ELTRON INTERNATIONAL INC, 8-K, 1996-06-17

ELTRON INTERNATIONAL INC
8-K, 1996-06-17
COMPUTER PERIPHERAL EQUIPMENT, NEC

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FORM 8-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) June 13, 1996

ELTRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

CALIFORNIA
(State or other jurisdiction of incorporation)

0-23342 95-4302537
(Commission File Number) (I.R.S. Employer Identification No.)

41 MORELAND ROAD 93065
SIMI VALLEY, CALIFORNIA (Zip Code)
(Address of principal executive offices)

(805) 579-1800
(Registrant's telephone number, including area code)

N.A.
(Former name or former address, if changed since last report)

Total Number of Pages: 25

Index to Exhibits appears on Page: Not Applicable

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1
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ITEM 5. OTHER ITEMS

Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS")
in a business combination accounted for as a pooling of interests. Restated
pooled financial statements for the three years ended December 31, 1995 as well
as the corresponding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for such restated results are provided as
follows:

2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Eltron International, Inc.:

We previously audited and reported on the consolidated balance sheets
of Eltron International, Inc. and subsidiaries as of December 31, 1994 and 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 prior to
their restatement for the 1996 pooling of interests with RJS, Inc. and
subsidiary ("RJS"). The contribution of RJS to the combined revenues and net
income represented approximately 64% and 19%; 41% and 20%; 23% and 11% of the
respective restated totals for the years ended December 31, 1993, 1994, and
1995. The total assets of RJS represented 27% and 13% of the respective restated
totals for December 31, 1994 and 1995. Separate financial statements of RJS
included in the related restated consolidated balance sheets, statements of
income, shareholders' equity and cash flows were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying balance sheets as of December 31, 1994 and 1995 and the
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995, after restatement for
the 1996 pooling of interest; in our opinion, such consolidated statements have
been properly combined on the basis described in Note 1 of notes to consolidated
financial statements.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Eltron
International, Inc. and subsidiaries as of December 31, 1994 and 1995 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Sherman Oaks, California
February 24, 1996
except for Notes 1 and 13
as to which the date is March 1, 1996

3
<PAGE> 4

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
RJS, Incorporated:

We have audited the consolidated balance sheets of RJS, Incorporated and
subsidiary (the "Company") as of September 30, 1995 and 1994, and the related
consolidated statements of income and retained earnings and of cash flows for
each of the three years in the period ended September 30, 1995 (not presented
separately herein). 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.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Los Angeles, California
November 22, 1995

(1927)

3(a)
<PAGE> 5
ELTRON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS

December 31,
--------------------------------
1994 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................................... $ 1,740,905 $ 729,055
Short term investments ....................................................... 4,109,411 15,552,076
Accounts receivable, net of allowance for doubtful accounts of $337,305
and $368,468, respectively ................................................. 5,718,461 9,397,603
Inventories .................................................................. 4,958,567 11,506,936
Prepaid expenses and other current assets .................................... 275,622 1,146,493
Deferred tax asset ........................................................... 1,374,000 1,891,398
------------ ------------
Total current assets ..................................................... 18,176,966 40,223,561

PROPERTY AND EQUIPMENT, net ....................................................... 1,156,699 3,769,436
DIFFERENCE BETWEEN COST AND FAIR VALUE OF NET ASSETS
ACQUIRED ..................................................................... 26,337 962,305

OTHER ASSETS ...................................................................... 134,000 668,923
------------ ------------
$ 19,494,002 $ 45,624,225
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Borrowings under line of credit .............................................. $ 1,250,000 $ 768,000
Accounts payable ............................................................. 2,457,544 4,091,008
Accounts payable to shareholder .............................................. 918,347 1,816,909
Accrued liabilities .......................................................... 826,284 976,599
Accrued compensation ......................................................... 287,753 820,217
Accrued taxes payable ........................................................ 1,775,239 --
Deferred service contract revenue ............................................ 199,000 215,000
------------ ------------
Total current liabilities ................................................ 7,714,167 8,687,733

LONG TERM OBLIGATION .............................................................. -- 751,313
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized of which none are
outstanding ................................................................ -- --
Common stock, no par value:
Authorized -- 30,000,000 shares
Issued and outstanding -- 6,061,324 and 7,155,818 shares, respectively ... 6,702,308 23,990,634
Cumulative translation adjustment ............................................ (11,050) (13,733)
Retained earnings ............................................................ 5,088,577 12,208,278
------------ ------------
Total shareholders' equity ............................................... 11,779,835 36,185,179
------------ ------------
$ 19,494,002 $ 45,624,225
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements

4
<PAGE> 6
ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
SALES .......................................... $ 17,989,005 $ 29,276,490 $ 54,971,064
COST OF SALES .................................. 10,961,012 16,253,100 30,123,477
------------ ------------ ------------
Gross profit ................................. 7,027,993 13,023,390 24,847,587
OPERATING EXPENSES:
Selling, general and administrative .......... 3,983,624 5,803,352 11,270,292
Research and product development ............. 1,592,022 1,885,320 2,932,003
------------ ------------ ------------
INCOME FROM OPERATIONS ......................... 1,452,347 5,334,718 10,645,292
OTHER (INCOME) EXPENSE:
Interest, net ................................ 231,906 29,800 (378,458)
Other, net ................................... 147,584 86,000 263,287
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 1,072,857 5,218,918 10,760,463
PROVISION FOR INCOME TAXES ..................... 72,473 1,595,714 3,640,762
------------ ------------ ------------
NET INCOME ..................................... $ 1,000,384 $ 3,623,204 $ 7,119,701
============ ============ ============
NET INCOME PER COMMON SHARE .................... $ 0.28 $ 0.58 $ 0.97
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .. 3,542,344 6,211,796 7,348,966
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements

5
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ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Cumulative Retained
--------------------------- Note Translation Earnings
Shares Amount Receivable Adjustment (Deficit) Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 ........ 3,345,852 $ 569,184 $ (65,288) $ -- $ 464,989 $ 968,885
Net income .................. -- -- -- -- 1,000,384 1,000,384
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1993 ........ 3,345,852 569,184 (65,288) -- 1,465,373 1,969,269
Issuance of common stock, net
of offering costs of
$1,436,368 ................... 2,500,000 6,063,632 -- -- -- 6,063,632
Repayment of note receivable ... -- -- 65,288 -- -- 65,288
Exercise of stock options ...... 215,472 69,492 -- -- -- 69,492
Translation adjustment ......... -- -- -- (11,050) -- (11,050)
Net income ..................... -- -- -- -- 3,623,204 3,623,204
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 ........ 6,061,324 6,702,308 -- (11,050) 5,088,577 11,779,835
Issuance of common stock, net
of offering costs of
$1,198,575 ................... 850,000 16,651,425 -- -- -- 16,651,425
Exercise and repurchase of
warrant, net ................. -- (274,527) -- -- -- (274,527)
Exercise of stock options ...... 244,494 266,428 -- -- -- 266,428
Tax benefit resulting from
exercise of options .......... -- 645,000 -- -- -- 645,000
Translation adjustment ......... -- -- -- (2,683) -- (2,683)
Net income ..................... -- -- -- -- 7,119,701 7,119,701
============ ============ ============ ============ ============ ============
BALANCE, December 31, 1995 ........ 7,155,818 $ 23,990,634 $ -- $ (13,733) $ 12,208,278 $ 36,185,179
============ ============ ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements

6
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ELTRON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 1,000,384 $ 3,623,204 $ 7,119,701
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 112,770 189,645 580,306
Amortization of the difference between cost and fair value
of net assets acquired ........................................ (142,000) (116,000) 56,000
Provision for doubtful accounts ................................. 25,875 121,595 31,163
Deferred income taxes ........................................... -- (323,000) (517,398)
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable ........................................... (732,639) (2,373,830) (3,150,979)
Inventories ................................................... (299,240) (2,156,196) (6,404,535)
Prepaid expenses and other assets ............................. 8,101 (222,754) (797,490)
Deferred offering costs ....................................... (158,000) 158,000 --
Accounts payable .............................................. (13,936) 564,095 958,786
Accounts payable to shareholder ............................... 409,149 443,837 898,562
Accrued liabilities and compensation .......................... 154,406 386,593 618,966
Accrued taxes payable ......................................... 19,222 1,756,017 (1,775,239)
Accrued interest payable to shareholder ....................... (65,106) -- --
Deferred service contract revenue ............................. 17,000 23,000 16,000
------------ ------------ ------------
Net cash provided by (used in) operating activities .............. 335,986 2,074,206 (2,366,157)

CASH FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (246,350) (927,745) (2,955,760)
Cash paid in connection with acquisition of Russet, Limited ..... -- (682,333) --
Purchase of short term investments .............................. -- (5,856,147) (20,852,247)
Sale of short term investments .................................. -- 1,746,736 9,409,582
------------ ------------ ------------
Net cash used in investing activities ............................. (246,350) (5,719,489) (14,398,425)

CASH FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit ............... 382,447 (333,447) (887,911)
Cash proceeds from stock sales, net ............................. -- 6,128,920 16,651,425
Exercise and repurchase of warrant, net ........................ -- -- (274,527)
Proceeds from exercise of stock options ......................... -- 69,492 266,428
Payments on notes payable to shareholder ........................ (286,046) (799,856) --
Repayment of long-term debt ..................................... (89,000) (100,000) --
------------ ------------ ------------
Net cash provided by financing activities ......................... 7,401 4,965,109 15,755,415
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............................. -- (11,050) (2,683)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ...................................... 97,037 1,308,776 (1,011,850)
CASH BALANCE, beginning of year ...................................... 335,092 432,129 1,740,905
------------ ------------ ------------
CASH BALANCE, end of year ............................................ $ 432,129 $ 1,740,905 $ 729,055
============ ============ ============

SUPPLEMENTAL DISCLOSURES:
Interest and taxes paid:
Interest paid .................................................... $ 308,612 $ 178,876 $ 119,767
Taxes paid ....................................................... 66,800 78,707 6,374,000
Non-cash transactions:
Assumption of liabilities in connection with acquisition of
Russet, Limited ............................................... -- 622,000 --
Tax benefit resulting from exercise of options ................... -- -- 645,000
Assumption of liabilities and obligations in connection with
acquisition of Donner Media, Incorporated ..................... -- -- 1,009,606
</TABLE>

The accompanying notes are an integral part of these financial statements

7
<PAGE> 9
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Eltron International, Inc. and subsidiaries (the "Company" or "Eltron")
designs, manufactures and markets bar code label printers, software, and related
accessories designed for use in Auto ID systems. The Company also designs,
manufactures and markets thermal printers which allow users to create
photo-realistic full color credit cards and drivers licenses on demand. Eltron
manufactures and distributes a full range of supplies designed for use with its
printers.

The Company currently offers a full range of direct thermal and thermal
transfer bar code printers, color card printers and custom print engines for
applications such as airline ticketing. These printers, together with the
Company's software, printer supplies and accessories, are sold by the Company
through multiple distribution channels that include value added resellers,
systems integrators, original equipment manufacturers, independent distributors
and its own direct sales force located throughout the world. Industries for
which the Company believes its printers are particularly well-suited include
shipping and package delivery, retail distribution and point-of-sale, health
care, manufacturing, financial services and governmental licensing. The Company
currently focuses its sales efforts in these markets, although it continues to
explore the potential for new markets.

Effective March 1, 1996, the Company acquired RJS, Incorporated ("RJS")
in a business combination accounted for as a pooling of interests. RJS is a
manufacturer of bar code label printers, bar code verifiers and verified
printing systems located in Monrovia, California. In accordance with the terms
of the merger, Eltron paid $776,000 in cash to dissenting shareholders (in lieu
of 22,861 shares of Eltron stock) and issued 322,991 shares of its Common Stock
to the shareholders of RJS as consideration for all of the outstanding capital
stock of RJS.

The accompanying financial statements are based on the assumption that
the two companies were combined at the beginning of the year, and all financial
statements for prior periods presented have been restated to give effect to the
combination. Earning per share data reflects the shares issued in the merger for
all periods presented. Prior to March 1996, Eltron and RJS, in the normal course
of business, entered into transactions for the purchase and sale of their
respective products merchandise. These intercompany transactions have been
eliminated in the accompanying financial statements.

In connection with the merger, RJS changed its fiscal year end from
September 30 to December 31, which conforms to Eltron's year end. The
consolidated financial statements for all periods prior to 1996 have not been
restated to reflect RJS's change in fiscal year and include RJS's results of
operations on a September 30 fiscal year end basis and Eltron on a December 31
calendar year basis.

A reconciliation of the amounts of net sales and net income previously
reported for each of the three years in the period ended December 31, 1995 is
as follows:

1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sales:
As previously reported by Eltron $ 6,505,005 $17,530,490 $42,361,064

RJS, Inc. 11,484,000 11,746,000 12,610,000
----------- ----------- -----------

As restated $17,989,005 $29,276,490 $54,971,064
=========== =========== ===========
Net Income:

As previously reported by Eltron $ 815,384 $ 2,913,204 $ 6,369,701

RJS, Inc. 185,000 710,000 750,000
----------- ----------- -----------

As restated $ 1,000,384 $ 3,623,204 $ 7,119,701
=========== =========== ===========
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The consolidated financial statements include the accounts of Eltron
International, Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

b. Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of 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.

c. Short Term Investments

The Company has classified its short term investments, including those
with a maturity from date of purchase of 90 days or less, as "available for
sale" and accordingly, carries such securities at aggregate fair value. At
December 31, 1995, the Company's short term investments consisted primarily of
municipal bonds and selected bond funds. The aggregate fair value of the
Company's short term investments approximated their amortized cost basis. At
December 31, 1995, all of the Company's short term investments had maturities of
less than one year.

8
<PAGE> 10
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

d. Revenue Recognition

Revenue is recognized upon shipment. Currently, the Company generally
does not provide its customers with the right of return. The Company sells
extended service contracts for its products. Revenue for such contracts is
recognized on a straight line basis over the life of the contract.

e. Difference Between Cost and Fair Value of Net Assets Acquired

Difference Between Cost and Fair Value of Net Assets Acquired
represents the difference between the purchase price and the fair value of
assets acquired in a business combination accounted for as a purchase. The
Company amortizes the difference between cost and fair value of net assets
acquired on a straight-line basis over the period for which such additional
value is expected to be realized by the acquired business, typically three to
five years (See Note 6). The Company continually evaluates whether changes have
occurred that would suggest that such additional value may not be realized by
the acquired business over the remaining amortization period. If this review
indicates that the remaining estimated useful life of the difference between
cost and fair value of net assets acquired requires revision or is not
recoverable, the carrying amount is reduced by the estimated shortfall. To date,
the Company has not revised the carrying amount of the difference between cost
and fair value of net assets acquired. Accumulated amortization of the
difference between cost and fair value of net assets acquired is as follows:

<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Accumulated amortization of excess cost over fair value of net
assets acquired ......................................... $ (26,000) $ (225,000)

Accumulated amortization of excess fair value over cost of net
assets acquired ......................................... 1,051,000 1,194,000
----------- -----------
$ 1,025,000 $ 969,000
=========== ===========
</TABLE>

f. Warranty

The Company provides a warranty of up to one year on certain components
of its printers. A provision for warranty expense is recorded at the time of
shipment. To date, the Company has not experienced any significant warranty
claims.

g. Research and Product Development

Research and product development costs are charged to expense as they
are incurred. Under certain circumstances, the Company will develop a custom
product for a customer. In these cases, the Company will generally charge the
customer for development costs associated with the product. Research and product
development expenses are presented net of reimbursements received from customers
for custom product development. The Company received reimbursements from a
customer for product development totaling $101,000 in 1993. No such
reimbursements were received in either 1994 or 1995.

h. Translation of Foreign Currencies

All assets and liabilities of the Company's foreign subsidiary are
translated at current exchange rates while revenues and expenses are translated
at average rates in effect for the period; the resulting gains and losses are
included in a separate component of shareholders' equity. Gains (losses) on
foreign exchange transactions were not significant in 1993, 1994 or 1995.

9
<PAGE> 11
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

i Sales and Concentration of Credit Risk

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, short
term investments and trade accounts receivable. The Company places its cash and
short term investments in a variety of financial instruments such as market rate
accounts, municipal bonds, selected bond funds and U.S. Government agency debt
securities. The Company, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.

The Company sells to its international customers in local currencies.
To date gains and losses related to foreign currency transactions have not been
significant. The Company has not entered into any currency hedging transactions
to date, however, in the future, the Company may seek to hedge certain
transactions.

The Company's largest customer, United Parcel Service, accounted for
approximately $1.2 million, $7.9 million and $20.8 million of the Company's
sales for the years ended December 31, 1993, 1994 and 1995, respectively. At
December 31, 1995, accounts receivable from United Parcel Service totaled
approximately $3.1 million.

The Company performs periodic credit evaluations of its customers and
generally does not require collateral. The Company extends credit to its
domestic customers for a term of 30 days and, in accordance with local business
practices, may extend credit to its international customers for a term of up to
60 days. The Company maintains reserves for potential credit losses and, to
date, such losses have been within management's expectations.

j. Advertising

Advertising costs are expensed as incurred. Advertising expenses for
the years ended December 31, 1995, 1994 and 1993 totaled $797,000, $543,000 and
$414,000, respectively.

k. Income Taxes

The Company utilizes the liability method to account for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

l. Net Income Per Common Share

Net income per common share is computed using the weighted average
number of shares outstanding and dilutive common stock equivalents (options and
warrants).

m. Recent Accounting Pronouncements

In March of 1995, the Financial Accounting Standards Board issued SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement is effective for fiscal years
beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable by using the future
undiscounted cash flows expected from the use or the eventual disposition of the
asset. Management anticipates implementing SFAS No. 121 effective January 1,
1996 and believes the implementation will not have a material impact on the
Company's financial position, results of operations or cash flows.

The Company accounts for its stock-based employee compensation awards
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Under APB 25, because the exercise price of
the Company's employee stock options equals the market price on the date of the
grant, no compensation expense is recognized.

10
<PAGE> 12
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Awards of Stock Based Compensation to Employees." This Statement
is effective for fiscal years beginning after December 15, 1995. SFAS No. 123
established financial accounting and reporting standards for stock based
employee compensation plans. Management anticipates implementing the disclosure
requirements of SFAS No. 123 effective January 1, 1996 and believes that
implementation will not have a material impact on the Company's financial
position, results of operations or cash flows.

n. Reclassifications

Certain amounts in the prior period financial statements have been
reclassified to conform to the current period's presentation.

3. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of the following:

<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Subassemblies and raw materials ...... $ 3,799,323 $ 8,569,233
Work in process ...................... 238,860 386,519
Finished goods ....................... 920,384 2,551,184
----------- -----------
$ 4,958,567 $11,506,936
=========== ===========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment stated at cost consists of the following:

<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Tooling and machinery .............................. $ 1,224,529 $ 3,803,238
Office equipment ................................... 377,997 915,996
Leasehold improvements ............................. 30,033 40,034
----------- -----------
1,632,559 4,759,268
Less, accumulated depreciation and amortization .... (475,860) (989,832)
----------- -----------
Net property and equipment ......................... $ 1,156,699 $ 3,769,436
=========== ===========
</TABLE>

Depreciation of property and equipment is computed using the
straight-line method over the following estimated useful lives:

<TABLE>
<S> <C>
Machinery and manufacturing equipment....................... 3 to 5 years
Furniture and office equipment.............................. 3 to 7 years
</TABLE>

The Company capitalizes tooling costs once a product design has been
finalized. Tooling costs are amortized to cost of sales on a straight-line basis
over the estimated product life, generally three years, or the ratio of current
revenue to the total of current and anticipated future revenue, whichever is
greater. Leasehold improvements are amortized on a straight-line basis over the
lesser of the asset life or lease term. Depreciation and amortization expense
totaled $96,317 $208,356 and $530,972 for the years ended December 31, 1993,
1994 and 1995, respectively. Major replacements or betterments of property and
equipment are capitalized. Costs of normal repairs and maintenance are charged
to expense as incurred.

11
<PAGE> 13
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. PUBLIC OFFERINGS, CHANGES IN CAPITALIZATION AND WARRANTS

On February 9, 1994, the Company completed an initial public offering
(the "IPO") of 2,500,000 shares of its Common Stock at $3.00 per share, raising
approximately $6.1 million. In connection with the IPO the following
transactions occurred: (i) notes payable to Shareholders totaling $799,856 were
repaid in full -- see Note 7; (ii) borrowings under the Company's line of credit
in the amount of $483,447 were repaid and the line of credit was amended to
allow the Company to borrow up to 75% of eligible accounts receivable (as
defined in the agreement) to a maximum of $1,500,000 -- see Note 13; (iii) the
Company received payment in full for a note receivable from a shareholder in the
amount of $65,288 -- see Note 10.

In connection with the IPO the Company sold, for $110, to Cruttenden
Roth Incorporated ("Cruttenden") , the underwriter, warrants to purchase up to
220,000 shares of the Company's Common Stock, at an exercise price of $3.60 per
share. The Cruttenden warrants are exercisable for a period of up to four years
beginning February 9, 1995 and are not transferable, except to officers of
Cruttenden. In addition, the Company has granted certain rights to the holders
of the Cruttenden's warrants to register the Common Stock underlying Cruttenden
warrants under the Securities Act of 1933, as amended. None of the Cruttenden
warrants had been exercised as of December 31, 1995.

On May 31, 1995, the Company completed a follow on public offering (the
"Offering") of 850,000 shares of its Common Stock at $21.00 per share, raising
approximately $16.7 million.

6. ACQUISITIONS

Russet, Limited

At October 31, 1994, the Company expanded its operations in Europe and
the United Kingdom by purchasing certain assets and the distribution business of
Russet, Limited ("Russet") in a transaction accounted for as a purchase for
financial reporting purposes. The purchase price paid by Eltron was
approximately $682,000 in cash and the assumption of approximately $622,000 in
trade liabilities and debt. The assets acquired by Eltron consisted of trade
receivables, inventories, equipment, technology and agency rights used in
Russet's business as a distributor of bar code equipment, ticket printing
equipment and related products.

The estimated fair values of the assets of Russet acquired are
summarized as follows:

<TABLE>
<S> <C>
Trade receivables........................................ $ 412,000
Inventories.............................................. 352,000
Equipment and other tangible assets...................... 119,000
Cost in excess of net assets acquired.................... 421,000
----------
Total.......................................... $1,304,000
==========
</TABLE>

The results of operations relating to Russet are included with those of
the Company from November 1, 1994. Net revenues generated from Russet operations
totaled approximately $454,000 for the period from November 1, 1994 to December
31, 1994. The cost in excess of the net assets of Russet acquired is being
amortized on a straight-line basis over a five year period

12
<PAGE> 14
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated statements of income which follow were
prepared as if the acquisition of Russet had occurred as of January 1, 1993 or
1994. For the purposes of the pro forma information presented, Statements of
Operations for the years ended March 31, 1994 and 1995 have been included for
Russet. In the opinion of the Company's management, all adjustments necessary to
present fairly such pro forma financial statements have been made based on the
terms and structure of the transaction. However, the preparation of pro forma
financial information requires many assumptions which may differ from actual
operations. These unaudited pro forma financial statements are not necessarily
indicative of the actual results which the Company would have reported had the
acquisition occurred as of January 1, 1993 or 1994, nor do they purport to
indicate the results of future operations.

Pro Forma Statements of Income
for Eltron International, Inc. and Russet, Limited
(Unaudited)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1993 1994
----------- -----------
<S> <C> <C>
Sales .............................................. $21,577,950 $31,245,671
Income before provision for taxes .................. 1,197,965 5,379,378
Net income ......................................... $ 1,107,708 $ 3,676,097
=========== ===========
Net income per common share ........................ $ 0.31 $ 0.59
=========== ===========
</TABLE>

Donner Media, Incorporated

Effective September 1, 1995, the Company purchased 80% of the
outstanding capital stock of Donner Media, Incorporated (Donner), a manufacturer
of pressure sensitive labels located in Appleton, Wisconsin for $250,000 in
cash. The Company also entered into an agreement (the "Agreement") to acquire
the remaining 20% of Donner's outstanding capital stock. Under the terms of the
Agreement the Company has committed to purchase Donner's remaining capital stock
on September 1, 1998 for the greater of (i) the incremental value of such shares
as determined in accordance with the valuation methodology set forth in the
Agreement or (ii) $1,000,000 in cash. The amount recorded in the accompanying
financial statements related to this payment is based upon management's
judgments regarding such factors as future competitive conditions and product
costs, which can be difficult to predict. Actual results could differ from those
estimates. The net present value of this estimated payment, calculated at an
effective interest rate of 9% per annum, has been included in "Long Term
Obligation" on the accompanying Consolidated Balance Sheet.

The acquisition has been accounted for as a purchase for financial
reporting purposes and, accordingly, the results of operations for Donner are
included with those of the Company from September 1, 1995. Revenues for the
period from September 1, 1995 to December 31, 1995, totaled $1.1 million. A
portion of the purchase price has been allocated to the assets and liabilities
of Donner based on their estimated respective fair values. The purchase price
and expenses associated with the acquisition exceeded the fair value of Donner's
net assets by $1,010,000 which has been included in "Difference Between Cost and
Fair Value of Net Assets Acquired" on the accompanying Consolidated Balance
Sheets. The cost in excess of the net assets of Donner acquired is being
amortized on a straight-line basis over a five year period.

7. NOTES PAYABLE TO SHAREHOLDER

At December 31, 1993, the Company had outstanding notes payable to a
shareholder in the amount of $799,856. These notes were collateralized by
substantially all of the Company's assets and bore interest at 10 percent per
annum. The interest expense recorded on the notes payable to shareholder was
$95,434 and $11,569 for the years ended December 31, 1993 and 1994,
respectively. In 1994, these notes were paid in full with proceeds from the
Company's IPO ( See Note 5).

13
<PAGE> 15
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INCOME TAXES

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
December 31,
----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ....................... $ 30,387 $ 1,404,705 $ 3,151,148
State ......................... 42,086 459,708 884,204
Foreign ....................... -- 54,301 72,808
Deferred:
Federal ....................... -- (323,000) (395,000)
State ......................... -- -- (72,398)
----------- ----------- -----------
Provision for income taxes ......... $ 72,473 $ 1,595,714 $ 3,640,762
=========== =========== ===========
</TABLE>

A reconciliation of the provision for income taxes to the amount
computed at the Federal statutory rate is as follows:

<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at statutory rate of 34% ........ $ 364,772 $ 1,774,432 $ 3,658,557
Effect of graduated tax rates ................................ (9,161) -- --
Effect of tax rate difference for Foreign Sales Corporation .. -- (33,017) (69,372)
State taxes, net of Federal benefit .......................... 29,351 303,460 535,876
Utilization of net operating loss carryforwards .............. (453,680) (245,674) (130,701)
Tax credits .................................................. -- (93,573) (287,413)
Interest income exempt from Federal tax ...................... -- (41,931) (161,131)
Change in valuation allowance for deferred tax assets ........ (39,000) (64,871) (78,820)
Foreign tax provision ........................................ -- 54,301 72,808
Non taxable income............................................ (48,000) (48,000) (48,000)
Expenses not deductible for income tax purposes............... 13,000 15,399 17,000
Other, net ................................................... 215,191 (24,812) 131,958
----------- ----------- -----------
Provision for income taxes .......................... $ 72,473 $ 1,595,714 $ 3,640,762
=========== =========== ===========
Effective tax rate ........................................... 6.8% 30.6% 33.8%
=========== =========== ===========
</TABLE>

The components of the Company's deferred tax assets and liabilities are
as follows:

<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Expenses deductible in future years ............. $ 669,779 $ 924,888
Federal benefit of state tax liability .......... 120,022 263,991
Net operating loss carryforwards ................ 1,487,000 1,325,000
Investment credit carryforwards ................. 223,100 335,000
----------- -----------
Gross deferred tax asset ...................... 2,499,901 2,848,879
Valuation allowance for deferred assets ......... (1,065,388) (851,000)
----------- -----------
Net deferred tax asset ........................ 1,434,513 1,997,879
----------- -----------

Deferred tax liabilities:
Depreciation .................................... (60,513) (106,481)
----------- -----------
Net deferred tax liability .................... (60,513) (106,481)
----------- -----------

Net deferred tax asset ............................. $ 1,374,000 $ 1,891,398
=========== ===========
</TABLE>

14
<PAGE> 16
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31,1995, the Company had net operating loss carryforwards
available to offset future federal taxable income which totaled $1,397,000.
These credit carryforwards expire through 2002. At December 31, 1995, the
Company also had tax loss carryforwards totaling $1,500,000 available to offset
taxable income in Germany. A valuation allowance of $851,000 has been recorded
against these German tax loss carryforwards.

During 1995, the Company reduced its valuation allowance for deferred
tax assets to reflect the Company's increased earnings capacity which, in the
opinion of management, is sufficient to ensure utilization of recorded deferred
tax assets in future periods

9. RELATED PARTY TRANSACTIONS

In addition to the related party transactions discussed in Notes 7 and
10, the Company has entered into a manufacturing and marketing agreement with a
shareholder, TSC. The agreement provides TSC with the non-exclusive right to
manufacture printers and printer components for the Company as well as the
exclusive right to market and distribute certain of Eltron's products in the
continent of Asia. Under the terms of the agreement, TSC must pay the Company a
royalty equal to 3.5% of gross revenues derived from sales of Eltron products
and may either: (i) manufacture the Eltron products which are sold in Asia or
(ii) purchase the products from Eltron.

For the years ended December 31, 1993, 1994 and 1995, the Company
purchased subassemblies and components totaling $2,379,784, $2,855,387 and
$7,899,775, respectively from TSC (of which $1,977,829, $2,708,313 and
$5,153,426 are recorded in cost of goods sold) and received royalties of $5,297,
$8,088 and $4,624 respectively.

10. NOTE RECEIVABLE FROM SHAREHOLDERS

In December of 1992, the Company sold 107,914 shares of common stock at
$0.61 per share to an officer in exchange for a $65,288 note receivable,
reflected as reduction to shareholders' equity. Interest on the note accrued at
the rate of 10% per annum. The note was collateralized by the related common
stock and was paid in full in February of 1994 ( See Note 5).

11. COMMITMENTS

The Company leases warehouse and office space as well as certain
equipment. Rental expense under these agreements was $209,428, $249,852 and
$580,311 for the years ended December 31, 1993, 1994 and 1995, respectively. The
Company's leases for its main warehouse and office facilities in Simi Valley,
California expire in January of 1999. The Company's future minimum rental
commitments on these leases at December 31, 1995 are as follows:

<TABLE>
<S> <C>
Year ending December 31,
1996........................................... $ 467,084
1997........................................... 427,092
1998........................................... 407,237
1999........................................... 97,875
2000........................................... 53,007
Thereafter..................................... --
-----------
$ 1,452,295
===========
</TABLE>

15
<PAGE> 17
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. STOCK OPTION PLANS

The Company adopted stock option plans in 1992 and 1993 (the 1992 Stock
Option Plan and the 1993 Stock Option Plan). Incentive and nonqualified options
under these plans may be granted to employees, officers and consultants of the
Company. There are 1,101,000 shares of common stock reserved for issuance under
these plans of which 459,966 shares have been exercised. The exercise price of
the options are determined by a committee of the board administering the plans,
but in the case of an incentive stock option, the exercise price may not be less
than 100% of the fair market value on the date of grant. Nonqualified options
may be granted at an exercise price that is less than the fair market value of
the common stock on the date of grant and require the recognition of a
corresponding compensation expense by the Company. Outstanding options generally
become exercisable over four years.

Information with respect to the stock option plans is summarized below:

<TABLE>
<CAPTION>
Outstanding Stock Options
---------------------------
Shares Number of
Available Shares Price Per Share
--------- --------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1992 ........ -- 433,812 $ .18 to .28
Increase in shares reserved .... 316,188 -- --
Options granted ................ (148,870) 148,870 .61 to 1.56
Options canceled ............... -- -- --
Options exercised .............. -- -- --
-------- -------- --------------
Balance, December 31, 1993 ........ 167,318 582,682 .18 to 1.56
Increase in shares reserved .... 185,000 -- --
Options granted ................ (231,000) 231,000 2.50 to 4.75
Options canceled ............... 5,250 (5,250) 2.50
Options exercised .............. -- (215,472) .18 to 2.50
-------- -------- --------------
Balance, December 31, 1994 ........ 126,568 592,960 .18 to 4.75
Increase in shares reserved .... 166,000 -- --
Options granted ................ (245,896) 245,896 9.38 to 28.25
Options canceled ............... 9,760 (9,760) .61
Options exercised .............. -- (244,494) .18 to 4.75
-------- -------- --------------
Balance, December 31, 1995 ........ 56,432 584,602 $ .18 to 28.25
======== ======== ==============
</TABLE>

At December 31, 1995, options for 22,063 shares were exercisable at
prices ranging from $.18 to $3.88 per share.

13. LINE OF CREDIT AND BANK WARRANTS

In May 1995, Eltron amended its revolving credit agreement (the
"Agreement") with Silicon Valley Bank (the "Bank"). As amended, the Agreement
allows Eltron to borrow up to 75% of eligible accounts receivable, as defined by
the Agreement, to a maximum of $1,500,000. Borrowings under the Agreement bear
interest at the Bank's prime rate (8.5% at December 31, 1995) and are
collateralized by substantially all of the assets of Eltron. Under the terms of
the Agreement, Eltron may not enter into certain transactions or declare
dividends without receiving prior written consent from the Bank and is required
to comply with certain covenants, maintain certain debt to net worth ratios,
current ratios and minimum net worth requirements. Included within the borrowing
limits of the Agreement, Eltron has available $250,000 in letters of credit. At
December 31, 1995, Eltron had no outstanding letters of credit or borrowings
outstanding under the line. In connection with the Agreement, the Company issued
the Bank a warrant to purchase up to 15,832 shares of its Common Stock at a
price of $2.50 per share. This warrant was exercised, and retired for
approximately $274,000, paid by the Company in May of 1995. The agreement
expired in May 1996. The Company is actively seeking replacement financing for
the expired line.

16
<PAGE> 18
ELTRON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to the merger, RJS had a $2,000,000 line-of-credit facility with
a bank. The credit facility was collateralized by accounts receivable,
inventories and property and equipment. Immediately upon the merger of Eltron
and RJS, the RJS line-of-credit was paid in full, and the line terminated. The
weighted average borrowing rates for 1993, 1994 and 1995, on the above credit
facilities, were 9.7%, 9.2% and 9.3%, respectively.

14. INTERNATIONAL SALES AND FOREIGN OPERATIONS

Sales to foreign customers other than the Company subsidiary Russet,
amounted to approximately $4,878,000, $5,852,000 and $12,000,000 in the years
ended December 31, 1993, 1994 and 1995, respectively. These sales were primarily
to European customers. The following table sets forth data with respect to
Russet since its acquisition in November 1994:

<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Sales......................................... $ 454,000 $3,435,000
Income before provision for income taxes...... 36,000 78,000
Total assets.................................. 1,589,000 1,806,000
</TABLE>

15. STOCK SPLITS

In October 1993 the Company's Board of Directors declared a 1.5-for-1
split of the Company's common stock, which also became effective in October
1993. In November 1993 the Company's Board of Directors declared a
.9640288-for-1 reverse split of the Company's Common Stock, which became
effective in January 1994. On April 18, 1995, the Company's Board of Directors
declared a 2-for-1 forward stock split of the Company's Common Stock, which was
effective on May 1, 1995. All common share data and per share data included in
the accompanying financial statements and notes thereto have been adjusted to
reflect these stock splits.

16. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) savings and profit sharing plan that is
available to substantially all of its employees. Under the plan, employees can
make voluntary contributions not to exceed the lesser of an amount equal to 15%
of their compensation or limits established by the Internal Revenue Code. The
Company, at its discretion, matches a portion of the employees' annual
contributions. Company contributions during each of 1995, 1994 and 1993 were
$18,000.

17. SUBSEQUENT EVENTS (UNAUDITED)

Acquisition of Privilege S.A.

In January 1996, the Company purchased all the outstanding Common Stock
of Privilege S.A., a manufacturer of custom color card printers located in
Varades, France. The purchase price paid by Eltron was approximately $3.2
million in cash.

17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Eltron designs, manufactures and markets bar code label printers,
software, and related accessories designed for use in Auto ID systems. The
Company also designs, manufactures and markets thermal printers which allow
users to create photo-realistic full color credit cards and drivers licenses on
demand. Eltron manufactures and distributes a full range of supplies designed
for use with its printers. The Company believes that its success to date has
resulted from Eltron's ability to, at a lower cost, offer high-quality printers
and related products with features comparable to or exceeding those of available
competing products.

The Company currently offers a full range of direct thermal and thermal
transfer bar code printers, color card printers and custom print engines for
applications such as airline ticketing. These printers, together with the
Company's software, printer supplies and accessories, are sold by the Company
through multiple distribution channels that include value added resellers,
systems integrators, original equipment manufacturers, distributors and its own
direct sales force located through out the world. Industries for which the
Company believes its printers are particularly well-suited include shipping and
package delivery, retail distribution and point-of-sale, health care,
manufacturing, financial services and governmental licensing. The Company
currently focuses its sales efforts in these markets, although it continues to
explore the potential for new markets.

Eltron is currently seeking to expand its line of quality printers and
related accessories to meet the needs of a broad range of end users and to be
positioned as price and value leaders. Management is engaged in efforts to
accomplish this expansion through both internal development efforts and
strategic acquisitions and alliances. In the first quarter of 1996, the Company
enhanced its market position through the acquisition of Privilege S.A.
("Privilege") and RJS, Incorporated ("RJS"). Privilege, located in Varades,
France, is a manufacturer of custom color card printers with 1995 sales in
excess of $3 million. RJS, located in Monrovia, California, is a manufacturer of
high speed thermal bar printers, bar code verifiers and verified printing
systems with 1995 sales in excess of $12 million.

The acquisition of RJS has been accounted for as a pooling of interests
for financial reporting purposes. The accompanying financial statements are
based on the assumption that the two companies were combined at the beginning of
the year, and all financial statements for prior periods presented have been
restated to give effect to the combination. In connection with the acquisition,
RJS changed its fiscal year end from September 30 to December 31, which conforms
to Eltron's year end.

18
<PAGE> 20
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations
expressed as percentages of sales. The table also presents information on the
Company's consolidated results of operations expressed as a percentage increase
or decrease relative to the results of the previous period.

<TABLE>
<CAPTION>
Percentage increase
(decrease) over
Percentage of Sales results for prior period
--------------------- ------------------------
Year Ended Year Ended
December 31, December 31,
--------------------- ------------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales................................. 100% 100% 100% 63% 88%
Cost of Sales......................... 61 56 55 48 85
---- ---- ---- ---- ----
Gross profit........................ 39 44 45 85 91
Operating Expenses:
Selling, general and administrative. 22 20 21 46 94
Research and product development.... 9 6 5 18 56
---- ---- ---- ---- ----
Income from operations................ 8 18 19 267 100
Other (income) expense, net........... 2 NM NM NM NM
---- ---- ---- ---- ----
Income before provision
for income taxes.................... 6 18 20 386 106
Provision for income taxes............ NM 6 7 NM 128
---- ---- ---- ---- ----
Net income............................ 6% 12% 13% 262% 96%
==== ==== ==== ==== ====
</TABLE>

NM = not meaningful

COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994

Sales for 1995 totaled $55 million, an increase of $25.7 million
or 88% over sales for 1994 which totaled $29.3 million. This was primarily due
to a 92% or $22.7 million increase in printer sales. The increase in printer
sales can be attributed to wider market acceptance of the Company's established
lines of bar code printers, increased acceptance of the recently introduced
TLP-2242, which management believes is the industry's first sub-$1,000 thermal
transfer printer, as well as higher than anticipated demand from the Company's
largest customer, United Parcel Service ("UPS").

1995 sales were also bolstered by the inclusion of a full year's
operations for Russet, as compared to two months in 1994, which accounted for
$3.0 million of the 1995 sales increase. Sales of supplies were aided by the
acquisition of Donner Media, effective September 1, 1995, and increased 65%, or
$2.2 million, over the previous year.

Throughout 1995 sales of printers were enhanced by increased sales to
UPS, which contributed approximately $19.2 million and $7.9 million to sales in
1995 and 1994, respectively. Although the Company had outstanding orders from
UPS in excess of $4.0 million as of December 31, 1995, there is no obligation on
the part of UPS to place any further orders with Eltron. The Company has derived
a significant portion of its revenues from UPS and may in the future be
dependent on UPS, or other significant customers, the loss of any one of which
could materially adversely affect the Company's financial position, results of
operations and cash flows. No customer other than UPS contributed greater than
10% of the Company's net sales during 1995.

In 1995, 1994 and 1993, the Company achieved annual sales growth of
41%, 63% and 88%, respectively. In the opinion of management, these growth
percentages can primarily be attributed to initial market penetration by the
Company's products and are not necessarily indicative of future sales trends.

19
<PAGE> 21
Gross profit for 1995 totaled $24.8 million, an increase of $11.8
million or 91% over gross profit for 1994. As a percentage of revenues, gross
profit increased 1% to 45% in 1995 from 44% in 1994. Gross profit margins
remained relatively consistent from 1994 to 1995.

Sales to high volume customers or OEMs are typically transacted at a
price which yields a lower than average gross margin, although the incremental
selling costs associated with these transactions are generally less than those
associated with a non-OEM sale. Sales of supplies are typically made at lower
than average gross margins, as a result of general market conditions and the
commodity nature of these products. During the period from September 1995 to
February 1996 the Company completed the acquisition of three companies: Donner,
Privilege and RJS. These companies had aggregate 1995 sales of approximately $18
million. Each of these companies have historically exhibited gross margins which
are lower than Eltron's. Although management is currently seeking to increase
the gross margins of these subsidiaries, there can be no assurance that gross
margins similar to Eltron's will be achieved. As a result, management believes
that it is not reasonable to assume that the 45% gross margin exhibited in 1995
will necessarily be maintained in the future.

Selling, general and administrative expenses as a percentage of sales
were 21% and 20% for 1995 and 1994, respectively. In 1995, Selling, general and
administrative expenses increased in absolute dollars 94% to $11.3 million up
from $5.8 million in 1994. These increases primarily reflect sales and marketing
efforts focused on the Company's domestic and European bar code sales channels.

The Company currently anticipates that selling, general and
administrative expense will increase in future quarters but may decrease as a
percentage of sales. The actual amount spent will depend on a variety of
factors, including the Company's level of operations, and the number of new
markets the Company attempts to enter.

Research and development expenses increased 56% in 1995 to $2.9
million, up from $1.9 million in 1994. This increase related primarily to
increased efforts to develop new products. As a percentage of sales, these
expenses decreased to 5% in 1995, from 6% in the previous year.

The Company currently anticipates that research and product development
expense will increase in future quarters and may increase as a percentage of
sales. The actual amount spent will depend on a variety of factors, including
the Company's level of operations, and the number of product development
projects that it embarks upon.

Other income (expense), net. Net interest income totaled $378,000 in
1995, an increase of $408,000 over net interest expense of $30,000 for the
previous year. This increase in interest income was primarily due an increase in
interest earned on the approximately $16.7 million generated in a follow on
public offering which were invested in May of 1995. See "Liquidity and Capital
Resources."

The provision for income taxes for 1995 was $3.6 million, or
approximately 34% of pretax income, which reflects the utilization of certain
tax credits and current benefit of deferred tax assets under SFAS 109. The
Company's provision for income taxes for 1994 was $1.6 million or 31% of pretax
income. The Company's provision for income taxes was slightly higher as a
percentage of pretax income in 1995 primarily as a result of the amortization of
certain tax credits over a larger pretax contribution.

COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993

Sales for 1994 were $29.3 million, an increase of $11.3 million or 63%
over sales for 1993, which were $18 million. This was primarily due to a 65%
increase in printer sales. The increase in printer sales can be attributed to
continued market acceptance of the LP Series printers, increased acceptance of
the LP+ and TLP Series printers, and the introduction of new products within
these series. An additional $454,000 was contributed by the Company's
subsidiary, Russet, which was acquired in October 1994. Sales of supplies
increased 53% over the previous year. Throughout 1994, sales of printers were
enhanced by increased sales to UPS, which contributed approximately $1.2 million
and $7.9 million to sales in 1993 and 1994, respectively. No customer other than
UPS contributed more than 10% of the Company's sales during 1993 or 1994.

Gross profit for 1994 was $13 million, an increase of $6 million or 85%
over gross profit for 1993. As a percentage of sales, gross profit increased to
44% for 1994 from 39% in 1993. The gross profit margin improved as a result of
increased sales of higher profit margin products and lower per unit product
costs and efficiencies resulting from greater volumes.

20
<PAGE> 22
Selling, general and administrative expense for 1994 increased 46% to
$5.8 million, up from $4.0 million for 1993, primarily as a result of an
increase in sales volume. As a percent of sales, however, the expense decreased
from 22% in 1993 to 20% in 1994.

Research and product development expense for 1994 increased 18% to $1.9
million up from $1.6 million for 1993. This increase related primarily to new
product development. As a percentage of sales, however, research and product
development expense decreased from 9% in 1993 to 6% in 1994.

Other income (expense),net. Net interest expense totaled $30,000 for
1994, compared to net interest expense of $232,000 for 1993. This reduction in
net interest expense was primarily due to the retiring of notes payable to a
shareholder and interest earned on cash proceeds from the Company's IPO which
were offset by interest expense on outstanding borrowings under the Company's
line of credit.

The provision for income taxes for 1994 was $1.6 million, or
approximately 31% of pretax income, which reflects the utilization of certain
tax credits and current benefit of deferred tax assets under SFAS 109. The
Company's provision for income taxes for 1993 was $72,000 or 7% of pretax
income. The Company's provision for income taxes was lower in 1993 as a result
of the utilization of net operating loss carry forwards for Federal and state
income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

Historically, Eltron's primary source of liquidity has been cash flow
from operations, supplemented by borrowings from its shareholders and borrowings
under its revolving bank line of credit. In February of 1994 the Company
completed an initial public offering of its Common Stock which provided $6.1
million of net cash proceeds, $1.3 million of which was used to repay borrowings
from shareholders and its bank. In May of 1995 the Company completed a follow on
offering of its Common Stock which generated net proceeds of $16.7 million.

In 1995, operating activities used $2.4 million as compared to $2.1
million and $336,000 provided during 1994 and 1993, respectively. Significant
changes in 1995 included cash used as a result of increases in accounts
receivable and inventories of $3.1 million and $6.4 million, respectively, which
were offset by cash provided by increases in trade accounts payable to vendors
and a shareholder, as well as accrued liabilities and compensation which totaled
$2.5 million. In 1994, the Company was not required to make quarterly estimated
tax payments during the year which enhanced the amount of cash provided by
operations by $1.8 million. In 1995, the Company was required to pay its accrued
1994 liability which reduced cash flow from operations by $1.8 million.

In 1995, investing activities used cash totaling $14.4 million as
compared to $5.7 million and $246,000 used in 1994 and 1993, respectively. This
was primarily due to the net investment of $11.4 million in municipal bonds and
selected bond funds and the purchase of approximately $3 million in equipment.

In 1995, financing activities provided cash totaling $15.8 million.
Cash from financing activities was provided by the sale of 850,000 shares of the
Company's Common Stock in a follow-on public offering which generated net
proceeds of $16.7 million. These proceeds were partially offset by debt
repayments totaling $888,000.

In September 1993, the Company entered into a revolving credit
agreement with Silicon Valley Bank (the "Bank"). As amended, the line of credit,
which expired on May 5, 1996. The Company is actively seeking replacement
financing for the expired line. Prior to the merger, RJS had a $2,000,000
line-of-credit facility with a bank. The credit facility was collateralized by
accounts receivable, inventories and property and equipment. Immediately upon
the merger of Eltron and RJS, the RJS line-of-credit was paid in full, and the
line terminated. At December 31, 1995, $768,000 was outstanding under this line
of credit.

Subsequent to year end the Company's liquidity was affected by the
acquisition of Privilege and RJS which used approximately $3.2 million and
$776,000 of cash, respectively. The Company believes that cash provided by
operating activities, cash and short-term investments, and the net proceeds from
its public offering will be sufficient to fund the Company's capital needs for
the foreseeable future.

The Company did not have any significant capital commitments as of
December 31, 1995.

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RECENTLY ISSUED ACCOUNTING STANDARDS

In 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This Statement is effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable by using the future undiscounted cash flows
expected from the use or the eventual disposition of the asset. Management
anticipates implementing SFAS No. 121 effective January 1, 1996 and believes
that implementation will not have a material impact on the Company's financial
position, results of operations or cash flows.

CAUTIONARY STATEMENTS AND RISK FACTORS

Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those stated appear below. In addition to the other information
contained in this document, readers should carefully consider the following
cautionary statements and risk factors.

Dependence on Significant Customer

For the years ended December 31, 1993, 1994 and 1995, the Company's
largest customer, United Parcel Service ("UPS"), accounted for approximately
$1.2 million, $7.9 million and $20.8 million, respectively, of the Company's
sales. The Company has not entered into any long-term contract for the sale of
its products to UPS, and there is no obligation on the part of UPS to place any
further orders with the Company. The Company's financial position, results of
operations and cash flows are substantially dependent on sales to UPS, the loss
or reduction of which would have a material adverse effect on the Company's
results of operations and adversely affect the market price of the Company's
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."

Ability to Sustain Growth Rate

In 1995, 1994 and 1993, the Company achieved annual sales growth of
51%, 63% and 88%, respectively. In the opinion of management, these growth
percentages can primarily be attributed to initial market penetration by the
Company. Management believes that as the Company further penetrates its target
markets and matures, it may not be able to sustain its historic growth rate.
Shareholders and investors should not rely on the continuation of the Company's
historic growth rate in making their investment decisions.

Management of Rapidly Changing Business, Acquisitions

The Company has experienced recent rapid growth and is subject to the
risks inherent in the expansion and growth of a business enterprise. This
significant growth has placed and, if sustained, will continue to place, a
substantial strain on the operational, administrative and financial resources of
the Company and has resulted in an increase in the level of responsibility for
the Company's existing and new management personnel. To manage its growth
effectively, the Company will be required to continue to implement and improve
its operating and financial systems and to expand, train and manage its employee
base. There can be no assurance that the management skills and systems currently
in place will be adequate if Eltron continues to grow.

Recently the Company has completed a number of acquisitions and a
merger. Eltron's management has only limited experience with acquisitions or
mergers, which involve numerous risks, including difficulties in the
assimilation of acquired operations and products, the diversion of management's
attention from other business concerns and the potential loss of key employees,
suppliers, and customers of the acquired companies. For a period after these
acquisitions it may become more difficult for management to accurately forecast
product demand, operating expenses and capital requirements until these
businesses are successfully integrated into Eltron's business systems and
operations. During this period the Company's financial position, results of
operations and cash flows may be adversely affected. There can be no assurance
that management will be able to manage these issues successfully.

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Management of Inventory

The Company's market requires that its products be shipped very quickly
after an order is received. Since purchased component and manufacturing lead
times are typically much longer than the short order fulfillment time for the
Company's products, the Company is required to keep adequate inventories of both
components and finished goods, and must accurately forecast demand for its many
products. Inaccurate forecasts of customer demand, restricted availability of
purchased components, supplier quality control problems, production equipment
problems, carrier strikes or damage to products during manufacture could result
in a buildup of excess components or finished goods on the one hand and an
inability to deliver product on a timely basis on the other hand, either of
which could have a material adverse effect on the Company's financial position,
results of operations and cash flows.

Competition

Competition in the bar code printer market is intense and is expected
by the Company to increase. The Company competes with a number of companies,
many of which have greater financial, technical and marketing resources than the
Company.

The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; strategic relationships with other suppliers; timing of new product
introductions by the Company and its competitors; general market and economic
conditions; and government actions throughout the world.

Risks Associated with International Operations

The Company's sales outside of the United States totaled approximately
$4.9 million, $5.9 million and $12 million in 1993, 1994 and 1995, respectively.
The Company expects that international sales will continue to represent a
significant portion of its revenues. International sales are subject to inherent
risks, including fluctuations in local economies, difficulties in staffing and
managing foreign operations, fluctuating exchange rates, increased difficulty of
inventory management, greater difficulty in accounts receivable collection,
costs and risks associated with localizing products for foreign countries,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
and burdens of complying with a variety of foreign laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales or on its
financial position, results of operations and cash flows. A substantial portion
of the value of the components used in the manufacture of the Company's products
is represented by components purchased from entities based in Japan. The
continued weakness of the U.S. dollar against the Japanese yen could result in
an increase in the cost of these components.

Development of Markets and Acceptance of Products; Growth of Bar Code Market

The Company's continued growth will depend on the Company's ability to
improve and market its existing products and to develop and successfully market
new products. However, the Company's near-term financial results will depend in
part upon increasing market acceptance of, and the Company's ability to expand
the market share for, its products. There can be no assurance that any new
products the Company may introduce will gain market acceptance.

The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions and price erosion.
Accordingly, the Company believes its future prospects depend on its ability not
only to enhance and successfully market its existing products, but also to
develop and introduce new products in a timely fashion that achieve market
acceptance. There can be no assurance that the Company will be able to identify,
design, develop, market or support such products successfully or that the
Company will be able to respond effectively to technological changes or product
announcements by competitors. Delays in new product introductions or product
enhancements, or the introduction of unsuccessful products, could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.

The Company's current products are primarily used in the bar code
market, which began in the 1960s and since then has experienced substantial
growth, particularly since 1989. To the extent the bar code market does not
continue to grow or experiences a significant economic downturn, the Company's
ability to generate revenues could be materially adversely affected. Moreover,
even if the size of the bar code market does increase, there can be no assurance
that the demand for the Company's products will also increase.

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Reliance on Certain Suppliers

The Company purchases numerous parts, supplies and other components
from various suppliers, which the Company assembles into its products. Although
there are at least two sources for many of such parts, supplies and components,
the Company currently relies on a single source of supply, Mitsubishi
Electronics, for the main microprocessor used to control its printers, and is
heavily dependent on Rohm Co., Ltd. and Kyocera Industrial Ceramics CP, its
primary supply sources for print heads, and NMB Technologies, Inc., its primary
supply source for motors. As such, the Company is vulnerable to limits in supply
and pricing and product changes by these suppliers. Although management believes
that such changes could be accommodated by the Company, they may necessitate
changes in the Company's product design or manufacturing methods, and the
Company could experience temporary delays or interruptions in supply while such
changes are incorporated. Further, because the order time for microprocessors,
print heads and motors averages four months, the Company could also experience
delays or interruptions in supply in the event the Company is required to find a
new supplier for any of these components. Any future disruptions in supply of
suitable parts and components from the Company's principal suppliers could have
a material adverse effect on the Company's results of operations.

No back-up tooling exists for many of the Company's molded plastic
components. Should a mold break or become unusable, repair or replacement could
take several months. The Company does not always maintain sufficient inventory
to allow it to fill customer orders without interruption during the time that
would be required to obtain an adequate supply of molded plastic products.
Accordingly, an extended interruption in the supply of any such components could
adversely affect the Company's financial position, results of operations and
cash flows.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

ELTRON INTERNATIONAL, INC.

June 17, 1996 By: /s/ DANIEL C. TOOMEY, JR.
-------------------------------
Daniel C. Toomey, Jr.
Chief Financial Officer