Trimble
Annual Report 2003

Plain-text annual report

TRIMBLE LOCATIONS WORLDWIDE Corporate Headquarters Trimble Navigation Limited 749 North Mary Avenue Sunnyvale, CA 94085 Operations United States Trimble Chandler 7408 West Detroit Street Suite 100 Chandler, Arizona 85226 Trimble Rockies 7403 Church Ranch Boulevard Suite 100 Westminster, Colorado 80021 Trimble Dayton 5475 Kellenburger Road Dayton, Ohio 45424 Tripod Data Systems 345 SW Avery Avenue Corvallis, Oregon 97333 Americas Regional Fulfillment Center 5475 Kellenburger Road Dayton, Ohio 45424 International Trimble TerraSat Haringstrasse 19 D-85635 Höhenkirchen-Siegertsbrunn Germany Trimble Jena Carl-Zeiss Promenade 10 D-07740 Jena Germany Trimble Kaiserslautern Am Sportplatz 5 D-67661 Kaiserslautern Germany Trimble New Zealand 11 Birmingham Drive P.O. Box 8729 Riccarton, Christchurch New Zealand Trimble Sweden Box 64, Rinkebyvägen 17 182 11, Danderyd Sweden European Regional Fulfillment Center Meerheide 45 5521DZ Eersel Netherlands Applanix 85 Leek Crescent Richmond Hill, Ontario Canada L4B 3B3 MENSI 30, rue de la Fontaine du Vaisseau 94120 Fontenay-sous-Bois France International Sales Centers Europe Trimble France Parc Hightec VI 9 Avenue du Canada, Les Ulis 91966 Courtaboeuf, Cedex France Trimble Germany Am Prime Parc 11 D-65479 Raunheim Germany Trimble Italy Largo Temistocle Solera, 7 00199 Rome Italy Centro Torri Bianche Palazzo Larice, 3 20059 Vimercate (MI) Italy Trimble Russia 23, 1st Tverskaya-Yamskaya St. Moscow, 125047 Russia Trimble Spain Via de las Dos Castillas No. 33 Atica. Edificio 6. Planta 3 Despacho B-2 28224 Pozuelo de Alarcon Madrid Spain Trimble Nordic Box 64, Rinkebyvägen 17 182 11, Danderyd Sweden Trimble UK Trimble House Meridian Office Park Osborn Way, Hook Hampshire RG27 9HX U.K. Annual Report 2003 Technology Solutions for the Right Place and Time Technology Solutions for the Right Place and Time T r i m b l e N a v i g a t i o n L i m i t e d • A n n u a l R e p o r t 2 0 0 3 Middle East Trimble Dubai LOB 14 Office 322 PO Box 17760 Jebel Ali Free Zone Dubai UAE Pacific Rim Trimble Australia Level 1/123 Gotha Street Fortitude Valley QLD 4006 Australia Trimble China Suite 16D, Building 2, Epoch Center 4 Beiwa Road, Haidian District Beijing 100089 China 666 Fuzhuo Road Haixin Plaza Shanghai 200001 China Trimble Korea 8F, Geumwon Bldg., 943-12 Daechi3-dong Kangnam-gu, Seoul 135-845 Korea Trimble Singapore 80 Marine Parade Road 22-06, Parkway Parade Singapore 449269 Singapore The Americas Trimble Canada 41 Horner Avenue, Unit 5 Toronto, Ontario M8Z 4X4 Canada Trimble Latin America 6505 Blue Lagoon Drive Suite 120 Miami, Florida 33126 Joint Ventures Caterpillar Trimble Control Technologies LLC 5475 Kellenburger Road Dayton, Ohio 45424 Nikon-Trimble Co., Ltd. Technoport Mitsuiseimei Building 16-2, Minamikamata 2-chome, Ota-ku Tokyo 144-0035, Japan THIS IS TRIMBLE Trimble is a world leader in providing advanced, position-centric solutions to commercial, governmental and professional customers. Our solutions enable our users to work with greater productivity, convenience and safety and, in many cases, do things they couldn’t do before. Market & Segments % % % Representative Products * Engineering & Construction Engineering & Construction Engineering & Construction 68% Surveying Construction Infrastructure 3D Scanning GPS, optical, robotic and mechanical total stations Digital levels and theodolites Data collectors and field computers Field and office application software Data communication solutions Machine guidance systems Laser and optical positioning and alignment tools Field and office application software Data communication solutions Typical Customers Surveyors Civil engineers Construction contractors Transportation agencies Utility companies Earth-moving contractors General construction contractors Utility contractors Wall and ceiling contractors Transportation agencies GPS reference networks and software Government and scientific agencies Laser scanners Field and office application software Civil and plant engineers Surveyors Field Solutions 15% Mapping & GIS Handheld GPS field data collectors Field and office application software Utility companies Natural resource agencies Government agencies Agriculture Vehicle Guidance Manual and automated steering systems for farm vehicles Farmers Agriculture Water Management Grade control systems for irrigation and drainage Farmers Agricultural contractors ologie ologies Component Technologies 12% OEM (Silicon Integration) OEM (Modules) Timing Mobile Solutions Mobile Solutions Fleet Management 2% GPS chipsets Embedded silicon and companion firmware Modules supplying position, velocity and time solutions or raw GPS measurement data Automobile tier-one suppliers Portable appliance manufacturers Automobile tier-one suppliers Asset management integrators Security device suppliers CDMA base station clocks Time and frequency boards and instruments Wireless infrastructure providers Wireless location solution providers Mobile devices combining wireless communication and GPS Internet-delivered fleet management application services Trucking, ready-mix cement, refuse, and other local fleet operators Construction contractors Municipal fleet operators Security Mobile devices combining wireless communication and GPS Commercial vehicle and equipment owners Mobile Workforce Management Internet-delivered wireless workforce application services Sales, service, and delivery businesses Portfolio Business 3% Military Applanix * Percent of total revenue GPS receivers for military operations Military time and frequency boards Integrated inertial/GPS positioning and orientation surveying and mapping systems for surveying and mapping surveying and mapping U.S. Department of Defense Allied defense ministries Defense contractors Land, marine, and aerial surveying and mapping contractors Military Executive Officers Board of Directors Shareholder Information Robert S. Cooper, Ph.D., Chairman President Aerospace Electronics Division Titan Corporation Steven W. Berglund President & CEO Trimble Navigation Limited John B. Goodrich, Secretary Business Consultant William Hart Venture Capital Investor and Business Consultant Ulf J. Johansson, Ph.D. Chairman Europolitan Vodafone AB Bradford W. Parkinson, Ph.D. Professor (Emeritus) Department of Aeronautics and Astronautics Stanford University Nickolas W. Vande Steeg Executive Vice President & COO Parker Hannifin Corporation Corporate Headquarters: Trimble Navigation Limited 749 North Mary Avenue Sunnyvale, California 94085 Phone: (408) 481-8000 Fax: (408) 481-2218 Independent Auditors: Ernst & Young LLP Palo Alto, California Transfer Agent & Registrar: Mellon Investor Services P.O. Box 3315 South Hackensack, NJ 07606 (800) 522-6645 for U.S.A. (201) 329-8660 for International TDD for Hearing Impaired: (800) 231-5469 for U.S.A. (201) 329-8660 for International http://www.melloninvestor.com Investor Relations Contact: Brian Siegel (408) 481-6914 investor_relations@trimble.com Additional Information The Company’s annual report on Form 10-K, as filed with the Securities Exchange Commission, is also available on the Investor Relations portion of the Company’s website at: http://www.trimble.com/ir_reports.html Trimble Investor Information Traded: The NASDAQ Stock Exchange Symbol: TRMB Trimble’s website: http://www.trimble.com Steven W. Berglund President and Chief Executive Officer Mary Ellen P. Genovese Chief Financial Officer Bryn Fosburgh Vice President General Manager, Geomatics & Engineering Michael W. Lesyna Vice President General Manager, Mobile Solutions Chris Shephard Vice President General Manager, Construction Instruments Alan R. Townsend Vice President General Manager, Field Solutions Dennis L. Workman Vice President General Manager, Component Technologies William C. Burgess Vice President Human Resources Joseph F. Denniston, Jr. Vice President Operations Mark A. Harrington Vice President Strategy & Business Development Irwin L. Kwatek Vice President & General Counsel Bruce E. Peetz Vice President Advanced Technology & Systems John E. Huey Treasurer Anup V. Singh Corporate Controller © 2004, Trimble Navigation Limited. All rights reserved. Trimble, the Globe & Triangle logo, AgGPS and EZ-Guide are trademarks of Trimble Navigation Limited registered in the United States Patent and Trademark Office. DriveSafe, Force-5, and TrimTrac are trademarks of Trimble Navigation Limited. All other trademarks are the property of their respective owners. TID 13400 (3/04) FINANCIAL HIGHLIGHTS Fiscal Year Ended (in thousands except per-share amounts) 2003 2002 2001 Operating Data: Net revenue EBITDA Cash flow from operations Net income (loss) from continuing operations Diluted net income (loss) per share Diluted net income (loss) per share Diluted net income (loss) per share from continuing operations (1) (1) $ 540,903 $ 466,602 $ 475,292 $ 63,838 $ 45,832 $ 39,454 $ 36,460 $ 32,316 $ 26,370 $ 38,485 $ 10,324 $ (23,492) $ 0.77 $ 0.24 $ (0.63) Revenue 540.9 475.3 466.6 466.6 600 500 400 300 200 100 0 01 02 01 02 03 01 02 03 01 02 01 02 01 02 EBITDA 63.8 45.8 39.5 60 40 20 0 Earnings per share (1) 0.77 0.24 (0.63) 0.80 0.40 0.00 (0.40) (0.40) (0.80) (0.80) 01 02 03 Balance Sheet Data: Cash and equivalents Total assets Non-current portion of long-term debt and other non-current liabilities 01 02 01 02 03 01 02 03 01 02 01 02 01 02 Shareholders’ equity $ 45,416 $ 28,679 $ 31,078 $ 544,903 $ 441,656 $ 419,395 $ 85,880 $ 114,051 $ 131,759 $ 348,244 $ 201,351 $ 138,489 $ 38,485 $ 10,324 $ (23,492) 14,051 $ 21,106 $ 11,473 $ $ (2,900) $ 3,500 $ 1,900 $ 8,864 $ 9,850 $ 11,218 $ 7,916 $ 8,107 $ 28,722 EBITDA Reconciliation: Net income (loss) from continuing operations Add back: Interest expense, net Interest tax (benefit) provision Depreciation expense Amortization expense EBITDA $ 63,838 $ 45,832 $ 39,454 In millions except for earnings per share (1) All share and per-share information has been adjusted to reflect the 3 for 2 stock split on a retroactive basis for all periods presented. This document may contain forward-looking statements based on current expectations that involve a number of risks and uncertainties. Other potential risks and uncertainties that could cause actual results to differ materially are included in the SEC filings, such as Form 10-K and Form 10-Q and Form 8-K, for Trimble. 1 TO OUR SHAREHOLDERS, EMPLOYEES AND PARTNERS Trimble demonstrated significant progress in 2003. Although our external environment remained uncertain in some markets and geographies, we continued to produce improved financial and market performance across the Company. In Retrospect In last year’s letter I identified a number of objectives for 2003. Let me begin by reviewing our progress against those objectives. • Grow revenues in spite of the environment. Revenues grew by 16% in 2003 and have grown at an annual compound rate of 19% since 1999. The underlying growth of our business in 2003 was positively impacted by the weaker U.S. dollar and by the effects of acquisitions. Revenues grew by 16% in 2003 and have grown at an annual compound rate of 19% since 1999. More importantly, earnings grew at a rate higher than the rate of sales growth. All major segments reflected growth in the year—most producing double-digit percentage increases. More importantly, earnings grew at a rate higher than the rate of sales growth. Reported operating income was up 59% for the year and GAAP EPS were up 221%. This growth in earnings occurred in spite of a significant negative impact from the weaker dollar. The relative paradox of receiving a foreign exchange benefit on revenues while experiencing a negative impact on earnings is a result of the internationalization of our development and manufacturing. • Extend our presence in emerging markets—both new geographies and new market categories. We continue to position ourselves in newer markets that are potential important sources of future growth. Our efforts in China, India, Russia, Korea and Eastern Europe resulted in improving financial results—with the promise of more in the future. We also continued to extend our market and product capabilities through internal development, acquisitions and alliances. For example, we established a joint venture with Nikon, which will extend our presence in the con- struction positioning market. In addition, our acquisitions of Applanix and MENSI both added important new technologies, which will enable us to develop new applications or to extend current application solutions. We also announced an alliance with CNH Global, which will extend our distribution reach for our AgGPS AgGPS Ag agricultural product line. The TrimTrac™ locator product, which was developed during 2003 and introduced in early 2004, is an impor- tant step towards creating a new market category for Trimble. It establishes a new asset tracking and security monitoring capability at an aggressive price point and opens up a new class of customers and applications that were previously not available to Trimble. ® Autopilot • Continue to make advances in operational performance that are valuable to our customers. We made progress towards the long-term standards that will enable us to differentiate ourselves competitively on many of the elements of the user solution that matter most. During 2003 we recovered from the initial imple- mentation difficulties of our 2002 Regional Fulfillment Center initiative and reestablished the trajectory to meet our performance goals. These include: improving delivery performance, making it easier to work with Trimble, and eliminating cost from the entire distribution channel. Other points of operational emphasis include improv- ing both the “out-of-the-box” and lifetime quality of our products and improving the level of support available to our users—whether it is made available from a dealer, directly from Trimble or over the Internet. • Build our organizational capabilities. Trimble’s success relies on the quality of our organization. We continue to evolve as a company and have been successful at adding a number of strong players to the company in the last few years. The emphasis in 2003 continued the shift from the question of “Do we have the right players?” to “How do we develop our talent to create more organizational leverage?” 2 • Manage the Mobile Solutions business to demonstrate improved financial results. During the year we increased our subscribers by over 600%, albeit from a low base. This progress began to reflect itself in our financial performance with revenues up 53% from the level of 2002 and with our loss decreasing by 46%. The early 2004 acquisition of TracerNET provides us with important new sources of strength in this market. We are positioned to see steady progression towards breakeven during 2004 while maintaining a rapid increase in subscribers. Beyond the defined goals for the year, we demonstrated progression throughout the company. The Engineering and Construction (E&C) segment had a strong year. Revenues increased 15% in a market that, although better, has not recovered to the levels of a few years ago. Segment operating profits were up over 13%, in spite of sig- nificant negative exchange-rate impacts. Survey instrument and software sales were particularly strong as we saw growth coming from continuing industry consolidation, emerging markets and new product categories. Machine control results in 2003 were less robust than expected. The year represented a transition period: our Caterpillar Trimble Controls Technology joint venture was preparing the rollout of its first major We continue to position ourselves in markets which we believe will be important sources of future growth. products; the Caterpillar channel was not yet a signifi- cant factor in the sales of joint-venture products; and the Trimble distribution channel was adapting to the post-joint-venture environment. Our construction layout tools business, principally laser positioning devices, demonstrated some revenue improvement during the year, but has not yet reached its targeted operating performance levels. Overall, we remain pleased with our positioning in E&C. With the acquisitions of MENSI and Applanix and the joint venture with Nikon, we continued to put the strategic building blocks in place for the “intelligent construction site” of the future. The Field Solutions segment also demonstrated impressive improvements in performance in 2003. Revenues increased by 19%, and segment operating profits increased 50%. Both constituent businesses in the segment, geographic information systems (GIS) and agriculture, reflected improved performance in the year. GIS ben- efited from better economic conditions, improved geographic coverage, and a revamped distribution channel. Agriculture benefited from an improved farm economy and, more importantly, from the strong positioning of our products in the market. The Component Technologies segment made a major earnings contribution to Trimble. Revenues grew by 7% and segment operating profits grew by 55%. The strong earnings leverage resulted both from a richer product mix and from the benefits of our move of production to China. Our timing product line, which provides high- accuracy timing solutions for the wireless infrastructure market, continues to perform well and has successfully established an Asian market position. Because we are fundamentally a solutions company, redefining ourselves and redefining the nature of the solutions we offer provides significant opportunities to create additional growth. Looking Forward Our objectives continue to be consistent with past years. We target our internal managerial process on achieving long-term market leadership, consistent double-digit revenue growth, and a return on capital that will place us well within the top quartile of the universe of comparable companies. Given the external environment of the past several years, our emphasis has been on improving return on capi- tal with revenue growth being, of necessity, a secondary emphasis. As a result, since 1999 we have successfully increased our operating income at a significantly faster rate than revenue. Our on-going challenge will be to take advantage of the more growth-friendly environment and continue to produce strong incremental profitability on additions to revenue. While the effect of the weaker dollar during the year lowered the improvement we would have otherwise shown, we remain on track towards the goal of achieving a reported operating margin of 14 to 15% of revenues. 3 With our improving profitability, we now have the opportunity to emphasize revenue growth. This growth will come from four sources: • Existing markets We expect significant gains can still be achieved through continued penetration of our current markets. We believe that the right formula to achieve this goal includes the elements of improving our market insight, continued innovation, channel development, operational improvement and willingness to play the role of an opportunistic market consolidator. • Leveraging our existing product and technology base into new market areas An example of addressing new markets is our success in bringing our products and technology to emerging geographic regions such as China, Russia and India. We are also evaluating the potential of bringing Trimble capabilities into other emerging new application areas, such as homeland security. • Leveraging our domain knowledge within our existing markets into new value-added products and services for those markets During 2003 we expanded the range of product categories available to our existing markets. Examples include the addition of Nikon and MENSI products to the portfolio offered to Engineering and Construction customers. We are also offering the asset management capabilities from our Mobile Solutions segment to construction con- tractors for managing their assets on the construction site. Because we are fundamentally a solutions company, the ability to redefine ourselves and redefine the nature of the solutions we offer provides numerous ways to create additional growth. • Pioneering new product concepts into new markets We continue to explore new products in entirely new markets. Our effort in Mobile Solutions continues to pioneer new markets, such as the ready-mix and refuse markets, with product categories that are new to Trimble. Other examples include the TrimTrac locater and Recon computer (a rugged handheld unit developed at our Corvallis facility) —both of which represent beachhead products in new markets. We had a good year in 2003 and are positioned to have a better year in 2004. Trimble employees and Trimble partners remain the foundations of our successes. Thanks to all of you. Steven W. Berglund President and Chief Executive Officer 4 TECHNOLOGY SOLUTIONS FOR THE RIGHT PLACE AND TIME THE RIGHT PLACE AND TIME In 2003, Trimble celebrated its first quarter-century of innovation. Throughout those 25 years, we have provided advanced positioning solutions to enhance the way people work. Our markets range from construction to telecommunications and from agriculture to urban and resource management. For most of our first 25 years, we focused on using Global Positioning System (GPS) technology to accu- rately determine location and time. In recent years, we have added a variety of new technologies to expand our core competencies and product portfolio beyond GPS. We now have the broadest portfolio of advanced posi- tioning and location-based solutions in the industry. As a result, we are able to provide solutions for new applications and more comprehensive solutions for existing applications. During our first 25 years we have increased workplace efficiencies, productivity and profitability for our customers. We’re just getting started. 5 GPS LASERS OPTICS ROBOTICS 3D SCANNING INERTIAL NAVIGATION WIRELESS COMMUNICATION APPLICATIONS SOFTWARE INTERNET SERVICES ENGINEERING & CONSTRUCTIO ENGINEERING & CONSTRUCTION ENGINEERING & CONSTRUCTION Trimble historically has been the recognized GPS technology leader in surveying. In 2000, we expanded our leadership position to the overall engineering and construction market. We are extending our leadership with new technologies that enhance our customers’ ability to do construction tasks faster, better and more profitably. Our integrated line of GPS-, laser-, optical-, and robotic-based tools and specialized software helps to speed any construction project from concept to completion. “The advanced Trimble survey systems we use have helped us treat our clients like gold.” John Kantner Director of Field Services The Schneider Corporation 6 “GPS machine control improves our efficiency and accuracy—and our bottom line.” Mark Trucco, CEO Trucco Companies “Trimble equipment pro- vides the accuracy we need and the time and labor savings we want.” Steve Newell, PS Survey Project Manager Woolpert “We bought the TS315 Total Station because it lets us do very accurate build- ing layouts much faster.” Daniel Boutri Managing Director Boutri Bati (France) New developments: • R-track technology will enable Trimble users to realize the performance benefits of the U.S. Government’s planned GPS Modernization Program. • 3D laser scanning makes precise measurements of large, complex objects such as bridges, buildings, and process plants much faster and easier. • Field layout software simplifies complex operations, enabling contractors to do on-site measurements and layout operations themselves, saving time and money. • A next-generation machine-control system for dozers from our joint venture with Caterpillar (Caterpillar Trimble Control Technologies, LLC) further increases productivity for earth-moving operations. • Our joint venture with Nikon (Nikon-Trimble Co., Ltd.) broad- ens our portfolio of survey and construction products and enables us to better access emerging markets in Russia, Eastern Europe, India and China. • A rugged, handheld field computer that can be bundled with a variety of Trimble application software provides a new tool for our traditional markets and entrée into new, specialized applications. 7 COM COMPONENT TECHNOLOGIES COMPONENT TECHNOLOGIES In 2003, we expanded our range of high-volume prod- ucts to include complete end-user devices. We also increased our capabilities to include wireless com- munications and alternative positioning technologies. These enhance our existing lines of chipsets, boards and modules for original equipment manufacturers (OEMs) and system integrators in automobile navigation, fleet management and security applications. In addition, our timing solutions for wireless infrastructure providers continued to gain market share. New developments: • The TrimTrac locator, a milestone in our technology roadmap for integrating GPS and wireless capabilities, sets a new price/perfor- mance standard for vehicle monitoring, security and recovery services. Service providers and system integrators can now make these services more affordable and convenient for the end users. • We increased our Asian presence with the successful ramp-up of full- scale production in China. In addition, we attained significant expansion of sales to customers in Asia including Nortel and Samsung. • We entered into a technology development and licensing agreement with Rosum Corporation for television-based positioning technology. This technology complements GPS by providing additional capability in dense urban areas and building interiors. 8 FIELD SOLUTIONS Our mapping & GIS solutions enable data collect- ing in the field to record position and other infor- mation for geographic information systems (GIS). A GIS is an information system that works with geo-referenced data to help utilities, government agencies and businesses manage assets and resources. We are a pioneer in the rapidly developing Mobile GIS market, which uses wireless communications, GPS and other technologies to enable field person- nel to access and manipulate massive GIS data bases for greater efficiency. In agriculture, we are a leading provider of GPS- based manual guidance and automated steering systems for farm vehicles. Our systems significantly increase farm efficiencies and crop yields through more accurate steering and faster in-field driving with less stress on the driver. New developments: • Our mapping & GIS products have been used effectively to map large, rapidly evolving events such as the southern California fires in mid-2003 and the expanding threat from West Nile virus. •Building on a six-year relationship, we entered into a new agree- Building on a six-year relationship, we entered into a new Building on a six-year relationship, we entered into a new agree- ment with CNH Global, which enables them to offer our auto- mated steering and guidance systems as factory options on their Case IH and New Holland agricultural tractors. • Our AgAgA GPS EZ-Guide® Plus lightbar guidance system brings a new level of performance at a significantly lower price point to a wider segment of the agricultural market. “This project has totally changed our utility mapping process. Your products have made our jobs easier and have helped us to improve some of the largest datasets that our city maintains.” Christopher Ryan Laingen GIS Technician, City of Sioux Falls, GIS Division “Autopilot saved us after hail ruined our crops—I couldn't have re- planted in time without it. I won’t own another tractor without it.” Kenny Lunsford, Lunsford Farms 9 MOBILE SOLUTIONS We are expanding our productivity-enhancing fleet management services beyond our initial target markets of ready-mix concrete, refuse hauling and aggregate trucks into a broad range of commercial fleets. Our GPS-based software and service provide the fleet operator with Internet access to current vehicle locations and conditions and offer extensive reporting capabilities that can be used to evaluate and maximize the efficiency of the fleet routes and operations. New developments: • Our unique DriveSafe™ service enables fleet operators to mini- mize accidents by detecting and correcting unsafe driving habits. Developed in conjunction with McNeilus Companies, Inc., the largest ready-mix truck manufacturer in North America, DriveSafe is now included as a standard feature on selected new McNeilus truck models. The system is readily adaptable for use with other types of fleet applications. • The acquisition of TracerNET Corporation in March 2004 provides new expertise in integrating fleet information with enterprise software applications. We expect to combine the capabilities of both companies to provide large enterprise fleets with more diverse and complete fleet management solutions. 10 PORTFOLIO BUSINES PORTFOLIO BUSINESS PORTFOLIO BUSINESS Military Trimble is the leading supplier offering Federal Aviation Administration (FAA)-certified GPS equipment that supports both military and civil GPS signals. We also are the preferred GPS source for military timing appli- cations and key space/strategic programs. New developments: • During 2003, our market position was enhanced with the develop- ment and implementation of Trimble’s TA-12S GPS receiver on the KC-10 tanker upgrade program and selection of our Force-5™ GPS embedded receiver on a major military transport platform. Applanix Applanix, acquired by Trimble in 2003, develops posi- tioning systems that integrate inertial navigation system (INS) and GPS technologies. The INS capability can extend a GPS solution’s effectiveness in difficult envi- ronments, such as high-rise urban or heavily forested areas. This integrated solution enhances the perfor- mance of precision GPS-based products for airborne photogrammetry, marine survey, and GIS applications. 11 OUR PEOPLE AND OUR PARTNER OUR PEOPLE AND OUR PARTNERS OUR PEOPLE AND OUR PARTNERS Our performance would not be possible without the outstanding contributions of the more than 2,000 Trimble employees around the world. Working for a growing company is a demanding proposition in terms of time, energy, productivity and ideas. Trimble employees met those demands—and more—in 2003: • The sun seldom sets on Trimble business—our facilities around the world are at work around the clock. • The sun often sets on our traveling employees, who spent almost 14,000 nights on the road (equivalent to 37+ years) and flew more than 23 million miles (942 times around the world). • Our engineers wrote and tested more than 3 million lines of software and firmware code. We applied for 55 patents and more than 100 new ideas are in the pre-application process. • Our Regional Fulfillment Centers in Ohio and Europe shipped some 580,000 boxes of products to customers and partners. • We produced over 30,000 pages of user documentation in 11 languages to support our products. • We collectively quaffed more than 1,200,000 cups of coffee and tea to help fuel all of the other activities. For all of the above and a great deal more, we thank all of our employees in all of our offices around the world. Trimble’s wide range of solutions and markets requires multiple means of serving our customers throughout the world. Our partners—dealers, distributors, original equipment manufacturers (OEMs), value-added resellers (VARs) and others— play critical roles in making Trimble a success. We are especially cognizant of the work of our partners. These individuals and companies know the customers’ needs in their markets and geographic areas. They provide us with information that helps us optimize the products and solutions we offer. And they work with their customers before and after the sale to ensure that their needs are truly met. We appreciate their efforts and are proud that they have made the decision to share their destiny with Trimble. 12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 2, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________to______________ Commission File Number: 0-18645 TRIMBLE NAVIGATION LIMITED (Exact name of Registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) California 94-2802192 749 North Mary Avenue, Sunnyvale, CA 94085 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (408) 481-8000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock Preferred Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market on July 3, 2003 was approximately $795 million. There were 50,537,119 shares of the registrant's Common Stock issued and outstanding as of March 11, 2004. 1 DOCUMENTS INCORPORATED BY REFERENCE Certain parts of Trimble Navigation Limited's Proxy Statement relating to the annual meeting of stockholders to be held on May 19, 2004 (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10- K. 2 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. The forward-looking statements regarding future events and the future results of Trimble Navigation Limited (“Trimble” or “ The Company” or “We” or “Our” or “Us”) are based on current expectations, estimates, forecasts, and projections about the industries in which Trimble operates and the beliefs and assumptions of the management of Trimble. Discussions containing such forward-looking statements may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations." In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," and similar expressions. These forward-looking statements involve certain risks and uncertainties that could cause actual results, levels of activity, performance, achievements and events to differ materially from those implied by such forward-looking statements, but are not limited to those discussed in this Report under the section entitled “Other Risk Factors” and elsewhere, and in other reports Trimble files with the Securities and Exchange Commission (“SEC”), specifically the most recent reports on Form 8-K and Form 10-Q, each as it may be amended from time to time. These forward-looking statements are made as of the date of this Annual Report on Form 10-K. We reserve the right to update these statements for any reason, including the occurrence of material events. The risks and uncertainties under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risks and Uncertainties" contained herein, among other things, should be considered in evaluating our prospects and future financial performance. We have attempted to identify forward-looking statements in this report by placing an asterisk (*) before paragraphs containing such material. 3 TRIMBLE NAVIGATION LIMITED 2003 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Item 1 Item 2 Item 3 Item 4 PART I Business Overview................................................................................................................................................... 5 Properties...................................................................................................................................................................17 Legal Proceedings ....................................................................................................................................................17 Submission of Matters to a Vote of Security Holders ........................................................................................17 PART II Market for Registrant's Common Equity and Related Stockholder Matters ...................................................18 Item 5 Selected Financial Data ...........................................................................................................................................19 Item 6 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................20 Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................................................................42 Financial Statements and Supplementary Data....................................................................................................45 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................76 Item 9 Controls and Procedures .........................................................................................................................................76 Item 9a Item 10 Item 11 Item 12 Item 13 Item 14 PART III Directors and Executive Officers of the Registrant.............................................................................................76 Executive Compensation.........................................................................................................................................76 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..............................................................................................................................77 Certain Relationships and Related Transactions..................................................................................................77 Principal Accountant Fees and Services...............................................................................................................77 Item 15 PART IV Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................................77-88 TRADEMARKS Trimble, the globe and triangle logo, EZ-Guide, Telvisant, Lassen, SiteVision, GeoExplorer, AgGPS, Thunderbolt, FirstGPS, and CrossCheck are trademarks of Trimble Navigation Limited registered in the United States Patent and Trademark Office and other countries. Force, Galaxy, Placer, TrimTrac, and Trimble Toolbox are trademarks of Trimble Navigation Limited. All other trademarks are the property of their respective owners. 4 PART I Item 1 Business Overview Trimble Navigation Limited, a California corporation (“Trimble” or “the Company” or “we” or “our” or “us”), provides advanced positioning product solutions to commercial and government users in a large number of markets. These markets include surveying, construction, agriculture, urban and resource management, military, transportation, and telecommunications. Our products typically provide benefits that can include cost savings, improved quality, or higher productivity. Examples of our products include earthmoving equipment guidance systems, surveying instruments, fleet management systems, components for in vehicle navigation and telematics systems, farm equipment guidance systems, field data collection handhelds, and timing modules used in the synchronization of wireless networks. Our products typically integrate positioning, communication, and information technologies. Positioning technologies used include the Global Positioning System (GPS), laser, optical, and inertial, while communication techniques include both public networks, such as cellular, and private networks such as business band radio. A significant amount of the differentiation in the products is provided through software; both firmware that enables the positioning solution and applications software that allows the customer to make use of the positioning information. We design and market our own products. Our manufacturing strategy includes a combination of in house assembly and fabrication as well as subcontracting those functions to third parties. We conduct our business globally with major development, manufacturing or logistics operations in the United States, Sweden, Germany, New Zealand, and the Netherlands. Products are sold through dealers, representatives, joint ventures, and other channels throughout the world. These channels are supported by our sales offices located in more than 20 countries. We began operations in 1978 and incorporated in California in 1981. Our common stock has been publicly traded on Nasdaq since 1990 under the symbol TRMB. Technology Overview A majority of our revenues is derived from applying GPS to terrestrial applications. GPS is a system of 24 orbiting satellites and associated ground control that is funded and maintained by the U. S. Government and is available worldwide free of charge. GPS positioning is based on a technique that precisely measures distances from four or more satellites. The satellites continuously transmit precisely timed radio signals using extremely accurate atomic clocks. A GPS receiver measures distances from the satellites in view by determining the travel time of a signal from the satellite to the receiver, and then uses those distances to compute its position. Under normal circumstances, a stand-alone GPS receiver is able to calculate its position at any point on earth, in the earth's atmosphere, or in lower earth orbit, to approximately 10 meters, 24 hours a day. Much better accuracies are possible through a technique called “differential GPS.” In addition, GPS provides extremely accurate time measurement. GPS accuracy is dependent upon the locations of the receiver and the number of GPS satellites that are above the horizon at any given time. Reception of GPS signals requires line-of-sight visibility between the satellites and the receiver, which can be blocked by buildings, hills, and dense foliage. The receiver must have a line of sight to at least four satellites to determine its latitude, longitude, attitude (angular orientation), and time. The accuracy of GPS may also be limited by distortion of GPS signals from ionospheric and other atmospheric conditions. Our GPS products are based on proprietary receiver technology. The convergence of positioning, wireless, and information technologies enables significant new value to be added to positioning systems, thereby creating a more robust solution for the user. In addition, recent developments in wireless technology and deployments of next generation wireless networks have enabled less expensive wireless communications. These developments allow for the efficient transfer of position data to locations away from the positioning field device, allowing the data to be accessed by more users and thereby increasing productivity. Our laser and optical products measure distances and angles accurately using light. We generally use commercially available laser diodes to create light beams for distance measurement. In addition, our proprietary precision 5 mechanics and software algorithms in these products combine to give robust, accurate distance and angle measurements for a variety of agricultural, surveying, and construction applications. Business Strategy Our business strategy leverages our expertise in positioning to provide solutions for our customers, built around several key elements: • Attractive markets – We focus on markets that offer potential for revenue growth, profitability, and market leadership. • Innovative solutions that provide significant benefits to our customers – We seek to apply our technology to applications for which position data has a high value. We anticipate that further advances in positioning, wireless, and information technologies will enable new classes of solutions to emerge that will create new opportunities. • Distribution channels to best access our markets – We utilize a range of distribution channels to best serve the needs of individual markets. These channels can include independent dealers, direct sales, OEM sales, and distribution alliances with key partners. In addition, we will continue to extend our international distribution. Business Segments and Markets We are organized into four main operating segments encompassing our various applications and product lines: Engineering and Construction, Field Solutions, Component Technologies, and Mobile Solutions. We also operate in smaller business areas, primarily focused on military and inertial integration technologies, which aggregate into the Portfolio Technologies segment. Our segments are distinguished by the markets they serve. Each segment consists of businesses which are responsible for product development, marketing, sales, strategy, and financial performance, and is headed by a general manager. Segment Realignment In the first fiscal quarter of 2003, we realigned two of our reportable segments. The Tripod Data Systems (TDS) business is now included in the Engineering and Construction segment. Previously it was included in the Portfolio Technologies segment. All comparable information for earlier periods has been restated to conform to the new basis. Engineering and Construction Products in the Engineering and Construction segment improve productivity and accuracy throughout the entire construction process including the initial survey, planning, design, earthmoving, and building phases. The product emphasis is aimed at making each individual task more efficient, as well as speeding up the entire process by improving information flow from one step to the next. We typically combine a number of technologies into product solutions. The elements of these solutions may incorporate GPS, optical, laser, radio or cellular communications, and software. An example of the customer benefits provided by our product is our GPS and robotic optical surveying instruments which enable the surveyor to perform operations in the field faster, more reliably and with a smaller crew. Similarly, our construction machine guidance products allow the operator to achieve the desired landform by eliminating stakeout and reducing rework. In turn, these steps in the construction process can be readily linked together with data collection modules and software to minimize the time and effort required to maintain data accuracy throughout the entire construction process. We sell and distribute our products from this segment through a global network of independent dealers that are supported by our sales force. This channel is supplemented by relationships that create additional channel breadth including our joint ventures with Caterpillar, Nikon, and private branding arrangements with other companies. 6 We also design and market handheld data collectors and data collection software for field use by surveyors, contractors, and other professionals. These products are sold directly, through dealers, and other survey manufacturers. Competitors in this portion of the business are small and geographically diverse. Competitors in this segment are typically companies that provide optical, laser, or GPS positioning products. Our principal competitors are Topcon Corporation and Leica Geosystems. Price points in this segment range from less than $1,000 for certain laser systems to approximately $125,000 for a high precision, three-dimensional, machine control system. Representative products sold in this segment include: 5800 RTK Rover – This is an integrated unit that allows the surveyor to make centimeter-level measurements or do construction stakeout with only one person. Wireless technology eliminates cables that could otherwise snag on foliage and structures. The rover weighs 3.5kg for an entire system on a pole including batteries. 5600 Total Station – This optical total station series provides a choice of increasing levels of automation that allow the surveyor to choose a system that will best suit his work. Depending on the job, these configurations enable one- person stakeout and survey. The included Attachable Control Unit (ACU) also works with the 5800 RTK Rover providing complete measurement compatibility regardless of the technology used. SiteVision® GPS System – SiteVision GPS is a machine-mounted, positioning system that guides the operator by comparing the actual position of the blade with the digitized design that resides in a computer on the machine. The use of this system enables faster machine speed, eliminates the need for placing stakes, and lowers the number of passes needed to get the desired grade. Applications include road construction and site preparation. Spectra Precision® Laser GL 700 Series – This laser product provides grade control capability for heavy equipment on a construction site. The level surface of the laser light can be precisely controlled, and machines with a laser receiver can be controlled to establish a precise and uniform grade over the desired area. Applications include trenching, pipe laying, machine control grading, and road construction applications. TDS Ranger™ Series – The TDS Ranger device is a handheld data collector supporting Microsoft’s Windows CE operating system. Running TDS survey software, this unit can control and collect data from all major brands of optical and GPS surveying instruments. The operator can also run his or her own application programs for the Microsoft Windows CE operating system on the platform. Field Solutions Our Field Solutions segment addresses the agriculture and geographic information system (GIS) markets. Our agriculture products consist of manual and automated navigation guidance for tractors and other farm equipment used in spraying, planting, cultivation, and harvesting applications. The benefits to the farmer include faster machine operation, higher yields, and lower consumption of chemicals. We also provide positioning solutions for leveling agricultural fields in irrigation applications and aligning drainage systems to better manage water flow in fields. Our distribution to the agricultural market is through multiple channels. Revenue is generated through independent dealers and through partners such as CNH Global. Competitors in this market are either vertically integrated implement companies such as John Deere, or agricultural instrumentation suppliers such as Raven, RHS, CSI Wireless, Beeline and Integrinautics. Our GIS product line is centered on handheld data collectors that gather information in the field to be incorporated into GIS databases. Typically this information includes features, attributes, and positions of fixed infrastructure and natural resource assets. An example would be that of a utility company performing a survey of its transmission poles including the age and condition of each telephone pole. Our handheld unit enables this data to be collected and automatically stored while confirming the location of the asset. The data can then be downloaded into a GIS 7 database. This stored data could later be used to navigate back to any individual asset or item for maintenance or data update. Our mobile GIS initiative goes one step further by allowing this information to be communicated from the field worker to the back-office GIS database through the combination of wireless technologies (Bluetooth and cellular), as well as giving the field worker the ability to download information from the database using these same wireless technologies. This capability provides significant advantages to users including improved productivity, accuracy and access to the information in the field. Distribution for GIS products is primarily through a network of independent dealers and business partners, supported by our sales force. Primary markets for our GIS products and solutions include government, defense and homeland security, utility and communications and natural resources management. Competitors in this market are typically either survey instrument companies having GPS technology and/or consumer GPS companies. Two examples are Leica Geosystems and Thales Navigation. Approximate price points in this segment range from $3,000 for a GIS handheld unit to $35,000 for a fully automated, farm equipment control system. Representative products sold within this segment include: GeoExplorer® CE Series – Combines a GPS receiver in a rugged handheld unit running Microsoft’s Windows CE operating system that makes it easy to collect and maintain data about objects in the field. AgGPS® Autopilot System – A GPS-enabled, agricultural navigation system that connects to a tractor’s steering system and automatically steers the tractor along a precise path to within three centimeters or less. This enables both higher machine productivity and more precise application of seed and chemicals, thereby reducing costs to the farmer. AgGPS® EZ-Guide® System – A GPS-enabled, manual guidance system that provides the tractor operator with steering visual corrections required to stay on course to within 25 centimeters. This system reduces the overlap or gap in spraying, fertilizing, and other field applications. Component Technologies Our Component Technologies segment provides GPS-based components for applications that require embedded position or time. Our largest markets are in the telecommunications and automotive industries where we supply modules, boards, custom integrated circuits and software, or single application IP licenses to the customer according to the needs of the application. Sales are made directly to original equipment manufacturers (OEMs) and system integrators who incorporate our component into a sub-system or a complete system-level product. In the telecommunications infrastructure market, we provide timing modules that keep wireless networks synchronized and on frequency. For example, CDMA cellular telephone networks require a high level of both short- term and long-term frequency stability for proper operation (synchronization of information/voice flow to avoid dropped calls). Our timing modules meet these needs at a much lower cost than the atomic standards or other specially prepared components that would otherwise be required. Customers include wireless infrastructure companies such as Nortel, Samsung, Nokia, UTStarcom, and Andrew. In the automotive and embedded market, we provide a GPS component that is embedded into in-vehicle navigation (IVN) systems. Our focus on high reliability, continuous improvement, and low cost has earned us supplier awards and continuing business in this market. Customers include IVN system manufacturers and integrators such as Siemens VDO Automotive AG, Hyundai Automotive Company, Robert Bosch GmbH, and Ixfin Magneti Marelli Sistemi Electronici S.P.A . * The declining size and power requirements for GPS components, coupled with improving capabilities allow GPS to potentially be used in a new class of applications such as position-aware cellular telephones or other wireless handheld devices. We expect our strength in GPS technology will expand our participation in this market. 8 * Component Technologies continues to explore other positioning solutions in addition to GPS. An example of such a solution is the television triangulation technology developed by Rosum. With Rosum, we intend to develop a family of devices which will greatly extend the ability to locate both people and assets in environments that would be difficult or impossible for GPS only solutions. The major competitor in the telecommunication infrastructure market is Symmetricom. Competitors in the automotive and embedded markets are typically component companies with GPS capability, including Japan Radio Corporation, Motorola, and SiRF. Representative products sold by this segment include: Thunderbolt® GPS Disciplined Clock – The Thunderbolt clock is used as a time source for the synchronization of wireless networks. By combining a GPS receiver with a high-quality quartz oscillator, the Thunderbolt achieves the performance of an atomic standard with higher reliability and lower price. FirstGPS® Technology – We license our FirstGPS technology, which is a host-based, GPS system available as two integrated circuits and associated software. The software runs on a customer’s existing microprocessor system complementing the work done by the integrated circuit to generate position, velocity, and time. This low-power technology is particularly suitable for small, mobile, battery-operated applications. Lassen® SQ Module – The Lassen SQ module adds complete GPS functionality to a mobile product in a postage stamp-sized footprint with ultra-low power consumption, consuming less than 100mW at 3.3V. This module is designed for portable handheld, battery-powered applications such as cell phones, pagers, PDAs, digital cameras, and many others. TrimTrac™ Locator – Our new TrimTrac product is a complete end user device that combines GPS functionality with tri-band global system for mobile communications (GSM) wireless communications. It is intended for high volume personal vehicle and commercial asset management applications that demand a low-cost locator device. Mobile Solutions Our Mobile Solutions segment addresses the market for fleet management services by providing a Trimble-hosted platform solution that bundles both the hardware and software needed to run the application. The software solution is typically provided to the user through Internet-enabled access to our hosted platform for a monthly service fee. This bundled solution enables the fleet owner to dispatch, track, and monitor the conditions of vehicles in the fleet on a real-time basis. A vehicle-mounted unit consists of a single module including a GPS receiver, sensor interface, and a cellular modem. Our solution includes the communication service from the vehicle to our data center and access over the Internet to the application software, relieving the user of the need to maintain extensive computer operations. We market our fleet management services in three primary areas, leveraging the core platform. Our vertical market strategy targets opportunities in specific vertical markets where we believe we can provide a unique value to the end user by customizing the hardware and software solution for a particular industry. For example, the first vertical we are addressing is ready mix concrete. Here, we combine a suite of sensors into a solution that can automatically determine the status of a vehicle without driver intervention. Our agreement with McNeilus, a major manufacturer of trucks for the ready mix concrete and waste management industries, facilitates the delivery of a complete management solution to ready mix concrete fleet operators and refuse haulers. McNeilus’ sales force markets our solution as a retrofit for trucks already in the field, or as a factory-installed option. We plan on leveraging our technology, partners and customers into other verticals, such as other construction material delivery vehicles and waste management trucks, where a customized solution can provide similar benefits as in ready mix. We also have a horizontal market strategy that focuses on providing turnkey solutions to a broad range of service fleets and mobile workers that span over 90 distinct markets. Here, we leverage the same general applications that are used in our vertical markets, however, the same level of customization, such as additional sensors, is typically not required. These products are distributed through individual dealers and dealer service providers, as well as after- market automotive electronics suppliers. 9 Our enterprise strategy focuses on sales to large, enterprise accounts. Here, in addition to a Trimble-hosted solution, we can also integrate our software directly into the customer’s IT infrastructure, giving them control of the information. In this market we sell directly to end users and sales cycles tend to be long due to field trials followed by an extensive decision-making process. Approximate prices for the hardware fall in the range of $300 to $3,000, while the monthly software service fees range from approximately $20 to approximately $55, depending on the customer service level. Competition comes largely from service-oriented businesses such as @Road and software companies such as Command Alkon. Representative products sold by this division include: Telvisant® System – Our fleet management service offering, Telvisant provides different levels of service that run from snapshots of fleet activity to real-time fleet dispatch capability. Telvisant includes truck communication service and computer backbone support of the software. Variations of Telvisant are tailored for specific industry applications. CrossCheck® Module – This hardware, mounted on the vehicle, provides location and information through its built-in cellular interface. This module also includes GPS positioning, sensor interfaces for vehicle conditions, and built-in intelligence for distributed decision-making. Portfolio Technologies Our Portfolio Technologies segment includes various operations that aggregate to less than 10 percent of our total revenue. The products in this segment are navigation modules and embedded sensors that are used in avionics, flight, and military applications. The two operations in this segment are Applanix, and Military and Advanced Systems (MAS). Applanix develops, manufactures, sells and supports high-value, precision products that combine GPS with inertial sensors for accurate measurement of the position and attitude of moving vehicles. Sales are made directly by our sales force to the end users or to systems integrators. Competitors include IGI in the airborne survey market, and iXsea and VT TSS in the marine survey market. Our MAS business supplies GPS modules that use the military’s GPS advanced capabilities. The modules are used for guiding aircraft. Military products are sold directly by our sales force to either the US Government or a contractor. Sales are also made to non-US governments, with the sales of the encrypted components taking place through the US Government. Competitors in this market include Rockwell, L3, Raytheon, and Thales. Representative products sold by this segment include: Applanix POS/AV - An integrated GPS/inertial system for airborne surveying that measures aircraft position to an accuracy of a few centimeters and aircraft attitude (angular orientation) to an accuracy of 30 arc seconds or better. This system is typically interfaced to large format cameras and scanning lasers for producing geo-referenced topographic maps of the terrain. Force 5™ Module – A dual frequency, embedded GPS module that is used in a variety of military airborne applications. Acquisitions and Joint Ventures Our growth strategy is centered around developing and marketing innovative and complete value-added solutions to our existing customers, while also marketing them to new customers and geographic regions. To do this, we believe it is essential to continually enhance our market position, which has led to partnering with or acquiring companies that bring technologies, products or distribution capabilities that will allow us to enter or penetrate a market quicker than if we had done so solely through internal development. Over the past five years, this has led us to form two 10 joint ventures and acquire six companies. No assurance can be given that our previous or future acquisitions will be successful or will not materially adversely affect our financial condition or operating results. Applanix Corporation * On July 7, 2003, we acquired privately held Applanix Corporation, a Canadian developer of systems that integrate inertial navigation system and GPS technologies. We expect the Applanix acquisition to extend our technology portfolio and enable increased robustness and capabilities in our future positioning products. Applanix’s performance is reported under our Portfolio Technologies segment. MENSI S.A. * On December 9, 2003, we acquired privately held MENSI S.A., a French developer of terrestrial 3D laser scanning technology. We expect the MENSI acquisition to enhance our technology portfolio and expand our product offerings. MENSI’s performance is reported under our Engineering and Construction segment. TracerNET Corporation * On March 5, 2004, we acquired privately held TracerNET Corporation of Virginia, a provider of wireless fleet management solutions. We expect the TracerNET acquisition to offer more diverse and complete fleet management solutions. TracerNET’s performance will be reported under our Mobile Solutions segment. Nikon-Trimble Co., Ltd. On March 28, 2003, Trimble and Nikon Corporation entered into an agreement to form a joint venture in Japan, Nikon-Trimble Co., Ltd., which would assume the operations of Nikon Geotecs Co., Ltd., a Japanese subsidiary of Nikon Corporation and Trimble Japan KK, our Japanese subsidiary. Nikon-Trimble began operations in July of 2003. Nikon-Trimble is 50% owned by us and 50% owned by Nikon, with equal voting rights. It is focusing on the design and manufacture of surveying instruments including mechanical total stations and related products. In Japan, this joint venture distributes Nikon’s survey products as well as our survey, agriculture, construction and GIS products. Outside of Japan, we are the exclusive distributor of Nikon survey and construction products. * We expect the joint venture to enhance our market position in survey instruments through geographic expansion and market penetration. The Nikon instruments will broaden our survey and construction product portfolio and enable us to better access emerging markets such as Russian, Chinese, and Indian markets. It will also provide us with the ability to sell our GPS and robotic technology to existing Nikon customers. Additionally, Nikon-Trimble is expected to improve our market position in Japan. Caterpillar Trimble Control Technologies, LLC On April 1, 2002, we established and began operations of a joint venture with Caterpillar called Caterpillar Trimble Control Technologies, LLC, in which each company has a 50% ownership stake and have equal voting rights. This joint venture is developing new generations of machine control products for the construction and mining markets for installation in the factory or as a dealer option. * Today, we sell construction machine control products to contractors through our dealer channel, for installation on bulldozers, motorgraders, and excavators that are already in the field (the “after-market”). However, both companies believe the adoption of the technology will spur future demand for machine control products that can be integrated into the design of new Caterpillar machines, while also available for “after-market” installation. Patents, Licenses and Intellectual Property We hold approximately 600 US patents and 108 non-US patents, the majority of which cover GPS technology and applications, and over 94 of which cover optical and laser technology and applications. 11 We prefer to own the intellectual property used in our products, either directly or though subsidiaries. From time to time we license technology from third parties. There are approximately 60 trademarks registered to Trimble including "Trimble," the globe and triangle logo, "AgGPS," "GeoExplorer," and "Telvisant," among others that are registered to Trimble Navigation Limited in the United States and other countries. Additional trademarks are pending registration. Sales and Marketing We currently have regional sales offices throughout North America and Europe. Offices serving the rest of the world include Australia, China, Korea, New Zealand, Singapore, and United Arab Emirates. We tailor the distribution channel to the needs of our products and regional markets. Therefore, we have a number of forms of sales channel solutions around the world. North America We sell our products in the United States and Canada primarily through dealers, distributors, and authorized representatives. This channel is supplemented and supported by our employees who provide additional sales support. In some cases, where third party distribution is not available, we utilize a direct sales force. We also utilize distribution alliances and OEM relationships with other companies as a means to serve selected markets. International We market to end users through an extensive world wide network of dealers and distributors. Distributors carry one or more product lines and are generally assigned a territory. We occasionally grant exclusive rights to market certain products within specified countries. See Note 3 of the Notes to the Consolidated Financial Statements for financial information regarding joint ventures Sales to unaffiliated customers outside the United States comprised approximately 51% in 2003, 49% in 2002, and 50% in 2001. During the 2003 fiscal year, North and South America represented 56%, Europe, the Middle East and Africa represented 31%, and Asia represented 13% of our total revenues. Support and Warranty The warranty periods for our products are generally between one and three years from date of shipment. Selected military programs may require extended warranty periods up to 5.5 years, certain TDS products have a 90-day warranty period, and certain Nikon products have a five-year warranty period. We support our GPS products through a circuit board replacement program from locations in the United Kingdom, Germany, Japan, and the United States. The repair and calibration of our non-GPS products are available from company-owned or authorized facilities. We reimburse dealers and distributors for all authorized warranty repairs they perform. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, our warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required. Seasonality of Business * Our revenues are affected by seasonal buying patterns in some of our businesses. Over half of our total revenue comes from our Engineering and Construction business, which has the biggest seasonal impact on our total revenue. This business, and therefore our total revenue, is seasonally strongest during the second quarter due to the start of the construction buying season in the northern hemisphere in spring. Typically, we expect the first and fourth quarters to be the seasonal lows due to the lack of construction during the winter months. If other factors such as 12 economic conditions or underlying growth in the business are removed, the historical variability in our total quarterly revenue from seasonality has generally been less than 10 percent. Backlog In most of our markets, the time between order placement and shipment is short. Therefore, we believe that backlog is not a reliable indicator of present or future business conditions. Manufacturing Manufacturing of our GPS products is subcontracted to Solectron Corporation. We completed the move of all Component Technologies products to Solectron in China in the first quarter of 2003. During 2003 we started utilizing Solectron in Mexico for some of our handheld products. We continue to utilize Solectron California for our high-end GPS products and new product introduction services. Solectron is responsible for substantially all material procurement, assembly, and testing. We continue to manage product design up through pilot production for the subcontracted products, and we are directly involved in qualifying suppliers and key components used in all our products. Our current contract with Solectron continues in effect until either party gives the other ninety days written notice. We manufacture laser and optics-based products at our plants in Dayton, Ohio; Danderyd, Sweden; and Jena and Kaiserslautern, Germany. Some of these products or portions of these products are also subcontracted to third parties for assembly. All of our manufacturing sites are registered to ISO9001:2000, covering the design, production, distribution, and servicing of all our products. The Component Technologies segment is registered to QS9000 for its automotive products. QS9000 is the automotive version of ISO9000 covering specific requirements for the market. Research and Development We believe that our competitive position is maintained through the development and introduction of new products that incorporate improved features, better performance, smaller size and weight, lower cost, or some combination of these factors. We invest substantially in the development of new products. We also make significant investment in the positioning, communication, and information technologies that underlie our products and will likely provide competitive advantages. Our research and development expenditures, net of reimbursed amounts were $67.6 million for fiscal 2003, $61.2 million for fiscal 2002, and $62.9 million for fiscal 2001. * We expect to continue investing in research and development with the goal of maintaining or improving our competitive position, as well as the goal of entering new markets and satisfying new needs for positioning related solutions. There can be no assurance that we will succeed in doing so. Employees As of January 2, 2004, we employed approximately 2,150 employees, including 30% in sales and marketing, 29% in manufacturing, 28% in engineering, and 13% in general and administrative positions. Approximately 45% of employees are in locations outside the United States. Our employees are not represented by unions except for those in Sweden and some in Germany. We also employ temporary and contract personnel that are not included in the above headcount numbers. We have not experienced work stoppages or similar labor actions. Available Information The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all the Company’s website through amendments those reports are available free of charge on to 13 www.trimble.com/investors.html, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Information contained on our website is not part of this annual report on Form 10-K. In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at our principal executive offices at the following address or telephone number: Trimble Navigation Limited 749 North Mary Avenue, Sunnyvale, CA 94085 Attention: Investor Relations Telephone: 408-481-8000 Executive Officers The names, ages, and positions of the Company's executive officers as of March 1, 2004 are as follows: Age Position Name --------------------------------------------------------------------------------------------------------------------------------- Steven W. Berglund Mary Ellen P. Genovese William C. Burgess Joseph F. Denniston, Jr. Bryn A. Fosburgh Mark A. Harrington John E. Huey Irwin L. Kwatek Michael W. Lesyna Bruce E. Peetz Christopher J. Shephard Anup V. Singh Alan R. Townsend Dennis L. Workman President and Chief Executive Officer Chief Financial Officer Vice President, Human Resources Vice President, Operations Vice President and General Manager, Geomatics and Engineering Vice President of Strategy and Business Development Treasurer Vice President and General Counsel Vice President and General Manager, Mobile Solutions Vice President, Advanced Technology and Systems Vice President and General Manager, Construction Instruments Corporate Controller Vice President and General Manager, Field Solutions Vice President and General Manager, Component Technologies 52 44 57 43 41 48 54 64 43 52 41 33 55 58 Steven W. Berglund – Steven Berglund joined Trimble as president and chief executive officer in March 1999. Prior to joining Trimble, Mr. Berglund was president of Spectra Precision, a group within Spectra Physics AB, and a pioneer in the development of laser systems. He spent 14 years at Spectra Physics in a variety of senior leadership positions. In the early 1980s, Mr. Berglund spent a number of years at Varian Associates in Palo Alto, where he held a variety of planning and manufacturing roles. Mr. Berglund began his career as a process engineer at Eastman Kodak in Rochester, New York. He attended the University of Oslo and the University of Minnesota where he received a B.S. in chemical engineering in 1974. He later received his M.B.A. from the University of Rochester in New York in 1977. Mary Ellen Genovese – Mary Ellen Genovese, chief financial officer, has been responsible for the overall financial activities of Trimble since September 2000. Ms. Genovese was vice president of finance and corporate controller from 1997 to September 2000. From 1994 to 1997, Ms. Genovese served as business unit controller for Software and Component Technologies, and Tracking and Communications. She joined Trimble as controller of manufacturing operations in December 1992. Prior to joining Trimble, Ms. Genovese was chief financial officer for Minton Co., a distributing company to the commercial building market, from 1991 to 1992. Prior to 1991, she worked for 10 years with General Signal Corp. in several management positions. Ms. Genovese is a certified public accountant and received her B.S. in accounting from Fairfield University in Connecticut in 1981. William C. Burgess – William Burgess joined Trimble in August of 2000 as vice president of Human Resources. Prior to joining Trimble, Mr. Burgess was vice president of Human Resources and Management Information Systems for Sonoma West Holdings, Inc. From 1993 to 1997, he served as vice president of Human Resources for 14 Optical Coating Laboratory, from 1990 to 1993, he established and managed the human resources function at Teknekron Communications Systems, and from 1985 to 1990 he was vice president of Human Resources for a $25 billion, 35,000-employee segment of Asea Brown Boveri (ABB), a global technology company. Mr. Burgess received a B.S. from the University of Nebraska and an M.S. in organizational development from Pepperdine University. Joseph F. Denniston, Jr. – Joseph Denniston joined Trimble as vice president of operations in April 2001, responsible for worldwide manufacturing, distribution and logistics. Prior to Trimble, Mr. Denniston worked for 3Com Corporation. During his 14-year tenure, he served as vice president of supply chain management for the Americas and held several positions in test engineering, manufacturing engineering and operations. Previously at Sentry Schlumberger for seven years, he held several positions including production engineering, production management and test engineering over six years. Mr. Denniston received a B.S. in electrical engineering technology from the Missouri Institute of Technology in 1981 and an M.S. in computer science engineering from Santa Clara University in 1990. Bryn A. Fosburgh – Bryn Fosburgh was appointed vice president and general manager of the Geomatics and Engineering business in July 2002, with responsibility for all the division-level activities associated with survey, construction, and infrastructure solutions. From October 1999 to July 2002, Mr. Fosburgh served as division vice president of survey and infrastructure. In 1997, Mr. Fosburgh was appointed director of development for the Company’s land survey business unit where he oversaw the development of field and office software that enabled the interoperability of Trimble survey products. Mr. Fosburgh joined Trimble in 1994 as technical service manager for surveying, mining, and construction. Prior to Trimble, Mr. Fosburgh was a civil engineer with the Wisconsin Department of Transportation where he was responsible for coordinating the planning, data acquisition, and data analysis for statewide GPS surveying projects in support of transportation improvement projects. He has also held various engineering, research and operational positions for the US Army Corps of Engineers and Defense Mapping Agency. Mr. Fosburgh received a B.S. in geology from the University of Wisconsin in Green Bay in 1985 and an M.S. in civil engineering from Purdue University in 1989. Mark A. Harrington – Mark Harrington joined Trimble in January 2004 as vice president of strategy and business development. Prior to joining Trimble, Mr. Harrington served as vice president of finance at Finisar Corporation and chief financial officer for both Cielo Communications, Inc. and Vixel Corporation. His experience also includes 11 years at Spectra-Physics where he served in a variety of roles including vice president of finance for Spectra-Physics Lasers, Inc. and vice president of finance for Spectra-Physics Analytical, Inc. Mr. Harrington began his career at Varian Associates, Inc. where he held a variety of management and individual positions in finance, operations and IT. Mr. Harrington received his B.S. in Business Administration from the University of Nebraska-Lincoln. John E. Huey – John Huey joined Trimble in 1993 as director corporate credit and collections, and was promoted to assistant treasurer in 1995 and treasurer in 1996. Past experience includes two years with ENTEX Information Services, five years with National Refractories and Minerals Corporation (formerly Kaiser Refractories), and thirteen years with Kaiser Aluminum and Chemical Sales, Inc. He has held positions in credit management, market research, inventory control, sales, and as an assistant controller. Mr. Huey received his B.A. degree in Business Administration in 1971 from Thiel College in Greenville, Pennsylvania and an MBA in 1972 from West Virginia University in Morgantown, West Virginia. Irwin L. Kwatek – Irwin Kwatek has served as vice president and general counsel of Trimble since November 2000. Prior to joining Trimble, Mr. Kwatek was vice president and general counsel of Tickets.com, a ticketing service provider, from May 1999 to November 2000. Prior to Tickets.com, he was engaged in the private practice of law for more than six years. During his career, he has served as vice president and general counsel to several publicly held high-tech companies including Emulex Corporation, Western Digital Corporation and General Automation, Inc. Mr. Kwatek received his B.B.A. from Adelphi College in Garden City, New York and an M.B.A. from the University of Michigan in Ann Arbor. He received his J.D. from Fordham University in New York City in 1968. Michael W. Lesyna – Michael Lesyna has been vice president and general manager of the Mobile Solutions segment since September 2000. Prior to Trimble, Mr. Lesyna spent six years at Booz Allen & Hamilton where he most recently served as a principal in the operations management group. Prior to Booz Allen & Hamilton, Mr. 15 Lesyna held a variety of engineering positions at Allied Signal Aerospace. Mr. Lesyna received his M.B.A., as well as an M.S. and B.S. in mechanical engineering from Stanford University. Bruce E. Peetz – Bruce Peetz has served as vice president of Advanced Technology and Systems since 1998 and has been with Trimble for 15 years. From 1996 to 1998, Mr. Peetz served as general manager of the Survey Business. Prior to joining Trimble, Mr. Peetz was a research and development manager at Hewlett-Packard for 10 years. Mr. Peetz received his B.S. in electrical engineering from Massachusetts Institute of Technology in Cambridge, Massachusetts in 1973. Anup V. Singh – Anup Singh has served as corporate controller since joining Trimble in December 2001. Prior to joining Trimble, Mr. Singh was with Excite@Home from July 1999 to December 2001. During his tenure at Excite@Home, he held the positions of senior director of Corporate Financial Planning and Analysis, and international controller. Before Excite@Home, Mr. Singh also worked for 3Com Corporation from December 1997 to July 1999, and Ernst & Young LLP in San Jose, California and London, England. Mr. Singh received his B.A. in 1991 and M.A. in 1995 in economics and management science from Cambridge University in England. He is also a chartered accountant and was admitted as a member of the Institute of Chartered Accountants in England and Wales in 1994. Christopher J. Shephard – Chris Shephard was appointed vice president and general manager of the Construction Instruments business area in July 2002 after serving as division vice president of operations for Engineering and Construction since Trimble’s acquisition of Spectra Precision Group in July 2000. Prior to Trimble, Mr. Shephard served from 1998 to 2000 as Spectra Precision’s chief financial officer. Mr. Shephard also worked for more than eight years at Booz Allen & Hamilton. Prior to Booz Allen & Hamilton, Mr. Shephard spent three years at Copeland Corporation, a division of Emerson, in their management-training program. Mr. Shephard received a B.A. in business studies from Manchester Polytechnic in England in 1985 and an M.M. from the J.L. Kellogg Graduate School of Management at Northwestern University, Evanston, Illinois in 1990. Alan R. Townsend – Alan Townsend has served as vice president and general manager of the Field Solutions business area since November 2001. He also serves as the managing director of Trimble Navigation New Zealand Ltd. for which he has overall site responsibility. From 1995 to 2001, Mr. Townsend was general manager of Mapping and GIS. Mr. Townsend joined Trimble in 1991 as the manager of Trimble Navigation New Zealand Ltd. Prior to Trimble, Mr. Townsend held a variety of technical and senior management roles within the Datacom Group of companies in New Zealand including managing director of Datacom Software Research Ltd. from 1986 to 1991. In addition, Mr. Townsend is a director of IT Capital Ltd., a venture capital company based in Auckland, New Zealand. He is also a fellow of the New Zealand Institute of Management and a past president of the New Zealand Software Exporters Association. Mr. Townsend received a B.S.c in economics from the University of Canterbury in 1970. Dennis L. Workman – Dennis Workman has served as vice president and general manager of Trimble’s Component Technologies segment since September 1999. From 1998 to 1999, Mr. Workman was senior director and chief technical officer of the newly formed Mobile and Timing Technologies (MTT) business group, also serving as general manager of Trimble's Automotive and Timing group. In 1997, he was director of engineering for Software & Component Technologies. Mr. Workman joined Trimble in 1995 as director of the newly created Timing vertical market. Prior to Trimble, Mr. Workman held various senior-level technical positions at Datum Inc. During his nine year tenure at Datum, he held the position of CTO. Mr. Workman received a B.S. in mathematics and physics from St. Mary’s College in 1967 and an M.S. in electrical engineering from the Massachusetts Institute of Technology in 1969. 16 Item 2 Properties The following table sets forth the significant real property that we own or lease: Location Segment(s) served Size in sq. feet Commitment Sunnyvale, California All Huber Heights (Dayton), Ohio Westminster, Colorado Engineering & Construction, Field Solutions Distribution Engineering & Construction, Field Solutions Corvallis, Oregon Engineering & Construction 150,000 150,000 57,200 32,800 73,000 20,000 21,000 Leased, expiring 2005 4 buildings Owned, no encumbrances Leased, expiring in 2011 Leased, month to month Leased, expiring 2006 2 buildings Owned, encumbered by $1.7M mortgage Leased, expiring 2006 Chandler, Arizona Mobile Solutions 11,500 Leased, expiring 2004 Toronto, Canada Portfolio Technologies 50,500 Leased, expiring 2004 Danderyd, Sweden Engineering & Construction 93,900 Leased, expiring 2005 Christchurch, New Zealand Engineering & Construction, Mobile Solutions, Field Solutions 65,000 Leased, expiring 2011 2 buildings Jena, Germany Engineering & Construction 28,700 Leased, no expiration date 12 months notice Kaiserslautern, Germany Engineering & Construction 26,000 Leased, expiring 2005 Raunheim, Germany Sales 28,700 Leased, expiring 2011 In addition, we lease a number of smaller offices around the world primarily for sales functions. For financial information regarding obligations under leases, see Note 10 of the Notes to the Consolidated Financial Statements. * We believe that our facilities are adequate to support current and near-term operations. Item 3 Legal Proceedings * We are from time to time a party to disputes or litigation incidental to our business. We believe that our ultimate liability as a result of such disputes, if any, would not be material to our overall financial position, results of operations, or liquidity. Item 4 Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of 2003. 17 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters PART II On January 22, 2004, our Board of Directors approved a 3-for-2 split of all outstanding shares of our common stock, payable March 4, 2004 to stockholders of record on February 17, 2004. All shares and per share information presented has been adjusted to reflect the stock split on a retroactive basis for all periods presented. Our common stock is traded on the Nasdaq National Market under the symbol "TRMB." The table below sets forth, during the periods indicated, the high and low per share bid prices for our common stock as reported on the Nasdaq National Market. 2003 Sales Price Low Quarter Ended First quarter Second quarter Third quarter Fourth quarter High $14.17 18.50 19.57 25.60 $8.68 12.43 14.97 13.49 2002 Sales Price Low High $11.43 12.33 10.00 9.65 $7.84 9.98 6.85 5.35 As of January 2, 2004, there were approximately 1,055 holders of record of our common stock. We made the following sales of unregistered securities during the year ended January 2, 2004. Our merger agreement with LeveLite provides for us to make earn-out payments not to exceed an aggregate $3.9 million (in common stock and cash payment) based on certain future revenues and payments received. Upon a hearing before the California Department of Corporations in which the terms and conditions of the offer to the LeveLite shareholders were approved, the shares of Common Stock to be issued in the transaction were exempt from registration by reason of qualification under Section 3(a)(10) of the Securities Act of 1933, as amended. We made the following earn-out payments in common stock during fiscal 2003: Date of issuance January 22, 2003 April 23, 2003 July 29, 2003 October 27, 2003 Number of shares issued 35,994 26,549 20,679 19,842 Price $ 9.35 13.86 16.52 15.25 On June 30, 2003, we issued 349,251 shares of common stock to Nikon-Trimble Co. Ltd. We issued these shares as a contribution to capital in the formation of Nikon-Trimble Co. Ltd. as a joint venture with Nikon Corporation. The shares were valued at $16.95 per share and were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, based on the nature of the purchaser and the nature of the arms-length negotiated transaction. Dividend Policy We have not declared or paid any cash dividends on our common stock during any period for which financial information is provided in this Annual Report on Form 10-K. At this time, we intend to retain future earnings, if any, to fund the development and growth of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We are allowed to pay dividends and repurchase shares of our common stock up to 25% of net income in the previous fiscal year, under the existing terms of our credit facilities. 18 Equity Compensation Plan Information The following table sets forth, as of January 2, 2004, the total number of securities outstanding under our stock option plans, the weighted average exercise price of such options, and the number of options available for grant under such plans. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Equity compensation plans approved by security holders: Stock Option Plans …. Equity compensation plans not approved by security holders... Total ………………... 7,600,787 - 7,600,787 Item 6. Selected Financial Data Weighted average exercise price of outstanding options, warrants and rights (b) $13.61 - $13.61 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 1,643,555 - 1,643,555 The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this annual report. Historical results are not necessarily indicative of future results. In particular, because the results of operations and financial condition related to our acquisitions are included in our Consolidated Statement of Operations and Consolidated Balance Sheets data commencing on those respective acquisition dates, comparisons of our results of operations and financial condition for periods prior to and subsequent to those acquisitions are not indicative of future results. We have significant intangible assets on our Consolidated Balance Sheets that include goodwill and other purchased intangibles related to acquisitions. At the beginning of fiscal 2002, we adopted Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations, and No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Application of the non-amortization provisions of SFAS 142 significantly reduced amortization expense of purchased intangibles and goodwill to approximately $8.3 million for the fiscal year 2002 from $29.4 million in fiscal year 2001. 19 Fiscal Years Ended (Dollar in thousands, except per share data) Revenue Gross margin Gross margin percentage Income (loss) from continuing operations Gain on disposal of discontinued operations (net of tax) Net income (loss) Per common share: (1) Income (loss) from continuing operations - Basic - Diluted Gain on disposal of discontinued operations (net of tax) - Basic - Diluted Net income (loss) - Basic - Diluted Shares used in calculating basic earnings per January 2, 2004 January 3, 2003 December 28, 2001 December 29, 2000 December 31, 1999 $ 540,903 $ 466,602 $ 475,292 $ 369,798 $ 271,364 $ 268,030 $ 234,432 $ 237,235 $ 196,561 $ 144,247 53% $ 38,485 $ 10,324 $ (23,492) $ 14,185 $ 18,662 53% 50% 50% 50% - $ $ - $ 2,931 $ 38,485 $ 10,324 $ (22,879) $ 14,185 $ 21,593 - $ 613 $ $ 0.81 $ 0.24 $ (0.63) $ 0.40 $ 0.55 $ 0.77 $ 0.24 $ (0.63) $ 0.37 $ 0.54 $ $ - $ - $ - $ 0.01 $ - $ 0.01 $ - $ 0.09 - $ 0.09 $ 0.81 $ 0.24 $ (0.62) $ 0.40 $ 0.64 $ 0.77 $ 0.24 $ (0.62) $ 0.37 $ 0.63 share (1) 47,505 42,860 37,091 35,402 33,636 Shares used in calculating diluted earnings per share (1) Cash dividends per share Total assets Non-current portion of long term debt and 50,012 43,578 37,091 38,964 $ - $ - $ - $ - $ 34,278 - $ 544,903 $ 441,656 $ 419,395 $ 488,628 $ 181,751 other liabilities $ 85,880 $ 114,051 $ 131,759 $ 143,553 $ 33,821 (1) Earnings per share and shares used in calculating earnings per share have been restated to reflect a three-for-two stock split in February 2004. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those listed under "Risks and Uncertainties." EXECUTIVE LEVEL OVERVIEW We are a global provider of complete, integrated solutions that provide a seamless flow of position information both in the field and between the field and back office. To do this, we utilize advanced positioning technologies (including GPS, optical, inertial and laser technologies) combined with wireless communications and applications software, to get data points with accuracies down to several millimeters. This can increase productivity through time and cost savings, as the need for labor is reduced, rework from mistakes is less frequent, and the time to complete a job is shortened. 20 Our solutions businesses, Engineering and Construction, Field Solutions, and Mobile Solutions make up over 80% of our revenue. We believe our strength in these businesses stems from our ability to bring innovative products or solutions to the market, as well as effectively train and manage a global, third-party distribution channel that is proficient in selling technology solutions into markets that have historically utilized manual and low-tech processes. In 2003 we extended our market and product capabilities through internal development, acquisitions, and alliances. In July, we established a joint venture with Nikon Corporation, which will extend our presence in the global construction positioning market. Our acquisitions of Applanix in July and MENSI in December added important new technologies which will enable us to develop new applications or broaden current application solutions. We also announced an alliance with CNH Global, which will significantly extend our distribution reach for our Autopilot agricultural product line. Our other strategic business, Component Technologies, is different from the “solution businesses”, as it seeks to either provide GPS technology directly to third parties, such as OEM's and system integrators, or to integrate GPS into other technologies, such as wireless. These products allow for higher functionality and therefore, a higher average selling price for our offerings. Through greater integration we see potential future growth opportunities. For example, our recently announced TrimTrac product integrates GPS and GSM cellular technologies into a fully functional location device. It establishes a new asset tracking or security capability at an aggressive price point and opens up a new class of customers and applications which were previously not available to us. In 2003 we positioned ourselves in newer markets that will serve as important sources of future growth. Our efforts in China, India, Russia, Korea and Eastern Europe all reflected improving financial results, with the promise of more in the future. With our improving profitability, we now have the opportunity to re-emphasize revenue growth. We expect this growth to come from the continuation of several trends that we saw in 2003. These trends include further penetrating existing markets with current and new products, continued geographic expansion into emerging markets such as Russia, China, India, Korea and Eastern Europe, taking advantage of market consolidation, improving competitive position due to offering complete solutions with a proficient dealer channel, and entering new markets with new products such as our TrimTrac & Recon products, fleet management services, and our inertial/GPS positioning and orientation systems acquired as part of Applanix. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. We consider the accounting polices described below to be our critical accounting polices. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these policies. Revenue Recognition We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product is specified by the customer or is uncertain, revenue is deferred until all acceptance criteria have been met. Our total deferred revenue was $7.7 million and $6.0 million as of January 2, 2004 and January 3, 2003, respectively. Revenue is reduced by a sales return reserve as described under “Allowance for Doubtful Accounts and Sales Returns.” Revenue from purchased extended warranty and support agreements is deferred and recognized ratably over the term of the warranty/support period. Substantially all technology licenses and research revenue have consisted of initial license fees and royalties, which were recognized when earned, provided we had no remaining obligations. 21 Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Our shipment terms for US orders, and international orders fulfilled from our European distribution center are typically FCA (Free Carrier) shipping point, except certain sales to US government agencies which are shipped FOB destination. FCA shipping point means that we fulfill the obligation to deliver when the goods are handed over, cleared for export, and into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, we may choose within the place or range stipulated where the carrier will take the goods into carrier’s charge. Other international orders are shipped FOB destination, which means these international orders are not recognized as revenue until the product is delivered and title has transferred to the buyer or FCA shipping point. FOB destination means that we bear all costs and risks of loss or damage to the goods up to that point. . Revenue to distributors and resellers is recognized upon delivery, assuming all other criteria for revenue recognition have been met. Distributors and resellers do not have a right of return. When a sale involves multiple elements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. The amount of product revenue allocated to an individual element is limited to the lesser of its relative fair value or the amount not contingent on our delivery of other elements under the arrangement, regardless of the probability of our performance. Our software arrangements generally consist of a license fee and post-contract customer support (PCS). We have established vendor-specific objective evidence (VSOE) of fair value for our PCS contracts based on the renewal rate. The remaining value of the software arrangement is allocated to the license fee using the residual method, and revenue is primarily recognized when the software has been delivered and there are no remaining obligations. Revenue from PCS is recognized ratably over the term of the PCS agreement. Allowance for Doubtful Accounts and Sales Returns Our accounts receivable balance, net of allowance for doubtful accounts, was $96.2 million as of January 2, 2004, compared with $77.6 million as of January 3, 2003. The allowance for doubtful accounts as of January 2, 2004 was $10.0 million, compared with $9.9 million as of January 3, 2003. We evaluate the collectibility of our trade accounts receivable based on a number of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, a specific allowance for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding. A reserve for sales returns is established based on historical trends in product return rates experienced in the ordinary course of business. The reserve for sales returns as of January 2, 2004 and January 3, 2003 included $3.3 million and $2.7 million, respectively, for estimated future returns that were recorded as a reduction of our accounts receivable and revenue. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected. Inventory Valuation Our inventory balance was $70.8 million as of January 2, 2004, compared with $61.1 million as of January 3, 2003. Our inventory allowances as of January 2, 2004 were $25.9 million, compared with $25.2 million as of January 3, 2003. Our inventory is recorded at the lower of cost or market. We use a standard cost accounting system to value inventory and these standards are reviewed a minimum of once a year and multiple times a year in our most active manufacturing plants. We adjust the inventory value for estimated excess and obsolete inventory based on our 22 assessment of future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by us, additional inventory write-downs may be required. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is determined to be more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we consider future taxable income, resolution of tax uncertainties and prudent and feasible tax planning strategies. In fiscal year 2003, we have recorded a deferred tax asset of $7.6 million that is more likely than not to be realized. We need to generate $20.0 million of future US income to realize the deferred tax asset. If we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the carrying value of the deferred tax assets would be charged to income in the period in which such determination is made. Our effective income tax rates from continuing operations for fiscal years 2003, 2002 and 2001 were (8%), 25% and (9%), respectively. The 2002 and 2001 income tax rates differ from the US federal statutory rate of 35%, due primarily to non-US taxes and the inability to realize the benefit of net operating losses. The 2003 income tax rate is less than the US federal statutory rate, due primarily to the realization of benefits from net operating losses and other previously reserved deferred tax assets. Goodwill Impairment Goodwill as of January 2, 2004 was $241.4 million, compared with $205.9 million as of January 3, 2003. We perform goodwill impairment tests on an annual basis for each reporting unit. Based on impairment tests performed, there was no impairment of our goodwill in fiscal 2003 and 2002. For goodwill, the annual impairment evaluation includes a comparison of the carrying value of the reporting unit (including goodwill) to that reporting unit’s fair value. If the reporting unit’s estimated fair value exceeds the reporting unit’s carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the unit’s carrying value, then an additional analysis is performed to allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if that unit had been acquired in a business combination and the fair value of the unit was the purchase price. If the excess of the fair value of the reporting unit over the fair value of the identifiable assets and liabilities is less than the carrying value of the unit’s goodwill, an impairment charge is recorded for the difference. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in our relationships with significant customers. Accounting for the Long-Lived Assets Including Intangibles Subject to Amortization Depreciation and amortization of our long-lived assets is provided using straight-line methods over their estimated useful lives. Changes in circumstances such as the passage of new laws or changes in regulations, technological advances, changes to our business model, or changes in the capital strategy could result in the actual useful lives differing from initial estimates. In those cases where we determine that the useful life of a long-lived asset should be revised, we will depreciate the net book value in excess of the estimated residual value over its revised remaining useful life. Factors such as changes in the planned use of equipment, customer attrition, contractual amendments, or mandated regulatory requirements could result in shortened useful lives. Long-lived assets and asset groups are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based 23 upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. Warranty Costs The liability for product warranties was $5.1 million as of January 2, 2004, compared with $6.4 million as of January 3, 2003. (See Note 1 of the Notes to the Consolidated Financial Statements for further information regarding our warranty liability.) The warranty periods for our products are generally between one and three years from date of shipment. Selected military programs may require extended warranty periods up to 5.5 years, certain TDS products have a five year or 90-day warranty period, and certain Nikon products have a five year warranty period. We accrue for warranty costs as part of our cost of sales based on associated material costs and technical support labor costs. Material cost is primarily estimated based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from our estimates, revisions to the estimated warranty accrual and related costs may be required. Stock Compensation We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for our stock option plans and stock purchase plan. Accordingly, we do not recognize compensation cost for stock options granted at a price equal to fair market value. Note 13 of the Notes to the Consolidated Financial Statements describes the plans we operate, and Note 1 of the Notes to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income (loss) and earnings (loss) per share for fiscal 2003, 2002, and 2001 as if we had elected to recognize compensation cost based on the fair value of the options granted at grant date. Investment in Joint Ventures We have adopted the equity method of accounting for our investments in the Caterpillar and Nikon joint ventures. This requires that we record our share of the joint ventures’ profits or losses in a given fiscal period. See Note 3 of the Notes to the Consolidated Financial Statements for joint venture accounting. Upon the formation of our Caterpillar joint venture in April 2002, we received a cash distribution of $11.0 million. We have elected to treat the cash distribution as a deferred gain, being amortized to the extent that losses are attributable from the Caterpillar joint venture under the equity method described above. When and if the joint venture is profitable on a sustainable basis and future operating losses are not anticipated, then we will recognize as a gain, the portion of the $11.0 million, which is unamortized. To the extent that it is possible that we will have any future-funding obligation relating to the Caterpillar joint venture, then the relevant amount of the $11.0 million will be deferred until such time that the funding obligation no longer exists. As of January 2, 2004, the balance of the unamortized deferred gain was $9.8 million. RECENT BUSINESS DEVELOPMENTS Nikon-Trimble Joint Venture On March 28, 2003, Trimble and Nikon Corporation entered into an agreement to form a joint venture in Japan, Nikon-Trimble Co., Ltd. (“Nikon-Trimble”), which would assume the operations of Nikon Geotecs Co., Ltd., a Japanese subsidiary of Nikon Corporation and Trimble Japan KK, our Japanese subsidiary. Nikon-Trimble began operations in July of 2003. 24 Under the terms of the Nikon-Trimble agreement, Nikon contributed ¥1.2 billion (approximately US$10 million on June 30, 2003) in cash, while we contributed ¥500 million (approximately US$4.1 million as of June 30, 2003) in cash and ¥700 million of our common stock or 349,251 shares valued at approximately US$5.9 million on June 30, 2003. Nikon-Trimble purchased certain tangible and intangible assets from Nikon Geotecs Co., Ltd., and Trimble Japan KK. Nikon-Trimble is 50% owned by us and 50% owned by Nikon, with equal voting rights for both. Nikon-Trimble focuses on the design and manufacture of surveying instruments including mechanical total stations and related products. In Japan, this joint venture will distribute Nikon’s survey products as well as our GPS survey products and other Engineering and Construction products, including robotic total stations. Outside Japan, we will be the exclusive distributor of Nikon survey and construction products. * We expect the joint venture to enhance our market position in survey instruments through geographic expansion and market penetration. Nikon’s line of instruments will broaden our survey and construction product portfolio and enable us to better access emerging markets. It will also provide us with the ability to sell our GPS and robotic technology to existing Nikon customers. Additionally, we expect to improve our market position in Japan because of the Nikon-Trimble distribution network. Acquisitions Applanix Corporation * On July 7, 2003, we acquired privately held Applanix Corporation, a Canadian developer of systems that integrate inertial navigation system and GPS technologies. We expect the Applanix acquisition to extend our technology portfolio and enable increased robustness and capabilities in our future positioning products. Applanix’s performance is reported under our Portfolio Technologies segment. MENSI S.A. * On December 9, 2003, we acquired privately held MENSI S.A., a French developer of terrestrial 3D laser scanning technology. We expect the MENSI acquisition to enhance our technology portfolio and expand our product offerings. MENSI’s performance is reported under our Engineering and Construction segment. The combined purchase price of Applanix and MENSI was approximately $25 million. TracerNET Corporation * On March 5, 2004, we acquired privately held TracerNET Corporation of Virginia, a provider of wireless fleet management solutions. We expect the TracerNET acquisition to offer more diverse and complete fleet management solutions. TracerNET’s performance will be reported under our Mobile Solutions segment. RESULTS OF OPERATIONS The following table shows revenue and operating income by segment for the periods indicated and should be read in conjunction with the narrative descriptions below. Operating income by segment excludes unallocated corporate expenses which are comprised primarily of general and administrative costs, amortization of purchased intangibles as well as other items not controlled by the business segment. Segment operating income for fiscal 2002 and fiscal 2001 have been restated to reflect the allocations of certain corporate expenses so as to be comparable with the allocation methodology in fiscal 2003. At the beginning of fiscal 2003, we realigned two of our reportable segments. The following table shows restated revenue and operating income by segment to reflect this realignment. The Tripod Data Systems business is now included in the Engineering and Construction segment and was previously included in the Portfolio Technologies segment. 25 Fiscal Years Ended (Dollars in thousands) January 2, 2004 January 3, 2003 December 28, 2001 Total consolidated revenue Total consolidated operating income $540,903 $ 83,586 $466,602 $ 62,320 $475,292 $ 62,306 Engineering and Construction Revenue Segment revenue as a percent of total revenue Operating income Operating income as a percent of segment revenue Field Solutions Revenue Segment revenue as a percent of total revenue Operating income Operating income as a percent of segment revenue Mobile Solutions Revenue Revenue as a percent of total consolidated revenue Operating loss Operating loss as a percent of segment revenue Component Technologies Revenue Segment revenue as a percent of total revenue Operating income Operating income as a percent of segment revenue Portfolio Technologies Revenue Segment revenue as a percent of total revenue Operating income (loss) Operating income (loss) as a percent of segment revenue $367,058 68% 60,664 17% $319,615 68% 53,453 17% $317,849 67% 49,849 16% 79,879 15% 14,500 18% 12,981 2% (6,452) (50%) 64,193 12% 16,560 26% 16,792 3% (1,686) (10%) 67,259 14% 9,676 14% 8,486 2% (12,039) (142%) 59,755 13% 10,673 18% 11,487 2% 557 5% 68,519 14% 11,349 17% 13,791 3% (9,990) (72%) 58,083 12% 10,359 18% 17,050 4% 738 4% A reconciliation of our consolidated segment operating income (loss) to consolidated income before income taxes follows: Fiscal Years Ended (In thousands) Consolidated segment operating income from continuing operations Unallocated corporate expense Amortization of purchased intangible assets Restructuring charges Non-operating expense, net Consolidated income (loss) before income taxes January 2, 2004 January 3, 2003 December 28, 2001 $83,586 (20,320) (7,312) (2,019) (18,350) $ 35,585 $ 62,320 (19,098) (8,300) (1,099) (19,999) $ 13,824 $ 62,306 (29,137) (29,389) (3,599) (21,773) $ (21,592) 26 Basis of Presentation We have a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2003 was January 2, 2004. Fiscal 2003 was a 52-week year and fiscal 2002 a 53-week year. As a result of the extra week in fiscal 2002, year-over-year results are not exactly comparable. Thus, due to the inherent nature of adopting a 52-53 week fiscal year, the Company, analysts, shareholders, investors, and others will have to make appropriate adjustments to any analysis performed when comparing our activities and results in fiscal years that contain 53 weeks to those that contain the standard 52 weeks. Fiscal year 2001 comprised 52 weeks. Impact of Weaker US Dollar on Operating Income in Fiscal 2003 The depreciation of the US dollar versus major European currencies positively impacted revenues by approximately $15.3 million in fiscal 2003 compared with fiscal 2002. As a result of our significant manufacturing, distribution, research and development, and selling expenses incurred outside of the US, the weaker US dollar negatively impacted our operating income by approximately $5.9 million in fiscal 2003. Revenue In fiscal 2003, total revenue increased by $74.3 million or 15.9% to $540.9 million from $466.6 million in fiscal 2002. The increase in fiscal 2003 was primarily due to stronger performances in all of our operating segments driven by the new product offerings, increased acceptance of our products in the markets we serve, expanded distribution and selective acquisitions, as well the positive impact of the weaker US dollar on revenues generated in foreign currencies, primarily the Euro. Total revenue in fiscal 2002 decreased by $8.7 million or 1.8% to $466.6 million from $475.3 million in fiscal 2001, primarily due to the reduction of revenue in Mobile Solutions and Portfolio Technologies segments. International Revenues * Total revenue outside the United States comprised approximately 51% in 2003, 49% in 2002, and 50% in 2001. During the 2003 fiscal year, North and South America represented 56%, Europe, the Middle East and Africa represented 31%, and Asia represented 13% of total revenues. In fiscal 2003, the United States comprised approximately 49% of total revenues. We anticipate that sales to international customers will continue to account for a significant portion of our revenue. For this reason, we are subject to the risks inherent in these foreign sales, including unexpected changes in regulatory requirements, exchange rates, governmental approval, tariffs, or other barriers. Even though the US Government announced on March 29, 1996, that it supports and maintains the GPS system, and on May 1, 2000, stated that it has no intent to restore Selective Availability, a method of degrading GPS accuracy, there may be reluctance in certain non-US markets to purchase such products given the control of GPS by the US Government. Our results of operations could be adversely affected if we were unable to continue to generate significant sales in locations outside the US. * No single customer accounted for 10% or more of our total revenues in fiscal 2003, 2002, and 2001. It is possible, however, that in future periods the failure of one or more large customers to purchase products in quantities anticipated by us may adversely affect the results of operations. Gross Margin Our gross margin varies due to a number of factors including product mix, international sales mix, customer type, the effects of production volumes and fixed manufacturing costs on unit product costs, new product start-up costs, and foreign currency translations. Gross margin as a percentage of total revenues was 49.6 % in fiscal 2003 and 50.2% in fiscal 2002. The slight decrease in gross margin percentage for fiscal 2003, compared with fiscal 2002, was due primarily to the introduction of the Nikon products in the third quarter which generated a lower consolidated gross margin of approximately 0.8%. This was partially offset by stronger sales of TDS, GIS, wireless infrastructure, survey products as well as our ongoing focus on product cost reductions. Shipping and handling costs are included in cost of goods sold. 27 Gross margin as a percentage of total revenues was 50.2% in fiscal 2002 and 49.9% in fiscal 2001. The slight increase in gross margin percentage for fiscal 2002, compared with fiscal 2001, was due in part to approximately $3.3 million of additional charges associated with the write down of obsolete inventory in fiscal 2001 related to the rationalization and simplification of product lines and inventories in excess of our forecasted 12-month demand. * Because of potential product mix changes within and among the industry markets, market pressures on unit selling prices, fluctuations in unit manufacturing costs, including increases in component prices and other factors, current level gross margins cannot be assured. In addition, should the global economic conditions deteriorate, gross margin could be further adversely impacted. Engineering and Construction Engineering and Construction revenues increased by $47.4 million or 14.8% while segment operating income increased by $7.2 million or 13.5% for fiscal 2003 as compared to fiscal 2002. Approximately half of the revenue increase was driven by new product introductions and our increased marketing efforts. The remaining increase was split evenly between geographic expansion, especially in Asia and Russia, and the impact of the weaker US dollar. Segment operating income increased due to higher revenues that were partially offset by increased operating expenses outside the United States (largely driven by the weaker US dollar), increased research and development spending on certain programs as we continue to invest in developing next generation technology and lower margins earned on the sale of Nikon products. Overall, segment operating income remained consistent at 17% of revenues. Engineering and Construction revenues increased by $1.8 million or 0.6% during fiscal 2002 as compared to fiscal 2001 primarily due to the LeveLite acquisition which added $3.6 million of revenues, and strong performance by our machine control product offering as we continue to penetrate the after-market for machine guidance on earthmoving equipment. Increased revenues were partially offset by a reduction in revenues in several product areas due to continued difficult global economic conditions. Segment operating income increased by $3.6 million or 7.2% in fiscal 2002 over fiscal 2001 primarily due to a reduction of $4.2 million of operating expenses due to the transfer of employee-related expenses to Caterpillar Trimble Control Technologies. Higher revenues and lower operating expenses were partially offset by a reduction in gross margin as a result of product sales mix during fiscal 2002. Field Solutions Field Solutions revenues increased by approximately $12.6 million or 18.8% while segment operating income increased by $4.8 million or 49.9% for fiscal year 2003 as compared to fiscal 2002. Revenues were up year over year due to continued strong sales of the GeoExplorer® CE series handhelds released at the end of fiscal 2002, and due to the expansion of our automatic guidance products onto new agricultural vehicles. Segment operating income increased in 2003 from the fiscal year 2002 primarily due to higher revenues. This increase was partially offset by fractionally lower gross margins and more investment in research and development and sales functions. This enabled the segment operating income to increase from 14% to 18% of revenues. Field Solutions experienced a revenue decline in fiscal 2002 of $1.3 million or 1.8% compared with fiscal 2001 primarily due to the decline in the United States federal, state, and local government spending and a delay in the release of the new GeoExplorer® CE Series due to component supply issues. This decrease was partially offset by the increased demand for both the manual and auto guidance product lines. Segment operating income decreased by $1.7 million or 14.7% in fiscal 2002 over fiscal 2001 primarily due to the decrease in government spending described above and lower gross margin due to product sales mix, which was more weighted toward the relatively lower margin agricultural business area. Mobile Solutions Mobile Solutions revenues increased by $4.5 million or 53% in fiscal 2003 over fiscal 2002 due primarily to an increase in our CrossCheck product sales and higher fleet management services revenues as a result of an expanded customer base. Segment operating loss decreased by $5.6 million or 46.4% in fiscal 2003 over fiscal 2002 due to increased revenues and lower operating expenses. Operating expenses decreased by approximately $3.0 million primarily due to a reduction in outside services and our personnel related to the completion of our Telvisant system. 28 Mobile Solutions revenues decreased by $5.3 million or 38.5% in fiscal 2002 over fiscal 2001 primarily due to the reduction of approximately $3.0 million in our satellite communications business as a result of our decision to discontinue the Galaxy Inmarsat-C™ product line in early 2001, a slow down in system integration projects due to reduced spending at municipalities, and reduced sales of wireless products of $0.9 million due to a transition from a sensor provider to a fully integrated service provider. Sales of some product lines were down as a result of the economic slow down and the shift of technology from analog to digital. Segment operating loss increased by $2.0 million or 20.5% in fiscal 2002 over fiscal 2001 primarily due to the lower revenues as described above, and increased costs incurred in the development and marketing of a service platform to enable a range of asset management solutions. Component Technologies Component Technologies revenues increased by $4.4 million or 7.4%, while segment operating income increased by $5.9 million or 55.2% for the fiscal year 2003 as compared to fiscal 2002. The increase in revenues was primarily due to increased demand from our existing wireless infrastructure customers. Segment operating income increased from 18% to 26% of revenues. The increase was primarily due to a reduction in costs of goods sold due to the transfer of the manufacturing of our products to China, reduced costs of raw materials, increased revenues and higher margins aided by favorable product mix. Component Technologies revenues increased by $1.7 million or 2.9% in fiscal 2002 over fiscal 2001 due primarily to a timing products increase of $4.6 million in fiscal 2002 over fiscal 2001 due to significant demand during the second half of fiscal 2002 from new and existing wireless infrastructure customers. IVN revenue decreased $1.0 million in fiscal 2002 over fiscal 2001 as average selling prices declined by more than 9%, and license revenue decreased $1.7 million in fiscal 2002 over fiscal 2001 due to an expired license contract. Component Technologies operating income increased by $0.3 million or 3% in fiscal 2002 over fiscal 2001 as a result of higher gross margins resulting from higher revenues and favorable product mix, partially offset by higher operating expenses, primarily in research and development and marketing. Portfolio Technologies Portfolio Technologies revenues increased by $5.3 million or 46.2% for the fiscal year 2003 as compared to fiscal 2002. The increase in revenues was mostly driven by the inclusion of revenue from Applanix acquired in 2003, while offset by lower revenue of military-related products. Segment operating income decreased by $2.2 million or 402.7% for fiscal 2003 as compared to fiscal 2002 due to weaker operating results from military products. Portfolio Technologies revenues decreased by $5.6 million or 32.6% in fiscal 2002 over fiscal 2001 primarily due to lost revenues of $4.4 million as a result of the sale of our air transport product line to Honeywell in fiscal 2001. Portfolio Technologies operating income decreased by $0.2 million or 24.5% in fiscal 2002 over fiscal 2001 due to the lower revenues which was offset by cost reduction initiatives. 29 Operating Expenses The following table shows operating expenses for the periods indicated and should be read in conjunction with the narrative descriptions of those operating expenses below: Fiscal Years Ended (In thousands) Research and development Sales and marketing General and administrative Restructuring charges Amortization of goodwill and other purchased intangible assets Total operating expenses Research and Development January 2, 2004 January 3, 2003 December 28, 2001 $ 67,641 97,870 39,253 2,019 7,312 $ 214,095 $ 61,232 89,344 40,634 1,099 8,300 $ 200,609 $ 62,881 103,778 37,407 3,599 29,389 $ 237,054 Research and development expenses increased by $6.4 million to $67.6 million in fiscal 2003 over fiscal 2002 due to continued investment in next generation technology primarily in the Engineering and Construction segment, the weakness of the US dollar versus major European and New Zealand currencies, and also the inclusion of the research and development expenses from Applanix after the acquisition in July 2003. Overall spending remained relatively constant at approximately 13% of revenues. All of our research and development costs have been expensed as incurred. Research and development spending decreased by $1.6 million during fiscal 2002 as compared to fiscal 2001 and represented 13% of revenue, consistent with 13% in fiscal 2001, primarily due to the transfer of employee-related expenses to our Caterpillar joint venture of approximately $2.8 million, partially offset by an increase in engineering expenses associated with the introduction of new products. * We believe that the development and introduction of new products are critical to the our future success and we expect to continue active development of new products. Sales and Marketing Sales and marketing expenses increased by $8.5 million to $97.9 million in fiscal 2003 over fiscal 2002 primarily due to higher revenue, increased sales efforts mostly in emerging geographic areas such as China and Russia, the impact of the weaker US dollar in Europe, and the inclusion of Applanix sales and marketing expenses not applicable in the prior fiscal year. As a percentage of revenue, sales and marketing expenses decreased from 19% to 18%. Sales and marketing expenses decreased by $14.4 million in fiscal 2002 and represented 19% of revenue, compared with 22% in fiscal 2001. During fiscal 2001, we sold off many of our direct sales offices which decreased sales and marketing expenses by approximately $7.0 million for fiscal 2002, and we decreased overall compensation, travel, advertising, promotional, and trade show expenses by approximately $7.4 million for fiscal 2002 compared to the corresponding period in fiscal 2001. * Our future growth will depend in part on the timely development and continued viability of the markets in which we currently compete as well as our ability to continue to identify and exploit new markets for our products. General and Administrative General and administrative expenses in fiscal 2003 decreased by $1.4 million to $39.3 million and represented 7.3% of revenues compared with 8.7% in fiscal 2002. In fiscal 2002, we experienced higher bad debt expenses, primarily 30 due to the bankruptcy of a large Japanese distributor. In addition, in fiscal 2003 we incurred $3.0 million less in information systems expenses. These reductions were offset in fiscal 2003 by lower sublease income received, expenses from Applanix after the acquisition in July 2003, and higher compensation costs. General and administrative expenses increased by $3.2 million in fiscal 2002 representing 9% of revenue, compared with 8% in fiscal 2001 primarily due to an increase in bad debt provisions related to customers in an uncertain economic environment and bad debt expenses for accounts written off during the year due to customer defaults. Restructuring Charges Restructuring charges of $2.0 million were recorded in fiscal 2003, $1.1 million in fiscal 2002, and $3.6 million in fiscal 2001, all of which related to severance costs, except for $0.3 in 2003 which related to lease costs of our Japanese office closure due to the Nikon joint venture. As a result of the restructuring activities, our headcount decreased by 77, 49, and 207 in fiscal 2003, 2002, and 2001, respectively. As of January 2, 2004, the restructuring accrual balance was approximately $0.4 million which will be paid over the remaining term of the lease through 2006. Amortization of Goodwill, Purchased and Other Intangible Assets Fiscal Years Ended (in thousands) Amortization of goodwill and purchased intangibles (1) Amortization of other intangible assets Total amortization of goodwill, purchased, and other intangible assets (1) Amortization of goodwill in 2001 only. January 2, 2004 January 3, 2003 December 28, 2001 $ 7,312 604 $ 8,300 868 $ 29,389 917 $ 7,916 $ 9,168 $ 30,306 Amortization expense of purchased and other intangibles decreased in fiscal 2003 by approximately $1.3 million representing 1.5% of revenue, compared with 2% in fiscal 2002. The decrease was due to certain Spectra intangibles being fully amortized during fiscal 2003. Amortization expense of goodwill, purchased, and other intangibles decreased in fiscal 2002 by approximately $21.1 million representing 2% of revenue, compared with 6% in fiscal 2001. The decrease was primarily due to the adoption of FAS 142 in fiscal 2002 that does not require the amortization of goodwill and intangible assets with indefinite lives. Non-operating Expense, Net The following table shows non-operating expense, net for the periods indicated and should be read in conjunction with the narrative descriptions of those expenses below: Fiscal Years Ended (in thousands) Interest income Interest expense Foreign exchange loss Expenses for affiliated operations, net Other income (expense) Total non-operating expense, net January 2, 2004 January 3, 2003 December 28, 2001 $ 465 (11,938) (592) (6,403) 118 $ (18,350) $ 659 (14,710) (823) (3,954) (1,171) $ (19,999) $ 1,118 (22,224) (237) - (430) $ (21,773) Non-operating expense, net decreased by $1.6 million or 8% during fiscal 2003 as compared with fiscal 2002 primarily due to a reduction in interest expense of $2.8 million offset by an increase in expenses for affiliated 31 operations. The increase in expenses for affiliated operations is primarily due to the full year impact of transfer pricing effects on transactions between us and our Caterpillar joint venture, which commenced operations in April 2002. (See Note 3 of the Notes to the Consolidated Financial Statements for financial information regarding joint ventures). In addition, we recorded approximately $0.3 million relating to our share of the losses in our Nikon joint venture established in 2003. In fiscal 2003, interest expense decreased by approximately $2.8 million due to continued debt repayment during the year of approximately $51.8 million, combined with the effect of lower interest rates. Offsetting the lower debt interest, during the year, we recorded approximately $3.6 million of interest expense due to the write off of $2.3 million of unamortized debt issuance costs as a result of our debt refinancing in June 2003, as well as $1.3 million related to the unamortized portion of warrants associated with the principal balance of our Subordinated Note. (See Note 9 of the Notes to the Consolidated Financial Statements for financial information regarding our Subordinated Note.) Non-operating expense, net decreased by $1.8 million during fiscal 2002 as compared with fiscal 2001, as a result of a decrease in net interest expense of $7.1 million due to significant repayment of debt balances during the year of approximately $52 million, combined with the effect of lower interest rates. This was partially offset by expenses recorded for affiliated operations of $4.0 million as a result of transfer pricing effects on transactions between us and our Caterpillar joint venture, an increase in foreign exchange loss of $0.6 million, and a write-down of minority investment of $1.5 million. Income Tax Provision Our effective income tax rates from continuing operations for fiscal years 2003, 2002, and 2001 were (8%), 25% and (9%), respectively. The fiscal 2002 and 2001 income tax rates differ from the US federal statutory rate of 35% due primarily to non-US taxes and the inability to realize the benefit of net operating losses. The 2003 income tax rate is less than the US federal statutory rate, primarily due to the realization of benefits from net operating losses and other previously reserved deferred tax assets. Litigation Matters * From time to time, we are involved in litigation arising out of the ordinary course of our business. There are no known claims or pending litigation that are expected to have a material effect on our overall financial position, results of operations, or liquidity. OFF-BALANCE SHEET FINANCINGS AND LIABILITIES Other than lease commitments incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements. Additionally, we do not have any interest in, or relationship with, any special purpose entities. LIQUIDITY AND CAPITAL RESOURCES As of and for the Fiscal Year Ended (dollars in thousands) Cash and cash equivalents As a percentage of total assets Accounts receivable days sales outstanding (DSO) Inventory turns per year Total debt January 2, 2004 January 3, 2003 December 28, 2001 $ 45,416 8.3% 60 4 $ 90,486 $ 28,679 6.5% 58 5 $ 138,525 $ 31,078 7.4% 53 4 $ 190,565 Cash provided by operating activities $ 36,460 $ 32,316 $ 26,370 32 Cash used by investing activities Cash provided (used) by financing activities Net increase/(decrease) in cash and cash equivalents $(22,653) $ 54 $ 16,737 $ (5,766) $(31,729) $ (2,399) $(11,441) $(23,450) $ (9,798) Cash and Cash Equivalents In fiscal 2003, our cash and cash equivalents increased by $16.7 million from fiscal 2002. The increase was primarily due to cash generated by operating activities, partially offset by cash used in investing activities. In fiscal 2003, cash provided by operating activities was $36.5 million, as compared to $32.3 million in fiscal 2002. The increase of $4.1 million was primarily driven by the $28.2 million increase in net income during fiscal 2003 compared to fiscal 2002 offset by an increase in accounts receivable and inventory and a decrease in accounts payable. Also, fiscal 2002 was positively impacted by a special one-time distribution of $11.0 million to us from our Caterpillar joint venture. Our ability to continue to generate cash from operations will depend in large part on profitability, the rate of collections of accounts receivable, our inventory turns, and our ability to manage other areas of working capital. Our accounts receivable days for sales outstanding increased from 58 days at the end of fiscal 2002 to 60 days at the end of fiscal 2003. Our inventory turns decreased from five at the end of fiscal 2002 to four at the end of fiscal 2003. Cash used in investing activities were $22.7 million in fiscal 2003 as compared to $5.8 million in fiscal 2002. The increase was primarily due to approximately $4.8 million invested in our Nikon joint venture upon its formation, $2.2 million and $4.3 million cash outlays related to our acquisitions of Applanix and MENSI, respectively, certain earn-out payments made as a result of our previous LeveLite acquisition, and increased expenditure on capital equipment. During fiscal 2003, we spent approximately $10.9 million on capital expenditures. Cash provided by financing activities, net, was neutral in fiscal 2003, as compared to $31.7 million cash used in fiscal 2002. However during fiscal 2003, we repaid approximately $69 million of debt-related to our previous Subordinated Note and Credit Facility. These debt payments were funded primarily by proceeds from the issuance of common stock to employees pursuant to our stock option plan and employee stock purchase plan of approximately $13.9 million, as well as issuance of common stock under a private equity placement of $38.3 million. On April 14, 2003, we sold 3,148,000 shares of our common stock, no par value per share, to an investor at a price of $12.17 per share in an offering pursuant to our shelf registration statement. The offering resulted in net proceeds to us of approximately $36.6 million, approximately $31 million of which was used to pay down the principal balance on the Subordinated Note and $5.6 million was used to pay down the accrued interest on that Note. * We believe that our cash and cash equivalents, together with our credit facilities, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. At January 2, 2004, we had $45.4 million of cash and cash equivalents as well as access to $81 million of cash under the terms of our revolver loans. * We expect fiscal 2004 capital expenditures to be approximately $12 million to $14 million, primarily for computer equipment, software, manufacturing tools and test equipment, and leasehold improvements associated with business expansion. Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by operations. Debt At the end of fiscal 2003, our total debt was approximately $90.5 million as compared with approximately $138.5 million at the end of fiscal 2002. This balance primarily consists of $43.8 million outstanding under a term loan and $44.0 million outstanding under a senior secured revolving credit facility. On June 25, 2003, we obtained a new Credit Facility (comprising of a term loan and revolver) in the amount of $109 million that enabled us to pay off our indebtedness under our previous credit facility and the Subordinated Note. The new Credit Facility is secured by all material assets of our Company, except for a portion of assets that are not pledged due to foreign tax considerations. Financial covenants of the Credit Facility include leverage, fixed charge, and minimum net worth tests. At January 2, 2004 and as of the date of this report, we are in compliance with all debt covenants. The amortized principal, interest, and commitment fees due under the Credit Facility are paid quarterly. 33 Under the four-year term loan portion of the Credit Facility, we are due to make payments (excluding interest) of approximately $12.5 million in each of the next three fiscal years (2004, 2005, and 2006), and $6.3 million in fiscal 2007. Under the terms of the Credit Facility, we are allowed to pay dividends and repurchase shares of our common stock up to 25% of net income in the previous fiscal year. For additional discussion of our debt, see Note 9 of Notes to the Consolidated Financial Statements. CONTRACTUAL OBLIGATIONS The following table summarizes our future payment obligations: Contractual Obligations (in thousands) Total Less than 1 year 1-3 Years 3-5 years More than 5 years Total debt including $ 99,941 $ 17,310 $ 73,570 $ 7,851 $ 1,210 interest Operating leases Purchase obligations Total 28,141 33,062 161,144 $ 10,129 31,485 58,924 $ 11,723 1,577 86,870 $ 3,132 - 10,983 $ 3,157 - 4,367 $ * As of January 2, 2004, $65.9 million of our total debt was subject to variable quarterly interest rates. Per our loan agreement, we pay a three-month LIBOR rate plus a certain spread that depends on our leverage ratio. Our spread is expected to be 1.5% over the remaining life of our obligation of the debt. We have assumed a three-month LIBOR rate of 1.20% for each quarter in fiscal 2004 and have forecasted an increase of 25 basis points quarter over quarter to a maximum of 3.25%. (See Note 9 of the Notes to the Consolidated Financial Statements for further financial information regarding long-term debt) Purchase obligations represent open purchase orders for material purchases with our customers. Our pension obligation which is not included in the table above, and is included in “Other non-current liabilities” on our Consolidated Balance Sheets, is disclosed at Note 14 of the Notes to the Consolidated Financial Statements. NEW ACCOUNTING STANDARDS In November of 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Adoption of EITF Issue No. 00-21 did not have a material effect on our results. Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” was issued in January 2003, and a revised interpretation of FIN 46 (FIN 46-R) was issued in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, we have not obtained any variable interests in any entities we believe are variable interest entities. For arrangements entered into prior to February 1, 2003, we are required to adopt the provisions of FIN 46-R in the first quarter of fiscal 2004. We are in the process of determining the effect, if any, the adoption of FIN 46-R will have on our financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other 34 contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this Statement did not have an effect on our financial statements. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement did not have an effect on our financial statements. RISKS AND UNCERTAINTIES You should carefully consider the following risk factors, in addition to the other information contained in this Form 10-K and in any other documents to which we refer you in this Form 10-K, before purchasing our securities. The risks and uncertainties described below are not the only ones we face. Our Inability to Accurately Predict Orders and Shipments May Affect Our Revenue, Expenses and Earnings per Share. We have not been able in the past to consistently predict when our customers will place orders and request shipments so that we cannot always accurately plan our manufacturing requirements. As a result, if orders and shipments differ from what we predict, we may incur additional expenses and build excess inventory, which may require additional reserves and allowances. Any significant change in our customers’ purchasing patterns could have a material adverse effect on our operating results and reported earnings per share for a particular quarter. Our Operating Results in Each Quarter May Be Affected by Special Conditions, Such As Seasonality, Late Quarter Purchases, and Other Potential Issues. Due in part to the buying patterns of our customers, a significant portion of our quarterly revenues occurs from orders received and immediately shipped to customers in the last few weeks and days of each quarter, although our operating expenses tend to remain fairly predictable. Engineering and construction purchases tend to occur in early spring, and governmental agencies tend to utilize funds available at the end of the government’s fiscal year for additional purchases at the end of our third fiscal quarter in September of each year. Concentrations of orders sometimes also occur at the end of our other two fiscal quarters. Additionally, a majority of our sales force earns commissions on a quarterly basis which may cause concentrations of orders at the end of any fiscal quarter. If for any reason expected sales are deferred, orders are not received, or shipments are delayed a few days at the end of a quarter, our operating results and reported earnings per share for that quarter could be significantly impacted. We Are Dependent on a Sole Manufacturer and Assembler for Many of Our Products and on Sole Suppliers of Critical Parts for Our Products. We are substantially dependent upon Solectron Corporation in California, China and Mexico as the exclusive manufacturing partner for many of our GPS products previously manufactured out of our Sunnyvale facilities. Under the agreement with Solectron, we provide to Solectron a twelve-month product forecast and place purchase orders with Solectron at least thirty calendar days in advance of the scheduled delivery of products to our customers depending on production lead time. Although purchase orders placed with Solectron are cancelable, the terms of the agreement would require us to purchase from Solectron all inventory not returnable or usable by other Solectron customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate manufacturing capacity from Solectron to meet customers’ delivery requirements or we may accumulate excess inventories, if such inventories are not usable by other Solectron customers. Our current contract with Solectron continues in effect until either party gives the other ninety days written notice. 35 Solectron is assembling all of our Component Technologies products in China. Although this initiative in China has brought cost savings over assembling in California, we may experience quality control issues, shipping delays, or other problems associated with manufacturing in China. In addition, we rely on sole suppliers for a number of our critical components. We have experienced shortages of components in the past. Our current reliance on sole or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could significantly delay our ability to ship our products, which could damage relationships with current and prospective customers and could harm our reputation and brand, and could have a material adverse effect on our business. Our Annual and Quarterly Performance May Fluctuate. Our operating results have fluctuated and can be expected to continue to fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Results in any period could be affected by: changes in market demand, competitive market conditions, • • • market acceptance of existing or new products, • fluctuations in foreign currency exchange rates, • the cost and availability of components, • our ability to manufacture and ship products, • the mix of our customer base and sales channels, • the mix of products sold, • our ability to expand our sales and marketing organization effectively, • our ability to attract and retain key technical and managerial employees, • the timing of shipments of products under contracts and sale of licensing rights, and • general global economic conditions. In addition, demand for our products in any quarter or year may vary due to the seasonal buying patterns of our customers in the agricultural and engineering and construction industries. Due to the foregoing factors, our operating results in one or more future periods are expected to be subject to significant fluctuations. The price of our common stock could decline substantially in the event such fluctuations result in our financial performance being below the expectations of public market analysts and investors, which are based primarily on historical models that are not necessarily accurate representations of the future. Our Gross Margin Is Subject to Fluctuation. Our gross margin is affected by a number of factors, including product mix, product pricing, cost of components, foreign currency exchange rates and manufacturing costs. For example, sales of Nikon products generally have lower gross margins as compared to our GPS survey products. Absent other factors, a shift in sales towards Nikon would lead to a reduction in our overall gross margins A decline in gross margin could negatively impact our earnings per share. Our Business is Subject to Disruptions and Uncertainties Caused by War or Terrorism. Acts of war or acts of terrorism could have a material adverse impact on our business, operating results, and financial condition. The threat of terrorism and war and heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to our economy and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of orders, or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected. 36 Our Substantial Indebtedness Could Materially Restrict Our Operations and Adversely Affect Our Financial Condition. We now have, and for the foreseeable future expect to have, a significant level of indebtedness. Our substantial indebtedness could: • • • • • increase our vulnerability to general adverse economic and industry conditions; limit our ability to fund future working capital, capital expenditures, research and development and other general corporate requirements, or to make certain investments that could benefit us; require us to dedicate a substantial portion of our cash flow to service interest and principal payments on our debt; limit our flexibility to react to changes in our business and the industry in which we operate; and limit our ability to borrow additional funds. Our Credit Agreement Contains Financial Covenants. On June 25, 2003, we executed a Credit Agreement with Scotia Capital and certain other banks which provides for financial commitments totaling up to $175 million. This credit facility contains financial covenants regarding minimum fixed charge coverage and maximum leverage ratio which are extremely sensitive to changes in earnings before interest, taxes, depreciation and amortization, or EBITDA. In turn, EBITDA is highly correlated to revenues and costs. If we default on one or more covenants, we will have to obtain either negotiated waivers or amendments to the Credit Agreement. If we were unable to obtain such waivers or amendments, the banks would have the right to accelerate the payment of our outstanding obligations under the Credit Agreement which would have a material adverse effect on our financial condition and viability as an operating company. In addition, a default under one of our debt instruments may also trigger cross defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us. We Rely on Key Customers. We generate a portion of our revenue from large original equipment manufacturers such as Siemens VDO Automotive AG and Nortel. A reduction or loss of business with these customers could have a material adverse effect on our financial condition and results of operations. There can be no assurance that we will be able to continue to realize value from these relationships in the future. We Are Dependent on New Products. Our future revenue stream depends to a large degree on our ability to bring new products to market on a timely basis. We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance of such products. We may incur problems in the future in innovating and introducing new products. Our development stage products may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we were unable to successfully define, develop and introduce competitive new products, and enhance existing products, our future results of operations would be adversely affected. Development and manufacturing schedules for technology products are difficult to predict, and we might not achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success. A delay in new product introductions could have a significant impact on our results of operations. We May Not Be Able to Enter Into or Maintain Important Alliances. We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon, McNeilus, and CNH Global. Our failure to form and maintain such alliances, or the pre-emption of such alliances by actions of other competitors or us, will adversely affect our 37 ability to penetrate emerging markets. No assurances can be given that we will not experience problems from current or future alliances or that we will realize value from any such strategic alliances. We Are Dependent on the Availability of Allocated Bands Within the Radio Frequency Spectrum. Our GPS technology is dependent on the use of the Standard Positioning Service (“SPS”) provided by the US Government’s GPS. The GPS SPS operates in radio frequency bands that are globally allocated for radio navigation satellite services. International allocations of radio frequency are made by the International Telecommunications Union (“ITU”), a specialized technical agency of the United Nations. These allocations are further governed by radio regulations that have treaty status and which may be subject to modification every two to three years by the World Radio Communication Conference. Any ITU reallocation of radio frequency bands, including frequency band segmentation or sharing of spectrum, may materially and adversely affect the utility and reliability of our products, which would, in turn, cause a material adverse effect on our operating results. Many of our products use other radio frequency bands, together with the GPS signal, to provide enhanced GPS capabilities, such as real-time kinematics precision. The continuing availability of these non- GPS radio frequencies is essential to provide enhanced GPS products to our precision survey markets. Any regulatory changes in spectrum allocation or in allowable operating conditions may materially and adversely affect the utility and reliability of our products, which would, in turn, cause a material adverse effect on our operating results. In addition, unwanted emissions from mobile satellite services and other equipment operating in adjacent frequency bands or in-band from licensed and unlicensed devices may materially and adversely affect the utility and reliability of our products, which could result in a material adverse effect on our operating results. The FCC continually receives proposals for novel technologies and services, such as ultra-wideband technologies, which may seek to operate in, or across, the radio frequency bands currently used by the GPS SPS and other public safety services. Adverse decisions by the FCC that result in harmful interference to the delivery of the GPS SPS and other radio frequency spectrum also used in our products may materially and adversely affect the utility and reliability of our products, which could result in a material adverse effect on our business and financial condition. We Are Subject to the Adverse Impact of Radio Frequency Congestion. We have certain products, such as GPS RTK systems, surveying and mapping systems, and Robotic Total Stations, that use integrated radio communication technology requiring access to available radio frequencies allocated by the FCC (or the NTIA in the case of federal government users of this equipment) for which the end user is required to obtain a license in order to operate their equipment. In addition, access to these frequencies by state agencies is under management by state radio communications coordinators. Some bands are experiencing congestion that excludes their availability for access by state agencies in some states, including the State of California. To reduce congestion, the FCC announced that it will require migration of radio technology from wideband to narrowband operations in these bands. In December 2003, the FCC stayed the effectiveness of its new rules until it acts on petitions requesting a reconsideration of this new requirement. The stay is indefinite at this point and the outcome of this proceeding is unknown at this time. An inability to obtain access to these radio frequencies by end users, and for new products to comply with FCC requirements, could have an adverse effect on our operating results. Many of Our Products Rely on the GPS Satellite System. The GPS satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of 7.5 years and are subject to damage by the hostile space environment in which they operate. However, of the current deployment of 28 satellites in place, some have already been in operation for 13 years. To repair damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. A reduction in the number of operating satellites may impair the current utility of the GPS system and the growth of current and additional market opportunities. In addition, there can be no assurance that the US Government will remain committed to the operation and maintenance of GPS satellites over a long period, or that the policies of the US Government for the use of GPS without charge will 38 remain unchanged. However, a 1996 Presidential Decision Directive marks the first time in the evolution of GPS that access for civilian use free of direct user fees is specifically recognized and supported by Presidential policy. In addition, Presidential policy has been complemented by corresponding legislation, signed into law. Because of ever- increasing commercial applications of GPS, other US Government agencies may become involved in the administration or the regulation of the use of GPS signals. Any of the foregoing factors could affect the willingness of buyers of our products to select GPS-based systems instead of products based on competing technologies. Many of our products also use signals from systems that augment GPS, such as the Wide Area Augmentation System (WAAS) and national Differential GPS System (NDGPS). Many of these augmentation systems are operated by the federal government and rely on continued funding and maintenance of these systems. Any curtailment of the operating capability of these systems could result in decreased user capability thereby impacting our markets. Any resulting change in market demand for GPS products could have a material adverse effect on our financial results. For example, European governments have expressed interest in building an independent satellite navigation system, known as Galileo. Depending on the as yet undetermined design and operation of this system, there may be interference to the delivery of the GPS SPS and may materially and adversely affect the utility and reliability of our products which could result in a material adverse effect on our business and operating results. We Face Risks in Investing in and Integrating New Acquisitions. Acquisitions of companies, divisions of companies, or products entail numerous risks, including: • • • • • • • • • • potential inability to successfully integrate acquired operations and products or to realize cost savings or other anticipated benefits from integration; diversion of management’s attention; loss of key employees of acquired operations; the difficulty of assimilating geographically dispersed operations and personnel of the acquired companies; the potential disruption of our ongoing business; unanticipated expenses related to such integration; the correct assessment of the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount which must be amortized over the appropriate life of the asset; the impairment of relationships with employees and customers of either an acquired company or our own business; the potential unknown liabilities associated with acquired business; and inability to recover strategic investments in development stage entities. As a result of such acquisitions, we have significant assets that include goodwill and other purchased intangibles. The testing of these intangibles under established accounting guidelines for impairment requires significant use of judgment and assumptions. Changes in business conditions could require adjustments to the valuation of these assets. In addition, losses incurred by a company in which we have an investment may have a direct impact on our financial statements or could result in our having to write-down the value of such investment. Any such problems in integration or adjustments to the value of the assets acquired could harm our growth strategy and have a material adverse effect on our business, financial condition and compliance with debt covenants. We Face Competition in Our Markets. Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. Within each of our markets, we encounter direct competition from other GPS, optical and laser suppliers and competition may intensify from various larger US and non-US competitors and new market entrants, some of which may be our current customers. The competition in the future, may, in some cases, result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. We believe that our ability to compete successfully in the future against existing and additional 39 competitors will depend largely on our ability to execute our strategy to provide systems and products with significantly differentiated features compared to currently available products. We may not be able to implement this strategy successfully, and our products may not be competitive with other technologies or products that may be developed by our competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do. We Are Dependent on Proprietary Technology. Our future success and competitive position is dependent upon our proprietary technology, and we rely on patent, trade secret, trademark and copyright law to protect our intellectual property. The patents owned or licensed by us may be invalidated, circumvented, and challenged. The rights granted under these patents may not provide competitive advantages to us. Any of our pending or future patent applications may not be issued within the scope of the claims sought by us, if at all. Others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned by us. In addition, effective copyright, patent and trade secret protection may be unavailable, limited or not applied for in certain countries. The steps taken by us to protect our technology might not prevent the misappropriation of such technology. The value of our products relies substantially on our technical innovation in fields in which there are many current patent filings. We recognize that as new patents are issued or are brought to our attention by the holders of such patents, it may be necessary for us to withdraw products from the market, take a license from such patent holders, or redesign our products. We do not believe any of our products currently infringe patents or other proprietary rights of third parties, but we cannot be certain they do not do so. In addition, the legal costs and engineering time required to safeguard intellectual property or to defend against litigation could become a significant expense of operations. Such events could have a material adverse effect on our revenues or profitability. We Must Carefully Manage Our Future Growth. Growth in our sales or continued expansion in the scope of our operations could strain our current management, financial, manufacturing and other resources, and may require us to implement and improve a variety of operating, financial and other systems, procedures, and controls. Specifically we have experienced strain in our financial and order management system. We are expanding our sales, accounting, manufacturing, and other information systems to meet these challenges. These systems, procedures, or controls may not be adequate to support our operations and may not be designed, implemented, or improved in a cost-effective and timely manner. Any failure to implement, improve and expand such systems, procedures, and controls in a timely and efficient manner could harm our growth strategy and adversely affect our financial condition and ability to achieve our business objectives. We Are Dependent on Retaining and Attracting Highly Skilled Development and Managerial Personnel. Our ability to maintain our competitive technological position will depend, in a large part, on our ability to attract, motivate, and retain highly qualified development and managerial personnel. Competition for qualified employees in our industry and location is intense, and there can be no assurance that we will be able to attract, motivate, and retain enough qualified employees necessary for the future continued development of our business and products. We May Encounter Problems Associated With International Operations and Sales. Our customers are located throughout the world. Sales to unaffiliated customers in non-US locations represented approximately 51% of our revenues in our fiscal year 2003, 49% in our fiscal year 2002 and 50% in our fiscal year 2001. In addition, we have significant international operations, including manufacturing facilities, sales personnel and customer support operations. We have sales offices outside the US. Our non-US manufacturing facilities are in Sweden and Germany, and we have a regional fulfillment center in the Netherlands. Our non-US presence exposes us to risks not faced by wholly US companies. 40 Specifically, we have experienced issues relating to integration of non-US operations, greater difficulty in accounts receivable collection, longer payment cycles, and currency fluctuations. Additionally, we face the following risks, among others: • • • unexpected changes in regulatory requirements; tariffs and other trade barriers; political, legal and economic instability in non-US markets, particularly in those markets in which we maintain manufacturing and research facilities; difficulties in staffing and management; language and cultural barriers; seasonal reductions in business activities in the summer months in Europe and some other countries; • • • • war and acts of terrorism; and • potentially adverse tax consequences. In certain non-US markets, there may be reluctance to purchase products based on GPS technology, given the control of GPS by the US Government. We Are Exposed to Fluctuations in Currency Exchange Rates. A significant portion of our business is conducted outside the United States, and as such, we face exposure to adverse movements in non-US currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. In fiscal 2003, the US dollar weakened against several major currencies in which we do business, adversely impacting our financial results. Currently, we hedge only those currency exposures associated with certain assets and liabilities denominated in non- functional currencies and periodically will hedge anticipated foreign currency cash flows. The hedging activities undertaken by us are intended to offset the impact of currency fluctuations on certain non-functional currency assets and liabilities. Our attempts to hedge against these risks may not be successful resulting in an adverse impact on our net income. We Are Subject to the Impact of Governmental and Other Similar Certifications. We market certain products that are subject to governmental and similar certifications before they can be sold. For example, CE certification for radiated emissions is required for most GPS receiver and data communications products sold in the European Union. An inability to obtain such certifications in a timely manner could have an adverse effect on our operating results. Also, our products that use integrated radio communication technology require an end user to obtain licensing from the Federal Communications Commission (FCC) for frequency-band usage. These are secondary licenses that are subject to certain restrictions. During the fourth quarter of 1998, the FCC temporarily suspended the issuance of licenses for certain of our real-time kinematics products because of interference with certain other users of similar radio frequencies. An inability or delay in obtaining such certifications or changes to the rules by the FCC could adversely affect our ability to bring our products to market which could harm our customer relationships and have a material adverse effect on our business. The Volatility of Our Stock Price Could Adversely Affect Your Investment in Our Common Stock. The market price of our common stock has been, and may continue to be, highly volatile. During fiscal 2003, our stock price ranged from $8.68 to $25.60. We believe that a variety of factors could cause the price of our common stock to fluctuate, perhaps substantially, including: • • • • • announcements and rumors of developments related to our business or the industry in which we compete; quarterly fluctuations in our actual or anticipated operating results and order levels; general conditions in the worldwide economy, including fluctuations in interest rates; announcements of technological innovations; new products or product enhancements by us or our competitors; 41 • • • developments in patents or other intellectual property rights and litigation; developments in our relationships with our customers and suppliers; and any significant acts of terrorism against the United States. In addition, in recent years the stock market in general and the markets for shares of "high-tech" companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of our common stock, and the market price of our common stock may decline. We are Subject to Environmental Laws and Potential Exposure to Environmental Liabilities. We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of non-hazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties, or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties impacted by such contamination. The presence of, or failure to remediate properly, such substances could adversely affect the value and the ability to transfer or encumber such property. Based on currently available information, although there can be no assurance, we believe that such liabilities will not have a material impact on our business. Provisions in Our Charter Documents and Under California Law Could Prevent or Delay a Change of Control, which Could Reduce the Market Price of Our Common Stock. Certain provisions of our articles of incorporation, as amended and restated, our bylaws, as amended and restated, and the California General Corporation Law may be deemed to have an anti-takeover effect and could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of us without approval of our board of directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock. We have adopted a Preferred Shares Rights Agreement, commonly known as a "poison pill." The provisions described above, our poison pill and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us. Item 7A. Quantitative and Qualitative Disclosure about Market Risk We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We use certain derivative financial instruments to manage these risks. We do not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with policies approved by our board of directors. Market Interest Rate Risk We are exposed to market risk due to the possibility of changing interest rates under our secured Credit Facility. Our Credit Facility is comprised of a three-year, US dollar-only revolver that expires on June 25, 2006, and a four-year term loan that expires on June 25, 2007. Borrowings under the Credit Facility have interest payments based on a floating rate of LIBOR plus a number of basis points tied to a formula based on our Leverage Ratio. The revolver matures on June 25, 2006 and has an outstanding principal balance of $44 million, while the term loan matures on June 25, 2007 and has an outstanding principal balance of $43.8 million, as of January 2, 2004 (all in US currency only). The three-month LIBOR effective rate at January 2, 2004 was 1.155%. A hypothetical 10% increase in three- month LIBOR rates could result in approximately $101,790 annual increase in interest expense on the existing 42 principal balances. We have hedged the market risk with an interest rate swap on 50% of our term loan. The rate on that interest rate swap is 2.517%. * The hypothetical changes and assumptions made above will be different from what actually occurs in the future. Furthermore, the computations do not anticipate actions that may be taken by our management should the hypothetical market changes actually occur over time. As a result, actual earnings effects in the future will differ from those quantified above. Foreign Currency Exchange Rate Risk We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain trade and inter-company receivables and payables, primarily denominated in Australian, Canadian, New Zealand, and Swedish currencies, the Euro, and the British pound. These contracts reduce the exposure to fluctuations in exchange rate movements as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the forward contracts. These instruments are marked to market through earnings every period and generally range from one to three months in original maturity. We do not enter into foreign exchange forward contract for trading purposes. Foreign exchange forward contracts outstanding as of January 2, 2004 and January 3, 2003 are summarized as follows (in thousands): January 2, 2004 January 3, 2003 Nominal Amount Fair Value Nominal Amount Fair Value Forward contracts: Purchased Sold $ 15,767 $ 44,236 $ (1,666) $ 2,994 $ 24,414 $ 24,539 $ (658) $ 955 * We do not anticipate any material adverse effect on our consolidated financial position utilizing our current hedging strategy. From time to time, we may also utilize forward foreign exchange contracts designated as cash flow hedges of operational exposures represented by firm backlog orders to specific accounts over a specific period of time. We record changes in the fair value of cash flow hedges in accumulated, other comprehensive income (loss), until the firm backlog transaction ships. Upon recognition of revenue, we reclassify the gain or loss on the cash flow hedge to the statement of operations. The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flow from the forecasted transactions. All forward contracts have maturities of less than 12 months. For the fiscal year ended January 3, 2003, we recorded a gain of $57,000 reflecting the net change and ending balance in relation to a firm backlog hedge. We did not hedge against backlog orders during fiscal 2003. 43 TRIMBLE NAVIGATION LIMITED INDEX TO FINANCIAL STATEMENTS Consolidated Balance Sheets at January 2, 2004 and January 3, 2003..........................................................................45 Consolidated Statements of Operations for each of the three fiscal years in the period ended January 2, 2004 ............................................................................................................................46 Consolidated Statement of Shareholders' Equity for each of the three fiscal years in the period ended January 2, 2004 ............................................................................................................................47 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 2, 2004 ............................................................................................................................48 Notes to Consolidated Financial Statements...................................................................................................................49 Report of Ernst & Young LLP, Independent Auditors...................................................................................................75 44 Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS As at (in thousands) ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $9,953 and $9,900, respectively Inventories, net Deferred income taxes Other current assets Total current assets Property and equipment, at cost less accumulated depreciation Goodwill Other purchased intangible assets, less accumulated amortization Deferred income taxes Other assets Total non-current assets January 2, 2004 January 3, 2003 $ 45,416 $ 28,679 103,350 70,826 4,380 5,659 229,631 27,379 241,425 19,741 4,173 22,554 315,272 79,645 61,144 76 8,401 177,945 22,037 205,933 23,238 417 12,086 263,711 Total assets $ 544,903 $ 441,656 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank and other short-term borrowings Current portion of long-term debt Accounts payable Accrued compensation and benefits Accrued liabilities Accrued warranty expense Deferred income taxes Income taxes payable Total current liabilities Non-current portion of long-term debt Deferred gain on joint venture Deferred income tax Other non-current liabilities Total liabilities Commitments and Contingencies Shareholders' equity: Preferred stock no par value; 3,000 shares authorized; none outstanding Common stock, no par value; 90,000 shares authorized; 49,988, and 43,965 shares outstanding, respectively Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders' equity Total liabilities and shareholders' equity See accompanying Notes to the Consolidated Financial Statements. 45 $ - 12,885 26,019 25,950 15,599 5,147 1,136 9,969 96,705 77,601 9,845 4,229 8,279 196,659 $ 6,556 24,104 30,669 17,728 21,000 6,394 - 6,450 112,901 107,865 10,792 2,561 6,186 240,305 - - 303,015 14,990 30,239 348,244 225,872 (23,495) (1,026) 201,351 $ 544,903 $ 441,656 CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended (in thousands, except per share data) Revenue (1) Cost of revenue Gross margin Operating expenses Research and development Sales and marketing General and administrative Restructuring charges Amortization of purchased intangible assets and goodwill Total operating expenses Operating income from continuing operations Non-operating income (expense), net Interest income Interest expense Foreign currency transaction loss, net Expenses for affiliated operations, net Other income (expense), net Total non-operating expense, net Income (loss) before income taxes from continuing operations Income tax provision (benefit) Income (loss) from continuing operations Gain on disposal of discontinued operations (net of tax) Net income (loss) Basic earnings (loss) per share from continuing operations Basic earnings per share from discontinued operations Basic earnings (loss) per share Shares used in calculating basic earnings per share Diluted earnings (loss) per share from continuing operations Diluted earnings per share from discontinued operations Diluted earnings (loss) per share Shares used in calculating diluted earnings per share January 2, 2004 January 3, 2003 December 28, 2001 $ 540,903 $ 466,602 $ 475,292 272,873 232,170 238,057 237,235 234,432 268,030 67,641 97,870 39,253 2,019 62,881 61,232 103,778 89,344 37,407 40,634 3,599 1,099 7,312 8,300 29,389 214,095 200,609 237,054 181 33,823 53,935 465 659 (11,938) (14,710) (592) (823) (3,954) (6,403) 118 (1,171) (19,999) (18,350) 35,585 13,824 (2,900) 38,485 - 1,118 (22,224) (237) - (430) (21,773) (21,592) 3,500 1,900 (23,492) 613 $ 38,485 $ 10,324 $ (22,879) 10,324 - $ 0.81 $ 0.24 $ (0.63) 0.01 $ 0.81 $ 0.24 $ (0.62) 37,091 42,860 47,505 - $ 0.77 $ 0.24 $ (0.63) 0.01 $ 0.77 $ 0.24 $ (0.62) 37,091 43,578 50,012 - - (1) Includes sales to related parties of $4.0 million for fiscal 2003. None in fiscal 2001 and 2002. See accompanying Notes to the Consolidated Financial Statements. 46 CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY Common stock and warrants Shares Amount Retained Earnings (Deficit) Accumulative Other Total Comprehensive Shareholders' Income/(Loss) Equity (in thousands) Balance at December 29, 2000 36,243 $ 154,846 $ (10,940) $ (8,963) $ 134,943 Components of comprehensive income (loss): Net loss Loss on interest rate swap Unrealized gain on investments Foreign currency translation adjustments Comprehensive loss Subtotal Issuance of stock under employee plans and exercise of warrants Issuance of stock in private placement Balance at December 28, 2001 Components of comprehensive income (loss): Net income Gain on interest rate swap Unrealized loss on investments Foreign currency translation adjustments Comprehensive income Subtotal Issuance of stock for acquisition Issuance of stock under employee plans exercise of warrants Issuance of warrants Issuance of stock in private placement Balance at January 3, 2003 Components of comprehensive income (loss): Net income Gain on interest rate swap Unrealized gain on investments Foreign currency translation adjustments Comprehensive income Subtotal Issuance of stock for acquisition Issuance of stock for Joint Venture with Nikon Issuance of stock under employee plans and exercise of warrants Issuance of stock for Levelite Issuance of warrants Issuance of stock in private placement Balance at January 2, 2004 (22,879) (203) 16 (9,766) (33,819) (18,916) 10,324 210 (17) 17,697 (23,495) (1,026) 38,485 (7) 74 31,198 $ 14,990 $ 30,239 (22,879) (203) 16 (9,766) (32,832) 102,111 11,344 25,034 138,489 10,234 210 (17) 17,697 28,214 166,703 12,033 4,091 1,528 16,996 201,351 38,485 (7) 74 31,198 69,750 271,101 18,524 5,922 13,929 1,349 836 36,583 $ 348,244 1,376 2,675 40,294 11,344 25,034 191,224 1,190 12,033 561 1,920 43,965 4,091 1,528 16,996 225,872 825 350 1,593 107 3,148 49,988 18,524 5,922 13,929 1,349 836 36,583 $ 303,015 See accompanying Notes to the Consolidated Financial Statements. 47 CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended (In thousands) Cash flow from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to cash flows provided by operating activities: Depreciation expense Amortization expense Provision for doubtful accounts (Gain) loss on sale of fixed assets Amortization of deferred gain Amortization of debt issuance cost Deferred income taxes Other Decrease (increase) in assets: Accounts receivable Inventories Other current and non-current assets Effect of foreign currency translation adjustment Increase (decrease) in liabilities: Accounts payable Accrued compensation and benefits Deferred gain on joint venture Accrued liabilities Income taxes payable Net cash provided by operating activities Effect of exchange rate changes on cash and cash equivalents Cash flow from investing activities: Acquisition of property and equipment Proceeds from sale of assets Acquisitions, net of cash acquired Investment in Nikon-Trimble Joint Venture Costs of capitalized patents Net cash used by investing activities Cash flow from financing activities: Issuance of common stock and warrants (Payment)/collection of notes receivable Proceeds from long-term debt and revolving credit lines Payments on long-term debt and revolving credit lines Net cash provided (used) by financing activities January 2, 2004 January 3, 2003 December 28, 2001 $ 38,485 $ 10,324 $ (22,879) 8,864 7,916 (32) - - 3,515 (6,532) 2,533 (16,683) (4,862) (792) 6,895 (6,387) 6,723 (947) (6,437) 4,201 36,460 2,876 (10,901) 334 (6,606) (4,810) (670) (22,653) 50,514 1,326 138,288 (190,074) 54 9,850 9,168 5,443 423 (1,061) 1,197 1,464 193 (10,615) (7,649) (3,920) 438 8,593 3,452 10,792 (4,823) (953) 32,316 2,780 (7,157) 1,407 1,718 - (1,734) (5,766) 21,393 (1,082) 18,000 (70,040) (31,729) (2,399) 31,078 28,679 $ 11,218 30,306 5,077 (135) (1,584) 960 (887) (508) 6,842 7,442 2,393 (3,261) (4,954) (3,112) - (2,946) 2,398 26,370 (1,277) (7,254) 1,177 (4,430) - (934) (11,441) 36,378 872 30,062 (90,762) (23,450) (9,798) 40,876 31,078 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period $ 16,737 28,679 45,416 $ See accompanying Notes to the Consolidated Financial Statements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies: Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent nature of those estimates, actual results could differ from expectations. Basis of Presentation Trimble has a 52-53 week fiscal year, ending on the Friday nearest to December 31, which for fiscal 2003 was January 2, 2004. Fiscal 2002 was a 53-week year. The financial results of fiscal year 2002 have an extra week, and therefore will not be exactly comparable to the prior and subsequent 52-week fiscal years. Fiscal year 2001 comprised 52 weeks. The consolidated financial statements include the results of Trimble and its subsidiaries. Inter-company accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to the current year presentation. Foreign Currency Assets and liabilities of the Company’s non-US subsidiaries are translated into US dollars at year-end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Local currencies are considered to be the functional currencies for the Company’s non-US subsidiaries. Translation adjustments are included in shareholders’ equity in the consolidated balance sheet caption “Accumulated other comprehensive income (loss).” Foreign currency transaction gains and losses are included in results of operations as incurred and have not been significant to the Company’s operating results in any fiscal year presented. The effect of foreign currency rate changes on cash and cash equivalents is not material. Cumulative translation adjustment increased by approximately $31.2 million due to weakening US dollar against other currencies affecting the translation of our assets dominated in non-US currencies. Cash and Cash Equivalents Cash and cash equivalents include all cash and highly liquid investments with insignificant interest rate risk and maturities of three months or less at the date of purchase. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. Concentration of Risk In entering into forward foreign exchange contracts, Trimble has assumed the risk that might arise from the possible inability of counter-parties to meet the terms of their contracts. The counter-parties to these contracts are major multinational investment and commercial banks, and the Company does not expect any losses as a result of counter- party defaults (see Note 6 of the Notes to the Consolidated Financial Statements). The Company is also exposed to credit risk in the Company’s trade receivables, which are derived from sales to end user customers in diversified industries as well as various resellers. Trimble performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary but generally does not require collateral. With the selection of Solectron Corporation in August 1999 as an exclusive manufacturing partner for many of its GPS products, Trimble became substantially dependent upon a sole supplier for the manufacture of many of its products. In addition, the Company relies on sole suppliers for a number of its critical components. 49 Many of Trimble’s products use GPS as the positioning technology. GPS is a system of 24 orbiting satellites established and funded by the US Government, which has been fully operational since March 1995. A significant reduction in the number of operating satellites would impair the current utility of the GPS system and the growth of current and additional market opportunities. In addition, the US Government may not remain committed to the operation and maintenance of GPS satellites over a long period, and the policy of the US Government for the use of GPS without charge may change. Allowance for Doubtful Accounts Trimble maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Trimble evaluates the collectibility of its trade accounts receivable based on a number of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company, a specific allowance for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount Trimble believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding. The amount was not significant in fiscal 2003 and the expenses recorded for doubtful accounts were $5.4 million in fiscal 2002 and $5.1 million in fiscal 2001. Inventories Inventories are stated at the lower of standard cost or market (net realizable value). Standard costs approximate average actual costs. The Company uses a standard cost accounting system to value inventory and these standards are reviewed at a minimum of once a year and multiple times a year in the most active manufacturing plants. The Company provides for the inventory value for estimated excess and obsolete inventory, based on management’s assessment of future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Intangible and Non-Current Assets Intangible assets include goodwill, assembled workforce, distribution channels, patents, licenses, technology, and trademarks which are capitalized at cost. Intangible assets with definite lives are amortized on the straight-line basis. Useful lives generally range from five to seven years, with weighted average useful life of 5.7 years. Prior to December 29, 2001, goodwill was amortized over 20 years, except for goodwill from the Grid Data purchase, which was amortized over five years. If facts and circumstances indicate that the goodwill, other intangible assets, or property and equipment may be impaired, an evaluation of continuing value would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with these assets would be compared to their carrying amount to determine if a write-down to fair market value or discounted cash flow value is required. Trimble performed an impairment test of goodwill upon transition to FAS No. 142 on December 29, 2001, and an annual impairment test at the end of the third fiscal quarter of 2002 and 2003, respectively, and found no impairment. Trimble will continue to evaluate its goodwill for impairment on an annual basis at the end of each fiscal third quarter and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Trimble adopted SFAS No. 142 on December 29, 2001. As a result, goodwill is no longer amortized and intangible assets with indefinite lives were reclassified to goodwill. Revenue Recognition Trimble’s revenues are recorded in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition.” The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product is specified by the customer or is uncertain, revenue is deferred until all acceptance criteria have been met. 50 Revenues from purchased extended warranty and support agreements are deferred and recognized ratably over the term of the warranty/support period. Substantially all technology licenses and research revenue have consisted of initial license fees and royalties, which were recognized when earned, provided we had no remaining obligations. Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Trimble’s shipment terms for US orders, and international orders fulfilled from its European distribution center are typically FCA (Free Carrier) shipping point, except certain sales to US government agencies which are shipped FOB destination. FCA shipping point means that Trimble fulfills the obligation to deliver when the goods are handed over, cleared for export, and into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, Trimble may choose within the place or range stipulated where the carrier will take the goods into carrier’s charge. Shipping and handling costs are included in the cost of goods sold. Other international orders are shipped FOB destination, which means these international orders are not recognized as revenue until the product is delivered and title has transferred to the buyer or FCA shipping point. FOB destination means that Trimble bears all costs and risks of loss or damage to the goods up to that point. Revenue to distributors and resellers is recognized upon delivery, assuming all other criteria for revenue recognition have been met. Distributors and resellers do not have a right of return. When a sale involves multiple elements the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. The amount of product revenue allocated to an individual element is limited to the lesser of its relative fair value or the amount not contingent on the Company’s delivery of other elements under the arrangement, regardless of the probability of the Company’s performance. Trimble’s software arrangements generally consist of a license fee and post contract customer support (PCS). Trimble has established vendor-specific objective evidence (VSOE) of fair value for its PCS contracts based on the renewal rate. The remaining value of the software arrangement is allocated to the license fee using the residual method, which revenue is primarily recognized when the software has been delivered and there are no remaining obligations. Revenue from PCS is recognized ratably over the term of the PCS agreement. Support and Warranty The warranty periods for the Company’s products are generally between one and three years from date of shipment. Selected military programs may require extended warranty periods up to 5.5 years, certain TDS products have a five year or 90-day warranty period, and certain Nikon products have a five year warranty period. Trimble supports its GPS products through a circuit board replacement program from locations in the United Kingdom, Germany, Japan, and the United States. The repair and calibration of Trimble’s non-GPS products are available from company- owned or authorized facilities. The Company reimburses dealers and distributors for all authorized warranty repairs they perform. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required. Changes in the Company’s product warranty liability during the 12 months, ended January 2, 2004 and January 3, 2003, are as follows: 51 Fiscal Years Ended (In thousands) Beginning balance Warranties accrued Warranty claims Ending Balance January 2, 2004 January 3, 2003 $ 6,394 4,417 (5,664) $ 5,147 $ $ 6 ,827 2,821 (3,254) 6,394 Guarantees, Including Indirect Guarantees of Indebtedness of Others In addition to product warranties, the Company, from time to time, in the normal course of business, indemnifies other parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against specified losses, such as those arising from a breach of representations or covenants, third party claims that the Trimble’s products when used for their intended purpose(s) infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made by the Company under these obligations were not material and no liabilities have been recorded for these obligations on the balance sheets as of January 2, 2004 and January 3, 2003. Advertising Costs Trimble expenses advertising costs as incurred. Advertising expenses were approximately $9.2 million, $6.3 million, and $6.8 million in fiscal 2003, 2002, and 2001, respectively. Research and Development Costs Research and development costs are charged to expense as incurred. Trimble received third party funding of approximately $4.9 million, $5.3 million, and $4.1 million in fiscal 2003, 2002, and 2001, respectively. The Company offsets research and development expenses with any third party funding received. The Company retains the rights to any technology developed. Stock Compensation In accordance with the provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), "Accounting for Stock-Based Compensation" and “Statement of Financial Accounting Standards No. 148” (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure,” Trimble applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB 25”) and related interpretations in accounting for its stock option plans and stock purchase plan. Accordingly, the Company does not recognize compensation cost for stock options granted at fair market value. Note 13 of the Consolidated Financial Statements describe the plans operated by Trimble. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period, and the estimated fair value of purchases under the employee stock purchase plan is expensed in the year of purchase as well as the stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards. The effects on pro forma disclosure of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosure of future years. Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123 and has been determined as if Trimble had accounted for its employee stock options and purchases under the employee 52 stock purchase plan using the fair value method of SFAS No.123. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal 2003, 2002, and 2001: Expected dividend yield Expected stock price volatility Risk free interest rate Expected life of options after vesting January 2, 2004 - 59.87% 3.34% 1.56 January 3, 2003 - 52.70% 3.13% 1.18 December 28, 2001 - 69.59% 4.15% 1.20 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Trimble's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of its employee stock options. Trimble's pro forma information is as follows: Fiscal Years Ended (dollars in thousands) Net income (loss) – as reported Stock-based employee compensation expense determined under fair value method based for all awards, net of related tax effects Net earnings (loss) – pro forma Basic earnings (loss) per share – as reported Basic earnings (loss) per share – pro forma Diluted earnings (loss) per share – as reported Diluted earnings (loss) per share – pro forma Depreciation January 2, 2004 January 3, 2003 December 28, 2001 $ 38,485 $ 10,324 $ (22,879) 11,549 $ 26,936 0.81 0.57 0.77 0.54 11,641 $ (1,317) 0.24 (0.03) 0.24 (0.03) 12,718 $ (35,597) (0.62) (0.96) (0.62) (0.96) Depreciation of property and equipment owned or under capitalized leases is computed using the straight-line method over the shorter of the estimated useful lives or the lease terms. Useful lives include a range from two to six years for machinery and equipment, five years for furniture and fixtures, two to five years for computer equipment and software, and the life of the lease for leasehold improvements. Income Taxes Income taxes are accounted for under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not, that such assets will not be realized. 53 Earnings (Loss) Per Share Number of shares used in calculation of basic earnings per share represents the weighted average common shares outstanding during the period and excludes any dilutive effects of options, warrants, and convertible securities. The dilutive effects of options, warrants, and convertible securities are included in diluted earnings per share. (See Note 21 to the Consolidated Financial Statements regarding a 3 for 2 stock split subsequent to year end.) New Accounting Standards In November of 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into after June, 2003. The effect of adoption of EITF Issue No. 00-21 on Trimble’s results of operations and financial condition was immaterial. Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” was issued in January 2003, and a revised interpretation of FIN 46 (FIN 46-R) was issued in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, Trimble has not obtained any variable interests in any entities it believes are variable interest entities. For arrangements entered into prior to February 1, 2003, Trimble would be required to adopt the provisions of FIN 46-R in the first quarter of fiscal 2004. Trimble is in the process of determining the effect, if any, the adoption of FIN 46-R will have on its financial statements. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this Statement did not have an effect on Trimble’s financial statements. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, which for Trimble, was the fourth quarter of 2003. The adoption of this Statement did not have an effect on Trimble’s financial statements. Note 2 - Acquisitions: The following is a summary of acquisitions made by Trimble during fiscal 2003, 2002, and 2001, all of which were accounted for as purchases: Acquisition Grid Data LeveLite Applanix MENSI Primary Service or Product Wireless application service provider Low-end construction instrument products Inertial navigation systems and GPS 3D laser scanning technology Acquisition Date April 2, 2001 August 15, 2002 July 7, 2003 December 9, 2003 The consolidated financial statements include the results of operations of acquired companies commencing on the date of acquisition. Pro forma information is not presented, as these acquisitions did not have a material effect on the Company’s results of operations. 54 Allocation of Purchase Consideration The total purchase consideration for each of the above acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The following is a summary of purchase price, acquisition costs and purchase price allocation of the Grid Data, and LeveLite, Applanix, and MENSI acquisitions: (In thousands) Purchase price Acquisition costs Restructuring costs Total purchase price Purchase price allocation: Fair value of tangible net assets acquired Deferred tax Identified intangible assets: Existing technology Goodwill Total Grid Data, Inc. Grid Data LeveLite Applanix MENSI $ 8,248 50 - $ 8,298 $ 7,506 144 555 $ 8,205 $ 17,401 438 - $ 17,839 $ 4,273 372 - $ 4,645 (141) - 6,115 - 3,742 (1,153) 1,434 - - 8,439 $ 8,298 - 2,090 $ 8,205 3,440 11,810 $ 17,839 - 3,211 $ 4,645 On April 2, 2001, Trimble acquired certain assets of Grid Data, an Arizona corporation, for approximately $3.5 million in cash and the assumption of certain liabilities. In addition, the purchase agreement provided for Trimble to make earn-out payments based upon the completion of certain business milestones. In June 2002, Trimble issued 402,528 shares of common stock in settlement of all earn-out payments, which resulted in additional goodwill of $4.8 million, with a final purchase price of approximately $8.3 million. LeveLite Technology, Inc. On August 15, 2002, Trimble acquired LeveLite Technology, Inc., a California corporation, for approximately $5.7 million. This strategic acquisition complements Trimble’s entry-level construction instrument product line. The purchase price consisted of 655,626 shares of common stock. The merger agreement provides for Trimble to make additional earn-out payments not to exceed $3.9 million (in common stock and cash payment) based on future revenues derived from existing product sales to a certain customer and a share of the payments received from the settlement of potential litigation. As of January 2, 2004, the total earn-out amount was approximately $1.8 million resulting in additional goodwill and a final purchase price of approximately $7.5 million. Applanix Corporation * On July 7, 2003, Trimble acquired privately held Applanix Corporation of Ontario, Canada for approximately $17.8 million. Applanix develops systems that integrate inertial navigation system (INS) and GPS technologies. The purchase price consisted of 1,154,240 shares of Trimble common stock, of which 720,404 were issued. Former Applanix shareholders have the right to receive the remaining 433,836 shares of Trimble common stock upon the surrender of exchangeable shares of a Trimble subsidiary. Trimble expects the Applanix acquisition to extend its technology portfolio and enable increased robustness and capabilities in its future positioning products. Applanix’s performance is reported under the Company’s Portfolio Technologies segment. Trimble’s allocated a portion of the purchase price to existing technology, which is being amortized over seven years. 55 MENSI S.A. On December 9, 2003, we acquired privately held MENSI S.A., a French developer of terrestrial 3D laser scanning technology. This strategic acquisition will enhance our technology portfolio and expand our product offerings. The purchase price consisted of an initial cash payment of approximately Euro 3.5 million (approximately US$4.3 million on December 9, 2003). The acquisition agreement provides for Trimble to make additional earn-out cash payments not to exceed Euro 3 million (approximately US$3.7 million on December 9, 2003) based on future revenue derived from existing product sales. The additional payments, if earned, will result in additional goodwill. MENSI’s performance is reported under our Engineering and Construction segment. Note 3 – Joint Ventures: Caterpillar Trimble Control Technologies Joint Venture On April 1, 2002, Caterpillar Trimble Control Technologies LLC (“CTCT”), a joint venture formed by Trimble and Caterpillar began operations. CTCT, based in Dayton, Ohio, is 50% owned by Trimble and 50% owned by Caterpillar, with equal voting rights. It develops and markets next generation advanced electronic guidance and control products for earthmoving machines in the construction, mining, and waste industries. Under the terms of the joint venture agreement, Caterpillar contributed $11.0 million cash plus selected technology, for a total contributed value of $14.5 million, and Trimble contributed selected existing machine control product technologies valued at $25.5 million. Additionally, both companies have licensed patents and other intellectual property from their portfolios to CTCT. During the first fiscal quarter of 2002, Trimble received a special cash distribution of $11.0 million from CTCT. Trimble has recorded the cash distribution of $11.0 million as a deferred gain, being amortized to the extent that losses are attributable from CTCT under the equity method of accounting. When and if CTCT is profitable on a sustainable basis, and future operating losses are not anticipated, then Trimble will recognize as a gain, the un- amortized portion of the $11.0 million. To the extent that it is possible that the Company will have any future- funding obligation relating to CTCT, then the relevant amount of the $11.0 million will be deferred until such a time, as the funding obligation no longer exists. Both Trimble’s share of profits (losses) under the equity method and the amortization of the $11.0 million deferred gain are recorded under the heading of "Expense for affiliated operations, net" in Non-operating income (expense). The expenses for affiliated operations at CTCT, net also includes incremental costs as a result of purchasing products from CTCT at a higher price than Trimble's original manufacturing costs, partially offset by contract manufacturing fees charged to CTCT. In addition, Trimble received reimbursement of employee-related costs from CTCT for Trimble employees devoted to CTCT totaling $7.9 million in fiscal 2003 and $3.9 million in fiscal 2002. The reimbursements were offset against operating expenses. Fiscal year ended (In millions) CTCT incremental pricing effects, net Trimble's 50% share of CTCT's reported gain (loss) Amortization of deferred gain Total CTCT expense for affiliated operations, net (1) January 2, 2004 $ 5.9 (0.9) 0.9 $ 5.9 January 3, 2003 $ 4.0 (0.2) 0.2 $ 4.0 (1) Due to the nature of the relationship between Trimble and CTCT, a related party, the impact of these agreements is classified under non- operating income (expense) under the heading of "Expense for affiliated operations, net". At January 2, 2004, the net outstanding balance due from CTCT to Trimble was approximately $0.8 million. 56 Nikon-Trimble Joint Venture On March 28, 2003, Trimble and Nikon Corporation entered into an agreement to form a joint venture in Japan, Nikon-Trimble Co., Ltd., which assumed the operations of Nikon Geotecs Co., Ltd., a Japanese subsidiary of Nikon Corporation and Trimble Japan KK, a Japanese subsidiary of Trimble. Nikon-Trimble began operations in July 2003. Under the terms of the Nikon-Trimble agreement, Nikon contributed ¥1.2 billion (approximately US$10 million on June 30, 2003) in cash, while Trimble contributed ¥500 million (approximately US$4.1 million on June 30, 2003) in cash and ¥700 million of its common stock or 349,251 shares valued at approximately US$5.9 million on June 30, 2003. The Nikon-Trimble joint venture purchased certain tangible and intangible assets from Nikon Geotecs Co., Ltd. and Trimble Japan KK. Nikon-Trimble is 50% owned by Trimble and 50% owned by Nikon, with equal voting rights. It focuses on the design and manufacture of surveying instruments including mechanical total stations and related products. In Japan, this joint venture will distribute Nikon’s survey products as well as Trimble’s GPS survey products and other Engineering and Construction products, including robotic total stations. Outside Japan, Trimble is the exclusive distributor of Nikon survey and construction products. Trimble has adopted the equity method of accounting for its investment in Nikon-Trimble, with 50% share of profit or loss from this joint venture to be reported by Trimble in the Non-operating section of the Consolidated Statement of Operations under the heading of “Expenses for affiliated operations, net.” During fiscal 2003, and the first year of its operations, Nikon-Trimble reported a loss of $0.6 million of which Trimble’s share is $0.3 million. At January 2, 2004, the outstanding balance from Nikon-Trimble due to Trimble was approximately $1.4 million related to the transfer of certain tangible and intangible assets from Trimble Japan KK, recorded under the heading of “Accounts and other receivables, net” and $2.0 million net payable by Trimble to Nikon-Trimble related to the purchase and sale of products from and to Nikon-Trimble recorded under the heading of “Other accrued liabilities” on the Consolidated Balance Sheets. Note 4 – Goodwill and Intangible Assets: Goodwill and purchased intangible assets consisted of the following: January 2, 2004 January 3, 2003 As of (in thousands) Intangible assets: Intangible assets with definite life: $ 32,389 $ 25,986 Existing technology Trade names, trademarks, patents, and other intellectual properties 20,911 21,594 53,300 47,580 Total intangible assets with definite life (33,559) (24,342) Less accumulated amortization $ 19,741 $ 23,238 Total net intangible assets Goodwill: Goodwill, Spectra Precision acquisition Goodwill, other acquisitions Total goodwill $ 205,562 $ 185,277 35,863 20,656 $ 241,425 $ 205,933 The increase in goodwill of approximately $35.5 million during fiscal 2003 was primarily due to the acquisition of Applanix and MENSI of approximately $15.0 million and the exchange rate impact of approximately $18.0 million on non-US currency denominated goodwill assets. 57 The intangible asset amortization expense as of January 2, 2004 for the five years following fiscal 2003 is projected as follows: (In thousands) 2004 2005 2006 2007 2008 Thereafter Total Amortization Expense $ 8,177 5,384 2,522 1,747 824 1,087 $ 19,741 For comparative purposes, the pro forma adjusted net income (loss) per share excluding amortization of goodwill, distribution channel, and assembled workforce is as follows: Fiscal Years Ended (in thousands, except per share data) Net income (loss) Add back SFAS 142 adjustments: Amortization of goodwill Amortization of distribution channel Amortization of assembled workforce Adjusted net income (loss) Weighted average shares outstanding Basic Diluted Diluted net income (loss) per share Pro forma adjusted diluted net income (loss) per share Note 5 – Certain Balance Sheet Components: Inventories consisted of the following: As of (in thousands) Raw materials Work-in-process Finished goods January 2, 2004 January 3, 2003 December 28, 2001 $ 38,485 $ 10,324 $ (22,879) - - - 7,817 11,230 1,834 $ 38,485 $ 10,324 $ (1,998) - - - 47,505 50,012 37,091 42,860 37,091 43,578 $ 0.81 $ 0.24 $ (0.05) $ 0.77 $ 0.24 $ (0.05) January 2, 2004 January 3, 2003 $ 20,927 3,876 46,023 $ 70,826 $ 21,098 5,187 34,859 $ 61,144 58 Property and equipment consisted of the following: As of (in thousands) Machinery and equipment Furniture and fixtures Leasehold improvements Buildings Land Less accumulated depreciation Other current assets consisted of the following: As of (in thousands) Notes receivable Prepaid expenses Other Other non-current assets consisted of the following: As of (in thousands) Debt issuance costs, net Nikon-Trimble joint venture investment* Other investments Deposits Demonstration equipment, net Receivables from employees Other January 2, 2004 January 3, 2003 $ 66,634 9,085 4,502 5,236 1,391 86,848 (59,469) $ 27,379 $ 70,660 6,538 6,451 2,905 1,391 87,945 (65,908) $ 22,037 January 2, 2004 January 3, 2003 $ 446 4,566 647 $ 5,659 $ 1,685 5,495 1,221 $ 8,401 January 2, 2004 January 3, 2003 $ 1,691 10,717 1,216 925 3,226 801 3,978 $ 22,554 $ 2,493 - 1,381 1,196 2,665 1,223 3,128 $ 12,086 * Includes transaction costs of approximately $0.7 million. Note 6 - Derivative Financial Instruments: Trimble transacts business in various foreign currencies and hedges identified risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. Trimble utilizes forward contracts to hedge certain trade and inter-company receivables and payables. These contracts reduce the exposure to fluctuations in exchange rate movements, as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the hedge contracts and are marked to market through earnings every period and generally range from one to three months in original maturity. These hedge instruments are marked to market through earnings every period. Gains and losses are not material to the Company’s financial position or results of operation. From time to time, Trimble may also utilize forward foreign exchange contracts designated as cash flow hedges of operational exposures represented by firm backlog orders to specific accounts over a specific period of time. 59 Trimble records changes in the fair value of cash flow hedges in accumulated other comprehensive income (loss), until the firm backlog transaction ships. Upon recognition of revenue, the Company reclassifies the gain or loss on the cash flow hedge to the statement of operations. For the fiscal year ended January 3, 2003, Trimble recorded a gain of $57,000 reflecting the net change and ending balance in relation to a firm backlog hedge. The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flow from the forecasted transactions. All forward contracts have maturity of less than 12 months. As of January 3, 2003, the effect of all outstanding derivative instruments did not have a material impact on the Company’s financial position or results of operations and none are outstanding as of January 2, 2004. Note 7 - The Company, Industry Segment, Geographic, and Customer Information: Trimble is a designer and distributor of positioning products and applications enabled by GPS, optical, laser, and wireless communications technology. The Company designs and markets products, by delivering integrated information solutions such as collecting, analyzing, and displaying position data to its end users. Trimble offers an integrated product line for diverse applications in its targeted markets. To achieve distribution, marketing, production, and technology advantages in Trimble's targeted markets, the Company manages its operations in the following five segments: • Engineering and Construction — Consists of products currently used by survey and construction professionals in the field for positioning data collection, field computing, data management, and automated machine guidance and control. These products provide solutions for numerous construction applications including surveying, general construction, site preparation and excavation, road and runway construction, and underground construction. • Field Solutions — Consists of products that provide solutions in a variety of agriculture and fixed asset applications, primarily in the areas of precise land leveling, machine guidance, yield monitoring, variable- rate applications of fertilizers and chemicals, and fixed asset data collection for a variety of governmental and private entities. This segment is an aggregation of the mapping and geographic information systems (GIS) and agriculture businesses. Trimble has aggregated these business operations under a single general manager in order to continue to leverage its research and development activities due to the similarities of products across the segment. • Mobile Solutions — Consists of products that enable end users to monitor and manage their mobile assets by communicating location-relevant information from the field to the office. Trimble offers a range of products that address a number of sectors of this market including truck fleets, security, telematics, and public safety vehicles. • Component Technologies — Currently, Trimble markets its GPS component products through an extensive network of OEM relationships. These products include proprietary chipsets, modules, and a variety of intellectual property. The applications into which end users currently incorporate the component products include: timing applications for synchronizing wireless and computer systems; in-vehicle navigation and telematics (tracking) systems; fleet management; security systems; data collection networks; and wireless handheld consumer products. • Portfolio Technologies — The various operations that comprise this segment were aggregated on the basis that no single operation accounted for more than 10% of the total revenue. During the first two fiscal quarters of 2003, this segment was comprised solely of the Military and Advanced Systems business. Beginning with the third quarter of fiscal 2003, Applanix’s performance is reported in this business segment. At the beginning of fiscal 2003, Trimble realigned two of its reportable segments. The Tripod Data Systems business is now included in the Engineering and Construction segment, while previously it was included in the Portfolio Technologies segment. The following table has been restated to reflect this realignment. 60 Trimble evaluates each of its segment's performance and allocates resources based on profit and loss from operations before income taxes, and some corporate allocations. Trimble and each of its segments employ the same accounting policies. The following table presents revenues, operating income (loss), and identifiable assets for the five segments. The information includes the operations of Grid Data after April 2, 2001, LeveLite after August 15, 2002, Applanix after July 7, 2003 and MENSI after December 9, 2003. Operating income (loss) is net revenue less operating expenses, excluding general corporate expenses, goodwill amortization, restructuring charges, non-operating income (expense), and income taxes. The identifiable assets that Trimble's Chief Operating Decision Maker views by segment are accounts receivable and inventory. Fiscal Years Ended (In thousands) January 2, 2004 External net revenues Operating income (loss) before corporate allocations Accounts receivable (1) Inventories January 3, 2003 External net revenues Operating income (loss) before corporate allocations Accounts receivable (1) Inventories December 28, 2001 External net revenues Operating income (loss) before corporate allocations Accounts receivable (1) Inventories Reporting Segments Engineering and Construction Field Mobile Component Portfolio Solutions Solutions Technologies Technologies Total $ 367,058 $ 79,879 $ 12,981 $ 64,193 $ 16,792 $ 540,903 60,664 84,897 56,008 14,500 16,589 3,398 (6,452) 4,103 3,038 16,560 10,003 2,021 (1,686) 7,321 6,361 83,586 122,913 70,826 $ 319,615 $ 67,259 $ 8,486 $ 59,755 $ 11,487 $ 466,602 53,453 73,474 46,332 9,676 11,598 7,337 (12,039) 1,960 1,986 10,673 11,276 2,853 557 1,966 2,636 62,320 100,274 61,144 $ 317,849 $ 68,519 $ 13,791 $ 58,083 $ 17,050 $ 475,292 49,849 64,185 38,921 11,349 10,191 4,639 (9,990) 4,274 1,992 10,359 7,392 2,490 738 5,535 3,438 62,306 91,577 51,480 (1) As presented, accounts receivable excludes cash received in advance and allowances for doubtful accounts, which are not allocated between segments. The following are reconciliations corresponding to totals in the accompanying consolidated financial statements: Fiscal Years Ended (in thousands) Operating income from continuing operations: Total for reportable divisions (1) Unallocated corporate expenses Operating income from continuing operations January 2, 2004 January 3, 2003 December 28, 2001 $ 83,586 (29,651) $ 53,935 $ 62,320 (28,497) $ 33,823 $ 62,306 (62,125) $ 181 61 (1) Segment operating income for fiscal 2002 and fiscal 2001 have been restated to reflect the allocations of certain corporate expenses so as to be comparable with the allocation methodology in fiscal 2003. As of (in thousands) Assets: Accounts receivable total for reportable segments Unallocated (1) Total January 2, 2004 January 3, 2003 $ 122,913 (19,563) $ 103,350 $ 100,274 (20,629) $ 79,645 (1) Includes cash received in advance, other receivables, and accruals that are not allocated by segment. The following table presents revenues by product groups. Fiscal Years Ended (in thousands) GPS products Laser and optical products Other Total revenue January 2, 2004 January 3, 2003 December 28, 2001 $ 320.9 199.7 20.3 $ 540.9 $ 274.5 186.9 13.9 $ 475.3 $ 274.2 93.9 1.7 $ 369.8 The geographic distribution of Trimble’s revenues and identifiable assets is summarized in the table below. Other foreign countries include Canada and countries within South and Central America. Identifiable assets indicated in the table below exclude inter-company receivables, investments in subsidiaries, goodwill, and intangibles assets. Fiscal Years Ended (In thousands) January 2, 2004 Sales to unaffiliated customers (1) Inter-geographic transfers Total revenue Geographic Area Europe Middle East Africa Other Non-US Countries Asia US Eliminations Total $ 265,846 $ 166,153 $ 70,257 $ 38,648 $ - 3,755 - $ 540,903 - $ 378,469 $ 282,338 $ 70,257 $ 42,403 $ (232,563) $ 540,903 116,185 (232,563) 112,623 Identifiable assets $ 172,850 $ 91,008 $ 7,549 $ 12,330 $ - $ 283,737 January 3, 2003 Sales to unaffiliated customers (1) Inter-geographic transfers Total revenue Identifiable assets December 28, 2001 Sales to unaffiliated customers (1) Inter-geographic transfers Total revenue $ 235,716 $ 136,551 $ 60,878 $ 33,457 $ - 4,121 - $ 466,602 - $ 298,559 $ 210,176 $ 60,878 $ 37,578 $ (140,589) $ 466,602 73,625 (140,589) 62,843 $ 127,594 $ 70,057 $ 9,955 $ 5,743 $ (864) $ 212,485 $ 236,665 $ 143,051 $ 54,710 $ 40,866 $ - 49,940 2,137 - $ 475,292 - $ 294,146 $ 192,991 $ 56,847 $ 40,866 $ (109,558) $ 475,292 (109,558) 57,481 Identifiable assets $ 120,403 $ 71,081 $ 10,048 $ 3,829 $ (5,494) $ 199,867 (1) Sales attributed to countries based on the location of the customer. 62 Transfers between US and non-US geographic areas are made at prices based on total costs and contributions of the supplying geographic area. The Company's subsidiaries in Asia, except for Japan, which is a buy/sell entity, have derived revenue from commissions from US operations in each of the periods presented. These commission revenues and expenses are excluded from total revenue and operating income (loss) in the preceding table. The Japanese entity’s revenues and expenses are included in total revenue and operating income (loss) in the preceding table. In fiscal 2002, Germany comprised approximately 16% of sales to unaffiliated customers. Other than the United States, no other country comprised more than 10% of sales to unaffiliated customers for any periods presented, except as disclosed above. No single customer accounted for 10% or more of Trimble's total revenues in fiscal years 2003, 2002, and 2001. Note 8 - Restructuring Charges: Restructuring charges of $2.0 million were recorded in fiscal 2003, $1.1 million in fiscal 2002, and $3.6 million in fiscal 2001, all of which related to severance costs, except for $0.3 in 2003 which related to lease costs of Trimble’s Japanese office closure due to the Nikon joint venture. As a result of the restructuring activities, the Company’s headcount decreased in fiscal 2003 by 77, 49 and 207 in fiscal 2003, 2002, and 2001, respectively. As of January 2, 2004, the restructuring accrual balance was approximately $0.4 million which will be paid over the remaining term of the lease through 2006. Note 9 - Long-term Debt: Long-term debt consisted of the following: As of (In thousands) Credit Facilities: Term loan Revolving credit facility Subordinated note Promissory notes and other Less bank and other short-term borrowings Less current portion of long-term debt Non-current portion January 2, 2004 January 3, 2003 $ $ 43,750 44,000 - 2,736 90,486 - 12,885 77,601 $ $ 32,600 35,000 69,136 1,789 138,525 6,556 24,104 107,865 The following summarizes the future cash payment obligations (excluding interest) as of January 2, 2004: Total 2004 2005 2006 2007 2009 and 2008 Beyond (in thousands) Credit Facilities: Term loan Revolving credit facility Subordinated note Promissory note and other Total contractual cash obligations $ 43,750 $ 12,500 $ 12,500 $ 12,500 $ 6,250 $ - $ - - - 1,681 $ 90,486 $ 12,885 $ 12,665 $ 56,785 $ 6,360 $ 110 $ 1,681 44,000 - 2,736 44,000 - 285 - - 385 - - 165 - - 110 - - 110 63 Credit Facilities On June 25, 2003, Trimble obtained a $175 million secured Credit Facility (“2003 Credit Facility”) from a syndicate of nine banks to repay the Subordinated Note and refinance certain existing higher interest credit facilities, pay fees and expenses related to this new credit facility, and for ongoing working capital and general corporate needs. At January 2, 2004, Trimble had approximately $87.8 million of borrowings under the 2003 Credit Facility, comprised of a $43.8 million term loan and $44.0 million of a $125 million revolver. The Company has access to an additional $81 million of cash under the terms of the revolving credit facility. The Company has commitment fees on the unused portion of 0.5% if the Leverage Ratio (which is defined as total indebtedness to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), as defined in the related agreement) is 2.0 or greater and 0.375% if the Leverage Ratio is less than 2.0. Pricing of interest for any borrowings under the 2003 Credit Facility was fixed for the first six months at LIBOR plus 175 basis points (1.5% at January 2, 2004) and now is thereafter tied to a formula, based on the Leverage Ratio. The Credit Facility is secured by all of the Company’s material assets, except for assets that are subject to foreign tax considerations. Financial covenants of the 2003 Credit Facility include leverage, fixed charge, and minimum net worth tests. At January 2, 2004, Trimble was in compliance with all financial debt covenants. The amount due under the revolver loan is paid as the loan matures on June 25, 2006, and the loan commitment fees are paid on a quarterly basis. Under the terms of the 2003 Credit Facility, the Company is allowed to pay dividends and repurchase shares of common stock up to 25% of net income in the previous fiscal year, under the existing terms of the credit facilities. In July of 2000, Trimble obtained $200 million of senior, secured credit facilities (the "2000 Credit Facility") from a syndicate of banks to support the acquisition of Spectra Precision Group and its ongoing working capital requirements and to refinance certain existing debt. At January 3, 2003, Trimble had approximately $67.6 million outstanding under the 2000 Credit Facility, comprised of $32.6 million under a $100 million five-year term loan, $25 million under a $50 million US dollar only revolving credit facility ("revolver"), and $10 million under a $50 million multi-currency revolver. The Company had commitment fees on the unused portion of 0.5% assuming certain ratios were met. Pricing for any borrowings under the 2000 Credit Facility was fixed for the first six months at LIBOR plus 275 basis points and was thereafter tied to a formula, based on the leverage ratio. Due to the full repayment of the Subordinated Note and the refinancing of the 2000 Credit Facility, the Company wrote off approximately $3.6 million of unamortized debt issuance costs and warrants issued in connection with the Subordinated Note, as interest expense in fiscal 2003. Subordinated Note In July of 2000, as part of the acquisition of Spectra Precision Group, the Company issued Spectra-Physics Holdings USA, Inc., a subordinated seller note that had a stated two-year maturity. On March 20, 2002, the Company renegotiated the terms of the subordinated note. Under the revised agreement, Spectra-Physics Holdings, Inc., a subsidiary of Thermo Electron, extended the due date of the note until July 14, 2004, at the current interest rate of approximately 10.4% per year. As of January 3, 2003 the principal amount outstanding was approximately $69.1 million. As permitted by the 2000 Credit Facility, Trimble repaid the subordinated note during fiscal 2003. Promissory Note and Others The promissory note and others mainly consists of a $1.7 million liability arising from the purchase of a building for Trimble’s Corvallis, Oregon site and other government loans in our foreign subsidiaries. The $1.7 million note is payable in monthly installments through April 2015, bearing a 3.99% variable interest rate as of January 2, 2004. 64 Weighted Average Cost of Debt The weighted average cost of debt is approximately 2.9% for fiscal 2003 and 7.6% for fiscal 2002. Note 10 - Lease Obligations and Commitments: Trimble's principal facilities in the United States are leased under non-cancelable operating leases that expire at various dates through 2011. The Company has options to renew certain of these leases for an additional five years. Trimble also leases facilities under operating leases in the United Kingdom, Sweden, and Germany that expire in 2005. Future minimum payments required under non-cancelable operating leases are as follows: (In thousands) 2004 2005 2006 2007 2008 Thereafter Total Operating Lease Payments $ 10,129 9,401 2,322 1,643 1,489 3,157 $ 28,141 Net rent expense under operating leases was $13.2 million in fiscal 2003, $5.9 million in fiscal 2002, and $9.6 million in fiscal 2001. Sublease income was $1.7 million, $4.7 million, and $3.5 million, respectively. Note 11 - Fair Value of Financial Instruments: The carrying amounts and fair values of Trimble's financial instruments are as follows: (In thousands) Assets: Cash and cash equivalents (See Note 1) Forward foreign currency exchange contracts (See Note 6) Accounts receivable Liabilities: Subordinated notes (See Note 9) Credit facilities (See Note 9) Promissory note and other (See Note 9) Accounts payable Carrying Amount Fair Value Carrying Amount Fair Values January 2, 2004 January 3, 2003 $ 45,416 1,412 $ 45,416 1,328 $ 28,679 125 $ 28,679 297 103,350 103,350 79,645 79,645 - 87,750 2,736 26,019 - 87,750 2,335 26,019 69,136 67,600 1,789 30,669 65,798 67,600 1,421 30,669 The fair value of the subordinated notes, bank borrowings, and promissory notes have been estimated using an estimate of the interest rate Trimble would have had to pay on the issuance of notes with a similar maturity and discounting the cash flows at that rate. The fair values do not give an indication of the amount that Trimble would currently have to pay to extinguish any of this debt. 65 The fair value of forward foreign exchange contracts is estimated based on the difference between the market price and the carrying amount of comparable contracts. These contracts are adjusted to fair value at the end of every month. Note 12 - Income Taxes: Trimble's income tax provision (benefit) consisted of the following: Fiscal Years Ended (In thousands) US Federal: Current Deferred US State: Current Deferred Non-US: Current Deferred Income tax provision (benefit) January 2, 2004 January 3, 2003 December 28, 2001 $ 513 (7,000) (6,487) $ 250 (600) (350) $ - - - - 142 - - - - 58 142 58 1,594 2,343 3,937 $ (2,900) 2,052 1,306 3,358 $ 3,500 2,729 (887) 1,842 $ 1,900 The pre-tax US income (loss) from continuing operations was approximately $39.5 million, $3.3 million and $(29.3) million in fiscal years 2003, 2002 and 2001, respectively. The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows: Fiscal Years Ended (In thousands) January 2, 2004 January 3, 2003 December 28, 2001 Expected tax from continuing operations at $ 12,455 $ 4,839 $ 35% in all years Change in valuation allowance Non-US tax rate differential Goodwill amortization Other Income tax provision (benefit) Effective tax rate (15,028) - - (327) (2,900) (1,156) (137) - (46) $ 3,500 $ (7,557) 9,704 (855) 747 (139) $ 1,900 (8%) 25% (9%) The components of deferred taxes consist of the following: As of (In thousands) Deferred tax liabilities: 66 January 2, 2004 January 3, 2003  Purchased intangibles Depreciation and amortization Other individually immaterial items Total deferred tax liabilities Deferred tax assets: Inventory valuation differences Expenses not currently deductible US Federal credit carryforwards Deferred revenue US State credit carryforwards Warranty Depreciation and amortization US Federal net operating loss (NOL) carryforward Other individually immaterial items Total deferred tax assets Valuation allowance Total deferred tax assets $ $ 1,338 3,776 251 5,365 381 2,258 (78) 2,561 9,001 5,528 9,150 4,280 6,999 2,374 2,871 - 3,106 43,309 (34,756) 8,553 12,069 5,762 8,172 4,317 6,215 2,374 3,184 4,451 1,827 48,371 (47,878) 493 Total net deferred tax assets/(liabilities) $ 3,188 $ (2,068) The Company has US Federal credit carryforwards of approximately $9.1 million that expire beginning in 2004. The Company has state research and development credit carryforwards of approximately $10.4 million which do not expire. The change in valuation allowance in 2003 includes net operating losses realized as well as the benefit given to certain deferred tax assets in the amount of $7.6 million based on management’s assessment that it is more likely than not that such assets will be realized. The valuation allowance decreased by $13.1 million in 2003 and decreased by $3.1 million in 2002. Approximately $14.1 million of the valuation allowance at January 2, 2004 relates to the tax benefits of stock option deductions, which will be credited to equity if and when realized. Note 13 – Shareholder’s Equity: 3-for-2 Stock Split Trimble’s Board of Directors approved a 3-for-2 split of all outstanding shares of the Company's Common Stock, payable March 4, 2004 to stockholders of record on February 17, 2004. Cash will be paid in lieu of fractional shares. All share and per share information have been adjusted to reflect the stock split on a retroactive basis for all periods presented. Common Stock On April 14, 2003, Trimble sold 3,148,000 shares of its Common Stock, no par value per share, to an investor at a price of $12.17 per share in an offering pursuant to its shelf registration statement. The offering resulted in net proceeds to Trimble of approximately $36.6 million, approximately $31 million of which was used to pay down the principal balance and $5.6 million was used to pay down the accrued interest due on the Subordinated Note (see Note 9 to the Consolidated Financial Statements). On December 21, 2001, Trimble completed a private placement of 2,675,006 shares of its Common Stock at a price of $10.00 per share to certain qualified investors, resulting in gross proceeds of approximately $26.8 million to the Company. On January 15, 2002, Trimble had a second closing of the private placement issuing 1,920,006 shares of Common Stock at $10.00 per share resulting in gross proceeds of an additional $19.2 million. 67 2002 Stock Plan In 2002, Trimble’s Board of Directors adopted the 2002 Stock Plan (“2002 Plan”). The 2002 Plan approved by the shareholders provides for the granting of incentive and non-statutory stock options for up to 3,000,000 shares plus any shares currently reserved but un-issued to employees, consultants, and directors of Trimble. Incentive stock options may be granted at exercise prices that are not less than 100% of the fair market value of Common Stock on the date of grant. Employee stock options granted under the 2002 Plan have 120-month terms, and vest at a rate of 20% at the first anniversary of grant, and monthly thereafter at an annual rate of 20%, with full vesting occurring at the fifth anniversary of the grant. The exercise price of non-statutory stock options issued under the 2002 Plan must be at least 85% of the fair market value of Common Stock on the date of grant. As of January 2, 2004, options to purchase 2,326,742 shares were outstanding and 619,949 were available for future grant under the 2002 Plan. 1993 Stock Option Plan In 1992, Trimble's Board of Directors adopted the 1993 Stock Option Plan (“1993 Plan”). The 1993 Plan, as amended to date and approved by shareholders, provides for the granting of incentive and non-statutory stock options for up to 9,562,500 shares of Common Stock to employees, consultants, and directors of Trimble. Incentive stock options may be granted at exercise prices that are not less than 100% of the fair market value of Common Stock on the date of grant. Employee stock options granted under the 1993 Plan have 120-month terms, and vest at a rate of 20% at the first anniversary of grant, and monthly thereafter at an annual rate of 20%, with full vesting occurring at the fifth anniversary of grant. The exercise price of non-statutory stock options issued under the 1993 Plan must be at least 85% of the fair market value of Common Stock on the date of grant. As of January 2, 2004, options to purchase 4,799,045 shares were outstanding, and 980,627 shares were available for future grant under the 1993 Plan. 1990 Director Stock Option Plan In December 1990, Trimble adopted a Director Stock Option Plan under which an aggregate of 570,000 shares of Common Stock have been reserved for issuance to non-employee directors as approved by the shareholders to date. At January 2, 2004, options to purchase 287,501 shares were outstanding, and no shares were available for future grants under the Director Stock Option Plan. 1992 Management Discount Stock Option Plan In 1992, Trimble's Board of Directors approved the 1992 Management Discount Stock Option Plan ("Discount Plan"). Under the Discount Plan, 450,000 non-statutory stock options were reserved for grant to management employees at exercise prices that may be significantly discounted from the fair market value of Common Stock on the dates of grant. Options are generally exercisable six months from the date of grant. As of January 2, 2004, there were no shares available for future grants. For accounting purposes, compensation cost on these grants is measured by the excess over the discounted exercise prices of the fair market value of Common Stock on the dates of option grants. There were no discounted options granted in the plan in fiscal 2003, 2002, and 2001. As of January 2, 2004, options to purchase 187,500 shares were outstanding under the 1992 Management Discount Stock Option Plan. 1988 Employee Stock Purchase Plan In 1988, Trimble established an employee stock purchase plan under which an aggregate of 5,025,000 shares of Common Stock have been reserved for sale to eligible employees as approved by the shareholders to date. The plan permits full-time employees to purchase Common Stock through payroll deductions at 85% of the lower of the fair market value of the Common Stock at the beginning or at the end of each six-month offering period. In fiscal 2003 and 2002, 328,044 shares and 362,412 shares, respectively, were issued under the plan for aggregate proceeds to the Company of $3.1 million and $2.9 million, respectively. At January 2, 2004, the number of shares reserved for future purchases by eligible employees was 428,216. 68 SFAS 123 Disclosures As stated in Note 1 of the Notes to the Consolidated Financial Statements, Trimble has elected to follow APB 25 and related interpretations in accounting for its employee stock options and stock purchase plans. The alternative fair value accounting provided for under SFAS 123 requires use of option pricing models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Trimble's employee stock options equals the market price of the underlying stock on date of grant, no compensation expense is recognized. Exercise prices for options outstanding as of January 2, 2004, ranged from $5.33 to $34.46. The weighted average remaining contractual life of those options is 6.91 years. In view of the wide range of exercise prices, Trimble considers it appropriate to provide the following additional information in respect of options outstanding: Options Outstanding Options Exercisable Weighted- Average Exercise Price per Share Weighted- Average Remaining Contractual Life Number Outstanding (1) 908 $ 5.70 5.01 7.91 6.03 861 9.10 6.07 111 10.23 8.47 843 10.81 6.13 957 11.65 6.74 780 13.29 6.18 783 16.04 6.02 21 17.00 9.53 1,064 1,274 26.37 6.86 7,601 $ 13.61 6.91 Number Exercisable (1) Weighted- Average Exercise Price per Share 873 $ 5.71 7.89 614 8.94 65 10.23 228 10.66 585 11.65 426 13.13 525 16.04 17 17.00 5 800 27.01 4,136 $ 12.76 Range $ 5.33 - 6.63 6.67 - 8.53 8.75 - 9.33 10.23 10.25 - 11.43 11.65 - 11.67 11.93 - 15.71 16.04 17.00 17.55 - 34.46 Total (1) In thousands Activity during fiscal 2003, 2002, and 2001, under the combined plans was as follows: January 2, 2004 January 3, 2003 December 28, 2001 Fiscal Years Ended (In thousands, except for per share data) Options Weighted average exercise price Weighted average exercise price Weighted average exercise price Options Options Outstanding at beginning of year Granted Exercised Cancelled Outstanding at end of year 7,691 1,298 (1,263) (125) 7,601 $ 12.35 6,932 16.87 1,275 8.90 (199) 15.51 (317) 7,691 $ 13.61 6,390 $ 12.69 1,605 9.88 6.67 (436) 13.46 (627) 6,932 $ 12.35 Exercisable at end of year Available for grant Weighted-average fair value of options granted during year 4,136 1,605 $ 12.76 4,005 2,790 $ 11.69 3,009 1,565 $ 12.73 11.39 8.61 12.37 $ 12.69 $ 10.84 $ 10.03 $ 5.64 $ 6.39 69 Non-statutory Options On May 3, 1999, Trimble entered into an agreement to grant a non-statutory option to purchase up to 45,000 shares of common stock at an exercise price of $6.50 per share, with an expiration date of March 29, 2004. As of January 2, 2004, these non-statutory options have not been exercised. Warrants On April 12, 2002, the Company issued to Spectra-Physics Holdings USA, Inc., a warrant to purchase up to 564,350 shares of Trimble’s Common Stock over a fixed period of time. Initially, Spectra-Physics’ warrant entitles it to purchase 300,000 shares of Common Stock over a five-year period at an exercise price of $10.07 per share. On a quarterly basis beginning July 14, 2002, Spectra-Physics’ warrant became exercisable for an additional 375 shares of Common Stock for every $1 million of principal and interest outstanding to Spectra-Physics until the obligation is paid off in full. These shares are purchasable at a price equal to the average of Trimble’s closing price for the five days immediately preceding the last trading day of each quarter. On July 14, 2002 an additional 26,046 shares became exercisable at an exercise price of $9.64 per share. On October 14, 2002 an additional 26,736 shares became exercisable at an exercise price of $6.12. On January 14, 2003, an additional 27,426 shares became exercisable at an exercise price of $9.03. On April 14, 2003, an additional 14,312 shares became exercisable at an exercise price of $13.37. The additional shares are exercisable over a 5-year period. No additional shares will be issuable under the warrant to Spectra-Physics as the underlying obligation has been paid off in full. The approximate fair value of the warrants of $2.4 million was determined using the Black-Scholes pricing model with the following assumptions: contractual life of 5-year period, risk-free interest rate of 4%; volatility of 65%; and no dividends during the contractual term. The value of the warrants was being amortized to interest expense over the term of the subordinated note and the unamortized balances was written off to interest expense on June 2003 upon repayment of the note. On December 21, 2001 and January 15, 2002, in connection with the first and second closing of the private placement of the Company’s Common Stock, Trimble granted five-year warrants to purchase an additional 919,008 shares of Common Stock, subject to certain adjustments, at an exercise price of $12.97 per share. Common Stock Reserved for Future Issuances As of January 2, 2004, Trimble had reserved 11,371,652 common shares for issuance upon exercise of options and warrants outstanding and options available for grant under the 2002 Plan, the 1993 Plan, the 1990 Director Plan, and the 1992 Management Discount Plan, and available for issuance under the 1988 Employee Stock Purchase Plan. Note 14 – Benefit Plans: 401(k) Plan Under Trimble's 401(k) Plan, US employee participants (including employees of certain subsidiaries) may direct the investment of contributions to their accounts among certain mutual funds and the Trimble Navigation Limited Common Stock Fund. The Trimble Fund sold net 61,238 shares of Common Stock for an aggregate of $0.9 million in fiscal 2003. Trimble, at its discretion, matches individual employee 401(k) Plan contributions at a rate of fifty cents of every dollar that the employee contributes to the 401(k) Plan up to 5% of the employee’s annual salary to an annual maximum of $2,500. Trimble's matching contributions to the 401(k) Plan were $1.8 million in fiscal 2003, $1.8 million in fiscal 2002, and $1.7 million in fiscal 2001. Profit-Sharing Plan In 1995, Trimble introduced an employee profit-sharing plan in which all employees, excluding executives and certain levels of management, participate. The plan distributes to employees approximately 5% of quarterly adjusted pre-tax income. Payments under the plan during fiscal 2003, 2002 and 2001 were $2.5 million, $1.1 million, and $0.9 million, respectively. 70 Defined Contribution Pension Plans Certain of the Company’s European subsidiaries participate in state sponsored pension plans. Contributions are based on specified percentages of employee salaries. For these plans, Trimble contributed and charged to expense approximately $2.0 million for fiscal 2003, $1.4 million for fiscal 2002, and $1.4 million for fiscal 2001. Defined Benefit Pension Plan The Swedish and German subsidiaries have an unfunded defined benefit pension plan that covered substantially all of their full-time employees through 1993. Benefits are based on a percentage of eligible earnings. The employee must have had a projected period of pensionable service of at least 30 years as of 1993. If the period was shorter, the pension benefits were reduced accordingly. Active employees do not accrue any future benefits; therefore, there is no service cost and the liability will only increase for interest cost. Net periodic benefit costs in fiscal 2003, 2002, and 2001 were not material. The changes in the benefit obligations and plan assets of the significant non-US defined benefit pension plans for fiscal 2003 and 2002 were as follows: Fiscal Years Ended (in thousands) January 2, 2004 January 3, 2003 (1) Change in benefit obligation: Benefit obligation at beginning of year Interest cost Benefits paid Foreign exchange impact Actuarial (gains) losses Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Plan participants' contributions Benefits paid Foreign exchange impact Fair value of plan assets at end of year Benefit obligation in excess of plan assets Unrecognized prior service cost Unrecognized net actuarial gain Accrued pension costs (included in accrued liabilities) (1) Prior year’s disclosure has been restated to correct for a clerical error. $ 4,972 328 (256) 1,102 58 6,204 787 29 150 - (256) 162 872 5,332 - 35 $ 5,297 $ 4,105 317 (212) 814 (52) 4,972 731 122 121 - (212) 24 786 4,186 - 25 $ 4,161 Actuarial assumptions used to determine the net periodic pension costs for the year ended January 2, 2004 were as follows: Discount rate Rate of compensation increase Note 15 - Earnings Per Share: Swedish Subsidiary 5.5% 2.5% German Subsidiaries 6.0% 1.5% The following data show the amounts used in computing earnings (loss) per share and the effect on the weighted- average number of shares of potentially dilutive Common Stock. 71 Fiscal Years Ended (in thousands, except per share data) Numerator: Income available to common shareholders: Used in basic and diluted earnings (loss) per share January 2, 2004 January 3, 2003 December 28, 2001 from continuing operations $ 38,485 $ 10,324 $ (23,492) Used in basic and diluted earnings per share from discontinued operations Used in basic and diluted earnings (loss) per share Denominator: Weighted-average number of common shares used in basic earnings (loss) per share Effect of dilutive securities (using treasury stock method): Common stock options Common stock warrants Weighted-average number of common shares and dilutive potential common shares used in diluted income per share Basic earnings (loss) per share from continuing operations Basic earnings per share from discontinued operations Basic earnings (loss) per share Diluted earnings (loss) per share from continuing operations Diluted earnings per share from discontinued operations Diluted income (loss) per share - 613 $ 38,485 $ 10,324 $ (22,879) - 47,505 42,860 37,091 2,058 449 705 13 - - 50,012 43,578 37,091 $ 0.81 $ 0.24 $ (0.63) 0.01 $ 0.81 $ 0.24 $ (0.62) - - $ 0.77 $ 0.24 $ (0.63) 0.01 $ 0.77 $ 0.24 $ (0.62) - - Due to the fact that the Company reported a net loss in fiscal 2001, options and warrants were not included in the computation of earnings per share in fiscal 2001. If the Company had reported net income in 2001, additional 1,407,000 common equivalent shares related to outstanding options and warrants would have been included in the calculation of diluted loss per share. Note 16 - Comprehensive Income (Loss): The components of comprehensive income (loss), net of related tax as follows: Fiscal Years Ended (in thousands) Net income (loss) Foreign currency translation adjustments Net gain (loss) on hedging transactions Net unrealized gain (loss) on investments Comprehensive income (loss) January 2, 2004 January 3, 2003 December 28, 2001 $38,485 31,198 (7) 74 $ 69,750 $10,324 17,697 210 (17) $ 28,214 $(22,879) (9,766) (203) 16 $ (32,832) 72 The components of accumulated other comprehensive (loss), net of related tax as follows: Fiscal Years Ended (in thousands) Cumulative foreign currency translation adjustments Net gain on hedging transactions Net unrealized gain (loss) on investments Accumulated other comprehensive income (loss) Note 17 - Related-Party Transactions: Related-Party Lease January 2, 2004 January 3, 2003 $ 30,166 - 73 $ 30,239 $ (1,032) 7 (1) $ (1,026) Trimble currently leases office space in Ohio from an association of three individuals, one of whom is an employee of one of the US operating units, under a non-cancelable operating lease arrangement expiring in 2011. The annual rent is subject to adjustment based on the terms of the lease. The Consolidated Statements of Operations include expenses from this operating lease of $0.35 million for fiscal 2003, fiscal 2002, and fiscal 2001. Related –Party Notes Receivable Trimble has notes receivable from officers and employees of approximately $0.8 million as of January 2, 2004 and $1.2 million as of January 3, 2003. The notes bear interest from 4.49% to 6.62% and have an average remaining life of 1.47 years as of January 2, 2004. See Note 3 to the Notes to the Consolidated Financial Statements for additional information regarding Trimble’s related party transactions with joint venture partners. Note 18 - Statement of Cash Flow Data: Fiscal Years Ended (in thousands) Supplemental disclosure of cash flow information: Interest paid Income taxes paid Significant non-cash investing activities: January 2, 2004 January 3, 2003 December 28, 2001 $ 10,208 $ 12,215 $ $ 688 $ 2,635 $ 17,363 825 Issuance of shares related to invest in joint venture Issuance of shares related to LeveLite earn-out payments $ $ 5,922 $ - $ 1,349 $ 336 $ - - Note 19 - Litigation: From time to time, the Company is involved in litigation arising out of the ordinary course of its business. There are no known claims or pending litigation expected to have a material effect on the Company’s overall financial position, results of operations, or liquidity. 73 Note 20 - Selected Quarterly Financial Data (unaudited): First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) Fiscal 2003 Revenue Gross margin Net income Basic net income per share Diluted net income per share Fiscal 2002 Revenue Gross margin Net income (loss) $ $ 127,325 $ 61,755 5,353 138,132 $ 71,095 8,105 139,569 $ 69,112 9,936 0.12 0.12 0.17 0.16 0.20 0.19 104,029 $ 54,333 (715) 123,256 $ 60,951 4,326 114,748 $ 57,581 2,708 Basic net income (loss) per share Diluted net income (loss) per share (0.02) (0.02) 0.10 0.10 0.06 0.06 135,877 66,068 15,091 0.30 0.28 124,569 61,567 4,005 0.09 0.09 Significant quarterly items for fiscal 2003 include the following: (i) in the first quarter of 2003 a $0.4 million charge or $0.01 per diluted share relating to workforce reduction; (ii) in the second quarter of 2003 a $0.7 million charge, or $0.01 per diluted share relating to work force reduction and $3.6 million of interest expenses, or $0.07 per diluted share relating to the Company's debt refinancing; (iii) in the third quarter of 2003 a $0.6 million charge, or $0.01 per diluted share relating to work force reduction; (iv) in the fourth quarter of 2003 a $0.3 million charge, or less than $0.01 per diluted share relating to work force reduction. Significant quarterly items for fiscal 2002 include the following: (i) in the first quarter of 2002 a $0.3 million charge or $0.01 per diluted share relating to workforce reduction; (ii) in the second quarter of 2002 a $0.2 million charge, or less than $0.01 per diluted share relating to work force reduction; (iii) in the third quarter of 2002 a $0.2 million charge, or less than $0.01 per diluted share relating to work force reduction and a $0.2 million gain, or less than $0.01 per diluted share relating to the sale of an investment; (iv) in the fourth quarter of 2002 a $0.5 million charge, or $0.01 per diluted share relating to work force reduction and a $1.5 million charge, or $0.03 per diluted share relating to the write-down of an investment. Note 21 - Subsequent Events: 3-for-2 Stock Split Trimble’s Board of Directors approved a 3-for-2 split of all outstanding shares of the Company's Common Stock, payable March 4, 2004 to stockholders of record on February 17, 2004. Cash will be paid in lieu of fractional shares. All share and per share information have been adjusted to reflect the stock split on a retroactive basis for all periods presented. 74 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders, Trimble Navigation Limited We have audited the accompanying Consolidated Balance Sheets of Trimble Navigation Limited as of January 2, 2004 and January 3, 2003, and the related Consolidated Statements of Operations, Shareholders' Equity, and Cash Flows for each of the three years in the period ended January 2, 2004. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule, based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and schedule referred to above present fairly, in all material respects, the consolidated financial position of Trimble Navigation Limited at January 2, 2004 and January 3, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 2, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related 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. As discussed in Note 1 to the consolidated financial statements, effective December 29, 2001, the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Ernst & Young LLP January 23, 2004* Palo Alto, California *Date of report as amended in the Company’s Form 10-K/A, as filed with the Securities Exchange Commission. 75 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9a. Controls and Procedures (a) Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART III Item 10 Directors and Executive Officers of the Registrant The information required by this item, insofar as it relates to Trimble's directors, will be contained under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. The information required by this item relating to executive officers is set forth above in Item 1 Business Overview under the caption “Executive Officers.” Code of Ethics The Company’s Business Ethics and Conduct Policy that applies, among others, to the Company’s Chief Executive Officer, Chief Financial Officer, Corporate Controller, and other finance organization employees. The Business Ethics and Conduct Policy is available on the Company’s website at www.trimble.com under the heading “Corporate Governance and Policies” on the Investor Information page of our website. A copy will be provided, without charge, to any shareholder who requests one by written request addressed to General Counsel, Trimble Navigation Limited, 749 N. Mary Avenue, Sunnyvale, CA 94085. If any substantive amendments to the Business Ethics and Conduct Policy are made or any waivers are granted, including any implicit waiver, from a provision of the Business Ethics and Conduct Policy, to its Chief Executive Officer, Chief Financial Officer or Corporate Controller, the Company will disclose the nature of such amendment or waiver on the Company’s website at www.trimble.com or in a report on Form 8-K. Item 11 Executive Compensation The information required by this item will be contained in the Proxy Statement under the caption "Executive Compensation" and is incorporated herein by reference. 76 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be contained in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters" and is incorporated herein by reference. Item 13 Certain Relationships and Related Transactions The information required by this item will be contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. Item 14 Principal Accountant Fees and Services The information required by this item will be contained in the Proxy Statement under the caption "Principal Accountant Fees and Services" and is incorporated herein by reference. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements PART IV The following consolidated financial statements required by this item are included in Part II Item 8 hereof under the caption "Financial Statements and Supplementary Data." Page in this Annual Report on Form 10-K Consolidated Balance Sheets at January 2, 2004 and January 3, 2003........................................................... 45 Consolidated Statements of Operations for each of the three fiscal years in the period ended January 2, 2004................................................................................................................. 46 Consolidated Statement of Shareholders' Equity for each of the three fiscal years in the period ended January 2, 2004................................................................................................................. 47 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 2, 2004................................................................................................................. 48 Notes to Consolidated Financial Statements ................................................................................................... 49 Report of Ernst & Young LLP, Independent Auditors.................................................................................... 75 2. Financial Statement Schedules The following financial statement schedule is filed as part of this report: Page in this Annual Report on Form 10-K Schedule II - Valuation and Qualifying Accounts........................................................................................ S-1 77 All other schedules have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto. 3. Exhibits Exhibit Number 3.1 3.2 3.3 3.4 3.5 3.8 4.1 4.2 4.3 4.4 4.5 Restated Articles of Incorporation of the Company filed June 25, 1986. (5) Certificate of Amendment of Articles of Incorporation of the Company filed October 6, 1988. (5) Certificate of Amendment of Articles of Incorporation of the Company filed July 18, 1990. (5) Certificate of Determination of the Company filed February 19, 1999. (5) Certificate of Amendment of Articles of Incorporation of the Company filed May 29, 2003. (15) Amended and Restated Bylaws of the Company. (16) Specimen copy of certificate for shares of Common Stock of the Company. (1) Preferred Shares Rights Agreement dated as of February 18, 1999. (4) First Amended and Restated Stock and Warrant Purchase Agreement between and among the Company and the investors thereto dated January 14, 2002. (9) Form of Warrant to Purchase Shares of Common Stock dated January 14, 2002. (10) Form of Warrant dated April 12, 2002. (11) 10.4+ Form of Indemnification Agreement between the Company and its officers and directors. (1) 10.32+ 1990 Director Stock Option Plan, as amended, and form of Outside Director Non-statutory Stock Option Agreement. (3) 10.46+ 1992 Management Discount Stock Option and form of Non-statutory Stock Option Agreement. (2) 10.59+ 1993 Stock Option Plan, as amended May 11, 2000. (7) 10.60 + 1988 Employee Stock Purchase Plan, as amended May 11, 2000. (7) 10.65+ Standby Consulting Agreement between the Company and Bradford W. Parkinson dated September 1, 1998. (5) 10.66+ Standby Consulting Agreement between the Company and Robert S. Cooper dated September 1, 1998. (5) 10.67+ Employment Agreement between the Company and Steven W. Berglund dated March 17, 1999. (5) 10.68+ Nonqualified deferred Compensation Plan of the Company effective February 10, 1994. (5) 10.70***Supply Agreement dated August 10, 1999 by and among Trimble Navigation Limited and Solectron Corporation and Solectron Federal Systems, Inc. (6) 10.77+ Australian Addendum to the Trimble Navigation 1988 Employee Stock Purchase Plan. (8) 78 10.81+ 2002 Stock Plan, including form of Option. (12) 10.82 Credit Agreement dated June 25, 2003. (14) 10.83 Letter dated May 8, 2002 exercising renewal option of the Supply Agreement dated August 10, 1999 by and among Trimble Navigation Limited and Solectron Corporation and Solectron Federal Systems, Inc. (13) 21.1 Subsidiaries of the Company. (16) 23.1 Consent of Ernst & Young LLP, independent auditors. (16) 24.1 Power of Attorney included on signature page herein. 31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (16) 31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (16) 32.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (16) 32.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (16) *** + (1) (2) (3) (4) (5) (6) (7) (8) Confidential treatment has been granted for certain portions of this exhibit pursuant to an order dated effective October 5, 1999. Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) thereof. Incorporated by reference to identically numbered exhibits to the registrant's Registration Statement on Form S-1, as amended (File No. 33-35333), which became effective July 19, 1990. Incorporated by reference to identically numbered exhibits to the registrant's Registration Statement on Form S-1 (File No. 33-45990), which was filed February 18, 1992. Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Incorporated by reference to Exhibit No. 1 to the registrant's Registration Statement on Form 8-A, which was filed on February 18, 1999. Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1999. Incorporated by reference to identically numbered exhibits to the registrant's Report on Form 8-K, which was filed on August 25, 1999. Incorporated by reference to identically numbered exhibits to the registrant's registration statement on Form S-8 filed on June 1, 2000. Incorporated by reference to identically numbered exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 2000. (9) Incorporated by reference to exhibit number 4.1 to the registrant's Current Report on Form 8-K filed on January 16, 2002. 79 (10) (11) (12) (13) (14) (15) Incorporated by reference to exhibit number 4.2 to the registrant's Current Report on Form 8-K filed on January 16, 2002. Incorporated by reference to exhibit number 4.1 to the registrant’s Registration Statement on Form S-3 filed on April 19, 2002. Incorporated by reference to exhibit number 10.82 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2002. Incorporated by reference to exhibit number 10.83 to the registrant’s Annual Report on Form 10-K for the year ended January 3, 2003. Incorporated by reference to exhibit number 10.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003. Incorporated by reference to exhibit number 3.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2003. (16) Filed herewith. (b) Reports on Form 8-K. On October 28, 2003, the Company filed a report on Form 8-K reporting the Company’s quarterly earnings for the third fiscal quarter of 2003. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. TRIMBLE NAVIGATION LIMITED By: /s/ Steven W. Berglund Steven W. Berglund, President and Chief Executive Officer March 10, 2004 POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and appoints Steven W. Berglund as his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: 80 Signature Capacity in which Signed Date /s/ Steven W. Berglund Steven W. Berglund President, Chief Executive Officer, Director March 15, 2004 /s/ Mary Ellen Genovese Mary Ellen Genovese Chief Financial Officer and Assistant Secretary (Principal Financial Officer) March 15, 2004 /s/ Anup V. Singh Anup V. Singh Corporate Controller (Principal Accounting Officer) March 15, 2004 March 9, 2004 March 15, 2004 March 9, 2004 March 9, 2004 March 9, 2004 March 9, 2004 /s/ Robert S. Cooper Director Robert S. Cooper /s/ John B. Goodrich Director John B. Goodrich /s/ William Hart Director William Hart /s/ Ulf J. Johansson Ulf J. Johansson Director /s/ Bradford W. Parkinson Director Bradford W. Parkinson /s/ Nickolas W. Vande Steeg Director Nickolas W. Vande Steeg 81 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Steven W. Berglund, certify that: 1. 2. 3. 4. 5. 6. I have reviewed this annual report on Form 10-K of Trimble Navigation Limited. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) b) c) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; The registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 10, 2004 /s/ Steven W. Berglund Steven W. Berglund Chief Executive Officer 82 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Mary Ellen Genovese, certify that: 1. 2. 3. 4. 5. 6. I have reviewed this annual report on Form 10-K of Trimble Navigation Limited. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) b) c) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; The registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 15, 2004 /s/ Mary Ellen Genovese Mary Ellen Genovese Chief Financial Officer 83 EXHIBIT 32.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Trimble Navigation Limited (the "Company") for the period ended January 2, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Steven W. Berglund, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that: (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven W. Berglund Steven W. Berglund Chief Executive Officer March 10, 2004 This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EXHIBIT 32.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Trimble Navigation Limited (the "Company") for the period ended January 2, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mary Ellen Genovese, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of her knowledge, that: (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mary Ellen Genovese Mary Ellen Genovese Chief Financial Officer March 15, 2004 This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 84 SCHEDULE II TRIMBLE NAVIGATION LIMITED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS) Allowance for doubtful accounts: Balance at beginning of period Acquired allowance (1) Bad debt expense Write-offs, net of recoveries Balance at end of period Inventory allowance: Balance at beginning of period Acquired allowance (2) Additions to allowance Write-offs, net of recoveries Balance at end of period January 2, 2004 January 3, 2003 December 28, 2001 $ 9,900 752 (32) (667) $ 9,953 $ 25,150 1,292 5,762 (6,319) $ 25,885 $ 8,540 - 5,443 (4,083) $ 9,900 $ 23,274 - 3,901 (2,025) $ 25,150 $ 6,538 - 5,077 (3,075) $ 8,540 $ 19,285 - 7,242 (3,253) $ 23,274 (1) Includes $168,000 acquired at July 7, 2003 as part of the acquisition of Applanix and $584,000 acquired at December 9, 2003 as part of the acquisition of MENSI. (2) Includes $494,000 acquired at July 7, 2003 as part of the acquisition of Applanix and $797,000 acquired at December 9, 2003 as part of the acquisition of MENSI. 85 EXHIBIT 21.1 TRIMBLE NAVIGATION LIMITED LIST OF SUBSIDIARIES AS OF 3/5/04 Name of Subsidiary Jurisdiction of Incorporation Trimble Navigation Australia Pty Limited Spectra Precision Pty Ltd. Trimble Austria Handels mbH Trimble Belgium BVBA Trimble Brasil Limitada Jamestown Manufacturing Corporation Trimble Export Limited Trimble Navigation International Limited Trimble Specialty Products, Inc. TR Navigation Corporation Applanix Corporation Trimble Canada Ltd. Trimble Exchangeco Ltd. Trimble Holdings Co. Trimble Electronic Products (Shanghai) Co. Ltd. Trimble Navigation Technology (Shanghai) Co. Ltd. MENSI, Inc. SPHM Inc. Trimble Middle East WLL MENSI, S.A. Trimble France S.A.S. Trimble GmbH Trimble Holdings GmbH Trimble Kaiserslautern GmbH 86 Australia Australia Austria Belgium Brazil California California California California California Canada Canada Canada Canada China China Delaware Delaware Egypt France France Germany Germany Germany Trimble terraSat GmbH Trimble Jena GmbH Trimble Italia SRL Trimble Navigation Italia s.r.l MENSI, KK Trimble Japan K.K. Spectra Precision de Mexico, SA de CV Trimble Mexico S de RL Trimble Europe B.V. Datacom Software Research Limited Trimble Navigation New Zealand Limited Tripod Data Systems Trimble Navigation Singapore PTE Limited Trimble International Holdings S.L. Trimble Navigation Iberica S.L. Spectra Precision Scandinavia AB Trimble AB Applanix LLC TNL Flight Services, Inc Trimble Navigation Europe Limited Trimble U.K. Ltd. Trimble Mobile Solutions, Inc. Germany Germany Italy Italy Japan Japan Mexico Mexico Netherlands New Zealand New Zealand Oregon Singapore Spain Spain Sweden Sweden Texas Texas United Kingdom United Kingdom Virginia 87 EXHIBIT 23.1 TRIMBLE NAVIGATION LIMITED CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements, Form S-8 Nos. 33-37384, 33- 39647, 33-45167, 33-45604, 33-46719, 33-50944, 33-57522, 33-62078, 33-78502, 33-84362, 33-91858, 333-04670, 333-28429, 333-53703, 333-84949, 333-38264, 333-65758, 333-65760, 333-97979, and Form S-3 Nos. 333-76986, 333-86656, 333-103676, 333-106893, pertaining to the 1983 Stock Option Plan, the Trimble Navigation Savings and Retirement Plan, the 1990 Director Stock Option Plan, the "Position Us for Progress" 1992 Employee Stock Bonus Plan, the 1992 Management Discount Stock Option Plan, the 1993 Stock Option Plan, C. Trimble Non- statutory Option Plan, the 2002 Stock Option Plan, the 1988 Employee Stock Purchase Plan, and various sales of Trimble Navigation Limited common stock, and the related Prospectuses, of our report dated January 23, 2004 with respect to the consolidated financial statements and schedule of Trimble Navigation Limited included in the Annual Report (Form 10-K) for the year ended January 2, 2004. /s/ Ernst & Young LLP March 11, 2004 Palo Alto, California 88 THIS IS TRIMBLE Trimble is a world leader in providing advanced, position-centric solutions to commercial, governmental and professional customers. Our solutions enable our users to work with greater productivity, convenience and safety and, in many cases, do things they couldn’t do before. Market & Segments % % % Representative Products * Engineering & Construction Engineering & Construction Engineering & Construction 68% Surveying Construction Infrastructure 3D Scanning GPS, optical, robotic and mechanical total stations Digital levels and theodolites Data collectors and field computers Field and office application software Data communication solutions Machine guidance systems Laser and optical positioning and alignment tools Field and office application software Data communication solutions Typical Customers Surveyors Civil engineers Construction contractors Transportation agencies Utility companies Earth-moving contractors General construction contractors Utility contractors Wall and ceiling contractors Transportation agencies GPS reference networks and software Government and scientific agencies Laser scanners Field and office application software Civil and plant engineers Surveyors Field Solutions 15% Mapping & GIS Handheld GPS field data collectors Field and office application software Utility companies Natural resource agencies Government agencies Agriculture Vehicle Guidance Manual and automated steering systems for farm vehicles Farmers Agriculture Water Management Grade control systems for irrigation and drainage Farmers Agricultural contractors ologie ologies Component Technologies 12% OEM (Silicon Integration) OEM (Modules) Timing Mobile Solutions Mobile Solutions Fleet Management 2% GPS chipsets Embedded silicon and companion firmware Modules supplying position, velocity and time solutions or raw GPS measurement data Automobile tier-one suppliers Portable appliance manufacturers Automobile tier-one suppliers Asset management integrators Security device suppliers CDMA base station clocks Time and frequency boards and instruments Wireless infrastructure providers Wireless location solution providers Mobile devices combining wireless communication and GPS Internet-delivered fleet management application services Trucking, ready-mix cement, refuse, and other local fleet operators Construction contractors Municipal fleet operators Security Mobile devices combining wireless communication and GPS Commercial vehicle and equipment owners Mobile Workforce Management Internet-delivered wireless workforce application services Sales, service, and delivery businesses Portfolio Business 3% Military Applanix * Percent of total revenue GPS receivers for military operations Military time and frequency boards Integrated inertial/GPS positioning and orientation surveying and mapping systems for surveying and mapping surveying and mapping U.S. Department of Defense Allied defense ministries Defense contractors Land, marine, and aerial surveying and mapping contractors Military Executive Officers Board of Directors Shareholder Information Robert S. Cooper, Ph.D., Chairman President Aerospace Electronics Division Titan Corporation Steven W. Berglund President & CEO Trimble Navigation Limited John B. Goodrich, Secretary Business Consultant William Hart Venture Capital Investor and Business Consultant Ulf J. Johansson, Ph.D. Chairman Europolitan Vodafone AB Bradford W. Parkinson, Ph.D. Professor (Emeritus) Department of Aeronautics and Astronautics Stanford University Nickolas W. Vande Steeg Executive Vice President & COO Parker Hannifin Corporation Corporate Headquarters: Trimble Navigation Limited 749 North Mary Avenue Sunnyvale, California 94085 Phone: (408) 481-8000 Fax: (408) 481-2218 Independent Auditors: Ernst & Young LLP Palo Alto, California Transfer Agent & Registrar: Mellon Investor Services P.O. Box 3315 South Hackensack, NJ 07606 (800) 522-6645 for U.S.A. (201) 329-8660 for International TDD for Hearing Impaired: (800) 231-5469 for U.S.A. (201) 329-8660 for International http://www.melloninvestor.com Investor Relations Contact: Brian Siegel (408) 481-6914 investor_relations@trimble.com Additional Information The Company’s annual report on Form 10-K, as filed with the Securities Exchange Commission, is also available on the Investor Relations portion of the Company’s website at: http://www.trimble.com/ir_reports.html Trimble Investor Information Traded: The NASDAQ Stock Exchange Symbol: TRMB Trimble’s website: http://www.trimble.com Steven W. Berglund President and Chief Executive Officer Mary Ellen P. Genovese Chief Financial Officer Bryn Fosburgh Vice President General Manager, Geomatics & Engineering Michael W. Lesyna Vice President General Manager, Mobile Solutions Chris Shephard Vice President General Manager, Construction Instruments Alan R. Townsend Vice President General Manager, Field Solutions Dennis L. Workman Vice President General Manager, Component Technologies William C. Burgess Vice President Human Resources Joseph F. Denniston, Jr. Vice President Operations Mark A. Harrington Vice President Strategy & Business Development Irwin L. Kwatek Vice President & General Counsel Bruce E. Peetz Vice President Advanced Technology & Systems John E. Huey Treasurer Anup V. Singh Corporate Controller © 2004, Trimble Navigation Limited. All rights reserved. Trimble, the Globe & Triangle logo, AgGPS and EZ-Guide are trademarks of Trimble Navigation Limited registered in the United States Patent and Trademark Office. DriveSafe, Force-5, and TrimTrac are trademarks of Trimble Navigation Limited. All other trademarks are the property of their respective owners. TID 13400 (3/04) TRIMBLE LOCATIONS WORLDWIDE Corporate Headquarters Trimble Navigation Limited 749 North Mary Avenue Sunnyvale, CA 94085 Operations United States Trimble Chandler 7408 West Detroit Street Suite 100 Chandler, Arizona 85226 Trimble Rockies 7403 Church Ranch Boulevard Suite 100 Westminster, Colorado 80021 Trimble Dayton 5475 Kellenburger Road Dayton, Ohio 45424 Tripod Data Systems 345 SW Avery Avenue Corvallis, Oregon 97333 Americas Regional Fulfillment Center 5475 Kellenburger Road Dayton, Ohio 45424 International Trimble TerraSat Haringstrasse 19 D-85635 Höhenkirchen-Siegertsbrunn Germany Trimble Jena Carl-Zeiss Promenade 10 D-07740 Jena Germany Trimble Kaiserslautern Am Sportplatz 5 D-67661 Kaiserslautern Germany Trimble New Zealand 11 Birmingham Drive P.O. Box 8729 Riccarton, Christchurch New Zealand Trimble Sweden Box 64, Rinkebyvägen 17 182 11, Danderyd Sweden European Regional Fulfillment Center Meerheide 45 5521DZ Eersel Netherlands Applanix 85 Leek Crescent Richmond Hill, Ontario Canada L4B 3B3 MENSI 30, rue de la Fontaine du Vaisseau 94120 Fontenay-sous-Bois France International Sales Centers Europe Trimble France Parc Hightec VI 9 Avenue du Canada, Les Ulis 91966 Courtaboeuf, Cedex France Trimble Germany Am Prime Parc 11 D-65479 Raunheim Germany Trimble Italy Largo Temistocle Solera, 7 00199 Rome Italy Centro Torri Bianche Palazzo Larice, 3 20059 Vimercate (MI) Italy Trimble Russia 23, 1st Tverskaya-Yamskaya St. Moscow, 125047 Russia Trimble Spain Via de las Dos Castillas No. 33 Atica. Edificio 6. Planta 3 Despacho B-2 28224 Pozuelo de Alarcon Madrid Spain Trimble Nordic Box 64, Rinkebyvägen 17 182 11, Danderyd Sweden Trimble UK Trimble House Meridian Office Park Osborn Way, Hook Hampshire RG27 9HX U.K. Annual Report 2003 Technology Solutions for the Right Place and Time Technology Solutions for the Right Place and Time T r i m b l e N a v i g a t i o n L i m i t e d • A n n u a l R e p o r t 2 0 0 3 Middle East Trimble Dubai LOB 14 Office 322 PO Box 17760 Jebel Ali Free Zone Dubai UAE Pacific Rim Trimble Australia Level 1/123 Gotha Street Fortitude Valley QLD 4006 Australia Trimble China Suite 16D, Building 2, Epoch Center 4 Beiwa Road, Haidian District Beijing 100089 China 666 Fuzhuo Road Haixin Plaza Shanghai 200001 China Trimble Korea 8F, Geumwon Bldg., 943-12 Daechi3-dong Kangnam-gu, Seoul 135-845 Korea Trimble Singapore 80 Marine Parade Road 22-06, Parkway Parade Singapore 449269 Singapore The Americas Trimble Canada 41 Horner Avenue, Unit 5 Toronto, Ontario M8Z 4X4 Canada Trimble Latin America 6505 Blue Lagoon Drive Suite 120 Miami, Florida 33126 Joint Ventures Caterpillar Trimble Control Technologies LLC 5475 Kellenburger Road Dayton, Ohio 45424 Nikon-Trimble Co., Ltd. Technoport Mitsuiseimei Building 16-2, Minamikamata 2-chome, Ota-ku Tokyo 144-0035, Japan 

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