 1997.

(K) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.

(L) Incorporated herein by reference from Exhibits to Registrant's Current
Report on Form 8-K dated July 15, 1997.

(M) Incorporated herein by reference from Annex D to the Joint Proxy
Statement/Prospectus included in the Registrant's Registration
Statement on Form S-4 (File No. 333-36283), filed on September 24,
1997.

(N) Incorporated herein by reference from Exhibits to the Registrant's
Registration Statement on Form S-8 (File No. 333-38923), filed on
October 28, 1997.

(O) Incorporated herein by reference from Annex A to Registrant's
preliminary proxy statement dated March 31, 1998.

(P) Incorporated herein by reference from Exhibits to Registrants Form 8-K
filed on August 26, 1998.

(b) Reports on Form 8-K

None

22
<PAGE> 24

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Paxar Corporation:

We have audited the accompanying consolidated balance sheets of Paxar
Corporation (a New York corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
International Imaging Materials, Inc. ("IIMAK") prior to 1997, a company
acquired during 1997 in a transaction accounted for as a pooling of interests,
as discussed in Note 2. The IIMAK financial statements for 1996 are included in
the consolidated financial statements of Paxar Corporation and reflect total
revenues of 33% of the 1996 consolidated total revenues. The IIMAK financial
statements for 1996 were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to amounts included for
IIMAK, is based solely upon the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paxar Corporation and subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 11, 1999

F- 1

23
<PAGE> 25

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
International Imaging Materials, Inc.:

We have audited the accompanying consolidated balance sheet of International
Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the two-year period ended March 31 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International
Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
KPMG LLP
April 23, 1997
Buffalo, New York

24
<PAGE> 26

INDEPENDENT AUDITORS' REPORT

The Board of Directors
International Imaging Materials, Inc.

Under date of April 23, 1997, we reported on the consolidated balance sheet of
International Imaging Materials, Inc. and subsidiaries as of March 31, 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the two-year period ended March 31, 1997, as
contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended March 31, 1997. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in item 14(a) 2 of
the annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
April 23, 1997
Buffalo, New York

25
<PAGE> 27

PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 14.8 $ 13.7
Short-term investments...................................... 4.4 2.2
Receivables, less allowances of $5.0 in 1998 and $4.4 in
1997...................................................... 99.6 102.4
Inventories................................................. 97.0 97.4
Deferred income taxes....................................... -- 6.9
Other current assets........................................ 13.3 11.6
--------- ---------
Total current assets.............................. 229.1 234.2
Property, plant and equipment, at cost...................... 300.4 273.2
Accumulated depreciation.................................... (106.8) (86.1)
--------- ---------
Net property, plant and equipment........................... 193.6 187.1
Long-term investments....................................... 3.2 3.0
Goodwill.................................................... 157.8 165.4
Other assets................................................ 9.5 8.7
--------- ---------
$ 593.2 $ 598.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Due to banks................................................ $ 1.9 $ 2.5
Notes payable............................................... -- 5.9
Current maturities of long-term debt........................ 0.7 21.7
Accounts payable and accrued liabilities.................... 82.8 82.8
Accrued taxes on income..................................... 4.5 --
--------- ---------
Total current liabilities......................... 89.9 112.9
Long-term debt.............................................. 204.5 211.4
Deferred income taxes....................................... 20.1 24.2
Other liabilities........................................... 5.3 6.1
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding................... -- --
Common Stock, $0.10 par value, 200,000,000 shares
authorized, 47,941,696 and 48,419,554 shares issued and
outstanding in 1998 and 1997, respectively................ 4.9 4.8
Paid-in capital............................................. 116.9 109.3
Retained earnings........................................... 168.1 134.5
Accumulated other comprehensive loss........................ (3.4) (4.8)
Treasury stock.............................................. (13.1) --
--------- ---------
Total shareholders' equity........................ 273.4 243.8
--------- ---------
$ 593.2 $ 598.4
========= =========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F- 2

26
<PAGE> 28

PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales....................................................... $611.6 $567.2 $326.0
Cost of sales............................................... 373.7 347.6 213.3
------ ------ ------
Gross profit........................................... 237.9 219.6 112.7
Selling, general and administrative expense................. 159.2 134.2 61.1
Research and engineering expense............................ 10.7 12.4 5.1
Amortization of intangibles................................. 5.4 6.1 2.2
Acquisition-related costs................................... -- 8.3 --
Integration/restructuring costs............................. -- 6.9 --
------ ------ ------
Operating income....................................... 62.6 51.7 44.3
Equity in net income of Monarch............................. -- -- 4.1
Interest expense, net....................................... (14.6) (13.8) (1.9)
------ ------ ------
Income before taxes......................................... 48.0 37.9 46.5
Taxes on income............................................. 14.4 13.5 13.4
------ ------ ------
Income before extraordinary item............................ 33.6 24.4 33.1
Extraordinary item, net of income taxes of $5.1............. -- (8.6) --
------ ------ ------
Net income............................................. $ 33.6 $ 15.8 $ 33.1
====== ====== ======
Basic earnings per common share:
Before extraordinary item................................... $ 0.69 $ 0.51 $ 0.69
Extraordinary item.......................................... -- (0.18) --
------ ------ ------
Net income.................................................. $ 0.69 $ 0.33 $ 0.69
====== ====== ======
Diluted earnings per common share:
Before extraordinary item................................... $ 0.68 $ 0.49 $ 0.68
Extraordinary item.......................................... -- (0.17) --
------ ------ ------
Net income.................................................. $ 0.68 $ 0.32 $ 0.68
====== ====== ======
Average common shares outstanding
Basic....................................................... 48.4 48.1 47.7
Diluted..................................................... 49.4 49.7 49.0
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F- 3

27
<PAGE> 29

PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES
RECEIV-
ABLE
FROM
EXERCISE
COMMON STOCK UNEARNED OF OPTIONS
------------------------- PAID-IN COMPEN- AND TREASURY
SHARES AMOUNT CAPITAL SATION WARRANTS STOCK
------ ------ ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995....... 35.5 $ 3.5 $ 88.6 ($0.7) ($1.2) ($5.5)
Comprehensive income
Net income....................... -- -- -- -- -- --
Other comprehensive income:
Translation adjustments.......... -- -- -- -- -- --
Comprehensive income............. -- -- -- -- -- --
Stock split...................... 5.6 0.6 -- -- -- --
Shares surrendered............... (0.3) -- (4.7) -- 1.2 --
Shares issued-various plans(a)... 0.7 -- (1.6) -- -- 5.5
Tax benefit from exercise of
stock options.................. -- -- 1.8 -- -- --
Purchase and retirement of
shares......................... (0.2) -- (2.5) -- -- --
Restricted stock awards.......... -- -- -- 0.3 -- --
Balance, December 31, 1996....... 41.3 4.1 81.6 (0.4) -- --
Comprehensive income
Net income....................... -- -- -- -- -- --
Other comprehensive income:
Translation adjustments.......... -- -- -- -- -- --
Comprehensive income.............
Stock split...................... 7.1 0.7 -- -- -- --
Shares surrendered............... (0.9) -- (9.5) -- -- --
Shares issued-various plans(a)... 0.6 -- 5.4 -- -- --
Tax benefit from exercise of
stock options.................. -- -- 1.3 -- -- --
Shares issued -- acquisitions.... 0.3 -- 4.7 -- -- --
Warrants and options issued -
acquisitions................... -- -- 25.7 -- -- --
Restricted stock awards.......... -- -- 0.1 0.4 -- --
IIMAK pooling adjustment......... -- -- -- -- -- --
Balance, December 31, 1997....... 48.4 4.8 109.3 -- -- --
Comprehensive income
Net income....................... -- -- -- -- -- --
Other comprehensive income:...... -- -- -- -- --
Translation adjustments.......... -- -- -- -- -- --
Comprehensive income............. -- -- -- -- -- --
Shares issued-various plans(a)... 0.9 0.1 5.7 -- -- --
Purchase of shares............... (1.4) -- -- -- -- (13.1)
Tax benefit from exercise of
stock options.................. -- -- 1.9 -- -- --
Balance, December 31, 1998....... 47.9 $ 4.9 $ 116.9 -- -- ($13.1)
======= ======= =========== ===========

ACCUMU-
LATED
OTHER
COMPRE- COMPRE-
RETAINED HENSIVE HENSIVE
EARNINGS INCOME INCOME
-------- ------- -------
<S> <C> <C> <C>
Balance, December 31, 1995....... $ 89.4 ($0.7)
Comprehensive income
Net income....................... 33.1 -- 33.1
Other comprehensive income:
Translation adjustments.......... -- 1.3 1.3
-------
Comprehensive income............. -- -- 34.4
=======
Stock split...................... (0.6) --
Shares surrendered............... -- --
Shares issued-various plans(a)... -- --
Tax benefit from exercise of
stock options.................. -- --
Purchase and retirement of
shares......................... -- --
Restricted stock awards.......... -- --
Balance, December 31, 1996....... 121.9 0.6
Comprehensive income
Net income....................... 15.8 -- 15.8
Other comprehensive income:
Translation adjustments.......... -- (5.4) (5.4)
-------
Comprehensive income............. 10.4
=======
Stock split...................... (0.7) --
Shares surrendered............... -- --
Shares issued-various plans(a)... -- --
Tax benefit from exercise of
stock options.................. -- --
Shares issued -- acquisitions.... -- --
Warrants and options issued -
acquisitions................... -- --
Restricted stock awards.......... -- --
IIMAK pooling adjustment......... (2.5) --
Balance, December 31, 1997....... 134.5 (4.8)
Comprehensive income
Net income....................... 33.6 -- 33.6
Other comprehensive income:...... -- --
Translation adjustments.......... -- 1.4 1.4
-------
Comprehensive income............. -- -- 35.0
=======
Shares issued-various plans(a)... -- --
Purchase of shares............... -- --
Tax benefit from exercise of
stock options.................. -- --
Balance, December 31, 1998....... $ 168.1 ($3.4)
=========== ===========
</TABLE>

- ---------------
(a) See Note 13 of Notes to Consolidated Financial Statements.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F- 4

28
<PAGE> 30

PAXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
( IN MILLIONS)

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 33.6 $ 15.8 $33.1
------- ------- -----
Adjustments to reconcile net income to net cash provided by
operations:
Extraordinary item.......................................... -- 8.6 --
Depreciation and amortization............................... 32.7 27.1 18.1
Deferred income taxes....................................... 2.8 4.0 3.6
Other....................................................... -- (2.5) --
Equity in net income of affiliate........................... -- -- (4.1)
Changes in assets and liabilities, net of businesses
acquired:
Receivables................................................. 0.7 (8.4) (6.5)
Inventories................................................. 0.4 (8.5) 0.8
Other current assets........................................ (1.7) (3.0) (1.0)
Accounts payable and accrued liabilities.................... 0.8 1.4 6.3
Taxes on income............................................. -- (5.4) 2.9
Other....................................................... (0.8) 0.2 (1.9)
------- ------- -----
34.9 13.5 18.2
------- ------- -----
Net cash provided by operating activities................... 68.5 29.3 51.3
------- ------- -----
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (35.7) (30.3) (27.6)
Acquisition related......................................... 11.2 (81.6) (4.3)
(Increase) decrease of short-term investments............... (2.2) (0.3) 1.4
Other....................................................... (1.5) 2.4 (5.0)
------- ------- -----
Net cash used in investing activities....................... (28.2) (109.8) (35.5)
------- ------- -----
FINANCING ACTIVITIES:
(Decrease) increase in short-term debt...................... (27.5) 12.2 (9.0)
Additions to long-term debt................................. 458.3 286.7 21.7
Reductions in long-term debt................................ (465.2) (210.8) (26.5)
Exercise of stock options/stock purchase plan............... 7.7 2.3 3.3
Purchase of common stock.................................... (13.1) -- (2.5)
Other....................................................... -- (0.8) (1.6)
------- ------- -----
Net cash (used in) provided by financing activities......... (39.8) 89.6 (14.6)
------- ------- -----
OTHER ACTIVITIES:
Effect of exchange rate changes on cash..................... 0.6 (0.7) 0.1
------- ------- -----
Increase in cash............................................ 1.1 8.4 1.3
Cash, at beginning of year.................................. 13.7 5.3 4.0
------- ------- -----
Cash, at end of year........................................ $ 14.8 $ 13.7 $ 5.3
======= ======= =====
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F- 5

29
<PAGE> 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include those of Paxar Corporation
(the "Company") and its majority-owned subsidiaries. The effects of all
significant intercompany transactions have been eliminated.

SHORT-TERM INVESTMENTS:

Short-term investments consist of foreign lending institution and
government bonds pledged as collateral against foreign debt, as well as certain
other foreign financial institution commercial paper.

INVENTORIES:

Inventories are stated at the lower of cost or market. The value of
inventories determined using the last-in, first-out (LIFO) method totaled $55.6
and $53.1 as of December 31, 1998 and 1997 respectively. The value of all other
inventories, determined using the first-in, first-out (FIFO) method, was $41.4
and $44.3 as of December 31, 1998 and 1997, respectively. The value includes
approximately $11.8 as of December 31, 1998 and 1997, related to the fair value
write up of the inventory at the date of the Monarch acquisition.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are stated at cost, and depreciated by the
straight-line method over the estimated useful lives of the assets. Upon
retirement or other disposition, the cost and accumulated depreciation are
removed from the asset and accumulated depreciation accounts, and the net gain
or loss is reflected in income. Expenditures for maintenance and repairs are
charged against income as incurred. Significant expenditures for betterments and
renewals are capitalized.

INCOME TAXES:

Deferred tax assets and liabilities are established for temporary
differences between financial and tax reporting bases and are subsequently
adjusted to reflect changes in tax rates. A valuation allowance is established
for any deferred tax asset for which realization is not likely. The
classification of deferred tax assets and liabilities corresponds with the
classification of the underlying assets and liabilities giving rise to the
temporary difference.

REVENUE RECOGNITION:

Revenue is recognized when title passes to the customer, generally upon
shipment.

EARNINGS PER COMMON SHARE:

In December 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share." Under SFAS No. 128, basic earnings per common share is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share reflect the potential dilution that could occur if options and
warrants were exercised resulting in the issuance of common stock. Prior-period
amounts have been restated to conform to the requirements of SFAS No. 128.

F- 6

30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

STOCK DIVIDEND:

During 1998, no stock dividends were declared. On August 7, 1997 and August
7, 1996, the Board of Directors declared 25% stock splits, effected in the form
of stock dividends. All per share information presented in the accompanying
financial statements has been adjusted to reflect these stock dividends.

FINANCIAL INSTRUMENTS:

All financial instruments of the Company are carried at cost, which
approximates fair value with the exception of interest rate hedge agreements.

The Company's policy is to enter into interest rate hedge agreements to
manage exposure to variations in interest rates on its revolving credit
facility. The transactions generally involve the exchange of fixed and floating
interest payment obligations without the exchange of debt instruments. Interest
differentials under these agreements are reflected in the results of operations
as adjustments to interest expense when they are paid or received. The fair
value (i.e., the cost or benefit from terminating the agreements) related to
underlying debt is deferred. The Company also recognizes gains or losses on
these agreements as an adjustment of interest expense when the related variable
rate debt is less than the notional amount of the hedges. Since the agreements
are negotiated with creditworthy counterparties, the Company considers the risk
of their nonperformance to be remote.

During 1997, the Company entered into three interest rate hedge agreements
with a notional value of $100.

During 1998, the Company cancelled an interest rate hedge agreement with
notional value of $20, and at December 31, 1998, the Company had hedge
agreements with notional value of $80. The fair value of the interest rate hedge
agreements, based on estimates provided by financial institutions, was a loss of
$1.5 and $0.9 at December 31, 1998 and 1997, respectively. The notional value of
the interest rate hedge agreements exceeded the amount of variable rate debt
outstanding at December 31, 1998 by $34. The fair value of the agreements
related to underlying variable rate debt that has been deferred is $0.9. The
fair value related to the notional value of the agreements not having related
variable rate debt reflected in earnings for the year ended December 31, 1998
was a loss of $0.7.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999.

The Company has not yet quantified the impacts of adopting Statement 133 on
the financial statements and has not determined the timing or method of its
adoption of Statement 133. However, based on current interest rate levels, the
income statement treatment of derivative contracts would not have a material
impact on the Company's results of operations.

GOODWILL:

Goodwill represents the excess of the cost of acquired companies over the
sum of identifiable net assets. Goodwill is being amortized on a straight-line
basis over forty years. Subsequent to acquiring goodwill, the Company
continually evaluates whether events and circumstances, including anticipated
future operating

F- 7

31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

results, indicate the remaining estimated useful life of goodwill may warrant
revision. Based upon its most recent analysis the Company believes that no
impairment of goodwill exists at December 31, 1998.

FOREIGN CURRENCY TRANSLATION:

Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars using the exchange rate in effect at the balance sheet date.
Results of operations are translated using the average exchange rate prevailing
throughout the period. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. dollars are included in
shareholders' equity as foreign currency translation adjustments. Gains and
losses resulting from foreign currency transactions are included in net income
and were not significant in the past three years.

USE OF ESTIMATES:

The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to use certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

COMPREHENSIVE INCOME:

In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes rules for the reporting of comprehensive
income and its components. Comprehensive income consists of net income and
foreign currency translation adjustments and is presented in the Consolidated
Statement of Shareholders' Equity. The adoption of SFAS 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS 130 requirements.

RECLASSIFICATIONS:

Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.

NOTE 2: BUSINESS ACQUISITIONS
MONARCH:

On June 29, 1995, the Company acquired a 49% interest in Monarch Marking
Systems, Inc. ("Monarch"), which had been accounted for using the equity method.
On March 3, 1997, the Company acquired the remaining 51% of Monarch for a total
purchase price of $132. The Company acquired the 49% equity interest of Odyssey
Partners, L.P. for $94.1 in cash, a promissory note in the amount of $5.9 at an
annual interest rate of 4.88% payable on January 2, 1998, and five year warrants
to purchase (a) 1,250,000 shares of the Company's common stock, par value $0.10,
at an exercise price of $14.00 per share and (b) 250,000 shares of the Company's
common stock at an exercise price of $17.50 per share. The warrants have been
recorded at a fair value of approximately $9.7 at the date of acquisition. Upon
completion of the acquisition, the Chairman and the President of Monarch each
received 156,536 shares of the Company's common stock valued at $15.20 per
share, in exchange for the shares of Monarch common stock owned by each of them.
Additionally, the management of Monarch received incentive stock options to
purchase an aggregate of 1,244,469 shares of the Company's common stock pursuant
to the Company's 1990 Employee Stock Option Plan in exchange for outstanding
options to purchase Monarch common stock. The options have been recorded at a
fair value of approximately $16 at the date of acquisition.

F- 8

32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

The acquisition was accounted for as a purchase with assets acquired and
liabilities assumed recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price and transaction costs over the
fair value of net assets acquired was recorded as goodwill. The resulting
goodwill of $143.9 (including $13.5 related to the initial 1995 investment) is
being amortized over 40 years.

The fair value of assets acquired and liabilities assumed is as follows:

<TABLE>
<S> <C>
Current assets.............................................. $ 96.2
Property, plant and equipment............................... 44.1
Goodwill.................................................... 143.9
Other assets................................................ 11.8
Current liabilities......................................... (37.6)
Long-term debt.............................................. (105.8)
Other....................................................... (5.1)
-------
Net assets.................................................. 147.5
Initial investment (June 1995).............................. (20.1)
-------
$ 127.4
=======
</TABLE>

In September 1998, the Company received $14.5, including interest of $3.3
from Pitney Bowes (the former owner of Monarch) resulting from litigation
regarding the original purchase price and other disputed amounts. This resulted
in a reduction, net of income tax, in goodwill in the amount of $4.6.

The operating results of Monarch are included in the accompanying
consolidated statements of income beginning March 3, 1997. The following
unaudited pro forma results of operations assume the acquisition occurred as of
January 1, 1996. These pro forma results do not purport to be indicative of the
results of operations which may result in the future.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------ ------ ------
<S> <C> <C>
Sales....................................................... $606.8 $578.6
------ ------
Income before extraordinary item............................ $ 22.8 $ 30.9
------ ------
Net income.................................................. $ 14.2 $ 30.9
------ ------
Basic earnings per common share:
Before extraordinary item................................... $ 0.47 $ 0.65
Extraordinary item.......................................... (0.18) --
------ ------
Net income.................................................. $ 0.29 $ 0.65
====== ======
Diluted earnings per common share:
Before extraordinary item................................... $ 0.46 $ 0.63
Extraordinary item.......................................... (0.17) --
------ ------
Net income.................................................. $ 0.29 $ 0.63
====== ======
</TABLE>

IIMAK:

On October 28, 1997 the Company completed the acquisition of International
Imaging Materials, Inc. ("IIMAK"), which was accounted for as a pooling of
interests. In connection with the merger, each outstanding share of IIMAK common
stock was converted into 1.5 shares of the Company's common stock

F- 9

33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

and all existing IIMAK warrants and options were converted into warrants and
options to purchase the Company's common stock. As a result of the merger,
shares of IIMAK common stock were converted into 12,431,757 shares of the
Company's common stock and IIMAK options and warrants were converted into
1,937,055 of the Company's options and warrants.

As the merger was accounted for as a pooling of interests, the financial
statements have been restated to include the results of IIMAK for all periods
presented.

No adjustments were required to conform the accounting policies of the
companies.

The Company recognized acquisition-related costs of $8.3 in the fourth
quarter of 1997. Included in these costs are $5 of fees and expenses
specifically related to the merger and costs of $3.3 related to the termination
and severance of certain members of IIMAK management pursuant to pre-existing
IIMAK agreements.

NOTE 3: EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT

On April 11, 1997, Monarch completed the purchase of $100 of principal
amount of its 12 -1/2 % Senior Notes due July 1, 2003 (the "Notes"). Monarch
paid $120.2, consisting of $100 of principal, $3.5 of accrued interest, a $13.7
premium, and a consent payment of $3. Upon payment, all of the outstanding Notes
were canceled and the indenture under which they were issued was terminated. The
early redemption of the Notes resulted in an extraordinary charge of $8.6, net
of income taxes of $5.1.

NOTE 4: INVENTORIES

The components of inventories are set forth below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
- ------------------------ ----- -----
<S> <C> <C>
Raw materials............................................... $49.3 $56.3
Work-in-Process............................................. 11.8 8.6
Finished goods.............................................. 35.9 32.5
----- -----
$97.0 $97.4
===== =====
</TABLE>

If all inventories were reported on a FIFO basis, inventories would be
approximately $2.2 and $1.8 higher at December 31, 1998 and 1997 respectively.

F- 10

34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment is set forth below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
- ------------------------ ------- ------
<S> <C> <C>
Machinery and equipment..................................... $ 213.6 $200.5
Buildings and building improvements......................... 80.2 66.8
Land........................................................ 6.6 5.9
------- ------
300.4 273.2
Accumulated depreciation.................................... (106.8) (86.1)
------- ------
$ 193.6 $187.1
======= ======
Estimated useful lives are principally:
5 to 40
Buildings and building improvements......................... years
3 to 10
Machinery and equipment..................................... years
</TABLE>

NOTE 6: LONG TERM DEBT

A summary of long-term debt is set forth below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- ----------------------- ------ ------
<S> <C> <C>
6.74% Senior Notes (a)...................................... $150.0 $ --
Unsecured bank credit facility (b).......................... 45.8 222.2
Economic Development Revenue Bonds due 2011 (c)............. 8.0 8.0
Secured term loans on certain Plant and equipment(d)........ 0.3 1.4
Secured and unsecured loans on Foreign property, plant and
Machinery (e)............................................. 0.9 1.2
Other....................................................... 0.2 0.3
------ ------
205.2 233.1
Less current maturities..................................... 0.7 21.7
------ ------
$204.5 $211.4
====== ======
</TABLE>

Maturities of long-term debt for the five years subsequent to December 31, 1998
are: $0.5, $0.3, $0.2, $0.1, and $0.1.
- ---------------
(a) On August 11, 1998, the company entered into unsecured ten-year $150 Senior
Note agreements with institutional lenders, primarily insurance companies.
The Senior Notes bear interest at 6.74%, payable semi-annually. The proceeds
were used to repay the term loan and a portion of the indebtedness
outstanding under the revolving credit facility before it was amended. The
Notes contain covenants requiring the Company, among other things, to
maintain a minimum net worth. The Company believes it was in compliance with
all covenants as of December 31, 1998.

(b) On March 3, 1997, the Company entered into an unsecured six-year, $280
credit agreement ($140 term loan, $140 revolving credit facility) with Fleet
Bank, N.A. and other participating banks. On August 11, 1998, the Company
and the banks amended and restated the credit agreement to provide a $200
unsecured revolving credit facility for five years from the date of the
amendment. Under the agreement,

F- 11

35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

the Company pays a facility fee determined by reference to certain financial
ratios (0.15% at December 31, 1998.)

Borrowings under the agreement bear interest at rates referenced to the
London Interbank Offered Rate (LIBOR) with applicable margins varying in
accordance with the Company's attainment of specified financial thresholds
or, at the Company's option, rates competitively bid among the participating
banks or the Prime Rate, as defined (7.75% and 8.5% at December 31, 1998 and
1997, respectively), and are guaranteed by certain domestic subsidiaries of
the Company.

The agreement contains covenants requiring the Company, among other things,
to maintain certain financial ratios and minimum net worth. The Company was
in compliance with all covenants as of December 31, 1998. The amount
outstanding under the term loan at December 31, 1997 was $135. The amounts
outstanding under the revolving credit facility at December 31, 1998 and
1997 were $45.8 and $87.2, respectively. The weighted average interest rates
for borrowings under the agreement at December 31, 1998 was 6.1%.

(c) Economic Development Revenue Bond financed facilities have been accounted
for as plant and equipment and the related bonds are recorded as long-term
debt. The variable rate bonds for the years ended December 31, 1998 and 1997
had a weighted average interest rate of 3.57% and 3.8%, respectively.

(d) The balances outstanding at December 31, 1998 and 1997 are payable by IIMAK
in monthly installments, bear interest at variable rates based on the Prime
Rate and are secured by certain plant and equipment and mature during 2001.

(e) The balances outstanding at December 31, 1998 and 1997 are payable by the
Collitex Group, bear interest at rates ranging from 4.75% -13.5%, mature
serially through 2003 and are secured by property, plant, machinery and
lending institution bonds.

NOTE 7: INCOME TAXES

The provision for income taxes contains the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal Current............................................. $ 8.0 $ 3.1 $ 6.4
Deferred.................................................... 0.4 5.7 3.6
Foreign Current............................................. 1.8 6.1 2.3
Deferred.................................................... 2.4 (2.3) 0.1
State....................................................... 1.8 0.9 1.0
----- ----- -----
$14.4 $13.5 $13.4
===== ===== =====
</TABLE>

F- 12

36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

The cumulative amounts of each temporary difference that comprise the net
deferred tax liability are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Alternative minimum and investment tax credit
carryforwards............................................. $ 4.4 $ 4.3 $ 8.2
Costs capitalized to inventory.............................. 1.2 1.2 (0.2)
Accrued integration/restructuring........................... -- 1.4 --
Other accrued liabilities and allowances.................... 6.1 9.0 1.5
Other....................................................... 1.3 1.2 --
------- ------- -------
Total gross deferred tax asset.................... 13.0 17.1 9.5
Valuation allowance......................................... (0.5) -- (3.7)
------- ------- -------
Net deferred tax asset...................................... 12.5 17.1 5.8
Deferred tax liability:
Depreciation and other property basis differences........... (32.6) (34.4) (24.3)
------- ------- -------
Net deferred tax liability.................................. ($ 20.1) ($ 17.3) ($ 18.5)
======= ======= =======
</TABLE>

The valuation allowance decreased in 1997 principally due to the expiration
of certain of the credit carryforwards for which a valuation allowance had been
made in prior years. The 1998 valuation allowance relates to certain capital
transactions subject to restriction for tax purposes.

An analysis of the differences between the federal statutory income tax rate and
the effective tax rate is set forth below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit......... 2.4 1.5 1.4
Foreign taxes less than federal rate........................ (7.6) (7.5) (4.8)
Non-deductible merger costs................................. -- 4.3 --
Affiliate dividend exclusion................................ -- -- (2.5)
Reserves no longer required................................. (2.8) -- --
All other, net.............................................. 3.0 2.3 (0.3)
---- ---- ----
30.0% 35.6% 28.8%
==== ==== ====
</TABLE>

During the year the Company reviewed the status of ongoing tax examinations
and determined there to be an excess of tax reserves, an adjustment for which is
reflected above. Collitex and Orvac benefit from tax incentives in Italy, which
significantly reduce the Company's effective tax rate. These incentives expire
during 1999.

United States income taxes have not been provided on undistributed foreign
earnings of $47 since the Company intends to permanently reinvest such earnings
in expanding foreign operations. The un-recognized U.S. tax liability on the
undistributed earnings is approximately $13 at December 31, 1998. Total foreign
based pre-tax income was approximately $23, $21, and $15 for 1998, 1997 and
1996, respectively.

F- 13

37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 8: RELATIONSHIP WITH FUJICOPIAN CO., LTD.

The Company manufactures thermal transfer ribbons pursuant to a license
agreement with Fujicopian Co., Ltd., which expires in 2008. However, the Company
is presently renegotiating the terms of the license agreement. Royalty expenses
under the agreement totaled $2.1 in 1998, $2.6 in 1997 and $2.7 in 1996.

NOTE 9: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

A summary of accounts payable and accrued liabilities is set forth below:

<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Accounts payable............................................ $34.8 $31.9
Accrued payroll costs....................................... 19.2 11.9
Other accrued liabilities................................... 28.8 39.0
----- -----
$82.8 $82.8
===== =====
</TABLE>

In December 1997, the Company approved a plan to sever 132 employees from
the Monarch, Miamisburg, Ohio operation as part of the integration/restructuring
program. At December 31, 1997, other accrued liabilities included $4.6 of
accrued severance costs. During 1998, $4.5 had been paid representing costs
associated with the severance plan.

NOTE 10: EMPLOYEE SAVINGS PLANS

The Company maintains three voluntary employee savings plans adopted
pursuant to Section 401(k) of the Internal Revenue Code. The Company's
contribution under the Plans was $3.6, $3.3 and $1.2 during 1998, 1997 and 1996
respectively.

NOTE 11: BUSINESS SEGMENTS

In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued effective for fiscal years ending after
December 15, 1998. The information for 1996 and 1997 has been restated from the
prior years' presentations in order to conform to the 1998 presentation.

The Company operates the following business segments: Apparel
Identification, Printing Solutions, and International. The Apparel
Identification business segment includes label systems, bar code systems,
labels, tags and related supplies for apparel manufacturers and retailers based
primarily in the U.S. Printing Solutions business segment includes electronic
bar code printers, mechanical identification and price marking machines, and
thermal transfer ribbons used in bar code printers to print tags and labels for
use in manufacturing and factory automation systems, shipping and distribution
systems, retail price tag and packaging applications. The International business
segment includes all of the aforementioned products.

The accounting policies of the segments are the same as those described in
Note 1: Summary of Significant Accounting Policies. Inter-segment sales prices
are cost plus a mark-up to allow the selling segment to make a reasonable
profit. The Company evaluates performance based on operating income of its
business segments before corporate expenses, amortization, non-recurring
charges, interest, income taxes and extraordinary items.

38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

in-plant label printing. Bar code systems, consisting of electronic printers and
related supplies and services, are used by customers to print data on labels and
tags to provide accurate product, inventory and point of sale information for
integration with sophisticated data systems. Labels and tags are attached to
apparel by manufacturers and retailers to identify and promote their products,
allow automated data collection and provide brand identification and consumer
information such as country of origin, size, fabric content and care
instructions. Labels are attached to garments early in the manufacturing process
and must withstand all production processes and remain legible through washing
and dry cleaning by the end user. The Company's products also include tags and
labels for sheets, towels, pillow cases and other white goods. The Company's
Apparel Identification operations are primarily located in North America and
Hong Kong.

F- 15

39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

The following table shows the financial information of the Company's
business segments. "Corporate" represents amounts not attributable or allocated
to the business segments, including corporate administrative expenses,
amortization, and non-recurring charges such as acquisition-related costs and
integration/restructuring costs in 1997.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Apparel Identification...................................... $210.6 $196.1 $164.7
Printing Solutions.......................................... 253.8 236.3 106.2
International............................................... 147.2 134.8 55.1
------ ------ ------
Total............................................. $611.6 $567.2 $326.0
====== ====== ======
Inter-segment sales:
Apparel Identification...................................... $ 13.6 $ 9.1 $ 6.6
Printing Solutions.......................................... 27.4 16.4 0.7
International............................................... 2.0 -- --
------ ------ ------
Total............................................. $ 43.0 $ 25.5 $ 7.3
====== ====== ======
Segment operating income:
Apparel Identification...................................... $ 32.1 $ 34.1 $ 26.8
Printing Solutions.......................................... 34.6 35.0 18.0
International............................................... 9.6 10.1 8.0
Corporate................................................... (13.7) (27.5) (8.5)
------ ------ ------
Total............................................. $ 62.6 $ 51.7 $ 44.3
====== ====== ======
Assets:
Apparel Identification...................................... $208.1 $197.4 $166.9
Printing Solutions.......................................... 211.9 239.4 117.6
International............................................... 87.3 93.1 46.5
Corporate................................................... 85.9 68.5 (31.2)
------ ------ ------
Total............................................. $593.2 $598.4 $299.8
====== ====== ======
Capital expenditures:
Apparel Identification...................................... $ 12.7 $ 11.9 $ 6.4
Printing Solutions.......................................... 12.7 13.4 13.8
International............................................... 9.8 4.5 6.8
Corporate................................................... 0.5 0.5 0.6
------ ------ ------
Total............................................. $ 35.7 $ 30.3 $ 27.6
====== ====== ======
Depreciation and amortization expense:
Apparel Identification...................................... $ 7.4 $ 7.5 $ 5.8
Printing Solutions.......................................... 15.1 10.1 6.7
International............................................... 4.8 3.2 2.9
Corporate................................................... 5.4 6.3 2.7
------ ------ ------
Total............................................. $ 32.7 $ 27.1 $ 18.1
====== ====== ======
</TABLE>

F- 16

40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

Geographic Information:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ------ ------ ------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States............................................... $403.9 $415.1 $246.7
Other countries............................................. 207.7 152.1 79.3
------ ------ ------
Total............................................. $611.6 $567.2 $326.0
====== ====== ======
Long lived assets:
United States............................................... $163.6 $155.3 $115.1
Other countries............................................. 30.0 31.8 22.2
------ ------ ------
Total............................................. $193.6 $187.1 $137.3
====== ====== ======
</TABLE>

NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes is set forth below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----- ----- ----
<S> <C> <C> <C>
Interest.................................................... $10.7 $10.8 $2.2
Income Taxes................................................ $12.8 $ 6.0 $7.0
</TABLE>

Additional supplemental information on non-cash investing and financing
activities is included in Notes 2
and 13.

NOTE 13: SHAREHOLDERS' EQUITY

The Company has various stock-based compensation plans including stock
options and an Employee Stock Purchase Pan.

On April 25, 1997, the Company's shareholders approved the 1997 Incentive
Stock Option Plan under which shares of common stock are reserved for issuance
upon the exercise of options to be granted to key employees and directors. On
October 28, 1997, the Company's shareholders approved an increase in the number
of shares of common stock reserved for issuance under the 1997 Employee Stock
Option Plan from 1,875,000 shares to 5,000,000 shares of common stock. In
addition, the 1990 Employee Stock Option Plan approved by the Company's
shareholders on April 24, 1990 has 1,640,479 shares of common stock, as adjusted
for subsequent stock dividends, reserved for issuance upon the exercise of
options granted to key employees and directors.

The plans provide for issuances in the form of incentive stock options,
non-qualified stock options, and stock appreciation rights, which may be granted
in tandem with non-qualified stock options. The option price per share of
incentive stock options cannot be less than 100% of the market value at the date
of grant. The option price per share of non-qualified stock options and stock
appreciation rights are determined by the Board of Directors at its sole
discretion.

The options vest over periods of up to four years. Options granted prior to
1994 are for a period of five years, and those granted subsequently are for a
period of ten years.

F- 17

41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

The following is a summary of outstanding stock options:

<TABLE>
<CAPTION>
NUMBER OF SHARES
(IN MILLIONS) WEIGHTED AVERAGE EXERCISE PRICE
---------------- -------------------------------
<S> <C> <C>
1996
Outstanding at beginning of year.................. 3.1 $ 8.35
Granted........................................... 0.9 $10.74
Exercised......................................... (0.7) $ 4.16
Canceled/Forfeited................................ (0.2) $12.90
----
Outstanding at end of year........................ 3.1 $ 9.59

1997
Granted........................................... 1.8 $ 7.53
IIMAK grants in first quarter..................... (0.1) $11.22
Exercised......................................... (0.7) $ 5.61
IIMAK exercised in first quarter.................. 0.2 $ 3.33
Canceled/Forfeited................................ (0.1) $ 8.19
----
Outstanding at end of year........................ 4.2 $ 9.79

1998
Granted........................................... 1.0 $13.41
Exercised......................................... (0.7) $ 3.99
Canceled/Forfeited................................ -- --
----
Outstanding at end of year........................ 4.5 $11.41
====
</TABLE>

In connection with the acquisition of Monarch, 1,244,469 stock options were
issued, at equivalent intrinsic value, to replace stock options to purchase
Monarch common stock.

The following table summarizes information about stock options outstanding as of
December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS OUTSTANDING WEIGHTED AVERAGE REMAINING
RANGE OF EXERCISE PRICES (IN MILLIONS) EXERCISE PRICE CONTRACTUAL LIFE
- ------------------------ ------------------- ---------------- ----------------
<S> <C> <C> <C>
Options Outstanding $1.00-$6.00 0.6 $ 4.83 4.2
$6.00-$10.00 1.2 $ 8.07 7.6
$10.00-$18.00 2.7 $14.19 7.4
---
4.5 $11.41 7.0
===
Options Exercisable $1.00-$6.00 0.5 $ 4.80
$6.00-$10.00 0.7 $ 7.50
$10.00-$18.00 1.8 $13.84
---
3.0 $10.84
===
</TABLE>

The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, pursuant to which no compensation cost has been recognized for
the options granted. The following table reflects pro forma net income and
earnings per share had the Company elected to adopt the fair value approach of
SFAS123:

F- 18

42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----- ----- -----
<S> <C> <C> <C>
Net income:
As reported................................................. $33.6 $15.8 $33.1
Pro forma................................................... $31.7 $14.1 $32.3
Basic earnings per share:
As reported................................................. $0.69 $0.33 $0.69
Pro forma................................................... $0.65 $0.29 $0.68
Diluted earnings per share:
As reported................................................. $0.68 $0.32 $0.68
Pro forma................................................... $0.64 $0.28 $0.66
</TABLE>

These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.

The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The following summarizes the assumptions
used in the model:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.0% 6.0% 6.1%
Expected years until exercise............................... 7.2 7.5 7.5
Expected stock volatility................................... 35.5% 38.4% 38.4%
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN:

The Company maintains an Employee Stock Purchase Plan, which allows
employees to purchase a certain amount of stock at a discount of 20% to the
market price. The Company may sell up to 818,847 shares under this plan and, as
of December 31, 1998, 301,017 shares were available for future purchases. The
average fair value of shares sold in 1998 was $11.47. The total number of shares
issued under this plan was 232,602, 71,343 and 50,324 in 1998, 1997 and 1996,
respectively. Total compensation expense recognized for stock-based compensation
for 1998, 1997 and 1996 was $0.5, $0.5 and $0.4, respectively.

WARRANTS:

As discussed in Note 2, warrants were granted to certain parties in
connection with the acquisition of Monarch. Exercise prices of outstanding
warrants at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
1998 1997
--------------- -----
<S> <C> <C>
Warrants outstanding........................................ 1.5 1.6
Warrants exercisable........................................ 1.5 0.1
Exercise price of exercisable warrants...................... $14.00and$17.50 $6.67
</TABLE>

F- 19

43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

LOANS TO OFFICERS:

During 1997 and 1996, the Company made loans to certain officers for the
purpose of exercising options and paying the related income tax liability. Such
loans were repaid through the surrender of Company stock. The following analyzes
the activity in relation to these loans:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans made in connection with exercise of stock options..... $0.8 $ --
Loans made in connection with income tax liabilities........ $0.8 $1.6
Surrender of shares to repay loans.......................... $2.3 $4.0
Surrender of shares to exercise options..................... $ -- $0.7
</TABLE>

No loans from officers were outstanding at December 31, 1998 for the purpose of
exercising options.

TREASURY STOCK:

On July 30, 1998, the Company announced a plan to purchase, from time to
time, up to $25 of the Company's common stock as conditions warrant. The
repurchased shares will be available for issuance under employee stock option
and purchase plans and other financing activities. As of December 31, 1998, the
Company had repurchased 1,434,400 shares at an average price of $9.10. On
February 12, 1999, the Company announced it had increased the stock repurchase
plan from the initial $25 to $40.

NOTE 14: EARNINGS PER COMMON SHARE

The reconciliation of basic and diluted per-share computation is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----- ----- -----
<S> <C> <C> <C>
Income before extraordinary item............................ $33.6 $24.4 $33.1
Extraordinary item.......................................... -- (8.6) --
----- ----- -----
Net income.................................................. $33.6 $15.8 $33.1
===== ===== =====
Average common shares (basic)............................... 48.4 48.1 47.7
Options and warrants........................................ 1.0 1.6 1.3
----- ----- -----
Adjusted average common shares (diluted).................... 49.4 49.7 49.0
===== ===== =====
Earnings per common share:
Basic Income before extraordinary item...................... $0.69 $0.51 $0.69
Extraordinary Item.......................................... -- (0.18) --
----- ----- -----
Net income.................................................. $0.69 $0.33 $0.69
===== ===== =====
Diluted Income before extraordinary item.................... $0.68 $0.49 $0.68
Extraordinary item.......................................... -- (0.17) --
----- ----- -----
Net income.................................................. $0.68 $0.32 $0.68
===== ===== =====
</TABLE>

NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES

A manufacturing facility in Sayre, Pennsylvania, owned beneficially by
principal shareholders of the Company, is leased at an annual rental of $0.1
through 1998.

Total rental expense for all operating leases amounted to $7.3 in 1998,
$6.7 in 1997 and $2.8 in 1996. Minimum rental commitments for all non-cancelable
operating leases for the years 1999-2003 are $6.3, $4.5, $3.2, $2.6 and $2.9,
respectively. The minimum total rental commitment for all years subsequent to
2003 is $8.9.

F- 20

44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)

The Company accrues severance expense for employees of its Italian
subsidiaries, as required by Italian statute, and these amounts are included in
other liabilities in the accompanying consolidated financial statements.

The Company has been named a potentially responsible party relating to
contamination that occurred at certain superfund sites. Management believes the
ultimate outcome of settling these contingencies is not expected to be material.

In the ordinary course of business, the Company and its subsidiaries are
involved in certain disputes and litigation, none of which will, in the opinion
of management, have a material adverse effect on the Company's financial
position or results of operations.

NOTE 16: SUBSEQUENT EVENT

On February 2, 1999 the Company completed the acquisition of the apparel
identification business of Ferguson International PLC for approximately $24.0.
The acquisition will be accounted for as a purchase with assets and liabilities
assumed recorded at their estimated fair values at the date of acquisition.

NOTE 17: CONDENSED QUARTERLY FINANCIAL DATA
(UNAUDITED)

<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1998
Sales....................... $149.4 $156.9 $153.8 $151.5
Operating income............ 14.6 17.1 16.7 14.2
Net income.................. 7.3 7.2 11.0 8.1
Basic earnings per common
share:
Net income.................. 0.15 0.15 0.23 0.17
Diluted earnings per common
share:
Net income.................. 0.15 0.14 0.22 0.17

1997
Sales....................... $105.9 $158.9 $148.8 $153.6
Operating income............ 13.9 17.3 16.7 3.8
Income (loss) before
extraordinary item........ 8.2 8.6 9.2 (1.6)
Net income (loss)........... 8.2 -- 9.2 (1.6)
Basic earnings (loss) per
common share:
Income (loss) before
extraordinary item........ 0.17 0.18 0.19 (0.03)
Net income (loss)........... 0.17 -- 0.19 (0.03)
Diluted earnings (loss) per
common share:
Income (loss) before
extraordinary item........ 0.17 0.17 0.18 (0.03)
Net income (loss)........... 0.17 -- 0.18 (0.03)
</TABLE>

All per share data have been adjusted to reflect stock dividends.

F- 21

45
<PAGE> 47

PAXAR CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION YEAR EXPENSES OTHER(1) DEDUCTIONS(2) YEAR
----------- ------------ --------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful
accounts.................... $4.4 $1.8 -- $1.2 $5.0
Year ended December 31, 1997
Allowance for doubtful
accounts.................... $1.0 $0.9 $3.7 $1.2 $4.4
Year ended December 31, 1996
Allowance for doubtful
accounts.................... $0.8 $0.6 -- $0.4 $1.0
</TABLE>

- ---------------
(1) Allowance related to acquisition.

(2) Write-off of uncollectible accounts, net of recoveries and other.

F- 22

46
<PAGE> 48

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

Paxar Corporation

By: /s/ ARTHUR HERSHAFT

----------------------------------
Arthur Hershaft
Chairman of the Board of Directors
and Chief Executive Officer

Dated: March 31, 1999

47
<PAGE> 49

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<S> <C>

By: /s/ ARTHUR HERSHAFT By: /s/ JACK PLAXE
------------------------------------------------- -------------------------------------------------
Arthur Hershaft Jack Plaxe
Chairman of the Board of Directors Senior Vice President and Chief Financial Officer
and Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer) Dated: March 31, 1999
Dated: March 31, 1999

By: /s/ VICTOR HERSHAFT By: /s/ JOHN FITZGERALD
------------------------------------------------- -------------------------------------------------
Victor Hershaft John Fitzgerald
Vice Chairman Vice President and Controller
Director (Principal Accounting Officer)
Dated: March 31, 1999 Dated: March 31, 1999

By: /s/ JACK BECKER By: /s/ LEO BENATAR
------------------------------------------------- -------------------------------------------------
Jack Becker Director
Director Dated: March 31, 1999
Dated: March 31, 1999

By: /s/ JAMES C. MCGRODDY By: /s/ ROBERT G. LAIDLAW
------------------------------------------------- -------------------------------------------------
James C. McGroddy Robert G. Laidlaw
Director Director
Dated: March 31, 1999 Dated: March 31, 1999

By: /s/ DAVID E. MCKINNEY By: /s/ WALTER W. WILLIAMS
------------------------------------------------- -------------------------------------------------
David E. McKinney Walter W. Williams
Director Director
Dated: March 31, 1999 Dated: March 31, 1999

By: /s/ THOMAS R. LOEMKER
-------------------------------------------------
Thomas R. Loemker
Director
Dated: March 31, 1999
</TABLE>

48
<PAGE> 50

EXHIBIT INDEX

EXHIBIT DESCRIPTION
NO.
<S> <C>

3.1 Amended and Restated Certificate of Incorporation. (G)
3.2 Amendment to Amended and Restated Certificate of
Incorporation. (M)
3.3 By-Laws (A)
4.1 Warrant Agreement for "A" Warrants between the Registrant
and Odyssey Partners, L.P. dated March 3, 1997. (J)
4.2 Odyssey Partners, L.P. Certificate for 1,000,000 Warrants
dated March 3, 1997. (J)
4.3 Warrant Agreement for "B" Warrants between the Registrant
and Odyssey Partners, L.P. dated March 3, 1997. (J)
4.4 Odyssey Partners, L.P. Certificate for 200,000 Warrants
dated March 3, 1997. (J)
10.2 Employment Agreement, dated as of December 16, 1986, between
Registrant and Arthur Hershaft. (C)
10.3 Employment Agreement, dated February 13, 1989, between
Registrant and Victor Hershaft. (D)
10.4 Amendment dated as of October 1, 1998 to the Employment
Agreement, dated as of February 13, 1989 between Registrant
and Victor Hershaft.
10.5 Employment Agreement dated as of August 6, 1998 between
Registrant and Craig O. Morrison.
10.6 Promissory Note dated September 8, 1998 from Craig O.
Morrison to the Registrant.
10.7 Promissory Note dated September 18, 1998 from Craig O.
Morrison to the Registrant.
10.8 Registrant's 1990 Employee Stock Option Plan. (F)
10.9 Registrant's 1997 Incentive Stock Option Plan. (N)
10.10 Deferred Compensation Plan for Directors. (O)
10.11 Omnibus Purchase and Sale Agreement dated June 6, 1995 by
and between Pitney Bowes Inc., Monarch Marking Systems,
Inc., Pitney Bowes Marking Systems Ltd., Pitney Bowes
International Holdings Inc., Pitney Bowes France S.A. and
Monarch Acquisition Corp. (H)
10.12 Stock Purchase Agreement dated as of December 20, 1996
between the Registrant and Odyssey Partners, L.P. (I)
10.13 Amendment No. 1 to Stock Purchase Agreement dated as of
March 3, 1997 between the Registrant and Odyssey Partners,
L.P. (I)
10.14 Agreement and Plan of Merger dated as of March 3, 1997 by
and among the Registrant, Monarch Holdings, Inc., Thomas
Loemker and John W. Paxton. (J)
10.15 Registration Rights Agreement dated as of March 3, 1997
between the Registrant and Odyssey Partners, L.P. (J)
10.16 Credit Agreement dated March 3, 1997. (K)
10.17 Agreement and Plan of Merger dated as of July 15, 1997,
among the Registrant, Ribbon Manufacturing, Inc., and
International Imaging Materials, Inc. (L)
10.18 Amended and Restated Credit Agreement dated as of August 11,
1998.(P)
10.19 Note Purchase Agreement dated as of August 4, 1998.(P)
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
27.1 Financial Data Schedule
</TABLE>

- ---------------

(A) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1980.

(B) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1985.

(C) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.

(D) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.

(E) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.

49
<PAGE> 51