Zebra
Annual Report 2002

Plain-text annual report

t r o p e r l a u n n a 2 0 0 2 Which companies will be around in ten years? Which will thrive? Who will continue to lead into the future? Who should you invest in? The answer is black and white. Zebra Technologies Corporation Desktop label, ticket and receipt printers Connectivity and label design software . . . Zebra Technologies Corporation Plastic card printers High performance bar code label and specialty printers Industrial and commercial bar code printers Thermal printing supplies Radio frequency identification (RFID) Mobile printing systems Zebra Technologies Corporation delivers innovative and reliable on-demand printing solutions for business improvement and security applications in nearly 100 countries around the world. A broad range of applications benefit from Zebra® thermal bar code, “smart” label and receipt printers, and Eltron® card printers, resulting in enhanced security, increased productivity, improved quality, lower costs, and better customer service. F I N A N C I A L S U M M A R Y 2002 % change 2001 % change 2000 (In thousands, except per share data and percentages) Operating Results Net sales $475,611 5.7% Gross profit Operating income Net income Diluted earnings per share 230,747 101,805 71,595 2.29 9.9 10.1 16.4 15.1 Capitalization Cash and cash equivalents and investments in marketable securities Working capital Total assets Total stockholders’ equity $348,577 427,676 573,088 534,155 $450,008 209,893 92,459 61,529 1.99 $249,349 330,510 479,556 445,007 -6.6% $481,569 -9.7 -14.9 -14.1 -13.5 232,428 108,670 71,622 2.30 $156,714 256,799 418,896 371,288 Sales (in millions) Diluted earnings per share Free cash flow (in millions) $500 475 450 425 400 375 350 325 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 $2.50 2.25 2.00 1.75 1.50 1.25 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 $80 70 60 50 40 30 20 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Zebra Technologies Corporation 2002 Annual Report | 1 L E T T E R T O S T O C K H O L D E R S At Zebra, we are proud of our accomplishments and the positions of financial strength and market leadership that we occupy. We are confident in our ability to achieve our strategic goals for growth and deliver increasing stockholder value. At this time a year ago, we discussed with you our strategy of investing in activities to extend Zebra’s market leadership, improve its growth prospects and, fundamentally, continue to build value for all of Zebra’s stockholders over the long term. We made these investments while many of our competitors lacked the resources or had busi- ness models that required them to pull back on their spending. We affirmed our confidence in the long- term prospects for our markets, as competitive forces drive companies and organizations worldwide to increase productivity, enhance quality, improve customer service, and ensure more effective security. Throughout the U.S. economic downturn, we leveraged our financial strength to achieve these goals by following a growth strategy based on: Introducing new products, including wireless and mobile printing systems, photo ID card printers, and printer/ encoders that incorporate radio transponder technology (RFID). Expanding our international presence with greater Zebra repre- sentation in the high-growth, under- penetrated regions of Asia Pacific, Eastern Europe, and Latin America. Increasing our focus on delivering business improvement and specialty printing applications and building the infrastructure to support them. Investing in marketing initiatives to enter high-growth vertical markets where we can deliver appli- cations in routing and tracking, identification and authentication, and transactions processing. Pursuing acquisitions to deploy our substantial cash reserves to strengthen the strategic position of our current business and diversify into related specialty printing and supporting technologies. Edward Kaplan Chairman and Chief Executive Officer 2 | Zebra Technologies Corporation 2002 Annual Report S TO C K H O L D E R VA L U E • Zebra • Nasdaq • S&P 500 300% 250% 200% 150% 100% 50% 1997: Q4 1998: Q4 1999: Q4 2000: Q4 2001: Q4 2002: Q4 Stockholder wealth in Zebra Technologies increased 40% for the two years through 2002. For the five-year period, Zebra's stock appreciated 93%. If you had become a stockholder at Zebra’s IPO in 1991, the value of your holding would have increased 639%, compared with 150% for the stock market. While pursuing these objectives, we also strengthened our manage- ment team and took steps to ensure full compliance with the new corporate governance regulations enacted in 2002. At the same time, we invested in information systems to support effective corporate gov- ernance, maintain strong financial oversight, and improve our ability to serve our customers. Our financial results for 2002 reflect the success of these investments and validate our growth strategy. During this difficult economic environment: • • • Quarterly sales increased throughout the year. North American sales, which had been a source of weakness, began to rebound. All three international geographic territories achieved record sales, as well as our Plastic Card Business Unit. Net income advanced 16.4% to $2.29 per diluted share on 5.7% sales growth to $475.0 million, as we leveraged higher sales to achieve increased gross profit and operating margins. We improved our already enviable financial position with tighter management of working capital to generate $82.8 million in free cash flow, a record for the second consecutive year. We ended 2002 with $348 million in cash and investments and no long-term debt. Just as our invest- ments throughout the economic downturn helped us achieve growth in 2002, they will also have an enduring effect on Zebra’s business and provide a foundation for further investment as we look to 2003 and beyond. As we discuss in the following pages of this annual report, this year we will extend our product leadership with a stream of new bar code, specialty, and plastic card printer products. Our plans also call for building on our strategy to deliver applications into high-growth vertical markets. And, we will make additional investments in people and infrastructure to generate fur- ther international sales growth. Innovative products. Industry-leading support. Unprecedented financial strength. Leading industry brand. With these attributes, Zebra is attracting new busi- ness opportunities and new customers who are assured that the company will continue to grow and succeed in delivering printing solutions for business improvement. I believe we are a stronger company today than at any time in our company’s history. Because of our ability to invest, we distanced ourselves from the competition We enhanced our ability to GROW and DELIVER s t o c k h o l d e r value over the long term. and improved our ability to serve our customers better. Zebra’s man- agement team, product portfolio, infrastructure, and competitive position have never been as great. We have the financial resources to invest in high-growth areas to gain share, develop new markets, and make acquisitions to strengthen our competitive positions further. These elements make us confident that Zebra’s business strategy puts us firmly on the path to deliver sustainable long-term growth and increasing stockholder value. Edward Kaplan Chairman and Chief Executive Officer Zebra Technologies Corporation 2002 Annual Report | 3 Product L E A D E R S H I P Innovation is at the heart of Zebra Technologies. New products and new ways to connect enable us to extend our leadership into growing markets by building on our unmatched reputation for reliability and durability. We offer the industry’s broadest product line and incorporate market-leading wireless and security technologies to deliver real value in specialty printing, business improvement and compliance labeling applications. 4 | Zebra Technologies Corporation 2002 Annual Report L I N K I N G T H E S U P P L Y C H A I N Zebra bar code label printers, on automated information software, and connectivity exchange, facilitated by technologies enable the network-addressable bar delivery of goods and services code printers, to move more accurately and with goods from production greater efficiency. Routing and inventory all the way and tracking operations rely to customer delivery. P L A S T I C C A R D P R I N T I N G Personalized identification cards printed on Zebra plastic card printers are used for a broad range of purposes, from simple membership cards to controlled access in sophisticated, high- security environments. Overt and covert technologies add new levels of security to Zebra printing systems and supplies. R F I D The emerging technology of radio frequency identification (RFID) offers an exciting complement to bar coding. The ability to “read” labels embedded with RF chips without seeing them and append information in a record that accompanies the label is opening new auto-ID opportunities that will work along side the expanding number of bar coding applications. D E L I V E R I N G M O B I L E A N D W I R E L E S S P R I N T I N G S Y S T E M S Advances in radio technology, with Bluetooth™ and other wireless protocols, are greatly expanding the opportunities for business improvement and specialty printing applications. Zebra wireless printing systems help mobile workers perform consumer credit collections, retail shelf labeling, bus and train ticketing, and other operations that provide better customer service, increase worker productivity, and deliver real-time information for improved accuracy. Bluetooth is a trademark owned by Bluetooth SIG and used by Zebra Technologies under license. PS2122 105SL TR220 Cameo 3 S600 2002 Annual Report | 5 Vertical M A R K E T F O C U S Zebra is expanding its relationships with channel partners to deliver high-growth applications more effectively to targeted markets. The company is enhancing its growth opportunities by demonstrating the bottom-line value of implementing printing solutions that increase productivity, provide better customer service, and strengthen safety and security. 6 | Zebra Technologies Corporation 2002 Annual Report E L E C T R O N I C S M A N U FA C T U R I N G Small spaces need small labels and even smaller bar codes. Zebra’s 600 dpi printers produce sharp bar codes on a wide variety of durable materials to ensure accurate product ID during production, and for subse- quent warranty and product authentication purposes. S A F E T Y A N D S E C U R I T Y Cards printed on Zebra plastic card printers incorporating digital photos, biometric infor- mation, and other identification technologies are one of numerous solutions from Zebra to ensure increased safety and more effective security of people, products, and property. H I G H G R O W T H L I F E S C I E N C E S The life sciences supply chain increasingly relies on the exceptional accuracy bar coding offers to minimize costly errors. With the U.S. Food and Drug Administration taking positive steps to mandate the use of bar coding, drug manufacturers are implementing unit-of-use marking with bar codes, enabling health care facilities to conduct an automated and reliable bedside match of medication and patient, identified by a bar coded wristband. Prescription medicines are labeled more clearly with bar codes to ensure proper dispensing, and bar coded specimen vials are identified, tracked, and recorded more easily throughout the health care system. P310 170xiIII Plus Supplies and Software 2746e PA/PT403 2002 Annual Report | 7 Global E X P A N S I O N We continue to pursue international business opportunities by expanding Zebra’s presence in high-growth countries and regions. In-country Zebra representatives are successfully working with channel partners to implement a broad range of solutions, from important compliance and shipping applications to emerging applications in retail, transportation and postal delivery. 8 | Zebra Technologies Corporation 2002 Annual Report E B O L G E H T G N I N N A P S Our success in growing international sales results from our commitment to invest in the scope of our global operations. International Sales (in millions) 1998 - $134.7 2002 - $205.3 International Employees 1998 - 221 2002 - 290 International Zebra Locations 1998 - 9 2002 - 23 E X T E N D I N G O U R P O S TA L A P P L I C AT I O N S Zebra is leveraging its strength in bar code label printing for small package delivery applica- tions to help postal organizations around the world become more efficient in tracking parcels and important mail. Mobile applica- tions also are providing new revenue opportunities for couriers. Q U E U E B U S T I N G Retailers use mobile printers equipped with magnetic stripe readers in stores and at entertain- ment venues to speed sales transactions and ticketing during peak times. Shorter checkout lines increase customer satisfaction and minimize lost sales. I N T E R N A T I O N A L O P P O R T U N I T I E S Global presence makes it attractive for multi-national companies to do business with Zebra. The company’s financial resources give it the ability to invest in the people and infrastructure to support customers outside North America. As companies in developing countries adopt bar coding, they increasingly turn to Zebra for expertise in compliance and business improvement applications. Zebra Technologies Corporation 2002 Annual Report | 9 Selected Consolidated Financial Data Financial Data (In thousands, except per share amounts) Year Ended December 31, Consolidated statements of earnings data Net sales Cost of sales Gross profit 2002 2001 2000 1999 1998 $ 475,611 $ 450,008 $ 481,569 $ 402,213 $ 339,678 244,864 240,115 249,141 198,942 183,639 230,747 209,893 232,428 203,271 156,039 Total operating expenses 128,942(1)(2) 117,434(2) 123,758(2) 99,487(3) 94,174(3) Operating income 101,805(1)(2) 92,459(2) 108,670(2) 103,784(3) 61,865(3) Income before income taxes 110,883(1)(2) 96,139(2) 111,911(2) 108,800(3) 65,021(3) Net income Earnings per share Basic Diluted 71,595(1)(2) 61,529(2) 71,622(2) 69,632(3) 40,069(3) $ $ 2.31(1)(2) 2.29(1)(2) $ $ 2.01(2) 1.99(2) $ $ 2.33(2) 2.30(2) $ $ 2.23(3) 2.21(3) $ $ 1.30(3) 1.29(3) Weighted average shares outstanding Basic Diluted 30,983 31,265 30,645 30,881 30,790 31,155 31,175 31,521 30,919 31,176 (In thousands) December 31, Consolidated balance sheet data Cash and cash equivalents and investments and marketable securities $ 348,577 $ 249,349 $ 156,714 $ 235,568 $ 162,668 Working capital Total assets Long-term obligations Stockholders’ equity 427,676 330,510 256,799 302,804 229,688 573,088 479,556 418,896 394,643 310,002 1,613 408 513 664 36 534,155 445,007 371,288 349,307 270,884 (1) Includes $3,300 in operating expenses related to the terminated acquisition of Fargo Electronics, Inc. (2) Includes pretax charges for merger costs relating to the acquisition of Comtec Information Systems, Inc., and merger with Eltron International, Inc. of $73 in 2002, $1,838 in 2001 and $11,066 in 2000. (3) 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. 10 | Zebra Technologies Corporation 2002 Annual Report DiscussionManagement’s Discussion and Analysis of Financial Condition and Results of Operations Comparison of Years Ended December 31, 2002 and 2001 During 2001 and 2002, through the downturn in the Sales by product category, related percent changes and percent of total sales for 2002 and 2001 were as follows: U.S. economy, the Company implemented its growth Product Category Hardware Supplies Service and software Freight revenue Years Ended December 31, 2002 December 31, 2001 Percent Change Percent of Total Sales 2002 Percent of Total Sales 2001 $360,185 $339,895 87,981 23,301 4,144 85,266 19,336 5,511 6.0 3.2 20.5 (24.8) 5.7 75.7 18.5 4.9 0.9 100.0 75.6 18.9 4.3 1.2 100.0 Total sales $475,611 $450,008 Sales to customers by geographic region, related percent changes, and percent of total sales for 2002 and 2001 were as follows: Geographic Region International North America Total sales Years Ended December 31, 2002 December 31, 2001 Percent Change Percent of Total Sales 2002 Percent of Total Sales 2001 $205,323 270,288 $475,611 $180,053 269,955 $450,008 14.0 0.1 5.7 43.2 56.8 100.0 40.0 60.0 100.0 strategy by introducing new products, expanding international coverage, and creating new sales and marketing programs. The Company’s investments in product development resulted in a stream of product introductions throughout this period. The Company also placed Zebra sales representatives in international territories deemed to have growth potential, thereby allowing the Company to work more closely with its channel partners in those regions. In addition, the Company organized its sales and marketing efforts to support a sales strategy that demonstrates the business benefits associated with implementing bar code labeling and specialty printing solutions. Management believes that these investments contributed to the Company’s sales growth in 2002. In North America, the Company recorded positive sales growth in the second, third and fourth quarters of 2002, compared with the corresponding periods of 2001. Overall, however, the slow U.S. economy continued to limit sales growth of bar code label and receipt printers to rates below the Company’s historical average. Sales of supplies, specifically ribbons, were affected by price pressure from increased international competition particularly from Japan. Sales of supplies nevertheless benefited from an increase in unit sales. Management believes that the long-term outlook for Zebra Technologies Corporation 2002 Annual Report | 11 bar code label and receipt printing in North America Gross profit was $230,747,000 for 2002, up 9.9% from selling and marketing expenses in future periods will remains favorable but is unable to determine at this $209,893,000 for 2001. In addition, gross profit margin reflect the higher costs related to generating business time when growth might return to historical levels increased to 48.5% from 46.6%. The major contributors within vertical markets. experienced before the 2001 downturn. to the margin improvement were higher capacity All three of the Company’s international regions — Europe, Asia Pacific, and Latin America — had record sales and contributed to the significant growth in international sales in 2002. The Company’s increase of the number of Zebra representatives in these regions, utilization related to the higher sales volume, product cost reductions, and the effect of foreign exchange movements. Management estimates that changes in foreign exchange rates increased gross profit by $4,377,000 in 2002. Research and development expenses for 2002 were $29,210,000, up 3.6% from $28,184,000 for 2001, and represented 6.1% of net sales in 2002 versus 6.3% in 2001. Printer products introduced over an 18-month period that ended December 31, 2002 accounted for approximately 22% of printer sales for 2002, compared including the formation of a sales team in Europe for Selling and marketing expenses increased 13.1% to with 20% for the comparable period ending mobile printing solutions in 2001, was an important $56,176,000, or 11.8% of net sales, from $49,688,000, December 31, 2001. Higher project and personnel factor in the growth of international sales. On a dollar- or 11.0% of net sales. Most of the change can be expenses were partially offset by lower expenditures for volume basis, the largest increase occurred in the attributed to an increase in additional headcount and consulting services. The Company considers its ability to Company’s European region. The strength of the British performance-related payroll expenses, specifically develop and introduce new products to be a significant pound and the euro versus the U.S. dollar increased commissions and bonuses related to the Company’s competitive factor. Accordingly, management expects sales for the Company’s European region by approxi- growth in net sales. Trade show, travel and consulting to continue high levels of expenditures on the develop- mately $5,565,000, compared with exchange rates that expenses were also higher compared with 2001. ment of a broad range of printers and related items. prevailed during 2001. It is difficult for management to accurately forecast the direction of foreign exchange movements, and therefore, to estimate the impact of foreign exchange rates on future financial results, either positive or negative. Management believes that international territories hold significant growth opportunities for the Company and expects to continue to invest in personnel and infrastructure to support sales growth in these regions. During 2002, the Company identified vertical markets General and administrative expenses increased that management believes offer growth opportunities 19.1% to $38,689,000 from $32,491,000. As a percentage for Zebra’s printing and connectivity technologies. To of net sales, general and administrative expenses this end, management expects that a higher level of increased to 8.1% from 7.2%. The Company had higher selling and marketing infrastructure will be required bonus payments related to the growth in net sales. It to access these markets and achieve the Company’s also incurred additional consulting expenses for the growth objectives within them, compared with Zebra’s development and implementation of growth strategies, historical business model. Increased staffing occurred as well as higher expenditures on information systems in marketing functions in 2002 to enable the Company and insurance. to access vertical markets. Management expects that 12 | Zebra Technologies Corporation 2002 Annual Report 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 During 2002, Zebra recorded $1,494,000 in amortization Also in the first quarter of 2002, the Company occurred because the decline in the asset’s value was of intangible assets, compared with $5,233,000 for terminated the acquisition agreement and tender offer viewed as other than temporary. This write-down 2001. During the first quarter of 2002, Zebra imple- in which the Company would acquire all outstanding reduced 2001 diluted earnings by $0.05 per share. The mented SFAS No. 142, Goodwill and Other Intangible shares of common stock (including associated rights to Company made an additional write-down of $193,000 Assets, which eliminates the requirements to amortize purchase preferred stock) of Fargo Electronics, Inc. for for this investment in 2002. intangible assets with indefinite lives and goodwill $7.25 per share in cash. In connection with the termi- with a requirement for an annual impairment test. nation, the Company recorded $3,300,000 in expenses SFAS No. 142 also establishes requirements for iden- for acquisition costs that would otherwise have been tifiable intangible assets. As a result, during the first capitalized. There was no such expense in 2001. quarter Zebra reclassified $21,272,000 of intangible assets into goodwill, as such assets, which included assembled workforce and customer lists, did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142. Operating income for 2001 includes $3,835,000 of amortization of goodwill and other intangible assets that are not included in the 2002 results in conjunction with the implementation of SFAS No. 142. The Company incurred merger costs of $73,000 in 2002 and $1,838,000 in 2001. These costs related to the acquisition of Comtec Information Systems in April 2000. Management expects that future periods will have no further merger costs related to acquisitions completed prior to the date of this report. In the event of future acquisitions, management expects to record Income before income taxes increased 15.3% to $110,883,000 from $96,139,000. As a percentage of net sales, income before income taxes increased to 23.3% from 21.4%. The effective income tax rate for 2002 was 35.4% versus 36.0% in 2001. This change is the result of implementing tax minimization strategies during the third quarter of 2002. Management expects that these strategies will allow the Company to remain at a 35.0% effective tax rate in future periods. merger costs related to those acquisitions, the amount Net income of $71,595,000, or $2.29 per diluted share, of which cannot be determined at this time. for 2002 was up 16.4% from $61,529,000, or $1.99 per diluted share, for 2001. Investment income was $10,004,000 for 2002, an increase of 84.6% from $5,419,000 for 2001. Favorable investment income was a result of a $1,953,000 pre- tax gain on the sale of 585,000 shares of common stock of Fargo Electronics, in addition to the absence of a $2,242,000 pre-tax write-down of a long-term investment that occurred in 2001. The write-down Zebra Technologies Corporation 2002 Annual Report | 13 Comparison of Years Ended December 31, 2001 and 2000 The decline in sales was primarily related to softness Sales by product category, related percent changes and percent of total sales for 2001 and 2000 were as follows: in sales of bar code label and receipt printers in Product Category Hardware Supplies Service and software Freight revenue Years Ended December 31, 2001 December 31, 2000 Percent Change Percent of Total Sales 2001 Percent of Total Sales 2000 $339,895 $378,093 85,266 19,336 5,511 81,045 16,659 5,772 (10.1) 5.2 16.1 (4.5) (6.6) 75.6 18.9 4.3 1.2 100.0 78.5 16.8 3.5 1.2 100.0 Total sales $450,008 $481,569 Sales to customers by geographic region, related percent changes, and percent of total sales for 2001 and 2000 were as follows: Geographic Region International North America Total sales Years Ended December 31, 2001 December 31, 2000 $180,053 269,955 $450,008 $179,989 301,580 $481,569 Percent Change 0.0 (10.5) (6.6) Percent of Total Sales 2001 Percent of Total Sales 2000 40.0 60.0 100.0 37.4 62.6 100.0 14 | Zebra Technologies Corporation 2002 Annual Report North America from deteriorating economic conditions in the U. S., specifically in the manufacturing and technology sectors. A full year’s sales of mobile printing systems as a result of the Comtec acquisition, compared with only three quarters in 2000, partially offset the decline from this weakness. The decline in North American sales was a result of the slowdown in the U.S. economy, which restricted sales of bar code label and receipt printers in North America. This slowdown began in 2000 and became more severe in 2001. International sales for 2001 showed virtually no growth. Growth in the Company’s European region to a record level resulted from the formation of a team dedicated to the sale of mobile printing systems and sales expansion in Eastern Europe. This growth was offset by sales declines in Latin America and Asia Pacific. The strength of the U.S. dollar versus the British pound and the euro reduced sales for the Company’s European region by approximately $2,976,000, compared with exchange rates that prevailed during 2000. 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 Gross profit was $209,893,000 for 2001, down 9.7% Amortization of intangible assets totaled $5,233,000, Investment income was $5,419,000 for 2001, a from $232,428,000 for 2000. In addition, gross profit compared with $4,046,000 for 2000. The increase was decrease of 52.2% from $11,345,000 for 2000. Lower margin declined to 46.6% from 48.3%. Lower produc- due to a full year’s amortization of intangible assets investment returns on invested balances contributed tion volumes and the resulting decline in manufacturing related to the Comtec acquisition, compared with to the decline. In addition, in the third quarter of capacity utilization had the predominant effect on the three quarters in 2000. 2001, the Company recorded a $2,242,000 pre-tax gross profit and gross profit margin declines. Selling and marketing expenses increased 2.9% to $49,688,000, or 11.0% of net sales, from $48,306,000, or 10.0% of net sales. During 2001, the Company continued to invest in demand-generating activities to support long-term growth. For 2001, higher expenditures for personnel, market research and co-op activities were partially offset by declines in travel and entertainment and other expenses. Research and development expenses for 2001 were $28,184,000, up 5.4% from $26,746,000 for 2000, and represented 6.3% of net sales in 2001 versus 5.6% in 2000. Lower project expenses partially offset higher expenditures related to engineering personnel and consulting services. As part of the Comtec acquisition, the Company acquired printer and wireless technology. A portion of the purchase price was attributed to acquired in-process technology, as the development work associated with the projects had not yet reached technological feasibility and was believed to have no alternative future use. The Company assessed the fair value of the acquired in-process technology using an income approach. During the second quarter of 2000, the Company recorded a $5,953,000 charge to write off this acquired in-process technology. There was no such charge in 2001. write-down of a long-term investment, in which the decline in value was viewed as other than temporary. This write-down reduced 2001 diluted earnings by $0.05 per share. Interest expense and other expense, net, for 2001 totaled $1,739,000, compared with $8,104,000 in 2000. The 78.5% decline was primarily attributable to the effectiveness of currency hedging strategies to minimize the effects of foreign currency transactions, which the Company implemented during the second half of 2000. In 2001, losses from foreign currency transactions on the value of euro-denominated cash deposits and receivables from customers and pound The Company incurred merger costs of $1,838,000 in sterling-denominated receivables from the Company’s 2001 and $5,113,000 in 2000. These costs related to U.K. subsidiary totaled $896,000, compared with the merger with Eltron International, Inc. in October $6,032,000 for 2000. General and administrative expenses declined 3.3% to 1998, which was accounted for as pooling-of-interests, $32,491,000 from $33,594,000. As a percentage of net and the Comtec acquisition. These costs exclude sales, general and administrative expenses increased certain direct costs of the Comtec acquisition, which to 7.2% from 7.0%. Higher expenditures on information were not included as a portion of the purchase price systems were partially offset by expense declines for or recorded at the time of the transaction. In 2001, Income before income taxes decreased 14.1% to $96,139,000 from $111,911,000. As a percentage of net sales, income before income taxes declined to 21.4% from 23.2%. personnel-related expenses from benefits and taxes, these costs primarily consisted of expenditures on Net income of $61,529,000, or $1.99 per diluted share, as well as lower expenditures on outside services for information technology infrastructure to integrate the for 2001 was down 14.1% from $71,622,000, or $2.30 recruiting and consulting. Comtec and Eltron operations. per diluted share, for 2000. Zebra Technologies Corporation 2002 Annual Report | 15 Critical Accounting Policies and Estimates • significant changes in the manner of use of the review of its goodwill in 2002 and an annual impairment Management prepared the consolidated financial acquired assets or the strategy for the overall business review thereafter. • significant negative industry or economic trends The Company completed its initial impairment review statements of Zebra Technologies Corporation in conformity with accounting principles generally accepted in the United States. Accordingly, the consolidated financial statements require certain • significant decline in Zebra’s stock price for a sustained period estimates, judgments and assumptions, which are • significant decline in market capitalization relative believed to be reasonable, based upon the information to net book value during the second quarter of 2002. Considering the share price of the Company’s stock among other measures of fair value, this impairment test indicated that the fair value of the Company’s goodwill was sig- nificantly in excess of the carrying value. Consequently, available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results. Valuation of Long-Lived and Intangible Assets and Goodwill Management assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise-level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important to possibly trigger an impairment review consist of: When it is determined that the carrying value of no impairment charge was recorded. intangibles, long-lived assets and related goodwill and enterprise-level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, management measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Net intangible assets, long-lived assets, and goodwill amounted to $97,473,000 as of December 31, 2002. Revenue Recognition Zebra recognizes revenue from product sales at the time of shipment and passage of title. Certain cus- tomers have the right to return products that do not function properly within a limited time after delivery. The Company regularly monitors and tracks product returns and records a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending In 2002, SFAS No. 142, Goodwill and Other Intangible returns. While such returns have historically been Assets, became effective. As a result, the Company within expectations and the provisions established, ceased amortizing approximately $54,455,000 of the Company cannot guarantee that it will continue to goodwill, including existing intangible assets that experience return rates consistent with historical pat- were not considered identifiable under SFAS No. 142. terns. Any significant increase in product failure rates The Company recorded approximately $3,835,000 of and the resulting credit returns could have a material amortization on these amounts during 2001 and adverse effect on operating results for the periods in • significant underperformance relative to expected would have recorded approximately $3,835,000 of which such returns materialize. A 10% increase (decrease) historical or projected future operating results amortization during 2002. In lieu of amortization, the in returns above historical levels would decrease Company was required to perform an initial impairment (increase) operating income by approximately 0.3%. 16 | Zebra Technologies Corporation 2002 Annual Report 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 Accounts Receivable The Company maintains a provision for estimated Inventories The Company has established standardized credit credit losses based upon historical experience and The Company values its inventories at the lower of granting and review policies and procedures for all any specific customer collection issues. Over the last the actual cost to purchase or manufacture, or the customer accounts receivable. These policies and three years, accounts receivable reserves have been in current estimated market value. Management regularly procedures include credit reviews of all new customer the range of 1.7% to 2.9% of total accounts receivable. reviews inventory quantities on hand and records a accounts to establish credit limits and payment terms Accounts receivable reserves as of December 31, provision for excess and obsolete inventory based based on available credit information, which may 2002 were $1,236,000, or 1.7% of the balance due. primarily on estimated forecasts of product demand and include customer financial statements, bank and trade Management feels this reserve level is appropriate production requirements for the subsequent twelve references, credit rating agency information and other given the relatively low accounts receivable balances months. A significant increase in the demand for credit related information that becomes available. combined with the quality of the portfolio as of Zebra’s products could result in a short-term increase Additionally, the Company performs ongoing credit December 31, 2002. While credit losses have histori- in the cost of inventory purchases, while a significant evaluations of current customers and adjusts credit cally been within expectations and the provisions decrease in demand could result in an increase in limits based upon payment history and the customer’s established, management cannot guarantee that the the amount of excess inventory quantities on hand. current credit worthiness, as determined by a review Company will continue to experience credit loss Additionally, the Company’s estimates of future product of current credit information. The Company has estab- consistent with historical experience. demand may prove to be inaccurate, in which case lished regional credit functions, reporting directly to the provision required for excess and obsolete inventory the corporate financial officers, to manage the credit Zebra’s accounts receivable portfolio is diversified may be understated or overstated. In the future, if granting, review, and collections processes. among a large number of customers and geographic inventories are determined to be overvalued, the markets. No individual customer exceeds 9% of Company would be required to recognize such costs Over the last three years, quarter-end accounts gross accounts receivable balances as of December 31, in cost of goods sold at the time of such determination. receivable balances have ranged from 53.0 to 68.5 2002, and only one customer exceeds 5% of gross Likewise, if inventories are determined to be under- days sales outstanding. As of December 31, 2002, accounts receivable as of December 31, 2002. valued, the Company may have over-reported cost of accounts receivable before provisions for uncollectible Included in accounts receivable is an account with a goods sold in prior periods and would be required to accounts were $72,535,000, or 53.0 days of sales. $2,100,000 disputed balance. Although management recognize such additional operating income at the Similarly, past due accounts receivable are also at the believes this account is fully collectible, a $481,000 time of sale. The Company makes every effort to ensure low end of historical ranges as of December 31, 2002. accrued liability has been recorded to cover the the accuracy of its forecasts of future product demand; The historically low balance, high quality, accounts estimated cost of collection. If the actual collection, however any significant unanticipated changes in receivable portfolio is the result of improvements to net of costs, is less than $1,619,000, operating income demand or technological developments could have a credit and collections policies, procedures, and would be reduced. significant impact on the value of inventories and staffing implemented during 2002. reported operating results. Zebra Technologies Corporation 2002 Annual Report | 17 Over the last three years, the Company’s reserves for The Illinois Department of Revenue has also examined Liquidity and Capital Resources excess and obsolete inventory have ranged from the Company’s tax returns for the years 1996 and Internally generated funds from operations are the 9.7% to 12.9% of gross inventory. As of December 31, 1997, and issued an assessment for $3,200,000. The primary source of liquidity for the Company, largely 2002, reserves for excess and obsolete inventory were issues involved in this audit are identical to those as a result of the Company’s sales and profitability, $5,075,000, or 11.5% of gross inventory. involved in the 1993 to 1995 returns being litigated. control over working capital and relatively low require- The Company has paid this assessment under protest. ments for purchases of property and equipment. As Reserve for Tax Litigation and Tax Audits Management believes that the ultimate outcome of of December 31, 2002, the Company had $348,577,000 The Company has recorded the estimated liability this assessment will be consistent with the 1993 to in cash and cash equivalents and investments and related to certain pending tax litigation and tax audits 1995 litigation under appeal. marketable securities, compared with $249,349,000 at based on management’s estimates of the probable range of loss. As additional information becomes available, management will assess the potential liability related to pending litigation and tax audits, and revise estimates. Such revisions in the estimates of potential future liabilities could materially affect the results of operations and financial position. In addition, the Illinois Department of Revenue has not yet examined the Company’s income tax returns for 1998 through 2001, but has a right to do so. Management believes that if such an audit occurred, the Illinois Department of Revenue would raise issues similar to those raised during the 1993 through 1997 audits. the end of 2001. Capital expenditures totaled $8,481,000 in 2002, $9,613,000 in 2001, and $8,947,000 in 2000. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. For 2002, net cash used in operating activities was $13,393,000, which included increases in investments The Company is litigating a dispute over a 1998 tax The Company recorded tax reserves equal to manage- and marketable securities of $108,498,000 and assessment in the amount of approximately $2,000,000, ment’s estimate of the likely outcome of the Illinois accounts receivable of $1,629,000, offset by a decline including penalties and interest, with the Illinois Department of Revenue litigation for 1993 to 1995, the in inventories and other assets totaling $6,891,000 Department of Revenue for the years 1993 through audit assessment for 1996 and 1997, and the unaudited and an increase in accrued liabilities of $2,564,000. 1995. The case was filed by the Company in the District 1998 through 2001 returns. If the Company loses all These changes are net of the effect of foreign exchange Court of Illinois and tried during November 2000. issues on appeal, the Company would record an rates on cash. Depreciation and amortization totaled The decision from the court was unfavorable to the additional one-time tax expense of $1,300,000. If the $12,259,000. Net cash used in investing activities Company but has been appealed. The Company does Company wins all issues on appeal, the Company was used exclusively for $8,481,000 in purchases of not expect to know the result of the appeal until some would record a reduction to tax expense of $4,400,000. property and equipment, and $13,032,000 in net cash time in the second half of 2003. For additional information respecting this matter, see provided by financing activities was substantially Note 9 “Income Taxes” in the Notes to Consolidated generated by proceeds from the exercise of stock Financial Statements annexed to this report. options. Cash and cash equivalents decreased by $7,910,000 for the year. 18 | Zebra Technologies Corporation 2002 Annual Report 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 Net cash provided by operating activities totaled Recently Issued Accounting Pronouncements In July 2002, the FASB issued SFAS No. 146, Accounting $14,076,000 in 2001, which included an increase in invest- In June 2001, the FASB issued SFAS No. 143, for Costs Associated with Exit or Disposal Activities. ments and marketable securities of $78,874,000 and Accounting for Asset Retirement Obligations. SFAS 143 This standard requires companies to recognize costs relatively significant declines of $16,223,000, or 19.3%, addresses financial accounting and reporting for associated with exit or disposal activities when they in accounts receivable and of $17,284,000, or 30.4%, in obligations associated with the retirement of tangible are incurred rather than at the date of a commitment inventories. Both declines exclude the effect of foreign long-lived assets and for the associated asset retirement to an exit or disposal plan. Examples of costs covered exchange rates on cash. Depreciation and amortization costs. SFAS 143 must be applied starting with fiscal by the standard include lease termination costs and totaled $15,691,000. Net cash used in investing activities years beginning after June 15, 2002. Management does certain employee severance costs that are associated was used exclusively for $9,613,000 in purchases of not believe the adoption of SFAS No. 143 will have a with a restructuring, discontinued operation, plant property and equipment, and $8,863,000 in net cash pro- significant impact on the Company’s consolidated closing, or other exit or disposal activity. This standard vided by financing activities was substantially generated financial statements. will be applied prospectively to exit or disposal activities by proceeds from the exercise of stock options. In April 2002, the FASB issued SFAS No. 145, Net cash provided by operating activities totaled Rescission of FASB Statements No. 4, 44, and 64, $132,565,000 in 2000. During the year, the Company Amendment of FASB Statement No. 13, and reduced its investments and marketable securities by Technical Corrections. SFAS 145 requires that gains $60,860,000 as partial funding for the Comtec acquisi- and losses from extinguishment of debt be classified tion. The Company also recorded increases of $7,106,000 as extraordinary items only if they meet the criteria in accounts receivable and $7,179,000 in inventories. in Accounting Principles Board Opinion No. 30. Depreciation and amortization totaled $14,383,000. Applying the provisions of Opinion No. 30 will Investing activities used $97,423,000 in cash in 2000. distinguish transactions that are part of an entity’s In addition to the $8,947,000 used for purchases of recurring operations from those that are unusual property and equipment, the Company used $88,476,000 and infrequent and meet the criteria for classification for the Comtec acquisition, net of cash acquired. For as an extraordinary item. SFAS No. 145 is effective 2000, the Company used $48,675,000 for financing beginning January 1, 2003. Management does not activities, including $55,505,000 for the purchase of believe the adoption of SFAS No. 145 will have a treasury stock. Proceeds of $6,653,000 from the exercise significant impact on the Company’s consolidated of stock options had a positive effect on net cash financial statements. used in financing activities. For 2000, cash and cash equivalents declined by $15,041,000. initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 will have a significant impact on the Company’s consolidated financial statements. Risk Factors Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on the Company’s business, financial condition, operating results, and growth prospects. Zebra Technologies Corporation 2002 Annual Report | 19 The Company could encounter difficulties in any The Company may not be able to continue to develop substantial marketing, financial, development and acquisition it undertakes, including unanticipated products to address user needs effectively in an personnel resources. To remain competitive, the integration problems and business disruption. industry characterized by rapid technological change. Company believes it must continue to provide: Acquisitions could also dilute stockholder value and To be successful, Zebra must adapt to rapidly changing • technologically advanced systems that satisfy the adversely affect operating results. Proposed acquisitions technological and application needs by continually that are not consummated may result in the write-off improving its products as well as introducing new of certain acquisition costs. products and services to address user demands. user demands; • superior customer service; The Company may acquire or make investments in other businesses, technologies, services or products. Zebra’s industry is characterized by: The process of integrating any acquired business, technology, service or product into operations may result in unforeseen operating difficulties and expendi- • rapidly changing technology • evolving industry standards tures. Integration of an acquired company also may • frequent new product and service introductions • evolving distribution channels • changing customer demands • high levels of quality and reliability, and • dependable and efficient distribution networks Zebra cannot assure it will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and Future success will depend on the Company’s ability marketing and customer support. Some competitors to adapt in this rapidly evolving environment. The may make strategic acquisitions or establish cooper- Company could incur substantial costs if it has to ative relationships with suppliers or companies that modify its business to adapt to these changes, and produce complementary products. Any of these may even be unable to adapt to these changes. factors could reduce the Company’s earnings. consume considerable management time and attention, which could otherwise be available for ongoing devel- opment of the business. The expected benefits of any acquisition may not be realized. Moreover, the Company may be unable to identify, negotiate or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity secu- rities or the incurrence of debt, contingent liabilities or amortization expenses. To the extent that a proposed acquisition is not consummated, the Company may be required to write off certain costs associated with The Company competes in a highly competitive market, the acquisition, which could be significant. which is likely to become more competitive. Competitors may be able to respond more quickly to new or emerg- ing technology and changes in customer requirements. Zebra faces significant competition in developing and selling its systems. Principal competitors have 20 | Zebra Technologies Corporation 2002 Annual Report 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 inability to protect intellectual property could • Restrictions on the export or import of technology of a third party’s patent or other intellectual property harm the Company’s reputation, and its competitive may reduce or eliminate the ability to sell in or right, the Company may be prevented from operating position may be materially damaged. purchase from certain markets. its business as planned, and may be required to pay Zebra’s intellectual property is valuable and provides the Company with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of the Company’s products or, without authorization, to obtain and use information which • Potentially limited intellectual property protection in certain countries, such as China, may limit recourse against infringing products or cause the Company to refrain from selling in certain geographic territories. • Staffing and managing international operations may be unusually difficult. damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. The Company depends on the ongoing service of its Zebra regards as trade secrets. • The Company may not be able to control senior management and ability to attract and retain international distributors working on its behalf. other key personnel. Zebra sells a significant portion of its products internationally and purchases important components from foreign suppliers. These circumstances create a number of risks. Economic factors, which are outside the Company’s control, could lead to deterioration in the quality of the Company’s accounts receivables. The Company sells a significant amount of its products The Company sells its products to customers in the Future success of the Company is substantially dependent on the continued service and continuing contributions of senior management and other key personnel. The loss of the service of any of executive officer or other key employees could adversely affect to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks United States and several other countries around the business. The Company neither has long-term world. Sales are typically made on unsecured credit employment agreements with key personnel, nor terms, which are generally consistent with the prevailing maintains key man life insurance policies on any of associated with sales and purchases outside the business practices in a given country. A deterioration its key employees. United States include: • Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries. • Foreign governments may impose burdensome tariffs, quotas and taxes or other trade barriers. of economic or political conditions in a country could impair Zebra’s ability to collect on receivables in the affected country. Infringement on the proprietary rights of others could The ability to attract, retain and motivate highly skilled employees is important to Zebra’s long-term success. Competition for personnel in the Company’s industry is intense, and the Company may be unable put the company at a competitive disadvantage, and any to retain key employees or attract, assimilate or related litigation could be time consuming and costly. retain other highly qualified employees in the future. • Political and economic instability may reduce demand Third parties may claim that Zebra violated their for our products, or put our foreign assets at risk. intellectual property rights. To the extent of a violation Zebra Technologies Corporation 2002 Annual Report | 21 Continued terrorist attacks or war could lead to further economic instability and adversely affect the Quantitative and Qualitative Disclosure About Market Risk Company’s stock price, operations, and profitability. Interest Rate Risk Foreign Exchange Risk The Company conducts business in approximately 100 countries throughout the world and, therefore, The terrorist attacks that occurred in the United The Company is exposed to the impact of changes in is exposed to risk based on movements in foreign States on September 11, 2001 caused periodic major interest rates because of its large investment portfolio. exchange rates. Currency exposures are related to the instability in the U.S. and other financial markets. As stated in the Company’s written investment policy, U.S. dollar/U.K. pound sterling, U.S. dollar/euro, and Possible further acts of terrorism and current and the Company’s investment portfolio is viewed as a the U.K. pound sterling/euro exchange rates arising future war risks could have a similar impact. The strategic resource that will be managed to achieve from invoicing European customers in pounds sterling United States continues to take military action above market rates of return in exchange for accepting and euros from the Company’s U.K. office. The U.S. against terrorism and has made strong overtures of a prudent amount of incremental risk, which includes dollar/Japanese yen exchange rate arises from invoicing going to war with Iraq. Terrorist attacks and potential the risk of interest rate movements. Risk tolerance is customers in Japanese yen. The yen foreign currency war in the Middle East may lead to additional armed constrained by an overriding objective to preserve exposure averages approximately $125,000. There is hostilities or to further acts of terrorism and civil capital across each quarterly reporting cycle. no foreign exchange risk associated with the Company’s disturbance in the United States or elsewhere, which may further contribute to economic instability. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect the Company’s facilities and operations or those of its customers or suppliers. The Company mitigates interest rate risk with an investment portfolio. investment policy that requires the use of outside The Company manages its foreign exchange exposure professional investment managers, investment liquidity through a policy of selective hedging. This policy and broad diversification across investment strategies, involves selling forward up to 120 days projected and which limits the types of investments that may be remittances in euros from the Company’s U.K. sub- made. Moreover, the policy requires due diligence of sidiary. Currency swaps that are net settled every each investment manager both before employment month mitigate the U.S. dollar to U.K. pound sterling Taxing authority challenges may lead to tax payments and on an ongoing basis. exceeding current reserves. The following table sets forth the impact of a 1% move- The Company operates in multiple tax jurisdictions in ment in interest rates on the value of the Company’s the United States and worldwide, and uses strategies investment portfolio as of December 31, 2002. to minimize its tax exposure. Local tax authorities may challenge these tax positions from time to time. Effect on Pretax Income Effect on Diluted EPS (after tax) Adverse outcomes in these situations may exceed the Interest rate sensitive instruments Company’s reserves for tax payments and may increase the Company’s effective tax rate. +1% movement -1% movement $(3,428,059) $(0.07) $ 3,428,059 $ 0.07 net exposure. This policy mitigates, but does not eliminate, the impact of exchange movements on the value of future cash flows. Thus, adverse movements in either the pound or the euro in relation to the dollar can directly affect the Company’s financial results. The corporate treasury department executes all foreign exchange contracts with major financial institutions 22 | Zebra Technologies Corporation 2002 Annual Report only. Under no circumstances does the Company The Company currently employs three investment enter into any type of foreign exchange contract for managers, two of which manage portfolios of investment trading or speculative purposes. funds (i.e. fund of funds). These investment funds use The following table sets forth the impact of a 1% movement in the dollar/pound and dollar/euro rates measured as if the Company did not engage in the selective hedging practices described above. It is based on the dollar/euro and dollar/pound exchange rates and euro and pound denominated assets and liabilities as of December 31, 2002. Foreign exchange Dollar/pound Dollar/euro Effect on Pretax Income Effect on Diluted EPS (after tax) $ 96,582 $273,000 $0.00 $0.01 a variety of investment strategies, some of which involve the use of equity securities. Each investment manager’s portfolio is designed to be market neutral, although an individual fund within a portfolio may be exposed to market risk. By policy, management limits the amount of the Company’s investments in alternative investment strategies to a maximum of 20% of the total investment portfolio, with no single investment exceeding $10,000,000. The Company utilizes a “Value-at-Risk” (VaR) model to determine the maximum potential one-day loss in the fair value of its interest rate, foreign exchange and equity price sensitive instruments. Equity Price Risk The following table sets forth the impact of a 1% From time to time, the Company has taken direct change in the value of all equity positions held by the equity positions in companies. These investments Company’s investment managers. relate to potential acquisitions and other strategic business opportunities. To the extent that it has a direct Effect on Pretax Income Effect on Diluted EPS (after tax) investment in the equity securities of another company, Equity price sensitive instruments the Company is exposed to the risks associated with such investments. +1% movement -1% movement $ 183,112 $ 0.00 $(183,112) $(0.00) 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 Zebra Technologies Corporation 2002 Annual Report | 23 Balance Sheets Consolidated Balance Sheets (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 $1,236 in 2002 and $1,975 in 2001 Inventories Deferred income taxes Prepaid expenses Total current assets Property and equipment at cost, less accumulated depreciation and amortization Deferred income taxes Goodwill Other intangibles Other assets Total assets Liabilities and stockholders’ equity Current liabilities: Accounts payable Accrued liabilities Short-term note payable Current portion of obligation under capital lease Income taxes payable Total current liabilities Obligation under capital lease, less current portion Deferred rent Other long-term liability Total liabilities Stockholders’ 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, 27,660,466 and 26,018,743 shares issued, and 27,282,087 and 25,256,380 shares outstanding in 2002 and 2001, respectively Class B Common Stock, $.01 par value; 28,358,189 shares authorized, 3,886,050 and 5,527,773 shares issued and outstanding in 2002 and 2001, respectively Additional paid-in capital Treasure stock, at cost (378,379 shares and 762,363 shares, respectively) Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. 24 | Zebra Technologies Corporation 2002 Annual Report 2002 2001 $ 18,418 330,159 71,299 38,066 4,107 2,531 464,580 39,462 1,722 54,455 3,556 9,313 $ 26,328 223,021 67,160 39,923 4,295 3,611 364,338 40,742 902 32,735 26,693 14,146 $ 573,088 $479,556 $ 15,447 17,661 275 145 3,376 36,904 605 416 1,008 38,933 — 276 39 56,478 (16,760) 494,150 (28) 534,155 $ 573,088 $ 14,414 14,993 221 79 4,121 33,828 408 313 — 34,549 — 260 55 59,012 (35,482) 422,555 (1,393) 445,007 $479,556 Earnings Consolidated Statements of Earnings (Amounts in thousands, except per share data) Year Ended December 31, Net sales Cost of sales Gross profit Operating expenses: Selling and marketing Research and development General and administrative Amortization of intangible assets Acquired in-process technology Costs related to terminated acquisition Merger costs Total operating expenses Operating income Operating income (expense): Investment income Interest expense Other, net Total other income Income before income taxes Income taxes Net income 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 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 2002 2001 2000 $ 475,611 $ 450,008 $ 481,569 244,864 230,747 56,176 29,210 38,689 1,494 — 3,300 73 128,942 101,805 10,004 (319) (607) 9,078 110,883 39,288 240,115 209,893 49,688 28,184 32,491 5,233 — — 1,838 117,434 92,459 5,419 (231) (1,508) 3,680 96,139 34,610 249,141 232,428 48,306 26,746 33,594 4,046 5,953 — 5,113 123,758 108,670 11,345 (1,120) (6,984) 3,241 111,911 40,289 $ 71,595 $ 61,529 $ 71,622 $ $ 2.31 2.29 30,983 31,265 $ $ 2.01 1.99 30,645 30,881 $ $ 2.33 2.30 30,790 31,155 Zebra Technologies Corporation 2002 Annual Report | 25 Consolidated Statements of Comprehensive Income Income (Amounts in thousands) Year Ended December 31, Net income Other comprehensive income (loss): 2002 2001 2000 $ 71,595 $ 61,529 $ 71,622 Foreign currency translation adjustment 2,968 (977) (1,508) Unrealized holding gains (losses) on investments: Net change in unrealized holding gains (losses) for the period, net of income tax expense (benefit) of ($863) for 2002, $1,687 for 2001, and ($801) for 2000 Comprehensive income (1,603) 3,000 (1,425) $ 72,960 $ 63,552 $ 68,689 See accompanying notes to consolidated financial statements. 26 | Zebra Technologies Corporation 2002 Annual Report Stockholders’ Equity Consolidated Statements of Stockholders’ Equity (Dollars in thousands) Class A Common Stock Class B Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock 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 Accumulated Other Comprehensive Income Unrealized Cumulative Holding Gain (Loss) Translation Adjustment on Investments Total Balance at December 31, 1999 $ 249 $ 65 $ 60,072 $ 289,404 $ — $ — $ (483) $ 349,307 Issuance of 128,827 shares of Class A Common Stock upon exercise of stock options Conversion of 604,187 shares of Class B Common Stock to 604,187 shares of Class A Common Stock Repurchase of 1,170,500 shares of Class A Common Stock Reissuance of 111,747 treasury shares upon exercise of stock options and purchases under stock purchase plan Tax benefit resulting from exercise of options Gains on put options Net income Unrealized holding loss on investments (net of income taxes) Foreign currency translation adjustment Balance at December 31, 2000 Conversion of 408,228 shares of Class B Common Stock to 408,228 shares of Class A Common Stock Reissuance of 296,390 treasury shares upon exercise of stock options and purchases under stock purchase plan Tax benefit resulting from exercise of options Loss on put options Net income Unrealized holding gain on investments (net of income taxes) Foreign currency translation adjustment Balance at December 31, 2001 Conversion of 1,641,723 shares of Class B Common Stock to 1,641,723 shares of Class A Common Stock Reissuance of 383,984 treasury shares upon exercise of stock options and purchases under stock purchase plan Tax benefit resulting from exercise of options Net income Unrealized holding loss on investments (net of income taxes) Foreign currency translation adjustment 1 6 — — — — — — — 256 4 — — — — — — 260 16 — — — — — — (6) — — — — — — — 59 (4) — — — — — — 55 3,227 — — (1,952) 1,505 639 — — — — — — — — — 71,622 — — — — (55,505) 5,377 — — — — — 63,491 361,026 (50,128) — (5,751) 1,273 (1) — — — — — — — 61,529 — — — 14,646 — — — — — 59,012 422,555 (35,482) (16) — — — — — — (5,616) 3,082 — — — — — — 71,595 — — — 18,722 — — — — — — — — — — — (1,425) — (1,425) — — — — — 3,000 — 1,575 — — — — (1,603) — — — — — — — — — (1,508) (1,991) — — — — — — (977) 3,228 — (55,505) 3,425 1,505 639 71,622 (1,425) (1,508) 371,288 — 8,895 1,273 (1) 61,529 3,000 (977) (2,968) 445,007 — — — — — 2,968 — 13,106 3,082 71,595 (1,603) 2,968 Balance at December 31, 2002 $276 $39 $56,478 $494,150 $(16,760) $ (28) $ — $534,155 See accompanying notes to consolidated financial statements. Zebra Technologies Corporation 2002 Annual Report | 27 Cash Flows Consolidated Statements of Cash Flows (Amounts in thousands) Year Ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Tax benefit from exercise of options Acquired in-process technology Depreciation (appreciation) in market value of investments and marketable securities Write-down of long-term investment Deferred income taxes Changes in assets and liabilities, net of businesses 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 (used in) operating activities Cash flows from investing activities: Purchases of property and equipment Acquisition of Comtec Information Systems, net of cash acquired Net cash used in investing activities Cash flows from financing activities: Purchase of treasury stock Proceeds from exercise of stock options Proceeds from (cost of) put options 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 (decrease) 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 Supplemental disclosures of non-cash transactions: 12,259 3,082 — 1,360 193 (616) (1,629) 2,922 3,969 (939) 2,564 (896) 1,241 (108,498) (13,393) (8,481) — (8,481) — 13,106 — 43 (117) 13,032 932 (7,910) 26,328 $ 18,418 $ 319 33,840 2002 2001 2000 $ 71,595 $ 61,529 $ 71,622 15,691 1,273 — (1,209) 2,242 2,873 16,223 17,284 (7,895) (9,424) 3,083 (6,792) (1,928) (78,874) 14,076 (9,613) — (9,613) — 8,895 (1) 72 (103) 8,863 (774) 12,552 13,776 $ 26,328 $ 231 38,604 4 — 14,383 1,505 5,953 2,952 — (6,076) (7,106) (7,179) (542) (6,064) (810) 3,372 (305) 60,860 132,565 (8,947) (88,476) (97,423) (55,505) 6,653 639 (140) (322) (48,675) (1,508) (15,041) 28,817 $ 13,776 $ 1,120 44,736 6 — See accompanying notes to consolidated financial statements. Conversion of Class B Common Stock to Class A Common Stock Assets under capital lease obligation 16 333 28 | Zebra Technologies Corporation 2002 Annual Report NotesNotes to Consolidated Financial Statements 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 1 Description of Business securities are those securities that the Company has the ability and intent to hold Zebra Technologies Corporation and its wholly-owned subsidiaries (the Company) until maturity. All securities not included in trading or held-to-maturity are classified design, manufacture, sell and support a broad line of bar code label and receipt printers as available-for-sale. and card printers, self-adhesive labeling materials, card supplies, thermal transfer ribbons and bar code label design software. These products are used principally in automatic identification (auto ID), data collection and personal identification applications and are distributed world-wide through a network of resellers, distributors and end users representing a wide cross-section of industrial, service and government organizations. 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 stockholders’ equity until realized. Note 2 Summary of Significant Accounting Policies Principles of Consolidation. The accompanying financial statements have been Inventories. Inventories are stated at the lower of cost or market, and cost is determined prepared on a consolidated basis to include the accounts of the Company and its by the first-in, first-out (FIFO) method. wholly owned subsidiaries. All significant inter-company accounts, transactions, and unrealized profit have been eliminated in consolidation. Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization is computed primarily using the straight-line method over the estimated Use of Estimates. The preparation of consolidated financial statements in conformity useful lives of the various classes of property and equipment, which are 30 years for with accounting principles generally accepted in the United States requires management buildings and range from 3 to 10 years for other property. Property and equipment to make estimates and assumptions that affect the reported amounts of assets and held under capital leases is amortized using the straight-line method over the shorter liabilities and disclosure of contingent assets and liabilities at the date of the consoli- of the lease term or estimated useful life of the asset. dated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes.The Company accounts for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addition, tax consequences attributable to differences between the financial statement carrying the Company considers highly liquid short-term investments with original maturities amounts of existing assets and liabilities and their respective tax bases. Deferred tax of less than seven days to be cash equivalents. assets and liabilities are measured using enacted tax rates expected to apply to taxable Investments and Marketable Securities. Investments and marketable securities at December 31, 2002, consisted of U.S. government securities, state and municipal bonds, partnership interests and equity securities, which are held indirectly in 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. diversified funds actively managed by investment professionals. The Company Intangible Assets. Goodwill represents the unamortized excess of the cost of acquiring classifies its debt and marketable equity securities in one of three categories: a business over the fair values of the net assets received at the date of acquisition. trading, available-for-sale or held-to-maturity. Trading securities are bought and Goodwill is no longer being amortized as required by SFAS No. 142, Goodwill and held principally for the purpose of selling them in the near term. Held-to-maturity Other Intangible Assets. Zebra Technologies Corporation 2002 Annual Report | 29 Other intangible assets consist primarily of current technology. These assets are Stock-based Compensation. At December 31, 2002, the Company has three stock-based recorded at cost and amortized on a straight-line basis over 5 years. Accumulated compensation plans, which are described more fully in Note 16. The Company accounts amortization for these other intangible assets was $3,865,000 and $5,944,000 at for those plans under the recognition and measurement principles of APB Opinion No. December 31, 2002 and 2001, respectively. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock- Revenue Recognition. Revenue is recognized at the time of shipping and includes freight billed to customers. Research and Development Costs. Research and development costs are expensed as incurred. Advertising. Advertising costs are expensed as incurred. Advertising expenses for based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB No. 123, Accounting for Stock-based Compensation, to stock-based compensation. 2002 2001 2000 the years ended December 31, 2002, 2001 and 2000 totaled $3,965,000, $4,405,000 Net income, as reported $ 71,595 $61,529 $ 71,622 and $4,637,000, respectively. Warranty. The Company provides warranty coverage of up to one year on printers Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects against defects in material and workmanship. A provision for warranty expense is Pro forma net income recorded at the time of shipment and adjusted quarterly based on historical warranty Basic earnings per share: experience. The following is a summary of the Company’s accrued warranty obligation during the year ended December 31, 2002. Accrued warranty — beginning balance Add: warranty expense Deduct: warranty payments Accrued warranty — ending balance 2002 $ 1,021 3,080 2,426 $ 1,675 As reported Pro forma Diluted earnings per share: As reported Pro forma (5,102) $ 66,493 $ 2.31 2.15 $ 2.29 2.13 (3,558) $ 57,971 $ 2.01 1.89 $ 1.99 1.88 (4,009) $ 67,613 $ 2.33 2.20 $ 2.30 2.17 Deferred Compensation Plan. The Company has a deferred compensation plan that permits management and highly compensated employees to defer portions of their compensation and to select a method of investing these funds. The salaries that have Financial instruments. The reported amounts of the Company’s financial instruments, been deferred since the plan’s inception have been accrued and the only charges, which include investments and marketable securities, trade accounts receivable, other than additional deferred salaries, related to this plan are the unrealized gain/loss accounts payable, accrued liabilities, income taxes payable and short-term notes on the deferred amounts. payable, approximate their fair values because of the contractual maturities and short-term nature of these instruments. 30 | Zebra Technologies Corporation 2002 Annual Report 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 Foreign Currency Translation. The consolidated balance sheets of the Company’s Acquisition Costs. The Company periodically invests in potential acquisitions. Any foreign subsidiaries are translated into U.S. dollars using the year-end exchange external costs incurred are recorded as prepaid expenses until such time as the rate, and statement of earnings items are translated using the average exchange rate Company either completes the transaction or abandons the transaction. If the for the year. The resulting translation gains or losses are recorded in stockholders’ transaction is completed, the costs are treated as part of the cost of the acquisition. equity as a cumulative translation adjustment, which is a component of accumulated If the transaction is abandoned, the costs are expensed during the period in which it other comprehensive loss. Capitalized Software. The Company’s investment in software development consists primarily of enhancements to its existing E-commerce web-based application, which is abandoned. During 2002, operating expenses include $3,300,000 of costs related to such an abandonment. As of December 31, 2002, the balance sheet includes $35,000 in prepaid expenses related to acquisitions. will include the automation of current business activities. Specifically, the activities Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. The include the processing of customer orders; the acknowledgement of customer orders Company accounts for long-lived assets in accordance with the provisions of SFAS and delivery; and the financial invoicing for all of Zebra’s products and will aid in No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.The statement enabling the Company to create new business efficiencies. requires that long-lived assets and certain identifiable intangibles be reviewed for Costs associated with the planning and design phases of web-based development, including coding and testing activities necessary to establish technological feasibility of the functionality of the website, are charged to research and development as incurred. Once technological feasibility has been determined, costs incurred in the construction phase of software development including coding, testing, and product quality assurance are capitalized. impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at Funded Engineering Arrangement. The Company was part of an arrangement with a the lower of the carrying amount or fair value less costs to sell. third party, whereby the Company was reimbursed for certain engineering services performed on behalf of the third party. The arrangement had a term of three years. The Recently Issued Accounting Pronouncements. In June 2001, the FASB issued SFAS arrangement also provided that the Company would be the exclusive manufacturer No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses of the products resulting from the engineering agreement. The products would be financial accounting and reporting for obligations associated with the retirement of distributed under the third party’s brand name. During 2000 and 2001, the Company tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 incurred approximately $2,800,000 of reimbursable expenses under the agreement. must be applied starting with fiscal years beginning after June 15, 2002. Management As of December 31, 2002, the Company had an accounts receivable of approximately is currently evaluating the impact that the adoption of SFAS No. 143 will have on the $2,100,000 related to this arrangement. A provision of $481,000 has been established consolidated financial statements. to cover estimated collection costs, which is included in accrued liabilities. The arrangement was terminated in 2002. Zebra Technologies Corporation 2002 Annual Report | 31 In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, At the time of acquisition, the purchase price allocation for Comtec was as follows: and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordi- nary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 is effective beginning January 1, 2003. Management is currently evaluating the impact that the adoption of Net tangible assets Acquired in-process technology Intangible assets Goodwill Purchase price Amount (in thousands) $15,235 5,953 31,786 35,502 $88,476 SFAS No. 145 will have on the Company’s consolidated financial statements. The following summary presents information concerning the purchase price allocation for the Comtec acquisition after the Company’s implementation of SFAS No. 142, Goodwill and Other Intangible Assets, during the first quarter of 2002: In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated Net tangible assets Acquired in-process technology with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This standard will be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 Current technology Goodwill Purchase price will have a significant impact on the Company’s consolidated financial statements. Amount (in thousands) $15,235 5,953 6,494 60,794 $88,476 Note 3 Business Combinations Comtec Information Systems, Inc. On April 3, 2000, the Company acquired Comtec Information Systems, Inc. (Comtec), by acquiring all of the outstanding capital stock of Comtec for approximately $88,476,000 in cash. Located in Warwick, Rhode Island, Comtec had been a privately held company. Comtec designs, manufactures and sup- ports mobile printing systems. The acquisition was accounted for under the purchase method. At the time of the acquisition, the purchase price was allocated to identifiable tangible assets and intangible assets acquired and liabilities assumed based on their Prior to the implementation of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected period of 20 years and other intangible assets were amortized over periods up to 15 years. These amortization periods are reflective of the expense amounts recorded in the Company’s 2001 and 2000 income statements. Subsequent to the implementation of SFAS No. 142, the amount allocated to current technology related to the Comtec acquisition is amortized over a period of five years and is included as a component of other intangible assets on the balance sheet as of December 31, 2002. See Note 10 for a further discussion of the Company’s implementation of SFAS No. 142. estimated fair values. Estimated amounts allocated to acquired in-process technology Acquisition Termination Costs and Sale of Investment. In the first quarter of 2002, the were expensed at the time of the acquisition. The consolidated statements of earnings Company terminated the acquisition agreement and tender offer in which the Company reflect the results of operations of Comtec since the effective date of the acquisition. would acquire all outstanding shares of common stock (including associated rights 32 | Zebra Technologies Corporation 2002 Annual Report 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 to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In Note 5 Investments and Marketable Securities connection with the termination, the Company recorded $3,300,000 in expenses for The amortized cost, gross unrealized holding gains, gross unrealized holding losses capitalized acquisition costs and other acquisition costs that would otherwise have and aggregate fair value of investment securities at December 31, 2002, were as been capitalized. Also during the quarter ended March 30, 2002, the Company sold follows (in thousands): its investment in common stock of Fargo and realized a pre-tax gain of $1,953,000, which is included in investment income. Amortized Cost Gross Unrealized Gross Unrealized Holding Gains Holding Losses Fair Value Note 4 Earnings Per Share For the years ended December 31, 2002, 2001, and 2000, earnings per share were computed as follows (in thousands, except per-share amounts): Year Ended December 31,2000 2002 2001 2000 Basic earnings per share: Net income Weighted average common shares outstanding Per share amount Diluted earnings per share: $71,595 $61,529 $71,622 30,983 $ 2.31 30,645 $ 2.01 30,790 $ 2.33 Net income $71,595 $61,529 $71,622 Available for sale (included in other assets): Equity securities $ 365 $ — $ (42) $ 323 Trading securities: U.S. government and agency securities 96,195 State and municipal bonds 174,508 Corporate bonds Partnership interests Other 34,316 15,676 7,607 328,302 207 275 149 3,139 28 3,798 (152) (1,565) (196) (12) (16) 96,250 173,218 34,269 18,803 7,619 (1,941) 330,159 $ 328,667 $3,798 $ (1,983) $ 330,482 The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at December 31, 2001, were as Weighted average common shares outstanding Add: Effect of dilutive securities – stock options Diluted weighted average and equivalent shares outstanding Per share amount 282 236 365 31,265 $ 2.29 30,881 $ 1.99 31,155 $ 2.30 30,983 30,645 30,790 follows (in thousands): 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. For the years ended December 31, the shares amounted to 194,875 in 2002, 436,325 in 2001, and 267,500 in 2000. Amortized Cost Gross Unrealized Gross Unrealized Holding Gains Holding Losses Fair Value Available for sale (included in other assets): Equity securities $ 1,804 $2,462 $ — $ 4,266 Trading securities: U.S. government and agency securities State and municipal bonds Corporate bonds Partnership interests Other 118,825 76,576 5,077 17,326 2,000 219,804 42 286 89 3,104 — 3,521 (53) (222) — (29) — (304) 118,814 76,640 5,166 20,401 2,000 223,021 $ 221,608 $5,983 $ (304) $ 227,287 Zebra Technologies Corporation 2002 Annual Report | 33 The Company is a limited partner in two non-registered partnerships. The partnerships Note 6 Related-Party Transactions seek to provide returns to its partners by making strategic investments in a diversified Unique Building Corporation (Unique), an entity controlled by certain officers and portfolio of investment funds. Zebra’s investment as a limited partner allows it to stockholders of the Company, leases a facility and equipment to the Company under have liability protection limited to the amount of its investments in the funds. a lease described in Note 12. Management believes that the lease payments are The contractual maturities of debt securities at December 31, 2002, were as follows (in thousands): Due within one year Due after one year through five years Due after five years Fair Value $142,829 138,508 30,019 $ 311,356 substantially consistent with amounts that could be negotiated with third parties on an arm’s-length basis and represent conditions at the time of the negotiations. Lease payments related to the leases, and recorded as a component of all functional areas, were included in the consolidated financial statements as follows (in thousands): 2002 2001 2000 Unique Operating Lease Payments $2,085 2,085 2,085 Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands): Future minimum lease payments related to this lease as of December 31, 2002, are Proceeds Realized gains (losses) 2002 2001 $3,499 $1,760 $ — $(2,242) 2000 $ — $ — The realized gain of $1,760,000 in 2002 includes a gain on the sale of an available- for-sale stock offset by an additional write-down of an available-for-sale security whose decline in value was determined to be other than temporary. The realized loss of $2,242,000 in 2001 is the result of a write-down of an available-for-sale security whose decline in value was determined to be other than temporary. as follows (in thousands): 2003 2004 2005 2006 2007 Thereafter Total minimum lease payments Operating Leases $ 2,195 2,284 2,336 2,336 2,336 17,341 $28,828 Note 7 Inventories The components of inventories, net of allowances, are as follows (in thousands): December 31, Raw material Work in process Finished goods Total inventories 2002 2001 $ 21,404 1,104 15,558 $ 25,410 1,360 13,153 $ 38,066 $ 39,923 34 | Zebra Technologies Corporation 2002 Annual Report 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 8 Property and Equipment The Company does not provide for deferred income taxes on undistributed earnings Property and equipment, which includes assets under capital leases, is comprised of of foreign subsidiaries, which totaled approximately $11,600,000 at December 31, the following (in thousands): December 31, Buildings Land Machinery, equipment and tooling Machinery and equipment under capital leases Furniture and office equipment Computers and software Automobiles Leasehold improvements Projects in progress Less accumulated depreciation and amortization 2002 2001 $ 11,499 $ 12,029 1,910 38,941 2,757 6,164 33,899 153 4,012 1,274 100,609 (61,147) 1,910 35,507 1,670 5,681 28,951 183 2,997 2,705 91,633 (50,891) Net property and equipment $ 39,462 $ 40,742 2002 and $8,700,000 at December 31, 2001. Management expects such earnings to be permanently reinvested in these companies. Should such earnings be remitted to the Company, foreign tax credits would be available to substantially offset the U.S. income taxes due upon repatriation. The provision for income taxes consists of the following (in thousands): Current: Federal State Foreign Deferred: Federal State Foreign 2002 2001 2000 $ 30,660 $ 25,998 $ 35,362 5,247 3,254 296 40 (209) 5,319 2,107 1,132 152 (98) 6,441 3,761 (4,922) (472) 119 Amortization of capitalized software was $2,042,000 in 2002, $1,834,000 in 2001, and Total $ 39,288 $ 34,610 $ 40,289 $1,797,000 in 2000. Note 9 Income Taxes The geographical sources of earnings before income taxes were as follows (in thousands): United States Outside United States Total 2002 2001 2000 $ 101,454 9,429 $ 90,272 5,867 $ 101,532 10,379 $ 110,883 $ 96,139 $ 111,911 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): 2002 2001 2000 Provision computed at statutory rate $ 38,809 $ 33,649 $ 39,169 State income tax (net of Federal tax benefit) Tax-exempt interest and dividend income Tax benefit of exempt foreign trade income Other 3,634 (2,422) (1,575) 842 3,556 (1,524) (1,438) 367 3,880 (1,588) (1,035) (137) Provision for income taxes $ 39,288 $ 34,610 $ 40,289 Zebra Technologies Corporation 2002 Annual Report | 35 Deferred income taxes reflect the impact of temporary differences between the Tax effects of temporary differences that give rise to deferred tax assets and liabilities amounts of assets and liabilities for financial reporting purposes and such amounts are as follows (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. The Company is litigating a dispute over a 1998 tax assessment in the amount of approximately $2,000,000, including penalties and interest, with the Illinois Department of Revenue for the years 1993 through 1995. The case was filed by the Company in the District Court of Illinois and tried during November 2000. The decision from the court was unfavorable to the Company but has been appealed. The Company does not expect to know the result of the appeal until some time in the second half of 2003. The Illinois Department of Revenue has also examined the Company’s tax returns for the years 1996 and 1997 and issued an assessment for $3,200,000. The issues involved in this audit are identical to those involved in the 1993 through 1995 returns December 31, Deferred tax assets: Deferred rent — building Capital equipment lease Accrued vacation Inventory items Allowance for doubtful accounts Other accruals Acquisition related items Unrealized loss on securities Total deferred tax assets Deferred tax liabilities: being litigated. The Company has paid this assessment under protest. The Company Unrealized gain on securities believes that the ultimate outcome of this assessment will be consistent with the 1993 to 1995 litigation under appeal. In addition, the Illinois Department of Revenue has not yet examined the Company’s income tax returns for 1998 through 2001, but has a right to do so. Management believes that if such an audit occurred, the Illinois Department of Revenue would raise issues similar to those raised during the 1993 through 1997 audits. Depreciation Total deferred tax liabilities Net deferred tax asset 2002 2001 $ 165 $ 124 114 647 2,008 19 3,424 2,114 189 8,680 — (2,851) (2,851) 11 576 2,193 259 3,102 2,321 — 8,586 (1,717) (1,672) (3,389) $ 5,829 $ 5,197 Note 10 Goodwill and Other Intangible Asset Data During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and The Company recorded tax reserves equal to management’s estimate of the likely Other Intangible Assets, which replaces the requirements to amortize intangible outcome of the Illinois Department of Revenue litigation for 1993 to 1995, the audit assets with indefinite lives and goodwill with a requirement for an annual impairment assessment for 1996 and 1997, and the unaudited 1998 through 2001 returns. If the test. SFAS No. 142 also establishes requirements for identifiable intangible assets. Company loses all issues on appeal, the Company would record an additional one-time As a result, during the first quarter Zebra reclassified $21,720,000 of intangible assets tax expense of $1,300,000. If the Company wins all issues on appeal, the Company into goodwill, as such assets, which included assembled workforce and customer would record a reduction to tax expense of $4,400,000. lists, did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142. 36 | Zebra Technologies Corporation 2002 Annual Report 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 Intangible asset data are as follows (in thousands): Note 11 401(k) Savings and Profit Sharing Plans Amortized intangible assets Current technology Unamortized intangible assets Goodwill Aggregate amortization expense For the year ended December 31, 2002 Estimated amortization expense For the year ended December 31, 2003 For the year ended December 31, 2004 For the year ended December 31, 2005 As of December 31, 2002 Gross Carrying Amount Accumulated Amortization The Company has a Retirement Savings and Investment Plan (the 401(k) Plan), which 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. $ 7,421 $ (3,865) The Company matches each participant’s contribution of up to 6% of gross eligible $ 54,455 $ 1,494 1,494 1,494 568 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 1.9% of eligible earnings for 2002, 1.9% for 2001 and 3.1% for 2000. 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): Operating income for 2001 and 2000 includes $3,835,000 and $2,876,000 respectively, of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142. If adjusted for the impact of the implementation of SFAS No. 142 (i.e., if goodwill had not been amortized), net income, basic earnings per share, and diluted earnings per share would have been 401(k) Profit sharing Total 2002 2001 2000 $ 1,452 1,146 $ 2,598 $ 1,374 1,178 $ 2,552 $ 1,287 877 $ 2,164 as follows: Years Ended December 31, Net income Basic earnings per share Diluted earning per share 2001 2000 $ 63,983 $ $ 2.09 2.07 $ 73,463 $ $ 2.39 2.36 Note 12 Commitments and Contingencies Leases. In September 1989, the Company entered into a lease agreement for its Vernon Hills facility and certain machinery, equipment, furniture and fixtures with Unique Building Corporation. The facility portion of the lease is the only remaining portion in existence as of December 31, 2002, and is treated as an operating lease. An amendment to the lease dated July 1997 added 59,150 square feet and extended the term of the existing lease through June 30, 2014. The lease agreement includes a modification to the base monthly rental, which goes into effect if the prescribed rent payment is less than the aggregate principal and interest payments required to be made by Unique under an Industrial Revenue Bond (IRB). Zebra Technologies Corporation 2002 Annual Report | 37 Minimum future obligations under noncancelable operating leases and future minimum capital lease payments as of December 31, 2002, are as follows (in thousands): 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. 2003 2004 2005 2006 2007 Thereafter 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 The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. The notional principal amounts of outstanding $ 184 $ 4,198 forward contracts were €26,000,000 and £3,293,000 at December 31, 2002, and 3,839 3,331 3,096 3,031 21,352 $ 38,847 169 169 228 28 97 $ 875 (125) 750 (145) €16,391,000 and £6,019,000 at December 31, 2001. The realized losses, included in other, net expense, were $1,432,000 in 2002 and $661,000 in 2001. Legal proceedings. On January 31, 2003, a Writ of Summons was filed in the Nantes Commercial Court, Nantes, France, by Printherm, a French corporation, and several of its shareholders (collectively, “Printherm”), against Zebra Technologies France, a French corporation and wholly-owned subsidiary of the Company. Printherm seeks damages in the amount €15,004,000 and additional unspecified damages in connection Long-term portion of obligation under capital lease $ 605 with Zebra France’s termination of negotiations in December 2000 with respect to Rent expense for operating leases charged to operations for the years ended December Company believes that Printherm’s claims are without merit, and the Company will 31, 2002, 2001, and 2000 was $5,699,000, $4,917,000, and $4,833,000, respectively. vigorously defend the action. the proposed acquisition by the Company of the capital stock of Printherm. The 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, 2002, is $700,000, which is the limit of the Company’s guaranty throughout the term of the IRB. Derivative Instruments. In the normal course of business, portions of the Company’s operations are subject to fluctuations in currency values. The Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments. Note 13 Segment Data and Export Sales The Company operates in one industry segment. Information regarding the Company’s operations by geographic area for the years ended December 31, 2002, 2001, and 2000 is contained in the following table. These amounts (in thousands) are reported in the geographic area where the final sale originates. United States United Kingdom Other Total 2002 2001 2000 Net sales Long-lived assets Net sales Long-lived assets Net sales Long-lived assets $ 341,941 90,873 $325,003 93,345 $ 357,412 97,637 $ 133,670 5,707 $ 111,577 5,755 $ 100,988 6,526 $ — 893 $13,428 1,070 $23,169 1,234 $ 475,611 97,473 $450,008 100,170 $ 481,569 105,397 38 | Zebra Technologies Corporation 2002 Annual Report 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 14 Stockholders’ Equity 2002 to reflect its liability under this plan. To fund this plan, the Company purchases Holders of Class A Common Stock are entitled to one vote per share. Holders of corporate-owned whole-life insurance contracts on the related employees, of which the Class B Common Stock are entitled to 10 votes per share. Holders of Class A and Company is the beneficiary. Investments and marketable securities include the cash Class B Common Stock vote together as a single class on all actions submitted to a surrender value of these policies aggregating $914,000 as of December 31, 2002. vote of stockholders, 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 Note 16 Stock Option and Purchase Plans such outstanding shares of Class B Common Stock will automatically convert into an As of December 31, 2002, the Company had three active stock option and stock equal number of shares of Class A Common Stock. purchase plans, described below. Class A Common Stock has no conversion rights. A holder of Class B Common Stock may convert the Class B Common Stock into Class A Common Stock, in whole or in part, at any time and from time to time. Shares of Class B Common Stock convert into shares of Class A Common stock on a share-for-share basis. Holders of Class A and Class B Common Stock are entitled to receive cash dividends equally on a per-share basis, if and when the Company’s Board of Directors declares such dividends. In the case of any stock dividend paid, holders of Class A Common Stock are entitled to receive the same percentage dividend (payable in shares of Class A Common Stock) as the holders of Class B Common Stock receive (payable in shares of Class B Common Stock). Holders of Class A and Class B Common Stock share with each other on a ratable basis as a single class in the net assets of the Company in the event of liquidation. Note 15 Deferred Compensation Plan The Board of Directors adopted the 1997 Stock Option Plan, effective February 11, 1997, and 4,250,000 shares of Class A Common Stock were reserved for issuance under the plan. The 1997 Stock Option Plan is a flexible plan that provides the committee that administers the Plan broad discretion to fashion the terms of the awards to provide eligi- ble participants with stock-based incentives, including: (i) nonqualified and incentive stock options for the purchase of the Company’s Class A Common Stock and (ii) dividend equivalents. The persons eligible to participate in the 1997 Stock Option Plan are direc- tors, officers, and employees of the Company or any subsidiary of the Company who, in the opinion of the committee administering the plan, are in a position to make contri- butions to the growth, management, protection and success of the Company or its subsidiaries. As of December 31, 2002, 1,377,587 shares were available under the plan. The options granted under the 1997 Stock Option Plan have an exercise price equal to the closing market price of the Company’s stock on the date of grant. The options generally vest over two- to five-year periods and have a legal life of ten years from the date of grant. The Board of Directors administers the plan. Beginning January 1, 2002, the Company offered a deferred compensation plan that The Company’s Board of Directors adopted the 1997 Director Plan, effective February 11, permits management and highly compensated employees to defer portions of their 1997. The 1997 Director Plan provides for the issuance of options to purchase up to compensation and to select a method of investing these funds. The salaries that have 77,000 shares of Class A Common Stock, which shares are reserved and available for been deferred since the plan’s inception have been accrued and the only expense, other purchase upon the exercise of options granted under the 1997 Director Plan. Only than salaries, related to this plan is the unrealized gain/loss on the deferred amounts. directors who are not employees or officers of the Company are eligible to participate Investment income includes an unrealized loss of $16,000 for 2002 related to this plan. in the 1997 Director Plan. Under the 1997 Director Plan, each non-employee director The Company has included $1,008,000 in other long-term liabilities at December 31, was granted, on the effective date of the plan, an option to purchase 15,000 shares Zebra Technologies Corporation 2002 Annual Report | 39 of Class A Common Stock, and each non-employee director subsequently elected to the Board will be granted an option to purchase 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 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). A total of 52,500 shares were issued under this plan, which was terminated February 1, 2002. At December 31, 2002, 9,000 options issued under the 1997 Director Plan remained outstanding and unexercised. The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan and reserved 500,000 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 10% of their cash compensation through regular payroll deductions to purchase shares of Class A Common Stock from the Company over a period not to exceed 12 months at a purchase price per share equal to the lesser of: (1) 85% of the fair market value of the shares as of the date of the grant, or (2) 85% of the fair market value of the shares as of the date of purchase. As of December 31, 2002, 68,905 shares have been purchased under the plan. was granted, on the effective date of the plan, an option to purchase 20,000 shares of Class A Common Stock, and each non-employee director subsequently elected to the Board will be granted an option to purchase shares of Class A Common Stock on the date of his or her election. Options granted under the 2002 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, 2002, 100,000 shares were available under the plan. Unless otherwise provided in an option agreement, options granted under the 2002 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, (b) the first anniversary of the termination of the non-employee director’s directorship for any reason other than those listed in clause (c) below, or (c) the termi- nation of the non-employee director’s directorship by the Company’s stockholders for cause, or resignation for cause, in each case as defined in the option agreement. For purposes of calculating the compensation cost consistent with SFAS No. 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 2002, 2001, and 2000, respectively: expected dividend yield of 0% for each period; expected volatility of 53%, 59%, and 58%; risk free interest rate of 4.55%, 4.38%, and 5.05%; and expected weighted-average life of six years, five years, and five years. The fair value of options granted was $35,234,000 in 2002, $11,930,000 in 2001 and $24,290,000 in 2000. The fair value of the employees’ purchase rights pursuant to the Stock Purchase Plan The Company’s Board of Directors adopted the 2002 Director Plan, effective February 1, are estimated using the Black-Scholes option-pricing model with the following 2002. The 2002 Director Plan provides for the issuance of options to purchase up to weighted-average assumptions used for purchase rights granted in 2002, 2001, and 160,000 shares of Class A Common Stock, which shares are reserved and available for 2000, respectively: fair market value of $51.14, $38.18, and $44.62; option price of purchase upon the exercise of options granted under the 2002 Director Plan. Only $43.47, $32.45, and $37.92; expected dividend yield of 0% for each period; expected directors who are not employees or officers of the Company are eligible to participate volatility of 40%, 54%, and 71%; risk-free interest rate of 1.32%, 2.17%, and 5.85%; in the 2002 Director Plan. Under the 2002 Director Plan, each non-employee director and expected lives of three months to one year. 40 | Zebra Technologies Corporation 2002 Annual Report 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, 2002, 2001, and 2000 was as follows: 2002 2001 2000 Fixed Options Shares Weighted-Average Exercise Price Shares Weighted-Average Exercise Price Outstanding at beginning of year 1,413,385 $38.38 1,487,277 $36.08 Granted Exercised Canceled Outstanding at end of year Options exercisable at end of year 718,750 (342,001) (124,739) 1,665,395 385,201 49.02 32.09 48.45 43.51 34.87 287,500 (247,838) (113,554) 1,413,385 477,385 41.49 28.38 38.02 38.38 31.22 Shares 1,390,588 440,000 (195,369) (147,942) 1,487,277 417,570 Weighted-Average Exercise Price $27.88 55.29 23.76 31.57 36.10 27.82 The following table summarizes information about fixed stock options outstanding at December 31, 2002: Range of Exercise Prices $ 4.31 $17.38 – $26.56 $29.25 – $40.88 $43.13 – $54.69 $60.63 Options Outstanding Options Exercisable Number of Shares Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price 4,500 350,198 298,959 816,863 194,875 1,665,395 1.52 years 5.63 years 7.46 years 8.82 years 7.13 years $ 4.31 $26.02 $39.39 $48.64 $60.63 4,500 214,567 73,510 30,397 62,227 385,201 $ 4.31 $ 25.68 $ 36.47 $ 47.68 $ 60.63 Zebra Technologies Corporation 2002 Annual Report | 41 Note 17 Quarterly Results of Operations (unaudited) Note 18 Major Customers (Amounts in thousands, except per share data) First Quarter(1)(2) Second Quarter Third Quarter Fourth Quarter accounted for 10% or more of net sales in 2001 or 2000. Sales to ScanSource, Inc., accounted for 13.6% of net sales in 2002. No customer 2002 Net sales Gross profit Operating expenses Operating income Net income $ 110,185 $ 115,951 $ 123,151 $ 126,324 52,012 32,474 19,538 14,940 55,749 30,783 24,966 16,460 60,422 31,538 28,884 19,867 62,564 34,147 28,417 20,328 Basic earnings per share Diluted earnings per share $ $ 0.49 0.48 $ $ 0.53 0.53 $ $ 0.64 0.64 $ $ 0.65 0.65 (Amounts in thousands, except per share data) First Quarter(2) Second Quarter(2) Third Quarter(2) Fourth Quarter(2) 2001 Net sales Gross profit Operating expenses Operating income Net income $ 115,144 $ 112,935 $ 110,318 $ 111,611 54,022 29,339 24,683 16,930 52,334 31,069 21,265 14,471 52,037 28,317 23,720 14,882 51,500 28,709 22,791 15,246 Basic earnings per share Diluted earnings per share $ $ 0.55 0.55 $ $ 0.47 0.47 $ $ 0.49 0.48 $ $ 0.50 0.49 (1) First quarter 2002 includes $3,300 in operating expenses related to the terminated acquisition of Fargo Electronics, Inc. (2) Reflects pretax charges for merger costs and acquired in-process technology relating to the Company’s merger with Eltron International, Inc. and acquisition of Comtec Information Systems, Inc. as follows: First Quarter Second Quarter Third Quarter Fourth Quarter 2002 2001 $ 73 $832 $ 0 $532 $ 0 $305 $ 0 $169 42 | Zebra Technologies Corporation 2002 Annual Report Auditors’ Report Independent Auditors’ Report The Board of Directors and Stockholders 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 auditing standards generally accepted Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related in the United States of America. Those standards require that we plan and perform consolidated statements of earnings, comprehensive income, stockholders’ equity, the audit to obtain reasonable assurance about whether the financial statements are and cash flows for each of the years in the three-year period ended December 31, free of material misstatement. An audit includes examining, on a test basis, evidence 2002. In connection with our audits of the consolidated financial statements, we also supporting the amounts and disclosures in the financial statements. An audit also have audited the consolidated financial statement schedule of valuation and qualifying includes assessing the accounting principles used and significant estimates made by accounts. These consolidated financial statements and the consolidated financial management, as well as evaluating the overall financial statement presentation. We statement schedule are the responsibility of the Company’s management. Our believe that our audits provide a reasonable basis for our opinion. responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Chicago, Illinois February 11, 2003 Zebra Technologies Corporation 2002 Annual Report | 43 Stockholder Stockholder Information Corporate Headquarters Zebra Technologies Corporation 333 Corporate Woods Parkway Vernon Hills, Illinois 60061-3109 U.S.A. Phone: 847-634-6700 Fax: 847-913-8766 Annual Meeting Zebra’s Annual Meeting of Stockholders will be held on May 20, 2003, 10:30 A.M. Equal Employment Opportunity/Affirmative Action It is the policy of Zebra Technologies Corporation to provide equal opportunity and affirmative action in all areas of its employment practices without regard to race, religion, national origin, sex, age, ancestry, citizenship, disability, veteran status, marital status, sexual orientation or any other reason prohibited by law. 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 (Central Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue, quarter in 2002 and 2001, as reported by the Nasdaq Stock Market. No market exists Northbrook, Illinois. Independent Auditors KPMG LLP Chicago, Illinois Corporate Counsel Katten Muchin Zavis Rosenman Chicago, Illinois Transfer Agent and Registrar Mellon Investor Services 85 Challenger Road Ridgefield, New Jersey 07660 Phone: 877-870-2368 www.mellon-investor.com Investor Relations For corporate or product information, please contact the Corporate Headquarters. Form 10-K Report You may receive a free copy of the Zebra Technologies Corporation Form 10-K Report filed with the Securities and Exchange Commission by contacting the Investor Relations Department at the Corporate Headquarters. Web Site Investors are invited to learn more about Zebra Technologies Corporation by accessing the Company’s web site at www.zebra.com 44 | Zebra Technologies Corporation 2002 Annual Report 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. 2002 First Quarter Second Quarter Third Quarter Fourth Quarter 2001 First Quarter Second Quarter Third Quarter Fourth Quarter High $58.99 60.15 57.94 68.60 High $57.00 52.06 49.95 56.50 Low $47.27 47.37 45.12 48.50 Low $35.50 34.13 35.15 36.00 Source: The Nasdaq Stock Market At February 25, 2003, the last reported price for the Class A Common Stock was $62.01 per share, and there were 412 registered stockholders of record for the Company’s Class A Common Stock and 31 registered stockholders of record for the Company’s Class B Common Stock. Dividend Policy Since the Company’s initial public offering in 1991, the Company has not declared any cash dividends or distributions on its capital stock. The Company intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends in the foreseeable future. Number of Employees The Company had approximately 2,000 associates as of February 28, 2003. Board of Directors Officers Edward Kaplan Chairman and Chief Executive Officer Zebra Technologies Corporation Gerhard Cless Executive Vice President and Secretary Zebra Technologies Corporation Christopher Knowles (1)(2)(3) Retired Chief Executive Officer Insurance Auto Auctions, Inc. John Paxton President, Bar Code Business Unit Zebra Technologies Corporation Edward Kaplan Chairman and Chief Executive Officer Gerhard Cless Executive Vice President and Secretary Veraje Anjargolian Vice President, General Manager Card Printer Business Unit Michael Edicola Vice President, Human Resources Noel Elfant Vice President and General Counsel David Riley (1)(2)(3) Retired President and Chief Executive Officer The Middleby Corporation John Kindsvater Senior Vice President, Corporate Development Michael Smith (1)(3) Chairman and Chief Executive Officer FireVision, L.L.C. (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating Committee Todd Naughton Vice President, Controller John Paxton President, Bar Code Business Unit 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.zebra.com 

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