EX-5 7 edgdurelfinancials.txt DUREL CORPORATION FINANCIALS FINANCIAL STATEMENTS Durel Corporation December 29, 2002 Durel Corporation Index to Financial Statements Financial Statements: Report of Independent Auditors.............................................1 Balance Sheets at December 29, 2002 and December 30, 2001..................2 Statements of Income for the Years Ended December 29, 2002, December 30, 2001 and December 31, 2000........................3 Statements of Shareholders' Equity for the Years Ended December 29, 2002, December 30, 2001 and December 31, 2000........................................................4 Statements of Cash Flows for the Years Ended December 29, 2002, December 30, 2001 and December 31, 2000........................................................5 Notes to Financial Statements..............................................6 Report of Independent Auditors Board of Directors Durel Corporation We have audited the accompanying balance sheets of Durel Corporation as of December 29, 2002, and December 30, 2001, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 referred to above present fairly, in all material respects, the financial position of Durel Corporation at December 29, 2002, and December 30, 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst and Young LLP Phoenix, Arizona March 14, 2003 1 Durel Corporation Balance Sheets December 29 December 30 2002 2001 Assets Current assets: Cash and cash equivalents $ 3,613,570 $ 1,833,355 Accounts receivable, less allowance for doubtful accounts of $500,000 and $400,000 at December 29, 2002 and December 30, 2001, respectively 11,544,627 8,193,511 Inventories, net 6,382,929 6,237,553 Deferred tax assets 1,863,000 1,724,949 Prepaid expenses and other 14,149 215,080 ------------ ------------ Total current assets 23,418,275 18,204,448 Noncurrent pension asset 563,036 236,676 Property, plant, and equipment, net 21,228,037 24,897,772 ------------ ------------ Total assets $45,209,348 $43,338,896 ============ ============ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 6,224,782 $ 3,884,204 Accrued payroll and related expenses 3,608,899 2,014,100 Accrued liabilities 1,078,448 799,341 Payable to shareholders 309,495 464,412 Income taxes payable 1,630,531 1,770,126 Payable to shareholders 656,557 -- Notes Payable to shareholders -- 5,000,000 Current portion of long-term debt -- 1,102,982 ------------ ------------ Total current liabilities 13,508,712 15,035,165 Noncurrent pension liability 121,168 201,254 Deferred tax liability 1,370,576 1,012,303 Payable to shareholders, noncurrent -- 656,557 Long-term debt -- 10,650,572 Contingencies Shareholders' equity: Common shares, par value $.01 per share Authorized shares-150,000 Issued and outstanding shares-2,000 20 20 Additional paid-in capital 7,040,294 7,040,294 Accumulated other comprehensive loss (114,637) -- Retained earnings 23,283,215 8,742,731 ------------ ------------ Total shareholders' equity 30,208,892 15,783,045 ------------ ------------ Total liabilities and shareholders' equity $45,209,348 $43,338,896 ============ ============ See accompanying notes. 2 Durel Corporation Statements of Income Years Ended ----------------------------------------- December 29 December 30 December 31 2002 2001 2000 ----------------------------------------- Net sales $84,061,876 $59,231,061 $73,811,266 Cost of goods sold 47,168,975 40,044,666 47,586,633 ----------------------------------------- Gross profit 36,892,901 19,186,395 26,224,633 Costs and expenses: Selling and administrative 10,987,745 10,080,889 12,858,030 Research and development 2,990,504 2,494,819 2,681,629 ----------------------------------------- Income from operations 22,914,652 6,610,687 10,684,974 Other (expense) income: Interest income 45,059 62,646 108,567 Interest expense (958,579) (1,301,443) (985,770) Other 29,352 127,737 470,282 ----------------------------------------- Income before income taxes 22,030,484 5,499,627 10,278,053 Provision for income taxes 7,490,000 1,924,000 2,363,952 ----------------------------------------- Net income $14,540,484 $ 3,575,627 $ 7,914,101 ========================================= See accompanying notes. 3 Durel Corporation Statements of Shareholders' Equity Accumulated Common Shares Additional Other --------------- Paid-In Comprehensive Retained Shares Amount Capital Income(Loss) Earnings Total ------ -------------------------------------------------------- Balance at January 2, 2000 2,000 $20 $7,040,294 $ -- $(2,746,997) $ 4,293,317 Comprehensive Income: Net income -- -- -- -- 7,914,101 7,914,101 Comprehensive ----------- Income 7,914,101 --------------------------------------------------------------- Balance at December 31, 2000 2,000 20 7,040,294 -- 5,167,104 12,207,418 Comprehensive Income: Net income -- -- -- -- 3,575,627 3,575,627 Comprehensive ----------- Income 3,575,627 --------------------------------------------------------------- Balance at December 30, 2001 2,000 20 7,040,294 -- 8,742,731 15,783,045 Comprehensive Income: Net income -- -- -- -- 14,540,484 14,540,484 Pension plan additional minimum liability, net of taxes -- -- -- (114,637) -- (114,637) Comprehensive ----------- Income 14,425,847 --------------------------------------------------------------- Balance at December 29, 2002 2,000 $20 $7,040,294 $(114,637) $23,283,215 $30,208,892 =============================================================== See accompanying notes. 4 Durel Corporation Statements of Cash Flows Years Ended ------------------------------------------- December 29 December 30 December 31 2002 2001 2000 ------------------------------------------- Operating activities Net income $ 14,540,484 $ 3,575,627 $ 7,914,101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,171,165 2,920,263 1,807,891 Noncash property, plant and equipment charges 785,260 -- (58,062) Provision for doubtful accounts 100,000 50,000 175,000 Provision for inventory allowances -- 640,000 1,360,000 Deferred income tax provision (benefit) 296,646 295,953 (812,599) Deferred pension benefits (597,507) (225,422) (10,000) Changes in operating assets and liabilities: Accounts receivable (3,451,116) 6,171,823 (7,557,464) Inventories (145,376) 1,197,506 (5,372,107) Prepaid expenses and other 200,931 (117,080) (92,000) Accounts payable 2,366,395 (1,241,160) 1,334,496 Accrued payroll and related expenses 1,594,799 (2,794,136) 3,192,021 Accrued liabilities 279,107 (400,725) 197,841 Income taxes payable (139,595) 872,387 689,549 Payable to shareholders (154,917) (1,756,580) 1,851,190 ------------------------------------------ Net cash provided by operating activities 18,846,276 9,188,456 4,619,857 Investing activities Purchase of property, plant, and equipment (286,690) (3,965,344) (14,521,383) Decrease in accounts payable relating to purchases of property, plant and equipment (25,817) (267,395) (105,621) Proceeds from disposal of property, plant and equipment -- -- 248,413 Net cash used in investing ------------------------------------------ activities (312,507) (4,232,739) (14,378,591) Financing activities Repayments of long-term debt (15,327,740) (2,318,539) (763,553) Proceeds from long-term debt 3,574,186 1,000,000 4,500,000 (Repayments to) borrowings from shareholders (5,000,000) (1,500,000) 6,000,000 Repayments of payable to shareholders -- (1,700,000) (43,996) Net cash (used in) provided by financing -------------------------------------------- activities (16,753,554) (4,518,539) 9,692,451 Net increase (decrease) in -------------------------------------------- cash and cash equivalents 1,780,215 437,178 (66,283) Cash and cash equivalents at beginning of year 1,833,355 1,396,177 1,462,460 Cash and cash equivalents at -------------------------------------------- end of year $ 3,613,570 $ 1,833,355 $ 1,396,177 ============================================ See accompanying notes. 5 Durel Corporation Notes to Financial Statements December 29, 2002 1. Accounting Policies Description of Business Durel Corporation (the "Company") was incorporated on June 1, 1988, in the state of Delaware. The Company operates in one operating segment and engages primarily in the research, development, manufacture and sale of electroluminescent products. The Company is a joint venture of Rogers Corporation and Minnesota Mining and Manufacturing Company (the "Shareholders"), with each owning 50 percent of the outstanding common stock. The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Sunday nearest December 31. Fiscal year 2002 ended on December 29, 2002, fiscal year 2001 ended on December 30, 2001, and fiscal year 2000 ended on December 31, 2000. All were 52 week years. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company's cash and cash equivalents, accounts receivable, accounts payable and long-term debt represent financial instruments as defined by statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. The carrying value of these financial instruments is a reasonable approximation of fair value, due to their current maturities. Cash and Cash Equivalents Cash and cash equivalents consist of checking accounts and funds invested in overnight repurchase agreements and are stated at cost, which approximates market value. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Allowance for Doubtful Accounts In circumstances where the Company is made aware of a specific customer's inability to meet its financial obligations, a reserve is established. The majority of accounts are individually evaluated on a regular basis and appropriate reserves are established as deemed appropriate. The remainder of the reserve is general in nature and is based upon historical trends and current market assessments. 6 Durel Corporation Notes to Financial Statements (continued) 1. Accounting Policies (continued) Inventories Inventories are carried at the lower of cost or market using the first-in, first-out (FIFO) method. Revenue Recognition Revenue is recognized upon delivery of goods to customers, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collection is reasonably assured. Property, Plant, and Equipment Property, plant, and equipment is stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives ranging generally from two to 35 years. Impairment of Long-Lived Assets The Company periodically evaluates its long-lived assets used in operations for impairment. Impairment losses would be recorded when events and circumstances indicate that an asset might be impaired and the undiscounted cash flows to be generated by that asset are less than the carrying amounts of the asset. Shipping Costs Costs of shipping products to customers are included in costs of goods sold. Income Taxes The Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. 7 Durel Corporation Notes to Financial Statements (continued) 1. Accounting Policies (continued) Reclassifications Certain amounts in the prior year financial statements have been reclassified to conform with the current year presentation. Recently Issued Accounting Standards In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121 (SFAS No. 121), Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. SFAS No. 144 was effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company's adoption of SFAS No. 144 had no effect on the Company's financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 supersedes Emerging Issues Task Force No. 94-3 (EITF 9403), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146 eliminates the provisions of EITF 94-3 that required a liability to be recognized for certain exit or disposal activities at the date an entity committed to an exit plan. SFAS No. 146 requires a liability for costs associated with an exit or disposal activity to be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this statement to have a material impact on its results of operations or financial position. 2. Capitalization The Company believes current and future cash flows will be sufficient to fund the operations and growth of the business. Should the need arise for additional funding, the Company's Board of Directors will evaluate the Company's liquidity and determine the timing and form for obtaining such funds. Accordingly, the Company is restricted from issuing capital shares or securities convertible into capital shares without the consent of the Shareholders. 8 Durel Corporation Notes to Financial Statements (continued) 3. Inventories Inventories consist of the following: December 29 December 30 2002 2001 -------------------------------- Raw materials $ 4,159,303 $ 4,240,203 Work in process 3,728,035 3,764,640 Finished goods 995,591 732,710 -------------------------------- 8,882,929 8,737,553 Less allowance for obsolescence and net realizable value 2,500,000 2,500,000 -------------------------------- $ 6,382,929 $ 6,237,553 ================================ 4. Property, Plant, and Equipment Property, plant, and equipment consist of the following: December 29 December 30 2002 2001 ------------------------------- Land $ 658,506 $ 658,506 Building and improvements 16,566,863 16,767,353 Machinery and equipment 17,541,213 17,992,724 Office equipment and furniture 1,369,795 1,216,364 ------------------------------- 36,136,377 36,634,947 Less accumulated depreciation 14,908,340 11,737,175 ------------------------------- $21,228,037 $24,897,772 =============================== The Company wrote down certain of its fixed assets that were no longer needed in its operations. This resulted in a charge of approximately $785,000 in 2002, which is included in cost of goods sold in the the statement of income. 9 Durel Corporation Notes to Financial Statements (continued) 5. Transactions with Shareholders In connection with the sale of the Company's products, the Company reimburses one of the Shareholders for selling costs and pays no commission. Selling costs reimbursed to this Shareholder were approximately $3,400, $237,000 and $252,000 for the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively. The other Shareholder bears a large portion of all selling costs and receives a commission ranging from 4 to 11 percent. Commissions earned by this Shareholder were approximately $3,115,000, $2,365,000 and $2,864,000 for the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively. The financial statements of the Company include allocations from the Shareholders for direct expenditures made on its behalf. In addition, the Shareholders have charged the Company costs for research and development, marketing, and general corporate overhead based upon estimates of expenses incurred for the benefit of the Company. Total allocations and charges from the Shareholders aggregated approximately $4,067,000, $3,320,000 and $3,331,000 for the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively. The Company's long-term payable to the Shareholders in the amount of $656,557 at December 29, 2002, and December 30, 2001, represents charges for past services provided to the Company by the Shareholders. The amount is noninterest-bearing and has no definitive repayment terms. The amount has been classified as current at December 31, 2002 since the Company repaid the amount in February 2003. On September 24, 1999, the Company executed a promissory note with one of its Shareholders under which the Shareholder will make funds available to the Company from time to time. This promissory note was amended on September 22, 2000, and September 2001, to ultimately increase the borrowing amount under the note to $8.0 million and extend the maturity date through September 21, 2002. The amended and restated note accrued interest at prime. The Company had $5.0 million outstanding under this note on December 30, 2001, and has repaid all principal and accrued interest prior to the maturity date in 2002. Interest paid during the years ended December 29, 2002, December 30, 2001, and December 31, 2000, was $51,000, $477,000 and $19,444, respectively. 10 Durel Corporation Notes to Financial Statements (continued) 6. Long-Term Debt On January 4, 1999, the Company converted a $10 million unsecured revolving line of credit agreement with a bank into a term loan. The loan was guaranteed by one of the Shareholders, bearing interest at a fixed rate of LIBOR plus 1.05 percent. On January 2, 2002, the Company amended this term loan and merged the outstanding balance of the term loan in the amounts of $7,753,554 and $2,246,446 outstanding under the Company's unsecured revolving line of credit into a new term loan in the amount of $10 million. Principal and interest were payable in monthly installments beginning February 1, 2002 through January 2, 2005, when all remaining principal and unpaid interest was due and payable. On January 3, 2002, the Company also entered into an interest rate swap agreement to fix the effective interest rate on the term loan at 5.44 percent. On December 11, 2002, the company paid all principal and accrued interest on the term loan. In addition, the Company paid $390,600 to settle its interest rate swap agreement with the bank, which is included in interest expense in 2002. The Company's $5.4 million line of credit was also terminated in connection with the pay-off of the debt. Interest paid during the years ended December 29, 2002, December 30, 2001, and December 31, 2000 was $655,861, $856,502 and $778,883, respectively. 7. Income Taxes The provision for income taxes is as follows: Years Ended --------------------------------------------- December 29 December 30 December 31 2002 2001 2000 --------------------------------------------- Current expense: Federal $ 6,825,000 $ 1,603,380 $ 2,724,451 State 368,354 24,667 452,100 Deferred expense (benefit): Federal 259,565 358,953 (743,815) State 37,081 (63,000) (68,784) --------------------------------------------- $ 7,490,000 $ 1,924,000 $ 2,363,952 ============================================= 11 Durel Corporation Notes to Financial Statements (continued) 7. Income Taxes (continued) The reconciliation of the provision for income taxes with expected income taxes based on statutory income tax rates is as follows: Years Ended ------------------------------------------- December 29 December 30 December 31 2002 2001 2000 ------------------------------------------- Expected income tax provision at statutory rates $ 7,711,000 $ 1,869,873 $ 3,494,538 State income taxes, net of federal benefit (excluding state credits) 742,000 193,874 536,683 Nondeductible expenses 16,000 28,575 -- Research and development credits (189,000) (168,322) -- Extraterritorial income exclusion (790,000) -- -- Decrease in valuation allowance -- -- (1,569,000) Other -- -- (98,269) ------------------------------------------ $ 7,490,000 $ 1,924,000 $ 2,363,952 ========================================== The valuation allowance decreased by $1,569,000 to $0 during the year ended December 31, 2000, due to operating income sustained during the year. For financial reporting purposes, no valuation allowance has been recognized to offset the deferred tax assets as management believes that it is more likely than not that all tax assets will be recovered. 12 Durel Corporation Notes to Financial Statements (continued) 7. Income Taxes (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: Years Ended ----------------------------------------- December 29 December 30 December 31 2002 2001 2000 ----------------------------------------- Deferred tax assets: Asset valuation allowances $ 1,320,000 $ 1,160,000 $ 884,000 Nondeductible accruals 543,000 516,791 706,324 Alternative minimum tax credit -- -- 388,331 Research and development credits -- -- 70,000 State tax credits -- 48,158 -- ----------------------------------------- 1,863,000 1,724,949 2,048,655 Deferred tax liabilities: Basis in fixed assets 1,235,000 1,012,303 1,040,056 Other 135,576 -- -- ----------------------------------------- 1,370,576 1,012,303 1,040,056 ----------------------------------------- Net deferred taxes $ 492,424 $ 712,646 $ 1,008,599 ========================================= The Company paid income taxes of approximately $6,310,000, $1,068,000 and $2,494,000 during the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively. 13 Durel Corporation Notes to Financial Statements (continued) 8. Concentrations of Credit Risk The Company's revenue is derived from customers primarily in North America, the Pacific Rim and Europe. The amount of total export sales by geographic area was as follows: Years Ended ----------------------------------------- December 29 December 30 December 31 2002 2001 2000 ----------------------------------------- Pacific Rim $70,705,000 $44,924,000 $60,599,000 Europe 801,000 1,292,000 1,184,000 Other 152,000 209,000 549,000 ----------------------------------------- Total export sales $71,658,000 $46,425,000 $62,332,000 ========================================= The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The following individual customers comprised more than 10 percent of net sales and accounts receivable: Years Ended ----------------------------------------- December 29 December 30 December 31 2002 2001 2000 ----------------------------------------- Net sales: Customer: A 23% 25% 13% B 14 3 7 C 8 11 5 ----------------------------------------- 45% 39% 25% ========================================= Net accounts receivable: Customer: A 37% 32% 24% B 15 13 10 C 3 11 3 ----------------------------------------- 55% 56% 37% ========================================= 14 Durel Corporation Notes to Financial Statements (continued) 9. Retirement Plan The Company sponsors a noncontributory defined benefit pension plan (the "Plan") covering all employees meeting eligibility requirements. The Company intends to make contribution to fund this Plan at such times and in amounts to at least meet the Employment Retirement Income Security Act's minimum funding requirements. The following sets forth the Plan's funded status and amounts recognized in the Company's balance sheets and statements of operations at December 29, 2002, December 30, 2001, and December 31, 2000: 2002 2001 2000 --------------------------------- Components of net periodic benefit cost: Service cost $ 243,934 $ 329,256 $ 269,425 Interest cost 208,817 184,817 165,864 Expected return on plan assets (202,984) (136,079) (94,659) Amortizations and deferrals 2,386 12,716 26,466 Amortization of transition asset 45,188 45,188 45,188 ---------------------------------- Net periodic benefit cost $ 297,341 $ 435,898 $ 412,284 ================================== Change in plan assets: Fair value of plan assets at beginning of year $1,993,520 $1,275,249 $ 962,099 Actual return on plan assets (293,855) 88,785 79,258 Employer contributions 894,848 661,320 241,637 Benefit payments (42,778) (31,834) (7,745) ---------------------------------- Fair value of plan assets at end of year $2,551,735 $1,993,520 $1,275,249 ================================== Change in benefit obligation: Benefit obligation at beginning of year $3,060,210 $2,682,281 $2,373,407 Service cost 243,934 329,256 269,425 Interest cost 208,817 184,817 165,864 Actuarial gains 20,135 (104,310) (118,670) Benefit payments (42,778) (31,834) (7,745) ---------------------------------- Benefit obligation at end of year $3,490,318 $3,060,210 $2,682,281 ================================== 15 Durel Corporation Notes to Financial Statements (continued) 9. Retirement Plan (continued) 2002 2001 2000 ------------------------------------- Reconciliation of funded status: Funded status $ (938,583) $(1,066,690) $(1,407,032) Unrecognized net gain 1,008,476 493,888 563,620 Unrecognized prior service cost -- -- -- Unrecognized transition asset 563,036 608,224 653,412 -------------------------------------- Prepaid (accrued) benefit cost at end of year $ 632,929 $ 35,422 $ (190,000) ====================================== Amounts recognized in the balance sheet consist of: Prepaid (accrued) benefit cost $ 632,929 $ 35,422 $ (190,000) Accrued benefit liability (754,097) (236,676) (460,046) Intangible asset 563,036 236,676 460,046 Accumulated other comprehensive income 191,061 -- -- -------------------------------------- Net amount recognized at end of year $ 632,929 $ 35,422 $ (190,000) ====================================== In accordance with SFAS No. 87, the Company has recorded an additional minimum pension liability for underfunded plans of $191,061 for 2002, representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to shareholders' equity, net of tax. There were no additional minimum liabilities recorded in 2001 or 2000. 2002 2001 2000 ------------------------- Assumptions as of year-end: Discount rate 7.00% 7.25% 7.00% Expected rate of return on plan assets 8.50% 8.50% 8.50% Rate of compensation increase 4.00% 4.00% 4.00% 16 Durel Corporation Notes to Financial Statements (continued) 10. Employee Benefit Plans The Company maintains a 401(k) Retirement Plan (the "401(k) Plan") covering all employees effective upon hire. Under the terms of the 401(k) Plan, employees may contribute up to 18 percent of their annual compensation, subject to Internal Revenue Service limitations. During the years ended December 29, 2002, December 30, 2001, and December 31, 2000, the Company matched 50 percent of employee contributions up to 6 percent of the employee's compensation for the pay period for which such contribution was made. Contribution expense during the years ended December 29, 2002, December 30, 2001, and December 31, 2000, was approximately $194,000, $215,000 and $228,000, respectively. The Company has also accrued a two percent profit sharing contribution to the 401(k) Plan of $240,000 and $197,000 at December 29, 2002 and December 30, 2001, respectively. Payment of these discretionary contributions is made within nine months after year-end in accordance with IRS regulations. Certain employees also participate in short-term and long-term incentive plans (Incentive Plans). Under the terms of the Incentive Plans, eligible employees are compensated based on profits, as defined, and the cumulative return on investment of the Company, as defined, as well as an additional compensation component based on the appreciation in the prices of the Shareholders' stock. The Company recognized expense of $3,113,000, $15,000 and $3,197,000 for the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively, related to the Incentive Plans. 11. Contingencies The Company was party to a legal proceeding, which arose out of the ordinary course of business. On February 17, 2000, this lawsuit resulted in a judgment of $49,882,000 for the Company in damages for patent infringement. The other party in the suit immediately filed a notice of appeal and countersuits, which resulted in overturning the judgment in 2001. On November 30, 2001, the Company entered into a settlement agreement to settle all outstanding patent litigation. The Company paid $1.7 million in 2001 related to this settlement and has agreed to enter into a supply agreement with the other party within 18 months from the date of settlement. Should negotiations to enter the supply agreement fail, the Company will be obligated to pay the other party a final payment of $300,000. This amount has been accrued at December 31, 2002, as the Company expects to make this payment in May 2003. Selling and administrative expenses include legal and settlement fees of $307,000, $3,043,000, and $2,090,000 in the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively, incurred in defense of the Company's patents and settlement of the lawsuits above. 17