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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, 1997
Commission File Number 0-19406
ZEBRA TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2675536
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
333 CORPORATE WOODS PARKWAY, VERNON HILLS, ILLINOIS 60061
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (847) 634-6700
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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
As of March 6, 1998, 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 $673,573,845 and $1,340,780, respectively.
The closing price of the Class A Common Stock on March 6, 1998, as reported
on the Nasdaq National Market, was $35.00. 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 6, 1998, the number of shares outstanding of the
registrant's Class A Common Stock, par value $.01 per share, and of the
registrant's Class B Common Stock, par value $.01 per share, was 19,421,019,
and 4,890,609, respectively.
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 5, 1998, as described in the Cross-Reference Sheet and Table of
Contents included herewith, are incorporated by reference into Part III of
this report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE (1)
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 12(2)
Item 11. Executive Compensation 12(3)
Item 12. Security Ownership of Certain Beneficial Owners and Management 12(4)
Item 13. Certain Relationships and Related Transactions 12(3)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13
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(1) Certain information is incorporated by reference, as indicated below,
from the registrant's Notice of Annual Meeting of Stockholders and Proxy
Statement for its Annual Meeting of Stockholders to be held on May 5,
1998 (the "Proxy Statement").
(2) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(3) Proxy Statement section entitled "Executive Compensation and Certain
Transactions."
(4) Proxy Statement section entitled "Security Ownership of Management and
Certain Beneficial Owners."
ZEBRA TECHNOLOGIES CORPORATION
333 CORPORATE WOODS PARKWAY
VERNON HILLS, ILLINOIS 60061
(847)634-6700
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PART I
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ITEM 1. BUSINESS
THE COMPANY
Zebra Technologies Corporation (the "Company" or "Zebra") provides bar
code labeling solutions, principally to manufacturing and service entities,
for use in automatic identification and data collection systems. The Company
designs, manufactures, sells and supports a broad line of computerized label
printing systems, related specialty supplies and PC-based label design
software on a world-wide basis. The Company's equipment is designed to
operate at the user's location to produce and dispense high quality bar coded
labels in time-sensitive and physically demanding environments. Zebra's
solutions approach integrates the Company's applications expertise,
computerized printing systems, specialty supplies and software. Applications
for the Company's systems are extremely diverse. They include any
application 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. Applications
for the Company's technology cut across all industries and geographies. They
include, but are not limited to: inventory control, automated warehousing,
JIT (Just-In-Time) manufacturing, employee time and attendance records, file
management systems, hospital information systems, shop floor control, library
systems, pharmaceutical laboratories and scientific experimentation. As of
December 31, 1997, management estimates that over 290,000 Zebra bar code
printing systems are installed at approximately 30,000 user sites in
approximately 80 countries throughout the world.
The Company anticipates that its future growth will be enhanced by two
continuing trends: bar code label standardization programs and the focus of
businesses worldwide on improving quality and productivity. Industry
mandated standardization has been a major catalyst in the rapid development
of bar coding, and Zebra believes that the mandate of standards will continue
to proliferate. Zebra also believes that increasing demands for improvements
in productivity and quality in commercial and service organizations will lead
to increased use of automatic identification systems.
The Company completed an initial public offering in August 1991. The
Company is organized under the laws of the State of Delaware. The Company's
principal offices are located at 333 Corporate Woods Parkway, Vernon Hills,
Illinois 60061, and its telephone number is (847) 634-6700.
THE COMPANY'S PRODUCTS
The Company's products consist of a broad line of
computerized demand bar code label printers and print engines, specialty bar
code labeling/ticketing materials, ink ribbons and bar code label design
software. These products are integrated to provide automatic identification
labeling solutions for manufacturing, business and industrial applications.
The Company's equipment and supplies are designed for operating at the user's
location to produce bar coded labels in extremely time-sensitive and
physically demanding environments. The Company works closely with its
distributors, other resellers and the end users of its products to fashion
labeling solutions that meet the technical demands of the end user. To
achieve this, the Company provides its customers with the ability to
configure printing systems with various options available on the Company's
systems. Additionally, the Company will select and, if necessary, create
appropriate labeling stock, ink ribbons and adhesives to suit the particular
intended use. In-house engineering personnel with years of experience in the
disciplines of software, mechanical, electronic and chemical engineering all
participate in the creation and realization of bar code solutions for
particular applications.
LABEL PRINTING SYSTEMS. The Company produces a broad range of "on
demand" thermal transfer and direct thermal bar code label printers with, the
Company believes, more models, options and features than any of its
competitors. Zebra manufactures thirteen bar code label printers, which
range in list price from $425 to $7,495, and a high performance print engine
for label applicator systems. Zebra's printing systems include hundreds of
optional configurations that can be selected as necessary to meet particular
customer needs. The Company believes that this breadth of product is a
unique and significant competitive strength because it allows the Company to
satisfy the huge variety of printing applications in its target market.
Zebra's printer product line is organized into multiple series: each
with unique price/performance characteristics. At the low end, the Company's
A-Series and T-Series printers have list prices of under $1,000 and are
well-suited to low volume desktop applications. At the high end, the
Company's XIII Series printers, which consist of four models, are targeted at
applications that require continuous operation in high output, mission
critical operations. These units provide a wide variety of
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option configurations, features, print widths, dot densities and speeds. The
Company's Stripe and S Series printers are targeted at distributed printing
applications where heavy duty cycles are less important. These units have
fewer option configurations and features, but are offered at a significantly
lower price. The Company's high performance 170PAX print engine is targeted
at manufacturers of high speed automatic label applicator systems. In
comparison to competitive offerings, the 170PAX provides increased print
speeds, reduced formatting times, and improved image resolution.
In the fourth quarter of 1997, the Company introduced a new printer
platform, the Z Series, consisting of two models, the Z4000 and Z6000. The Z
Series printers are targeted at the industrial market and are characterized
by modular design and substantial improvements in ease of use features. Both
characteristics make these printers attractive to the Company's channel
partners and end-users alike. Modular design is a feature that enables all
printer options to be installed in the field, a characteristic that is
unique in the industry. This feature substantially reduces inventory risk
for the reseller, and simplifies the purchasing decision of the end-user.
Ease of use features substantially reduce the cost of training and
installation.
In addition to use in demand printing situations, the Company's products
can also be used to meet customers' needs for on-site production of small or
large quantities of custom bar code labels and other graphics. This
capability results in shorter lead times, reduced inventory, and more
flexibility than can be provided with traditional off-site printing.
Management believes that of the major on-site printing technologies, thermal
transfer is best suited for most industrial applications. Thermal transfer
printing produces dark and solid blacks and sharply defined lines that are
important for printing readily scannable bar codes. These images can be
printed on a variety of labeling materials which enables users to adhere bar
code labels to virtually any object. This capability is very important in the
industrial and service markets served by the Company.
Thermal transfer printing creates an image by applying an electrically
heated printhead onto a ribbon that releases ink onto labeling stock. It is
a relatively low cost way to address the special needs of the Company's
target market because it results in excellent image quality, can be used with
a wide variety of materials so long as they are smooth-surfaced, requires no
specially coated or otherwise specially formulated labeling/ticketing stock
and permits the use of certain inks which are not viable with alternative
printing technologies. Direct thermal printing creates an image by applying
the heated printhead directly to specially treated paper that changes color
when heated. Direct thermal technology is preferable where image durability
is less critical, and where the application does not require
specialty-labeling materials such as plastics or metal foils. All printer
products, with the exception of the A-100 and A-300 printers, are optimized
for thermal transfer printing. The A-100 and A-300 operate in direct thermal
mode only. However, the Company's thermal transfer printers also operate
effectively in direct thermal mode simply by removing the ink ribbon and
utilizing direct thermal labeling materials.
The Company's printing systems incorporate Company-designed computer
hardware, electro-mechanisms and software, which operate the printing
functions of the system and communicate with the host computer. All Zebra
printing systems, except the A-100 personal printer, operate using Zebra
Programming Language ("ZPL-Registered Trademark-") and Zebra Programming
Language II ("ZPL II-Registered Trademark-"), 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-Registered
Trademark- and ZPL II-Registered Trademark- 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-Registered Trademark- and ZPL II-Registered Trademark- give the Company a
competitive strength 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-Registered
Trademark- and ZPL II-Registered Trademark- drivers specifically for Zebra
printers. ZPL-Registered Trademark- and ZPL II-Registered Trademark-label
format programs can be run on a personal computer with ordinary word
processing programs, making ZPL-Registered Trademark- and ZPL II-Registered
Trademark- particularly adaptable to PC-based systems.
Sales of the Company's printers accounted for $146,239,000 of the
Company's net sales in 1997, $120,889,000 in 1996, and $106,778,000 in 1995.
These sales amounted to 76.1%, 73.7%, and 73.5% of the Company's total net
sales in each of the last three years, respectively.
SUPPLIES. The Company sells label/ticketing stock, custom labels and
tags, and thermal transfer ribbons worldwide, to support its printing systems
and systems users. Zebra supplies are selected for a particular user's needs
based on the specific application and environment in which the labeling
system must operate. Critical criteria include levels of abrasion, possible
exposure to chemicals and liquids, variations in both the environment (such
as temperature or humidity) in which the labels will be used and the surfaces
to which the labels will be affixed. These factors are all taken into
account in selecting the type of ribbon, the type of labeling material and
the adhesive to be used. Zebra supplies include proprietary ribbon
formulations developed according to Company specifications. Zebra develops
its printers and supplies contemporaneously, as if they were a single unit,
to optimize performance of Zebra printers and genuine Zebra supplies.
Performance is typically measured as a function of both print speed and print
quality and both of these factors can be adversely affected by the use of
supplies that are
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not suited to particular printers. Because of the close relationship between
the printing system, the supplies and the specific applications, the Company
sells supplies together with printing systems. In addition, the Company
sells supplies to existing users of its printing systems. Zebra promotes the
use of Zebra supplies with Zebra equipment. Management believes that owners
of Zebra's printing systems purchase Zebra supplies to attain peak
performance and optimum print quality and to minimize costly downtime and
malfunctions in their automatic identification systems. Sales of the
Company's supplies in 1997, 1996, and 1995 were $41,079,000, $39,537,000, and
$36,033,000, respectively, amounting to 21.4%, 24.1%, and 24.8% of total net
sales, respectively, in each of the past three years.
SOFTWARE. In February 1996, the Company acquired the intellectual
property of a UK-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 will ship with a special version of
JetForm's premier multi-platform, output management product, JetForm
Central-TM-. This will enable Zebra printers to receive output directly from
most of the popular software packages on the market without the need to write
costly software interfaces.
During 1997, the Company discontinued the operation of Zebra
Technologies VTI ("Zebra VTI"), a provider of bar code label design software
targeted at the small business market and distributed through PC distributors
and catalogs. The Company originally acquired Zebra VTI in July of 1995.
MAINTENANCE SERVICES. The Company also provides service for its
printing systems with depot repair at its Vernon Hills, Illinois facility and
its distributors' locations, in addition to on-site service, which is
provided by distributors and Wang Laboratories, Inc. ("Wang"). Under a
service support agreement, Wang and the Company share the revenue for on-site
service contracts sold by Wang for Zebra printing systems installed in the
United States. The Company in turn provides maintenance parts as needed to
repair units under contract. This technical support is available to end-users
and to the Company's distributors and resellers. The Company's distributors
in each country handle international maintenance service, either directly or
through service agents. Zebra 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. The Company also 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.
SALES AND MARKETING
SALES. The Company sells its products in the United States and
internationally through a multi-channel distribution system including
distributors, value-added resellers ("VAR's"), original equipment
manufacturers ("OEM's") and international accounts. This multi-channel
distribution system purchases, warehouses, and sells a variety of automatic
identification components including printers, supplies, scanners, and
application software, and brings system integration expertise to the end
users. Two of the Company's distributors are classified as National
Distributors because of their broad territorial representation within the
United States. Other distributors have qualified for Zebra Solution Center
("ZSC") status. ZSC's carry the full range of Zebra printers and supplies,
and focus on providing a Zebra bar code solution to their customers. VAR's,
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 OEM's,
then resell the products under their own logos. The Company believes that
the breadth of this indirect channel network, both in terms of variety and
geographic scope, is a material competitive advantage.
The Company obtains a significant portion of its sales from outside of
the Unites States, distributing its products in approximately 80 countries
throughout the world. For 1997, 1996, and 1995, sales to international
customers comprised 45.5%, 45.0%, and 44.5%, respectively, of the Company's
total net sales. Management believes that international sales have the
potential to grow faster than domestic sales due to the lower penetration of
bar code systems outside the United States. As a result, the Company has
invested substantial resources to support its international growth and
currently operates facilities and sales offices in the United Kingdom,
Germany, and Singapore.
Because of the wide variety of applications for Zebra's printing systems
and because these printers are frequently integrated with products from other
manufacturers to form a complete automatic identification system, management
believes that it is more
3
effective to sell printing systems through multiple distributors and
resellers with defined market niche expertise and presence rather than
directly to end users. By forming relationships with distributors who serve
various submarkets and types of end users and who have existing customers and
in-place sales and distribution networks that identify new customers and
sales opportunities, the Company is able to reach end users throughout the
world in a variety of industries. 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 around the world.
MARKETING. The Company's marketing operations include product
management, marketing communications, technical services, training, market
research and market development functions. The product management group
specifies new products and product enhancements that create customer value,
and manages product positioning and introductions.
The marketing services 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 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, among other things, a hotline staffed by experienced
technical personnel 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 versus its competition. This
group identifies and analyzes market opportunities for current, planned and
potential products, and gathers and analyzes competitive and market
intelligence.
The market development group is responsible for the development of new
market opportunities and relationships with key customers, vendors and
government regulatory and industry standards committees. This group also
prepares speeches, application training programs and seminars which are
presented around the world to industry and customer groups.
CUSTOMERS
The Company estimates that it has over 290,000 bar code printing systems
installed at approximately 30,000 user sites around the world. Sales to the
Peak Technologies Group, Inc. ("Peak Technologies"), one of the Company's
National Distributors, accounted for approximately 17% of the Company's total
net sales in the year ended December 31, 1997.
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 utilize 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 all 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
creates products that are highly manufacturable specifying and designing
manufacturing processes and facilities simultaneously with product design.
RESEARCH AND DEVELOPMENT
The Company devotes significant resources to developing new products to
serve the needs of targeted markets, providing bar code solutions to users of
the Company's printing systems and developing new and reliable products that
have a high degree of manufacturability. The Company's research and
development expenditures were $10,784,000, $9,615,000, and $7,771,000, in
1997, 1996, and 1995, respectively.
COMPETITION
The Company considers its direct competition to be the providers of
thermal transfer and direct thermal printing systems and supplies to the
"demand printing" market. This excludes the larger group of companies
engaged in the design, manufacture and marketing of standard computer and
label printers. It also excludes manufacturers of other equipment for
automated data collection systems, such as scanners or data collection
devices. 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, as well as hardware innovations and
specifications, information systems connectivity, price, 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.
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The Company has a number of important competitors in the thermal
transfer and direct thermal bar code printing systems and supplies markets,
some with substantially greater resources than the Company. These
competitors include: UNOVA Corporation, a 1997 spin-off from Western Atlas,
which manufactures bar code readers, scanning wands, laser scanners, labels
and label printers; and Sato, a manufacturer of thermal transfer bar code
printers and printer supplies. Also included in this group are Tokyo Electric
Corporation, a subsidiary of Toshiba, which manufactures a broad range of
electronic products including bar code printers; Datamax Corporation, a
manufacturer of mid-range thermal transfer printers; and Eltron
International, a manufacturer of low cost thermal and thermal transfer
printers.
ALTERNATIVE TECHNOLOGIES
Various other methods of bar code printing exist, including ink jet,
laser, impact dot matrix and direct thermal, but the Company believes that
thermal transfer printing will be the technology of choice in Zebra's target
markets for the foreseeable future. Among the many advantages of thermal
transfer printing is its ability to print high-resolution images on a wide
variety of label materials at a relatively low cost compared to alternative
printing technologies. Although there is no assurance that a new technology
will not supplant thermal transfer printing, the Company is not aware of any
developing technology that offers the advantages of thermal transfer printing
for the Company's target markets.
INTELLECTUAL PROPERTY RIGHTS
The Company, through its subsidiary Zebra Domestic Intangibles, Inc.,
currently holds US trademarks on the words "STRETCH", "Value-Line",
"Performance Line", "220XiII", "170XiII", "140XiII", and "90XiII" and holds
US registered trademarks on the Company's Zebra head logo and the words or
marks "Zebra", "ZPL", "ZPL II", "STRIPE", "Element Energy Equalizer", "E ",
and "Z- Ultimate". The Company, through its subsidiary Zebra International
Intangibles, Inc., holds trademarks on the word "Zebra" and the Company's
Zebra head logo in France, Canada, Germany, the United Kingdom, Sweden, and
China. The Company actively protects these trademarks. Zebra relies on a
combination of trade secrets, copyright laws and contractual rights to
establish and protect its proprietary rights in its products. For example,
the firmware in Zebra's printing systems is copyrighted and the Company's
specifications for certain inks and supplies are treated by the Company as
trade secrets and disclosed subject to confidentiality agreements. 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 February 1, 1998, the Company employed approximately 745
persons. None of these employees are members of a union. The Company
considers its relationship with its employees to be excellent.
ITEM 2. PROPERTIES
The Company conducts its operations from a custom-designed facility in
Vernon Hills, Illinois (north suburban Chicago), which provides approximately
167,628 square feet of space. Approximately 61,528 square feet have been
allocated to office and laboratory functions with 106,100 square feet
allocated to manufacturing and warehouse functions. This facility was
constructed for the Company in 1989, expanded in 1993, 1995, and 1996, and 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.
An additional 2.8 acre parcel of land adjacent to the Company's facility
is also owned by Unique Building Corporation and available to the Company for
expansion.
The Company leases 6,092 square feet of office space in Vernon Hills,
Illinois that is occupied by the Company's Personal Printer Division. The
lease extends through June of 1998.
The Company established a branch in the United Kingdom in late 1990,
which was incorporated as a subsidiary in 1993. This subsidiary, Zebra
Technologies Europe Limited, moved in 1995 to a new facility at High Wycombe
outside London in the United Kingdom. This facility, which consists of
18,400 square feet leased by the Company, serves as a sales office, product
distribution point and service center for sales in the United Kingdom and as
headquarters for all European operations.
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The Company purchased the assets of a label conversion company in
Preston, England, incorporating it as a subsidiary under the name Zebra
Technologies Preston Limited in September 1993. In 1995, Zebra Technologies
Preston moved to a larger facility in Preston, occupying 23,000 square feet
of leased manufacturing and office space. In October of 1997, the Company
committed to the purchase of a 37,124 square foot manufacturing and office
facility for $1,100,000 which will replace the current facility. The Company
plans to begin transferring its operations to this facility in September
1998.
ITEM 3. LEGAL PROCEEDINGS
As of June 28, 1997, the Company settled litigation between Zebra and
Messrs. David Carter and William Flury, former officers of Zebra VTI. The
legal actions, which were initiated in March of 1996, have been settled out
of court. Terms are confidential and all payments have been completed. In
connection with the settlement of the litigation, the Company reduced
long-term liabilities by $1,999,000 and paid-in capital by $1,372,000.
In addition to the matter described above, the Company presently 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 impact on the Company's business, financial condition, or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION: PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market under
the symbol ZBRA. The following table shows the high and low closing prices
for each fiscal quarter in 1997 and 1996 as reported by Nasdaq.
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW
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First Quarter $27.25 $21.38 First Quarter $35.25 $25.25
Second Quarter 32.00 21.50 Second Quarter 27.88 17.75
Third Quarter 35.00 27.19 Third Quarter 26.25 15.50
Fourth Quarter 37.88 29.75 Fourth Quarter 31.50 23.13
At March 6, 1998, the last reported sale price for the Class A Common
Stock was $35.00 and there were 572 and 14 holders of record of the Company's
Class A Common Stock and Class B Common Stock, respectively.
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 currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except
per share amounts) 1997 1996(1) 1995(1) 1994 1993
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Net sales $192,071 $163,980 $145,348 $107,103 $87,456
Gross profit $98,200 $78,678 $69,107 $52,023 $43,567
Operating income $52,775 $41,031 (2) $39,981 $30,343 $24,897
Net income from continuing
operations $42,810 $30,853 (2) $29,574 $21,073 $18,255
Net income $40,155 $28,915 (2) $22,564 (3) $21,073 $18,255
Basic earnings per share
from continuing operations $1.77 $1.27 (2) $1.23 $0.88 $0.76
Diluted earnings per share
from continuing operations $1.76 $1.27 (2) $1.22 $0.87 $0.76
Basic earnings per share $1.66 $1.19 (2) $0.94 (3) $0.88 $0.76
Diluted earnings per share $1.65 $1.19 (2) $0.93 (3) $0.87 $0.76
Total assets $203,584 $164,386 $131,071 $95,043 76,697
Long-term obligations $263 $2,326 $2,177 $236 $293
(1) Revised to reflect the discontinuance of operations of Zebra VTI. See
the Company's consolidated financial statements Note 11 - Discontinued
Business Operations.
(2) Reflects a pre-tax charge for acquired in-process technology of $1,117
relating to the Company's acquisition of Fenestra Computer Services.
(3) Reflects a pre-tax charge for acquired in-process technology of $6,028
relating to the Company's acquisition of Zebra VTI.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. During 1997 Zebra's net sales were $192,071,000, increasing by
17.1% from net sales of $163,980,000 in 1996. Net sales in 1995 were
$145,348,000. Net sales growth in both 1997 and 1996 is attributed to unit
growth, as the average unit price of the Company's printer products declined
due to product mix changes and price reductions on certain products.
PRINTERS VS. SUPPLIES. Zebra sells printer products, software and related
supplies, which consist of self-adhesive labels and thermal transfer ribbons.
In 1997, printer sales were $146,239,000 (76.1% of net sales), supplies sales
were $41,079,000 (21.4% of net sales), and software and service sales were
$4,753,000 (2.5% of net sales). In 1996, printer sales were $120,889,000
(73.7% of net sales), supplies sales were $39,537,000 (24.1% of net sales),
and software and service sales were $3,551,000 (2.2% of net sales). In 1995,
printer sales were $106,778,000 (73.5% of net sales), supplies sales were
$36,033,000 (24.8% of net sales), and software and service sales were
$2,537,000 (1.7% of net sales). Management believes that the decline in
supplies revenues as a percentage of total net sales is partially due to the
shift in the Company's installed base of printers to lower cost printers,
which consume smaller quantities of supplies per unit. Contributing factors
also include the overcapacity in ribbon coating worldwide, which is forcing
ribbon manufacturers to be more aggressive in marketing their output directly
to the Company's distribution channel partners and end users than in prior
periods. Also, label sales were adversely affected in 1997 due to the
acquisition of a significant customer, Peak Technologies, by Moore
Corporation. Moore Corporation is a major provider of self-adhesive labels.
See "- Significant Customer."
INTERNATIONAL SALES. Zebra products are sold through an international
network of resellers in approximately 80 countries. International sales in
1997 were $87,428,000, an increase of 18.4% over 1996 international sales of
$73,853,000. International sales comprised 45.5% of net sales in 1997 and
45.0% in 1996. In 1995, international sales were 44.5% of net sales, or
$64,631,000. Management believes that international sales have the potential
to grow faster than domestic sales due to the lower penetration of bar code
systems outside the United States. The Company is expanding its operations
outside the United States in order to take advantage of these favorable
growth opportunities. Sales offices were opened in Germany and Singapore in
1997.
GROSS MARGINS. Gross margins increased significantly in 1997 to 51.1% of
net sales, compared to 48.0% of net sales in 1996. Margins were 47.5% in
1995. The increase in gross margins in 1997 is attributed to decreased
material costs of high volume printer parts plus favorable product mix.
Supplies sales, which were a lower portion of total sales in 1997, provide a
lower gross margin than the printer and software product lines.
SALES AND MARKETING. Total sales and marketing expenses increased by
$4,506,000 or 29.2% in 1997, to $19,951,000 or 10.4% of net sales, compared
to 1996 expenses of $15,445,000 or 9.4% of net sales. In 1995, the Company
incurred $12,421,000 of sales and marketing costs, or 8.5% of net sales. The
increasing trend in sales and marketing expenses as a percentage of net sales
over the past three years is principally the result of expenses related to
expansion of the Company's sales infrastructure needed to support
international sales. In 1996, the Company opened a sales office in Miami,
Florida to serve its markets in Central and South America. In addition, the
Company opened several domestic sales offices to improve service to its
customers in the United States. Marketing expenses have also increased as a
percent of sales (3.5% in 1995, 3.7% in 1996, 4.2% in 1997) to support the
Company's expanded distribution channel structure in various international
markets. In late 1997, the Company incurred significant advertising and
promotional expenses related to the introduction of the Z Series platform of
printers, which was introduced at the Scan Tech trade show in November 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
12.1% in 1997, to $10,784,000, from $9,615,000 in 1996, and $7,771,000 in
1995. As a percentage of net sales, these expenses decreased to 5.6% in 1997
compared to 5.9% in 1996, and 5.3% in 1995. The change in research and
development expenses was primarily the result of increased staffing to
support new product development in its European and each of its Vernon Hills
facilities. As a percent of sales, research and development expenses in 1996
were higher than 1995 or 1997 due to the quantity of new product development
projects then in progress. The Company will continue to invest significant
amounts in new product development as management believes that a steady
stream of new products is vitally important to the Company's future sales
growth.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
28.1% to $14,690,000 or 7.6% of net sales in 1997, compared to $11,470,000, or
7.0% of net sales in 1996. In 1995, general and administrative expenses were
$8,934,000, or 6.1% of net sales. The increased level of general and
administrative expenses in 1997 and 1996 was caused
8
principally by higher staffing levels plus increased usage of professional
services. In addition, 1997 and 1996 expenses include increased information
systems costs related to the Company's enterprise-wide software
implementation project.
ACQUIRED IN-PROCESS TECHNOLOGY. The charge for acquired in-process
technology in 1996 relates to the Company's acquisition of software
technologies as part of the acquisition of Fenestra Computer Services in the
first quarter of 1996. This acquisition was accounted for under the purchase
method, which requires that the purchase price be allocated to the fair value
of the assets acquired. Among these assets was in-process technology
(projects that had not reached technological feasibility and had no
alternative future use) that was valued at $1,117,000. Accounting rules
require that this asset be immediately expensed. Intangible assets and
goodwill resulting from the acquisition are being amortized over periods of
between three and ten years.
OTHER INCOME. Other income, which consists of investment income and gains
on the sales of securities (net of interest expense), increased by 119.5% in
1997 to $13,959,000, from $6,358,000 in 1996. The substantial increase in
investment income is the result of a one-time gain of $5,458,000 during the
first quarter of 1997 from the sale of 350,000 shares of Norand Corporation
common stock, which was purchased in October of 1995 when Management briefly
considered Norand a possible acquisition candidate. Without this gain on
securities, other income was up 33.7% as a result of larger investment
balances. Other income in 1996 was up 16.8% from $5,444,000 in 1995, again,
principally due to gains on the Company's investment portfolio. The pretax
return on average cash invested for 1997, 1996, and 1995, excluding the gain
from the sale of Norand stock, was 7.5%, 8.8%, and 9.8%, respectively.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1997 was
$66,734,000, or 34.7% of net sales, an increase of 40.8% from $47,389,000, or
28.9% of net sales, in the previous year. In 1995, income before income
taxes was $45,425,000, or 31.3% of net sales.
PROVISION FOR INCOME TAXES. The provision for income taxes in 1997 was
$23,924,000, or 35.8% of income before income taxes. The provision for
income taxes in 1996 was $16,536,000, or 34.9% of income before income taxes.
In 1995, the provision for income taxes was $15,851,000, representing 34.9%
of income before income taxes.
NET INCOME FROM CONTINUING OPERATIONS. Net income from continuing
operations in 1997 was $42,810,000, or $1.77 per basic share and $1.76 per
diluted share. In 1996, net income from continuing operations was
$30,853,000, or $1.27 per basic share and $1.27 per diluted share. In 1995,
net income from continuing operations was $29,574,000, or $1.23 per basic
share and $1.22 per diluted share. Outstanding shares have all been adjusted
for the two-for-one stock split effective December 28, 1995. Net income from
continuing operations, as a percentage of net sales, increased in 1997 to
22.3% of net sales compared to 18.8% in 1996, and 20.3% in 1995. 1996 and
1995 earnings per share have been restated in accordance with Statement of
Financial Accounting Standards No. 128, which the Company adopted during the
fourth quarter of 1997.
DISCONTINUED OPERATIONS
As of June 28, 1997, the Company made the decision to discontinue the
operations of Zebra VTI, a subsidiary of the Company. The discontinuance of
Zebra VTI and the related PC retail channel was completed during the third
quarter of 1997. A one-time charge of $2,363,000, before income tax
benefits, was recorded in the second quarter and was related to the
discontinuance of VTI and the Company's presence in the PC retail channel.
The one-time charge includes a provision for expected product returns from
present retail channel partners, provision for slow moving/obsolete product,
and provisions for estimated contingent liabilities. As part of recording
the provisions and charges, the related remaining goodwill and intangible
assets were written off as part of the discontinued operations charge. The
transition of remaining products and the business records and
responsibilities was made during the third quarter of 1997 to appropriate
personnel at the Company's Vernon Hills facility. Due to the discontinuance
of Zebra VTI, the Company's 1995 and 1996 financial statements have been
revised to reflect such discontinuance.
LIQUIDITY AND CAPITAL RESOURCES
Internally generated funds from operations are the primary source of
liquidity for the Company. The Company has long-term obligations of $263,000
as of December 31, 1997, which consist of $212,000 of deferred payouts owed
to the former shareholders of Fenestra Computer Services and $51,000 of
deferred rent and capitalized lease obligations. As of December 31, 1997,
the Company had $128,853,000 in cash and marketable securities compared to
$94,540,000 at the end of 1996. 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 150 basis points over the London Inter-bank Offer Rate (LIBOR), at the
Company's discretion. As of December 31, 1997, the Company had outstanding
borrowings of $137,000 under its lines of credit. Capital expenditures in
1997 were $5,272,000, compared to $5,994,000 in 1996, and $4,333,000 in 1995.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements.
9
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 130, ("Statement 130") "Reporting Comprehensive
Income", beginning with financial statements issued for 1998. Statement 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. Management believes that the adoption of
Statement 130 will not have a significant impact on the Company's financial
statements.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 131, ("Statement 131") "Disclosures about Segments
of an Enterprise and Related Information," for financial statements issued
for periods after December 15, 1997. Statement 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information, quarterly and entity-wide, disclosures about
products and services, major customers, and the material countries in which
the entity holds assets and reports revenues. Management believes that the
adoption of Statement 131 will not have a significant impact in the
Company's financial statements.
YEAR 2000 CONSIDERATIONS
The Company initiated an enterprise-wide system
conversion in 1994 to meet changing business needs, using the Baan system.
This system is year 2000 compliant and its implementation is planned to be
completed in the second quarter of 1998 for Vernon Hills and completed by
year-end 1998 for the United Kingdom location. In addition, the Company's
payroll system, not covered by the Baan system, will also be replaced by the
end of 1998. The payroll system will integrate payroll with the Company's
human resources software and will be year 2000 compliant. To date,
expenditures on the Baan project have aggregated $4,870,000, of which
$3,702,000 have been capitalized. At completion, total expenditures are
estimated to be $8,800,000, of which $7,100,000 are estimated to be
capitalized.
SIGNIFICANT CUSTOMER
Sales to Peak Technologies accounted for more than 20% of the Company's total
net sales in the fiscal year ended December 31, 1996 and 17% in the fiscal year
ended December 31, 1997. Peak Technologies was acquired by Moore Corporation in
June 1997. Management recognizes Moore Corporation is a major provider of
labels which could have an adverse affect on Zebra sales of this product to Peak
Technologies. Sales to Peak Technologies of labels accounted for 2% of the
Company's total net sales in the fiscal year ended December 31, 1997 and 3% in
the fiscal year ended December 31, 1996.
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 the acceptance of the Company's printer and
software products by the market, and product offerings made by its competitors.
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 conditions will also have an impact on results, as will foreign exchange
rates due to the large percentage of the Company's sales in international
markets. When used in this document and documents referenced hereby, 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 release are referred to prior
filings with the Securities and Exchange Commission, including the information
contained in the "Risk Factors" section of Zebra's prospectus of September 4,
1997, for further discussions of factors that could affect Zebra's future
results.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule of the Company are annexed to this Report
as pages F-1 through F-14. An index to such materials appears on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
11
- -------------------------------------------------------------------------------
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."
12
- -------------------------------------------------------------------------------
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. No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
13
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, 1998.
ZEBRA TECHNOLOGIES CORPORATION
By: /s/ EDWARD L. KAPLAN
-------------------------
Edward L. Kaplan,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
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 March 6, 1998
- ----------------------- and Chairman (Principal
Edward L. Kaplan Executive Officer)
/s/ GERHARD CLESS Executive Vice President March 6, 1998
- ---------------------- and Director
Gerhard Cless
/s/ CHARLES R. WHITCHURCH Chief Financial Officer and March 6, 1998
- -------------------------- Treasurer (Principal
Charles R. Whitchurch Financial and Accounting
Officer)
/s/ CHRISTOPHER G. KNOWLES Director March 6, 1998
- ---------------------------
Christopher G. Knowles
/s/ DAVID P. RILEY Director March 6, 1998
- ----------------------
David P. Riley
/s/ MICHAEL A. SMITH Director March 6, 1998
- -----------------------
Michael A. Smith
14
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.
10.2 (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 John H.
Kindsvater, Jr. +
10.7 (2) Employment Agreement between the Registrant and Clive P.
Hohberger. +
10.8 (2) Guaranty by the Registrant of certain obligations.
10.9 (2) Forms of Distributor Agreement.
10.10 Directors' Stock Option Plan. +
10.11(4) Employment Agreement between the Registrant and Charles R.
Whitchurch. +
10.13(4) Form of Authorized Zebra Solution Center Agreement.
10.14(4) Credit Agreement with American National Bank and Trust
Company of Chicago.
10.15(4) Description of Executive Officer Bonus Plan. +
10.16(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.
10.17(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.
10.18(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.
10.19(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.
10.20(7) Employment Agreement between the Registrant and Thomas C.
Beusch.+
10.21(7) Employment Agreement between the Registrant and Jeffrey K.
Clements.+
10.22(7) Employment Agreement between the Registrant and Jack A.
LeVan.+
10.23 1997 Stock Option Plan
21.0 Subsidiaries of the Registrant.
23.0 Report and Consent of KPMG Peat Marwick LLP, independent
auditors (included on page F-18 of this Annual Report on
Form 10-K).
27.1 Financial Data Schedule--Fiscal Year Ended December 31,
1997.
27.2 Restated Financial Data Schedule--Fiscal Years Ended
December 31, 1996 and 1995.
- -------------------------------------------------------------------------------
(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.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
(b) Reports on Form 8-K
15
The Company did not file any reports on Form 8-K during the last quarter of the
period covered by this Annual Report on Form 10-K.
16
ZEBRA TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
(1) Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Earnings for the years ended December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996,
and 1995. F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedule:
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts F-17
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.
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, 1997 and 1996,
and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 27, 1998
F-2
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Dollars in thousands, except per share data) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $7,155 $5,168
Investments and marketable securities 121,698 89,372
Accounts receivable, net of allowance of $1,788 in 1997
and $960 in 1996 31,032 31,631
Inventories 22,443 21,503
Prepaid expenses 843 1,322
Deferred income taxes 4,307 1,250
--------------------------------------
Total current assets 187,478 150,246
--------------------------------------
Machinery and equipment at cost, less accumulated depreciation and amoritization 12,753 11,328
Other assets 3,353 2,812
--------------------------------------
TOTAL ASSETS $203,584 $164,386
--------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $11,141 $12,200
Accrued liabilities 6,900 4,180
Short-term note payable 137 1
Current portion of obligation under capital lease with related
party, less current portion 65 62
Income taxes payable 4,329 3,750
--------------------------------------
Total current liabilities 22,572 20,193
--------------------------------------
Obligation under capital lease with related party, less current portion 51 115
Long-term obligations 212 2,211
Other 287 308
Deferred income taxes 911 1,103
--------------------------------------
Total liabilities 24,033 23,930
--------------------------------------
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,
19,413,933 and 16,924,973 shares issued and outstanding in 1997
and 1996, respectively 194 169
Class B Common stock, $.01 par value: 28,358,189 shares authorized,
4,890,609 and 7,315,404 shares issued and outstanding in 1997
and 1996, respectively 49 73
Additional paid-in capital 29,984 30,386
Retained earnings 148,779 108,624
Unrealized holding loss on investments - (6)
Cumulative translation adjustment 545 1,210
-------------------------------------
Total shareholders' equity 179,551 140,456
--------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $203,584 $164,386
--------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
--------------------------------------------------
December 31, December 31, December 31,
(In thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $192,071 $163,980 $145,348
Cost of sales 93,871 85,302 76,241
--------------------------------------------------
Gross profit 98,200 78,678 69,107
--------------------------------------------------
Operating expenses:
Sales and marketing 19,951 15,445 12,421
Research and development 10,784 9,615 7,771
General and administrative 14,690 11,155 8,934
Merger costs - 315 -
Acquired in-process technology - 1,117 -
--------------------------------------------------
Total operating expenses 45,425 37,647 29,126
--------------------------------------------------
Operating income 52,775 41,031 39,981
--------------------------------------------------
Other income (expense):
Investment income 13,288 6,189 5,207
Interest expense (35) (87) (59)
Other, net 706 256 296
--------------------------------------------------
Total other income 13,959 6,358 5,444
--------------------------------------------------
Income from continuing operations before income taxes 66,734 47,389 45,425
Income taxes 23,924 16,536 15,851
--------------------------------------------------
Net income from continuing operations 42,810 30,853 29,574
--------------------------------------------------
Discontinued operations:
Loss from discontinued operations (less applicable
income tax benefit of $372, $815, and $442) (1,692) (1,938) (7,010)
Loss on disposal of discontinued operations including
provision for operating losses during phase-out period
(less applicable income tax benefit of $615) (963) - -
--------------------------------------------------
Net income $40,155 $28,915 $22,564
--------------------------------------------------
--------------------------------------------------
Basic earnings per share from continuing operations $1.77 $1.27 $1.23
Diluted earnings per share from $1.76 $1.27 $1.22
Basic earnings per share $1.66 $1.19 $0.94
Diluted earnings per share $1.65 $1.19 $0.93
Weighted average shares outstanding 24,255 24,203 24,113
Weighted average and equivalent 24,318 24,241 24,166
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------------
December 31, December 31, December 31,
(Dollars In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $40,155 $28,915 $22,564
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,275 3,839 2,219
Acquired in-process technology - 1,117 6,028
Appreciation in market value of (5,973) (2,483) (2,061)
Discontinued operations (3,371) - -
(Increase) decrease in accounts 599 (6,744) (7,295)
(Increase) in inventories (940) (1,138) (3,193)
(Increase) decrease in other assets (968) 132 (1,884)
Increase (decrease) in accounts (1,059) 932 3,867
Increase in accrued expenses 2,699 355 1,003
Increase (decrease) in income taxes 579 (317) 1,791
(Decrease) in deferred taxes (3,249) (484) (815)
Net increase (decrease) in other (186) 1,491 927
Net (purchases) of investments and (37,853) (24,153) (11,460)
----------------------------------------------
Net cash provided by (used in) operating (5,292) 1,462 11,691
----------------------------------------------
Cash flows from investing activities:
Purchases of machinery and equipment (5,273) (5,994) (4,333)
Payment for acquisition - (962) (2,550)
Proceeds from sales/ (purchases) of investments
and marketable securities 11,506 265 (6,147)
----------------------------------------------
Net cash provided by (used in) investing activities 6,233 (6,691) (13,030)
----------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock 971 476 324
Proceeds from sales of common stock - - 631
Issuance (repayment) of short-term notes payable 136 (37) 37
Payments for obligation under capital lease (61) (59) (57)
----------------------------------------------
Net cash provided by financing activities 1,046 380 935
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,987 (4,849) (404)
Cash and cash equivalents at beginning of year 5,168 10,017 10,421
Cash and cash equivalents at end of year $ 7,155 $ 5,168 $10,017
----------------------------------------------
----------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $35 $87 $59
Income taxes paid $23,858 $16,763 $13,626
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ZEBRA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Class A Class B Additional Holding Cumulative
Common Common Paid-in Retained Loss On Translation
(Dollars in thousands) Stock Stock Capital Earnings Investments Adjustment Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $76 $44 $25,313 $57,145 $(395) $(151) $82,032
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of 117,388 shares of
Class A Common stock 1 -- 2,453 -- -- -- 2,454
Conversion of 1,391,712 shares of
Class B Common stock to 1,391,712
shares of Class A Common stock 7 (7) -- -- -- -- --
Adjustments for stock split 85 36 (121) -- -- -- --
VTI acquisition -- -- 2,000 -- -- -- 2,000
Net income -- -- -- 22,564 -- -- 22,564
Cumulative translation adjustment -- -- -- -- -- (73) (73)
Unrealized holding loss on
investments -- -- -- -- (771) -- (771)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 169 73 29,645 79,709 (1,166) (224) 108,206
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of 56,815 shares of Class A
Common stock -- -- 741 -- -- -- 741
Conversion of 2,658 shares of Class B
Common stock to 2,658 shares of
Class A Common stock -- -- -- -- -- -- --
Net income -- -- 28,915 -- -- 28,915
Cumulative translation adjustment -- -- -- -- -- 1,434 1,434
Unrealized holding gain on
investments -- -- -- -- 1,160 -- 1,160
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 169 73 30,386 108,624 (6) 1,210 140,456
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of 64,165 shares of Class A
Common Stock 1 -- 970 -- -- -- 971
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 VTI -- -- (1,372) -- -- -- (1,372)
Net income -- -- -- 40,155 -- -- 40,155
Cumulative translation adjustment -- -- -- -- -- (665) (665)
Unrealized holding gain on
investments -- -- -- -- 6 -- 6
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $194 $49 $29,984 $148,779 $0 $545 $179,551
- ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
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 computerized
on-demand bar code label printers, specialty bar code labeling materials,
thermal transfer ribbons, and PC-based bar code software, which provides bar
code labeling solutions targeted primarily at industrial and service
organizations worldwide.
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, 1997 consisted of U.S. Treasury, mortgaged-backed, and corporate
debt and equity securities. The Company applies the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement 115). Under Statement 115, the Company
classifies its debt and marketable equity securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term. Held-to-
maturity securities are those securities which 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. Transfers of securities between categories are recorded
at fair value at the date of transfer. Unrealized holding gains and losses are
recognized in earnings for transfers into trading securities.
INVENTORIES. Inventories are stated at the lower of cost or market, and cost
is determined by the first-in, first-out (FIFO) method.
MACHINERY AND EQUIPMENT. Machinery 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 machinery and
equipment, which range from 3 to 10 years. Machinery and equipment held under a
capital lease is amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
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.
EARNINGS PER SHARE. For the years ended December 31, 1997, 1996, and 1995,
earnings per share was computed in accordance with Statement of Financial
Accounting Standards No. 128, which the Company adopted during the fourth
F-7
quarter of 1997. Weighted-average and equivalent shares outstanding include
the dilutive effect of common stock options aggregating 63,435, 37,724, and
53,402, for the years ended December 31, 1997, 1996, and 1995, respectively.
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 sales and expenses are translated using the average exchange rate for the
year. The resulting translation gains or losses are recorded as a separate
component of shareholders' equity as a cumulative translation adjustment.
NOTE 3 INVESTMENTS AND MARKETABLE SECURITIES
Investments and marketable securities consist of (in thousands):
December 31, December 31,
1997 1996
- -------------------------------------------------------------------------------
Trading, at fair value $121,698 $83,334
Available-for-sale, at fair value - 6,038
------------------------
$121,698 $89,372
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, and fair value for available-for-sale investments and marketable
securities as of December 31, 1996 were as follows (in thousands):
Gross Unrealized Holding
Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------
$6,047 - $(9) $6,038
Proceeds from the sale of an available-for-sale security during 1997 were
$11,506,000, resulting in a gross realized gain of $5,458,000.
NOTE 4 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 9. Management believes that the lease
payments are substantially consistent with amounts which 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 Operating Lease Interest Expense on Unique
Payments Capital Lease
- -------------------------------------------------------------------------------
1997 $1,261 $7
1996 1,227 10
1995 1,114 12
NOTE 5 INVENTORIES
The components of inventories are as follows (in thousands):
December 31, 1997 December 31, 1996
-------------------------------------------
Raw material $14,651 $10,750
Work in process 1,273 325
Finished goods 6,519 10,428
-------------------------------------------
Total inventories $22,443 $21,503
F-8
NOTE 6 MACHINERY AND EQUIPMENT
Machinery and equipment, which includes assets under capital leases, is
comprised of the following (in thousands):
December 31, December 31,
1997 1996
-----------------------------
Machinery, equipment, and tooling $12,129 $11,091
Machinery and equipment under capital leases 574 591
Furniture and office equipment 2,512 2,259
Computers and related equipment 10,834 6,943
Automobiles 505 536
Leasehold improvements 843 704
-----------------------------
27,397 22,124
Less accumulated depreciation and amoritization 14,644 10,796
-----------------------------
Net machinery and equipment $12,753 $11,328
Unamortized computer software costs were approximately $1,800,000 and
$1,700,000 at December 31, 1997 and December 31, 1996, respectively.
NOTE 7 INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
----------------------------
Current:
Federal $21,217 $12,914 $12,365
State 2,446 1,412 1,192
Foreign 2,523 1,879 1,037
Deferred:
Federal (2,974) (240) 289
State (391) (244) 64
Foreign 116 - 462
----------------------------
Total $22,937 $15,721 $15,409
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):
1997 1996 1995
---------------------------
Provision computed
statutory rate $22,091 $15,623 $13,291
State income tax (net of
Federal tax benefit) 1,336 759 816
Tax-exempt interest and
dividend income (493) (280) (211)
Tax benefit of exempt
foreign trade income (441) (585) (670)
Acquisition related items 109 259 2,213
Other 335 (55) (30)
---------------------------
Provision for income
taxes $22,937 $15,721 $15,409
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-9
Temporary differences which give rise to deferred tax assets and liabilities
are as follows (in thousands):
December 31, December 31,
1997 1996
----------------------------
Deferred tax assets:
Deferred rent--building $103 $104
Capital equipment lease 46 70
Accrued vacation 340 276
Inventory items 1,484 951
Allowance for doubtful
accounts 577 275
Other accruals 2,085 569
Acquisition related items 404 435
----------------------------
Total deferred tax assets 5,039 2,680
Deferred tax liabilities:
Unrealized gain on
securities (179) (821)
Depreciation (897) (979)
Acquisition of VTI (451) (451)
Other (116) (282)
----------------------------
Total deferred tax liabilities (1,643) (2,533)
----------------------------
Net deferred tax asset $3,396 $147
The valuation allowance was zero as of December 31, 1997 and 1996.
NOTE 8 401(k) SAVINGS AND PROFIT SHARING PLANS
The Company has a Retirement Savings and Investment Plan (the "401(k) Plan")
that is intended to qualify under Section 401(k) of the Internal Revenue Code.
Qualified employees may participate in the Company's 401(k) Plan by contributing
up to 15% of their gross earnings to the plan subject to certain Internal
Revenue Service restrictions. The Company matches each participant's
contribution of up to 6% of gross earnings at the rate of 50%. The Company may
contribute additional amounts to the 401(k) Plan at the discretion of the Board
of Directors, subject to certain legal limits.
The Company has a discretionary profit-sharing plan for qualified employees,
to which it contributed 3.318% of eligible earnings for 1997, 2.925% for 1996,
and 3.4% for 1995. 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
------------------------------------------------
1997 $522 $847 $1,369
1996 398 513 911
1995 324 453 777
NOTE 9 COMMITMENTS AND CONTINGENCIES
(a) Leases
In September 1989, the Company entered into a lease agreement for its Vernon
Hills facility and certain machinery, equipment, furniture and fixtures with
Unique Building Corporation. The facility portion of the lease is treated as an
operating lease. An amendment to the lease dated June 1996 extended the term of
the lease through March 31, 2008. The lease agreement includes a modification to
the base monthly rental which goes into effect if the prescribed rent payment is
less than the aggregate principal and interest payments required to be made by
Unique under an Industrial Revenue Bond (IRB). Under the portion of the lease
agreement with Unique which is accounted for as a capital lease, the Company
leases machinery, equipment, furniture and fixtures at a monthly rental of
$5,725 for a ten-year period. Assets under these leases are as follows (in
thousands):
December 31, December 31,
1997 1996
--------------------------------
Assets under capital leases $553 $592
Less accumulated amortization 553 578
- ------------------------------------------------------------------------------
Net leased machinery and equipment under
capital leases - $14
F-10
Minimum future obligations under noncancelable operating leases and future
minimum capital lease payments as of December 31, 1997 are as follows (in
thousands):
Capital Operating
Lease Leases
-------------------------
1998 $69 $1,297
1999 52 1,349
2000 - 1,417
2001 - 1,384
2002 - 1,384
Thereafter - 8,000
-------------------------
Total minimum lease payments 121 $14,831
Less amount representing interest 5
-----------
Present value of minimum payments 116
Less current portion of obligation under 65
capital lease
-----------
Long-term portion of obligation under capital
lease $51
Rent expense for operating leases charged to operations for the years
ended December 31, 1997, 1996, and 1995 was $1,932,000, $1,750,000, and
$1,348,000, respectively.
(b) Manufacturing and Office Facility
In October 1997, the Company committed to the purchase of a 37,124
square foot manufacturing and office facility for its Preston, England
operations which will replace its current facility. The Company plans to
begin transferring its operations to this facility in September 1998.
(c) Letter of credit
In connection with the lease agreements described above, the Company has
guaranteed Unique's full and prompt payment under Unique's letter of credit
agreement with a bank. The liability of the Company under this guaranty as of
December 31, 1997 is $700,000, which is the limit of the Company's guaranty
throughout the term of the IRB.
(d) 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
150 basis points over the LIBOR rate, at the Company's discretion. The Company
had $137,000 outstanding at December 31, 1997. The lines of credit expire on
February 28, 1999.
(e) Derivative Instruments
In the normal course of business, portions of the Company's expenses 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. To some degree, the Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments, but management does not expect any counterparties to
fail to meet their obligations given their high credit ratings.
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, 1997, the
Company had entered into foreign exchange forward contracts which provide for
purchases of approximately 1,227,038 pounds sterling per month through March
1998. At December 31, 1997 and 1996, the notional principal amounts of
outstanding forward contracts were $6,211,000 and $9,858,000, respectively.
NOTE 10 SEGMENT DATA AND EXPORT SALES
The Company operates in one industry segment. The Company generated sales to
foreign customers of approximately $87,428,000, $73,853,000, and $64,631,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
For the year ended December 31, 1997, the Company's wholly-owned subsidiaries
located in the United Kingdom had net sales, net income, and total assets of
$55,029,000, $5,818,000, and $23,066,000, respectively. For the year ended
December 31, 1996, the subsidiaries' had net sales, net income, and total assets
of $44,518,000, $3,532,000, and $21,015,000, respectively.
F-11
NOTE 11 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.
NOTE 12 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. All actions
submitted to a vote of shareholders are voted on by holders of Class A and Class
B Common Stock voting together as a single class, 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 his Class B Common Stock into Class A Common Stock, in whole
or in part, at any time and from time to time on the basis of one share of Class
A Common Stock for each share of Class B Common Stock.
Holders of Class A and Class B Common Stock are entitled to receive cash
dividends equally on a per share basis if and when such dividends are declared
by the Board of Directors of the Company from funds legally available therefore.
In the case of any dividend paid in stock, 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 available for
distribution in respect of Class A and Class B Common Stock in the event of
liquidation.
The Company has authorized 10,000,000 shares of Preferred Stock. No shares of
Preferred Stock have been issued.
In 1997, the Board of Directors and the shareholders of the Company approved
an amendment to the Company's Certificate of Incorporation which increased the
total authorized Class A Common Stock of the Company from 35,000,000 shares to
50,000,000.
NOTE 13 STOCK OPTION AND PURCHASE PLANS
As of December 31, 1997, 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. These options have an exercise
price equal to the closing market price of the Company's stock on the date of
grant. Typically, the options vest in annual installments of 15% on the
first anniversary, 17.5% on the second anniversary, 20% on the third
anniversary, 22.5% on the fourth anniversary, and 25% on the fifth
anniversary of the grant date. Upon vesting, the options have a legal life of
two years from the date of vesting. The specific provisions of any grant are
determined by the Board of Directors.
The Board of Directors and shareholders also adopted a Directors' Stock
Option Plan, which reserves 80,000 shares of Class A Common Stock for issuance
under the plan. 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.
In addition, the Board of Directors and shareholders adopted an employee
stock purchase plan ("Stock Purchase Plan") and have reserved 300,000 shares of
Class A Common Stock for issuance thereunder. Under this plan, employees who
work a minimum of 20 hours per week may elect to withhold up to 8.5% of their
cash compensation through regular payroll deductions to purchase shares of Class
A Common Stock from the Company over a period not to exceed 12 months at a
purchase price per share equal to the lesser of: (1) 85% of the fair market
value of the shares as of the date of the grant, or (2)
F-12
85% of the fair market value of the shares as of the date of purchase. As of
December 31, 1997, 125,870 shares have been purchased under the plan.
In general, the options granted under the Stock Purchase Plan during 1997
and 1996 have similar provisions. Under this plan, the Company has granted only
nonqualified stock options. These options are granted either on January 1 or
July 1 of the current year and expire at the end of the year. Therefore, the
options have a legal life of six months to one year, and typically vest upon
grant. The specific provisions of any grant are determined by the Board of
Directors.
The Company's Board of Directors adopted the 1997 Stock Option Plan,
effective February 11, 1997. The Company has reserved 531,500 shares of Common
Stock for issuance under the plan. 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) non-qualified and incentive stock options for the purchase of the
Company's Class A Common Stock and (ii) dividend equivalents. The persons
eligible to participate in the 1997 Stock Option Plan are directors, officers,
and employees of the Company or any subsidiary of the Company who, in the
opinion of the Option Committee, are in a position to make contributions to the
growth, management, protection and success of the Company or its subsidiaries.
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. Typically, the options vest in annual installments of 15% on the first
anniversary, 17.5% on the second anniversary, 20% on the third anniversary,
22.5% on the fourth anniversary, and 25% on the fifth anniversary of the grant
date. The options have a legal life of ten years from the date of grant. The
specific provisions of any grant are determined by the Board of Directors.
The Company's Board of Directors adopted the 1997 Director Plan,
effective February 11, 1997. The 1997 Director Plan provides for the
issuance of options to purchase up to 77,000 shares of Class A Common Stock,
which shares are reserved and available for purchase upon the exercise of
options granted under the 1997 Director Plan. Only directors who are not
employees or officers of the Company are eligible to participate in the 1997
Director Plan. Under the 1997 Director Plan, each non-employee director was
granted, on the effective date of the plan, an option to purchase 15,000
shares of Class A Common Stock, and each non-employee director subsequently
elected to the Board will be granted an option to purchase 15,000 shares of
Class A Common Stock on the date of his or her election. Options granted
under the 1997 Director Plan provide for the purchase of Class A Common Stock
at a price equal to the fair market value on the date of grant. If there are
not sufficient shares remaining and available to all non-employee directors
eligible for an automatic grant at the time at which an automatic grant would
otherwise be made, then each eligible non-employee director shall receive an
option to purchase a pro rata number of shares.
Unless otherwise provided in an option agreement, options granted under
the 1997 Director Plan shall become exercisable in five equal increments on the
date of the grant and on each of the first four anniversaries thereof. All
options expire on the earlier to occur of (a) ten years following the grant date
or (b) the second anniversary of the termination of the non-employee director's
directorship for any reason other than due to death or Disability (as defined in
the 1997 Director Plan).
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its plans. No
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's stock option and
stock purchase plans been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(Statement 123), the Company's 1997 net income and diluted earnings per share
would have been as follows:
Net income:
As reported $40,155
Pro forma 39,638
Diluted earnings
per share:
As reported $1.65
Pro forma 1.63
Net income and earnings per share were affected by less than 1% in 1996
and 1995.
For purposes of calculating the compensation cost consistent with
Statement 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 1997, 1996, and
1995, respectively: option price, which equals the fair market value at the
date of grant; expected dividend yield of 0% for each period; expected
volatility of 42.08%, 41.21%, and 41.21%; risk free interest rate of 6.36%,
6.45%, and 6.36%; and expected weighted-average life of 6.00 years, 5.25 years,
and 5.25 years.
F-13
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
1997, 1996, and 1995, respectively: fair market value of $23.63, $22.11, and
$20.20; option price of $20.09, $18.79, and $17.17; expected dividend yield of
0% for each period; expected volatility of 48%, 44%, and 30%; risk-free interest
rate of 5.49%, 5.55%, and 5.55%; and expected lives of six months to one year.
Stock option activity for the years ended December 31, 1997, 1996, and 1995
was as follows:
1997 1996 1995
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at
Beginning of 187,500 $19.70 174,000 $15.19 176,000 $12.02
Year
Granted 336,500 24.70 57,000 27.11 56,000 19.36
Exercised (22,400) 14.63 (38,500) 9.01 (38,500) 8.42
Canceled -- -- (5,000) 29.25 (19,500) 11.91
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end
of year 501,600 23.28 187,500 19.70 174,000 15.19
Options exercisable
At end of year 90,450 19.92 78,700 18.19 63,500 15.63
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
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
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.88-$20.50 108,600 2.63 years $16.54 52,575 $15.57
$ 24.50-$24.50 331,500 9.12 years 24.50 9,000 24.50
$ 25.19-$37.63 61,500 4.19 years 28.60 28,875 26.42
F-14
NOTE 14 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
1997 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $41,009 $47,844 $49,889 $53,329 $192,071
Cost of sales 20,603 23,546 24,878 24,844 93,871
-----------------------------------------------------------------------------
Gross profit 20,406 24,298 25,011 28,485 98,200
Total operating expenses 9,234 11,768 11,360 13,063 45,425
-----------------------------------------------------------------------------
Operating income 11,172 12,530 13,651 15,422 52,775
Total other income 7,231 2,236 1,888 2,604 13,959
-----------------------------------------------------------------------------
Income from continuing operations before
income taxes 18,403 14,766 15,539 18,026 66,734
Income taxes 6,876 5,121 5,594 6,333 23,924
-----------------------------------------------------------------------------
Net income from continuing operations 11,527 9,645 9,945 11,693 42,810
Loss from discontinued operation (292) (1,400) - - (1,692)
Loss on disposal of discontinued operation - (963) - - (963)
-----------------------------------------------------------------------------
Net income $11,235 $7,282 $9,945 $11,693 $40,155
-----------------------------------------------------------------------------
Basic earnings per share from continuing
operations $0.48 $0.40 $0.41 $0.48 $1.77
Diluted earnings per share from continuing
operations $0.48 $0.40 $0.41 $0.48 $1.76
Basic earnings per share $0.46 $0.30 $0.41 $0.48 $1.66
Diluted earnings per share $0.46 $0.30 $0.41 $0.48 $1.65
Basic weighted-average shares outstanding 24,240 24,244 24,257 24,278 24,255
Diluted weighted-average and equivalent shares
outstanding 24,268 24,293 24,338 24,373 24,318
1996 (2) (2) (2) (2) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $36,526 $38,920 $41,858 $46,676 $163,980
Cost of sales 18,961 20,468 21,763 24,110 85,302
-----------------------------------------------------------------------------
Gross profit 17,565 18,452 20,095 22,566 78,678
Total operating expenses 10,236 (1) 9,759 8,345 9,307 37,647
-----------------------------------------------------------------------------
Operating income 7,329 (1) 8,693 11,750 13,259 41,031
Total other income 1,282 1,529 1,399 2,148 6,358
-----------------------------------------------------------------------------
Income before income taxes 8,611 (1) 10,222 13,149 15,407 47,389
Income taxes 2,903 3,440 4,526 5,667 16,536
-----------------------------------------------------------------------------
Net income from continuing operations 5,708 (1) 6,782 8,623 9,740 30,853
Loss from discontinued operation (459) (522) 92 (1,049) (1,938)
Loss on disposal of discontinued operation - - - - -
-----------------------------------------------------------------------------
Net income $5,249 (1) $6,260 $8,715 $8,691 $28,915
-----------------------------------------------------------------------------
Basic earnings per share from continuing
operations $0.24 (1) $0.28 $0.36 $0.40 $1.27
Diluted earnings per share from continuing
operations $0.23 (1) $0.28 $0.36 $0.40 $1.27
Basic earnings per share $0.22 (1) $0.26 $0.36 $0.36 $1.19
Diluted earnings per share $0.22 (1) $0.26 $0.36 $0.36 $1.19
Basic weighted-average shares outstanding 24,189 24,198 24,203 24,223 24,203
Diluted weighted-average and equivalent shares
outstanding 24,242 24,237 24,228 24,257 24,241
(1) Reflects a pre-tax charge for acquired-in-process technology of $1,117
relating to the Company's acquisition of Fenestra Computer Services.
(2) Revised to reflect the discontinuance of operations of Zebra Technologies
VTI. (See Note 11 - Discontinued Business Operations).
NOTE 15 MAJOR CUSTOMERS
One customer represents revenues of 17% and 21% in the fiscal years ended
December 31, 1997, and December 31, 1996, respectively. Consolidated sales
to Peak Technology amounted to $31,762,000 in 1997 and $36,310,000 in 1996.
No
F-15
other customer accounted for 10% or more of consolidated sales. Peak
Technologies was acquired by Moore Corporation in 1997. Management
recognizes Moore Corporation is a major provider of labels which could have
an adverse affect on Zebra sales of this product to Peak Technologies. Sales
to Peak Technologies of labels accounted for 2% of the Company's total net
sales in the fiscal year ended December 31, 1997 and 3% in the fiscal year
ended December 31, 1996.
F-16
ZEBRA TECHNOLOGIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Balance at Charged to Costs Balance at
Description Beginning of Period and Expenses Deductions End of Period
- ---------------------------------------------------------------------------------------------------
Valuation account for
accounts receivable:
Year ended December 31, 1997 $960 $911 $83 $1,788
Year ended December 31, 1996 $349 $611 $0 $960
Year ended December 31, 1995 $349 $0 $0 $349
Valuation account for
inventory:
Year ended December 31, 1997 $2,734 $2,376 $1,801 $3,309
Year ended December 31, 1996 $969 $1,945 $180 $2,734
Year ended December 31, 1995 $677 $1,351 $1,059 $969
F-17
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Zebra Technologies Corporation:
Under date of February 27, 1998, we reported on the consolidated balance
sheets of Zebra Technologies Corporation and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, as contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule listed under Item 14. The
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We consent to incorporation by reference in the registration statements
(No. 33-4706 and No. 33-72774) on Form S-8 of Zebra Technologies Corporation
of our reports relating to the consolidated balance sheets of Zebra
Technologies Corporation and Subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997, and related financial statement schedule, as contained herein. These
consolidated financial statements and the related financial statement
schedule and our reports thereon are included herein.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Chicago, Illinois
March 23, 1998
F-18