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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number: 000-19406
ZEBRA TECHNOLOGIES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2675536
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 CORPORATE WOODS PARKWAY, VERNON HILLS, IL 60061
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(Address of principal executive offices) (Zip Code)
(847) 634-6700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant 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 has been subject to such filing requirements
for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ ]
As of March 19, 1999, the aggregate market value of each of the registrant's
Class A Common Stock and Class B Common Stock held by non-affiliates was
approximately $564,844 and $176,603, respectively. The closing price of the
Class A Common Stock on March 19, 1999, as reported on the Nasdaq Stock Market,
was $23.938 per share. Because no market exists for the Class B Common Stock and
the shares of Class B Common Stock are convertible on a one-for-one basis into
shares of Class A Common stock, the registrant has assumed for purposes hereof
that each share of Class B Common Stock has a market value equal to one share of
Class A Common Stock.
As of March 19, 1999, the registrant had outstanding 23,596,112 shares of Class
A Common Stock, par value $.01 per share, and 7,377,500 shares of Class B Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Notice of Annual Meeting of Stockholders
and Proxy Statement for its Annual Meeting of Stockholders to be held on May 18,
1999, as described in the Cross-Reference Sheet and Table of Contents included
herewith, are incorporated by reference into Part III of this report.
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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX
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PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 12
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
SIGNATURES
Signatures 22
EXHIBITS
Index to Exhibits 23
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements F1
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PART I
ITEM 1. BUSINESS
THE COMPANY
Zebra Technologies Corporation (the Company or Zebra) designs, manufactures and
distributes a full range of direct thermal and thermal transfer bar code label
printers, receipt printers, plastic card printers, secure identification
printing systems, related accessories, and support software. The Company markets
its products worldwide principally to manufacturing and service organizations
for use in automatic identification, data collection, and personal
identification systems.
The Company's equipment is designed to operate at the user's location or on a
mobile basis to produce and dispense high quality bar coded labels and plastic
cards in time-sensitive applications and under a variety of environmental
conditions. Applications for the Company's products are extremely diverse. They
include applications where bar coding is used to identify or track objects or
information, particularly in situations that require high levels of data
accuracy and where speed and reliability are critical variables. For plastic
cards, they are used where secure, reliable identification is required on an
on-demand basis.
Applications for the Company's technology cut across all industries and
geographies. They include, but are not limited to, inventory control, small
package delivery, baggage handling, automated warehousing, JIT (Just-In-Time)
manufacturing, employee time and attendance records, file management systems,
hospital information systems, shop floor control, library systems, employee ID
cards, drivers licenses, access control systems, and medical specimen labeling.
As of December 31, 1998, management estimates that more than 1,000,000 Zebra
printers are installed in more than 90 countries throughout the world.
The Company believes the growth of its bar code printer business will be
enhanced by the proliferation of bar code label standardization programs, which
are driven by competitive forces on businesses worldwide to reduce costs,
improve quality, and increase productivity. Industry-mandated standardization
has been a major catalyst in the rapid development of bar coding. Zebra also
believes that increasing demands for improvements in productivity and quality in
commercial and service organizations, including the increasing use of
enterprise-wide resource planning (ERP) systems, will lead to increased use of
automatic identification systems.
The Company's card printer business is being driven by the rapid growth in
applications for smart card technology and increased concern over personal
identification, including secure ID systems for drivers license applications and
access control systems.
On October 28, 1998, the Company merged with Eltron International, Inc.
(Eltron). Eltron manufactures and markets high-quality, low-cost direct thermal
and thermal transfer bar code printers, plastic card printers, secure card
printing systems, ribbons, self-adhesive labels, and related accessories
throughout the world. Financial results for the Company have been restated to
reflect the merger as a pooling-of-interests.
The Company completed its initial public offering in August 1991. The Company is
organized under the laws of the State of Delaware, and its principal offices are
located at 333 Corporate Woods Parkway, Vernon Hills, Illinois 60061. The
Company's telephone number is (847) 634-6700.
PRODUCTS
The Company's products consist of a broad line of computerized on-demand bar
code label printers, print engines, plastic card printers, specialty bar code
labeling materials, ink ribbons and bar code label design software. These
products are used to provide bar code labeling and personal identification
solutions principally in the manufacturing, service, and government sectors of
the economy. The Company's equipment and supplies are designed to operate at the
user's location under a variety of work environments. The Company works closely
with its distributors, other resellers, and the end users of its products to
design and implement labeling solutions that meet the technical demands of the
end user. To achieve this flexibility, the Company provides its customers with a
very broad selection of printer models, each of which can be configured to a
specific use. Additionally, the Company will select and, if necessary, create
appropriate labeling stock, ink ribbons and adhesives to suit a particular
intended use. In-house engineering personnel in software, mechanical, electronic
and chemical engineering participate in the creation and realization of bar code
solutions for particular applications.
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Label Printing Systems
The Company believes it produces the industry's broadest range of on-demand
thermal transfer and direct thermal bar-code label printers, with more options
and features than any of its competitors. Zebra's printing systems include
hundreds of optional configurations, which can be selected to meet particular
customer needs. The Company believes this breadth of product is a unique and
significant competitive strength, since it allows the Company to satisfy the
wide variety of printing applications in its target market.
The Company currently offers 32 printer models, which are marketed under the
Zebra and Eltron brand names. At December 31, 1998, the Company's main printer
product offerings were as follows:
PERFORMANCE PRINTERS. At the high end of the label printer market, Zebra
produces printers targeted at applications requiring continuous operation in
high output, mission-critical settings. These units provide a wide variety of
option configurations, features, print widths, speeds, and dot densities
(including the industry's only 600-dpi printer). The Company offers four Zebra
models under its XiII Series line. List prices range from $4,295 to $7,495.
MID-RANGE PRINTERS. The Company offers 15 printer models designed for less
demanding applications. These units offer fewer option configurations and
features for a commensurate lower price. Products in this category consist of
the Zebra Stripe, S, and Z Series as well as Eltron brand units under the
Strata, LP/TLP, Eclipse, QualaBar, and ThermaBar series.
List prices range from $1,195 to $8,995.
DESKTOP PRINTERS. Applications with low volume suit the Company's desktop
printers. Zebra currently offers nine desktop printer models, which are marketed
under Zebra's A and T lines, and Eltron's Companion Plus, Orion, and LP/TLP
series. List prices range from $595 to $945.
PORTABLE PRINTERS. The Company offers three portable printer models, which
provide durability, light weight, and optional infra red and radio frequency
interfaces. These printers are designed for remote and mobile applications, and
are marketed under both the Zebra and Eltron brands. The Company's portable
printers range in price from $695 to $1,195.
PRINT ENGINES. Zebra's 170 PAX print engine is targeted at manufacturers of
high-speed automatic label applicator systems. The price of the 170 PAX print
engine is approximately $3,100.
In addition to their use in on-demand automatic identification applications, the
Company's bar code label printers can also be used to meet customers' needs for
on-site production of small or large quantities of custom bar code labels and
other graphics. This capability results in shorter lead times, reduced
inventory, and more flexibility than can be provided with traditional off-site
printing. Management believes that of the major on-site printing technologies,
thermal transfer is best suited for most industrial applications. Thermal
transfer printing produces dark and solid blacks and sharply defined lines that
are important for printing readily scannable bar codes. These images can be
printed on a variety of labeling materials, which enable users to affix bar code
labels to virtually any object. This capability is very important in the
industrial and service markets served by the Company.
Plastic Card Printers
The Company offers five plastic card printers, including one secure
identification printing system. Uses for plastic cards printed by these systems
include smart cards, on-demand access control, identification, and loyalty card
applications. Users can select from a number of printer options, including
monochrome and color printing, single- and two-sided printing, and magnetic
stripe and smart card encoding. The Company's P300, P400, P500, and P600 plastic
card printers are marketed under the Eltron brand. Plastic card printers range
in price from $2,495 to $9,995.
The Max3000 is a single process secure ID printing system that provides maximum
security, durability, and tamper resistance for applications such as driver's
licenses. The system integrates printing, lamination, rotary die cutting, and
optional magnetic encoding of 3M Secure Card media. The Max3000 is priced at
approximately $15,000.
Sales of hardware (bar code and plastic card printers and replacement parts)
represented $266,625,000 of the Company's net sales in 1998, $225,081,000 in
1997, and $179,170,000 in 1996. These sales amounted to 79.4%, 75.8%, and 71.0%
of the Company's net sales in 1998, 1997, and 1996, respectively.
Supplies
The Company sells label/ticketing stock, custom labels and tags, and thermal
transfer ribbons worldwide, to support its printing systems and systems users.
Zebra supplies are selected for a particular user's needs based on the specific
application
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and environment in which the labeling system must operate. Critical criteria
include levels of abrasion, possible exposure to chemicals and liquids, and
variations in both the environment (such as temperature or humidity) in which
the labels will be used and the surfaces to which the labels will be affixed.
These factors are all taken into account in selecting the type of ribbon, the
type of labeling material and the adhesive to be used. Zebra supplies include
proprietary ribbon formulations developed according to Company specifications.
Zebra develops its printers and supplies contemporaneously, as if they were a
single unit, to optimize performance of Zebra printers and genuine Zebra
supplies. Performance is typically measured as a function of both print speed
and print quality, and both of these factors can be adversely affected by the
use of supplies that are not suited to particular printers.
Because of the close relationship between the printing system, the supplies and
the specific applications, the Company sells supplies together with printing
systems. In addition, the Company sells supplies to existing users of its
printing systems. Zebra promotes the use of Zebra supplies with Zebra equipment.
Management believes that owners of Zebra's printing systems purchase Zebra
supplies to attain peak performance and optimum print quality and to minimize
costly downtime and malfunctions in their automatic identification systems.
Sales of the Company's supplies in 1998, 1997, and 1996 were $62,644,000,
$59,424,000, and $55,599,000, respectively, amounting to 18.6%, 20.0%, and 22.0%
of net sales, respectively.
Software
In February 1996, the Company acquired the intellectual property of a United
Kingdom-based partnership, Fenestra Computer Services, which provides a
high-performance label design and integration software package specifically
designed to optimize the performance of Zebra printers. Known as BAR-ONE(TM),
this software provides the capability to design and integrate sophisticated
labels from standalone or legacy applications through a powerful, easy to use
Windows interface. In late 1997, the Company signed an exclusive alliance
agreement with JetForm Corporation, a leading worldwide provider of electronic
forms, workflow and output management software applications. Zebra's BAR-ONE
product includes a special version of JetForm's premier multi-platform, output
management product, JetForm Central(TM). This software package enables Zebra
printers to receive output directly from most of the popular software packages
on the market, including the increasingly used enterprise-wide resource planning
(ERP) software, without the need to write costly software interfaces.
Maintenance Services
The Company provides service for its printing systems with depot repair at its
Vernon Hills, Illinois, facility and its distributors' locations. In addition
the Company has agreements with International Business Machines Corporation
(IBM) and Wang Laboratories, Inc. (Wang) to provide on-site repair services.
Under these agreements, the Company shares the revenue for on-site service
contracts sold by IBM and Wang for Zebra printing systems installed in the
United States. Outside of the United States, the Company's distributors in each
country provide maintenance service, either directly or through service agents.
Zebra also provides service and technical support assistance from in-house
support personnel located in the United States, the United Kingdom, and
Singapore, who are available by telephone hotline five days a week during
regular business hours. Also, for Zebra brand products the Company provides
interactive technical support via the Internet, which can be accessed through
the Company's web page, http://www.zebra.com, 24 hours a day, seven days a week.
Warranties
All Zebra printing equipment is warranted against defects in material and
workmanship for twelve months. Zebra supplies are warranted against defects in
material and workmanship for the stated shelf life or twelve months, whichever
occurs first. Defective equipment and supplies may be returned to the Company
for repair, replacement or refund during the applicable warranty periods.
THE COMPANY'S TECHNOLOGY
The Company's products employ thermal transfer, direct thermal, and thermal die
sublimation technologies. Each technology has certain characteristics that
provide specific benefits to the end user.
Thermal transfer printing is used in the Company's high-end and mid-range label
printers, as well as its high-speed print engine. This technology creates an
image by applying an electrically heated printhead to a ribbon that releases ink
onto labeling stock. It is a relatively low-cost way to address the special
needs of the Company's target market. The benefits of thermal transfer printing
include superior image quality, the ability to print on a wide variety of
smooth-surfaced materials, no requirement for specially coated or otherwise
specially formulated labeling/ticketing stock, and the ability to use certain
inks that are not viable with alternative printing technologies.
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Direct thermal printing is used in the Company's desktop and portable printer
products. Direct thermal printing creates an image by applying the heated
printhead directly to specially treated paper that changes color when heated.
Direct thermal technology is preferable where image durability is less critical,
and where the application does not require specialty-labeling materials such as
plastics or metal foils.
The Company's plastic card printers incorporate thermal dye sublimation, a
relatively new thermal printing process. Thermal dye sublimation has recently
become commercially viable for applications that call for color printing on PVC
and polyester cards. This capability has given rise to an industry focused on
the on-site creation of full color, photographic quality plastic cards. These
cards can typically be created in less than 30 seconds for under one dollar.
Traditional photographic processes are both more expensive and time consuming.
The Company believes that personalized card applications such as driver's
licenses, loyalty cards, school and work identification cards, security access
cards, and financial transaction cards are well suited to benefit from this
technology. Bar codes, smart chip and magnetic stripe encoding can be used to
record such personal data as health records, financial transactions, security
access codes, and vital statistics.
The Company's printing systems incorporate Company-designed computer hardware,
electrical mechanisms and software, which operate the printing functions of the
system and communicate with the host computer. All Zebra brand printing systems,
except the A-100 personal printer, operate using Zebra Programming Language
(ZPL(TM)) and Zebra Programming Language II (ZPL II(TM)), proprietary printer
driver languages, which were designed by the Company and are compatible with
virtually all computer operating systems, including UNIX, MS/DOS and Windows.
Because the Company guarantees backward compatibility, ZPL and ZPL II allow
users to replace older Zebra printers with newer equipment without costly
reprogramming of label design programs. This compatibility also allows users to
operate multiple Zebra printers in different applications using standardized
programs and to integrate these printers into a local area network. Management
believes that ZPL and ZPL II give the Company a competitive advantage by
ensuring compatibility across the full family of the Company's present and
future printer products and by facilitating system upgrades and customer loyalty
to Zebra products. Certain independent software vendors have written label
preparation programs with ZPL and ZPL II drivers specifically for Zebra
printers. ZPL and ZPL II label format programs can be run on a personal computer
with ordinary word processing programs, making ZPL and ZPL II particularly
adaptable to PC-based systems.
All Eltron brand printing systems operate using Eltron Programming Language
(EPL(TM)), which have characteristics for networking and backward compatibility
similar to those of ZPL and ZPL II. To enhance product marketability, the
Company intends to make selected Zebra brand printer models EPL-compatible and
selected Eltron printer models ZPL-compatible.
SALES AND MARKETING
SALES. The Company sells its products in the United States and internationally
through distributors, value-added resellers (VARs), original equipment
manufacturers (OEMs), international customers, and directly to a small number of
designated key accounts. Distributors and VARs purchase, warehouse, and sell a
variety of automatic identification components from different manufacturers, and
customize systems for end-user applications using their systems integration
expertise. Because these sales channels provide specific software,
configuration, installation, integration, and support services required by end
users within various market segments, these relationships allow the Company to
reach end users throughout the world in a wide variety of industries.
The Company classifies two of its distributors as National Distributors because
of their broad territorial representation within the United States. Other
distributors qualify as Zebra Solution Centers (ZSCs). ZSCs carry the full range
of Zebra printers and supplies and focus on providing a Zebra bar-code solution
to their customers. VARs, OEMs and systems integrators provide customers with a
variety of automatic identification components including scanners, accessories,
applications software and systems integration expertise, and, in the case of
some OEMs, then resell the products under their own brands. The Company believes
that the breadth of this indirect channel network, both in terms of variety and
geographic scope, is a material competitive advantage.
In certain instances, the Company may designate a customer as a key account when
purchases of Company products reach certain levels. Zebra sales personnel,
together with the Company's distribution partners, manage these accounts to
ensure their complete needs are met, including consistent support for projects
and applications.
Sales to international customers comprised 40.5%, 42.2%, and 41.3% of net sales
for 1998, 1997, and 1996, respectively. The Company's products are distributed
in more than 95 countries throughout the world. Management believes that
international sales have the long-term potential to grow faster than domestic
sales because of the lower penetration of bar-code systems outside the United
States. As a result, the Company has invested resources to support its
international growth
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and currently operates facilities and sales offices in the United Kingdom,
France, Germany, Japan, Hong Kong, China, and Singapore.
MARKETING. The Company's marketing operations include product management,
marketing communications, technical services, training, market research and
market development functions. The product management group initiates the
development of new products and product enhancements to meet customer needs, and
manages product introductions and positioning. The product management group also
focuses on strategic planning and market definition and analyzes the Company's
competitive strengths and weaknesses.
The marketing group operates as an internal advertising and public relations
resource. This group, working with advertising agencies and contractors, creates
advertising, brochures and documentation, manages trade show exhibits, maintains
the Company's Web sites and places articles highlighting applications of Zebra
products in trade and industry publications.
The technical services group offers technical support to the Company's
distribution channels and end users of the Company's products. These services
include a hotline staffed by experienced technical personnel, an advanced
Internet-based technical support system available 24 hours a day, and, when
necessary, trips to customer sites.
The Company's market research group is a strategic planning, research-oriented
group that focuses on market definition and analysis of Company's relative
strengths and weaknesses compared with its competition. This group identifies
and analyzes market opportunities for current, planned and potential products,
and gathers and analyzes competitive and market information.
The market development group is responsible for the development of new market
opportunities and relationships with key customers, vendors and government
regulatory and industry standards committees. This group also prepares speeches,
application training programs and seminars, which are presented around the world
to industry and customer groups.
CUSTOMERS
The Company estimates that it has more than 1,000,000 bar code and plastic card
printing systems installed in more than 90 countries.
For the year ended December 31, 1998, sales to United Parcel Service (UPS), one
of the Company's designated key accounts, accounted for 10.3% of the Company's
net sales.
PRODUCTION AND MANUFACTURING
The Company's strategy is to create and produce production designs that optimize
product performance, quality, reliability, durability and versatility. These
designs use cost-efficient materials, sourcing and assembly methods with high
standards of workmanship. The Company has aggressively pursued a manufacturing
strategy of increasing control over the manufacture of its hardware products by
developing in-house capability to produce mechanical and electronic assemblies,
and it has designed many of its own tools, fixtures and test equipment. The
Company's manufacturing engineering staff is dedicated to co-engineering new
products in coordination with Zebra's new product engineers and vendors. This
collaborative effort increases manufacturing efficiency by specifying and
designing manufacturing processes and facilities simultaneously with product
design.
RESEARCH AND DEVELOPMENT
The Company had research and development expenditures of $21,248,000,
$17,911,000, and $15,159,000, for 1998, 1997, and 1996, respectively. These
expenditures amount to 6.4%, 6.0%, and 6.0% of net sales for the corresponding
periods. The Company devotes significant resources to develop new bar-code
printing solutions for its target markets, as well as to ensure that the
Company's products maintain high levels of reliability and efficient
manufacturing.
At December 31, 1998, the Company had 128 full-time associates in new product
design, engineering and development. Zebra engineers design all firmware,
hardware, software, mechanisms, mechanical parts and enclosures used in its
printers and other products.
COMPETITION
Many companies are engaged in the design, manufacture and marketing of automatic
identification data collection equipment and plastic card printers. The Company
considers its direct competition to be providers of on-demand thermal transfer
and direct thermal printing systems and supplies. To a lesser extent the Company
also competes with companies engaged in the design, manufacture and marketing of
standard computer and label printers which employ alternative printing
technologies,
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particularly for low-cost label printers. For card printers, the Company
considers its direct competition to be the providers of thermal plastic card
printing systems and supplies designed for on-demand printing.
Management believes that the ability to compete effectively in the thermal
transfer and direct thermal market depends on a number of factors. These factors
include the reliability, quality, and reputation of the manufacturer and its
products; hardware innovations and specifications; breadth of product offerings;
information systems connectivity; price; the level of technical support;
supplies and applications support offered by the manufacturer; available
distribution channels; and financial resources to support new product design and
innovation. The Company believes that it presently competes favorably with
respect to these factors.
No single competitor competes across the entire breadth of the Company's product
line. The Company, however, faces, significant competition in each of its
product segments. For low-cost desktop label printer products, the Company's
principal competitors are Cognitive Solutions, a subsidiary of Axiohm
Transaction Solutions, Inc.; Tokyo Electric Company (TEC); Seiko; Microcom; and
Datamax Corporation. In the mid-range printer market, the Company's principal
competitors are Datamax Corporation; UBI and Intermec Corporations, subsidiaries
of Unova, Inc.; Monarch Marking Systems, a subsidiary of Paxar, Inc.; Sato; and
TEC. Principal competition in the high end of the market derives from Sato, TEC,
and Intermec. For print engines, the Company's principal competitor is Sato. For
portable printers, the Company's principal competitors are Monarch Marking
Systems, as well as Comtec Information Systems, Inc., and O'Neil Product
Development, Inc., two privately held companies.
The Company's principal competitors in the plastic card market include Datacard,
Inc., a privately-held manufacturer of card personalization systems and
transaction terminals, and Fargo, Inc., a privately-held manufacturer of thermal
transfer and dye sublimation color page printers and plastic card printers.
ALTERNATIVE TECHNOLOGIES
The Company believes that direct thermal and thermal transfer printing will be
the technology of choice in Zebra's target markets for the foreseeable future.
Among the many advantages of direct thermal and thermal transfer printing is its
ability to print high-resolution images on a wide variety of label materials at
a relatively low cost, compared with alternative printing technologies. The
Company continually assesses competitive methods of bar code printing and
automatic identification. These technologies include ink jet, laser, impact dot
matrix, laser etching, and radio-frequency identification (RFID). Currently, the
Company believes that direct thermal and thermal transfer print technology
provide the best low-cost, high quality printing solution for its target
markets.
Although there is no assurance that a new technology will not supplant direct
thermal and thermal transfer printing, the Company is not aware of any
developing technology that offers the advantages of direct thermal and thermal
transfer printing for the Company's target markets. If other technologies were
to evolve or become available to the Company, it is possible that those
technologies would be incorporated into the Company's products. Alternatively,
if such technologies were to evolve or become available to the Company's
competitors, the Company's products may become obsolete, which would have a
material adverse affect on the Company's financial position, results of
operations and cash flows.
INTELLECTUAL PROPERTY RIGHTS
Zebra relies on a combination of trade secrets, patents, employee and third
party nondisclosure agreements, copyright laws and contractual rights to
establish and protect its proprietary rights in its products. The Company holds
and actively protects a number of trademarks, which are registered domestically
and internationally. The Company holds six patents and eight patents pending
pertaining to its products.
The Company does not believe that the legal protections afforded to its
intellectual property rights are fundamental to its success. Despite the
Company's efforts to protect its intellectual property rights, it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or to reverse engineer or otherwise obtain and use, to the
Company's detriment, technology and information that the Company regards as
proprietary. Moreover, the laws of certain countries do not afford the same
protection to the Company's proprietary rights as do United States laws. There
can be no assurance that legal protections relied upon by the Company to protect
its proprietary position will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies.
Other trademarks mentioned in this report include IBM, which is a registered
trademark of International Business Machines Corporation; UNIX, which is a
registered trademark of UNIX Systems Laboratories, Inc.; MS/DOS and Windows,
which are
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registered trademarks of Microsoft Corporation; and Jet Form Central, which is a
registered trademark of Jet Form Corporation.
EMPLOYEES
As of March 19, 1999, the Company employed approximately 1,500 persons. None of
these employees is a member of a union. The Company considers its relationship
with its employees to be excellent.
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Vernon Hills, Illinois, a
northern suburb of Chicago. From this location, the Company conducts its
operations from a custom-designed facility, which provides approximately 167,600
square feet of space. Approximately 61,500 square feet have been allocated to
office and laboratory functions and 106,100 square feet to manufacturing and
warehousing. This facility was constructed in 1989 and expanded in 1993, 1995,
and 1996. It is owned and leased to the Company, under a lease terminating on
March 31, 2008, by Unique Building Corporation, a corporation owned in part by
Edward Kaplan and Gerhard Cless, both executive officers and directors of the
Company.
The Company is currently adding 57,400 square feet of space to its Vernon Hills
facility on property also owned by Unique Building Corporation. Approximately
22,700 square feet will be dedicated to warehousing and 34,700 square feet to
offices. Completion and occupancy of the expansion is expected in the second
quarter of 1999.
The Company's major facilities as of December 31, 1998, are listed below:
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Square Footage
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Manufacturing,
Production & Administrative,
Location Warehousing Research & Sales Total Lease Expires
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Vernon Hills, Illinois, USA 106,100 61,500 167,600 March 2008
Camarillo, California, USA 72,000 70,000 142,000 Owned
High Wycombe, UK 9,500 8,900 18,400 January 1999
Wokingham, Berkshire, UK 16,000 11,000 27,000 October 2010
Preston, UK 28,100 8,700 36,800 Owned
Varades, France 12,300 9,200 21,500 August 2000
Greenville, Wisconsin, USA 27,000 3,000 30,000 March 2007
Hong Kong and Mainland China -- 6,700 6,700 December 1999
Simi Valley, California, USA 37,500 30,000 67,500 January 1999
Simi Valley, California, USA 35,000 -- 35,000 January 1999
</TABLE>
The Company also has facilities totaling 15,700 square feet, with 4,000 square
feet dedicated to warehousing and 11,700 square feet dedicated to
administrative, research, and sales functions, in the following locations:
Northbrook, Illinois; Miami, Florida; Sandy, Utah; Boulogne Billancourt, France;
Singapore (2 facilities); Tokyo, Japan; and Frankfurt, Germany.
During 1999, the Company intends to consolidate certain of its facilities,
including moving its UK operations from the High Wycombe and Wokingham locations
to a new facility.
-10-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits, which are incidental to the
ordinary conduct of its business. The Company does not believe that any such
matters will have a material adverse effect on the Company's business, financial
condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 26, 1998, the Company held a special meeting (the "Special Meeting")
of stockholders at the Company's corporate headquarters at 333 Corporate Woods
Parkway, Vernon Hills, Illinois. Holders of Common Stock of record at the close
of business on September 4, 1998, were entitled to vote at the Special Meeting.
Approval of each issue to be voted upon required the affirmative vote of a
majority of the voting power of Zebra common stock entitled to vote at the
special meeting. The Special Meeting was called to authorize the following:
Proposal 1. To issue Class B Common Stock to enable Zebra to merge with
Eltron, after which Eltron would become a wholly owned subsidiary
of Zebra.
Proposal 2. To increase the number of authorized shares of Class A Common
Stock available for issuance under Zebra's 1997 Stock Option Plan
from 531,500 shares to 2.0 million shares.
The results of the vote were as follows:
Proposal 1. Votes for, 62,927,885; votes against, 349,784; broker non-votes,
0; abstentions, 163,165.
Proposal 2. Votes for, 62,119,009; votes against, 1,111,772; broker non-votes,
0; abstentions, 210,053.
Based on the authorization received from the Company's stockholders and the
authorization received from the stockholders of Eltron to approve the merger and
merger agreement, on October 28, 1998, the Company completed the merger with
Eltron.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION: PRICE RANGE AND COMMON STOCK
The Company's Class A Common Stock is traded on the Nasdaq Stock Market under
the symbol ZBRA. The following table shows the high and low trade prices for
each quarter in 1998 and 1997, as reported by Nasdaq. No market exists for the
Company's Class B Common Stock. The shares of Class B Common Stock are
convertible on a one-for-one basis into shares of Class A Common Stock at the
option of the holder.
<TABLE>
<CAPTION>
1998 High Low 1997 High Low
- --------------------------------------- ----------- ----------- ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
First Quarter $38.50 $25.50 First Quarter $27.75 $21.25
Second Quarter 44.63 34.75 Second Quarter 32.00 21.50
Third Quarter 42.63 27.00 Third Quarter 36.00 26.56
Fourth Quarter 37.00 25.00 Fourth Quarter 38.25 29.00
</TABLE>
SOURCE: THE NASDAQ STOCK MARKET
At March 19, 1999, the last reported price for the Class A Common Stock was
$23.938 per share. There were 652 shareholders of record for the Company's Class
A Common Stock and 40 shareholders of record for the Company's Class B Common
Stock.
DIVIDEND POLICY
Since the Company's initial public offering in 1991, the Company has not
declared any cash dividends or distributions on its capital stock. The Company
intends to retain its earnings to finance future growth and therefore does not
anticipate paying any cash dividends in the foreseeable future.
-12-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 (1) 1996 (1) 1995 (1) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $335,983 $297,100 $252,487 $200,319 $136,379
Cost of sales 180,173 153,392 135,474 106,365 71,333
-------- -------- -------- -------- --------
Gross profit 155,810 143,708 117,013 93,954 65,046
Total operating expenses 94,174 72,446 62,880(4) 43,328 29,368
-------- -------- -------- -------- --------
Income from operations 61,636(2) 71,262 54,133(4) 50,626 35,678
Income from continuing operations
before provision for income taxes 65,021(2) 85,225(3) 60,703(4) 56,185 38,095
Income from continuing operations 40,069(2) 54,447(3) 37,952(4) 36,693 24,696
Earnings per share from continuing operations
Basic $ 1.30(2) $ 1.76(3) $ 1.24(4) $ 1.22 $ .85(5)
Diluted $ 1.29(2) $ 1.74(3) $ 1.21(4) $ 1.19 $ .83(5)
Weighted average number of shares outstanding
Basic 30,919 30,897 30,696 30,128 29,011(5)
Diluted 31,176 31,380 31,269 30,780 29,813(5)
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents and
investments and marketable
securities $ 162,668 $ 139,320 $ 103,777 $ 88,139 $ 60,053
Working capital 229,688 209,862 164,678 131,369 86,704
Total assets 310,002 270,447 218,631 176,695 114,537
Long-term obligations 36 314 3,137 2,928 236
Shareholders' equity 270,884 236,220 184,007 144,391 93,812
</TABLE>
(1) Revised to reflect the discontinuance of operations of Zebra Technologies
VTI, which was acquired by the Company in July 1995.
(2) Includes a pretax charge for merger costs of $8,080 relating to the merger
with Eltron International, Inc.
(3) Includes a one-time pretax gain of $5,458 from the sale of Zebra's
investment in Norand Corporation common stock.
(4) Reflects a pretax charge for acquired in-process technology of $1,117
relating to the Company's acquisition of Fenestra Computer Services and
$2,500 relating to the Company's acquisition of Privilege, S.A.
(5) Adjusted to reflect a two-for-one stock split on December 28, 1995.
-13-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On October 28, 1998, the Company merged with Eltron International, Inc. This
transaction has been accounted for as a pooling of interests for financial
reporting purposes. All financial statements for prior periods presented have
been restated to give effect to the combination.
In the fourth quarter of 1998, the Company recorded one-time charges totaling
$13,161,000 related to the merger with Eltron. Of this amount, $8,080,000 is
reported separately as Merger Costs and consists of fees for accountants,
attorneys, consultants, and investment bankers, as well as provisions for
facilities consolidation and severance costs. The balance of $5,081,000 relates
to adjustments to bring the former Eltron operations into conformance with
Zebra's accounting policies and to eliminate certain duplicate assets. These
adjustments, which are reported within Cost of Goods Sold and Operating Expenses
as described below, include increases to inventory and bad debt reserves and the
expensing of certain duplicate fixed assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased 13.1% in 1998 to $335,983,000 from $297,100,000 in 1997.
Unit growth in hardware (printers and replacement parts) principally drove sales
growth. Product mix changes lowered the average unit price for printers, since
volume in lower-priced models increased faster than higher-priced models. Price
reductions on some printer models also affected average unit prices, although
management does not consider these reductions to be a material contributor to
the overall decline in average prices. Hardware sales increased 18.5% to 79.4%
of net sales, and supplies sales increased 5.4% to 18.6% of net sales. The
remaining 2.0% of net sales consisted of service and software revenue.
International sales increased 8.5% to $136,128,000 from $125,411,000 and
accounted for 40.5% of net sales in 1998, compared with 42.2% of net sales in
1997. The decrease in the percentage of international sales is principally due
to higher sales growth to North American customers combined with a decline in
sales to the Asia-Pacific region. Notwithstanding this decrease, management
believes that international markets for bar code-related products and services
will grow faster than domestic markets because of lower levels of market
penetration by the technology. To support its long-term international business
expansion strategy, the Company opened a new sales office in Japan in 1998.
Gross profit increased 8.4% to $155,810,000 from $143,708,000 for 1997. As a
percentage of net sales, gross profit decreased 2.0 percentage points to 46.4%
from 48.4%. Gross profit for 1998 was affected by $3,485,000 in one-time
adjustments related to the Eltron merger. Excluding this one-time charge, gross
profit for 1998 would have been $159,295,000, or 47.4% of net sales. The decline
in gross profit margin was also due to an unfavorable shift in product mix
toward lower margin printers.
Selling and marketing expenses of $36,052,000 increased 9.2% from $33,017,000.
As a percentage of net sales, selling and marketing expenses decreased to 10.7%
from 11.1%. For 1998, selling and marketing expenses include $242,000 in
one-time charges related to the Eltron merger. Excluding these one-time charges,
selling and marketing expenses for 1998 would have been $35,810,000, or 10.7% of
net sales. During 1998, the Company increased staff levels to support
anticipated higher levels of business. Higher personnel-related expenses and
depreciation were partially offset by lower advertising and trade show expenses.
Research and development expenses for 1998 totaled $21,428,000, or 6.4% of net
sales, compared with $17,911,000, or 6.0% of net sales, for 1997. Research and
development expenses for 1998 include $175,000 in one-time charges related to
the Eltron merger. Excluding these one-time charges, research and development
expenses for 1998 would have been $21,253,000, or 6.3% of net sales. Higher
personnel-related expenses and prototype work related to new product development
were primarily responsible for the increase.
General and administrative expenses increased by 33.0% to $28,614,000 from
$21,518,000. As a percentage of net sales, general and administrative expenses
increased to 8.5% from 7.2%. Excluding $1,178,000 in one-time charges related to
the Eltron merger, 1998 general and administrative expenses were $27,436,000, or
8.2% of net sales. In 1998, the Company incurred higher personnel costs related
to increased staffing levels. Depreciation and other expenses also increased, as
Zebra's Baan ERP system became active during the second quarter of 1998.
In 1998, the Company incurred $8,080,000 in costs related to the Eltron merger.
These merger costs include accounting, legal, investment banking, and consulting
fees, as well as provisions for facilities consolidation and severance.
-14-
<PAGE>
Other income decreased to $3,358,000 from $13,963,000, including investment
income of $4,005,000 compared with $13,520,000. During the second half of 1998,
net investment income declined because of financial market volatility. In
addition, investment income for 1997 includes a one-time pretax investment gain
of $5,458,000, which was recognized in the first quarter of 1997. This one-time
gain resulted from the sale by the Company of 350,000 shares of Norand
Corporation common stock. Excluding this gain, investment income for 1997 would
have been $8,062,000. During the fourth quarter of 1998, the Company took steps
to reduce its investment portfolio's exposure to market volatility.
Income from continuing operations before income taxes was $65,021,000, compared
with $85,225,000, a decrease of $20,204,000, or 23.7%. Excluding the $13,161,000
in merger-related charges in 1998 and the one-time investment gain recognized in
the first quarter of 1997, income from continuing operations before taxes
declined 2.0% to $78,182,000 in 1998 from $79,767,000 in 1997.
The effective income tax rate for 1998 was 38.4%, compared with 36.1% for 1997.
The provision for income taxes for 1998 includes the effect of $2,875,000 in
certain merger-related costs, which are not deductible for income tax purposes.
Excluding these effects, the Company's effective tax rate for 1998 would have
been 36.8%.
Income from continuing operations for 1998 was $40,069,000, or $1.29 per diluted
share. For 1997, income from continuing operations was $54,447,000, or $1.74 per
diluted share.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased 17.7% to $297,100,000 from $252,487,000. The sales increase
is principally attributable to unit growth in hardware (printers and replacement
parts). The average unit price for printers declined slightly, because of
product mix changes since volume in lower-priced models grew faster than volume
in higher-priced models, although selective price decreases were made in
portions of the Company's product line. Hardware sales increased 25.6% to 75.8%
of net sales, and supplies sales increased 6.9% to 20.0% of net sales. The
remaining 4.2% of net sales consisted of service and software revenue.
International sales accounted for 42.2% of net sales in 1997, compared with
41.3% of net sales in 1996. The Company opened sales offices in France, Germany
and Singapore (2 facilities) in 1997. In 1996, the Company opened a sales office
in Miami, Florida, to serve Central and South American markets.
Gross profit was $143,708,000, up 22.8% from the gross profit of $117,013,000
for 1996. As a percentage of net sales, gross profit increased 2.1 percentage
points to 48.4% from 46.3%. The increase in gross profit margin was due to a
decrease in printer component costs, offset in part by a $544,000 provision for
certain excess component inventories related to the phase-out of a printer
program with a key customer.
Selling and marketing expenses of $33,017,000 increased 16.0% from $28,461,000.
As a percentage of net sales, selling and marketing expenses decreased to 11.1%
from 11.3%. Growth in selling and marketing expenses occurred because of higher
expenses related to the opening of new international and domestic sales offices,
the opening of a new distribution facility in the United Kingdom, and expansion
of the Company's card printer facility in France. Selling and marketing expenses
also increased as a result of advertising and promotional expenses related to
the introduction of new products.
Research and development expenses increased 18.2% to $17,911,000 from
$15,159,000. This increase is primarily related to higher staffing levels to
support more aggressive new product development efforts. As a percentage of
sales, research and development expenses was unchanged at 6.0%.
General and administrative expenses increased by 50.5% to $21,518,000 from
$14,299,000. The Company incurred higher expenses for increased staffing levels,
greater use of professional services, and certain project costs related to
implementation of the Company's enterprise-wide software system. As a percentage
of net sales, general and administrative expenses increased to 7.2% from 5.7%.
In 1996, the Company incurred charges for acquired in-process technology of
$3,617,000, related to the acquisition of Fenestra Computer Services and
Privilege, S.A. In addition, $1,344,000 is reflected in merger costs for legal
and other costs associated with business combinations, either attempted or
completed. No such costs were recorded in 1997.
Other income increased 112.5% to $13,963,000 from $6,570,000. This growth was
principally due to a $7,137,000 increase in investment income, which includes a
one-time gain of $5,458,000 recorded in the first quarter of 1997 from the sale
by the
-15-
<PAGE>
Company of 350,000 shares of Norand Corporation common stock. Excluding this
gain, investment income would have increased $1,679,000, or 26.3%, as a the
result of realized and unrealized gains on the Company's investment portfolio.
Income from continuing operations before income taxes was $85,225,000, compared
with $60,703,000, an increase of $24,522,000, or 40.4%. Excluding the previously
discussed one-time investment gain recognized in the first quarter of 1997,
income from continuing operations before taxes increased 31.4%.
The effective income tax rate for 1997 was 36.1%, compared with 37.5% for 1996.
The provision for income taxes for 1996 includes the effect of the write-off of
certain acquired in-process technology and acquisition costs, which was not
deductible for income tax purposes, the utilization of certain tax credits, and
the reduction of the deferred tax valuation allowance. Excluding these effects,
the Company's effective tax rate for 1996 would have been 35.4%.
Income from continuing operations for 1997 was $54,447,000, or $1.76 per basic
share and $1.74 per diluted share. For 1996, income from continuing operations
was $37,952,000, or $1.24 per basic share and $1.21 per diluted share.
DISCONTINUED OPERATIONS
During 1997, the Company decided to discontinue the operations of its Zebra
Technologies VTI subsidiary (Zebra VTI), which developed bar code label design
software targeted at the small business market and distributed through PC
distributors and catalogs. A one-time charge of $2,363,000, net of applicable
tax benefit, was recorded in the second quarter of 1997 to cover expected
product returns, provisions for slow-moving and obsolete inventory, estimated
contingent liabilities, and the write-off of remaining goodwill and other
intangible assets. Remaining business records and assets were transferred to
other portions of the Company. Financial results for prior quarters were revised
to reflect the discontinued operations. The Company originally acquired Zebra
VTI in July 1995.
LIQUIDITY AND CAPITAL RESOURCES
Internally generated funds from operations are the primary source of liquidity
for the Company. As of December 31, 1998, the Company had $162,668,000 in cash
and marketable securities, compared with $139,320,000 at the end of 1997.
The Company has a $6,000,000 unsecured line of credit plus an additional
$4,000,000 unsecured revocable line of credit with its bank. These credit
facilities are priced at either the prime rate or 100 basis points over the
London Interbank Offered Rate (LIBOR), at the Company's discretion. As of
December 31, 1998, the Company had borrowings of $184,700 outstanding under its
lines of credit. The Company also has a revolving credit facility that allows
the Company to borrow up to $10,000,000 on an unsecured basis. Borrowings under
the revolving credit facility bear interest at the bank's prime rate. The
Company did not use this revolving credit facility during 1998.
Capital expenditures in 1998 were $25,586,000, compared with $10,270,000 in 1997
and $11,274,000 in 1996. The increase in capital expenditures in 1998 includes
purchases of new manufacturing and distribution facilities in Camarillo,
California (purchased in conjunction with the Eltron merger), and Preston, the
United Kingdom, as well as expenditures on computer hardware and software,
including the Company's new enterprise-wide resource planning (ERP) system.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This pronouncement will require the Company
to recognize derivatives on its balance sheet at fair value. Changes in the fair
values of derivatives that qualify as cash flow hedges will be recognized in
other comprehensive income until the hedged item is recognized in earnings. The
Company expects that this new standard will not have a significant effect on its
results of operations. SFAS 133 is effective for fiscal years beginning after
June 15, 1999.
YEAR 2000 CONSIDERATIONS
INTERNAL SYSTEMS. Management believes that substantially all of Zebra's critical
internal computer systems and technical infrastructure is presently Year 2000
(Y2K) compliant and that those systems not presently compliant will be brought
into compliance in sufficient time to avoid adverse business consequences as the
result of the Year 2000. Among the systems not compliant as of December 31,
1998, are the Company's internal payroll system utilized at its Vernon Hills
headquarters facility, and the manufacturing control software used in its
Preston label conversion facility in the UK. Both systems are scheduled for
replacement or upgrade during 1999 to bring them into compliance by the end of
the third quarter of 1999. A variety of sub-systems were also non-compliant as
of December 31, 1998. These typically require the installation of a
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<PAGE>
software upgrade or patch and do not, in management's opinion, present a serious
obstacle to achieving Y2K compliance by year-end.
PRODUCTS. The Company has reviewed its entire product line for Year 2000
compliance issues and has identified those products that will be affected. In
general, Year 2000 issues do not affect the company's printer products because
they contain no internal clock or timing mechanism. The Company's current
software products are all Y2K compliant, although in some cases previous
versions were not. In addition, the Company's PC-470 printer controller contains
a real-time clock that must be reset to function properly after January 1, 2000.
In all cases where products are not Y2K compliant, customers have been notified
via letter or postings on the Company's web site about any corrective action
that is needed, including, where appropriate, a requirement to upgrade certain
software products.
SUPPLIERS. The Company surveyed each of its significant suppliers to determine
their ability to provide necessary products and services that are critical to
business continuation through Y2K. To date 125 suppliers deemed critical to the
business have been surveyed and 116 have affirmed positively that they would be
Y2K compliant and that there would be no impact on their ability to supply the
Company due to Y2K problems. The Company is pursuing responses from the
remaining nine suppliers. Despite these assurances of compliance, the Company
does not warrant the performance of its suppliers. The failure by one or more
significant suppliers to achieve compliance could have a material adverse effect
on the Company. The Company has not undertaken to quantify the effect of such
possible non-compliance or to determine the likely worst-case scenario or to
develop contingency plans to deal with such a scenario.
Management estimates that it will have incurred approximately $400,000 of costs
to ensure Y2K compliance by December 31, 1999. This includes $200,000 of direct
expenditures to upgrade its systems and products and $200,000 of management and
internal technical support to upgrade systems and ensure the status of
compliance within the Company's supplier base. This estimate does not include
the cost of new systems or system upgrades that were made for reasons other than
Y2K compliance but included Y2K compliance as part of the upgrade package.
Specifically excluded from the cost of Y2K compliance is the cost of the
Company's recent conversion to the Baan ERP system and the cost of its new
payroll/human resources system, both of which were made for reasons other than
Y2K compliance.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 1998, sales to United Parcel Service (UPS), one
of the Company's direct customers, accounted for 10.3% of the Company's net
sales.
SAFE HARBOR
Forward-looking statements contained in this filing are subject to the safe
harbor created by the Private Securities Reform Act of 1995 and are highly
dependent upon a variety of important factors which could cause actual results
to differ materially from those reflected in such forward looking statements.
These factors include market acceptance of the Company's products and
competitors' product offerings. They also include the success and speed of the
Company's integration with Eltron International, as well as the effect of market
conditions in the Asia-Pacific region on the Company's financial results.
Profits will be affected by the Company's ability to control manufacturing and
operating costs. Due to the Company's large investment portfolio, interest rate
and financial market conditions will also have an impact on results. Foreign
exchange rates will have an effect on financial results because of the large
percentage of the Company's international sales. When used in this document and
documents referenced, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions as they relate to the Company or its management
are intended to identify such forward-looking statements. Readers of this
document are referred to prior filings with the Securities and Exchange
Commission, including Zebra's joint proxy statement/prospectus dated September
21, 1998, particularly the "Risk Factors" section, for further discussions of
issues that could affect the Company's future results.
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to the impact of changes in interest rates because of its
large investment portfolio. As stated in the Company's written investment
policy, the Company's investment portfolio is viewed as a strategic resource
that will be managed to achieve above market rates of return in exchange for
accepting a prudent amount of incremental risk, which includes the risk of
interest rate movements. Risk tolerance is constrained by an overriding
objective to preserve capital across each quarterly reporting cycle.
The Company mitigates interest rate risk with an investment policy that requires
the use of outside professional investment managers, investment liquidity, broad
diversification across investment strategies, and limits on the types of
investment assets that may be used. Moreover, the policy requires strict due
diligence of each manager both before employment and on an on-going basis.
FOREIGN EXCHANGE RISK
The Company conducts business in more than 90 countries throughout the world
and, therefore, can be exposed to movements in foreign exchange rates. Currency
exposures are related only to the U.S. dollar/U.K. pound sterling exchange rate
arising from invoicing European customers in pounds sterling from the Company's
U.K. office and to the U.S. dollar/Japanese yen exchange rate arising from
purchases of some thermal transfer ribbons denominated in yen. There is no
foreign exchange risk associated with the Company's investment portfolio.
The Company manages its foreign exchange exposure through a policy of selective
hedging. This policy involves selling forward up to 180 days, projected
remittances in pounds sterling from the Company's U.K. subsidiary. The Company
also purchases a limited number of yen contracts to hedge the cost of
yen-denominated invoices from certain suppliers. This policy mitigates, but does
not eliminate, the impact of exchange movements on the value of future cash
flows. Thus, adverse movements in either the pound or the yen in relation to the
dollar can directly impact the Company's financial results. All foreign exchange
contracts are executed by the corporate treasury department only with major
financial institutions. Under no circumstances does the Company enter into any
type of foreign exchange contract for trading or speculative purposes.
EQUITY PRICE RISK
The Company does not generally invest in marketable equity securities, except as
part of its acquisition strategy, although one of its investment managers
utilizes a market neutral strategy that involves offsetting long-short equity
positions. The Company held no direct equity positions as of December 31, 1998.
The Company utilizes a "Value-at-Risk" (VaR) model to determine the maximum
potential one-day loss in the fair value of its interest rate, foreign exchange
and equity price sensitive instruments.
The following table sets forth the impact of a 1% movement in interest rates on
the value of the Company's investment portfolio as of December 31, 1998.
Similarly, the impact of a 1% change in the value of all equity positions held
by the Company's investment managers is tabulated. The impact of a 1% movement
in the dollar/pound and dollar/yen rates is measured as if the Company did NOT
engage in the selective hedging practices described above and is based on the
actual yen obligations of the Company as of December 31, 1998, and the present
value of the projected average monthly remittances from the Company's U.K.
subsidiary for the first quarter of 1999.
<TABLE>
<S> <C>
Interest rate sensitive instruments $811,300
Foreign exchange
Dollar/pound $17,500
Dollar/yen $12,800
Equity price sensitive instruments $48,400
</TABLE>
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and schedule of the Company are annexed to this Report
as pages F-2 through F-22. An index to such materials appears on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from the
Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from the
Proxy Statement section entitled "Executive Compensation and Certain
Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from the
Proxy Statement section entitled "Security Ownership of Management and Certain
Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from the
Proxy Statement section entitled "Executive Compensation and Certain
Transactions."
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements and schedule filed as part of this report are listed in
the accompanying Index to Financial Statements and Schedule. The exhibits filed
as a part of this report are listed in the accompanying Index to Exhibits.
The Company filed a Current Report on Form 8-K dated October 28, 1998, to report
the Company's consummation of its merger with Eltron International, Inc. (Items
2 and 7 of Form 8-K).
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<PAGE>
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, on the 29th day of March,
1999.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/Edward L. Kaplan
---------------------------
Edward L. Kaplan
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/Edward L. Kaplan Chief Executive Officer and March 29, 1999
- --------------------------- Chairman of the Board of Directors
Edward L. Kaplan (Principal Executive Officer)
/s/Donald K. Skinner Vice Chairman of the Board March 29, 1999
- --------------------------- of Directors
Donald K. Skinner
/s/Gerhard Cless Executive Vice President, March 29, 1999
- --------------------------- Secretary and Director
Gerhard Cless
/s/Charles R. Whitchurch Chief Financial Officer and Treasurer March 29, 1999
- --------------------------- (Principal Financial and Accounting
Charles R. Whitchurch Officer)
/s/Christopher G. Knowles Director March 29, 1999
- ---------------------------
Christopher G. Knowles
/s/David P. Riley Director March 29, 1999
- ---------------------------
David P. Riley
/s/Michael A. Smith Director March 29, 1999
- ---------------------------
Michael A. Smith
</TABLE>
-22-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
3.1 (1) Certificate of Incorporation of the Registrant.
3.2 (2) Bylaws of the Registrant.
3.3 (4) Amendment to Bylaws of the Registrant.
4.0 (2) Specimen stock certificate representing Class A Common Stock.
10.1 (9) 1997 Stock Option Plan +
10.2 (3) Stock Purchase Plan (as Amended and Restated). +
10.3 (2) Form of Indemnification Agreement between the Registrant and each of its directors.
10.4 (2) Lease between the Registrant and Unique Building Corporation for the Registrant's facility in
Vernon Hills, Illinois, as amended.
10.5 (2) Employment Agreement between the Registrant and Clive P. Hohberger. +
10.6 (2) Guaranty by the Registrant of certain obligations.
10.7 (2) Forms of Distributor Agreement.
10.8 (9) Directors' Stock Option Plan.+
10.9 (4) Employment Agreement between the Registrant and Charles R. Whitchurch. +
10.10 (4) Form of Authorized Zebra Solution Center Agreement.
10.11 (4) Credit Agreement with American National Bank and Trust Company of Chicago.
10.12 (4) Description of Executive Officer Bonus Plan. +
10.13 (5) Amendment to the lease between the Registrant and Unique Building Corporation for the
Registrant's facility in Vernon Hills, Illinois, dated April 1, 1993.
10.14 (6) Amendment to the lease between the Registrant and Unique Building Corporation for the
Registrant's facility in Vernon Hills, Illinois, dated December 1, 1994.
10.15 (8) Amendment to the lease between the Registrant and Unique Building Corporation for the
Registrant's facility in Vernon Hills, Illinois, dated June 1, 1996.
10.16 (8) Amendment to the lease between the Registrant and Unique Building Corporation for the
Registrant's facility in Vernon Hills, Illinois, dated June 2, 1996.
10.17 (7) Employment Agreement between the Registrant and Jack A. LeVan. +
10.18 (10) Employment Agreement between the Registrant, Eltron, and Donald K. Skinner. +
21.0 Subsidiaries of the Registrant.
23.1 Report and Consent of KPMG LLP, independent auditors (included on page F-24 of this Annual
Report on Form 10-K).
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.
27.1 Financial Data Schedule--Fiscal Year Ended December 31, 1998.
27.2 Restated Financial Data Schedule--Fiscal Years Ended December 31, 1997 and 1996.
99 Report of Independent Accountants
</TABLE>
(1) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Registration Statement on Form S-3, File No.
333-33315, and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Registration Statement on Form S-1, as
amended, File No. 33-41576, and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Registration Statement on Form S-8, as
amended, File No. 33-44706, and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992, and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Registration Statement on Form S-4, as
amended, File No. 333-60241, and incorporated herein by reference.
+ Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Annual Report on Form 10-K.
F-1
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Earnings for the Years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Comprehensive Income
for the Years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts F-22
Report and Consent of Independent Auditors F-24
Consent of Independent Accountants F-25
Report of Independent Accountants F-28
</TABLE>
ALL OTHER FINANCIAL STATEMENT SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT
APPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN THE CONSOLIDATED FINANCIAL
STATEMENTS OR NOTES THERETO.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Zebra Technologies Corporation:
We have audited the accompanying consolidated balance sheets of
Zebra Technologies Corporation and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of earnings,
comprehensive income, shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not
audit the financial statements of Eltron International, Inc., a
wholly-owned subsidiary, which statements reflect total assets
constituting 25 percent as of December 31, 1997 and net sales
constituting 35 percent in 1997 and 1996, of the related consolidated
totals. Those statements were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to the
amounts for Eltron International, Inc., is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide, and the report of
the other auditors, a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Zebra Technologies Corporation and Subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
February 24, 1999
F-3
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,391 $ 10,925
Investments and marketable securities 151,277 128,395
Accounts receivable, net of allowance of $2,156 in 1998 and $2,130 in 1997 57,654 51,608
Inventories 39,684 43,860
Deferred income taxes 5,137 6,111
Prepaid expenses 1,328 1,678
-------- --------
Total current assets 266,471 242,577
-------- --------
Property and equipment at cost, less
accumulated depreciation and amortization 38,850 23,138
Other assets 4,681 4,732
-------- --------
TOTAL ASSETS $310,002 $270,447
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,565 $ 17,069
Accrued liabilities 11,498 10,754
Short-term note payable 183 136
Current portion of obligation under capital lease with related 51 65
party
Income taxes payable 4,486 4,691
-------- --------
Total current liabilities 36,783 32,715
-------- --------
Obligation under capital lease with related party, less current portion -- 51
Long-term liability 36 263
Deferred income taxes 1,932 911
Other 367 287
-------- --------
TOTAL LIABILITIES 39,118 34,227
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
none outstanding -- --
Class A Common Stock, $.01 par value; 50,000,000 shares
authorized, 22,635,661 and 19,413,933 shares issued
and outstanding in 1998 and 1997, respectively 227 194
Class B Common Stock, $.01 par value; 28,358,189 shares
authorized, 8,619,919 and 11,600,937 shares issued
and outstanding in 1998 and 1997, respectively 86 115
Additional paid-in capital 49,850 55,918
Retained earnings 219,772 179,703
Accumulated other comprehensive income 949 290
-------- --------
-------- --------
TOTAL SHAREHOLDERS' EQUITY 270,884 236,220
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $310,002 $270,447
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 335,983 $ 297,100 $ 252,487
Cost of sales 180,173 153,392 135,474
--------- --------- ---------
Gross profit 155,810 143,708 117,013
Operating expenses:
Selling and marketing 36,052 33,017 28,461
Research and development 21,428 17,911 15,159
General and administrative 28,614 21,518 14,299
Merger costs 8,080 -- 1,344
Acquired in-process technology -- -- 3,617
--------- --------- ---------
Total operating expenses 94,174 72,446 62,880
--------- --------- ---------
Operating income 61,636 71,262 54,133
--------- --------- ---------
Other income (expense):
Investment income 4,005 13,520 6,383
Interest expense (425) (86) (116)
Other, net (195) 529 303
--------- --------- ---------
Total other income 3,385 13,963 6,570
--------- --------- ---------
Income from continuing operations before income taxes 65,021 85,225 60,703
Income taxes 24,952 30,778 22,751
--------- --------- ---------
Income from continuing operations 40,069 54,447 37,952
--------- --------- ---------
Discontinued operations
Loss from discontinued operation (less applicable
income tax benefit of $372 and $815 in 1997 and 1996) -- (1,692) (1,938)
Loss on disposal of discontinued operations, including
provision for operating losses during phase-out period
(less applicable income tax benefit of $615 in 1997) -- (963) --
--------- --------- ---------
Net income $ 40,069 $ 51,792 $ 36,014
--------- --------- ---------
--------- --------- ---------
Basic earnings per share from continuing operations $ 1.30 $ 1.76 $ 1.24
Diluted earnings per share from continuing operations $ 1.29 $ 1.74 $ 1.21
Basic earnings per share $ 1.30 $ 1.68 $ 1.17
Diluted earnings per share $ 1.29 $ 1.65 $ 1.15
Basic weighted average shares outstanding 30,919 30,897 30,696
Diluted weighted average and equivalent shares outstanding 31,176 31,380 31,269
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Net income $40,069 $ 51,792 $36,014
Other comprehensive income (loss):
Foreign currency translation adjustment 659 (946) 1,474
Unrealized holding gains (losses) on investments:
Net change in unrealized holding gains for the period,
net of income tax expense of $3 and $625 in 1997 and 1996 -- 6 1,160
------- -------- -------
Comprehensive income $40,728 $ 50,852 $38,648
------- -------- -------
------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE
INCOME
----------------------------
CLASS A CLASS B ADDITIONAL UNREALIZED CUMULATIVE
COMMON COMMON PAID-IN RETAINED HOLDING LOSS TRANSLATION
STOCK STOCK CAPITAL EARNINGS ON INVESTMENTS ADJUSTMENT TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $169 $ 137 $ 53,571 $ 91,917 ($1,166) ($ 238) $ 144,390
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustment to retained earnings as a
result of business combination -- -- -- (20) -- -- (20)
Issuance of 56,815 shares of
Class A Common stock -- -- 742 -- -- -- 742
Issuance of 152,403 shares of
Class B Common stock -- 1 446 -- -- -- 447
Conversion of 2,658 shares of
Class B Common Stock to 2,658
shares of Class A Common stock -- -- -- -- -- -- --
Cancellation of 20,575 shares of Class
B Common Stock in connection with
RJS merger -- -- (776) -- -- -- (776)
Tax benefit resulting from exercise of
options -- -- 576 -- -- -- 576
Net Income -- -- -- 36,014 -- -- 36,014
Foreign currency translation adjustment -- -- -- -- -- 1,474 1,474
Unrealized holding gain on
investments -- -- -- -- 1,160 -- 1,160
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 169 138 54,559 127,911 (6) 1,236 184,007
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of 64,165 shares of
Class A Common stock 1 -- 970 -- -- -- 971
Issuance of 144,978 shares of
Class B Common stock -- 1 1,011 -- -- -- 1,012
Conversion of 2,424,795 shares of
Class B Common Stock to 2,424,795
shares of Class A Common stock 24 (24) -- -- -- -- --
Settlement of litigation-
Zebra Technologies VTI -- -- (1,372) -- -- -- (1,372)
Cancellation of 6,715 shares of Class
B Common Stock in connection with
RJS merger -- -- (253) -- -- -- (253)
Tax benefit resulting from exercise of
options -- -- 1,003 -- -- -- 1,003
Net income -- -- -- 51,792 -- -- 51,792
Foreign currency translation adjustment -- -- -- -- -- (946) (946)
Unrealized holding gain on
investments -- -- -- -- 6 -- 6
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 194 115 55,918 179,703 -- 290 236,220
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of 55,578 shares of
Class A Common stock 1 -- 1,181 -- -- -- 1,182
Issuance of 229,290 shares of
Class B Common stock -- 3 566 -- -- -- 569
Conversion of 3,187,641 shares of
Class B Common Stock to 3,187,641
shares of Class A Common stock 32 (32) -- -- -- -- --
Elimination of intercorporate
investments
In Eltron -- -- (8,092) -- -- -- (8,092)
Tax benefit resulting from exercise
of options -- -- 277 -- -- -- 277
Net income -- -- -- 40,069 -- -- 40,069
Foreign currency translation adjustment -- -- -- -- -- 659 659
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $227 $ 86 $ 49,850 $ 219,772 $ -- $ 949 $ 270,884
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 40,069 $ 51,792 $ 36,014
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,248 7,002 5,515
Acquired in-process technology -- -- 3,617
Depreciation (appreciation)
in market value of investments & marketable securities 1,085 (5,973) (2,483)
Deferred income taxes 1,995 (3,761) 103
Discontinued operations -- (3,371) --
Changes in assets and liabilities, net of businesses acquired
Accounts receivable, net (6,046) (3,645) (12,713)
Inventories 4,176 (5,409) (6,208)
Other assets (294) (1,007) 267
Accounts payable 3,496 (2,172) 1,011
Accrued expenses 744 3,909 906
Income taxes payable (205) 1,944 (317)
Other operating activities 430 339 978
Investments and marketable securities (23,967) (37,853) (24,154)
-------- -------- --------
Net cash provided by operating activities 31,731 1,795 2,536
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (25,615) (10,241) (11,274)
Payment for acquisitions -- -- (4,158)
Purchase of investments and marketable securities -- (14,549) (14,930)
Sales of investments and marketable securities -- 27,304 22,802
-------- -------- --------
Net cash provided by (used in) investing activities (25,615) 2,514 (7,560)
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,028 1,983 923
Common stock retired in Eltron merger (8,092) -- --
Common stock purchased in connection with RJS merger -- -- (776)
Repayment of notes payable (180) (819) (825)
Payments for obligation under capital lease (65) (61) (59)
-------- -------- --------
Net cash provided by (used in) financing activities (6,309) 1,103 (737)
-------- -------- --------
Effect of exchange rate changes on cash 659 (946) 1,474
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 466 4,466 (4,287)
Cash and cash equivalents at beginning of year 10,925 6,459 10,746
-------- -------- --------
Cash and cash equivalents at end of year $ 11,391 $ 10,925 $ 6,459
-------- -------- --------
-------- -------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 425 $ 85 $ 116
Income taxes paid 22,624 30,060 21,853
Supplemental disclosures of noncash transactions:
Tax benefit arising from exercise of options 277 1,003 576
Assumption of liabilities and obligations in connection
with acquisition of Privilege, S.A -- -- 1,323
Cancellation of shares issued in connection with RJS merger -- (253) --
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
NOTE 1 DESCRIPTION OF BUSINESS
Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company)
design, manufacture, sell, and support a broad line of bar code label and
plastic card printers, self-adhesive labeling materials, plastic card supplies,
thermal transfer ribbons and bar code label design software. These products are
used principally in automatic identification (auto ID), data collection and
personal identification applications and are distributed world-wide through a
multi-channel reseller network to a wide cross section of industrial, service
and government organizations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying financial statements have been
prepared on a consolidated basis to include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts, transactions,
and unrealized profit have been eliminated in consolidation.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs are expensed as
incurred.
CASH EQUIVALENTS. Cash equivalents consist primarily of short-term treasury
securities. For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
INVESTMENTS AND MARKETABLE SECURITIES. Investments and marketable securities at
December 31, 1998, consisted of U.S. government securities, state and municipal
bonds, partnership interests, and equity securities, which are held indirectly
in diversified funds actively managed by investment professionals. The Company
applies the provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (FASB 115).
Under FASB 115, the Company classifies its debt and marketable equity securities
in one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities that the
Company has the ability and intent to hold until maturity. All securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of discounts or premiums. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of shareholders'
equity until realized.
INVENTORIES. Inventories are stated at the lower of cost or market, and cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation
and amortization is computed primarily using the straight-line method over the
estimated useful lives of the various classes of property and equipment, which
is 30 years for buildings and range from 3 to 10 years for machinery and
equipment. Property and equipment held under a capital lease is amortized using
the straight-line method over the shorter of the lease term or estimated useful
life of the asset.
INCOME TAXES. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (FASB
109). Under the asset and liability method of FASB 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under FASB 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
F-10
<PAGE>
ADVERTISING. Advertising costs are expensed as incurred. Advertising expenses
for the years ended December 31, 1998, 1997, and 1996 totaled $3,931,000,
$4,767,000 and $4,070,000, respectively.
WARRANTY. The Company provides warranty coverage of up to one year on printers
against defects in material and workmanship. A provision for warranty expense is
recorded at the time of shipment. To date, the Company has not experienced any
significant warranty claims.
STOCK-BASED COMPENSATION. The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES.
RECLASSIFICATIONS. Certain amounts in the prior period financial statements have
been reclassified to conform to the current period's presentation.
USE OF ESTIMATES. The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION. The balance sheets of the Company's foreign
subsidiaries are translated into U.S. dollars using the year-end exchange rate,
and statement of earnings items are translated using the average exchange rate
for the year. The resulting translation gains or losses are recorded as a
separate component of shareholders' equity as a cumulative translation
adjustment.
NOTE 3 BUSINESS COMBINATIONS
ELTRON. On October 28, 1998, the Company acquired all of the outstanding capital
stock of Eltron International, Inc. (Eltron), a manufacturer of bar code
printers and related accessories, in exchange for 6,916,951 shares of the
Company's Class B Common Stock (see Note 14 for information concerning the
Company's Common Stock), which had a market value of approximately $201 million
at the time of the acquisition.
The acquisition was accounted for as a pooling of interests and, accordingly,
the consolidated financial statements have been restated as if the companies had
been combined for all periods presented. Merger costs reported in the
consolidated statement of earnings for the year ended December 31, 1998 include
investment banking and other professional fees, write-downs of certain assets,
employee severance, and other acquisition related charges. Included in accrued
liabilities as of December 31, 1998, is $1,181,000 related to these costs.
The following information (in thousands) reconciles net sales and income from
continuing operations of the companies as previously reported in the companies'
Annual Report on Form 10-K for the year ended December 31, 1997 with the amounts
presented in the accompanying consolidated statements of earnings for the years
ended December 31, 1997 and 1996, as well as the separate results of operations
of Eltron for the period from January 1, 1998 through October 28, 1998,
representing the period in 1998 preceding the acquisition.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ----------------------------- -------------------------------
Income Income Income
from continuing from continuing from continuing
Net sales operations Net sales operations Net sales operations
------------------------------- ------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Zebra(*) $192,071 $42,810 $163,977 $30,853
Eltron $100,043 $9,090 105,029 11,637 88,510 7,099
------------------------------ --------------------------------
Total $297,100 $54,447 $252,487 $37,952
</TABLE>
(*) Represents the historical results of Zebra without considering the effect of
the pooling of interests business combination with Eltron.
F-11
<PAGE>
PRIVILEGE, S.A. Effective January 1, 1996, the Company purchased all of the
outstanding capital stock of Privilege, S.A. (Privilege), a French company
primarily engaged in the design, manufacture and distribution of custom plastic
card printers. This transaction has been accounted for as a purchase, and
acquired in-process technology valued at $2.5 million was expensed immediately.
The purchase price paid by the Company was approximately $3.2 million in cash
and the assumption of approximately $1.3 million in trade liabilities and debt.
The assets acquired by the Company consisted of trade receivables, inventories,
equipment and technology. The results of operations relating to Privilege are
included with those of the Company from January 1, 1996.
RJS, INCORPORATED. Effective March 1, 1996, the Company acquired RJS,
Incorporated (RJS) in a business combination accounted for as a pooling of
interests. RJS is a manufacturer of bar code label printers, bar code verifiers
and verified printing systems located in Monrovia, California.
In January 1998, Printronix Inc., a leading manufacturer of computer printers,
acquired the assets and rights to the bar code verification business and the RJS
name from the Company for approximately $2.8 million. In the first quarter of
1998, the Company recorded a tax affected gain on the sale of approximately
$250,000. The Company retained the rights to the in-line verification technology
for use in its line of integrated verified printing systems, as well as the
QualaBar and ThermaBar industrial printer lines.
NOTE 4 EARNINGS PER SHARE
For the years ended December 31, 1998, 1997, and 1996, earnings per share were
computed in accordance with Statement of Financial Accounting Standards No. 128,
which the Company adopted during the fourth quarter of 1997. Earnings per share
are calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income from continuing operations $40,069 $54,447 $37,952
Weighted average common shares outstanding 30,919 30,897 30,696
Per share amount $1.30 $1.76 $1.24
DILUTED EARNINGS PER SHARE:
Income from continuing operations $40,069 $54,447 $37,952
Weighted average common shares outstanding 30,919 30,897 30,696
Add: Effect of dilutive securities - stock options 257 483 573
-------------------------------------------
Diluted weighted average and
equivalent common shares outstanding 31,176 31,380 31,269
Per share amount $1.29 $1.74 $1.21
</TABLE>
The potentially dilutive securities, which were excluded from the earnings per
share calculation, consisted of stock options for which the exercise price
was greater than the average market price of the Class A common stock,
amounting to 227,250, 246,855 and 178,000 at December 31, 1998, 1997 and 1996,
respectively.
F-12
<PAGE>
NOTE 5 INVESTMENTS AND MARKETABLE SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and aggregate fair value of investment securities at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
State and municipal bonds $ 6,928 -- -- $ 6,928
Trading Securities:
U.S. government and agency securities 8,981 147 (6) 9,122
State and municipal bonds 82,869 469 (30) 83,308
Equity securities 16,456 589 (117) 16,928
Partnership interests 24,500 3,162 -- 27,662
Other 7,487 -- (158) 7,329
-----------------------------------------------------------------
140,293 4,367 (311) 144,349
-----------------------------------------------------------------
$147,221 $ 4,367 $ (311) $151,277
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and aggregate fair value of investment securities at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
State and municipal bonds $ 6,696 -- -- $ 6,696
Trading Securities:
U.S. government and agency securities 12,163 311 (4) 12,470
State and municipal bonds 63,584 231 (49) 63,766
Equity securities 7,812 431 (8) 8,235
Partnership interests 19,500 4,313 -- 23,813
Other 13,499 -- (84) 13,415
-----------------------------------------------------------------
116,558 5,286 (145) 121,699
-----------------------------------------------------------------
$123,254 $ 5,286 $ (145) $128,395
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
The contractual maturities of debt securities at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Fair Value
(In thousands)
-------------
<S> <C>
Due within one year $ 59,724
Due after one year through five years 37,195
Due after five years 9,768
-------------
$ 106,687
-------------
-------------
</TABLE>
Using the specific identification method, the proceeds and realized gains on the
sales of an available-for-sale security during 1997 were $11,506,000 and
$5,458,000, respectively.
F-13
<PAGE>
NOTE 6 RELATED-PARTY TRANSACTIONS
Unique Building Corporation (Unique), an entity controlled by certain officers
and shareholders of the Company, leases a facility and equipment to the Company
under a lease described in Note 11. Management believes that the lease payments
are substantially consistent with amounts that could be negotiated with third
parties on an arm's-length basis.
Interest expense and lease payments related to the leases were included in the
consolidated financial statements as follows (in thousands):
<TABLE>
<CAPTION>
Unique Interest
Operating Expense on
Lease Payments Unique Capital
Lease
---------------- -----------------
<S> <C> <C>
1998 $1,323 $4
1997 1,261 7
1996 1,227 10
</TABLE>
NOTE 7 INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Raw material $21,292 $28,350
Work in process 2,838 3,684
Finished goods 15,554 11,826
---------------- -----------------
Total inventories $39,684 $43,860
---------------- -----------------
---------------- -----------------
</TABLE>
NOTE 8 PROPERTY AND EQUIPMENT
Property and equipment, which includes assets under capital leases, is comprised
of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Buildings $ 10,256 $ --
Land 1,910 --
Machinery, equipment and tooling 25,005 20,696
Machinery and equipment under capital leases 574 574
Furniture and office equipment 4,125 8,500
Computers and software 21,589 10,834
Automobiles 514 505
Leasehold improvements 1,444 1,442
---------------- -----------------
65,417 42,551
Less accumulated depreciation and amortization 26,567 19,413
---------------- -----------------
Net property and equipment $ 38,850 $ 23,138
---------------- -----------------
---------------- -----------------
</TABLE>
F-14
<PAGE>
NOTE 9 INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current:
Federal $17,194 $26,553 $17,356
State 2,822 3,599 2,229
Foreign 2,941 3,528 2,235
Deferred:
Federal 2,197 (3,250) 188
State (202) (627) (72)
Foreign - 116 --
---------------- ----------------- ----------------
Total $24,952 $29,919 $21,936
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>
The provision for income taxes differs from the amount computed by applying the
U.S. statutory Federal income tax rate of 35%. The reconciliation of statutory
and effective income taxes is presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Provision computed at statutory rate $22,747 $28,608 $20,283
State income tax (net of Federal tax benefit) 2,044 2,284 1,557
Tax-exempt interest and dividend income (1,369) (635) (351)
Tax benefit of exempt foreign trade income (1,227) (441) (634)
Acquisition related items 1,006 109 1,347
Other 1,751 (6) (266)
---------------- ----------------- ----------------
Provision for income taxes $24,952 $29,919 $21,936
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Based on management's assessment, it is more
likely than not that the deferred tax assets will be realized through future
taxable earnings.
Temporary differences that give rise to deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Deferred rent-building $ 77 $ 103
Capital equipment lease 20 46
Accrued vacation 595 340
Inventory items 4,220 1,484
Allowance for doubtful accounts 667 577
Net operating loss carryforwards -- 1,222
Other accruals -- 3,451
Acquisition related items 473 404
---------------- -----------------
Gross deferred tax assets 6,052 7,627
Valuation allowance -- (427)
---------------- -----------------
Net deferred tax assets 6,052 7,200
Deferred tax liabilities:
Unrealized gain on securities (440) (179)
Depreciation (1,587) (1,254)
Other (820) (567)
---------------- -----------------
Total deferred tax liabilities (2,847) (2,000)
---------------- -----------------
Net deferred tax asset $ 3,205 $ 5,200
---------------- -----------------
---------------- -----------------
</TABLE>
F-15
<PAGE>
The valuation allowance decreased $427,000 and $424,000 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 10 401(K) SAVINGS AND PROFIT SHARING PLANS
The Company has a Retirement Savings and Investment Plan (the 401(k) Plan) that
is intended to qualify under Section 401(k) of the Internal Revenue Code.
Qualified employees may participate in the Company's 401(k) Plan by contributing
up to 15% of their gross earnings to the plan subject to certain Internal
Revenue Service restrictions. The Company matches each participant's
contribution of up to 6% of gross earnings at the rate of 50%. The Company may
contribute additional amounts to the 401(k) Plan at the discretion of the Board
of Directors, subject to certain legal limits.
The Company has a discretionary profit-sharing plan for qualified employees, to
which it contributed 3.4% of eligible earnings for 1998, 3.3% for 1997,
and 3.0% for 1996. Participants are not permitted to make contributions under
the profit-sharing plan.
Company contributions to these plans, which were charged to operations,
approximated the following (in thousands):
<TABLE>
<CAPTION>
401(k) Profit sharing Total
---------------- ----------------- ----------------
<S> <C> <C> <C>
1998 $620 $970 $1,590
1997 $548 $847 $1,395
1996 $398 $513 $911
</TABLE>
NOTE 11 COMMITMENTS AND CONTINGENCIES
LEASES. In September 1989, the Company entered into a lease agreement for its
Vernon Hills facility and certain machinery, equipment, furniture and fixtures
with Unique Building Corporation. The facility portion of the lease is treated
as an operating lease. An amendment to the lease dated June 1996 extended the
term of the lease through March 31, 2008. The lease agreement includes a
modification to the base monthly rental which goes into effect if the prescribed
rent payment is less than the aggregate principal and interest payments required
to be made by Unique under an Industrial Revenue Bond (IRB). Under the portion
of the lease agreement with Unique which is accounted for as a capital lease,
the Company leases machinery, equipment, furniture and fixtures at a monthly
rental of $5,725 for a ten-year period. The assets under these leases were fully
depreciated as of December 31, 1998 and 1997.
Minimum future obligations under noncancelable operating leases and future
minimum capital lease payments as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
---------------- -----------------
<S> <C> <C>
1999 $52 $2,403
2000 -- 2,304
2001 -- 2,060
2002 -- 2,024
2003 -- 2,104
Thereafter -- 12,069
---------------- -----------------
Total minimum lease payments 52 $22,964
Less amount representing interest 1
----------------
Present value of minimum payments 51
Less current portion of obligation under capital lease 51
----------------
Long-term portion of obligation under capital lease $--
</TABLE>
Rent expense for operating leases charged to operations for the years ended
December 31, 1998, 1997, and 1996 was $2,898,000, $2,871,000, and $2,395,000,
respectively.
F-16
<PAGE>
LETTER OF CREDIT. In connection with the lease agreements described above, the
Company has guaranteed Unique's full and prompt payment under Unique's letter of
credit agreement with a bank. The liability of the Company under this guaranty
as of December 31, 1998 is $700,000, which is the limit of the Company's
guaranty throughout the term of the IRB.
LINES OF CREDIT. In December 1992, the Company established a $6,000,000
unsecured line of credit and an additional $4,000,000 unsecured revocable line
with a bank. Borrowings under these lines bear interest indexed at either the
prime rate or 100 basis points over the London Interbank Offered Rate, at the
Company's discretion. The Company had $184,700 outstanding at December 31, 1998.
The lines of credit expire on February 28, 2000.
In 1997, the Company entered into an agreement for a revolving line of credit
with a bank. The revolving credit facility allows the Company to borrow up to
$10,000,000 on an unsecured basis. Borrowings under the revolving credit
facility bear interest at the bank's prime rate. Under the terms of the
revolving credit facility, the Company is not able to enter into certain
transactions or declare dividends without receiving prior written consent from
the bank and is required to comply with certain covenants as well as maintain
certain debt to net worth ratios, current ratio and minimum net worth
requirements. The revolving credit agreement expires in April 1999. There was no
utilization of the credit line during 1998.
DERIVATIVE INSTRUMENTS. In the normal course of business, portions of the
Company's operations are subject to fluctuations in currency values. The Company
addresses these risks through a controlled program of risk management that
includes the use of derivative financial instruments.
The Company enters into foreign exchange forward contracts to manage exposure to
fluctuations in foreign exchange rates to the funding of its United Kingdom
operations. The Company accounts for such contracts by recording any unrealized
gains or losses in income each reporting period. At December 31, 1998, the
Company had entered into foreign exchange forward contracts, which provide for
purchases of approximately 1,201,616 pounds sterling per month through February
1999. At December 31, 1998 and 1997, the notional principal amounts of
outstanding forward contracts were $4,057,000 and $6,211,000, respectively.
NOTE 12 SEGMENT DATA AND EXPORT SALES
The Company operates in one industry segment. Information regarding the
Company's operations by geographic area for the years ended December 31, 1998,
1997, and 1996 is included in the following table. These amounts are reported in
the geographic area where the final sale originates.
<TABLE>
<CAPTION>
Domestic Europe Other Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales $238,354 $96,397 $1,232 $335,983
Identifiable assets 305,172 4,049 781 310,002
1997
Net sales 222,340 74,760 -- 297,100
Identifiable assets 247,766 22,650 31 270,447
1996
Net sales 193,001 59,486 -- 252,487
Identifiable assets 199,215 19,417 -- 218,632
</TABLE>
NOTE 13 DISCONTINUED BUSINESS OPERATIONS
As of June 28, 1997, the Company made the decision to discontinue the operations
of its subsidiary, Zebra Technologies VTI (Zebra VTI). The discontinuance of
Zebra VTI and its related PC-retail channel resulted in a one-time charge of
$2,363,000 before income tax benefits, which was recorded in the second quarter
of 1997. The one-time charge includes a provision for expected product returns
from the present retail channel partners, provision for slow moving/obsolete
product, and provisions for estimated contingent liabilities. Additionally, the
remaining goodwill and intangible assets of $1,833,000 were written off as part
of the charge to discontinued operations.
F-17
<PAGE>
NOTE 14 SHAREHOLDERS' EQUITY
Holders of Class A Common Stock are entitled to one vote per share. Holders of
Class B Common Stock are entitled to 10 votes per share. Holders of Class A and
Class B Common Stock vote together as a single class on all actions submitted to
a vote of shareholders, except in certain circumstances. If at any time the
number of outstanding shares of Class B Common Stock represents less than 10% of
the total number of outstanding shares of both classes of common stock, then at
that time such outstanding shares of Class B Common Stock will automatically
convert into an equal number of shares of Class A Common Stock.
Class A Common Stock has no conversion rights. A holder of Class B Common Stock
may convert the Class B Common Stock into Class A Common Stock, in whole or in
part, at any time and from time to time. Shares of Class B Common Stock convert
into shares of Class A Common stock on a share-for-share basis.
Holders of Class A and Class B Common Stock are entitled to receive cash
dividends equally on a per-share basis, if and when such dividends are declared
by the Company's Board of Directors. In the case of any stock dividend paid,
holders of Class A Common Stock are entitled to receive the same percentage
dividend (payable in shares of Class A Common Stock) as the holders of Class B
Common Stock receive (payable in shares of Class B Common Stock).
Holders of Class A and Class B Common Stock share with each other on a ratable
basis as a single class in the net assets of the Company in the event of
liquidation.
NOTE 15 STOCK OPTION AND PURCHASE PLANS
As of December 31, 1998, the Company has five stock option and stock purchase
plans, described below.
The Board of Directors and shareholders adopted the Zebra Technologies
Corporation Stock Option Plan (the 1991 Plan), effective as of August 1, 1991. A
total of 400,000 shares of Class A Common Stock have been authorized and
reserved for issuance under the 1991 Plan. Under this plan, the Company has
granted only nonqualified stock options. As of December 31, 1998, 177,763 shares
were available under the plan. These options have an exercise price equal to the
closing market price of the Company's stock on the date of grant. Typically, the
options vest in annual installments of 15% on the first anniversary, 17.5% on
the second anniversary, 20% on the third anniversary, 22.5% on the fourth
anniversary, and 25% on the fifth anniversary of the grant date. Upon vesting,
the options have a legal life of two years from the date of vesting. The
specific provisions of any grant are determined by the Board of Directors.
The Board of Directors and shareholders also adopted a Directors' Stock Option
Plan, which reserves 80,000 shares of Class A Common Stock for issuance under
the plan. As of December 31, 1998, 12,000 shares were available under the plan.
All options granted under this plan are exercisable immediately upon grant at a
price per share equal to the closing market price of the Company's Class A
Common on the date of grant. Options granted to the Board of Directors carry a
seven year expiration period, however, should a member of the board discontinue
service on the Board of Directors, they are limited to a two year period to
exercise all outstanding options.
The Board of Directors and shareholders adopted an employee stock purchase plan
(Stock Purchase Plan) and have reserved 300,000 shares of Class A Common Stock
for issuance thereunder. Under this plan, employees who work a minimum of 20
hours per week may elect to withhold up to 8.5% of their cash compensation
through regular payroll deductions to purchase shares of Class A Common Stock
from the Company over a period not to exceed 12 months at a purchase price per
share equal to the lesser of: (1) 85% of the fair market value of the shares as
of the date of the grant, or (2) 85% of the fair market value of the shares as
of the date of purchase. As of December 31, 1998, 147,361 shares have been
purchased under the plan.
Under the stock purchase plan, the Company has granted only nonqualified stock
options. These options are granted either on January 1 or July 1 of the current
year and expire at the end of the year. Therefore, the options have a legal life
of six months to one year, and typically vest upon grant. The specific
provisions of any grant are determined by the Board of Directors.
F-18
<PAGE>
The Company's Board of Directors adopted the 1997 Stock Option Plan, effective
February 11, 1997. On October 26, 1998, the Company announced an increase in the
amount of reserved shares of Common Stock for issuance under the plan to
2,000,000 from 531,500 shares. The 1997 Stock Option Plan is a flexible plan
that provides the Option Committee broad discretion to fashion the terms of the
awards to provide eligible participants with stock-based incentives, including:
(i) nonqualified and incentive stock options for the purchase of the Company's
Class A Common Stock and (ii) dividend equivalents. The persons eligible to
participate in the 1997 Stock Option Plan are directors, officers, and employees
of the Company or any subsidiary of the Company who, in the opinion of the
Option Committee, are in a position to make contributions to the growth,
management, protection and success of the Company or its subsidiaries. As of
December 31, 1998, 569,452 shares were available under the plan.
The options granted under the 1997 Stock Option Plan have an exercise price
equal to the closing market price of the Company's stock on the date of grant.
The options generally vest over three- to five-year periods and have a legal
life of ten years from the date of grant. The specific provisions of any grant
are determined by the Board of Directors.
The Company's Board of Directors adopted the 1997 Director Plan, effective
February 11, 1997. The 1997 Director Plan provides for the issuance of options
to purchase up to 77,000 shares of Class A Common Stock, which shares are
reserved and available for purchase upon the exercise of options granted under
the 1997 Director Plan. Only directors who are not employees or officers of the
Company are eligible to participate in the 1997 Director Plan. Under the 1997
Director Plan, each non-employee director was granted, on the effective date of
the plan, an option to purchase 15,000 shares of Class A Common Stock, and each
non-employee director subsequently elected to the Board will be granted an
option to purchase 15,000 shares of Class A Common Stock on the date of his or
her election. Options granted under the 1997 Director Plan provide for the
purchase of Class A Common Stock at a price equal to the fair market value on
the date of grant. If there are not sufficient shares remaining and available to
all non-employee directors eligible for an automatic grant at the time at which
an automatic grant would otherwise be made, then each eligible non-employee
director shall receive an option to purchase a pro rata number of shares. As of
December 31, 1998, 32,000 shares were available under the plan.
Unless otherwise provided in an option agreement, options granted under the
1997 Director Plan shall become exercisable in five equal increments
beginning on the date of the grant and on each of the first four
anniversaries thereof. All options expire on the earlier of (a) ten years
following the grant date or (b) the second anniversary of the termination of
the non-employee director's directorship for any reason other than due to
death or Disability (as defined in the 1997 Director Plan).
The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, in accounting for its plans. No compensation cost has
been recognized for its fixed stock option plans and its stock purchase plan.
Had compensation cost for the Company's stock option and stock purchase plans
been determined consistent with Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (FASB 123), the Company's net
income from continuing operations and diluted earnings per share from continuing
operations would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Income from continuing operations:
As reported $40,069 $54,447 $37,952
Pro forma 37,785 52,215 37,272
Basic earnings per share from continuing operations:
As reported $1.30 $1.76 $1.24
Pro forma 1.22 1.69 1.21
Diluted earnings per share from continuing operations:
As reported $1.29 $1.74 $1.21
Pro forma 1.21 1.66 1.19
</TABLE>
F-19
<PAGE>
For purposes of calculating the compensation cost consistent with FASB 123, the
fair value of each stock option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock option grants in 1998, 1997, and 1996, respectively:
option price equals the fair market value at the date of grant; expected
dividend yield of 0% for each period; expected volatility of 55%, 51%, and
53%; risk free interest rate of 4.75%, 5.71%, and 6.21%; and expected
weighted-average life of five years for years.
The fair value of the employees' purchase rights pursuant to the Stock Purchase
Plan are estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchase rights granted in 1998,
1997, and 1996, respectively: fair market value of $28.75, $23.63, and $22.10;
option price of $24.44, $20.09, and $18.79; expected dividend yield of 0% for
each period; expected volatility of 51%, 51%, and 62%; risk-free
interest rate of 4.60%, 5.59%, and 5.87%; and expected lives of six months to
one year.
Stock option activity for the years ended December 31, 1998, 1997, and 1996 was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------ ------------ --------------------- ------------ --------------------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1,180,293 $ 23.31 722,654 $ 18.90 458,239 $ 12.35
beginning of
year
Granted 368,550 35.18 567,410 26.12 324,750 26.62
Exercised (66,767) 18.03 (109,771) 8.83 (55,335) 8.96
Canceled (65,263) 25.49 -- -- (5,000) 29.25
- ------------------------ ------------ --------------------- ------------ --------------------- ---------- ---------------------
Outstanding at end 1,416,813 26.55 1,180,293 23.31 722,654 18.90
of year
Options exercisable 568,877 23.06 330,971 23.05 159,324 14.95
at end of year
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ -----------------------------------
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices of Shares Contractual Life Exercise Price Of Shares Exercise Price
- -------------------- ----------- -------------------------------- --------------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
$ 3.33-$12.38 124,027 4.71 years $8.38 116,305 $8.22
$ 17.13-$24.17 343,381 6.83 years $22.16 158,346 $22.02
$ 24.50-$24.50 295,250 8.12 years $24.50 52,350 $24.50
$ 25.19-$32.29 313,550 7.98 years $29.35 144,800 $28.45
$ 32.36-$38.75 340,605 9.12 years $36.77 97,076 $33.70
</TABLE>
F-20
<PAGE>
NOTE 16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share data)
Quarterly results of operations for periods prior to the fourth quarter of 1998
reflect amounts previously reported in the Company's quarterly reports on Form
10-Q or annual report on Form 10-K for the year ended December 31, 1997.
Restated amounts reflect the effect of the merger with Eltron, which was
accounted for on a pooling-of-interests basis.
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter (1) Quarter (1) Quarter (1) Quarter (2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales previously reported $50,214 $55,353 $57,354
Restated 80,798 87,040 88,068 80,077
Gross profit previously reported 26,140 28,790 30,677
Restated 38,861 41,701 42,381 32,867
Operating expense previously reported 12,960 12,860 13,680
Restated 20,752 20,464 21,009 31,949
Operating income previously reported 13,180 15,930 16,997
Restated 18,109 21,237 21,372 918
Income from continuing
operations previously reported 10,434 11,288 11,230
Restated 13,163 14,037 13,213 (344)
Net income previously reported 10,434 11,288 11,230
Restated 13,163 14,037 13,213 (344)
Basic earnings per share from
continuing operations previously reported $0.43 $0.46 $0.46
Basic earnings per share from
continuing operations restated $0.42 $0.45 $0.43 ($0.01)
Diluted earnings per share from
continuing operations previously reported $0.43 $0.46 $0.46
Diluted earnings per share from
continuing operations restated $0.42 $0.45 0.42 ($0.01)
Basic earnings per share previously reported $0.43 $0.46 $0.46
Basic earnings per share restated $0.42 $0.45 $0.43 ($0.01)
Diluted earnings per share previously reported $0.43 $0.46 $0.46
Diluted earnings per share restated $0.42 $0.45 $0.42 ($0.01)
</TABLE>
F-21
<PAGE>
NOTE 16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter (3) Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales previously reported $41,009 $47,844 $49,889 $53,329
Restated 64,179 75,358 75,498 82,065
Gross profit previously reported 20,406 24,298 25,011 28,485
Restated 30,730 36,361 36,624 39,993
Operating expense previously reported 9,234 11,768 11,360 13,063
Restated 15,533 18,531 17,685 20,697
Operating income previously reported 11,172 12,530 13,651 15,422
Restated 15,197 17,830 18,939 19,296
Income from continuing
operations previously reported 11,527 9,645 9,945 11,693
Restated 14,135 12,997 13,453 13,862
Net income previously reported 11,235 7,282 9,945 11,693
Restated 13,843 10,634 13,453 13,862
Basic earnings per share from
continuing operations previously reported $0.48 $0.40 $0.41 $0.48
Basic earnings per share from
continuing operations restated $0.46 $0.42 $0.44 $0.45
Diluted earnings per share from
continuing operations previously reported $0.48 $0.40 $0.41 $0.48
Diluted earnings per share from
continuing operations restated $0.45 $0.41 $0.43 $0.44
Basic earnings per share previously reported $0.46 $0.30 $0.41 $0.48
Basic earnings per share restated $0.45 $0.34 $0.44 $0.45
Diluted earnings per share previously reported $0.46 $0.30 $0.41 $0.48
Diluted earnings per share restated $0.44 $0.34 $0.43 $0.44
</TABLE>
(1) Reflects the elimination of intercorporate investment in Eltron
International, Inc., and the related tax effect.
(2) Reflects a pretax charge for merger costs of $8,080 relating to the
Company's merger with Eltron International, Inc.
(3) Reflects a pretax charge for acquired-in-process technology of $2,617
relating to the Company's acquisition of Fenestra Computer Services and
Privilege, S.A.
F-22
<PAGE>
NOTE 17 MAJOR CUSTOMERS
The Company has two customers which each have net sales in excess of 10% of
total net sales in at least one of the fiscal years ended December 31, 1998,
1997, and 1996. The Peak Technologies Group, Inc. (Peak) represents net sales of
9.5%, 10.9%, and 12.8%, respectively. United Parcel Service represents net sales
of 10.3%, 8.7%, and 10.7%, respectively.
F-23
<PAGE>
ZEBRA TECHNOLOGIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at End
Description Period Expenses Deductions of Period
- ----------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Valuation account for accounts receivable:
Year ended December 31, 1998 $2,130 $1,061 $1,035 $2,156
Year ended December 31, 1997 $1,412 $997 $279 $2,130
Year ended December 31, 1996 $564 $848 $0 $1,412
Valuation account for inventories:
Year ended December 31, 1998 $4,330 $6,043 $1,019 $9,354
Year ended December 31, 1997 $3,211 $2,920 $1,801 $4,330
Year ended December 31, 1996 $1,102 $2,289 $180 $3,211
</TABLE>
F-24
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Zebra Technologies Corporation, V.I. Ltd., a U.S. Virgin Islands corporation
ZIH Corp., a Delaware corporation
Zebra Technologies Europe Limited, a U.K. limited liability company
Zebra Technologies Preston Limited, a U.K. limited liability company
Zebra International Intangibles, Inc., a Delaware corporation
Zebra Domestic Intangibles, Inc., a Delaware corporation
Eltron International, Inc., a California corporation
Donner Media, Incorporated, a Wisconsin corporation
Privilege S.A., a French corporation
RJS, Inc., a California corporation
Eltron International, FSC, a Barbados corporation
Eltron Holdings Limited, a United Kingdom corporation
Russet Limited, a United Kingdom corporation
Eltron International Limited, a United Kingdom corporation
Eltron Singapore, a Singapore corporation
F-25
<PAGE>
Exhibit 23.1
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Zebra Technologies Corporation:
Under date of February 24, 1999, we reported on the consolidated balance sheets
of Zebra Technologies Corporation and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of earnings, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. Our report is based in part on
the report of other auditors. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule listed under Item 14. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, based on our audits and the report of the other auditors, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We consent to the incorporation by reference in the registration statements
(Nos. 33-4706, 33-72774, 333-59733 and 333-63009) on Form S-8 of Zebra
Technologies Corporation of our reports relating to the consolidated balance
sheets of Zebra Technologies Corporation and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of earnings,
comprehensive income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998, and related financial
statement schedule, as contained herein. These consolidated financial statements
and the related financial statement schedule and our reports thereon are
included herein.
KPMG LLP
Chicago, Illinois
March 29, 1999
F-26
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Eltron International, Inc. on Form S-8 of our report dated February 24, 1998 on
our audits of the consolidated financial statements of Eltron International,
Inc. as of December 31, 1997, and for the years ended December 31, 1997 and
1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Woodland Hills, California
March 29, 1999
F-27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Zebra
Technologies Corporation and subsidiaries consolidated balance sheet as of
December 31, 1998, and consolidated statement of earnings for the year ended
December 31, 1998, and is qualified in its entirety by reference to such
financial statements. Dollars in thousands, except per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,391
<SECURITIES> 151,277
<RECEIVABLES> 59,810
<ALLOWANCES> (2,156)
<INVENTORY> 39,684
<CURRENT-ASSETS> 266,471
<PP&E> 65,417
<DEPRECIATION> (26,567)
<TOTAL-ASSETS> 310,002
<CURRENT-LIABILITIES> 36,783
<BONDS> 0
0
0
<COMMON> 313
<OTHER-SE> 270,571
<TOTAL-LIABILITY-AND-EQUITY> 310,002
<SALES> 331,610
<TOTAL-REVENUES> 335,983
<CGS> 178,968
<TOTAL-COSTS> 180,173
<OTHER-EXPENSES> 93,113
<LOSS-PROVISION> 1,061
<INTEREST-EXPENSE> 425
<INCOME-PRETAX> 65,021
<INCOME-TAX> 24,952
<INCOME-CONTINUING> 40,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,069
<EPS-PRIMARY> $1.30
<EPS-DILUTED> $1.20
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Zebra
Technologies Corporation and subsidiaries consolidated balance sheet as of
December 31, 1997 and 1996 and consolidated statement of earnings for the year
ended December 31, 1997 and 1996, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 10,925 6,459
<SECURITIES> 128,395 97,318
<RECEIVABLES> 53,738 49,374
<ALLOWANCES> (2,130) (1,412)
<INVENTORY> 43,860 38,451
<CURRENT-ASSETS> 242,577 194,754
<PP&E> 49,734 45,620
<DEPRECIATION> (19,413) (13,259)
<TOTAL-ASSETS> 270,477 218,632
<CURRENT-LIABILITIES> 32,715 30,077
<BONDS> 0 0
0 0
0 0
<COMMON> 309 307
<OTHER-SE> 235,911 183,700
<TOTAL-LIABILITY-AND-EQUITY> 270,447 218,632
<SALES> 292,373 249,194
<TOTAL-REVENUES> 297,100 252,487
<CGS> 153,392 134,445
<TOTAL-COSTS> 153,392 135,474
<OTHER-EXPENSES> 71,562 62,238
<LOSS-PROVISION> 884 642
<INTEREST-EXPENSE> 86 116
<INCOME-PRETAX> 85,225 60,703
<INCOME-TAX> 30,778 22,751
<INCOME-CONTINUING> 54,447 37,952
<DISCONTINUED> (2,655) (1,938)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 51,792 36,014
<EPS-PRIMARY> 1.68 1.17
<EPS-DILUTED> 1.65 1.15<F1>
<FN>
<F1>The restated figures herein reflect the Company's merger with Eltron
International, Inc., which was account for on a pooling of interests basis.
Dollars in thousands, except per share data.
</FN>
</TABLE>
<PAGE>
Exhibit 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Eltron International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Eltron
International, Inc. and subsidiaries (the "Company") as of December 31, 1997,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Woodland Hills, California
February 24, 1998
F-28
