<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>