-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VvWIeie/Ex0gTlqjPR3E/DjMqPhCyMm7+hRp/3N0l28vZgjII825jBdbYVkK50SR 9L3eYC4qkBHBOYi7vUjscw== 0000912057-00-010648.txt : 20000310 0000912057-00-010648.hdr.sgml : 20000310 ACCESSION NUMBER: 0000912057-00-010648 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEBRA TECHNOLOGIES CORP/DE CENTRAL INDEX KEY: 0000877212 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 366966580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19406 FILM NUMBER: 564394 BUSINESS ADDRESS: STREET 1: 333 CORPORATE WOODS PKWY CITY: VERNON HILLS STATE: IL ZIP: 60061 BUSINESS PHONE: 7086346700 10-K 1 FORM 10-K 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, 1999 Commission File Number: 000-19406 ZEBRA TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-2675536 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 CORPORATE WOODS PARKWAY, VERNON HILLS, IL 60061 (Address of principal executive offices) (Zip Code) (847) 634-6700 (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 1, 2000, 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 $1,686,317,000 and $421,298,000, respectively. The closing price of the Class A Common Stock on March 1, 2000, as reported on the Nasdaq Stock Market, was $67.00 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 1, 2000, the registrant had outstanding 25,168,914 shares of Class A Common Stock, par value $.01 per share, and 6,288,028 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 16, 2000, as described in the Cross-Reference Sheet and Table of Contents included herewith, are incorporated by reference into Part III of this report. ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES INDEX
PAGE 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
-2- PART I ITEM 1. BUSINESS THE COMPANY Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company or Zebra) design, manufacture and support a broad range of direct thermal and thermal transfer bar code label printers, receipt printers, instant-issuance plastic card printers and 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, driver's licenses, access control systems, and medical specimen labeling. As of December 31, 1999, management estimates that more than 1,500,000 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 continues to be a major catalyst in the rapid development of bar coding. Zebra also believes that increasing use of enterprise-wide resource planning (ERP) systems in manufacturing and service organizations and the rapid growth of e-commerce 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 driver's license applications and access control systems. On October 28, 1998, the Company merged with Eltron International, Inc. (Eltron). Products manufactured and marketed under the Eltron brand name consist of high-quality, low-cost direct thermal and thermal transfer bar code printers, instant-issuance plastic card printers and secure card printing systems, ribbons, self-adhesive labels, and related accessories. 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 -3- 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. Zebra markets its products under the Zebra and Eltron brand names. Zebra bar code products are designed and principally targeted for mission-critical applications, where high volume or demanding compliance labeling standards are required. The Company offers comprehensive bar code labeling solutions under the Zebra brand, including a wide range of premium-quality bar code label printers. Bar code labeling products marketed under the Eltron brand are targeted at end-users looking for an economical, easy-to-use printing solution in general office and light manufacturing and distribution environments. The Company's full range of card printer products is also marketed under the Eltron brand name. Bar Code Labeling Solutions 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 offers 29 bar code printer models, which are marketed under the Zebra and Eltron brand names. At December 31, 1999, 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. In 1999, Zebra introduced the R-140 Printer/Encoder. The R-140 prints and encodes "smart labels," which are printable labels embedded with an ultra-thin radio frequency transponder, in a single pass. Information encoded in these transponders can then be read and modified by a radio frequency reader. The R-140 is targeted at the developing market for radio frequency identification (RFID), where line-of-sight reading or scanning a label may not be possible. List price for the R-140 is $5,690. MID-RANGE PRINTERS. The Company offers 10 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 TLP 2746, LP/TLP 2684 (Strata), TLP Eclipse, and TLP 2046 printers. List prices range from $1,395 to $3,295. DESKTOP PRINTERS. Applications with low volume suit the Company's desktop printers. Zebra currently offers nine desktop models, which are marketed as Zebra Stripe DA402 and T402 printers and Eltron Companion Plus, LP 2443 (Orion), LP/TLP 2622, LP/TLP 2642, TLP 3642, LP/TLP 2722, LP/TLP 2742, and TLP 3742 printers. List prices range from $595 to $845. PORTABLE PRINTERS. The Company offers four portable printer models, which provide durability, lightweight, and optional infrared 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 $1,495. PRINT ENGINES. Zebra's 170PAX2 print engine is targeted at manufacturers of high-speed automatic label applicator systems. The price of the 170PAX2 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, -4- 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 P310, P420, 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 Max3300 is a single process secure ID printing system that provides maximum security, durability, and tamper resistance for applications such as driver's licenses and national ID card programs. The system integrates printing, lamination, rotary die cutting, and optional magnetic encoding of 3M Secure Card media. The Max3300 is priced at $16,500. Sales of hardware (bar code and plastic card printers and replacement parts) represented $321,354,000 of net sales in 1999, $265,495,000 in 1998, and $229,763,000 in 1997. These sales amounted to 80.6%, 79.0%, and 77.3% of net sales in 1999, 1998, and 1997, respectively. Supplies The Company sells supplies, which consist of stock and customized thermal labels and tags and thermal transfer ribbons, to both new and current users of its label printing systems worldwide. Zebra promotes the use of genuine Zebra brand and Eltron brand supplies with its equipment. Management believes that owners of Zebra and Eltron printing systems purchasing Zebra brand and Eltron brand supplies attain peak performance and optimum print quality and minimize costly downtime and malfunctions in their automatic identification systems. Zebra fully supports its printers, resellers and end users with an extensive line of superior quality, high performance supplies optimized to a particular user's needs. Supplies are expertly chosen, in consultation with the end user and reseller, based on the specific application, printer and environment in which the labeling system must perform. The Company's supplies also include proprietary ribbon and label formulations developed according to our specifications and designed to maximize printer performance and meet the most demanding end user performance criteria. Factors such as scratch, smudge and abrasion resistance, and chemical and environmental exposures are all taken into account when selecting the type of ribbon and labeling materials. The use of supplies that are not carefully matched to specific printers can adversely impact printer performance in print speed, print quality and ultimately overall customer satisfaction. Sales of the Company's supplies in 1999, 1998, and 1997 were $69,092,000, $62,298,000, and $58,873,000, respectively, amounting to 17.3%, 18.5%, and 19.8% 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. In 1999, the Company released a new version of BAR-ONE, which enables users to print to both Zebra- and Eltron-brand printers. 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. -5- 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 use 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 all performance and certain mid-range, desktop and portable bar code label printers, as well as the Company's high-speed print engine. This technology creates an image by applying an electrically heated printhead to a ribbon that releases ink onto labeling/ticketing media. 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 media, and the ability to use certain inks that are not viable with alternative printing technologies. Direct thermal printing is used in certain mid-range, desktop and portable printer products. Direct thermal printing creates an image by applying the heated printhead directly to specially treated paper, which 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 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 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 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. -6- 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 40.1%, 40.1%, and 41.4% of net sales for 1999, 1998, and 1997, respectively. The Company's products are distributed in more than 90 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 and currently operates facilities and sales offices in the United Kingdom, France, Germany, Japan, Hong Kong, China, Singapore, and South Africa. 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 communications 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 As of December 31, 1999, Company estimates that it has more than 1,500,000 bar code and plastic card printers installed in more than 90 countries. -7- Two customers accounted for more than 10% of the Company's total net sales in at least one of the fiscal years ended December 31, 1998 and 1997. The Peak Technologies Group, Inc., represented 10.9%, of the Company's net sales in 1997. United Parcel Service represented 10.3% of the Company's net sales in 1998. 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 $22,007,000, $21,428,000, and $17,911,000 for 1999, 1998, and 1997, respectively. These expenditures amounted to 5.5%, 6.4%, 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, 1999, the Company had 131 full-time employees 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 producers of on-demand thermal transfer and direct thermal label 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 use alternative printing technologies, particularly for low-cost label printers. For card printers, the Company considers its direct competition to be the producers 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); Taiwan Semiconductor; 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 Electronics, Inc., a privately-held manufacturer of thermal transfer and dye sublimation color page printers and plastic card printers. -8- 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, durable images on a wide variety of label materials at a relatively low cost and at very high speeds, compared with alternative printing technologies. The Company continually assesses competitive and complementary 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. To complement its thermal printing technology, Zebra introduced the R-140 printer/encoder for printing and encoding "smart labels," which are printable labels embedded with an ultra-thin radio frequency transponder. Information encoded in these transponders can then be read and modified by a radio frequency reader. The R-140 is targeted at the developing market for RFID, where line-of-sight reading or scanning a label may not be possible. 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 effect on the Company's business, 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 27 patents and nine patents pending pertaining to its products. 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. The Company does not believe that the legal protections afforded to its intellectual property rights are fundamental to its success. 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 registered trademarks of Microsoft Corporation; and Jet Form Central, which is a registered trademark of Jet Form Corporation. EMPLOYEES As of March 1, 2000, the Company employed approximately 1,650 persons. None of these employees is a member of a union. The Company considers its relationship with its employees to be excellent. -9- ITEM 2. PROPERTIES The Company's corporate headquarters are located in Vernon Hills, Illinois, a northern suburb of Chicago. The Company conducts its operations from a custom-designed facility at this location, which provides approximately 242,000 square feet of space. Approximately 106,800 square feet have been allocated to office and laboratory functions and 135,200 square feet to manufacturing and warehousing. This facility was constructed in 1989 and expanded in 1993, 1995, 1996, and 1999. 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. A new lease is currently under development to include the 59,200 square feet of space that was added in 1999. The proposed new terms of the lease covering the entire Vernon Hills facility would extend the lease to terminate on June 30, 2014. The Company's major facilities as of December 31, 1999, are listed below:
Square Footage ------------------------------------------------------ MANUFACTURING, PRODUCTION & ADMINISTRATIVE, LOCATION WAREHOUSING RESEARCH & SALES TOTAL LEASE EXPIRES - -------- ----------- ---------------- ----- ------------- Vernon Hills, Illinois, USA 135,200 106,800 242,000 June 2014 Camarillo, California, USA 73,600 68,400 142,000 Owned High Wycombe, UK -- 20,900 20,900 November 2018 Preston, UK 29,000 8,000 37,000 Owned Varades, France 11,800 9,000 20,800 August 2000 Greenville, Wisconsin, USA 27,000 3,000 30,000 March 2007
The Company also has facilities totaling an aggregate of 12,640 square feet, with 3,954 square feet dedicated to warehousing and 8,686 square feet dedicated to administrative, research, and sales functions, in the following locations: Northbrook, Illinois; Miami, Florida; Sandy, Utah; Boulogne Billancourt, France; Singapore; Tokyo, Japan; and Frankfurt, Germany. During 1999, the Company consolidated certain of its facilities. In the UK, this consolidation consisted of moving distribution from the Company's Wokingham and High Wycombe facilities to the Company's Preston location, and transferring Wokingham associates to the renovated High Wycombe location. The vacant Wokingham facility totals 27,000 square feet and has a lease that expires in October 2010. The Company expects to dispose of or sub-lease the Wokingham facility in 2000. -10- 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 Not applicable. -11- 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 1999 and 1998, as reported by the Nasdaq Stock Market. 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.
1999 HIGH LOW 1998 HIGH LOW - --------------------------------------- ----------- ------------- --------------------------------- -------------- ------------ First Quarter $37.00 $22.88 First Quarter $38.50 $25.50 Second Quarter 38.50 23.50 Second Quarter 44.63 34.75 Third Quarter 50.38 37.00 Third Quarter 42.63 27.00 Fourth Quarter 64.50 44.19 Fourth Quarter 37.00 25.00
SOURCE: THE NASDAQ STOCK MARKET At March 1, 2000, the last reported price for the Class A Common Stock was $67.00 per share, and there were 524 shareholders of record for the Company's Class A Common Stock and 24 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- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA CONSOLIDATED STATEMENTS OF EARNINGS DATA (In thousands, except per share amounts)
Year Ended December 31, 1999 1998 1997 (1) 1996 (1) 1995 (1) ---- ---- ---- ---- ---- Net sales $ 398,517 $ 335,983 $ 297,100 $ 252,487 $ 200,319 Cost of sales 196,128 180,173 153,392 135,474 106,365 ---------- ---------- ---------- ---------- ---------- Gross profit 202,389 155,810 143,708 117,013 93,954 Total operating expenses 99,487(2) 94,174(2) 72,446 62,880(4) 43,328 --------- --------- ---------- ---------- ---------- Operating income 102,902(2) 61,636(2) 71,262 54,133(4) 50,626 Income from continuing operations before income taxes 108,800(2) 65,021(2) 85,225(3) 60,703(4) 56,185 Income from continuing operations 69,632(2) 40,069(2) 54,447(3) 37,952(4) 36,693 Earnings per share from continuing operations Basic $ 2.23(2) $ 1.30(2) $ 1.76(3) $ 1.24(4) $ 1.22 Diluted $ 2.21(2) $ 1.29(2) $ 1.74(3) $ 1.21(4) $ 1.19 Weighted average shares outstanding Basic 31,175 30,919 30,897 30,696 30,128 Diluted 31,521 31,176 31,380 31,269 30,780
CONSOLIDATED BALANCE SHEET DATA (In thousands)
December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Cash and cash equivalents and investments and marketable securities $ 235,568 $ 162,668 $ 139,320 $ 103,777 $ 88,139 Working capital 302,804 229,688 209,862 164,678 131,369 Total assets 394,643 310,002 270,447 218,631 176,695 Long-term obligations 664 36 314 3,137 2,928 Shareholders' equity 349,307 270,884 236,220 184,007 144,391
(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 $6,341 in 1999 and $8,080 in 1998 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. -13- 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 periods presented prior to the merger 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 Sales and Operating Expenses as described below, include increases to inventory and bad debt reserves and the expensing of certain duplicate fixed assets. For 1999, charges related to the Eltron merger totaled $6,341,000, which was all reported as Merger Costs. These costs, which could not be provided for at the time of the merger, include expenditures on consulting fees, as well as personnel-related expenses for relocation, severance, and recruitment. COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Net sales increased 18.6% in 1999 to $398,517,000 from $335,983,000 in 1998. 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 in higher-priced models. Hardware sales increased 21.0% to 80.6% of net sales, and supplies sales increased 10.9% to 17.3% of net sales. The remaining 2.0% of net sales consisted of service and software revenue. Both North American and international sales increased at the same 18.6% rate. International sales increased to $159,769,000 from $134,723,000 and accounted for 40.1% of net sales in both 1999 and 1998. Gross profit increased 29.9% to $202,389,000 for 1999 from $155,810,000 for 1998. As a percentage of net sales, gross profit increased 4.4 percentage points to 50.8% from 46.4%. Gross profit for 1998 was affected by $3,485,000 in one-time adjustments to cost of goods sold 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. Excluding the effect of merger costs on 1998 gross profit, the increase in gross profit margin was primarily due to better overhead utilization, as the increased sales volume was produced through roughly the same amount of fixed assets, as well as lower product component costs. Average unit costs deteriorated slightly, primarily because of changes in the mix of products sold toward shipments of relatively larger volumes of lowered priced printers. Selling and marketing expenses increased 10.8% to $39,930,000 from $36,052,000. As a percentage of net sales, selling and marketing expenses decreased to 10.0% from 10.7%. Excluding one-time charges of $242,000 related to the Eltron merger, selling and marketing expenses for 1998 would have been $35,810,000, or 10.7% of net sales. Excluding the effect of merger costs, the higher selling and marketing expenses in 1999 resulted from higher co-op and other business development expenses and higher staffing levels to support the increased levels of business. Research and development expenses for 1999 increased 2.7% to $22,007,000, or 5.5% of net sales, from $21,428,000, or 6.4% of net sales, for 1998. Research and development expenses for 1998 included $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. For 1999, lower business development expenses partially offset higher expenses for increased staffing levels and outside professional services. General and administrative expenses increased by 9.1% to $31,209,000 from $28,614,000. As a percentage of net sales, general and administrative expenses decreased to 7.8% from 8.5%. 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. For 1999, higher expenses related to increased staffing levels and information technology operations were partially offset by lower expenditures for outside consulting and other professional services. -14- In 1999, the Company incurred $6,341,000 in costs related to the Eltron merger for consulting fees as well as personnel-related expenses for relocation, severance, and recruitment. For 1998, the Company incurred $8,080,000 in merger-related costs for accounting, legal, investment banking, and consulting fees, as well as provisions for facilities consolidation and severance. The Company expects to incur merger costs through the second quarter of 2000. Investment income increased to $8,732,000 from $4,005,000. The increase was principally due to higher invested balances and a more normalized return on the Company's investment portfolio during 1999, compared with the loss resulting from the unusually high volatility in the capital markets during the second half of 1998. During the fourth quarter of 1998, the Company took steps to reduce its investment portfolio's exposure to market volatility. Other expense for 1999 totaled $2,625,000, compared with $195,000 for 1998. The expense increase was principally due to certain one-time items recorded during the third quarter of 1999, including a settlement for claims prior to any litigation that was unrelated to the Company's operations. Other expense also includes a revaluation of the Company's euro- and deutsche mark-denominated receivables and cash balances as a result of the relative strength of the pound sterling versus both the euro and deutsche mark in the fourth quarter of 1999. Income from continuing operations before income taxes increased 67.3% to $108,800,000 from $65,021,000. Excluding merger-related charges of $6,341,000 in 1999 and $13,161,000 in 1998, income from continuing operations before taxes increased 47.3% to $115,141,000 in 1999 from $78,182,000 in 1998. The effective income tax rate for 1999 was 36.0%, compared with 38.4% for 1998. 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 costs, the Company's effective tax rate for 1998 would have been 36.8%. Income from continuing operations for 1999 was $69,632,000, or $2.21 per diluted share. For 1998, income from continuing operations was $40,069,000, or $1.29 per diluted share. Excluding the effects of merger expenses, income from continuing operations for 1999 was $73,691,000, or $2.34 per diluted share, up 49.1% from $49,420,000, or $1.59 per diluted share, for 1998. 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. 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. 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%. Excluding $3,485,000 in one-time charges related to the Eltron merger, 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%. Excluding $242,000 in one-time charges related to the Eltron merger, 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. Excluding $175,000 in one-time charges related to the Eltron merger, 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. -15- 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 merger charges, 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. Other income decreased to $3,385,000 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. Excluding charges related to the Eltron merger, income from continuing operations for 1998 was $49,420,000, or $1.59 per diluted share, compared with $54,447,000, or $1.74 per diluted share, for 1997. 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. LIQUIDITY AND CAPITAL RESOURCES Internally generated funds from operations are the primary source of liquidity for the Company. As of December 31, 1999, the Company had $235,568,000 in cash and marketable securities, compared with $162,668,000 at the end of 1998. 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, 1999, the Company had borrowings of $176,959 outstanding under its lines of credit. Capital expenditures were $12,445,000 in 1999, $25,615,000 in 1998 and $10,241,000 in 1997. In 1998, capital expenditures included purchases of new manufacturing and distribution facilities in Camarillo, California (acquired in conjunction with the Eltron merger), and Preston, 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. -16- 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, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133 establishes a comprehensive standard for the recognition and measurement of 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. YEAR 2000 CONSIDERATIONS The Company conducted a program to bring its internal systems and products into Year 2000 (Y2K) compliance. This program included upgrades to internal computer systems and technical infrastructure, as well as a review of the Company's product lines to bring them into Y2K compliance. In addition, the Company surveyed its significant suppliers to determine their ability to provide necessary products and services that are critical to business continuation through Y2K. Zebra has experienced no interruptions in its business because of Y2K and is not aware of any significant problems being experienced by its customers or suppliers that would have a negative impact on the Company. There can be no assurance, however, that unexpected difficulties related to Y2K compliance at the Company, its customers, or its suppliers will not occur. Such unexpected difficulties could have a material adverse effect on the Company. Through December 31, 1999, the Company estimates that it spent approximately $400,000 on Y2K compliance for software testing and modifications or upgrades. These funds exclude regular upgrades to computer systems and technical infrastructure to meet the Company's information technology requirements. SIGNIFICANT CUSTOMERS For the year ended December 31, 1999, no customer accounted for 10.0% or more of net sales. Two customers accounted for more than 10% of net sales in at least one of the years ended December 31, 1998 and 1997. The Peak Technologies Group, Inc., represented 10.9% of net sales in 1997. United Parcel Service represented 10.3% of net sales in 1998. SAFE HARBOR Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation 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. 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 operations. 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, for further discussions of issues that could affect the Company's future results. -17- 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, U.S. dollar/euro, and the U.K. pound sterling/euro exchange rates arising from invoicing European customers in pounds sterling and euros 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 and euros 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, euro 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, 1999. 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, 1999. 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/euro rates is measured as if the Company did NOT engage in the selective hedging practices described above and is based on the present value of the projected average monthly remittances from the Company's U.K. subsidiary for the first quarter of 2000. Interest rate sensitive instruments +1% movement ($1,093,000) - -1% movement $1,435,000 Foreign exchange Dollar/pound $8,000 Dollar/euro $20,000 Equity price sensitive instruments $75,000 -18- 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. -19- 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." -20- 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 no Current Report on Form 8-K during the fourth quarter of 1999. -21- 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 6th day of March 2000. 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.
SIGNATURE TITLE DATE /S/EDWARD L. KAPLAN Chief Executive Officer and March 6, 2000 - ------------------- Chairman of the Board of Directors Edward L. Kaplan (Principal Executive Officer) /S/DONALD K. SKINNER Vice Chairman of the Board March 6, 2000 - -------------------- of Directors Donald K. Skinner /S/GERHARD CLESS Executive Vice President, March 6, 2000 - ---------------- Secretary and Director Gerhard Cless /S/CHARLES R. WHITCHURCH Chief Financial Officer and Treasurer March 6, 2000 Charles R. Whitchurch (Principal Financial and Accounting Officer) /S/CHRISTOPHER G. KNOWLES Director March 6, 2000 Christopher G. Knowles /S/DAVID P. RILEY Director March 6, 2000 David P. Riley /S/MICHAEL A. SMITH Director March 6, 2000 Michael A. Smith
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INDEX TO EXHIBITS 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 Consent of KPMG LLP, independent auditors. 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27.1 Financial Data Schedule--Fiscal Year Ended December 31, 1999.
-23- (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. -24- ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE Financial Statements Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3 Consolidated Statements of Earnings for the Years ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Comprehensive Income for the Years ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 1999, 1998 and 1997 F-6 Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997 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-21 Report of Independent Accountants F-22
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-1 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, 1999 and 1998, 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, 1999. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We did not audit the financial statements of Eltron International, Inc., a wholly-owned subsidiary, which statements reflect net sales constituting 35 percent for the year ended December 31, 1997, of the related consolidated total. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included 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, and the report of the other auditors, provide 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated 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. /s/KPMG LLP Chicago, Illinois January 31, 2000 F-2 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data)
DECEMBER 31, DECEMBER 31, 1999 1998 --------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 38,501 $ 11,391 Investments and marketable securities 197,067 151,277 Accounts receivable, net of allowance of $1,850 in 1999 and $2,156 in 1998 62,870 57,654 Inventories 42,379 39,684 Deferred income taxes 3,467 5,137 Prepaid expenses 1,614 1,328 --------------- -------------- Total current assets 345,898 266,471 --------------- -------------- Property and equipment at cost, less accumulated depreciation and amortization 41,686 38,850 Other assets 7,059 4,681 --------------- -------------- TOTAL ASSETS $ 394,643 $ 310,002 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 23,798 $ 20,565 Accrued liabilities 11,295 11,498 Short-term note payable 196 183 Current portion of obligation under capital lease with related party 264 51 Income taxes payable 7,541 4,486 --------------- -------------- Total current liabilities 43,094 36,783 --------------- -------------- Obligation under capital lease with related party, less current portion 571 - Long-term liability 93 36 Deferred income taxes 1,473 1,932 Other 105 367 --------------- -------------- TOTAL LIABILITIES 45,336 39,118 --------------- -------------- 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, 24,877,501 and 22,323,094 shares issued and outstanding in 1999 and 1998 249 223 Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 6,540,188 and 8,619,919 shares issued and outstanding in 1999 and 1998 65 86 Additional paid-in capital 60,072 49,854 Retained earnings 289,404 219,772 Accumulated other comprehensive income (483) 949 --------------- -------------- TOTAL SHAREHOLDERS' EQUITY 349,307 270,884 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 394,643 $ 310,002 =============== ==============
See accompanying notes to consolidated financial statements. F-3 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 --------------- ------------- -------------- Net sales $ 398,517 $ 335,983 $ 297,100 Cost of sales 196,128 180,173 153,392 --------------- ------------- -------------- Gross profit 202,389 155,810 143,708 Operating expenses: Selling and marketing 39,930 36,052 33,017 Research and development 22,007 21,428 17,911 General and administrative 31,209 28,614 21,518 Merger costs 6,341 8,080 -- --------------- ------------- -------------- Total operating expenses 99,487 94,174 72,446 --------------- ------------- -------------- Operating income 102,902 61,636 71,262 --------------- ------------- -------------- Other income (expense): Investment income 8,732 4,005 13,520 Interest expense (209) (425) (86) Other, net (2,625) (195) 529 --------------- ------------- -------------- Total other income 5,898 3,385 13,963 --------------- ------------- -------------- Income from continuing operations before income taxes 108,800 65,021 85,225 Income taxes 39,168 24,952 30,778 --------------- ------------- -------------- Income from continuing operations 69,632 40,069 54,447 --------------- ------------- -------------- Discontinued operations: Loss from discontinued operation (less applicable income tax benefit of $372 in 1997) -- -- (1,692) 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 $ 69,632 $ 40,069 $ 51,792 =============== ============= ============== Basic earnings per share from continuing operations $ 2.23 $ 1.30 $ 1.76 Diluted earnings per share from continuing operations $ 2.21 $ 1.29 $ 1.74 Basic earnings per share $ 2.23 $ 1.30 $ 1.68 Diluted earnings per share $ 2.21 $ 1.29 $ 1.65 Basic weighted average shares outstanding 31,175 30,919 30,897 Diluted weighted average and equivalent shares outstanding 31,521 31,176 31,380
See accompanying notes to consolidated financial statements. F-4 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Net income $ 69,632 $ 40,069 $ 51,792 Other comprehensive income (loss): Foreign currency translation adjustment (1,432) 659 (946) Unrealized holding gains (losses) on investments available for sale: Net change in unrealized holding gains for the period, net of income tax expense of $3 in 1997. -- -- 6 ============= ============= ============= Comprehensive income $ 68,200 $ 40,728 $ 50,852 ============= ============= =============
See accompanying notes to consolidated financial statements. F-5 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME ------------------------------- CLASS A CLASS B ADDITIONAL UNREALIZED CUMULATIVE COMMON COMMON PAID-IN RETAINED HOLDING GAIN TRANSLATION STOCK STOCK CAPITAL EARNINGS ON INVESTMENTS ADJUSTMENT TOTAL - ------------------------------------------------------------------------------------------------------------------------------- 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 -- 907 -- -- -- 908 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 -- -- 1,066 -- -- 1,066 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 -- 946 -- -- -- 947 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 (4) -- (8,088) -- -- -- (8,092) Tax benefit resulting from exercise of options -- -- 512 -- -- -- 512 Net income -- -- -- 40,069 -- -- 40,069 Foreign currency translation adjustment -- -- -- -- -- 659 659 - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 223 86 49,854 219,772 -- 949 270,884 - ------------------------------------------------------------------------------------------------------------------------------- Issuance of 474,676 shares of Class A Common Stock 5 -- 9,828 -- -- -- 9,833 Conversion of 2,079,731 shares of Class B Common Stock to 2,079,731 shares of Class A Common Stock 21 (21) -- -- -- -- -- Tax benefit resulting from exercise of options -- -- 390 -- -- -- 390 Net income -- -- -- 69,632 -- -- 69,632 Foreign currency translation adjustment -- -- -- -- -- (1,432) (1,432) - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $249 $65 $60,072 $289,404 $-- $(483) $349,307 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
YEAR ENDED DECEMBER 31 -------------------------------------------------- 1999 1998 1997 --------------- ---------------- ---------------- Cash flows from operating activities: Net income $ 69,632 $ 40,069 $ 51,792 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,900 10,248 7,002 Depreciation (appreciation) in market value of investments and marketable securities (936) 1,085 (5,973) Deferred income taxes 1,211 1,995 (3,761) Discontinued operations - - (3,371) Changes in assets and liabilities, net of businesses acquired Accounts receivable, net (5,216) (6,046) (3,645) Inventories (2,695) 4,176 (5,409) Other assets (2,931) (294) (1,007) Accounts payable 3,233 3,496 (2,172) Accrued liabilities (203) 744 3,909 Income taxes payable 3,055 (205) 1,944 Other operating activities (286) 430 339 Investments and marketable securities (51,800) (23,967) (37,853) --------------- ---------------- ---------------- Net cash provided by operating activities 22,964 31,731 1,795 --------------- ---------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (11,349) (25,615) (10,241) Purchase of investments and marketable securities - - (14,549) Sales of investments and marketable securities 6,946 - 27,304 --------------- ---------------- ---------------- Net cash provided by (used in) investing activities (4,403) (25,615) 2,514 --------------- ---------------- ---------------- Cash flows from financing activities: Proceeds from exercise of stock options 10,223 2,028 1,983 Common stock retired in Eltron merger - (8,092) - Issuance (repayment) of notes payable 70 (180) (819) Payments for obligation under capital lease (312) (65) (61) --------------- ---------------- ---------------- Net cash provided by (used in) financing activities 9,981 (6,309) 1,103 --------------- ---------------- ---------------- Effect of exchange rate changes on cash (1,432) 659 (946) --------------- ---------------- ---------------- Net increase in cash and cash equivalents 27,110 466 4,466 Cash and cash equivalents at beginning of year 11,391 10,925 6,459 --------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 38,501 $ 11,391 $ 10,925 =============== ================ ================ Supplemental disclosures of cash flow information: Interest paid $ 209 $ 425 $ 85 Income taxes paid 36,010 22,624 30,060 Supplemental disclosures of noncash transactions: Tax benefit arising from exercise of options 390 512 1,066 Cancellation of shares issued in connection with RJS merger - - (253) Equipment under capital lease obligation 1,096 - -
See accompanying notes to consolidated financial statements. F-7 ZEBRA TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1999, 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 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 are 30 years for buildings and range from 3 to 10 years for other property. Property and equipment held under capital leases 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 under the asset and liability method. Accordingly, 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. 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. ADVERTISING. Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 1999, 1998, and 1997 totaled $4,700,000, $3,931,000 and $4,767,000, respectively. F-8 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. FINANCIAL INSTRUMENTS. The reported amounts of the Company's financial instruments, which include investments and marketable securities, trade accounts receivable, accounts payable, accrued liabilities, income taxes payable, and short-term notes payable, approximate their fair values because of the contractual maturities and short-term nature of these instruments. 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 (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and provides the pro forma disclosures required by Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. RECLASSIFICATIONS. Certain amounts in the prior years' financial statements have been reclassified to conform to the current years' 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 in shareholders' equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income. 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 label and plastic card printers and related accessories, in exchange for 6,916,951 shares of the Company's Class B 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, 1999 and 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, 1999 and 1998 is $115,000 and $1,181,000, respectively, related to these costs. F-9 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 year ended December 31, 1997, 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.
1998 1997 ---------------------------- ------------------------------ Income Income from from Continuing Continuing Net Sales Operations Net Sales Operations ---------------------------- ------------------------------ Zebra(*) $192,071 $42,810 Eltron $100,043 $9,090 105,029 11,637 ------------------------------ Total $297,100 $54,447
(*) Represents the historical results of Zebra without considering the effect of the pooling of interests business combination with Eltron. RJS, INCORPORATED. 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-effected 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, 1999, 1998, and 1997, earnings per share were computed as follows (in thousands, except per-share amounts):
1999 1998 1997 ------------------------------------------- BASIC EARNINGS PER SHARE: Income from continuing operations $69,632 $40,069 $54,447 Weighted average common shares outstanding 31,175 30,919 30,897 Per share amount $2.23 $1.30 $1.76 DILUTED EARNINGS PER SHARE: Income from continuing operations $69,632 $40,069 $54,447 Weighted average common shares outstanding 31,175 30,919 30,897 Add: Effect of dilutive securities - stock options 346 257 483 ------------------------------------------- Diluted weighted average and equivalent shares outstanding 31,521 31,176 31,380 Per share amount $2.21 $1.29 $1.74
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 21,500, 227,250 and 246,855 at December 31, 1999, 1998 and 1997, respectively. F-10 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, 1999 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Cost Holding Gains Holding Losses Fair Value ---------------------------------------------------------------------- Trading Securities: U.S. government and agency securities 8,191 16 (81) 8,126 State and municipal bonds 138,946 90 (426) 138,610 Corporate Bonds 5,056 -- (39) 5,017 Equity securities 9,522 32 (903) 8,651 Partnership interests 26,933 6,106 -- 33,039 Other 3,428 196 -- 3,624 ---------------------------------------------------------------------- $ 192,076 $ 6,440 $ (1,449) $ 197,067 ======================================================================
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 (in thousands):
Gross Gross Amortized Unrealized Unrealized Cost Holding Gains Holding Losses Fair Value ---------------------------------------------------------------------- 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 ======================================================================
The contractual maturities of debt securities at December 31, 1999 were as follows (in thousands):
Fair Value ----------------- Due within one year $ 88,893 Due after one year through five years 57,124 Due after five years 9,360 ----------------- $ 155,377 =================
Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands):
Proceeds Realized Gains ------------------------ -------------------------- 1999 $ 6,947 $ 19 1998 -- -- 1997 $ 11,506 $ 5,458
F-11 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):
Unique Interest Operating Expense on Lease Payments Unique Capital Lease ---------------- ----------------- 1999 $1,662 $1 1998 1,323 4 1997 1,261 7
NOTE 7 INVENTORIES The components of inventories are as follows (in thousands):
December 31, ---------------------------------- 1999 1998 ---------------- ----------------- Raw material $23,098 $21,292 Work in process 3,744 2,838 Finished goods 15,537 15,554 ---------------- ----------------- Total inventories $42,379 $39,684 ================ =================
NOTE 8 PROPERTY AND EQUIPMENT Property and equipment, which includes assets under capital leases, is comprised of the following (in thousands):
December 31, ---------------------------------- 1999 1998 ---------------- ----------------- Buildings $ 11,185 $ 10,256 Land 1,910 1,910 Machinery, equipment and tooling 26,672 25,005 Machinery and equipment under capital leases 1,670 574 Furniture and office equipment 5,310 4,125 Computers and software 25,775 21,589 Automobiles 347 514 Leasehold improvements 2,848 1,444 ---------------- ----------------- 75,717 65,417 Less accumulated depreciation and amortization 34,031 26,567 ---------------- ----------------- Net property and equipment $ 41,686 $ 38,850 ================ =================
F-12 NOTE 9 INCOME TAXES The geographical sources of earnings before income taxes were as follows (in thousands):
1999 1998 1997 ---------------- ----------------- ---------------- United States $95,637 $62,071 $82,614 Outside United States 13,163 2,950 2,611 ---------------- ----------------- ---------------- Total $108,800 $65,021 $85,225 ================ ================= ================
Management expects that the cumulative unremitted earnings of foreign operations, which amounted to $6,000,000 after foreign taxes at December 31, 1999, will be reinvested. Accordingly, no provision has been made for additional U.S. taxes, which would be payable if such earnings were to be remitted to the parent company as dividends. The provision for income taxes consists of the following (in thousands):
1999 1998 1997 ---------------- ----------------- ---------------- Current: Federal $27,914 $17,194 $26,553 State 4,489 2,822 3,599 Foreign 5,554 2,941 3,528 Deferred: Federal 1,376 2,197 (3,250) State (85) (202) (627) Foreign (80) -- 116 ---------------- ----------------- ---------------- Total $39,168 $24,952 $29,919 ================ ================= ================
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):
1999 1998 1997 ---------------- ----------------- ---------------- Provision computed at statutory rate $38,080 $22,747 $28,608 State income tax (net of Federal tax benefit) 2,862 2,044 2,284 Tax-exempt interest and dividend income (1,677) (1,369) (635) Tax benefit of exempt foreign trade income (805) (1,227) (441) Acquisition related items -- 1,006 109 Other 708 1,751 (6) ---------------- ----------------- ---------------- Provision for income taxes $39,168 $24,952 $29,919 ================ ================= ================
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. F-13 Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):
December 31, ---------------------------------- 1999 1998 ---------------- ----------------- Deferred tax assets: Deferred rent-building $ 42 $ 77 Capital equipment lease 20 20 Accrued vacation 798 595 Inventory items 2,221 4,220 Allowance for doubtful accounts 405 667 Other accruals 1,096 -- Acquisition related items 413 473 ---------------- ----------------- Total deferred tax assets 4,995 6,052 Deferred tax liabilities: Unrealized gain on securities (1,067) (440) Depreciation (1,934) (1,587) Other -- (820) ---------------- ----------------- Total deferred tax liabilities (3,001) (2,847) ---------------- ----------------- Net deferred tax asset $ 1,994 $ 3,205 ================ =================
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 eligible 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 4.2% of eligible earnings for 1999, 3.4% for 1998, and 3.3% for 1997. 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):
401(k) Profit Sharing Total ---------------- ----------------- ---------------- 1999 $740 $820 $1,560 1998 $620 $970 $1,590 1997 $548 $847 $1,395
F-14 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 the only remaining portion in existence as of December 31, 1999, and is treated as an operating lease. An amendment to the lease dated July 1997 added 59,150 square feet and extended the term of the existing lease through June 30, 2014. 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). Minimum future obligations under noncancelable operating leases and future minimum capital lease payments as of December 31, 1999 are as follows (in thousands):
Capital Operating Lease Leases ---------------- ----------------- 2000 $ 316 $ 3,773 2001 117 3,135 2002 117 2,907 2003 117 2,882 2004 103 2,436 Thereafter 325 13,587 ---------------- ----------------- Total minimum lease payments $ 1,095 $ 28,720 ================= Less amount representing interest 260 ---------------- Present value of minimum payments 835 Less current portion of obligation under capital lease 264 ---------------- Long-term portion of obligation under capital lease $ 571 ================
Rent expense for operating leases charged to operations for the years ended December 31, 1999, 1998, and 1997 was $4,317,000, $2,898,000, and $2,871,000, respectively. 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 contingent liability of the Company under this guaranty as of December 31, 1999 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 line of credit is renewed annually with the current agreement expiring on February 28, 2001. At December 31, 1999, borrowings under these lines amounted to $176,959 bearing interest at 6.0%. 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, 1999 and 1998, the notional principal amounts of outstanding forward contracts were $0, and $4,057,000, respectively. F-15 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, 1999, 1998, and 1997 is contained in the following table. These amounts (in thousands) are reported in the geographic area where the final sale originates.
DOMESTIC EUROPE OTHER TOTAL ---------------------------------------------------------------------- 1999 Net sales $ 281,890 $ 116,627 $ -- $ 398,517 Identifiable assets 327,347 67,177 119 394,643 1998 Net sales $ 238,354 $ 96,397 $ 1,232 $ 335,983 Identifiable assets 267,470 41,751 781 310,002 1997 Net sales $ 224,376 $ 72,724 $ -- $ 297,100 Identifiable assets 239,117 31,236 94 270,447
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-16 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 the Company's Board of Directors declares such dividends. 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, 1999, 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, 1999, 196,311 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, 20.0% on the third anniversary, 22.5% on the fourth anniversary, and 25.0% 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 Board of Directors determines the specific provisions of any grant. 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, 1999, 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 (January 1 or July 1), or (2) 85% of the fair market value of the shares as of the date of purchase. As of December 31, 1999, 181,456 shares have been purchased under the plan. The Company's Board of Directors adopted the 1997 Stock Option Plan, effective February 11, 1997. On May 18,1999, the Company's shareholders approved an increase in the number of shares of Class A Common Stock reserved for issuance under the plan to 4,250,000 from 2,000,000 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 F-17 contributions to the growth, management, protection and success of the Company or its subsidiaries. As of December 31, 1999, 2,375,603 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 two- to five-year periods and have a legal life of ten years from the date of grant. The Board of Directors determines the specific provisions of any grant. 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, 1999, 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 APB No. 25 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 SFAS No. 123, the Company's net income from continuing operations and diluted earnings per share from continuing operations would have been as follows:
1999 1998 1997 ---------------- ----------------- ---------------- Income from continuing operations: As reported $69,632 $40,069 $54,447 Pro forma 66,569 37,785 52,215 Basic earnings per share from continuing operations: As reported $2.23 $1.30 $1.76 Pro forma 2.14 1.22 1.69 Diluted earnings per share from continuing operations: As reported $2.21 $1.29 $1.74 Pro forma 2.11 1.21 1.66
For purposes of calculating the compensation cost consistent with SFAS 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 1999, 1998, and 1997, respectively: expected dividend yield of 0% for each period; expected volatility of 50%, 55%, and 51%; risk free interest rate of 6.54%, 4.75%, and 5.71%; and expected weighted-average life of five 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 1999, 1998, and 1997, respectively: fair market value of $30.45, $28.75, and $23.63; option price of $25.88, $24.44, and $20.09; expected F-18 dividend yield of 0% for each period; expected volatility of 49%, 51%, and 51%; risk-free interest rate of 6.11%, 4.60%, and 5.59%; and expected lives of six months to one year. Stock option activity for the years ended December 31, 1999, 1998, and 1997 was as follows:
1999 1998 1997 ---------------------------------- ---------------------------------- -------------------------------- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------ ------------ --------------------- ------------ --------------------- ---------- --------------------- Outstanding at beginning of year 1,416,138 $ 26.55 1,180,293 $ 23.31 722,654 $ 18.90 Granted 720,500 27.45 368,550 35.18 567,410 26.12 Exercised (433,526) 21.28 (66,767) 18.03 (109,771) 8.83 Canceled (312,524) 30.03 (65,938) 25.34 -- -- - ------------------------ ------------ --------------------- ------------ --------------------- ---------- --------------------- Outstanding at end of year 1,390,588 27.88 1,416,138 26.55 1,180,293 23.31 Options exercisable at end of year 291,485 25.24 604,453 23.10 330,971 23.05
The following table summarizes information about fixed stock options outstanding at December 31, 1999:
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 - -------------------- -------------- ----------------------------- --------------------- --- ------------- --------------------- $ 4.31-$24.17 141,386 5.19 years $18.70 87,554 $16.42 $ 24.50-$26.50 225,966 6.94 years $24.55 65,868 $24.66 $ 26.56 601,500 9.17 years $26.56 -- $ 0.00 $ 29.25-$33.27 206,761 7.13 years $30.04 114,713 $29.57 $ 35.38-$46.25 214,975 8.56 years $39.02 23,350 $38.62 -------------- ------------- 1,390,588 291,485 ============== =============
F-19 NOTE 16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share data)
First Second Third Fourth 1999 Quarter(2) Quarter(2) Quarter(2) Quarter(2) - ------------------------------------------------------------------------------------------------------------------------------ Net sales $89,822 $97,321 $103,988 $107,386 Gross profit 42,480 48,195 55,849 55,865 Operating expenses 24,526 24,666 24,458 25,837 Operating income 17,954 23,529 31,391 30,028 Net income 12,650 17,122 19,932 19,928 Basic earnings per share $0.41 $0.55 $0.64 $0.64 Diluted earnings per share $0.41 $0.55 $0.63 $0.63
First Second Third Fourth 1998 Quarter(1) Quarter(1) Quarter(1) Quarter(2) - ------------------------------------------------------------------------------------------------------------------------------ Net sales $80,798 $87,040 $88,068 $80,077 Gross profit 38,861 41,701 42,381 32,867 Operating expenses 20,752 20,464 21,009 31,949 Operating income 18,109 21,237 21,372 918 Net income (loss) 13,163 14,037 13,213 (344) Basic earnings per share $0.42 $0.45 $0.43 ($0.01) Diluted earnings per share $0.42 $0.45 $0.42 ($0.01)
(1) Reflects the elimination of intercorporate investment in Eltron International, Inc., and the related tax effect. (2) Reflects a pretax charge for merger costs relating to the Company's merger with Eltron International, Inc. as follows:
1998 1999 1999 1999 1999 Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter ---------------- ----------------- ------------------- ---------------- ------------------- Merger costs $ 8,080 $ 1,869 $ 1,291 $ 1,581 $ 1,600
NOTE 17 MAJOR CUSTOMERS Two customers accounted for more than 10% of total net sales in at least one of the fiscal years ended December 31, 1998 and 1997. The Peak Technologies Group, Inc., represented 10.9% of net sales in 1997. United Parcel Service represented 10.3% of net sales in 1998. F-20 ZEBRA TECHNOLOGIES CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Balance at Charged to Beginning of Costs and Balance at End DESCRIPTION Period Expenses Deductions of Period ---------------- ----------------- ---------------- ----------------- Valuation account for accounts receivable: Year ended December 31, 1999 $2,156 ($176) $130 $1,850 Year ended December 31, 1998 $2,130 $1,061 $1,035 $2,156 Year ended December 31, 1997 $1,412 $997 $279 $2,130 Valuation account for inventories: Year ended December 31, 1999 (1) $9,354 $971 $5,769 $4,556 Year ended December 31, 1998 (1) $4,330 $6,043 $1,019 $9,354 Year ended December 31, 1997 $3,211 $2,920 $1,801 $4,330
(1) During 1998, the Company established $3,945,000 of reserves to value certain inventory at market, which was below historical cost. During 1999, the Company charged $3,944,000 to that reserve. Additionally, during 1998, the Company increased its reserves for shrinkage and obsolescence by $3,985,000, as a result of the merger between the Company and Eltron. This action was due to planned discontinuances and other one-time merger-related activities. During 1999, the Company charged a net of $990,000 against these reserves. F-21 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Eltron International, Inc.: In our opinion, the accompanying consolidated statements of income, shareholders' equity and cash flows of Eltron International, Inc. and subsidiaries (the "Company") present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States 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. /s/PricewaterhouseCoopers LLP Woodland Hills, California February 24, 1998 F-22 EX-21 2 EXHIBIT 21 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 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 Zebra Technologies France, a French corporation Eltron FSC, Inc., a Barbados corporation Eltron Holdings Limited, a United Kingdom corporation Zebra Technologies VTI Corporation, a Utah corporation EX-23.1 3 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS 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 report relating to the consolidated balance sheets of Zebra Technologies Corporation and Subsidiaries as of December 31, 1999 and 1998, 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, 1999, and related consolidated financial statement schedule, as contained herein. These consolidated financial statements and the related consolidated financial statement schedule and our report thereon are included herein. Our report was based in part on the report of other auditors. /s/KPMG LLP Chicago, Illinois March 1, 2000 EX-23.2 4 EXHIBIT 23.2 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 audit of the consolidated financial statements of Eltron International, Inc. for the year ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/PricewaterhouseCoopers LLP Woodland Hills, California March 1, 2000 EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999, AND CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 38,501 197,067 64,720 (1,850) 42,379 345,898 75,717 (34,031) 394,643 43,094 0 0 0 314 348,993 394,643 393,332 398,517 192,682 196,128 99,663 (176) 209 108,800 39,168 69,632 0 0 0 69,632 $2.23 $2.21
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