<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR
[ ] FOR THE TRANSITION PERIOD FROM _______________ TO _______________
The Registrant meets the conditions set forth in General Instructions I (1) (a)
and (b) of Form 10-K and is, therefore, filing this form with the reduced
disclosure format.
Commission file number 33-95470
MONARCH MARKING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0861226
(State of Incorporation) (I.R.S. Employer Identification No.)
170 MONARCH LANE
MIAMISBURG, OHIO 45342
(Address of principal executive offices) (Zip Code)
(937) 865-2123
(Registrant's telephone number, including area code)
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 voting stock held by nonaffiliates of the
registrant as of December 31, 1996 was $0.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. COMMON STOCK, $.01 PAR VALUE:
1,000 SHARES
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.......................................................................................1
Item 2. Properties.....................................................................................5
Item 3. Legal Proceedings..............................................................................5
Item 4. Submission of Matters to a Vote of Security Holders ...........................................6
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters......................6
Item 6. Selected Financial Data........................................................................6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...........6
Item 8. Financial Statements and Supplementary Data...................................................13
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..........14
PART III
Item 10. Directors and Executive Officers of the Registrant............................................14
Item 11. Executive Compensation........................................................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management................................14
Item 13. Certain Relationships and Related Transactions................................................15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................15
</TABLE>
<PAGE> 3
PART I
Monarch Marking Systems, Inc. (the "Company"), a Delaware corporation, is a
leading manufacturer and marketer of bar code and price marking equipment and
supplies in the United States and also sells such products, directly and through
distributors, in approximately 75 other countries. The Company's products
include handheld mechanical labeling guns (collectively, Identification and
Pricing Solutions IPS) which print and affix pressure-sensitive, adhesive-backed
price and other labels onto merchandise for retailers and electronic bar code
printers (Automated Identification Systems AIS), which are used in a wide range
of retail and industrial applications, including inventory management and
distribution. The Company also manufactures and markets the supplies used by its
IPS labelers and bar code printers and provides extensive aftermarket services.
The breadth of the Company's marking machines, supplies and services satisfies
most of its customers' marking needs. The Company was organized in 1995 and its
business dates back to 1890.
On June 29, 1995, the stock of the Company and the stock and assets of certain
of the Company's affiliates (collectively the "Business") were acquired (the
"Acquisition") from Pitney Bowes, Inc. ("Pitney Bowes") by Monarch Acquisition
Corp., a Company formed by Odyssey Partners, L.P. ("Odyssey") and Paxar
Corporation ("Paxar" and, together with Odyssey, the "Principals"). Odyssey is a
private investment firm and Paxar, a New York Stock Exchange listed company, is
a leading manufacturer of apparel and textile identification products and
systems, including in-plant labeling systems, printed and woven labels and bar
code printers and tags. Immediately following the Acquisition, Monarch
Acquisition Corp. merged with and into the Company.
The Company has 1000 shares of Common Stock all of which are owned by Monarch
Holdings, Inc. Of the 1000 shares of Monarch Holdings, Inc., Paxar owned 49%,
Odyssey Partners owned 49% and two executives owned 1% each. On December 20,
1996, Paxar Corporation reached an agreement with Odyssey Partners, L.P. for the
purchase of its 49% equity ownership in Monarch. Paxar Corporation also reached
an agreement with the two executives to purchase the 1% of Monarch Holdings,
Inc. held by each of them.
On March 3, 1997, the Acquisition concluded and Monarch Holdings, Inc. was
merged into Paxar Corporation. The two executives received shares of Paxar
Corporation common stock for their holdings. The Company is now a wholly-owned
direct subsidiary of Paxar Corporation. Further information on this acquisition
can be found with the filing of Paxar Corporation at SEC file number 0-5610, on
Form 8K, filed on March 18, 1997.
Description of the Business. Monarch Marking Systems, Inc. is a leading
manufacturer and marketer of bar code and price marking equipment and supplies.
The Company operates manufacturing plants in the U.S., Canada, Mexico,
Australia, England, Singapore and Hong Kong. The Company sells its products,
directly and through distributors, in the U.S. and in approximately 75 other
countries. The Company has direct sales operations in the U.S., Canada, Mexico,
Australia, England, Singapore, Hong Kong, France and Germany. The Company has a
growing dealer network with particular strength in Japan, India, Hungary, the
Middle East and Southeast Asia. The Company has also established distribution
networks in China, South Africa, Poland and Russia. Financial information on the
Company's significant international operations can be found in the footnotes to
the Consolidated Financial Statements included herein.
- 1 -
<PAGE> 4
Industry Segments. The Company operates in two specific segments of the marking
industry: (i) the Identification and Pricing Solutions (IPS) segment, and (ii)
the Automated Identification Systems (AIS) segment.
IDENTIFICATION AND PRICING SOLUTIONS SEGMENT - The IPS segment is a mature
market. The IPS segment experienced a significant decline, principally in the
late 1980s and early 1990s, due to implementation of point-of-sale scanning
systems which utilize bar code technology. However, IPS continues to be used by
most small retailers and by some larger retailers that continue to item price
products as part of their merchandising strategy. IPS price marking is also used
for promotional labeling and for selected industrial inventory applications.
AUTOMATED IDENTIFICATION SYSTEMS -The AIS printing segment is a newer sector of
the marking industry which has expanded rapidly with the development of
standardized bar code symbologies. Bar coding permits rapid, simple and accurate
identification of any number of product variables which are systematically
tracked or managed by a host computer. With bar code data collection systems,
users are able to collect data by scanning bar codes to input information into
computer databases in real time. Bar code systems are utilized in a variety of
applications including: point-of-sale, compliance labeling, inventory control,
order processing, tracking, shipping, receiving and accounting.
Principal Products and Services. The Company's products consist of IPS labelers,
bar code printers and the related supplies for these systems. The Company also
generates revenue by providing maintenance services on its products.
IPS LABELERS - The Company's labelers are tabletop or portable, handheld
mechanical labelers that 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. The Company
manufactures models ranging from simple labelers that print one line of
alphanumeric text with few characters to larger labelers that print three lines
of alphanumeric text with more than thirty characters. The Company also
manufacturers a broad range of supplies utilized with these labelers.
AIS PRINTERS - The Company's AIS family of bar code machines consists of
tabletop, handheld and portable thermal transfer and direct thermal printers.
Thermal transfer printers create an image by applying an electrically heated
printhead onto a ribbon that releases ink onto labeling stock. Thermal transfer
printers produce excellent image quality which can be used with a wide variety
of papers. 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, and who does not require specialty labeling stock such as plastics or
metal foils.
Customers. The Company has customers in both retail and industrial. Retail
customers include some of the major retailers in the U.S. and abroad. No
individual customer accounted for 10% or more of the Company's sales in 1996,
1995 or 1994.
Retail Customers. The Company historically has focused on the retail segment
with special emphasis on price marking, merchandise identification, tracking and
promotional applications. The retail marking segment is a mature market and the
Company's revenues in this area have declined as a percentage of total sales.
Retail sales accounted for approximately 63% of domestic revenues in 1996.
- 2 -
<PAGE> 5
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. Management believes that the Company is an industry
leader in bar code product sales (both machines and supplies) to the retail
market.
Industrial Customers. More and more retailers require their vendors to bar code
merchandise before they ship it to the stores. The Company is leveraging its
retail presence to become a leading bar code supplier for vendors responding to
retailers' compliance marking programs. The Company has embarked on compliance
marking solutions for several retail suppliers, such as suppliers to Wal-Mart,
J.C. Penney and Kmart.
The Company has invested in products and marketing programs to establish a
presence with industrial customers. In addition, the Company is broadening its
distribution channels with new product introductions and distribution agreements
with value-added resellers and systems integrators. Industrial sales accounted
for approximately 31% of domestic revenues in 1996.
International. In 1926, the Company began international operations in Canada and
has since expanded its international reach by adding plants in Mexico,
Australia, England, Singapore and Hong Kong. The Company now distributes its
products in approximately 75 countries around the world and international sales
accounted for approximately 32% of 1996 revenues. The Company has direct sales
operations in Canada, Mexico, Australia, England, Singapore, Hong Kong, France
and Germany and has a growing international dealer network with particular
strength in Japan, India, Hungary, the Middle East and Southeast Asia. The
Company has also established distribution networks in China, South Africa,
Poland and Russia. The Company's international sales and marketing focus has
been on retail customers.
Competition. The marking business is very competitive both in terms of price and
product features. The IPS price marking segment in the U.S. is a mature market
with four key competitors, including the Company, Esselte-Meto, Garvey and Avery
Dennison Corporation, each of which offers a full line of labeler and label
products. Management believes that the Company is a market leader in the U.S.
IPS price marking segment and that the Company's market share is significantly
higher than its next closet competitor.
In contrast to the IPS price marking segment, many companies are engaged in the
design, manufacture and marketing of bar code printing products, which is the
Company's AIS business segment. The Company considers its direct competition to
be the providers of direct thermal and thermal transfer printers and supplies.
Competition in the Company's target markets is based on a number of factors,
including reliability, quality and reputation of the manufacturer and its
products, hardware innovations and specifications, price, level of technical
support and applications support offered by the manufacturer and available
distribution channels. The Company's principal competitors in the AIS business
segment are Zebra, Eltron, Datamax, Comtech and DH Technology, Inc.
Research and Engineering. The Company incurs significant amounts of research and
development costs in its efforts to develop new products to serve the needs of
its customers. In each of the past three calendar years, the Company's research
and development costs have approximated $10 million, $7.6 million and $7.4
million, respectively. All of the Company's research and development costs are
expensed as incurred.
- 3 -
<PAGE> 6
Seasonality. The Company's business is also somewhat seasonal as a significant
portion of the Company's customers operate in the retail industry. These
customers purchase larger quantities of products during the fall in anticipation
of their holiday needs.
Industry Working Capital Practices. Consistent with industry practice, the
Company maintains a stock of inventory items for certain customers that require
customized marking supplies. These inventories were not a material component of
the Company's inventories at either December 31, 1996 or 1995.
Backlog. The Company's total backlog of orders at December 31, 1996 was
approximately $16.5 million, as compared with $19.5 million at December 31,
1995. Management estimates that more than forty percent (40%) of annual sales
are comprised of orders which 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 or four months.
Sources and Availability of Raw Materials. Management believes that the Company
has adequate sources and availability of raw materials.
Patents and Trademarks. The Company owns and controls numerous patents and
trademarks. However, other than the Monarch trademark, management believes that
the Company's business is not materially dependent upon any single patent or
trademark.
Environmental Matters. The Company has been advised of potential liability under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") at three off-site disposal sites. The Company is contesting its
liability at these sites where the Company believes its relationship with the
sites is non-existent or insignificant. The Company has prepared a remedial
action plan with regard to soil and groundwater contamination at its Pickering,
Ontario facility. This remedial action is being performed subsequent to
notification of the Ontario Ministry of Environment and Energy. The Company has
removed contaminated soils and installed groundwater monitoring wells.
Pitney Bowes, the Company's former owner, has agreed to indemnify the Company
for the costs of certain environmental claims or conditions arising from the
activities of the Company or Pitney Bowes prior to June 29, 1995 provided that
the Company notifies Pitney Bowes of any such liabilities prior to June 29,
2000. The Company has notified Pitney Bowes of the above described claims and
believes that it can seek reimbursement for any liabilities related to these
sites.
To the best of the Company's knowledge, there are no other existing or potential
environmental claims against the Company of a material nature.
Employees. The Company employed approximately 2,000 employees as of December 31,
1996. Approximately 700 of these employees are based in the Company's
international operations.
- 4 -
<PAGE> 7
ITEM 2. PROPERTIES.
PROPERTIES
The Company operates the following manufacturing plants:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET (1) OWNED/LEASED
- -------- --------------- ------------
<S> <C> <C>
Miamisburg, Ohio..................................... 392,000 Owned
Pickering, Ontario, Canada........................... 67,032 Owned
Harlow, United Kingdom............................... 60,668 Leased
Mexico City, Mexico.................................. 57,193 Owned
Sydney, Australia.................................... 17,248 Owned
Hong Kong............................................ 18,800 Leased
Singapore (2)........................................ 15,939 Leased
------
Total 628,880
- -----------
<FN>
(1) Includes office space.
(2) Joint venture 55% owned by the Company.
</TABLE>
The Company also maintains warehouse facilities and sales and service offices in
18 other domestic locations and in several international locations. Most of
these offices are occupied by the Company under short-term leases. The Company
does not believe that any lease is material to its business and that it could
relocate its facilities on comparable terms.
ITEM 3. LEGAL PROCEEDINGS
The Omnibus Purchase Agreement ("Purchase Agreement") between the Pitney Bowes
and Monarch Acquisition Corporation provided for a purchase price adjustment. In
September 1995, the Company's management advised Pitney Bowes that it was
entitled to a purchase price reduction pursuant to the terms of the Purchase
Agreement. Pitney Bowes disagreed with management's position and this matter was
referred to an arbitrator for settlement as provided for in the Purchase
Agreement. In September 1996, the arbitrator awarded the Company an $11.2
million reduction in its purchase price. In January 1997, the Supreme Court of
the State of New York for the Country of New York confirmed this award. On March
11, 1997 the total judgment in the amount of $12,777,653 (which includes accrued
interest) was entered by the court. Pitney Bowes filed a notice of appeal on
March 11, 1997. The appeal will be held and heard by the New York Supreme Court,
Appellate Division. The Company's management cannot predict the final timing or
outcome of this litigation and has not reflected any of this settlement in the
Company's records.
- 5 -
<PAGE> 8
The Company is also presently engaged in litigation with Comtec Information
Systems (Comtec). The Company has charged Comtec with infringement of a number
of Monarch's patents and trademarks, false advertising and unfair competition.
Comtec has asked for a declaratory judgment of invalidity, non-infringement and
unenforceability of these patents. Management cannot predict the outcome or
timing of this litigation. However, Company policy is to vigorously defend and
enforce its intellectual property positions.
The Company is involved in a number of other pending or threatened legal
proceedings in the ordinary course of business. In the opinion of management,
there are no other legal proceedings which will have a material adverse effect
on the financial position or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
As of December 31, 1996 and as of the date of this filing, there was no
established market for the Company's equity securities. All of the Company's
common stock is owned by Paxar Corporation.
ITEM 6. SELECTED FINANCIAL DATA.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As described in Part I, Item I, through a series of Acquisitions and a merger,
Paxar Corporation became the sole holder of 100% of the common shares of
Monarch. The purchase price of $130 million will be allocated to the assets and
liabilities acquired.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1996 Compared to the Pro Forma Twelve Months
Ended December 31, 1995.
Management believes that comparisons of the Company's results of operations for
the twelve months ended December 31, 1996 to the twelve months ended December
31, 1995 are not meaningful. As the ownership of the Company changed effective
June 30, 1995, the results of operations subsequent to this date include
transactions arising from the Acquisition and subsequent reorganization, such as
interest expense on borrowings, cost savings from the workforce reduction
program, amortization of goodwill, financing fees and other acquisition costs,
increased depreciation expense resulting from the write-up of assets to fair
value, among other items. Management believes that a more meaningful analysis is
a comparison of the results of operations for the twelve months ended December
31, 1996 to the pro forma results of operations for the twelve months ended
December 31, 1995. This discussion is presented below.
- 6 -
<PAGE> 9
<TABLE>
<CAPTION>
(Dollars in millions) UNAUDITED
ACTUAL TWELVE PRO FORMA TWELVE
MONTHS ENDED ENDED MONTHS
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net Sales $259.2 $254.5
Gross profit 112.0 102.6
Selling, general and administrative expenses 76.7 73.8
Research and development expenses 10.0 8.2
Non-recurring charges for adjustments to
operating items - 6.1
Operating income 25.3 14.5
Net income 8.4 1.1
</TABLE>
The 1995 pro forma results are unaudited and reflect purchase accounting
adjustments assuming the Acquisition had occurred on January 1, 1995. Pro forma
adjustments consist of cost savings associated with the workforce reduction
program, interest expense on borrowings utilized to finance the Acquisition,
amortization of goodwill, financing and other acquisition costs and incremental
depreciation expense on the additional value assigned to the property, plant and
equipment to record these assets at their fair value at the Acquisition date.
Revenue. Total revenue increased $4.7 million, or 1.8%, to $259.2 million for
the twelve months ended December 31, 1996 from $254.5 million for the pro forma
twelve months ended December 31, 1995. Domestic revenue, which represented 67.6%
of total revenue for the 1996 period, increased by $1.2 million or .7% to $175.2
million in 1996 from $174 million in pro forma 1995. The increase is due to both
the AIS and retail industry customized label operation ("Service Bureau")
product lines offset slightly by lower sales volume in the IPS product line.
International revenues increased by $3.5 million, or 4.3%, to $84.0 million in
1996 from $80.5 million in pro forma 1995. Year to date growth in international
revenues was primarily related to the Company's operations in the U.K., Hong
Kong and Australia. All foreign operations experienced growth with the exception
of Canada and France. The growth in the international operations was primarily
due to increased sales of AIS products, although Hong Kong's growth was solely
attributable to Service Bureau. The U.S. dollar strengthened against currencies,
primarily the Mexican Peso, which created a negative exchange impact of
approximately $2.1 million.
Gross Profit. Total gross profit increased by $9.4 million, or 9.2%, to $112.0
million for the twelve months ended December 31, 1996 from $102.6 million for
the pro forma twelve months ended December 31, 1995. Gross profit as a percent
of sales increased to 43.2% in 1996 from a pro forma 40.3% in 1995. The increase
in gross profit was attributable to the effects of higher product prices,
especially related to the Service Bureau operations, and lower raw materials
costs. Additionally, for the pro forma twelve months ended December 31, 1995,
margins were unfavorably impacted by a $4.5 million charge related to the
roll-out of a portion of the inventory write-up.
- 7 -
<PAGE> 10
Selling, General and Administrative ("SG&A"). SG&A expenses increased by $2.9
million, or 3.9%, to $76.7 million for the twelve months ended December 31, 1996
from $73.8 million for the pro forma twelve months ended December 31, 1995. The
increase is due to $1 million of management fees paid to related parties in 1996
which were not charged in 1995 as well as higher training, recruiting,
commission and relocation costs. SG&A as a percentage of revenue increased to
29.6% in 1996 from a pro forma 29% in 1995.
Research & Development ("R&D"). R&D expenses increased by $1.8 million, or
22.0%, to $10.0 million for the twelve months ended December 31, 1996 from $8.2
million for the pro forma twelve months ended December 31, 1995. The increased
R&D spending was the result of greater spending on new product development.
Non-Recurring Charges. Charges of $6.1 million in 1995 represented non-recurring
adjustments to operating reserves, including adjustments for excess and obsolete
inventories, warranty, sales returns and workers' compensation, among others.
See Note 1 in the Consolidated Financial Statements, as of and for the six
months ended June 29, 1995.
Operating Income. Operating income increased $10.8 million, or 74.5%, to $25.3
million for the twelve months ended December 31, 1996 from $14.5 million for the
pro forma twelve months ended December 31, 1995. The improved operating income
was largely driven by the elimination of the 1995 non-recurring charges and
better gross profit margins in 1996 for the reasons previously identified.
Net Income. Net income increased by $7.3 million to $8.4 million for the twelve
months ended December 31, 1996 from $1.1 million for the pro forma twelve months
ended December 31, 1995 due primarily to the elimination of the 1995
non-recurring charges and the improved gross profit margins in 1996. The
effective tax rate for the 1996 period decreased to 35.4% from a pro forma 37.9%
due to 1995 including certain non-deductible expenses which did not reoccur in
1996.
The pro forma results are unaudited and reflect purchase accounting adjustments
assuming the Acquisition occurred at the beginning of the period presented.
Six Months Ended December 31, 1995 Compared to the Pro Forma Six Months Ended
December 31, 1994
<TABLE>
<CAPTION>
UNAUDITED
($ in millions) ACTUAL SIX ACTUAL SIX PRO FORMA
MONTHS ENDED MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue $128.1 $130.3 $130.3
Gross profit 49.1 52.1 53.9
Selling general and
administrative expenses 36.8 41.9 38.1
Research and development
expenses 4.2 4.9 4.5
Operating income 8.1 5.3 11.3
Interest expense (income) 6.8 (0.5) 7.1
Other non-operating income (0.6) (1.0) (0.9)
Net income before accounting change 1.2 4.1 3.1
</TABLE>
- 8 -
<PAGE> 11
The pro forma results are unaudited and reflect purchase accounting adjustments
assuming the Acquisition occurred at the beginning of the period presented. Pro
forma adjustments consist of cost savings associated with the workforce
reduction program, implemented in August 1995, interest expense on borrowings
utilized to finance the Acquisition, amortization of goodwill, financing and
other acquisition costs and incremental depreciation expense on the additional
value assigned to the property, plant and equipment to record these assets at
their fair value at the Acquisition date. Certain reclassification have also
been made to the 1994 results to be consistent with the current year
presentation.
Revenue. Total revenue decreased by $2.2 million, or 1.7%, to $128.1 million for
the six months ended December 31, 1995 from $130.3 million for the pro forma six
months ended December 31, 1994. Domestic revenue which represented 67.9% of
total revenue for the 1995 period, decreased by $0.9 million or 1.0% to $87.0
million from $87.9 million in pro forma 1994. The domestic revenue decrease
resulted from a decline in sales of IPS products, reflecting generally weak
market conditions and continued pressure from supplies-only competitor's
manufacturers. Overall, AIS sales were essentially flat as continued growth in
bar code supplies was offset by a decline in shipments of bar code machines due
to temporary supplier delivery problems. International revenues decreased by
$1.3 million, or 3.0% to $41.1 million in 1995 as a $2.8 million revenue decline
in Mexico was partially offset by revenue growth in Europe. Overall, the U.S.
dollar strengthened against the Company's various foreign currencies. The
revenue decline in Mexico was due to the weak Mexican economy and devaluation of
the peso. The revenue increase in Europe was due to growth in bar code sales and
the currency translation effects of a weaker U.S. dollar in relation to European
currencies.
Gross Profit. Total gross profit decreased by $4.8 million, or 8.9%, to $49.1
million for the six months ended December 31, 1995 from $53.9 million for the
pro forma six months ended December 31, 1994. The gross profit margin decreased
to 38.3% in 1995 from 41.4% for pro forma 1994 due to a higher cost of
inventories sold during 1995 as the Company sold certain inventories which were
valued at fair market value in accordance with purchase accounting at the
Acquisition date. The charge to earnings, representing the excess of fair market
value over replacement cost, during the six months ended December 31, 1995 was
$4.5 million. This charge was primarily caused by a reduction of U.S. inventory
quantities at December 31, 1995 in comparison to the Acquisition date as
management began a program to reduce inventory quantities to improve liquidity.
The Company has also made significant changes to its Service Bureau during the
last half of 1995. Such changes include increasing service bureau selling prices
as well as implementing a stringent cost containment program. These changes
increased gross profit by approximately $1.0 million between periods. Offsetting
this improvement in margin, the Company experienced less cost savings from its
workforce reduction program in 1995 in comparison to the pro forma 1994 results.
The workforce reduction program began in August 1995 while the pro forma results
assume that this event occurred at the beginning of the reporting period.
Selling, General and Administrative ("SG&A"). SG&A expenses declined $1.3
million, or 3.4%, to $36.8 million for the six months ended December 31, 1995
from $38.1 million for the pro forma six months ended December 31, 1994. SG&A
expenses as a percentage of revenue decreased to 28.7% in 1995 compared to 29.2%
for the pro forma 1994 results. The decrease in SG&A expenses is due primarily
to the strengthening of the U.S. dollar in 1995 in comparison to certain foreign
currencies offset slightly by the timing of the realization of the cost savings
from the work force reduction program.
- 9 -
<PAGE> 12
Research & Development ("R&D"). R&D expenses decreased by $0.3 million, or 6.7%,
to $4.2 million for the six months ended December 31, 1995 from $4.5 million for
the pro forma six months ended December 31, 1994. Pro forma 1994 R&D expenses
were higher than 1995 due primarily to modifications to newly developed
products.
Operating Income. Operating income decreased $3.2 million, or 28.3%, to $8.1
million for the six months ended December 31, 1995 from $11.3 million for the
pro forma six months ended December 31, 1994. The decrease in 1995 operating
income was due to higher inventory costs during the six month period ended
December 31, 1995, as a result of purchase accounting described above, offset to
some extent by lower SG&A expenses during this period.
Other Nonoperating Income. Other nonoperating income decreased $0.3 million, or
33.3%, in 1995 to $0.6 million from $0.9 million for the pro forma six months
ended December 31, 1994. The 1994 pro forma nonoperating income includes a
settlement that the Company received on a patent infringement claim.
Net Income. Net income declined by $1.9 million to $1.2 million for the six
months ended December 31, 1995 from $3.1 million for the pro forma six months
ended December 31, 1994. The decrease in net income between periods is primarily
due to the higher costs of inventory sold discussed above which resulted from
purchase accounting. The effective tax rate for the period decreased to 38.0% in
1995 from 39.3% in 1994 due to a higher percentage of the Company's earnings
being recognized in countries with lower tax rates in 1995.
Six Months Ended June 29, 1995 Compared to Six Months Ended June 30, 1994
<TABLE>
<CAPTION>
ACTUAL SIX UNAUDITED SIX
($ in millions) MONTHS ENDED MONTHS ENDED
JUNE 29, 1995 JUNE 30, 1994
------------- -------------
<S> <C> <C>
Revenue $126.4 $116.6
Gross profit 48.4 47.6
Selling general and administrative expenses 39.9 38.6
Research and development expenses 3.4 3.6
Non-recurring charges 6.1 -
Operating income (loss) (1.1) 5.4
Net income (loss) before accounting change (0.2) 3.9
</TABLE>
Revenue. Total revenue increased by $9.8 million, or 8.4%, to $126.4 million for
the six months ended June 29, 1995 from $116.6 million for the six months ended
June 30, 1994 due to an increase in sales of supplies and machines. Domestic
revenue, which represented 68.9% of total revenue in 1995, increased by $8.8
million, or 11.3%, to $87.0 million in 1995 from $78.2 million in 1994.
International revenue, which represented 31.1% of total revenue in 1995,
increased by $1.0 million, or 2.5%, to $39.4 million in 1995 compared to $38.4
million in 1994.
Domestic revenue increased due to increased sales of supplies and machines.
Domestic supplies sales increased by $3.6 million, or 7.6%, to $51.7 million in
1995 from $48.0 million in 1994. In 1994, sales of conventional supplies were
adversely impacted by sales promotions conducted by the Company in the last
quarter of 1993, which caused customers to increase their supplies purchases in
that quarter and to reduce purchases of conventional supplies for the first six
months of 1994. Sales
- 10 -
<PAGE> 13
of bar code supplies increased as a result of the continued growth in the
Company's installed base of bar code printers. Domestic machines sales increased
by $5.9 million, or 26.1%, to $28.4 million in 1995 from $22.5 million in 1994
due to higher sales of four new portable and handheld bar code printers
introduced in late 1993 and early 1994, several large orders for table top
printers and higher sales of conventional labelers due to due to lower sales in
the first six months of 1994 resulting from the 1993 promotion discussed above.
The increase in international revenue was due to higher sales in the United
Kingdom and France, partially offset by a revenue decline in Mexico reflecting
the devaluation of the Mexican peso.
Gross Profit. Total gross profit increased by $0.8 million, or 1.7%, to $48.4
million for the six months ended June 29, 1995 from $47.6 million for the six
months ended June 30, 1994. Gross profit margin decreased to 38.3% in 1995 from
40.8% in 1994. Domestic gross profit increased by $1.0 million, or 3.0%, to
$33.7 million in 1995 from $32.7 million in 1994. Domestic gross profit margin
decreased to 38.7% in 1995 from 41.8% in 1994. The decrease in domestic gross
profit margin was attributable to: (i) a change in product mix toward bar code
products, which generate lower gross profit margins than conventional products;
(ii) a decline in bar code printer prices due to increased competitive pressures
in the industry; and (iii) an increase in paper prices. The Company has
implemented price increases for its supplies to substantially offset the paper
price increase.
International gross profit decreased by $0.2 million, or 1.6%, to $14.7 million
in 1995 from $14.9 million in 1994. International gross margin decreased to
37.3% in 1995 from 38.9% in 1994. The reduction in international gross profit
margin was due to increased costs resulting from the higher paper prices
discussed above.
Selling, General and Administrative ("SG&A"). SG&A expenses increased $1.3
million, or 3.4%, to $39.9 million for the six months ended June 29, 1995 from
$38.6 million for the six months ended June 30, 1994 due to translation of
European subsidiaries' expenses at a weaker dollar exchange rate and higher
sales commissions and ordinary salary and benefits increases. In 1994, SG&A
expenses included a $1.2 million charge relating to severance costs associated
with a reduction in the Company's domestic sales force. SG&A expenses as a
percentage of total revenue decreased to 31.6% in 1995 from 33.1% in 1994 due to
the increase in total revenue.
Nonrecurring charges for adjustments to operating items. In connection with the
preparation of the Closing Balance Sheet, the Company identified approximately
$6.1 million of nonrecurring adjustments to operating reserves for the six
months ended June 29, 1995, including adjustments for excess and obsolete
inventories, warranty, sales returns and workers compensation, among others. See
Note 1 to the Consolidated Financial Statements as of and for the six months
ended June 29, 1995.
Operating Income. Operating income decreased $6.5 million for the six months
ended June 29, 1995 to a loss of $1.1 million compared to a profit of $5.4
million for the six months ended June 30, 1994 due to the nonrecurring charges
discussed above. Excluding these nonrecurring charges, operating income would
have decreased $0.4 million, or 7.4%, to $5.0 million for the 1995 six month
period primarily as a result of the decrease in domestic and international gross
profit margin discussed above.
- 11 -
<PAGE> 14
Accounting Change. The Company began a new method of accounting for
post-employment benefits effective January 1, 1994 in accordance with Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits ("SFAS 112"). SFAS 112 requires post-employment benefits
to be recognized on the accrual basis of accounting. The effect of adopting SFAS
112 was a one-time non-cash, after-tax charge of $3.5 million (net of
approximately $2.2 million of income taxes) during 1994.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
($ in millions) AS OF OR FOR THE AS OF OR FOR THE AS OF OR FOR THE
TWELVE MONTHS SIX MONTHS ENDED AS OF OR FOR THE TWELVE MONTHS
ENDED DECEMBER DECEMBER SIX MONTHS ENDED ENDED DECEMBER
31, 1996 31, 1995 JUNE 29, 1995 31, 1994
-------------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Net cash provided $.3 $16.7 $1.2 $.8
Working capital 58.2 49.3 48.0 46.6
Long-term debt (2) 100.3 100.3 0.4 0.6
Capital expenditures 8.9 3.0 3.7 6.8
Debt-to-capital ratio (1) 72% 77% NA NA
- ----------------------
<FN>
(1) Debt-to-capital ratio represents long-term debt as a percentage of the sum
of long-term debt and stockholder's equity.
(2) Long-term debt as of December 31, 1996 and 1995 includes $100 million of
long term debt issued in connection with the Acquisition and $0.3 million
worth of certain capital leases.
</TABLE>
The Company's principal sources of liquidity are expected to be cash flow from
operations and borrowings under the revolving credit facility. It is anticipated
that the Company's principal uses of liquidity will be to provide working
capital, finance capital expenditures and meet debt service requirements. The
revolving credit facility permits borrowings in an amount not to exceed the
lesser of $25.0 million or the "Borrowing Base," as defined in the revolving
credit facility to include a stated percentage of certain of the Company's
inventories and accounts receivable.
Comparisons of the Company's cash flows for the twelve months ended December 31,
1996 and the six months ended December 31, 1995 to prior periods may not be
meaningful due to the Acquisition. At December 31, 1996, the Company had cash of
$18.2 million and working capital of $58.2 million. For the twelve months ended
December 31, 1996, the Company had net cash flows of $.3 million. Cash provided
by operating activities was $15.7 million which was offset by cash utilized for
capital expenditures of $8.9 million and repayment of the borrowings on the
revolving credit facility of $6.7 million. Capital expenditures were primarily
related to improvements in production machinery and computer equipment. Changes
in the components of working capital used $.8 million of cash.
For the six months ended December 31, 1995, the Company had net cash flows of
$16.7 million due primarily to $17.6 million of cash provided by operating
activities. Changes in the components of working capital provided $7.3 million
of cash. The main component of the cash provided by working capital was a $10.0
million inventory reduction. Approximately $5.5 million of the reduction was due
to management's efforts to reduce inventory quantities at standard costs while
the remaining $4.5 million reduction was due to the inclusion in cost of goods
sold of the excess of fair value of inventories over replacement costs (as a
result of purchase accounting) for inventories which were sold during the
period.
- 12 -
<PAGE> 15
For the six months ended June 29, 1995, the Company had net cash flows of $1.2
million. Cash provided by operating activities was $5.0 million which was offset
by cash utilized for capital expenditures of $3.7 million. Changes in the
components of working capital provided $8.7 million of cash. The major
contributor to the changes in working capital was a $6.8 million increase in
accrued liabilities.
In 1994, the Company had net cash flows of $0.8 million. The decrease in cash
flows is due to $11.4 million less cash flows from operating activities in 1994.
Changes in the components of working capital resulted in a $5.9 million
reduction of cash in 1994. The largest component of this decrease in cash
provided was due to changes in inventory levels ($6.0 million increase).
The Company's debt service requirements consist of payments of interest on the
$100 million of long term notes aggregating $12.5 million per year. The
Company's long term notes mature in 2003, at which time the Company will be
obligated either to repay or refinance all outstanding borrowings. In March
1997, the Company's revolving credit facility was terminated.
On March 13, 1997, the Company commenced a cash tender offer for 100% of
Monarch's 12.5% long-term notes due 2003. The redemption price has been set at
the greater of $1,167.50 for each $1,000 of the principal or the present value
of the notes determined on the basis of 75 basis points above the yield on the
6.75% U.S. Treasury Note due June 30, 1999. The Company's offer will expire at
12:00 a.m. midnight EST on April 10, 1997 unless extended. Management believes
this redemption will permit the Company's debt to be financed at a lower cost.
The Company is highly leveraged. Debt service requirements associated with the
borrowings under the revolving credit facility and the long term notes have
increased the Company's liquidity requirements. Based on current operations and
anticipated improvements in operating performance, the Company believes that
cash flow from operations, together with available borrowings under the
revolving credit facility, will be sufficient to carry on its business and to
meet its debt service and other liquidity requirements. If the Company is unable
to generate sufficient cash flow from operations in the future to meet the
principal and interest obligations on its indebtedness and to meet its other
commitments, the Company will be required to adopt one or more alternatives,
such as refinancing or restructuring its indebtedness, selling material assets
or operations, or seeking to raise additional material amounts of long-term debt
or equity capital, although the Company has no present intention of doing so in
the near future. The Company's ability to incur additional indebtedness is
restricted by the indenture governing the notes (the "Indenture") and the
revolving credit facility. In addition, there can be no assurance that any of
these actions could be effected on satisfactory terms, on terms that would
enable the Company to continue to satisfy its capital requirements or on terms
that would be permitted by the provisions of existing or future debt agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company are included as a separate
section of this annual report on Form 10-K.
- 13 -
<PAGE> 16
The Consolidated Financial Statements of the Company as of and for the year
ended December 31, 1996, six months ended December 31, 1995 and the six months
ended June 29, 1995, included elsewhere herein, have been audited by Arthur
Andersen, LLP, whose report thereon is included elsewhere herein. The
Consolidated Financial Statements of the Company as of and for the twelve months
ended December 31, 1994 have been audited by Price Waterhouse, LLP ("Price
Waterhouse"), whose unqualified report thereon was included in the Company's
Registration Statement on Form S-4 (File No. 33-95470), as filed with the
Securities and Exchange Commission (the "Commission") on August 7, 1995, and in
amendments 1-4 thereto. The Consolidated Financial Statements of the Company as
of December 31, 1994 and for the year ended December 31, 1994 were prepared in
connection with the sale of the Company by Pitney Bowes. In its report relating
to such financial statements, Price Waterhouse indicated that the financial
statements were prepared to present the net assets of the Company to be sold and
the related operations and cash flows and were not intended to be a complete
presentation of the Company's assets, operations and cash flows. See Note 1 of
Notes to Consolidated Financial Statements as of and for each the year ended
December 31, 1994. Price Waterhouse also indicated in such report that the
Company had adopted a new accounting standard for post-employment benefits in
1994. See Note 9 of Notes to Consolidated Financial Statements as of and for the
year ended December 31, 1994. Price Waterhouse has declined the Company's
request for permission to use its audit report in this Annual Report on Form
10-K and, as a result, the Consolidated Financial Statements of the Company as
of and for the year ended December 31, 1994, included herein, do not include
Price Waterhouse's audit report.
The Company and Pitney Bowes are engaged in a dispute relating to a purchase
price adjustment in connection with the Acquisition. The Company believes that
the determination by Price Waterhouse not to grant permission to the Company for
the use of its audit report is based upon the unresolved differences that are
the subject of the dispute.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's past two fiscal years, no independent accountant who was
engaged as the principal accountant to audit the Company's financial statements
has resigned or was dismissed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
ITEM 11. EXECUTIVE COMPENSATION.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
- 14 -
<PAGE> 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not required as the registrant meets the conditions set forth in General
Instructions I (1) (a) and (b) of Form 10-K for a reduced disclosure format.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K.
(a) 1. Financial Statements
Consolidated Financial Statements as of and for the Year Ended December 31, 1996
and Six Months Ended December 31, 1995
- - Report of Independent Public Accountants
- - Consolidated Balance Sheets as of December 31, 1996 and 1995
- - Consolidated Statements of Operations for the Twelve Months Ended December
31, 1996 and the Six Months Ended December 31, 1995
- - Consolidated Statements of Stockholder's Equity for the Twelve Months Ended
December 31, 1996 and the Six Months Ended December 31, 1995
- - Consolidated Statements of Cash Flows for the Twelve Months Ended December
31, 1996 and the Six Months Ended December 31, 1995
- - Notes to the Consolidated Financial Statements
Consolidated Financial Statements as of and for the Six Months Ended June 29,
1995
- - Report of Independent Public Accountants
- - Consolidated Balance Sheet as of June 29, 1995
- - Consolidated Statement of Operations for the Six Months Ended June 29, 1995
- - Consolidated Statement of Cash Flows for the Six Months Ended June 29, 1995
- - Notes to the Consolidated Financial Statements
Consolidated Financial Statements as of and for the Year Ended December 31, 1994
(Unaudited)
- - Consolidated Balance Sheet as of December 31, 1994
- - Consolidated Statement of Operations for the Year Ended December 31, 1994
- - Consolidated Statement of Cash Flows for the Year Ended December 31, 1994
- - Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the Year Ended December 31,
1994, for the Six Months Ended June 29, 1995 and December 31, 1995 and the for
the Year Ended December 31, 1996
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of
this report.
(b) Reports on Form 8-K
None
- 15 -
<PAGE> 18
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.
MONARCH MARKING SYSTEMS, INC. MONARCH MARKING SYSTEMS, INC.
By /s/ JOHN W. PAXTON By /s/ JEFFREY S. SINK
---------------------------------- --------------------------------
John W. Paxton Jeffrey S. Sink
President and Chief Executive Officer Vice President, Finance
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ JOHN W. PAXTON President and Chief
- ----------------------------- Executive Officer (Principal
John W. Paxton Executive Officer)
Director March 26, 1997
/s/ JEFFREY S. SINK Vice President, Finance
- ----------------------------- (Principal Financial and Accounting March 26, 1997
Jeffrey S. Sink Officer)
/s/ ARTHUR HERSHAFT Director March 26, 1997
- -----------------------------
Arthur Hershaft
/s/ VICTOR HERSHAFT Director March 26, 1997
- -----------------------------
Victor Hershaft
</TABLE>
- 16 -
<PAGE> 19
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 1996 AND 1995
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 20
Report of Independent Public Accountants
----------------------------------------
To the Stockholders of Monarch Marking Systems, Inc.:
We have audited the accompanying consolidated balance sheets of MONARCH
MARKING SYSTEMS, INC. (a Delaware Corporation) AND SUBSIDIARIES as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the twelve months ended December 31,
1996 and for the six months ended December 31, 1995. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Monarch Marking
Systems, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the twelve months ended December
31, 1996 and for the six months ended December 31, 1995, 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 accompanying
index is presented for purposes 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 our 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.
Arthur Andersen LLP
Dayton, Ohio,
January 31, 1997 (except with respect to the subsequent event discussed in
Note 15, as to which the date is March 3, 1997)
<PAGE> 21
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
AS OF DECEMBER 31, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 2, 5, and 11) $ 18,170 $ 17,889
Accounts receivable, net of allowance for doubtful
accounts of $3,631 and $3,945 at December 31, 1996
and 1995, respectively (Notes 3, 4, 5, and 11) 41,532 40,164
Inventories (Notes 2 and 5)-
Raw materials and work in process 20,198 22,984
Supplies and service parts 6,244 6,425
Finished goods 14,323 13,990
Prepaid income taxes (Notes 2 and 7) 736 2,737
Prepayments and other current assets (Note 2) 2,798 3,015
--------- ---------
Total current assets 104,001 107,204
--------- ---------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Land and land improvements 3,380 3,353
Buildings and building improvements 18,282 18,157
Machinery and equipment 63,935 61,007
Furniture and fixtures 6,015 5,517
Leasehold improvements 2,825 2,477
Rental equipment 729 917
Assets held under capital leases 713 348
Construction in progress 934 1,696
--------- ---------
96,813 93,472
Accumulated depreciation (53,356) (49,817)
--------- ---------
Property, plant and equipment, net 43,457 43,655
--------- ---------
GOODWILL (Note 2) 27,891 28,153
FINANCING AND ACQUISITION FEES (Note 2) 7,856 7,938
OTHER INTANGIBLE ASSETS (Note 2) 3,600 3,866
OTHER NON-CURRENT ASSETS 3,549 3,030
--------- ---------
Total assets $ 190,354 $ 193,846
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE> 22
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
AS OF DECEMBER 31, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings (Notes 5 and 11) $ - $ 6,734
Current portion of capital lease obligations (Note 10) 129 117
Accounts payable and overdrafts (Note 11) 9,871 10,712
Advance billings (Note 2) 5,876 6,070
Deferred income tax liabilities (Notes 2 and 7) 1,554 2,550
Other current liabilities -
Accrued interest 6,250 6,319
Accrued salaries, wages, vacation pay, commissions and bonus
9,526 8,976
Income and other taxes (Note 2) 4,377 4,070
Reorganization 1,110 4,600
Other 7,151 7,730
-------- --------
Total current liabilities 45,844 57,878
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Notes 5, 10 and 11) 100,258 100,352
POSTEMPLOYMENT BENEFITS LIABILITY (Note 2) 5,075 5,662
-------- --------
Total liabilities 151,177 163,892
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 6):
Common stock, $.01 par value; 1,000 shares authorized,
1,000 shares issued and outstanding - -
Paid-in capital 30,606 30,303
Cumulative translation adjustment (Note 2) (1,070) (1,558)
Retained earnings 9,641 1,209
-------- --------
Total stockholders' equity 39,177 29,954
-------- --------
Total liabilities and stockholders' equity $190,354 $193,846
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE> 23
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED DECEMBER 31, 1995
(In Thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
NET SALES (Note 2, 3, and 4) $ 259,245 $ 128,123
COST OF GOODS SOLD 147,273 79,008
---------- -----------
Gross Profit 111,972 49,115
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 76,700 36,793
RESEARCH AND DEVELOPMENT EXPENSES 9,967 4,171
---------- -----------
Operating income 25,305 8,151
INTEREST EXPENSE, NET 13,164 6,830
OTHER NONOPERATING INCOME, NET (904) (628)
---------- -----------
Income before provision for income taxes 13,045 1,949
PROVISION FOR INCOME TAXES (Notes 2 and 7) 4,613 740
---------- -----------
Net income (Note 6) $ 8,432 $ 1,209
---------- -----------
Weighted average number of shares (Notes 2 and 6) 1,048 1,000
---------- -----------
Earnings per share (Notes 2 and 6) $ 8,046 $ 1,209
========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE> 24
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED DECEMBER 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED
STOCK CAPITAL ADJUSTMENT EARNINGS TOTAL
------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY at
June 30, 1995 $ - $ 30,303 $ - $ - $ 30,303
Net income - - - 1,209 1,209
Translation adjustment - - (1,558) - (1,558)
------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY at
December 31, 1995 - 30,303 (1,558) 1,209 29,954
Net income - - - 8,432 8,432
Issuance of common stock - 303 - - 303
Translation adjustment - - 488 - 488
------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY at
December 31, 1996 $ - $ 30,606 $ (1,070) $ 9,641 $ 39,177
======= ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE> 25
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED DECEMBER 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,432 $ 1,209
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 12,121 5,449
Deferred income tax provision (982) 2,828
Other, net (3,014) 879
Changes in components of working capital-
Increase in receivables (1,368) (2,131)
Decrease (increase) in prepaid income taxes 2,001 (2,737)
Decrease in inventories 2,634 10,025
Decrease in prepayments and other current assets 217 15
Decrease in accounts payable and overdrafts (841) (1,963)
(Decrease) increase in advance billings (194) 806
(Decrease) increase in other current liabilities (3,281) 3,246
--------- ----------
Net cash provided by operating activities 15,725 17,626
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (8,868) (2,969)
--------- ----------
Net cash used in investing activities (8,868) (2,969)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed by stockholders 303 3,493
Repayments on revolving credit facility (6,734) (1,277)
Repayments of capital lease obligations (82) (16)
--------- ----------
Net cash (used in) provided by financing activities (6,513) 2,200
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (63) (168)
--------- ----------
Net increase in cash and cash equivalents 281 16,689
CASH AND CASH EQUIVALENTS, beginning of period 17,889 1,200
--------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 18,170 $ 17,889
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 13,051 $ 310
Cash paid for income taxes $ 3,214 $ 925
========= ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE> 26
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Dollars in Thousands, except as otherwise indicated)
(1) The Company-
-----------
Monarch Marking Systems, Inc. (the "Company") operates in the United
States, Australia, Canada, France, Germany, Hong Kong, Mexico, Singapore
and the United Kingdom. The Company is a manufacturer and marketer of
marking equipment and supplies. The Company also sells, directly and
through distributors, marking equipment and supplies in 75 other
countries around the world. The Company manufactures, markets and
distributes (i) tabletop label dispensers and handheld, mechanical
labeling guns which print pressure-sensitive price and other
identification labels and affix them onto merchandise for retailers and
(ii) electronic bar code printers which are used in a wide range of
retail and industrial applications, including inventory management and
distribution systems. The Company also manufactures and markets supplies
used in both its conventional labelers and bar code printers and provides
extensive service to its installed base of machines. The Company's
products are utilized in both retail and industrial applications.
On June 29, 1995, the Company was acquired by and merged with Monarch
Acquisition Corp. (the "Acquisition"). Prior to this date, the Company
was operated as a wholly owned subsidiary of Pitney Bowes Inc. ("Pitney
Bowes"). Certain assets and liabilities not integral to the business,
including certain real property, intercompany accounts with Pitney Bowes
and its subsidiaries, certain cash accounts, investments in affiliates,
intercompany loans, certain income taxes payable and the base material
business, were retained by Pitney Bowes upon sale of the Company.
The aggregate purchase price for the Company, including related fees and
expense, was approximately $138,300. The purchase price and such fees and
expenses were funded with (i) an initial borrowing of approximately
$8,000 under a revolving credit agreement, (ii) the net proceeds from the
offering of senior notes of $100,000, (iii) $30,000 of common equity
contributed in equal portions by Odyssey Partners, L.P. and Paxar
Corporation through Monarch Holdings, Inc. ("Holdings") and (iv) $300 of
common equity contributed by the Company's Chairman of the Board through
Holdings.
The Omnibus Purchase Agreement between the Company and Pitney Bowes
relating to the Acquisition (the "Omnibus Purchase Agreement") provided
for an adjustment to the purchase price under certain circumstances. The
Company advised Pitney Bowes that it believed it was entitled to a
purchase price adjustment in its favor, and Pitney Bowes similarly
advised the Company that it believed it was entitled to a purchase price
adjustment in its favor. This dispute was referred to an arbitrator for
settlement; the arbitrator concluded that a decrease in the purchase
price of $11.2 million was warranted. Pitney Bowes has commenced legal
action to overturn this award. In January 1997, the court confirmed this
award. Pitney Bowes has commenced legal action to appeal this decision.
The Company intends to vigorously pursue its right to this purchase price
adjustment.
<PAGE> 27
- 2 -
The following table summarizes the allocation of the purchase price to
the assets and liabilities acquired. Due to the litigation described
above, the Company has not yet revised the allocation of the purchase
price to reflect the arbitration settlement.
<TABLE>
<S> <C>
Allocation of purchase price:
Current assets $101,231
Property, plant and equipment, net 41,960
Goodwill, financing fees & other intangible assets 43,322
Other non-current assets 2,315
Severance and other organization costs (9,181)
Liabilities assumed (41,347)
--------
Total purchase price $138,300
========
</TABLE>
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of Monarch Marking Systems, Inc. and its
wholly owned subsidiaries ("the Company"). All significant
intercompany transactions have been eliminated.
(b) USE OF ESTIMATES--In preparing the consolidated financial
statements in conformity with generally accepted accounting
principles, management has made, where necessary, estimates and
judgments based on currently available information that affect
certain of the amounts reflected in the consolidated financial
statements. Actual results could differ from those estimates.
Reserves which require the use of estimates consist of the
following: sales returns and allowances, inventory obsolescence,
self-funded workers' compensation and medical claims and warranty
obligations, among others.
(c) CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash
on hand, demand deposits and highly liquid investments with an
initial maturity of three months or less.
(d) INVENTORIES--Inventories are stated at the lower of cost or
market. Cost is determined on the last-in, first-out (LIFO) basis
for U.S. inventories (76% of total inventories) and the first-in,
first-out (FIFO) method for non-U.S. inventories. Cost also
includes approximately $11,825 as of December 31, 1996 related to
the "fair value write-up" of inventories at the Acquisition Date.
At December 31, 1996, the Company had a LIFO reserve of $476. In
addition, there are reserves in the amount of approximately $3,622
and $7,500 to reduce inventory carrying costs to net realizable
value at December 31, 1996 and 1995, respectively.
(e) FIXED ASSETS AND DEPRECIATION--Property, plant and equipment are
stated at historical cost. For assets acquired at the Acquisition
Date, historical cost represents the allocated purchase accounting
values at such date. The Company's property, plant and equipment
are depreciated using the straight-line method over the useful
lives of the various assets. Estimated useful lives of the
Company's property, plant and equipment are as follows:
Land improvements 10 years
Buildings 5-25 years
Building improvements 10 years
Machinery and equipment 3-10 years
Tooling 3-10 years
Data processing equipment 3-5 years
Furniture and fixtures 3-10 years
<PAGE> 28
- 3 -
Major improvements which add to productive capacity or extend the
life of an asset are capitalized while repairs and maintenance are
charged to expense as incurred. Properties leased under capital
leases are amortized on a straight-line basis over the primary
lease terms.
(f) RENTAL ARRANGEMENTS AND ADVANCE BILLINGS--The Company rents
equipment to its customers under short-term rental agreements,
generally for periods of three months to three years. Charges for
equipment rental and maintenance contracts are billed in advance;
the related revenue is included in advance billings and included
in the Company's operating results as earned.
(g) REVENUE RECOGNITION AND PRODUCT WARRANTY--Sales revenue is
recognized when a product is shipped. Service revenue is
recognized over the life of service agreements. Anticipated
warranty costs are provided for when the associated product is
shipped.
(h) ADVERTISING COSTS--The Company expenses the costs of advertising
as incurred except for direct-response advertising, which is
capitalized and amortized over its expected period of future
benefits. Direct-response advertising consists of catalogs which
are published semi-annually. At December 31, 1996 and 1995, the
Company reported $153 and $236, respectively, of advertising costs
as capitalized assets. These capitalized costs are amortized over
the six month period following the catalog's publication.
Advertising costs expensed were $2,062 for the twelve months ended
December 31, 1996 and $800 for the six months ended December 31,
1995.
(i) FOREIGN EXCHANGE CONTRACTS--The Company periodically enters into
contracts to buy certain foreign currencies to hedge against
losses on U.S. dollar denominated inventory purchases by its
foreign subsidiaries. These transactions are firmly committed
transactions. Accordingly, the gains and losses associated with
these instruments are deferred until the underlying transactions
are recognized. At December 31, 1996, the Company had forward
contracts outstanding to sell French francs and pounds sterling
for an equivalent U.S. dollar value of $900 and $1,887,
respectively. These forward contracts mature through December
1997.
(j) INCOME TAXES--The Acquisition has been treated as a purchase for
the purposes in most countries in which the Company operates,
except for France and the United Kingdom.
The deferred tax provision is determined under the liability
method. Deferred tax assets and liabilities are recognized based
on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. The Company's
deferred income taxes result principally from expenses not
currently recognized for tax purposes, additional inventory
deductions for taxes purposes not recognized for book purposes and
the excess of tax over book depreciation. Deferred tax assets and
liabilities are classified as current or noncurrent based on the
classification of the related asset or liability for financial
reporting purposes.
It has not been necessary to provide for income taxes on
approximately $6,000 of cumulative undistributed earnings of
subsidiaries outside the U.S. These earnings will be either
indefinitely reinvested or remitted substantially free of
additional tax. Determination of the liability that would result
in the event all of these earnings were remitted to the U.S. is
not practicable. It is estimated, however, that withholding taxes
on such remittances would approximate $300 as of December 31,
1996.
<PAGE> 29
- 4 -
(k) FOREIGN CURRENCY TRANSLATION--The Company complies with Statement
of Financial Accounting Standards No. 52, "Foreign Currency
Translation" for translating foreign currency denominated
financial statements in reporting its consolidated financial
position. The functional currency of the Company's non-U.S.
operations are their respective local currencies. Accordingly,
assets and liabilities of operations outside the U.S. are
translated at currency rates in effect at the end of the period,
and revenues and expenses are translated at average currency rates
during the period. Net cumulative translation adjustments are
recorded as a separate component of stockholders' equity in the
accompanying consolidated balance sheets.
(l) GOODWILL, FINANCING AND ACQUISITION FEES, AND OTHER INTANGIBLE
ASSETS--The Company amortizes goodwill on a straight-line basis
over forty years, financing fees on a straight-line basis over the
life of the related debt (three to eight years) and other
intangible assets (primarily customer lists) on a straight-line
basis over approximately seven years. Accumulated amortization of
goodwill and other capitalized costs (including intangible assets)
was $3,975 and $1,175 at December 31, 1996 and 1995, respectively.
(m) POSTEMPLOYMENT BENEFITS--The Company accrues for postemployment
benefits as these benefits are earned by employees. Postemployment
benefits consist of Company provided medical benefits to disabled
employees and life insurance, disability and death-related
benefits to former or inactive employees, their beneficiaries and
covered dependents. In 1996, a 11% increase in cost of health care
benefits was assumed. This rate was assumed to decrease to 5% for
2002 and remain at that level thereafter. The weighted average
discount rate used was 7% at December 31, 1996.
(n) EARNINGS PER SHARE--Earnings per share are based upon the weighted
average number of common shares outstanding during the year and
include the dilutive effect of stock options. Primary and fully
diluted earnings per share are the same.
(o) SFAS 121 - "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF"--In January 1996, the
Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 ("SFAS 121"). SFAS 121 establishes
standards which require the Company to compare the undiscounted
future cash flows from the use and ultimate disposition of its
long-lived tangible and intangible assets to their carrying
amounts in order to determine whether an impairment exists. The
adoption of SFAS 121 did not have a material impact on the
Company's consolidated financial statements.
(p) SFAS 123 - "ACCOUNTING FOR STOCK-BASED COMPENSATION"--The Company
has elected to account for the cost of its stock options utilizing
the intrinsic value method prescribed in APB Opinion No. 25 as
allowed by Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for stock
options as all stock options were granted at prices which reflect
fair market value, as defined in the Plan, at the grant date. The
pro forma disclosures required by SFAS 123 are presented in Note
6.
(q) NONCASH TRANSACTIONS--On December 8, 1995, the Company redeemed
$100 million of privately-held borrowings and issued $100 million
of publicly-traded debt pursuant it to Form S-4 registration
statement previously filed with the Securities and Exchange
Commission.
<PAGE> 30
- 5 -
(3) Concentrations of Credit Risk-
-----------------------------
A significant portion of the Company's sales are to customers in the
retail industry. The Company generally extends credit to these customers
and, therefore, collection of these receivables is affected by conditions
or occurrences within the retail industry. No single customer accounted
for greater than 10% of the Company's receivables or net sales as of or
during the periods ended December 31, 1996 or 1995.
(4) Related Party Transactions-
--------------------------
In connection with the Acquisition, the Company and Pitney Bowes entered
into certain agreements which require, among other things, for Pitney
Bowes to provide certain administrative services to the Company for a
period of time following the Acquisition, the continued purchase by
Pitney Bowes of bar code printers from the Company, and the purchase by
the Company of ink and ink rollers from Pitney Bowes. The purchase
commitments have a minimum term of five years and automatically renew for
twelve month periods unless six months notice is given by either party.
Sales to Pitney Bowes amounted to $8,378 during the twelve months ended
December 31, 1996 and $3,728 during the six months ended December 31,
1995. In addition, the Company had accounts receivable from Pitney Bowes
of $2,476 and $2,750 as of December 31, 1996 and 1995, respectively.
Purchases from Pitney Bowes were $787 for the twelve months ended
December 31, 1996 and $948 for the six months ended December 31, 1995.
Accounts payable to Pitney Bowes were not material at either December 31,
1996 or 1995.
At December 31, 1996, the Company held notes receivable totaling $550
from the President of the Company. These notes bear interest at rates of
5.9% and 7.5% and will mature on December 31, 1997 and June 14, 1998. At
December 31, 1996, the Company also held a note receivable of $200 from
another member of management. This note bears interest at a rate of 7.05%
and will mature in equal installments on February 15, 1997 and February
15, 1998. These notes related primarily to relocating their residences to
Ohio. These notes have been classified in accounts receivable and other
non-current assets in the accompanying Consolidated Balance Sheets.
(5) Debt-
----
The Company and its Canadian subsidiary maintain a Revolving Credit
Facility. The Revolving Credit Facility permits borrowings in an amount
not to exceed the lesser of $25,000 or the "Borrowing Base", as defined
in the Revolving Credit Facility to include a stated percentage of
certain of the Company's inventories and accounts receivable. Borrowings
under the revolving credit agreement bear interest at a rate equal to
Bankers Trust Company's U.S. or Canadian prime rate plus 1.5%. In 1996,
the maximum and average borrowings were $6,051 and $4,495, respectively.
The weighted average interest rate on these borrowings 9.37% in 1996 and
8.0% in 1995. The revolving credit agreement expires on June 30, 1998. At
December 31, 1996, the Company had no borrowings outstanding under this
agreement.
The Company's long-term debt consists of $100,000 of Unsecured Senior
Notes which bear interest at a fixed rate of 12.5%. Repayment of these
Senior Notes is due in 2003. The notes may be prepaid by the Company at
106.25% of their principal amount.
The Company's Unsecured Senior Notes and Revolving Credit Facility
include provisions which limit total consolidated indebtedness, require
the maintenance of minimum amounts of working capital and net worth and
of certain financial ratios, restrict payment of cash dividends by the
Company, restrict investments, restrict cash on hand when there are
borrowings outstanding under the revolving credit agreement and require
approval for amendments to material contracts.
<PAGE> 31
- 6 -
(6) Stock Based Compensation Plans-
------------------------------
During 1996, the Company adopted a stock option plan (Option Plan) which
retroactively granted stock options to certain executives in 1995. The
Company accounts for the Option Plan under APB Opinion No. 25, and no
compensation cost has been recognized as all stock options have an
exercise price which equal or exceeded fair market value at their date of
grant. Fair market value of the company's stock is defined in the Option
Plan as 6.5 times earnings before interest, taxes, depreciation and
amortization (EBITDA) less net borrowings.
Had compensation cost for the Option Plan been determined consistent with
FASB Statement No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Twelve Months
(In thousands, except per Ended Six Months Ended
share data) December 31, 1996 December 31, 1995
----------------------------- ----------------- -----------------
<S> <C> <C> <C>
Net income As reported $8,432 $1,209
Pro forma 8,135 1,147
Earnings Per Share As reported 8,042 1,209
Pro forma 7,762 1,147
</TABLE>
The Company has reserved 87.5 shares of common stock for issuance under
the Option Plan. At December 31, 1996, options have been granted which
are convertible into 80 shares of common stock. The options vest over a
five year period and expire after ten years.
Following is a summary of the Company's stock options at December 31,
1996 and 1995, and the changes during the periods then ended:
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
(Options in thousands) OPTIONS PRICE OPTIONS PRICE
- ---------------------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 400 $ 3.29 0 $ -
Granted 475 12.06 400 3.29
Exercised 0 - 0 -
Forfeited/Expired 0 - 0 -
Outstanding at end of year 875 8.05 400 3.29
Exercisable at end of year 239 4.29 100 3.29
======== =========== ======== ===========
Weighted average fair value of
options granted $ 2.18
==========
</TABLE>
At December 31, 1996, 425 of the outstanding options have an exercise
price of $3.29 with a remaining contractual life of approximately 9
years. Approximately 208 of these options are exercisable. The remaining
450 options have exercise prices between $9.00 and $16.00, with a
weighted average exercise price of $12.55 and a weighted average
remaining contractual life of 9.7 years. Only 31 of these options are
exercisable; their weighted average exercise price is $10.97.
<PAGE> 32
- 7 -
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
<S> <C>
Dividend yield 0%
Risk-free interest rates 6.07 - 7.11%
Expected lives 10 years
</TABLE>
Effective December 20, 1996, Paxar Corporation, which already owned 49%
of the Company, announced that it had reached an agreement to purchase
all of the Company's common stock owned by the other shareholders. Under
the terms of this agreement, the Company's outstanding stock option will
be converted to Paxar stock options.
(7) Taxes on Income-
---------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Currently payable:
U.S. federal $ 3,474 $ (2,192)
U.S. state and local 130 (545)
Outside the U.S. 1,991 649
---------------- ----------------
Total current 5,595 (2,088)
---------------- ----------------
Deferred:
U.S. federal (70) 2,342
U.S. state and local (4) 348
Outside the U.S. (908) 138
---------------- ----------------
Total deferred (982) 2,828
---------------- ----------------
Total provision for income taxes $ 4,613 $ 740
================ ================
</TABLE>
Net deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
---------------- ---------------
<S> <C> <C>
Current deferred taxes:
Inventory step-up $(4,780) $ (5,068)
Severance (2,797) (1,849)
Vacation and other employee benefits 1,739 1,623
Sales returns & allowances and warranty 1,119 1,138
Inventory cost capitalization 377 457
Foreign 1,487 739
Other 1,301 410
---------------- ---------------
Net current deferred income tax liabilities (1,554) (2,550)
---------------- ---------------
Non-current deferred taxes:
Depreciation (305) 312
Post employment benefits other than pensions 9 106
AMT credit carryforwards 700 -
---------------- ---------------
Net non-current deferred tax assets 404 418
---------------- ---------------
Net deferred income tax liabilities $(1,150) $ (2,132)
================ ===============
</TABLE>
<PAGE> 33
- 8 -
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate for the twelve months ended December 31, 1996 and the
six months ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Provision for income taxes at federal statutory rate 35.0% 35.0%
Increase (decrease) in taxes resulting from-
State and local income taxes, net of federal benefit 1.8 5.0
Other (1.4) (2.0)
------------- -----------
Effective income tax rate 35.4% 38.0%
============= ===========
</TABLE>
(8) Retirement Plans-
----------------
The Company provides retirement benefits to eligible employees in the
U.S. through a defined contribution plan. The Company matches
contributions at a rate ranging from 1.0% to 4.5% percent of such
contributions depending on the level of the participant's contribution
and age. The Company's matching contributions under such plan for the
twelve months ended December 31, 1996 and the six months ended December
31, 1995 were $1,713 and $585, respectively.
The Company also has several defined benefit pension plans covering its
employees in Canada, Mexico and Germany. Benefits are primarily based on
employees' compensation and years of service. Company contributions are
determined based on the funding requirements of each country's
governmental laws and regulations.
Total defined benefit plans expense was $2 for the twelve months ended
December 31, 1996 and $166 for the six months ended December 31, 1995.
Net pension expense for the Company's non-U.S. defined benefit plans
included the following components:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Service cost - benefits earned during period $ 158 $ 106
Interest cost on projected benefit obligations 270 200
Actual return on assets (887) (155)
Net amortization 461 15
----------------- -----------------
Net periodic defined benefit pension expense $ 2 $ 166
================= =================
</TABLE>
The funded status for the Company's non-U.S. defined benefit plans
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
Actuarial present value of:
Vested benefits $ 4,495 $ 2,097
============= ==============
Accumulated benefit obligations $ 4,495 $ 2,104
============= ==============
Projected benefit obligations $ (4,960) $ (3,364)
Plan assets at fair value, primarily stocks and bonds
5,478 4,791
Unrecognized net loss (gain) 213 (102)
Unrecognized net asset - (265)
------------- --------------
Net pension asset $ 731 $ 1,060
============= ==============
</TABLE>
- 9 -
<PAGE> 34
The actuarial assumptions used for these defined benefit plans were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
Discount rate 8.25% 9%
Rate of increase in future compensation levels 6-7% 6-7%
Expected long-term rate of return on plan assets
9-11% 9%
</TABLE>
(9) Commitments and Contingencies-
-----------------------------
The Company is a defendant in a number of lawsuits, none of which will,
in the opinion of management, have a material adverse effect on the
Company's financial position or results of operations.
Pursuant to the Omnibus Purchase Agreement, Pitney Bowes has agreed to
indemnify the Company against certain scheduled environmental
liabilities, including liabilities relating to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA
sites) discussed below, and claims arising from environmental conditions
described in written environmental assessments and audits conducted since
January 1, 1985, without any time limitations. Pitney Bowes has also
agreed to indemnify the Company against additional liabilities arising
from environmental claims or conditions resulting from the activities of
or existing on properties of the Company or Pitney Bowes prior to the
closing date of the Acquisition, provided that the Company must notify
Pitney Bowes of any such liabilities within five years of such closing
date.
The Company's operations are subject to federal, state, local and
international environmental laws and regulations that impose limitations
on the discharge of, and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal
of, certain materials, substances and wastes. To the best of the
Company's knowledge, the Company's operations are in material compliance
with the terms of all applicable environmental laws and regulations as
currently interpreted. The Company is currently investigating soil and
ground water contamination at its Pickering, Ontario facility. The
investigation is being performed subsequent to notification of, and will
be conducted in accordance with the requirements of the Ontario Ministry
of Environment and Energy. The Company has removed contaminated soils and
installed ground water monitoring wells at the facility and is preparing
for potential additional investigation or remedial actions. The Company
believes that, in connection with the Acquisition, it is indemnified by
Pitney Bowes for the costs of the investigation and any necessary
remediation at the Pickering, Ontario facility. Because discussions with
the Ministry of Environment and Energy concerning future remedial options
have not yet commenced, the Company cannot at this time estimate the
potential costs of cleanup, but based on currently available information
and taking into consideration the indemnity from Pitney Bowes, the
Company believes that its liability with respect to the cleanup is
unlikely to have a material adverse effect on the Company's financial
position, results of operations or its consolidated financial statements
taken as a whole.
The Company has been advised of potential liability under "CERCLA" at six
off-site disposal sites. The Company has entered into settlement
agreements at three of such sites. Although the Company is contesting its
liability at the three remaining sites, the Company is unable to
determine its ultimate liability at this time. Based on currently
available information and taking into consideration the indemnity from
Pitney Bowes, the Company does not believe its aggregate CERCLA
liabilities for these sites will have a material effect on the Company's
financial position, results of operations or its consolidated financial
statements taken as a whole.
<PAGE> 35
- 10 -
To the best of the Company's knowledge, there are no other existing or
potential environmental claims against the Company that are likely to
have a material adverse effect on the Company's financial position,
results of operations or its consolidated financial statements taken as a
whole.
(10) Leases-
------
The Company leases certain factory and office facilities under lease
agreements extending from three to ten years. In addition to factory and
office facilities leased, the Company leases computer and information
processing equipment under lease agreements extending from three to five
years.
Future minimum lease payments for capital and operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, CAPITAL LEASES LEASES
------------------------- -------------- ---------
<S> <C> <C>
1997 $129 $3,724
1998 129 2,268
1999 129 1,427
2000 28 497
2001 - 232
Later years - 246
----------- -----------
Total minimum lease payments 415 $8,394
======
Less amount representing interest (38)
-----------
Present value of minimum lease payments $377
===========
</TABLE>
Rental expense under operating leases was $5,577 for the twelve months
ended December 31 1996 and $3,296 for the six months ended December 31,
1995.
(11) Fair Value of Financial Instruments-
-----------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalent $18,170 $18,170 $ 17,889 $ 17,889
Accounts receivable 41,532 41,532 40,164 40,164
Accounts payable 9,871 9,871 10,712 10,712
Short-term borrowings - - 6,734 6,734
Long-term debt 100,000 109,559 100,000 108,642
Forward exchange contracts - (160) N/A N/A
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(a) CASH AND CASH EQUIVALENTS--The carrying value amount of cash and
cash equivalents approximates its fair value.
(b) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying value
amounts approximate fair value based on the short-term maturities
of these instruments.
<PAGE> 36
- 11 -
(c) SHORT-TERM BORROWINGS--The carrying value amounts of these
borrowings approximates fair value due to the short-term
maturities of these instruments. The Company's short term
borrowings were repaid prior to December 31, 1996.
(d) LONG-TERM DEBT--The fair values of the Company's debt are
estimated by discounting the future cash flows based on the
Company's estimate of current borrowing rates for debt with
similar maturities.
(e) FORWARD EXCHANGE CONTRACTS--The fair values of the Company's
foreign exchange contracts represent the amount the Company would
pay to terminate the specific agreements. The fair values were
derived based on quoted market prices for similar instruments,
adjusted for maturity differences.
(12) Quarterly Financial Data (Unaudited)-
------------------------------------
The Company is subject to the Securities and Exchange Commission's rules
on quarterly reporting. Summarized quarterly financial data for the
applicable reporting periods in 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 QUARTER
- ---------------------------------- --------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $62,295 $65,056 $65,259 $66,635 $259,245
Gross profit 26,218 28,061 28,519 29,174 111,972
Net income 1,126 2,071 2,410 2,825 8,432
Earnings per share 1,126 2,071 2,410 2,435 8,046
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER
- ---------------------------------- --------------------------------------------------------------------
THIRD FOURTH TOTAL
-------- ------- --------
<S> <C> <C> <C>
Net sales $ 65,531 $62,592 $128,123
Gross profit 23,551 25,564 49,115
Net income 400 809 1,209
Earnings per share 400 809 1,209
</TABLE>
(13) Pro forma Disclosures-
---------------------
As discussed in Note 1, the ownership of the Company changed effective
June 29, 1995. The following table reflects the 1995 unaudited pro forma
consolidated operating results of the Company assuming that the
acquisition had occurred on January 1, 1995.
<TABLE>
<CAPTION>
<S> <C>
Net sales $254,533
Net income 1,100
Income per share 1,100
</TABLE>
Pro forma adjustments consist principally of additional interest expense
on the revolving line of credit and the unsecured senior notes, cost
savings from the Company's reduction of headcount and changes to benefit
plans pursuant to the restructuring plan, incremental depreciation on
property, plant and equipment due to the write-up to fair value of these
assets, incremental management fees and incremental amortization of
goodwill, financing fees and other intangibles recorded in accordance
with the purchase method of accounting.
<PAGE> 37
- 12 -
These pro forma results have been prepared for comparative purposes only
and do not purport to represent the results of operations which would
have resulted had the Acquisition occurred on January 1, 1995.
(14) Non U.S. Operations-
-------------------
The Company has a significant amount of sales to countries outside the
U.S. with a significant concentration in the European market. Total net
sales and operating income in countries outside the United States and in
Europe were as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- --------------------
<S> <C> <C>
Foreign -
Net sales $84,022 $41,100
Operating income 8,111 4,341
Europe -
Net sales 49,541 24,125
Operating income 5,287 1,921
</TABLE>
Identifiable assets of the Company's international operations were
approximately $48,798 and $54,841 at December 31, 1996 and 1995,
respectively. Identifiable assets of the Company's European operations
were approximately $26,553 and $35,008 at December 31, 1996 and 1995,
respectively.
(15) Change in Control-
-----------------
On March 3, 1997, Paxar Corporation, formerly a 49% shareholder of
Monarch Marking Systems, acquired 100% of the Company's remaining shares
owned by other shareholders. The purchase price consisted of $100 million
in cash and warrants valued at $30 million. Effective with this
transaction, Monarch Marking Systems, Inc. became a wholly-owned
subsidiary of Paxar Corporation.
<PAGE> 38
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF
JUNE 29, 1995
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 39
Report of Independent Public Accountants
----------------------------------------
To the Stockholder of Monarch Marking Systems, Inc.:
We have audited the accompanying consolidated balance sheet of MONARCH
MARKING SYSTEMS, INC. AND SUBSIDIARIES (a Delaware Corporation) as of June 29,
1995, and the related consolidated statements of operations and cash flows for
the six months ended June 29, 1995. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Monarch Marking
Systems, Inc. and Subsidiaries as of June 29, 1995, and the results of their
operations and their cash flows for the six months ended June 29, 1995 in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index is presented for purposes 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 our 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.
Arthur Andersen LLP
Cincinnati, Ohio,
September 26, 1995
<PAGE> 40
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (NOTE 1)
AS OF JUNE 29, 1995
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,200
Accounts receivable, net of allowance for doubtful accounts
and returns of $3,609 39,227
Inventories (Notes 2 and 3) 36,853
Future income tax benefits (Notes 2 and 7) 6,095
Prepaid expenses 2,388
---------
Total current assets 85,763
PROPERTY, PLANT AND EQUIPMENT, NET (Notes 2 and 4) 34,003
DEFERRED CHARGES AND OTHER ASSETS 1,200
---------
Total assets $ 120,966
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of capital lease obligations (Note 11) $ 121
Accounts payable - trade 9,092
Accrued liabilities (Note 5) 23,277
Advance income (Note 2) 5,280
---------
Total current liabilities 37,770
LONG-TERM POSTEMPLOYMENT BENEFIT LIABILITY (Note 9) 5,700
DEFERRED INCOME TAXES (Notes 2 and 7) 738
CAPITAL LEASE OBLIGATIONS (Note 11) 364
---------
Total liabilities 44,572
---------
STOCKHOLDER'S EQUITY:
Cumulative translation adjustment (Note 2) (4,500)
Retained earnings 80,894
---------
Total stockholder's equity 76,394
---------
Total liabilities and stockholder's equity $ 120,966
=========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated balance sheet.
<PAGE> 41
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (NOTE 1)
FOR THE SIX MONTHS ENDED JUNE 29, 1995
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
NET SALES (Note 2) $126,410
COST OF GOODS SOLD 78,048
-----------
Gross profit 48,362
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 39,903
RESEARCH AND DEVELOPMENT EXPENSES 3,416
NONRECURRING CHARGES FOR ADJUSTMENTS
TO OPERATING ITEMS
6,123
-----------
Operating loss (1,080)
INTEREST INCOME, NET 713
-----------
Loss before benefit from income taxes (367)
BENEFIT FROM INCOME TAXES (133)
-----------
Net loss $ (234)
===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
<PAGE> 42
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTE 1)
FOR THE SIX MONTHS ENDED JUNE 29, 1995
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (234)
Nonrecurring charges for adjustments to operating items 6,123
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 3,930
Deferred income tax provision (2,150)
Other, net (178)
Changes in components of working capital-
Increase in accounts receivable (149)
Decrease in inventories 2,557
Decrease in prepaid expenses and other current assets 25
Decrease in accounts payable (631)
Increase in advance income 80
Increase in accrued liabilities 6,843
Net impact of eliminating assets not sold/liabilities not acquired (11,249)
--------
Net cash provided by operating activities 4,967
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (3,657)
--------
Net cash used in investing activities (3,657)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (110)
--------
Net cash used in financing activities (110)
--------
Net increase in cash 1,200
CASH AND CASH EQUIVALENTS, beginning of year -
--------
CASH AND CASH EQUIVALENTS, end of period $ 1,200
========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 38
========
Cash paid for income taxes $ 4,280
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
<PAGE> 43
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands or as otherwise indicated)
(1) The Company-
-----------
Monarch Marking Systems, Inc. and subsidiaries (the "Company") is a
wholly owned subsidiary of Monarch Holdings, Inc. ("Holdings"). The
Company operates in the United States, Australia, Canada, France,
Germany, Hong Kong, Mexico, Singapore and the United Kingdom. The Company
is a manufacturer and marketer of marking equipment and supplies. The
Company also sells, directly and through distributors, marking equipment
and supplies in 75 countries around the world. The Company manufactures,
markets and distributes (i) tabletop label dispensers and handheld,
mechanical labeling guns which print pressure-sensitive price and other
identification labels and affix them onto merchandise for retailers and
(ii) electronic bar code printers which are used in a wide range of
retail and industrial applications, including inventory management and
distribution systems. The Company also manufactures and markets supplies
used in both its conventional labelers and bar code printers and provides
extensive service to its installed base of machines. As of June 29, 1995,
the Company's receivables from customers in the retail industry were
approximately $22,500.
On June 29, 1995, the Company was acquired by and merged with Monarch
Acquisition Corp. (a former wholly owned subsidiary of Holdings) (the
"Acquisition"). Prior to this date, the Company was operated as a wholly
owned subsidiary of Pitney Bowes Inc. ("Pitney Bowes"). The aggregate
purchase price for the Company, including related fees and expense, was
approximately $138,300.
Certain assets and liabilities not integral to the Company, including
certain real property, intercompany accounts with Pitney Bowes and its
subsidiaries, certain cash accounts, investments in affiliates,
intercompany loans, certain income taxes payable and the base material
business, were retained by Pitney Bowes upon sale of the Company and,
therefore, have been excluded from these financial statements. In
addition, Pitney Bowes retained the Company's U.S. pension plan liability
($12,800) and the post-retirement benefit liabilities for the Company's
employees in the United States and Canada ($28,300). Pitney Bowes has
retained the associated future tax benefits related to these liabilities
($16,700).
The Consolidated Statement of Operations ("Operations Statement") for the
six months ended June 29, 1995 includes all the revenues and expenses
associated with Monarch's business during this period, except for
intercompany interest income related to investments in Pitney Bowes
subsidiaries. Additionally, the accompanying Operations Statement
includes pension expense associated with benefit plans which have been
retained by Pitney Bowes. Finally, this Statement includes $6,123 of
nonrecurring adjustments to operating reserves, including adjustments for
excess and obsolete inventory, warranty, sales returns and workers'
compensation, among others.
The Omnibus Purchase and Sale Agreement between the Company and Pitney
Bowes relating to the Acquisition (the "Omnibus Purchase Agreement")
provides for an adjustment to the purchase price under certain
circumstances. The Company has advised Pitney Bowes that it believes it
is entitled to a purchase price adjustment in its favor, and Pitney Bowes
similarly advised the Company that it believes it is entitled to a
purchase price adjustment in its favor. Pursuant to the Omnibus Purchase
Agreement, the Company and Pitney Bowes had 10 days to resolve these
differences. Because such
- 2 -
<PAGE> 44
differences were not resolved during such ten-day period, the Omnibus
Purchase Agreement requires that the dispute be referred to a mutually
satisfactory accounting firm, which will resolve such differences. At
this time, the Company can make no determination as to the amount of the
adjustment, if any, that will be made to the purchase price.
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) Consolidation--The accompanying consolidated financial statements
include the accounts of Monarch Marking Systems, Inc. and its
wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
(b) Estimates--The preparation of the consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(c) Cash and Cash Equivalents--Cash and cash equivalents include cash
on hand, demand deposits and highly liquid investments with an
initial maturity of three months or less.
(d) Inventories Valuation--Inventories are valued at the lower of cost
or market. Cost is determined on the last-in, first-out (LIFO)
basis for U.S. and Mexican inventories and the first-in, first-out
(FIFO) method for most non-U.S. inventories. Approximately 79% of
the Company's inventories are valued at LIFO.
(e) Fixed Assets and Depreciation--Property, plant and equipment are
stated at cost and depreciated using the straight-line method over
the useful lives of the various assets. Estimated useful lives of
the Company's property, plant and equipment are as follows:
Land improvements 10 years
Buildings 5-50 years
Building improvements 10 years
Machinery and equipment 3-10 years
Tooling 3-10 years
Data processing equipment 3-5 years
Furniture and fixtures 3-10 years
Major improvements which add to productive capacity or extend the
life of an asset are capitalized, while repairs and maintenance
are charged to expense as incurred. Properties leased under
capital leases are amortized on a straight-line basis over the
primary lease terms.
(f) RENTAL ARRANGEMENTS AND ADVANCE INCOME--The Company rents
equipment to its customers under short-term rental agreements,
generally for periods of three months to three years. Charges for
equipment rental and maintenance contracts are billed in advance;
the related revenue is included in advance billings and taken into
income as earned.
<PAGE> 45
- 3 -
(g) REVENUE--Sales revenue is primarily recognized when a product is
shipped.
(h) INCOME TAXES--The Company's U.S. taxable income is included in the
consolidated federal and certain state income tax returns of
Pitney Bowes. The Company computes its provision for taxes on a
stand alone basis.
The deferred tax provision is determined under the liability
method. Deferred tax assets and liabilities are recognized based
on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. Deferred tax assets
and liabilities are classified as current or noncurrent based on
the classification of the related asset or liability for financial
reporting. The provision for income taxes is the sum of the amount
of income taxes paid or payable to Pitney Bowes for the period as
determined by applying the provisions of enacted tax laws to the
taxable income for that period and the net change during the
period in the Company's deferred tax assets and liabilities.
It has not been necessary to provide for income taxes on $45,665
of cumulative undistributed earnings of subsidiaries outside the
U.S. These earnings will be either indefinitely reinvested or
remitted substantially free of additional tax. Determination of
the liability that would result in the event all of these earnings
were remitted to the U.S. is not practicable. It is estimated,
however, that withholding taxes on such remittances would
approximate $2,300.
Deferred income taxes result principally from expenses not
currently recognized for tax purposes and the excess of tax over
book depreciation.
(i) FOREIGN CURRENCY TRANSLATION--The Company complies with Statement
of Financial Accounting Standards No. 52, "Foreign Currency
Translation," for translating foreign currency denominated
financial statements in reporting its consolidated financial
position. Assets and liabilities of operations outside the U.S.
are translated at currency rates in effect at the end of the
period, and revenues and expenses are translated at average rates
during the period. This Statement provides that the net cumulative
translation adjustment (a loss of approximately $4,500 as of June
29, 1995) be recorded as a separate component of stockholder's
equity.
(3) Inventories-
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 29,
1995
------------
<S> <C>
Raw materials and work in process $ 19,519
Supplies and service parts 5,062
Finished products 12,272
---------
Total inventories $ 36,853
=========
</TABLE>
The Company's LIFO reserve as of June 29, 1995 was $8,900. In addition,
reserves in the amount of $2,100 were recorded to reduce LIFO inventories
to their net realizable value as of June 29, 1995.
<PAGE> 46
- 4 -
(4) Property, Plant and Equipment, net-
----------------------------------
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 29,
1995
-------
<S> <C>
Land and improvements $ 871
Buildings and improvements 16,812
Machinery and equipment 57,858
Furniture and fixtures 7,654
Leasehold improvements 2,730
Rental equipment and related inventories 955
Assets held under capital lease 671
Construction in progress 1,154
-------
88,705
Accumulated depreciation (54,702)
-------
Property, plant and equipment, net $34,003
=======
</TABLE>
(5) Accrued Liabilities-
-------------------
Accrued liabilities include the following:
<TABLE>
<CAPTION>
JUNE 29,
1995
-------
<S> <C>
Vacation pay $ 4,467
Accrued salaries, commissions and bonus 3,840
Taxes 4,257
Warranty 1,697
Other 9,016
-------
Total accrued liabilities $23,277
=======
</TABLE>
(6) Related Party Transactions-
--------------------------
In connection with the Acquisition, the Company and Pitney Bowes entered
into certain agreements which require, among other things, for Pitney
Bowes to provide certain administrative services to the Company for a
period of time following the Acquisition, the continued purchase by
Pitney Bowes of bar code printers from the Company, and the purchase by
the Company of ink and ink rollers from Pitney Bowes. The purchase
commitments have a minimum term of five years and automatically renew for
twelve month periods unless six months notice is given by either party.
Prior to June 29, 1995, Monarch was operated principally as a wholly
owned subsidiary of Pitney Bowes. The Company supplied certain inventory
and component parts to Pitney Bowes and its subsidiaries. The Company
arranged financing for certain of its products through either Pitney
Bowes Credit Corporation (PBCC) in the U.S., or leasing subsidiaries in
Canada and the U.K., all of which are wholly owned subsidiaries of Pitney
Bowes. Sales to these financing entities were approximately $100 for the
six months ended June 29, 1995.
<PAGE> 47
- 5 -
Prior to June 29, 1995, the Company earned interest income from its
investments in and loans to subsidiaries of Pitney Bowes. The return
yielded from these Pitney Bowes subsidiaries has been excluded from the
Consolidated Statement of Operations for the six months ended June 29,
1995 as the related investments and loans were retained by Pitney Bowes.
Interest income and expense related to the cash position of the Company
during these periods has been included in the Consolidated Statement of
Operations.
(7) Taxes on Income-
---------------
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 29, 1995
---------------
<S> <C>
Current:
U.S. federal $ 1,357
U.S. state and local 194
Outside the U.S. 456
-------
Total current 2,007
-------
Deferred:
U.S. federal (1,586)
U.S. state and local (272)
Outside the U.S. (292)
-------
Total deferred (2,150)
-------
Total $ (133)
=======
</TABLE>
The current and non-current deferred tax assets and liabilities consist
of the following:
<TABLE>
<CAPTION>
JUNE 29, 1995
---------------
<S> <C>
Current deferred taxes:
Vacation pay $ 1,678
Inventory and equipment capitalization 1,892
Receivables allowances 1,444
Other 1,081
-------
Net deferred tax assets 6,095
-------
Non-current deferred taxes:
Depreciation (2,961)
Postemployment benefits other than pensions 2,223
-------
Net deferred tax liabilities (738)
-------
Net deferred tax assets $ 5,357
=======
</TABLE>
<PAGE> 48
- 6 -
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate for the six months ended June 29, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
U.S. federal statutory rate (35.0)%
State and local income taxes, net of federal tax benefit (5.2)
Meals and entertainment 2.3
Other 1.7
-----
Effective income tax rate (36.2)%
=====
</TABLE>
(8) Retirement Plans-
----------------
The Company has several defined benefit and defined contribution pension
plans covering substantially all employees world-wide. Benefits are
primarily based on employee's compensation and years of service with the
Company. Company contributions are determined based on the funding
requirements of U.S. federal and other governmental laws and regulations.
The Company's defined benefit plan in the U.S. as well as the
supplemental retirement plan in Canada were retained by Pitney Bowes. No
new defined benefit plans have been adopted in these countries. The
defined benefit plans in Canada, Mexico, Germany and the United Kingdom
were retained by the Company.
Total pension expense was approximately $1,762 for the six months ended
June 29, 1995. The pension plan from the United States was part of the
Pitney Bowes pension plan and the expense was allocated by Pitney Bowes;
thus, no breakout of expense is available for the period ended June 29,
1995. The Company's U.K., Mexico and Germany defined benefit plans did
not obtain SFAS No. 87 reports; thus, no breakout of the expense and
funded status is available as of June 29, 1995.
The funded status at June 29, 1995 for the Canadian defined benefit plan
was:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of:
Vested benefits $ 1,899
========
Accumulated benefit obligation $ 1,906
========
Projected benefit obligation $ 2,832
--------
Plan assets at fair value, primarily stocks and bonds, adjusted
by:
4,200
Unrecognized net gain (570)
Unrecognized transition asset (396)
Unamortized prior service cost 243
3,477
--------
Net pension asset $ 645
========
</TABLE>
The actuarial assumptions used for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Discount rate 9.0%
Rate of increase in future compensation levels 6.0%
Expected long-term rate of return on plan assets 9.0%
</TABLE>
The Company provides retirement benefits to eligible employees in the
U.S. through a defined contribution plan. The Company matches
contributions of up to four percent of a participant's compensation at a
rate of 50% percent of such contributions. The Company contributed
approximately $492 to this plan for the six months ended June 29, 1995.
- 7 -
<PAGE> 49
(9) Nonpension Postretirement and Postemployment Benefits-
-----------------------------------------------------
The Company's obligation for nonpension postretirement benefits has been
assumed by Pitney Bowes. Therefore, this liability has been excluded from
the Consolidated Balance Sheet. The Company currently does not offer any
nonpension postretirement benefits.
The Company accounts for postemployment benefits under the accrual basis
of accounting as required by Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits".
Postemployment benefits include Company provided medical benefits to
disabled employees and Company provided life insurance as well as other
disability and death-related benefits to former or inactive employees,
their beneficiaries and covered dependents. In 1995, a 12% increase in
the cost of health care benefits was assumed. This rate was assumed to
decrease to 5% for 2002 and remain at that level thereafter. The weighted
average discount rate used was 6.5% at June 29, 1995.
(10) Commitments and Contingencies-
-----------------------------
The Company is a defendant in a number of lawsuits, none of which will,
in the opinion of management, have a material adverse effect on the
Company's financial position or results of operations.
In connection with the Acquisition, Pitney Bowes has agreed to indemnify
the Company against certain scheduled environmental liabilities,
including liabilities relating to the CERCLA sites discussed below, and
claims arising from environmental conditions described in written
environmental assessments and audits conducted since January 1, 1985,
without any time limitations. Pitney Bowes has also agreed to indemnify
the Company against additional liabilities arising from environmental
claims or conditions resulting from the activities of or existing on
properties of the Company or Pitney Bowes prior to the closing date of
the Acquisition, provided that the Company must notify Pitney Bowes of
any such liabilities within five years of such closing date.
The Company's operations are subject to federal, state, local and
international environmental laws and regulations that impose limitations
on the discharge of, and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal
of certain materials, substances and wastes. To the best of the Company's
knowledge, the Company's operations are in material compliance with the
terms of all applicable environmental laws and regulations as currently
interpreted. The Company is currently investigating soil and ground water
contamination at its Pickering, Ontario facility. The investigation is
being performed subsequent to notification of and will be conducted in
accordance with the requirements of the Ontario Ministry of Environment
and Energy. The Company has removed contaminated soils and installed
ground water monitoring wells at the facility and is preparing for
potential additional investigation or remedial actions. The Company
believes that, in connection with the Acquisition, it is indemnified by
Pitney Bowes for the costs of the investigation and any necessary
remediation at the Pickering, Ontario facility. Because discussions with
the Ministry of Environment and Energy concerning future remedial options
have not yet commenced, the Company cannot at this time estimate the
potential costs of cleanup but, based on currently available information
and taking into consideration the indemnity from Pitney Bowes, the
Company believes that its liability with respect to the cleanup is
unlikely to have a material adverse effect on the Company's financial
position, results of operations or its consolidated financial statements
taken as a whole.
To the best of the Company's knowledge, there are no other existing or
potential environmental claims against the Company that are likely to
have a material adverse effect on the Company's financial position,
results of operations or its consolidated financial statements taken as a
whole.
<PAGE> 50
- 8 -
The Company has been advised of potential liability under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA") at six off-site disposal sites. The Company has entered
into settlement agreements at three of such sites. Although the Company
is contesting its liability at the three remaining sites, the Company is
unable to determine its ultimate liability at this time. Based on
currently available information and taking into consideration the
indemnity from Pitney Bowes, the Company does not believe its aggregate
CERCLA liabilities for these sites will have a material effect on the
Company's financial position, results of operations or its consolidated
financial statements taken as a whole.
(11) Leases-
------
The Company leases certain factory and office facilities under lease
agreements extending from three to ten years. In addition to factory and
office facilities leased, the Company leases computer and information
processing equipment under lease agreements extending from three to five
years.
Future minimum lease payments for capital and operating leases as of June
29, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
------------------------- -------------- ----------------
<S> <C> <C>
1995 $ 75 $ 3,100
1996 123 3,800
1997 123 2,400
1998 123 1,000
1999 122 600
Later years - 500
------- -------
Total minimum lease payments 566 $11,400
=======
Less amount representing interest (81)
-------
Present value of minimum lease payments $485
=======
</TABLE>
Rental expense under operating leases was $3,654 for the six months ended
June 29, 1995.
(12) Fair Value of Financial Instruments-
-----------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(a) CASH AND CASH EQUIVALENTS-- The carrying amount of cash and cash
equivalents in the Consolidated Balance Sheet approximates fair
value.
(b) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying amounts
approximate fair value because of the short maturities of these
instruments.
<PAGE> 51
- 9 -
(13) Non-U.S. Operations-
-------------------
The Company has a significant amount of sales to countries outside the
U.S. with a significant concentration in the European market. Total net
sales and operating income in countries outside the United States for the
six months ended June 29, 1995 aggregated approximately $39,370 and $453,
respectively. Identifiable assets of the international operations were
approximately $37,515 at June 29, 1995. Net sales and operating income in
Europe during the six months ended June 29, 1995 were approximately
$22,648 and $1,212, respectively. Identifiable assets of the European
operations were approximately $20,330 at June 29, 1995.
(14) Pro forma Disclosure-
--------------------
The consolidated results of operations on a pro forma basis for the six
months ended June 29, 1995 are presented below:
<TABLE>
<CAPTION>
<S> <C>
Net sales $126,410
Net loss (2,021)
Loss per share (2,021)
</TABLE>
Pro forma adjustments consist principally of additional interest expense
on the revolving line of credit and the notes, cost savings from the
Company's reduction of head count and changes to benefit plans pursuant
to the restructuring plan, incremental depreciation on property, plant
and equipment due to the write-up to fair value of these assets,
incremental management fees and incremental amortization of goodwill,
financing fees and other intangibles recorded in accordance with the
purchase method of accounting.
These pro forma results have been prepared for comparative purposes only
and do not purport to represent the results of operations which actually
would have resulted had the Acquisition occurred on January 1, 1995 or of
future results of operations.
<PAGE> 52
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR YEAR ENDED
DECEMBER 31, 1994
UNAUDITED
<PAGE> 53
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1994 (NOTE 1)
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful accounts of $2,357 $ 39,078
Inventories 42,989
Deferred income taxes 6,346
Prepayments and other current assets 2,413
----------
Total current assets 90,826
PROPERTY, PLANT AND EQUIPMENT, NET 33,901
RENTAL EQUIPMENT AND RELATED INVENTORIES, NET 539
PROPERTY LEASED UNDER CAPITAL LEASES, NET 486
DEFERRED INCOME TAXES 13,501
OTHER NON-CURRENT ASSETS 1,022
----------
Total assets $ 140,275
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 38,141
Current portion of capital lease obligations and non-U.S. overdrafts 890
Advance billings 5,210
----------
Total current liabilities 44,241
NON-CURRENT LIABILITIES 33,914
----------
Total liabilities 78,155
STOCKHOLDER'S EQUITY 62,120
----------
Total liabilities and stockholder's equity $ 140,275
==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated balance sheet.
<PAGE> 54
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
FOR THE YEAR ENDED DECEMBER 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
Revenue from:
Sales $ 220,287
Sales to Pitney Bowes Inc. 9,675
Rentals 755
Support services 17,860
---------
Total revenue 248,577
---------
Costs and expenses:
Cost of sales 138,292
Cost of rentals 584
Selling, service and administrative 90,765
Research and development 7,380
Interest income (956)
Interest expense 39
---------
Total costs and expenses 236,104
---------
Income before income taxes and effect of changes in accounting
12,473
Provision for income taxes 4,514
Income before effect of change in accounting 7,959
Effect of change in accounting (3,477)
---------
Net income $ 4,482
=========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE> 55
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
FOR THE YEAR ENDED DECEMBER 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,482
Effect of change in accounting 3,477
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,577
Deferred income taxes (154)
Change in assets and liabilities:
Accounts receivable 26
Inventories (6,006)
Other current assets and prepayments (468)
Accounts payable and accrued liabilities 504
Advance billings 31
Other (1,226)
-------
Net cash provided by operating activities 8,243
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in fixed assets (6,831)
-------
Net cash used in investing activities (6,831)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease obligations (87)
Increase in overdrafts 74
-------
Net cash (used in) provided by financing activities (13)
-------
EFFECT OF EXCHANGE RATE CHANGES ON CASH FLOWS (621)
-------
CHANGE IN CASH FLOWS $ 778
=======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE> 56
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands or as otherwise indicated)
(1) Basis of Presentation-
---------------------
In 1994, Pitney Bowes, Inc. announced its intent to seek buyers for the
business of its Monarch Marking Systems, Inc. subsidiary and certain
related assets ("Monarch" on the "Business").
Certain assets and liabilities not integral to the Business, including
certain real property, intercompany accounts with Pitney Bowes Inc.,
cash, investments in affiliates, intercompany loans, income taxes payable
and the base material business, were retained by Pitney Bowes upon sale
of the Company and, therefore, have been excluded from these financial
statements.
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) PRINCIPLES OF CONSOLIDATION--The financial statements of Monarch
include operations in the United States, France, Italy, Sweden,
Canada, Germany, Australia, Mexico, Hong Kong and the United
Kingdom as well as a majority-owned joint venture in Singapore.
All significant intercompany transactions have been eliminated
among Monarch businesses.
(b) INVENTORIES VALUATION--Inventories are valued at the lower of cost
or market. Cost is determined on the last-in first-out (LIFO)
basis for U.S. inventories and the first-in, first-out (FIFO)
method for most non-U.S. inventories.
(c) FIXED ASSETS AND DEPRECIATION--Property, plant and equipment are
stated at cost and depreciated using the straight-line method over
the useful lives of the various assets, generally three to 50
years. Major improvements which add to productive capacity or
extend the life of an asset are capitalized while repairs and
maintenance are charged to expense as incurred. Rental equipment
is depreciated on the straight-line method. Properties leased
under capital leases are amortized on a straight-line basis over
the primary lease terms.
<PAGE> 57
- 2 -
(d) RENTAL ARRANGEMENTS AND ADVANCE BILLINGS--The Company rents
equipment to its customers under short-term rental agreements,
generally for periods of three months to three years. Charges for
equipment rental and maintenance contracts are billed in advance;
the related revenue is included in advance billings and taken into
income as earned.
(e) REVENUE RECOGNITION--Sales revenue is primarily recognized when a
product is shipped.
(f) COSTS AND EXPENSES--Operating expenses of field sales and service
offices are included in selling, service and administrative
expenses because no meaningful allocation of such expenses to cost
of sales, cost of rentals or support services is practicable.
(g) INCOME TAXES--The Company's U.S. taxable income is included in the
consolidated federal and certain state income tax returns of
Pitney Bowes Inc. The Company computes its provision for taxes on
a separate company basis.
The deferred tax provision is determined under the liability
method. Deferred tax assets and liabilities are recognized based
on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. The provision for
income taxes is the sum of the amount of income tax paid or
payable to the parent for the year as determined by applying the
provisions of enacted tax laws to the taxable income for that year
and the net change during the year in the Company's deferred tax
assets and liabilities.
It has not been necessary to provide for income taxes on $45.4
million of cumulative undistributed earnings of subsidiaries
outside the U.S. These earnings will be either indefinitely
reinvested or remitted substantially free of additional tax.
Determination of the liability that would result in the event all
of these earnings were remitted to the U.S. is not practicable. It
is estimated, however, that withholding taxes on such remittances
would approximate $2.4 million.
Deferred income taxes result principally from expenses not
currently recognized for tax purposes and the excess of tax over
book depreciation.
(h) FOREIGN CURRENCY TRANSLATION--Assets and liabilities of operations
outside the U.S. are translated at rates in effect at the end of
the period, and revenues and expenses were translated at average
rates during the period. Net cumulative translation losses were
$5.3 million at December 31, 1994.
<PAGE> 58
- 3 -
The Company enters into foreign exchange contracts primarily to
hedge certain firm foreign currency commitments. Gains and losses
are deferred and recognized as part of the cost of the underlying
transaction being hedged. Gains and losses related to changes in
the value of speculative contracts are recognized in income
currently. At December 31, 1994 the Company had approximately $2.2
million of foreign exchange contracts outstanding with Pitney
Bowes Inc. as the counterpart, maturing through 1995, to buy or
sell various currencies.
Foreign currency transaction and translation gains and (losses)
were not significant for the year ended December 31, 1994.
(3) Inventories-
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Raw materials and work in progress $21,416
Supplies and service parts 6,223
Finished products 15,350
-------
Total inventories $42,989
=======
</TABLE>
Had all inventories valued at LIFO been stated at current costs,
inventories would have been $9.6 million higher than reported at December
31, 1994.
<PAGE> 59
- 4 -
(4) Fixed Assets-
------------
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Land $ 791
Buildings 18,661
Machinery and equipment 65,699
----------
85,151
Accumulated depreciation (51,250)
----------
Property, plant and equipment, net $ 33,901
Rental equipment and related inventories $ 1,062
Accumulated depreciation (523)
----------
Rental equipment and related inventories, net $ 539
----------
Property leased under capital leases $ 486
Accumulated amortization -
----------
Property leased under capital leases, net $ 486
==========
</TABLE>
(5) Current Liabilities-
-------------------
Accounts payable and accrued liabilities are comprised as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
-------------
<S> <C>
Accounts payable--trade $10,103
Accrued salaries, wages and commissions 7,179
Accrued pension benefits 13,398
Miscellaneous accounts payable and accrued liabilities 7,461
-------
Accounts payable and accrued liabilities $38,141
=======
</TABLE>
In countries outside the U.S., banks generally lend to subsidiaries of
the Company on an overdraft basis. These overdraft arrangements are
extended by banks, and may require commitment fees. For each of the
periods presented, no such fees were incurred.
Unused credit facilities outside the U.S. totaled $4.1 million at
December 31, 1994.
<PAGE> 60
- 5 -
(6) Related Party Transactions-
--------------------------
Prior to June 29, 1995, Monarch was operated principally through a
wholly-owned subsidiary of Pitney Bowes Inc. The Company supplied certain
inventory and component parts to Pitney Bowes Inc. and its affiliates.
The Company arranged financing for certain of its products through Pitney
Bowes Credit Corporation (PBCC) in the U.S., and leasing subsidiaries in
Canada, and the U.K., all wholly-owned subsidiaries of Pitney Bowes Inc.
Sales to these financing entities were $0.6 million for 1994. In
connection with the sale of the Business, certain assets and liabilities
not integral to the Business were retained by Pitney Bowes Inc. See Note
1.
Prior to June 29, 1995, the Company earned interest income from its
investments in and loans to affiliates of Pitney Bowes Inc. The return
yielded from these Pitney Bowes Inc. affiliates has been excluded from
the Consolidated Statements of Operations for the year ended December 31,
1994 as the related investments and loans were retained by Pitney Bowes
Inc. Interest income and expense related to the cash position of the
Company during these periods has been included in the Consolidated
Statements of Operations.
(7) Taxes on Income-
---------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
<S> <C>
Current:
U.S. federal $ 1,796
U.S. state and local 572
Outside the U.S. 2,300
--------
Total current 4,668
Total deferred (154)
--------
Total $ 4,514
========
</TABLE>
<PAGE> 61
- 6 -
The deferred tax liabilities and (assets) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Deferred tax liabilities:
Depreciation $ 2,961
Other 2,950
--------
Gross deferred tax liabilities 5,911
--------
Deferred tax assets:
Nonpension postretirement benefits (11,884)
Pension liability (4,803)
Postemployment benefits (2,223)
Inventory and equipment capitalization (935)
Other (5,913)
--------
Gross deferred tax assets (25,758)
--------
Net deferred tax assets $(19,847)
========
</TABLE>
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------
PERCENT OF PRE-TAX INCOME
-------------------------
<S> <C>
U.S. federal statutory rate 35.0%
State and local income taxes 1.1
Cumulative impact of statutory rate increase -
Foreign tax credits 0.1
----
Effective income tax rate 36.2%
====
</TABLE>
(8) Retirement Plans-
----------------
The Company has several defined benefit and defined contribution pension
plans covering substantially all employees worldwide. Benefits are
primarily based on employees' compensation and years of service. Company
contributions are determined based on the funding requirements of U.S.
federal and other governmental laws and regulations.
<PAGE> 62
- 7 -
Total pension expense was $3.6 million for the year ended December 31,
1994. Net pension expense for defined benefit plans for the year ended
December 31, 1994 included the following components:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
1994 1994
------------- -------
<S> <C> <C>
Service cost - benefits earned during period
$ 2,436 $ 199
Interest cost on projected benefit obligations
4,480 283
Actual return on assets 470 42
Net (deferral) and amortization
(5,251) (391)
-------- ------
Net periodic defined benefit pension expense
$ 2,135 $ 133
======== ======
</TABLE>
The funded status at December 31, 1994 for the Company's defined benefit
plans was:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
1994 1994
------------- ----------
<S> <C> <C>
Actuarial present value of:
Vested benefits $ 34,188 $ 1,899
Accumulated benefit obligations $ 36,769 $ 1,907
======== ==========
Projected benefit obligations $ 54,993 $ 2,903
-------- ---------
Plan assets at fair value, primarily stocks and bonds,
adjusted by: $ 47,131 $ 4,087
Unrecognized net (gain) (2,333) (683)
Unrecognized net asset (2,437) (418)
Unamortized prior service costs from plan
amendments (94) 254
-------- ---------
42,267 3,240
-------- ---------
Net pension liability (asset) $ 12,726 $ (337)
======== =========
Assumptions for defined benefit plans*:
Discount rate 8.75% 9.0%
Rate of increase in future compensation levels 5.75% 6.0%
Expected long-term rate of return on plan assets 9.50% 9.0%
<FN>
* Pension costs are determined using assumptions as of the beginning of
the year while the funded status of the plans is determined using
assumptions as of the end of the year.
</TABLE>
<PAGE> 63
- 8 -
(9) Nonpension Postretirement and Postemployment Benefits-
-----------------------------------------------------
In the fourth quarter of 1992, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (FAS 106). This statement requires that the
cost of these benefits be recognized over the period the employee
provides credited service to the Company rather than recognized on a cash
basis, when incurred. It is the Company's practice to fund amounts for
these nonpension postretirement benefits, primarily health care, as
incurred. Substantially all of the Company's U.S. and Canadian employees
become eligible for retiree health care benefits after reaching age 55
and with the completion of the required service period.
Net nonpension postretirement benefit costs consisted of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------
<S> <C>
Service cost-benefits earned during the period $ 776
Interest cost on accumulated postretirement benefit obligations
1,248
Net (deferral) and amortization (2,208)
--------
Net periodic postretirement benefit costs $ (184)
========
</TABLE>
The Company's nonpension postretirement benefit plans are not funded. The
status of the plans was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
-----------
<S> <C>
Accumulated postretirement benefit obligations:
Retirees and dependents $10,151
Fully eligible active plan participants 1,496
Other active plan participants 3,389
Unrecognized net gain (loss) 4,115
Unrecognized prior service cost 8,587
-------
Accrued nonpension postretirement benefits $27,738
=======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations was 11.75% in 1994. This was assumed
to gradually decline to 5% by the year 2000 and remain at the level
thereafter for 1994. A one-percentage-point increase in the assumed
health care cost trend rate for each year would increase the year-end
accumulated postretirement benefit obligations by approximately $1.1
million as of December 31, 1994 and the net periodic postretirement
health care cost by approximately $90 in 1994.
<PAGE> 64
- 9 -
The assumed weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.75% for the year
ended December 31, 1994.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112) as of
January 1, 1994. FAS 112 required that postemployment benefits be
recognized on the accrual basis of accounting. Postemployment benefits
include primarily Company provided medical benefits to disabled employees
and Company provided life insurance as well as other disability and
death-related benefits to former or inactive employees, their
beneficiaries and covered dependents.
The effect of adopting FAS 112 was a one-time non-cash, after-tax charge
of $3.5 million (net of approximately $2.2 million of income taxes)
during 1994.
(10) Commitments and Contingencies-
-----------------------------
The Company is a defendant in a number of lawsuits, none of which will,
in the opinion of management, have a material adverse effect on the
Company's financial position or results of operations.
The Company's operations are subject to federal, state, local and
international environmental laws and regulations that impose limitations
on the discharge of, and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal
of, certain materials, substances and wastes. To the best of the
Company's knowledge, the Company's operations are in material compliance
with the terms of all applicable environmental laws and regulations as
currently interpreted. The Company is currently investigating soil and
ground water contamination at its Pickering, Ontario facility. The
investigation is being performed subsequent to notification of, and will
be conducted in accordance with the requirements of, the Ontario Ministry
of Environment and Energy. The Company has removed contaminated soils and
installed ground water monitoring wells at the facility and is preparing
for potential additional investigation or remedial actions. The Company
believes that, in connection with the Acquisition, it is indemnified by
Pitney Bowes for the costs of the investigation and any necessary
remediation at the Pickering, Ontario facility. Because discussions with
the Ministry of Environment and Energy concerning future remedial options
have not yet commenced, the Company cannot at this time estimate the
potential costs of cleanup but, based on currently available information
and taking into consideration the indemnity from Pitney Bowes, the
Company believes that its liability with respect to the cleanup is
unlikely to have a material adverse effect on the Company's financial
position or results of operations or its financial statements taken as a
whole.
<PAGE> 65
- 10 -
To the best of the Company's knowledge, there are no other existing or
potential environmental claims against the Company that are likely to
have a material adverse effect on the Company's financial position or
results of operations or its financial statements taken as a whole.
The Company has been advised of potential liability under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) at six off-site disposal sites. The Company has entered
into settlement agreements at three of such sites. Although the Company
is contesting its liability at the three remaining sites, the Company is
unable to determine its ultimate liability at this time. Based on
currently available information and taking into consideration the
indemnity from Pitney Bowes, the Company does not believe its aggregate
CERCLA liabilities for these sites will have a material effect on the
Company's financial position or results of operations or its financial
statements taken as a whole.
In connection with the acquisition, Pitney Bowes has agreed to indemnify
the Company against certain scheduled environmental liabilities,
including liabilities relating to the CERCLA sites discussed above,
without any time limitations, and to indemnify the Company against
certain additional environmental liabilities for a period of five years.
Although the Company would remain liable for indemnified environmental
matters in the first instance, the Company believes that it will be able
to seek reimbursements for such liability from Pitney Bowes.
(11) Leases-
------
The Company leases certain factory and office facilities under lease
agreements extending from three to ten years. In addition to factory and
office facilities leased, the Company leases computer and information
processing equipment under lease agreements extending from three to five
years.
<PAGE> 66
- 11 -
Future minimum lease payments for capital and operating leases as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
Years ending December 31:
1995 $195 $ 6,174
1996 123 3,783
1997 123 2,371
1998 123 1,042
1999 122 621
Later years - 455
---- --------
Total minimum lease payments 686 $14,446
=======
Less amount representing interest (91)
----
Present value of minimum lease payments $595
====
</TABLE>
Rental expense under operating leases was $8.0 million for the year ended
1994.
(12) Fair Value of Financial Instruments-
-----------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(a) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying amounts
approximate fair value because of the short maturity of these
instruments. The Company sells and services price marking and item
identification equipment and supplies. As of December 31, 1994,
the Company's receivables from customers in the retail industry
were $4.8 million.
(b) FOREIGN CURRENCY EXCHANGE CONTRACTS--The fair value of foreign
currency exchange contracts is obtained from dealer quotes. These
values represent the estimated amount the Company would receive or
pay to terminate agreements taking into consideration the credit
worthiness of the counter- parties and current foreign currency
exchange rates. The fair value of such contracts was not
significant at December 31, 1994.
(13) Non-U.S. Operations-
-------------------
In addition to its U.S. operations, the company maintains operations in
France, Italy, Canada, Sweden, Germany, Australia, Mexico, Hong Kong and
the United Kingdom as well as a majority-owned joint venture in
Singapore.
<PAGE> 67
- 12 -
Summary financial statement information for non-U.S. operations at
December 31, 1994 and for the year ended December 31, 1994 are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Total assets -- non U.S. operations $39,714
Total liabilities -- non U.S. operations 11,922
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------
<S> <C>
Total revenue:
Non-U.S. operations $ 82,487
U.S. operations 166,090
----------
Total revenue $ 248,577
Income before effect of changes in accounting:
Non-U.S. operations $ 3,908
U.S. operations 4,051
----------
Total income before effect of changes in accounting $ 7,959
==========
</TABLE>
<PAGE> 68
SCHEDULE II
MONARCH MARKING SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996,
FOR THE SIX MONTHS ENDED JUNE 29, 1995 AND DECEMBER 31, 1995
AND FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER DEDUCTIONS AT END
OF PERIOD EXPENSES ACCOUNTS (A) OF PERIOD
--------- -------- -------- --- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS:
Year ended December 31, 1994
(unaudited) $2,169 $1,043 $ - $ 855 $2,357
Six months ended June 29, 1995 $2,357 $1,619 $ - $ 367 $3,609
- -----------------------------------------------------------------------------------------------------------------------------------
Six months ended December 31, 1995 $ 3,915 (B) $ 576 $ - $ 546 $3,945
Year ended December 31, 1996 $3,945 $ 815 $ - $1,129 $3,631
<FN>
(A) Uncollectible accounts written-off, net of recoveries.
(B) Reflects additional reserve recorded in purchase accounting on opening
balance sheet.
</TABLE>
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT FORM 10-K
NO. DESCRIPTION PAGE
--- ----------- ----
<S> <C> <C>
3.1* Certificate of Incorporation, as amended, of Monarch Marking
Systems, Inc........................................................
3.2* Certificate of Ownership and Merger.................................
3.3* By-Laws of Monarch Marking Systems, Inc.............................
4.1* Indenture, dated as of June 29, 1995, between Monarch Acquisition
Corp. and Shawmut Bank Connecticut, National Association, as
trustee, relating to $100,000,000 principal amount of 12 1/2%
Senior Notes due 2003...............................................
4.2* Registration Rights Agreement, dated as of June 29, 1995, between
Monarch Acquisition Corp. and BT Securities Corporation.............
4.3* Specimen Certificate of 12 1/2% Senior Note due 2003 (the "Private
Notes") (included in Exhibit 4.1 hereto)............................
4.4* Specimen Certificate of 12 1/2% Senior Note due 2003 (the "Exchange
Notes") (included in Exhibit 4.1 hereto)............................
10.1* Purchase Agreement, dated as of June 23, 1995, between Monarch
Acquisition Corp. and BT Securities Corporation.....................
10.2* Stockholder's Agreement, dated June 29, 1995, among Monarch
Acquisition Corp., Odyssey Partners, L.P., and Paxar Corporation....
10.3* Credit Agreement, dated as of June 29, 1995, among Monarch
Acquisition Corp., the financial institutions from time to time
party thereto, BT Commercial Corporation, as Administrative Agent,
and Bankers Trust Company, as Issuing
Bank..........................
10.4* Canadian Credit Agreement, dated as of June 29, 1995, among Monarch
Marking Systems, Inc., Monarch Marking Systems Canada Ltd., the
financial institutions from time to time party thereto, and BT Bank
of Canada, as
agent.................................................
10.5* Security Agreement, dated as of June 29, 1995, among Monarch
Acquisition Corp., Monarch Finance Corp., Monarch International
Holdings, Inc., and Monarch Marking Systems, for the benefit of BT
Commercial Corporation, as Collateral Agent.........................
10.6* Revolving Note for $12,500,000, dated as of June 29, 1995, by
Monarch Marking Systems, Inc. for the benefit of BT Commercial
Corporation.........................................................
10.7* Revolving Note for $12,500,000, dated as of June 29, 1995, by
Monarch Marking Systems, Inc. for the benefit of Congress Financial
Corporation.........................................................
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
<S> <C> <C>
10.8* Pledge Agreement, dated as of June 29, 1995, among Monarch
International Holdings, Inc. and Monarch Marking Systems, Inc., for
the benefit of BT Commercial Corporation, as Collateral Agent.......
10.9* Collateral Assignment of Contracts, dated June 29, 1995, among
Monarch International Holdings, Inc., Monarch Finance Corp.,
Monarch Marking Systems, Inc. and BT Commercial Corporation.........
10.10* Collateral Assignment of Contracts for PBI Purchase Documents,
dated June 29, 1995, among Monarch Acquisition Corp., Monarch
Marking Systems, Inc. and BT Commercial Corporation, as Collateral
Agent...............................................................
10.11* Collateral Assignment of Trademarks, dated as of June 29, 1995,
between Monarch Marking Systems, Inc. and BT Commercial Corporation.
10.12* Collateral Assignment of Patents and Patent Licenses, dated as
June 29, 1995, between Monarch Marking Systems, Inc. and BT
Commercial Corporation..............................................
10.13* Lock Box Agreement, dated as of June 29, 1995, among Monarch
Marking Systems, Inc., BT Commercial Corporation and National City
Bank................................................................
10.14* Guarantee, dated June 29, 1995, among Monarch Finance Corp.,
Monarch International Holdings, Inc. and Monarch Marking
Systems, Inc., for the benefit of BT Bank of Canada, as
Administrative Agent................................................
10.15* Management Consulting Agreement, dated June 29, 1995, among Odyssey
Investors, Inc., Monarch Holdings, Inc. and Monarch Acquisition Corp
10.16* Management Consulting Agreement, dated June 29, 1995, among Paxar
Corporation, Monarch Holdings, Inc. and Monarch Acquisition Corp....
10.17* Tax Allocation Agreement, dated June 29, 1995, among Monarch
Holdings, Inc., Monarch Marking Systems, Inc., Monarch
International Holdings, Inc. and Monarch Finance Corp...............
10.18* Purchase and Sale Agreement, dated as of June 29, 1995, among
Monarch Marking Systems Australia Pty. Limited, Votraint No. 898
Pty. Limited, Monarch Acquisition Corp. and Pitney Bowes Inc........
10.19* Purchase and Sale Agreement, dated as of June 29, 1995, among
Pitney Bowes Deutschland GmbH, Monarch Marking Systems Deutschland
GmbH, Monarch Acquisition Corp. and Pitney Bowes Inc................
10.20* Purchase and Sale Agreement, dated as of June 29, 1995, among
Monarch Marking Systems, Ltd., Monarch Marking Systems Canada Ltd.,
Monarch Acquisition Corp. and Pitney Bowes Inc......................
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K.
Arthur Andersen LLP
Cincinnati, Ohio
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,170
<SECURITIES> 0
<RECEIVABLES> 45,163
<ALLOWANCES> 3,631
<INVENTORY> 40,765
<CURRENT-ASSETS> 104,001
<PP&E> 96,813
<DEPRECIATION> 53,356
<TOTAL-ASSETS> 190,354
<CURRENT-LIABILITIES> 45,844
<BONDS> 100,258
<COMMON> 0
0
0
<OTHER-SE> 39,177
<TOTAL-LIABILITY-AND-EQUITY> 190,354
<SALES> 259,245
<TOTAL-REVENUES> 259,245
<CGS> 147,273
<TOTAL-COSTS> 147,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,164
<INCOME-PRETAX> 13,045
<INCOME-TAX> 4,613
<INCOME-CONTINUING> 8,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,432
<EPS-PRIMARY> 8,046
<EPS-DILUTED> 8,046
</TABLE>
