Zebra
Annual Report 1999

Plain-text annual report

1 9 9 9 a n n u a l r e p o r t About The Company Zebra Technologies Corporation is the leading worldwide manufacturer of bar code labeling solutions and a leading provider of instant-issuance plastic card printers. We distribute our on-demand bar code label printers, plastic card printers, secure ID printing systems, software and related supplies under the Zebra and Eltron brand names to users in more than 90 countries. Our products are used in F I N A N C I A L S U M M A R Y Getting Results continuing operations 69,632 (In thousands, except per share data and percentages) Operating Results Net sales Gross profit Operating income Income from Diluted earnings per share from continuing operations Capitalization Cash and cash equivalents and investments and marketable securities Working capital Total assets 1999 % change 1998 % change 1997 $398,517 18.6% $335,983 13.1% $297,100 202,389 102,902 29.9 67.0 73.8 155,810 61,636 8.4 (13.5) 143,708 71,262 40,069 (26.4) 54,447 2.21 71.3 1.29 (25.9) 1.74 $235,568 302,804 394,643 $162,668 229,688 310,002 270,884 $139,320 209,862 270,447 236,220 high-growth automatic identification Total shareholders’ equity 349,307 applications that improve quality and productivity. We count among our customers more than 70 percent of the FORTUNE 500. $420 385 350 315 280 245 210 175 140 105 70 35 s n o i l l i M n I $2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 .80 .60 .40 .20 $60 55 50 45 40 35 30 25 20 15 10 5 s n o i l l i M n I = Year-end closing price $60 55 50 45 40 35 30 25 20 15 10 5 e r a h s r e p e c i r P 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 Net Sales Earnings Per Share* Free Cash Flow Shareholder Value Record Sales Record Earnings per Share Record Free Cash Flow Record Shareholder Value In 1999, Zebra’s net sales increased Earnings (excluding merger costs) 18.6% to $398.5 million. Net sales have increased every year rose 47.5% to $2.34 per share in 1999. Consistent with our sales and, over the past five years, have growth, our earnings per share have increased at a compound average increased at an average annual rate annual rate of 23.9%. of 23.0% over the past five years. A consistent producer of free cash flow, Zebra generated a record $62.1 million in free cash in 1999 and ended the year with $236 million in cash and investments. Investor recognition of our leading market position, record financial results, and opportunities for further growth led to record stock prices for Zebra and a doubling of our market capitalization in 1999. * Excludes merger costs and other one-time items. Our goal is clear global Leadership leadership in our target markets. 1 The Cless Technology Center In 1999, Zebra dedicated the Cless Technology Center. Named in honor of Zebra co-founder Gerhard (Gary) Cless, this 59,000-square-foot facility is the new home of our Vernon Hills engineering department. A noticeable feature in the CTC is a leaping frog carved on many of the chairs. This whimsical motif reminds us of one of Gary’s favorite stories. In it, two frogs were trapped in separate jugs of cream. One frog, seeing no hope of escape, gave up and died. The other did not give up; he paddled so hard that he turned the cream into butter. When the lid was opened, he leaped out and went on to live a long life. This tale illustrates Zebra’s undying spirit and our commit- ment to developing innovative products that meet the needs of our customers. 2 Edward Kaplan Chairman and Chief Executive Officer We are extremely pleased with Zebra’s financial performance in 1999. As important, Zebra is well positioned to capture further growth opportunities in 2000 and beyond. To Our Shareholders: Last year I shared with you a vision of increased sales growth and prof- itability resulting from our merger with Eltron International in October 1998. I am pleased to report that in 1999 Zebra turned this vision into reality. Our Number One goal in 1999 was the successful integration of Eltron. During the year, we worked to capture the merger’s growth opportunities of an expanded product line, further channel development, and entry into new markets. We organized our Bar Code Labeling Solutions and Plastic Card Printer business units to focus on their markets, with their own resources, strong leadership, and abundant growth opportunities. Other efforts reduced product costs, eliminated duplicate functions, and leveraged global channel partnerships. Our record financial results for 1999 reflect the tremendous success of our integration efforts. Net sales of $398.5 million advanced 18.6%. Profit margins set new records. Net income, excluding merger costs, increased 47.5% to $73.7 million, or $2.34 per share. In addition, free cash flow more than doubled to $62.1 million, and we ended the year with $236 million in cash and investments. Investors recognized these strong results and more than doubled the market capitalization of Zebra to nearly $2 billion by the end of 1999. As impressive as these results are, Zebra is now well positioned to capture further growth opportunities in 2000 and beyond. This year, we intend to leverage on our extraordi- nary financial and market strength to increase market share in bar code labeling solutions and to continue the rapid growth of our plastic card printer business. We also expect acquisitions to play an important role in building our business units, aided by our strong cash position. Our growth plan calls for a continuous stream of innovative new products and solutions to capitalize on the applications developing with new tech- nologies. Supply chain logistics, small package delivery, and e-commerce fulfillment are just some of the markets where the Internet and technological advances create an ever-increasing array of exciting opportunities for Zebra. In addition, emerging wireless applications are spurring opportunities for portable printing applications. Heightened global concern for security is driving demand for instant-issuance plastic card printers. For e-commerce, bar code labeling is essential for efficient package shipping and tracking from the point of origin to the customer. We see businesses shipping more small pack- ages, in part because of e-commerce, and Zebra is the largest provider of bar code label printers to the small package delivery industry. The convergence of computing and wireless technologies enables mobile computing devices to communicate with corporate networks and the Internet. Realizing the power of this trend, we view portable printer products as an outstanding growth opportunity. We are enhancing printer connectivity and wireless capabilities to improve worker productivity in warehousing and distribution, in-store retail, and non-retail receipt printing. We are also leading the development of radio frequency identification. We are extending our technology with new products that simultaneously print bar codes and encode chip-embedded smart labels for use in emerging applications in package sortation and equipment tracking. Instant-issuance plastic card printing is benefiting from new products and expanding worldwide distribution. With our digital printing technology, we are rapidly increasing our installed base in access control, driver’s license, and personal identification applications. We are genuinely excited about our growth prospects, because Zebra is uniquely positioned to extend its leading position in high-growth mar- kets. We are tapping global opportu- nities with the industry’s broadest product line and strongest channels. New OEM and key account relation- ships, and new business alliances, are benefiting both business units as well. We have a great plan in place for 2000 and great people to carry it out. We look forward to leveraging on our market strength to deliver further increases in the value of your invest- ment in Zebra. I am very optimistic about our future and look forward to another excellent year. Edward Kaplan Chairman and Chief Executive Officer 3 Desktop printers Mid-range printers High performance printers Bar code labeling solutions1Zebra Technologies Corporation accessories, Zebra’s printing solutions range of on-demand thermal printers application needs and requirements. manufactures the industry’s broadest for automatic identification solu- tions. With supplies, software and fulfill a multitude of business Portable printers Print engines Zebra is the only company that offers a full line of bar code label printers across five categories. Together, Zebra- and Eltron-brand bar code label printers cover the entire range of business conditions, from mission-critical manufacturing to distributed office desktop use. Our product breadth, combined with a worldwide network of channel partners, strategically position Zebra to succeed with our aggressive growth plan of extending our leadership position by increasing market share in established and emerging markets. Supplies and Software 4 Instant issuance plastic card printers We a r e s e e i n g dramatic growth for our instant issuance plastic card printers. Eltron plastic card printers allow users to create digital personalized cards on demand, right at the point of issuance. Combining a lower cost with the ability to tailor identification technology to an application and the capability to issue a fully customized identification card in mere seconds is making Eltron the card printer of choice. Our commitment to developing innovative products that deliver higher performance and better value, the increasing number of our worldwide channel partners and the rapid adoption of new technology support this rapidly growing area of our business. 2002 2001 2000 5 Driving Growth The global movement toward quality and productivity Beyond our traditional markets of manufacturing and warehousing/ improvement is driving the rapid growth for our bar code in small package delivery, supply chain management, e-commerce distribution, we are capitalizing on the expanding auto ID printing needs fulfillment, personal identification, and other high-growth applications. labeling solutions and instant issuance plastic card printers. Efficiency Durability Commerce today demands ever-increasing speed and efficiency in the delivery of goods and services. Zebra’s bar code labeling solutions enhance performance in every step of the supply chain — from production and inventory, to shipping, receiving and tracking, and ultimately, to delivery of the product. S C I T S I G O L N I A H C Y L P P U S Extreme labeling applications, such as high-temperature solder baths for PC boards and hazardous chemical container identification, are easily served with our specialized labeling materials and bar code label printers. The durability of labels under the most challenging conditions improves the quality of production processes and helps customers meet stringent compliance labeling requirements. M A N U F A C T U R I N G 6 Security Accuracy The safety of people, assets, and premises are challenges for all businesses and organizations. Zebra’s instant- issuance card printers are addressing a rapidly growing number of applications, including driver’s licenses, student and employee identification, electronic purse, and high- security access control. Immediate photo personalization combines with magnetic stripes, smart card chips, linear and 2-D bar codes, and hologram laminate overlays to deliver the optimal identification solution. N O I T A C I F I T N E D I T N A T S N I A quick scan of a crisply printed bar code increases data-collection accuracy and procedural efficiency while decreasing operational costs. Health care professionals increasingly depend on the accuracy that bar codes provide to materially reduce potentially life-threatening errors in specimen handling, patient tracking, therapy delivery, and other clinical and laboratory procedures. E R A C H T L A E H 7 Opportunities NewTechnology New By staying at the forefront of new auto-identification trends, innovations and applications, Zebra’s growth remains on target. Our products, technology and powerful alliances strengthen our move into new, high-growth markets as well as help us gain market share where we already hold the clear leadership position. As e-commerce is generating an increasing number of small package shipments, our bar code labeling solutions are a key component of the e-commerce infrastructure. Worldwide distribution, fulfillment operations, and on-line/Internet tracking require the efficiency and accuracy provided by barcoding and auto ID technologies. Portable printing is one of our industry’s fastest growing segments. Zebra is strategically positioned for leadership, as new opportunities for distrib- uted printing applications develop for shipping and receiving, in-store retail and non-retail receipt printing. 8 E-Commerce E-Commerce Government Government Portable Printing Portable Printing E R P E R P Eltron card printers continue to win contracts for driver’s licenses and government security cards around the globe. Our participation in the Defense Department’s AIT II contract is only the beginning of federal government opportunities. To capture these opportunities, we expanded our sales pres- ence in Washington, D.C. New software solutions integrate Zebra bar code label printers into enterprise-wide resource planning, warehouse and other resource manage- ment systems. We are strengthening Zebra’s market position by build- ing relationships with key software integrators and companies such as SAP, BaaN, and J. D. Edwards. R a d i o F r e q u e n c y I d e n t i f i c a t i o n In 1999, we established a leadership role with the industry’s first printer/encoder, which simultaneously prints a bar code label and encodes an embedded RFID chip. Smart labels offer advantages over traditional bar codes where it is not possible to achieve line-of-sight between label and scanner. Working with several beta site partners, we have developed RFID printer/encoders that will meet the needs of users who incorporate RFID technology into their applications. C o n n e c t i v i t y a n d W i r e l e s s As wireless communication evolves, Zebra will be on the cutting edge with the most comprehensive package of connectivity solutions. We are developing new technologies and strong associations to add value to our printers by eliminat- ing the need for hard network wiring. Examples of our leadership include radio frequency connectivity and web-enabled printers, which permit on-site or remote printer configuration, instant error mes- saging and plug-and-play compatibility with hand-held data terminals. 5 year Financial Review Z E B R A T E C H N O L O G I E S C O R P O R A T I O N (In thousands, except per share amounts) Year Ended December 31, Consolidated statements of earnings data Net sales Cost of sales Gross profit 1999 1998 1997 (1) 1996 (1) 1995 (1) $ 398,517 $ 335,983 $ 297,100 $ 252,487 $ 200,319 196,128 180,173 153,392 135,474 106,365 202,389 155,810 143,708 117,013 93,954 Total operating expenses 99,487(2) 94,174(2) 72,446 62,880(4) 43,328 Operating income 102,902(2) 61,636(2) 71,262 54,133(4) 50,626 Income from continuing operations before income taxes 108,800(2) 65,021(2) 85,225(3) 60,703(4) Income from continuing operations 69,632(2) 40,069(2) 54,447(3) 37,952(4) 56,185 36,693 Earnings per share from continuing operations Basic Diluted $ $ 2.23(2) 2.21(2) $ $ 1.30(2) 1.29(2) $ $ 1.76(3) 1.74(3) $ $ 1.24(4) 1.21(4) $ $ 1.22 1.19 Weighted average shares outstanding Basic Diluted 31,175 31,521 30,919 31,176 30,897 31,380 30,696 31,269 30,128 30,780 (In thousands) December 31, Consolidated balance sheet data Cash and cash equivalents and investments and marketable securities $ 235,568 $ 162,668 $ 139,320 $ 103,777 $ 88,139 Working capital Total assets Long-term obligations Shareholders’ equity 302,804 229,688 209,862 164,678 131,369 394,643 310,002 270,447 218,631 176,695 664 36 314 3,137 2,928 349,307 270,884 236,220 184,007 144,391 (1) Revised to reflect the discontinuance of operations of Zebra Technologies VTI, which was acquired by the Company in July 1995. (2) Includes a pretax charge for merger costs of $6,341 in 1999 and $8,080 in 1998 relating to the merger with Eltron International, Inc. (3) Includes a one-time pretax gain of $5,458 from the sale of Zebra’s investment in Norand Corporation common stock. (4) Reflects a pretax charge for acquired in-process technology of $1,117 relating to the Company’s acquisition of Fenestra Computer Services and $2,500 relating to the Company’s acquisition of Privilege, S.A. 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations General On October 28, 1998, the Company merged with Eltron International, Inc. This transaction has been accounted for as a pooling of interests for financial reporting purposes. All financial statements for periods presented prior to the merger have been restated to give effect to the combination. In the fourth quarter of 1998, the Company recorded one-time charges totaling $13,161,000 related to the merger with Eltron. Of this amount, $8,080,000 is report- ed separately as Merger Costs and consists of fees for accountants, attorneys, consultants, and investment Comparison of Years Ended December 31, 1999 and 1998 Net sales increased 18.6% in 1999 to $398,517,000 from $335,983,000 in 1998. Unit growth in hardware (printers and replacement parts) principally drove sales growth. Product mix changes lowered the average unit price for printers, since volume in lower- priced models increased faster than in higher-priced models. Hardware sales increased 21.0% to 80.6% of net sales, and supplies sales increased 10.9% to 17.3% of net sales. The remaining 2.0% of net sales consisted of service and software revenue. increase in gross profit margin was primarily due to better overhead utilization, as the increased sales volume was produced through roughly the same amount of fixed assets, as well as lower product component costs. Average unit costs deteriorated slightly, primarily because of changes in the mix of products sold toward shipments of relatively larger volumes of lowered priced printers. Selling and marketing expenses increased 10.8% to $39,930,000 from $36,052,000. As a percentage of net sales, selling and marketing expenses decreased to 10.0% from 10.7%. Excluding one-time charges of bankers, as well as provisions for facilities consolidation Both North American and international sales increased $242,000 related to the Eltron merger, selling and and severance costs. The balance of $5,081,000 relates at the same 18.6% rate. International sales increased marketing expenses for 1998 would have been to adjustments to bring the former Eltron operations into to $159,769,000 from $134,723,000 and accounted for $35,810,000, or 10.7% of net sales. Excluding the effect conformance with Zebra’s accounting policies and to 40.1% of net sales in both 1999 and 1998. of merger costs, the higher selling and marketing eliminate certain duplicate assets. These adjustments, expenses in 1999 resulted from higher co-op and other which are reported within Cost of Sales and Operating Gross profit increased 29.9% to $202,389,000 for 1999 business development expenses and higher staffing Expenses as described below, include increases to from $155,810,000 for 1998. As a percentage of net levels to support the increased levels of business. inventory and bad debt reserves and the expensing of sales, gross profit increased 4.4 percentage points to certain duplicate fixed assets. For 1999, charges related 50.8% from 46.4%. Gross profit for 1998 was affected Research and development expenses for 1999 to the Eltron merger totaled $6,341,000, which was all by $3,485,000 in one-time adjustments to cost of increased 2.7% to $22,007,000, or 5.5% of net sales, reported as Merger Costs. These costs, which could not goods sold related to the Eltron merger. Excluding from $21,428,000, or 6.4% of net sales, for 1998. be provided for at the time of the merger, include expen- this one-time charge, gross profit for 1998 would have Research and development expenses for 1998 included ditures on consulting fees, as well as personnel-related been $159,295,000, or 47.4% of net sales. Excluding $175,000 in one-time charges related to the Eltron expenses for relocation, severance, and recruitment. the effect of merger costs on 1998 gross profit, the merger. Excluding these one-time charges, research 10 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N and development expenses for 1998 would have been Investment income increased to $8,732,000 from 47.3% to $115,141,000 in 1999 from $78,182,000 $21,253,000, or 6.3% of net sales. For 1999, lower $4,005,000. The increase was principally due to higher in 1998. business development expenses partially offset higher invested balances and a more normalized return on expenses for increased staffing levels and outside the Company’s investment portfolio during 1999, The effective income tax rate for 1999 was 36.0%, professional services. compared with the loss resulting from the unusually compared with 38.4% for 1998. The provision for General and administrative expenses increased by half of 1998. During the fourth quarter of 1998, the in certain merger-related costs, which are not 9.1% to $31,209,000 from $28,614,000. As a percent- Company took steps to reduce its investment portfolio’s deductible for income tax purposes. Excluding these age of net sales, general and administrative expenses exposure to market volatility. costs, the Company’s effective tax rate for 1998 high volatility in the capital markets during the second income taxes for 1998 includes the effect of $2,875,000 decreased to 7.8% from 8.5%. Excluding $1,178,000 would have been 36.8%. in one-time charges related to the Eltron merger, Other expense for 1999 totaled $2,625,000, compared 1998 general and administrative expenses were with $195,000 for 1998. The expense increase was Income from continuing operations for 1999 was $27,436,000, or 8.2% of net sales. For 1999, higher principally due to certain one-time items recorded $69,632,000, or $2.21 per diluted share. For 1998, expenses related to increased staffing levels and during the third quarter of 1999, including a settlement income from continuing operations was $40,069,000, information technology operations were partially for claims prior to any litigation that was unrelated to or $1.29 per diluted share. Excluding the effects of offset by lower expenditures for outside consulting the Company’s operations. Other expense also includes merger expenses, income from continuing operations and other professional services. a revaluation of the Company’s euro- and deutsche for 1999 was $73,691,000, or $2.34 per diluted share, mark-denominated receivables and cash balances as up 49.1% from $49,420,000, or $1.59 per diluted In 1999, the Company incurred $6,341,000 in costs a result of the relative strength of the pound sterling share, for 1998. related to the Eltron merger for consulting fees as versus both the euro and deutsche mark in the well as personnel-related expenses for relocation, fourth quarter of 1999. severance, and recruitment. For 1998, the Company Comparison of Years Ended December 31, 1998 and 1997 incurred $8,080,000 in merger-related costs for Income from continuing operations before income Net sales increased 13.1% in 1998 to $335,983,000 accounting, legal, investment banking, and consulting taxes increased 67.3% to $108,800,000 from from $297,100,000 in 1997. Unit growth in hardware fees, as well as provisions for facilities consolidation $65,021,000. Excluding merger-related charges of (printers and replacement parts) principally drove and severance. The Company expects to incur merger $6,341,000 in 1999 and $13,161,000 in 1998, income sales growth. Product mix changes lowered the costs through the second quarter of 2000. from continuing operations before taxes increased average unit price for printers, since volume in 11 lower-priced models increased faster than higher- Selling and marketing expenses of $36,052,000 administrative expenses were $27,436,000, or 8.2% priced models. Hardware sales increased 18.5% to increased 9.2% from $33,017,000. As a percentage of of net sales. In 1998, the Company incurred higher 79.4% of net sales, and supplies sales increased net sales, selling and marketing expenses decreased personnel costs related to increased staffing levels. 5.4% to 18.6% of net sales. The remaining 2.0% of to 10.7% from 11.1%. Excluding $242,000 in one-time Depreciation and other expenses also increased, as net sales consisted of service and software revenue. charges related to the Eltron merger, selling and Zebra’s Baan ERP system became active during the marketing expenses for 1998 would have been second quarter of 1998. International sales increased 8.5% to $136,128,000 $35,810,000, or 10.7% of net sales. During 1998, the from $125,411,000 and accounted for 40.5% of net Company increased staff levels to support anticipated In 1998, the Company incurred $8,080,000 in costs sales in 1998, compared with 42.2% of net sales in higher levels of business. Higher personnel-related related to the Eltron merger. These merger costs 1997. The decrease in the percentage of international expenses and depreciation were partially offset by include accounting, legal, investment banking, and sales is principally due to higher sales growth to lower advertising and trade show expenses. consulting fees, as well as provisions for facilities North American customers combined with a decline consolidation and severance. in sales to the Asia-Pacific region. Research and development expenses for 1998 totaled $21,428,000, or 6.4% of net sales, compared with Other income decreased to $3,385,000 from $13,963,000, Gross profit increased 8.4% to $155,810,000 from $17,911,000, or 6.0% of net sales, for 1997. Excluding including investment income of $4,005,000 compared $143,708,000 for 1997. As a percentage of net sales, $175,000 in one-time charges related to the Eltron with $13,520,000. During the second half of 1998, gross profit decreased 2.0 percentage points to 46.4% merger, research and development expenses for 1998 net investment income declined because of financial from 48.4%. Excluding $3,485,000 in one-time would have been $21,253,000, or 6.3% of net sales. market volatility. In addition, investment income for charges related to the Eltron merger, gross profit for Higher personnel-related expenses and prototype work 1997 includes a one-time pretax investment gain of 1998 would have been $159,295,000, or 47.4% of net related to new product development were primarily $5,458,000, which was recognized in the first quarter sales. The decline in gross profit margin was also responsible for the increase. of 1997. This one-time gain resulted from the sale due to an unfavorable shift in product mix toward by the Company of 350,000 shares of Norand lower margin printers. General and administrative expenses increased by Corporation common stock. Excluding this gain, 33.0% to $28,614,000 from $21,518,000. As a percentage investment income for 1997 would have been of net sales, general and administrative expenses $8,062,000. During the fourth quarter of 1998, the increased to 8.5% from 7.2%. Excluding $1,178,000 Company took steps to reduce its investment in one-time merger charges, 1998 general and portfolio’s exposure to market volatility. 12 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Income from continuing operations before income Discontinued Operations Rate (LIBOR), at the Company’s discretion. As of taxes was $65,021,000, compared with $85,225,000, During 1997, the Company decided to discontinue the December 31, 1999, the Company had borrowings of a decrease of $20,204,000, or 23.7%. Excluding the operations of its Zebra Technologies VTI subsidiary $176,959 outstanding under its lines of credit. $13,161,000 in merger-related charges in 1998 and (Zebra VTI), which developed bar code label design the one-time investment gain recognized in the first software targeted at the small business market and Capital expenditures were $12,445,000 in 1999, quarter of 1997, income from continuing operations distributed through PC distributors and catalogs. A $25,615,000 in 1998 and $10,241,000 in 1997. In 1998, before taxes declined 2.0% to $78,182,000 in 1998 one-time charge of $2,363,000, net of applicable tax capital expenditures included purchases of new from $79,767,000 in 1997. benefit, was recorded in the second quarter of 1997 manufacturing and distribution facilities in Camarillo, to cover expected product returns, provisions for California (acquired in conjunction with the Eltron The effective income tax rate for 1998 was 38.4%, slow-moving and obsolete inventory, estimated merger), and Preston, United Kingdom, as well as compared with 36.1% for 1997. The provision for contingent liabilities, and the write-off of remaining expenditures on computer hardware and software, income taxes for 1998 includes the effect of $2,875,000 goodwill and other intangible assets. Remaining including the Company’s new enterprise-wide resource in certain merger-related costs, which are not business records and assets were transferred to other planning (ERP) system. Management believes that deductible for income tax purposes. Excluding these portions of the Company. existing capital resources and funds generated from effects, the Company’s effective tax rate for 1998 operations are sufficient to finance anticipated would have been 36.8%. Liquidity and Capital Resources capital requirements. Internally generated funds from operations are the Income from continuing operations for 1998 was primary source of liquidity for the Company. As of Recently Issued Accounting Pronouncements $40,069,000, or $1.29 per diluted share. Excluding December 31, 1999, the Company had $235,568,000 In June 1998, the Financial Accounting Standards charges related to the Eltron merger, income from in cash and marketable securities, compared with Board issued Statement of Financial Accounting continuing operations for 1998 was $49,420,000, or $162,668,000 at the end of 1998. Standards No. 133 (SFAS 133), Accounting for $1.59 per diluted share, compared with $54,447,000, Derivative Instruments and Hedging Activities, as or $1.74 per diluted share, for 1997. The Company has a $6,000,000 unsecured line of amended by SFAS No. 137, Accounting for Derivative credit plus an additional $4,000,000 unsecured Instruments and Hedging Activities—Deferral of the revocable line of credit with its bank. These credit Effective Date of FASB Statement No. 133, which is facilities are priced at either the prime rate or 100 basis points over the London Interbank Offered 13 effective for all fiscal quarters of all fiscal years Zebra has experienced no interruptions in its Safe Harbor beginning after June 15, 2000. SFAS 133 establishes business because of Y2K and is not aware of any Forward-looking statements contained in this document a comprehensive standard for the recognition and significant problems being experienced by its are subject to the safe harbor created by the Private measurement of derivative instruments and hedging customers or suppliers that would have a negative Securities Litigation Reform Act of 1995 and are activities. This pronouncement will require the impact on the Company. There can be no assurance, highly dependent upon a variety of important factors Company to recognize derivatives on its balance however, that unexpected difficulties related to Y2K which could cause actual results to differ materially sheet at fair value. Changes in the fair values of compliance at the Company, its customers, or its from those reflected in such forward looking state- derivatives that qualify as cash flow hedges will be suppliers will not occur. Such unexpected difficul- ments. These factors include market acceptance of recognized in other comprehensive income until ties could have a material adverse effect on the the Company’s products and competitors’ product the hedged item is recognized in earnings. The Company. Through December 31, 1999, the Company offerings. Profits will be affected by the Company’s Company expects that this new standard will not estimates that it spent approximately $400,000 on ability to control manufacturing and operating costs. have a significant effect on its results of operations. Y2K compliance for software testing and modifica- Due to the Company’s large investment portfolio, tions or upgrades. These funds exclude regular interest rate and financial market conditions will also Year 2000 Considerations upgrades to computer systems and technical have an impact on results. Foreign exchange rates The Company conducted a program to bring its infrastructure to meet the Company’s information will have an effect on financial results because of the internal systems and products into Year 2000 (Y2K) technology requirements. large percentage of the Company’s international compliance. This program included upgrades to operations. When used in this document, the words internal computer systems and technical infrastruc- Significant Customers “anticipate,” “believe,” “estimate,” and “expect” ture, as well as a review of the Company’s product For the year ended December 31, 1999, no and similar expressions as they relate to the lines to bring them into Y2K compliance. In addition, customer accounted for 10.0% or more of net sales. Company or its management are intended to identify the Company surveyed its significant suppliers to Two customers accounted for more than 10% of such forward-looking statements. Readers of this determine their ability to provide necessary products net sales in at least one of the years ended document are referred to prior filings with the and services that are critical to business continuation December 31, 1998 and 1997. The Peak Technologies Securities and Exchange Commission, for further through Y2K. Group, Inc., represented 10.9% of net sales in 1997. discussions of issues that could affect the Company’s United Parcel Service represented 10.3% of net future results. sales in 1998. 14 Consolidated Balance Sheets Z E B R A T E C H N O L O G I E S C O R P O R A T I O N (Amounts in thousands, except share and per share data) December 31, Assets Current assets: Cash and cash equivalents Investments and marketable securities Accounts receivable, net of allowance of $1,850 in 1999 and $2,156 in 1998 Inventories Deferred income taxes Prepaid taxes Total current assets Property and equipment at cost, less accumulated depreciation and amortization Other assets Total assets Liabilities and shareholders’ equity Current liabilities: Accounts payable Accrued liabilities Short-term note payable Current portion of obligation under capital lease with related party Income taxes payable Total current liabilities Obligation under capital lease with related party, less current portion Long-term liability Deferred income taxes Other Total liabilities Shareholders’ equity: Preferred stock, $.01 par value; 10,000,000 shares authorized, none outstanding Class A Common Stock, $.01 par value; 50,000,000 shares authorized, 24,877,501 and 22,323,094 shares issued and outstanding in 1999 and 1998 Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 6,540,188 and 8,619,919 shares issued and outstanding in 1999 and 1998 See accompanying notes to consolidated financial statements. Additional paid-in capital Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity 1999 1998 $ 38,501 197,067 62,870 42,379 3,467 1,614 345,898 41,686 7,059 $ 11,391 151,277 57,654 39,684 5,137 1,328 266,471 38,850 4,681 $ 394,643 $310,002 $ 23,798 11,295 $ 20,565 11,498 196 264 7,541 43,094 571 93 1,473 105 45,336 — 249 65 60,072 289,404 (483) 349,307 $ 394,643 183 51 4,486 36,783 — 36 1,932 367 39,118 — 223 86 49,854 219,772 949 270,884 $310,002 15 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N (Amounts in thousands, except per share data) Year Ended December 31, Consolidated Statements of Earnings Net sales Cost of sales Gross profit Operating expenses: Selling and marketing Research and development General and administrative Merger costs Total operating expenses Operating income Operating income (expense): Investment income Interest expense Other, net Total other income Income from continuing operations before income taxes Income taxes Income from continuing operations Discontinued operations: Loss from discontinued operations (less applicable income tax benefit of $372 in 1997) Loss on disposal of discontinued operations, including provision for operating losses during phase-out period (less applicable income tax benefit of $615 in 1997) 1999 1998 1997 $ 398,517 $ 335,983 $ 297,100 196,128 202,389 39,930 22,007 31,209 6,341 99,487 102,902 8,732 (209) (2,625) 5,898 108,800 39,168 69,632 — — 180,173 155,810 153,392 143,708 36,052 21,428 28,614 8,080 94,174 61,636 4,005 (425) (195) 3,385 65,021 24,952 40,069 — — 33,017 17,911 21,518 — 72,446 71,262 13,520 (86) 529 13,963 85,225 30,778 54,447 (1,692) (963) Net income $ 69,632 $ 40,069 $ 51,792 Basic earnings per share from continuing operations Diluted earnings per share from continuing operations Basic earnings per share Diluted earnings per share See accompanying notes to consolidated financial statements. Basic weighted average shares outstanding Diluted weighted average and equivalent shares outstanding $ $ $ $ 2.23 2.21 2.23 2.21 31,175 31,521 $ $ $ $ 1.30 1.29 1.30 1.29 30,919 31,176 $ $ $ $ 1.76 1.74 1.68 1.65 30,897 31,380 16 Statements of Comprehensive Income Consolidated Z E B R A T E C H N O L O G I E S C O R P O R A T I O N (Amounts in thousands) Year Ended December 31, 1999 1998 1997 Net income $ 69,632 $ 40,069 $ 51,792 Other comprehensive income (loss): Foreign currency translation adjustment (1,432) 659 (946) See accompanying notes to consolidated financial statements. Comprehensive income $ 68,200 $ 40,728 $ 50,852 period, net of income tax expense of $3 in 1997 — — 6 Unrealized holding gains (losses) on investments available for sale: Net change in unrealized holding gains for the 17 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Consolidated Statements of Shareholders’ Equity (Dollars in thousands) Balance at December 31, 1996 Issuance of 64,165 shares of Class A Common Stock Issuance of 144,978 shares of Class B Common Stock Conversion of 2,424,795 shares of Class B Common Stock to 2,424,795 shares of Class A Common Stock Settlement of litigation – Zebra Technologies VTI Cancellation of 6,715 shares of Class B Common Stock in connection with RJS merger Tax benefit resulting from exercise of options Net income Foreign currency translation adjustment Unrealized holding gain on investments Balance at December 31, 1997 Issuance of 55,578 shares of Class A Common Stock Issuance of 229,290 shares of Class B Common Stock Conversion of 3,187,641 shares of Class B Common Stock to 3,187,641 shares of Class A Common Stock Elimination of intercorporate investments in Eltron Tax benefit resulting from exercise of options Net income Foreign currency translation adjustment Balance at December 31, 1998 Issuance of 474,676 shares of Class A Common Stock Conversion of 2,079,731 shares of Class B Common Stock to 2,079,731 shares of Class A Common Stock Tax benefit resulting from exercise of options Net income Foreign currency translation adjustment Class A Common Stock Class B Common Stock Additional Paid-in Stock Retained Earnings Unrealized Holding Gain on Investments Cumulative Translation Adjustment Total Accumulated Other Comprehensive Income $ 169 1 — 24 — — — — — — 194 1 — 32 (4) — — — 223 5 21 — — — $138 $ 54,559 $ 127,911 $ (6) $1,236 $ 184,007 — 1 (24) — — — — — — 115 — 3 (32) — — — — 86 — (21) — — — 907 1,011 — (1,372) (253) 1,066 — — — — — — — — — 51,792 — — 55,918 179,703 946 566 — (8,088) 512 — — 49,854 9,828 — 390 — — — — — — — 40,069 — 219,772 — — — 69,632 — — — — — — — — — 6 — — — — — — — — — — — — — — — — — — — — — (946) — 290 — — — — — — 659 949 — — — — (1,432) 908 1,012 — (1,372) (253) 1,066 51,792 (946) 6 236,220 947 569 — (8,092) 512 40,069 659 270,884 9,833 — 390 69,632 (1,432) Balance at December 31, 1999 $249 $ 65 $60,072 $289,404 $ — $ (483) $349,307 See accompanying notes to consolidated financial statements. 18 Consolidated Statements of Cash Flows Z E B R A T E C H N O L O G I E S C O R P O R A T I O N (Amounts in thousands) Year Ended December 31, Cash flows from operating activities: Net income 1999 1998 1997 $ 69,632 $ 40,069 $ 51,792 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Depreciation (appreciation) in market value of investments and marketable securities Deferred income taxes Discontinued operations Changes in assets and liabilities, net of business acquired: Accounts receivable, net Inventories Other assets Accounts payable Accrued liabilities Income taxes payable Other operating activities Investments and marketable securities Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Purchase of investments and marketable securities Sales of investments and marketable securities Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from exercise of stock options Common stock retired in Eltron merger Issuance (repayment) of notes payable Payments for obligation under capital lease Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Interest paid Income taxes paid See accompanying notes to consolidated financial statements. Supplemental disclosures of non-cash transactions: Tax benefit arising from exercise of options Cancellation of shares issued in connection with RJS merger Equipment under capital lease obligation 9,900 10,248 7,002 (936) 1,211 — (5,216) (2,695) (2,931) 3,233 (203) 3,055 (286) (51,800) 22,964 (11,349) — 6,946 (4,403) 10,223 — 70 (312) 9,981 (1,432) 27,110 11,391 $ 38,501 $ 209 36,010 390 — 1,096 1,085 1,995 — (6,046) 4,176 (294) 3,496 744 (205) 430 (23,967) 31,731 (25,615) — — (25,615) 2,028 (8,092) (180) (65) (6,309) 659 466 10,925 $ 11,391 $ 425 22,624 512 — — (5,973) (3,761) (3,371) (3,645) (5,409) (1,007) (2,172) 3,909 1,944 339 (37,853) 1,795 (10,241) (14,549) 27,304 2,514 1,983 — (819) (61) 1,103 (946) 4,466 6,459 $ 10,925 $ 85 30,060 1,066 (253) — 19 Notesto Consolidated Financial Statements Note 1 Description of Business Trading and available-for-sale securities are recorded at fair value. Held-to-maturity Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company) securities are recorded at amortized cost, adjusted for the amortization or accretion design, manufacture, sell, and support a broad line of bar code label and plastic card of discounts or premiums. Unrealized holding gains and losses on trading securities printers, self-adhesive labeling materials, plastic card supplies, thermal transfer ribbons are included in earnings. Unrealized holding gains and losses, net of the related tax and bar code label design software. These products are used principally in automatic effect, on available-for-sale securities are excluded from earnings and are reported identification (auto ID), data collection and personal identification applications and as a separate component of shareholders’ equity until realized. are distributed world-wide through a multi-channel reseller network to a wide cross section of industrial, service and government organizations. Note 2 Summary of Significant Accounting Policies Principles of Consolidation. The accompanying financial statements have been prepared on a consolidated basis to include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit have been eliminated in consolidation. Inventories. Inventories are stated at the lower of cost or market, and cost is determined by the first-in, first-out (FIFO) method. Property and equipment. Property and equipment is stated at cost. Depreciation and amortization is computed primarily using the straight-line method over the estimated useful lives of the various classes of property and equipment, which are 30 years for buildings and range from 3 to 10 years for other property. Property and equipment held under capital leases is amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Research and Development Costs. Research and development costs are expensed Income Taxes. The Company accounts for income taxes under the asset and liability as incurred. Cash Equivalents. Cash equivalents consist primarily of short-term treasury securities. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Investments and Marketable Securities. Investments and marketable securities at December 31, 1999, consisted of U.S. government securities, state and municipal bonds, partnership interests, and equity securities, which are held indirectly in diver- sified funds actively managed by investment professionals. The Company classifies its debt and marketable equity securities in one of three categories: trading, available- method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carry- ing amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Advertising. Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 1999, 1998, and 1997 totaled $4,700,000, $3,931,000 and $4,767,000, respectively. for-sale, or held-to-maturity. Trading securities are bought and held principally for Warranty. The Company provides warranty coverage of up to one year on printers the purpose of selling them in the near term. Held-to-maturity securities are those against defects in material and workmanship. A provision for warranty expense is securities that the Company has the ability and intent to hold until maturity. All secu- recorded at the time of shipment. To date, the Company has not experienced any rities not included in trading or held-to-maturity are classified as available-for-sale. significant warranty claims. 20 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Financial Instruments. The reported amounts of the Company’s financial instruments, Note 3 Business Combinations which include investments and marketable securities, trade accounts receivable, Eltron. On October 28, 1998, the Company acquired all of the outstanding capital accounts payable, accrued liabilities, income taxes payable, and short-term notes stock of Eltron International, Inc. (Eltron), a manufacturer of bar code label and plastic payable, approximate their fair values because of the contractual maturities and card printers and related accessories, in exchange for 6,916,951 shares of the short-term nature of these instruments. Company’s Class B Common Stock, which had a market value of approximately Stock-based Compensation. The Company grants stock options for a fixed $201 million at the time of the acquisition. number of shares to employees with an exercise price equal to the fair value of The acquisition was accounted for as a pooling of interests and, accordingly, the the shares at the date of grant. The Company accounts for stock option grants in consolidated financial statements have been restated as if the companies had been accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting combined for all periods presented. Merger costs reported in the consolidated for Stock Issued to Employees, and provides the pro forma disclosures required statement of earnings for the year ended December 31, 1999 and 1998 include by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for investment banking and other professional fees, write-downs of certain assets, Stock-based Compensation. employee severance, and other acquisition related charges. Included in accrued liabilities as of December 31, 1999 and 1998 is $115,000 and $1,181,000, respectively, Reclassifications. Certain amounts in the prior years’ financial statements have been related to these costs. reclassified to conform to the current years’ presentation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following information (in thousands) reconciles net sales and income from continuing operations of the companies as previously reported in the companies’ Annual Report on Form 10-K for the year ended December 31, 1997, with the amounts presented in the accompanying consolidated statements of earnings for the year ended December 31, 1997, as well as the separate results of operations of Eltron for the period from January 1, 1998, through October 28, 1998, representing the period in 1998 preceding the acquisition. Foreign Currency Translation. The balance sheets of the Company’s foreign sub- sidiaries are translated into U.S. dollars using the year-end exchange rate, and statement of earnings items are translated using the average exchange rate for the year. The resulting translation gains or losses are recorded in shareholders’ equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income. Zebra* Eltron Total 1998 1997 Net Sales Income from Continuing Operations $100,043 $9,090 Net Sales $192,071 105,029 $297,100 Income from Continuing Operations $42,810 11,637 $54,447 *Represents the historical results of Zebra without considering the effect of the pooling of interests business combination with Eltron. 21 RJS, Incorporated. In January 1998, Printronix, Inc., a leading manufacturer of Note 5 Investments and Marketable Securities computer printers, acquired the assets and rights to the bar code verification The amortized cost, gross unrealized holding gains, gross unrealized holding losses business and the RJS name from the Company for approximately $2.8 million. In and aggregate fair value of investment securities at December 31, 1999 were as follows the first quarter of 1998, the Company recorded a tax-effected gain on the sale of (in thousands): approximately $250,000. The Company retained the rights to the in-line verification technology for use in its line of integrated verified printing systems, as well as the QualaBar and ThermaBar industrial printer lines. Note 4 Earnings Per Share For the years ended December 31, 1999, 1998, and 1997, earnings per share were computed as follows (in thousands, except per share amounts): Basic earnings per share: Income from continuing operations $ 69,632 $ 40,069 $ 54,447 1999 1998 1997 Trading Securities: U.S. government and agency securities State and municipal bonds Corporate bonds Equity securities Partnership interests Other Amortized Cost Gross Unrealized Gross Unrealized Holding Gains Holding Losses Fair Value $ 8,191 $ 16 $ (81) $ 8,126 138,946 5,056 9,522 26,933 3,428 $ 192,076 90 — 32 6,106 196 $6,440 (426) (39) (903) — — 138,610 5,017 8,651 33,039 3,624 $ (1,449) $197,067 31,175 $ 2.23 30,919 $ 1.30 30,897 $ 1.76 The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at December 31, 1998 were as follows Weighted average common shares outstanding Per share amount Diluted earnings per share: Income from continuing operations $ 69,632 $ 40,069 $ 54,447 Weighted average common shares outstanding Add: Effect of dilutive securities – stock options Diluted weighted average and equivalent shares outstanding Per share amount 31,175 30,919 30,897 346 257 483 31,521 $ 2.21 31,176 $ 1.29 31,380 $ 1.74 The potentially dilutive securities, which were excluded from the earnings per share calculation, consisted of stock options for which the exercise price was greater than the average market price of the Class A Common Stock, amounting to 21,500, 227,250 and 246,855 at December 31, 1999, 1998 and 1997, respectively. 22 (in thousands): Available for sale: State and Amortized Cost Gross Unrealized Gross Unrealized Holding Gains Holding Losses Fair Value municipal bonds $ 6,928 $ — $ — $ 6,928 Trading Securities: U.S. government and agency securities State and municipal bonds Equity securities Partnership interests Other 8,981 82,869 16,456 24,500 7,487 140,293 147 469 589 3,162 — 4,367 (6) 9,122 (30) (117) — (158) (311) 83,308 16,928 27,662 7,329 144,349 $ 147,221 $4,367 $ (311) $151,277 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N The contractual maturities of debt securities at December 31, 1999 were as follows Note 7 Inventories (in thousands): The components of inventories are as follows (in thousands): Due within one year Due after one year through five years Due after five years Fair Value $ 88,893 57,124 9,360 $155,377 December 31, Raw material Work in process Finished goods Total inventories 1999 1998 $ 23,098 3,744 15,537 $ 42,379 $ 21,292 2,838 15,554 $ 39,684 Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands): Note 8 Property and Equipment 1999 1998 1997 Property and equipment, which includes assets under capital leases, is comprised of Proceeds Realized gains $ 6,947 19 $ — $ 11,506 — 5,458 the following (in thousands): December 31, Buildings Land Note 6 Related-Party Transactions Machinery, equipment and tooling Unique Building Corporation (Unique), an entity controlled by certain officers and Machinery and equipment under capital leases shareholders of the Company, leases a facility and equipment to the Company under a lease described in Note 11. Management believes that the lease payments are substantially consistent with amounts that could be negotiated with third parties on an arm’s-length basis. Furniture and office equipment Computers and software Automobiles Leasehold improvements Less accumulated depreciation and amortization 1999 1998 $ 11,185 $ 10,256 1,910 26,672 1,670 5,310 25,775 347 2,848 75,717 34,031 1,910 25,005 574 4,125 21,589 514 1,444 65,417 26,567 Interest expense and lease payments related to the leases were included in the consolidated financial statements as follows (in thousands): Unique operating lease payments $ 1,662 $ 1,323 $ 1,261 Interest expense on unique capital lease 1 4 7 1999 1998 1997 Net property and equipment $ 41,686 $ 38,850 23 Note 9 Income Taxes 1999 1998 1997 The geographical sources of earnings before income taxes were as follows Provision computed at statutory rate $ 38,080 $ 22,747 $ 28,608 (in thousands): United States Outside United States Total 1999 1998 1997 $ 95,637 13,163 $ 108,800 $ 62,071 2,950 $ 65,021 $ 82,614 2,611 $ 85,225 Management expects that the cumulative unremitted earnings of foreign opera- tions, which amounted to $6,000,000 after foreign taxes at December 31, 1999, will State income tax (net of Federal tax benefit) Tax-exempt interest and dividend income Tax benefit of exempt foreign trade income Acquisition related items Other 2,862 (1,677) (805) — 708 2,044 (1,369) (1,227) 1,006 1,751 2,284 (635) (441) 109 (6) Provision for income taxes $ 39,168 $ 24,952 $ 29,919 be reinvested. Accordingly, no provision has been made for additional U.S. taxes, Deferred income taxes reflect the impact of temporary differences between the which would be payable if such earnings were to be remitted to the parent company amounts of assets and liabilities for financial reporting purposes and such amounts as dividends. The provision for income taxes consists of the following (in thousands): 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. 1999 1998 1997 Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands): $ 27,914 $ 17,194 $ 26,553 December 31, 1999 1998 Current: Federal State Foreign Deferred: Federal State Foreign 4,489 5,554 1,376 (85) (80) 2,822 2,941 2,197 (202) — 3,599 3,528 (3,250) (627) 116 Total $ 39,168 $ 24,952 $ 29,919 The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35%. The reconciliation of statutory and effective income taxes is presented below (in thousands): 24 Deferred tax assets: Deferred rent — building Capital equipment lease Accrued vacation Inventory items Allowance for doubtful account Other accruals Acquisition related items Total deferred tax assets Deferred tax liabilities: Unrealized gain on securities Depreciation Other Total deferred tax liabilities Net deferred tax asset $ 42 20 798 2,221 405 1,096 413 4,995 (1,067) (1,934) — (3,001) $ 1,994 $ 77 20 595 4,220 667 — 473 6,052 (440) (1,587) (820) (2,847) $ 3,205 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Note 10 401(k) Savings and Profit Sharing Plans Minimum future obligations under noncancelable operating leases and future The Company has a Retirement Savings and Investment Plan (the 401(k) Plan) that minimum capital lease payments as of December 31, 1999 are as follows is intended to qualify under Section 401(k) of the Internal Revenue Code. Qualified (in thousands): employees may participate in the Company’s 401(k) Plan by contributing up to 15% of their gross earnings to the plan subject to certain Internal Revenue Service restrictions. The Company matches each participant’s contribution of up to 6% of gross eligible earnings at the rate of 50%. The Company may contribute additional amounts to the 401(k) Plan at the discretion of the Board of Directors, subject to certain legal limits. 2000 2001 2002 2003 2004 Thereafter The Company has a discretionary profit-sharing plan for qualified employees, to which it contributed 4.2% of eligible earnings for 1999, 3.4% for 1998, and 3.3% for 1997. Participants are not permitted to make contributions under the profit-sharing plan. Total minimum lease payments Less amount representing interest Present value of minimum payments Less current portion of obligation under capital lease Capital Lease Operating Leases $ 316 $ 3,773 3,135 2,907 2,882 2,436 13,587 $ 28,720 117 117 117 103 325 $ 1,095 260 835 264 Company contributions to these plans, which were charged to operations, Long-term portion of obligation under capital lease $ 571 approximated the following (in thousands): 401(k) Profit Sharing Total 1999 1998 $ 740 820 $ 1,560 $ 620 970 $ 1,590 1997 $ 548 847 $ 1,395 Note 11 Commitments and Contingencies Leases. In September 1989, the Company entered into a lease agreement for its Vernon Hills facility and certain machinery, equipment, furniture and fixtures with Rent expense for operating leases charged to operations for the years ended December 31, 1999, 1998, and 1997 was $4,317,000, $2,898,000, and $2, 871,000, respectively. Letter of credit. In connection with the lease agreements described above, the Company has guaranteed Unique’s full and prompt payment under Unique’s letter of credit agreement with a bank. The contingent liability of the Company under this guaranty as of December 31, 1999 is $700,000, which is the limit of the Company’s guaranty throughout the term of the IRB. Unique Building Corporation. The facility portion of the lease is the only remaining Lines of credit. In December 1992, the Company established a $6,000,000 unsecured portion in existence as of December 31, 1999, and is treated as an operating lease. line of credit and an additional $4,000,000 unsecured revocable line with a bank. An amendment to the lease dated July 1997 added 59,150 square feet and extended Borrowings under these lines bear interest indexed at either the prime rate or 100 the term of the existing lease through June 30, 2014. The lease agreement includes a basis points over the London Interbank Offered Rate, at the Company’s discretion. modification to the base monthly rental, which goes into effect if the prescribed rent The line of credit is renewed annually with the current agreement expiring on payment is less than the aggregate principal and interest payments required to be February 28, 2001. At December 31, 1999, borrowings under these lines amounted to made by Unique under an Industrial Revenue Bond (IRB). $176,959 bearing interest at 6.0%. 25 Derivative Instruments. In the normal course of business, portions of the Company’s Note 13 Discontinued Business Operations operations are subject to fluctuations in currency values. The Company addresses As of June 28, 1997, the Company made the decision to discontinue the operations these risks through a controlled program of risk management that includes the use of its subsidiary, Zebra Technologies VTI (Zebra VTI). The discontinuance of Zebra of derivative financial instruments. VTI and its related PC-retail channel resulted in a one-time charge of $2,363,000 The Company enters into foreign exchange forward contracts to manage exposure to fluctuations in foreign exchange rates to the funding of its United Kingdom operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. At December 31, 1999 and 1998, the notional principal amounts of outstanding forward contracts were $0, and $4,057,000, respectively. 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 Segment Data and Export Sales Holders of Class A Common Stock are entitled to one vote per share. Holders of The Company operates in one industry segment. Information regarding the Class B Common Stock are entitled to 10 votes per share. Holders of Class A and Company’s operations by geographic area for the years ended December 31, 1999, Class B Common Stock vote together as a single class on all actions submitted to a 1998, and 1997 is contained in the following table. These amounts (in thousands) vote of shareholders, except in certain circumstances. If at any time the number of are reported in the geographic area where the final sale originates. outstanding shares of Class B Common Stock represents less than 10% of the total Note 14 Shareholders’ Equity Domestic Europe Other Total 1999 Net sales $281,890 $116,627 $ — Identifiable assets 327,347 67,177 119 1998 Net sales $238,354 $ 96,397 $ 1,232 Identifiable assets 267,470 41,751 781 1997 Net sales $224,376 $ 72,724 $ — Identifiable assets 239,117 31,236 94 $398,517 394,643 $335,983 310,002 $297,100 270,447 number of outstanding shares of both classes of common stock, then at that time such outstanding shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock. Class A Common Stock has no conversion rights. A holder of Class B Common Stock may convert the Class B Common Stock into Class A Common Stock, in whole or in part, at any time and from time to time. Shares of Class B Common Stock convert into shares of Class A Common stock on a share-for-share basis. Holders of Class A and Class B Common Stock are entitled to receive cash dividends equally on a per-share basis, if and when the Company’s Board of Directors declares such dividends. In the case of any stock dividend paid, holders of Class A Common Stock are entitled to receive the same percentage dividend (payable in shares of Class A Common Stock) as the holders of Class B Common Stock receive (payable in shares of Class B Common Stock). 26 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Holders of Class A and Class B Common Stock share with each other on a ratable for issuance thereunder. Under this plan, employees who work a minimum of 20 basis as a single class in the net assets of the Company in the event of liquidation. hours per week may elect to withhold up to 8.5% of their cash compensation through Note 15 Stock Option and Purchase Plans 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 As of December 31, 1999, the Company has five stock option and stock purchase grant (January 1 or July 1), or (2) 85% of the fair market value of the shares as of the plans, described below. date of purchase. As of December 31, 1999, 181,456 shares have been purchased The Board of Directors and shareholders adopted the Zebra Technologies Corporation under the plan. Stock Option Plan (the 1991 Plan), effective as of August 1, 1991. A total of 400,000 The Company’s Board of Directors adopted the 1997 Stock Option Plan, effective shares of Class A Common Stock have been authorized and reserved for issuance February 11, 1997. On May 18,1999, the Company’s shareholders approved an under the 1991 Plan. Under this plan, the Company has granted only nonqualified increase in the number of shares of Class A Common Stock reserved for issuance stock options. As of December 31, 1999, 196,311 shares were available under the under the plan to 4,250,000 from 2,000,000 shares. The 1997 Stock Option Plan is a plan. These options have an exercise price equal to the closing market price of the flexible plan that provides the Option Committee broad discretion to fashion the Company’s stock on the date of grant. Typically, the options vest in annual install- terms of the awards to provide eligible participants with stock-based incentives, ments of 15% on the first anniversary, 17.5% on the second anniversary, 20% on including: (i) nonqualified and incentive stock options for the purchase of the the third anniversary, 22.5% on the fourth anniversary, and 25% on the fifth Company’s Class A Common Stock and (ii) dividend equivalents. The persons eligi- anniversary of the grant date. Upon vesting, the options have a legal life of two ble to participate in the 1997 Stock Option Plan are directors, officers, and employ- years from the date of vesting. The Board of Directors determines the specific ees of the Company or any subsidiary of the Company who, in the opinion of the provisions of any grant. The Board of Directors and shareholders also adopted a Directors’ Stock Option Plan, which reserves 80,000 shares of Class A Common Stock for issuance under Option Committee, are in a position to make contributions to the growth, manage- ment, protection and success of the Company or its subsidiaries. As of December 31, 1999, 2,375,603 shares were available under the plan. the plan. As of December 31, 1999, 12,000 shares were available under the plan. The options granted under the 1997 Stock Option Plan have an exercise price All options granted under this plan are exercisable immediately upon grant at a equal to the closing market price of the Company’s stock on the date of grant. The price per share equal to the closing market price of the Company’s Class A Common options generally vest over two- to five-year periods and have a legal life of ten on the date of grant. Options granted to the Board of Directors carry a seven-year years from the date of grant. The Board of Directors determines the specific provi- expiration period, however, should a member of the board discontinue service sions of any grant. on the Board of Directors, they are limited to a two year period to exercise all outstanding options. 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 The Board of Directors and shareholders adopted an employee stock purchase plan purchase up to 77,000 shares of Class A Common Stock, which shares are reserved (Stock Purchase Plan) and have reserved 300,000 shares of Class A Common Stock and available for purchase upon the exercise of options granted under the 1997 27 Director Plan. Only directors who are not employees or officers of the Company continuing operations and diluted earnings per share from continuing operations are eligible to participate in the 1997 Director Plan. Under the 1997 Director Plan, would have been as follows: each non-employee director was granted, on the effective date of the plan, an option to purchase 15,000 shares of Class A Common Stock, and each non- employee director subsequently elected to the Board will be granted an option to purchase 15,000 shares of Class A Common Stock on the date of his or her election. Options granted under the 1997 Director Plan provide for the purchase of Class A Common Stock at a price equal to the fair market value on the date of grant. If there are not sufficient shares remaining and available to all non-employee directors eligible for an automatic grant at the time at which an automatic grant would otherwise be made, then each eligible non-employee director shall receive an option to purchase a pro rata number of shares. As of December 31, 1999, 32,000 shares were available under the plan. Unless otherwise provided in an option agreement, options granted under the 1997 Director Plan shall become exercisable in five equal increments beginning on the date of the grant and on each of the first four anniversaries thereof. All options expire on the earlier of (a) ten years following the grant date or (b) the second anniversary of the termination of the non-employee director’s directorship for any reason other than due to death or Disability (as defined in the 1997 Director Plan). 1999 1998 1997 Income from continuing operations: As reported Pro forma $ 69,632 66,569 $ 40,069 37,785 $ 54,447 52,215 Basic earnings per share from continuing operations: As reported Pro forma Diluted earnings per share from continuing operations: As reported Pro forma $ 2.23 2.14 $ 2.21 2.11 $ $ 1.30 1.22 1.29 1.21 $ $ 1.76 1.69 1.74 1.66 For purposes of calculating the compensation cost consistent with SFAS 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assump- tions used for stock option grants in 1999, 1998, and 1997, respectively: expected dividend yield of 0% for each period; expected volatility of 50%, 55%, and 51%; risk free interest rate of 6.54%, 4.75%, and 5.71%; and expected weighted-average The Company applies APB No. 25 in accounting for its plans. No compensation life of five years. cost has been recognized for its fixed stock option plans and its stock purchase plan. Had compensation cost for the Company’s stock option and stock purchase plans been determined consistent with SFAS No. 123, the Company’s net income from The fair value of the employees’ purchase rights pursuant to the Stock Purchase Plan are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchase rights granted in 1999, 1998, and 1997, respectively: fair market value of $30.45, $28.75, and $23.63; option price of $25.88, $24.44, and $20.09; expected dividend yield of 0% for each period; expected volatility of 49%, 51%, and 51%; risk-free interest rate of 6.11%, 4.60%, and 5.59%; and expected lives of six months to one year. 28 Z E B R A T E C H N O L O G I E S C O R P O R A T I O N Stock option activity for the years ended December 31, 1999, 1998, and 1997 was as follows: 1999 1998 1997 Fixed Options Shares Weighted-Average Exercise Price Shares Weighted-Average Exercise Price Outstanding at beginning of year 1,416,138 $26.55 1,180,293 $23.31 Granted Exercised Canceled Outstanding at end of year Options exercisable at end of year 720,500 (433,526) (312,524) 1,390,588 291,485 27.45 21.28 30.03 27.88 25.24 368,550 (66,767) (65,938) 1,416,138 604,453 35.18 18.03 25.34 26.55 23.10 Shares 722,654 567,410 (109,771) — 1,180,293 330,971 Weighted-Average Exercise Price $18.90 26.12 8.83 — 23.31 23.05 The following table summarizes information about fixed stock options outstanding at December 31, 1999: Range of Exercise Prices $4.31 – $24.17 $24.50 – $26.50 $26.56 $29.25 – $33.27 $35.38 – $46.25 Options Outstanding Options Exercisable Number of Shares Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price 141,386 225,966 601,500 206,761 214,975 1,390,588 5.19 years 6.94 years 9.17 years 7.13 years 8.56 years $18.70 $24.55 $26.56 $30.04 $39.02 87,554 65,868 — 114,713 23,350 291,485 $ 16.42 $ 24.66 $ 0.00 $ 29.57 $ 38.62 29 Note 16 Quarterly Results of Operations (unaudited) Note 17 Major Customers (Amounts in thousands, except per share data) First Quarter(2) Second Quarter(2) Third Quarter(2) Fourth Quarter(2) Two customers accounted for more than 10% of total net sales in at least one of the fiscal years ended December 31, 1998 and 1997. The Peak Technologies Group, Inc., represented 10.9% of net sales in 1997. United Parcel Service represented 1999 Net sales Gross profit Operating expenses Operating income Net income $ 89,822 $ 97,321 $103,988 $107,386 10.3% of net sales in 1998. 42,480 24,526 17,954 12,650 48,195 24,666 23,529 17,122 55,849 24,458 31,391 19,932 55,865 25,837 30,028 19,928 Basic earnings per share Diluted earnings per share $ $ 0.41 0.41 $ $ 0.55 0.55 $ $ 0.64 0.63 $ $ 0.64 0.63 (Amounts in thousands, except per share data) First Quarter(1) Second Quarter(1) Third Quarter(1) Fourth Quarter(2) 1998 Net sales Gross profit Operating expenses Operating income Net income (loss) $ 80,798 $ 87,040 $ 88,068 $ 80,077 38,861 20,752 18,109 13,163 41,701 20,464 21,237 14,037 42,381 21,009 21,372 13,213 32,867 31,949 918 (344) Basic earnings per share Diluted earnings per share $ $ 0.42 0.42 $ $ 0.45 0.45 $ $ 0.43 0.42 $ (0.01) $ (0.01) (1) Reflects the elimination of intercorporate investment in Eltron International, Inc., and the related tax effect. (2) Reflects a pretax charge for merger costs relating to the Company’s merger with Eltron International, Inc. as follows: 1998 Fourth Quarter 1999 First Quarter 1999 Second Quarter 1999 Third Quarter 1999 Fourth Quarter Merger costs $8,080 $1,869 $1,291 $1,581 $1,600 30 Independent Auditors’ Report The Board of Directors and Shareholders Zebra Technologies Corporation: Z E B R A T E C H N O L O G I E S C O R P O R A T I O N We have audited the accompanying consolidated balance sheets of Zebra Technologies We conducted our audits in accordance with generally accepted auditing standards. Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related Those standards require that we plan and perform the audit to obtain reasonable consolidated statements of earnings, comprehensive income, shareholders’ equity, assurance about whether the financial statements are free of material misstatement. and cash flows for each of the years in the three-year period ended December 31, An audit includes examining, on a test basis, evidence supporting the amounts and 1999. These consolidated financial statements are the responsibility of the Company’s disclosures in the financial statements. An audit also includes assessing the accounting management. Our responsibility is to express an opinion on these consolidated principles used and significant estimates made by management, as well as evaluating financial statements based on our audits. We did not audit the financial statements the overall financial statement presentation. We believe that our audits, and the of Eltron International, Inc., a wholly-owned subsidiary, which statements reflect net report of the other auditors, provide a reasonable basis for our opinion. sales constituting 35 percent for the year ended December 31, 1997, of the related consolidated total. Those statements were audited by other auditors whose report has In our opinion, based on our audits and the report of the other auditors, the been furnished to us and our opinion, insofar as it relates to the amounts included consolidated financial statements referred to above present fairly, in all material for Eltron International, Inc., is based solely on the report of the other auditors. respects, the financial position of Zebra Technologies Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Chicago, Illinois January 31, 2000 31 Shareholder Information Corporate Office Zebra Technologies Corporation 333 Corporate Woods Parkway Stock Information: Price Range and Common Stock The Company’s Class A Common Stock is traded on the Nasdaq Stock Market under the symbol ZBRA. The following table shows the high and low trade prices for each Vernon Hills, Illinois 60061 3109 U.S.A. quarter in 1999 and 1998, as reported by the Nasdaq Stock Market. No market exists Phone: 847-634-6700 Fax: 847-913-8766 Independent Auditors KPMG LLP Chicago, Illinois Corporate Counsel Katten Muchin Zavis Chicago, Illinois Investor Relations For corporate or product information please contact the Corporate Office. for the Company’s Class B Common Stock. The shares of Class B Common Stock are convertible on a one-for-one basis into shares of Class A Common Stock at the option of the holder. 1999 First Quarter Second Quarter Third Quarter Fourth Quarter 1998 First Quarter Second Quarter Third Quarter Fourth Quarter High $37.00 38.50 50.38 64.50 High $38.50 44.63 42.63 37.00 Low $22.88 23.50 37.00 44.19 Low $25.50 34.75 27.00 25.00 Form 10-K Report Source: The Nasdaq Stock Market You may receive a free copy of the Zebra Technologies Corporation Form 10-K Report At March 1, 2000, the last reported price for the Class A Common Stock was filed with the Securities and Exchange Commission by contacting the Investor $67.00 per share, and there were 524 shareholders of record for the Company’s Relations Department at the Corporate Headquarters. Class A Common Stock and 24 shareholders of record for the Company’s Class B Web Site Common Stock. Investors are invited to learn more about Zebra Technologies Corporation by Dividend Policy accessing the Company’s web site at www.zebracorporation.com Since the Company’s initial public offering in 1991, the Company has not declared Equal Employment Opportunity/Affirmative Action any cash dividends or distributions on its capital stock. The Company intends to retain its earnings to finance future growth and therefore does not anticipate paying It is the policy of Zebra Technologies Corporation to provide equal opportunity and any cash dividends in the foreseeable future. affirmative action in all areas of its employment practices without regard to race, color, religion, national origin, sex, age, ancestry, citizenship, disability, veteran status, Number of Employees marital status, sexual orientation or any other reason prohibited by law. The Company had approximately 1,650 associates as of March 1, 2000. 32 GlobalGrowth Zebra serves the needs of companies, from small local suppliers to the largest multinational firms, through its valued network of reseller partners on six continents. We have 15 manufacturing, warehousing, and sales facilities located in 12 countries, and our installed base of more than 1.5 million printers is distributed in more than 90 countries around the world. Zebra Locations: Representation in: Reseller Locations: Illinois Washington, D.C. Italy The Netherlands South Africa California Florida Utah Wisconsin Denmark France Germany Hong Kong Japan Singapore South Korea United Kingdom United Kingdom Ukraine United Arab Emirates United States Uruguay Uzbekistan Venezuela Yugoslavia Zimbabwe Costa Rica Croatia Cyprus Guatemala Hong Kong Kuwait Latvia Hungary Lebanon Oman Pakistan Panama Singapore Slovak Republic Tunisia Turkey Argentina Australia Austria Bahrain Belarus Belgium Brazil Bulgaria Canada Chile China Czech Republic Denmark Iceland India Dominican Republic Indonesia Ecuador Egypt Finland France Germany Ireland Israel Italy Japan Jordan Kenya + Colombia Greece Board of Directors Edward Kaplan Chairman and Chief Executive Officer Zebra Technologies Corporation Gerhard Cless Executive Vice President and Secretary Zebra Technologies Corporation Donald Skinner Vice Chairman and President, Card Printer Business Unit Zebra Technologies Corporation Christopher Knowles Chief Executive Officer Insurance Auto Auctions, Inc. David Riley President and Chief Executive Officer The Middleby Corporation Michael Smith Chairman and Chief Executive Officer FireVision L.L.C. Slovenia South Africa South Korea Liechtenstein Paraguay Lithuania Malaysia Mexico Morocco Peru Philippines Spain Poland Portugal Sri Lanka Sweden Netherlands Puerto Rico Switzerland New Zealand Romania Syria Taiwan Russia Saudi Arabia Thailand Nigeria Norway Officers Edward Kaplan Chairman and Chief Executive Officer Gerhard Cless Executive Vice President and Secretary Charles Turnbull President Donald Skinner Vice Chairman and President, Card Printer Business Unit Jack LeVan Senior Vice President, Business Development Charles Whitchurch Chief Financial Officer and Treasurer Zebra Technologies Corporation International Headquarters 333 Corporate Woods Parkway | Vernon Hills, IL | 60061-3109 U.S.A. 847-634-6700 | www.zebracorporation.com 

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